Construction Partners, Inc. (ROAD) Earnings

Management highlights

- Company Culture and People * Culture rooted in core values of family, opportunity, respect, and excellence is a key competitive advantage for attracting and retaining talent. Approximately 7,200 employees drove strong execution and record backlog growth in the quarter. * The company follows a disciplined long-term growth strategy aligned with its Road 2030 five-year plan focused on consistent, controlled profitable growth. - Business Resilience * The business remained resilient in Q3 despite continued energy cost inflation and unusually wet weather across many markets in May. The company's cost pass-through model, strong local operating teams, and disciplined strategy enabled continued profitable growth. - Federal Transportation Funding Update * Management expects Congress will ultimately approve a new multi-year surface transportation bill with increased funding compared to prior legislation. The House-passed Build America 250 Act already has strong bipartisan support and provides 7.2% more total funding over its term than the IIJA, with an even larger increase in funding for hard infrastructure projects. * A temporary continuing resolution (CR) is increasingly likely due to the tight legislative calendar ahead of midterm elections, but management does not expect a CR to cause meaningful disruption to federal funding or project activity in fiscal 2026 or 2027. Approximately 45% of existing IIJA funding remains to be deployed, and bid activity and awards remain healthy. - Commercial and Public Project Demand * Activity in the AI data center construction segment has accelerated meaningfully. 70-75% of all new U.S. data center construction is planned for the company's existing 8-state footprint, and the company is well-positioned to participate through existing local market presence and established relationships with general contractors. Current active data center pipelines exceed $100 million in Texas and $130 million in Oklahoma. * Broader commercial activity remains strong, with over 1,000 commercial projects planned for 2026, including retail, healthcare, corporate campus, and manufacturing facilities. * Publicly funded infrastructure work remains robust across Sun Belt markets. Recent notable wins include a $ reconstructing project at Pensacola International Airport and two I-4 rest area construction contracts totaling over $80 million in Florida, alongside consistent recurring resurfacing and repair work for state DOTs that drives steady growth. - Growth Strategy * The company recently completed the strategic acquisition of Ellsworth Construction, a leading Oklahoma-based asphalt and construction firm, which expands its footprint in Oklahoma's fast-growing Tulsa and Oklahoma City metro areas and strengthens its data center construction capabilities. * The M&A pipeline remains robust, driven by ongoing generational ownership transitions across the construction industry. The company sees opportunities for both tuck-in acquisitions and new platform acquisitions across its existing footprint and adjacent Sun Belt states, and is the industry's acquirer of choice for many sellers. * Organic growth is supported by continued investments in capacity, geographic expansion, and vertical integration. Several new greenfield facilities are expected to come online later in 2026 to expand into underserved high-growth markets.

Guidance

- Management raised full fiscal 2026 guidance to reflect stronger-than-expected Q3 performance and the contribution of the newly acquired Ellsworth Construction. - New 2026 guidance ranges are: revenue of $3.64–$3.68 billion, net income of $165–$168 million, adjusted net income of $177.6–$181.4 million, adjusted EBITDA of $559–$569 million, and adjusted EBITDA margin of 15.35–15.46%. The midpoint of the guidance reflects approximately 30% total year-over-year growth in both top-line revenue and bottom-line margins. - The company expects to convert 75% to 85% of full-year 2026 EBITDA to operating cash flow. - For fiscal 2027, management expects continued strong organic growth, with approximately $140 million of acquired revenue already carrying over from 2026 acquisitions, putting the company on track for another year of disciplined growth.

Segment performance

Aggregate Q3 fiscal 2026 total revenue was $999.4 million, representing 28.2% year-over-year growth, consisting of 8.9% organic growth and 19.3% acquisitive growth. Gross profit was $168.4 million, up 28% year-over-year, with gross margin of 16.8% (flat compared to 16.9% in Q3 2025). General and administrative expenses as a percentage of revenue fell to 6.3% from 6.5% year-over-year. Net income was $59.6 million, adjusted net income was $60.6 million, and adjusted diluted EPS was $1.08. Adjusted EBITDA was $163 million, up 24% year-over-year, with an adjusted EBITDA margin of 16.3%. Cash flow from operations was $93.1 million, up from $83 million in Q3 2025. As of quarter end, the company held a record total backlog of $3.36 billion, which covers 80-85% of projected contract revenue for the next 12 months. No separate segment financials with revenue contribution percentages were provided in the transcript.

Risks & headwinds

- Forward-looking statements are inherently uncertain, and actual results may differ materially from projections due to risks and uncertainties detailed in the company's SEC filings. - Unusually wet weather can disrupt near-term construction operations, though management notes that weather impacts typically even out over the course of the year, and teams can make up lost work via weekend shifts. The quarter did experience minor weather-related disruption from unusually wet conditions in May. - Continued energy and input cost inflation could pressure margins, though the company's cost pass-through model mitigates this risk, and management has already incorporated current higher costs into project bids. - Delay or failure to pass a new federal surface transportation bill could create near-term project planning uncertainty at the state level, though management expects no material disruption to activity even if a continuing resolution is implemented.

Analyst Q&A

• Q: What is the size of asphalt pass-through revenue impact, 2026 M&A contribution, and confirmed carry-over acquisitive revenue for 2027? /

  A: Asphalt pass-through added $8–$10 million in Q3 revenue, split between organic and acquisitive growth based on geographic source. For full year 2026, around 22% of total 30% projected revenue growth comes from acquisitions, equal to ~$780–$790 million of acquisitive revenue. Management confirms that approximately $140 million of 2026 acquisition revenue will carry over to fiscal 2027.

• Q: How does unusual wet weather impact your operations, and how do you make up for lost work? /

  A: Outdoor paving cannot proceed during rain, but warm seasonal temperatures dry out work areas quickly. Missed work days are typically made up via additional weekend shifts when weather clears. Management notes that weather impacts almost always even out over the course of the year; Q3 was wetter than average, but prior quarters in 2026 had better than average weather, so there is no material full-year impact.

• Q: Would a federal continuing resolution shift state DOT activity toward smaller short-term projects rather than large multi-year projects? /

  A: Yes, historically a continuing resolution does lead to more short-term maintenance and resurfacing projects while states wait for long-term federal funding to be finalized. Even during a multi-year CR like the one that occurred during the Obama administration, there were no material disruptions to overall activity, states and local governments stepped up to maintain funding flow, and the period even produced strong acquisition opportunities and solid company results. Current federal funding is already at all-time highs, so activity remains robust regardless of short-term authorization status.

• Q: What is driving the implied fourth quarter margin step-up, beyond pass-through of commodity inflation? /

  A: The margin improvement is driven by three main factors: full integration of 2026 acquisitions including Ellsworth, which bring healthy margin backlogs and contribute full-quarter revenue and margin in Q4; normal seasonal fixed cost over-absorption in the fourth quarter that naturally boosts profitability; and the company's cost pass-through model fully offsetting the minor Q3 impacts of weather and energy inflation, leading to a return to expected margin levels.