Asphalt, Infrastructure, and the Hidden Engine of the Real Economy

0:00This is why we like it. A quick dive into the industries capturing our attention in the lower middle market in the United States. We're asking the questions that unlock why and where we see value in the lower middle market. I'm Sam and each episode I'll share why our sector stands out. We're going to bring in the voices who know it best and we'll point to where we think the future is moving. When people think about infrastructure, they tend to think big. Bridges, airports, megaprojects. But one of the most critical pieces of physical infrastructure in the economy is far more everyday. It's roads, it's parking lots, runways, and surfaces that keep the commerce of our country moving.

0:46Let's start with the fundamentals. Roughly 94 % of US roads are asphalt, and the average roadway condition still grades out at a D+. Not a great grade. Roads don't get fixed once. They actually get maintained on a 10 to 15 year cycle, which creates a built-in repeatable demand that we love. Then you layer in the structural tailwinds. Since the early 2000s, US lane miles are up about 8%. The vehicle miles traveled are up about 16 % and the vehicles themselves are heavier. They're about 13 % heavier on average, which accelerates the wear and tear of those roads materially, especially with electric vehicles.

1:33More miles, more weight, more deterioration, more resurfacing. Big industry tailwinds that we love. them. Now adding the funding, federal highway funding has stepped up meaningfully. The current cycle sits around$365 billion-ish versus$226 billion in the prior program. And it's not just abstract infrastructure spend. It translates into real work on the ground, including an estimated million jobs. That's roughly 90 billion of GDP in by 2027. But it's still highly fragmented. And as you know, if you've tuned into these podcasts, that fragmentation is the opportunity, but only if you compare local execution with a scalable operating model.

2:29And that's why today's conversation is with operators who've lived and breathed this exciting category. And we're joined by industry legends, the team behind Palmetto, one of the most respected names in paving, with 38 years of operating experience and deep credibility within the South Carolina area where they operate eight asphalt plants. Palmetto and Access Holdings have formed a strategic partnership. That partnership is called Palmetto National, with a clear ambition to partner with best-in-class paving businesses across Florida, Georgia, South Carolina, and Texas to help them scale into the next generation of regional leaders.

3:16So this episode is about the category. It's about the demand, the durability, and the margin levers about what great actually looks like operationally. And it's also about what happens when the right operators and the right platform ambition align. Today, I'm joined from Palmetto by Sean and Craig. Welcome, guys. Welcome, Sam. Thanks, Sam. First off, let's begin with the basics. Sean, Craig, what are your roles at Palmetto? So I'm the CEO and owner of Palmetto. I've been here with Palmetto since January of 94. And I'm the president and CFO, and I've been here since 2007. Awesome. So as I said, we've got people who have lived and breathed this industry for a long time.

4:04Let's start with the history. Can you guys tell me a little bit about what drew you guys into paving so early on? How did Palmetto become to be one of the most respected names in the space? So Sam, it was a family business that my father started back in 1987. And I kind of worked in the business as a teenager. And then after I got out of college, I immediately started with the business right after I graduated. And when we first got started, it was a small local little asphalt paving company that we've been able to kind of take the tailwinds of the South Carolina growth and just kind of grow from 20 employees to a thousand.

4:45This business is no different than any other business. How they succeed is surviving the tough times and when the times are good, setting some money aside so that you continue to grow when that opportunity comes up. But you still got to treat your customers well. You got to treat your employees well. You got to do what you say you're going to do. All those things that any business needs to do. Taking on a family business, it's a big responsibility and you've taken it from a modest size to a giant in the space. Over what period of time have you done that, Sean? So when I first got in in 94, you know, we were obviously only had about 20 employees, but the growth spurts have come, you know, over staunches of time where we had some big growth in 97, a little bit more in 2006.

5:31Obviously the decline in the markets in 08 allowed us to kind of hold tight there for a little while. Then in 16, we made another expansion. And then since then, we've kind of kept adding on asphalt plants all up until even this year. Typically how that growth happens, at least it has for us, is looking for opportunities and holes in the market, either a market that's underutilized when it comes to competition or it's a market where there's going to be some growth in a market where expansion in a market, we've just been able to kind of move into those markets when those opportunities come out.

6:04And we've done them all organically. Obviously, there's other ways to do it from acquisitions, but all of ours has been with organic growth. I was speaking to one of my colleagues as I was researching this episode, and they described paving as unsexy, but essential. Now, I'm sure the annual Palmetto calendar would disagree with that, but from your perspective, why is this industry so foundational to local economies and infrastructure, and why do people underestimate it? It certainly is fundamental to the economy because almost all growth involves building roads to some degree, whether that be in developments, new developments, new industry, and the transportation to and from those industries or from the businesses that they create.

6:50And especially if a local or state economy wants to grow, wants to expand, it's going to involve roads and therefore more asphalt. In general, I think the general public underestimates the importance of asphalt and roads because they just travel it on every day. And until there's either an issue with the roads or until the traffic becomes unbearable, they don't really pay attention to it. We've been lucky enough here in South Carolina, the DOT and our industry is doing a really good job of getting the word out on the status of the roads and what needs to be done to fix it. And if you were around her, you would see that it is a top talking point for all of our politicians in our state at this time.

7:33The market for both paving and asphalt is massive, but it's very regional and it's very fragmented. What structural characteristics of the industry make it resilient, but also difficult to scale? And I guess tangentially to that, what's the value in owning your own asphalt plans? So this business is really kind of a boots on the ground business where you really need to be out there on the job site. So you really can't run a business like this from some ivory tower. And because of that, you want to have local management. And that's why a lot of these businesses were started as family businesses.

8:13They started locally. Maybe they grew and expanded a little bit. and then you've had these businesses and they've in a lot of cases been successful. So you've had situations where a family business really just wanted to pass it down to the next generation. The problem is if you do not have a good succession plan, then you don't really know what to do with it. That's why there's such a big opportunity right now with outside equity to come in, take over all these little small private businesses that still have boots on the ground. You can still leave the leadership in place that's actually going to be able to get the work done, but then pull them under a bigger platform to help them grow and give them resources and that type thing.

8:53And those type things is really what makes a business like that help and grow and make it better. But as far as an asphalt plan is concerned, you know, you don't have to necessarily have an asphalt plan to be successful in the caving business, but it just helps from a standpoint of control. One, controlling when you get your materials, when you make your asphalt, control as far as quality is concerned. And then you also, assuming you do a good job manufacturing it, you also have a good price advantage. And when it comes to most of your larger projects, your larger interstates or regional roads or those types of things, you really need to be competitive in that space.

9:29You've got to have your own asphalt plant to control all those derivatives. At Access, we spend often years on a thesis. Curiosity is one of our company values, and we like to go really, really deep on it. But you're absolutely right, Sean. You can't get into this type of business managing it behind a spreadsheet. We've spent a lot of time with you guys getting to know you, trying to understand the industry, but it was clear this isn't an industry that you can become a professional in unless you operate in it. And that's why we formed our partnership. And particularly because margins in paving are often described as tight, but dependable.

10:12Where, in your view, is profitability actually won or lost? Equipment, utilization, bidding discipline, labor materials, or is it something else entirely? Sam, yeah, it is true that particularly in the municipality and DOT segment of the business, that margins are relatively tight and somewhat predictable, particularly when there's a lot of work available and most of the providers are pretty busy. For us, the profitability starts at the bidding table. One of our favorite sayings is that there are no bad jobs, just bad bids. and if you truly understand your costs and you have those true costs in your base bid, then it really just comes down to understanding how much margin you're willing and able to get and still win the jobs.

11:03And then once the job is won, then it absolutely becomes how well you execute in the field, primarily related to the labor and equipment efficiency bid rates that you've put in the bid. I love that. No bad jobs, only bad bids. And I guess that kind of leads into a topic around execution and the criticality of execution discipline in the industry. Tell me a little bit about why small mistakes maybe in planning and scheduling or fleet management compounds so quickly. Yeah. If you've ever actually been out on a paving job and you see the number of people and the amount of equipment it takes to just to pave one road, it literally starts, as Craig said, from the estimating table.

11:50But when it comes to the execution side, it comes from, say you do own asphalt plants, you've got a team of people there that are making the asphalt. You've got a team of people that are picking up the asphalt from a freight distribution standpoint, coming out to the job site. on any job site you may have 10 pieces of equipment with you know 10 different people operating them and all it takes is one thing within that big chain of events there to not work properly maybe it's a piece of equipment breaks down maybe it's the asphalt plant maybe it's weather maybe it's just poor planning when it came to deciding which equipment you needed out there anytime one thing is not working properly the whole show stops and that production is lost for that day and as we discussed earlier margins are tight so the last thing you need to do is have any kind of issues where you lose a day of production.

12:37When that happens, it eats into those margins quicker. I've seen those jobs and I've seen how many people are on the roads working on them. We all have at Access. So I do want to hit on labor, but just before that, particularly as we're talking about execution and margins, what's the unique selling point? What's the stuff that the Palmetto does uniquely well against the competition? Well, first of all, typically in all government contracts, it's strictly low bid. So they pre-qualify everybody. And if you're on a pre-qualified list and you're the cheapest bid, you get the job. But typically what separates us is our capacity.

13:16So what will happen with most competitors is that they get full, they only have so much labor, they only have so much equipment. And the next thing you know, they just won't bid jobs. Whereas in Palmetto's case, because of our size, because of our aggressive nature to want to expand and grow all the time, we will take on a lot more projects and take a little bit more risk in things than other individuals will. And using that advantage that we have and the ability for that risk has kind of made the difference and has allowed us to grow as we have. If you go into a DOT contract knowing that the lowest bid wins, and as Craig said, there's no such thing as a bad job, just a bad bid, how do you walk that tightrope?

13:58Sure. Yeah, there's a balance there. You know, there's a balance of you need to have the volume to keep everybody busy and to cover the overhead. But at the same time, you need to analyze those jobs and look at the risks associated with those jobs. Even us that have tight margins, there are certain jobs that are just easier than others. And when you understand those jobs, the better you understand and know how you need to put those margins on those jobs. And the last thing you want to do is to have very valuable resources, equipment, and people tied up old jobs that are very risky with low margins.

14:31So understanding how you determine what's a risky job versus a not risky job is where you distinguish yourself between other contractors. One other thing I think that helps us is we self-perform a lot of different aspects of the DOT work, maybe more than most of our competitors. And I think that gives us a little more of an advantage and flexibility sometimes on the margins because we're self-performing that instead of using maybe a subcontractor on other aspects of the work. Got it. Makes a lot of sense and a great point of differentiation. Sean, you talk about the risk in it. Risk is managed by people, people and data.

15:09But if we go to labor, labor availability, like with many industries, is one of the biggest constraints in construction and infrastructure. How is the labor challenge specifically impacting operators like you guys today? and how you address that? Sam, it's always been a challenge, but in particular since COVID, it's been a really brutal challenge, I think, to say the least. We use both internal and outside resources, and we're constantly recruiting potential employees. In the last couple of years, we've created an internal subcommittee, a recruiting and retention subcommittee that is constantly evaluating and recommending improvements to all of our benefits that may help retain our current employees, but also attract new employees.

15:57In today's environment, you never want to lose a good current employee for almost any reason. So we're constantly evaluating our health benefits, our 401k plans, our vacation policies, as well as implementing new programs. One of the newest ones we implemented this year was a guaranteed pay program for our hourly employees. In our industry, we may have a period where we have rain for two weeks, and these hourly employees may not make any money during that time. Well, this year we implemented a guaranteed pay where we pay them a base amount regardless of whether we get work hours in that week or not, and that gives them a comfort that they're not going to have to worry about their paycheck coming, whether it's good weather or bad weather.

16:42And then another really good program for us internally is an employee referral program where we pay an employee up to$1 ,000, a current employee, if they refer an employee that comes on board with us and stays with us for a year. And our feeling with all that is if someone enjoys working for us and they're recruiting someone to come work for us, there's a much higher likelihood that they're going to bring on a good employee and that employee is going to stay with us. I mean, I was about to ask you, I'm always fascinated about benefits programs with organizations like yours. And I was going to ask what the favorite one was amongst the employee base, but I'm guessing guaranteed pay is up there.

17:23And I also love the idea of turning your best employees into your recruitment engine. You probably have some outperformers who are recruiting loads of people. It's almost like a side hustle for them. Absolutely. Love it. We mentioned data briefly. In the world we operate in today, even if you're laying roads, data is critical. And AI is lighting the usability of that data up. And you guys are collecting data on bids, job costing, fleet utilization, weather, as you mentioned, and running a modern paving operation. How do you think about that data? Well, as far as how we think about it is, is we want to start with making sure that we have the most up-to-date technology that basically allows us to gather that data and gather accurate data.

18:15But we start it from we have technology that's tracking our trucks that are driving every day, not just where they are in the maintenance on the trucks, but also from a safety standpoint of understanding what the driver is doing while he's in that truck, from cameras that are facing forward and reverse. First, we've got technology that's tracking our equipment usage and that equipment usage trackers allow us to take that information and better use that to put into our bids for future jobs that we've been on. And also, there's so many more technology things when it comes to safety on our equipment today, from backup cameras to front cameras to alarms to different things that keep not just the traveling public safe, but also our employees safe.

18:58And by doing that, it keeps those employees that we need working for us on the job side every day, working every day and feeling comfortable. They're going to be able to go home with their family. But most of the data we use, we gather, is to help us either with future vids and to make adjustments as we look forward to upcoming projects. And I think it just allows us to understand where we are from a cost standpoint. And the better we understand that, the better it will help us bid projects in the future. In my profession and many professions, relationships and trust are everything, especially for a family business.

19:33And through the conversations the Access team have had with you guys and recently at the ACAF conference, it's evident that that's the case here. Relationships and FaceTime is incredibly valuable. How important are relationships and relationship building in your industry? Sam, it's critical. This industry is very much based on relationships, whether it be with the DOT, with our customers, our vendors, our subcontractors, our employees. We make an effort to be involved in all the key groups in our industry, whether it be the South Carolina Asphalt Paving Association, Carolina's AGC, National Asphalt Paving Association, or the South Carolina Trucking Association.

20:17But one of the things that we prioritize is having a board seat on those groups so that we are fully engaged with all aspects of that group in the industry. And that way we are staying as close as we can to all the latest news and technology, as well as the key people in the industry, including all the potential future employees that we may meet at those meetings. We formed a partnership not long ago to go after this industry together and to scale in regions that you guys aren't already in. I always love asking this question. Normally, I don't ask it on a podcast. But what made partnering with Access the right decision for you guys and the right timing in the Palmetto growth journey?

21:02Well, first of all, I was looking at an opportunity to try to grow and expand our footprint outside of South Carolina. but wanted to do it with a partner in such a way that they could bring capital, but also could bring some expertise within the M &A space. And Access had a great track record, obviously, of not just buying other companies, but also building and running other companies. And the team at Access, from what I've seen in the relationships we've built over the last year or so, I guess made me feel comfortable that they are not just in it to just buy somebody and turn around and resell them.

21:38They're looking at interested in building it, growing it, and finding the things that they can do to help make that company better. And also, I think they've really realized that having an industry partner on their team helps them understand that actual industry a whole lot better. And I've been excited, one, to learn about their business and how they do things, but also it's been fun teaching them about our industry and our business. I'm pleased to hear it. It's actually exactly the same reason that I'm at Access as well. And I think that humility combined with curiosity to work with experts in their field is critical, particularly in essential industries.

22:16Let's do a little bit of kind of stargazing for a moment. Looking ahead, I was going to say 10 years, but maybe that's a little far out in the world we live in. But so five to 10 years, what pressures and changes are going to reshape the paving industry? Is it regulation, funding, labor, materials, consolidation? How are you viewing the future? Well, Sam, I would say that a little bit of all those things, I don't necessarily say reshape it, but it may tweak it here or there. I mean, the pavement industry, as much as it has changed over the years, it still hasn't changed that much. You know, we still take, when it comes to asphalt, we still take aggregates, rock and sand and tar, we put them together and we make asphalt out of it.

23:00But, you know, regulations have gotten a little tougher. There's just a little bit more hoops to jump through to get anything done. So that affects our industry from a growth standpoint as far as going to getting another asphalt plant permitted somewhere. But also any individual who's trying to grow in any industry that wants to get a new building built or a new subdivision put in, it's just tougher from a regulation standpoint to get those things done. So what that tends to happen is it takes longer to get a project to the construction phase. What used to take six months now takes a year and a half.

23:31The current administration wants to cut down on regulation. I'm not sure exactly how much they're going to get done with it. But, you know, at least in my experience, it hadn't got shorter to get projects. It's always taken longer. Funding, you know, luckily, as Craig mentioned earlier, every politician is always talking about infrastructure and we need to have better infrastructure. The question is, are they willing to step out on a platform and say, hey, we need to invest more money in it? And where that money will come from? Is it going to come from a gas tax or is it going to come from, you know, just budget increases or whatever?

24:03And the appetite for people paying more taxes, is that something that the politicians are willing to die on the hill for? Who knows? Some are, some aren't. But that government funding is necessary and is a major thing that we have to have to continue repairing the infrastructure that you mentioned earlier is sitting at that D-plus level. And it's going to take funding to get it there. You know, hopefully technology will help us a little bit on the labor side. Maybe we can get some more autonomous equipment or, you know, get it. I haven't seen it yet that's going to change it. I mean, yeah, there's some things out there where you've got some driverless trucks and quarries and in certain, you know, closed off scenarios you've gotten it where equipment can operate by itself.

24:43But they're not quite there yet. Hopefully they'll get there one day. If they do, you know, we will be able to take that technology and make things safer for our employees and make things a little bit more efficient. And, you know, consolidation is always a thing, you know, and that can be a good thing. If you've got a good consolidator who's putting all good people together and making them better, that it could be great. If you put the wrong group together and the people that are really making that happen retire and go live in the island somewhere, then it may be a bad thing. So that would just be way to determine how that plays itself out.

25:14Greg, how are you seeing the future? Yeah, I think the two things that really stand out to me are what's getting mechanisms that get put in place for funding, because that's just critical for everyone to be able to remain competitive. And then I'm an engineer by degree, so the technology side really tweaks me. And I just, I'm anxious to see what AI and autonomous equipment and vehicle operation brings to this industry over the next five to 10 years. In a recent podcast episode, we spent time with our management team at our car wash business. And we also spent time in conversation with the CEO of the industry trade body.

25:52And an analogy that we spoke through and I gave, I often have this debate with my wife that my six-year-old and two-year-old boys are never going to learn to drive, which if they drive anything like me and my wife is probably a good thing. But yeah, he's going to walk outside when he's ready to drive and he's going to look at me mad thinking there was a car outside with 99 % downtime. And I'm going to say, no, son, there were two cars with 99 % downtime. And he's going to have this big electric vehicle with no driver turn up. And those electric vehicles change the game. They're going to be autonomous.

26:29They're a lot heavier. To be autonomous, you have to have a different type of road and lane markings and all that sort of stuff. How do you think the electric vehicle shift is going to play into the industry? Yeah, I think it's, again, part of the whole thing, what it's going to look like five, 10 years. I think it's going to be good for us that the heavier vehicles are going to affect the roads until they create the vehicles that aren't touching the rotor and are flying, I think it's still going to be a good thing for the road building industry. It is going to create potentially a new segment or a new specialized segment of the industry where the markings and the signs and everything else have to meet the requirements needed for those autonomous vehicles to be able to safely operate on different types of highways.

27:18I would agree 100%. The good news is that I think we're anywhere near the Jetsons flying car situation. Although I will say one of my favorite LinkedIn pages is Gravity Industries. And this British chap, Richard, has created an unbelievable jetpack being used by ministries of defense all around the world. But they're expensive. They look very unsafe. And I'm a long way away from that, certainly for us to use. Guys, thank you. As expected, this was awesome. Fascinating. and it is such a privilege for access to be partnered with true leaders and professionals in their field. So a big thank you from all of us and from the listeners for sharing your insights and your many years of knowledge.