Good afternoon, ladies and gentlemen, and welcome to the Knife River Corporation Fourth Quarter and Full Year 2023 Results Conference Call. [Operator Instructions] This call is being recorded on Thursday February 15 2024. I would now like to turn the conference over to Nathan Ring, Chief Financial Officer of Knife River. Please go ahead.

Thank you, operator and welcome to everyone joining us for the Knife River Corporation fourth quarter and full year 2023 results conference call. My name is Nathan Ring, Chief Financial Officer of Knife River, and I'm joined by President and CEO Brian Gray. Today's discussion will contain forward-looking statements about future business 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 both our website and the Securities and Exchange Commission's website. Except as required by law, we undertake no obligation to update our forward-looking statements. During this presentation, we will make reference to certain non-GAAP information. These non-GAAP measures are defined and reconciled to the most directly 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. Brian Gray will begin today's call with a high-level overview of our fourth quarter and full year 2023 results. Followed by an update on our strategic priorities as outlined within our competitive edge plan. Following his prepared remarks, I will provide a product line summary, a balance sheet update and a review of 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. Welcome everyone and thank you for joining us today. I'm excited to talk about our record year, our strategic priorities for continued profitable growth and what we see ahead in 2024. We reached all-time annual records in 2023 for revenue, net income, EBITDA and adjusted EBITDA. I'm incredibly proud of our team for safely delivering these impressive results, including revenue of $2.8 billion and adjusted EBITDA of $432 million. Each of our reporting segments saw improved year-over-year revenue and EBITDA as we benefited from strong markets, operational execution and strategic efforts to optimize prices and improve margins. Combined, these efforts drove our adjusted EBITDA margins to 15.3% for 2023, an improvement of 280 basis points. We are very pleased to have surpassed our initial goal of 15% margins, a full two years ahead of the schedule. Doing so is a testament to the strength of our team, the strength of our business, and the strength of our markets. While we certainly enjoy the moment and the milestone, we are now focused on our longer term goal of 20% plus EBITDA margins. On our past two quarterly calls, I highlighted the early successes from our new competitive EDGE strategy and I'll discuss drivers from that strategy again today. We believe our EDGE plan will continue to improve our adjusted EBITDA margins and deliver long-term value for our shareholders. Turning to Slide 4, we launched our EDGE strategy at our 2023 Investor Day, and we have already enjoyed meaningful success. As we move forward, we will continue to focus on commercial and operational excellence as well as disciplined capital allocation, which will drive margin expansion. As a recap, the letters in EDGE stand for EBITDA margin improvement, discipline, growth and excellence. Let me provide some updates on key developments…

Thank you, Brian, and good afternoon, everyone. I'll begin my remarks with a review of our product line performance followed by an update on our balance sheet and capital allocation priorities and conclude with our 2024 financial guidance. As Brian mentioned, our fourth quarter results were a strong finish to a record year. We achieved record revenue for the quarter of $647 million, up 20% from 2022. Quarterly revenue also increased across all product lines compared to the prior year, benefiting from strong market demand, a longer construction season and the first stages of our competitive edge initiatives. On a full year basis, we reported record revenue of $2.8 billion, an increase of 12% from the prior year. Underpinning this revenue improvement was our continued pricing momentum in our product lines. Average selling prices increased across all product lines for the year, including 11.5% for aggregates, 12.3% for ready-mix and 13.6% for asphalt. Although volumes have declined for the year in these product lines, our strategic focus on quality over quantity, was exemplified with prices more than offsetting volume declines. Given these price and volume conditions as well as productivity gains, the material product line saw considerable improvement in gross margin for the year. Aggregates were up 600 basis points to 20% gross margin. Ready-mix was up 140 basis points and asphalt 380 basis points. Within contracting services, margins improved 300 basis points during the year. Our disciplined pricing and bidding strategy helps ensure that we capture the value of the materials and services we provide. This strategy, combined with solid execution was successful, culminating in consolidated gross margin improvement of 480 basis points for the year. We believe this strategy will continue to positively impact future results. For the quarter, our contracting services backlog of $662 million was down…

[Operator Instructions] And your first question comes from the line of Sherif El-Sabbahy from Bank of America.

And congratulations on a great quarter. I was just wondering if you could give us a sense of seasonality over the course of 2024. It seems like Q4 came in with maybe a bit of an extended period due to better weather. How should we think about Q1 sequentially and then just the cadence through 2024 more broadly?

Yes. We did have a lengthened construction season in the fourth quarter. We had very favorable weather in the last year. We are a seasonal company. We have a northern footprint. And so we do slow down, obviously, in the first quarter -- the fourth quarter -- the first quarter, we typically have somewhere in that 10% of our revenue. The second and third quarter is about two-third of our business comes in that second and third quarter. And then the fourth quarter, again, it's somewhere in that 20%, 25% of our revenue. And so that's kind of the seasonality of our footprint.

And you mentioned your expectation for pricing. What kind of cost inflation are you seeing?

Yes. We introduced that mid-single to high-single-digit for prices on those core products. And last year, we had cost of goods on our material side of the business around 5%. And so we're kind of projecting that same mid-single-digit price or cost for this upcoming year.

And your next question comes from the line of Garik Shmois from Loop Capital.

You talked about refocusing on to the acquisition pipeline in 2024. I was wondering if you could speak to some of the opportunities that are in front of you in that regard. And also, with respect to your balance sheet, given that the net leverage is at 1.1x, it's well below your target range? Any updated thoughts on potentially tapping into the balance sheet to help drive further acquisitions.

Garik, I'll talk about the pipeline and kind of our strategy for M&A and then I'll turn it over to Nathan to answer the balance sheet. And so we have a lot of opportunities in the pipeline, and we're going to continue to stay disciplined in our approach. We definitely look for aggregates-based companies in those midsized high-growth markets. We built this company at Knife River on over 80 acquisitions. A majority of those, a lot of those are those bolt-on operations in that $10 million to $30 million range. We will absolutely look for platform operations. We've got some that we're looking at now. So we're not afraid to go out and do a larger acquisition. But we certainly are focused in those markets that we're already in and looking for those aggregates-based materials-driven operations that support our vertical integration model. Those opportunities are out there. We drive that kind of that acquisition process really from our regional level with some corporate programming that we can kind of monitor at the corporate level, we help build the models and assist the regions with their due diligence and integration, but really is a regional-driven M&A acquisition strategy. So with that, I will turn it over to Nathan to maybe touch on the balance sheet.

Yes. You talked a bit about tapping into the balance sheet and our capital that's available. I think, first, it will be helpful just to look back at the cash that we have available and the revolver capacity. Those are two important points that we'll look at to fund our acquisitions. So first, from just a cash flow standpoint, as we looked at the performance we had this year, which was outstanding. I mean, our adjusted EBITDA grew $119 million. And a lot of that translated to our improvement in cash flows from operations, right from the cash flow statement of $128 million. We've been diligent about our balance sheet. In fact, our working capital as a percent of revenue decreased year-over-year in our cash flow conversion improved to 120%. So all that said, the balance sheet has about $220 million of available cash and our revolver capacity is about at $330 million. So $550 million on the balance sheet to tap is, I guess, you said, to pursue these bolt-on and larger acquisitions as well as organic growth. That's something that we've been successful with in the past as well. We've done a number of aggregate sites that we've grown as well as maintaining our fleet. And so I think sort of it is we've got a strong balance sheet to support that we'll continue to be disciplined, as Brian said on how we pursue these acquisitions, but well ready to get the job done.

And then just looking at the EBITDA margin expansion that you expect this year, you talked to the volume and pricing outlook, you talked a little bit around cost inflation. I'm just curious just around the edge initiatives, pick cruise, things of that nature that are relatively newly implemented. Any sense as to how much of the margin expansion could be chalked up to some of the new company-specific cost initiatives?

Yes. I think there's definitely that self-help opportunities, Garik, with our EDGE. And I can tell you that the regions are leaning in hard on that. Hence, one of the reasons why we hit our 15% EBITDA margins two years earlier. We had that said that goal at our May Investor Day to hit 15% by 2025, we rolled out the edge initiatives early in the year. We started talking about dynamic pricing, but we really have not implemented dynamic pricing until the beginning of this year. And we're still -- that's a process that will take several years to fully implement it throughout the regions. We deployed our PIT Crews, the process improvement teams, and that's really a group of internal experts by product line and then external experts. They go out and spend a week at an individual facility and really just dissect every aspect of that operation. And so we've seen some real big wins. In fact, such under demand that we've had to double the size of that team so we can deploy it even more locations in the upcoming years. So yes, we have lots of self-help when it comes to the EDGE strategy, and that's built into our projections for our guidance on EBITDA. So we're excited that we can grow. When we look at our growth rate in those geographic locations, the Northwest Pacific Mountain and Central regions, that's an 11.5% growth over last year. And so we've got the mid- to high digit price increases controlling those costs flat too slightly down volumes. But -- so it's definitely some of that self-help is going to help us achieve that 11.5% year-over-year growth.

And your next question comes from the line of Brent Thielman from D.A. Davidson.

I guess, Brian or Nathan, when do you anticipate seeing sort of more of the positive impacts of the dynamic pricing strategy sort of hit the P&L? I know these things sort of take time and they're calculated. But I guess the question is kind of when might we on the outside sort of be able to better recognize the impact of it?

Yes, Brent. We've been doing dynamic pricing in the Northwest region for seven, eight years. We're not fully implemented even in the Northwest region. But I would say that we're in that seventh, eighth inning when it comes to dynamic pricing. We brought over 100 of our sales managers and executives from around all of the different regions to the training center back in November and had a three day seminar class Summit on dynamic pricing and commercial excellence. And so we are in the process of doing that right now. We did not send out nor the number of annual increase letters. The increased letters have different language in them that were the ones that went out there to really give us the opportunity to bid work in real time. And so again, the dynamic pricing is the opportunity for have our customers call us for aggregates, ready-mix and asphalt on their individual projects allow us to look at our proximity of our locations to their job sites to look at our backlog, to look at our current cost inputs and really maximize, optimize that price that goes out on that job. So that's what dynamic pricing is all about. We're in the process of rolling that out in all the regions right now. But we're really in the first second innings of that rollout of the dynamic pricing. You'll see that's baked into some of our increases for this year. So you'll begin to see some of those benefits this year.

And then Brian, how should we interpret the decline in backlog? I mean I know you're being much more selective on what you're pursuing in the 14.5% gross margin in contracting services is pretty notable here in the fourth quarter. Is that what -- is that the type of margin you're starting to see come through on the work or you're booking? Was that an anomaly this quarter? Just curious around all those things around backlog?

Yes. I think you should look at that over a full year, Brent, to get a good feel. We closed out jobs in the fourth quarter. And so I think looking at the 11.4% that we had for the full year, is probably something you could look at. I would say that the -- how you look at our lower backlog is intentional. And I think that we have been very disciplined and taken a different strategic approach to how we take on work and really taking on higher quality work and aesthetic quantity. And we had seven consecutive quarters of record backlog and that was at some lower margins that did not fit our edge strategy. And so that's one way you can look at our lower backlog is it's very intentional. It's very calculated. We are targeting projects and customers that fit us to pull through higher-margin upstream materials. And the other thing to say is that we had $50 million of additional revenue in the fourth quarter from contracting from that favorable weather. And so that definitely had an impact on our year-end backlog. What I'd tell you is that it's opened up more capacity for us to go out and pursue some of those higher-margin projects. And the good news for us is the states that we operate in, we've got 16% larger DOT budgets. So the tailwinds in infrastructure funding at the state, local, federal level really allows us to be more selective on the type of work that we do.

And your next question comes from the line of Ian Zaffino from Oppenheimer. All right. And your next question comes from the line of Michael Dudas from Vertical Research.

So following up on some discussion on competition and discipline. Maybe you could share like maybe on a regional basis, given the exposure you have towards public markets and also the competition that might be occurring because of all the activity on the on the construction side, which areas seem to be more contributory towards the growth outlook you're looking at, which ones be tagged a little bit slower in that front? And is the market, you're talking about discipline on bidding on your contracting but also on the side, is the volumes of work opportunities increasing at a much greater rate than you'd be witness the last 6 to 12 months? Is there a lot more opportunities to bid and gives you a better chance to be selective?

Yes. I will take that, and I'll start with the volume question is, yes, there is -- I'll tell you, it's been a little bit -- Michael, it's been a little bit slow to let this year. And I think that the extended season for us in the fourth quarter was also extended seasons for the DOTs. And so I would say that they were out inspecting work being built instead about designing and getting it let. And so I think part of it, again, our lower backlog is a timing issue, but what we see in the horizon and the pipeline and our bid schedules is strong. And so the volume of work is just not dollars because of inflation. There is more work to go out and bid. And again, that really does allow us to look at how can we maximize, optimize the upstream materials. And when we bid work, we don't just bid it as a prime contractor. We're going to try to get many bites at that apple as we possibly can to get work. And so we may bid one of those DOT jobs as a prime contractor. We certainly would bid as a subcontractor, and will absolutely always be it as a material supplier. And so we're going to try to get as many bites of that apple as we can. As far as the markets, I would say that it's early in the season, and I would say it's not that different than it has been in the past. I mean, to bid federal, state highway work, there are some nuances that go into that, you've got to know what you're doing. And you just don't jump from the private market to the public markets. And so we see the same kind of the typical bidders and each region, each state, each bid will range in the number of bidders on that. Early in the year, we obviously see more bidders and we are in the early parts of the bidding season right now. And that typically is where you're going to see some of the lower margin work that goes out as well. And so we're going to be patient or going to be disciplined, and we will get the amount of work that we need to be successful in 2024.

And my follow-up would be back to the acquisition discussion, as you're targeting, let's call it, the bolt-on ones as opposed to platform enhancing, is there a focus on leveraging your contracting business with materials or if the bolt-ons are potent if the returns are there in the markets there for just selling the material as opposed to not having a downstream, which do you lean towards? Or is there a difference in which ones would you rather focus on as you execute this plan over the next couple of years?

Yes. So we're going to absolutely focus on aggregates-led companies. And we may -- because it's a bolt-on, we may have a local pit to where we go out and look at one of those downstream products or contracting services if we were able to sell more of our rocks somewhere else. And so we would go out and do a pure-play downstream acquisition if we had a quarry that could supply that. Typically, the synergies that we get from bolting on those operations, obviously, all the back-office functions, we get immediate synergies on. But we also -- we can move jobs around and customers around. And we may be delivering to a project that was at a 20, 30-minute disadvantaged from the pit that we just purchased. And so a lot of times because the cost of delivering these materials, whether that's asphalt, ready-mix or aggregates is a bulk -- is a large part of getting and being competitive and getting work. That's one of the big opportunities that we have when we do these bolt-ons. So we also -- frankly, we have a lot of internal expertise when it comes to our technical resources team. And we're very effective at going into a site that may be nearing depletion and meet with the local regulators and take our technical services team and be able to expand those reserves. So there's a number of different strategic opportunities for us. That's one of the reasons we really do target those bolt-on operations. Again, we're not afraid of platform operations. We've done platform operations in the past, and we certainly would do them again.

[Operator Instructions] your next question comes from the line of Ian Zaffino from Oppenheimer.

All right. Sorry, I don't know what happened there. As far as the aggregate mix, and I guess this is maybe answered a little bit. But when you think about expanding your aggregate mix, how much is that going to come from M&A? And then how much can come from just organic activity? And what might that be? And how do you kind of get there?

Yes. We are certainly focused as we target that 20%-plus long-term EBITDA margin is to grow that aggregate mix. And we can do it both ways. We can do it organically. We have the capacity at our sites to continue to sell more rock and be more competitive by different delivery methods. So whether that's by rail, by barge, we have a large fleet of our own trucks. We can control that supply chain and be competitive and provide a service that the customers really want. And so we can, and we have been and we will continue to increase organically. But yes, I think when you're selling $16, $17 a time material, you need a lot more of that to move that dial as we move that 16% of our total revenue in aggregates up. And so that will be through acquisitions. And so Ian, as we grow our product mix and grow that revenue on aggregates, it will be both organic and through acquisitions.

Okay. And then maybe a region that's kind of deal to you is the Northwest, continue to see margins go up there. What's going on there? And I guess my understanding is that the playbook that was implemented there is what will be kind of implemented across system-wide, which then brings you to your margin expansion targets. Given what you're seeing maybe there, that gives me even more confidence in hitting that 20% number and then maybe even exceeding that 20% number?

Yes, absolutely. And I think the road map of EDGE really did come from the framework around Northwest regions. So there's a couple of things we did in Northwest region. They grew their aggregates from 18% to 24% over a 10-year period. And so they certainly had more of their revenue geared towards aggregates. And that was both organic and through acquisitions. So that helped. I mean we remain to be vertically integrated in the Northwest region. And so it's very important that we take those rocks and we sell approximately 40% of those to ourselves to make concrete and asphalt. We take those materials, we go perform contracting services in the Northwest region, we also do prestress, which is also another margin accretive opportunity for us. And so it's -- we're committed to the vertical integration. That model that we have in the Northwest region is the same that we'll have in those other regions as well. The dynamic pricing, they have been effective at doing that for the last eight years. And I think that's had a lot to do with their success. And then just the team that we've got in the Northwest, similar to all the teams that we've got throughout all of the segments, we've got unbelievable talent and they're committed to margin expansion. They talked about it at meetings we go to right now, they're learning about it, and they're all focused on that. And that region is no different than the rest of our other regions. So we're going to get there. There's multiple paths that we get to the top of the mountain for that 20%. And it's not just doing exactly what the Northwest region did, but that certainly is the framework of what we built the edge model around.

And there are no further questions at this time. I would like to turn it back to Brian Gray, President and CEO, for closing remarks.

Thank you. Well, thank you for joining us today. 2023 was a historic year for Knife River from bringing the belt on New York Stock Exchange on our first day of trading to delivering record results. I am very proud of the team that got us here and that will help us continue to grow. Our business is fundamentally strong, and we are focused on delivering long-term profitable growth for our investors. We appreciate the interest and support. And now, I'll turn the call back over to the operator. Thank you.

Thank you, presenters. And ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.