Good morning, ladies and gentlemen, and welcome to the Knife River Corporation second quarter earnings conference call. [Operator Instructions] This call is being recorded today, Tuesday, August 8, 2023. I would now like to turn the conference over to Nathan Ring, Chief Financial Officer. Please go ahead.

Thank you, and good morning. My name is Nathan Ring, Chief Financial Officer of Knife River, and it's my pleasure to welcome you to our second quarter 2023 earnings call, our very first as an independent public company. Today's discussion includes forward-looking statements as defined by the United States securities laws in connection with future events. Knife River is subject to risks and uncertainties that could cause actual results to differ materially. Knife River is under no obligation to, except as legally required, publicly update or revise any forward-looking statements, whether resulting from new information, future events or otherwise. For more information about risks and uncertainties associated with forward-looking statements, please refer to our most recent SEC filings. For further detail, please refer to the legal disclaimers contained in today's earnings release and other public filings, which are available on both our website and the Securities and Exchange Commission website. During this presentation, we will make references to certain non-GAAP information. These non-GAAP measures are defined and reconciled to the most directly comparable GAAP measures in the appendix to the supplemental information as well as our filings with the SEC. These materials are also available on our website at www.kniferiver.com under the Investors tab. Joining me today is President and Chief Executive Officer, Brian Gray. He will begin today's call with a discussion of our financial results, segment performance and competitive EDGE plan. I will then review second quarter product line results, leverage position and 2023 guidance. Following prepared remarks, the operator will open the call for a question-and-answer session. I will now turn the call over to Brian.

Thank you, Nathan. Welcome, everyone, and thank you for joining us today. I am excited to present our first earnings call as a public company and even more excited to discuss our strong results and the solid momentum we are seeing. Knight River achieved record second quarter revenue, record net income and record EBITDA while also compiling a quarterly record backlog. We saw improved results from last year in each region as our operations benefited from price increases and targeted bidding strategies across all consolidated product lines. This is a direct result of our competitive EDGE strategy for sustainable and profitable growth, which I will discuss further in a minute. For the quarter, we reported revenue of $785.2 million, a 10% increase from the same period in 2022. Our second quarter EBITDA was $125.1 million, which is a 43% increase year-over-year. Our adjusted EBITDA was $126.3 million, a 40% increase year-over-year. Nathan will discuss EBITDA and adjusted EBITDA in more detail so you can fully appreciate the significant underlying momentum in our business and the progress we are making with the execution of our EDGE plan. Based on our strong first half and the tailwinds we see in our operations going forward, we are raising our guidance for revenue and EBITDA. In addition, we are initiating guidance for the adjusted EBITDA of $330 million to $380 million for 2023, implying year-over-year growth of 20% at the midpoint and underscoring the demand we are seeing. Nathan will discuss this further. These are very strong results, and they are a testament to the strength of our 6,000 team members and of their support of our EDGE strategy. Our results also show the strength and resiliency of our aggregates-led vertically integrated business model. While new to the public markets as an independent company,…

Thank you, Brian. We have had an impressive quarter on a consolidated basis and at the segment level. Next, I'd like to focus on the product lines, which have also benefited from our strategic initiatives. First, let's review the progress we made on pricing. For the quarter, the average selling price for aggregates improved 11%. Ready-mix concrete improved 13% and asphalt also increased 13%. These strong price increases are a direct result of the EDGE initiatives as well as the actions taken to overcome inflationary pressures from the prior year. Although we anticipate inflationary pressures will moderate, we expect the dynamic pricing initiative to continue providing margin improvement. The delayed start to the construction season impacted our internal sales of aggregates for the quarter as reflected in the volumes. I am pleased to report that all operations are in full swing, and we are entering the heart of our construction season. External sales of aggregates increased for the quarter, and we continue to see broad-based demand. Our successful pricing strategies and cost control measures have resulted in strong improvement in gross margins across all our product lines for an improvement at the consolidated level of close to 500 basis points. Again, we are very pleased with the work our teams have done to implement new initiatives and take advantage of strong market opportunities. Switching to our financial health and capital allocation priorities, we are dedicated to financial discipline, particularly as it relates to our targeted leverage and capital allocation. Long term, we are targeting a net debt to trailing 12-month EBITDA of approximately 2.5x. As Brian mentioned, since the spin date, we have paid down $35 million in debt. So that at the end of the quarter, we were 2.3x EBITDA. This is based on net debt balance of $815…

[Operator Instructions] Your first question will come from Brent Thielman at Davidson.

Congrats on a great quarter. Brian or Nathan, I mean, look, solid pricing returns, profitability across the company. Maybe if you could just speak to what the overhang on volume was this quarter? Do you see that reversing into the second half of the year? Or any thoughts around the opportunity for volume to snap back here as we move into the second half?

Yes, Brent, this is Brian. So I'll go on to take that question. Yes, we saw small volume declines in aggregates, ready-mix and asphalt for the quarter. I'll start with the downstream products and I think that will explain the aggregates. For ready-mix, we divested ourselves of the Southeast Texas operations and so that was the primary driver of that. I mean, without the divestiture of Texas, our ready-mix volumes would actually have been up. Then second, as far as asphalt, we had a late start to the construction season this year. We talked about the impacts in the Pacific region, Mountain region in the first quarter and so really, the work that should have got done in this first quarter is really just now getting started in the second quarter, and it's been delayed. So the delayed start of that impact really our aggregates in total. Our aggregate volumes were actually up to our third-party customers for the quarter and so it really all came from selling internal materials to our ready-mix plants and our asphalt plants downstream, Brent. So overall, yes, I think that construction work with our record backlog. We've got time to get that work done. So I do see those volumes coming back.

Okay. Great. Then maybe if you could talk a little more about the progress you're seeing with the various internal initiatives around pricing, bidding practices, some of the other objectives you've got, I guess, specifically as you think about this kind of 15% margin objective. I mean how much of that shows up in its results this quarter, Brian? I mean, in fairness, you guys have only been in the role for a little while. I'm just trying to understand that versus maybe some other things that are driving really strong profitability here this quarter.

Yes. We appreciate the recognition, Brent, of a fantastic quarter, and it does have a lot to do with our EDGE initiatives. So there's a primary driver of that 15% EBITDA by 2025, and our success this last quarter really has been driven by our pricing initiatives, both for our materials and downstream construction services and so we have had good success in our markets in all product lines of getting double-digit price increases. We really are telling our story of the being vertically integrated and supplying all the materials through the value chain, there is value that our customers see in that. The quality, the service, the availability of materials at our sites, that has been well received by our customers. That's transitioned also translated on the bid date for our contracting services. We've become much more strategic, disciplined, patient in identifying the jobs that really fit our crews, fit our backlog, and that's allowed us to raise our margins. You saw that in our construction margins for the quarter were much better as well. We've got record backlog going into the rest of this year and our EDGE initiatives, I can tell you, we had a region president in Bismarck last week and that initiative has been completely embraced. We get to 15%, not by just raising prices, but also our cost controls. We've implemented the PIT Crews and the PIT Crews have been out on the road for a week, a month. They've made 7 visits so far and have identified literally hundreds of small operational improvements, some of them more meaningful. So it's multiple ways to get there. We continue to look for opportunities to go through acquisitions and refueling our aggregates operations. So we're well on track, Brent, to get to that 15% by 2025.

Okay. Appreciate that. Brian, maybe just if you could comment on some of the business trends, demand trends, just maybe among your larger revenue contributing states. I mean is there an air pocket and housing, are there more positive than negative right now as we think about the demand climate in some of the bigger markets for you?

Yes. There's been a lot of conversations around residential because of our geographic footprint and really focused on the midsized higher-growth markets. We're not seeing a big slowdown in the markets we operate in residential. Now keep in mind, Brent, there's not a large percent of our backlog on contracts and services or even on the material side is directly related to residential. The markets that we operate in, many of our competitors are more of the regional smaller suppliers that really do target the residential markets but the markets that we're in and we do see the booming area in that Treasure Valley, as far as residential there, Northern California, our residential has not had a big impact on that. Obviously, right now, 84% of our backlog is public funded and so that remains very strong for us. We have markets right now that are seeing a bigger rebound than others. Hawaii, I mean the tourism, the military spending in Hawaii has been very solid for us. We're seeing a lot of strong commercial warehousing. I think across the board, we're seeing strength in tailwinds in most of those markets.

[Operator Instructions] We have follow-up questions from Brent Thielman at Davidson.

Okay. When you think about the upgraded implied outlook for the second half, you do have some markets that can be very seasonal. Have you embedded some element of conservatism for that into the guidance, I guess, I'm thinking particularly about the fourth quarter, Brian, or Nathan.

Yes. We kept the range at $50 million, Brent.  We're early into the construction season right now. We still have approximately 60% of our revenue will happen in the second half of the year and so yes, you're right that our Northern tier exposure can have an impact in the fourth quarter. But it's early on, and we've got strong backlog and momentum going into that but that led into our guidance. Maybe Nathan has something to add on there.

Yes. Another part, Brent, of the second half of the year does relate, and we mentioned this in our remarks, relates to the incremental costs that we'll see from the transition. If you recall from the Form 10, we didn't indicate that for a full year, we'll probably see about $23 million, $24 million of recurring costs in relation to that. For the rest of the year, about $2 million a month, we'll see about an additional $12 million of incremental costs related to the spin.

Yes. Maybe just last one, just strategic. You guys have been very focused internally in some of the initiatives you've been focused on. I guess I'm curious your appetite today for looking at acquisitions, would you rather see that a little later on as you're still putting things to work internally? I'd be curious to your thoughts there as we think about the expansion of the business here eventually.

Yes. A key component of our EDGE initiative is growth, and it's a big part of our DNA in our past and absolutely, Brent. We've got a Vice President of Business Development that is focused right now on both organic and inorganic opportunities. We've been obviously very focused on getting the spin across the finish line, and that's taken a lot of our resources and attention. However, during that time, we've been busy talking to prospective sellers. I think we are an acquirer of choice in the markets we operate in, primarily because we're a people-first company, and we take good care of our employees, our neighbors, our customers, and we have strong relationships and reputations in those markets that we operate in. So very much I think that we are very active looking at acquisitions. I think Nathan could possibly touch on a little bit of our available funds to grow. Maybe, Nathan, do you want to talk about that?

Yes. The other part of that, Brent, too, is just that we're prepared to pursue those when they come to the pipeline. As we noted within the prepared remarks, we're sitting at a 2.3x net leverage, which helps indicate that we have the funds to support the growth that the Vice President of Business Development and the team is looking at. Really with the performance we've had in the first half of the year and expectations for the second half of the year, strong cash flows to where we can maintain that 2% to 2.3% or 2.5% spend leverage while pursuing these growth opportunities, very exciting for us.

There are no further questions on the phone, so I will turn the conference back to Brian Gray for any closing remarks.

Well, thank you for taking the time to join us for our call today where we posted record results, raised our guidance for the full year. We're excited by the early results from implementing our EDGE plan and the robust demand environment across our footprint. We are well positioned with our EDGE strategy, our people-first culture and a leading position in our midsized high-growth markets to create durable long-term value for our shareholders. Thank you for your continued support for Knife River. Have a great day.

Ladies and gentlemen, this does conclude your conference call for this morning. We would like to thank you all for participating and ask you to please disconnect your lines.