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spk06: Greetings and welcome to the Construction Partners Incorporated fourth quarter earnings conference call. At this time, all participants are in a listen-only mode. Question and answer session will follow the formal presentation. Anyone to require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Rick Black of Investor Relations. Thank you, Rick. You may begin.
spk08: Thank you, operator, and good morning, everyone. We appreciate you joining us for the Construction Partners conference call to review fourth quarter and year-end results for fiscal 2022. 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. Information recorded on this call speaks only as of today, November 22nd, 2022. So please be advised that any time-sensitive information may no longer be accurate as of the date of any replay 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, are forward-looking statements made pursuant to the Safe Harbor's 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 are uncertain and outside of the company's control. Actual results may differ materially. Please refer to the earnings press release that was issued today for our disclosure on forward-looking statements. These statements, as well as 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 gap measures can be found at the end of today's earnings press release. Construction Partners assumes no obligation to publicly update or revise any forward-looking statements. And now, I would like to turn the call over to Construction Partners CEO, Jule Smith. Jule?
spk10: Thank you, Rick, and good morning, everyone. With me on the call today are Alan Palmer, our Chief Financial Officer, and Ned Fleming, our Executive Chairman. as well as other members of our senior management team. I'd like to start by stating how proud I am of the entire team of 3,800 dedicated employees throughout our five states in the Southeast for their continued commitment and hard work to produce a record year at CPI. With the acquisition announced yesterday, I'm excited to welcome our sixth state of Tennessee and the talented new teammates that live and work in the Nashville metro area. In fiscal 2022, our team persevered through inflation that hit hard in the first half of the year and supply chain disruptions that persisted all year and continue to present numerous challenges to our productivity and profitability. Even so, we were able to gain momentum and increase profitability in the second half of fiscal 22, and we now look to carry that momentum into fiscal 23. The company had a record fourth quarter for revenue, adjusted EBITDA, and backlog. Compared to our fourth quarter last year, both revenue and adjusted EBITDA were up over 40%. I would highlight that this marks our first double-digit adjusted EBITDA margin in the last five quarters. This reflects that we have worked through most of our pre-inflationary backlog from one year ago, and we continue to manage through supply chain headwinds. Similar to our third quarter, abnormally high contract adjustments for liquid asphalt pricing again inflated revenue of approximately $10 million. As a reminder, this is effectively a dollar-for-dollar cost reimbursement that has no impact on margin dollars. As we communicated last month, in the last week of our quarter, Hurricane Ian impacted three of our states. While we were fortunate to not have had any loss of life or property, The main effect was the Florida DOT shutdown all projects statewide most of that week to prepare for the storm's arrival. We estimate the impact per million was approximately $8 million of revenue, which is not lost but moves forward as part of a record backlog of $1.4 billion. In Q4, more than $400 million of new work was added to backlog. In FY22, we grew backlog sequentially for both quarters of our busy work season, which is not the historical norm at CPI. This reflects strong project demand and the added contribution of new markets entered this year. This new backlog continues to have both higher inflation factored in on the cost side, while also steadily increasing profitability on the margin side. Using backlog as one indicator of our future, we began FY23 with a more resilient and profitable book of work on hand than we had one year ago. Demand remains strong in both the public and commercial sectors. Healthy funding programs at the state and federal levels are creating numerous public bidding opportunities, and we are beginning to see the funding from the IIJA work its way into project lettings. We still see healthy commercial project opportunities throughout our geographic footprint as migration to the southeastern United States continues to drive growth. As we begin 2023, our initial guidance is driven by three factors. First, a record backlog with strong project demand. Second, higher margins in our backlog. And lastly, the continued economic uncertainty and potential productivity loss due to the supply chain's challenges. We expect the supply chain will begin to normalize over 2023. The midpoint year-over-year reflects revenue growth of approximately 13%, adjusted EBITDA growth of 33%, and double-digit EBITDA margins. This fiscal year should have our typical seasonality of revenue being realized approximately 40% in the first half of the year and 60% in the second half and our margins having caused under-recovery in the first half of the year and over-recovery in the second half of the year during our busy work season. Turning now to acquisitions. During the past year, our record results were held by the additional contributions of numerous new markets we acquired, including a platform company in a new state and several bolt-on acquisitions. Yesterday, we announced the first acquisition of FY23. adding three hot mix asphalt plants and a construction operation in the Nashville metro area, purchased from Blue Water Industries. These new assets and employees will be integrated as a bolt-on acquisition to our Alabama-based platform company, Wiregrass Construction. Wiregrass maintains an outstanding and well-managed operation in North Alabama and Huntsville within close proximity to the Nashville metro area. We expect to take advantage of the growth opportunities in one of the fastest growing regions in the country. In connection with this transaction, we also received cash and transferred ownership of the Doherty Springs Quarry in North Carolina to Blue Water Industries, one of the leading aggregate producers in the Southeast. We believe this strategic transaction with Blue Water strengthens both of our organizations by creating a partnership in two dynamic markets. that retains aggregate sourcing rights and allows each company to focus on their core area of expertise. As we move into a new year, we continue to have conversations with potential sellers, both inside and outside of our current states, and we remain patient and focused on finding the best strategic acquisitions that expand our footprint and relative market share. We strengthen our operations also through building greenfields. such as the HMA plant we recently opened in Benson, North Carolina. An additional example is a greenfield investment we are making to enhance our vertical integration strategy, a new liquid asphalt terminal under construction in northern Alabama. It is expected to be operational this spring. The Hansfull facility will supply 10 hot mix asphalt plants in Alabama, as well as the three acquired Tennessee asphalt plants. This new terminal captures the margin between wholesale and retail for liquid asphalt used in our construction activities, just as we've done successfully at our first liquid asphalt terminal on the Gulf Coast in Panama City. These greenfields require an initial cash investment, as does the double-digit real organic growth we have achieved in our existing markets. Before turning the call over to Alan to review the financials and 2023 outlook, I want to reiterate our optimism for the future of CPI. In 2022, the team successfully managed through numerous challenges and set the table for a new year of growth, all while not losing sight of CPI's strategic model. At CPI, we know who we are and what we do. Our company is well positioned for the numerous opportunities on the road ahead, and we are committed to staying focused and working hard to build value for all of our stakeholders. I'd now like to turn the call over to Alan.
spk12: Thank you, Jewel, and good morning, everyone. I will begin with a review of our key performance metrics in fiscal 2022 before discussing our outlook for fiscal 2023. Revenue was $1.3 billion, up 43% compared to the prior year. Acquisitions completed during or subsequent to the fiscal year end of 2021 contributed $170.4 million of revenue, and we had an increase of $220.5 million of revenue in our existing markets. The mix of our total revenue growth for the year was approximately 24.2% organic revenue and approximately 18.7% from recent acquisitions. Gross profit was $139.3 million, an increase of $19.4 million compared to the prior year due to the factors that Jewel discussed during his remarks. General and administrative expenses were $107.6 million, an increase of $15.7 million, or 17%, compared to last year. This increase was primarily $11.1 million of expenses associated with the operation of businesses acquired in fiscal 2022, equity-based compensation, professional fees, and various other expenses. G&A as a percentage of total revenue was 8.3% in fiscal 2022 compared to 10.1% last year. In fiscal 2023, we expect general and administrative expenses as a percentage of revenue to be in the 8.3 to 8.5% range. Net income was $21.4 million, an increase of 5.9% compared to net income of $20.2 million in the prior year. Adjusted EBITDA for fiscal 2022 was $111.2 million, an increase of 23% compared to last year. You can find GAAP to non-GAAP reconciliations of adjusted net income and adjusted EBITDA financial measures at the end of today's press release. Turning now to the balance sheet, at September 30, 2022, we had $35.5 million of cash $271.9 million of principal outstanding under the term loan and $105.1 million of principal outstanding under the revolving credit facility. We have availability of $208.6 million under the credit facility, net of a reduction for outstanding letters of credit. As of the end of the quarter, our debt to trailing 12 months EBITDA ratio was 2.79. This liquidity provides financial flexibility and capital capacity for potential near-term acquisitions, allowing us to respond to growth opportunities when they arise. Cash provided by operating activities net of acquisitions was $16.5 million for the 12 months ended September 30, 2022, compared to $48.5 million for the same period last year. Capital expenditures for fiscal 2022 were $68.9 million. We expect capital expenditures for fiscal 2023 to be in the range of $75 to $80 million. This includes maintenance capex of approximately 3.25 to 3.5% of revenue, so the remaining cash is invested in funding growth initiatives. Today we are announcing our fiscal year 2023 outlook. We expect revenue in the range of $1.4 to $1.55 billion, net income in the range of $24.6 to $38.4 million, and adjusted EBITDA in the range of $135 to $160 million. And finally, as Jewel mentioned, we're reporting a record project backlog that was $1.4 billion at September 30th, 2022, compared to $966 million at September 30th, 2021, and $1.3 billion at June 30th, 2022. And with that, we're now ready to take your questions. Operator?
spk06: Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. The confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for your questions. Our first questions come from the line of Tyler Brown with Raymond James. Please proceed with your questions.
spk03: Hey, good morning, guys.
spk06: Morning, Tyler.
spk03: Hey, I just wanted to start with the guidance. So it seems that the 25 million range for EBITDA is fairly wide. I think that's certainly understandable given the environment. But just curious if you could talk about what are some of the key factors that kind of get you to the high end, what gets you to the low end when we think about the scenarios and For example, are you assuming on the high end that there's additional M&A or diesel coming off? Just any color there would be helpful.
spk10: Yeah, Tyler, you know, the guidance that we gave, it's wider because we're in an uncertain environment. That's for sure. So, you know, the low end of the guidance, you know, assumes we have some uncertainty out there. Supply chain, The first two articles I read today were about a potential railroad strike and a potential diesel fuel allocation. So that's the world we're operating in. But the upper end assumes things go well, that we avoid some of those scenarios. We operate well. We have good organic growth and reasonably good weather. We don't put any speculative M&A in our guidance. If there's a deal that's pending that's imminent that we're very sure of, we may include that in the upper end of the range, but we don't just put speculative opportunities in the guidance.
spk03: Okay, perfect. That's super helpful. Since we're on that, Alan, just more of a modeling question, but just based on all the deals that have been done today, Is that 75 to 100 million of rollover benefit from M&A? I think you mentioned that last quarter. Is that right? Or does that pick up inclusive of the blue water transaction?
spk12: Yeah, that would be inclusive of blue water. That was baked in because we knew we were going to close it. So any additional pickup, but the 75 to 100 million would continue to be our estimate of acquisitions because with Blue Water, we're actually losing some revenue with the quarry that we traded, but we're picking up more revenue in Tennessee.
spk03: Right. Okay. Okay. That's helpful. And then just kind of maybe talking about the balance sheet, since we're talking a little bit about deals, I think you ended trailing the DA maybe around three times. You talked a little bit about the capacity on the balance sheet, but I am curious about your approach. Just given the interest rate environment, do you feel somewhat restricted doing deals with just free cash flow, or are you willing to temporarily lever up for the right type of deal?
spk12: Yeah. I mean, we certainly are willing to. I mean, our credit facility allows us to go as high as three and a half and even higher for a larger deal for, I think, nine months. But we're comfortable at being at a three times leverage. But one thing that's not reflected in the number you gave is we get, because of the acquisition activity, we get credit for pro forma EBITDA because of the number of deals that we're doing. So our actual calculation under our bank covenant is 2.79, a little bit lower than what you are. And then the transaction that we just completed, we received $28 million of cash in that net transaction. So that would be available to be redeployed for future acquisitions. So the Bluewater one, we swapped assets and we received $28 million worth of cash out of that.
spk03: Okay, perfect. Yep. Thank you for the $28 million. That's helpful. I will turn it over and hop back in queue. Thanks.
spk04: All right. Thank you, Tyler.
spk06: Thank you. Our next question has come from the line of Stanley Elliott with Stifel. Please proceed with your questions.
spk09: Good morning, everybody. Thank you all for the question. Good morning, Stan. Can you guys talk about kind of what you're seeing on the labor front? I mean, I'm consistently hearing about issues there, but you guys are posting strong double-digit organic growth really throughout the year, just trying to kind of size what's happening versus some of the other issues we're hearing in other parts of the market.
spk10: Yeah, Stanley, you know, the labor market is still tight. There's still not enough workers, and it's a challenge. You know, if you go back almost two years ago when the COVID, the economy opened up from COVID, we looked around and, you know, we saw a shortage of workers just like everyone else. If you remember, I talked about ankle weights on productivity. But we saw that. We also saw the growth opportunities coming right at us. So we just rolled up our sleeves. If you remember, I said we're going to do what it takes to attract and retain a workforce. And so we've just done a lot of work attracting workers. And so I would say the labor market is still tight, but we've done a great job. Our team has done a great job in each state of putting initiatives in place, having the right culture, the right compensation initiatives, and the right career opportunities to attract folks to come work with us. And I think that's showing up in the top line.
spk09: That's great. And, you know, you talked about the seasonality of the business, and I apologize if you said it. But in terms of the margin progression through the year, kind of looking at the 10% kind of midpoint, in the release you talked about steady increases. Any more color that you could share, you know, and help us maybe kind of even with like an exit run rate in the September quarter next year? Thanks.
spk10: Yeah, I'll give a high level and then let Alan maybe give more detailed numbers. But we clearly in the first quarter. We have late November and December included in that. And then the second quarter we have the winter months. So the margin on the jobs doesn't change. But what happens is we just have under recovery at our plants and in our fleet just because you have less utilization. And then the opposite happens in the third and fourth quarter where we over recover on those fixed assets. So our gross margin profile is not even throughout the year. Yes, Stanley.
spk12: Historically, we've said in a normal year, and we haven't had one of those in a couple of years because of inflation and things like that, but in a normal year, the spread between our margin due to the under and over absorption, the 40% revenue and the 60% revenue, is usually in the range of 200 to 250 basis points between what we would make in the first six months and then the last six months. And again, as Jules said, the jobs perform equally well all through that cycle, but you've got a lot of fixed costs that lower that margin when you're not charging all of those out to the jobs and recovering them. And then you have over-recovery in the last six months. But that spread between the any one quarter in the first six months and the second six. And normal stabilized kind of times, that's about 250 basis points.
spk09: Perfect, guys. Thanks for the color. Happy Thanksgiving. We'll talk to you soon.
spk10: All right, Stanley. Thank you.
spk06: Thank you. Our next question has come from the line of Andy Whitman with Baird. Please proceed with your questions.
spk02: Yeah, good morning. I hope you all are. Good morning, Andy. I guess, hey, guys, I just wanted to... talk a little bit more about free cash flow here, Alan. It looks like, I mean, I guess the question is, is the tax and interest rate that's in your EBITDA bridge, are those reflective of cash numbers as well as the accounting numbers? And do you also see, is there a potential to have outsized collections in working capital in 23-year TSOs up a little bit? And so I just wondered, if you thought there was an opportunity there. Because when I put it together with the CapEx guidance that you gave here, if those gap numbers on interest and tax reflect the cash numbers, I'm getting free cash flow in the maybe $10, $15 million range. I was just wondering if you would comment on those issues, CapEx.
spk12: Yeah, I'd be glad to, Andy. In 2023, the interest in 2023 would be reflective of cash interest. In 2022, we had about a $2 million credit to interest expense, which was a non-cash credit due to marking the swap to market. When we entered the new $300 million swap in June of this year, that's going through other comprehensive income, so it doesn't show up in that interest expense number that you're looking at. So that would represent pretty much cash interest during that period. I think one of the things that you're seeing, and Jule alluded to it in his remarks about the free cash flow, we've got a fairly substantial amount of capital expenditures in 2023 that are related to some long-term growth initiatives. Jewel mentioned the liquid asphalt terminal, and we'll spend $17 to $20 million of CapEx in 2023, and that will only be in operation for about five months. So as we've demonstrated when we purchased the one in Panama City a few years ago, it substantially adds to the margin profile. It doesn't raise revenue very much. But in this case, since we're constructing it from the ground up, it's a pretty substantial capex. But our typical maintenance capex is still about 3.25% to 3.5%. But that amount over that includes that liquid asphalt terminal and some other growth initiatives that we've got out there that are adding a fairly substantial amount that will pay off in margin in future years and a little bit this year, as well as revenue growth.
spk11: Yeah, Andy, this is Ned. By the way, happy Thanksgiving to you and your family. But we're still at the beginning stages of being able to reinvest our cash flow in high return projects. And we're going to continue to do that as we grow this business. If you look at it, whether it's a return on capital employed basis with the assets, or you just look at it and as Alan just did with margins, we have a lot of opportunities to continue to grow and build this business through reinvesting cash flow in high return opportunities.
spk02: Yeah, fair enough. That makes sense. And then just for a follow-up here, just on Blue Water, so you're giving up a quarry, you're getting cash and three HMA plants and a construction operation. I think I understood that all correctly. Maybe, Alan, what's the net difference in revenue from this that you expect? It sounds like the HMA plants and the construction operations are expected to generate more revenue than you're giving up, but what's the net change on that transaction or anything else you can tell us to help us understand how that deal worked?
spk12: Yeah. First year, the net change in revenue is about $15 million. Uh, we think that will grow, uh, because we're entering a very dynamic market. Uh, we have a lot of opportunity as we do in most acquisitions that we make to grow, uh, revenue after that first year. So, uh, but in, in 2023, the net change in revenue is about $15 million. Great.
spk02: I'm going to leave it there. Have a happy Thanksgiving, all.
spk06: Thank you, Andy. Thank you. Our next question has come from the line of Adam Thalheimer with Thompson Davis. Please proceed with your questions.
spk05: Hey, good morning, guys. Nice quarter. Hey, Adam. What kind of trends are you seeing in private construction in your markets?
spk10: You know, Adam, as I indicated earlier, We're still seeing it pretty strong in the southeast. We haven't seen a lot of change there. We anticipate it may come. We're seeing a lot of bidding opportunities. I think residential, we're anticipating it slowing down, but there's a lot of opportunities in commercial and industrial on the private sector. As we've said several times, with the public funding that's there, if the private economy slows down significantly, our backlog is going to give us almost a year window to see it, and we'll just simply deploy those resources and assets to work on public-funded jobs. But we really haven't seen a really big fall-off in bidding opportunities on the private side yet.
spk11: Adam, this is Ned. The demographic trends for our part of the country are actually getting stronger. More people are moving into the southeast. They're still struggling to find homes. We don't anticipate that changing.
spk05: Okay. And then maybe it's hard to make a broad comment on this, but how would you characterize competitor behavior right now?
spk10: Well, obviously we see it every week as we're bidding projects. I would say, Adam, the fact that we're adding to backlog as strong as we are We're getting pricing up in our backlog. That's continuing to happen. That tells me that our competitors also have healthy backlogs. Our competitors also have gotten more efficient at passing through inflation in their bids. So I feel like that it's a good environment. It's a good, strong demand environment, and I think our competitors are taking advantage of that as well.
spk11: And we're in 60-plus different markets. Right, so each market's a little different, and we pay attention, as Alan has said before, to every single market and growing relative market share in all markets. So it's hard sometimes, those questions get asked, to generalize it, but recognize we pay attention to every single market.
spk05: All right, and then just lastly, thoughts on the public side, thoughts on your Your top five, I guess now six states, what do the budgets look like for next year?
spk10: Adam, you know, the budgets are pretty healthy in all the states. They're not all equal, but they're pretty healthy. And each state's getting that IIJA funding. And, you know, one thing to remember with that, while some of the funding comes from grants, and that's sporadic and project-based in each state, Most of the funding from the IIJA comes from the formula that's always been used by the federal government for their surface transportation. So it comes to the states by formula. It has to be used and allocated in that federal fiscal year so they can't hoard it or save it for some big project at the end. And that helps us because it gives us a good steady demand for work. They deploy it on maintenance projects, which are our bread and butter. You know, one thing that I would say indicates good, healthy state budgets, if you look, you know, the states that don't use their funding, it gets reallocated to other states. And I've noticed just last week of the top ten states in the nation for receiving reallocated funds, three out of the top ten are our states of North Carolina, South Carolina, and Florida. So that tells me that they've got healthy budgets. They're able to use their dollars and match additional dollars coming to their states.
spk05: Great. Okay. Thanks, guys.
spk10: All right, Adam.
spk06: Thank you. Our next question has come from the line of Michael Feniger with Bank of America. Please proceed with your questions.
spk01: Hey guys, thanks for taking my question. Can you just help quantify how much were the costs up in 2022 versus 2021 on liquid diesel alone and what you're kind of embedding for that increase in 2023?
spk12: Yeah, well, we talked about last quarter that a good indicator of on liquid asphalt is how much do we get back through the indexes and we shared last quarter, we got our third quarter, we got an unprecedented amount over $10 million. Well, we got over $10 million in the fourth quarter. So year to date, that's $24 million. But the cost of liquid asphalt and a ton of asphalt has gone up probably on average for the year about 40%. We've seen aggregate has gone up, if you go with the full year last year and the full year this year, around 12%. Those are two of our main components that go in. Of course, we've seen increases on everything. As we talked about and Jules mentioned, the first six months of the year, most of that increase came out of our profit, and that suppressed our margins. As we began to bid that, in our later work and most of the work that we're carrying into 2023, we've got that built in. But I'd say on average, if you take everything, labor and all, from October 1 of last year to October 1 of this year, it's probably an average of 10% to 12% total increase.
spk10: You know, Michael, I would just say one thing that tells me that even with growing, that we're doing a good job of getting these costs in our bids, in the fourth quarter, we generated $26 million of cash from operations. So that's a good healthy sign, even with good top line growth that we're generating cash.
spk01: Fair enough. Thanks, everyone. And just lastly, you're growing double digits, and we're not really even seeing the IAJA yet. So just help unpack... What's the timeline here? When do you see the IAJ funding finally get to the state level? How long before the states do letting and that becomes a project you book in the backlog and then you recognize for revenue? Is that more of a 2024 story?
spk10: No, good question, Michael, because the IIJA took longer than most people anticipated to start rolling out, but it's definitely coming out now. It's in the project lettings. I see that continuing in a steady way. You know, as I said a year ago, almost a year and a half ago, the COVID relief money inflated the state budgets for the last year and a half, and now the IIJA is really just going to replace that. We'll see healthy project lettings for quite a while. The states, as I said earlier, have to use that money. We're seeing it across the board in all of our states. There's just good healthy lettings. Next month, Alabama is having one of the largest lettings in its history, I think. I envision to just see that for the next six to seven years as this money flows through, the states are just going to be making just significant investments in their infrastructure. And we're going to participate not only on the roads, but the airports have a significant investment, railroads, ports. We're going to see a lot of that going on.
spk01: Perfect. Thanks, everyone.
spk07: Thank you, Michael.
spk06: Thank you. Our next question has come from the line of Brian Russo with Sidoti. Please proceed with your questions. Hi, good morning.
spk10: Good morning, Brian.
spk07: Hey, just to follow up on the entry into Tennessee with the three HMA plans and how that kind of triangulates with your M&A strategy, you know, what's it going to take to get your now growing presence in Tennessee to kind of resemble the vertically integrated strategy you have in the other states in terms of scale and scope? Do you need more labor or more scale and or scope in other parts of the value chain there?
spk10: Brian, first of all, let me say we're excited to be in Tennessee. We're excited to be in Nashville. When I first went to look at those asphalt plants, I rode around Nashville for a day and I couldn't believe all the construction activity and cranes I saw. I live in Raleigh, North Carolina, so that shows you how much is going on there. I noticed that the roads around the Nashville metro area have got a lot of work to keep up with that growth. That was exciting to me. Blue Water Industries approached us with what I thought was a very attractive strategic opportunity to partner with them in two states. I've been very impressed just dealing with that whole organization, Ted Baker and his group. We're excited to be there and be partnered with them. These three asphalt plants sit in their quarries. I see a lot of growth opportunities in Nashville. One of the things you asked was the vertical integration. I think this is a perfect example of that. That new liquid asphalt terminal we're building in North Alabama, once we bought Good Hope last year, that gave us the critical mass to start really thinking about adding a liquid asphalt terminal there. These three asphalt plants are going to be able to just drive more throughput through that facility. We're going to be able to supply that and capture more margin for that work in Nashville just by adding this liquid asphalt terminal in Northern Alabama. So it's just, that's a great example of how, as we build relative market share, that vertical integration just allows us to capture more of that margin.
spk12: And on the construction side, you know, with our proximity to our North Alabama operations, some of the other construction services that they're not doing right now, we will be able to immediately begin to be able to do in that market. and support it just like we would a greenfield when we do a greenfield with an asphalt plant in a contiguous market. And then as that part of our work, some of those items that they have been subcontracting out, we'll be able to grow the construction services side of that vertical integration also by doing it over the next couple of years and supporting that from having that North Alabama operations just across the state line.
spk07: Okay, got it. And then just on your public and market exposure, I think it's been running maybe around 70% of total revenue or the total business. Do you see that increasing relative to the private side, just given the healthy DOT lettings and the accelerating IIJA funding? Just want to get a better sense of Or is just the whole pie getting bigger and you're going to maintain that kind of ratio between public and private?
spk12: Yeah, actually the ratio has been a little bit closer to 65-35. We see that probably trending up just a little bit closer to the 70-30. And that, again, At this point, we don't see it moving a lot from the 65-35 right now. Residential, which is going to be the first part of the private work that sees slowdown, is really only about 5% of our revenue. So if that cut in half, you might move from 65-35 to 67-33. But the strong demand we're seeing in other areas, private work in our markets. We don't see that shifting back to, I'd say our long-term average is 70-30, but we really haven't been, we've been a little bit closer to 65 or even below that in some periods, especially 2020 and a little bit in 21 when North Carolina was not letting any public work, but not a huge shift. And historically, even in a significant downturn in the private work, we don't get two, you know, maybe four or five percent more one way or the other.
spk07: Okay, great. And then just on the balance sheet to follow up, it seems as if you're comfortable where leverage is now and obviously you've got an attractive, you know, consolidation roll-up bolt-on type growth strategy. Should we assume that leverage comes down not from absolute debt reduction, but from EBITDA growth and cash flow generation, given the opportunities that you see out in the marketplace?
spk12: Yeah, exactly. You really nailed it right there. We're rolling off some 2022, the first and second quarter of 2022. We're kind of the beginning of some of those – significant margin compressions, which obviously drove the EBITDA down. So the quarters we're going to be rolling on are going to be much more rich in profit compared to last year because our margins, as we talked about, are growing where last year they were beginning to decline that kind of bottomed out at the end of March. So we're going to roll off to declining quarters in 2022, increasing margin quarters in 23, and that's going to drop that leverage ratio closer to the 2.5 times that we would like for it to get to. And then we can, again, I mentioned earlier, we have about $28 million of cash that will help with that calculation also that we can apply to that debt or invest in assets and add EBITDA.
spk10: You know, Brian, just to speak a little bit about growth opportunities, just last week we had our strategic planning retreat, and I just was really encouraged and just reminded of how many opportunities we have in the states we're in, and whether it be for acquisitions, green fields. And so, you know, we're going to be able to keep our leverage ratio down and still execute our growth plan. as long as we just execute on our plan and build our backlog. So we don't see that being mutually exclusive, and we plan on doing both.
spk07: Okay, great. Thank you very much. Thank you, Brian.
spk06: Thank you. Our next question has come from the line of Brent Thielman with DA Davidson. Please proceed with your questions.
spk04: Hey, great. Thanks. Good morning.
spk10: Good morning, Brent.
spk04: If I look at it over the last five years or so, your forward 12-month revenue to backlogs averaged somewhere around, call it 1.4 times. And the guidance for this year represents something quite a bit below that, just based on where your backlog was at the end of September. I recognize one embeds some conservatism because of things you can't foresee, but just wondering if there's anything different about the composition of the backlog Things we ought to consider just in the context of that.
spk10: No, Brent. There's really been no change in our typical project size or duration. We do have a higher percentage of our guidance on backlog now. I think you're right about that. I think that what that really reflects is just more uncertainty as we look out into the year than we typically have had. And as we see the year unfold, usually at mid-year, we update our guidance and we'll know a lot more about just the macro environment we're dealing in.
spk12: Brent, just to add to that, we have historically, if you go back for 20 years, typically what we have on backlog that we're going to complete in the next 12 months would represent between 60, at the most 65% of our next 12 months revenue. And then we would have about 15 to 20% of what we have on backlog that's going to be completed in more than 12 months. And that percent that we're going to complete in more than 12 more than 12 months from now is up a little bit. But what's up significantly is that we've got approximately 85% of our revenue contract revenue that we're going to do in 2023 that we've got already on backlog. And that represents the highest percentage that we've ever had. And that's just a, you know, reflection of how strong the market is right now. So what we used to refer to is we're going to have to book and burn about 40% of our next 12 months revenue. That's down to more like 15%. And the states have just continued to put work out there. Private work is still strong. But it really comes down to how much can we complete in a 12-month period. And that's obviously how we came up with what our revenue projection is for next year. But what that does, and Jewel has said this a number of times, is when you have that strong of a backlog, it gives you an opportunity to work on bidding with better margins, making sure you've got cost contingencies in there so you don't have the margin compression like we had this year And that's the part about 2023 I think that's very exciting for us is, you know, we can be very disciplined in our bidding and make sure that we get a reasonable margin on any project that we add to backlog.
spk04: Okay. Got it. No, very helpful. Just as a follow-up, you know, based on everything you're talking about and what we seem to be seeing in the bidding environment right now, obviously really, really strong. I mean, do you see the potential for any shift in what you're willing or wanting to take on because the profiles, the bid margins just look increasingly more appealing? Are you more willing to pursue projects of greater size and scale to leverage your people and equipment?
spk10: Brent, you know, that's an interesting question. As the margins go up, you can get distracted. But we're going to stay focused on what we do. As I said in the prepared remarks, we know who we are and what we do. And we feel like the projects that we go after bring less risk, bring a higher margin profile than the big mega projects that you could go after. And so we just see there's no reason to not stay disciplined and focused on our strategy. There's more work than we can bid on now. We've gotten through the inflation from last year, and we just see plenty of opportunity ahead just doing what we've always done. So we're going to stay focused on that.
spk04: Okay. Okay, great. Well, hey, thanks, guys. Best of luck. Thank you, Brent.
spk06: Thank you. There are no further questions at this time. I'd like to turn the floor back over to management for any closing comments.
spk10: Well, we'd just like to thank everyone for participating on the call today and wish everyone a happy Thanksgiving.
spk06: Thank you for your participation. This does conclude today's teleconference. You may disconnect your lines at this time.
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