Knife Riv Holding Co.

Question 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. 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.

Thank you, Operator, and welcome to everyone joining us for the Knife River Corporation's second 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 operational and financial expectations. After 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 our website and the SEC website. Except as required by law, we undertake no obligation 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 measure in the appendix to today's presentation. 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 line for a question and answer session. With that, I'll now turn the call over to Brian.

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. 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, adjusted EBITDA margin. A year ago, we pointed to adjusted EBITDA margin as a benchmark to track as we profitably grow 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. We continue to move forward and make meaningful progress for our long-term goal of 20% adjusted EBITDA margins. 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. 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. As a quick recap, competitive edge is the plan we began to implement in 2023 to drive long-term profitable growth. EDGE stands for EBITDA Margin Improvement, Discipline, Growth, and Excellence. The first E, EBITDA Margin Improvement, is a focal point in our strategy. We are committed to increasing our adjusted EBITDA margin. Our primary objectives here are optimizing prices, controlling costs, and successfully executing on our work. Let me provide some highlights. During the second quarter, we continue to see traction with price increases. 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. We see pricing momentum in each geographic segment for aggregates and ready mix, so we are increasing our pricing assumptions for 2024 to high single digits for those two product lines. While average selling prices for aggregates was impacted by product mix during the quarter, we believe our year-to-date results and projected full-year pricing support our updated assumptions. To reinforce this continued optimization, we have expanded the training on our dynamic pricing efforts across each segment, In addition to our material pricing initiatives, we continue to be disciplined on bid day, targeting construction projects that meet our edge strategy, most prominently the pull-through of higher margin upstream materials. Moving from pricing optimization to cost control and productivity, our process improvement teams, or pit crews, continue to work to identify and share best practices across our operations. We've expanded the number of teams to 10, focusing on all aspects of our business, including operations, commercial excellence, and standardizing our support services. While it is still early in the process, our pit crews have been successful. The original pit crew, which is focused on materials operations, has visited 98 sites across 10 states since it was launched last year. These site visits have resulted in nearly 1,300 improvement opportunities, of which approximately 60% have been completed to date. Let me provide a few examples of these early successes. In 2023, the operations pit crew visited our Medford aggregate site in southern Oregon. recommended new mining practices including the installation of an overlay conveyor system to eliminate trucking and reduce harvesting costs we expect this project to be complete in the fourth quarter of this year and the annual benefit will be over one million dollars later in 2023 our pit crews visited casper wyoming and recommended a process change that reconfigured sand washing equipment to increase production capability decrease waste and improve quality we expect the annual benefit to be approximately two hundred thousand dollars and in portland oregon Our team visited a large aggregate site just a few months ago and recommended a change to reintroduce the quarry byproduct back into the production of base rock, resulting in an increase of sellable products and a reduction of waste. This is expected to provide a benefit of approximately $1.1 million per year, starting immediately. Our operations pit 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. 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. They continue to stay disciplined while bidding work, securing $400 million of additional work for the second quarter at slightly higher margins than the same period last year. From the bid room into the field, our construction teams delivered. By hitting production schedules and exceeding project specifications for quality work, they improved contracting margins over what was originally bid. For the quarter, Our growth profits in contracting services improved by $14 million year-over-year. Along with that, our growth margins improved by 320 basis points. 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. I'm very proud of the advancements this product line has made in such a short amount of time. Night purpose contracting services are generating industry-leading margins, and will continue to be a stable contributor to our overall success. The G in EDGE is growth, and we have a highly experienced and respected corporate development team leading these efforts. They are currently advancing several possible deals across our market areas, focusing on materials-based operations within or adjacent to our current operations. We closed on the purchase of a small quarry operation in the Northwest region since our last call, and we continue to identify additional acquisition opportunities. We have many deals in our pipelines. ranging from small acquisitions that strategically support our current operations, to mid-sized bolt-ons that help us grow in our current regions, to new platforms that expand our footprint at adjacent markets. 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-sized, high-growth markets. I look forward to some deal announcements as we bring these opportunities into the Knife River family. Lastly, in our Edge recap, I'd like to highlight our relentless efforts to be excellent at everything we do, which includes the safety and well-being of our team. We continue to make progress on our goal of keeping everyone safe, which is at the heart of being a people-first company. We will maintain our focus on this core value. We firmly believe that one of the multiple trails to our 20% adjusted EBITDA goal is the safety trail. Keeping our teams healthy, our plants well-maintained, and implementing additional safety tools is the right thing to do, and we expect it to positively impact our financial performance. 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. In addition to the actions we are taking, our markets have provided a strong backdrop for our year-over-year success. Our vertical integration strategy targets low-risk, publicly funded work with strong pull through of higher margin upstream materials. You've heard me say this before, and it continues to be true. Our national infrastructure needs repair, and there's growing support to fund that work. 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. We expect to benefit from that funding as it continues to be dispersed. On top of that, state and local governments are continuing to be proactive in funding infrastructure projects. As of July 1st, lawmakers in eight of Knife River's 14 states have introduced additional legislation to fund construction projects. Funding in our states is at record or near record levels, and they are continuing to pursue long-term, dedicated revenue solutions. It is clear there is public demand for safer, less congested roads and bridges. We will continue to support and monitor the status of those bills. Approximately 87% of our current backlog is publicly funded. with dedicated dollars from federal, state, and local government agencies. The work needs to get done, and we are well positioned to perform it. Now taking a closer look at our performance for the quarter, EBITDA improved in each geographic segment over last year. Starting in Pacific, we had record revenue, primarily driven by price increases across all our product lines, along with increased contracting services activity in Northern California. Overall, gross margin was down for the quarter, driven by lower gross profit on ready mix and aggregates. This was related to increased repair and maintenance expenses as we took additional steps to improve production capabilities, particularly in Hawaii and Alaska. 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, disciplined bidding, and lowering production costs. In the Northwest, we continue to see growth, building on the records we set last year. Revenue was up 12% and EBITDA was up 31%. 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-spressed concrete division recently securing projects related to data centers, parking garages, and bridge infrastructure. Also, as I mentioned, we purchased a quarry during the quarter to provide aggregates for the growing suburbs southeast of Portland. 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. 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 meeting in this region, and we are well prepared to deliver on it. In our central segment, you can clearly see the impacts of our edge strategy. Price increases, Discipline bidding and solid project execution helped drive EBITDA up 27% to a record $36 million. 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. 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. 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. While EBITDA decreased approximately 11% from the 2023 record, EBITDA margins held steady as a result of those lower input costs. 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. Before turning the call over to Nathan, I would again like to thank our entire team for this outstanding quarter. We delivered record results while also working safely. During the quarter, we hit our one-year anniversary as an independent company. In that time, we made significant progress on our competitive edge goals and have generated meaningful value for our shareholders. 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. 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. 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. Average selling prices for aggregates increased 6%, ready mix 11%, and asphalt 1%, contributing to a record consolidated gross profit of $176.2 million, an increase of 15% for the quarter. 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. 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. 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. 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. 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. However, even though volumes declined, The price over cost improvement in each product line helped us achieve record consolidated gross profit. Moving to contracting services, we saw substantially higher gross margin at 13.8% in the second quarter compared to 10.6% last year. 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. Furthermore, our backlog continues to benefit from infrastructure funding and is 87% public work. Of our total backlog, 85% of our projects are less than $5 million, and approximately 95% of our projects are completed within 12 months. 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. Next, I would like to provide some additional information on our corporate services department and consolidated SG&A expenses. As of May 31st, we have essentially completed our transition services agreement with MDU Resources and successfully set up the corporate functions needed to operate our businesses. We truly appreciate all the work our team has done to accomplish this. 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. 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. 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. 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. 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. With this strong balance sheet and liquidity, we believe we are well positioned to support our acquisition growth strategy that Brian mentioned. We also continue to reinvest in our operations. During the first half of 2024, We invested approximately $103.6 million on capital projects, 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. 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 deployments. 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. We are raising consolidated revenue guidance to a range of $2.8 billion to $3 billion. For consolidated adjusted EBITDA, we are raising and narrowing guidance to a range of $445 million to $485 million. This includes adjusted EBITDA for our geographic segments and corporate services of $390 million to $425 million, as well as adjusted EBITDA and energy services between $55 million and $60 million. And lastly, we expect total capital expenditures between 5% and 7% of revenue, excluding any potential future acquisitions. Additionally, our 2024 guidance includes the following assumptions. We anticipate average selling prices for our aggregates and ready mix product lines to increase high single digits and asphalt pricing to be flat to up low single digits. We expect aggregates volumes to be flat to down low single digits, ready mix down low to mid single digits, and asphalt down to mid to high single digits. And finally, guidance is based on normal weather, economic, and operating conditions for the remainder of the year. We are very excited about our second quarter record results, which have helped set the stage for increased financial guidance and what we expect will be another record year. For our geographic segments, the midpoint of our adjusted EBITDA guidance represents a 15% increase from our full year 2023 adjusted EBITDA. We believe these results are achievable given implementation of our competitive edge initiatives, committed infrastructure funding, market position, and opportunities for growth. With that, I'd like to open the call for questions.

Thank you, sir. Ladies and gentlemen, if you would like to ask a question, please press star followed by one on your touch tone 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 two. And if you're using a speakerphone, we ask that you please lift the handset first before pressing any key. And your first question will be from Brent Stillman at DA Davidson Company. Please go ahead.

Hey, thanks. Good morning. Great quarter. Thanks, Brent. 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 more of the regions of the business. I know this is sort of a careful, methodical approach. Brett KenCairn, might be visible in the reported averages you're showing here so just be curious if there's some case studies or examples you've seen the success of that strategy.

Brett KenCairn, yeah 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 roll that out to the beginning of this year, we talked a lot about it last year. But really, we are in the early innings of rolling that dynamic pricing out to the other regions. So as part of that, we've brought on a full-time trainer that is helping training our sales team around commercial excellence. We've gone out and done some additional training through Sandler training with our sales team. We're out hiring some additional sales staff in some of our regions that, frankly, didn't have them because as part of dynamic pricing, as you well know, we have to price. We're pricing every job to every customer in every market to where we can maximize, optimize our pricing based on the proximity of our locations to those job sites. And so we truly are giving out quotes every single day to customers and can control the 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.

Okay, that's great. And Brian, you mentioned the 15.9%. Fairlane 12 adjusted EVA dot margin. Yep. I guess 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, what do you think you've yet to see leverage from some of your internal initiatives, 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?

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, we said we can get to 15% EBITDA margin 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% to 20%. it would evolve into some of the other initiatives within Edge. So the early phases of Edge was to immediately begin our quality over quantity initiative in the bid room. And that is really to maximize our margin opportunities in the bid room on contracting services. And we've seen some significant improvements as it related to our contracting services margins. At the same time, we began rolling out dynamic pricing 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 honor those prices in most of those regions, so we're still in the early innings 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 prepared remarks were up to 10, and I'd say that that initiative is, again, in the very early innings of going out and implementing best practices, identifying opportunities to where we can reduce our production costs, and we're rolling that out into the other product lines. And throughout the organization, it's been well-received by the entire team. So that's specifically as it relates to margin improvement. But to get from where we're at today, from 16% as far as our midpoint, that 15.9 that you talked about, the training 12 months, to get to that 20%, I mean, we know that our strategy is going to continue to evolve, which will include growth and And we're very much targeting those higher margin upstream materials businesses. And so we are actively 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. 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.

Okay. I appreciate the comments. I'll get back in queue. All right. Thanks.

Thank you. Next question is from Trey Grooms at Stevens, Inc. Please go ahead.

Hey, good morning, and well done in the quarter. Thank you, Trey. I wanted to touch on contracting services, you know, the 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. 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? for that and how that kind of plays a role in the 20% EBITDA margin targets that you guys have laid out.

Yeah, so it's certainly a path to that 20% flag, and we are still on that path and marching forward and up on our margins. Yeah, we are very excited at the amount of improvement we've made. I mean, just If you go look at our trailing 12-month gross profit margin in contracting services at the end of June, it was 12.7. And if you go back to the end of 22, just a year and a half ago, it was 8.4. And so we've had a 430 basis point improvement 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. 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, meeting our project schedules, delivering quality materials, and putting asphalt down where we can get compaction bonuses and other job site incentives. And so, 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. And our crews have gone out and executed that work very well. That being said, I mean, 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, you know, 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 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. 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. It plays a really critical role in our overall organization. It's about 38% of our revenue. It provides resiliency to our strategy of pulling through those high margin upstream materials. And it's operating in an environment right now with very strong funding. And you've seen the DOT budgets, and they're at or near record levels. And we see that for the foreseeable future. So very pleased with what was going on in contracting services.

Great. Thanks for that, Brian. And yeah, I mean, I know aggregates gets a lot of attention, but I did just have to highlight, you know, the great job you guys are doing on the contracted services side as well. But speaking to aggregates here for a second, you know, it sounded like repair and maintenance impacted 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.

Yeah, as we've deployed our pit crews, I mean, they've certainly gone out and, you know, these 1,300 opportunities to improve our margins is having our repair maintenance costs go up temporarily for a longer-term benefit. And so, 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 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, they had an impact of increasing our uptime significantly. 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 costs increases inflation for the rest of this year. Diesel has 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.

Okay. Thanks, Brian. I'll pass it on. All right.

Thank you. Next question will be from Catherine Thompson at Thompson Research Group. Please go ahead.

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?

Yeah, the bigger impact, Catherine, was what Nathan had mentioned and I had mentioned is the product mix. And so we have our year, you know, way 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. 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. 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 some additional sales in the north central region, their pricing may be slightly lower than what it is in the northwest region or Pacific regions where we're importing materials into Hawaii. 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?

Yeah. Yeah. No, it does. Absolutely. And, you know, I know you responded earlier just about some good progress on margins in the quarter. But when you parse out the upsides of margins for your ready mix and your asphalt segments in the quarter, help us clarify, like, how much of that is part of the pricing discipline that you've been executing on 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.

Yeah, I would say that a lot of it, Catherine, has to do with our price increases. I mean, our average selling price for ready mix went up 11%, and, you know, we had 12% less yardage going out. And so this is that classic case of quality of work over quantity and less is more. And in this case, we have taken on and we are being more selective on jobs and customers that we are servicing and definitely have done a great job through dynamic pricing of raising our prices above our input costs. And the same could be said with asphalt. I mean, We had less tonnage in asphalt by about 5%. Average sales price went up slightly, and obviously that's a big function of your input costs being liquid asphalt and natural gas. So a lot of it is pricing, but I also wouldn't dismiss the work that the pit crews are doing. The pit crews, when they're out looking at our aggregate operations, spend about a half a day to a full day on each one of the ready mix and asphalt plants, And we have some cost initiatives and best practices being implemented in those facilities as well. So it's really a function of strong dynamic pricing and controlling our costs.

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. Just wanted to get your thoughts on that, just in terms of the delayed versus lost. how you're thinking about things, particularly focusing in on some of the points that you laid out on backlogs.

Yeah, I would say that that's definitely the case in some of the markets that had a very wet June. So that central segment for us, whether that's Minnesota, South Dakota, Iowa, or Texas, 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, was definitely impacted by weather in that month of June for us. 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. So I think I would share that same sentiment with you. You know, I think on the ready mix in certain markets, there's certainly a softening of that. As you know, most of that ready mix is consumed in the private sector. whether that's residential or commercial industrial projects. And so there is softening that's driving some of those volumes that's not necessarily being delayed. 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's being pushed forward into the next quarters.

Okay, great. Thanks very much. Yep.

Thank you. Next question will be from Tim at Tanners at Wolf Research. Please go ahead.

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 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 spendings. Just wondering if you're, you know, provide some more color.

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 providing much higher margin but lower volume work to the tune of almost 30% in that one region. And so I would say that it's intentional, Timna, on our guide as far as going forward on our volumes and asphalt specifically. I've not seen the PCA report. What we've seen and the information we get from ARCPA and our local DOTs when we meet with the director's 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 level, they're very close to a record level. And you talk to those DOTs, and there's a lot of work to still be built. 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 continuing. There's lots of new legislation in the states we work in. We're very active in helping pass those bills. But because the roads need to get fixed, as do the bridges. So I'm not exactly sure of 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.

Okay, great. Yeah, that's our 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? Or is there more interest, you know, more willingness to sell than normal? What are valuations looking like? Anything you can provide?

Yeah, I appreciate that question. We're very excited and pleased with the progress we've made. We've got a very reputable, experienced, well-respected business development team that we've assembled that's been out working, filling the pipeline up. And I can tell you, in my career at Knife River for 31 years, this is the healthiest pipeline of opportunities that I've seen. We've mentioned that our priority is to bolt on those nice $30 million to $50 million-ish projects bolt-ons into our existing strategic market areas. That's our number one focus is to continue to bolt those opportunities on. And there's a lot of fragmented opportunities, a lot of regionally owned family operated companies in our midsize high growth markets. Within the regions, we have opportunities to grow within a region that may be in a new strategic market area. And so 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, 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 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 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. Okay.

Thank you.

Yep.

Thank you. Next question will be from Garrick Schmortz at Loop Capital Markets. Please go ahead.

Oh, hi. Thanks. Congrats on the quarter. I know you talked to some new project wins in data centers and parking garages in the Pacific Northwest. I know private construction is a much smaller part of your end market exposure, but I was wondering if you could 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.

Yeah, very specific, Derek, to pre-stress. 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. We provide a lot of wall panels to those data centers. We do parking garages. whether that's for public or private parking garages. And then the infrastructure work. A big part of our business is providing bridge girders for the DOT projects. So specifically to the private market, we still have a lot of opportunities. These take some time to engineer. You work directly with the owners when you're transferring or transitioning a job from cast in place or steel to precast or pre-stress. And so our engineering team have been working for months on several of these projects. And we have contracts to get paid to help design and utilize our products. And so we see data centers in that Idaho, Oregon, Wyoming markets. There's still opportunities. We've got portable batch plants in Oregon supplying concrete to some of those projects. 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.

Okay. 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 Northwest. Is that where you expect it to be uh at this point uh in the rollout just you know maybe you know help put some context uh in in that you know timeline as to where you're at um you know as far as you know your your you know if it's going as well you know a little bit faster a little bit slower than you expected at this point yeah um I would say you know every region is a little bit of a different spot uh when it comes to

how they're progressing with dynamic pricing. And so there's certainly some regions that have 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 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. 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, Garrick, is that We have a lot of opportunities for us to continue to go forward in optimizing our materials pricing in most of the markets. I think we still have opportunities in all the markets, frankly, even in the Northwest region, 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 very positively, and we've gotten very little to no resistance I think our customers appreciate knowing what their cost is going to be on that particular project and not 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 just got to give us a call first to get the current pricing.

That makes sense. All right. Thanks for all that. I'll pass it on. Thanks, Garrett.

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. And your next question will be from Ian Zaffino at Oppenheimer. Please go ahead.

Hi, great. Thank you very much. A lot of my questions aren't answered, but I wanted to just kind of go back to pricing here. Let me help us understand on the pricing. You know, what are you seeing, I guess, if you were to bucket the pricing, you know, letters, semi-annual, dynamic, You know, 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.

Yeah. So, you know, I'll share, I mean, what I know, which is, I mean, near term, is the demand is still strong for our products. And so, you know, that we have a heavy influence on infrastructure and 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 is 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 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 on that same pit for 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'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 go build bridges or pave runways without aggregates. And so the fundamental, the underlying demand, it's there long term. As you know, it's a non-renewable resource. It's a depleting resource, and they're difficult to permit. 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 variables changing. The demand is strong, and it's a non-renewable resource that is depleting. And I see that, you know, it really is the foundation of the infrastructure. And so I see strong momentum in that. in aggregate pricing going forward.

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 and also size of deals. I know there was a large deal when 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. Yeah, we...

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, that being said, we certainly are involved and part of our pipeline includes some of those larger platform companies that are being brokered 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-sized high-growth markets were a very logical acquirer of those companies. And so, Ian, the multiples, I mean, would be a range of literally 10 times. I mean, I could say it's from 6 to 16. 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.

All right. Thank you very much.

Thank you. And at this time, Mr. Gray, it appears we have no other questions registered. Please proceed, sir.

Okay. Well, thank you again for joining us today. We're proud of our record quarter, excited to be increasing guidance for the year. 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'll now turn the call back over to the operator. Thank you.

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.