Good morning, ladies and gentlemen, and welcome to the Knife River Corporation First Quarter 2025 Results Conference Call. At this time, all lines are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. [Operator Instructions] Also note that this call is being recorded on Tuesday, May 06, 2025. And now I would like to turn the conference over to Nathan Ring, Chief Financial Officer. Please go ahead.

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 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-GAAP measures are defined and reconciled to the most directly comparable GAAP measure in today's earnings release. These materials are also available on our website. Brian will begin today's call with a high-level overview of our 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 and 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 today. 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 closed 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, Knife River has 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…

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 preproduction activities across the company to prepare for the upcoming construction season and pull some costs forward. This work included stripping and harvesting at 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 preproduction efforts were the primary reason for our lower profitability in 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. Ready Mix 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 five percent of the full year's…

Thank you. [Operator Instructions] First, we will hear from Brent Thielman with D.A. Davidson. Please, go ahead Brent.

Hey, thanks. Good morning.

Good morning, Brent.

Hey Brian, when you look around your territories that you're operating in, could you talk about where you're seeing more resiliency in private construction markets and then maybe where you're seeing some increased pressure? I would imagine maybe being more in Tier 2 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, with our footprint primarily being in mid-sized high growth markets, you're right, we're shielded to some of those pressures. 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 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 California, Hawaii, the legacy Pacific region that we had before, there's 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.

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

Yes. 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 and as we get started in the construction season coupled with just a couple of days ago, North Dakota passing 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 that's why we upped our guidance to a record year for us from that $510 million that we initially published up to $555million 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.

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

Hi. Good morning, Brian and Nathan. Hope you're doing well.

Good morning.

So recent M&A has changed the seasonality here some with the business. But can you talk about 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, in those markets, any color on how, the start to the season has begun?

Yes. 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, it's going 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, I mean, they were down 9%, but if you I mean, 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 our fair share of private work that we have secured volumes on secured contracts, paused for a while right now. And so that had an impact on us 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 could hit our guidance numbers.

Great. On that, you mentioned kind of the private earlier, you mentioned private versus public. With the addition of the recent acquisitions, can you remind us what is that in market mix? You guys have always been much more exposed to the public side of things. But any change to that mix now as you've added the Strata and other deals over the last 12 months or so?

Yes. So as far as our construction revenue, that's about 39% to 40% of our total revenue for the year. And the majority of that work in that bucket of that construction contracting revenue, 87% of that is public works 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 ready mix and they're a large ready-mix 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, Trey, we certainly have more influence from public funding. And as you know, that backdrop to that funding is very strong and 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 ready mix more than the others.

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

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

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, Kathryn. And I'll just at a high level, start off and ask Nathan Ring to provide some details. And so we had 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 just 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. Nathan, I'll let you do that and maybe you can just touch on maybe on a run rate going forward as well.

Yes, for sure. Good morning, Kathryn. 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, Kathryn, that you were trying to understand the pieces to. So Brian mentioned the $20 million in step up. So of the $13 million, $8 million of that $13 million relates to the $20 million in step up. And you kind of wanted a breakdown of that, too. So I'll give you just the quick pieces. $6 million of that 8 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, $8 million of the $13 million relates to the step up. And then we had about $3.5 million almost $4 million that relates to SG&A 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 dollars 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 cost for inflation. So I'll pause there, Kathryn, 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 yes-- go ahead, sorry.

No, for the full year. Go ahead.

Yes, 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 $24 million, 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 I guess 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.

Yes. Yes. I appreciate that, Kathryn. 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 in 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. 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 less than -- right around 1% of our total sales for aggregates. 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 the high single digits that we can hit this year.

Okay, great. Thanks very much and good luck.

Thank you.

Next question will be from Garik Shmois at Loop Capital. Please go ahead, Garik.

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? Has the type of projects, that you're bidding on, has that changed? So any kind of incremental color on that side?

Yes. No, I appreciate that, Garik. So, yes, we have good backlog right now. I mean, it's 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 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. So we also mentioned Strata, albeit about 30% of their revenue is contracting margins. We certainly have mentioned in C 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 over performing 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?

Yes. 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 at tariffs. You're right, diesel 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, Garik.

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

Hi, great. Thank you very much. I just wanted to ask you on the investment. 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 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. Yes.

Yes. I think that step up really is $24 million going into $25 million. 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, 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 a little bit in the fourth quarter and 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 you know, just as far as a little bit more color on the projects that you said are being delayed on the private side, what type of contracts are those, or what type of projects are those, that you're seeing? I mean, is there any kind of theme you could draw across it or is this kind of episodic and one offs? Thanks.

Yes. 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 are 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. So it would be impacting our aggregates and ready mix the most. And it's just a wide range of whether it's subdivision projects, hospital projects. There are a number of just -- these are decent sized 100,000-to-200,000-ton projects that in any one quarter could have an impact on us. The good news, Ian, that I've got 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 quite 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'd say that it's a little bit on the West Coast. I mean, being from Oregon, I mean, I see the headlines often. We are an exporter, whether that's with Intel, Nike, Boeing. So some of those drive our local economy in Oregon and certainly the tariffs maybe have slowed some of those projects down. But I'd say that gives you a little bit of color on what we're seeing as far as the type of jobs that are been delayed.

Okay, great. Thank you very much.

Thank you. Next, we will hear from Gabe Hajde at Wells Fargo. Please go ahead, Gabe.

Brian, Nathan, thanks for all the detail on taking the question.

You're welcome. Gabe Hajde I want 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 years spend. And really what I'm trying to understand is, I think you 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 as if anything has changed, from a seller buyer standpoint, would be helpful. Thank you.

Yes. 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, it -- and you talked about, okay, how does that compare with the prior year? We just 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 million 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 cost, 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 million to $25 million. Does that help answer the first part of your question, Gabe?

Absolutely, it does. Thank you.

Gabe, I'll take the second part as far as the pipeline. Yes, 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 were in a non-brokered in a relationship negotiated area. And so that is continues to be our focus. We have a very good position in these mid-sized high-growth markets in a unique part of The United States that we like to do business in, the mid-size 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 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 night 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 or of that is related to Strata? Thank you.

Okay. Yes. 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 related to our first quarter results here would be a nominal amount. And really when you look to the full year of how much that markup was, I would say overall to the company, it'd be an immaterial 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 million up to a midpoint of $555 million 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 of Knife River. And we'll now turn the call back over to the operator.

[Operator Closing Remarks].