Asphalt Inc., LLC (ROAD) Earnings Call Transcript & Summary

Welcome to Construction Partners' Conference Call. [Operator Instructions]. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Rick Black with Investor Relations. Thank you, you may begin.

Thank you, operator, and good morning, everyone. We appreciate you joining us for today's investor update call to discuss Construction Partners' announcements this morning that the company has entered into a definitive agreement to acquire a platform company in Texas, Lone Star Paving. In addition, CPI has also released preliminary financial results for fiscal year '24 and introduced its fiscal year '25 outlook. This call is also being webcast and can be accessed through the audio link on the Events and Presentations page of the Investor Relations section of constructionpartners.net. An investor update presentation has also been posted on the website. This webcast will be available by replay. Please be advised that any time-sensitive information may no longer be accurate as of the date of any replay listening or transcript reading. I would also like to remind you that the statements made in today's discussion that are not historical facts, including statements of expectations or future events or future financial performance or forward-looking statements made pursuant to the safe harbor provision of the Private Securities Litigation Reform Act of 1995. We will be making forward-looking statements as part of today's call that, by their nature or uncertain and outside of the company's control. Actual results may differ materially. Please refer to our press release for our disclosure on forward-looking statements. These factors and other risks and uncertainties are described in detail in the company's filings with the Securities and Exchange Commission. Management will also refer to non-GAAP measures, including adjusted EBITDA. Reconciliations to the nearest GAAP measures can be found at the end of our press release. Construction Partners assumes no obligation to publicly update or revise any forward-looking statements. And now I'd like to turn the call over to Construction Partners' CEO, Jule Smith. Jule?

Thank you, Rick, and good morning, everyone. We appreciate you joining us on the call today. With me this morning is Greg Hoffman, our Chief Financial Officer; and Ned Fleming, our Executive Chairman. We are excited today to announce our acquisition of Lone Star Paving as our platform company in Texas. In addition, we also announced this more than our preliminary results for our fiscal year 2024 and introduced our fiscal year 2025 outlook, which concludes combined expectations for Lone Star beginning in January. I'll start off today by providing a strategic overview of Lone Star Paving and then I'll turn the call over to Greg and Ned before taking questions. As you can imagine, we're very excited to enter Texas and we believe Lone Star Paving is the perfect fit, both strategically and culturally, to join our CPI family of companies. Lone Star's Founder and CEO, Jack Wheeler, has built an incredible vertically integrated construction business located in Central Texas in three of the fastest growing markets in the country and is run by deeply experienced and effective management team. Combining all these components, this business generates annualized EBITDA margins in excess of 20%. Essentially, Lone Star is a proof of concept of the power and potential of our three margin expansion levers that we talk about for CPI and our ROAD-Map 2027 goals. Lone Star is a market leader across multiple high-growth metro areas in Central Texas, including Austin, San Antonio and Temple-Killeen. They have a very skilled and experienced team that operates 10 hot-mix asphalt plants, 4 aggregate facilities and 1 liquid asphalt terminal. Through its vertical integration strategy, Lone Star reduces volatility, captures value to enhance margins and maintains its operational schedule flexibility. We expect this transaction to significantly accelerate our ROAD-Map 2027 goals, including by allowing us to reach our EBITDA margin goal of 13% to 14% in fiscal year 2025, 2 years ahead of schedule. Once closed, we'll be adding Lone Star's annualized run rate revenue of approximately $530 million and adjusted EBITDA of approximately $120 million. Acquiring Lone Star is consistent with CPI's decades-long growth strategy of entering new states through the acquisition of a platform company with a strong and experienced local management team, a well-established reputation for quality and opportunities for organic and acquisitive growth. Through this acquisition, not only do we add three of the fastest-growing markets in the country to our geographic footprint immediately but also Lone Star will serve as a strong platform for continued acquisitive and organic growth in the state of Texas in these three markets and other markets throughout Texas. This value-enhancing acquisition is expected to close before the end of the calendar year, which is our first fiscal quarter of 2025 and we expect it to be immediately accretive to earnings. As you saw in the press release, we are paying $654 million in cash and 3 million CPI Class A shares. We plan to finance the cash portion of the purchase price through borrowing under a new term loan credit facility. Lone Star was founded by Jack Wheeler, an industry -- asphalt industry veteran with more than 40 years of experience, that, along with his talented team, has created a well-established and respected brand in Texas. After the transaction is closed, Jack will continue with CPI, leading our strategic growth in Texas, leveraging his decades of experience and his deep relationships in the state. We welcome Jack and the 625 Lone Star employees as the newest additions to our family of companies at CPI. Now let's drill down a little more on the state of Texas. It is clearly a high-growth state. Similar to our current states, it continues to benefit from population migration from other parts of the country. It's also an extremely business-friendly state positioned in the center of the country where many corporations and businesses are relocating and expanding their operations. Texas also has the largest transportation funding program in the United States. The Texas DOT benefits from two unique revenue streams. First, is that TxDOT receives an annual portion of existing oil and natural gas production taxes, which represents approximately $3.1 billion annually. Second is that a portion of the sales and use taxes and vehicle sales and rental taxes may only be used to construct and maintain or acquire right of way for public roadways, which represents approximately $2.5 billion annually. And when it comes to federal funding, again, Texas stands out. It has received $26.9 billion in IIJA funds, the most of any state. In fiscal year 2024, TxDOT is poised to let over $13.6 billion in contracts. To put the size of the Texas Roadway system in perspective, Texas has more than 700,000 lane miles, which equals more lane miles than all of our six current states combined. Lastly, 2 months ago, the Governor of Texas announced a record $148 billion in total investment of Texas transportation infrastructure, an increase of $5.6 billion from last year's previous record. For CPI moving forward, acquisitions have always been a part of our growth model as we enter new areas, expand market share and add capacity services and talented new team members. Importantly, our acquisition strategy also fuels our future organic growth, helping keep us on our path to achieve ROAD-Map 2027 Goals, which are annual revenue growth of 15% to 20%, with approximately half of the growth being acquisitive and half organic as well as expanding EBITDA margins in the range of 13% to 14% by 2027, which we now will achieve in 2025 with the Lone Star acquisition. Currently, we continue to see a very active environment for acquisition opportunities as our industry is going through a generational transition and we believe we're the leader in building a scalable business by acquiring great privately held construction companies. While we continue to have conversations with potential sellers both inside and outside of our current states, it's important for us that we remain patient and focused on finding the best strategic acquisitions that will bring operational excellence and add to the great culture of the CPI family of companies. I'd now like to turn the call over to Greg.

Thank you, Jule, and good morning, everyone. I'll begin with comments about this acquisition, followed by remarks about the fiscal year 2025 outlook that we introduced in this morning's press release. Under the terms of the definitive agreement to acquire Lone Star Paving, CPI will acquire all of the outstanding equity units of the company for $654 million in cash and 3 million newly issued shares of CPI's Class A common stock. We expect to finance the cash portion of the purchase price through borrowings under a new term loan credit facility. And as Jule mentioned, we expect to close the transaction in the first fiscal quarter of 2025 subject to certain regulatory approvals and other closing conditions. We expect pro forma for the transaction we will have CPI's debt to trailing 12 months EBITDA ratio at 3.5x. Lone Star clearly represents a transformational acquisition for CPI and while our leverage ratio will initially increase, we expect over the next 4 to 6 quarters to bring that ratio back down in line with our long-term sustainable target of 1.5x to 2.5x as our business model continues to grow both the top and bottom lines while generating over 50% retained cash flow. Turning now to our outlook. Today, we announced our preliminary fiscal 2024 financial results, reflecting a record fourth quarter despite the significant impacts of Hurricanes Debby, Francine and Helene in August and September. Despite these challenges through the strong operational performance across our family of companies, we were able to complete a record fiscal year that generated revenue growth of nearly 17%, net income growth of more than 40% and increased adjusted EBITDA of approximately 27% compared to fiscal 2023, including a return to expected adjusted EBITDA margin of approximately 12%. Today, we also introduced our fiscal year 2025 outlook. This outlook includes the expected results from Lone Star Paving and assumes the transaction closes in the first quarter of fiscal 2025 and that the Lone Star contributions begin in the second quarter for 9 months. Here are the ranges. Revenue in the range of $2.42 billion to $2.52 billion, net income in the range of $90 million to $106 million; adjusted EBITDA in the range of $338 million to $368 million and adjusted EBITDA margin in the range of 14% to 14.6%. And with that, I'll now turn the call over to Ned.

Thank you, Greg. Obviously, we are excited and ready to enter Texas. We've been looking at companies to acquire in Texas for many years. And with Lone Star, Jule, Greg, Nelson and the whole team at CPI have found the right company. We are excited to welcome Jack Wheeler, Steve Spinn, Dean Lundquist and all the great people of Lone Star to the CPI team. And I know they are excited to be the Texas platform company for CPI. The similarities both companies have culturally and strategically is remarkable, including a focus on operational excellence, investing in technology, equipment and facilities to position operational teams for success to drive profitability. On behalf of the Board, we could not be more pleased with this expansion in Texas with Lone Star Paving. This acquisition exemplifies the proven growth strategy that we have executed since our founding. Partnering with experienced local operators who know how to build and operate great companies that we can further support with our larger organization. We will continue to execute our growth strategy supported by regional and transportational funding tailwinds. We remain laser-focused on expanding margins through enhanced local market performance, further vertical integration of construction materials and services and scaling corporate costs across the organization. And with that, we are now ready to take your questions. Operator?

[Operator Instructions] Our first question is from Kathryn Thompson with Thompson Research Group.

Congratulations. Two-part question. One is strategic and then there'll be just some mechanics questions. The first on margins, as you noted, you're already hitting your bogeys that you laid out for 2027. When you look at Lone Star margins specifically, what are the -- how much of that is due to vertical integration or is it more market specific, the market carries higher margins? Or how much of it is product, more specifically to aggregate? And any color you can give in terms of how much of aggregates are internally served versus externally would be helpful?

Kathryn, that's -- that is not only a great question, is really the question. As we got to know Lone Star Paving and realize what a great management team they had, they're also in great markets. And they've taken advantage of basically all three of the margin expansion levers we talked about a year ago at our Analyst Day. They've built great markets. They have great market share in Austin, in San Antonio, and Temple-Killeen. They just -- they've got a great market share. They've got a great brand. They've done a great job of building that market, taking care of their customers. And so they have great margins just in their contracting but then they add to that margin by capturing the value of aggregates and liquid asphalt by vertically integrating, which is our second margin lever. They internally source about 33% of their aggregates and almost 90% to 95% of their liquid asphalt. And then they built scale. They've been able to grow and build a business and keep their fixed costs low. And so as I said in my remarks, we really look at it as a proof of concept of exactly what we're trying to do in our current operations, in our current states. So we're excited. I think there's upside, not only to their margins but just to grow throughout the state of Texas.

Okay. That's helpful. And speaking of the public side in terms of TxDOT, and hopefully, we're actually hosting a call with TxDOT in early November. So this, I mean this is super helpful. But when you look at their -- I know you've given in your PowerPoint, the break out of public versus private. But if you dig a little bit further into TxDOT work, how much of it is more kind of maintenance versus structural and really kind of give us a flavor of what type of public work does Lone Star typically go after?

Yes. Well, their public/private breakdown is similar to ours, and they do -- obviously, with the commercial growth there, they have a lot of commercial clients. And so it's maybe instead of 65%-35%, it's more 60%-40%. But when you look at the TxDOT program, Lone Star is the largest subcontractor in the whole state of Texas. So they work as a prime contractor on a lot of Texas maintenance work, but they also work as a subcontractor with some of Texas' largest roadway contractors and have great relationships with them. So it's both as a prime contractor and subcontractor, Lone Star is able to participate in just a great funding that TxDOT has throughout the state.

Are there margin differences between prime and subcontractor?

No, there's really not any significant difference. It matters more the type of project than whether you're a prime or subcontractor.

Okay. There will be 9 months, assuming you're able to close in your calendar '25 or your fiscal year, but it will be included for your fiscal year, next year, 9 months of revenues. You've indicated there is $530 million annualized revenues, but we also know that, for CPI specifically, there is a cadence in terms of EBITDA contribution. So what -- kind of what we have is in any given year, 20% for Q1, low teens for Q2 and then Q3 is about 1/3 and Q4 is a balance around 36% or so percent. How does that EBITDA contribution for CPI stack up versus Lone Star?

Yes, Kathryn. It's surprisingly that very similar to CPIs. Yes, we typically say 30% in the first half of the year, 70% in the back half of the year. So I think your percentages work out. It could be in the 25% to 30% range, but mostly 30% in the first half.

Our next question is from Michael Feniger with Bank of America.

Yes. I'm just curious on -- if you just touch on for LSP, just what's their typical project length? I know we kind of talked about you guys where the kind of backlog looks like typical project length of backlog. Maybe you could just talk about for LSP, just where the backlog is today and the type of projects they kind of get involved with, what's a typical project there?

Yes, Michael, thank you for the question. The size of projects, the duration of projects on average is very similar again to CPI. So we expect the same cadence as what we see at CPI. And then in terms of backlog, there in the neighborhood of $660 million will be added we expect when we close something similar to that.

Perfect. And just can you help give us some color? You guys gave us kind of the preliminaries for 2024, higher to get 2025. I guess I'm just kind of thinking about what CapEx kind of looks like for '25, how we're thinking about that free cash flow? And what is kind of the capital intensity maybe for LSP compared to what we're kind of known for with you guys?

Almost sound like a broken record, Michael, but it's very similar. We're going to employ basically the same program at CPI. So that 5%, 5.25% total CapEx, but then maintaining that 3.25% maintenance CapEx.

Michael, this is Jule. And the reason, Greg, I want to emphasize at this point, the reason Greg keeps saying similar to us is and I want to make sure to really say this with clarity. Lone Star Paving does exactly what CPI does in our 6 current states. They fit strategically very well. It's a very simple business model. They're in the road maintenance and payment business. They vertically integrated very well but there's -- it really fits exactly what we do. And just as we got to know them and know their culture and operation, we felt very comfortable that this was right in our wheelhouse. This wasn't anything different than we've done for 20 years. They're just doing it in a state that has just got a lot of great opportunity.

That's great, Jule. And maybe if I could just follow up. And when you kind of look at the cash portion of it, the stock portion of it, the margins here, the outlook for Texas, I mean you're kind of backing into like a 7.5x EBITDA multiple, which seems very attractive. Is there anything we're kind of missing about this business? I mean, I'm sure you guys have looked at historically, is it very volatile do the margins move around a lot. I'm just kind of curious because clearly, the margin profile here, the growth outlook, just curious how we kind of think about what you guys are able to transact as multiple? Clearly, it looks like when you look at the multiple, the math synergies, there may be less synergistic value since it's in a different state than your other region. Anything you want to touch on there? And just the last one, Jule. What gets you more excited about? Is it the organic growth opportunity there, which hopefully is consistent with what you guys kind of guide to that 15%, 20% half organic? Or is it actually more on the M&A side? Do you see a lot more of those bolt-on opportunities over time to build around?

Yes, Michael. I'll first of all, just say I think you're right on the multiple. That's consistent with what we think. And we feel like we're getting a great company at an attractive price. But I will tell you what gets us the most exciting, what gets me the most excited. While the growth opportunities are great, to me, it's all about the management team and the people and having someone -- it's really an industry legend like Jack Wheeler, who wanted to join CPI, who wanted to become the platform company in Texas, who wanted to join our team. And it's just -- we take it as a great honor that Jack Wheeler wanted to stay on and work and help CPI grow in the state of Texas. But his management team is incredible. Ned mentioned a few of them, but there's a long list of just very experienced great operators. And for us to go to Texas, we wanted a company that was run by Texans, just like is our culture, but we wanted to find a great company. As Ned says, we've looked for a long time and we just -- we could not believe that we found a company like Lone Star that just fits so culturally with us, but also, they're just great operators on what they do. Their margins are very stable. They feel like there's upside in their margins as they continue to execute on their strategy. But it's really the people and the new teammates that get me the most excited.