Q2 2024 Knife River Corp Earnings Call
Speaker Change: Good morning, ladies and gentlemen, and welcome to the Knife River Corporation Second Quarter Results Conference Call. At this time, all lines are in listen-only mode. Following the presentation, we will conduct a question-and-answer session.
Operator: Corporation's second quarter results conference call. At this time, all lines are in the listen-only mode.
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. Also, please note that this call is being recorded on Tuesday, August 6, 2024. I would now like to turn the conference over to Nathan Ring. Please go ahead, sir.
Speaker Change: If at any time during this call you require immediate assistance, please press star zero for the operator. Also note that this call is being recorded on Tuesday, August 6, 2024. I would now like to turn the conference over to Nathan Ring. Please go ahead, sir.
Nathan Ring: Thank you, Operator, and welcome to everyone joining us for the Knife River Corporation's second quarter results conference. My name is Nathan Ring, Chief Financial Officer of Knife River, and I'm joined by our President and Chief Executive Officer, Brian Gray.
Nathan Ring: Thank you, operator, and welcome to everyone joining us for the Knife River Corporation second quarter results conference call.
Nathan Ring: My name is Nathan Ring, Chief Financial Officer of Knife River, and I'm joined by our President and Chief Executive Officer, Brian Gray.
Nathan Ring: Today's discussion will contain forward-looking statements about future operational and financial expectations. After results may differ significantly from those projected in today's forward-looking statement, 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 our website and the SEC website. Accept as required by law, we undertake no obligation to update our forward-looking statement. 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 GAP measure in the appendix to today's presentation.
Nathan Ring: Today's discussion will contain forward-looking statements about future operational and financial expectations. After results may differ significantly from those projected in today's forward-looking statements.
Nathan Ring: 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 our website and the SEC website.
Nathan Ring: Accept as required by law, we undertake no obligation to update our forward-looking statements.
Nathan Ring: During this presentation, we will make references to certain non-GAAP information.
Nathan Ring: These non- GAAP measures are defined and reconciled to the most directly comparable gap measure in the appendix to today's presentation. These materials are also available on our website.
Nathan Ring: These materials are also available on our website. Brian Gray will begin today's call with a high-level overview of our second quarter 2024 results, followed by an update on our competitive edge plan and a segment recap. Following his remarks, I will provide a product line summary, a balance sheet update, and a review of our revised 2024 financial guidance. At the conclusion of our prepared remarks, we will open the floor for a question and answer session. With that, I'll now turn the call over to Brian.
Nathan Ring: Brian Gray will begin today's call with a high-level overview of our second quarter 2024 results, followed by an update on our competitive edge plan and a segment recap.
Speaker Change: Following his remarks I will provide a product line summary, a balance sheet update, and a review of our revised 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 .
Brian Gray: Thank you, Nathan, and thank you, everyone, for joining us today. The second quarter is typically when our construction activity takes off for the year, and that certainly was the case for us in 2024 in record fashion. We hit our stride early and maintained that momentum, leading to record second quarter revenue, net income, and adjusted EBITDA. Our adjusted EBITDA of $154.3 million was a 22% increase from the prior year record. Our markets are strong, and our team is delivering.
Brian Gray: Thank you, Nathan, and thank you, everyone, for joining us today.
Brian Gray: The second quarter is typically when our construction activity takes off for the year, and that certainly was the case for us in 2024, in record fashion.
Brian Gray: We hit our stride early and maintained that momentum, leading to record second-quarter revenue, net income, and adjusted EBITDA. Our adjusted EBITDA of $154.3 million was a 22% increase from the prior year record.
Brian Gray: We are leveraging our competitive edge strategy to generate profitable growth. I'll provide more detail on our EDGE plan and the progress we are making in a minute. But quickly, I'd like to highlight a key metric in that plan: Adjust the EBITDA margin.
Brian Gray: Our markets are strong and our team is delivering. We are leveraging our competitive edge strategy to generate profitable growth. I'll provide more detail on our edge plan and the progress we are making in a minute. But quickly, I'd like to highlight a key metric in that plan, adjust the EBITDA margin.
Brian Gray: A year ago, we pointed to Jesse Iveda's margin as a benchmark to track as we promptly grew our business. As you recall, our initial goal was to achieve 15% adjusted EBITDA margin by 2025. We surpassed that goal at the end of last year, a full two years early, hitting 15.3%. Now, as of June 30, 2024, our trailing 12-month adjusted EBITDA margin is 15.9%. That is a 240 basis point improvement from where we were just a year ago.
Brian Gray: A year ago, we pointed to a Jesse Iveda margin as a benchmark to track as we profitably grow our business.
Brian Gray: As you recall, our initial goal was to achieve 15% adjusted EBITDA margin by 2025. We surpassed that goal at the end of last year, a full two years early, hitting 15.3%.
Brian Gray: We continue to move forward and make meaningful progress toward our long-term goal of a 20% adjusted EBE margin. Given these results and opportunities ahead of us, we have increased our financial guidance for the year. Nathan will provide detail on our guidance in just a few minutes, but first, I'd like to share additional details about our EDGE strategy and some of the driving factors that supported our results. Moving to the D in EDGE, discipline, I'd like to especially thank our Contracting Services teams for an excellent quarter and for embracing our quality over quantity initiative. Price increases, disciplined bidding, and solid project execution helped drive EBITDA up 27% to a record $36 million.
Speaker Change: I'm very proud of our Knife River team members. It's exciting to see the strategy, the hard work, and the execution come together in a record quarter for our team and our shareholders.
Speaker Change: As a quick recap, Competitive EDGE is a plan we began to implement in 2023 to drive long-term profitable growth. EDGE stands for EBITDA Margin Improvement, Discipline, Growth, and Excellence.
Speaker Change: During the second quarter, we continue to see traction with price increases.
Speaker Change: Year-over-year prices are up across all of our core product lines, with the exception of liquid asphalt, as we expected and discussed on our previous calls.
Speaker Change: Let me provide a few examples of these early successes. In 2023, the Operations Pick crew visited our Medford Aggregate site in southern Oregon and recommended new mining practices.
Speaker Change: This is expected to provide a benefit of approximately $1.1 million per year, starting immediately. Our operations tech crews have been extremely busy, and their work is far from being complete. They are currently out in the field working to identify additional improvements and expect to reach 31 locations in the second half of this year.
Speaker Change: From the bedroom into the field, our construction team's delivered.
Speaker Change: Looking at the contracting services backlog, we anticipate some moderation in gross margin expansion, as our year-over-year comparisons will now include the significant improvements we have made through our EDGE strategy over the past four quarters.
Speaker Change: I am very proud of the advancements that this product line has made in such a short amount of time. Knife River's contracting services are generating industry-leading margins and will continue to be a stable contributor to our overall success.
Speaker Change: We close on the purchase of a small quarry operation in the Northwest region since our last call, and we continue to identify additional acquisition opportunities.
KnifeRiver: Knife River has completed over 85 acquisitions in our history. Our experienced team, combined with our local relationships and reputation, positioned us as the acquirer of choice in our mid-size, high-growth markets. I look forward to some deal announcements as we bring these opportunities into the Knife River family.
KnifeRiver: We believe in our Life at Knife culture of putting people first and will continue supporting our core values of people, safety, quality, and the environment. Combining each of our competitive edge initiatives is providing positive outcomes for our shareholders and our team.
Speaker Change: You've heard me say this before, and it continues to be true. Our national infrastructure needs repair and there is growing support to fund that work.
Speaker Change: At the federal level, funding from the Infrastructure Investment and Jobs Act is still being allocated. Approximately 56% of IIJA formula funding has yet to be obligated in our markets.
Speaker Change: The work needs to get done, and we are well positioned to perform it.
Speaker Change: Looking ahead, our Northern California market continues to see strong demand, both in private and public construction. We are committed to our EDGE plan and will keep our focus on optimizing pricing, discipline bidding, and lowering production costs.
Speaker Change: In the Northwest, we continue to see growth, building on the records we set last year.
Speaker Change: Revenue was up 12% and EBITDA was up 31%.
Speaker Change: Our contracting services projects in Southern Oregon and Central Oregon are progressing well, helping to drive a 260-basis point improvement in the segment's growth margin. Looking ahead, we see additional opportunities for growth in this region, with the Pre-Stress Concrete Division recently securing projects related to data centers, parking garages, and bridge infrastructure.
Speaker Change: Also, as I mentioned, we purchased a quarry during the quarter to provide aggregates for the growing suburbs southeast of Portland.
Speaker Change: Moving to our mountain segment, we continue to benefit from very strong markets. We had record revenue in EBITDA, and our EBITDA margins increased by 500 basis points.
Speaker Change: Driving these records were price increases on all product lines and increased contracting services activity. Our Idaho and western Montana markets are particularly strong, and we see some additional upside ahead in Wyoming with potential wind farm and data center work. There continues to be substantial work bidding in this region, and we are well prepared to deliver on it.
Speaker Change: In our central segment, you can clearly see the impacts of our EDGE strategy. Price increases, disciplined bidding, and solid project execution helped drive EBITDA up 27% to a record $36 million.
Speaker Change: Revenue decreased 7% for the quarter, largely related to weather, as this segment had a wet June , with heavy rainfall in parts of Minnesota, South Dakota, Iowa, and Texas.
Speaker Change: Looking ahead, we are seeing an increase in bidding opportunities for the remainder of the year and into next year. Minnesota, Iowa, Nebraska, and Texas have each been adding projects funded by statewide infrastructure initiatives.
Speaker Change: Moving from our geographic segments to energy services, we had a strong second quarter. While financial results were well above the historic average, they were down from last year's all-time records, as anticipated. Pricing for liquid asphalt decreased across all markets from last year due to lower input costs.
Speaker Change: While EBITDA decreased approximately 11% from the 2023 record, EBITDA margins held steady as a result of those lower input costs.
Speaker Change: As I mentioned on our last two calls, we have good visibility into this segment and have updated our guidance accordingly, which Nathan will cover in his remarks.
Speaker Change: Before turning the call over to Nathan, I would again like to thank our entire team for this outstanding quarter.
Nathan Ring: We delivered record results while also working safely.
Nathan Ring: During the quarter, we hit our one-year anniversary as an independent company. In that time, we've made significant progress on our competitive edge goals and have generated meaningful value for our shareholders.
Nathan Ring: Our strategy is working. We have the right team, in the right markets, with the right plan, and we're just getting started. I'll now turn the call back over to Nathan for his remarks. Nathan?
Nathan Ring: Thank you, Brian . I'll begin with an overview of our product line results, then provide a summary of our capital position, and end by outlining the increase to our 2024 guidance.
Speaker Change: Our core product lines continue to benefit from our EDGE initiatives, as aggregates, ready mix, and asphalt all saw price, gross profit, and gross margin improvements for the quarter compared to prior year.
Speaker Change: Average selling prices for aggregates increased 6%, ReadyMix 11%, and Asphalt 1%, contributing to a record consolidated gross profit of $176.2 million, an increase of 15% for the quarter.
Speaker Change: Taking a closer look at aggregates, our dynamic pricing initiatives have been effective. And as we continue these efforts, we have confidence in our ability to further optimize prices. Therefore, we are raising our full year assumptions for aggregate prices to increase by high single digits compared to 2023.
Speaker Change: As Brian mentioned, the quarter was impacted by product mix as we sold more lower-priced, unprocessed material this year compared to prior year. These materials cost less to produce and are a solid contributor to our overall aggregates gross profit margins.
Brian Gray: We often have product mix variations like this that may impact pricing for the quarter, but have less of an effect on the full year. While our average selling price is up 6% for the quarter, it is up 8% year-to-date, and we expect that positive trend to continue.
Speaker Change: Volumes for our product lines were mixed for the quarter. Aggregates were up 2% largely as a result of the higher volumes of unprocessed material mentioned previously.
Speaker Change: Ready mix and asphalt volumes declined 12% and 5% respectively, related in part to our initiatives to capture improved prices and in part to weather-related delays in our central segment.
Speaker Change: However, even though volumes declined, the price over cost improvement in each product line helped us achieve record consolidated gross profit.
Speaker Change: Moving to contracting services, we saw substantially higher gross margin at 13.8% in the second quarter, compared to 10.6% last year.
Speaker Change: This increase of $14 million in gross profit is directly related to our disciplined approach in pursuing higher margins on bid day and then executing on that backlog.
Speaker Change: Furthermore, our backlog continues to benefit from infrastructure funding and is 87% public work.
Speaker Change: Of our total backlog, 85% of our projects are less than $5 million, and approximately 95% of our projects are completed within 12 months.
Speaker Change: We believe the size and duration of these projects, coupled with our reliable public funding, lowers our risk profile while also providing pull-through demand for our upstream product lines.
Speaker Change: Next, I would like to provide some additional information on our Corporate Services Department and consolidated SG&A expenses.
Speaker Change: As of May 31st, we have essentially completed our Transition Services Agreement with MD Resources and successfully set up the corporate functions needed to operate our businesses.
Speaker Change: We truly appreciate all the work our team has done to accomplish this.
Speaker Change: Furthermore, we have seen the recurring standalone costs for these departments come in lower than expected as we are focused on finding efficiencies and managing costs.
Speaker Change: Consolidated SG&A expenses were the same year-over-year for the quarter at $59.5 million, as increased costs were partially offset by gains on the sale of assets.
Speaker Change: Looking ahead for the second half of the year, we expect our corporate and consolidated SG&A expenses to remain in line with prior year.
Speaker Change: Moving to our balance sheet, we ended the quarter with no amount drawn on our $350 million revolving credit facility, compared to $155 million last year.
Speaker Change: Our continued disciplined use of cash has contributed to an improved net leverage of 1.5 times compared to 2.3 times in the second quarter last year.
Speaker Change: With this strong balance sheet and liquidity, we believe we are well positioned to support our acquisition growth strategy that Brian mentioned.
Speaker Change: We also continue to reinvest in our operations.
Speaker Change: During the first half of 2024, we invested approximately $103.6 million on capital projects.
Speaker Change: with the majority being spent on replacement of fixed assets as well as organic growth projects that are focused on increasing return on invested capital.
Speaker Change: Lastly, our industry-leading ROIC for the quarter was 15.9% on a trailing 12-month basis, reflecting the efficiency and discipline of our capital deployment.
Speaker Change: As we look back on a successful quarter and look ahead to the remainder of the year, we are excited to be increasing financial guidance for the full year 2024.
Speaker Change: We are raising consolidated revenue guidance to a range of 2.8 billion dollars to 3 billion dollars.
Speaker Change: For Consolidated Adjusted EBITDA, we are raising and narrowing guidance to a range of $445 million to $485 million.
Speaker Change: This includes adjusted EBITDA for our geographic segments and corporate services of $390 million to $425 million, as well as adjusted EBITDA at energy services between $55 million and $60 million.
Speaker Change: We expect aggregates volumes to be flat to down low single digits.
Speaker Change: Thank you, sir. Ladies and gentlemen, if you would like to ask a question, please press star followed by 1 on your touchtone phone. You will hear a prompt that your hand has been raised. Should you wish to withdraw from the question queue, simply press star followed by 2.
Brent: Thanks, Brent.
Speaker Change: Brian or Nathan, I guess first question, just if you can talk through a little more the progression of the dynamic pricing strategy as you're advancing that across.
Speaker Change: more of the regions of the business. I know this is sort of a careful methodical approach, might be less visible in the reported averages you're showing here. So just be curious if there's some case studies or examples you're seeing of success with that strategy.
Speaker Change: So that's a blueprint from the Northwest region, as you know, Brent. And so we've taken what we've been doing in the Northwest region for the last eight years and we rolled that out to the beginning of this year. We talked a lot about it last year.
Speaker Change: We're out hiring some additional sales staff in some of our regions that frankly didn't have them because it's part of dynamic pricing as you well know, we have to price
Speaker Change: We're pricing every job, every customer, and every market to where we can maximize, optimize our pricing based on the proximity of our locations to those job sites. So we truly are giving out quotes every single day to customers.
Speaker Change: and can control, you know, the pricing around what our current costs are doing, what our current backlog is doing, but most importantly, where is that job in proximity to our location. So we're still, you know, I've talked that we've been in the first or second innings. I'd say today, Brent, we're probably in the third innings in most of those regions and still probably in the eighth or ninth inning there in the Northwest region.
Brent: Okay, that's great. And Brian , you mentioned the 15.9% Trillium-12 adjusted EVA dot margin.
Brent: As you indicated, you're gradually sort of moving toward that eventual 20% target. As you think about the next 12, 24, 36 months, however long it is, Brian ,
Speaker Change: What do you think you've yet to see leverage from, from some of your internal initiatives?
Brent: operational initiatives, etc. that sort of edges you closer towards that 20% target. What's kind of beyond the low-hanging fruit, what do you still get leverage from from here?
Brian Gray: Yeah, let's go through the major initiatives within EDGE. So, when we rolled out our EDGE at Investor Day back in May of last year,
Speaker Change: You know, we said we can get to 15% EBITDA margin.
Speaker Change: by 2025. And so obviously, Brent, it's taken on a lot more traction than we had originally anticipated. And then it gets up from 15 percent to 20 percent.
Speaker Change: Faces of Edge was to immediately begin our quality over quantity initiative in the bedroom and that is really to
Ed: maximize our margin opportunities in the bid room.
Ed: At the same time, we began rolling out dynamic pricing.
Ed: and doing a lot of the training, but we did honor our 2020, you know, three prices that we had given late in 22. We honored those prices in most of those regions, so we're still the early...
Speaker Change: Any of that and there's still some upside there we've talked a fair amount about our pit crews our process improvement teams and We started off with one team and now like I said my preferred remarks were up to ten
Speaker Change: Implementing best practices, identifying opportunities to where we can reduce our production costs and we're rolling that out into the other product lines.
Speaker Change: and throughout the organization. It's been well received by the entire team.
Speaker Change: So that's specifically as it relates to margin improvement, but to get to from where we're at today, from 16% as far as our midpoint, that 15.9 that you talked about, the training 12 months.
Speaker Change: To get to that 20%, I mean, we know that...
Speaker Change: We're filling our pipeline of those growth opportunities. We also will be shifting slowly our product mix towards those higher profit margin lines. Then the last thing is, we just have that relentless drive to be excellent at everything that we do, and that also is going to help us get to that 20% EBITDA margin.
Speaker Change: Overall, we are still, we have a lot of things to do, a lot of self-help that we can go get Brent in that EDGE strategy.
Brent: Okay, I appreciate the comments. I'll get back in queue.
Speaker Change: Thank you. Next question is from Trey Grooms at Stevens Inc. Please go ahead.
Trey Grooms: Hey, good morning and well done in the quarter.
Trey Grooms: Thank you, Trey.
Trey Grooms: I wanted to touch on contracting services, you know, the
Trey Grooms: Really nice margin improvement you're seeing there, and I know this is all by design and part of all the initiatives you guys are executing on.
Speaker Change: But as I kind of think about that part of the business, contracting services, how do you think about the kind of the long-term kind of margin potential?
Speaker Change: you know, for that and how that kind of plays a role in the 20% EBITDA margin targets that you guys have laid out.
Speaker Change: Yeah, so it's certainly a path to that 20% flag and we are...
Speaker Change: still on that path and marching forward and up on our margins. We, yeah, we are very excited at the amount of improvement we've made. I mean, just, you know, if you go look at our trailing 12-month...
Speaker Change: Gross Profit Margin in Contracting Services at the end of June , it was 12.7. If you go back to the end of 22, just a year and a half ago, it was 8.4. So we've had a 430 basis point improvement.
Speaker Change: Since the beginning of last year and so we have made a lot of progress and the majority of that a lot of that Has come in the bid room
Speaker Change: But I would give a shout out to our teams out in the field, too. I mean, you've got to go out and execute that work. And I can say that, I mean, we've taken a very disciplined approach at how we do that.
Speaker Change: meeting our project schedules, delivering...
Speaker Change: quality materials and putting an asphalt down where we can get...
Speaker Change: compaction bonuses and other job site incentives and so
Speaker Change: You know, you always look at how you bid a job and whether or not you gain or fade on those jobs from the time you bid them to the time you perform them.
Speaker Change: And our crews have gone out and executed that work very well.
Speaker Change: That being said, we are now peeling that onion back one more layer and looking at what type of work do we do is the most profitable and can we transition more of our work to maybe higher margin subcontract work versus prime work and we continue to look at how can we increase our margins.
Speaker Change: But really, it goes back to our bid room and taking on quality backlog over quantity. We don't have a record backlog today, and that's by design.
Speaker Change: And really just taking on those jobs that pull through the higher margin upstream materials and then go out and execute that work. So we could be more proud of that contracting services group, but it plays a really critical role.
Speaker Change: and our overall organization is about 38% of our revenue. It provides resiliency to our strategy of pulling through those high stream, those high margin upstream materials and is, you know, operating in an environment right now with very strong funding. And you've seen the DOT budgets and, you know, they're at or near record levels and we see that for the foreseeable future.
Speaker Change: Very pleased with what was going on in contracting services.
Speaker Change: Great. Thanks for that, Brian . I know aggregates get a lot of attention, but I did just have to highlight the great job you guys are doing on the contracted services side as well. Speaking to aggregates here for a second,
Speaker Change: You know, it sounded like repair and maintenance impacted.
Speaker Change: margins a bit in the quarter. You know, should that continue as we kind of look into the back half or, you know, any kind of color around that? And then maybe if you could also give us some color kind of on the overall kind of cost outlook for aggregates.
Speaker Change: Yeah, as we've deployed our pit crews, I mean, they've certainly gone out and, you know,
Speaker Change: these 1,300 opportunities to improve.
Speaker Change: our margins, is having our repair maintenance costs go up temporarily for a longer-term benefit. And so, you know, part of the pit crew recommendations are some larger, longer-term capital improvements that are going through the system now, but also there's some immediate...
Speaker Change: opportunities to change how we're maintaining the facilities and doing some additional repairs and maintenance to increase our uptime. And I'd say that almost everywhere our pit crews have gone
Speaker Change: They had an impact of increasing our uptime.
Speaker Change: And as related to that, I mean, we have had a bump in our repairs and maintenance costs. You know, going forward, I think we still feel very comfortable in our guidance as far as mid-single digit.
Speaker Change: costs increases inflation for the rest of this year. Diesel's been a little bit of a tailwind for the first couple of quarters. I'd say that's leveling out and it'll just be kind of a neutral to our business going forward. So that's what we're seeing right now with our costs.
Speaker Change: Okay, thanks, Brian. I'll pass it on.
Speaker Change: Thank you. Next question will be from
Speaker Change: Hi, thank you for taking my questions today. Just one follow-up clarification on aggregate pricing. How much of it was pricing actions versus an impact from mix or geographic mix in the quarter?
Speaker Change: Yeah, the bigger impact.
Speaker Change: what Nathan had mentioned and I had mentioned is the product mix.
Speaker Change: So, what you should look at our pricing is year-to-date, and so our year-to-date right now is about 8% increase, is up from last year's year-to-date numbers.
Speaker Change: We have good visibility with our new dashboards that we've created to really look at like-for-like products. I mean, taking a sand product coming out of the same pit, and what are we doing with that pricing? And so we've got that visibility through new dashboards, and so that's why we've raised our guidance to high single digits.
Speaker Change: I would say that, you know, on the product mix side of things, we had a large sale. I mean, we had a 350,000 ton sale in Oregon of unprocessed materials. And that can absolutely have an impact just like geographic mix can as well. So as we bring on...
Speaker Change: some additional sales in the north-central region, their pricing.
Speaker Change: may be slightly lower than what it is in the Northwest region or Pacific regions where we're importing materials into Hawaii.
Speaker Change: And so that definitely has an impact, but for the quarter, the bigger impact was that sale of the unprocessed material on product mix. Does that make sense?
Speaker Change: Yeah, yeah, no, it does. Absolutely. And, you know, I know you responded earlier just about some good progress on...
Speaker Change: margins in the quarter but when you when you parse out the the upside of margins for your ready mix and your asphalt
Speaker Change: segments in the quarter.
Speaker Change: Help us clarify, like, how much of that is part of the pricing discipline that you've been executing on?
Speaker Change: versus better product, like better job mix versus any other factor, you know, really just kind of helping us understand the puts and takes for that 140 basis point improvement in both ready mix and asphalt gross margins in the quarter. Thank you.
Speaker Change: 11% and, you know, we had 12%.
Speaker Change: Okay, great. And then just one quick follow-up question. Certainly all the feedback in the field that we're receiving is that the volumes are more delayed and not necessarily lost.
Speaker Change: I just wanted to get your thoughts on that, just in terms of the delayed versus lost and how you're thinking about things, particularly focusing in on some of the points that you laid out on backlogs.
Speaker Change: Certainly some of those projects that we should have been working on both in Contracting services, which is consuming those upstream materials like asphalt and aggregates and then the ready mix business
Speaker Change: So yeah, I think some of that work has certainly been delayed. I think there's some timing of projects as it relates to asphalt.
Speaker Change: But the good news there is there's a pent-up demand for residential and commercial industrial to get going. So, primarily on asphalt contracting services, certainly some work is being pushed forward into the next quarters.
Speaker Change: Okay, great. Thanks very much.
Speaker Change: Yep.
Speaker Change: Thank you. Next question will be from Tim Tanners at Wolf Research. Please go ahead.
Tim Tanners: Hey, good morning. I wanted to follow up actually on the Asphalt Outlook. So just along those same lines, if the asphalt volumes are getting pushed out, why lower the volume outlook? And I kind of just wanted a little bit more color on what you're seeing there in light of some of the commentary. I think PCA came out recently with a lower forecast for IIJ spending. So just wondering if you're, you know, provide some more color.
Brian Gray: Yeah, so part of that on the asphalt is by design, and I'll give you a very specific example of that. In the north-central region, we used to have more portable asphalt plants going out on the road, and frankly, they were chasing high-volume, low-margin work, and our team in the north-central region made the strategic decision early in the year to go park two of those asphalt plants in stationary aggregate locations and provide much higher margin but lower volume work to the tune of almost 30% in that one region. So I would say that it's intentional, Timna, in our guide as far as going forward with our volumes and asphalt specifically. I've not seen the PCA report yet.
Speaker Change: Yeah, so part of that on the asphalt is by design, and I'll give you a very specific example of that.
Speaker Change: In the north-central region, we used to have more portable asphalt plants going out on the road.
Speaker Change: and providing...
Speaker Change: Much higher margin, but lower volume work to the tune of almost 30% in that one region is so
Brian Gray: What we've seen and the information we get from ARTBA and our local DOTs when we meet with the directors is that funding is still very strong and that there's still more than half of that IAJ funding to be dispersed and spent in those states that we do business in. So our DOT budgets are really at record levels. If they're not at record levels, they're very close to record levels, and you talk to those DOTs, and there's a lot of work to still be built.
Speaker Change: is that funding is still very strong and there's still more than half of that IAJ funding to be disbursed and spent in those states that we do business in. So our DOT budgets...
Speaker Change: are really at record levels. If they're not at a record level, they're very close to a record level.
Brian Gray: I mean, the IAJA and the current transportation funding that those states have is not enough to fix the infrastructure, and so this should be continued. There's lots of new legislation in the states we work in. We're very active in helping pass those bills because the roads need to get fixed, as do the bridges. So I'm not exactly sure what the report you're looking at is about, but we see strong DOT budgets, and 87% of our backlog in our contracting services is publicly funded, and we just continue to see strong markets there.
Speaker Change: The IAJA and the current transportation funding that those states have is not enough to fix the infrastructure. So this should be continuing. There's lots of new legislation in the states we work in. We're very active.
Speaker Change: in helping pass those bills.
Speaker Change: but because the roads need to get fixed, as do the bridges. So I'm not exactly sure the report you're looking to, but we see strong DOT budgets. And 87% of our backlog in our contracting services is publicly funded. And we just continue to see strong markets there.
Speaker Change: Okay, great. Yeah, it was our summer outlook and a reference to kind of slower realizations, but not lost to your point, I think. Just second question, if I could, on the M&A environment, can you elaborate a little bit on, you know, I know you talked about three different options. What adjacent platforms might you be looking at? And, you know, what's the dynamic of the environment? Is there more interest, you know, more willingness to sell than normal? What are valuations looking like? Anything you can provide?
Speaker Change: Yeah, I appreciate that question. We're very excited and pleased with the progress we've made.
Speaker Change: We've got a very reputable, experienced, well-respected...
Speaker Change: business development team that we've assembled that's been out working filling the pipeline up and I can tell you
KnifeRiver: In my career at Knife River for 31 years, this is...
KnifeRiver: the healthiest pipeline of opportunities that I've seen.
KnifeRiver: We've mentioned that our priority is to bolt on those nice $30 million to $50 million-ish
KnifeRiver: bolt-ons into our existing strategic market areas. That's our number one focus is to continue...
KnifeRiver: to bolt those opportunities on and there's a lot of fragmented opportunities, a lot of regionally owned, family-operated.
KnifeRiver: companies in our mid-sized high-growth markets.
KnifeRiver: within the regions we have opportunities to grow within a region that may be in a new strategic market area and so you know we have a relatively small footprint in Texas and you look at some of our other footprints and some of the states that we currently do business in
KnifeRiver: There are opportunities for us to expand in those states under our current management teams and the current region structure. And then there's also states that adjoin or are adjacent to our current footprint. So we're in 14 states, Tim, and without giving any specific information, I would just tell you that...
KnifeRiver: Where we're looking at would be states that would be contiguous adjacent to one of our existing states. So that's really our strategy and we've got deals in the pipeline of all sizes in all of those different markets I just mentioned.
Tim Tanners: Okay, thank you.
Tim Tanners: Yep.
Tim Tanners: Thank you. Next question will be from Garik Shmois at Loop Capital Markets. Please go ahead.
Garrick Schmoyce: Oh, hi. Thanks. Congrats on the quarter. I know you talked to some new project wins in data centers and parking garages.
Speaker Change: in the Pacific Northwest. I know private constructions.
Garrick Schmoyce: much smaller part of your end market exposure, but I was wondering if you can maybe speak to the outlook, what you're seeing in private, and the opportunities when looking at some of the projects that you're bidding on.
Garrick Schmoyce: Yeah, very specific, Garik, to pre-stress.
Speaker Change: You know, we have our new facility in Spokane, Washington that we commissioned last year and it's up and running and it's doing great. It's got a little bit more capacity than we had anticipated and it's got some operating costs that are better than we thought and so it's going great in Spokane. And then our other facility is near Eugene, Oregon.
Speaker Change: We provide a lot of wall panels to those data centers. We do parking garages.
Speaker Change: whether that's for public or private parking garages.
Speaker Change: And then the infrastructure work, you know, a big part of our business is providing bridge girders.
Speaker Change: for the DOT projects. So specifically to the private market, you know, we still have a lot of opportunities. These take some time to engineer and you work directly with the owners when you're
Speaker Change: Transitioning a job from cast-in-place or steel to pre-cast or pre-stress. So our engineering team have been working...
Speaker Change: for months on several of these projects and we have contracts to get paid to help design and utilize our products and so
Speaker Change: We see data centers in that Idaho, Oregon, Wyoming markets, there's still opportunities. We've got a portable batch plant in Oregon supplying concrete to some of those projects.
Speaker Change: So, that still has been a very strong market for us on the data centers, and then the parking garages and bridge girders and more of the infrastructure work continues to see a lot of opportunities there.
Unnamed Analyst: Okay, no, that sounds good. And just wanted to follow up on the progress that you're making with respect to dynamic pricing. I think you mentioned you're in the third inning in most regions outside of the
Speaker Change: Okay, that sounds good. I just wanted to follow up on the progress that you're making with respect to dynamic pricing. I think you mentioned you're in the third inning in most regions outside of the
Speaker Change: Northwest, you know, is that where you expect it to be at this point in the rollout? Just, you know, maybe, you know, help put some context in.
Speaker Change: in that, you know, timeline as to where you're at, you know, as far as, you know, you're, you're, you know, if it's going as well, you know, a little bit faster, a little bit slower than you expected at this point.
Speaker Change: Yeah, I would say every region is a little bit of a different spot when it comes to
Speaker Change: where they're how they're progressing with dynamic pricing and so there's certainly some regions that have
Speaker Change: had the structure in place and the point-of-sale systems in place and the commercial excellence teams in place to really go from your traditional way of sending out an annual...
Speaker Change: price increase letter or possibly a mid-year increase, they had that structure in place where they were able to pick up the dynamic pricing playbook and run with it and those regions are probably in that third or fourth inning.
Speaker Change: There's other regions where, again, we did not have that infrastructure in place and we're in the process of adding sales teams and doing a lot of additional training and putting in the software and the dashboards to help us implement that dynamic pricing. So what I would say, Garik, is that
Speaker Change: We have a lot of opportunities for us to continue to go forward in, you know, optimizing our materials pricing in most of the markets. You know, I think we still have opportunities in all the markets, frankly, even in the Northwest region.
Speaker Change: But they're all progressing well. What I would tell you is that they've embraced it. Our team and our customers have received that new way of pricing materials.
Speaker Change: very positively, and we've gotten very little to no resistance on that. I think our customers appreciate knowing what their cost is going to be on that particular project and not...
Speaker Change: be concerned whether or not they're going to be getting a mid-year increase or not. They know what their prices are on every job they go out and build. They've just got to give us a call first to get the current pricing.
Speaker Change: No, that makes sense. All right, thanks for all that. I'll pass it on.
Gary: Thanks, Garik.
Speaker Change: Thank you. As a reminder, ladies and gentlemen, if you do have any questions, please press star followed by one on your touch-tone phone.
Speaker Change: And your next question will be from Ian Zaffino at Oppenheimer. Please go ahead.
Unnamed Analyst: Hi, great. Thank you very much.
Ian Zaffino: Thank you very much. A lot of my questions have been answered, but I wanted to just kind of go back to pricing here. You made me help us understand on the pricing, you know, what are you seeing? I guess if you were to bucket the pricing, you know,
Unnamed Analyst: A lot of my questions have been answered, but I wanted to just kind of go back to pricing here. Can you maybe help us understand the pricing, you know, what are you seeing? I guess if you were to bucket the pricing, you know, letters, semiannual, dynamic, you know, each kind of seeing, you know, similar types of price increases or, you know, what type of color you could give us there and kind of what's driving it.
Speaker Change: Letters, Semiannual, Dynamic, you know, they're each kind of seeing, you know, similar type of price increases or, you know, any type of color you could give us there and kind of what's driving it. Thanks.
Speaker Change: Yeah, so, you know, Sherif, I mean, what I know, which is, I mean, near-term, is the demand is still strong for our products. And so, you know, we have a heavy influence on infrastructure.
Brian Gray: Spending, and we benefit from that a lot. And so the demand is good. And keep in mind, we sell about 40% of our aggregates to our downstream businesses. That's one thing I do know, demand remains strong. The other thing I know is that we have a number one or number two market position in 75% of the markets where we're selling aggregates. And so that allows us to be a market leader.
Speaker Change: spending, and we benefit from that a lot. And so the demand is good. And keep in mind, we sell about 40% of our aggregates to our downstream.
Speaker Change: businesses. That's one thing I do know is demand remains strong. The other thing I know is that we have a number one or number two market position in 75 percent of the markets where we're selling aggregates and so you know that allows us to be a market leader.
Brian Gray: I also know from our dashboards that we've got, if you look at like-for-like materials, taking a product from one pit this year compared to what we were selling that same product at that same pit for, is in the high single digits. Our year-to-date numbers are in the high single digits. And so Nathan and I, along with the region presidents, we feel comfortable with our guidance, our assumption of being in
Speaker Change: I also know from our dashboards that we've got, if you look at like-for-like materials, taking a product from one pit this year compared to what we were selling that same product of that same pit for.
Nathan Ring: is high single digits. Our year-to-date numbers are high single digits, and so Nathan and I, along with the region presidents, we feel comfortable with our guidance, our assumption of being high single digits. You know, you're looking at it, you know, longer term, and that, you know, I think, again, those fundamentals
Brian Gray: You're looking at it longer term. And I think, again, those fundamentals. We need a lot of rock to go fix our infrastructure. I mean, it's literally the foundation of America's infrastructure. You can't produce concrete or make asphalt mix or build bridges or pave runways without aggregates.
Speaker Change: We need a lot of rock to go fix our infrastructure. I mean, it's literally the foundation of America's infrastructure. You can't
Speaker Change: Produce concrete or make asphalt mix or go build bridges
Brian Gray: And so the fundamental, the underlying demand, is there for the long term. As you know, it's a non-renewable resource. It's a depleting resource, and it's difficult to permit. And so, with those things, it gives me a kind of strong conviction that we're going to continue to see pricing momentum going forward for the foreseeable future. I don't see any of those variables changing. The demand is strong, and it's a non-renewable resource that is depleting. And I see that it really is the foundation of the infrastructure, and so I see strong momentum in aggregate pricing going forward.
Speaker Change: or paved runways without aggregates. And so the fundamental, you know, the underlying demand...
Speaker Change: if they're long-term.
Speaker Change: As you know, it's a non-renewable resource, it's a depleting resource, and they're difficult to permit.
Speaker Change: And so, you know, with those things, it gives me a kind of strong conviction that we're going to continue to see pricing momentum going forward for the foreseeable future. I don't see any of those...
Speaker Change: variables changing. The demand is strong and it's a non-renewable resource that is depleting.
Speaker Change: And I see that, you know, it really is the foundation of the infrastructure. And so I see strong momentum in aggregate pricing going forward.
Speaker Change: Okay, thank you. And then also just another one on M&A. You know, maybe help us understand what you're seeing as far as multiples...
Speaker Change: and also size of deals. I know there was a large deal, one of your competitors did. You know, would you go into larger markets and you know, how do you kind of feel about the multiples that are on recent transactions? Thanks.
Brian Gray: Yeah, part of our strategy is we definitely target opportunities that can be negotiated directly with the owner and stay out of an auction or a broker deal. Now with that being said, we certainly are involved, and part of our pipeline includes some of those larger platform companies that are being brokered, which would be part of an auction, and those, as you can well imagine, are driving higher multiples than the ones that we could be negotiating in those midsize, high-growth markets would be a very logical acquisition of those companies.
Brian Gray: Yeah, we...
Speaker Change: Yeah, we...
Speaker Change: Part of our strategy is we definitely target opportunities that can be negotiated directly with the owner and stay out of an auction.
Speaker Change: or a broker deal. Now with that being said, we certainly are involved and part of our pipeline includes some of those larger platform companies that are being brokered.
Speaker Change: that would be part of an auction, and those typically, as you can well imagine, are driving higher multiples than the ones that we could be negotiating in those mid-size, high-growth markets where a very logical acquire of those companies.
Brian Gray: And so the multiples I mean would be a range of literally ten times I mean I could say it's from six to sixteen I mean there's just a broad range every deal is unique every deal has its own logic you know strategy to it and so really there's no way of saying what the multiples we're seeing I'll tell you again that we target those brokered local family-owned deals where we already have long-standing relationships with those owners and we've been having those conversations and that would be the majority of what's in our pipeline but we are bidding on some larger deals and those multiples can be a little bit higher.
Speaker Change: And so, Ian, the multiples, I mean, would be a range of literally ten times. I mean, I could say it's from six to sixteen. I mean, there's just a broad range, every deal.
Speaker Change: is unique. Every deal has its own...
Speaker Change: Logical, you know strategy to it. And so really there's no way of Saying what the multiples we're seeing I'll tell you again that we target those brokered local family owned deals where we already have long-standing relationships with those owners and
Speaker Change: We've been having those conversations and that would be the majority of what's in our pipeline, but we are bidding on some larger deals and those multiples can be a little bit higher.
Speaker Change: Alright, thank you very much.
Operator: Thank you. And at this time, Mr. Gray, it appears we have no other questions registered. Please proceed, sir.
Speaker Change: Thank you. And at this time, Mr. Gray, it appears we have no other questions registered. Please proceed, sir.
Mr. Gray: Okay, well thank you again for joining us today. We're proud of our record quarter and excited to be increasing guidance for the year.
Speaker Change: We continue to make good progress on our edge goals, and we are well positioned to grow our company and deliver long-term value for our shareholders. We appreciate the interest and support, and we will now turn the call back over to the operator.
Speaker Change: Thank you, sir. Ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending. And at this time we do ask that you please disconnect your lines.