Q4 2023 Knife River Corp Earnings Call

Operator: Good afternoon, ladies and gentlemen, and welcome to the Knife River Corporation fourth quarter and full year 2023 results conference call. At this time, all lines are in a listen-only mode.

Good afternoon, ladies and gentlemen, and welcome to the Knife River Corporation fourth quarter and full year 2022 movie jaws.

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At this time all lines right now listen only nelligan.

Operator: Following the presentation, we will conduct a question and answer session. If at any time during this call you require immediate assistance, please press star zero for the operator. This call is being recorded on Thursday, February 15, 2024. I would now like to turn the conference over to Nathan Ring, Chief Financial Officer of Knife River. Please go ahead.

Following the presentation, we will conduct a question and answer session.

If at any time during the call you require assistance the specified zero for the operator.

This call is being recorded on Thursday February 15 2024.

I would now like to turn the conference over to Nathan Green Chief Financial Officer of Knife River. Please go ahead.

Nathan Ring: Thank you, operator, and welcome to everyone joining us for the Knife River Corporation fourth quarter and full year 2023 results conference. My name is Nathan Ring, Chief Financial Officer of Knife River, and I'm joined by our President and CEO, Brian Gray. Today's discussion will contain forward-looking statements about future business and financial expectations, due to various risks and uncertainties, including the risks described in our periodic reports filed with the SEC. For further detail, please refer to the legal disclaimers contained in today's earnings release and other public documents, which are available on both our website and the Securities and Exchange Commission's website. Except as required by law, we undertake no obligation to update our forward-looking statement.

Thank you operator, and welcome to everyone joining us for the Knife River Corporation fourth quarter and full year of 2023 results conference call.

My name is Nathan Rainey, Chief Financial Officer of Knife River, and I'm joined by our President and CEO, Brian Great.

Today's discussion will contain forward looking statements about future business and financial expectations.

Actual results may differ significantly from those projected in today's forward looking statements due to various risks and uncertainties, including the risks described in our periodic reports filed with the SEC.

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's website, except as required by law, we undertake no obligation to update our forward looking statements.

Nathan Ring: During this presentation, we will make reference to certain non-GAAP information. These non-GAAP measures are defined and reconciled to the most directly comparable GAAP measures in the appendix to today's presentation, as well as in our filings with the SEC. These materials are also available on our website at www.kniferiver.com under the Investors tab. Brian Gray will begin today's call with a high-level overview of our fourth quarter and full year 2023 results, followed by an update on our strategic priorities as outlined within our competitive ed. Following his prepared remarks, I will provide a product line summary, a balance sheet update, and a review of 2024 financial guidance. At the conclusion of our prepared remarks, we will open the line for a question and answer session. With that, I'll now turn the call over to Brian.

During this presentation, we will make reference to certain non-GAAP information. These.

These non-GAAP measures are defined and reconciled to the most directly comparable GAAP measures in the appendix to today's presentation as well as our filings with the SEC. These.

These materials are also available on our website at Www Dot knife River Dot com under the investors tab.

Greg will begin today's call with a high level overview of our fourth quarter and full year 2023 results followed by an update on our strategic priorities as outlined within our competitive edge plan.

Following his prepared remarks, I will provide a product line summary, a balance sheet update and a review of 2024 financial guidance at the conclusion of our prepared remarks, we will open the lines for a question and answer session with that I'll now turn the call over to Brian.

Brian Gray: Thank you, Nathan. Welcome, everyone. And thank you for joining us today. I'm excited to talk about our record year, our strategic priorities for continued profitable growth, and what we see ahead in 2024. We reached all-time annual records in 2023 for revenue, net income, EBITDA, and adjusted EBITDA. I'm incredibly proud of our team for safely delivering these impressive results, including revenue of $2.8 billion and adjusted EBITDA of $432 million. Each of our reporting segments saw improved year-over-year revenue and EBITDA as we benefited from strong markets, operational execution, and strategic efforts to optimize prices and improve margins. Combined, these efforts drove our adjusted EBITDA margins to 15.3% for 2023, an improvement of 290 basis points. We are very pleased to have surpassed our initial goal of 15% margins, a full two years ahead of schedule.

Thank you Nathan welcome everyone and thank you for joining us today I'm excited to talk about a record year, our strategic priorities for continued profitable growth and what we see ahead in 2024, we reached all time annual records in 2023 for revenue net income EBITDA and adjusted EBITDA I'm incredibly proud of our team for.

Safely delivering these impressive results, including revenue of $2 8 billion.

And adjusted EBITDA of $432 million.

Each of our reporting segments saw improved year over year revenue and EBITDA as we benefited from strong markets operational execution and strategic efforts to optimize prices and improve margins combined these efforts drove our adjusted EBITDA margins to 15, 3% for 2023, an improvement of 290 basis points.

We are very pleased to have surpassed our initial goal of 15% margins a full two years ahead of schedule.

Brian Gray: Doing so is a testament to the strength of our team, the strength of our business, and the strength of our market. While we certainly enjoy the moment and the milestone, we are now focused on our longer-term goal of 20% plus EBITDA margins. On our past two quarterly calls, I highlighted the early successes from our new competitive edge strategy, and I will discuss drivers from that strategy again today.

Doing so is a testament to the strength of our team the strength of our business and the strength of our markets. While we certainly enjoy the moment and the milestone. We are now focused on our longer term goal of 20% plus EBITDA margins on our past two quarterly calls I highlighted the early successes from our new competitive edge strategy.

I'll discuss drivers from that strategy again today, we believe our edge plan will continue to improve our adjusted EBITDA margins and deliver long term value for our shareholders.

Brian Gray: We believe our EDGE plan will continue to improve our adjusted EBITDA margins and deliver long-term value for our shareholders. Turning to slide four, we launched our EDGE strategy at our 2023 Investor Day, and we have already enjoyed meaningful success. As we move forward, we will continue to focus on commercial and operational excellence as well as disciplined capital allocation, which will drive margin expansion. As a recap, the letters in EDGE stand for EBITDA Margin Improvement, Discipline, Growth, and Excellence.

Turning to slide four we launched our strategy at our 2023 Investor day, and we have already enjoyed meaningful success as we move forward. We will continue to focus on commercial and operational excellence as well as disciplined capital allocation, which will drive margin expansion as a recap the letters and edge stand for EBITA margin improvement discipline.

Growth and excellence, let me provide some updates on key developments in each of these areas starting with margins.

Brian Gray: Let me provide some updates on key developments in each of these areas, starting with margins. In 2023, we made good progress on our long-term target. We are on a solid path to achieving our long-term adjusted EBITDA margin goal of 20% plus. We are focused on increasing aggregates as a percentage of our gross profit. We are continuing to build on the strategic positions we have in our mid-sized, high-growth markets, and we are driving productivity gains across the organization. We have seen early success with dynamic pricing and targeted bidding strategies, and we continue to refine each as we seek to optimize the value of our core products. We brought our sales managers and regional executives to the Knife River Training Center last fall for extensive training sessions on dynamic pricing and commercial excellence.

In 2023, we made good progress to our long term target we are on a solid path to achieving our long term adjusted EBITDA margin goal of 20% plus we are focused on increasing aggregates as a percentage of our gross profit we are continuing to build on our strategic positions. We have in our mid sized high growth markets and we are driving productivity gains across the <unk>.

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We have seen early success with dynamic pricing and targeted bidding strategies and we continue to refine each as we seek to optimize the value of our core products.

We brought our sales managers and regional executives to the knife River training Center last fall for extensive training sessions on dynamic pricing and commercial excellence and.

Brian Gray: And we have also had promising early returns from our process improvement team, or what we call the PIT crew. They've identified capital improvement opportunities, operating efficiencies, and cost controls that can be implemented throughout the company. The team visited 10 of our largest locations in 2023, including quarries, asphalt plants, and ready-to-mix plants.

And we have also have promising early returns from our process improvement team or what we call. The pit crew they've identified capital improvement opportunities operating efficiencies and cost controls that can be implemented throughout the company.

The team visited 10 of our largest locations in 2023, including inquiries asphalt plants and ready mix plants in 2024, we've expanded the team. So we can extend its influence to more locations as we standardize best practices. Our entire team at knife River is fully engaged in our continuous efforts to improve margins.

Brian Gray: In 2024, we expanded the team so we can extend its influence to more locations as we standardize best practices. Our entire team at Knife River is fully engaged in our continuous efforts to improve margins. With respect to discipline, we are committed to a strong balance sheet and a disciplined allocation of capital to drive long-term investor returns.

With respect to discipline, we are committed to a strong balance sheet and disciplined allocation of capital to drive long term investor returns, we take a highly disciplined approach to managing our business one of the guys where and how we compete how we manage our costs and how we allocate capital over the last year, we continue to drive capital efficiency across the organization.

Brian Gray: We take a highly disciplined approach to managing our business, one that guides where and how we compete, how we manage our costs, and how we allocate capital. During the last year, we have continued to drive capital efficiency across the organization. We maximize free cash flow generation, we deliver improved operating leverage, and we significantly reduce our outstanding debt. Moving to growth, M&A is part of our corporate DNA. Since 1992, we've completed 84 acquisitions, including nine in the past five years.

<unk>, we maximize free cash flow generation, we delivered improved operating leverage and we significantly reduce our outstanding debt.

Moving to growth M&A as part of our corporate DNA. Since 1992, we've completed 84 acquisitions, including <unk> in the past five years, while our primary focus in 2023 was establishing ourselves as an independent company and then implementing our <unk> strategy, we expect to become more active on the acquisition front in 2024.

Brian Gray: While our primary focus in 2023 was establishing ourselves as an independent company and then implementing our edge strategy, we expect to become more active on the acquisition front in 2024. We have an active pipeline of potential bolt-on and platform targets, and we intend to emphasize aggregates-led, materials-based transactions. We have reinforced our corporate development team to help pursue M&A opportunities, and we remain committed to reinvesting in organic growth in our operations as we aim to build our market positions and support profitability. And finally, the second E, excellence.

We have an active pipeline of potential bolt on and platform targets and we intend to emphasize aggregates led materials based transactions, we have reinforced our corporate development team to help pursue M&A opportunities and we remain committed to reinvesting in organic growth at our operations as we aim to build our market positions and support profitability.

And finally, the second E excellence, we are driven to be the best at all aspects of our business being a best in class operator starts with our people. We are committed to the health and safety of our team. We believe that excellence in these areas is integral to our long term success. Our state of the art Knife River training Center hosted over 100 students last year, including interactive search.

Brian Gray: We are driven to be the best in all aspects of our business. Being a best-in-class operator starts with our people. We are committed to the health and safety of our team.

Brian Gray: We believe that excellence in these areas is integral to our long-term success. Our state-of-the-art Knife River Training Center hosted over 1,100 students last year, including interactive sessions on safety, sales, and operational performance. Core curriculum at the center also includes CDL training, equipment operator training, and leadership development. Investing in our team and advancing their skills through ongoing training is an investment in our future as a pillar of our sustainability strategy. Putting people first and maintaining our unique knife culture brings us together, supports retention, and builds a team that will help us achieve our business goals.

On safety sales and operational performance core curriculum at this center also includes CDL training equipment, operator training and leadership development.

Investing in our team in advancing the scale through ongoing training is an investment in our future as a pillar of our sustainability strategy.

Putting people first and maintaining our unique life a knife culture brings us together supports retention and build the teams that will help us achieve our business goals.

Brian Gray: While we take advantage of our self-help from our competitive edge strategy, the underlying fundamentals of our business are strong. Our vertical integration, ability to serve public and private customers, and our strategic positions in mid-size, high-growth markets provide competitive advantages for Knife River. While we became a standalone publicly traded company just 8 months ago, we have been in the construction materials and contracting services business for over 30 years. Knife River is well established.

While we take advantage of our self help from our competitive edge strategy. The underlying fundamentals of our business are strong our vertical integration ability to serve public and private customers and our strategic positions in mid sized high growth markets provide competitive advantages for knife River.

While we became a standalone publicly traded company just eight months ago, we have been in the construction materials and contracts in the services business for over 30 years knife River is well established in.

Brian Gray: In addition to being a top 10 agribusiness producer in the United States with 1.1 billion tons of reserves, we provide value-added contracting services. Our vertically integrated model allows us to self-supply the majority of the aggregates used in the production of our downstream products, which are then supplied to the contracting job. We have built a business that seeks to capture value and margin at every step of the value chain. Over 75% of the value of our contracting services contracts is in public projects, and we believe Knife River is uniquely positioned to capitalize on the significant growth in infrastructure funding from the federal, state, and local levels. Within the 14 states we operate in, state transportation departments have increased their 2024 spending authorizations by more than $9 billion, which is up 16% from 2023.

In addition to being a top 10 aggregates producer in the United States with $1 1 billion tons of reserves, we provide value added contracting services. Our vertically integrated model allows us is self supply the majority of the aggregates used in the production of our downstream products, which are their supply to a contracting jobs. We have built a business that seeks to capture value and margin.

At every step of the value chain over 75% of the value of our contracting services contracts is in public projects and we believe <unk> is uniquely positioned to capitalize on the significant growth in infrastructure funding from the federal state and local levels.

Within the 14 states, we operate safe transportation departments have increased their 2024 spending authorizations by more than $9 billion, which is up 16% from 2023, we will maintain a disciplined approach to project bidding one that emphasizes backlog quality over quantity consistent with our strategic focus on expanding EBITDA margins.

Brian Gray: We will maintain a disciplined approach to project bidding, one that emphasizes backlog quality over quantity, consistent with our strategic focus on expanding EBITDA margins. Now, we'll transition to providing some color on our reporting segments, starting with a structural update. Since our initial Investor Day in May, we have committed to being available, to listening, and to being transparent with our investors. As we aim to add clarity to our operating results, we have created a stand-alone product line segment for our liquid asphalt operations called Energy Services. This business has operations in Iowa, Nebraska, South Dakota, Texas, and Wyoming, and the segment now also includes liquid asphalt operations in California that previously were part of our Pacific segment.

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Now I will transition to providing some color on our reporting segments, starting with our structural update since our initial investor day in May we are committed to being available to listening and to being transparent with our investors as we aim to add clarity into our operating results. We have created a standalone product line segment for our liquid asphalt operations called energy service.

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This business has operations in Iowa, Nebraska, South Dakota, Texas, and Wyoming and the segment. Now also includes the liquid asphalt operations in California that previously were part of our Pacific segment.

Energy services is new segment liquid asphalt has been part of our vertically integrated value chain for nearly 20 years. It is a value added construction material and to give investors more clarity into this product line, we will begin providing EBITDA guidance specific to energy services.

Brian Gray: While energy services is a new segment, liquid asphalt has been part of our vertically integrated value chain for nearly 20 years. It is a value-added construction material, and to give investors more clarity on this product line, we will begin providing EBITDA guidance specific to energy services. The other change is reporting our south region with our north central region, now called the central segment. Going forward, we'll reference the Pacific, Northwest, Mountain, and Central segments collectively as our geographic segment. With these updates, all other services have been eliminated and replaced simply with corporate services and elimination.

The other changes to reporting our south region with our North Central region now called the Central segment going forward will referenced the Pacific Northwest Mountain and central segments collectively as our geographic segments with these updates all other has been eliminated and replaced simply with corporate services and eliminations.

Moving on to our results I will start with a specific segment.

We saw increased market activity in California, and Hawaii in the fourth quarter, including more work for our contracting services business in Northern California, which helped grow revenues for the full year revenues increased 11% to a record $462 million EBITDA increased 28% to $56 million.

Brian Gray: Moving on to our results, I will start with the Pacific segment. We saw increased market activity in California and Hawaii in the fourth quarter, including more work for our contracting services business in Northern California, which helped grow revenue. For the full year, revenues increased 11% to a record $462 million.

Entering 2024, we are optimistic about continued growth in Hawaii, which is seeing an increase in tourism spending and stands to benefit from multi year military projects in northern California, We continue to see people moving out of the Bay area and the mid sized markets, where we have a strong presence and in Alaska. There are several projects associated with the Anchorage Airport.

Brian Gray: EBITDA increased 28% to $56 million. Entering 2024, we are optimistic about continued growth in Hawaii, which is seeing an increase in tourism spending and stands to benefit from multi-year military projects. In Northern California, we continue to see people moving out of the Bay Area into mid-sized markets where we have a strong presence. And in Alaska, there are several projects associated with Anchorage Airport that are in the permitting stage, and we are in a good position to be one of the primary material suppliers. Next is the Northwest segment, where we had another record year.

They are in the permitting stage, where we are in a good position to be one of the primary material suppliers.

Next is the northwest segment, where we had another record year.

While fourth quarter EBITDA was down year over year largely related to one time items in the form of a noncash aggregate impairment and lower gains on asset sales. The segment results reflect record revenue and EBITDA for the year revenue improved 11% to $666 million EBITDA improved 17% to $100.

$1 million and the segment improved its EBITDA margins to 18, 2%.

Entering 2024 are market conditions remain healthy, including a strong pipeline of work at our priest rest Division, where we opened a new production facility late last year.

Brian Gray: While fourth-quarter EBITDA was down year over year, largely related to one-time items in the form of a non-cash aggregate impairment and lower gains on asset sales, the segment results reflect record revenue and EBITDA for the year. Revenue improved 11% to $666 million. EBITDA improved 17% to $121 million, and the segment improved its EBITDA margins to 18.2%. Entering 2024, our market conditions remain healthy, including a strong pipeline of work at our pre-stress division, where we opened a new production facility late last year. We are extremely pleased with the higher capacity and efficiencies of this new plant, which is featured as the cover story in this month's Concrete Products magazine. We look forward to strong contributions from our pre-stress business in 2024 and the years to come. We also have solid DOT spinning in Southern Oregon, with a near record amount of work on the books and more to come.

We are extremely pleased with the higher capacity and efficiencies of this new plan, which is featured as the cover story in this month's concrete products magazine wed.

We look forward to strong contributions from our <unk> business in 2024 and the years to come. We are also seeing solid D&C spending in southern Oregon with a near record amount of work on the books and more to come.

We also see opportunities with microchip plants and data centers. They look to begin construction later this year, which we expect will benefit our aggregates ready mix and pre Swiss operations.

In our mountain segment, we continue to enjoy strong demands in the fourth quarter, we experienced volume growth across all product lines and contracting services led by strong residential commercial and public activity.

For the year revenue improved 17% to a record $634 million and EBITDA improved 42% to a record $103 million. The mountain region continues to be one of the fastest growing areas in the United States. We have a strong position and we look to take advantage of future growth in our footprint are key operations includes Boise.

Billings, Missoula, and Bozeman, all of which are benefiting from population growth.

Brian Gray: We also see opportunities with microchip plants and data centers that look to begin construction later this year, which we expect will benefit our aggregates, Radimix, and PreSwiss operations. In our mountain segment, we continue to enjoy strong demand. In the fourth quarter, we experienced volume growth across all product lines and contracting services, led by strong residential, commercial, and public activities. For the year, revenue improved 17% to a record $634 million, and EBITDA improved 42% to a record $103 million. The mountain region continues to be one of the fastest growing areas in the United States.

The state of Idaho has a $500 million remaining to be spent in its transportation expansion in congestion mitigation fund, which includes roads and bridge work.

We have two airport projects in Western Montana in 2024, and we have opportunities with the continued expansion of wind farm projects in Wyoming.

The Central segment, which includes North Dakota, South Dakota, Minnesota, Iowa, and now, Texas continues to benefit from a combination of edge related business initiatives.

We had strong pricing growth across the segment as well as more profitable contracting work full year 2023 revenues improved 6% to a record $825 million and EBITDA improved 35% to a record $117 million.

Both Texas and Minnesota pass additional transportation funding packages in 2023 that will provide more bidding opportunities in infrastructure improvements techs.

Brian Gray: We have a strong position, and we look to take advantage of future growth in our footprint. Our key operations include Boise, Billings, Missoula, and Bozeman, all of which are benefiting from population growth. The State of Idaho has $500 million dollars remaining to be spent in its Transportation Expansion and Congestion Mitigation Fund, which includes roads and bridges.

Texas was the fastest growing state last year and projections show population continuing to grow and the Texas triangle that area between Dallas, Houston and San Antonio. The current population is $21 million and it is expected to grow to $30 million over the next six years, our mid size market locations in Texas, our position within that triangle as stand to benefit from the strong growth.

And finally under our new segment energy services, our liquid asphalt business has been a solid profitable contributor for us since we purchased it 19 years ago EBITA margins of energy services have been accretive to <unk> overall consolidated margins in 18 out of those 19 years.

Brian Gray: We have two airport projects in Western Montana in 2024, and we have opportunities with the continued expansion of wind farm projects in Wyoming. The Central Segment, which includes North Dakota, South Dakota, Minnesota, Iowa, and now Texas, continues to benefit from a combination of edge-related business initiatives. We have strong pricing growth across the segment, as well as more profitable contracting. Full year 2023 revenues improved 6% to a record $825 million. And EBITDA improved 35% to a record $117 million. Both Texas and Minnesota passed additional transportation funding packages in 2023 that will provide more bidding opportunities and infrastructure improvements. Texas was the fastest-growing state last year, and projections show the population continuing to grow. In the Texas Triangle, that area between Dallas, Houston, and San Antonio, the current population is 21 million, and it is expected to grow to 30 million over the next six years.

We had exceptionally strong financial results for energy services in 2023, benefiting from historic price cost dynamics across our markets and a longer than expected paving season, we had record revenue of $292 million for the year and record EBITDA of $78 million.

In 2024.

Anticipate another strong year from our energy services, well above its historical average, but not at the all time records. We saw in 2023 the state Dot's in a market, where we provide liquid asphalt are continuing to invest in their roads for context about 94% of the nation's pedros are paid with asphalt.

Energy service has been and will continue to be an integral part of knife river's vertical integration strategy.

In summary, the fundamentals of our businesses are strong the federal state and local funding backdrop is at unprecedented levels in 2024, we anticipate price growth across all of our product lines as the demand continues to build at the same time, we anticipate volumes will be flat or slightly down as we maintain our disciplined approach to bidding and as we.

Continue to implement dynamic pricing to improve margins.

Brian Gray: Our mid-sized market locations in Texas are positioned within that triangle and stand to benefit from this strong growth. And finally, onto our new segment, Energy Services. Our liquid asphalt business has been a solid, profitable contributor for us since we purchased it 19 years ago. EBITDA margins at Energy Services have been accretive to Knife River's overall consolidated margins in 18 out of those 19 years.

We had a remarkable year in 2023, we became an independent company, we achieved record financial results and we've implemented a strategy to continue delivering long term profitable growth at knife River, we win as a team and I would like to thank our entire team for what we accomplished together in 2023 I'm also excited about what we have ahead of us. Thank you for your continued.

Interest in knife River I'll now turn the call over to Nathan for his remarks Nathan.

Thank you, Brian and good afternoon, everyone I'll begin my remarks with a review of our product line performance followed by an update on our balance sheet and capital allocation priorities and conclude with our 2024 financial guidance.

Brian Gray: We had exceptionally strong financial results at Energy Services in 2023, benefiting from historic price-cost dynamics across our markets and a longer-than-expected paving season. We had record revenue of $292 million for the year and record EBITDA of $78 million in 2024. We anticipate another strong year from our energy services, well above its historical average, but not at the all-time records we saw in 2023. The state DOT is in a market where we provide liquid asphalt or continue to invest in their roads. For context, about 94% of the nation's paid roads are paved with asphalt.

As Brian mentioned, our fourth quarter results were a strong finish to a record year, we achieved record revenue for the quarter of $647 million.

Up 20% from 2022.

Quarterly revenue also increased across all product lines compared to the prior year benefiting from strong market demand a longer construction season in the first stages of our competitive edge initiatives on.

On a full year basis, we reported record revenue of $2 8 billion.

An increase of 12% from the prior year.

Underpinning this revenue improvement was our continued pricing momentum in our product lines average selling prices increased across all product lines for the year, including 11, 5% for aggregates 12, 3% for ready mix and 13, 6% for asphalt.

Brian Gray: Energy service has been and will continue to be an integral part of Knife River's vertical integration strategy. In summary, the fundamentals of our businesses are strong. The federal, state, and local funding backdrop is at unprecedented levels.

Although volumes have declined for the year in these product lines, our strategic focus on quality over quantity was exemplified with prices more than offsetting volume declines.

Brian Gray: In 2024, we anticipate price growth across all of our product lines as demand continues to build. At the same time, we anticipate volumes will be flat or slightly down as we maintain our disciplined approach to bidding and as we continue to implement dynamic pricing to improve margins. We had a remarkable year in 2023. We became an independent company, we achieved record financial results, and we implemented a strategy to continue delivering long-term profitable growth. At Knife River, we win as a team.

Given these price and volume conditions as well as productivity gains the material product line saw a considerable improvement in gross margin for the year aggregates were up 600 basis points to 20% gross margin ready mix was up 140 basis points and asphalt 380 basis points.

Within contracting services margins improved 300 basis points during the year.

Our disciplined pricing and bidding strategy helps ensure that we capture the value of the materials and services. We provide this strategy combined with solid execution was successful, culminating in consolidated gross margin improvement of 480 basis points for the year. We believe this strategy will continue to positively impact.

Brian Gray: And I would like to thank our entire team for what we accomplished together in 2023. I'm also excited about what we have ahead of us. Thank you for your continued interest in Knife River. I'll now turn the call over to Nathan for his remarks.

Nathan Ring: Thank you, Brian, and good afternoon, everyone. I'll begin my remarks with a review of our product line performance, followed by an update on our balance sheet and capital allocation priorities, and conclude with our 2024 financial guide. As Brian mentioned, our fourth quarter results were a strong finish to a record year. We achieved record revenue for the quarter of $647 million, up 20% from 2022. Quarterly revenue also increased across all product lines compared to the prior year, benefiting from strong market demand, a longer construction season, and the first stages of our competitive edge initiative. On a full year basis, we reported record revenue of $2.8 billion, an increase of 12% from the prior year. Underpinning this revenue improvement was our continued pricing momentum in our products. Average selling prices increased across all product lines for the year, including 11.5% for aggregate, 12.3% for ready mix, and 13.6% for acid.

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For the quarter, our contracting services backlog of $662 million was down from the prior year as expected, while dot's funding and Lettings activity remained strong across our footprint, we've adopted a more disciplined bidding strategy to prioritize our gross margin over the volume of projects.

As a result of this bidding strategy the margin profile of our existing backlog is higher than it was at the end of 2022.

Furthermore, about 90% of our backlog is a diverse base of lower risk short duration work valued at less than $5 million per project.

Our competitive edge initiatives, while in the early stages have set the groundwork for knife river to maximize the value of our products and services, while optimizing the utilization of our resources.

Generating profitable and sustainable growth for our shareholders.

As Brian referenced one of the core pillars of our edge strategy involves operational and financial discipline.

That includes maintaining a strong balance sheet as well as a returns focused approach to capital allocation.

In 2023, we generated $336 million of cash from operations of $128 million improvement year over year.

Total free cash flow, which we calculate as operating cash flow less total capital expenditures plus proceeds from asset sales was more than $220 million in 2023, an increase of more than $167 million from 2022, representing free cash conversion as a percent of net income of 100.

Nathan Ring: Although volumes declined for the year in these product lines, our strategic focus on quality over quantity was exemplified with prices more than offsetting volume. Given these price and volume conditions, as well as productivity gains, the material product line saw a considerable improvement in gross margin for the year. Aggregates were up 600 basis points to 20% gross margin. ReadyMix was up 140 basis points, and Asphalt was up 380 basis points. Within contracting services, margins improved 300 basis points during the year. Our disciplined pricing and bidding strategy helps ensure that we capture the value of the materials and services we provide. This strategy, combined with solid execution, was successful, culminating in a consolidated gross margin improvement of 480 basis points for the year.

20%.

Furthermore, we ended 2023 with $219 million of available cash and $329 million of available capacity under our revolving credit facility.

We believe our strong free cash generation together with our nearly $550 million of cash and liquidity position is to reinvest within our existing operations as well as pursue strategic acquisitions.

While our business development pipeline remains active we intend to stay disciplined in our approach to capital allocation, ensuring that we pursue high quality assets to support our growth strategy.

In 2023, our capital expenditures totaled $124 million, the bulk of which was allocated to upgrade our inquiries fleet and facilities, we reduced our ratio of net debt to adjusted EBITDA to one one times at year end 2023.

Nathan Ring: We believe this strategy will continue to positively impact future. For the quarter, our contracting services backlog of $662 million was down from the prior year, as expected. While DOT funding and lettings activity remain strong across our footprint, we've adopted a more disciplined bidding strategy to prioritize our gross margin over the volume of projects. As a result of this bidding strategy, the margin profile of our existing backlog is higher than it was at the end of 2022. Furthermore, about 90% of our backlog is a diverse base of lower-risk, short-duration work valued at less than $5 million per project.

And we remain committed to our long term annualized goal of approximately two five times net leverage providing knife river at the balance sheet flexibility to support our organic and inorganic growth objectives.

Our capital allocation strategy will remain returns focused.

2023 was a record year, one in which we exceeded our financial guidance and as we look to 2024, we see continued pathways towards adjusted EBITDA growth and margin expansion to date, we are introducing financial guidance for the full year 2024.

Nathan Ring: Our competitive edge initiatives, while in the early stages, have set the groundwork for Knife River to maximize the value of our products and services while optimizing the utilization of our resources, generating profitable and sustainable growth for our shareholders. As Brian referenced, one of the core pillars of our EDGE strategy involves operational and financial disability. That includes maintaining a strong balance sheet as well as a returns-focused approach to capital allocation. In 2023, we generated $336 million of cash from operations, a $128 million improvement year over year. Total free cash flow, which we calculate as operating cash flow, less total capital expenditures, plus proceeds from asset sales, was more than $220 million in 2023, an increase of more than $167 million from 2022, representing free cash conversion as a percent of net income of 120%. Furthermore, we ended 2023 with $219 million of available cash and $329 million of available capacity under our revolving credit facility.

Our guidance includes the following assumptions and.

In 2024, we anticipate average selling prices for our product lines to improve mid to high single digits. While volumes are expected to be flat to down low single digits when compared to 2023.

Furthermore, we expect our process improvement team initiatives will continue to identify operational efficiencies and improvements across the organization as outlined within our <unk> strategy.

In addition to the consolidated financial guidance, we are providing we have begun to report EBITA guidance specific to the energy services segment as Brian mentioned <unk>.

Given the visibility we have into this product line segment, we wanted to provide additional clarity and transparency to our investors.

To that end for the full year 2024, we are providing the following financial guidance.

Total revenue of between $2 75 billion and $2 $95 billion.

Consolidated adjusted EBITDA of between $425 million and $475 million.

Adjusted EBITDA for our geographic segments, including corporate services of between 375 and $415 million.

Nathan Ring: We believe our strong free cash generation, together with our nearly $550 million of cash and liquidity, positions us to reinvest within our existing operations as well as pursue strategic acquisitions. While our business development pipeline remains active, we intend to stay disciplined in our approach to capital allocation, ensuring that we pursue high-quality assets that support our growth strategy. In 2023, our capital expenditures totaled $124 million, the bulk of which was allocated to upgrade our quarries, fleet, and facilities. We reduced our ratio of net debt to adjusted EBITDA to 1.1 times at year-end 2023, and we remain committed to a long-term annualized goal of approximately 2.5 times net load, providing Knife River with the balance sheet flexibility to support our organic and inorganic growth objectives.

At entities services, adjusted EBITDA of 50 million to $60 million.

And lastly, we expect total capital expenditures of between 5% and 7% of revenue excluding any potential future acquisitions.

As you can see by the midpoint of our guidance, we expect to see continued margin expansion and EBITDA growth.

At our geographic segments, the 2024 midpoint for adjusted EBITDA is $395 million.

Which is 11, 5% above 2023.

In summary, we are pleased with our record results from 2023, our markets and business fundamentals are strong and we will continue to focus on commercial excellence operational execution and disciplined capital allocation as we build momentum into 2024. We are excited about the year ahead with that I'd like to open the call for.

Nathan Ring: Our capital allocation strategy will remain returns. 2023 was a record year, one in which we exceeded our financial guidance. And as we look to 2024, we see continued pathways towards adjusted EBITDA growth and margin expansion. Today, we are introducing financial guidance for the full year 2024. Our guidance includes the following. In 2024, we anticipate average selling prices for our product to improve mid to high single digits, while volumes are expected to be flat to down low single digits when compared to 2023. Furthermore, we expect our process improvement team initiatives will continue to identify operational efficiencies and improvements across the organization, as outlined in our EDGE strategy.

Questions.

Thank you and ladies and gentlemen, we will now begin the question and answer session should you have a question. Please press the star followed by the number one on your telephone keypad.

You will hear from acknowledging your request and there are questions will be pulled into or J D. LLC.

Have you reached a decline from the polling process. Please press the star followed by then and thank you and if you're using a speaker phone. Please keep your handset before pressing on LTE.

Please for your first question.

And your first question comes from the line of Sherri, It's al Tobias <unk> from Bank of America. Your line is open.

Hi, good afternoon, and congratulations on a great quarter.

Nathan Ring: In addition to the consolidated financial guidance we are providing, we have begun to report EBITDA guidance specific to the energy services segment, as Brian mentioned. Given the visibility we have into this product line segment, we wanted to provide additional clarity and transparency to our investors. To that end, for the full year 2024, we are providing the following financial guidance: total revenue of between $2.75 billion and $2.95 billion, consolidated adjusted EBITDA of between $425 million and $475 million, adjusted EBITDA for our geographic segments, including corporate services, of between $375 and $415 million, and Energy Services adjusted EBITDA of $50 million to $60 million.

I was just wondering if you could give us a sense of seasonality over the course of 2024.

It seems like Q4 came in with maybe a bit of.

Ended period due to better weather and how should we think about Q1 sequentially and then just the cadence through 2024 and more broadly.

Yes, we did have a link then just got a construction season in the fourth quarter, we had very favorable weather.

Last year, we are a seasonal company, we have a northern footprint and so we do slowdown obviously in the first quarter the fourth quarter. The first quarter, we typically have somewhere in that 10% of our revenue.

Second and third quarter is about two thirds of our business comes in that second and third quarter, and then fourth quarter again somewhere in that 20% to 25% of our revenue and so that's kind of the seasonality of our footprint.

Understood and you mentioned your expectation for pricing.

Nathan Ring: And lastly, we expect total capital expenditures of between 5% and 7% of revenue, excluding any potential future accidents, as you can see by the midpoints of our guidance. We expect to see continued margin expansion and EBITDA growth. For our geographic segments, the 2024 midpoint for adjusted EBITDA is $395 million, which is 11.5% above 2023.

What kind of cost inflation are you seeing.

Yes.

Produce that mid single to high single digit for prices on those core products and last year, we had cost of goods on our materials side of the business around 5% and so we're kind of projecting that seeing mid single digit price of their costs for this upcoming year.

Thank you.

And your next question comes from the line of Garik <unk> from loop capital. Your line is open.

Operator: In summary, we are pleased with our record results for 2023. Our markets and business fundamentals are strong, and we will continue to focus on commercial excellence, operational execution, and disciplined capital allocation as we build momentum into 2024. We are excited about the year ahead. With that, I'd like to open the call to questions. Thank you, and ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press the star followed by the number 1 on your telephone keypad. You will hear a three-tone prompt acknowledging your request, and your questions will be polled in the order they are received. Should you wish to decline the polling process, please press the star followed by the number 2. And if you are using a speakerphone, please lift the handset before pressing any keys.

Oh, hi, Thanks for taking my question.

You talked about refocusing on to the acquisition pipeline in 2024 I was wondering if you could speak to some of the opportunities that are in front of you in that regard and also with respect to your balance sheet.

Even that the net leverage is at one one times well below your target range.

Any other thoughts on.

Essentially tapping into the balance sheet to help drive further acquisitions.

Yeah, Greg I'll talk about the pipeline and kind of our strategy for M&A and then I'll turn it over to Nathan to answer the the balance sheet and so we have a lot of opportunities in the pipeline and we're going to continue to stay disciplined in our approach we definitely look for aggregates based companies in those mid size high growth markets.

Built this company at knife River on over 80 acquisitions in a majority of those a lot of those are those bolt on operations in that $10 million to $30 million range. We will absolutely look for platform operations. We've got some that we're looking at now so we're not afraid to go out and do a larger acquisition, but we certainly are focused in those markets that we're already in.

Operator: One moment, please for your first question. And your first question comes from the line of Sherif El Sabahi from Bank of America. Your line is open. Hi, good afternoon, and congratulations on a great quarter. Thank you.

Nathan Ring: I was just wondering if you could give us a sense of seasonality. Yeah, we did have a lengthened construction season in the fourth quarter. We had very favorable weather conditions in the last year. We are a seasonal company. We have a northern footprint. And so we do slow down, obviously, in the first and fourth quarters.

Looking for those aggregates based materials driven operations that support our vertical integration model.

Those opportunities are out there we drive that.

Kind of the acquisition process really from our regional level with.

Corporate.

Programming that we can kind of monitor at the corporate level, we help build the models and assist the regions with their due diligence and integration, but it really is a regional driven M&A acquisition.

Nathan Ring: The first quarter, we typically have somewhere in that 10 percent of our revenue. The second and third quarter is about two-thirds of our business comes in that second and third quarter. And then the fourth quarter, again, is somewhere in that 20, 25 percent of our revenue. So that's kind of the seasonality of our footprint, understood. And you mentioned your expectation for pricing. What kind of cost inflation?

Our strategy, so with that I'll, just turn it over to Nathan and maybe touch on the balance sheet.

Good afternoon, Gary Thanks for the question you talked a bit about tapping into the balance sheet and our capital. That's available I think first of all would be helpful. Just to look back at the cash that we have available and the revolver capacity those are two important.

Points that we'll look at to fund our acquisitions. So first from just a cash flow standpoint, as we looked at the performance. We had this year, which was outstanding our adjusted EBITDA grew $119 million and a lot of that translated to our improvement in cash flows from operations right from the cash flow statement of $128 million.

Nathan Ring: Yeah, we introduced that mid single to high single digit price for those core products. And last year, we had cost of goods on our material side of the business around 5%. And so we're kind of projecting that same mid single digit price or cost for this upcoming year. And your next question comes from the line of Garrett Schmoys from Loop Capital. Your line is open.

We've been diligent about our balance sheet in fact, our working capital as a percent of revenue decreased year over year and our cash flow conversion.

Operator: Oh, hi, thanks for taking my question. Um, you talked about refocusing on the acquisition pipeline in 2024. I was wondering if you could speak to some of the opportunities that are in front of you in that regard.

Improved to 120%. So all that said the balance sheet has about $220 million of available available cash and our revolver capacity is about at $330 million, so $550 million on the balance sheet to tap as I guess, you said to pursue these bolt on and larger acquisitions as well as.

Brian Gray: And also with respect to your balance sheet, you know, given that the net leverage is at 1.1 times, it's well below your, your target range. Any updated thoughts on, uh, potentially, tapping into the balance to help drive further equity? Yeah, Greg, I'll talk about the pipeline and kind of our strategy for M&A, and then I'll turn it over to Nathan to answer the balance sheet. And so we have a lot of opportunities in the pipeline, and we're going to continue to stay disciplined in our approach. We definitely look for aggregates-based companies in those mid-size, high-growth markets. We built this company at Knife River on over 80 acquisitions, and a majority of those, a lot of those are those bolt-on operations in that $10 million to $30 million range.

Organic growth, that's something that we've been successful with in the past as well.

We've done a number of aggregates sites that we are growing as well as maintaining our fleet and so I think it sort of it is we've got a strong balance sheet to support that we will continue to be disciplined as Brian said and how we pursue these acquisitions, but well ready to get the job done.

Great I appreciate that and then just looking at the EBITDA margin expansion that you expect.

This year, you talked to the volume and pricing outlook can you talk a little bit.

Around cost inflation I'm, just curious just around the.

<unk> edge initiatives pit crews.

Brian Gray: We will absolutely look for platform operations. We've got some that we're looking at now, so we're not afraid to go out and do a larger acquisition. But we certainly are focused on those markets that we're already in and looking for those aggregates-based, materials-driven operations that support our vertical integration model. Those opportunities are out there.

Things of that nature that are relatively newly implemented any any sense as to how much of the margin expansion could be.

Up to some of the.

New company specific cost initiatives.

Yes, I think there is definitely that self help opportunities Gary with our edge and I can tell you that the regions are leaning in hard on that and one of the reasons why we.

Nathan Ring: We drive that kind of acquisition process really from our regional level with corporate programming that we can kind of monitor at the corporate level. We help build the models and assist the regions with their due diligence and integration, but it really is a regional-driven M&A acquisition strategy. So with that, I'll just turn it over to Nathan and maybe touch on the balance sheet. Yeah, good afternoon, Garrett.

<unk> hit our 15% EBITDA margins two years earlier, we had that said that that goal at our May investor day to hit 15% by 2025, we rolled out the edge initiatives early in the year, we started talking about dynamic pricing, but we really haven't not implemented dynamic pricing until the beginning of this year and we're still that's a that's a process that will take several.

Years of fully implemented throughout the regions, we deployed our pit crews the process improvement teams and that's really a group of internal experts by product line and an external experts they go out and spend a week at an individual facility and it really just dissect every aspect of that operation and so we've seen some real big wins.

Nathan Ring: Thanks for the question. You talked a bit about tapping into the balance sheet and our capital that's available. I think, first, it'll be helpful just to look back at the cash that we have available and the revolver capacity. Those are two important points that we'll look at to fund our acquisitions. So first, from just a cash flow standpoint, we looked at the performance we had this year, which was outstanding. I mean, our adjusted EBITDA grew $119 million, and a lot of that translated to our improvement in cash flows from operations right from the cash flow statement of $128 million. We've been diligent about our balance sheet. In fact, our working capital as a percent of revenue decreased year-over-year, and our cash flow conversion improved to 120. So all that said, the balance sheet has about $220 million of available cash, and our revolver capacity is about 330 million.

In fact, such under demand that we've had to double the size of that team. So we can deploy it even more at more locations in upcoming years. So yes, we have lots of self help.

When it comes to the edge strategy and Thats built into our.

Our projections for our guidance.

On EBITDA. So we're excited that we can grow we look at.

Our growth rate in those geographic locations, the northwest specific mountain and central regions. That's 11, 5% growth over last year and so we've got the mid to high digit price increases controlling those costs flat to slightly down volumes, but so.

Nathan Ring: So $550 million on the balance sheet to tap, as I guess you said, to pursue these bolt-on and larger acquisitions as well as organic growth. That's something that we've been successful with in the past as well. We've done a number of aggregate sites that we've grown as well as maintaining our, And so I think the short of it is we've got a strong balance sheet to support that will continue to be disciplined, as Brian said, in how we pursue these acquisitions, but well ready to get the job done. Great, I appreciate that.

Definitely some of that self help is going to help us achieve that 11, 5% year over year growth.

Understood well, thanks for that I'll pass it on.

Okay.

Thank you and your next question comes from the line of Brent Thielman from D. A Davidson your line is open.

Alright, Thanks, Scott good morning.

I guess, Brian or Nathan.

Brian Gray: And then just looking at the EBITDA margin expansion that you expect this year, you need to talk about the volume and pricing outlook, you talked a little bit about cost inflation. I'm just curious about, you know, the edge initiatives, Picruz, you know, things of that nature that are relatively newly implemented. Any sense as to, you know, how much of the margin expansion could be chalked up to some of the, you know, new company-specific cost initiatives? Yeah, I think there's definitely self-help opportunities, Garrick, with our EDGE, and I can tell you that the regions are leaning in hard on that. Hence, one of the reasons why we hit our 15% EBITDA margins two years earlier. We had that goal at our May Investor Day to hit 15% by 2025. We rolled out the EDGE initiatives early in the year. We started talking about dynamic pricing, but we really have not implemented dynamic pricing until the beginning of this year, and we're still in the process that will take several years to fully implement throughout the regions.

When do you anticipate seeing sort of more of the positive impacts of the dynamic pricing strategy sort of hit the P&L.

I know these things take time and a calculated bet.

I guess the question is when might we on the outside sort of be able to better recognize the impact of that.

Yes, Brent.

We've been doing dynamic pricing in the northwest region for seven years eight years were not fully implemented even in the northwest region, but I'd say that we're in that seventh to eighth inning.

When it comes to dynamic pricing we brought.

Over 100 of our sales managers and executives from around all of the different regions to the training center back in November and had a three day seminar class summit on dynamic pricing in commercial excellence and so we are in the process of doing that right now.

Did not send out.

The number of annual increase letters.

These letters have different language in them that we're the ones that went out there to really give us the opportunity to bid work.

Brian Gray: We deployed our pit crews, the process improvement teams, and that's really a group of internal experts by product line and then external experts. They go out and spend a week at an individual facility and really just dissect every aspect of that operation, and so we've seen some really big wins. In fact, it's so under demand that we've had to double the size of that team so we can deploy it at more locations in the upcoming year. So yeah, we have lots of self-help when it comes to the EDGE strategy, and that's built into our projections for our guidance on EBITDA. So we're excited that we can grow. When we look at our growth rate in those geographic locations, the Northwest, Pacific Mountain, and Central regions, that's 11.5% growth over last year, and so we've got the mid to high-digit price increases controlling those costs, flat to slightly down volumes, but so it's definitely some of that self-help is going to help us achieve that 11.5% year-over-year growth. Understood. Thanks for that. I'll pass it on.

In real time, and so again the dynamic pricing is the opportunity for our customers call us for aggregates ready mix and asphalt on the individual projects allow us to look at our proximity of our locations to their job sites.

Look at our backlog to look at our current cost inputs and really maximize optimize that price that goes out on that job. So that's where dynamic pricing is all about we're in the process of rolling that out and all of the regions right now but.

Early in the first or second innings of that that rollout of the dynamic pricing youll see that.

Baked into some of our.

Increases for this year, so you'll see you'll begin to see some of those benefits this year.

Okay.

And then.

How should we interpret the decline in backlog I mean, I know you're being much more selective on what youre pursuing.

In the 14, 5% gross margin in contracting services is pretty notable here in the fourth quarter.

Operator: Thank you. And your next question comes from the line of Brent Thielman from BA Davidson. Your line is open. Hey, thanks, good morning.

Is that what is that the type of margin you are starting to see come through on that.

Brian Gray: I guess Brian or Nathan, when do you anticipate seeing sort of more of the positive impacts of the dynamic pricing strategy sort of hit the P&L? I know these things sort of take time, and they're calculated. But I guess the question is kind of when might we on the outside sort of be able to better recognize the impact?

Booking was that an anomaly this quarter.

Just curious around all of those things around backlog.

Yes, I think you should look at that.

Our full year Brent to get a good feel we closeout jobs in the fourth quarter and so I think looking at the 11, 4% that we had for the full year.

Brian Gray: Yeah, Brent, we've been doing dynamic pricing in the Northwest region for seven, eight years. We're not fully implemented even in the Northwest region, but I'd say that we're in that seventh or eighth inning when it comes to dynamic pricing. We brought over a hundred of our sales managers and executives from around all of the different regions to the training center back in November and had a three-day seminar class summit on dynamic pricing and commercial excellence. And so we are in the process of doing that right now. You know, we did not send out nearly the number of annual increase letters.

Is probably something you could look at.

I'd say that the how do you look at our lower backlog is intentional and I think that we have.

<unk> been very disciplined and taken a different strategic approach to how we take on work and really taken on.

Higher quality work instead of quantity and we had seven consecutive quarters of record backlog.

And that was that some lower margins that did not fit our edge strategy and so that's one way you can look at our lower backlog as it's very intentional. It's very calculated we are targeting projects and customers that fit.

Brian Gray: The increase letters have different language in them than the ones that went out there to really give us the opportunity to bid on work in real time. And so again, dynamic pricing is the opportunity for us to have our customers call us for aggregates, ready mix, and asphalt on their individual projects, and allow us to look at the proximity of our locations to their job sites, to look at our backlog, to look at our current cost inputs, and really maximize, optimize that price that goes out on that job. So that's what dynamic pricing is all about. We're in the process of rolling that out in all the regions right now, but we're really in the first or second innings of that rollout of dynamic pricing.

Us to pull through higher margin upstream materials.

And the other thing to say is that we had $50 million of additional revenue in the fourth quarter from contracting from that favorable weather and so that's definitely had an impact on our year.

Year end backlog, but I would tell you is it's opened up more capacity for us to go out and pursue some of those higher margin projects and the good news for US is the states that we operate in we've got 16% larger dot budgets, so the tailwind and infrastructure funding at the state local and federal level really allows us to be more selective on the type of work that we do.

Brian Gray: You'll see that's baked into some of our, you know, increases for this year. So you'll begin to see some of those benefits this year. Okay.

Brian Gray: And then, Brian, how should we interpret the decline in backlog? I mean, I know you're being much more selective on what you're pursuing, but the 14.5% gross margin in contracting services is pretty notable here in the fourth quarter. Is that the type of margin you're starting to see come through on the work you're booking? Was that an anomaly this quarter? Just curious about all that.

Alright, great. Thank you.

Yep.

And your next question comes from the line of Young Zaffino Oppenheimer. Your line is open.

Yes.

Angel.

Alright, and your next question comes from the line of Michael Goose. This Tom Vishal Research. Your line is open.

Brian Gray: Yeah, I think you should look at that over a full year, Brent, to get a good feel. We close out jobs in the fourth quarter, and so I think, you know, looking at the 11.4% that we had for the full year is probably something you could look at. I would say that the, you know, how you look at our lower backlog is intentional, and I think that we have been very disciplined and taken a different strategic approach to how we take on work and really taken on higher quality work instead of quantity. And we had seven consecutive quarters of record backlog, but, you know, that was at some lower margins that did not fit our edge strategy. And so that's one way you can look at our lower backlog: it's very intentional. It's very calculated.

Good afternoon Nathan.

Hey, Michael.

So following up on the discussion on competition and discipline.

Sure like maybe on a regional basis, given the exposure you have to the public markets and also the competition that might be occurring because of all the activity on the <unk>.

Construction site, which areas seem to be more contributed contributory towards the growth outlook, you look looking at which ones.

Okay.

A little bit slower in that front.

And as the market can you talk about disciplined on bidding on your contracting but also on the site.

As the volumes of work opportunities increasing at a much greater rate than you've witnessed the last six to 12 months is there a lot more opportunities to bid and gives you a better chance to be selected.

Brian Gray: We are targeting projects and customers that fit us to pull through higher-margin upstream materials. And the other thing I'd say is that, you know, we had $50 million of additional revenue in the fourth quarter from contracting due to that favorable weather, and so that's definitely had an impact on our, you know, year-end backlog. What I'd tell you is that it's opened up more capacity for us to go out and pursue some of those higher-margin projects, and the good news for us is that in the states that we operate in, we've got 16% larger DOT budgets. So the tailwinds in infrastructure funding at the state, local, and federal level really allow us to be more selective in the type of work that we do. Thank you.

Yes, I will take that and I'll start with a volume question is yes. There is it's I'll tell you it's been a little bit Michael is a little bit slow to let this year and I think that the extended season for us in the fourth quarter was also extended seasons for the Dod.

So I would say that they were out inspecting work being built instead about designing a getting it let and so I think part of it again, our lower backlog is a timing issue, but what we see in the horizon and the pipeline in our bid schedules is strong and so the volume of work is just not dollars because of inflation. There is more work to go out and bid and again.

Operator: Yep. And your next question comes from the line of Ian Zaffino from Oppenheimer. Your line is open. Ian Zaffino, your line is open.

Operator: All right, and your next question comes from the line at Michael Dubis from Vertical Research. Your line is open. Good afternoon, Nathan, Brian, and Michael.

That really does allow us to look at how can we maximize optimize.

The upstream materials and when we bid work, we don't just bid as a prime contractor, we're going to try to get as many bites of the Apple as we possibly can to get work and so we may be in one of those jobs as a prime contractor, we certainly would bid as a subcontractor and will absolutely always but it is a material supplier and so we're going to try.

Brian Gray: So following up on the discussion on competition and discipline, share like maybe on a regional basis given the exposure you have to public markets and also the competition that might be occurring because of all the activity on the construction side. Which areas seem to be more contributing? at www.kniferiver.com, are the volumes of work opportunities increasing at a much greater rate than you've been with us for the last six to 12 months? Are there a lot more opportunities to bid, and does that give you a better chance to be selected? Yeah, I will take that. And I'll start with the volume question: yeah, there is, it's, I'll tell you, it's been a little bit, Michael's been a little bit slow to release this year. And I think that the extended season for us in the fourth quarter was also an extended season for the DOTs.

It gives many bites of the Apple as we can as far as the markets I would say that it's early in the season and I would say, it's not that different than it has been in the past to bid federal State Highway work.

There is some nuances that go into that that you've got to know what youre doing and you just don't jump from the private market to the public markets.

Brian Gray: And so I would say that they were out inspecting work being built instead of out designing and getting it let. And so I think part of, again, our lower backlog is a timing issue. But what we see in the horizons in the pipeline and our bid schedules is strong. And so the volume of work is just not dollars because of inflation; there is more work to go out and bid.

So we see the same kind of the typical bidders.

And each region each state each bid.

We will range in the number of bidders on that early in the year.

Obviously see more bidders and we are in the early parts of the bidding season right now and that typically is where you see some of the lower margin work that goes out as well and so we're going to be patient or to be disciplined and we will get the amount of work that we need to be successful in 2024.

Brian Gray: And again, that really does allow us to look at how we can maximize optimize the upstream materials. And, you know, when we bid work, we don't just bid it as a prime contractor. We're going to try to get as many bites of that apple as we possibly can to get work.

Good answer Brian and then my follow up would be.

Brian Gray: And so we may bid on one of those DOT jobs as a prime contractor. We certainly would bid on it as a subcontractor. And we'll absolutely always bid it as a material supplier. And so we're going to try to get as many bites of that apple as we can. As far as the markets are concerned, I would say that it's early in the season, and I would say it's not that different than it has been in the past. To bid on federal, state, and highway work, there are some nuances that go into that. You've got to know what you're doing.

Back to the acquisition discussion.

<unk>.

As you are targeting what's called the bolt on once as opposed to platform enhancing.

Is there a focus on leveraging your contracting business with materials to visit or <unk>.

Bolt ons appropriate if the returns are there and the market's there for.

Just selling the material as opposed to not having a downstream, which which do you lean towards the reserve difference and which ones you would rather focus on is <unk>.

Brian Gray: And so we see the same, the typical bidders. And each region, each state, each bid will range in the number of bidders on that. Early in the year, we obviously see more bidders. And we are in the early parts of the bidding season right now.

Execute this plan over the next couple of years.

Yes, so we're going to absolutely focus on aggregates led companies in.

We may because it is a bolt on we may have a local pit to where we go out and look at one of those downstream products or contracting services.

Brian Gray: And that typically is where you're going to see some of the lower-margin work that goes out as well. And so we're going to be patient. We're going to be disciplined. And we will get the amount of work that we need to be successful in 2024. That's a good answer, Brian.

We're able to sell more of our rocks somewhere else and so.

We would go out and do a pure play downstream acquisition, if we had a core that can supply that.

Brian Gray: And my follow-up would be back to the acquisition discussion. As you're targeting what's called the bolt-on ones, as opposed to platform-enhancing ones, is there a focus on leveraging your contracting business with materials to visit? Or if the bolt-ons are pertinent, if the returns are there, and the market's there for just selling the material, as opposed to not having a downstream, which do you lean towards? Or is there a difference?

Typically the synergies that we get from bolting on those operations, obviously all of the back office functions, we get immediate.

Synergies on but we also we can move jobs around and customers around and we may be delivering to a project that was at a 2030 minute disadvantaged from the pit that we just purchased and so a lot of times because the cost of delivering these materials, whether that's asphalt ready mix aggregates is a bulk is a large part of getting and be.

Brian Gray: And which ones would you rather focus on as you're... Executing this plan over the next couple years? Yeah, so we're going to absolutely focus on aggregates-led companies. And, you know, we may, because it's a bolt-on, we may have a local pit where we go out and look at one of those downstream products or contracting services if we were able to sell more of our rocks somewhere else. And so we would go out and do a pure-play downstream acquisition if we had a quarry that could supply that.

Competitive and getting work that's one of the big opportunities that we have when we do these bolt ons. So we also.

Frankly, we have a lot of internal expertise when it comes to our technical resources team and we're very effective at going into a site that may be nearing depletion and meet with the local regulators and take our technical services team to be able to expand those reserves. So there is a number of different strategic opportunities for us that's one of the reasons we.

Brian Gray: You know, typically, the synergies that we get from bolting on those operations, obviously all the back-office functions we get immediate synergies on. But we also, you know, we can move jobs around and customers around, and we may be delivering to a project that was at a 20, 30-minute disadvantage from the pit that we just purchased. And so a lot of times because the cost of delivering these materials, whether that's asphalt ready mix or aggregates, in bulk, is a large part of getting and being competitive and getting work.

Really do target those bolt on operations again, we're not afraid of platform operations, we've done platform operations in the past and we certainly will do them again.

Very helpful. Thank you Mike.

Thank you and once again, if you would like to ask a question. Please press star followed by the number one on your telephone keypad.

Your next question comes from the line of Ian Zaffino from Oppenheimer. Your line is open.

Brian Gray: You know, that's one of the big opportunities that we have when we do these bolt-ons. So we also, you know, frankly, we have a lot of internal expertise when it comes to our technical resources team. And we're very effective at going into a site that may be nearing depletion and meeting with the local regulators and taking our technical services team and being able to expand those reserves. So there are a number of different strategic opportunities for us, and that's one of the reasons we really do target those bolt-on operations. Again, we're not afraid of platform operations. We've done platform operations in the past, and we certainly would do them again, or you can help. Thank you. And once again, if you would like to ask a question, simply press star followed by the number one on your telephone keypad.

Okay, Great can you hear me now.

Yes, we can hear you.

Hi, sorry, I don't know what happened there.

As far as the aggregate mix and I guess this is maybe answer it a little bit, but when you think about expanding your aggregates mix.

How much is that going to come from M&A and then how much can come from just organic activity and.

What might that be and how you kind of get there. Thanks.

Yes, we are certainly focused as we are.

Target that 20% plus long term EBITDA margin is to grow that aggregate mix and we can do it both ways. We can do it organically we have the capacity.

At our sites to continue to sell more rock and be more competitive by.

Operator: Your next question comes from the line of Ian Zaffino from Oppenheimer. Your line is open. Okay, great. Can you hear me now?

Different delivery methods and so whether that's by rail by barge.

Have a large fleet of our own trucks, we can control that supply chain and be competitive and provide a service that our customers really want and so we can and we have been and we will continue to increase organically.

Brian Gray: Hey Ian, we can hear you. Alright, sorry, I didn't know what had happened there. You know, as far as the aggregates mix is concerned, and I guess this is maybe answered a little bit, but when you think about expanding your aggregates mix, how much is that going to come from M&A and then how much can come from, you know, just organic activity, and what might that be and how do you kind of get there? Yeah, we are certainly focused as we, you know, target that 20% plus long-term EBITDA margin to And we can do it both ways.

But yes, I think when you're selling $16 $17 time material.

You need a lot more of that to move that dial as we move that 16% of our total revenue in aggregate is up and so that will be through acquisitions, and so and as we grow our product mix and grow that revenue on aggregates it will be both organic and through acquisitions.

Brian Gray: We can do it organically. We have the capacity at our sites to continue to sell more rock and be more competitive by, you know, different delivery methods, whether that's by rail or by barge. We have a large fleet of our own trucks. We can control that supply chain and be competitive and provide a service that customers really want. And so we can, and we have, and we will continue to increase organically. But yes, I think, you know, when you're selling $16, $17 a ton of material, you need a lot more of that to move that dial as we move that 16% of our total revenue in aggregates up. And so that will be through acquisitions, and so, you know, Ian, as we grow our product mix and grow that revenue on aggregates, it will be both organic and through acquisitions. Okay, thanks. And then maybe a region that's kind of dear to you is the northwest, because continuously margins go up there. You know, what's going on here?

Okay. Thanks, and then maybe a week and thats kind of gear of the year.

From northwest continue to see margins go up there.

What's going on there and I guess my understanding is that.

The playbook that was implemented bar is what will be kind of implementing.

Our cost system wide, which then brings you to your margin expansion targets.

Given what youre seeing maybe.

Second even more confidence of hitting that 20% number or maybe even exceeding that 20% number. Thanks.

Yeah, absolutely and I think the roadmap of edge really did it came from the comfort of the framework around northwest region. So there's a couple of things we did in the northwest region.

They grew their aggregates.

Yes.

From 18% to 24% over a 10 year period, and so they certainly had more of their revenue geared towards aggregates and that was both organic and through acquisitions. So that helped we remained to be vertically integrated in the northwest region and so it's very important that we take those rocks and we saw.

Brian Gray: And I guess my understanding is that, you know, the playbook that was implemented there is what will be kind of implemented across system-wide, which then brings you to your margin extension targets. You know, given what you're seeing maybe there, that could be even more confidence in hitting that 20% number and then maybe even exceeding that 20% number. Yeah, absolutely. And I think the roadmap of EDGE really did come from the framework around the Northwest regions. So there's a couple of things we did in the Northwest region. They grew their aggregates from 18 to 24 percent over a 10-year period.

Approximately 40% of those to ourselves to make concrete and asphalt we take those materials. We go perform contracting services in the northwest region. We also do pre stressed which is also another mark.

Brian Gray: And so they certainly had more of their revenue geared towards aggregates, and that was both organic and through acquisitions. So that helped. I mean, we remain vertically integrated in the Northwest region. And so it's very important that we take those rocks, and we sell approximately 40 percent of them to ourselves to make concrete and asphalt.

Margin accretive opportunity for us. So it's we're committed to the vertical integration that model that we have in the northwest region is the same that we'll have in those other regions as well the.

The dynamic pricing they have been effective at doing that for the last eight years.

Brian Gray: We take those materials, we go perform contracting services. And in the Northwest region, we also do pre-stress, which is also another margin accretive opportunity for us. And so we're committed to vertical integration. That model that we have in the Northwest region is the same that we'll have in those other regions as well.

And I think that's had a lot to do with their success and then just the team that we've got in the northwest similar to all the teams we've got throughout.

All of the segments, we've got unbelievable talent and.

They are committed to margin expansion.

<unk> talked about it at meetings, we go through right now they are learning about it and they're all focused on that in that region is no different than the rest of our other regions. So we're going to get there there's multiple paths that we get to the top of the mountain for that 20%.

Brian Gray: The dynamic pricing, they have been effective at doing that for the last eight years, and I think that's had a lot to do with their success. And then just the team that we've got in the Northwest, similar to all the teams we've got throughout all of the segments, we've got unbelievable talent.

And it's not just <unk>.

Brian Gray: And they're committed to margin expansion. They talk about it at meetings we go to right now. They're learning about it. And they're all focused on that. And that region is no different than the rest of the region.

Doing exactly what the northwest region did but Thats certainly is that the framework of what we built the edge model around.

Okay. Thank you very much.

Thank you and there are no further questions at this time I would like to turn it back to Brian.

Brian Gray: And so I think that's a [inaudible] Okay, thank you very much. Thank you, and there are no further questions at this time. I would like to turn it back to Brian Gray, President and CEO, for closing remarks. Thank you. Well, thank you for joining us today. 2023 was a historic year for Knife River, from ringing the belt on the New York Stock Exchange on our first day of trading to delivering record results. I am very proud of the team that got us here, and it will help us continue to grow.

NGL for closing remarks.

Thank you well. Thank you for joining US today 2023 was a historic year for knife River from ringing the Bell at the New York Stock Exchange on our first day of trading to delivering record results I am very proud of the team that got us here and that will help us continue to grow our business is fundamentally strong and we are on and we are focused on delivering long term profitable growth for our investors.

We appreciate the interest and support and now I'll turn the call back over to the operator. Thank you.

Brian Gray: Our business is fundamentally strong, and we are focused on delivering long-term profitable growth for our investors. We appreciate the interest and support, and now I'll turn the call back over to the operator. Thank you. Thank you, presenters, and ladies and gentlemen. This concludes today's conference call. Thank you for participating. You may now disconnect, and more. I'm Sherif Abdul, and I'll see you next time. [inaudible]

Thank you presenters, ladies and gentlemen. This concludes today's conference call. Thank you for participating you may now disconnect.

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