Knife Riv Holding Co.

Good morning, ladies and gentlemen, and welcome to the Knife River Corporation first quarter results conference call. At this time, note that all participants are in a listen-only mode. Following the presentation, we will 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 this call is being recorded on Tuesday, May 6, 2025. 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 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 operational and financial expectations Actual results may differ materially from those projected in today's forward-looking statements. For further detail, please refer to today's earnings release and the risk factors discussed in our most recent filings with the SEC, 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 gap measures are defined and reconciled to the most directly comparable gap measure in today's earnings release and investor presentation these materials are also available on our website. Brian will begin today's call with an overview of our first quarter 2025 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 in a review of our 2025 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. Our construction season is just getting started. As we look at the opportunities in the year ahead, we are excited about three key points. First, Knife River is in a position to have our most profitable year in history, including record revenue, net income, and adjusted EBITDA. Second, our acquisition program is in full swing. We close on Strata Corporation, and we have additional deals in our pipeline with a focus on materials-led companies. And third, we continue to invest in our competitive edge strategy to drive excellence and long-term profitable growth. While there are some macro-level uncertainties in the economy, we have been insulated from any direct impacts related to tariffs. With our vertical integration and our ability to flex between public and private work, Night River is a resilient business model. We are focused on what we can control, including operational improvements and working hard to deliver results for our shareholders. We are entering the construction season with confidence in our long-term strategy, and we are forecasting record results for the full year. The fundamentals of our business are strong, and we are excited about the acquisition program and edge initiatives. We believe the investments we made during the first quarter will benefit Knife River this year and beyond. On the year-end call, we highlighted a step up in SG&A for 2025 as we invest in our business to drive future success. We spent approximately $8 million of that in the first quarter, largely related to acquisitions and business development activity. Nathan will provide more detail on SG&A in his remarks. As we look at the first quarter overall, results were in line with our expectations. Because of our unique footprint in northern states, Knife River has historically recorded a seasonal loss in the first quarter of approximately 5% of annual EBITDA. With the addition of Strata and Albina, which are also in northern states, we anticipate the 8% seasonal loss we experienced this quarter to be more reflective of our first quarter results going forward. We expect the investments we made in Strata and Albina to begin positively impacting our financial results in the second quarter. It's exciting to see the progress we're making in integrating these two companies, including the efficiencies they're finding as we bring our teams together. Also during the first quarter, we closed on the acquisition of the Kalamakori. This property includes 50 million tons of strategically located reserves and supports our ability to serve the growth corridor north of Vancouver, Washington. Our business development team continues to be hard at work in each Knife River segment, evaluating potential materials-led acquisitions in mid-size, high-growth markets. In addition to our M&A growth, we continue to make progress on multiple organic investments and edge improvements. A few highlights of these projects include the continued build-out of an aggregates expansion project in South Dakota, along with a new asphalt plant in the Sioux Falls market, a greenfield ready mix plant in Twin Falls, which is a new market for us in southern Idaho, and the installation of larger silos or asphalt plant in Boise, which will increase capacity as we serve more third-party customers. We expect each of these opportunities will help drive margin growth, which is a key component of our edge strategy. Let me provide a quick update on other edge efforts. In the first quarter, our teams improved pricing on aggregates and rated mix, as we continued to focus on dynamic pricing. We also deployed best-in-class pricing and analytic software for our materials operations. By investing in cutting-edge technology for our sales teams, We aim to optimize pricing, support margin growth, and provide exceptional customer service. Also during the quarter, we identified operational improvements at multiple aggregate sites. Our pit crews identified opportunities to increase throughput and reduce production costs at plants in Hawaii, Oregon, Texas, and Wyoming. We fully expect to see the benefits of these first quarter expenses during the upcoming construction season. The team is visiting several more operations this year across our footprint focused on controlling our costs, increasing production capacity, and implementing best practices. I look forward to sharing their additional successes throughout the year. Lastly, at EDGE, we are excited about the rollout of our new safety program, which is based on the belief that safety is a personal choice and that all injuries are preventable. Safety is a core value at Knife River and part of our Life at Knife culture. We are committed to excellence, starting with the health and well-being of our team members. As our operations ramp up for the year, we stand to benefit from infrastructure investment, Roads, bridges, and runways need to be repaired. The funding is there to support it, and NYFER is well-positioned to perform the work. In March, the American Society of Civil Engineers published its much-anticipated report card for America's infrastructure, giving U.S. roads a grade of D+. The report estimates that the country will need $2.2 trillion in funding over the next decade to maintain the current roadway system. Budgets at the local, state, and federal levels remain at or near all-time records. Night River states still have about 60% of federal IAJ funding to spend. And at the state level, we're tracking 51 transportation funding bills. In late April, Washington passed a fuel tax that is expected to raise $3 billion in transportation funding over the next six years. In Idaho, two transportation bills have been approved totaling over $1 billion in funding, primarily to relieve congestion and expand its current transportation system. And just a few days ago, North Dakota passed a $400 million increase to its two-year DOT budget. Finally, the Oregon legislature is currently working on a much needed funding plan for the state's infrastructure, which could benefit us yet this year. Public projects represent 87% of our backlog and perfectly fit our vertically integrated business model. They give us the opportunity to not only perform the work as a prime or subcontractor, but to also utilize upstream materials. Backlog at the end of the first quarter was near our record from a year ago and at similar expected margins. Starting in late March and throughout April, We saw increased bidding activity compared to last year, and the work we secured in that timeframe is not reflected in our first quarter backlog. This work included dozens of public projects, including three jobs totaling $170 million of subcontract work that we expect will be awarded soon. As I've mentioned over the last year, we continue to see states lighting larger multi-year projects. However, we've remained disciplined in the bid room, fully vetting the type of projects we pursue. We are focused on materials pull-through opportunities, on optimizing contracting margins, and on minimizing our risk profile. We believe asphalt paving projects that are publicly funded will remain the largest part of our backlog for the foreseeable future. On the private side, we've seen a slowdown in some markets as developers and owners weigh uncertainty around tariffs and the economy. We will continue to monitor these delays, but we do see some private projects picking up in the second half of the year in each segment. As you recall, we reorganized our segments to better align with our business strategy. The segments are now West, Mountain, Central, and Energy Services. In the West, our operations in Hawaii and California helped drive revenue and EBITDA increases. We saw higher demand in Hawaii for cement and ready mix, and we implemented price increases across the region in all product lines. In California, we added to our public backlog and have seen an increase in residential and commercial work coming out for bid. This more than offset decreased demand in Oregon, which is mostly related to less highway funding and delayed private jobs that are impacting material sales. We will continue to track Oregon's funding solution and will make operational adjustments as needed. Overall, we believe the West is poised to have another solid year with meaningful improvements coming from our operations in Alaska, California, and Hawaii. In Mountain, the $96 million farmway road project in Idaho is just getting started, and we continue to add backlog to our first quarter record. The recent passing of two transportation bills in Idaho should support additional growth in this very strong market. Bid lettings in Montana have been delayed this year, but we've seen more opportunities in the past few weeks that should positively impact our backlog going forward. And in Wyoming, we see good potential for data center jobs and related commercial construction in the second half of the year. In Central, we've been actively integrating Strata and look forward to the positive impact it will have on our financial performance. We continue to find synergies with this acquisition, and the additional transportation funding in North Dakota bodes well for our combined operations. We've been securing public work in each of our markets, and we see strong commercial work ahead in Texas, specifically in the College Station area. Finally, at Energy Services, we are excited about having a full year of contributions from the Albina acquisition that closed late last year. We also expect to benefit from the startup in the second quarter of our new polymer modified plant in South Dakota. We had a slower start to the year related to weather impacts in Texas, but we expect another strong year from Energy Services with margins that continue to lead our segments. In conclusion, We're in a strong position to have another record year. We reinvested in our business during the first quarter as we prepared for the start of the construction season. Our acquisition program is active, and we continue to invest in self-help through our edge initiatives. I'm proud of our team for all their efforts, and I'm looking forward to what's ahead in 2025. With that, I'll turn the call over to Nathan.

Thank you, Brian. Next, I'd like to review our product line results, capital allocation, and updated guidance. Starting with our aggregate product line, We performed more pre production activities across the company to prepare for the upcoming construction season and pull some costs forward. This work included stripping and harvesting in our aggregate sites, as well as maintaining and mobilizing equipment. As Brian mentioned, we also incurred costs implementing pit crew improvements across a number of our locations. These initiatives and pre production efforts were the primary reason for our lower profitability and aggregates during the quarter. but we believe they will benefit us for the remainder of the year as production volumes come online and sales volumes ramp up. For the quarter, volumes were down compared to the prior year related to lower demand in Oregon and weather impacts in Montana and Wyoming. But as we look at the full year, including our recently completed acquisitions, we believe aggregate volumes will increase high single digits compared to the previous year. Furthermore, thanks to our ongoing pricing initiatives, The Aggregates product line continues to see pricing improvement, with the average selling price increasing 6% year-over-year. Therefore, we are maintaining our annual guidance of mid-single-digit price increases in 2025. ReadyMix saw a 9% increase in revenue due to higher average selling prices and volume growth. Pricing continues to benefit from our dynamic pricing, and the higher volumes were driven by increased demand in California, Hawaii, and Texas. We expect full year volumes to increase high teens, and we are also reaffirming our pricing expectations of mid-single digit increases for full year 2025. Moving to asphalt, the quarter had light activity as is typical for this product line. The first quarter historically accounts for less than 5% of the full year's volume. We expect activity to pick up as we enter the second quarter, and we maintain our guidance that volume and price will increase low single digits. Contracting services experienced higher revenues for the quarter, with the largest increase coming from our mountain segment, particularly Idaho, which continues to see steady growth. However, the segment realized lower gross profit compared to the first quarter last year due to the type of work and incentives recognized on key projects in the prior year. Keep in mind, the first quarter generally represents less than 10% of our consolidated contracting services revenue. Therefore, small changes in timing and the type of work we perform can have a disproportionate impact as we saw this quarter. For the full year, we anticipate contracting services margins to be in line with our 2024 results. Switching to SG&A, as you heard from Brian, we had significant acquisition activity in the first quarter as we continue to fill the deal pipeline, perform due diligence, and integrate acquired companies. As anticipated, these activities contributed to a $13 million increase in SG&A over the prior year. The increase primarily relates to SG&A from Strata and Albina of $3.5 million and higher business development costs of $6 million. As discussed during our previous earnings call, we anticipated a $20 million step up in SG&A for the full year, which will be front loaded in the first half. Of that amount, $8 million was invested in the first quarter for business development, acquisitions, and other key edge initiatives. We anticipate that annual SG&A expenses will be in line with our guidance given earlier in the year, plus the addition of Stratus SG&A. In addition to those strategic investments, we have been disciplined in deploying capital while retaining our strong balance sheet for future expansion. For the quarter, we have reinvested $64 million in our fixed assets for maintenance and improvements. We anticipate that 2025 capital expenditures for this category will be similar to the prior years at 5% to 7% of expected revenue. Along with that, we have invested $11 million in organic growth during the first quarter. For the full year, we have approved $68 million for organic projects. Additionally, in the first quarter, we spent $429 million on acquisitions, including $10 million on the Kalama Quarry and $419 million on Strata. The cash paid for Strata includes adjustments for networking capital, proceeds from the divestiture of four ready-mix plants, and cash acquired. To help finance the Strata transaction, we successfully issued $500 million in term loan B debt. That puts our net leverage at 2.5 times based on the trailing 12-month EBITDA at the end of the first quarter. This aligns with our long-term net leverage target. We ended the quarter with $86 million in unrestricted cash and no borrowings on a revolver, which we recently increased from $350 million to $500 million. This increased capacity provides additional liquidity for working capital and seasonal needs as we grow the company, as well as short-term financing for smaller acquisitions. Moving over to financial guidance. With the addition of Strata, we are raising our full-year expectations. Guidance includes... consolidated revenue between 3.25 billion and 3.45 billion dollars, adjusted EBITDA between 530 million and 580 million dollars, including geographic segments and corporate services between 465 million and 505 million dollars, and energy services between 65 million and 75 million dollars. This guidance is based on normal weather, economic and operating conditions, and does not include future acquisitions or any significant impacts related to tariffs. The work we do is essential for America's infrastructure. As we enter the 2025 construction season, we anticipate another record year for Knife River. We have a strong funding backdrop and we have made investments in our business to help drive our continued success. I would now like to open the call for questions.

Thank you, sir. Ladies and gentlemen, if you do have any questions at this time, please press star followed by one on your touch-tone phone. You will hear a prompt that your hand has been raised. And should you wish to decline from the polling process, please press star followed by two. And if you're using a speakerphone, you will need to lift the handset first before pressing any keys. Please go ahead and press star one now if you have any questions. First, we will hear from Brent Thielman at Davidson. Please go ahead, Brent.

Hey, thanks. Good morning. Hey, Brian, when you look around your territories that you're operating in, could you talk about where you're seeing kind of more resiliency in private construction markets and then maybe where you're seeing some increased pressure? I would imagine maybe being more in tier two cities, you avoid some of that pressure, but love to hear from you what you're seeing on that side of the business.

No, appreciate that, Brent. And certainly, you know, with our footprint primarily being in midsize high growth markets, you're right, we're shielded to some of those pressures. Where we're seeing some positive activities on the private side is certainly in Hawaii. It would be in California. And then Texas is strong right now. And then, you know, the other one would be just throughout some of our north central region. Unfortunately, we're slow in the first quarter. And so it's hard to really see that in our volumes. But You know, California, Hawaii, kind of that legacy Pacific region that we had before, has really got some positive volumes on the private side. Where we're seeing some pressure downward on the private side really would be not totally isolated, but it's really magnified in Oregon right now, and then a little bit in Montana. But for the most part, Idaho is strong for us right now, both on the public and private side. But probably Hawaii, California would be our strongest markets on the private.

That sounds like good balance overall, Brent. I guess maybe as a follow-up, I mean, you're two months into the Strata integration. You've obviously got some numbers here and guidance for that. Maybe you could talk about what you're learning from that business already, just an update there.

Yeah, no, we're very excited and pleased at how the integration is going. Obviously, it came online during the latter part of the winter, and so we showed some seasonal losses in the first quarter associated with that. Obviously, some integration and due diligence costs that were part of our increased SG&A, but it really, I mean, we thought and we knew that this was going to check all the boxes for EDGE, and it has not let us down on that at all. It's going to be accretive to our margins. It's aggregates-led. It's got an amazing, great... management team at the operations there. It's a great cultural fit. I mean, it's going to provide long-term value for Knife River for years to come. This year, we could come at a better timing to close the deal, kind of as we get started in the construction season, coupled with just a couple days ago, North Dakota passing an infrastructure fund that will benefit from that. So the combined operations between Knife River and the Strata acquisition is looking very favorable for us. And You know, that's why we upped our guidance to a record year for us from that 510 that we initially published up to 555 with the addition of Strata. So right now everything is going well on the integration front, Brent, and very excited for a positive contribution this year. Very good. Thank you. Yep.

Thank you. Next question will be from Trey Grooms at Stevens. Please go ahead, Trey.

Good morning, Brian and Nathan. Hope you're doing well. Good morning. So, you know, the... Oh, good. So, recent M&A has, you know, changed the seasonality here some with the business. But can you talk about, you know, how volumes have been trending across your segments now that the weather is starting to cooperate and we're kind of getting more into the maybe the early days still yet of the seasonal uptick. But, you know, in those markets, you know, any color on how the start to the season has begun?

Yeah. So you mentioned that the Albina acquisition that we did late last year and Strata, certainly those being northern states, added to our typical seasonality. Our five-year history before those acquisitions was that 5%. loss of our annualized EBITDA and with those acquisitions to be closer to 8%, as you pointed out, Trey. But we do see some, I mean, positive signs. And I think that's why we've increased our aggregate volumes from low single digits up to that high single digits with the addition of strata and also just some positive signs that we're seeing throughout our footprint. I mean, if I look at our aggregate volumes for the quarter, they were down 9%, but that's less than 400,000 tons, which is right about a little over 1% of our annualized sales for all of aggregates. And so very small impact in that first quarter. And the reality is that we have seen aggregate volumes increase in 70% of our states that we operate in. And so we are seeing positive signs. We certainly have seen a fair share of private work that we have secured volumes on, secured contracts, paused for a while right now. So that had an impact on our volumes for the quarter. But we are seeing very good shipments out of our Honey Creek facility on Texas. Like I said, 70% of our states, we actually had volumes that were up in aggregates. And our ready mix volumes overall for the company are up for the quarter as well. So even though it's a small quarter for us, it's the least meaningful quarter for us. certainly seeing some nice signs that we can hit our guidance numbers.

Great. On that, you know, you mentioned kind of the private earlier, you mentioned private versus public. You know, with the addition of the recent acquisitions, can you remind us, what is that in-market mix? You guys have always been

uh much more exposed to the public side of things but any any change to that mix now as you've added the uh you know strata and other other deals over the last 12 months or so yeah so you know our as far as our construction revenue uh that's about 40 39 to 40 percent of our total revenue for the year and the majority of that work in that bucket of that construction contracting revenue you know 87 of that is public works uh projects now The addition of Strata, they're more of a materials-driven company. Their aggregates, I'm sorry, their contracting revenue would be a little bit closer to 30% for their revenue, total revenue. And it would be similar mix of type of work that we currently have at Knife River. So they would be heavily influenced by public work as well. Being more of a material supplier though, on our material side of the business, in particular ReadyMix, and they're a large ReadyMix provider, and aggregates, we do have more influence in those two product lines on the private side. So overall, if you look at all of our revenue trade, you know, we certainly have more influence from public funding. And as you know, that backdrop to that funding is very strong and it continues to get stronger in our states that we operate in. And we have less exposure to private, but that certainly would impact aggregates and rated mix more than the others.

Got it. Okay. Thanks a lot. That's it for me. I'll pass it on. Best of luck. Thanks, Greg.

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

Hi, thank you for taking my questions today. First, I just wanted to circle back and get some clarification on your SG&A for the quarter and then also how we should think about it for the year. Of the 8 million in Q1, how much of that is from acquisitions or M&A activity versus others. And for when we look at the balance of the 20 million for the full year guidance, how much of this is maybe help us differentiate what is step up that includes strata, and then what are the dollars that are just due to residual costs related to acquisitions and comp.

I appreciate that, Catherine, and I'll just at a high level start off and ask Nathan Ring to provide some details. And so, you know, we announced three months ago at our last earnings call that we were stepping up our total investment in SG&A, primarily focused on our business development and our edge initiatives to become best in class in all that we do and execute our excellence initiatives along with business development. So we had announced that $20 million that you're referencing certainly saw and projected that we would see a lot of that activity in the first quarter. And so we did see a total of $13 million more SG&A in that first quarter. And so I'll let Nathan kind of talk specifically about what was made up in that $13 million increase in SG&A that was anticipated, very much in line with management's plan that we had put in place. And so Nathan, I'll let you do that. And maybe you can just touch on maybe on a run rate going forward as well.

yeah for sure good morning catherine good to hear from you probably the easiest way to do it is to put that 13 million that we had in variance year over year for the first quarter into three buckets and i'll put it into the buckets catherine that you were trying to understand the pieces too so brian mentioned the 20 million dollars in step up so of the 13 eight of that 13 relates to the 20 million step up and you kind of wanted a breakdown of that too so i'll give you just the quick pieces six of that eight million relates to business acquisition costs so business development due diligence integration and then the other two relates to other edge initiatives such as pit crew activities operations for our segments so again eight million of the 13 million relates to the step up and then we had about three and a half million almost four million that relates to sgna for the acquisition so as you recall we did albina late last year and then we had of course strata here recently The SG&A that those two companies bring on was approximately $4 million, $3.5 million for the first quarter. So that gets you close to about $12 million. And then the last piece, there really is a combination of, just as we shared before, inflationary costs year over year, and then offset by some gains in some insurance. But most of that is a small amount. So really, again, three buckets. The step-up, $8 million, almost $4 million for SG&A for acquisitions, and then the rest kind of ongoing costs for inflations. So I'll pause there, Catherine, to make sure that kind of answers the question on the quarter, and then I'll get into the full year.

It does.

Okay, perfect. So then for the year, yeah, oh, go ahead, sorry.

No, no, no, go for the full year.

Go ahead. Yeah, for the full year then. What I'll do is I'll just back up one step, because we're really just making one change to get to what we look at for the full year of SG&A. So as you recall, back in February, we shared that To determine what SG&A would be for 2025, we said, let's start with 2024's full-year SG&A. And that was about $255 million. And we said you'd grow that by mid-single digits for inflation and then add the $20 million that Brian just mentioned. So really, we just talked about three things back in February. Start with 2024, inflation, and then the $20 million step-up. The only additional item that you would need to use to determine what the full-year 2025 would look like is to add in Strata. And for Strata, I think a fair estimate is to look at their SG&A as a percent of revenue is currently comparable to Knife River. So as you calculate Knife River, you can extrapolate that to Strata and get to a full year for the full company.

Okay, perfect. All right, that's helpful. Very good. Switching gears to your aggregate volume guidance, For the quarter, it was down high single digits, but you've guided for up low single digits. But understand that this is a seasonally slower, the slowest quarter. So against that backdrop, could you conceptualize just the optics and what makes you comfortable with your prior low single digit guidance? And then also, how has that changed with the inclusion of strata? Because as you noted earlier, they have are a little bit more materials heavy in their mix. Thanks.

Yeah, I appreciate that, Catherine. And so certainly the combined operations, Knife River Legacy operations plus strata, we do feel comfortable with a high single digit guide for aggregate volumes and then the high teens for ready mix. And that certainly, that increase is on top of a guide that we're maintaining of low single digits for our organic growth, both for ready mix and aggregates. You know, as you mentioned, and as I said a little earlier, our first quarter is really is a very small quarter. It's 10 to 15% of our revenue as it relates to aggregates. So we literally have 90% of the year still in front of us. And although we were down 9% for the quarter, again, that number is right around 1% of our total sales for aggregate. So not a huge impact, plenty of time to make those jobs up. A lot of the work that was postponed in the first quarter, I mean, we have contracts for, they just were delayed, whether that's because of weather. And we certainly had less favorable weather this year than we had last year. And so part of this is a difficult comp of looking at last year's favorable weather versus less favorable this year. But another part of it is what I've mentioned is there's been some projects that have been delayed and put on pause that had an impact on our sales, specifically in aggregate. So excited that 70% of our states had actually increases in volumes and certainly see very reasonable guide in that high single digits that we can hit this year.

Okay, great.

Thanks very much. Good luck.

Thank you.

Next question will be from Garrick Chamois at Loop Capital. Please go ahead, Garrick.

Hi, thank you. First question is on contracting services. Wondering if you could talk a little bit about how you're balancing the revenue opportunity versus margins moving forward. You've spoken to, it sounds like, flattish margins for the year. Has this threshold changed at all as a type of projects that you're bidding on? Has that changed? So any kind of incremental color on that side?

Yeah. No, I appreciate that, Garrick. So, yeah, we have good backlog right now. I mean, we're very near our record backlog that we had a year ago. And as we announced, it's at similar margins. So we are set up to have another solid year in contracting services. The recent passage of the Idaho Transportation Bill, the North Dakota Transportation Bill, That should be some upside for us this year. And so, you know, as far as bid dynamics, I mean, and maintaining our margins, I would say that we are short on some work in a few of our markets. And I'd highlight Oregon and Montana, part of that being timing of projects, part of that being some short falls that they're having in Oregon that the current legislature is trying to fix as we speak and fully expect and hope that they solve that problem. So in a few of our markets, we're still looking for some work, and that could put some downward pressure on margins as we pick up the amount of work we need to get. But I can also tell you that we've been patient, and some of our competitors have filled up in some other markets that are very good markets right now with very good, strong funding that should allow us to have higher margins. We also mentioned Strata, albeit about 30% of their revenue is contracting margins. We certainly have mentioned and see that those margins are accretive to our Knife River margins. So overall, I think that we are poised to have a very solid year in contracting services. The funding, the backdrop just continues to be at record levels and our teams are very good at going out and executing the work and overperforming and gaining margins when they're out executing that work. So set up to have a very solid year in contracting services.

No, thanks for that. Follow-up question is just on costs. With the decline in oil, has there been any change in your unit cost expectations across your segments, particularly interested in aggregates asphalt and liquid asphalt?

Yeah, I would say that it's not been material that we would change our guide at that mid single digit that we provided just three months ago. We're monitoring that situation. Obviously, on energy services, they buy a lot of liquid asphalt to resell to third party customers. And a lot of that liquid asphalt, the crude comes from Canada. And so we're monitoring that very closely and talking to our customers around any potential impacts of tariffs. You're right, diesel. You know, it has been a little bit of a tailwind, but this time of year, we don't use a lot of diesel. And so I would say that's not been that material. And we kind of see that just as a stable number going forward. That's how we've modeled it in our guidance.

Okay. Thank you very much. Best of luck.

Okay. Thanks, Garrick.

Next question will be from Ian Zaffino at Oppenheimer. Please go ahead, Ian.

I agree. Thank you very much. I just wanted to ask you on the investment. You know, I guess we saw some of that last year creep up, and I guess we're seeing investment again. Are we kind of done with investment cycle? Is there anything else we need to do from an SG&A or an investment perspective? And with that said, is that enough investment at this point to get to your 20% margin? your 20% margin target. Thanks.

So Ian, I assume you're talking about the step up in SG&A, the $20 million that we had that we would consider an investment in our future. Is that what you're referencing?

Correct, yeah.

Yeah, I think that step up really is 24 going into 25. We definitely have filled our pipeline of business development. And so the majority of that $20 million step up is related to our business development activity that we see as kind of an ongoing investment in future years. And so it's not going to be a $20 million step up next year, but we do see that run rate that we currently have this year. And really we want, you know, in the perfect world, you would try to do as much due diligence and integration of those acquisitions during the winter months. So I could see that being, you know, a little bit in the fourth quarter. It's certainly front loaded in the first half of the year as we bring those operations onto Knife River for the summer benefit. So as far as additional monies beyond that step up at this point in time, we feel like the $20 million investment that we're making, majority business development activity, and then also just staffing our edge initiatives, whether that's dynamic pricing, pit crews, our regional structure, to support the growth that we've got in mind we do see that kind of as a one-time step up this year that could support our future growth and get to that 20% EBITDA long-term margin.

Okay, good. And then, you know, just as far as a little bit more color on the projects that you said are being delayed on the private side, you know, what type of contracts are those and what type of projects are those that you're seeing? I mean, is there any kind of theme you could draw across or is this kind of episodic and one-off things?

Yeah, I would say that all private jobs, for the most part, we've seen very little to, frankly, I don't know of any public contracts that we have signed that have been delayed and or canceled. And so this is really isolated to the private market, which you know is a smaller, we have less exposure to the private side than we do on the public side. but that impacts our aggregates and ready mix the most. And so these would be more materials driven projects. And so it'd be impacting our aggregates and ready mix the most. And it's just a wide range of, you know, whether it's subdivision projects, a hospital project, there are a number of just, you know, these are decent size, 100 to 200,000 ton projects that in any one quarter could have an impact on us. The good news, Ian, that, you know, I've got, you know, a list of projects have been delayed and only one of those have been delayed indefinitely. The other ones, I mean, we really do, at least at this point in time, the developers, the owners, the contractors are telling us that they hope to see those volumes kick off again back in the third quarter. And so that is something that we anticipate. But as you know, with the economic uncertainties, that there's probably some volatility to that and that confidence is maybe a little bit strained at this point in time on that. But I think what we're being told is those jobs should start going again in the third and fourth quarter. I would say that it's a little bit on the West Coast. I mean, being from Oregon, I mean, I say the headlines often. We are an exporter, whether that's with Intel, Nike, Boeing. So some of those drive the local economy in Oregon. And certainly the tariffs maybe have slowed some of those projects down. But, you know, I'd say that gives you a little bit of color on what we're seeing as far as the type of jobs that have been delayed.

Okay, great. Thank you very much.

Thank you. As a reminder, ladies and gentlemen, if you do have any questions, please press star followed by one on your touchtone phone. Next, we will hear from Gabe Hajde at Wells Fargo. Please go ahead, Gabe.

Brian, Nathan, thanks for all the detail and taking the question. You're welcome. I hate to beat the dead horse, but maybe a different angle. On the $6 million that you called out specifically, I think, Nathan, on the increase related to diligence and integration, just curious how that relates to maybe prior year's spend. And really what I'm trying to understand is I think you kind of talked about strata as being maybe towards the upper end in terms of size and scope of sort of deals that were in the pipeline. A, if you can confirm that. B, maybe give us a sense for what you're seeing today in terms of price expectations if anything has changed from a seller-buyer standpoint would be helpful. Thank you.

Yeah, I'll take that first part there as it pertains to the $6 million and the cost that we're incurring, and then I'll turn it to Brian to talk about what we're seeing as far as deals in the pipeline and their pricing. So of that $6 million, again, and you talked about, okay, how does that compare with the prior year? We really did start up the acquisition process in 2024, and towards the beginning of that year, the amount of SG&A costs that would fit within this step-up bucket were nominal. Now, we did have some costs later in the year that was kind of mid-single digits, I think $6 to $8 million. So we did have some in the latter part of last year. As we look into this year, that $6 million that is related to the acquisition costs, most of that actually does pertain to strata within the quarter. And within our guidance in that $20 million step-up, we do incorporate what we expect for the full year on acquisition costs, which again would be due diligence on projects we've got in the pipeline, integration for those that we close on, but also the buildup of the business development team, which is essentially there. So I think what we've got out there for you today, Gabe, in terms of guidance and what we've shared with the $20 million step-up captures the increase that we would have seen from 24 to 25. Does that help answer the first part of your question, Gabe?

Absolutely does. Thank you.

Maybe I'll take the second part as far as the pipeline. Yeah, our pipeline continues to be full. Our business development team has been busy out there. If you look at the eight deals that we've done, the six that we did last year and the two that we got across the finish line in the first quarter, Strata being the largest, Strata, as you mentioned, Strata being the largest that we've ever done at Knife River. But all eight of those acquisitions were in the range of mid-single digit to high single digit multiples. All eight of those deals... We're in a non-brokered and a relationship negotiated area. And so that is continues to be our focus. We have a very good position in these midsize high growth markets in a unique part of the United States that we like to do business in the midsize or high growth markets. We continue to look at materials-led businesses. We continue to not be afraid if they're vertically integrated. We like that part of the model. And we really are, and oftentimes, just the acquirer of choice because of the local relationships that we've got by managing our teams and our regions at the local level, the life at knife culture that we've got. And so we continue to see a lot of opportunities of these family-owned companies, maybe multi... generational companies that want to be part of Knife River. And so that continues to be our targets. And I would just say that there are a lot of opportunities out there for us to go out and execute our proven playbook. We are good at integrating these companies into our structure and look forward to having more deals yet this year.

Appreciate that. If I can ask one sort of in the weeds accounting question. Is there anything odd as it relates to like inventory step-ups that you didn't call out as like a one-time item in your press release? And then are you willing to, I mean, I guess the increase in EBITDA guide for this year, that 45 million that you called out, are we safe to assume all of that is related to Strata? Thank you.

Okay yeah as far as unique inventory items related to accounting so yes you're right at times, when you do an acquisition of a company you'll have a. markup to the fair value of what the inventory is as well strata does have some of that there was none of that that related to our first quarter results here or be a nominal amount. And really when you look to the full year of how much that markup was, I would say, with overall to the company and be an inventory amount low single digits in terms of millions so. not something that I would consider large enough to say, hey, we need to take a closer look at what that markup was for the inventory as it relates to the strata acquisition.

And, Gabe, yes, the entire $45 million bump from 510 up to a midpoint of 555 is reflective of our expected earnings from the strata acquisition.

Thank you, and good luck.

Thanks, Gabe.

And at this time, Mr. Gray, it appears we have no further questions. Please proceed, sir.

Just want to thank everyone again for joining us today. We made strategic investments in the first quarter that we believe will lead to another record year for Knife River. We continue to make good progress on our edge goals and are well positioned to grow our company and deliver long-term value for our shareholders. We appreciate the interest and support in Knife River and will now turn the call back over to the operator.

Thank you, sir. Ladies and gentlemen, this is