Executive Summary / Key Takeaways

• Construction Partners is executing a high-growth strategy centered on strategic acquisitions and organic expansion in the booming Sunbelt civil infrastructure market, evidenced by recent platform entries into Texas, Oklahoma, and Tennessee.
• The company's vertically integrated model, encompassing asphalt production, aggregates, and specialized services, provides operational efficiencies and margin enhancement, contributing to record Q2 FY25 Adjusted EBITDA margins of 12.1%.
• Strong demand from both public funding (IIJA, state initiatives) and private development (migration, reshoring) is driving record backlog ($2.84 billion as of March 31, 2025) and supporting robust revenue growth, with FY25 guidance raised to $2.77B - $2.83B.
• While recent large acquisitions have increased leverage (3.23x Debt/TTM EBITDA as of March 31, 2025), management is on pace to reduce this to ~2.5x within four quarters, supported by strong cash flow conversion (80-85% of EBITDA expected in FY25).
• The company's focus on attracting and retaining talent through its "family of companies" culture and equity incentives is a key competitive advantage in a fragmented industry undergoing generational transition.

The Sunbelt Foundation: Laying the Groundwork for Growth

Construction Partners, Inc. (NASDAQ:ROAD) operates at the intersection of critical infrastructure needs and dynamic regional growth. Formed in 2007 with a clear mandate for acquisition-led expansion, the company has systematically built a presence across the U.S. Sunbelt, specializing in the construction and maintenance of roadways and related civil infrastructure. This strategic focus positions ROAD squarely in markets benefiting from significant population migration, economic expansion, and robust government funding for transportation projects.

The company's business model is built on a decentralized, local market approach, now spanning approximately 100 distinct areas across eight states: Alabama, Florida, Georgia, North Carolina, Oklahoma, South Carolina, Tennessee, and Texas. In each market, local teams leverage strategically located assets – including hot mix asphalt (HMA) plants, aggregate facilities, and liquid asphalt terminals – to execute projects ranging from highways and bridges to airports and commercial/residential developments. This vertically integrated structure is a core tenet of ROAD's strategy, providing greater control over the supply chain, enhancing operational efficiency, and capturing additional margin along the value chain.

ROAD's competitive landscape includes larger national players like Vulcan Materials (VMC), Martin Marietta Materials (MLM), and CRH plc (CRH), which often have greater scale in aggregates and broader geographic reach. It also competes with regional and local contractors, including publicly traded Granite Construction (GVA). While larger peers may benefit from superior economies of scale in raw materials like aggregates, ROAD differentiates itself through its deep local market penetration, strong relationships with state and local transportation departments, and operational agility. The company's vertical integration, particularly in HMA production and aggregates, is stated to provide tangible benefits, such as lower operating costs per unit in regional projects compared to relying solely on third-party suppliers. This cost advantage, while not precisely quantified across all operations, is a key component of its strategy to enhance profitability.

The demand environment in the Sunbelt is a significant tailwind. Public funding, historically a stable source of revenue, is currently amplified by the federal Infrastructure Investment and Jobs Act (IIJA) and various state-level initiatives like Florida's Moving Florida Forward program. Management notes that as of the end of calendar year 2024, only about 40% of designated IIJA funds had been spent, indicating substantial future opportunities. This public sector demand is complemented by a healthy and growing private market, fueled by population growth, business relocation, and reshoring trends driving industrial, corporate, and residential development. This dual-market exposure provides flexibility; should private demand soften, resources can be redirected to the ample public work pipeline.

ROAD's strategic response to this environment is clear: capitalize on demand through both organic growth and targeted acquisitions, while leveraging its integrated model and operational expertise to drive margin expansion. The company's "Roadmap 2027" targets reflect this ambition, aiming for 15% to 20% annual top-line growth and 50 basis points of EBITDA margin expansion per year.

Performance Momentum and Strategic Acceleration

The company's recent financial performance underscores the effectiveness of its strategy. For the three months ended March 31, 2025 (Q2 FY25), revenue surged 53.9% year-over-year to $571.7 million. This growth was a combination of 7% organic expansion in existing markets and a significant 47% contribution from recent acquisitions. Gross profit increased 83.9% to $71.4 million, resulting in a gross profit margin of 12.5%, up from 10.4% in the prior-year quarter. Operating income saw a dramatic increase, rising from $3.1 million in Q2 FY24 to $27.3 million in Q2 FY25.

Net income for Q2 FY25 was $4.2 million, a substantial improvement from a net loss of $1.1 million in Q2 FY24. Adjusted EBITDA, a key profitability metric, grew an impressive 135% to $69.3 million, yielding an Adjusted EBITDA margin of 12.1%. This marked the highest Q2 Adjusted EBITDA margin in the company's history and was attributed by management to strong project and plant performance, efficient utilization of assets, and the completion of new backlog with more favorable margins.

Looking at the six months ended March 31, 2025, the trends are equally compelling. Revenue increased 47.6% to $1.13 billion, driven by 9.3% organic growth in existing markets and 38.3% from acquisitions. Gross profit rose 63.1% to $147.9 million, with the gross margin expanding to 13.1% from 11.8%. Adjusted EBITDA for the six-month period was $138.1 million, up 96.2% year-over-year, resulting in an Adjusted EBITDA margin of 12.2%. While net income for the six months decreased year-over-year to $1.2 million (from $8.7 million), this was primarily due to higher general and administrative expenses, acquisition-related expenses ($20.4 million, largely from the Lone Star deal), and increased interest expense related to acquisition financing. Adjusted Net Income, which excludes these non-recurring items, increased 102.5% to $17.7 million for the six-month period.

The company's backlog continues its upward trajectory, reaching a record $2.84 billion as of March 31, 2025. This represents 16 consecutive quarters of backlog growth (as of Q4 FY24) and provides strong visibility into future revenue. Management estimates that 80% to 85% of the next 12 months' contract revenue is already booked in backlog, up from 70% to 75% a year prior. This robust backlog allows the company to bid more patiently and selectively, contributing to healthier margins on new work.

Strategic Expansion and Integration

Recent acquisitions have been pivotal in accelerating ROAD's growth and expanding its geographic and operational footprint. The acquisition of Lone Star Paving in Texas (November 2024) was particularly significant, described as accelerating progress toward Roadmap 2027 goals by two years. This deal brought substantial vertical integration assets, including 10 HMA plants, four aggregate facilities, and a liquid asphalt terminal, establishing a major platform in a high-growth state.

Following this, the company entered Oklahoma with the acquisition of Overland Corporation (January 2025), adding eight HMA plants and a platform to drive future expansion in that state and northern Texas. The acquisition of Mobile Asphalt Company in Alabama (February 2025) added five HMA plants and strengthened market share in the Mobile area. Most recently, the acquisition of PRI (May 2025) established a platform in Tennessee, adding an HMA plant and specialized pavement preservation capabilities that management sees as valuable and potentially replicable across other markets.

These acquisitions are not merely about adding revenue; they are strategic moves to gain experienced local management teams, expand the base for future bolt-on acquisitions, increase market share organically within new regions, and enhance the vertically integrated model. The ability to successfully integrate these companies and leverage their local expertise within the CPI framework is crucial. Management emphasizes that integration is a core competency and that their culture helps attract sellers looking for a good future for their employees and businesses.

Organic growth remains a focus alongside acquisitions. The company is investing in its existing operations by adding crews, equipment, and capacity at plants and terminals. They are also pursuing strategic greenfield expansions and growing service offerings organically, such as adding grading and utility crews in South Carolina. These initiatives aim to increase throughput volume and capture more margin.

Financial Strength and Outlook

ROAD's balance sheet reflects the impact of its acquisition strategy. As of March 31, 2025, total assets stood at $2.75 billion, up significantly from $1.54 billion at September 30, 2024, primarily due to the recent business combinations. Cash and cash equivalents were $101.9 million, with $248.4 million available under the credit facility. Total debt increased substantially to $1.37 billion (net of current maturities and deferred costs) from $487 million, largely due to the $850 million Term Loan B facility used for the Lone Star acquisition. This resulted in a Debt to TTM EBITDA ratio of 3.23x as of March 31, 2025, up from 1.80x at September 30, 2024.

While leverage has increased, management is committed to reducing this ratio to approximately 2.5x within the next four quarters. This deleveraging is expected to be supported by strong cash flow generation. The company anticipates converting 80% to 85% of Adjusted EBITDA to cash flow from operations in fiscal year 2025. Capital expenditures for FY25 are projected to be between $130 million and $140 million, balancing maintenance needs (approx. 3.25% of revenue) with investments in new growth initiatives.

Based on strong performance year-to-date and the contribution from recent acquisitions, Construction Partners has raised its outlook for fiscal year 2025. The revised guidance ranges are:

• Revenue: $2.77 billion to $2.83 billion (up from $2.66B - $2.74B)
• Organic Revenue Growth: 8% to 10% (up from 7% to 8%)
• Net Income: $106 million to $117 million (up from $93M - $105.6M)
• Adjusted Net Income: $122.5 million to $133.5 million (up from $109.5M - $122.1M)
• Adjusted EBITDA: $410 million to $430 million (up from $335M)
• Adjusted EBITDA Margin: 14.8% to 15.2% (up from 14.1% - 14.6%)

This significantly raised guidance reflects management's confidence in continued strong demand, successful integration of acquired businesses, and ongoing operational execution.

Risks and Considerations

Despite the positive momentum and outlook, investors should consider potential risks. The company's business is inherently sensitive to government funding levels for infrastructure projects. While the current environment is favorable, future changes in federal or state budgets could impact demand. Competition for projects remains a factor, although management currently describes the bidding environment as rational due to high demand.

Integrating acquired businesses always carries risks, including potential challenges in retaining key personnel, harmonizing operational systems, and realizing expected synergies. The recent pace of acquisitions amplifies these integration risks. The increase in debt to finance these deals also presents financial risk, particularly in a rising interest rate environment, although the company utilizes interest rate swaps to hedge some exposure. A hypothetical 1% increase in variable rates could impact annual interest expense by $13.7 million based on current debt levels (absent swaps).

Operational risks include fluctuations in commodity prices (liquid asphalt, diesel fuel), labor availability and costs, and adverse weather conditions which can disrupt project schedules and impact profitability, particularly in the seasonally slower winter quarters. An environmental inquiry from the EPA regarding alleged Clean Water Act violations at two quarries could result in penalties and remediation costs, the full extent of which is not yet certain. The company also faced allegations from a short seller in January 2025 regarding backlog weakness and financial reporting, which it strongly refuted. While the company addressed these claims, such reports can introduce market volatility.

Conclusion

Construction Partners is executing a clear and effective growth strategy in a favorable market environment. By combining strategic acquisitions that expand its geographic footprint and enhance vertical integration with focused organic growth initiatives, the company is capitalizing on robust demand for civil infrastructure in the Sunbelt. The recent string of significant acquisitions, particularly the Lone Star deal, has accelerated its scale and market position, contributing to strong financial performance and margin expansion, as evidenced by the record Q2 FY25 Adjusted EBITDA margin and the significantly raised FY25 guidance.

While the increased debt load associated with these acquisitions warrants monitoring, the company's strong cash flow generation provides a pathway for deleveraging towards its target range. The competitive landscape includes larger, more scaled players, but ROAD's localized expertise, integrated operations, and focus on attracting talent provide key differentiators. The investment thesis hinges on the company's continued ability to successfully integrate acquired businesses, execute on its record backlog, and leverage the sustained tailwinds from public funding and private development in its core markets, paving the way for further profitable growth.