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.