Knife River Corporation (NYSE:KNF) Q4 2023 Earnings Call Transcript

Knife River Corporation (NYSE:KNF) Q4 2023 Earnings Call Transcript February 15, 2024

Knife River Corporation beats earnings expectations. Reported EPS is $0.36, expectations were $0.2. Knife River Corporation isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

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

Nathan Ring : Thank you, operator and welcome to everyone joining us for the Knife River Corporation fourth quarter and full year 2023 results conference call. My name is Nathan Ring, Chief Financial Officer of Knife River, and I’m joined by President and CEO Brian Gray. Today’s discussion will contain forward-looking statements about future business and financial expectations. Actual results may differ significantly from those projected in today’s forward-looking statements due to various risks and uncertainties, including the risks described in our periodic reports filed with the SEC. For further detail, please refer to the legal disclaimers contained in today’s earnings release and other public filings, which are available on both our website and the Securities and Exchange Commission’s website.

Except as required by law, we undertake no obligation to update our forward-looking statements. During this presentation, we will make reference to certain non-GAAP information. These non-GAAP measures are defined and reconciled to the most directly GAAP measures in the appendix to today’s presentation as well as our filings with the SEC. These materials are also available on our website at www.kniferiver.com under the Investors tab. Brian Gray will begin today’s call with a high-level overview of our fourth quarter and full year 2023 results. Followed by an update on our strategic priorities as outlined within our competitive edge plan. Following his prepared remarks, I will provide a product line summary, a balance sheet update and a review of 2024 financial guidance.

At the conclusion of our prepared remarks, we will open the line for a question-and-answer session. With that, I’ll now turn the call over to Brian.

Brian Gray: Thank you, Nathan. Welcome everyone and thank you for joining us today. I’m excited to talk about our record year, our strategic priorities for continued profitable growth and what we see ahead in 2024. We reached all-time annual records in 2023 for revenue, net income, EBITDA and adjusted EBITDA. I’m incredibly proud of our team for safely delivering these impressive results, including revenue of $2.8 billion and adjusted EBITDA of $432 million. Each of our reporting segments saw improved year-over-year revenue and EBITDA as we benefited from strong markets, operational execution and strategic efforts to optimize prices and improve margins. Combined, these efforts drove our adjusted EBITDA margins to 15.3% for 2023, an improvement of 280 basis points.

We are very pleased to have surpassed our initial goal of 15% margins, a full two years ahead of the schedule. Doing so is a testament to the strength of our team, the strength of our business, and the strength of our markets. While we certainly enjoy the moment and the milestone, we are now focused on our longer term goal of 20% plus EBITDA margins. On our past two quarterly calls, I highlighted the early successes from our new competitive EDGE strategy and I’ll discuss drivers from that strategy again today. We believe our EDGE plan will continue to improve our adjusted EBITDA margins and deliver long-term value for our shareholders. Turning to Slide 4, we launched our EDGE strategy at our 2023 Investor Day, and we have already enjoyed meaningful success.

As we move forward, we will continue to focus on commercial and operational excellence as well as disciplined capital allocation, which will drive margin expansion. As a recap, the letters in EDGE stand for EBITDA margin improvement, discipline, growth and excellence. Let me provide some updates on key developments in each of these areas starting with margins. In 2023, we made good progress to our long-term target. We are on a solid path to achieving our long-term adjusted EBITDA margin goal of 20% plus. We are focused on increasing aggregates as a percentage of our gross profit. We are continuing to build on the strategic positions we have in our mid-sized high growth markets and we are driving productivity gains across the organization. We’ve seen early success with dynamic pricing and targeted bidding strategies and we continue to refine each as we seek to optimize the value of our core products.

We brought our sales managers and regional executives to the Knife River Training Center last fall for extensive training sessions on dynamic pricing and commercial excellence. And we have also had promising early returns from our process improvement team or what we call the PIT Crew. They have identified capital improvement opportunities, operating efficiencies and cost controls that can be implemented throughout the company. The team visited 10 of our largest locations in 2023, including Quarries, Asphalt Plants and ready-mix plants. In 2024, we’ve expanded the team so we can extend its influence to more locations as we standardize best practices. Our entire team at Knife River is fully engaged in our continuous efforts to improve margins.

With respect to discipline, we are committed to a strong balance to achieve a disciplined allocation of capital to drive long-term investor returns. We take a highly disciplined approach to managing our business, one that guides where and how we compete, how we manage our costs and how we allocate capital. Over the last year, we continued to drive capital efficiency across the organization. We maximized free cash flow generation, we delivered improved operating leverage and we significantly reduced our outstanding debt. Moving to growth, M&A is part of our corporate DNA. Since 1992, we’ve completed 84 acquisitions, including 9 in the past 5 years. While our primary focus in 2023 was establishing ourselves as an independent company and then implementing our EDGE strategy, we expect to become more active on the acquisition front in 2024.

We have an active pipeline of potential bolt-on and platform targets and we intend to emphasize aggregates led materials based transactions. We have reinforced our corporate development team to help pursue M&A opportunities and we remain committed to reinvesting in organic growth at our operations as we aim to build our market positions and support profitability. And finally, the second E, Excellence. We are driven to be the best at all aspects of our business. Being a best-in-class operator starts with our people. We are committed to the health and safety of our team. We believe that excellence in these areas is integral to our long-term success. Our state of the art Knife River Training center hosted over 1,100 students last year including interactive sessions on safety, sales and operational performance.

Core curriculum at the center also includes CDL training, equipment operator training, and leadership development. Investing in our team and advancing the skills through ongoing training is an investment in our future as a pillar of our sustainability strategy. Putting people first and maintaining our unique life at night culture brings us together, supports retention and build the teams that will help us achieve our business goals. While we take advantage of our self-help from our competitive edge strategy, the underlying fundamentals of our business are strong. Our vertical integration, ability to serve public and private customers, and our strategic positions in mid-sized high growth markets provide competitive advantages for Knife River.

While we became a standalone publicly traded company just eight months ago, we have been in the construction materials and contracting services business for over 30 years. Knife River is well established. In addition to being a top 10 aggregates producer in the United States with 1.1 billion tons of reserves, we provide value added contracting services. Our vertically integrated model allows us to self-supply the majority of the aggregates used in the production of our downstream products, which are then supplied to contracting jobs. We have built a business that seeks to capture value and margin at every step of the value chain. Over 75% of the value of our contracting services contracts is in public projects, and we believe a significant growth in infrastructure funding from the federal, state and local levels.

Within the 14 states we operate, State transportation departments have increased their 2024 spending authorizations by more than $9 billion which is up 16% from 2023. We will maintain a disciplined approach to project bidding, one that emphasizes backlog quality over quantity consistent with our strategic focus on expanding EBITDA margins. Now, I will transition to providing some color on our reporting segments, starting with a structural update. Since our initial Investor Day in May, we have committed to being available, to listening, and to being transparent with our investors. As we aim to add clarity into our operating results, we have created a standalone product line segment for our liquid asphalt operations called Energy Services. This business has operations in Iowa, Nebraska, South Dakota, Texas and Wyoming and the segment now also includes the liquid asphalt operations in California that previously were part of our Pacific segment.

While Energy Services is new segment, liquid asphalt has been part of our vertically integrated value chain for nearly 20 years. It is a value added construction material and to give investors more clarity into this product line, we will begin providing EBITDA guidance specific to Energy Services. The other change is reporting our South region with our North Central region, now called the Central segment. Going forward, we will reference the Pacific, Northwest, Mountain and Central segments collectively as our geographic segments. With these updates, all other has been eliminated and replaced simply with corporate services and eliminations. Moving on to our results, I will start with the Pacific segment. We saw increased market activity in California and Hawaii in the fourth quarter, including more work for our contracting services business in Northern California, which helped grow revenues.

For the full year, revenues increased 11% to a record $462 million, EBITDA increased 28% to $56 million. Entering 2024, we are optimistic about continued growth in Hawaii, which is seeing an increase in tourism spending and stands to benefit from multiyear military projects. In Northern California, we continue to see people moving out of the Bay Area into midsize markets where we have a strong presence. And in Alaska, there are several projects associated with the Anchorage airport that are in the permitting stage where we are in good position to be one of the primary material suppliers. Next to the Northwest segment, where we have another record year. While fourth quarter EBITDA was down year-over-year, largely related to a onetime items in the form of a non-cash aggregate impairment and lower gains on asset sales, the segment results reflect record revenue and EBITDA for the year.

Revenue improved 11% to $666 million, EBITDA improved 17% to $121 million and the segment improved its EBITDA margins to 18.2%. Entering 2024, our market conditions remain healthy including a strong pipeline of work at our pre-stressed division where we opened a new production facility late last year. We are extremely pleased with the higher capacity and efficiencies of this new plant, which is featured as the cover story in this month’s Concrete Products Magazine. We look forward to strong contributions from our pre-Swiss business in 2024 and the years to come. We’re also seeing solid DOT spending in Southern Oregon with a near record amount of work on the books and more to come. We also see opportunities with microchip plants and data centers that rigs that look to begin construction later this year, which we expect will benefit our aggregates, ready mix and pre-Swiss operations.

In our Mountain segment, we continue to enjoy strong demands. In the fourth quarter, we experienced volume growth across all product lines and contracting services led by strong residential, commercial and public activity. For the year, revenue improved 17% to a record $634 million and EBITDA improved 42% to a record $103 million. The Mountain region continues to be one of the fastest growing areas in the United States. We have a strong position and we look to take advantage of future growth in our footprint. Our key operations include Boise, Billings, Missoula, and Bozeman, all of which are benefiting from population growth. The State of Idaho has $500 million remaining to be spent in its transportation expansion and congestion mitigation fund, which includes roads and bridge work.

We have two airport projects in Western Montana in 2024 and we have opportunities with the continued expansion of wind farm projects in Wyoming. The Central segment which includes North Dakota, South Dakota, Minnesota, Iowa, and now Texas continues to benefit from a combination of edge related business initiatives. We had strong pricing growth across the segment as well as more profitable contracting work. Full year 2023 revenues improved 6% to a record $825 million and EBITDA improved 35% to a record $117 million. Both Texas and Minnesota pass additional transportation funding packages in 2023 that will provide more bidding opportunities and infrastructure improvements. Texas was the fastest growing state last year and projections show population continuing to grow.

In the Texas triangle that area between Dallas, Houston, and San Antonio, the current population is 21 million and is expected to grow to 30 million over the next six years. Our midsize market locations in Texas are position within that triangle and stand to benefit from the strong growth. And finally, under our new segment energy services, our liquid asphalt business has been a solid profitable contributor for us since we purchased it 19 years ago. EBITDA margins at energy services have been accretive to Knife River’s overall consolidated margins in 18 out of those 19 years. We had exceptionally strong financial results at energy services in 2023, benefiting from historic price cost dynamics across our markets and a longer than expected paving season.

We had record revenue of $292 million for the year and record EBITDA of $78 million. In 2024, we anticipate another strong year from our energy services, well above its historical average, but not at the all-time records we saw in 2023. The state DOT is in the market where we provide liquid asphalt are continuing to invest in their roads. For context, about 94% of the nation’s paid rows are paid with asphalt. Energy service has been and will continue to be an integral part of Knight River’s vertical integration strategy. In summary, the fundamentals of our businesses are strong. The federal state and local funding back office at unprecedented levels. In 2024, we anticipate price growth across all of our product lines as the demand continues to build.

At the same time, we test volumes will be flat or slightly down as we maintain our disciplined approach to bidding and as we continue to implement dynamic pricing to improve margins. We had a remarkable year in 2023. We became an independent company. We achieved record financial results and we’ve implemented a strategy to continue delivering long-term profitable growth. At Knife River, we win as a team, and I would like to thank our entire team for what we accomplished together in 2023. I’m also excited about what we have ahead of us. Thank you for your continued interest in Knife River. I’ll now turn the call over to Nathan for his remarks. Nathan?

Nathan Ring: Thank you, Brian, and good afternoon, everyone. I’ll begin my remarks with a review of our product line performance followed by an update on our balance sheet and capital allocation priorities and conclude with our 2024 financial guidance. As Brian mentioned, our fourth quarter results were a strong finish to a record year. We achieved record revenue for the quarter of $647 million, up 20% from 2022. Quarterly revenue also increased across all product lines compared to the prior year, benefiting from strong market demand, a longer construction season and the first stages of our competitive edge initiatives. On a full year basis, we reported record revenue of $2.8 billion, an increase of 12% from the prior year. Underpinning this revenue improvement was our continued pricing momentum in our product lines.

Average selling prices increased across all product lines for the year, including 11.5% for aggregates, 12.3% for ready-mix and 13.6% for asphalt. Although volumes have declined for the year in these product lines, our strategic focus on quality over quantity, was exemplified with prices more than offsetting volume declines. Given these price and volume conditions as well as productivity gains, the material product line saw considerable improvement in gross margin for the year. Aggregates were up 600 basis points to 20% gross margin. Ready-mix was up 140 basis points and asphalt 380 basis points. Within contracting services, margins improved 300 basis points during the year. Our disciplined pricing and bidding strategy helps ensure that we capture the value of the materials and services we provide.

This strategy, combined with solid execution was successful, culminating in consolidated gross margin improvement of 480 basis points for the year. We believe this strategy will continue to positively impact future results. For the quarter, our contracting services backlog of $662 million was down from the prior year. As expected, while DOT funding and lettings activity remains strong across our footprint, we’ve adopted a more disciplined bidding strategy to prioritize our gross margin over the volume of projects. As a result of this bidding strategy, the margin profile of our existing backlog is higher than it was at the end of 2022. Furthermore, about 90% of our backlog is a diverse base of lower risk, short duration work valued at less than $5 million per project.

Our Competitive EDGE initiatives while in the early stages, have set the groundwork for Knife River to maximize the value of our products and services while optimizing the utilization of our resources, generating profitable and sustainable growth for our shareholders. As Brian referenced, one of the core pillars of our edge strategy involves operational and financial discipline. That includes maintaining a strong balance sheet as well as a returns-focused approach to capital allocation. In 2023, we generated $336 million of cash from operations, a $128 million improvement year-over-year. Total free cash flow, which we calculate as operating cash flow less total capital expenditures, plus proceeds from asset sales was more than $220 million in 2023, an increase of more than $167 million from 2022, representing free cash conversion as a percent of net income of 120%.

Furthermore, we ended 2023 with $219 million of available cash and $329 million of available capacity under our revolving credit facility. We believe our strong free cash generation, together with our nearly $550 million of cash and liquidity, position us to reinvest within our existing operations as well as pursue strategic acquisitions. While our business development pipeline remains active, we intend to stay disciplined in our approach to capital allocation, ensuring that we pursue high-quality assets to support our growth strategy. In 2023, our capital expenditures totaled $124 million, the bulk of which was allocated to upgrade our quarries, fleet and facilities. We reduced our ratio of net debt to adjusted EBITDA to 1.1x at year-end 2023.

And we remain committed to a long-term annualized goal of approximately 2.5x net leverage, providing Knife River the balance sheet flexibility to support our organic and inorganic growth objectives. Our capital allocation strategy will remain returns-focused. 2023 was a record year, one in which we exceeded our financial guidance. And as we look to 2024, we see continued pathways towards adjusted EBITDA growth and margin expansion. Today, we are introducing financial guidance for the full year 2024. Our guidance includes the following assumptions. In 2024, we anticipate average selling prices for our product lines to improve mid- to high single digits, while volumes are expected to be flat to down low single digits when compared to 2023. Furthermore, we expect our process improvement team initiatives will continue to identify operational efficiencies and improvements across the organization as outlined within our strategy.

In addition to the consolidated financial guidance we are providing, we have begun to report EBITDA guidance specific to the Energy Services segment, as Brian mentioned. Given the visibility we have into this product line statement, we wanted to provide additional clarity and transparency to our investors. To that end, for the full year 2024, we are providing the following financial guidance. Total revenue of between $2.75 billion and $2.95 billion, consolidated adjusted EBITDA of between $425 million and $475 million, adjusted EBITDA for our geographic segments, including corporate services of between $375 million and $415 million and Energy Services, adjusted EBITDA of $50 million to $60 million. And lastly, we expect total capital expenditures of between 5% and 7% of revenue, excluding any potential future acquisitions.

As you can see by the midpoints of our guidance, we expect to see continued margin expansion and EBITDA growth. At our geographic segments, the 2024 midpoint for adjusted EBITDA is $395 million, which is 11.5% above 2023. In summary, we are pleased with our record results from 2023. Our markets and business fundamentals are strong, and we will continue to focus on commercial excellence, operational execution and disciplined capital allocation as we build momentum into 2024. We are excited about the year ahead. With that, I’d like to open the call for questions.

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Q&A Session

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

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

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

Sherif El-Sabbahy: And you mentioned your expectation for pricing. What kind of cost inflation are you seeing?

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

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

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

Brian Gray: Garik, I’ll talk about the pipeline and kind of our strategy for M&A and then I’ll turn it over to Nathan to answer the balance sheet. And so we have a lot of opportunities in the pipeline, and we’re going to continue to stay disciplined in our approach. We definitely look for aggregates-based companies in those midsized high-growth markets. We built this company at Knife River on over 80 acquisitions. A majority of those, a lot of those are those bolt-on operations in that $10 million to $30 million range. We will absolutely look for platform operations. We’ve got some that we’re looking at now. So we’re not afraid to go out and do a larger acquisition. But we certainly are focused in those markets that we’re already in and looking for those aggregates-based materials-driven operations that support our vertical integration model.

Those opportunities are out there. We drive that kind of that acquisition process really from our regional level with some corporate programming that we can kind of monitor at the corporate level, we help build the models and assist the regions with their due diligence and integration, but really is a regional-driven M&A acquisition strategy. So with that, I will turn it over to Nathan to maybe touch on the balance sheet.

Nathan Ring: Yes. You talked a bit about tapping into the balance sheet and our capital that’s available. I think, first, it will be helpful just to look back at the cash that we have available and the revolver capacity. Those are two important points that we’ll look at to fund our acquisitions. So first, from just a cash flow standpoint, as we looked at the performance we had this year, which was outstanding. I mean, our adjusted EBITDA grew $119 million. And a lot of that translated to our improvement in cash flows from operations, right from the cash flow statement of $128 million. We’ve been diligent about our balance sheet. In fact, our working capital as a percent of revenue decreased year-over-year in our cash flow conversion improved to 120%.

So all that said, the balance sheet has about $220 million of available cash and our revolver capacity is about at $330 million. So $550 million on the balance sheet to tap is, I guess, you said, to pursue these bolt-on and larger acquisitions as well as organic growth. That’s something that we’ve been successful with in the past as well. We’ve done a number of aggregate sites that we’ve grown as well as maintaining our fleet. And so I think sort of it is we’ve got a strong balance sheet to support that we’ll continue to be disciplined, as Brian said on how we pursue these acquisitions, but well ready to get the job done.

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

Brian Gray: Yes. I think there’s definitely that self-help opportunities, Garik, with our EDGE. And I can tell you that the regions are leaning in hard on that. Hence, one of the reasons why we hit our 15% EBITDA margins two years earlier. We had that said that goal at our May Investor Day to hit 15% by 2025, we rolled out the edge initiatives early in the year. We started talking about dynamic pricing, but we really have not implemented dynamic pricing until the beginning of this year. And we’re still — that’s a process that will take several years to fully implement it throughout the regions. We deployed our PIT Crews, the process improvement teams, and that’s really a group of internal experts by product line and then external experts.

They go out and spend a week at an individual facility and really just dissect every aspect of that operation. And so we’ve seen some real big wins. In fact, such under demand that we’ve had to double the size of that team so we can deploy it even more locations in the upcoming years. So yes, we have lots of self-help when it comes to the EDGE strategy, and that’s built into our projections for our guidance on EBITDA. So we’re excited that we can grow. When we look at our growth rate in those geographic locations, the Northwest Pacific Mountain and Central regions, that’s an 11.5% growth over last year. And so we’ve got the mid- to high digit price increases controlling those costs flat too slightly down volumes. But — so it’s definitely some of that self-help is going to help us achieve that 11.5% year-over-year growth.

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

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

Brian Gray: Yes, Brent. We’ve been doing dynamic pricing in the Northwest region for seven, eight years. We’re not fully implemented even in the Northwest region. But I would say that we’re in that seventh, eighth inning when it comes to dynamic pricing. We brought over 100 of our sales managers and executives from around all of the different regions to the training center back in November and had a three day seminar class Summit on dynamic pricing and commercial excellence. And so we are in the process of doing that right now. We did not send out nor the number of annual increase letters. The increased letters have different language in them that were the ones that went out there to really give us the opportunity to bid work in real time.

And so again, the dynamic pricing is the opportunity for have our customers call us for aggregates, ready-mix and asphalt on their individual projects allow us to look at our proximity of our locations to their job sites to look at our backlog, to look at our current cost inputs and really maximize, optimize that price that goes out on that job. So that’s what dynamic pricing is all about. We’re in the process of rolling that out in all the regions right now. But we’re really in the first second innings of that rollout of the dynamic pricing. You’ll see that’s baked into some of our increases for this year. So you’ll begin to see some of those benefits this year.

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

Brian Gray: Yes. I think you should look at that over a full year, Brent, to get a good feel. We closed out jobs in the fourth quarter. And so I think looking at the 11.4% that we had for the full year, is probably something you could look at. I would say that the — how you look at our lower backlog is intentional. And I think that we have been very disciplined and taken a different strategic approach to how we take on work and really taking on higher quality work and aesthetic quantity. And we had seven consecutive quarters of record backlog and that was at some lower margins that did not fit our edge strategy. And so that’s one way you can look at our lower backlog is it’s very intentional. It’s very calculated. We are targeting projects and customers that fit us to pull through higher-margin upstream materials.

And the other thing to say is that we had $50 million of additional revenue in the fourth quarter from contracting from that favorable weather. And so that definitely had an impact on our year-end backlog. What I’d tell you is that it’s opened up more capacity for us to go out and pursue some of those higher-margin projects. And the good news for us is the states that we operate in, we’ve got 16% larger DOT budgets. So the tailwinds in infrastructure funding at the state, local, federal level really allows us to be more selective on the type of work that we do.

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