Knife Riv Holding Co.

Good morning, ladies and gentlemen, and welcome to Knife River First Quarter Results 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 anyone has any difficulties hearing the conference, please press bar zero for operator assistance at any time. I would now like to turn the conference over to Nathan Ring, Chief Financial Officer. Please go ahead.

Thank you, Operator, and welcome to everyone joining us for the Knife River Corporation First Quarter Results Conference Call. My name is Nathan Ring, Chief Financial Officer of Knife River, and I'm joined by our President and Chief Executive Officer, Brian Gray. Today's discussion will contain forward-looking statements about future businesses and financial expectations. Actual results may differ significantly from those projected in today's forward-looking statements due to various risks and uncertainties. including the risks described in our periodic reports filed with the SEC. For further detail, please refer to the legal disclaimers contained in today's earnings release and other public filings, which are available on both our website and the SEC website. Except as required by law, we undertake no obligations to update our forward-looking statements. 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. These materials are also available on our website under the Investors tab. Brian Gray will begin today's call with a high-level overview of our first 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 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.

Thank you, Nathan. Welcome, everyone, and thank you for joining us today. After a record-breaking year in 2023, we continue to have momentum heading into the 2024 construction season. I'm going to talk about what we see ahead for 2024, including our strong markets, improved backlog, growth opportunities, and favorable materials pricing. Since this is our first time reporting first quarter results as a standalone company, we wanted to provide you with additional context for the quarter. Knife River traditionally spends the winter months preparing for the start of the construction season, which for us, ramps up in the second quarter. These preparations include maintenance on our equipment, mobilization of portable plants, and training for our team members. Typically, these reconstruction activities begin in the fourth quarter and last into the second quarter. However, due to the extended construction season last year and an earlier start this year, these activities were largely compressed into the first quarter. This earlier start contributed to record first quarter revenue. While the additional preseason expenses affected our adjusted EBITDA for the quarter, we fully anticipate we'll recoup most of these expenses in the second quarter. Adjusted EBITDA for the quarter was a loss of $17.7 million compared to a loss of $13.7 million in the prior year period. The difference was expected, as we had the increased pre-construction expenses I just mentioned, along with the additional cost of being a standalone business in the quarter that we didn't have in the first quarter of last year. Our crews and equipment are ready to get back to work, and we have a lot of work to go perform. As I mentioned during our year-end call, we noticed delayed bid lettings in the fourth quarter last year compared to normal. That contributed to an increase of lettings in the first quarter, and we picked up our fair share of new work. Our contracting services added nearly $423 million to our backlog during the first quarter, a 66% increase from what we captured during the same period last year. This brings our backlog to similar levels we had at the same time last year, but this time at higher expected margins. We continue to be disciplined on bid day, incorporating new edge-related bidding tools and strategies. The transportation departments in Knife River's 14 states increased their total spending authority for this year by 16% from 2023. We are already seeing the results in our backlog, and we expect these tailwinds, coupled with continued pricing growth for our materials, to provide momentum through the 2024 construction season and beyond. We operate in healthy markets. The fundamentals of our business are strong, and we believe we are well positioned for a good year. Next, I'd like to update you on a number of growth initiatives we are pursuing, along with other important components of our competitive edge plan. If you are new to our calls, Knife River's competitive edge strategy is our plan to improve our adjusted EBITDA margins and deliver long-term value for our shareholders. Edge stands for EBITDA margin improvement, discipline, growth, and excellence. On our year-end call, we spent some time discussing our EBITDA margin improvement, including that we achieved our stated goal of 15% adjusted EBITDA margins two years ahead of schedule. Our next goal is to reach 20% adjusted EBITDA margins, and we are making good progress towards that goal. Let me provide you some insights from the first quarter. Starting with EBITDA margin improvement, we are focused on a number of initiatives to optimize pricing and lower our costs. The success of the process improvement teams that I've mentioned on previous calls has led to the development of additional such teams, each with a different area of focus. We now have a process improvement team dedicated to providing targeted training on our commercial excellence with an early emphasis on dynamic pricing. We have introduced new tools to help us analyze daily margins at the transactional level. We have implemented these tools at our aggregates operations and are now moving forward at our ready mix operations. In addition to new tools, our senior leadership team committed to a company wide sales training program to develop support and educate our sales professionals. We have hired a full time sales training instructor and partnered with a national third party sales training provider to support our sales team and their efforts to optimize pricing. We're also in the first phase of streamlining the applications and systems we use in our sales process, from order to cash. This in-depth review of business applications and systems will help us support our commercial teams and customers. Lastly, under the first E in EDGE, I want to give you an update on our original process improvement team, or pit crew, which is focused on operational excellence. We launched this initiative last year to identify and share areas for improvement at our aggregates, asphalt, and ready-to-mix plants. The team visited 10 of our larger locations last year, and we have increased its size this year to help us drive operational improvements in the field. The team this year hit the ground running and has already identified opportunities at several of our locations to reduce production costs, improve runtime, and support faster truck loading. We have company-wide support for each of these commercial and operational excellence initiatives with the goal of continuing to improve our margins. Moving to the D in EDGE, we remain disciplined on our approach to bidding and continue our disciplined allocation of capital. I highlighted the fact that we picked up 66% more work in the first quarter at higher expected margins. Our sales and construction estimating teams continue to be disciplined on bid day, utilizing new bidding tools with an emphasis on optimizing margins and targeting work that meets our edge initiatives. Also during the quarter, we remain committed to the disciplined allocation of capital towards strategic growth projects. We've had a number of organic growth investments, focusing our capital on areas where we believe we can achieve strong returns. Nathan will talk more about our balance sheet and healthy financial position in his remarks. I'll share some news on advancements we made in the first quarter related to growth. First, our intent in 2024 is to utilize approximately $40 to $50 million from our CapEx budget toward edge-related growth initiatives. During the first quarter, we advanced a number of these initiatives, including a greenfield ready mix operation in Iowa, a liquid asphalt expansion in South Dakota, and multiple plant upgrades to reduce production costs. Our pit crews and regional operations teams continue to identify organic growth opportunities to help us achieve our goals. Also, as noted in our earnings release, we acquired a small ready-mix operation in South Dakota on April 3rd. This business adds two ready-mix plants and 10 trucks between our Sioux Falls and Yankton operations, providing infill development in the rapidly growing Sioux Falls market area. Our acquisition pipeline is active, and we are looking at several potential deals with a focus on aggregates and materials-led operations in mid-size, high-growth markets. We continue to add resources to our corporate development team, and we have line of sight opportunities to grow in each of our existing operating segments and product lines. And finally, our second E in EDGE is excellence, which is our relentless drive to be the best at everything we do. I mentioned that we partnered with a corporate sales training consultant, hired a sales training manager, and formed a new pit crew to help us become best in class at commercial excellence. We also launched a training workshop for our dispatch teams in February. a focus on excellent customer service while reducing our delivery costs and we continue to focus on efforts to keep improving our safety performance as a people first company the safety and well-being of our team is paramount and we are intent on becoming best in class each of our segments is committed to these edge initiatives and our operations teams have led the way in implementing them i'm very pleased with the progress we have made and i'll now provide a quick recap of each segment's performance for the quarter as a quick reminder In the fourth quarter last year, we realigned our reportable segments to better support our operational strategies. The liquid asphalt business from the Pacific segment is now reported in energy services. In addition, the north central and south operations both now report as a new central segment. Starting in the Pacific segment, we were able to get into the field earlier and more frequently in California than we were last year, which contributed to a 19% increase in revenue. EBITDA for the segment decreased $800,000 year over year largely related to the timing of expenses for repair and maintenance. Looking ahead, we anticipate continued strength in the public works, residential, and warehouse markets in Northern California to positively impact the segment, along with strong military spending in Hawaii and Alaska. In the Northwest segment, we achieved record first quarter revenue in EBITDA. The segment had improved gross margins in contracting services and aggregates, both driven by edge-related pricing initiatives and solid execution of early season construction work. The outlook in the Portland metro area is strong for aggregates, related in part to investments from the CHIPS Act and increased residential spending. The segment's pre-stressed concrete division also has a lot of work in the pipeline for 2024, and the Northwest is poised for another solid year. In our mountain segment, we had a similar start to last year's record year, though EBITDA was down $2.3 million, largely related to the absence of asset sales from the first quarter of 2023 that totaled about $2 million. We expect a strong and earlier start to the construction season, particularly in our Idaho and Montana markets. We have good backlog in the segment, including four airport projects in Montana and one in Wyoming that total approximately $60 million. Demand in the Boise and Bozeman markets is strong, and this region remains one of the fastest growing and desirable places to live in the country. The central segment had improved revenue on increased pricing across all core product lines. The segment recognized a normal seasonal loss in the quarter, as less construction activity is typically completed in the first quarter in its northern markets. This was partially offset by the strong aggregate margins in Texas, driven by increased pricing and continued production improvements at our Honey Creek quarry. Aggregate demand in Texas remains strong, and the Texas bidding schedule has its busiest months coming up. We secured a 30,000 cubic yard concrete project at Texas A&M University, and there continues to be good material supply opportunities in our Texas footprints. Our north central markets have secured more backlog this year compared to the same time last year, and we continue to see good bidding opportunities. And finally, the energy services segment delivered solid revenue growth in this quarter. As a reminder, this is our liquid asphalt business, which includes operations in California, Iowa, Nebraska, South Dakota, Texas, and Wyoming. The segment benefited during the quarter from strong demand in the California and Texas markets, and revenue improvement was largely related to product mix and the timing of sales. As noted during our year-end call, this business segment has good visibility into its input costs and sales contracts with customers. Therefore, we provided specific guidance for 2024. Based on current sales contracts and the cost of inventory, we are reaffirming guidance of $50 to $60 million for the energy services segment. In summary, we are in a good position as we head into the heart of the construction season. Our winter maintenance activities were largely completed by the end of the first quarter, and we are able to get into the field earlier than last year. Federal, state, and local funding for infrastructure development continues to provide tailwinds for our contracting services business and to pull through of our higher margin construction materials. Our backlog is up from last year with higher expected margins, and we continue to see momentum on our materials pricing. We are 100% committed to our competitive edge plan, and we will continue to invest in our business where we believe we can achieve the best returns with a focus on aggregates and materials-led, vertically integrated companies in our mid-sized, high-growth markets. Lastly, before I turn the call over to Nathan for his remarks, I'd like to thank our entire Knife River team for all their efforts in the quarter, helping to position us for what we believe will be another good year. I'm very grateful for our team and look forward to what is ahead the next three quarters. Nathan will provide more detail on our first quarter performance and touch on our guidance for 2024. Nathan?