Okay, great. We're gonna get started here with the next session. Thanks, all, for joining us here this afternoon. If you're in the room for Construction Partners, you're in the right space. I'm Andy Wittmann. I'm the Senior Research Analyst at Baird that covers the Construction and Engineering sector. Very happy to be joined by the management team from Construction Partners Inc, Jule Smith is the company's CEO. Greg Hoffman is the company's CFO. Back here for, I'm thinking this is the sixth consecutive year since your IPO. I think that's right?
I think that's right.
Maybe could be five. I think it's six. And you've got a pretty high growth company that you're here to learn a little bit more today. To get us kicked off, Jule, I just thought it'd be helpful if you could give us just a couple minute overview of who Construction Partners is.
Yeah.
-and what you do, and then we'll kinda drill in a little bit more.
Yeah. Andy, it's great to be with you guys, and Baird, it's a great conference. We love coming up here. Construction Partners, we're an infrastructure construction contractor located in the southeastern United States. We're in six states. And just a high level, we're revenue-wise, about a $1.8 billion company, market cap of around $3 billion, and we laid out an analyst day last October, just sort of our five-year growth plan of about 15%-20% per year. We do mostly public infrastructure, but we do have a good bit of our work that's in the commercial and private markets. And we're a family of companies. We're not one big company, we're a family.
We have a platform company in each state that serves as a growth engine, has a really good management team, that both helps us grow organically and does acquisitions. So kind of a high level.
Great. I'm gonna ask you some other high-level questions-
For the people who might not be as familiar, and then as we progress through our time here today, we'll get a little bit more granular.
All right.
A little bit more of what's going on today. But, so you touched on you work mostly for public, some for private. Greg, do you wanna just quantify in any given year about what the split is between those two?
Yeah. Traditionally, it's in the 60% public, 40% private. Last year, it was 63% public, 37% private, so that's where we kinda, kinda live, in that range.
Yeah, and this year, there's been a lot of chatter about, like, what interest rates might do to the private sector demand. What's been your experience so far on that one?
Well, you know, we, we watch that really closely, and we get asked that a lot. In the Southeast, we really haven't seen any real fall off in the commercial activity.
Yeah.
I felt like last year, when the rates initially went up, there seemed to be a lot more budgeting and working that our commercial customers were doing, to get their projects started, and it feels like this year, that there's a lot more projects that are going.
Hmm.
So, it's been pretty active. What our customers are doing. Again, our commercial customers are mainly developers and general contractors.
Mm-hmm.
What they're doing is changed. In other words, four or five years ago, they may be building office buildings, retail. What we're working a lot now on the commercial side is more corporate facilities, warehouses, labs, corporate headquarters. So I feel like the reshoring or the migration of businesses to the Southeast is really creating a lot of activity on that side.
Yeah, probably worth noting, you said Southeast a few times. I think it's a really important part of your story.
Right.
What you basically just said there, in other words, is, you know, your economy's in the areas where you're working or growing.
Right.
There's been population migration. So you're Florida to North Carolina, basically everything in between, slightly over there, Tennessee, and Alabama.
Tennessee and Alabama.
Right. That's right, Tennessee.
Yeah.
I always forget about Tennessee.
Yeah, Tennessee.
Tennessee came in about a year, year and a half ago, too. That's right.
Right.
I forgot about that. Okay, so, another question, I think just fundamentally here, is that roads tend to last... An asphalt road, which is where you guys live, is paved in asphalt, tends to last, you know, 9 or 10 years, and then it needs to just be scraped and redone. What percentage of your business is just, like, maintenance type of work that has to happen predictably every 10 years?
Yeah. So, we talked about the public/private split.
So of that 60% public, probably 70%, 80%, depending on the year-
Yeah
... is gonna be maintenance related. On the private side, it's a lot smaller percentage. That's mostly, as Jule described, new work, but, you know, also recurring, though, right? Because there's customer relationships, certainly with GCs, that Jule talked about, and developers that continue to come to us, time and time again to help 'em out.
Yeah, and if you looked at historically in the company, is there any change in the way your DOTs, your customers, address their maintenance needs, or is that really as predictable as I like to think that it is?
Yeah, it's, it's really predictable in that they're gonna need to maintain their infrastructure, as you said, resurface their roads. I will tell you one thing that was amazing, that I heard last November when I went to the ARTBA convention down in Fort Lauderdale. The economist, Dr. Alison Premo Black, was making a presentation about: Okay, we're in the year two of ARP, the IIJA.... how are the different regions of the country spending their money? And it was the Northeast region and the Southern region, so she presented those two, and it really was surprising.
She said, "The Northeastern United States, 90% of their IIJA funds, the states are spending on simply maintaining their current infrastructure—" And the South, Southern United States, where we are, she said, "About 60% is going to maintain current infrastructure, and about 40% is going to increase capacity, widenings." And so that matches sort of what you would think. It's, there, these states are having so much migration that they're having to increase the capacity. And for us-
Yeah.
We count widening sort of when we're thinking of maintenance. We love going in and increasing the capacity of the roads -
Yeah
in addition to just resurfacing.
Yeah, 'cause that also brings in, grading, probably scope for you guys, too-
Right
Where you've got to fill out and build it out. And that brings me to another thing that I've heard you guys talk about more. Maybe it's just me listening better, but I feel like in the last year or so, you've been talking about doing more of the, what I'd call almost ancillary services to that core paving service, which has been what you are. So it might be grading, and you've talked about becoming even more vertically integrated. So, it's probably worth talking a little bit about what other areas of the construction scope you would add to your existing scope. And you know what? We haven't talked about the HMA plants yet either. So why don't you talk about-
Yeah
The scope that you currently have?
Yeah, so-
And what else you might add to it.
Yeah, I think to understand the opportunity there, you have to understand how we're organized. So we're not a construction company that sends a lot of crews traveling and living in hotels. We organize in local markets. We have 72 of them currently, and those markets have a management team and a workforce that lives in that market, goes to bed every night in that market. As Greg said, they're working for repeat customers, taking care of them, doing recurring revenue work, both on the public and the private side.
So for us, we say, "Okay, if we're gonna be doing $50 million worth of work in Pensacola, Florida, and we have the asphalt with plant, which gives us a competitive advantage, the ability to bid these type projects, instead of subcontracting some of these grading and utility services out, can we vertically integrate into those services as well?" So, for example, in Pensacola, Florida, two years ago, we made an acquisition of a grading and utility contractor who was ready to sell, just like our typical acquisition. He didn't have an asphalt plant, but for us, the ability to take those crews and that equipment and now put it working as a part of our team, we were able to capture more of the margin along the value chain.
So, as we said at the Analyst Day, when you look at our six states and the target map of potential acquisitions, there's about 150 private HMA producers in our states, but there's over 1,000 construction companies just like this one we bought in Pensacola. So those companies, it really only works where we already have an asphalt plant management team, but once we're there, the ability to vertically integrate and do more services is pretty powerful.
It seems like that's a really big, important part of the margin outlook that you gave, Greg, at the, at the Analyst Day. I mean, why don't you just articulate, for the room here, kind of where your margins are today and what you, what you thought they could be in the 2027 outlook, I guess?
2027, that's right. So-
And how much of that is just driven by the vertical integration versus other things?
Yeah, so, you know, we're approaching 12 this year. We've talked about,
This is an adjusted EBITDA.
Adjusted EBITDA margins, and expect by 2027 to be in the 13%-14% range. But, so certainly, adding those services, adding liquid asphalt terminals, for example, that could be... Adding a liquid asphalt terminal could be as much as 20 basis points to that margin. So, you know, the growth we're talking about is split, you know, 50/50 from organic-
Yep
... to acquisitive. So, you know, a pretty significant portion of that organic growth, at least the volume side of it, is gonna be part of that strategy.
Yep. Obviously, that would all be addressing the gross margin, but you guys have been pretty good about maintaining the SG&A line-
Mm-hmm
... and shrinking that as a percentage of revenue. How much of the margin and those targets in 2070 you think can be coming out of the SG&A line?
Yeah, we're thinking 8-10 basis points-
Yeah
... per year.
Per year?
Yeah. Absolutely.
Yeah.
Just keeping discipline as we grow the top line is gonna drive that.
Basically, a third of the margin expansion kind of from SG&A-
Mm-hmm
... and two-thirds from the gross margin.
Right.
Yep.
Yeah.
Okay, it's probably worth digging into the organic growth rate since we started talking about it.
Yeah.
So you said, so the outlook was 15%-20% total top line. You guys have talked about being kinda half and half in a given year, can be not half and half, will not be half and half-
Yeah
... in a given year, but over time, you think there will be.
Mm-hmm.
Certainly with the, the tailwinds that you have from stimulus today, that seems very doable. Do you think that those growth rates are applicable even without the stimulus?
Yeah. So for us, you know, we try to keep reminding folks, we had a really good funding program before IIJA, right? So the IIJA's provided a boost, and we think at the end of the IIJA, in five or so years, that's gonna be the new baseline for the Surface Transportation program. But we don't necessarily count on that boost being what's driving our growth, because as you know, we've grown 15%-20% since our founding 20 years ago.
Right.
So in a sense, we're really just continuing to run the same play that the company has been doing for two decades. But that 15%-20% growth on the top line, you know, we say it's about half organic, half acquisitive. You really don't have to focus on the acquisitive. It's gonna, it's gonna be there. It's gonna get your attention. But we wake up every day, and we focus on organic growth. We talk constantly to our operating companies about organic growth opportunities. Greg runs a pretty rigorous process to fund the best ideas organically. And so what we wanna try to do, because we think that's the best return for our shareholders, is where we can grow organically, we want to, you know, that 7%-10%. You know, right now, we think about 4% of that's price.
That's what we're sorta thinking in our models. So that's 3%-6% real organic growth that we need to focus on every year creating, and so we do that through growing market share where we are, greenfields, where we go into adjacent markets. But the thing that we're trying to communicate better, 'cause people say, "Well, how can you keep growing organically?" is that for us, the acquisitions are a vehicle to... for organic growth. In other words, the acquisition we just announced Monday, Hudson Paving, great business, a new market for us, just south of Pinehurst. That is gonna be bolted on and integrated into our platform company, Fred Smith Company. That's gonna give Fred Smith Company, over the next 2 to 3 to 5 years, just a great organic growth opportunity as well.
Did you just feel like the company just needed investment or crews that you can deliver to it? What is it about, you know, these acquisitions that allows you to, to grow-
Yeah
... them organically?
So Hudson Paving's a great company. Tom Hudson wanted to retire. You know, we were able to acquire him and integrate him. But we're gonna go in with unlimited bonding capacity. We're gonna be able to bid more types of projects. We're gonna be able to give them capital. We're gonna be able to give them the ability to bid patiently. All those things that we bring to every acquisition, just over time, not only increases margins, but it increases the top line as well, and we grow organically. King Asphalt's a great example. So in 2021, October of 2021, they became the platform company for us in South Carolina. They were in Greenville, Spartanburg area, three asphalt plants, great management team. Today, just three years later, they're throughout the state in a lot of different markets.
They have 10 asphalt plants, and so that's just an acquisition creating the opportunity to have organic growth. So that's, you know, that's... Organic growth is a huge part of what we focus on.
Does it ever get harder to manage with 20% growth? Is the business that scalable?
I think it is because of the way we're organized as a family of companies. If we try to be just one company, centralized, with the parent company having to manage everything, that gets to be where it's hard to scale. But, we have a family of companies. These platform companies have great management teams. They've retained their culture. They're growing in their states. So if we go to another state, like Texas or, Louisiana, we're gonna look for a platform company with a great management team that can be the growth engine in that state. So then, at the parent company level, we just have to make sure that, you know, we're able to provide good support and leadership.
Got it. I think the margin story at Construction Partners has been, it's been a dynamic story over the last couple of years, certainly with inflation. You're on the right side of that now.
... you're starting to get your margins back up. Can you talk about, maybe Greg, talk a little bit about some of the changes that you've made, if any, to the way you're writing your contracts today, to protect the company, from cost inflation, if and when it happens?
Well, so, you know, let's talk first about, you know, our pass-through mechanism.
Standard, yeah.
Right.
So, you know, the rapid change in inflation, from whatever it was, 2%-9%, you know, that was difficult to absorb. But our pass-through mechanisms can handle what's happening now. Still-
Yep
... we're still higher inflation, but it's stable, or relatively stable.
Yep.
So our pass-through mechanisms can understand what that does to labor, understand what that does to materials. We get pretty good insight into the aggregates. So, you know, I think that that's always gonna be the constant, in our, in our strategy, that passing through that cost. There are some ways that we're able now to, mitigate cost as it relates to, to some contracts. Yeah, and then state DOT contracts, we've always been able to, index our liquid AC, which is obviously one of the biggest, input, components to making hot-mix asphalt.
Got it. Okay, let's see here. It's probably worth talking a little bit about, the, the DOTs as a whole. That's, I guess, your, as a, collectively, they're your biggest customer type inside that-
Yeah
... biggest public sector. Can you talk about other funding mechanisms, maybe gas taxes or general funds that you're seeing being employed for the kind of work that you're doing?
Yeah.
Maybe if there's anything that stands out in any particular state that we should know about, or any changes that are happening at the DOTs, that'd be helpful.
Yeah. So each DOT and each state has a funding mechanism at the state level. In each of our states, several years ago, they raised their gas taxes because they knew that the infrastructure was deteriorating. So even before the IIJA, all six of our states had healthy funding mechanisms. So that's the first thing. I'm gonna go through three big buckets that they have. So, healthy funding mechanisms at the state level. Then the second thing is the surface transportation bill that every year comes out of Washington, D.C., that goes to the states in what's called formula. In other words, bigger states are gonna get more money than smaller states. There's a formula that they spread the money out across the 50 states. That program has existed for years. It's gone through several names, SAFETEA-LU.
The last seven years, it was called the FAST Act. So that's an important funding mechanism for each state, is the federal highway component. And then this third funding that I would say has just been a boost, it actually started before the IIJA for a year, coming from the COVID relief bills, that created just a boost in 2021 and 2022 in the funding. That then, once the IIJA, which is a generational investment in the nation's infrastructure, started happening, these states experienced about a 30% boost in funding. And since then, it's just sort of growing at single digits, but we really, it's created a huge amount of work for the states trying to get ahead of their infrastructure and maintain their infrastructure.
So those are the sort of the three funding things that are going on. There's really not been a big change in that. I mean, obviously, our DOTs took a while to program the IIJA, so even though in Washington they may be getting ready to enter year four, we're, we're just in year two of actually producing work in the field and on our P&L.
Yeah. It's really interesting. So would you say that overall today, do you... Is it fair to say that there's better visibility today as a result of that? I mean, you've always got a backlog that gives you 6, 9, 12 months of kind of visibility, but is it, is it better today? I don't know.
Yeah, it is. We've kind of talked about the visibility over the next 12 months. Backlog covered, you know, 70%-75% of that. Now we're probably more 80%-85%. So it is giving us more visibility, yeah.
So you're really sold, you're really selling, you're really sold out for the summer, probably, most of the early winter, and you're selling into your fiscal 25 at this point in time.
That's right. Yeah, there's some book and burn that we'll do-
Right
... to fill in, you know, spots that we need something to work on. Sure.
A couple years ago, you guys, did this thing where you, you actually kind of oversold your capacity. I kind of, at the time, this was my analogy, and like, you, you kind of sold like an airplane flight. Like, you booked a little bit more than you could, and you had to sub it out. Is that a situation where you might be in this year?
In some places, in some markets-
But you still make a little margin on that, too, right?
Yeah, yeah. You'd sub it out. The reason that we've been able to sell a high percentage of our next twelve months in, than we typically have, is because the customers, they know that contractors are very busy, and they know that for us to bid on the work, they have to create more flexible delivery schedules, more flexible terms. So our area managers are able to say, "Sure, I'll bid on this job, because instead of it having to be done in December, they're giving me till next July or two years to do it.
They're able to book it. That's because of the elevated amount of work, and because it's busy in the private economy, our customers are just being more flexible with the terms.
Are they, are they protecting you? The one thing that you'd hate to see is you, you bid something a year, a year and a half in advance. It's nice that you get to it when you get to it.
Yeah.
It allows you to schedule it, but gosh, what happens if commodity prices-
Well-
Greg, move in that time between bid and when you're actually putting in construction? You get in terms and conditions that protect you on that, too?
We do. Well, so there's a couple things. Yeah, there are some states that have indexes as it relates to energy. So we're protected in some states. And in other ways, we're gonna go ahead and help ourselves and hedge that, too.
Yeah.
So, you know, it's certainly there, by pushing it out a little bit, you have to be a little more, you know, conservative in your bidding.
Yeah. Yeah, so that goes in the price, too?
Sure.
Right.
Can you pre-buy aggregate to the extent you need it?
We c-
Just basically lock in that price in advance?
Yeah, the aggregate, the aggregate companies are great partners. So when we're bidding a significant job, they'll give us a job quote.
Okay.
They'll live with that. So-
They will? Okay.
Yeah. The aggregate players, they're really good about... They like to raise their price, but they'll hold it for the jobs that you have.
Yeah. Got it. Now, that is helpful. All right, so we're gonna talk a little bit about the capital returns, I think, at this part. Why don't you talk about... I mean, there's a lot of yellow iron, a lot of things that are dirty and covered in asphalt, and things kinda wear out-
Sure.
-And you gotta maintain this stuff. So why don't you, Greg, talk to us a little bit about your capital budget. What investors should expect that you need to put back in this business-
Yeah
in terms of just maybe maintaining the fleet, but also the fact that-
Sure
You know, Jule, you mentioned greenfield. That for people who don't know, like, sometimes they wanna be in a new market, they just build an asphalt plant. They say, "We're gonna plant a flag here," and that's a capital expenditure to, to grow the business. So there's some of that that's happening too, right?
There is. There is, yeah. So first, let's talk maintenance CapEx. We typically, year in and year out, spend about 3.25% of revenue on just replacing our existing fleet. Now, when we purchase that piece of equipment, we also dispose of it. So we think of CapEx as net CapEx-
As net, yeah.
... right? So we're getting cash in. It's really a way to, you know, manage our fleet.
We're taking good care of that equipment, so we wanna make sure we get the best value out of it, and so that's essentially reducing our new maintenance spend, right?
And then in addition to that, we're trying to live in that net CapEx 5% range. So that additional 1.75% can go up a little bit, but we're looking to spend that on organic growth plays, greenfields, liquid asphalt terminals. That was a big, big spend for us over a couple of years, so that certainly was taken into consideration there. But that's that rigorous, you know, Shark Tank type request for dollars that the platform companies do in order to make sure that we get the highest returns from that organic spend.
I mean, I guess the other way I kinda look at it is, like, here's a company that you're spending growth CapEx, couple percent-
... to get organic growth in the high single digits.
Mm-hmm. That's right.
That actually... It's a capital-intensive business.
Right.
But that doesn't seem overly burdensome at all-
No
... frankly. What are you doing right now to improve cash flow? Can you write in terms and conditions that get you paid sooner?
So yeah, we're using every tool in the book. We certainly are trying to do that, absolutely. Trying to get, you know, prepaid for certain things, for sure. But just, you know, elbow grease, communication, compensation, it all factors into good cash flow.
Yeah. Greg, Greg's done a great job on that in the last few years of just really improving the cash flow from operations by just, as he said, focusing on it. It's been, it's been very powerful.
It has. It has gotten better, and one of the things that's unique, for anybody who's gonna look at the model here, when you guys do acquisitions, a lot of times you won't buy the working capital out of the companies, and so on the cash flow from operations, you're gonna see that Construction Partners has to actually inject new working capital. That hurts your cash flow from ops, makes it look worse than it, what I would say, economically-
Yeah
... it's actually what it is.
Yeah.
It's not a huge number, but it's $a few million probably a year, right?
Yeah.
Mm.
8%-10% of,
Yeah.
Yeah.
Of the revenue that you acquire.
That's right. Yeah.
But you're acquiring, you know, I don't know-
Yeah, fifty-
... $80 million a year?
Well, this year, alright, what we have on the books now is $155 million.
Right.
Yeah.
This year's a bigger year, so 10% of that is $15 million of CFO-
That's right
... that you're dinging yourself with on the-
That's right
... financial statement.
Yeah.
So, I just like to point that out, 'cause people will say, "Oh, man, maybe the stock looks kind of expensive on a free cash flow," but, like, some of it's really not economically-
Mm-hmm
... that way, and you're getting-
Mm-hmm
... very good growth out of it, too.
Yeah.
That's why we talk about kind of our, you know, I don't know if it's free cash flow conversion, it's more retained cash flow-
Right
... right? So we're talking about, again, Adjusted EBITDA minus cash taxes, minus interest, minus that 3.25%-
3.5. Yep
... yeah, CapEx, which is about 50%-52% of-
Conversion
... conversion or retained cash.
Yep. Yep.
Mm-hmm.
Great. We're out of time. I hope that was helpful for y'all, and, like, I just see all of you guys, just being around you-
I love it. All right, have a good day, everyone.
Thanks for being here.
Thanks for joining us.
Thanks.