Knife River Corporation (NYSE:KNF) Q2 2024 Earnings Call Transcript

Knife River Corporation (NYSE:KNF) Q2 2024 Earnings Call Transcript August 6, 2024

Knife River Corporation beats earnings expectations. Reported EPS is $1.37, expectations were $1.24.

Operator: 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.

Nathan Ring: 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.

Brian Gray: 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 some of the driving factors that supported our results. As a quick recap, competitive EDGE is the plan we began to implement in 2023 to drive long term profitable growth. EDGE stands for EBITDA margin improvement, Discipline, Growth and Excellence. The first E, EBITDA Margin Improvement is a focal point in our strategy. We are committed to increasing our adjusted EBITDA margin. Our primary objectives here are optimizing prices, controlling costs and successfully executing on our work. Let me provide some highlights. During the second quarter, we continue to see traction with price increases. Year-over-year prices are up across all of our core product lines with the exception of liquid asphalt as we expected and discussed on our previous calls.

We see pricing momentum in each geographic segment for aggregates and ready mix. So we are increasing our pricing assumptions for 2024 to high single digits for those two product lines. While average selling prices for aggregates was impacted by product mix during the quarter, we believe our year to date results and projected full year pricing support our updated assumptions. To reinforce this continued optimization, we’ve expanded the training on our dynamic pricing efforts across each segment. In addition to our materials pricing initiatives, we continue to be disciplined on bid day targeting construction projects that meet our EDGE strategy most prominently the pull through of higher margin upstream materials. Moving from pricing optimization to cost control and productivity, our process improvement teams or PIT crews continue to work to identify and share best practices across our operations.

We’ve expanded the number of teams to 10 focusing on all aspects of our business including operations, commercial excellence and standardizing our support services. While it is still early in the process, our PIT crews have been successful. The original PIT crew which is focused on materials operations has visited 98 sites across 10 states since it was launched last year. These site visits have resulted in nearly 1300 improvement opportunities of which approximately 60% have been completed to date. Let me provide a few examples of these early successes. In 2023, the operations PIT crew visit our Medford aggregate site in Southern Oregon and recommended new mining practices including the installation of an overland conveyor system to eliminate trucking and reduce harvesting costs.

We expect this price to be complete in the fourth quarter of this year and the annual benefit will be over $1 million. Later in 2023, our PIT crews visited Casper, Wyoming and recommended a process change that reconfigured sand washing equipment to increase production capability, decrease waste and improve quality. We expect the annual benefit to be approximately $200,000. And in Portland, Oregon, our team visited a large aggregate site just a few months ago and recommended a change to reintroduce a quarry byproduct back into the production of base rock resulting in an increase of sellable products and reduction of waste. This is expected to provide a benefit of approximately $1.1 million per year starting immediately. Our operations PIT crews have been extremely busy and their work is far from being complete.

They are currently out in the field working to identify additional improvements and expect to reach 31 locations in the second half of this year. Moving to the D in EDGE, discipline, I’d like to especially thank our contracting services teams for an excellent quarter and for embracing our quality over quantity initiative. They continue to stay disciplined while bidding work, securing $400 million of additional work for the second quarter at slightly higher margins than the same period last year. From the bid room into the field, our construction teams delivered. By hitting production schedules and exceeding project specifications for quality work, they improved contracting margins over what was originally bid. For the quarter, our gross profit in contracting services improved by $14 million year-over-year.

Along with that, our gross margins improved by 320 basis points. Looking at the Contracting Services backlog, we anticipate some moderation in gross margin expansion as our year-over-year comparisons will now include the significant improvements we have made through our EDGE strategy over the past four quarters. I’m very proud of the advance [Technical Issues] the overall success. The GE in EDGE is growth and we have a highly experienced and respected corporate development team leading these efforts. They are currently advancing several possible deals across our market areas focusing on materials based operations within or adjacent to our current operations. We closed on the purchase of a small quarry operation in Northwest Region since our last call and we continue to identify additional acquisition opportunities.

We have many deals in our pipeline ranging from small acquisitions that strategically support our current operations to midsize bolt-on that help us grow in our current regions to new platforms to expand our footprint at adjacent markets. Knife River has completed over 85 acquisitions in our history. Our experienced team combined with our local relationships and reputation position us as the acquirer of choice in our midsize high growth markets. I look forward to some deal announcements as we bring these opportunities in the Knife River family. Lastly, in our EDGE recap, I’d like to highlight our relentless efforts to be excellent in everything we do which includes the safety and well-being of our team. We continue to make progress on our goal of keeping everyone safe, which is at the heart of being a people first company.

We will maintain our focus on this core value. We firmly believe that one of the multiple trails to our 20% adjusted EBITDA goal is the safety trail. Keeping our teams healthy, our plans well maintained and implementing additional safety tools is the right thing to do and we expect it to positively impact our financial performance. We believe in our life at night culture of putting people first and we’ll continue supporting our core values of people, safety, quality and the environment. Combining each of our competitive EDGE initiatives is providing positive outcomes for our shareholders and our team. In addition to the actions we are taking, our markets have provided a strong backdrop for our year-over-year success. Our vertical integration strategy targets low risk publicly funded work with strong pull through of higher margin upstream materials.

You’ve heard me say this before and it continues to be true, our national infrastructure needs repair and there is growing support to fund that work. At the Federal level, funding from the Infrastructure Investment and Jobs Act is still being allocated. Approximately 56% of IIJA formula funding has yet to be obligated in our markets. We expect to benefit from that funding as it continues to be dispersed. On top of that state and local governments are continuing to be proactive in funding infrastructure projects. As of July 1st, lawmakers in eight of Knife River’s 14 states have introduced additional legislation to fund construction projects. Funding in our states is at record or near record levels and they are continuing to pursue long-term dedicated revenue solutions.

It is clear there is public demand for safer less congested roads and bridges. We will continue to support and monitor the status of those bills. Approximately 87% of our current backlog is publicly funded with dedicated dollars from Federal, State and local government agencies. The work needs to get done and we are well positioned to perform it. Now taking a closer look at our performance for the quarter, EBITDA improved in each geographic segment over last year. Starting in Pacific, we had record revenue, primarily driven by price increases across all our product lines along with increased contracting services activity in Northern California. Overall, gross margin was down for the quarter driven by lower gross profit on ready mix and aggregates.

This was related to increased repair and maintenance expenses as we took additional steps to improve production capabilities particularly in Hawaii and Alaska. Looking ahead, our Northern California market continues to see strong demand both in private and public construction. We are committed to our EDGE plan and we’ll keep our focus on optimizing pricing, disciplined bidding and lowering production costs. In the Northwest, we continue to see growth building on the records we set last year. Revenue was up 12% and EBITDA was up 31%. Our contracting services projects in Southern Oregon and Central Oregon are progressing well, helping to drive a 260 basis point improvement in the segment’s gross margin. Looking ahead, we see additional opportunities for growth in this region with the prestressed concrete division recently securing projects related to data centers, parking garages and bridge infrastructure.

Also as I mentioned, we purchased a quarry during the quarter to provide aggregates for the growing suburbs southeast of Portland. Moving to our Mountain segment, we continue to benefit from very strong markets. We had record revenue and EBITDA and our EBITDA margins increased by 500 basis points. Driving these records were price increases on all product lines and increased contracting services activity. Our Idaho and Western Montana markets are particularly strong and we see some additional upside ahead in Wyoming with potential wind farm and data center work. There continues to be substantial work bidding in this region and we are well prepared to deliver on it. In our Central segment, you can clearly see the impacts of our EDGE strategy.

Price increases, disciplined bidding and solid project execution helped drive EBITDA up 27% to a record $36 million. Revenue decreased 7% for the quarter largely related to weather as this segment had a wet June with heavy rainfall in parts of Minnesota, South Dakota, Iowa and Texas. Looking ahead, we are seeing an increase in bidding opportunities for the remainder of the year and into next year. Minnesota, Iowa, Nebraska and Texas have each been adding projects funded by statewide infrastructure initiatives. Moving from our geographic segments to Energy Services, we had a strong second quarter. While financial results were well above the historic average, they were down from last year’s all-time records as anticipated. Pricing for liquid asphalt decreased across all markets from last year due to lower input costs.

While EBITDA decreased approximately 11% from the 2023 record, EBITDA margins held steady as a result of those lower input costs. As I mentioned on our last two calls, we have good visibility into this segment and have updated our guidance accordingly which Nathan will cover in his remarks. Before turning the call over to Nathan, I would again like to thank our entire team for this outstanding quarter. We delivered record results while also working safely. During the quarter, we hit our one-year anniversary as an independent company. In that time, we made significant progress on our competitive EDGE goals and have generated meaningful value for our shareholders. Our strategy is working. We have the right team in the right markets with the right plan and we’re just getting started.

I’ll now turn the call back over to Nathan for his remarks. Nathan?

Nathan Ring: 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 improvement in each product line helped us achieve record consolidated gross profit. Moving to Contracting Services, we saw substantially higher gross margin at 13.8% in the second quarter compared to 10.6% last year. This increase of $14 million in gross profit is directly related to our disciplined approach in pursuing higher margins on bid day and then executing on that backlog. Furthermore, our backlog continues to benefit from infrastructure funding and is 87% public work. Of our total backlog, 85% of our projects are less than $5 million and approximately 95% of our projects are completed within 12 months.

We believe the size and duration of these projects, coupled with our reliable public funding, lowers our risk profile while also providing pull through demand for our upstream product lines. Next, I would like to provide some additional information on our corporate services department and consolidated SG&A expenses. As of May 31, we have essentially completed our transition services agreement with MDU Resources and successfully set up the corporate functions needed to operate our businesses. We truly appreciate all the work our team has done to accomplish this. Furthermore, we have seen the recurring stand alone cost for these departments come in lower than expected as we are focused on finding efficiencies and managing costs. Consolidated SG&A expenses were the same year-over-year for the quarter at $59.5 million as increased costs were partially offset by gains on the sale of assets.

Looking ahead for the second half of the year, we expect our corporate and consolidated SG&A expenses to remain in line with prior year. Moving to our balance sheet, we ended the quarter with no amount drawn on our $350 million revolving credit facility compared to $155 million last year. Our continued disciplined use of cash has contributed to an improved net leverage of 1.5 times compared to 2.3 times in the second quarter last year. With this strong balance sheet and liquidity, we believe we are well positioned to support our acquisition growth strategy that Brian mentioned. We also continue to reinvest in our operations. During the first half of 2024, we invested approximately $103.6 million on capital projects, with the majority being spent on replacement of fixed assets as well as organic growth projects that are focused on increasing return on invested capital.

Lastly, our industry leading ROIC for the quarter was 15.9% on a trailing 12-month basis, reflecting the efficiency and discipline of our capital deployment. As we look back on a successful quarter and look ahead to the remainder of the year, we are excited to be increasing financial guidance for the full year 2024. We are raising consolidated revenue guidance to a range of $2.8 billion to $3 billion. For consolidated adjusted EBITDA, we are raising and narrowing guidance to a range of $445 million to $485 million. This includes adjusted EBITDA for our geographic segments in corporate services of $390 million to $425 million as well as adjusted EBITDA at Energy Services between $55 million and $60 million and lastly, we expect total capital expenditures between 5% and 7% of revenue, excluding any potential future acquisitions.

Additionally, our 2024 guidance includes the following assumptions. We anticipate average selling prices for our aggregates and ready mix product lines to increase high single digits and asphalt pricing to be flat to up low single digits. We expect aggregates volumes to be flat to down low single digits, ready mix down low to mid-single digits and asphalt down to mid to high single digits and finally, guidance is based on normal weather, economic and operating conditions for the remainder of the year. We are very excited about our second quarter record results, which have helped set the stage for increased financial guidance and what we expect will be another record year. For our geographic segments, the midpoint of our adjusted EBITDA guidance represents a 15% increase from our full year 2023 adjusted EBITDA.

We believe these results are achievable given implementation of our competitive EDGE initiatives, committed infrastructure funding, market position and opportunities for growth. With that, I’d like to open the call for questions.

Q&A Session

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

Brent Thielman: 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.

Brian Gray: 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.

Brent Thielman: 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?

Brian Gray: 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.

Brent Thielman: Okay. I appreciate the comments. I’ll get back in queue.

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

Trey Grooms: Hey, good morning and well done in the quarter.

Brian Gray: Thank you, Trey.

Trey Grooms: 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?

Brian Gray: 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.

Trey Grooms: 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?

Brian Gray: 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.

Trey Grooms: Okay. Thanks, Brian. I’ll pass it on.

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

Kathryn Thompson: 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?

Brian Gray: 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?

Kathryn Thompson: 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.

Brian Gray: 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.

Kathryn Thompson: 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?

Brian Gray: 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.

Kathryn Thompson: Okay, great. Thanks very much.

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

Timna Tanners: 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?

Brian Gray: 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.

Timna Tanners: 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?

Brian Gray: 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.

Timna Tanners: Okay. Thank you.

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

Garik Shmois: 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?

Brian Gray: 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.

Garik Shmois: 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?

Brian Gray: 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.

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

Ian Zaffino: 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.

Brian Gray: 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.

Ian Zaffino: 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.

Brian Gray: 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.

Ian Zaffino: All right. Thank you very much.

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

Brian Gray: 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.

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