Thanks, everybody, for joining us and sticking around here a little bit later in the day. We've got another exciting presentation here with Construction Partners, Inc. I'm Andy Wittmann. I'm the senior research analyst that covers construction and engineering stocks here at Baird. And Jule Smith's the company's CEO, and Greg Hoffman's the company's CFO. We're really happy that they joined us here again. This stock has obviously been having quite a move. They've got a lot of really exciting things that they talked about at their last analyst day, and they've been really delivering on what they talked about at that analyst day if you look at the results. So I think for those of you who don't know the company very well, I'm just going to turn it to Jule for a couple-minute high-level overview about the company..
I'll be launching from there with some of my Q&A. If you had any questions from the audience, you can also email session3@rwbaird.com, and I'll be monitoring that email while we're chatting.
Yeah. Well, thank you, Andy. Greg and I always look forward to coming to this conference with Baird. So Construction Partners, Inc. is an infrastructure contractor, construction contractor. We used to say six southeastern states, but we just entered the state of Texas last week, or November 1st, officially. So we're now going to start, probably hear you say, Sunbelt more than Southeast. So we're in seven Sunbelt states, and we are in 65- 75 local markets. And that's the key to our business. It's a very local business. We do road maintenance, construction, turnkey site work development for commercial projects such as data centers, warehouses. And we center our markets around hot-mix asphalt plants. So we've been in business 20 years.
As Andy said, we had our first analyst day last year, which gave us a chance to speak to some of the things we had said back in 2018 when we went public and show how those predictions had come true and to sort of lay out our five-year plan, which we call Roadmap 2027. So that's what we're executing on now.
Greg, why don't you talk about what those financial targets were for Roadmap 2027 and where you finished in your fiscal 2024?
Yeah. So the 2027 targets from a top-line standpoint were a range of $2.7 billion-$3.2 billion and an EBITDA margin goal of 13%-14%.
Can you give us some context as to what the implied CAGR was on that revenue?
Yeah. So traditionally, we're growing at 20%. 10% of that's inorganic and 10% organic. So for 2024, we revised our outlook to about just over $1.8 billion, $1.823 billion, and implied EBITDA margin of 12.1%. And again, about a 17% growth year-over-year top line.
In 2024.
In 2024.
You also came out with that announcement, and you gave us a little bit of a glimpse into 2025 just because you did a really exciting acquisition that we're going to talk about, but why don't you, I guess maybe stick with you, Greg, just talk a little bit about how the 2024 to 2025 progression's looking as well.
So we've actually issued two different releases over the past couple of weeks.
True enough.
One that included the new acquisition we'll be talking more about, considering it being a part of our numbers starting 1/1/2025. We ended up closing a little bit more quickly than we expected, so we revised that so that their numbers are now included from 11/1/2024, so two additional months as a part of that guidance.
Important to recognize that you have an October 1st fiscal year start.
Yes.
So it sounds like what are they revising at higher, but the fiscal year started October 1st.
The implied midpoint of our guidance for 2025 is $2.6 billion, roughly, at 14.3% margin, EBITDA margin.
Yeah, which is well on track towards the EBITDA margin that you kind of laid out and helped by a positive mix from Lone Star. So Lone Star is the big acquisition. And the thing that I think we need to talk about here first, Jule, why don't you talk about who Lone Star is? And then, Greg, if you could help us with some of the financials for that standalone company and how they kind of compare to Construction Partners' numbers. So why don't you start out, Jule?
Yeah. I'd love to. And before I say something about Lone Star , I just want to say, even before Lone Star Paving was added. We just did our budget, right? Our fiscal year just started. And even without Lone Star , the legacy CPI business did that same progression and took another step forward to our Roadmap 2027. And obviously, a year ago at our analyst day, which seems like two or three years ago by this point, but it was just last fall, you can't count on, and we didn't count on an acquisition the size and the scale of Lone Star Paving. We knew they were out there, and we knew that they would happen at some point, but they weren't in our numbers and plan. So clearly, Lone Star moved us a couple of years forward on the progression toward those goals.
But Lone Star Paving is just an incredibly well-managed, well-positioned company in Central Texas. Texas, for those who might not know, is I'm sure you all know about how many people are moving there and how great the economy is, but it is also the best-funded state in our entire country from an infrastructure standpoint. And so Lone Star Paving is a company in Austin, San Antonio, and then Temple, Killeen, which is a pretty big metropolitan area north of Austin. And that's their three markets. They are a company that was founded by a man named Jack Wheeler, who is like a legend in Texas infrastructure. He's been there for 40 years. And Jack's built just a great company with a great management team. And when we got to know them last spring, we knew, okay, this is the platform company for us to enter Texas with.
As I alluded to, our culture is one where we like to have a platform company in each state. We're a family of companies, not one company. My family joined CPI, our family business joined CPI as the North Carolina platform back in 2011. So I was able to work for the founder of the company, Charles Owens, for a decade. Really, we believe in this culture. Greg worked in Alabama as the CFO for the platform company, Wiregrass Construction. So that's a huge part of our secret sauce, is to have these platform companies that retain their culture, retain their operating effectiveness. But we knew Texas was a market that you better have a really good company going in there. And so for us, we've looked at other opportunities to go into Texas before. They just didn't feel quite right.
But Lone Star Paving, being in great markets, vertically integrated, and having a great management team, that was a great opportunity.
Yeah. And then financially, it really stands out. And there's some things about Lone Star that you kind of look at. And I think a lot of people, when you first announced it, said, "Whoa, what's that all about? How do they do that?" So Greg, why don't you talk about what the financials are at Lone Star and how they compare to kind of legacy CPI? And then, Jule, you know where I'm going next, which is what's the roadmap?
Yeah. So we announced in a release a couple of weeks ago that the run rate for Lone Star Paving is in the neighborhood of a top line of $530 million and an EBITDA margin of $120 million. So doing the math, that's 22.5%. And I just talked about how we finished or we revised our outlook for 2024 and our EBITDA margins at 12.1%. So quite a bit different in terms of margin profile.
Yeah. I'm going to get to the question. I know you want to go next, but let's just talk about that. So because it was a material acquisition, you guys actually did disclose a few years of financial history at Lone Star. And the last couple of years are running in that 20% range. There was a big step up, though, like three years ago in the margins. And so I thought maybe, Greg, you could talk a little bit about what led to that step up from a few years ago in the margins and the sustainability of that.
Yeah. So we're on record for saying during that time period that there was an inflationary move from 2% to 9%. We had a backlog that we had to finish. They were very similar. They had a backlog that was built for a 2% inflation, and they obviously realized the same 9% we all did. They had to work through that, but they did. And then a couple of other things happened as a part of that. So their move from a low to where they went up to in the 20% range was realized because of some consolidation in a couple of their markets from a competitive standpoint.
And then gaining access to some aggregate facilities, building margin from selling to themselves aggregates at market price, as well as acquiring a liquid asphalt terminal that also gave them the ability to buy at cost and market them in their jobs at a market price or sell into their jobs at a market price.
So when you guys look at the Texas markets, is there something about the, I guess you mentioned the consolidation that helped the market? Are there any other factors that are market-driven that are unique to them or not?
I think, first of all, as Greg said, something significant happened in the life of that company in 2021. Our industry is not a huge industry. There's several players in each market. And as we talk about, as we build better markets where we can have two competitors instead of three or three competitors instead of four, that's going to help margins as it does in every industry. In 2021, Lone Star Paving bought the assets of Summit Materials in Austin. They were able to get not only asphalt plants and to get a competitor off the bid list, but they were able to get a quarry and a liquid asphalt terminal. That was a significant event in the life of that company. The same year, CRH bought Angel Brothers in the market.
So in addition to Austin and San Antonio being a great growth area for them, they were able to get more markets.
Since the IPO, your predecessor, Charles, and you subsequent to him have talked about how we want to be the number one or two player, usually one in a three or four kind of person market, and the fewer, the better, and you've been talking about this long before that was executed in their markets, so I don't know how to ask this question, but how far away are you and your legacy operations from achieving the same sort of competitive dynamics, and we'll talk about vertical integration and all that later, but I'm just talking about the competition side.
No, I mean, it's the heart of our business. Obviously, our business is a relative market share business. You can only haul asphalt 40-50 miles. So for example, in Birmingham, Alabama, we have a set of competitors there. And Huntsville is two hours away to the north. We have another set of competitors there. You're not going to surprise each other. So that allows you to get to know your competition and be able to understand that market. So there are some markets where we have just one other big competitor. There are some markets where we have two, and there are some bigger markets where we may have three. But clearly, as we can consolidate the markets, that's going to help margins. Just to give you an example, in September, we entered Mobile, Alabama with an acquisition of John G. Walton.
It's a market we've wanted to be in a long time in Alabama. It's a great market. There's three players in Mobile, Alabama. We were able to acquire one of them. So now we're in Mobile with two other competitors. If the opportunity over the next year or two presents itself to acquire one of the other two, that would be a really good opportunity for us. That's just how we think about it. It's the same whether it's Panama City, Florida, or Greenville, South Carolina, or Myrtle Beach, or Raleigh, North Carolina. Each of those local markets, we're trying to just, in each one of them, build a better market structure.
What becomes more obvious, the logical conclusion of what you're talking about, which is not afraid and actually want to buy competitors out in your existing markets to capture it. But then there's this whole other opportunity on the acquisition side to vertically integrate. It's just like you've got a lot of shots on goal to do what you're trying to do with your strategy. So we haven't talked about the vertical integration yet. It's probably worth talking about what the core of the business is with the paving operations, but there's a lot of other services that are attached to it. And some markets you're executing it, some you're not, but you've got a perspective on what you like to do and some things you don't like to do. So why don't you talk about some of those things and what you think you can build out there?
Yeah, so obviously, if we build our markets around that hot mix asphalt plant, that's a great tool. But the real competitive advantage for us in that market is the management team. It's the management team and the workforce that are experts in that market that are working for the same customers every year and recurring revenue, so we have a very steady revenue. Greg, who led our budget processes past few months, he's not going to be surprised if the area manager, when they turn in their budget, they're going to be the same and plus at least inflation and organic growth, so we don't have a lot of ups and downs. But when we're in that local area and we're doing paving services, there's the chance to vertically integrate materials and services.
Services, if we can vertically integrate and do other aspects of the job, whether it's moving the earth, putting the pipes in the ground for the utilities, those are things that we can do and capture more margin and, frankly, allow us to bid different types of projects more competitively. So that's the service integration. We don't like to do a lot of other specialty things, but grading and utilities are things we can add as services and grow margins.
You're not talking about striping. You're not talking about doing moving barrels. You're not talking about doing other signage. Those are outside of what you want to be.
Those are the things that specialty subcontractors are better at doing than we are. What we want to do is things that are very much a central part of the project that having workers, our business, having the right people and being able to take care of people and workforce is huge. Those are things we can create a competitive advantage. On the material side of things, it's really mainly aggregates and liquid asphalt. If you think about asphalt, it's really just rocks glued together. It's really that simple. So when we have a chance to vertically integrate into aggregates, that gives us an opportunity to capture some margin. But really, the liquid asphalt is something we've really pursued over the last several years with liquid asphalt terminal in Panama City and one in North Alabama. It's a huge part of Lone Star's profitability, having that terminal in Houston.
Really, that's just buying the same liquid asphalt we're going to buy anyway, just buying it at wholesale. We don't discount it in the bid. We want to put it in the bid at retail so we can capture that margin. And so that's really the main vertical integration opportunities we have.
That makes sense. Greg, when you boil it all together over the last couple of years when inflation was going amok, you guys were talking about, "Well, you know we've got our backlog and our as-bid margins are here and here," and kind of moved around a lot because everything was moving around a lot. I know that things are stabilizing today. But when you look at the bid margins, the expected profits that you're putting in your backlog today, how do those compare against what you've posted in 2024?
Yeah. So I mean, 2024 was a big lift over 2023, 110 basis points, right? So I think, as we've discussed in our Roadmap 2027, that was in the neighborhood of 50- 75 basis points as we moved through each year through 2027. And what I will tell you is that the backlog right now, as it stands, supports that kind of a lift year-over-year. Not all of it will come from contract work. Some of that will be the other piece of the margin pie, which is just building scale. But those two components support that level of achievement year-over-year.
As the company takes on a larger acquisition like Lone Star, are there other positions that you need to fill from a corporate? So setup is company's done a pretty good job managing the SG&A line of the company. Now you're just throwing on a really big acquisition. Do you need to invest outsized to be able to manage that, or can you hold that one? I mean, I know there's going to be SG&A. It's a big company. But are there additional heads that need to be put in to make it work?
I wouldn't say anything significant. There may be a couple of people just from a risk standpoint or an accounting standpoint just to help. But it's really, this is a huge step in building scale, I mean, obviously. So that's part of our model. Even when we add a $50 million or $60 million acquisition, it's building scale little by little. This is just a big step in that we don't micromanage these platform companies.
That's what I mean.
We're the parent company, but we don't have to go hire a bunch of people just because Lone Star joined us because Lone Star is running Lone Star.
Yeah. And part of my question was implicitly saying you don't typically look at a big acquisition. We're so used to going to a conference like this, did a big acquisition. There's some cost actions, but that's really not the game that you guys play. These platform companies are run like the company because the management team was a big part of what you kind of bought.
Oh, yeah. Right. For us to buy a platform company, the very first thing we look at is, can these guys run this business? Are they able to wake up every day and run this business and be the face of this business in the state? And sometimes they're not. Sometimes we look at business and say, you know what, it's a great business market-wise, but the owner wants to retire and there's really no one to be the platform management team. In this case, these guys were incredible.
Yeah. There's a succession plan in place, as I understand it.
Yeah. Jack's not even with Lone Star. He's so excited about growing in Texas with CPI. He's now working with CPI. So he and our business development guy, they already have so many ideas. I'm just telling Greg, he's got to be able to keep up with them.
That's interesting because that was actually my next question, which is he knows who he'd like in his dream scenario. He knows what other companies he wants to own. That's what you're basically saying.
Yeah. I mean, he's been there 40 years. He knows a lot of people, has a lot of relationships. And so when we were talking this summer, I mean, he loves to work. He loves the business, loves the industry. He said, "I'd love to help you all be successful in Texas and help you grow. My management team can run the company.
Yeah. He's doing the strategy role as the 40-year vet, and these guys are doing the day-to-day, and that's a valuable advisor from your perspective. In the world of finance, we always like to talk about incentives too, but they did take some stock in this deal, so not saying that that helps them be aligned, but that helps them be aligned as well.
No, Jack said this summer, he said, "Jule, you're getting in the canoe with me, but I'm getting in the canoe with you."
Sure as heck is.
Yeah, so we're very aligned in that way.
Yeah. What was the cash stock split? Can you remind me?
Yeah. $654 million of cash and 3 million of shares.
3 million shares valued at whatever, like $80 at the time.
As it turns out.
I think that's right, so that's $200 and some million in stock too. Okay, well, let's see here. Where do I want to go next? That's all the really good stuff that I want to do. I'm going to be totally honest with you. Where do we want to go next? All right, so you had a little hurricane in 3Q. It slowed you down a little bit in 4Q, but you guys didn't make a big fuss over it. Is that just because the other results are so strong you didn't need to, or did it really not impact you that much?
I think Greg and I, we try to approach and not talk about weather, right? Yes, we play an outside game. When we do our budgets over the course of a year, we don't even talk about weather. We know that there's going to be some wet stretches and dry stretches, and they're going to even out. Obviously, we have to report to Wall Street quarter to quarter. So sometimes you're going to have a wet quarter. Sometimes you're going to have a dry quarter. Sometimes in the course of a quarter, a wet month and a dry month average out, and so the fourth quarter, we had a wet July, and we thought it might even out, but then we got hit with three hurricanes. So it just happened to be one of those quarters where the top line, you just couldn't get as much work done.
But I think, Greg, you can speak to it, but I think the margins came through even really well.
Yeah. I mean, so just Q3 versus Q4. Q4 was more revenue than Q3. So even though with two hurricanes in the fourth quarter, still a pretty strong revenue generation month. But then, yeah, the margins were slightly down from what they were in Q3, I think maybe 30 basis points, but still very strong based on the weather in July and September.
Yeah. It's always hard to parse out what the total weather effect was, but it kind of feels like only 30 basis points down, still pretty good revenue. It feels like the underlying demand for the quarter was quite strong. It could have been a big, who knows if it was going to be a big beat, but it kind of feels like the trend line was very positive and that should give some degree of confidence too.
I think when you pre-released the quarter or when you released the acquisition, you gave a view on the quarter. I think that's part of the reason the stock rallied was a really big deal and a lot of capital outlay that people liked because the multiple was right. We didn't even talk about the multiple. We should probably talk about the multiple, but also the quarter was good too. Just want to talk about the multiple real quick since that came up. Go ahead.
Yeah. I mean, I think that the math depending upon where you value the stock, the multiple for Lone Star was about 7.5. And for us, we typically do a bolt-on acquisition for around 5-5.5 . And for a platform company, it may be 6-6.5 to go into a new state. But I think the vertical integration piece of that is what justified is just the fact that they had four quarries and a liquid asphalt terminal. So we felt like it was a very attractive multiple to get a business in those markets that was that well run.
Yeah. And even if you paid a little bit more, which I don't think anybody really believed for this one, I think they said that was a fair price. It does demonstrate that if you're buying even at five or six, you're still trading with a teens EBITDA multiple. And this is one of the things that a lot of people see really quickly and really easily and don't want to lose missing that point here today either. Is there any questions from the audience here that you're wondering? Yeah.
On the point of vertical integration, I know one of the large aggregate players purchased Wake Stone in North Carolina. I'm curious at this point in your evolution, would you be ready for a pure aggregate acquisition, or do you still look at assets within a combination of capabilities and verticals?
The question was, would you do a standalone aggregate?
Yeah. First of all, I want to say we're very close with Wake Stone. Personal friends of the Brattons. We're their biggest customer in Raleigh, and they're a great company. And so Vulcan Materials got a great company there. But our strategy really is for it to be vertically integrated and to support our construction. And so when we look at acquisitions, we're looking mainly at contracting companies that have aggregates. Like when we did the Good Hope acquisition in Alabama in 2021, we got four quarries there, the Lone Star acquisition. So I'm not saying we wouldn't do that, but that's not something that's primarily part of our strategy is to just go out and buy an aggregates company.
Time for one more? Let's leave it there. Thanks a lot.
Thank you.
Thank you, Andy.