Good morning, ladies and gentlemen, and welcome to the Knife River Corporation Third Quarter Earnings Conference Call. [Operator Instructions] I would now like to turn the conference over to Mr. 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 Third Quarter 2023 Earnings Call. 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 the 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's 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 today's presentation, 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 the third 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'll now turn the call over to Brian.

Thank you, Nathan. Welcome, everyone, and thank you for joining us today. The third quarter is historically our strongest quarter each year, and historic is exactly the right word to describe the third quarter of 2023. We reached all-time quarterly records for revenue, net income, EBITDA and adjusted EBITDA. Each reporting segment saw improved year-over-year results as our operations continue to benefit from price optimization and targeted bidding strategies across all consolidated product lines. These strategies are part of our Competitive EDGE plan, which I discussed last quarter, and which we began to implement early this year to help drive long-term profitable growth. Based on our pricing initiatives, we experienced significant profitability improvement, led by a 16.2% increase in the average sales price for aggregates. We also benefited from strong results at our Energy Services business within All Other. Combined, the effects of our EDGE initiatives, our strong market dynamics and our vertically integrated business model helped drive our record results. We will provide a more detailed update on each of these areas as part of today's presentation. For the quarter, we reported revenue of $1.1 billion, a 12% increase from the same period in 2022. Our third quarter EBITDA was $241 million, which was a 40% increase year-over-year. While our adjusted EBITDA was $247 million, a 43% increase year-over-year. These record results were driven by a few key catalysts. First, our employees fully committed to our EDGE plan and began setting the groundwork for the successful full-scale implementation of key operational improvements. I can't thank them enough for their efforts and complete support of our EDGE initiatives. Second, the markets where we operate continue to benefit from tailwinds in the form of federal, state and local funding for public infrastructure projects. And finally, the work by our pit crews…

Thank you, Brian. As we take a closer look at Knife River's third quarter financials, I want to reiterate how pleased we are with our performance and the results we've been able to generate during our first 2 quarters as a stand-alone public company. First and foremost, we continue to show improvement in pricing across all of our product lines. For the quarter, the average selling price for aggregates improved 16.2%. Ready-mix concrete improved 11.6% and asphalt improved 14.9%. These double-digit price increases benefited from the initial stages of our EDGE initiatives, further supported by strong markets and public funding. We will continue to optimize our prices to align with the value of the products and services we provide. During the quarter, all regions were at full operation, and we worked through the peak of the construction season. Our teams have refocused on pursuing more profitable work with new bidding and dynamic pricing strategies. As we had anticipated, these efforts have resulted in slight volume declines. On a consolidated basis, we saw a 3% decline in aggregate volumes and a 6% decline in asphalt volumes. Ready-mix volumes also declined 3%, largely related to the divestiture of our Southeast Texas assets in late 2022. But again, price increases and operational efficiencies drove top line and bottom line growth for aggregates, ready-mix and asphalt. So while materials volumes were slightly down, we generated considerably more profit and improved margins. As Brian mentioned, we are also more selective on the work we bid, we targeted higher-margin work at contracting services, and that strategy, coupled with solid execution, was successful. While our backlog is lower year-over-year, margins in the backlog improved and overall profitability in dollars is higher, more than offsetting the lower backlog of work. Our goal highlighted in the EDGE plan is…

[Operator Instructions]. Our first question comes from the line of Ian Zaffino from Oppenheimer.

Fantastic quarter here. Question would be on the pricing side. For fourth quarter, any new pricing or are we just going to carry forward of third quarter. And then also into next year, how much will then carry over into 2024?

Thank you. Yes. I think we still have a good momentum going into the fourth quarter for our pricing strategies. And we've been very focused on our EDGE initiatives, as you've heard us talk about price optimization on the material side and bid day strategies and really optimizing those bid margins. And so that's going to continue forward our backlog that we've got right now is at higher margins. That's going to carry into the fourth quarter and into next year. And so we still see a lot of upside on our edge initiatives. We're really still in the early rollout of our dynamic pricing strategies and bid day optimization. So I think you'll see that move into the fourth quarter and carrying into next year.

Okay. And then just as a follow-up. You kept CapEx unchanged despite higher EBITDA, higher margins. Do you now feel like going forward in your efforts to kind of hit that 20% margin that you can kind of keep CapEx at these levels? Or how are you now thinking about CapEx, I guess, going forward, after this year and your goal to kind of hit that 20% margin?

Yes. You now have Nathan Ring, our CFO answer that one for us.

Yes, Ian, thanks for the question. So as it relates to the CapEx, first, just what we've had this year. As you know, coming off of the spin, we focused primarily on maintenance CapEx, which I noted earlier, $125 million. As we look forward, there's a few things that I think about. First of all, our acquisitions. I mean, as you know, Ian, we're a company that's built on 80-plus acquisitions. We've developed a strong playbook for that, and we are focused on continuing with aggregates led in those midsized high-growth markets. So we'll pursue those deals going forward. We've got opportunities that are in the pipeline. And so acquisitions will continue to be a very important part of the utilization of cash. Secondly, we're going to look for those organic projects as well coming up. I mean as we talked about a few times within the opening remarks, we've got the Prestress facility, Honey Creek. So organic projects will always be an important part of what we do. Maintenance, that component of it will continue to be somewhere around our depreciation expenses we've had in the past. And so I would look forward to those three areas being the utilization of our cash on a go-forward basis.

And Ian, specifically to get to the 20%, it's important to just recognize that our CapEx budget does not include monies for the acquisition of M&A activity. And as we do transition and continue to look at that 20% long-term EBITDA -- adjusted EBITDA margin that we will have some larger acquisitions as part of that and be very focused on aggregates product line. And so that would not be part of our CapEx that we talk about traditionally.

Right. And if I could just maybe squeeze in one more on the M&A side as we're talking about this. Maybe help us understand the environment now, big players kind of involved in other acquisition. So has the environment changed? What have you seen as far as multiples and kind of willingness of the seller to engage in discussions to sell.

Yes. Our business development team is busy right now. And I think we continue to be a logical acquirer of choice in the markets that we operate in. And so we continue to focus a lot of our attention in the markets that we are currently in along with those states that are adjacent to our existing regions. And so we are very active. I would say that the marketing, the bid environment, the multiples that we're seeing are similar to what we've had in the past couple of years. But the activity, I think, has picked up and I think you'll see us continue to be very active. It's been a big part of our past, and it's an integral part of our EDGE strategy. G is the growth part of that, and you'll continue to see us focus on both organic and inorganic growth.

[Operator Instructions] We have our next question coming from the line of Brent Thielman from D.A. Davidson.

Congrats on great quarter. I guess, Brian or Nathan, the backlog, I guess, what looks to reflect what I think is sort of a normal cadence for you as you burn through some of it in the third quarter. It sounds like you're being a little more selective as well. To the extent that it's down year-over-year, how -- I mean, how should we look at that as we start to think about 2024, is a lower 3Q backlog? Any sort of read for next year? Should we be kind of focusing more on what you're able to secure over the next couple of quarters?

Yes. Good talking to you, Brent. And yes, we do have slightly lower backlog, about 9% down. And I'd say that it is a normal cadence. Timing is a lot of this. Last year, we actually had some unusually early bid lettings in North Dakota that happened in the third quarter. I think, traditionally, those -- you see those most normally in the fourth quarter and the first quarter. So a part of this is timing. Part of it is exactly what you talked about, our Mountain region, experienced record revenues, and they had a significant increase in revenue in their contracting service. So they burned through some additional backlog. We had very favorable weather throughout our entire footprint for the third quarter. But part of this is just really taking on higher quality backlog instead of just quantity. And a big part of our EDGE initiative is to focus on high-quality work that is in our wheelhouse that we can do well at high margins. And so we're out there doing that. And I think the North Central region is -- they're down $72 million of backlog, and that's -- we're down $72 million of backlog company-wide. And so they've been very disciplined on bid day, and you've seen that both on their performance year-to-date in contracting services as well as the backlog that we're taking on. We mentioned that we have higher margins in our backlog. But to put it very specifically, I mean, the total dollars available in profit that we've got in the current backlog, those total dollars of available profit is higher than the backlog that we had a year ago. So granted, it's down. The good news is that it's high-quality backlog, it's going to carry into next year, and we're going to continue that focus on bid A to be very disciplined on our margins.

Okay. That's helpful, Brian. And then looking at your -- I guess, your aggregates gross profit per ton, I mean, it was up significantly here in the third quarter. And I guess to take a step back, too, Brian, I mean, the margins in some of the areas that your EDGE plan has been focused on are also much higher. I guess my question is it pertains to those two areas. To what degree is this reflective of the initiatives you're implementing versus the sort of overall market strength?

Yes. The overall market strength is very healthy in all of our markets. And part of that increase in gross profit margin, I mean, it's really coming across from all of our different regions. But we had a nice turnaround and fairly healthy improvement down at our Honey Creek facility down in Texas. And that helped our aggregate margins. But it's across the board in all the regions. And it is a solid market conditions. The demand continues to be very healthy, which allows us to be, frankly, a little bit more selective on the work that we're taking on. So we had 3% less volume, but significant margin expansion. And that just goes to, again, that EDGE initiative. And we're in the early stages of rolling out our price optimization and bid day strategies. We've talked about dynamic pricing that we've been doing in the Northwest region. And we're still in the early process of rolling that out to all of the other regions. So it's both. I mean, it's a solid, healthy market throughout our footprint. But certainly, the self-help that we gave us through our EDGE initiatives and the traction it's taken on internally. Brent, I can tell you that I've been to half of an operations a lot in the last couple of months. And I've talked more about margins and pricing optimization that I've had in my 30-year career. And so the traction is very good and our team is embracing EDGE fully.

Okay. That's helpful, Brian. And Brian, I do apologize because I was a few minutes late to the intro, but I didn't catch the comments about maybe some headwinds as you move into '24, just in terms of the Energy Services business. Is it your view that the rest of things, the things that you're doing internally plus some of the strength that you have in the market can overcome that margin headwind next year from a margin perspective?

Yes. And I don't -- Brent, I don't know if I would necessarily look at it as a headwind going into 2024. I think it's trying to normalize a few of the things and looking at it for a full year this year. So I now let Nathan expand on his comments around the $30 million. So Nathan, go ahead.

Yes, Brent, I appreciate the question. So as we look at All Other, which you referenced there, I mean, there's a few components in the All Other. It is our Energy Services that we've talked about. It is corporate support, so our administrative functions. And then it's a South region, our Texas operations. And just remember, I mean, the reason that we have these in All Other is just relative to their size with the other segments. They're still an important and integral part of our company. So to the revision, as you asked about, I mean, as I shared in the prepared remarks, the Energy Services business, what we're recommending there is to normalize that from the outstanding year that they're having. And they're having an outstanding year. For corporate support, we've had a partial year of separation costs. There were recommending annualizing for a full year of separation costs. And then, of course, we've talked about the upside in Texas, particularly as it relates to Honey Creek. So really taking these factors into account, Brent, what we're recommending there is normalizing them for the run rate for forward modeling purposes on your base rate and a reduction of $30 million. To say it another way, I mean, we've shared with you that we've got a guidance of $400 million to $430 million for adjusted EBITDA this year. So if you pick the midpoint -- for a discussion, if you pick the midpoint of that at $415 million, and you take into account these pieces that we're talking about, that $30 million, you'd be looking at a base rate or run rate for modeling purposes of $385 million of adjusted EBITDA.

Yes. I appreciate that color, Nathan, on the All Other. And I think, Brent, I don't want that to overshadow the success that we're having in our core product lines and all of our reportable segments. I mean the Pacific, the Northwest, the Mountain, North Central, all of them are performing equally as well. I mean they are -- they had a record quarter, both for revenue and a record quarter for EBITDA -- adjusted EBITDA. And so all segments are performing well. I appreciate Nathan provided some additional color on our All Other group there. The other thing is, I think, when you look at our core product lines of aggregates, ready-mix, asphalt, contracting services, cement, the liquid asphalt all of those combined core products, I mean, we had a 560 basis point improvement in those gross profit margins and our core products for the quarter, and we're sitting year-to-date at a 500 basis point improvement on those core products. And so really, I mean, we're having a phenomenal year across the entire organization, including our Energy Services as well. So I hope that -- does that help, Brent?

It does. No, I really appreciate it. Best of luck.

[Operator Instructions]. There seems no further questions at this time. I'd now like to turn the call back over to Mr. Brian Gray for final closing remarks.

Thank you. I'd like to thank you again for your interest in Knife River and for joining us today as we share our record third quarter results. Our business is strong, and we are benefiting from our efforts to optimize prices and target higher-margin work. We are in the early days of rolling out our EDGE strategy, which we believe will help us deliver long-term profitable growth. Lastly, I'd like to thank our team for helping to deliver these excellent results, and I look forward to continued progress towards our goals. Thank you. Have a good day.

Thank you, sir. Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines. Have a lovely day.