Q4 2024 Knife River Corp Earnings Call
Speaker Change: Good morning, ladies and gentlemen, and welcome to the Knife River Corporation fourth quarter and full year 2024 results conference call. At this time, all lines are in the listen-only mode.
Speaker Change: Following the presentation, we will conduct a question and answer session.
Speaker Change: And 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 Thursday, February 13, 2025. And now I would like to turn the conference over to Nathan Ring, Chief Financial Officer. Please go ahead.
Nathan Ring: Thank you and welcome to everyone joining us for the Knife River Corporation fourth quarter and full year 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.
Nathan Ring: Actual results may differ materially from those projected in today's forward-looking statements.
Nathan Ring: For further detail, please refer to today's earnings release and the risk factors discussed in our most recent filings with the SEC Which are available on our website and the SEC website
Speaker Change: These non-GAAP measures are defined and reconciled to the most directly comparable GAAP measure in today's earnings release. These materials are also available on our website. Brian Gray will begin today's call with a high-level overview of our 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 capital update, and a review of our 2025 financial guidance.
Speaker Change: 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. Good morning, everyone, and thank you for joining us today. In 2024, we completed our first full year as a publicly traded company and, again, achieved record results. Over the last two years, we grew our adjusted EBITDA by 48% and our adjusted EBITDA margins by 360 basis points.
Brian Gray: This is a testament to the success of our competitive edge strategy and the dedication of the entire KnifeRiver team. I continue to be excited about the opportunities we have in front of us to grow and create long-term value for our shareholders.
Brian Gray: With that, let me recap KnifeRiver's record 2024 results, and share a preview of what we see ahead in 2025, including progress on our EDGE plan and an update on our pending acquisition of Strata Corporation.
Brian Gray: Starting with 2024 performance, we achieved record full-year revenue, adjusted EBITDA, and adjusted EBITDA margin. In 2024, our efforts to optimize prices drove annual price increases of 7% for aggregates and 10% for ready mix.
Brian Gray: At the same time, we focus on controlling our costs. Our process improvement teams visited 58 plants, continuing to improve our operational efficiencies. This helped drive margin improvements across our aggregates, ready-to-mix, and asphalt product lines.
Brian Gray: On the contracting side of our business, we improved our industry-leading gross margin by 160 basis points, a result of disciplined bidding and solid project execution.
Brian Gray: Looking at growth, we invested 131 million dollars on six acquisitions last year with a focus on materials-led opportunities.
Brian Gray: We look forward to a full year of EBITDA contributions from our 2024 acquisitions, which we expect to be approximately $16 to $20 million in 2025.
Brian Gray: Lastly, we are committed to excellence and we strive to be the best in everything we do. We recently created the position of Chief Excellence Officer to oversee our relentless drive to become best in class. This role will focus on expanding our pit crews and leading our standardization efforts to implement best practices.
Brian Gray: Looking ahead to 2025, we are starting the year with a strong backlog and we continue to add new work. Our backlog of $746 million is 13% higher than the same point last year.
Brian Gray: With our selected bidding, we are very pleased with the strong margins we achieved with our backlog in 2024, and expect to see our 2025 backlog deliver at similar margins.
Brian Gray: The majority of our contracting backlog is public work, building and paving roads and highways, which provides us the opportunity to pull through our upstream materials.
Brian Gray: As a prime example of this, we recently secured a $96 million 3-year road construction project in Idaho.
Brian Gray: This job includes the reconstruction of 5 miles of highway, 2 bridge replacements, and 10 miles of concrete pathways. In total, it will utilize 1 million tons of aggregates, 145,000 tons of asphalt, and 20,000 cubic yards of ready mix.
Brian Gray: While we are seeing more large projects coming out for bid, most of our jobs are under five million dollars and will be completed in less than one year.
Brian Gray: Across our footprint, local, state, and federal infrastructure bidding remains at or near record levels. In our 14 states, nearly half of the IAJ funding has yet to be obligated. The majority of our bidding takes place in the fourth quarter and the first quarter, and we continue to see active bid schedules from our publicly funded customers.
Brian Gray: In addition, we are beginning to see increased opportunities in private work as projects have been delayed for macroeconomic reasons are starting to bid again.
Brian Gray: On top of robust infrastructure spending and improved backlog, we are entering 2025 with several line-of-sight opportunities in our EDGE plan.
Brian Gray: Starting with the G in EDGE, growth, we are excited about our acquisition pipeline. We have several deals in various stages of development, including Strata Corporation.
Brian Gray: In December, we announced our definitive agreement to acquire Strata for $454 million. Like Knife River, Strata is an aggregates-led, vertically-integrated construction materials company.
Brian Gray: It will provide infill growth in our central segment, adding well over 30 years of agri-reserves for its operations, along with 28 Radimix plants, 3 Asphalt plants, and a Contracting Services Division.
Brian Gray: We expect the transaction to close in the first half of this year, subject to customary closing conditions.
Brian Gray: In addition to Strata, our corporate development team is working diligently on numerous other acquisition targets in the pipeline.
Brian Gray: We have potential deals ranging in size from single-site bolt-ons to larger, multi-location platform companies, and we are in a strong financial position to invest in these opportunities.
Brian Gray: Over the course of 90 acquisitions, we have developed a proven playbook for due diligence and integration.
Brian Gray: and we look forward to additional acquisition announcements throughout the year.
Brian Gray: Equally important as our M&A strategy, we are also investing in multiple organic projects to grow our business. These include an aggregates expansion project in South Dakota, which is expected to significantly increase our production capabilities in the rapidly growing Sioux Falls market and add rail services for distribution.
Brian Gray: The project is scheduled to be finished in 2027, but we anticipate seeing partial returns prior to it going into full production. We are excited about the ability to provide high-quality quartzite materials in this region for decades to come.
Brian Gray: We are also grain fielding new operations in Twin Falls, Idaho, starting with a ready-mix plant, small office, and equipment yard. In the past, we have performed a lot of work in this part of Idaho with our portable crews.
Brian Gray: With this greenfield, we will now have a fixed base to work from and can begin building a local team in this mid-sized, high-growth market.
Brian Gray: Another example of organic growth is in our energy services segment, where we will bring a new polymer modified liquid asphalt production facility fully online this spring.
Brian Gray: We have started taking delivery of feed supply at the plant, and we are already seeing benefits on this project in the bid room through transportation savings and additional market capacity.
Brian Gray: We currently have approved approximately $70 million in 2025 for organic growth projects.
Brian Gray: Along with acquisitions, organic growth has been an integral part of KnifeRiver's success over the past three decades and is a vital component of our competitive edge strategy.
Brian Gray: We look forward to discussing updates on all of our growth projects as the year progresses.
Brian Gray: At the same time, we are equally excited about the excellence initiatives we are undertaking, which is another key aspect of our EDGE strategy.
Brian Gray: In 2025, we expect to see even more momentum from our expanded pit crews. As a reminder, we have gone from one materials-focused pit crew to over a dozen teams that are now focused on three key areas commercial excellence, operational excellence, and standardization.
Brian Gray: Our newly appointed Chief Excellence Officer, Glenn Platson, is leading this process, which we believe will drive continued improvements at our current operations, while also allowing for quicker integration of our acquisitions.
Brian Gray: We also continue our efforts to optimize pricing and drive margin expansion. We are deep into the rollout and execution of our company-wide sales training program, and we continue to enhance our curriculum.
Brian Gray: Complementing this, we are in the early phases of introducing new software to manage our customer service and quoting processes.
Brian Gray: Each of these opportunities, from acquisitions to organic growth, to the self-help from dynamic pricing in our pit crews, is an investment in our future, and combined, they represent our blueprint for achieving both our near-term and long-term growth goals.
Brian Gray: To help support our teams and facilitate the adoption of our initiatives, we have streamlined our segments from 5 to 4. In 2025, our reported segments are West, Mountain, Central, and Energy Services, with the former Pacific and Northwest segments combining into the newly formed West segment.
Brian Gray: We believe this allows us to provide enhanced regional support for our local teams as they implement EDGE and pursue growth opportunities. You will see this change in reporting segments starting with our Q1 Earnings Report.
Brian Gray: Finally, I will share an update on our segments performance in 2024 and what we see ahead in our markets in 2025. Our geographic segments had a record year achieving 455 million dollars in EBITDA, a 15% increase year-over-year.
Brian Gray: Starting the Pacific, full-year revenue and EBITDA both increased 7% from last year.
Brian Gray: This is driven by price increases across all product lines and strong contracting services activity in Northern California.
Brian Gray: Looking ahead, we see opportunities in 2025 for military projects in Hawaii, energy development in Alaska, marine construction in Southern California, and increased private and commercial work in Northern California.
Brian Gray: The Northwest region continued its success in 2024, improving its EBITDA by 24% to an all-time record of $150 million.
Brian Gray: The region also improved its EBIDTA margin to 21.6%, an increase of 340 basis points from the prior year.
Brian Gray: Strong public agency work helped drive these record results, along with efficiencies at our new pre-stress plant in Spokane, Washington.
Brian Gray: The plant came online in February 2024 and generated $2 million in labor and raw material savings and improved their gross profit by more than 40%.
We seek continued success at our pre-stress operations in 2025.
Speaker Change: Looking at the region on the whole, Oregon also is seeing an increase in private works later for the second half of this year, in particular data centers, railroad projects, commercial and residential developments. In the mountain region, higher pricing and strong demand for contracting services drove record revenue in EBITDA.
Speaker Change: We also improved our EBITDA margin to a full year regional record of 17.1% through disciplined bidding and solid project execution. This region continues to benefit from population growth and a strong budget for both public and private construction work.
Speaker Change: We have record backlog here to start the year and continue to add to it. In addition to public work, we are seeing an increase in residential subdivisions bidding, especially in the Boise and Idaho Falls market.
Speaker Change: There's also increased commercial and industrial spending throughout the region, in particular in Cheyenne, Wyoming, and throughout most of Idaho. In Central, we achieved record EBITDA and EBITDA margins, led by price increases and strong contracting services activity.
Speaker Change: We entered 2025 with higher backlog than a year ago, including strong DOT bidding environments in Texas, Minnesota, Iowa, and Nebraska.
Speaker Change: We expect to benefit from more projects in these states as we are seeing funding targeted more directly to asphalt paving in our markets.
Speaker Change: We also expect to benefit from acquisition growth and organic growth in this region, including improved uptime and rail shipments from a Honey Creek quarry in Texas.
Speaker Change: At Energy Services, Revenue and EBITDA were down from our record year in 2023, as anticipated, but we believe we are in a good position to grow. We are excited about the addition of Albina Asphalt. That integration is going smoothly, and we look forward to a full year of EBITDA contributions from the four terminals in Washington, Oregon, and California.
Speaker Change: In terms of vertical integration, Albina's footprint covers NYFERB's highest concentration of liquid asphalt demand.
Speaker Change: While Urbana's pre-acquisition backlog is at lower margins than what we typically see at Energy Services, we expect the margins to improve as we utilize our EDGE concepts of discipline bidding and operational improvements.
Speaker Change: In 2025, we expect energy services will remain accretive to Knife River's overall adjusted EBITDA margins.
Speaker Change: In conclusion, we are proud of our accomplishments in 2024. We achieved record financial results while also improving our safety performance. Our EDGE strategy is working, and our KnifeRiver team is delivering on it.
Speaker Change: We have a lot to look forward to in 2025 and beyond, including strong markets, excellent growth opportunities, and the continued evolution of our edge efforts to drive long-term, profitable growth. With that, I'll turn the call over to Nathan.
Speaker Change: Good morning. As Brian stated, we are very pleased with our record 2024 results.
Nathan Ring: These results include strong fundamentals in each of our product lines.
Nathan Ring: Starting in aggregates, we continue to see solid price improvement with the annual average selling price increasing 7% over the prior year.
Nathan Ring: This increase was directly related to our EDGE initiatives of taking on less work but at higher prices, which we call quality over quantity.
Nathan Ring: Along with improving our pricing, we improved our aggregate gross margin to a record 21%.
Nathan Ring: We have mostly completed the hard work of resetting our customer base and narrowing the type of projects we bid.
Nathan Ring: As we look ahead to 2025, we anticipate volumes will increase, low single digits over 2024, and be more reflective of economic growth in our markets.
Nathan Ring: We believe pricing momentum from the past two years will continue and expect mid-single-digit price increases for 2025.
Nathan Ring: Moving to the ReadyMix product line, we saw improvement in the average selling price, with a 10% annual increase over the prior year period. Our gross margin increased to a record 16%.
Nathan Ring: These are impressive numbers, considering our volumes were down 9%, primarily related to our edge pricing initiatives and less demand in the private market.
Nathan Ring: Similar to aggregates, we have reset our customer base and expect volumes to increase low single digits in 2025.
Nathan Ring: We are seeing increased demand for commercial and industrial projects, including several large infrastructure projects taking off in the second half of this year.
Nathan Ring: We focused on higher margin work, resulting in a 180 basis point improvement in gross margin, the highest increase among our product lines.
Nathan Ring: Based on our current backlog and visibility into future bid lettings, we anticipate asphalt volumes and pricing to increase low single digits for 2025.
Nathan Ring: At our Contracting Services product line, we continue to see strong revenue, margins, and backlog. We hit record revenue in 2024 of $1.4 billion and a record gross margin of 13%.
Nathan Ring: The improvement in margin is directly attributable to our disciplined bidding and successful execution at the job site.
Nathan Ring: Along with the record results of 2024, we are seeing higher construction backlog compared to the same time last year at similar margins. As Brian mentioned, federal and state funding is at or near record levels, and nearly half of the IIJ funds have yet to be obligated in the states where Knife River operates.
Nathan Ring: Additionally, in 2024, six of our states passed valid measures for transportation investments, with more than $7 billion in new and renewed funding.
Nathan Ring: Moving from operations to administration, SG&A increased 5% over the prior year, as anticipated, due to higher labor costs and third-party expenses related to our acquisition program.
Nathan Ring: These costs were partially offset by higher gains on asset sales and lower incentive payments.
Nathan Ring: In 2025, in addition to the standard year-over-year inflationary increases of mid-single digits, we will be investing approximately $20 million to support our acquisition program, pit crews, and other edge initiatives that are driving our long-term growth.
Nathan Ring: This step up in investment is included in our overall guidance and we are confident these initiatives will generate strong returns.
Nathan Ring: As we look to the balance sheet in our capital allocation, we believe we are in a solid position to grow our business.
Nathan Ring: In 2024, we invested $170 million for maintenance and improvement for our fixed assets, including aggregate reserve replacements and plant and rolling stock upgrades. Additionally, we invested $131 million on six construction materials acquisitions.
Nathan Ring: After investing $300 million in 2024, our net leverage remains healthy, having improved to 1.0 at year-end. With a long-term target of 2.5 times and $237 million of unrestricted cash, we are in a strong position to support our capital priorities.
Nathan Ring: For 2025, we expect our capital expenditures for maintenance and improvements to be between 5 and 7 percent of revenue.
Nathan Ring: with the maintenance portion in line with depreciation and depletion. For growth capital expenditures we have approved 522 million dollars including organic projects related to increasing aggregate reserves and ready mix production as well as the pending strata acquisition.
Nathan Ring: Future acquisitions and organic projects would be additional to this amount.
Nathan Ring: We are on track to close our acquisition of Strata Corporation in the first half of the year. To help finance this acquisition, we plan to raise approximately $500 million of additional debt.
Nathan Ring: Lastly, as we look to 2025, we expect another year of record revenue and adjusted EBITDA, including
consolidated revenue between 3 and 3.2 billion dollars.
Nathan Ring: and adjusted EBITDA between $485 and $535 million, including geographic segments and corporate services between $420 and $460 million and energy services between $65 and $75 million.
Nathan Ring: In conclusion, we are proud of the work our teams have done to achieve record results in 2024 and position us for further success in 2025 and beyond.
Nathan Ring: Our segments are producing excellent results. We have a strong backdrop of dedicated infrastructure funding, and we are excited about the contributions we expect to see from our acquisitions across both our geographic segments and energy services.
Nathan Ring: KnifeRiver is growing and we are committed to achieving our edge goals, serving our customers, being the employer of choice, and delivering long-term shareholder value.
I would now like to open the call for questions.
Nathan Ring: Thank you, sir. Ladies and gentlemen, if you do have any questions at this time, please press star followed by one on your touchtone phone. You will then hear a prompt acknowledging that your hand has been raised.
Nathan Ring: And also, should you wish to decline from the process, please press star followed by two. If you're using your speakerphone, you need to lift the handset first before pressing any keys.
Speaker Change: One moment for your first question, which will be from Brent Philman at DA Davidson. Please go ahead.
Brent Philman: Hey, thanks, good morning, congrats on a great finish to the year. I guess first question
Speaker Change: Brian, when when you look into 2025 and you sort of think about all the different initiatives you're putting in place
Speaker Change: within the company. Which of the regions are you expecting to see sort of more meaningful improvement and profitability and margins? And then, you know, similarly from a product line standpoint,
Speaker Change: Where do you think there's some good potential for kind of margin enhancement just based on the Initiatives you're executing and obviously exclusive of what strata is going to do for you
Yeah, thank you, Brent.
Speaker Change: We're excited about, frankly, all of our initiatives. I mean, we've been very consistent, very focused on the EDGE initiatives. Obviously, we've been focused a lot on dynamic pricing and maximizing our bid margins in the bid room.
Speaker Change: We're going to continue to do that. We deployed the initial materials pit crew and saw the successes that we were having and just identifying those operational efficiencies.
Speaker Change: We've significantly improved that initiative and added like 11, 12 more teams in there. You know, where I say that we're focused, I mean, it continues to be on our pit crews and the self-help as it relates to
Speaker Change: our Operating Efficiencies. We've identified some real areas that we can continue to improve on, specifically in our aggregate site. They've been focused on the aggregate sites.
Speaker Change: But it's time to go back around to some of the larger sites that we started with two years ago.
Speaker Change: And we see that our margin expansion in aggregates is probably the one product line that...
Speaker Change: We see the most opportunities and we see opportunities in all of them frankly in ready mix asphalt or liquid asphalt Our quality control team that we put together recently our maintenance and our shop pit crews are going out and looking at that Contracting services. We've had some significant margin expansion in the last two years, but we're not done there either And so I mean, I think the aggregates has probably got the most margin expansion Opportunities their brand as far as regions again
and all of our regions are improving.
Speaker Change: I'm very excited with the re-segmentation and really combining the Northwest and the Pacific into the West. And, you know, we've got some momentum in the Pacific region right now. And I think we've turned the corner and we see some very exciting impact projects in Hawaii, up in Alaska. We've got strong backlog up in Northern California. We're starting to see more marine construction opportunities down in Southern California.
Speaker Change: you know, as far as one specific geographic region, I think they're all going to improve. I think they all have their eye on that 20% EBITDA margin long term, but I see that there's probably the most upside in the Pacific region, Brent.
Yeah.
Yeah, really helpful. Yeah, maybe just just follow up.
Speaker Change: private work, which I'm not necessarily sure we've heard from all. Maybe if you could just expand on some of those opportunities you're seeing, kind of thoughts on why you're starting to see those unlock now, and then you know what maybe the areas it's still a bit of an overhang on the business right now as well.
Speaker Change: Yeah, you know I say that there's a lot of talk There is actually some very specific bidding that's going on. I would say that
Speaker Change: When we look at the private work coming back into play, I think that we're really looking at that in the second half of this year. We certainly have some line-of-sight projects that will help us in the first half of the year, but I would say the majority of those
Speaker Change: are in the second half of the year. Back to the Pacific region, I had our general manager there give me a list of over a dozen subdivision jobs that they've bid since the election, over $70 million.
Speaker Change: just since the election. And so there is a lot of activity on the private side of the market. Data centers obviously has been a key part of our business and success in the past. We continue to see those opportunities throughout our footprint in Oregon, in Idaho, in Wyoming, in South Dakota.
Speaker Change: And so, you know, there's a number of specific projects, some energy up in the North Slope. We've got some very specific contracts up there that's going to benefit us in Alaska next year. And then the big job at Pearl Harbor in Hawaii.
Speaker Change: We talked about that. It's been a little bit delayed from last year, but we're mobilizing the ReadyMix plant onto site and expect to see some volumes that will benefit us again.
Brent Philman: a little bit later this year, but certainly in 2025. So a fair amount of talk, a fair amount of actual bids, not a lot of volume going out on those jobs yet, Brent, but fully expect that that will happen in 2025.
Really helpful. I'll pass it on. Thank you.
All right. Thanks, Brent.
Speaker Change: Next question will be from Catherine Thompson, Thompson Research Group. Please go ahead, Catherine.
Brent Philman: Thank you for taking my questions today. I wanted to circle up on the $20 million step up related to acquisition costs. I appreciate that color in your prepared commentary, but just to clarify for SG&A in the quarter
Catherine Thompson: with that $20 million step up in acquisition-related costs. It'd be helpful to know what is or isn't included.
Catherine Thompson: in that, you know, for instance, is Strata included or not included in that? And I guess more importantly, how should we think about it going into 2025?
Catherine Thompson: and how is this move different than what you had been doing previously. Thank you.
Catherine Thompson: Yeah, Calvin, I'll start just with the excitement that we've got in those $20 million of initiatives. And then I'll turn it over to Nathan, really, to help you model and look at 2025 as it relates specifically to that $20 million bucket and the SG&A. You know that we've...
Catherine Thompson: started and we're active in our robust pipeline of opportunities in business development.
Catherine Thompson: We saw some of those costs hit us kind of later in the year, this last year at the third quarter and fourth quarter of 2024. And so a large part of that $20 million step up is related to our ongoing 12 full months of a robust pipeline.
Catherine Thompson: opportunities and really help us execute our growth strategy both for organic growth
and for our M&A activity.
Catherine Thompson: The other parts that are in that just really is to kind of...
Catherine Thompson: help us expedite and accelerate our EDGE initiatives and staff up those teams, purchase some software, and provide additional tools to our teams to really embrace and track our EDGE initiatives. And so I think it really is a
Speaker Change: Yeah, thanks, Brian. Good morning, Catherine. Thanks for calling. I appreciate it. So, for the fourth quarter, you asked if there was costs associated with what Brian mentioned. Maybe it's helpful to understand a little bit more about the fourth quarter because we did have actually $75 million in costs last year, 2023, compared to $70 million in 2024.
Speaker Change: There are three things that I want to talk about with you in 2023 that help understand this variance of why did you go down an SG&A cost year over year?
Speaker Change: The first one is in 2023, in the fourth quarter, we have higher incentive bonus paid out. That was about $4 million.
You also may recall that we talked about these
Speaker Change: One-time asset impairments that were about six million dollars and then lastly These are all in the fourth quarter 23
Speaker Change: We also had one-time costs still in the fourth quarter of 2023 of about $4 million, so all told, in the fourth quarter of 2023, we had about $14 million of what I'll call these one-time-like costs.
Speaker Change: If you take that into account and compare 24 and 23, we were actually higher in 24 and it relates to the acquisition program cost that we talked about in the third quarter of about 5 million and then the additional increase is really related to normal annual inflationary cost that we would see year over year.
Speaker Change: So hopefully that kind of helps understand the fourth quarter, what was in it, we did have higher costs associated with our acquisition program as we shared with you.
As we look to 2025 and what we expect there.
Speaker Change: I think we can look to 2024 as a starting point. I mean, I talked about a few variances in the fourth quarter. There's probably variances throughout the year in 2024, but 2024 is probably a fair starting point for your modeling. And on top of that, I would say just similar to what we did at the beginning of last year, we talked about.
Speaker Change: And then with that, the $20 million that we talked about in the Prayer to Marks and Brian went through.
Speaker Change: Very excited about it. This is all included with, you know, very excited in terms of what we have going on there. It's included within our guidance, and I'll just end with saying with that in our guidance, you can see that our adjusted EBITDA and our adjusted EBITDA margin are up, including these costs.
Speaker Change: So maybe that helps you understand fourth quarter, Catherine, and what we kind of expect going into 2025 for SG&A.
Speaker Change: It does. Thank you. Also sticking to a little bit of forward-looking and backwards-looking, I know you've been spending a lot of time on the contracting services revenue.
Speaker Change: I mean, a segment overall and margins. And you give a lot of detail for aggregates, concrete and asphalt, but maybe a little bit, and you have given some color in terms of backlogs.
Speaker Change: 425, that would impact contracting services, but more color on the guide for contracting services.
Speaker Change: Also, you know, you noted it in your prepared commentary just how much has happened over the past couple of years.
Speaker Change: since going public, maybe just putting into perspective how EDGE has flowed through for numbers for this segment in particular and other segments that you think would be important. Thank you.
Nathan Ring: Thanks, Catherine. Yeah, our contracting services is an important part of our company. It's about 39 to 40% of our total revenue. And as you've written in your reports, I mean, you've acknowledged that this is kind of that golden era of rebuilding America's infrastructure. And so all the fundamentals that feed into our contracting services continues to be strong. I mean, we've got record or near record DOT budgets in all the states that we operate in.
Nathan Ring: You know, we're starting, we have that unique ability to pivot between public and private work. The majority of the work that we do, 86% of...
Nathan Ring: was public, and so a big part of what we do is public work. So those fundamentals, that funding is very robust, it's very healthy, and it's not just for the next couple of years. We look at this as a decade worth of work to get caught up and go out and rebuild.
You mentioned that our backlog is up 13%.
Nathan Ring: And, as you know, that's not necessarily indicative of what our revenue is going to be for the year. And that backlog includes that $96 million job.
Nathan Ring: Really that's a three-year job and you can look at that kind of as a third and a third and a third It's one of those projects that we really get the benefit of having it be Kind of phased in equal chunks. And so that's built into that backlog and then
Nathan Ring: We had a more normal cycle timing of bid lightings this year. We had a good fourth quarter of bid lightings and success.
Nathan Ring: and so a little bit of our backlog improvement is the timing and the success that we had in the fourth quarter. We're still active.
Nathan Ring: very busy bidding work right now in the first quarter. So that's a long way to say the fundamentals are strong, our backlog is strong.
Nathan Ring: and how to look at, you know, we don't give specific guidance for contracting services, but really what I'd point you to is our success that we had last year. I think if you looked at our revenue and our revenue growth and our margins from last year,
Nathan Ring: That would be very much in line with how we're looking at our contracting services, which, again, is really pretty much in line with what we're looking at for volumes on
Nathan Ring: our material side of the business. We're saying low single digit increase for volumes, for aggregates, rated mix, and asphalt. And I think you can just kind of look at our contracting services pulling through a lot of those materials. So very excited about our contracting services.
you know, asked, kind of just...
Nathan Ring: frame up the amount of work and effort that we've been putting into the EDGE strategy and just
the successes that we've had in that, you know.
Nathan Ring: We went public in June of 2023, and we really started talking internally about our EDGE initiative early in 2023, and so during those two years, I mean, if you look at our results at the end of 22 compared to the results at the end of 24,
Nathan Ring: We've improved our EBITDA, our adjusted EBITDA, by almost $150 million. I mean, it's a 48% improvement in those two years.
Nathan Ring: which we went from 12.4% to 16% on our adjusted EBITDA margins. I mean, so the EDGE strategy is working, and a big part of that just has been to grow our...
Nathan Ring: revenue through pricing and really taking on less work. And we actually did less work across the board in aggregates, ReadyMix.
Nathan Ring: improved our EBITDA by almost $150 million. We've raised our aggregate prices.
Nathan Ring: by 20% in those two years, our ReadyMix prices by 24%. And so our dynamic pricing, and the Sandler training, and all the efforts we're putting into our sales team and commercial excellence is truly paying off.
Nathan Ring: You know, we talk a lot about our EBITDA margin, exceeding that 20% long term, but a big part of our edge strategy is also growth and just becoming best in class at everything we do.
Nathan Ring: So, excited about the six acquisitions that we did last year.
and the EBITDA is going to contribute in 2025.
Nathan Ring: Even more excited about the Strata acquisition that we announced the intent to close that deal in the first half of this year And then just all the other initiatives internally with our frontline employees team members as it relates to Improvements and just a keen focus on safety
Nathan Ring: and just becoming best in class at being world-class operators. So, lots of going on at NYFER, lots embedded in that edge, but certainly some great accomplishments the first two years.
Thank you. Best of luck.
Thank you.
Speaker Change: Next question will be from Trey Grooms at Stevens. Please go ahead, Trey.
Trey Grooms: Yep, good morning and thanks Brian and Nathan, nice work in the quarter.
Thank you. So.
Trey Grooms: If I could maybe, if we could maybe dive into Strata a little bit more, you know, just kind of speaking specifically about the geographic markets, you know, what attracts you to these markets, how
Trey Grooms: maybe these markets compared to, you know, the overall enterprise, maybe from a pricing and maybe demand outlook or also, you know, opportunities you see there for implementing your edge strategy and many other opportunities.
Trey Grooms: Yeah, no, we're very excited about that opportunity Trey and you know, we're going through the customary regulatory approval process right now and
Trey Grooms: have announced that we expect that to close in the first half of this year, and I just tell you that we are on track for that and it's going good. This is one of those acquisitions that, frankly, it checks all of the boxes of our edge strategy and our growth strategy. It's aggregates led.
It's vertically integrated. It's in mid-size high-growth markets.
It's a creative to knife reverse margins.
Trey Grooms: It's in markets that we know really well. It's an infill into our markets.
Trey Grooms: It's got a very qualified and high-quality, well-respected management team led by their owner, Jim Bradshaw.
They were really...
Trey Grooms: very thoughtful decades ago and started looking at how can they efficiently move aggregates by rail and they were really frankly ahead of their time and and so this
Trey Grooms: fits our model of looking at, you know, how can we move aggregates multimodal in midsize high growth markets, and frankly, in markets that we know well, and
And, you know, North Dakota is our home state.
And they've got operations throughout North Dakota, throughout Minnesota.
Trey Grooms: So, this one is a company that we've looked up to for a long time, and it's going to provide long-term value for our shareholders for really, you know, decades to come. So, something that we're really excited about.
Speaker Change: All right. Very good. Thanks for that color, Brian. Yeah. And maybe shifting gears to ReadyMix. You guys are still putting up some really good margins there in the ReadyMix business.
Speaker Change: You're looking for additional pricing in ReadyMix this year, so I guess the question is, what is the outlook for raw material inflation in your ReadyMix market, and how are you thinking about price-cost in this segment?
Yeah, I think we've done a fantastic job at really
Relooking at our customer base there.
Speaker Change: and taking on again less work and making more money per yard, overall margin, overall EBITDA.
It really has been...
Speaker Change: very intentional, and we've raised our prices over the last two years by 24%. We do see that moderating to a more sustainable...
Speaker Change: level of those mid-single digits tray. And so, you know, as you know, most of the ReadyMix that we supply would be into the private market.
Speaker Change: And we do see some opportunities with warehousing and data centers and residential eventually coming back. I think that's all up site.
as it relates to our ready-mix markets.
Speaker Change: As far as input costs, we supply most all of our aggregates, and so that increase in market pricing is going to go to Knife River as well, so there'll be a mid-single digit increase as far as cost there.
Speaker Change: Our cement suppliers, we have a number of different suppliers in each one of our markets.
Speaker Change: into our costs going forward, and I can just say that our mid-single-digit prices, price increases will outpace our costs in ReadyMix, and we'll continue to see margin expansion in ReadyMix.
Very good.
Speaker Change: That's good to hear. If I could sneak one more in, maybe for Nathan, just a little bit of a housekeeping one. So inventory ticked up a little bit in the quarter. Could you maybe expand on that a little bit? And, you know, maybe where working capital or just kind of inventories, you kind of have expectations there for this year? Anything to note? Thank you.
Nathan Ring: Yeah, Trey, good morning. Probably the main thing to note there is a few pieces. One, the largest piece of that would be, as we talked about, Brian mentioned it here just a moment ago.
Nathan Ring: We did acquisitions last year and of course that was towards the end of the year.
Nathan Ring: And we get their balance sheet then towards the end of the year. And so a lot of the increase that you see, I shouldn't say all of it, but a good portion of that does relate to bringing on materials led businesses. That's what we purchased. So you had Albina, that's a liquid asphalt business, and then we had aggregate reserves. So when you look, most of their
Nathan Ring: Balance sheet comes over in that inventory line. That's the majority of it. Of course, we do have annual increases in our costs. That's part of the inventory. And then we've talked about volumes going up, so we do have some, I mean, it's not a huge amount, but we do have higher volumes in terms of the tons of rock on the ground.
Nathan Ring: A little bit. So those are the three buckets I'd put into, but most of it, you talked about working capital, that'd be the other piece of it too, Trey.
Nathan Ring: is we bring on their full balance sheet of those acquisitions, that would be the increase you see in working capital.
Nathan Ring: You might be looking at percentage of working capital year over year and notice an uptick. I'd say a lot of that has to do. So when we get into 2025, and we see the results of these operations come into place, I think you'll see that working capital level off again, related to those acquisitions.
Speaker Change: that helped right yep absolutely that was super helpful thank you for the color that all makes sense to me so I'll pass it on and best luck thank you
Thanks, Trey.
Speaker Change: Next question will be from Garek Szymon at Loop Capital. Please go ahead.
Garek Szymon: Oh hi, thanks for having me on. I wanted to ask just first on how
Garek Szymon: the cadence of the year is expected to play out. Is there anything notable, whether it's first half or second half EBITDA growth? Also recognizing I think in the first quarter you had very strong aggregates price growth a year ago. I think some of that was project timing. So just wondering if there's anything to call out to help us model how the shape of the year should progress.
Yeah. Good morning, Garrick.
Garek Szymon: You know, traditionally, it's important to remind everyone that because of our footprint, having a northern exposure
Garek Szymon: that our first quarter, we've historically, over the last five years...
you know some jobs that we see starting in
Garek Szymon: that May, June, July timeframe, I think will benefit us a little bit more.
Garek Szymon: in the second half of the year. I wouldn't say that it's material enough that you really probably need to look very differently at our cadence, kind of that five-year average, the first quarter losses of 5%, then you'll make about a third of our EBITDA in the second half and in the second quarter. The third quarter is always our peak. It's a large quarter for us.
Garek Szymon: And as traditionally in that 50 to 60%, I don't see that changing very much. And then for us, weather can impact us in that fourth quarter and we've had very good weather over the last two years. Frankly, that was part of the reasons, part of the beat that we had this last fourth quarter in 2024. And that was against a comp in 2023 that was also very favorable weather. And so.
Garek Szymon: A couple of extra weeks of work does certainly help us out.
Garek Szymon: But no, I don't think it's material, but I do see more private opportunities, subdivision work, data center work, railroad work, warehousing, that could possibly impact us more in that second half than normal.
Garek Szymon: with implementing dynamic pricing across your network. And anything to think about, I think we heard from an aggregate producer.
yesterday that indicated some more markets were shifting to
Garek Szymon: Price increased a little bit later than what they saw a year ago. Just wondering if there's anything from a timing standpoint that we should think about for aggregates pricing this year.
Garek Szymon: No, I don't think there's anything different on timing on our end. I mean the dynamic pricing as you know is that we're bidding
jobs specifically throughout the year, that there's not an annual
Garek Szymon: We're dynamically pricing our materials based on the proximity of the jobs to our locations.
Garek Szymon: and what our real-time costs are. And so that will continue. We have had good adoption throughout our regions of that initiative last year. We're continuing that process and providing.
Our sales team's additional tools for dynamic pricing.
Garek Szymon: And so, I think that, you know, our guidance of mid-single digits is sustainable.
Garek Szymon: increase that I think could become the new norm. I think the high single digits and even the double digits we had two years ago.
was a catch-up from 22.
Garek Szymon: But I think that we have good pricing momentum going into next year with all the tools in place to kind of help us implement that throughout the year. So nothing real specific on first half, second half, cadence on pricing.
Speaker Change: Okay, now that that makes sense. Thanks for the help and best of luck.
Yep, thank you.
Speaker Change: Once again, ladies and gentlemen, a reminder to please press star 1 if you have any questions.
Speaker Change: Next we will hear from Ian Zaffino at Oppenheim. Please go ahead.
Speaker Change: Hey guys, this is Isaac Salazan on for Ian. Thanks for taking the question. Just on the 2025 guidance, the EBITDA margin expansion, I guess...
Speaker Change: you know, 20 to 70 basis points, uh, compared to 24. Um, what would it take for, I guess, marches to get to the high end of the guide? Um, I guess, is there anything to call out on the commercial side, like you spoke about on dynamic pricing, um, or operations such as the pit crew initiatives?
Speaker Change: That's maybe a particular focus for the playbook this year. Thanks.
Speaker Change: Yeah, so I think the midpoints, Isaac, that you suggested are midpoints is about 50 basis points of improvement, and that includes, frankly, it includes 70 basis points.
Speaker Change: of additional investments that we're making as those edge-related business development initiatives to help us grow and become excellent in everything that we do.
Speaker Change: That guidance, that 50 basis point improvement in our guidance, actually includes those $20 million in additional stepped up in costs.
Speaker Change: What would it take to hit us on the high end of that guidance? There's a number of things. I mean, you've heard me talk a fair amount about the private work that we're beginning to see and talk about. Some of those are coming to fruition in the bid room. And so I think that would be – I think there's, you know –
Speaker Change: There's lots of opportunities on the private side, specifically that would impact our material side of the business, especially aggregates and ready mix. That's where we'd see the biggest benefit.
Speaker Change: there. I think that we continue to roll out our pit crew initiatives and
Speaker Change: I think the self-help and the things that we have identified the last two years have been meaningful, and a lot of those were some operational costs and improvements that actually hit us as a cost last year that will begin to see those benefits this year.
you know, on the, on the
Speaker Change: Revenue side, to be on the high end of that, again, there's a lot of opportunities. This is our busiest time of the year to be bidding work, and we're still active in the bid room.
Speaker Change: right now, and so I think that, you know, if we continue to be disciplined and maintain our margin expectations in the bid room, but looking at the bid lettings and the amount of work that's coming out in states like Texas and Iowa, Nebraska, Minnesota, Idaho, there are a lot of opportunities to continue to pick up work. We've got the capacity.
Speaker Change: to take on more work, but we're going to continue to be disciplined and make sure we hit our margins. So that would be some upside both on the revenue side and on the EBITDA within that guidance range.
Speaker Change: Okay, thank you. That's very helpful. And then just a quick follow-up on Strata. It might be too early to comment, but I have to ask anyway, if you have any additional color on margin profile of the business and potential accretion for the deal.
Speaker Change: Yeah, we're anxious to provide more details upon the completion of the regulatory review and approval. You know, I would say that you can look at Strata
Very similar to Knife River. They are a materials-led business.
Speaker Change: And, you know, we have about 40% of our revenue is comes from contracting services and materials and I would just say, you know, 60% materials 40% contracting. I say they're a little bit more heavily influenced and percent of the revenue is a little bit more towards materials and so this is a bigger materials company.
Speaker Change: than Knife River is, and that will, you know, you look at our margin profile of our materials business, whether that's aggregates or ready mix, and that's their primary two products that they sell.
Speaker Change: and those margins are overall accretive to our consolidated margins. So, I think that, you know, I think you could look at it that way and we're excited to bring them on in the first half of the year.
Okay, awesome. Thanks so much. Yep.
Speaker Change: At this time, we have no other questions registered. Please proceed.
Speaker Change: Alright, well thanks everyone for joining us again today. We're excited about our EDGE plan and what we see ahead in 2025 and the years beyond that. We appreciate your continued support of Knife River and we'll 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. Enjoy the rest of your day.
Speaker Change: Many thanks to and all people who contributed to making this video possible!
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