Good morning, ladies and gentlemen, and welcome to Knife River Second Quarter Results Conference Call. At this time, all lines are in a listen-only mode. [Operator Instructions]. I would now like to turn the conference over to Nathan Ring, Chief Financial Officer. Please go ahead.

Thank you, operator, and welcome to everyone joining us for the Knife River Corporation second 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 businesses 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 SEC website. Except as required by law, we undertake no obligations to update our forward-looking statements. During this presentation, we will make references to certain non-GAAP information. These non-GAAP measures are defined and reconciled to the most directly comparable GAAP measures in the appendix to today's presentation. These materials are also available on our website. Brian Gray will begin today's call with a high-level overview of our second quarter 2024 results, followed by an update on our competitive EDGE plan and a segment recap. Following his remarks, I will provide a product line summary, a balance sheet update, and a review of our 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. The second quarter is typically when our construction activity takes off for the year and that certainly was the case for us in 2024 in record fashion. We hit our stride early and maintained that momentum leading to record second quarter revenue, net income and adjusted EBITDA. Our adjusted EBITDA of $154.3 million was a 22% increase from the prior year record. Our markets are strong and our team is delivering. We're leveraging our competitive EDGE strategy to generate profitable growth. I'll provide more detail on our EDGE plan and the progress we are making in a minute. But quickly, I'd like to highlight a key metric in that plan, adjusted EBITDA margin. A year ago, we pointed adjusted EBITDA margin as a benchmark to track as we profitably grow our business. As you recall, our initial goal was to achieve 15% adjusted EBITDA margin by 2025. We surpassed that goal at the end of last year, a full two years early hitting 15.3%. Now as of June 30, 2024, our trailing 12 month adjusted EBITDA margin is 15.9%. That is a 240 basis point improvement from where we were just a year ago. We continue to move forward and make meaningful progress for our long term goal of 20% adjusted EBITDA margin. I'm very proud of our Knife River team members. It's exciting to see the strategy, the hard work and the execution come together in a record quarter for our team and our shareholders. Given these results and opportunities ahead of us, we have increased our financial guidance for the year. Nathan will provide detail on our guidance in just a few minutes. But first, I'd like to share additional details about our EDGE strategy and…

Thank you, Brian. I'll begin with an overview of our product line results then provide a summary of our capital position and end by outlining the increase to our 2024 guidance. Our core product lines continue to benefit from our EDGE initiatives as aggregates, ready mix and asphalt all saw price, gross profit and gross margin improvements for the quarter compared to prior year. Average selling prices for aggregates increased 6%, ready mix 11% and asphalt 1%, contributing to a record consolidated gross profit of $176.2 million an increase of 15% for the quarter. Taking a closer look at aggregates, our dynamic pricing initiatives have been effective and as we continue these efforts, we have confidence in our ability to further optimize prices. Therefore, we are raising our full year assumptions for aggregate prices to increase by high single digits compared to 2023. As Brian mentioned, the quarter was impacted by product mix as we sold more lower-priced unprocessed material this year compared to prior year. These materials cost less to produce and are a solid contributor to our overall aggregates gross profit margins. We often have product mix variations like this that may impact pricing for the quarter, but have less of an effect on the full year. While our average selling price is up 6% for the quarter, it is up 8% year-to-date and we expect that positive trend to continue. Volumes for our product lines were mixed for the quarter. Aggregates were up 2%, largely as a result of the higher volumes of unprocessed material mentioned previously. Ready mix and asphalt volumes declined 12% and 5%, respectively, related in part to our initiatives to capture improved prices and in part to weather related delays in our Central segment. However, even though volumes declined, the price over cost…

Thank you. [Operator Instructions]. Your first question will be from Brent Thielman at D.A. Davidson and Company. Please go ahead.

Hey, thanks. Good morning. Brian or Nathan, I guess first question just if you can talk through a little more the progression of the dynamic pricing strategy as you're advancing that across more of the regions of the business. I know this is sort of a careful methodical approach, might be less visible in the reported averages you're showing here. So just be curious if there's some case studies or examples you've seen of success in that strategy.

Yes. So that's a blueprint from the Northwest region, as you know, Brent. And so we've taken what we've been doing in the Northwest region for the last eight years and we rolled that out at the beginning of this year. We talked a lot about it last year, but really we are in the early innings of rolling that dynamic pricing out to the other regions and so as part of that, we've brought on a full time trainer that is helping training our sales team around commercial excellence. We've got out and done some additional training through Sandler training with our sales team. We're out hiring some additional sales staff in some of our regions that frankly didn't have them because as part of dynamic pricing, as you well know, we have to price we're pricing every job to every customer in every market to where we can maximize, optimize our pricing based on the proximity of our locations to those job sites and so we truly are giving out quotes every single day to customers and can control the pricing around what our current costs are doing, what our current backlog is doing, but most importantly, where is that job in proximity to our location. So we're still I've talked that we've been in the 1st or second innings. I'd say today, Brent, we're probably in the 3rd innings in most of those regions and still by the 8th or 9th inning there in the Northwest region.

Okay. That's great. And Brian, you mentioned the 15.9% trailing 12% adjusted EBITDA margin. I guess as you indicated, you're gradually sort of moving toward that eventual 20% target. As you think about the next 12, 24, 36 months, however long it is, Brian, what do you think you've yet to see leverage from some of your internal initiatives -- operational initiatives, etc., that sort of EDGEs you closer towards that 20% target? What are going to -- what's kind of beyond the low hanging fruit? What do you still get leverage from here?

Yes, let's go through the major initiatives within EDGE. So when we rolled out our EDGE at Investor Day back in May of last year, we said we can get to 15% EBITDA margin by 2025 and so obviously, Brent, it's taken on a lot more traction than we had originally anticipated and then it gets them from 15% to 20%, it would evolve into some of the other initiatives within EDGE. So the early phases of EDGE was to immediately begin our quality over quantity initiative in the bid room, and that is really to maximize our margin opportunities in the bid room on contracting services, and we've seen some significant improvements as it related to our contracting services margins. At the same time, we began rolling out dynamic pricing and doing a lot of the training, but we did honor our 2023 prices that we've given late in 2022. We honor those prices in most of those regions. So we're still in the early innings of that and there's still some upside there. We've talked a fair amount about our PIT crews, our process improvement teams, and we started off with 1 team, and now, like I said in my prepared remarks, we're up to 10 and I'd say that initiative is again in the very early innings of going out and implementing best practices, identifying opportunities to reduce our production costs and we are rolling that out into the other product lines and throughout the organization. It's been well received by the entire team. So that's specifically as it relates to margin improvement, but to get to from where we're at today, from 16% as far as our midpoint, that 15.9% that you talked about, the trailing 12 month. To get to that 20%, I mean, we know that our strategy is going to continue to evolve, which will include growth, and we're very much targeting those higher margin upstream materials businesses and so we are actively filling our pipeline of those growth opportunities. We also will be shifting slowly our product mix towards those higher profit margin lines. Then the last thing is we just have that relentless drive to be excellent in everything that we do, and that also is going to help us get to that 20% EBITDA margin. So overall, we are still we have a lot of things to do, a lot of self-help that we can go get, Brent, in that EDGE strategy.

Okay. I appreciate the comments. I'll get back in queue.

Thank you. Next question is from Trey Grooms at Stephens Inc. Please go ahead.

Hey, good morning and well done in the quarter.

Thank you, Trey.

I wanted to touch on contracting services, the really nice margin improvement you're seeing there and I know this is all by design and part of all the initiatives you guys are executing on, but as I kind of think about that part of the business, contracting services, how do you think about the kind of the long-term margin potential for that and how that plays a role in the 20% EBITDA margin targets that you guys have laid out?

Yes. So it's certainly a path to that 20% flag and we are still on that path and marching forward and up on our margins. Yes, we are very excited at the amount of improvement we've made. I mean, just if you go look at our trailing 12-month gross profit margin in contracting services at the end of June, it was 12.7%. If you go back to the end of 2022, just a year and a half ago, it was 8.4%. So we've had a 430 basis point improvement since the beginning of last year and so we have made a lot of progress and the majority of that, a lot of that has come in the bid room but I would give a shout out to our teams out in the field too. I mean, you've got to go out and execute that work and I can say that, I mean, we've taken a very disciplined approach how we do that, meeting our project schedules, delivering quality materials and putting asphalt down where we can get compaction bonuses and other job site incentives. So, you always look at how you bid a job and whether or not you gain or fade on those jobs from the time you bid them to the time you perform them and our crews have gone out and executed that work very well. That being said, I mean, we are now peeling that onion back with 1 more layer and looking at what type of work do we do is the most profitable and can we transition more of our work to maybe higher margin subcontract work versus prime work. And we continue to look at how can we increase our margins, but really it goes back to our bid room and taking on quality of backlog over quantity. We don't have a record backlog today and that's by design and really just taking on those jobs that pull through the higher margin upstream materials and then go out and execute that work. So we couldn't be more proud of that contracting services group, but it plays a really critical role in our overall organization. It's about 38% of our revenue. It provides resiliency to our strategy of pulling through those high stream those high margin upstream materials and operating in an environment right now with very strong funding and you've seen the DOT budgets and they're at or near record levels and we see that for the foreseeable future. So very pleased with what was going on in contracting services.

Great. Thanks for that, Brian, and yes, I mean, I know aggregates gets a lot of attention, but I did just have to highlight the great job you guys are doing on the contracted services side as well but speaking to aggregates here for a second, it sounded like repair and maintenance impacted margins a bit in the quarter. Should that continue as we look into the back half or any color around that? And then maybe if you could also give us some color on the overall cost outlook for aggregates?

Yes. As we've deployed our PIT crews, I mean, they've certainly gone out and these 1300 opportunities improve our margins is having our repair and maintenance costs go up temporarily for a longer term benefit and so part of the pit crew recommendations are some larger longer term capital improvements that are going through the system now, but also there is some immediate opportunities to change how we're maintaining the facilities and doing some additional repairs and maintenance to increase our uptime, and I'd say that almost everywhere our PIT crews have gone, they had an impact of increasing our uptime and as related to that, I mean, we have had a bump in our repairs and maintenance costs. Going forward, I think we still feel very comfortable in our guidance as far as mid-single digit costs increases inflation for the rest of this year. Diesel has been a little bit of a tailwind for the first couple of quarters. I'd say that's leveling out and it will just be kind of a neutral to our business going forward. So that's what we're seeing right now with our costs.

Okay. Thanks, Brian. I'll pass it on.

Thank you. Next question will be from Kathryn Thompson at Thompson Research Group. Please go ahead.

Hi. Thank you for taking my questions today. Just one follow-up clarification on aggregate pricing. How much of it was pricing actions versus an impact from mix or geographic mix in the quarter?

Yes, the bigger impact, Catherine, was what Nathan had mentioned and I had mentioned is the product mix and so we have our way you should look at our pricing is year-to-date and so our year-to-date right now is about 8% increase is up from last year's year-to-date numbers. We have good visibility with our new dashboards that we've created to really look at like for like products. I mean, taking a sand product coming out of the same pit and what are we doing with that pricing and so we've got that visibility through new dashboards and so that's why we've raised our guidance to high single digits. I would say that on the product mix side of things, we had a large sale. I mean, we had a 350,000 ton sale in Oregon of unprocessed materials and that can absolutely have an impact just like geographic mix can as well. So as we bring on some additional sales in the North Central region, their pricing may be slightly lower than what it is in the Northwest region or Pacific regions where we're importing materials into Hawaii and so that definitely has an impact, but for the quarter, the bigger impact was that sale of the unprocessed material on product mix. Does that make sense?

Yes. No, it does. Absolutely. And I know you responded earlier just about some good progress on margins in the quarter, but when you parse out the upside to margins for your ready mix and your asphalt segments in the quarter, help us clarify like how much of that is part of the pricing discipline that you've been executing on versus, better product like, better, job mix versus any other factor. Really just kind of helping us understand the puts and takes for that 140 basis point improvement in both ready mix and asphalt gross margins in the quarter. Thank you.

Yes. I would say that a lot of it, Kathryn, has to do with our price increases. I mean, our average selling price for ready mix went up 11% and we had 12% less yardage going out and so this is that classic case of quality of work over quantity and less is more and in this case, we have taken on and we are being more selective on jobs and customers that we are servicing and definitely have done a great job through dynamic pricing of raising our prices above our input costs and the same could be said with asphalt. I mean, we had less tonnage in asphalt by about 5%. Average sales price went up slightly and obviously that's a big function of your input costs being liquid asphalt and natural gas. So a lot of it is pricing, but I also wouldn't dismiss the work that the PIT crews are doing. The PIT crews when they are out looking at our aggregate operations, spend about a half a day to a full day on each one of the ready mix and asphalt plants, and we have some cost initiatives and best practices being implemented in those facilities as well. So it's really a function of strong dynamic pricing and controlling our costs.

Okay, great. And then just one quick follow-up question. Certainly, all the feedback in the field that we're receiving is that the volumes are more delayed and not necessarily lost. Just wanted to get your thoughts on that just in terms of the delayed versus lost and how you're thinking about things, particularly focusing in on some of the points that you laid out on backlogs?

Yes, I would say that that's definitely the case in some of the markets that had a very wet June. So that central segment for us, whether that's Minnesota, South Dakota, Iowa or Texas, certainly, some of those projects that we should have been working on both in contracting services, which is consuming those upstream materials like asphalt and aggregates and then the ready mix business was definitely impacted by weather in that month of June for us. So yes, I think some of that work has certainly been delayed. I think there's some timing of projects as it relates to asphalt. So I think I would share that same sentiment with you. I think on the ready mix in certain markets, there is certainly a softening of that. As you know, most of that ready mix is consumed in the private sector, whether that's residential or commercial industrial projects and so there is softening that's driving some of those volumes that is not necessarily being delayed, but the good news there is, there is a pent up demand for residential and commercial and industrial to get going. So primarily on asphalt contracting services, certainly some work is being pushed forward into the next quarters.

Okay, great. Thanks very much.

Thank you. Next question will be from Timna Tanners at Wolfe Research. Please go ahead.

Hey, good morning. I wanted to follow-up actually on the asphalt outlook, so just along those same lines. If the asphalt, volumes are getting pushed out, why lower the volume outlook? And kind of just wanted a little bit more color on what you're seeing there in light of some of the commentary. I think PCA came out recently with the lower forecast for IIJ spending. So just wondering if you could provide some more color?

Yes. So part of that on the asphalt is by design, and I'll give you a very specific example of that. In the North Central region, we used to have more portable asphalt plants going out on the road and frankly, they were chasing high volume, low margin work and our team in the North Central region made the strategic decision early in the year to go park two of those asphalt plants in stationary aggregate locations and providing much higher margin but lower volume work to the tune of almost 30% in that one region, and so, I would say that it's intentional, Timna, on our guide as far as going forward on our volumes and asphalt specifically. I'm not seeing the PCA report. What we've seen and the information we get from ARPA and our local DOTs when we meet with the directors is that funding is still very strong and that the there's still more than half of that IIJA funding to be dispersed and spent in those states that we do business in. So our DOT budgets are really at record levels. If they're not at record level, they're very close to a record level and you talk to those DOTs and there's a lot of work to still be built. I mean, the IIJA and the current transportation funding that those states have is not enough to fix the infrastructure. So this should be continuing. There's lots of new legislation in the states we work in. We're very active in helping pass those bills, but because the roads need to get fixed as do the bridges. So I'm not exactly sure of the report you're looking to, but we see strong DOT budgets and 87% of our backlog in our contracting services is publicly funded and we just continue to see strong markets there.

Okay, great. Yes, there's some more outlook in reference to kind of slower realizations, but not lost to your point, I think. Just second question, if I could, on the M&A environment. Can you elaborate a little bit on, I know you talked about three different options. What adjacent platforms might you be looking at? And what's the dynamic of the environment? Is there more willingness to sell than normal? What are valuations looking like? Anything you can provide?

Yes. I appreciate that question. We're very excited and pleased with the progress we've made. We've got a very reputable experienced, well respected business development team that we've assembled that's been out working, filling the pipeline up and I can tell you in my career at Knife River for 31 years, this is the healthiest pipeline of opportunities that I've seen. We've mentioned that we are our priority is to bolt on those nice $30 million to $50 million market areas. That's our number one focus is to continue to bolt those opportunities on and there is a lot of fragmented opportunities, a lot of regionally owned family operated companies in our midsize high growth markets. Within the regions, we have opportunities to grow within a region that maybe in a new strategic market area and so we have a relatively small footprint in Texas and you look at some of our other footprints in some of the states that we currently do business in, there are opportunities for us to expand in those states with under our current management teams and the current region structure and then there's also states that join or adjacent to our current footprint. So we're in 14 states, Timna and without giving any specific information, I would just tell you that, where we're looking at would be states that would be contiguous adjacent to one of our existing states. So that's really our strategy, and we've got deals in the pipeline of all sizes in all of those different markets I just mentioned.

Okay. Thank you.

Thank you. Next question will be from Garik Shmois at Loop Capital Market. Please go ahead.

Hi, thanks. Congrats on the quarter. I know you talked to some new project wins in data centers and parking garages in the Pacific Northwest. I know private construction is a much smaller part of your end market exposure, but I was wondering if you can maybe speak to the outlook, what you're seeing, in private, and the opportunities when looking at some of the projects that you're bidding on?

Yes. Very specific, Garik, to prestress. We have our new facility in Spokane, Washington that we commissioned last year and it's up and running and it's doing great. It's got a little bit more capacity than we had anticipated, and it's got some operating costs that are better than we thought and so it's going great in Spokane, and then our other facility is in near Eugene, Oregon. We provide a lot of wall panels to those data centers. We do parking garages, whether that's for public or private parking garages and then the infrastructure work, a big part of our business is providing bridge girders for the DOT projects. So specifically to the private market, we still have a lot of opportunities that these take some time to engineer and you work directly with the owners when you're transferring or transitioning a job from cast in place or steel to precast or prestressed and so our engineering team have been working for months on several of these projects and we have contracts to get paid to help design and utilize our products and so we see data centers in that Idaho, Oregon, Wyoming markets, there is still opportunities. We've got portable batch plants in Oregon supplying concrete to some of those projects. So that still has been a very strong market for us on the data centers and then the parking garages and bridge gears and more of the infrastructure work continues to see a lot of opportunities there.

Okay. That sounds good. And just want to follow-up on the progress that you're making with respect to dynamic pricing. I think you mentioned you're in the three inning in most regions outside of the Northwest. Is that where you expect it to be, at this point, in the rollout? Just, you maybe help put some context, in in that timeline as to where you're at as far as -- if it's going as well a little bit faster, a little bit slower than you expected at this point?

Yes. I would say every region is a little bit of a different spot when it comes to where they how they're progressing with dynamic pricing and so there's certainly some regions that have had the structure in place and the point of sale systems in place and the commercial excellence teams in place to really go from your traditional way of sending out an annual price increase letter or possibly a midyear increase. They had that structure in place where they were able to pick up dynamic pricing playbook and run with it and those regions are probably in that third or fourth inning. There's other regions where, again, we did not have that infrastructure in place and we're in the process of adding sales teams and doing a lot of additional training and putting in the software and the dashboards to help us implement that dynamic pricing. So what I'd say, Garik, is that we have a lot of opportunities for us to continue to go forward in optimizing our materials pricing in most of the markets. I think we still have opportunities in all the markets, frankly, even in the Northwest region, but they're all progressing well. What I would tell you is that they've embraced it. Our team and our customers have received that new way of pricing materials very positively.

Your next question will be from Ian Zaffino at Oppenheimer. Please go ahead.

Hi, great. Thank you very much. A lot of my questions have been answered, but I wanted to just kind of go back to pricing here. Can you help us understand on the pricing? What are you seeing, I guess, your bucket, the pricing, or any color you could give us there and what's driving it? Thanks.

Yes. I mean what I know, which is I mean near term is the demand is still strong for our products. And so that we have a heavy influence on infrastructure spending and we benefit from that a lot and so the demand is good. And keep in mind, we sell about 40% of our aggregates to our downstream businesses. That's one thing I do know is demand remains strong. The other thing I know is that we have a number one or number two market position in 75% of the markets where we're selling aggregates and so that allows us to be a market leader. I also know from our dashboards that we've got, if you look at like for like materials, taking a product from one pit this year compared to what we're selling that same product on that same pit for is high single digits. Our year-to-date numbers are high single digits and so, Nathan and I along with the region presidents, we feel comfortable with our guidance, our assumption of being high single digits. You're looking at it longer term and I think again those fundamentals, we need a lot of rock to go fix our infrastructure. I mean, it's literally the foundation of America's infrastructure. You can't produce concrete or make asphalt mix or go build bridges or pave runways without aggregates and so the fundamental, the underlying demand is there long term. As you know, it's a nonrenewable resource. It's a depleting resource and they're difficult to permit and so with those things, it gives me that kind of strong conviction that we're going to continue to see pricing momentum going forward for the foreseeable future. I don't see any of those variables changing. The demand is strong and it's a nonrenewable resource that is depleting and I see that it really is the foundation of the infrastructure and so I see strong momentum in in aggregate pricing going forward.

Okay. Thank you, and then also just another one on M&A. Maybe help us understand what you're seeing as far as multiples and also size of deals. I know there was a large deal, one of your competitors did. Would you go into larger markets? And how do you feel about the multiples that are on recent transactions? Thanks.

Yes. Part of our strategy is we definitely target opportunities that can be negotiated directly with the owner and stay out of an auction or a broker deal. Now with that being said, we certainly are involved and part of our pipeline includes some of those larger platform companies that are being brokered that would be part of an auction and those typically as you can well imagine are driving higher multiples than the ones that we could be negotiating in those midsize high growth markets where a very logical acquirer of those companies and so Ian, the multiples, I mean, would be a range of literally 10 times. I mean, I could say it's from six to 16. I mean, there's just a broad range. Every deal is unique. Every deal has its own logic, strategy to it and so really, there's no way of saying what the multiples we're seeing. I'll tell you again that we target those brokered local family owned deals where we already have long standing relationships with those owners, and we've been having those conversations and that would be the majority of what's in our pipeline, but we are bidding on some larger deals and those multiples can be a little bit higher.

All right. Thank you very much.

Thank you. And at this time, Mr. Gray, it appears we have no other questions registered. Please proceed, sir.

All right. Well, thank you again for joining us today. We're proud of our record quarter and excited to be increasing guidance for the year. We continue to make good progress on our EDGE goals and we are well positioned to grow our company and deliver long term value for our shareholders. We appreciate the interest and support, and we'll now turn the call back over to the operator. Thank you.

Thank you, sir. Ladies and gentlemen, this does indeed conclude your conference call for today. [Operator Closing Remarks].