Construction Partners, Inc. (ROAD) Q1 2023 Earnings Call Transcript

Good morning. And welcome to Construction Partners, Incorporated First Quarter Earnings Conference Call. At this time, all participants are in a listen only mode. A brief question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Rick Black, Investor Relations. Thank you, sir. You may begin.

Thank you, operator, and good morning, everyone. We appreciate you joining us for the Construction Partners conference call to review the first quarter results for fiscal 2023. 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, February 10, 2023. 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 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 yesterday's earnings press release for our disclosures on forward-looking statements. These factors and other risks and uncertainties are described in detail in the company's filings with the Securities and Exchange Commission. Management will also refer to non-GAAP measures, including adjusted EBITDA. Reconciliations to the nearest GAAP measures can be found at the end of our earnings press release. Construction Partners assumes no obligation to publicly update or revise any forward-looking statements. 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 thanking our approximately 4,000 dedicated employees throughout our now six states in the Southeast for their focus on safety and taking care of their teammates each day at our job sites and plant sites. I believe our talented workforce is our most valuable asset and will continue to create a competitive advantage for our company. CPI had a good first quarter to begin our fiscal year 2023, with revenue growth of 20% year-over-year, a positive sign that our efforts to capture inflation in new bids are working, and will continue throughout the year to positively impact the results. This quarter, throughout our footprint, we experienced inclement weather for two-thirds of the quarter, with above-average precipitation in November and December, resulting in a reduced number of productive workdays. These weather impacts show up mainly in fixed cost recovery at our plants and fleet and create extra project costs. We approximate an abnormal weather impact in Q1 of approximately $4 million. However, weather impacts can go both ways, such as last year's first quarter, which had below-average precipitation that allowed us to over recover our fixed assets. In our line of work, usually, over the course of a full year, the weather tends to even out. Another factor this quarter that we did plan for was the completion of the majority of our remaining low gross margin projects from our pre-inflationary backlog that was bid prior to October 1, 2021. Our customers typically need their projects to complete the final paving before winter. So as expected, most of these older projects wrapped up construction in our first quarter and then represented approximately $50 million of revenue with little or no gross profit. In our annual financial plan for FY23, the combination of completing these older projects in the first half of the year and then moving almost exclusively to higher margin backlog during the work season creates a margin profile more heavily weighted towards the second half than normal. Over the past five years, CPI's average split of EBITDA has been 33% in the first half of the year and 67% in the second half of the year. In FY23, we anticipate this being close to 27% in the first half and 73% in the second half. We are right on track with our plan for the year, and our external environment is slowly but surely returning to normal. Both of these factors give us confidence today to revise our annual guidance and raise the midpoints for revenue, EBITDA, and net income. We are pleased to report another record backlog this quarter of $1.47 billion, demonstrating that the demand environment remains strong in both the public and private sectors. Public infrastructure lettings are beginning to deploy the IIJA funding impacting each of our six states for their highway and bridge projects, airport renovations and expansions, and other types of infrastructure. Over the last two years, CPI has focused on preparing our organization and workforce, and we're now ready to capitalize on this generational investment in infrastructure over the next six to eight years. We continue to see a steady amount of commercial bid opportunities on both nonresidential and residential projects. We believe the private markets will continue to be bolstered in our Southeast footprint by the strong migration of new residents and businesses into these states. This month, a National Association of REALTORS study measured the top states in 2022 for net migration gains, and five of the top six were CPI states. This strong demand for our services not only continues to keep revenue backlog high, but also has allowed pricing in the new backlog to remain at the higher margins in line with backlog added in the previous three quarters. We will continue to leverage this demand environment in our Southeastern footprint to add future work at attractive margins. During the first quarter, we also integrated two strategic acquisitions: a bolt-on company in Nashville, Tennessee, our first interest in that state; and a new platform company in North Carolina. Both of these expansions represent excellent new markets for CPI, adding six asphalt plants while expanding our workforce. We welcome Ferebee Corporation and 150 new teammates to the CPI family as the platform company in the Charlotte metro area and Western North Carolina. The Ferebee team is an impressive group of construction professionals and the company will continue to be led by Chris and David Ferebee. Throughout CPI's history, a platform company, once established, has served as a catalyst for dynamic growth throughout a state or region, as demonstrated last year with the addition of King Asphalt in South Carolina. We're excited that with Ferebee Corporation, we now have a well-run platform company with a great reputation in one of the fastest growing regions in the country. Right before Thanksgiving in our last earnings call, CPI entered the Nashville metro area with a purchase of three HMA plants and the construction operation from Blue Water Industries. I'm pleased to report that the initial integration led by our Wiregrass Construction team in nearby Huntsville has grown very well. The construction operation is staffed with experienced and talented personnel, and we will be entering the first heavy work season in Tennessee with a full backlog of good work. As you would expect in the fast-growing Nashville suburbs, we are pleased with the amount of bidding opportunities and potential for future organic growth. Turning now to growth initiatives. We continue to evaluate attractive investment opportunities in all three of our levers for growth. First, organic growth in our existing markets, such as last year's 24% organic growth and 8.7% in our first quarter. Secondly, greenfield investments in new asphalt plants and vertical integration facilities, such as the new asphalt terminal in Alabama we announced last quarter. Finally, strategic acquisitions in new markets such as our recent entry into Charlotte and Nashville. CPI will continue to carefully evaluate each opportunity and to use all three of these types of growth in making smart long-term investments that continue to grow the company. To fund these growth investments, we will continue to generate strong cash flow from ongoing operations. CPI, throughout its history, has generated strong free cash flow with a typical free cash flow conversion rate in the range of 50% to 60% of adjusted EBITDA. Over the last two years, CPI has invested this cash flow into numerous attractive long-term investments, which have generated 22% adjusted EBITDA growth last fiscal year despite a challenging macro environment, and this year is on track to generate 35% to 40% growth in adjusted EBITDA. As CPI expands its footprint and continues to consolidate markets, margins will increase, growth will continue, and shareholder value will compound. As CPI grows, we benefit from scale in our fixed costs. After significant investments in our organization to prepare for growth over the last two years, we now anticipate in our revised outlook that general and administrative expense will be in the range of 8% to 8.2% or 20 to 30 basis points lower than last year. As a growth company, we must stay ahead of the curve in preparing and investing for future growth as we did in FY21 and FY22. This will allow us to capitalize on efficiencies of scale at CPI over time and expand bottom line margins. Finally, this fiscal year should have our typical seasonality, revenue being realized approximately 40% in the first half of the year and 60% in the second half and our fixed asset recovery, having our normal under recovery in the first half of the year and over recovery in the second half of the year during our busy work season. We are excited for the year ahead and we expect to achieve significant top line and bottom line growth, supported by strong customer demand and project funding. 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 the first quarter of fiscal 2023 before discussing our revised 2023 outlook. Revenue was $341.8 million, up 20% compared to the prior year quarter. The mix of our total revenue growth for the quarter was approximately 8.7% organic revenue and approximately 11.3% from recent acquisitions. Gross profit was $30.5 million in the first quarter compared to $33 million in the same quarter last year due to the factors that Jule discussed during his remarks. General and administrative expense as a percentage of total revenue in the quarter was 8.7% compared to 8.8% in the same quarter last year. Net income was $1.9 million in the first quarter compared to $5.5 million in the same quarter last year. Adjusted EBITDA in the first quarter was $27.6 million, an increase of 4.7% compared to the same quarter last year. You can find GAAP to non-GAAP reconciliations of net income and adjusted EBITDA financial measures at the end of today's press release. Turning now to the balance sheet. At December 31, 2022, we had $43.5 million of cash, $269 million of principal outstanding under the term loan and $158 of principal outstanding under the revolving credit facility. We have availability of $182 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 2.96. This liquidity provides financial flexibility and capital capacity for potential near-term acquisitions, allowing us to respond to growth opportunities when they arise. During the three months ended December 31, 2022, cash used in investing activities was $70.7 million, of which $77.2 million related to acquisitions completed in the period and $31.6 million was invested in property, plant and equipment, partially offset by $1.6 million of proceeds from the sale of the property, plant and equipment and $36.4 million of net proceeds from the facility exchange. The company's interest rate swap contract is at a SOFR rate of 1.85%, which expects the company's interest rate during the quarter at 3.7% on $300 million of our debt. The maturity date of this swap is June 30, 2027. During the three months ended December 31, 2022, cash provided by financing activities was $49.7 million. We received $53 million of proceeds from our revolving credit facility, primarily used for acquisitions completed in the period. This cash flow was offset by $3.1 million of principal payments on long-term debt. Cash provided by operating activities, net of acquisitions, was $28.9 million for the three months ended December 31, 2022, compared to a use of $0.6 million for the same period last year. Capital expenditures were $31.6 million. We expect capital expenditures for fiscal 2023 to be in the range of $85 million to $90 million. This includes maintenance CapEx of approximately 3.25% of revenue. So the remaining cash invested is funding growth initiatives. Today, we are revising our fiscal year 2023 outlook by raising the lower ends of our estimates. We expect revenue in the range of $1.47 billion to $1.55 billion, net income in the range of $30 million to $40 million, and adjusted EBITDA in the range of $145 million to $160 million. And finally, as Jule mentioned, we’re reporting a record project backlog of $1.47 billion at December 31, 2022. And with that, we are ready to take your questions.

Our first question is from Stanley Elliott with Stifel.

Can you discuss any material shortages that the industry experienced last year? Do you anticipate that these will pose another challenge for your operations in the upcoming year? Any updates on this would be appreciated.

Stanley, I did mention that our external environment is normalizing, and that's part of it. We see that slowly, but surely, a lot of supply chain issues that kinks are starting to get worked out. It's nowhere near normal yet, but it's getting better. We've mentioned in the past, cement in South Carolina and rock in Georgia and Florida and pipe, all of those suppliers want to sell their products. So the market forces that you would expect to solve those, they're working. It just takes time. But I would say we see things getting better, and we don't anticipate those being a headwind this year.

And then in terms of like bidding activity, I mean, you still see pretty normal bidding activity across the market. I was just curious if maybe some of the softness in the headline numbers we see in the residential market is causing increased bidding activity in some of your core, like highway and some of the commercial work?

Stanley, no, bidding is still very busy. Let's take the public markets. The Infrastructure Act is in full swing now. And so we're seeing very healthy public lettings at the DOT level and with airports, just a lot of infrastructure on the public side. And that's good, and we've been expecting that, and it's now hitting. On the private side, you're seeing a lot of industrial and retail bids as we have. I've been watching the residential market and thinking, okay, is it going to fall off? And we just haven't really seen a big fall off. We've seen maybe where two years ago, a developer would say, we want to build this whole subdivision and bring on hundreds of lots upfront. What we're seeing now is they say, we want to start and build Phase 1 and bring on 50 lots and just take it in more bite-sized pieces. But I think I mentioned the migration to the south. I think that that's helping the residential market, maybe just go from white hot to good and steady. But we really haven't seen a big drop off in residential in our markets yet.

Our next question is from Andy Wittmann with Baird.

I guess just a point of clarification. When you mentioned that weather was a $4 million impact, I'm guessing that's EBITDA, not revenue. Is that right?

Yes, that's correct.

Do you have an estimate of the revenue impact from that, or could you provide any additional details?

I'll let Alan take a stab at that, Andy.

You can see in the revenue that the weather affected us primarily in our internal production of asphalt tons and the use of our own equipment. If we hadn't had those weather days, we would likely have seen an additional $10 million to $15 million in actual top-line revenue. However, the larger impact was on the volume of tonnes processed at our asphalt plants and the utilization of our equipment. The $4 million discussed refers to the under absorption of fixed costs at our asphalt plants and the use of our equipment. It's more about the utilization of the hot mix asphalt plants and recovering those fixed costs than it is about revenue.

I wanted to ask about some of the external factors you mentioned earlier and get your updated thoughts on them, particularly regarding labor and its availability. Are you managing to maintain the necessary man hours and the expected rate per hour? Additionally, could you provide insights on trucking costs, as I know they were a bit tight for a while?

The labor market has improved significantly since the summer of 2021 when we were facing some challenges. Part of the improvement can be attributed to a slowdown in the housing market, which frees up labor. Additionally, more people are returning to work after COVID. We have made adjustments to ensure we have the necessary labor, implementing various effective programs. We provide strong benefits and competitive pay, and we are committed to creating career paths for our employees. As a result, I haven’t been hearing much concern regarding labor lately. We are successfully staffing our crews, and this has not been a major issue. Regarding trucking, it seems that truck drivers are not as difficult to find as they were a year ago, which is a positive development. However, concerning trucking costs, I believe it’s crucial to note that we do not expect construction inflation to return to normal levels quickly. Although there are reports of general inflation moderating, construction inflation operates on a different scale and timeline. With the substantial funding for infrastructure projects, we remain vigilant about accounting for inflation in our bids to ensure we pass those costs along. I expect construction inflation to be higher than the general CPI figures.

And then, I guess, just kind of my final question dovetails on that last one a little bit, which was on these acquisitions, and one of them is one in North Carolina, obviously, a larger platform. I guess I was hoping maybe, Alan, first, if you could comment on how much backlog was acquired or maybe guidepost you want to give us on how much revenue you expect? But maybe as important or maybe more important, with the dynamic inflationary environments and the challenges about getting margin, can you talk about how well you're able to scrub that backlog and the confidence that you have, and if the newly acquired backlog and its ability to deliver product margins in line or above kind of what CPI would have done on its own?

I think Jule mentioned that we have a very strong backlog, particularly in North Carolina with platform acquisition and in Tennessee. We are quite pleased with this. The bid opportunities in both of these markets remain very positive even after the acquisition. The total backlog from these areas is approximately $70 million. We are currently assessing this backlog, and we find it to be healthy. While the dollar amount won’t significantly impact our overall margin, we are not anticipating any major issues. Fortunately, they are in a similar position as we are regarding the bidding. These contracts are of shorter duration and have built-in costs, which we can see. They did not bid based on pre-inflation costs and have included accelerators, just as we are doing. This is encouraging, and we expect a strong, healthy backlog moving forward, as both parties are aligned in the cycle and in the timely completion of jobs.

Our next question is from Tyler Brown with Raymond James.

Lots of good stuff in the preamble, but I do kind of want to go back to margins. So I appreciate you guys reported, call it, $28 million of EBITDA, but that does include a gain on sale. And I know there are gains time to time, but maybe not to the magnitude of this. So clearly, there's a lot of moving parts in EBITDA. But Alan, I don't know if you've done this, but if you were to normalize the gains, normalize the weather, and the $50 million of no gross profit revenue. Do you have any idea of what that cleaned-up Q1 margin might have been? I mean my simple math would maybe indicate that margins were more flat year-over-year, but just any color there would be super helpful.

Regarding the gross profit margins, you are correct. The $50 million in revenue would represent approximately 10% gross profit on the lower end, which would contribute an additional 1.5%. This brings the total to around 10.5%. Additionally, compared to last year, the $4 million mentioned by Jule concerning the weather's effect on cost recovery contributes another 1.2%. This means we should achieve margins similar to those we had last year. As Jule noted, it was a positive first quarter for us due to weather and cost recovery factors. Therefore, we expect to maintain the same gross profit margin. Furthermore, when excluding the gains, we anticipate a slightly higher EBITDA margin, but the gross profit margin will increase. Lastly, the G&A expenses are approximately 20 basis points lower than last year.

And so just big picture though, if we think about specifically EBITDA margins, you would kind of expect those to start trending up year-over-year starting here in Q2, Q3, Q4. Is that right?

Yes.

Yes, we expect Q3 and Q4 to be stronger. In Q2, we indicated that the latter part of this year would see a significant change in our margin profile compared to the first half. We anticipate about $35 million of no-margin backlog to be distributed more evenly throughout the year rather than concentrated in the first quarter, leading to substantial margin improvement. Therefore, the second half of this year should show a notable difference in margins when compared to the same periods last year.

And then a couple of other quick modeling. So I think asphalt was still up about 30% year-over-year in Q1. Do you have what the asphalt index adjustment revenue was in the quarter?

We had $4.7 million in this quarter. And a lot of that is related to those older projects. So we expect that to drop off pretty significantly, because we bid projects that we're beginning to do with that. So is that really old pre-September 30th, '21 backlog goes away, those indexes will go the other way, and they'll stop and they could possibly, even if liquid asphalt stays down, they could start taking some revenue away from us.

One of the things that we did in our prepared remarks is we gave sort of the first half and back half spread of EBITDA, which we really haven't done before, but it's really hard to look at this business quarterly. We look at it annually, we give annual guidance. But we do look at the first half and the second half. And we saw that this year was weighted more toward the second half and we wanted to communicate that clearly to you. So it's a little different this year. Overall, we're right on track with annual plan; it's just weighted a little differently. And so that's the reason we gave that color.

It's extremely helpful, believe me. Very helpful on the modeling side. So one other question though, just kind of a final question is around cash flow. And you guys kind of addressed it up in the front. So I think you said 50% to 60% conversion, is that right? Is that free cash flow? I may have missed that…

Yes, Tyler, please proceed.

Well, I was going to mention that this is from a free cash flow perspective, which includes CapEx. However, regarding cash from operations, I've been asked a lot about the working capital usage in the business. Is there a connection to acquisitions that might explain some of that working capital usage? I'm trying to grasp how to approach cash from operations, whether looking at it as a percentage of EBITDA or some other method for future consideration.

Tyler, we wanted to share a broad overview, and then I'll let Alan provide more details. Throughout its history, CPI has generated strong cash flow from operations. In previous years when we haven't pursued many acquisitions or growth initiatives, cash has accumulated quickly. It was important for us to communicate this because, with cash building and attractive growth opportunities available that we believe would benefit shareholders, we see it as wise to invest in those opportunities. We have made significant investments in the last two years. However, to maintain the business, you need to account for EBITDA, taxes, and interest, along with maintenance capital expenditures, which results in approximately 50% to 60% of your cash flow from operations being free. Given the numerous opportunities we've encountered, we believe it makes sense to invest that cash for the long-term growth of shareholder value. I'll let Alan provide further details, but we felt it was essential to start communicating this.

I'd just point out, and I think this quarter of this year compared to the same quarter of last year is a real good example of something that I've been saying before that the timing of when we get our revenue in the quarter, the first month and second month of the quarter versus the last month of the quarter, has a big impact on that because we bill 100% of our revenue after the end of the month. But if you look at last year, we had better margins, as we've talked about. We had real strong revenue last year in December, less in October and real strong in November. This year, as we've said, the weather impacted us more in November and December. So what you look at is the cash flow from operations this year because December and even November are slower months in the quarter, it was $29 million. Last year, it was a negative cash flow from operations because we did so much revenue in December, which was the last month of the quarter. But back on a bigger scale, and you pointed something out there, when we acquired Ferebee, it was at the very end of the quarter, it was in the first of December. Because it was an acquisition that included their working capital, we did not have to fund that working capital, which would have been $9 million or $10 million roughly out of our cash flow from operating activities; it was part of down in the purchase price, where other periods, if we buy a company and we're not buying the working capital, then it shows up as working capital. We have to fund out of that first month, and that ends up in that first quarter that we report. So that's a $10 million difference that would have come out of operating cash flow if it had not been a platform company where we acquired the working capital. So those are nuances that can make a difference. But again, last year, the organic revenue was higher in the quarter. And again, if it happens at the end of the quarter, that working capital cash flow doesn't show up until the next following quarter.

Yes. No, I appreciate all the detail. I'm still kind of figuring it all out here, but just very helpful. It's a cash generative model, and I was just trying to understand that better.

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

Can you just help us understand with where liquid asphalt is today? It rolled over pretty hard. I realize, Alan, it might take a bite out of your revenue in the back half, but does it help your margin? Maybe you can just remind us how do think about that lag between your price and liquid asphalt and how that rolls through?

It relates to the timing of when we bid on the job. This quarter, we received $4.7 million in revenue due to the customer paying us for higher-cost liquid, compared to when we initially bid. While this adds revenue, it doesn't contribute to profit. Therefore, although it increases revenue slightly, it impacts your margin minimally. For instance, if we have $4.7 million with no margin and an average margin of 10%, that's only $500,000, which isn’t significant but still affects it a bit. If that revenue decreases, you lose that amount, but you retain the margin since it offsets costs directly. Unfortunately, we must count it as revenue due to the contract structure, leading to a small margin improvement. Ultimately, it influences both revenue and overall margin, considering it's $5 million or $4.7 million out of $341 million. It works both ways; we see it as a slight tailwind when costs decrease. Conversely, costs for non-index jobs and FOB sales present a headwind in margin when they rise, and a tailwind when they fall.

And I mean, just on that, Alan, I realize there's been a lot of moving parts impacting the gross margin over the years. If we look pre-pandemic, so before COVID, surge in cost inflation, your gross margin was 15% to 16%. Is there anything structurally challenging the business preventing you from getting back there over time?

There's nothing structurally preventing us from getting back there. As I've mentioned before, we are on the path to recovery. The best indicators of our future performance are our backlog and backlog margin. We experienced another strong quarter in adding to our backlog at healthy margins, and this positive trend is ongoing. We are continuing to vertically integrate, with our terminal in Panama City contributing significantly to our margins. We are also excited about getting the new terminal in Northern Alabama operational in late spring. When considering the backlog margin and the benefits of vertical integration, along with a favorable external environment that allows our team a fair opportunity to enhance margins, we can expect to see those margins improve. A particularly encouraging trend in the first quarter was that more projects were completed at higher margins than lower, finishing above the bid margins. Historically, our projects have performed better than bid margins, but in the past two years, inflation has made this more difficult, similar to a football team trying to score touchdowns starting from a disadvantageous position. Now, as we begin to work through this newer backlog, we are starting to see a return to normal conditions where we can effectively execute in the field and find new ways to enhance margins. All of these factors contribute to the potential for margins to recover to that desired range.

One structural factor that helps us respond more quickly, even to abnormal cost inflation, is our shorter duration projects that turn over faster. We aren't dealing with $1 billion worth of long projects, and this allows us to react swiftly to both positive and negative situations. We continuously rebid jobs, reduce backlog, and replace it with new backlog that incorporates these cost factors. This is a key distinction between us and companies that handle longer-term design-build projects, which is not how we operate our business.

Our next question is from Brian Russo with Sidoti & Company.

What is the M&A environment like? You completed two acquisitions in early December and your leverage has increased to about 2.9 times from 2.79 times last quarter. What are your thoughts as you progress through the year? Should we anticipate a more active level of acquisitions compared to the last couple of years, especially considering you're now operating in six different states?

Brian, I'll give the answer for the short term, and then I'm going to let Ned give sort of a bigger picture outlook. We continue to have really good conversations, as we always have had throughout our footprint in some adjacent states. We're continuing to build relationships and talk to potential sellers, and we're looking at opportunities. We feel our leverage ratio is going to moderate down through the course of the year as we execute and deliver on the year that we've put forward in our annual guidance. I look more at making sure our organization can handle the acquisitions, and they fit well strategically. So Ned?

The market continues to grow significantly, especially with the impact of the Infrastructure Act from Washington. Although it remains highly fragmented with many family-owned businesses, we see numerous opportunities both within and near our operational area. As we move towards vertical integration and take part in more phases of the value chain from rock to road, we are uncovering more acquisition opportunities. Some promising options include new liquid asphalt terminals or acquiring businesses that focus on grading and then integrating them into our asphalt operations for additional workforce. This vertical integration not only boosts revenue but also improves margins. As families pass down their businesses through generations, we are encountering more opportunities and a favorable outlook than ever before. The overall demand is increasing in nearly every state, and it's rare to find places with well-maintained roads, which will continue to drive demand and opportunities for us.

And then just real quickly, any quick comments on the weather you've seen January to date with the understanding of the seasonality in the business? Just trying to get a better feel for kind of where you are and under recovery of costs, fixed costs, et cetera.

Brian, I saw an analysis this morning that I thought was pretty accurate that said, January has been what you would expect in the winter. It's been wet in some places, dryer in others in our footprint. So it's about what we expected in January, nothing out of the ordinary.

Our next question is from Brent Thielman with D.A. Davidson.

Alan, the guidance for the full year includes an interest expense component to it that would imply kind of a higher quarterly run rate that we saw in the first fiscal quarter. I'm just wondering if that's based on an assumption for higher rates or do you expect to tap the credit facility and add more debt just to fund the growth you're seeing? Or maybe it's both?

We borrowed a little over $50 million at the end of this quarter, and we will owe interest on that for the rest of the year. There are expected increases for the part of our debt not covered by the swap. We have $300 million that fixes the rate on a portion of our debt, but any additional debt we incurred in the fourth quarter is not included in our guidance for future borrowings for internal purposes or acquisitions. We did mention the liquid asphalt terminal, which may require a small amount of borrowing to complete, but our typical capital expenditures are funded from our internally generated cash. Therefore, the debt we currently have will be maintained, but it will be higher over the last three quarters due to the borrowing for the Ferebee acquisition.

And just the 2.96 leverage ratio, that's factoring in contributions from the deals you've done into that trailing 12 EBITDA. Is that right?

That is correct. We get credit for that in that calculation with our bank; that will roll off each quarter, so we have to replace it with real EBITDA.

And then just directionally, where would you like to see that leverage ratio? I know EBITDA and margins are compressed and that's going to change. Where would you like to take it?

We'd like to get it down in the low 2s. We feel like the projection we've got will get down into the 2.1 to 2.2 range by the end of the year.

And then just, Jule, this might be for you, but there's a lot of infrastructure work getting released around the country, maybe the best market, I mean, clearly in your areas, but elsewhere, too, maybe the best market we've seen in a long, long time. I guess going through what you've had to go through the last couple of years with supply chain, I was curious about the liquid asphalt market. Is there any concern about availability or future availability, just given this kind of national pull in demand, and then maybe what you're doing to ensure you get what you need?

Brent, we haven't heard of any supply chain or supply issues with liquid asphalt. But one of the things that we've done that I think helps hedge against that potential risk is, we have one terminal now, and we'll have two terminals here in the next few months. So we're able to store a lot of liquid asphalt and manage our own supply at a wholesale environment, not retail. That helps us if there is a potential supply issue there, but I haven't heard of any concern there.

And last one, just on the M&A pipeline, which obviously continues kind of here and there, issues in availability and just cost of new equipment. Is that coming up in your conversations with folks that may potentially be wanting to partner up with you?

When I build relationships with potential sellers, we often discuss the past two years, which everyone has experienced together. There is a lot of casual conversation about supply chains, as every contract has been affected. The potential sellers we are engaging with are primarily making their decisions based on what is best for their families and their long-term plans, and this focus has not changed. Many of them have been in the business for a long time and are preparing for retirement. Some have a new generation that may not want to continue in the asphalt or construction industry. Ultimately, their family’s best interests are what drives their decisions, and they have faced macro challenges before. I would say this focus is still influencing our mergers and acquisitions discussions.

Our final question is from Kevin Gainey with Thompson Davis.

I wanted to know if you can provide some more detail on the Ferebee acquisition. Is there any kind of vertical integration there already?

Well, we're very excited for the Ferebee’s to join the CPI family of companies. I have really enjoyed getting to know them. Their organization is very impressive. They're from Charlotte; their business has grown up there, and so they really know that market well. From a vertical integration standpoint, one of the things that's really impressive about them is they do a lot of crush concrete and making aggregate base that really helps them. That’s just been something that they're really good at. We're looking, and I'm sure throughout the CPI footprint, their sister companies will be talking to them and trying to learn from that expertise. So we consider that a vertical integration they do and do very well.

They do on the services side, the same things we do, the grading and different things like that. So very common to what we have. Of course, we've said they've got their own asphalt plants, which is very helpful. So not a lot of difference there as far as the vertical integration of things, but they do all the types of construction services that we typically do in our companies. I think you mentioned, Alan, that together they generated $70 million in revenues. Can you provide a breakdown between Blue Water and Ferebee? I believe the $70 million figure relates to the backlog present at the time of acquisition. We haven’t disclosed a specific revenue figure for them that I can remember. Generally speaking, a platform acquisition for us tends to be larger than a bolt-on acquisition. The Tennessee operation was sized in a way that it integrated into our existing Alabama operations, Wiregrass. The backlog typically represents about nine months of revenue for our companies at any given moment, and it is slightly higher for most of our companies currently. You can estimate the total revenue based on that backlog, dividing it by approximately 75% to 80%.

We've reached the end of our question-and-answer session. I would like to turn the conference back over to management for closing comments.

Yes. I'd just like to thank everybody for joining us today. We are right on track and looking forward to a great year. Hope everyone has a good weekend. Thank you.

Thank you. This does conclude today's conference. You may disconnect your lines at this time, and thank you for your participation.