Knife Riv Holding Co.

Good morning, ladies and gentlemen, and welcome to the Knife River Corporation, a third quarter earnings conference call. At this time, all lines are in a listen-only mode. 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. I would now like to turn the conference over to Mr. Nathan Ring, Chief Financial Officer. Please go ahead.

Thank you, and good morning. My name is Nathan Ring, Chief Financial Officer of Knife River, and it's my pleasure to welcome you to our third quarter 2023 earnings call. Today's discussion includes forward-looking statements as defined by the United States securities laws in connection with future events. Knife River is subject to risks and uncertainties that could cause actual results to differ materially. Knife River is under no obligation to, except as legally required, publicly update or revise any forward-looking statements. whether resulting from new information, future events, or otherwise. For more information about the risks and uncertainties associated with forward-looking statements, please refer to our most recent SEC filings. For further detail, please refer to the legal disclaimers contained in today's earnings release and other public filings, which are available on both our website and the Securities and Exchange Commission's website. During this presentation, we will make references to certain non-GAAP information. These non-GAAP measures are defined and reconciled to the most directly comparable GAAP measures in the appendix to today's presentation, as well as our filings with the SEC. These materials are also available on our website at www.kniferiver.com under the Investors tab. Joining me today is President and Chief Executive Officer, Ryan Gray. He will begin today's call with a discussion of our financial results, segment performance, and competitive edge plan. I will then review the third quarter product line results, leverage position, and 2023 guidance. Following prepared remarks, the operator will open the call for our question and answer session. I'll now turn the call over to Brian.

Thank you, Nathan. Welcome, everyone, and thank you for joining us today. The third quarter is historically our strongest quarter each year, and historic is exactly the right word to describe the third quarter of 2023. We reached all-time quarterly records for revenue, net income, EBITDA, and adjusted EBITDA. Each reporting segment saw improved year-over-year results as our operations continue to benefit from price optimization and targeted bidding strategies across all consolidated product lines. These strategies are part of our competitive edge plan, which I discussed last quarter and which we began to implement early this year to help drive long-term profitable growth. Based on our pricing initiatives, we experienced significant profitability improvements. led by a 16.2% increase in the average sales price for aggregates. We also benefited from strong results in our energy services business within all other. Combined, the effects of our edge initiatives, our strong market dynamics, and our vertically integrated business model helped drive our record results. We'll provide a more detailed update on each of these areas as part of today's presentation. For the quarter, we reported revenue of $1.1 billion, a 12% increase from the same period in 2022. Our third quarter EBITDA was $241 million, which was a 40% increase year over year, while our adjusted EBITDA was $247 million, a 43% increase year over year. These record results were driven by a few key catalysts. First, our employees fully committed to our EDGE plan and began setting the groundwork for the successful full-scale implementation of key operational improvements. I can't thank them enough for their efforts and complete support of our EDGE initiatives. Second, the markets where we operate continue to benefit from tailwinds in the form of federal, state, and local funding for public infrastructure projects. And finally, the work by our pit crews to improve operating efficiencies, coupled with our strategic pricing optimization plan, has resulted in significant margin expansion in every segment, as well as margin expansion in all product lines, most notably a 760 basis point improvement in aggregate. Based on the exceptional results year to date, we are raising and narrowing our guidance for revenue, EBITDA, and adjusted EBITDA, which Nathan will highlight during his remarks. Moving to slide four, I'd like to quickly recap our business model. While Knife River is an established company with over 30 years in the construction materials and contracting industry, we became an independent publicly traded company as of June 1, 2023. We believe our mix of construction materials and contracting services differentiates us from many of our competitors and peers. This proven model of vertical integration has created resiliency across market cycles and contributes to our industry-leading return on invested capital. We're a top 10 aggregates producer in the United States with 1.1 billion tons of permitted reserves. Our major downstream products include ready mix and asphalt, and we also supply liquid asphalt and cement in certain markets. Additionally, we perform contracting services across 12 of the 14 states where we operate. As we look over our operations, we continue to see generally strong demand for our products and services and our high growth mid-sized markets that is further supported by tailwinds from federal, state, and local infrastructure funding. The last key point I'll mention before moving on to discuss our core business strategy is our life at knife culture. We believe that our commitment to putting people first has a direct impact on our bottom line. By providing ongoing training and focusing on engagement with our team and being a great place to work, we have lower turnover, longer tenure, and a dedicated group of talented employees who safely deliver strong results for our shareholders. Turning to slide five, competitive edge is Knife River's framework for sustainable and profitable growth. As we highlighted last quarter at our investor day, the letters in edge stand for EBITDA margin improvement, discipline, growth, and excellence. Let me provide some updates from the third quarter on our initiatives in these areas. First, on EBITDA margins, we continue our efforts to better align our pricing with the value we are delivering to our customers. This resulted in double-digit price improvements across our core product lines of aggregates, ready mix, and asphalt. Our pricing strategy on our materials, combined with targeting higher margin work for contracting services and focusing on cost controls and efficiencies at our operations, contribute greatly to our 43% year-over-year increase in adjusted EBITDA. Our trailing 12-month adjusted EBITDA margin is 15.6% compared to 11.8% one year ago. Our team continues to be laser-focused on our longer-term goal of reaching 20% adjusted EBITDA margins. Second, during the quarter, we continue to champion financial discipline and generating strong cash flow, while significantly reducing leverage on our balance sheet. We exited the third quarter with ample capacity for further growth, which Nathan will highlight in his financial review. Third, we continue to prioritize growth, both organic and inorganic. our business development team is looking at a number of strategic opportunities to grow our business with our current footprint and adjacent markets, with an emphasis on our aggregate product line. Regarding organic opportunities, we brought our new state-of-the-art pre-spread manufacturing facility in Washington online in the third quarter, and our Honey Creek Quarry in Texas began full production late in the second quarter. We expect both of these organic efforts to positively contribute to our results going forward. And fourth, We are focused on excellence in everything we do, starting with maintaining our people-first, life-at-knife culture. These efforts are measurable in a number of ways, including our safety performance, retention rates, and outreach efforts. One I will highlight today is our training and recruiting efforts at the Knife River Training Center. As of September 30, our training team has provided 18 commercial driverless courses, including seven courses this year. Students from the Knife River Training Center have a 98% success rate in passing their CDL test. which is administered by third-party instructors and is significantly above the national CDL passing rate. We will continue to focus on excellence in all we do, with the goal of becoming best in class everywhere we operate. Our geographically diverse footprint saw solid, broad-based growth in the quarter, with record revenue in each segment. As is typical, some markets were stronger than others, and we were led this quarter by activity in the Mountain and Pacific regions, as well as by record results in energy services. While we are in the early days of implementing our EDGE plan, we have been pleased with the results and the progress toward our goals. Going forward, we believe the company-wide rollout and implementation of our EDGE strategies will support further pricing strength and continued profitable growth for the long term. I'll quickly recap the quarterly results for our reportable segments before turning the call over to Nathan for additional detail on our financial performance. Starting in the Pacific region, price increases contributed to increased revenue, gross profit, and EBITDA. We saw volume growth across all product lines in this segment, led by increased activity in Hawaii and Northern California. Contracting services revenue increased 12%, largely related to the catching up on work in California that had been delayed by wet weather earlier in the year. In this segment, we are also a submit distributor, and we saw good quarter over quarter gains in Alaska. We are a supplier to contractors who are working on a large dam project near Fairbanks. EBITDA improved $13 million year-over-year to $38 million, an all-time quarterly record for this segment. Moving into the Northwest region, we also benefited from strong product pricing, which more than offset volume declines in Oregon, as volumes moderated somewhat from preceding years of record activity. EBITDA improved $5 million year-over-year and is at an all-time record at $49 million for the quarter. Contracting services backlog increased 51% year-over-year to a quarterly record of $227 million, principally from an impact DOT project in Southern Oregon, which we secured last year. As I mentioned earlier, we commissioned our new state-of-the-art free space manufacturing facility in Spokane, Washington during the quarter. Historically, we have enjoyed strong returns from our free space business in the Northwest, and this new facility positions us for greater growth as it improves efficiencies and increases our capacity. Next is our mountain region, which had an exceptional quarter and remained ahead of our record year in 2022. We saw volume growth across all product lines and contracting services, led by strong residential, commercial, and public agency activity. We continue to see opportunities for bidding across these strong markets, and we continue to target higher margin growth in building our backlog. Revenue improved 25% year over year, driven primarily by price increases, and EBITDA improved to an all-time quarterly record of $60 million, a 53% increase year over year. The mountain region continues to be one of the fastest-growing areas in the United States, and we are well positioned to take advantage of future growth. In the North Central region, strong price increases across all product lines more than offset volume declines. EBITDA improved $12 million year-over-year to an all-time record of $71 million. Implementation of the EDGE strategy and solid project execution has led to significant improvement year-over-year on gross margin for the contracting business. As we were more selective on projects, we bid. Additionally, the state of Minnesota passed a $2.6 billion infrastructure funding package that will allocate money for roads, transit, and airport projects. Collectively, the region continues to see strong bid lettings. Finally, all other includes our energy services business, our south region, and corporate services. Third quarter revenue improved $19 million year over year to $139 million. The energy services business benefited from both favorable market pricing and a strong bidding season. which led to higher volumes and historically high revenues and profitability. Even though energy service is small relative to our primary reporting segments, it has made a larger than normal contribution to our success in 2023. Therefore, I'd like to take this opportunity to highlight our energy services business, which is a valued component of our vertically integrated business model. This business supplies liquid asphalt, which is the binding agent used along with aggregates to produce asphalt mix. We have terminals where we store value out of liquid asphalt, and also manufacture products in order to meet the quality specification requirements of our end customers. This business has been a stable and profitable performer since we purchased it in 2005. Results have been exceptional so far this year, and while we believe Energy Services will continue to be a solid contributor to EBITDA in 2024, we are expecting results to remain above average but trend lower than the results we are experiencing this year. As mentioned earlier, the bidding environment for Energy Services was strong this year, And while they are carrying forward contracts for the 2024 shipping season, the majority of their work will bid between now and next spring. We will have improved visibility when we provide guidance for 2024 early next year. Nathan will highlight this again when we discuss our updated guidance. Our south region is also included in all other, and results benefited from the fully operational Honey Creek quarry, along with improved margins in asphalt and contracting services in the quarter. Market conditions for our materials business remained attractive. The energy services strength and south regions improvement contributed to a third quarter EBITDA improvement of $18 million. Looking ahead, the state of Texas announced during the third quarter a record $142 billion investment in its transportation infrastructure, including a 10-year, $100 billion statewide roadway construction plan. We anticipate this being beneficial to our south region in the quarters and years to come. To conclude my remarks, I'd like to underscore my appreciation to our team for delivering on our EDGE plan and restate our commitment to our EDGE goals, including continued progress toward our long-term goal of 20% adjusted EBITDA margins, maintaining our industry-leading return on invested capital, and becoming number one in our markets of operations. We have a highly experienced team, a blueprint for profitable growth, and we are well-positioned to take advantage of funding tailwinds in a very healthy industry. I will now turn the call over to Nathan for a detailed look at our financial results. Nathan?