All right, let's go ahead and get started with the next presentation, so this afternoon, I'm very excited to have Construction Partners with us, but for those that don't know me, I'm Tyler Brown, Senior Analyst here at RayJay. I cover a myriad of things, including the Heavy Construction Materials sector. I do the Environmental sector, as well as some selected transportations, but like I said, I'm very excited to have Construction Partners with us today. Company CEO Jule Smith, CFO Greg Hoffman presenting today, but for those of you that don't know CPI, a large vertically integrated civil engineering construction company, the real focus on asphalt, but has a great footprint in the southeastern market. It's expanded a little bit. We're going to talk about that, but it has a fantastic footprint and really serves, obviously, both the public and private sector.
Jule, I don't think we have any slides, but I was just hoping to tell the good people what you do, just a little bit about who you are, what you do, just kind of start there. And then we'll jump into a Q&A. And again, this is an interactive Q&A. If anybody has questions, please feel free to interrupt me at any time. But Jule, I'm going to turn it over to you, and then we'll just jump into a fireside chat if that works.
Yeah. Thank you, Tyler. It's great to be here with Raymond James in Orlando, and we look forward to this each year, so Construction Partners is, as Tyler said, an infrastructure contractor throughout the South East, and now we say Sun Belt because we're in Texas and Oklahoma, but we're a family of companies. Think of CPI as the parent, and we have a platform company in each state that serves as the growth engine for that state. My family business joined CPI in 2011 as the platform company in North Carolina, so I was able to live the culture and the story and the model for over a decade. Greg was the CFO for our Alabama platform company, Wiregrass, so we have lived this for a long time, so we're a family of companies, and we're located. Each of our platform companies is further organized into local markets.
Our business is very local. We're not like a typical ENC contractor you might know of. Our workforce stays in that local area. We have a management team that does repeat work for recurring work for repeat customers. And that's a very important part of what we do. The asphalt plant that makes the asphalt is a key competitive advantage in that market, and it creates a relative market share of 40 to 50 miles. But I would say the real distinguishing competitive advantage is that management team and local workforce in places like Greenville, South Carolina, Myrtle Beach, South Carolina, Tallahassee, Florida, Huntsville, Alabama, Raleigh, North Carolina. These management teams are experts at what they do and the customers they serve in those markets.
So I do want to kind of come back and talk a little bit about hot mix asphalt. Yeah. So what exactly is hot mix asphalt? And maybe we can talk a little bit more about how time and temperature, really just basic physics, really create that local market.
Yeah, so at its basic definition, asphalt is just rocks glued together. There are different size rocks from sand to large rocks to medium sized rocks that we make parking lots and roads with, and it's got a market share in the United States of about 95% of roads are asphalt, so for us, a key core competency is making and putting down asphalt, so think of our typical job as doing a resurfacing of a road or a widening of a road for the state or the county or the city in our local markets. Our typical job size is $1 million to $3 million last six to nine months, but our crews this summer will be working in a lot of places while people are sleeping, resurfacing the roads, taking up two inches of the asphalt, recycling that.
Asphalt's the most recycled product in the world and paving it back before 6:00 A.M. But asphalt, the physical properties of asphalt is it gets made at a super hot temperature so that it can be laid down effectively on the road, but it can only stay hot for a certain period of time. So that creates a limit on how far you can haul it. What that means for us competitively is that it creates a relative market share business. So for example, we have an asphalt plant in Birmingham, Alabama. We have a couple of asphalt plants in Huntsville, Alabama. Now, those two cities are just over an hour and a half away from each other. But we have a whole different competitive dynamic in Huntsville than Birmingham.
And we don't have to worry when we're bidding in Birmingham that our competitor in Huntsville is going to surprise us and bid that job because they can't physically haul the asphalt there just like we can't physically haul the asphalt that far. So it creates in every one of our hundred some markets now an understanding of who our competitors are, what market share we have, and how we can grow organically in that market just due to the physical nature of hot mix asphalt.
Yeah, exactly. And this is something I just want to come back to. It creates that local market. And that's really, really important here. And we're going to talk a little bit more about that. But if you think about vertical integration all the way from the rocks to the road, you guys have made some investments or you have some additional assets on the aggregate side and on the liquid asphalt side. So can you talk a little bit about being vertically integrated across that whole chain?
Yeah. So you're right. So we're vertically integrated in both aggregates and liquid asphalt. So aggregates, I think, are self-explanatory. Liquid asphalt, maybe not so much. Essentially, we've created these large storage facilities to hold larger amounts of liquid asphalt. We buy directly from the refiner. We store it in those tanks. And essentially, we take the spread between retail and wholesale and essentially put that on the margin line. So the goal in both of those scenarios is to not use that as a supplement to our cost or allow us to be a low-cost provider. It is use those vertically integrated materials and be able to bid and keep that at market rates in our bids and then just keep that margin in our pocket.
Yeah. And I would just further say, it seems like years ago, but it was just last October of 2023, we had our analyst day. And we said we wanted to grow margins 50-60 basis points per year while growing the top line 15%-20% per year. And that's really historically what CPI has done on the top line. But we wanted to focus on those margins. And we said there's three margin levers we wanted to use. First was building better markets, right? We wanted to bid better, create a better bidding environment in the markets we're in. That's the first lever. But the second was vertical integration. Can we capture more margin, like Greg said, between the wholesale and retail? And the third is scale. And so the first full year after our analyst day, our margins grew about 100 basis points.
But we want to grow those margins 50-60 basis points a year using those three levers.
I do kind of want to come back to aggregates as well because there's been a lot of talk and chatter in the market about this. But how important is it necessarily to be vertically integrated? It seems in some cases you may be strategically vertically integrated, but you don't have to be vertically integrated in all markets, at least from a rock perspective.
No. From an aggregate perspective, CPI, we're never going to be an aggregates-led company. We're a contractor. Aggregates are a part of what we do when we make an acquisition and they have quarries. We'll operate them. We operate them in Alabama. We have sand operations in Georgia. Obviously, Lone Star Paving, our new platform company in Texas, has five to six quarries, and so that's additive. Liquid asphalt is a big part of our vertical integration strategy, but for us in the aggregates, we're great partners with some of the big aggregate players. They see us as partners. We see them as partners, and so for us, our core competency is to go out and consolidate the markets in our industry, which is the infrastructure contractor market. That's what we're going to focus on as our main business.
Right. Exactly. That's where the magic effectively happens. But I do want to come back to liquid asphalt. It would seem to me that there still could be some investments on that side to maybe in the Carolinas, for example. I mean, you've got a couple, I think, in North Alabama. You've got one in Florida. You have one in Texas. Is that a part of the longer-term strategy?
It is. So I think it's important to know that the liquid asphalt terminal, we only sell that to ourselves. So we're not going to try and create a competition between the suppliers that are out there right now. We're only taking our tons and gallons of liquid asphalt off the market, putting it in those tanks, and selling to ourselves. So there needs to be, therefore, a certain density within our footprint of asphalt plants in order to make it worthwhile to spend those dollars and to utilize that liquid asphalt terminal in that area. So absolutely, Tyler, that you'll see more liquid asphalt terminals come online over time.
Perfect. And kind of before we get too much into the mechanics of paving, let's talk about in-market exposure. So can you talk a little bit about your in-market exposure between the private side and the public side? Let's just start there at a really high level.
Yeah. So in each of the areas, they're choosing what to bid on based upon the capacity they have and where they can get the most margin. But historically, it's amazing how consistent it is that on average, each year, our revenue is 65% approximately public work and about 35% commercial or private work. So I would say the last few years, the commercial markets in the southeast have been amazingly steady. I feel like after the election, we felt like it was a surge of energy in the commercial markets. But let's say the commercial market slowed down. Those area managers are not going to pick up the phone and call Greg and I.
They're going to simply say, "Well, now if I have capacity, I'm going to bid more public work." So where we would see a slowdown in commercial activity, we would simply see the percentage of public to commercial go up to, say, 67% or 70% public because our crews and our asphalt, they can do public work or private work. There's really no limiting factor as to what they do. So we've got a good funding environment in all of our states. Obviously, there's been a generational investment in IIJA. So for us, we can't bid all the projects that are available for us to bid now. So we simply just, our area managers go to wherever the best margin they can get.
But at the end of the day, 95% of what you do is not residential.
Correct. And there's nothing wrong with residential work. It's just simply the lowest barrier to entry and therefore the lowest margin work. So it's just not a huge part of what we do simply because our crews and our management teams want to go work on more complicated work that brings a higher margin.
Right. And I think some people may not totally get this. And I'm not saying a road wears out year to year to year, but they do wear out over time. So unlike a concrete, let's say, footing that hopefully you never have to replace, a road will go through probably multiple mills and repaves over its lifetime.
Yeah, and I feel like I'm getting old. There's some roads that we've now done for a third time in my career, but about every 10 years, a road has to be resurfaced on average, so we go out and do it, and we know that the DOT or that city is going to circle back to that road about every decade.
Okay. So let's go back to the public work. So we've got a road in Alabama, five miles that need to be repaved. How does that work? How does the bid process work? Does the Alabama DOT put an RFP out and you bid on it? Just talk a little bit about the mechanics of that.
Yeah. So every month in every state, typically the DOT has what's called a highway letting or letting. And so four weeks usually before that, they say, "We want to resurface this road. Here are the plans and specs." And so if we're in that market and we want to bid that job, we will get those plans and do an estimate. As I said earlier, we sort of know the one or two competitors that are probably going to bid on that project also. Our estimator puts together an estimate of what it's going to cost to do that job. He or she needs to capture whatever inflation we want to put in that bid on the cost side, whatever contingencies we want to put in. And then that estimate, the real management decision at that point is what margin we want to put on that job to bid.
We have to be competitive. Most of what we do is low bid. But when I say building better markets as a margin strategy, that's when we're bidding that job, if we can put 16% margin instead of 13% on that project or 18% instead of 15%, that's where eventually that's going to drop to the bottom line at EBITDA. The goal for our crews is to go out and build that job, to do the job for that cost estimate so all that margin drops to the bottom line. But what their real goal is, is to build that job for less than that budget. And so they gain margin on the project. And if throughout the course of 1,000 projects throughout the Sun Belt over time, if they can just gain a little bit on each project, that's what creates good earnings calls for Greg and I.
They just win by a little bit.
Right. Right. So we hear this or we have heard this out there that it's a low-bid business and you don't always win. But that's exactly kind of by design. I mean, you maybe only win a third of the projects that you actually even bid on. And that's only on what you bid on.
Yeah.
That's not necessarily a bad thing. Let's put it that way.
No, that's right. The easiest thing for us to do would be to win 100% of everything we bid tomorrow. The margin profile would be horrendous. But yeah, so it's not a win rate. It's a left on table is the metric we use, right? So not how often we win, but how close we are or how the next competitor is to us in terms of on that bid. We want to win every bid by at least $1, right? We want to be $1 lower than the next guy.
Yeah. I would say.
Left on table.
Yeah. I would say.
That's right. Okay.
As most of y'all know, we had a little report come out on us last month. And one of the things they said was, "Well, they're not winning most of the work they bid." And so when we talked to shareholders about their report, we said, "When you need to worry is when you see us winning most of what we bid," right? For us to have a record backlog and to start winning a lot of work we bid would be crazy. This is the time to try to put as much margin as we think we can get on jobs and win what we can. So for us, we don't want to win everything we bid.
Right. And I think you called it left on table. My guy Ethan over here, and I've done a lot of work on this as well. But I think we called it the spread between the next lowest bid. And since it's webcast, I can't go into all the details, but that's a fairly wide spread. And I guess the idea is to bid a little bit better. And this is an opportunity to use technology and maybe machine learning or AI or all those fancy words to maybe just bid a little bit better because there is a little bit of meat being left on that bone.
Yeah, that's right. So over the years, we have used what I would call manual methodologies, right, to understand what our competitors are doing, what they have on their backlog. All of the bid data and who won those jobs and down to each individual pay item, there's numbers for all that data. If we collect that data and it's all public, like I said, and harness that in a way to understand what our competitors are doing in the marketplace as it relates to their bidding activity, then we can get closer to that or maybe shrink that left on table number we're talking about.
So it's a competitive bid by nature. It's a low bid by nature. I feel like there's a little bit of DOGE concern, if you will, out there in the marketplace. But to my point, it's a competitive bid. It's a low bid that's winning. Maybe you could talk a little bit about that, but that just does not seem like a big risk, in my opinion.
Yeah. I would say for us at Construction Partners, we really see this new administration as a great opportunity for us. And this is what I mean by that. If you look at the IIJA, which was a generational investment in infrastructure, of that $1.2 trillion, only $350 billion of that was designated for surface transportation, which was really just the reauthorization of the five-year surface transportation bill, which used to be known as the FAST Act. And so for us, we feel like that President Trump, in his first term, he campaigned on infrastructure. When the IIJA passed, he was against it. Why was he against it? He said, "Not enough of this money is going to hard infrastructure. It's being wasted." And so for us, and we've heard Secretary Duffy address this, I think there's a real opportunity for them to say, "Wait a minute.
Let's not waste money on things that don't have a real impact on economic growth. Let's move some of this $1.2 trillion to do more hard infrastructure," which is what we do. And so as far as DOGE goes, everything I've read about DOGE, they're attacking waste, fraud, and abuse. But they're not attacking anything that they need to create economic growth. And so I feel like there's a real opportunity for people who build hard infrastructure to do more of what we do with this administration.
Right. So let's try to kind of bring it, land this plane a little bit, coming back to the organic growth profile of the business. So you're in the right markets. Fundamentally, you think about your Sun Belt exposure, as you put it now. You're in the right markets. It feels like there's good federal spending still to come. You guys laid out a mid-single, mid-high single-digit organic growth profile. Is there any reason to believe over the next few years that that is not the case?
You may take that. You want to take that?
Yeah, I'll take that. So yeah, no, there is no reason to believe we can't continue doing that. Certainly, the next 12 months is already, most of it's already in our backlog, right? So we're pretty comfortable with that. And I think just historically, we know that organic growth has been pretty consistent. And as Jule talked about, the engines for growth, those platform companies, and then a lot of our M&A activity generates organic growth through injecting new capital into that entity and as well taking the bonding constraints off of that entity. So yeah, there's a very clear view of the future for us as it relates to organic growth.
Yeah. There's quite a bit to actually unpack there. So let's transition. We've got a few more minutes to talk about external growth. That's been obviously a huge success story over the last couple of years. You entered into a couple of new platforms, Texas and then in Oklahoma. Can you just talk a little bit about the M&A strategy broadly? Is it more about densification, or should we continue to see some geographic creep, or were those just opportunistic?
Yeah. So acquisitions are a big part of what we do, right? We've grown for 20 years at 15%-20%. As Greg just talked about, we focus on organic growth. But acquisitions are a big part of what we do. And for years, we were asked, "When are you going to Texas? Why aren't you in Texas?" And so when we went to Texas and then Oklahoma, last month, someone said, "I heard, well, the reason they're going to Texas and Oklahoma is they're out of opportunities in their legacy states." And when I heard that, I started thinking of all the cities we're not in: Jacksonville, Florida, Daytona Beach, Miami, Naples, and then Georgia, Atlanta, Thomasville, Savannah, Brunswick. We're actually not in more places than we are. And so we have a huge runway of places we can grow and make acquisitions.
Last year was a busy year for us, and we did eight acquisitions, right, so when you think about all the potential places we can do acquisitions, both in the states we're in and new states, there's just a huge runway for us to do it, and when you go into a new state, as Tyler said, having a great management team for that platform company is huge, and so for us, we've looked at Texas for years, but we had to find the right management team, and so Lone Star Paving, we felt great about, and then in Oklahoma, we had the opportunity with Overland to have a platform company, well, guess what, now that creates a lot of acquisition discussions in Texas and Oklahoma where these guys have relationships. They're entrepreneurial. They want to make acquisitions in their market.
So it's pretty busy right now on the M&A front, and it's going to be busy for a while.
So you mentioned it, Greg, about bonding.
Yeah.
Let's do the dummy's guide to bonding. So what exactly is that? And why does that impact the M&A markets? And why does it actually unleash organic growth in an acquired company post?
Yeah. So each publicly bid job, whether it be a state, city, or a county bid, requires a bond. So surety companies provide these bonds through a program to these family-owned companies. It's based on the health of the balance sheet as to how much those companies can have on contract at any given time, a dollar value. So if I have a strong balance sheet, I can bid more. I have a weak balance sheet, I can't. But the point is you have to have that to be able to bid work. In the M&A world, as that company gets acquired by us, we provide them an unlimited, essentially, amount to go bid jobs for. So instantly, the governor is off as it relates to what they can bid. So overnight, they can bid jobs that they were unable to bid yesterday after closing day.
Jule, was that the case at Fred Smith?
Yeah. I mean, in 2011, I had a really good management team in North Carolina. As you know, Raleigh-Durham's a very fast-growing market. We had lots of opportunity, but I could only bid so much work. I only had so much capital to invest in equipment, and so when I met the founder of the company, Charles Owens, and he talked about what it would mean for Fred Smith Company to join the CPI platform, I almost couldn't believe my ears. I was going to get to continue running the company. We were going to continue being Fred Smith Company and keep our culture, but all of a sudden now, I was going to be able to bid more work. I would have the capital if there were growth opportunities to do them, and we took off. Throughout from 2011 to 2021, we grew like a rocket.
Our margins grew. Not because CPI ever told us to grow. They just said, "Hey, do what's smart. But if there's opportunities, we're behind you," and that same thing happened with King Asphalt in 2021 in South Carolina. It's the same thing that will happen in Texas and Oklahoma: that you put a great management team, you get behind with capacity to bid and capital, and that's what creates the growth, the organic growth and the acquisitive growth in the years ahead.
Okay. Perfect. So Greg, sounds great, but you got to have a balance sheet to do it. So can you talk a little bit about the balance sheet, where we are today? Because you had done a couple of pretty chunky deals last year that probably put a little bit of pressure on the balance sheet. Can you just talk a little bit about where we are, where we are say 12 months from now?
Yeah, sure. So we did take a pretty big bite, obviously, in the first quarter of this year with Lone Star. We finished our first quarter just slightly less than three times leverage ratio. I think it's like 2.96 after the Lone Star acquisition. And then since then, with Mobile Asphalt, the Mobile Alabama acquisition, as well as the Oklahoma acquisition, we're somewhere in between 3.2-3.3 times leverage ratio pro forma. So the history of this company has always been one of leverage up and then bring it back down again. That's the goal here. We're comfortable at 1.5-2.5 times. We think four to five, maybe six quarters, we'll be back within that range.
Perfect. A couple of minutes just to maybe kind of finish out on this one. So if I go back to the analyst day, you talked about 15%-20% CAGR. It's pretty aggressive, pretty eye-popping number, if you will. Half of that being organic, which we talked about. It seems like that's doable. But does it feel that the other half that would come externally, does that feel still pretty good? It seems like there's a ton of opportunity in front of you.
Yeah. I mean, when you look at our guidance for this year, if we didn't do any other acquisitions, which I imagine we are probably going to do some bolt-on acquisitions between now and the end of the year and still stay within that four to five quarters, I mean, we're going to grow 45%-50% this year. That's not a normal year. Obviously, Lone Star was a transformative acquisition. But when you just look at the carryover revenue into 2026 that these acquisitions are going to create, that's going to be in the mid-20s. So this is what we do. For us to grow 15%-20% per year with all the acquisition opportunities we have, that's not the hard part. For us, we want to focus on organic growth every day. We think that's the best way to build shareholder value.
When I leave here after this talk, I'm going to Atlanta for our quarterly meet with our company presidents. Greg's going to join me tomorrow after spending another day with you guys. But we're going to focus on organic growth. We're going to talk to them about what in their markets they can do to grow organically. And the acquisitions will sort of take care of themselves. So that's sort of our algorithm of how we get to 15%-20% per year.
Just to end it, I mean, you've always said you're a family of companies, but a company of families.
Right.
I think your culture is very interesting and unique. You think that that is something that you can perpetuate kind of indefinitely if you do it right?
You said it, if we do it right. For the next two days, we're going to be talking. This is our biggest conference of the year. There'll be 120 people in Atlanta. The thing we focus on is we're going to grow. How do we grow big, smart and not big dumb, right? We're a family of companies. We need to protect our culture. I told you in 2011, when I joined CPI, I loved it. My management team and I, it was like a dream come true. Lone Star Paving. We were chosen by Lone Star because of our culture. They wanted to join CPI. Same with Overland. It's not going to just be on automatic pilot. We have to constantly focus on how we stay nimble, how we keep that culture and not grow into one big bureaucratic mess.
So that's what we'll be doing the next two days.
Love it. Thank you guys so much. Thank you all for attending.