I know. Th at does not hurt. All right. Let's go ahead and get started with the next presentation. For those of you that don't know me, I'm Tyler Brown. I'm the senior analyst here at Raymond James. I cover a variety of things, including the transportation sector, the garbage sector, the heavy construction material sector. This afternoon, I am extremely excited to have Construction Partners with us. Presenting today is the company's CEO, Jule Smith. Thank you so much, Jule, for coming. You know, you guys have been coming down for a couple of years now. I think some people may have a good idea of what you do, but we have 1 slide up, which I think is going to be very helpful.
If you could, Jule, just give us a little bit of a background, a little bit about who you are, what you do?
Yeah.
Your ticker is maybe an indication of what you do.
Yeah.
maybe we'll talk about that. Jule, I'll turn it over to you.
Sure. Tyler, it's great to be with you. We love coming to this conference. Thank everyone for spending some time with us today. Construction Partners, or as we're known by our ticker symbol, ROAD. We are a family of companies located in the Sun Belt. We say a family of companies because we are. CPI is the parent company. We have eight platform companies, one in each state. I got to join CPI in 2011 because my family business joined the company as the platform company in North Carolina. I got to live this strategy, this culture that I love as a part of it for a decade, working under the founder, Charles Owens.
In this role, we are continuing the exact same strategy the company was founded on and hopefully keep the same culture that has made the company successful. We're in a lot more states now. We're in 110 local markets, which is an important part of our strategy. As Construction Partners, we are a road construction maintenance contractor that's vertically integrated in some places with aggregate and liquid asphalt terminals. We do thousands of jobs throughout the Sun Belt every year, about 65% public, about 35% in the private market, and we're a growth company. We grow through acquisitions, organic, and that's a part of our story as well that I'm sure we'll get to.
Sure. Let's talk a little bit about asphalt.
Okay.
I turned 45 this year, I think I'm officially old. For my birthday, my wife does not make me a cake. She makes me Rice Krispies Treats.
Yeah.
And there's a reason-
Okay
... 'cause she knows that I love asphalt, and Rice Krispies Treats remind me a lot of asphalt. What I mean by that is the Rice Krispies are the sand and the gravel. You have the hot marshmallow and butter, and you mix that. That's effectively the asphalt that binds it all together. I wanna talk about why time and temperature really make this business a local business, because when those Rice Krispies get cooled down, they set. It's the same idea in asphalt. Maybe we can talk about why physics actually matter here.
It's a huge part of our competitive dynamic. Each of those dots is located as an asphalt plant, a hot mix asphalt plant. We have about 110. Each one of those creates a market, and the reason it creates a market that's a nice relative market share market is because you can only haul asphalt about 40 to 50 miles. If you haul it any further, it cools too much. The DOT will reject it and send it back. You don't want that. What that creates is a dynamic where you have a competitive dynamic in each one of those circles, and it could be very different, but you don't have to worry about someone surprising you. For example, we have asphalt plants in Huntsville, and in the middle of Alabama, we have one in Birmingham.
They're about 1.5 hours to 2 hours away from each other. One competitive dynamic exists in Huntsville, one exists in Birmingham, you can't haul asphalt from Birmingham to Huntsville or vice versa. Asphalt at its core, just like Tyler said, it's really just rocks glued together, right? It's the aggregate and the liquid asphalt is the glue. we buy virgin aggregate from Martin Marietta, Vulcan, Heidelberg. We supply some of our own, and a lot of our aggregate comes from just recycling asphalt. Asphalt is the most recycled product in the world. 30%-40% of all asphalt is really just asphalt that's been reclaimed from the road where you see a resurfacing project where we mill up 2 inches of asphalt and overnight we put 2 inches back. When you wake up, it's a new surface.
The physical properties of asphalt actually create the structure of the competitive dynamic that we work in.
Right, because when we lay that asphalt down, we've got to roll it out to keep it nice and smooth. That's why that time and temperature matters.
Right.
We've had a few companies, Waste Connections, a couple other companies up here today, and we talked a lot about market structure. The market structure really matters a lot. It matters a lot in your business, but that again, that time and temperature is what creates those local market dynamics. Talk a little bit about the markets that you choose.
Right
Maybe the markets you don't choose.
Right. As a growth company, we have to decide where we wanna put our capital. In the markets we're in we wanna either be the largest or the second-largest player in that market. Usually, in the asphalt business, depending upon the size of the market, there's either gonna be 2 players. You're never gonna be by yourself because the Justice Department ain't gonna let you have a monopoly. Having 2 players in a smaller market or 3 players in a mid-size market, or like where I'm from, Raleigh-Durham, we had 4 players, so they're not always the same size players, but that's usually the competitive dynamic.
For us, in deciding where we want to go, sometimes it makes sense to go into a new market, like we entered the state of Texas a year and a half ago. You can see how much we've grown just in Texas because Texas is growing. We focus a lot on organic growth, and we put a lot of time and attention to organic growth. It's a lot easier to grow organically when the market overall is growing. We wanna put our chips on growing markets, and we wanna have great partners. We partner up with the people in that market. We wanna get to the right market with the right partner.
Sometimes it makes sense, instead of going into a new market, if we can buy out one of our competitors in the current market we're in and capture their market share and hopefully raise the margin profile in that market. That's a big part of our acquisition strategy as well.
Right. Can we talk a little bit about vertical integration? You kind of touched on it a little bit. You do own a number of hot mix asphalt plants.
Right.
There are a few other pieces. You have some liquid asphalt terminals. You have some quarries.
Right
of aggregate. Can you talk a little bit about the vertical integration strategy?
Right. For us, vertical integration is really just trying to capture more margin along the value chain. We're gonna buy rock. We're gonna buy liquid asphalt. We're gonna bring it to our asphalt plants. We're gonna take it out and lay it down. On that job, we're gonna do some grading and utility work as well on some of our projects. For us, if we can own the aggregate facility, the quarry, and provide our own rock, we capture that margin, because we don't put it in our bids at cost. We wanna put it in at the market price and capture that margin. We have aggregate facilities in Alabama, and we have some in Texas. In South Georgia, we have some sand facilities. That's really our aggregate footprint.
Another very powerful thing is the glue, liquid asphalt. We have three terminals now. We have one in Panama City in the Panhandle of Florida that's served by water. We have one in North Alabama, Hanceville, that's a rail facility. With the Lone Star acquisition, we got a liquid asphalt terminal in Houston. Really, we are now able to buy liquid asphalt from refineries wholesale, put 'em in our tanks, and ship it out to our asphalt plants and capture that margin between wholesale and retail. That can be a very powerful margin additive in buying the materials that we were gonna have to buy anyway.
Perfect. Okay. We talked a little bit about the local nature of the hot mix business. Can we talk a little bit about the end market exposure? I think that a lot of us know.
Right
... makes sense that a lot of it is obviously infrastructure related. Just talk a little bit about the end market exposure and a little bit about what, again, you do and maybe what you don't do.
I think the important thing to start there is that these 110 markets, they all those workforces in those markets, they stay there. They sleep in their bed every night. More importantly, they're doing work for the same list of customers year after year. They get to build deep relationships in their local markets with both public customers and private customers. The reason that's important is because, number one, that makes us more effective and nimble in those markets, but also these resources are fungible. In Pensacola, Florida, that area manager is working for the Florida Department of Transportation, the county, the city. He's also working for general contractors and developers in that market. He's not going to call me and say, "What should I bid on?" He's looking for the highest margin work in that market.
If there's a lot of DOT jobs being let in that year, he might do more of those. He might do some county jobs. He might do more commercial projects. If the commercial market slows down in Pensacola, he's not gonna stop working. He's just gonna go bid on more public work. All of these markets have different dynamics. Obviously, there's more commercial business in a somewhere like Huntsville, Alabama, or Austin, Texas, or Raleigh-Durham. They're more rural markets. There's a different market profile, but it's remarkably consistent across our footprint that we're somewhere around 65% public and 35% commercial. That's roughly how it breaks down. We really don't care if it varies a few percentage points, but it's usually pretty consistent. About 65% all public entities. Public, I mean, state, local, county, airport authorities, all that we count public.
In the commercial markets, mainly, general contractors and developers. For example, housing, residential. We don't do a lot of residential work. It's not because it's something we don't like. It just happens to be the easiest projects in our ecosystem, so therefore it probably generates the lowest margins. Our area managers tend to seek out more complicated jobs. Think of like a distribution warehouse or a hospital working for a general contractor that's just gonna bring a higher margin profile for those projects.
Okay. One of the other things about construction materials, take concrete. Typically, you're not gonna usually redo your concrete, let's just say. Hopefully this hotel, you know, doesn't have to do a lot of concrete work.
Right.
Roads are different. There is a recurring nature to the business where they do ultimately wear out, they have to be milled up and obviously repaved. Can you talk a little bit about it? In your career, have you repaved the same road twice?
I have. I feel like I'm getting old. There's some roads coming up that would be the third time I've seen it repaved. Asphalt, as we talked about, there's a base layer of stone, there's intermediate layers of asphalt that might be 4 to 6 inches on a highway, and then there's usually a surface course that's smoother. Obviously, they want a smooth surface for cars. That surface, when they every, about every 10 years, 8 to 10 years, that will need to be resurfaced. What happens, usually at night, is the state or county or city will pay us to mill up, basically take up 2 inches of asphalt.
That's the recycle part that we simply take back to our asphalt plants, put in a pile. That will go into new asphalt where we both reclaim the rock, and we actually reclaim some of that liquid asphalt binder for it to use in new asphalt. We'll take up two inches in the middle of the night and fill that back in. For that lane, you'll have two inches of asphalt, new, that'll last another 10 years. I think one of the reasons 95% of the roads in America are asphalt is I think that creates a great product that in a very cost-efficient way can just be resurfaced forever, that those two inches.
Right. Just kinda over and over. Can we talk a little bit about the funding mechanisms? 'Cause I get this question time to time.
Right.
You know, how did the DOTs fund the road paving work?
Right. Every state's got a little difference, but for the most part, each state has its own work program. Each state has its own funding mechanisms, mostly built around a gas tax. We're lucky in that in our eight states, they all have indexed their gas tax, so as inflation happens, their funding mechanism grows, and they can keep up with their roads.
Some of our states are growing so fast with all the migration to the Sun Belt, states like Texas and Florida and Tennessee, South Carolina, these states have actually put in supplementary programs like Moving Florida Forward is a multi-billion dollar supplementary program that they're saying, "We have got to keep up with our infrastructure and our roads, or we're gonna fall behind." In Texas, the probably the most well-funded state in the union, they take oil and gas revenue and take a certain percentage of that and put it back into infrastructure. The states that are growing, they know they have to use some of that money to keep up with it. In that case, they're not just resurfacing roads, they're widening them, and they're adding capacity so that they don't fall behind and get gridlock.
The federal government gives the states between 30% and 40% of their work program on average. The federal government gives states money by formula from the 5-year Surface Transportation program that comes out of the federal highway system. That usually has a 5-year authorization. We are in the current reauthorization of the program now. That's a big topic in our industry. What I would say there is this program goes back decades. It's always had a name. Back in 2005, 2010, 2015, there's always been a program, SAFETEA-LU, MAP-21, FAST Act.
These last 5 years, one of the, one of the things that we have to explain to folks is the IIJA, this big infrastructure bill that the Biden administration passed, that $1.2 trillion headline number that people hear, what they don't realize is the Surface Transportation program was just a third of that, $350 billion. That's what's being reauthorized now. It just didn't have a name for those 5 years because it got caught up in the bigger bill. The program's always been reauthorized, and it's always been reauthorized at a higher amount the next 5 years than the previous 5 years. On Capitol Hill right now, both House and Senate are working with Secretary Duffy, working through the committees to mark up the bill, hopefully get a mark up here in the next 30 days.
Both houses want the bill to be larger, and they want more money to go to the states through formula, which is good for CPI because those generate the type of projects that we really participate in, the small and medium-sized projects at the state level. We're confident that we're gonna get a new bill, even if by September 30th. If there's not a new bill, they'll pass a continuing resolution, a CR, at the same level that this year's, which is $72 billion. This year has the highest funding we've ever had in a year. We've worked for an entire year before in the past under a continuing resolution. For us, we know that we're gonna get a bill reauthorized. It's the most bipartisan thing in Washington is infrastructure, and that's saying something.
We're confident that that'll help give the states the supplementary funding that they need.
Okay, perfect. That was a great segue 'cause I definitely get that question quite a bit about IJ, so that's very helpful. Let's go back. Let's say that the state of Alabama wants to you know, pave, call it a three-mile road. How does that actually work? It goes out for RFP, and then you bid on it, and then it's let. Maybe walk us through that, and then I wanna talk about your typical project win size-wise and length-wise. I'm kinda going somewhere with that.
Just a few days ago, we had the Alabama DOT letting, just the most recent one. Our platform company in the state, Wiregrass Construction, bid on 13 projects. They won 8 of those. That was a good letting for them. Sometimes they might only win 2 of those, and you might say, "Well, that's bad." Well, no, they may have a lot of work already on backlog. They're trying to get higher margins. The way this works is the DOT in each state usually has a monthly letting. They're not always even. Some states let more work in the winter. Some let more in the fall. Typically, the least amount of work is let in the summers 'cause traditionally that's when the heavy work season happens. We're a seasonal business.
I like to say we're not cyclical, but we're seasonal. In the winter months, there's less work going on, less fixed cost recovery recapture. In the summer, you're doing a lot of work, more fixed cost recovery. The states put out each month projects that they say we're gonna bid on in 30 days, around 4 weeks, and they'll tell us, "These are the projects we're gonna let. You're gonna bid on these." You will prepare a bid. Your estimator will prepare a bid. They know who their competition's gonna be. That's that relative market share. They know what their competitor's backlog is, they can get a sense of how competitive do we think we'll be. That morning of the bid, you turn in your bid. They open them up, read them out loud.
The low bidder gets to work, that's when we add the work to backlog. Typically, our projects are, our project size is between $1 million and $3 million. We do some larger, some smaller, but that's typical. Our backlog, typically is within 12 months, we're gonna do almost all of our backlog. We're constantly adding work to backlog and burning it off as we do it.
Right. Also keeping those projects short also takes away some of the, we'll call it estimation risk. You thought it was gonna cost X, and it ends up coming in X at Y, and you end up, you know, eating that. Maybe talk a little bit about that.
I think as we went public back in 2018, that was one of the things that the market had not seen before because most of the public E&C companies that do construction do big mega projects. That's just not what we do. We like to stay with small and medium-sized projects with a shorter duration and just do thousands of them because we think that we can get higher margins up front. We think that the execution of those, our teams tend to finish, more often than not, they're gonna finish at a higher margin than bid margin.
If they do that across a lot of projects, remember, not one project is gonna be an outsized gain or loss. If overall across our footprint, if they can win and gain margin on more projects, that's what adds up to good earnings calls. That's why a few weeks ago, we had a good earnings call. It's because those teams went out and found ways to gain margin as they're building those projects. The duration and size of those projects make it easier for them to find ways to win.
It sounds like there's a lot of game theory, I guess you could call it, in the bidding process, and there's been a lot of talk about AI at this conference. I'm just curious where technology can come in. It's maybe an old, boring business, but maybe technology actually could play a pretty big role here.
Yeah. We're using AI, and I answered this question earlier today. Someone said, "How are you using AI in your business?" I said, "Well, really two ways. One of them is sorta mundane, and one of them is pretty exciting." I'd say the mundane way is we're starting to use ChatGPT and Pro, and that hopefully over time will increase the productivity of our workforce, and we might not have to hire as many people, and that way we're a typical company.
The exciting way that we're using AI is we're building and have been working, I think we announced it at this conference a couple years ago, we're building a pretty powerful tool, we're using Palantir is partnering with us on this, that simply takes all the publicly available information. When that bid comes out for bid, and we have four weeks, and they say, "These are exactly the items we want you to bid on. This is exactly where these roads are located across the county or the area," then this tool will say, "Okay, I have all that information. I know who I'm bidding against. I know how much backlog they've won, I know how far along they are in doing that backlog, I know how they have traditionally bid jobs like this in the past." What it does is it predicts.
It does predictive modeling on what our competition would bid. We're not the only one in our industry doing this. Some other large companies are doing the same thing, which is great because all we're trying to do is reduce what we call left on the table. Remember we talked about the low bid wins? You'd like to win every bid by $1 if you could, but the reality is the average left on the table in our industry is about 10%. If we have a $3 billion backlog and two-thirds of that is public, call that $2 billion a year.
If we could take the left on the table from 10% and just cut it in half, that's a huge amount of margin gain we can have if we can just do a better job of looking at the market and analyzing what do we think our competition would bid. It gives our area managers the courage to say, "Well, based upon that, we should be bidding here." It You could have done this in the past if you had months and a lot of time and effort and spreadsheets. What AI is able to do is in real time just pull all that information together, aggregate it, and say, "Based upon that, this is what your competitor is likely to bid on this project.
Perfect. Okay, we got a couple minutes, so let's talk a little bit about M&A.
Okay.
Most of those DOTs were acquired. Why are you an acquirer of choice? Why do you get the opportunity to bid on those assets?
If you look back at the document 20-some years ago that CPI was founded upon, there were three theses, and they still hold true today, but it's amazing how prescient that document that Bain Capital put together for our founders was. It said, number one, this is a great local business model that throws off a lot of cash. Still does. Number two, the nation's infrastructure's been ignored, and at some point in time, they're gonna have to start catching up. That's part of what the IIJA was addressing. They're still gonna have to catch up on the infrastructure. The third thing it said is this industry is gonna go through a generational consolidation.
What they were saying is so many of these businesses throughout the country really, especially in our footprint, started in the 1950s or started to grow in the 1950s when the Eisenhower administration said we've got to have a federal highway program. These businesses have been privately owned, have made a lot of money, families are wealthy, they've done a great job. Over and over now, they're in their third and fourth generation, and they're ready to retire. For us, when they have multiple heirs, sometimes you can't split these businesses up, and sometimes they don't have heirs that wanna inherit this business. That gives us the opportunity to sit down with them. They know CPI. We've built a reputation for being fair, for being confidential, and most importantly, for taking care of their employees.
That gives us a chance to sit down with them and acquire their business and become a part of our family of companies.
Okay, perfect. To kinda land this proverbial plane, we talked about the organic piece, we talked about the inorganic piece. What does it all mean? I mean, you guys hosted an Analyst Day back in October, I believe it was. Maybe you can talk a little bit about those targets and kind of what does this all mean in a, in a more aggregate sense.
Yeah. We had our first Analyst Day in October 2023, and we rolled out Roadmap 2027. We said we'd wanna get to EBITDA margins. We wanna grow them 50-60 basis points and get to about between 13% and 14% by 2027, while growing the top line 15%-20%, which is really what the company's done since its founding. Well, 2 years after that, because of good execution in our legacy companies, but also because we did a transformational acquisition in Texas, we had exceeded those goals. People at conferences like this said, "Okay, where's this going? You've already surpassed these goals 2 years early. What does this mean?" We had another Analyst Day this past October, and we said, "Okay, those goals have been achieved.
This is our Road 2030 plan." We said for 5 years, we're gonna continue to run the exact same strategy. There's no new strategy. We're gonna continue to grow the top line 15% or more through acquisitive growth and organic growth, we're gonna continue to expand the bottom line 30 to 50 basis points and hopefully be at 17% EBITDA margins by 2030. We're gonna continue to just execute on that same strategy, hopefully by 2030 or before, that'll get us to be over a $6 billion dollar revenue company and $1 billion of EBITDA. That's the goal.
Perfect. I think we're out of time. Thank you so much, Julian.
All right.
Appreciate it. Break out downstairs.
Thank you, Tyler.