Knife Riv Holding Co.

we'll conduct a question and answer session. And if at any time during this call you require immediate assistance, please press star zero for the operator. Also note that the call is being recorded on Monday, November 4th, 2024. And I would like to turn the conference over to Nathan Ring, Chief Financial Officer. Please go ahead, sir.

Thank you, and welcome to everyone joining us for the Knife River Corporation Third 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. 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 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 third 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 capital 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.

Good morning, everyone, and thank you for joining us. We're pleased to report record third quarter revenue, gross profit, and net income as we continue to demonstrate the fundamental strength of our business. Our geographic segments, consisting of the Pacific, Northwest, Mountain, and Central, combined to achieve a record EBITDA of $225 million for the quarter, a 6% increase from the same period last year. EBITDA margin at these segments improved nearly 100 basis points to a record 22.5%. Growth at the geographic segments helped us overcome year-over-year decrease for the quarter of $12 million in EBITDA at our energy services segment. This reduction in energy services was anticipated and included in our guidance. A strong public funding backdrop contributed to our results, and so did our competitive edge strategy. During the quarter, we continued to implement edge initiatives, intentionally focused on quality of work over quantity of work. Our team secured higher prices for our products and higher bid margins. while also successfully executing on projects to optimize the value of our services. These initiatives offset volume declines and contributed our record third quarter revenue of $1.1 billion. Another key component of our EDGE plan is growth, and I'm excited to announce that Knife River has invested nearly $130 million on six acquisitions this year. The majority of this capital was spent in September, October, and November, so we have yet to benefit from revenue and EBITDA impact that we expect to see from these acquisitions in 2025. I'll talk more about them in just a minute. Adjusted EBITDA for the quarter was down slightly from last year's record, primarily from the anticipated reduction in energy services. Higher SG&A costs also applied some downward pressure. These costs were largely related to our M&A activity, including acquisition expenses on the deals I mentioned, as well as due diligence on our current pipeline of opportunities. But these expenses are an investment in our future. Our corporate development team has been active getting deals across the finish line and adding to our near-term pipeline. All in all, Our team performed well in the quarter at or near record pace, and we believe we are in a great position for long-term profitable growth. We remain focused on achieving our edge goals, including continued progress towards our long-term goal of 20% adjusted EBITDA margin. The materials we produce and the work we perform are crucial to our local, state, and national economies. We have continued to refine our sales practices to optimize the pricing of our products to better recognize their full value. Average sale prices of aggregates for the quarter improved 7.6% from 2023. We rolled out new tools and training across each region to emphasize our dynamic pricing model and track progress. We see pricing momentum continuing into 2025, and we expect to benefit from price increases exceeding costs. At the same time, we are finding efficiencies and improvements at our plants. Our process improvement teams, or pit crews, visited 26 plants in the third quarter, continuing to identify opportunities for us to remove production bottlenecks, increase plant capabilities, improve uptime, and control costs. They have now been to 58 plants in 2024, standardizing best practices, developing field training, and building on the momentum from last year's success. Our local management teams wholeheartedly support our pit crews and feel there's significant margin expansion opportunity to be realized from this initiative. While the material side of our business was busy optimizing prices, finding efficiencies, and sharing best practices, our contracting services teams were actively pushing margins in the bid room and out in the field. Gross profit margin for contracting services improved 120 basis points in the quarter compared to last year. We continue to bid strategically and find opportunities in the field to successfully execute on work and maximize margins. The third quarter is our busiest of the year, and I'd like to thank our teams for their hard work and for truly doing a tremendous job. For the sixth consecutive quarter, we have seen year-over-year contracting service margins improve. This dates back to the launch of our Edge plan, and we could not have accomplished it without bidding discipline, job execution, and our dedicated construction crews. Price optimization, cost controls, and margin improvement are key components of our Edge strategy. So is growth, both organic and through acquisitions. We have closed on six deals so far in 2024, with a focus on aggregate reserves and construction materials. In September, we acquired the assets of Frank B. Marks & Sons, a small aggregate producer in California's Central Valley. In October, we required the assets of two additional aggregate producers, Rock Products Incorporated in Central Oregon, and a high-quality sand reserve to support our operations in Sioux Falls, South Dakota. Also in October, we finalized a lease agreement to operate three existing ready-mix plants in California, where we'll be able to leverage our local aggregates. And just two days ago, we required the assets of Albina Asphalt. Albina is a liquid asphalt supplier with terminals in Washington, Oregon, and California. Albina has a leading market position and will increase the capacity of our energy services segment by approximately 25%. This is an exciting deal that expands the footprint of our high margin liquid asphalt business on the West Coast and supports our vertical integration. With these acquisitions, we are adding strategic assets to our portfolio that enhance our market positions and align with our strategy of acquiring materials-based companies within or adjacent to our current operations. These acquisitions are expected to generate an attractive financial return. with purchase multiples between six to eight times the projected 2025 EBITDA. We have several other deals in our pipeline that range in size, and our focus remains on materials-based acquisitions in mid-sized, high-growth markets. As we did in the third quarter, we expect to see higher corporate development costs in the fourth quarter compared to last year. While closing on deals during the off-season can create a headwind, we have accounted for those costs in our updated guidance, and we view these expenses as an investment in our future. The pipeline of acquisition opportunities remains strong in our markets, and we look forward to continuing our business development activity. In addition to acquisition growth, our existing operations are performing well and are benefiting from our edge initiatives and strong funding for public projects. Each of our segments is seeing continued opportunities to bid on projects with record or near record budgets at our state departments of transportation. We have a very good schedule of DOT bid lettings coming up for 2025 across our states. including some sizable projects with significant pull-through of aggregates, ready mix, and asphalt. With about 50% of IEJ funding yet to be allocated, public work continues to be the main driver for our contracting services. We believe we are still at the beginning of what looks to be a long period of growth in the construction industry. The roads, bridges, and airports that are so vital to our economy need fixing, and that doesn't happen overnight. We expect to continue benefiting from the build-out of the nation's infrastructure for years to come. Each of our segments had a solid third quarter. At a geographic segment, price increases helped drive our record revenue. Again, in total, these segments achieved record EBITDA and EBITDA margins. I'll briefly discuss a few highlights from each segment. In the Pacific, third quarter revenue increased to a record $165 million, driven by price increases across all product lines and continued construction activity in Northern California. There is strong funding support for road and highway projects, where wildfires have damaged the local infrastructure and require rebuilding. We have a significant backlog of work there, which includes an emphasis right now on more earth moving and heavy construction than it does paving. This has contributed to a temporary asphalt volume decline in the segment. As I mentioned, we added to our ready mix capacity and added aggregate reserves in California. In the northwest, revenue was up 4% and EBITDA was up 15% to a quarterly record of nearly $56 million. This region has strong public agency work, primarily in central and southern Oregon. Gross margin for contracting services in the northwest improved 490 basis points from the same period last year. The region also benefited from having its pre-stress plant fully operational. Efficiencies at the plant in Washington, combined with demand for pre-stress projects, positively contributed to both EBITDA and EBITDA margins. On October 18th, the region purchased the assets of Rock Products, Inc., bolstering its aggregate reserves in central Oregon and adding a new ready mix operation. Switching to Mountain, revenue and EBITDA were in line with last year's records. For the first nine months of the year, EBITDA in the Mountain region is up 12% year over year. Record revenue in the quarter was driven by higher pricing and continued contracting activity. Idaho Falls had several jobs that drove revenue growth, including highway work and a de-icing project at the Jackson Hole Airport. Backlog is also up 12% year over year and continues to grow with very strong bid schedule. Overall, the work is there, and this continues to be one of our fastest-growing markets. In our central segment, we have fully embraced the edge initiatives. This segment continues to see the most improved EBITDA margins, with trailing 12-month EBITDA up 200 basis points compared to the same period last year. For the quarter, EBITDA margins hit an all-time high of 22.5%. Pricing improvements outpaced costs and contributed to a 7% increase in EBITDA for the quarter. Also contributing to our record EBITDA in pickup and margin was disciplined project bidding and favorable project execution on contracting services. We're looking forward to several good bidding opportunities across the segment, including positive news from Iowa, Nebraska, Minnesota, and Texas, which have all pointed to more projects and more total paving tonnage for the 2025 season. This region has identified several organic growth opportunities, and we look forward to sharing more information on these exciting projects at the appropriate time. Finally, Our liquid asphalt product line is having its second best year ever. It's on track to hit its EBITDA guidance for the full year. For the quarter, revenue and EBITDA were both down from record highs, primarily driven by lower raw materials costs and subsequent lower pricing. We have a strong book of business for 2025, and we anticipate adding to it during the fourth quarter as our state adds more paving projects to their bid schedules. Over the past weekend, we purchased the assets of Albina Asphalt, a liquid asphalt business with terminals in Washington, Oregon, and California. As I mentioned earlier, This expands our footprint within markets where we have aggregates and asphalt operations, further strengthening our vertical integration. We are very excited to welcome Albina's 80 team members to the Life at Knife. Before turning the call over to Nathan, I'd like to reiterate that we believe we are in the early days of a long infrastructure build out in our country. Knife River is well positioned to capitalize on this growth. The work our teams do is essential for our cities, our states, and the nation. We are performing at record levels, and we are taking intentional steps to keep getting better. We are focused on optimizing prices and controlling costs. We are focused on strategic bidding and solid project execution. We are focused on growing our company, both organically and through acquisitions. Our edge strategy is working, and we're looking forward to a strong finish to 2024 and good things in the years to come. I'll now turn the call back over to Nathan for his remarks. Nathan?