Construction Partners, Inc. Q4 FY2022 Earnings Call

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. As a reminder, this call is being recorded.

I'd 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 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 GAAP 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?

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 by 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 from Ian 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 FY '22, 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 FY '23 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 Southeast 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 challenges. We expect that 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 haven't 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 helped 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 FY '23, 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 Darty 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 strengthened our operations also through building greenfields, such as the HMA plant we recently opened in Vince, 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 Hayneville 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 using 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.

Thank you, Jule, 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 Jule 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 million 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 billion to $1.55 billion, net income in the range of $24.6 million to $38.4 million, and adjusted EBITDA in the range of $135 million to $160 million. And finally, as Jule mentioned, we are reporting a record project backlog that was $1.4 billion at September 30, 2022, compared to $966 million at September 30, 2021, and $1.3 billion at June 30, 2022. And with that, we are now ready to take your questions.

Thank you. We will now be conducting a question-and-answer session. Our first questions come from the line of Tyler Brown with Raymond James. Please proceed with your questions.

Hey, good morning, guys.

Good morning, Tyler.

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.

Yes, Tyler, the guidance that we gave, it's wider because we're in an uncertain environment. That's for sure. So the low end of the guidance 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.

Okay. Perfect. Yes. That's super helpful. And 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 million 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?

Yes, 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 million 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.

Right. Okay. Okay. That's helpful. And then just kind of maybe talking about the balance sheet and sort of talking a little bit about deals. I think you ended trailing EBITDA maybe around 3 times. You talked a little bit about the capacity on the balance sheet, but I am curious about your approach given the interest rate environment, do you feel somewhat restricted on deals with just free cash flow? Or are you willing to temporarily leverage up for the right type of deal?

Yes. I mean, we certainly are willing to. I mean our credit facility allows us to go as high as 3.5 and even higher for a larger deal for, I think, nine months. But we're comfortable at being at a 3 times leverage, but one thing that's not reflected in the number you gave, because of that 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 Blue Water one, we swapped assets, and we received $28 million worth of cash out of that.

Okay. Perfect. Thank you for the $28 million, that's helpful. I will.

All right. Thank you, Tyler.

Thank you. Our next questions come from the line of Stanley Elliott with Stifel. Please proceed with your questions.

Good morning, everybody. Thank you all for the question. Can you guys talk about kind of what you're seeing on the labor front? I mean 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.

Yes, Stanley, the labor market is still tight, and there's still not enough workers, and it's a challenge. If you go back almost two years ago when the economy opened up from COVID, we looked around and 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.

That's great. And 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 and help us maybe kind of even with like an exit run rate in the September quarter next year? Thanks.

Sure. I'll provide a general overview and then let Alan share more specific numbers. In the first quarter, which includes late November and December, and in the second quarter during the winter months, our job margins remain consistent. However, we experience underutilization at our plants and in our fleet, leading to lower recovery. Conversely, in the third and fourth quarters, we typically see over recovery on those fixed assets. Therefore, our gross margin profile is not uniform throughout the year.

Yes, Stanley. 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 in the last six months. And again, as Jule said, the jobs performed 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 overrecovery in the last six months. But that spread between any one quarter in the first six months and the second six and normal stabilized kind of times, that's about 250 basis points.

Perfect, guys. Thanks for the color. Happy Thanksgiving. I’ll talk to you soon.

All right, Stanley. Thank you.

Thank you. Our next question is come from the line of Andy Wittmann with Baird. Please proceed with your questions.

Good morning. I hope you're all doing well. I wanted to discuss free cash flow further, Alan. My question is whether the tax and interest rate included in your EBITDA bridge reflect cash numbers as well as accounting figures. Additionally, do you see a potential for significant collections in working capital and increased DSOs this year? I was curious if you believe there's an opportunity there, especially considering your CapEx guidance. If those GAAP figures for interest and tax do represent cash, I calculate free cash flow might be in the range of $10 million to $15 million. Could you provide your thoughts on these CapEx issues?

Yes, I'll 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 noncash 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. Jule mentioned the liquid asphalt terminal, and we'll spend $17 million 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 margins in future years and a little bit this year as well as revenue growth.

Yes, Andy, this is Ned. Happy Thanksgiving to you and your family. We are still in the early stages of reinvesting our cash flow into high-return projects, and we will continue to do this as we enhance our business. Whether you look at it from a return on capital employed perspective with our assets or based on margins, there are many opportunities for us to grow and develop this business by reinvesting cash flow in high-return possibilities.

Yes, that makes sense. For a follow-up on Blue Water, you're giving up a quarry and receiving cash along with three HMA plants and the construction operation. I believe I understood that correctly. Alan, could you clarify the net difference in revenue that you anticipate from this? It seems like the HMA plants and the construction operations should generate more revenue than what you're giving up. What is the net change from that transaction? Also, is there anything else you can share to help us understand how that deal came together?

Yes. The first year, the net change in revenue is about $15 million. We think that will grow because we're entering a very dynamic market, we have a lot of opportunity as we do in most acquisitions that we make to grow revenue after that first year. But in 2023, the net change in revenue is about $15 million.

Great. I’m going to leave it there. Have a happy Thanksgiving all.

Thank you, Andy.

Thank you. Our next questions come from the line of Adam Thalhimer with Thompson Davis. Please proceed with your questions.

Hi. Good morning, guys. Nice quarter.

Hi, Adam.

What kind of trends are you seeing in the private construction in your markets?

We're still experiencing strong activity in the Southeast, and there hasn't been much change in that area. We expect some changes may occur, but currently, there are a lot of bidding opportunities. While we anticipate a slowdown in residential construction, the commercial and industrial sectors in the private market still offer many prospects. Additionally, the public funding available will provide us with nearly a year of backlog to adapt if the private economy sees a significant downturn. So far, we haven't noticed a substantial decrease in bidding opportunities in the private sector.

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 are still struggling to find homes. We don't anticipate that changing.

Okay. And then maybe it's hard to make a broad comment on this, but how would you characterize competitor behavior right now?

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 it's a good environment, it's a good strong demand environment. And I think our competitors are taking advantage of that as well.

And we're in 60-plus different markets, right? So each market is 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 be to generalize it, but recognize we pay attention to every single market.

All right. Lastly, what are your thoughts on the public side regarding your top five, now six states? How do the budgets look for next year?

Adam, the budgets are pretty healthy in all the states. They're not all equal, but they're pretty healthy. And each state is getting that IIJA funding. And 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 deployed on maintenance projects, which are our bread and butter. One thing that I would say indicates good healthy state budgets. If you look in the states that don't use their funding, it gets reallocated to other states. And I've noticed just last week, of the top 10 states in the nation for receiving reallocated funds, three out of the top 10 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.

Great. Okay. Thanks, guys.

Thank you. Our next questions come from the line of Michael Feniger with Bank of America. Please proceed with your questions.

Hi, 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?

Last quarter, we mentioned that a key indicator for liquid asphalt is the amount we receive through the indexes. In the third quarter, we received an extraordinary amount of over $10 million, and we saw the same in the fourth quarter, totaling $24 million for the year to date. However, the cost of liquid asphalt and a ton of asphalt has increased by about 40% on average for the year. We have also noticed that aggregate prices have risen, with a 12% increase when comparing the full year of last year to this year. These are two of our primary cost components, and we've observed price increases across the board. As Jule mentioned, during the first half of the year, most of this increase impacted our profit margins, which affected our bids for later projects. For the work we are carrying into 2023, we have accounted for these costs. Overall, if we look at the total costs, including labor, from October 1 of last year to October 1 of this year, we're seeing an average total increase of about 10% to 12%.

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.

Fair enough. Thanks everyone. And just lastly, look, you're growing double digits, and we're not really even seeing the IIJA yet. So just help unpack like what's the time line here? Like when do you see the IIJA funding finally get to the state level? How long for 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?

No, good question, Michael, because the IIJA took longer than expected to start rolling out. But it's definitely being implemented now, and I see that continuing steadily. As I mentioned about a year and a half ago, the COVID relief funds temporarily boosted state budgets. Now, the IIJA will effectively replace that funding, and we can anticipate healthy project lettings for some time. The states are required to use that money, and we’re observing strong lettings across all of our states. For instance, Alabama is set to have one of the largest lettings in its history. I expect this trend to persist for the next six to seven years as this funding flows through, leading to significant infrastructure investments by the states. We will be involved not only in road projects but also in airports, railroads, and ports, witnessing substantial activity in these areas.

Perfect. Thanks everyone.

Thanks, Michael.

Thank you. Our next questions come from the line of Brian Russo with Sidoti. Please proceed with your questions.

Hi, good morning.

Good morning, Brian.

Can you provide an update on your entry into Tennessee with the three HMA plants and how it aligns with your M&A strategy? What will it take to scale your presence in Tennessee to match the vertically integrated strategy you have in other states? Are you looking for more labor or additional scale and scope in other areas of the value chain?

Yes, Brian, we're really excited to be in Tennessee and particularly in Nashville. When I visited the asphalt plants, I spent a day driving around Nashville and was amazed by all the construction and cranes, especially coming from Raleigh, North Carolina. It really highlights the significant activity going on there. I've observed that the roads in the Nashville Metro area are undergoing a lot of work to keep up with the city's growth, which is quite promising. Blue Water Industries presented us with a compelling strategic opportunity to partner with them in two states, and I've been very impressed with their organization, especially Ted Baker and his team. So we’re looking forward to collaborating with them. The three asphalt plants are located within their quarries, which points to ample growth opportunities in Nashville. Regarding vertical integration, our new liquid asphalt terminal in North Alabama is a prime example. After acquiring Good Hope last year, we realized we had the critical mass to consider adding a liquid asphalt terminal there. With the three asphalt plants in play, we can enhance our throughput at that facility, thereby supplying more and capturing better margins for work in Nashville through this terminal in Northern Alabama. This illustrates how our growing market share and vertical integration empower us to capture more margin.

And on the construction side 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 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.

Okay. I understand. Regarding your exposure to the public end market, I believe it's currently about 70% of your total revenue. Do you anticipate that this percentage will increase compared to the private sector, especially considering the robust DOT lettings and the increasing IIJA funding? I would like to gain clarity on whether the overall market is expanding while you maintain the same proportion between public and private.

Yes. The ratio has been closer to 65:35, and we expect that to trend slightly toward 70:30. Currently, we don't anticipate significant movement from the 65:35 ratio, as residential work represents only about 5% of our revenue. If that were to decrease by half, the ratio might shift to 67:33. However, due to the strong demand in other private work areas, we don't foresee a return to our long-term average of 70:30. Historically, we have been around 65 or even lower during certain periods, particularly in 2020 and part of 2021 when North Carolina halted public work. There isn't likely to be a substantial shift, and even in a significant downturn, we typically only see a change of about 4% or 5% in either direction.

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 consolidation roll-up 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?

Yes, you captured it perfectly. We're moving past some of the first and second quarter results from 2022, where we started to see significant margin compressions that impacted EBITDA. The quarters we are now transitioning to will be much more profitable compared to last year because our margins are improving, whereas they were declining last year and reached their lowest point by the end of March. Therefore, we will be replacing two quarters of decline in 2022 with quarters of increasing margins in 2023, which should bring our leverage ratio closer to the desired 2.5 times. Additionally, I previously mentioned we have about $28 million in cash that will also assist in this calculation, which we can either use to reduce debt or invest in assets that contribute to EBITDA.

Brian, just to speak a little bit about growth opportunities. Just last week, we had our strategic planning retreat. And I just really encouraged and just reminded of how many opportunities we have in the states we're in and whether it be for acquisitions, greenfields. And so 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.

Okay. Great. Thank you very much.

Thank you, Brian.

Thank you. Our next question is come from the line of Brent Thielman with D.A. Davidson. Please proceed with your questions.

Hi. Great. Thanks. Good morning.

Good morning, Brent.

Just if I look at it over the last five years or so, your forward 12 month revenue to backlog average somewhere around, call it, 1.4x, and the guidance for this year represents something quite a bit below that, just based on where your backlog was at end of September. I recognize you want to embed some conservatism to the things we can't foresee. But just wondering, if there's anything different about the composition of the backlog, things we had to consider just in the context of that.

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 midyear, we update our guidance, and we'll know a lot more about just the macro environment we're dealing in.

Brent, I want to add that historically, if we look back over the past 20 years, the backlog we plan to complete in the next 12 months generally accounts for 60% to a maximum of 65% of our revenue for that period. Additionally, around 15% to 20% of our backlog is slated for completion beyond 12 months, and that figure has increased slightly. However, the significant change is that approximately 85% of the contract revenue we expect to generate in 2023 is already secured in our backlog, marking the highest percentage we've ever recorded. This trend reflects the current strength of the market. Previously, we anticipated needing to book and burn about 4% of our expected revenue over the next 12 months, but now that figure is closer to 15%. The states continue to provide work, and private projects remain robust, but our focus is on how much we can accomplish within a year. This is tied to our revenue projection for next year. Having such a strong backlog allows us to approach bidding with better margins and ensures that we include cost contingencies. This is crucial to avoid the margin compression we experienced this year. Therefore, the outlook for 2023 is exciting as we can maintain discipline in our bidding practices and secure reasonable margins on any new projects added to our backlog.

Got it, that's very helpful. As a follow-up, considering everything you've mentioned and the current bidding environment, which appears to be quite strong, do you think there’s a possibility of changing what you are willing to take on due to the attractive bid margins? Are you more inclined to pursue larger projects to better utilize your personnel and equipment?

Brent, 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. And so we're going to stay focused on that.

Okay. Great. Thank guys. Best of luck.

Thank you Brent.

There are no further questions at this time. I'd like to turn the floor back over to management for any closing comments.

Well, we'd just like to thank everyone for participating on the call today and wish everyone a happy Thanksgiving.

Thank you for your participation. This does conclude today's teleconference. You may disconnect your lines at this time. Have a wonderful day.