Prepared remarks
Greetings, and welcome to the Construction Partners Third Quarter Earnings Conference Call. 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 of 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 quarter, building a record backlog and once again allowing us to raise our fiscal 2026 outlook. Simply put, CPI's 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. 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 three 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 roads 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, the BUILD America 250 Act provides approximately 7.2% more funding over the life of the bill than the highway and public transportation funding included in the IIJA. 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 five years. It's also worth noting that for two decades, in each of the last three surface transportation reauthorizations, including IIJA, the FAST Act 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 IIJA 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 one 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 Paving 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 through the addition of Ellsworth, we are building AI data center projects totaling approximately $100 million with a current pipeline of opportunities exceeding $130 million. Other newly won commercial projects range from 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 eight states and 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 one 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 pavements, 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 two contracts totaling over $80 million to build new rest stop areas along the I-4 corridor. These projects also strengthen 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 eight 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 the 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 Tulsa 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's 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 are 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 a 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 five-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 2026 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 Jule mentioned, we reported a strong third quarter, maintaining the outperformance we experienced in the first six 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% 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. 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%. 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 3.1x. 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 outlook to reflect the outperformance of Q3 and to include the contribution of our newest acquisition, Ellsworth 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; and adjusted EBITDA margin in the range of 15.36% 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?
Questions and answers
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, Jule, 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 that's spread kind of both on the acquisitive side and the organic side, 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, I think the midpoint of our guidance growth is around 30% now for overall growth for the year. And if you take out 8% organic growth, 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. Well, I was just going to say you're right. We've got about $140 million of those acquisitions of 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. When we see the weather data, what are some things that we should consider regarding your operational flexibility? For example, does the timing of the rain matter because typically you're working late at night, early in the morning? So maybe afternoon showers 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? Maybe you can help us understand how you navigate weather in what is clearly an outdoor sport.
Right. That's a good question, Tyler. 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, so it dries out pretty quickly. 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 one day, we might make up for it on the weekend. And so when it dries 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 wetter than normal. So 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 one here. I appreciate all the color on IIJA replacement and obviously continuing resolution, etc. But kind of a bigger picture question. In times of more funding uncertainty, could there be more of a shift towards those $2 million to $3 million resurfacing projects versus larger multiyear projects? Is that what happens at the state DOT level? Or am I overthinking that?
No, you're not overthinking it. We've been discussing that in the last month or so. And Ned's older than me. He's seen a lot more. So I'm going to let him 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. 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 two 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 lived through a continuing resolution. It's just a fact. 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 three is the states really stepped up and created 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 acquisition growth. So from a historical perspective, I would say those 4.5 years were some of the best years the company had.
Our next question comes from Andrew Wittmann with Baird.
I want to talk about the fourth quarter implied margin here. Obviously, it's another step-up. I guess it's implying around flat year-over-year despite some of the inflationary commodities. So obviously, you're getting that pass-through and discussed that already. Is there anything more to it than that, Greg? Is it just really the seasonal cost leverage that gives you the 3Q to 4Q bump? Is there 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 really starts the engine moving and starts generating more profit and more EBITDA.
Got it. And then I guess just broader, 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 one that I always like to check in on is labor. But maybe anything else, Jule, that you'd comment on there?
Andy, I don't think there's anything out of the ordinary. We're experiencing normal cost adjustments with labor, concrete and pipe. We have a pass-through model. 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've 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.
I know you focused a bit on the guidance and the raise. But stepping back and looking at the forest for the trees, you have the obvious top line add. For the companies that you have acquired within the past six to twelve months, how much of overall margin improvement or operational improvement is adding to this raised momentum and earnings growth as we go into the balance of the year? Because it's understandable you've acquired companies, but you're also seeing some margin improvement on top of it. Help us connect the dots on that, if you could.
Thank you, Kathryn. I think obviously, in 2025, when we added Lone Star Paving, 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 along our path. Clearly, the new acquisitions we've made are helping that. Durwood Greene, GMJ, Lone Star Paving in Tennessee and now Ellsworth — they all are really good companies that have good margin in their backlogs. They're well-run operations. So the acquisitions that we're adding are helping us become more profitable.
Okay. I know we focused a little bit on the federal side for the new highway bill reauthorization. But we hosted a meeting with TxDOT in June, and they were pretty optimistic even with CRs. What are your other state DOTs telling you about what they are or are not doing or their overall perspective on this federal highway bill reauthorization? And importantly, how they're planning in and around that journey?
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 five-year bill passed, and we think that will happen late this fall. The DOTs may do a little more short-term projects at the very beginning, but once the five-year bill passes, they'll start planning longer-term projects. There should be really no interruption to the states' programs.
Our next question comes from Michael Feniger with Bank of America.
Gentlemen, just on the data centers, maybe for you, Jule, is there anything different in 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 curious how, as you guys have built out in some of these geographies and you look at this pipeline on data center work, are there other things that ROAD can do here that maybe we don't see you do on a typical project?
Good question, Michael. Data centers are a big topic. Our model hasn't changed. We have 115 local markets in eight states, and our teams pursue projects in their geography. Data centers are part of that ecosystem now. So our model hasn't changed, but there are great opportunities. We're doing more of them because we're building relationships with the people that are building them and 70% to 75% of the data centers being built are in our eight states right now. They are a growing part of our business, but we're simply allocating people and equipment to the highest-margin opportunities. These projects are good projects with nice margin. Size varies. Some are very large, and some are a couple of million dollars of paving, and some we're doing $30 million or $40 million worth of work. So it varies, but it's fitting into our overall business model just like a normal commercial project would.
That makes sense. Given fuel and liquid asphalt, on the private side and in open market biddings, are you seeing this cost inflation reflected in biddings with your work and with others? How is that informing people's views on 2027? Are you thinking differently about your storage capabilities? Do you want more terminals? I'm curious what we've seen this year and how you think that might impact bidding and your internalization heading into 2027?
For us, it really hasn't affected our outlook. We continue to run our business passing through the costs. So it's a normal inflation environment. We do love being in the terminal business. It's been very additive to have that as part of our vertical integration strategy. So we will look for opportunities to expand that part of our business.
Mike, in the short term, we have the protections we've talked about: hedging, the terminals and the indexes. Over time, the pass-through model kicks in. From two or three months ago when this energy inflation kicked off, we immediately started putting those higher prices in the bids. There are already jobs we bid with that new pricing mechanism and completed the work. Over the long term, all that settles out to be a normal part of our cost makeup and bidding process as we work through the jobs on the backlog now.
Our next question comes from Rohit Seth with B. Riley Securities.
Just curious if you can go through the footprint and talk about which markets are performing better and which ones are maybe lagging?
Rohit, we are in 115 local markets. They all have different competitive dynamics and margin profiles. Overall, most of the markets, almost all the markets, are doing really well. We don't get into the specifics of each market, but generally, you can tell by our guidance that our markets are growing. We're working steadily to make them more profitable, and we expect that to continue into 2027.
Our next question comes from Keith Hughes with Truist Securities.
The guidance implies some really good margins in the fourth quarter. You touched on this a little bit earlier, but is there anything specific driving the margins up year-over-year at a pretty strong clip here in the fourth quarter?
Yes, Keith. That's part of what we expected this year. This quarter we had good margins, but we had some impact from weather and diesel. Our pass-through model starts to make that up in the fourth quarter. We don't guide for any kind of weather impact—it's too early in the quarter to account for that, either good or bad. So largely, the fourth quarter guide is what we expected for this work season. Annually, we're guiding to a 30 to 40 basis point increase in our margins, and we focus on annual progress rather than quarterly noise.
Our next question comes from Adam Thalhimer with Thompson, Davidson & Company.
Great quarter. Sorry, you couldn't find an extra $600,000 of sales to have your first $1 billion quarter, but it looks like you're going to get there in September.
Blame the weather.
Jule, when you talk about state DOTs and budgets on the public side, is that uniformly good? Or are there some good states and some bad states?
Of our eight states, I wouldn't characterize any as bad. Each state has its own funding profile. All of our states have indexed their gas taxes and have healthy programs. Florida and Texas have clearly outsized programs that stand out, but all of our states have healthy, albeit different, programs.
And nobody touched on the M&A pipeline. Hoping you could comment on that.
We are very busy right now. We're in discussions with a lot of sellers, so it's very active. We're encouraged by some of the opportunities we're looking at and talking about. I would expect it to be a busy fall.
One of the things we just finished in our quarterly Board meeting is what a terrific job Jule and Greg and the team are doing. I think we're seeing a lot more opportunities than we're actually acquiring. This company is becoming the acquirer of choice. We're a bigger team and more sophisticated. The pipeline is strong and well thought out, and they have plans as we move forward. We're excited about the future of the acquisition profile of this business.
Is it still more on the tuck-in side? Or do you also have some platform ideas?
We're actually seeing both, and that has always been the case.
Last one for me. Greg, I wanted to ask you about—you touched on this—you basically gave a soft Q4 guide for free cash flow. That looks like it's going to be your best quarter of the year for operating and free cash flow.
Yes, absolutely. It's kind of funny in Q3 the last month of the quarter, June, was great. It's a lot of billings. That comes on the heels of not a great month in May. So the cash is going to flow through in the fourth quarter. We're pleased about that.
We've reached the end of our question-and-answer session. I would now like to turn the floor back over to management for closing comments.
We thank everyone for joining us today. We look forward to speaking again next quarter. Thank you.
This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.