Q2 2023 Knife River Corp Earnings Call
Operator: Good morning, ladies and gentlemen, and welcome to the Knife River Corporation second quarter earnings Conference call.
Operator: At this time all lines are in listen-only mode.
Operator: Following the presentation, we will conduct a question and answer session.
Operator: If at any time during this call you require immediate assistance, please press star zero for the operator.
Operator: This call is being recorded today, Tuesday, August 8th, 2023.
I would now like to turn the conference over to Nathan Ring, Chief Financial Officer. Please go ahead. Thank you and good morning. My name is Nathan Ring, Chief Financial Officer of Knife River and it's my pleasure to welcome you to our second quarter 2023 earnings call, our very first as an independent public company.
I would now like to turn the conference over to Nathan Ring, Chief Financial Officer. Please go ahead.
Nathan Ring: Thank you and good morning. My name is Nathan Ring, Chief Financial Officer of Knife River and it's my pleasure to welcome you to our second quarter 2023 earnings call, our very first as an independent public company.
Nathan Ring: Today's discussion includes forward-looking statements as defined by the United States Securities laws in connection with future events.
Nathan Ring: Knife River is subject to risks and uncertainties that could cause actual results to differ materially. Knife River is under no obligation to, except as legally required, publicly update or revise these forward-looking statements, whether resulting from new information, future events, or otherwise.
Knife River is under no obligation to, except as legally required, publicly update or revise any forward-looking statements, whether resulting from new information, future events, or otherwise.
future events, or otherwise.
Nathan Ring: For more information about risks and uncertainties associated with forward-looking statements, please refer to our most recent SEC filings. For further details, please refer to the legal disclaimers contained in today's earnings release, and other public filings, which are available on both our website and the Securities and Exchange Commission website.
For further detail please refer to the legal disclaimers contained in today's earnings release, and other public filings, which are available on both our website and the Securities and Exchange Commission website.
Nathan Ring: During this presentation, we will make references to certain non-GAAP information. These non-GAAP measures are defined and reconciled to the most directly comparable GAAP measures in the appendix of the supplemental information as well as our filings with the SEC. These materials are also available on our website at www.kniferiver.com under the investors tab.
These non-GAAP measures are defined and reconciled to the most directly comparable GAAP measures in the appendix of the supplemental information as.
As well as our filings with the SEC. These.
These materials are also available on our website at www.kniferiver.com under the investors tab.
Nathan Ring: Joining me today is President and Chief Executive Officer, Brian Gray, who will begin today's call with a discussion of our financial results, segment performance, and competitive edge plan. I will then review second quarter product line results, leverage position, and 2023 guidance. Following prepared remarks, the operator will open the call for a question and answer session. I will now turn the call over to Brian.
<unk> edge plan.
I will then review second quarter product line results leverage position and 2023 guidance. Following prepared remarks, the operator will open the call for a question and answer session.
I will now turn the call over to Brian .
Brian Gray: Thank you Nathan. Welcome everyone and thank you for joining us today. I am excited to present our first earnings call as a public company and even more excited to discuss our strong results and the solid momentum we are seeing. Knife River achieved record second quarter revenue, record net income, and record EBITDA, while also compiling a quarterly record backlog.
Brian Gray: We saw improved results from last year in each region as our operations benefited from price increases and targeted bidding strategies across all consolidated product lines. This was a direct result of our competitive edge strategy for sustainable and profitable growth, which I will discuss further in a minute.
We saw improved results from last year in each region as our operations benefited from price increases in targeted bidding strategies across all consolidated product lines. This is a direct result of our competitive edge strategy for sustainable and profitable growth, which I will discuss further in a minute for.
Brian Gray: For the quarter, we reported revenue of $785.2 million, a 10% increase from the same period in 2022. Our second quarter EBITDA was $125.1 million, which is a 43% increase year over year.
A 10% increase from the same period in 2022.
Our second quarter, EBITDA was $125 1 million, which is a 43% increase year over year.
Brian Gray: Our adjusted EBITDA was $126.3 million, a 40% increase year over year, Nathan will discuss EBITDA and adjusted EBITDA in more detail, so you can fully appreciate the significant underlying momentum in our business and the progress we are making with the execution of our edge plan.
Brian Gray: Based on our strong first half and the tailwinds we see in our operations going forward, we are raising our guidance for revenue and EBITDA. In addition, we are initiating guidance for the adjusted EBITDA of $330 million to $380 million for 2023, implying year over year growth of 20% at the midpoint and underscoring the demand we are seeing. Nathan will discuss this further.
Brian Gray: These are very strong results and they are a testament to the strength of our 6,000 team members and their support of our edge strategy.
Brian Gray: Our results also show the strength and resiliency of our aggregates led vertically integrated business model. While new to the public markets as an independent company, our business and operations are well established with a track record of executing on our goals, successfully expanding our business in mid-sized, high growth markets.
Brian Gray: Our mix of construction materials and contracting services provides resiliency and contributes to our industry leading return on invested capital.
Brian Gray: We are a top 10 aggregates producer in the United States with $1.1 billion tons of proven reserves. Our major downstream products include ready mix concrete and asphalt, and we also perform contracting services across 12 of our 14 states in which we operate.
Brian Gray: Tying it all together is our life at night, which is the name we give to our strong people first culture. We are committed to taking care of our team and be an employer of choice as we work together to build our communities.
Brian Gray: I've been with Knife River for 30 years, and it was a thrill for me to join our leadership team on the balcony of the New York Stock Exchange on June 1 to ring the opening bell and watch as shares of [inaudible] stock were traded for the first time.
Brian Gray: Our separation from MDU resources into a standalone public company has allowed us the opportunity to unlock our full potential and expand upon our strong platform. The decision to spin off enables us to more effectively allocate capital resources and pursue strategic efforts aimed at growing our business and creating long term value for our shareholders.
Brian Gray: Key among those strategic efforts is our competitive EDGE plan. EDGE is Knife River's framework for sustainable and profitable growth. The letters of EDGE stands for EBITDA margin improvement, discipline, growth, and excellence. Our team is laser focused on these initiatives and objectively, we have delivered.
His knife river's framework for sustainable and profitable growth the letters and edge, Stanford EBITDA margin improvement discipline growth and excellence. Our team is laser focused on these initiatives and objectively we have delivered.
Brian Gray: First, we improved our trailing 12-month adjusted EBITDA margin to 13.5%, a significant increase from our 2022 year end adjusted EBITDA margin of 12.4%. Much of this improvement was the result of our discipline and aligning the value we deliver to our customers through price optimization.
Brian Gray: For the quarter, we saw double digit price increases on all our materials, including aggregates, ready mix asphalt, cement, and liquid asphalt. In addition to strong material pricing, we improved our construction margins for the quarter by 280 basis points through the disciplined bidding strategies and project execution.
Brian Gray: Our pricing initiative, coupled with efficiency enhancements being implemented by our process improvement teams and a strong underlying demand we are seeing in our regions, has us on track to hit our goal of 15% adjusted EBITDA margins by 2025.
Brian Gray: Second, we've been highly disciplined in allocating capital and managing cash, evidenced in the quarter by paying down $35 million in debt to improve our financial flexibility.
Brian Gray: Third, we continue to prioritize organic and acquisition related growth. Our business development team has been busy analyzing a number of strategic opportunities to grow our aggregates position, a key objective for us both by greenfield of new sites, along with several prospective acquisitions.
Brian Gray: Looking to the future, we remain optimistic that local, state, and federal funding will continue to support strong construction activity. This funding has contributed to our record backlog of $1.04 billion.
$104 billion.
Brian Gray: And finally, we are focused on excellence in everything we do, starting with maintaining our people first culture. These efforts are measurable in a number of ways, including our commitment to safety, our retention rates, and our outreach efforts. At stat I'm proud to report as our outreach efforts this year to over 1,200 historically underrepresented organizations in our communities. Our world-class Nitro Training Center has been at the heart of this outreach effort and will continue to provide best-in-class training for our existing team members and future construction workers. Ultimately, our efforts to be the best-in-class drive our continuous pursuit of excellence.
These efforts are measurable in a number of ways, including our commitment to safety, our retention rates, and our outreach efforts. At stat I'm proud to report as our outreach efforts this year to over 1,200 historically underrepresented organizations in our communities. Our world-class Nitro Training Center has been at the heart of this outreach effort and will continue to provide best-in-class training for our existing team members and future construction workers. Ultimately, our efforts to be the best-in-class drive our continuous pursuit of excellence.
to provide best-in-class training for our existing team members and future construction workers. Ultimately, our efforts to be the best-in-class drive our continuous pursuit of excellence.
We believe that our near and long term opportunities to continue to build on the momentum we have seen in each of these edge initiatives at our Investor day in May we outlined our goals and a well defined path to achieving strong and balanced revenue growth adjusted EBITDA margin expansion to 15% by 2025 and 20% in the long term.
Generating attractive free cash flow, maintaining a healthy balance sheet and sustaining our industry leading return on invested capital. We are just getting started and I am proud to be able to report on some of our initial successes I'll quickly recap the quarterly results for our reportable segments before turning the call over to Nathan for additional details on our financial performance.
Starting in the Pacific region.
Age related pricing initiatives across all product lines contributed to increased revenue gross profit and EBITDA, we saw higher demand in Hawaii as a local economy continued to regain momentum through tourism in military spending.
And we also experienced higher materials demand in northern California. In addition to improved margins for our contracting services in Northern California. We also saw a ready mix volumes increase based in part on our late 2022 acquisition and Modesto.
Offsetting the regions increased revenues were lower asphalt volumes and decreased contracting services revenues, both resulting from the late start to the construction season.
Moving to the northwest region, we enjoyed exceptional results in the quarter, driven again by our pricing initiatives across all product lines and also by strong demand and contracting services.
Revenues in the northwest improved 19% year over year, and EBITDA improved 75%.
Higher asphalt and ready mix volumes more than offset a decrease in aggregate volumes associated with project timing as the region is benefiting from more available work than in previous years, including public agency work data centers and parking structures. We are in the process of commissioning our new state of the art pre stressed manufacturing facility in Spokane, Washington.
We acquired the Spokane operation in 2021 of eight acquisitions, we have made in the northwest since 2018.
Next is our mountain region, which had a strong quarter.
Head of our record year in 2022, we saw revenue growth of 3% and EBITDA growth of 14% with price increases across all product lines positively impacting segment revenue are contracting service business as the larger as a percent of revenue in this region than in any other and it continues to perform well we have a record.
Second quarter backlog of $377 $3 million, an 8% increase from last year.
I mentioned earlier as part of our edge strategy the process improvement teams or what we call. The pit crews. This is a cross section of internal product line experts and outside consultants to help each region identify opportunities to lower production costs and improve operating efficiencies. The pit crews spent approximately one week per month completing.
Their work at individual business units the.
The mountain region had the benefit of having a pit crew and the region twice now and they have identified and implemented meaningful improvements at two of their larger aggregate operations.
In the North Central region revenue improved 12% and EBITDA increased 52%, most notably for the quarter EBITA margins improved by 340 basis points as a region embraced edge related bidding strategies on.
On the material side aggregate price increases across the region related to the implementation of edge initiatives more than offset lower volumes.
Finally, our all other segment includes our energy services region, South region, and corporate services for the second quarter revenue improved $5 $8 million year over year as a result of higher average selling prices for asphalt products and ready mix concrete partially offset by the December 2022 divestiture.
Of nonstrategic assets in Southeast, Texas EBITDA.
EBITDA improved $1 $2 million year over year to $5 4 million as a result of increased pricing.
Cost increase related to our recent spin and we are diligently analyzing our SG&A. Once we have fully on boarded our dis synergies from a timing perspective, we expect to be able to drive greater productivity.
As I went through some of the highlights of our segments. There are common themes across our business first our choice of mid sized high growth markets and our leadership in those markets positioned us well to benefit from the demographic shift we are seeing to markets, where knife river is strongly positioned.
Our laser focus on continuing to implement our edge strategy is already delivering exceptional results and we believe it will keep us well positioned for profitable growth and long term value creation and third our people first culture and the commitment of all our team members to our core values and business objectives makes me extremely optimistic about the future.
Her for knife River and the value we can deliver to our shareholders I will now turn the call over to Nathan for a detailed look at our financial results Nathan. Thank.
Thank you, Brian we have had an impressive quarter on a consolidated basis and at the segment level next I'd like to focus on the product lines, which have also benefited from our strategic initiatives first let's review the progress we made on pricing for the quarter the average selling price for aggregates improved 11%.
Ready mixed concrete improved 13% and asphalt also increased 13%. These strong price increases are a direct result of the edge initiatives as well as the actions taken to overcome inflationary pressures from the prior year.
Although we anticipate inflationary pressures will moderate we expect the dynamic pricing initiative to continue providing margin improvement.
The delayed start to the construction season impacted our internal sales of aggregates for the quarter as reflected in the volumes.
Im pleased to report that all operations are in full swing and we are entering the heart of our construction season.
External sales of aggregates increased for the quarter and we continue to see broad based demand.
Our successful pricing strategies and cost control measures have resulted in strong improvement in gross margins across all our product lines for an improvement at the consolidated level of close to 500 basis points.
Again, we are very pleased with the work our teams have done to implement new initiatives and take advantage of strong market opportunities.
Switching to our financial health and capital allocation priorities, we are dedicated to financial discipline, particularly as it relates to our targeted leverage and capital allocation.
Long term, we are targeting a net debt to trailing 12 month EBITDA of approximately two five times as Brian mentioned since the spin date, we have paid down $35 million in debt. So that at the end of the quarter. We were two three times EBITDA. This is based on net debt balance of 815.
<unk>.
Our strong EBITDA growth and disciplined use of cash has helped us achieve this significant improvement.
A portion of the debt balance relates to the $350 million revolver in place to ensure we have access to adequate funds to meet our seasonal operating needs as.
As of June 30, near the peak of our construction season, we utilized $155 million, leaving.
Leaving ample room for future growth opportunities.
Growth is another key component of our edge plan.
Strategically managing our debt gives us flexibility to allocate capital to where we get the best long term value for our shareholders. This approach to sustainable growth has a few key components.
First we continued to actively reinvest for organic growth and maintenance into our fleet and equipment and to strengthen our people first culture with safety and training initiatives.
We expect these investments in Capex to account for approximately 5% to 7% of annualized revenues as examples I mentioned two initiatives at our Investor day in May are preset facility in Washington, and our Honey Creek, Oregon, Texas.
The <unk> facility is about to come online in the Honey Creek recently has started full production.
We anticipate EBITDA and margin improvement from both operations this year.
Second we also actively pursue M&A growth opportunities focusing on aggregates led businesses and mid sized high growth markets within or adjacent to our current footprint. We currently are pursuing a number of opportunities in the pipeline that meet our disciplined criteria.
Third we consistently review our portfolio of operations to ensure they fit our long term strategy and edge initiatives and ultimately we look to remain financially nimble and are committed to the long term annualized goal of approximately two five times net debt to EBITDA.
So far we have invested approximately $56 million of the plan $125 million of capital projects for 2023 with the majority allocated to maintaining our equipment.
Note that future acquisitions are not included and would be incremental to our capital plan.
Moving to our guidance as presented in the press release and as Brian highlighted earlier, we are very excited to be reporting record second quarter results based on those results as well as our strong market conditions operational momentum and visibility through year end, we are updating our revenue.
<unk> to $2 6 billion to $2 8 billion.
And our EBITDA guidance to $320 million to $370 million.
And we are initiating adjusted EBITDA guidance of $330 million to $380 million.
Let me provide some additional detail on these changes.
The increases to our revenue and EBITDA guidance are driven by the outcomes from our pricing and bidding strategies, our strong first half results and record levels of backlog for comparative purposes. This is a 20% increase from 2022 to the midpoint of our new EBITDA guidance.
Further as an independent public company, we are transitioning to adjusted EBITDA guidance to better reflect our core profitability by adjusting for one time events, such as nonrecurring transition costs related to the spin as well as stock based compensation and gains or losses on our benefit plans for further clarity.
In 2023, we estimate that one time spin related costs will be approximately $6 5 million.
For prior year comparison purposes.
<unk> adjusted EBITDA in 2022 was $296 million.
As presented in the form 10 and on Investor Day. This reflects a 20% growth to the midpoint of our new guidance range and underscores the strength of our ongoing core business.
We are committed to being transparent with our investors. So that you can share our excitement in the underlying momentum we have and what we see ahead with the full rollout and execution of our edge strategy and reinvestment in our country's infrastructure.
We had a strong quarter and importantly have strong momentum going forward and we believe our strategy our skilled team members and the essential work that needs to get done to support America's infrastructure will continue to provide long term value to our shareholders I would now like to turn it back to the operator and open it up for questions.
Thank you Sir Les.
Ladies and gentlemen, we will now begin the question and answer session.
I would like to ask a question. Please press star followed by the number one on your telephone keypad.
If your question has been answered and you would like to withdraw from the queue. Please press star followed by the number too.
If you are using a speaker phone please lift your handset before pressing net's. Please.
Please standby for your first question.
Your first question will come from Brent Thielman at D.
Davidson. Please go ahead.
Thanks, Thanks, good morning, Congrats on a great quarter.
Thanks Brent.
Hey, Brian Nathan I mean look solid pricing returns profitability across.
The company, maybe you could just speak to kind of what the overhang on volume what was this quarter R&D do you see that reversing ended the second half of the year or any thoughts around.
The opportunity for volume to snap back here is moving into the second half.
Yes, Brad this is Brian So I'll go and take that question, Yes, we saw small volume declines in aggregates ready mix and asphalt for.
For the quarter I'll start with the downstream products and I think that will kind of explain the aggregates.
For ready mix.
We divested ourselves of the southeast Texas operations. So.
That was the primary driver of that without the Divesture of Texas, our ready mix volumes would actually have been up.
And then second as far as asphalt we had a late start to the construction season. This year, we talked about the impacts in the Pacific Region Mountain region in the first quarter and so really the work that should it got done is first quarter is really just now getting started in the second quarter and its been delayed and so the delayed start of that impact really.
Our aggregates in total.
Our aggregate volumes were actually up to our third party customers for the quarter and so it really all came from selling internal materials through our ready mix plants in our asphalt plants downstream Brent. So overall, yes, I think that construction work with a record backlog.
We've got time to get that work done and so I do see those volumes coming back.
Okay, great. Thanks, Bryan and then.
Maybe if you could talk a little more about the progress you're seeing with the various internal initiatives around pricing bidding practices. Some of the other objectives, you have got and I guess specifically.
Specifically as you think about this kind of 15% margin objective I mean, how much how much of that shows up in the results. This quarter, Brian I mean in fairness you guidance when we have been in the role for a little while.
I'm, just trying to understand that versus maybe some other things that are driving really strong profitability here this quarter.
Yes no.
I appreciate the recognition brunt of a fantastic quarter and it does have a lot to do with our edge initiatives and so.
There is.
Primary driver of that 15% EBITDA by 2025, and our success. This last quarter really has been driven by our pricing initiatives, both for our materials and downstream construction services and so.
We have.
Had good success in our markets and all product lines are getting double digit price increases.
And we really are.
Telling our story.
Being vertically integrated and supplying all the materials through the value chain that is valued our customers seeing the quality the service the availability of materials at our sites.
That has been well received by our customers.
That's transitioned also translated on the bid date for our contracting services, we've become much more strategic disciplined patient and identifying the jobs that really fit our crews fit our backlog.
And that's allowed us to raise our margins and you saw that in our construction margins for the quarter were much better as well so.
We've got record backlog going into the rest of this year and.
Our edge initiatives I can tell you we had our region president and Bismarck last weekend.
That initiative has been completely embraced and it also is not just.
We get to 15% not by just raising prices, but also our cost controls and we've implemented the pit crews and the pit crews have been out on the road for a week or months they've made seven visits so far and have identified literally hundreds of small operational improvements some of them more meaningful.
So it's multiple ways to get there we continue to look for opportunities to grow both through acquisitions and Greenfields. Our aggregates operations. So we're well on track Brent to get to that 15% by 2025.
Okay I appreciate that yes.
Yes, Brian maybe just.
If you could comment on some of the business trends demand trends just maybe among your larger revenue contributing states.
Is there an air pocket in housing or Theyre more positive.
Negative right now as we think about the demand climate.
Bigger market square.
Yes, there's been a lot of conversations around residential because of our geographic footprint and really focused on the mid size higher growth markets.
We're actually we're not seeing a big slowdown in the markets. We operate in in residential now keep in mind Brent.
Not a large percent of our backlog on contracts and services or even though the material size is directly related to residential the markets that we operate in many of our competitors are more of the regional.
Smaller suppliers that really do target the residential markets, but the markets that we're in.
And we do see like the <unk>.
Booming area in the treasure valley as far as <unk>.
Residential there northern California.
Residential has not had a big impact on that obviously right now 84% of our backlog is public funded so that remains very strong for us and we have markets right now that are seeing a bigger rebound than others Hawaii.
The tourism the military spending in Hawaii has been very solid for us. So we're seeing a lot of strong commercial warehousing and so I think across the board.
We're seeing strength in <unk> and most of those markets.
Okay. Thanks, guys I'll get back in queue.
Thanks Brent.
Ladies and gentlemen, once again, if you would like to ask a question. Please press star one now.
We have follow up question from Brent Thielman at Davidson. Please go ahead Sir.
Okay.
Hey, maybe just on.
When you think about the upgraded implied outlook for the second half you do have some market.
Can be very seasonal have yet.
The embedded some element of conservatism for that into the guidance I guess, I'm thinking, particularly about the fourth quarter Bryan Nathan.
Yes, we kept the range at $50 million Brent.
We are just we're early into the construction season right now we still have approximately 60% of our revenue is will happen in the second half of the year and so yes.
Yes, you are right that our northern tier exposure can have an impact in the fourth quarter, but it's early on.
And we've got strong backlog and momentum going into that but that kind of led into.
Our guidance.
And maybe Nathan has something to add on there.
Another part brands of the second half of the year does relate and we mentioned this in her remarks relates to the incremental cost that we will see from the transition and so if you recall from the form 10, we didn't indicated for a full year, we'll probably see about 23 million $24 million of recurring costs in relation to that so for the rest of the year about $2 million.
Since we bought an additional $12 million of incremental costs related to spin.
Yes.
Maybe just.
Last one just strategic.
You guys have been very focused internally and some of the initiatives you have.
And focused on.
I'm curious.
And your appetite today for looking at acquisitions.
Would you rather see that little later on if you're still.
Putting things to work internally I'd be curious to your thoughts there as we think about the expansion business here eventually.
A key component of our edge initiative.
<unk> growth and it's a big part of our DNA in our past and absolutely Brent We've got a vice president of business development that is focused right now on both organic and inorganic opportunities we've been obviously very.
Focused on getting the spend across the finish line and Thats taken a lot of our resources and attention. However during that time.
We've been busy talking to prospective sellers I think we are an acquirer of choice in the markets we operate in.
Primarily because where people first company and we take good care.
Our employees are neighbors are customers and we have strong relationships and reputations in those markets that we operate in so very much.
I think that.
We are.
Very active looking at acquisitions, I think Nathan could possibly touch on a little bit of our available funds to grow and so maybe Nathan do you want to talk about the other part of that brands, who is just that we're prepared to pursue those when they when they come through the pipeline as we noted within the prepared remarks, we're sitting at a two three times net leverage which helps indicate.
That we have the funds to support the growth that Vice President business development and the team is looking at and really with the performance. We've had in the first half of the year and expectations for the second half of the year strong cash flows to where we can maintain that two to three years and two times net leverage while pursuing these growth opportunities are very exciting.
Yes.
Absolutely Okay. Thanks, guys.
Thanks Brent.
There are no further questions on the phone so I will turn the conference back to Brian <unk> for any closing remarks.
Well. Thank you for taking the time to join us for our call today, and where we posted record results raised our guidance for the full year. We're excited by the early results from implementing our edge plan and a robust demand environment across our footprint, we are well positioned with our edge strategy, our people first culture and a leading position.
Additionally, our mid sized high growth markets to create durable long term value for our shareholders. Thank you for your continued support for knife River have a great day.
Ladies and gentlemen, this does conclude your conference call for this morning, we would like to thank you all for participating and ask you to please disconnect your lines.
Okay.
Okay.
No.
Okay.
Thanks.
Got it.
Thanks.
Yes.
Okay.
Okay.
Got it.