Knife River Corporation 2026 Q2 Earnings Call

Dara, please go ahead. With me today are President and Chief Executive Officer, Brian Gray, and Chief Financial Officer, Nathan Ring.

A question and answer session will follow their prepared remarks. 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 disclosed in our most recent filings with the SEC, which are available on our website and the 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 and investor presentation. These materials are also available on our website. I would now like to turn the call over to Brian.

Thank you, Dara. Good morning, everyone. I'd like to start today's call by highlighting our strong operational performance in the second quarter. Despite a few external headwinds that weighed on our financial results, the underlying performance of the business was solid. We executed well in the field, converting record backlog into revenue increases of 13% year-over-year. Our materials product line saw double-digit volume growth, driven by the pull-through demand from contracting services and the contributions from recent acquisitions. Gross profit improved double digits for aggregates, ready-mix, and asphalt. Aggregate pricing increased by 8% on a product mix adjusted basis. I'd like to thank our teams for the good job they did optimizing prices and controlling costs. The fundamentals of our business are strong. Excluding gains on asset sales from Q2 this year and Q2 last year, adjusted EBITDA was up 7% year-over-year.

This is a testament that our crews are controlling what they can, our self-help initiatives are working. On an as-reported basis, adjusted EBITDA was flat with last year, related to a few external factors. First was a delay in recouping higher energy costs. Second was project timing shifts related to adverse weather and construction schedules. Third was a type of work and timing of projects incentives, which affected contracting services. Starting with the energy costs, higher diesel prices drove an increase in cost of about $10 million year-over-year. With the mitigation practices we discussed last quarter, we recouped $4 million of that through fuel surcharges in the second quarter. We expect to recover an additional $4 million through escalators on our DOT contracts.

However, that won't occur until the third quarter, as there are one to two-month lag between incurring the costs and recovering them from public agencies. While we anticipate diesel costs will remain elevated through the remainder of the year, we expect to continue recovering the majority of these increases. Next, adjusted EBITDA was affected by project schedule changes and weather-related delays on several impact projects. In Texas, we were scheduled to produce a significant amount of asphalt and pave two major highway projects, both of which were pushed back by excessive rain and schedule changes. In Hawaii, our P-209 project was delayed as part of a modified construction schedule, impacting concrete and cement volumes. In Alaska, an exceptionally cold winter prolonged road restrictions. This kept trucks off the roads until June 15th, delaying the start of the construction season by over a month.

In each of these cases, it's important to note that the projects have not been canceled, but the volume curve we expected was shifted to a later timeframe. We are confident the revenue and earnings opportunities remain. But for the quarter, we estimate this timing shift impacted adjusted EBITDA by approximately $10 million. Lastly, market dynamics, primarily the type and timing of work, played a factor on our quarterly performance, impacting contracting services margins. The type of projects we performed in the second quarter last year were larger general contracting jobs with multiple scopes of work. These roadway expansion projects enabled us to achieve significant gains related to value engineering and project performance. We didn't have as much of that work in the second quarter this year. Instead, we performed much more asphalt paving, which is generally lower risk and lower margin work.

As we've discussed in the past, Knife River is very good at this work. It's in our wheelhouse, and we often earn sizable performance bonuses for quality on this type of work. However, these bonuses are typically received as the project nears completion. During the second quarter, many of our projects were still in their early stages, so we have yet to see the bonuses. We expect to pick up gains on these jobs in the second half of the year. For the second quarter, we estimate market dynamics, primarily the type and timing of work, impacted adjusted EBITDA by approximately $8 million. As we enter the heart of the construction season, we expect second half contracting service margins to improve year-over-year, while we execute on our $1.2 billion of backlog, benefit from the timing of project bonuses, and collect on fuel escalators.

The additional paving we are performing this year will also benefit the pull-through of our higher margin materials, which we expect will drive margin expansion for aggregates. We remain laser focused on our self-help initiatives, including price optimization and cost controls. As an example of these efforts, our aggregate crews lowered their variable operating costs by 1% year-to-date, despite increased energy costs and inflationary headwinds. Our ready-mix crews improved their cubic yards per delivery hour by 12%. It's performance metrics like these that give me confidence that our crews are executing on our EDGE initiatives, and we are controlling what we can control. I believe Knife River is built for long-term success. The underlying demand for our products and services remains healthy. Critical infrastructure work needs to get done, and we are in a great position to do it.

Public funding is expected to remain strong, with 38% of IIJA funds yet to be spent in our states. There's a tail on IIJA, and if Congress requires extra time to complete BUILD America 250 Act, a continuing resolution is likely to preserve current funding levels. On the private side, we continue to see expanding opportunities driven by investments in data center development, semiconductor projects, and energy infrastructure. We also see exciting acquisition and organic growth opportunities, which I'll talk about in a few minutes. Altogether, these factors, including the operational execution that we have demonstrated, give us confidence in our ability to continually improve our financial performance and deliver value for our shareholders. Next, I'll turn the call over to Nathan to walk through our product line financial results. After that, I'll share some thoughts on our growth strategy.

Nathan? Thank you, Brian, and good morning.

As Brian just mentioned, we are pleased with the overall performance of our operations and, in particular, our material product lines, which had a strong quarter. Starting with aggregates, we had impressive volume growth of 14% over last year, primarily supported by the internal demand from our downstream product lines across all segments, demonstrating the benefits of our vertical integration. With this increased demand for aggregates, we now expect volumes to be up high single digits for the year. We have also seen an increase in third-party demand, particularly in the Central segment, where they are executing on a commercial strategy to increase external sales to industrial projects, such as data centers and power generation. Part of that volume increase was related to an opportunity to sell 630,000 tons of lower-priced natural fines.

This was positive for our cash flow and gross profit, but it did have a downward impact on consolidated pricing, which was up 3% as reported. Normalizing for overall product mix, including the natural fines sale, pricing was up 8%. With our continued optimization initiatives, pricing is still expected to be up mid-single digits for the year on an as-reported basis. Aggregate gross margins were down slightly for the quarter, partly as a result of increased delivery volumes and higher fuel costs. We delivered 41% more aggregates this year compared to the second quarter of last year and have implemented delivery surcharges to cover the increased input cost of diesel. However, delivery revenue is typically at cost plus a small margin, and fuel surcharges are at cost, both of which were dilutive to aggregate margins for the quarter.

Even so, we still expect gross margins to be up for the year, and overall, we are pleased with the aggregate product line performance, which saw a 12% increase in gross profit over last year. Ready-mix also had an impressive quarter, with volumes increasing 15%, driven by contributions from our Texcrete acquisition. As we have mentioned, this acquisition is expected to double our volumes in Texas this year. We maintain our forecast shared in the first quarter and expect mid-teen volume growth for ready-mix in 2026. Gross margin improved 80 basis points, thanks in part to the continued traction and strong execution of our ready-mix PIT Crew. Our production cost decreased 6% per cubic yard, resulting in higher gross profit of 21% over last year. Moving to asphalt, volumes increased 24% as a direct result of increased paving in our contracting services product line, with internal asphalt volumes increasing 44%.