All right, good morning, everyone. Welcome to Tuesday. So for those that don't know me, I'm Tyler Brown, Senior Analyst here at Raymond James. I cover the construction materials market, I cover the waste industry, I cover the transportation sector, and unfortunately or fortunately, you will likely see a lot of me today. I've got a lot of companies here. But this morning, we are kicking off with Construction Partners. I'm very excited to have Jule Smith, the CEO, Greg Hoffmann, CFO, Ned Fleming, the Executive Chairman and Founder, also joining us. But look, this is a fantastic story. It's one of our favorite stories. We think it's both got a really good internal growth story with IIJ funding, but there's also a really exciting external growth story with a very long runway to allocate capital very efficiently over time.
So Jule, I think we've got maybe a slide or two just to give a little overview.
Yeah.
Maybe just give us a little bit of overview, 'cause I have a feeling a lot of folks in the audience may not know who you are. So maybe just a little bit, and then we'll kind of jump into Q&A. If you have questions, feel free to raise your hand and interrupt at any moment. Thank you.
Yeah. Well, good morning, Tyler. It's great to be back here with Raymond James. Good morning, everyone. As Tyler said, CPI was founded a little over 20 years ago. It's great to have Ned here, one of the founders. We are a infrastructure construction contractor located in the Southeastern United States in six states. And the great thing about us, our model is we're a family of companies. And so if you think about that, CPI is the parent of six platform companies, and so that we have a management company, a platform company in each state, that's a great management team, provides a great culture and a growth engine in that state.
But even more than that, those six platform companies are located in 70 local markets, and they have a local workforce in that market with a local management team, and that local workforce and management team generates steady, recurring, predictable revenue from repeat customers on high-margin, lower-risk jobs. So think about, for example, Huntsville, Alabama, or Pensacola, Florida, or Greenville, South Carolina. And those local workforces and local management teams are generating very predictable budgets every year that Greg can predict and count on, and they're working there. They're not traveling to the next state or hours away and living in hotels, and they're working for customers they get to know. They're not going and doing big mega projects. They're working on the city resurfacing project. The DOT is widening a road.
The local hospital is building a new wing, and they're doing the site work and the infrastructure on that. So that provides higher margin, lower risk jobs. That's the business. It generates steady revenue. It also throws off a lot of cash flow that we then can invest in both organic and acquisitive growth. That's a little bit just to start with who we are.
Okay, perfect. So, let's talk just a little bit about what hot mix asphalt is.
Right.
So maybe just start at a high level. You know, what is hot mix asphalt? Because I think, again, some people may not have a great-
Yeah. Well, at its basic definition, hot mix asphalt, which you ride on over 90% of the roads in America, is really rocks glued together, right? At its basic definition. You've got large rocks, medium-sized rocks, and tiny rocks. Think sand. That's all it is, and it's glued together with liquid asphalt, asphalt cement. And so, and it's heated up at an asphalt plant, hauled to the road, laid down, and rolled. It's really that simple. But the key part that's a competitive advantage for our business, there's two things: First, in each of those local markets, we have an asphalt plant. That's a key part of the market that defines that market, and the reason it defines that market is two things.
Number 1 is the fact that we can make asphalt gives us a competitive advantage, and there's only usually one or two other manufacturers of asphalt in that market. So when we bid on projects, we know who our competitors for those projects are gonna be, which creates a relative market share business. The second key thing is you can only haul asphalt about 40-50 miles at most, for two reasons. Number 1, economically, it gets too expensive, and number 2 is it cools off, and so you can't lay it down on the road and get it accepted if it cools too much. So that creates a moat around that market. So, for example, in Tallahassee, Florida, we have an asphalt plant, and there's two other people that make asphalt in that market.
An hour and 45 minutes away in Panama City, we have an asphalt plant. We have two other competitors that make asphalt. We don't have to worry when we bid a job in Tallahassee that the players from Panama City are gonna haul asphalt and surprise us. We know it's very predictable who we're gonna be competing with, and we can understand our market share in each of those businesses. So that's what the asphalt plant tool provides us, is that competitive advantage and the ability to build a relative market share business.
Right. So I don't know what you had for breakfast. Maybe eggs and bacon?
Something like that.
Maybe I had some Rice Krispies, because I, I love this analogy. Hot mix asphalt's a lot like a Rice Krispie Treat. So when you make Rice Krispies, a Rice Krispie Treat, right, you've got the rock, the sand, that's the Rice Krispies, and you add in the bitumen, that is the marshmallow and butter. Now, but it's important because this is what creates the micro market. Because, again, literally physics, time and temperature, govern and create those small local markets.
Correct.
That would generally be correct, right?
That's right. Yes.
Yeah. Right, so as we think about, you know... I'm not sure, I do wanna talk about vertical integration there. So not only is it the hot mix asphalt plant, but you also own the rocks all the way down to the road. So you have the rocks in the aggregate quarries, the hot mix asphalt, but you also have been making investments in liquid terminal, liquid asphalt terminals as well.
Right.
Can you just talk a little bit about how vertical integration kind of works?
Right. So vertical integration is part of our strategy, one of our three levers of growing margin. So, we try not only to grow the top line, but we try to expand margins on our bottom line and our EBITDA. And vertical integration is one of those strategies. So, as Tyler said, and as I explained to you, rocks, aggregates, are a big part of asphalt, and in some markets, we are, we provide our own aggregates. In other markets, we're paired with the aggregate players you know very well, Martin Marietta, Vulcan, Heidelberg, and we're partnered with them, and we buy their aggregates. But where we supply our own aggregates, we are able to capture that margin. So as we pass our aggregates from the quarry to the asphalt plant, we don't discount that.
We capture that margin, and we don't put it in the bid at cost, we put it in at retail price. So we capture that margin along the value chain. As Tyler said, we also have vertically integrated in the liquid asphalt business. So we have a terminal in the Panama City that we barge liquid asphalt in, and we just opened last year a asphalt terminal on rail in Huntsville, Alabama, between Huntsville and Birmingham, where we rail liquid asphalt in. This is the same liquid asphalt we were buying at retail for many years. We're buying the same liquid asphalt, now we're buying it at wholesale, and again, we're just putting it in trucks and taking it to our asphalt plants and using it. We're putting it in our bids at retail and just capturing that margin.
And so that's a great return on investment in capturing that margin and growing the bottom line.
So, it looks like you have liquid asphalt terminals in Florida as well as northern Alabama, but where you don't is over in the Carolinas. Is that a potential opportunity longer term?
Absolutely. So I know we're gonna probably, as Tyler's really good at, looking at our map, our heat map, so to speak, and pointing out where we can grow, we're gonna be talking about growth. But where we start to build a concentration of hot mix asphalt plants in local markets, it starts to make sense for us to look at investing in vertical integration facilities, such as asphalt plants. So that asphalt plant between Huntsville and Birmingham became feasible when we bought Good Hope Contractors between Birmingham and Huntsville and really started to build a lot of critical mass there. And so it really made the throughput that we bought each month really feasible to invest in that hot, that asphalt terminal.
Right. So local markets, micro markets, vertically integrated, drives good market position.
Right.
So we've kind of set the stage for the business. Now let's talk about the end markets. So what exactly do you do? So is it residential? Is it generally public? Or what? Maybe a better question is, what don't you do?
Right. So our main customers are public players, right? So our business, we do public and private. And it's very predictable, usually year to year. It's amazing, Greg and I always laugh how predictable it is. These 70 local markets, they're bidding on projects organically. They're deciding on what they bid. But year in and year out, our business is about 60-63% public and about 37% private market. And that might vary a percentage or two, but that's about what it is. And so our main customers are gonna be the state DOTs, the Florida DOT, the North Carolina DOT, counties, Wake County in North Carolina, cities. Those are gonna be the main purchasers of roadway projects, paving needs.
But then on the private side, we do a lot of work for a lot of general contractors and developers doing commercial projects. We tend to work mostly in non-residential. We do some residential, but mostly we work in non-residential projects, simply because they bring higher margins. Residential subdivisions are the easiest projects in our ecosphere to do, and so they tend to bring lower margins. So mainly, we will sell the asphalt to players at our asphalt plants to do that. We would like to work, say, for a Skanska or a Brasfield & Gorrie, or Choate, or Gilbane, doing more complicated projects. That's mainly what we do on the commercial, private economy side.
So going back to the predictability, you know, this hotel, I'm sure, there's a lot of concrete forming going on to build this hotel. Hopefully, and presumably, that is only done once.
Right.
But in the road business and asphalt business, there is a natural recurring revenue stream. It may be over a long period of time, but roads do wear out and have to be replaced. So maybe you can talk a little bit about that, the mechanics of that.
Right. So for asphalt, most of what we do is maintenance, and that's a great part of our business is asphalt can be maintained over and over. So for example, we're working... My family joined CPI in 2011, and I was able to be the platform company president for over a decade with the founder, along with Ned, Charles Owens, who was the CEO for many years. And so we would work in Raleigh, North Carolina, and I remember we're now paving the same road we've paved now three times. So when you put down asphalt, it goes down, it has a lifespan of 10-12 years. And then, it needs to be resurfaced, so a crew, usually at night, will go out, mill up, take up the 2 inches, the top 2 inches.
We will simply haul that, what we call Recycled Asphalt Pavement, RAP, R-A-P, back to the asphalt plant, put it in a pile. That pile will then go, as we make new asphalt, will be put back in there. Asphalt is the most recycled product in the world. Almost 30%-40% of new asphalt is simply old asphalt recycled. And then that crew, in the middle of the night, will put two a new layer, will fill in that two inches with new asphalt. So at 6 A.M., when the traveling public starts going to work, they're riding on a new surface, and you can keep doing that over and over and over again for decades. So that's the maintenance part of asphalt.
Okay, so let's fast-forward. So Alabama DOT wants to let a project. How, how does that process work for you? So they go out, they want to pave 5mi of road in rural Alabama. Seems like a good fit for you. How does that process work?
So the procurement process in our business is projects get bid, advertised. So the Alabama DOT simply advertises a project. Usually, there's a four-week advertisement on almost all projects. And so they'll say, "We want to resurface. We want to maintain this road," and they'll put it out for bid. And so let's say that's in Montgomery, where we know that there's two other players. As I said, it's a relative market share business. Our company in Alabama, Wiregrass Construction, will get the plans, take it to their local Montgomery office. That local team will work up an estimate for that bid. They will figure out what it costs to do that project, and then they will decide what margin they want to put on top of that bid. And the cost side of that estimate, we're just a pass-through business.
In other words, we just figure out what it costs, and then we put a margin on top of that. And then, if we turn in the bid that day and win it, when the, there's a certain day that those bids get turned in, then we'll go out and do that project. Our typical projects are $3 million-$5 million and take between 6-9 months to do. We don't do big mega projects, $250 million -$500 million. That's why when I say we work on lower-risk, higher-margin jobs, that's what I mean. So Wiregrass Construction, that local team, they win the bid, they'll mobilize within the next few months to do that project. They'll go out, their crews will finish that project.
Usually, if we've done a good job estimating, they have a chance to finish that work at a higher margin than they bid it. And so, I often tell folks, "When you are doing thousands of projects across the Southeast, if our guys are finding a way to finish the jobs at higher than they bid, that's what adds up to good quarters." That's when Greg and I are able to have earnings calls that sound good, is when throughout the Southeast, our guys are working on those projects and finishing at bid margins higher than that. So-
But there is a little bit of estimation risk.
Right.
Maybe, Greg, you can talk about this.
Yeah.
But if we were to look at the trajectory of margins over the last couple of years, they were pretty steady, and they took this big dip. Now, they've since come back, but maybe talk about the dip.
Yeah. So, two things I think that I want to focus in on what Jule said. First of all, it's a pass-through business. Second of all, we're in a low-bid environment, right? Low bid wins. So pass-through environment first. We estimated jobs based on the cost that we knew prior to 2021 and 2022. As we all know, inflation went crazy to 9%. We had supply chain issues and other things, labor issues that hampered our business. So the cost that we estimated during that time wasn't enough based on the new world we were in, okay? So there's a period of time where we had some erratic EBITDA margins that were really caused by those issues. So the good news is that our duration is very short for our projects.
We work through those within, you know, 12-18 months, and now we're pretty much back to normal. We've now baked in the new world we're in.
which is what our model always was. We can handle really whatever level of inflation there is. If it's 2, great. If it's 4, 9, or 109, it doesn't matter as long as it's relatively stable. It's now relatively stable. It's at a higher rate, but we're able to bake that into our cost. So I think that's important to know is, you know, the input costs are passed through based on what we know in terms of the escalation. The other thing I think is very interesting is we're a low-bid environment. You talked about the estimation risk. It's we get asked a lot about win rates. "What's your win rate?" The easiest thing to do to, in our world is win a job. We could be 100%.
We'd have a 100% win rate if we wanted to. We wouldn't make any money. So the key to us is always be as close as we can be to the next bidder, right? That maximizes our margin. We understand our markets, we understand the tendencies of our bidders, in our markets, so we know and understand what their backlogs are as well. So that helps us eliminate as much as we can of that risk.
Right. So let's finish up the discussion on internal growth, just a little bit about IIJA.
Mm-hmm.
I look at those shaded states, and I feel like they're pretty fast-growing. There seems to be a lot of infrastructure need in those states. So can you just talk a little bit about IIJA, generational investment in infrastructure?
Yeah
... what that means for you guys over, not only this year, but kinda off into the next few years?
Sure. So, we often talk about, you know, the investment thesis in CPI, and the first one that I already talked about was just our business model, but the second one that I like to talk about is sort of the long-term, the long-term generational trends. And the two I talk about that CPI was really founded upon was two things: first, that our nation has neglected its infrastructure for decades, and the second is that people are moving to the southeast. And those are two tailwinds that CPI is really benefiting from. The first is the infrastructure needs that our nation's got to deal with. That's what the IIJA is really a down payment on. It's not gonna solve all the problems by far, but it's sort of a down payment on that. And so we're really...
People ask me, "Well, what stage of the IIJA we're in?" I would say, if you want to liken it to baseball, we're maybe in the third or fourth inning, at least as it affects our P&L, right? Because the money's got to flow to Washington, to the states, and it's flowing just through the normal mechanisms of the funding to the states. It's just a boost to that funding. And then it's got to be let in projects, as we just talked about, and then we've got to do it. And so it really started being let last year, and this is sort of the second year of that.
What's interesting, I was in Florida last November at the ARTBA, the American Road & Transportation Builders Association, conference, and they did an analysis of the different regions of the country on what they're spending the IIJA funds on. It was amazing. It said there was a conference of the Northeast and the Southeast sections. The Northeast of the United States, over 95% of the IIJA funds were going strictly to maintenance. Almost no capacity increase was being used by the Northeast states. Then the Southeast states, 60%-65% was going for maintenance, and the other 35% were going for capacity increases, widenings.
That just shows, which we like, we do widenings and capacity improvements also, but that just shows that the states that we're in not only are having to maintain their infrastructure, they're having to deal with increasing the capacity of their roads and their infrastructure to deal with the migration.
Perfect. So we got a few minutes left. I wanna switch the topic over to the external side, one of my favorite topics, with CPI, but I love rinse and repeat M&A stories. I've seen it in the garbage industry for a long time.
Yeah.
Can you just talk a little bit about the opportunity? There's quite a few dots there, but there are a lot of dots-
Yeah
... in those states. You know, you have maybe, we estimate, something like 10% of the hot mix mix in those six states that you operate in.
Yeah.
Can you just talk about the runway of M&A?
Yeah. So the third investment thesis that I say CPI has is our industry is going through a generational consolidation, and this is what I mean by generational consolidation. A lot of the businesses in our industry got started in the 1950s with the Eisenhower Interstate Highway Bill, where there was a huge demand to build roads throughout the country. And so we have hundreds and hundreds still of privately owned businesses throughout the southeast, of families who got started in the 1950s, have done really well, built great businesses, but now they're on their third or fourth generation, and they are now looking and saying, "Okay, how do I hand this to the next generation?
We have multiple heirs, some, some are in the business, a lot of heirs are not in the business." And more and more, they're saying, "You know, maybe it's time for, to turn this wealth into cash. That would be easier for our family planning." And CPI is known as the consolidator in our industry, and so they will reach out to us, and this is a big part of what I do, is go meet with these families, talk to them about their business, get to know if it's a good strategic fit... and, potentially acquire their business, take care of their employees, and that's how we get to consolidate these local markets. As I said, my family business joined CPI in 2011, so I'm able to talk about what it's like to join CPI.
That's a big part of what we do, is we're able to grow our market share and grow in these states through the generational consolidation of our business.
Lineage transition is always a huge catalyst for small private companies to sell, but there's a unique bonding requirement in your business. Can you talk about that and how that interrupts that lineage transition?
Yes. So a big part of our business is when you bid a job, like we talked about that bid to the Alabama DOT, every contractor that bids that job has to put a payment performance bond on the project. So the Alabama DOT requires that, and so most public projects and some private projects say you have to bond it. So think, every contractor in our business that wants to bid on public work has to have a bonding program, a relationship with a bonding company. Think Travelers, CNA, Liberty, Chubb, those companies.
Those companies back you, but they look at your balance sheet and say, "Okay, based upon your net worth and your assets, we're willing to back a certain program of your bidding." So, for these companies that are looking to transition and take wealth out of the business, potentially, the bonding requirement creates a problem, because for them to hand the business down to their next generation, the bonding company says, "That's fine for Junior to take over the business, but you got to leave the wealth in the business. And we really don't want you to split it up between Junior and Sally and Sam. You need to pick one junior to take care of this whole business." That creates issues. The bonding requirement oftentimes creates a situation where the two brothers, for example, that are in their seventies, say, "You know what?
Maybe it's time for us to sell." So that's just a unique part of our business, is the bonding company who's on the hook for all the work. This business goes under, they have to finish all the jobs. So they say, "Wait a minute, if we're gonna stand behind you, we want the balance sheet to stay intact. We want the business to stay intact." So that, that creates a situation where if you're gonna hand it to someone, you've got to hand the whole business and keep it intact.
Fantastic. Very, very helpful. Maybe we'll finish, Greg, with a little bit with the balance sheet-
Yeah, sure.
to fund all this exciting stuff.
Yes.
Can you talk about the cash generative qualities of CPI?
Yeah.
Talk a little bit about the state of the balance sheet.
Absolutely. So I think, our state of the balance sheet is very healthy right now. Our credit agreement, that's in place is more than enough to fund... We've talked a little bit about Roadmap 2027, fund, our acquisitive and CapEx needs, through 2027. We're currently, at a leverage ratio of 1.78, as of the end of the last quarter, and, you know, feel very comfortable being in a range of 1.5x-2.5 x going forward. And I think that the cadence of our, M&A, will certainly allow us to stay in that range.
Perfect. We'll leave it there. There is a breakout session for those that want a little more detail, but thank you guys so much for coming.
Thank you, Tyler.
Thanks, Tyler.