Transcript: Knife River Holding Q2 2026 Earnings Conference Call

On Tuesday, Knife River Holding (NYSE: KNF ) discussed second-quarter financial results during its earnings call. The full transcript is provided below. This content is powered APIs. For comprehensive financial data and transcripts, visit View the webcast at Summary Knife River Holding reported a 13% revenue increase year over year, driven by strong operational performance and a record backlog conversion, despite external headwinds.

Adjusted EBITDA increased by 7% year over year, excluding asset sales, but was flat on an as-reported basis due to higher energy costs, project timing shifts, and market dynamics. The company expects to recover the increase in energy costs in the third quarter and anticipates diesel costs to remain elevated through the year. Key strategic initiatives include price optimization, cost control measures, and a focus on acquisition-led growth, with 16 successful integrations since 2023. 6 billion for 2026, while maintaining its adjusted EBITDA guidance of $520 to $560 million.

Operational highlights include double-digit volume growth across aggregates, ready-mix, and asphalt, with gross profit improvements in each segment. Management is optimistic about long-term growth prospects, citing strong demand for infrastructure projects and favorable public funding dynamics. The company remains committed to its disciplined capital allocation strategy, investing in both organic growth and acquisitions to enhance its market position. Full Transcript OPERATOR We will host a question and answer session.

If you would like to ask a question, please press star one to raise your hand. To withdraw your question, press star one again. I will now hand the conference over to Dara Dirks, Head of Investor Relations. Dara, please go ahead.

Dara Dirks, Head of Investor Relations 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. Brian Gray — President - CEO 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, and 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 and 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.

And third was the type of work and timing of project incentives, which affected contracting services. Starting with energy costs, higher diesel prices drove an increase in costs 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 is a 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 P209 project was delayed as part of a modified construction schedule impacting concrete and cement volumes, and in Alaska, an exceptionally cold winter prolonged road restrictions. This kept trucks off the roads until June 15, 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 time frame. 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 Holding 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 the 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. 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, and 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 Holding 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, 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 Ring — Chief Financial Officer 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%, and 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 costs 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%.

As we look at the full year, we now expect volumes to be up high single digits. Our purchasing and storage strategy for liquid asphalt resulted in lower cost and pricing for hot-mix asphalt produced in the second quarter. We also reduced production costs 10% per ton, leading to an increase of 50 basis points in gross margin and a 24% increase in gross profit. As for liquid asphalt, we experienced improved market opportunities in California during the quarter, which helped the product line continue to perform in line with our expectations.

Within contracting services, the increase in paving projects resulted in revenue growth of 20% in the quarter. As Brian mentioned, we saw a decline in gross margins related to market dynamics, primarily the type of work and timing of incentives. We also inherited a number of lower-margin legacy projects at our recent acquisitions in the Mountain segment. As these legacy jobs are completed and replaced with new work, we expect a corresponding improvement in profitability.

Even with our strong revenue growth in the quarter, we also expanded our backlog by approximately $50 million sequentially. 2 billion reinforces the confidence we have in our future performance. Switching to SG&A, our costs continue to be in line with the expectations shared earlier this year. The main variance for the quarter relates to higher gains on sales of assets last year of about $10 million, most notably the sale of our property in Beaumont, Texas.

5%. As we look at the full year, we expect SG&A to be broadly in line with last year as a percent of revenue. Turning to capital allocation, we remain committed to our disciplined approach of reinvesting in our business, including maintaining fixed assets, improving operations, and growing the business. During the quarter, we invested $48 million in maintenance and improvements and $35 million in growth initiatives, including acquisitions and organic expansion.

For the full year, we still expect maintenance and improvement to be between 5% and 7% of revenue, with acquisitions and new organic projects being incremental to this forecast. We continue to maintain a strong balance sheet and liquidity to support our growth initiatives and future investment opportunities. During the quarter, we amended our Term Loan B credit agreement, increasing the borrowed amount by $400 million while also lowering the interest rate.

This transaction finances our recent acquisitions from earlier in the year while also enhancing our liquidity, reducing our cost of capital, and providing additional financial flexibility to execute on our strategic priorities. The second quarter is typically our peak seasonal borrowing period as we build working capital to support construction activity. 1x at this time last year. 5x.

Finally, I'll provide an update on our guidance for the year. 6 billion and reaffirming our adjusted EBITDA range of $520 to $560 million. We are encouraged by the underlying strength of our business. Again, on a like-for-like basis, adjusted EBITDA increased 7% from the second quarter of 2025 to the second quarter of 2026, excluding gains on asset sales from both periods.

Our teams are performing well, and the continued strength of our operations gives us confidence in our adjusted EBITDA outlook. I'll now turn the call back over to Brian. Brian Gray — President - CEO Thank you, Nathan. While there's a little bit of noise in the quarter with fuel and the type and timing of projects, the bottom line is our operations continue to perform well.

We're looking forward to the second half of the year as well as the years to come. Knife River Holding is in a good position to deliver long-term profitable growth for our shareholders. A large part of our optimism comes from the growth opportunities we see. I'd like to spend the last part of today's prepared remarks highlighting two additional drivers of long-term growth and value creation: acquisitions and organic investments.

I'll start with acquisitions, which have been a cornerstone of our growth strategy. We have completed 100 acquisitions since 1992, helping us expand our geographic reach, strengthen our materials platform, and build leading positions across our markets. Our approach is consistent. Our primary focus is on materials-led transactions in higher-growth midsize markets within our footprint or in adjacent new markets.

We are the acquirer of choice in our markets, helping us maintain valuation discipline and prioritize opportunities that create long-term value. Looking ahead, we continue to have a healthy acquisition pipeline. Our markets are highly fragmented with vertically integrated, family-owned businesses, creating hundreds of potential opportunities that align with our strategy. We place particular emphasis on aggregate-space opportunities in markets with strong demand fundamentals and less seasonality.

We believe we are well positioned to continue executing acquisitions that improve the quality, resilience, diversity, and growth profile of our business. Our M&A investment success starts with a disciplined and repeatable process. Since our spin in 2023, we have successfully integrated 16 acquisitions. The first step in our process is keeping the pipeline full by taking advantage of our local relationships with targeted potential sellers.

Second, we conduct rigorous due diligence to evaluate culture, strategic fit, operational improvements, synergy potential, and expected financial returns. Third, we execute a structured integration plan to capture identified synergies, leverage buying power, and optimize performance. We begin capturing these benefits as quickly as possible.