Knife River Aktie

Hello, everyone. Thank you for joining us, and welcome to the Knife River Corporation Third Quarter Results Conference Call. [Operator Instructions]

I will now hand the conference over to Dara Dierks, Head of Investor Relations. Dara, please go ahead.

Good morning, everyone, and thank you for joining Knife River Corporation's Third Quarter Results Conference Call. 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. On the call today, we'll discuss our third quarter performance characterized by resilience and led by substantial improvement in our aggregates business. We'll highlight the actions we're taking to help overcome some near-term headwinds. And most importantly, we'll discuss the initiatives underway that position us to drive long-term profitable growth and value creation. While we have made progress on our margins since launching EDGE in 2023, we've been sharpening our EDGE and have identified additional paths to achieve further growth.

First, let's start with our quarterly results. Our revenue increased 6% from the same time last year to $1.3 billion. Adjusted EBITDA was $272 million, and adjusted EBITDA margin was over 21%. We are especially pleased with our record third quarter in aggregates, where EDGE efforts helped drive improved profitability. We focused on increasing aggregate sales to third parties, and we targeted more paving work, which together supported 10% higher volumes year-over-year.

We also increased aggregate prices mid-single digits while reducing our per ton production costs. Combined, these efforts helped us realize a 240 basis point improvement in aggregate gross margin to nearly 30% for the quarter. These results demonstrate what we can accomplish with our EDGE initiatives. We believe there is potential for meaningful margin expansion across all of our product lines with the largest opportunity still in aggregates.

As we outlined in our September investor update, the external headwinds we faced in the second quarter, market dynamics, project delays and higher fuel costs carried into the third quarter. The impact has been most pronounced in contracting services throughout the year, which Nathan will address in his remarks. We believe these headwinds are transitory. We have seen similar cycles before and successfully managed through them. Our crews are focused on controlling what they can control, and I'm confident in our ability to manage near-term headwinds while continuing to build for future growth. Meanwhile, we are excited about the progress we are making as we implement new self-help initiatives to improve EBITDA and margins.

Let me discuss some of the results we are seeing and the additional steps we are taking. Since our spin in 2023, we've been putting our EDGE initiatives to work to improve our business across the board. These efforts have contributed to growth in our adjusted EBITDA, adjusted EBITDA margin and product line gross margins, highlighted by the 530 basis point improvement in aggregate gross margins. In addition to these results, the work our PIT Crews have done in the past 3 years has also given us greater visibility into the substantial new opportunities we have to improve our operations in a meaningful way.

While EDGE 1.0 will continue, our new Sharper EDGE program adds a new set of targeted line of sight improvement opportunities across 3 areas: operational excellence, commercial excellence and organizational excellence. We have already begun implementing these initiatives, and we expect to meaningfully ramp the program over the next 3 years with increased benefits each year. In operational excellence, we're focused on further improving productivity, reducing costs and making the best use of our assets, and we're seeing results.

Starting in aggregates, we improved plant run time by 4% in the third quarter, and we reduced variable production costs by 5%, contributing to the 29.6% gross margin we achieved. With Sharper EDGE, we're digging deeper into the day-to-day performance at each plant to unlock greater potential. We are focused on plant reconfigurations and automation, improved mine planning and optimizing heavy equipment to each operation. We plan to deploy over $125 million of capital on these aggregate opportunities over the next 3 years. We expect these Sharper EDGE investments will improve aggregate gross profit by approximately $1 per ton.

We're also excited about the benefits we expect to see in the first half of 2027 at our aggregates expansion project in South Dakota, which we expect will add over 1 million tons per year to the regional market at highly accretive margins. These are exactly the type of projects at the heart of Sharper EDGE, and we are pursuing similar organic expansions in other states.

In ready-mix, we have lowered cement costs by 5% year-to-date, even as suppliers added fuel surcharges to deliveries. With Sharper EDGE, we'll continue managing our cementitious materials, focused on bulk purchasing strategies and optimizing our mix designs. At the same time, we aim to improve truck utilization, including more effective load and haul configurations to lower costs and increase production. In asphalt, we have reduced variable production costs by 7% year-to-date despite the inflationary headwinds we faced this summer. With Sharper EDGE, we'll continue to optimize mix designs to manage our costs, focus on maximizing the use of recycled materials and minimizing specialty materials.

And in Energy Services, our Sharper EDGE efforts include plant automation, modernized rail and loading systems and increased tank capacity. These efforts are designed to create efficiencies, lower costs and enable additional illiquid asphalt sales. The second focus area is commercial excellence, where the goal is to ensure we're getting the full value for our materials and services. We're focused on 3 key areas. First, dynamic pricing. We continue to expand the use of pricing and quoting tools supported by real-time analytics. These tools give our teams better visibility into costs, demand and market conditions, so we can price each job with more precision. With Sharper EDGE, we are taking this a step further, and we'll be automating dashboards so regional leadership can track pricing and costs to ensure we are delivering on our targets. We expect this to strengthen accountability to our sales targets and improve customer service.

Second is the standardized use of advanced technology to optimize pricing, improve profitability and make Knife River the supplier of choice. With Sharper EDGE, our priority in this area is the full rollout and adoption of transactional software to give our sales teams greater visibility into pipelines, backlogs, pricing forecast and margins in each of our materials product lines.

Third is our go-to-market strategy. We're taking a more coordinated approach to pursuing opportunities across our footprint. This includes selling more materials to national contractors and developers. We're also marketing our capabilities across our 15-state footprint to customers who are building large, mission-critical projects, including data centers, power generation and semiconductor facilities. Our vertically integrated model allows us to offer these customers a single partner with the materials and services they need.

Lastly, we are focusing Sharper EDGE initiatives on organizational improvements to support our operations and reduce SG&A. We've begun streamlining certain administrative processes to remove inefficiencies and speed up decision-making. We started with a financial modernization initiative and accounting nearly a year ago with the goal of trimming days off our monthly closing process so management gets actionable data more quickly.

At the same time, we are focused on evolving our technology. In September, we hired a new executive to lead the AI transformation at Knife River. This team is actively working to become a true solutions provider to our operations in an effort to help drive profit. They have already delivered an AI bidding agent designed to help our estimators quickly search, score and rank bidding opportunities, which we rolled out last month. They have several projects underway to automate processes and identify cost savings across our company, both at the back office and in our operations.

All of these are tangible initiatives with clear line of sight to improved performance. We believe Sharper EDGE gives us a clear road map to build on the foundation established through EDGE 1.0. It is focused on opportunities we have identified, actions we can control and measurable improvements to the business. Ultimately, it's about driving sustainable growth in adjusted EBITDA, margin expansion and creating long-term value for our shareholders. We look forward to providing more detail on financial targets at our Investor Day in the coming months.

Next, I'll turn the call over to Nathan to walk through our product line performance, capital position and outlook. Nathan?

Thank you, Brian. As Brian mentioned, the quarter demonstrated the resilience of our business, led by substantial improvement in our aggregates product line. We delivered higher volumes than last year across our materials product lines, while our commercial and operational initiatives helped offset the headwinds we experienced during the quarter and contributed to higher gross profit compared to the prior year.

Starting with the aggregate product line, internal volumes increased 13% as we continue to benefit from additional paving activity and our vertically integrated model. Third-party sales also had a strong quarter, growing 8%, supported by demand from data center and power projects. Along with higher volumes, we also saw solid pricing with reported average selling price increasing 4.3% and mix-adjusted pricing increasing 5.9%. Our operational initiatives also continue to deliver results with variable cost per ton declining in each quarter this year.

Together, these improvements helped drive gross margin to almost 30%, the highest level in the company's recent history. Aggregates also became the largest contributor to our gross profit for both the quarter and year-to-date, demonstrating continued progress toward increasing the contribution of aggregates to our overall business mix. Although we still have work to do, we are pleased with the progress we continue to make on this product line.

For the full year, we expect volume growth of high single digits to low double digits, along with mid-single-digit pricing growth and at least 150 basis points of gross margin expansion. In ready-mix, volumes increased slightly during the quarter, supported by contributions from recent acquisitions in Texas and Montana, partially offset by lower residential and commercial demand in the West. Due to third quarter volumes being below our expectations, we now expect full year ready-mix volumes growth of high single to low double digits. Pricing also increased during the quarter, supported by our continued focus on sales training and dynamic pricing. Gross margin was lower, reflecting the geographic and end market mix of volumes during the quarter.

Turning to asphalt. Volumes increased during the quarter with internal volumes rising 10%, benefiting from higher paving activity in our contracting services business. Third-party volumes increased by 5% as we target sales to other contractors for their projects. For the full year, we now expect volumes to increase high single to low double digits. Our operational initiatives also continue to generate efficiencies, contributing to lower production costs at our plants during the quarter.

Gross margin was lower than the prior year, primarily due to increased competition for paving work and higher input costs. For liquid asphalt, gross margin was 18.9% in the third quarter, primarily due to lower sales volumes in certain markets as well as higher material input costs. While Energy Services has faced margin pressure over the past 2 years, it remains margin accretive to the overall company.

In contracting services, revenue grew by 9% during the quarter, driven by higher paving across our segments. This increased activity generated additional demand for our upstream aggregates and asphalt businesses, demonstrating the benefits of our vertically integrated model. The Mountain segment provides a clear example of this benefit where we shifted our bidding strategy to place greater emphasis on asphalt paving and materials pull-through. Mountain asphalt volumes increased by almost 60% with more than half coming from legacy operations.

As Brian mentioned, transitory headwinds from competitive market conditions, higher fuel costs and project delays have had the largest impact on our contracting services business. We saw margin compression as a result of fewer bid lettings in our more profitable markets like Oregon and increased competition in others. As such, we focused our bids where we could pull through our higher-margin material sales, as I noted, with the Mountain segment to offset this pressure.

Our teams continue to rightsize crews and equipment with current market demand and tightly manage variable operating costs, while also broadening the range of work we pursue. These actions, along with maintaining our disciplined approach to bidding, are focused on improving the quality of our work mix and driving better margin performance over time. For the second half of the year, we expect contracting margin to be 8% to 9%.

Backlog ended the quarter at $857 million, down from the prior year. The year-over-year change partly reflects the higher level of contracting services revenue recognized during the third quarter compared to last year. As I just mentioned, we have also seen fewer bidding opportunities in certain markets for the quarter, including Oregon and Idaho, where funding delays have contributed to reduced project lettings. While industry data indicates that DOT budgets are slightly below prior year levels in some of our markets, overall budgets still remain near historically high levels, with approximately 32% of IIJA funding still to be spent in Knife River markets.

We're also encouraged by the bipartisan support for BUILD America 250. Reauthorization of the Surface Transportation Bill through 2031 would provide state certainty for their budgets, and we believe a supportive backdrop for public infrastructure investment across Knife River's markets. As we approach our busiest bidding season, our focus remains on disciplined bidding and building high-quality backlog that supports profitable growth across our vertically integrated business.

Moving on to SG&A. Expenses continue to track the expectations we shared earlier this year. We saw an increase in $4.4 million during the quarter, including $2.8 million from acquisitions completed over the past year. As we fully integrate these businesses, we expect to achieve greater SG&A leverage over time. As a percent of revenue, SG&A was 5.8% for the quarter. And for the full year, we continue to expect it to be comparable to 2025. Looking ahead, we anticipate SG&A as a percentage of revenue to decline as we execute our Sharper EDGE initiatives.

Finally, switching to capital allocation. Our priorities remain consistent. We are investing in our existing operations while pursuing margin-accretive organic and acquisition growth opportunities that offer attractive long-term returns. During the quarter, we invested $37 million in maintenance and improvement capital and $21 million to advance our aggregates expansion project in South Dakota and additional growth investments across our footprint.

For the full year, we now expect maintenance and improvement capital expenditures between 5% and 6% of revenue with acquisitions and organic growth investments incremental to that range. We have the balance sheet capacity and liquidity to support our strategic growth priorities. We ended the quarter with net leverage of 2.9x and expect to continue deleveraging through year-end, finishing modestly above 2.5x. Looking back at the third quarter, our EDGE initiatives continue to deliver improvements across the business, helping us navigate the headwinds we experienced during the quarter.

Based on our performance through the third quarter and our projections for the remainder of the year, we now anticipate revenue of $3.375 billion to $3.425 billion and adjusted EBITDA of $475 million to $505 million. This outlook assumes normal weather and economic conditions for the remainder of the year and excludes the impact of potential acquisitions.

With that, I will now turn back to Brian to provide closing remarks.

Thank you, Nathan. I'd like to finish our quarterly recap where we started. We had a solid third quarter in a challenging operating environment, and we remain very optimistic about Knife River's ability to create long-term value. The short-term headwinds certainly had an impact, and I don't want to minimize that. But we should not confuse near-term challenges with the long-term potential of this company. We have multiple paths to achieve EBITDA and margin growth, and we're running at them simultaneously.

One is through our self-help efforts, which we continue to expand and improve. We're confident our Sharper EDGE initiatives will drive meaningful growth in EBITDA and EBITDA margin. At the same time, we have major organic investments moving closer to completion, including aggregate expansion projects in South Dakota and Texas. I mentioned our South Dakota expansion earlier, which includes plant advancements and a rail network to extend our reach into new markets. We're looking at similar investments in our other regions. Aggregates growth is a key component of our Sharper EDGE initiatives and represents an important path to reaching our margin goals.

Lastly, our M&A pipeline is active, and the industry in our higher-growth midsized markets is highly fragmented with vertically integrated opportunities. We are well respected in our markets and often the acquirer of choice. Whether it's self-help, organic efforts or M&A growth, we believe we are well positioned to capitalize on each of these opportunities to improve adjusted EBITDA and margins. While we have made meaningful progress since going public and launching EDGE, we believe there's much more growth ahead of us. Importantly, we know where those opportunities are, and we are actively pursuing them.

Thank you for the time today, we will now open the call for questions.

[Operator Instructions] Your first question comes from Brent Thielman with Oppenheimer & Co.

Brian, just on the Sharper EDGE initiative, I'm wondering if there's particular markets or regions where you see the initiatives kind of being more impactful to drive margins higher, I guess, post EDGE, wondering where you still see the low-hanging fruit in the business for improvement regardless of market conditions.

Yes. Thanks, Brent. Yes, we're excited to build on EDGE 1.0 with Sharper EDGE. The good thing is it does impact all 4 of our segments. We've got line of sight, very specific opportunities that we've identified to go deploy that $125 million over the next 3 years in literally all 4 of our segments and in all of our product lines. I can tell you, that it's very aggregate-centric and that the majority of that capital is going to be deployed at approximately 23 of our aggregate sites that we have already identified, plant improvements and cost saving opportunities.

So very aggregates focused, very operationally focused, but the commercial excellence side of it and the organizational side of the initiative is also very meaningful. And organizational is a little bit new. We started this about a year ago of really taking a closer look at our internal processes and our systems and really just trying to find opportunities to streamline those processes to reduce our SG&A. And more importantly, get information out into the operators' hands to make quicker and better decisions. So impacts both back office and out in the operations, impacts all 4 segments and all of our product lines, Brent. Very excited to share more details, more specific goals and targets at an upcoming Investor Day.

Okay. I guess a follow-up, may be more specific to contracting services. It's been a tougher year, obviously, understand some of the challenging market dynamics today and those might continue. But are these initiatives you're undertaking, whether short term, medium term, can they return that group to kind of the low double-digit margin performance next year? Or do you need more market cooperation?

The market cooperation, I mean the good news is that we -- there's demand for our services and the products that we provide, specifically asphalt paving. And with the BUILD 250 Act that we expect to be passed early next year and the bipartisan support that we have in each one of our states for ongoing funding, there's strong demand for our products and services.

And so we've had a lull that we've seen recently in some bid letting opportunities, specifically in the third quarter in a few of our markets. But we fully expect that, that is a cycle. It's a cycle that we've been in before and that we'll come out of it that we're very well positioned to go out and capture the work that we do, specifically asphalt paving and the benefit of that is the pull-through of those higher-margin upstream materials, whether that's liquid asphalt, hot mix asphalt and/or aggregates.

So we have initiatives underway. We've got some AI tools that are helping our estimators prospect for better leads that could lead to higher margins where we have the ability to pivot between public and private work. We're still heavily geared towards low bid public funded asphalt paving projects. But we certainly have the ability to pivot and go do more private work when the time is right. And so there's opportunities for us to continue to have margin expansion, Brent, over today's backlog and the performance we've had this year. We actually saw sequentially in our backlog for the first time in 5 quarters that our backlog margin went up at the end of the third quarter compared to the end of the second quarter. So we do see that we're headed in the right direction at contracting services.

Your next question comes from Kathryn Thompson with Thompson Research Group.

My first question is more on the near term for the quarter just reported, particularly an update on the geographic mix and the impact on earnings, particularly on margins. And stepping back, how has this changed over the past couple of years, especially in light of some of the challenges that Oregon has been and where Oregon is today as an overall mix and broadly, how this impacts margins?

Yes. Thank you, Kathryn. I mean region mix has certainly had an impact on our overall EBITDA margins for the year. As you know, Kathryn, Oregon is a very important state for Knife River. And so let me just provide some additional context for your appreciation. Oregon has been Knife River's largest state, both from a revenue standpoint and an EBITDA perspective for more than a decade. And its EBITDA margin has been in excess of 20% for the past 3 years, including this quarter's performance, which is actually higher in the third quarter year-over-year.

So they've been doing a great job of raising the margins, and it's a very important state to Knife River. But as we've discussed for the last 2 years, I mean, the state funding has had significant slowdown and had a dramatic impact on our revenue and its overall contribution to Knife River's overall portfolio. I guess to be very specific with you, Kathryn, I mean, Oregon was about 24% of our total revenue back in 2024. And today, it's less than 17% or a total decline of about 740 basis points as a percentage of our total revenue.

So it's been a challenge. It's absolutely had an impact on our overall EBITDA margin profile, and that has been the challenge. But there's good news in that. I mean, first, that we've been here before with these types of funding issues. And like other states, I've got full confidence being an Oregonian that we will get through and they will get through their funding challenges. There's strong public support to improve Oregon's roads. There's strong bipartisan political support to fund it. There are roads and bridges in Oregon that have to get fixed.

And I can tell you that we are very well positioned to capture that work when it returns. I think as the third quarter results suggest, I mean, our crews, our management team in Oregon are not just standing around waiting for that to happen. They've been actively controlling the things they can control. They're rightsizing their crews and the equipment pools. They're selling materials to contractors doing other work, including private work. And so all of this has led to higher margins for the quarter. And again, continued EBITDA margin performance in excess of 20%.

And so I think it's understatement to say that we're well positioned in Oregon to capture the opportunities when we come out of this cycle that we're in right now. So yes, Oregon has had a big impact on our overall region mix and obviously, our percent of EBITDA margin. Appreciate the question.

Yes. Shifting to backlogs. We are -- during our quarterly survey season, we heard from a wide variety of companies, private companies that state DOTs are slowing lettings to the decreased urgency going into the federal highway bill reauthorization, which we're currently on the CR. My question to you is, are you seeing that in the states which you participate? And how would that impact, if so, is that could explain some of the backlog that you reported in the quarter.

Thank you, Kathryn. I think it absolutely explains why our backlog is down 14%. We obviously had strong revenue generation in the third quarter. But the fewer bid letting opportunities, yes, we have noticed that. I don't know exactly the reason that it's because they are trying to put some political pressure to have Congress pass a long-term reauthorization bill, which we fully expect that they will. It could also be a higher inflationary cost. I mean our customers, specifically the DOTs are getting hit with those fuel escalations and oil escalation clauses.

And so yes, we have seen a slowdown in bid opportunities. Specifically, we've talked about Oregon. We've seen it in Idaho. Idaho is down almost 40% in bid lettings for the year. So we've seen fewer bid lettings in some of our markets in the Midwest. Texas, which is a big state with a massive budget, their bid lettings were down 25% for the year. So we have seen softness in the bid lettings, that's led to a little bit lower backlog. But it also has created the market dynamics that we have been talking about for the last 2 quarters and frankly, had a fairly large impact on our contracting margins in the third quarter and year-to-date. Fewer bid lettings and the same level or slightly more competition is going to create that bid room dynamic that we've been talking about. So yes, we have seen that. Thank you for your question.

Your next question comes from Trey Grooms with Stephens.

So on Page 5, you laid out some of the actions you guys are taking to help navigate some of these near-term headwinds. So just curious, when do you see these actions start to bear some fruit, maybe apart from EDGE. But just in the absence of a meaningful change in the demand environment, should we start to see some improvement going into next year? Or how should we be thinking about the timing there, just given some of those changes you guys have made?

Yes. Let me talk about diesel to begin with and the mitigation efforts that we have been taking, they are bearing fruit. We have recouped the majority of our actual direct impact as it relates to diesel. As we've talked about before, we consume about 25 million gallons of diesel per year. Our third quarter is our largest year, Trey. And we saw -- you've seen at the pumps that the diesel prices went up about 40%. So it was a large impact.

Because of our commercial excellence teams and the work that our sales teams are doing, we recouped the majority of that direct impact to Knife River through our fuel surcharges and the escalations that we're getting from the DOTs. What's lagging and what we're not necessarily recovering full recovery on are more of the indirect costs and the impact it's having on our cost of goods sold and our purchases going into some of our heavier bulk materials into ready-mix and asphalt and other product lines.

So yes, there's been -- the fruits of our labor, we can see that on the energy costs. The delayed jobs, yes, that has been an impact in the second and third quarter. The asphalt paving specifically that we had budgeted and forecasted and built inventories of aggregates to go out and perform is behind schedule, but they are paving now. And all that work gets shifted forward into either later this quarter or primarily next year, including the work at Pearl Harbor out on the P209 project. That was a job that we had forecasted to produce a fair amount of concrete with our on-site batch plant and that has been delayed for project scheduling reasons into next year.

So again, that -- those EBITDA dollars and those impacts that were headwinds for us in the third quarter, we will see those benefits next year. The market dynamics, Trey, is one that, again, we're rightsizing our crews. I'm excited to announce, I mean, that if you look at contracting services and you look at the things that we can control, we actually were able to lower our cost of labor as a percent of revenue by 120 basis points for the quarter. So in other words, the direct labor going out to job sites, the indirect labor that's in the office as a percent of our revenue, we lower that. So we are controlling the things that we can control. We're rightsizing equipment pools and crews for the market demand that we've got.

I think the fix to our market dynamics is to get on the other end of this cycle to get certainty with the infrastructure funding at the federal level, to continue to support the states that we're in to continue to find more funding at the state level. And that quickly fixes itself, and we will see margins expand again there. So not a lot I can do in control on the price of diesel, obviously, or the DOT funding and bid lettings, but certainly are mitigating those impacts. And we are seeing results on those even in the third quarter.

Got it. Understood. And then maybe a little longer term or bigger picture just around Sharper EDGE. So you guys had laid out long-term margin targets of 20%. Again, it's long term, and I understand it's not a straight line to get there, and there's market impacts and whatnot. But my question is, as you look at the things you're laying out here with Sharper EDGE, is that expected to be incremental to that 20% target over the long term? I know we might get more at Investor Day, but just to make sure we're thinking about this right.

Yes. Definitely, we'll provide more detail at Investor Day, Trey, in a couple of months. But no, I would say that EDGE, Sharper EDGE is a continuation of our EDGE efforts that we laid out 3 years ago. Obviously, EDGE 1.0 was very focused on dynamic pricing and most of the margin expansion that we enjoyed at the beginning of that was related to dynamic pricing and getting the full value of our materials. We also launched the PIT Crews out into the field. And I can tell you that the majority of the work they were doing were quick fixes while they're on site, lower capital-intensive improvements and certainly saw and we continue to see. I mean, we've had over 500 basis point improvement since launching EDGE in our aggregates margins.

Sharper EDGE is a continuation of those efforts and taking some of the work that the PIT Crews have done and they have identified very specific larger capital improvement projects to automate our plants to completely reconfigure facilities to change our mine planning. And this is where we have announced the $125 million of investment over the next 3 years that will be very targeted to our aggregate operations. There will be some money spent in other product lines, but the majority of that is going to be aggregates. It's also going to lead to an incremental dollar per ton over what we're currently doing as it relates to those improvements. That's going to boost our way and help us get to those long-term targets.

We've talked a fair amount about the projects in South Dakota, the aggregate expansion project in South Dakota. That will be coming online in the first half of next year. Those are at margins that are highly accretive to our existing margins. Sharper EDGE is to look for more projects exactly like that. So very aggregates-centric, very specific capital deployment program to improve all of our operations, but specifically aggregates. And then I've obviously talked about the reduction in SG&A as part of that. And again, that's one of our multiple pathways to get to the long-term targets that we've stated earlier. So does that help you put that in context?

Yes, it does. Best of luck and look forward to Investor Day.

Your next question comes from Garik Shmois with D.A. Davidson.

I wanted to follow up on the backlog. Just wondering how you're thinking about balancing the backlog dollars with margin. It's good to hear that margin has improved. But will you be at a point here again in which you might need to trade margin for growing the backlog just given some of the DOT headwinds that you spoke to?

Yes. I think that's a case-by-case, market-by-market analysis. And I think you could look at what we did in the Mountain region this last year, and you saw it in the third quarter, they had lower margins, Garik. And we made a very intentional decision to go out and secure additional asphalt paving work. And you can see the benefit. I mean, the overall EBITDA in the Mountain region for the quarter was 10% more than it was a year ago. But we don't have to do that in every market, and we'll be selective. We'll continue to be disciplined, and we'll look for the right opportunities to take advantage of our value integration model.

And so I think more work coming into the pipeline of bid lettings will certainly help that a lot as far as margins, and we are well positioned to capture that. The thing we like about our vertical integrated model is that we can have multiple opportunities to win on bid day. We can bid that work, as we've talked about in the past, as a prime contractor. We can bid that work to go out and do just the specific work that we do as a subcontractor and maybe that's most likely asphalt paving for a larger prime or we will sell our asphalt to a competitor or we'll sell our aggregates to an asphalt producer. I mean we've got multiple ways to win. And so that will help offset the margin challenges in the bid room that we're seeing now. But I think more work is going to definitely help that situation, Garik.

Okay. I wanted to look ahead to 2027. I know we're not there yet, but I was wondering if you could speak to any preliminary expectations you might have regarding volume and pricing, thinking about aggregates primarily, but any other comments you might have about some of the downstream businesses would be great.

Yes. I think the glide path that you've seen us on pricing and enjoying some healthy prices on aggregates is going to continue. I think the demand environment, I think, continues to be strong. I mean, I think this is a lull in bid lettings that we are seeing. The infrastructure scorecard is still at a D plus. There's bipartisan support. And so I think once we get more certainty at the federal level, we will see the public demand continue. I mean, even at today's dollars, most of our DOT budgets are at or near record levels.

And so that's a very important vehicle for us is DOT funding. But we're also seeing good opportunities that is public funding, but not necessarily the traditional DOT. I mean in our markets that we work in, there's a lot of military spending that we're going on. And we're benefiting from one of those big projects right now in Hawaii, another big project up in Grand Forks at the Air Force space up there. So there is military spending that we're seeing. And then obviously, the non-resi side next year, we sit very well in the markets that we're in.

These midsized markets that we operate in have become attractive areas for developers to build some of these larger warehouses, data centers. We've got some of those in our backyard right now, and we will benefit from that next year. We are 12 miles from a very large project outside of Bryan, Texas, and there's data centers being built in Wyoming and in Oregon and North Dakota right now. So we see that demand environment going into next year continuing to be strong. Our commercial excellence team should allow us to continue to have the pricing momentum that we've enjoyed the past couple of years. And then you couple that with our new very line of sight, very targeted initiatives to control costs and improve productivity. I'm excited about what I see in 2027.

Your next question comes from Sherif El-Sabbahy with Bank of America.

I just wanted to put a bit of a finer point on the backlog discussion. I understand you're working on prospecting better margin work. But just with -- to the lower margin that's in backlog this year, how should we think about the impact of that rolling out over the coming few quarters?

Yes. I think an important part of that, Sherif, is that I had mentioned that for the first time in 5 quarters that we have seen our backlog margin improve sequentially from the end of the second quarter to the end of the third quarter. And so I think that's something I've been watching very closely. And I think that's a good sign. The other thing that I can tell you is that because we have the ability to pivot and go look at private work and not just public work and that our crews are very geared to go out and do that type of work, that should also help that situation.

And the ultimate solution to this problem is, again, to pass the long-term reauthorize the Transportation Bill at the federal level and start fixing the roads and the bridges that we know that the engineers and the public works directors and the state engineers have said need to get fixed. And so that is a cycle that we've seen before. We lived through this before, and we've seen our backlog fluctuate before. So I've got good confidence that we'll continue to rebuild that backlog. We're going into the heart of our bidding season right now. I mean our busiest bidding periods are from November through April, especially in the markets that we operate in. And so anxious to give more updates on our backlog and where we see that going again as the year progresses next year.

And then I understand you're going into the bidding season and the federal funding is sort of a key item to monitor. But you mentioned there's been a few more bid opportunities this quarter. What other signs are you watching or what sign points are you looking for to see lettings improve here?

Yes. We have -- so the new AI software called Prospect, it's an internal tool that our team has recently built. That is yielding some new information that we had not seen before. We're broadening our reach and getting data points that are different. I can tell you that some of our states that are slower are looking at adjacent states to go into, specifically Oregon going into Washington and other adjacent states we may not be currently working in.

So we are aggressively pursuing work. We know the importance of our vertically integrated model and that the vehicle that the contracting services provides to pull through additional materials is important. But I'd also look at our third-party sales from our materials divisions to our competing contractors on bid day. I mean if we don't get the work as a contractor, I can tell you, if you look at our third-party sales, those have increased, and that's a very concentrated effort that our commercial sales teams are focused on is not putting all the pressure on bid day to build backlog, but to go out and get the higher-margin materials that we benefit from on the material side of the business.

Your next question comes from Timna Tanners with Wells Fargo.

I want to dig in a little bit more -- I wanted to ask a little bit more about the project delays. And of course, when you talk about some of the measures being transient, it would be helpful to understand what gives you that conviction. From past cycles, when you do see these project delays, have they resulted in eventual projects going forward? Or do they result in cancellations at some point?

Great question. So the project delays that we've talked about, there's 3 very specific projects. It's the Highway 6 project in Texas, the Highway State Route 190 in Texas and then the P209 concrete supply project in Hawaii. Timna, we've not seen any projects that are part of our backlog that have been canceled or delayed and/or waiting for funding. These are scheduling delays, weather-related delays really just phasing of construction activity. We're pouring water -- we're pouring concrete underwater in Hawaii on that dry dock at Pearl Harbor, and they needed to finish driving the piles before we pour the concrete.

So this is not a matter of funding or uncertainty where we're worried about these projects being delayed. This truly is just construction phasing is related to permitting, engineering and those types of events out on the job site. So nothing in our backlog have we seen be delayed or potentially canceled because of any kind of funding situations.

Okay. I wanted to ask also, you talked about continuing to look at M&A, but you're also a little bit outside of your target leverage ratio. So do you pause M&A until you kind of get back in that range? Or how are you thinking about the cadence there?

I'll let Nathan take that one.

Yes. Thank you for the question. And so if we go back to a few quarters, well, first, just let's set the landscape for where our balance sheet stands today. We do have a very strong balance sheet. In fact, our liquidity is at $566 million of that $118 million is cash. So one of the first questions we get is, are you able to still respond quickly if there's an opportunity? I think our liquidity position indicates that. From the strength of the balance sheet standpoint, back to your at 2.9x, the thing I would remind you is that this is a part of the year to where we start to get back towards net leverage near our target of 2.5x. We do anticipate being modestly above that.

But what I have shared in previous quarters, which is important, is that we would look at going near 3x for the right organic project for the right acquisition project, keeping in mind that we would look at the cash flows, the returns and margins of that project that it would quickly get us back to that 2.5x. So Timna, I think from a balance sheet standpoint, good liquidity, cash flows this year from a cash flow from operations to EBITDA conversion, probably close to 55%. And then the willingness temporarily to go to that near 3x, all indicate that if we do have good opportunities come through, we're still in a very good position to pursue them.

Your next question comes from Chris Ellinghaus with Siebert Williams Shank.

Brian, you seem confident on the reauthorization, but have you got any concerns that particularly we'll see what the election looks like today. And even though it may be pretty universal across parties, maybe that's not necessarily the primary goals initially of the new Congress. So do you have any concerns about the timing of reauthorization at all?

I don't have any concerns that they're going to get it done, Chris, because they have to, and they know that, and there's full support for that, and they understand the cost of delays. Our industry associations have done a great job in educating legislators in Congress that the longer you wait and kick the can down the road, the more exponentially expensive it gets. And so they all understand that.

And so yes, I mean, the timing, I would say I'm not going to speculate on that other than the work has been done. There's been a lot of very good work done in the last Congress. There is full support at the administration and in both the House and the Senate on both the Democrats and Republican side. So I do expect that, that's going to get passed sooner than later. It's a top priority.

I mean, the economic -- the economy that we've been talking about and you turn on the news, you hear it every day, a very important part of the economy is to keep freight and people moving and not in congestion and that you have safe roads and bridges to be driving on. And everybody agrees with that. And so yes, I'm not going to speculate on the timing, Chris. I just have full conviction that it's going to get done sooner than later, like it always has, and we'll stay tuned and watch the election results tonight.

Okay. Similar lines, have you got any update to your sense of sort of the cadence of when Oregon will address sort of rightsizing its DOT budget?

Yes. They're talking about it a lot. They're doing more than talking. I mean they've got work groups. They're traveling the state. They're prioritizing projects. They are reorganizing the department. They are looking for leadership. There's a lot of activities going on in Oregon. This has been a couple of years down the road now, and this started early in '25.

And so again, Oregonians, both taxpayers and engineers and roadmasters know the cost of delaying these projects, Chris, and they become much more expensive to fix and consume a lot more materials the longer you wait. And I can tell you there are lots of potholes and cracked roads and aging bridges that have got to get fixed in Oregon. So everybody knows that. They're working hard on it and fully expect that when the time is right for the legislature to come back into session early next year that that's going to be one of their top priorities.

Your next question comes from Ivan Yi with Wolfe Research. Moving on to Rohit Seth with B. Riley.

Just on the 4Q guide, you got the range of $95 million to $125 million. You did about $119 million last year. Can you just walk us through the scenarios that get you to the high end and the low end and the midpoint?

Yes, I'll talk kind of the puts and takes on that. We obviously, Rohit, guide to normal weather. And as you know, as we're entering into November, December, that can fluctuate a lot. And so last year, we had very favorable weather in the fourth quarter and performed work literally up until a couple of weeks before Christmas. And so if we continue to -- if we were to have favorable weather in November, December, that would put us toward the high side of that. If we get some early winter, that really does shut a lot of our operations down.

And so that would probably be the largest put and take for the remainder of the year. Obviously, we've talked enough about this, but we are out paving right now, and we have a schedule to go pave in Texas on those 2 big projects. And so we've put that at our midpoint of the paving schedule that we've got. There are some hopes that they can expedite and get some additional tonnages out of there yet this year that would put us a little on the high side. And -- but we've also seen a lot of delays for the last 6 months. And so that would put us on the low side.

The other thing that I'd say that this time of year, we have -- we're closing out jobs, and there's opportunities to earn a fair amount of quality bonuses for the work that we do. And those incentives, those bonuses get paid typically at the end of the job and as do some of the fuel escalators and oil escalators. And so depending on the timing of us closing out some of the work that we're currently working on, and some of the lags that we've seen of getting the fuel escalations, that could have a positive or negative impact on the fourth quarter. So that's also baked within that range. So those would be the large puts and takes for the fourth quarter.

Yes. The only thing I'd add to that. It is an important point you made, Rohit, with the end of the quarter for us as it relates to the bonuses and the incentives that Brian has talked about, we actually see in the fourth quarter for contracting services if you look over the last 4 years, historically, that fourth quarter for contracting services actually has higher gross margin than the third quarter and actually the year-to-date on average. So as Brian talks about that, this is something that we do see. It depends upon, like you said, as those jobs close out, but that opportunity has traditionally been good for us and could be something on the high side as they close out that we have traditionally seen.

Is that why your contract assets are up, more than doubled from last year?

Is that why our contract...

The contract assets on the balance sheet?

Yes. Part of that also has to do with -- from an accounting perspective, we did do a change year-over-year with how we do need to book retention. And so last year, that was part of the receivables. This year, it's actually part of the cost in excess account. So there was just a change in accounting. We have a footnote for you in the 10-Q that helps explain that further, but that's really the key change that occurred year-over-year for our receivables as well as our growth.

Okay. And then just back on the volume. You cited some lettings in key states, Idaho down double digit. I'm looking at my contract award data down about 15% for your footprint over the last 12 months, that's going to hit you in this fourth quarter and the first half of 2027. And so I'm just curious, you guys are -- do more infrastructure than some of your peers. And just curious how you think about volumes in the first half of 2027. Do you have enough data center work and other private work to offset that? Just are you expecting like down volumes in the first half, maybe better second half? Just curious on how you guys see that flowing through.

The next 3 months are very important for us. And we have a lot of this. It is the peak of our bidding season, November, December, January, February is really where the majority of our bidding work is done. So yes, our backlog is down about the same amount that your analysis shows. But we have time to make that up. We don't perform a ton of contracting services work this time of year. We're out securing it. So that can be a very important part of this. But yes, we do have some very good projects that are in our backyards that are non-resi private jobs that are large impact projects that we are currently selling materials to. And on the materials side of the business, that's what gives us really strong conviction that we'll continue to have materials volume growth going into next year. So including this fourth quarter.

The next question comes from Ivan Yi with Wolfe Research.

Can you hear me now?

We can.

Sorry about that. Just want to hear your comments on the drivers of gross margin improvement going forward. Do you see more potential upside from pricing or more so from cost cutting? Just want to see what's the bigger lever for you.

No, I appreciate that. And so we're pulling on both levers. And I think I've mentioned in the past that the most meaningful margin expansion that we've had for the part of EDGE 1.0 really was implementing dynamic pricing and getting full value for our materials and continue to optimize pricing through the dashboards and the automated tools that we've got. We certainly have benefited from the work that the PIT Crews have done out in the operations, but I do believe that the Sharper EDGE initiative really is geared more on the cost structure side of things, whether that's back office or out in the operations in all of our product lines, those line of sight, very targeted opportunities are geared to increase production, to increase the sales capabilities, but also primarily geared to lower our cost. And so that's where we would see margin expansion going forward. Thanks, Ivan, for that question.

And lastly, just on, since it's election day, I would love to just hear your thoughts on the Oregon governor race, expected impact to spending depending on the outcome. Just any color there.

Yes. No, I think we'll be paying attention to that race very closely. Both candidates, obviously, like all Oregonians, they support safe bridges and smooth roads. There's no debate around the support for that. And so certainly, when I get back to the hotel here in Bismarck, I'll be turn on the news and watching the results in Oregon. So I appreciate that.

This concludes the Q&A session. I will now turn the call back to Mr. Brian Gray for closing remarks.

Thank you. As always, we want to thank our teams for the work they put in this quarter and everything they're doing to position Knife River for future growth and long-term success. Thank you for joining the call today. We look forward to discussing the details of our Sharper EDGE at our Investor Day in the next few months. Thank you.

This concludes today's call. Thank you for attending. You may now disconnect.

Hello, everyone. Thank you for joining us, and welcome to the Knife River Corporation Second Quarter Results Conference Call. [Operator Instructions]

I will now hand the conference over to Dara Dierks, Head of Investor Relations. 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. 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 cost of about $10 million year-over-year. With the mitigation practices that 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 a 1 to 2 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 are scheduled to produce a significant amount of asphalt and pave 2 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 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.

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. 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 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?

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. Our second quarter backlog of $1.2 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. Adjusting for these gains, the SG&A increase would have been 3.5%. 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. This resulted in net leverage of 3.2x at the end of June, compared to 3.1x at this time last year. Looking ahead, we expect to end 2026 with no borrowings outstanding on our $500 million revolving credit facility and cash on hand, leading to an anticipated net leverage near our long-term target of 2.5x.

Finally, I'll provide an update on our guidance for the year. Based on our performance to date and our expectations for the remainder of 2026, we are raising our revenue guidance to a range of $3.4 billion to $3.6 billion and reaffirming our adjusted EBITDA range of $520 million 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.

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 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 2 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, midsized 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 aggregates-based 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. While year 1 is often characterized by cultural, back office and operational integration, the most meaningful financial benefits from synergies typically materialize in years 2 and 3 as the business becomes fully merged into our platform.

Strata is a great example of this. The acquisition of Strata expanded our presence in key markets within the central region. It added significant aggregate reserves and rail distribution sites, strengthened our vertical integration and came with a highly respected workforce.

As part of the acquisition, we focused on executing our integration plan while preserving the strengths that made Strata successful. More than a year later, we are pleased with the contribution Strata has delivered to our Central segment and the synergies that we've captured. Supported by a record North Dakota DOT budget and the full integration of the 2 teams, we expect Strata to have a record year in 2026 and outperform our original EBITDA projections by more than 15%. Strata demonstrates how we identify high-quality businesses, integrate them successfully and create value through our platform.

In addition to acquisitions, organic investments are an important component of our long-term growth strategy also. Over the past 18 months, we invested approximately $140 million in organic initiatives, primarily focused on aggregate reserve expansions and greenfield development projects to strengthen our position in existing markets.

Similar to our acquisition strategy, we take a disciplined approach to organic investment opportunities. Once projects are identified by our local operating teams, we evaluate each opportunity with rigor similar to any of our acquisitions, including market opportunity, long-term growth potential and meeting our financial criteria. As a result, these projects are expected to generate returns that exceed our cost of capital and are accretive to our margin profile.

One of our largest organic investments is underway in South Dakota. Over the past several quarters, we have invested approximately $85 million to develop a strategic rail-served quarry near Sioux Falls that will expand our market reach, enhance distribution capabilities and serve as a long-term replacement for our primary quarry there. The quarry contains approximately 70 million tons of high-quality quartzite reserves and has access to 2 Class I railroads.

The first phase expands rail service in South Dakota and establishes rail distribution into Nebraska and Iowa, including support for our Sioux City operations. This phase is expected to be operational in the first half of next year. This investment strengthens our transportation network, lowers delivery costs to our plants, improves supply flexibility and positions us to provide high-quality aggregates to customers across the region for decades to come.

Another example of organic growth delivering results is a prestressed facility we built in Spokane, Washington. We discussed this investment previously, but its value continues to grow as demand increases for the products it provides. The Spokane plant is a state-of-the-art facility that is unique to the Western United States. It has expanded our production capacity, geographic reach and ability to serve complex infrastructure and commercial construction projects.

In the second quarter, we secured a substantial contract to supply prestressed components for a semiconductor facility in Idaho. We would not have been able to pursue and win this project without the capabilities and scale provided by the Spokane plant. Beyond this large impact project, we're seeing increasing opportunities in data centers, advanced manufacturing and from other large-scale infrastructure developers that desire prefabricated concrete products. We also believe the facility is well positioned to benefit from future bridge replacement and infrastructure spending, providing a strong runway for growth in the years ahead.

Ultimately, Spokane and Sioux Falls are exactly the type of organic investments we seek to make, projects that enhance our capabilities, increase profitability and deliver attractive long-term returns for shareholders. Acquisitions and organic investments are an important part of our growth strategy, along with successful execution in our legacy operations.

Before we conclude, I'd like to recognize our team for delivering the safest second quarter in our company's history. This achievement reflects our team members' commitment to our safety culture and looking out for one another on every task, every job, every day.

Looking ahead, the fundamentals of our business are strong. With the majority of the construction season still in front of us, our focus is clear: execute safely, serve our customers well and capture opportunities across our markets to improve profitability and drive long-term value creation. Thank you for your time today. Operator, we're now ready to open the line for questions.

[Operator Instructions] Your first question comes from Kathryn Thompson with Thompson Research Group.

Thank you for taking my questions today, and also for the details that you gave in prepared commentary. I just want to circle back to some of the headwinds in the quarter, more specifically walking through SG&A and the gain on sale last year and how that impacted optics, particularly in Q2? And how does this impact the optics' first half performance? And more importantly, what can we expect in the second half of the year?

This is Brian. And I will let Nathan take the first part of that question and specifically talk about the prior year's gains on asset sales and the impact on that had on SG&A and our EBITDA -- adjusted EBITDA. So Nathan?

Yes. Thank you. Kathryn, good to hear from you. I'm glad you brought that up. I do want to take that in pieces. I think it's an important part of understanding how the quarter really performed. So as you noted, it's an SG&A, which was up about $12.5 million in the quarter compared to the prior year. In our SG&A, we include the gains on the sale of assets, which I noted in my remarks. When I say asset sales, I'm just talking property, plant and equipment sales. So last year, we had about $10.3 million in gains on the sale of assets, most notably a Texas sale of property land, this year we've got about $600,000. So there's a considerable difference between the 2 years in the gain on the sale of assets.

If we set those aside and first just look at SG&A, our costs were actually up 3.5% within SG&A, again, setting those gains aside. So first of all, I mean, we continue to manage our SG&A well, and I'll just note here, we expect overall, excluding gains -- or including the gains, excuse me, to be comparable to last year as a percent of revenue.

The next part here, I want to just refer to Page 4 of the slide deck. I think it's really helpful to kind of see how this comes together as part of our presentation. When you take a look at these gains and do the comparison of adjusted EBITDA, you can see that the overall company performed very well, and I mentioned this in my prepared remarks, we're up 7% on adjusted EBITDA, setting aside these gains. So Kathryn, I do appreciate the question. The gains kind of represent more -- not necessarily onetime, but they're not indicative of how the operations are actually performing. So I think it's really helpful to take a look at that Slide 4 and take into account the gains on the sale of assets.

And Kathryn, I'll just add on to your question, as far as the operations performing well specifically. Our revenue was up 13% and volumes across the board for all of our product lines were up double-digits. That led to a double-digit increase in gross profit as well across all of those product lines. And so the demand remains strong. We're very happy with what we're seeing with pricing, specifically adjusting for product mix on the aggregate side, an 8% increase. We're very pleased with that. And then the KPIs within the operations, the self-help initiatives we've talked so much about, there's a number of different indicators that, again, the underlying business, the performance of the operations was very solid for the quarter.

Okay. And the follow-up on that is sort of implying the underlying business is running pretty well, particularly in the product line with some headwinds with contracting services. But maybe discuss what is driving some of those fundamental gains that you're seeing? Is it by region? Or is it by product mix? Just any additional color on some of the gains in the quarter.

Yes. As you saw in the earnings release, the Central segment certainly had an outstanding quarter, 21% better in EBITDA year-over-year. And that's being driven by a number of different things in the Central region. We've made a concentrated effort, as we've talked about as far as our EDGE initiatives, to increase third-party sales. And part of our product mix adjustment this quarter was impacted from the 630,000 tons of natural fines they sold, but they did that in packages with some higher-valued, higher-margin materials.

And so we've done a great job at increasing our third-party sales in the Central region by 34% for the quarter. Probably the biggest movers in the Central is really the North Dakota DOT budget and the fully integrated teams at Strata and Knife River working together to go out and capture that work. And like I mentioned in my prepared remarks, very excited to see what we expect to be a record year for Strata and, frankly, about 15% better than we even modeled. That's doing great. That acquisition is performing as expected and, frankly, better.

Same -- so is Texcrete. Texcrete is having an outstanding year. They were impacted by weather for the quarter. They do deliver and supply a lot more residential, lower specification concrete. That's had a little bit of an impact on our product mix on pricing. But as far as integration, we were able to capture early synergies as it relates to our purchasing power. And we are continuing to integrate those teams together and expect that Texcrete is going to continue to perform well.

The last thing I'll just mention is we have several data centers in the Central region, and we're supplying materials to support construction around a data center up in Fargo. And there's a number of different end markets that are performing well, not just in the Central, but throughout all of our regions that would be driving those double-digit volume improvements across all of our product lines. So a number of good things going on there, Kathryn. Thanks for the question.

Your next question comes from Brent Thielman with Oppenheimer.

Brian, I apologize, my line dropped towards the end of your closing commentary. If you talked about this, again, I apologize. But if you look at what's transpired through the first half, including the second quarter, do you still think you can get to the upper end of your guidance range for 2026? And then -- and maybe just also with that, can you level set us on kind of the seasonality effects built into the guidance? You've been pretty acquisitive. I'm not sure if that's kind of morphed anything from what you typically see.

Yes, Brent, I will -- so the headwinds -- the external headwinds I talked about in my prepared remarks, they add up to $24 million-ish. And a large part of that, we will not get back this year. It would be moving into next year or it would just be an impact that would bring us back to more of the midpoint of our guidance. And so those 3 external factors that I mentioned, energy, that's a $6 million headwind impact for us for the quarter. We expect to get $3 million to $4 million of that back in the third quarter as we recoup our escalation clauses from those public contracts.

So we will get a portion of that back. We had about $10 million of delayed projects, $2 million or $3 million down in Texas, $3 million in Hawaii, a couple of million dollars up in Alaska with the late start. I would say that our crews were scheduled to pave 200,000 tons in Texas for the quarter on those 2 big impact projects and performed less than 15,000 tons. Our crews are also already scheduled to continue to pave on those jobs for the rest of this year. And so that work really is going to push into next year because we already had a full schedule of paving in Texas. So that will actually be pushing into next year.

As you know, the construction season is relatively short up in Alaska. So those projects that were delayed would also be pushed into next year. And then the P209 at Pearl Harbor in Hawaii, we're hopeful that can start late this year. But I would say that the majority of that benefit, again, that lost EBITDA for the quarter is going to get pushed into either late fourth quarter or early next year. So Brent, I think that is the delayed projects.

As it relates to the timing and the type of work as we categorize that as the market dynamics that are going on, really, the timing of incentives, the difference this quarter versus last year's quarter, we had $8 million less in project gains. And those project gains come from performance. They come from value engineering and change orders and they come from quality bonuses. Because we had so many larger new road construction projects that had multiple scopes last year, we were able to take advantage of some value engineering change orders to the tune of a difference of $8 million.

We will get incentives. We will get paving bonuses on that lower margin, lower-risk asphalt paving work, and we did a lot more of that work this last quarter, 44% more in Q2 than we did last year. That comes with a different timing of incentives. We will get those incentives in a 1 to 2-month lag from when we perform the work or in some cases, we don't get the smoothest bonuses until the job is completed. So the timing and the type of work is going to have about an $8 million impact for the quarter, and we'll get part of that back later in the year.

So Nathan, I'll let you answer the last part of the question.

Brent, good to hear from you. Just to make sure in case you did drop off there, I'll reiterate a couple of pieces, and then I'll get to the other part of your question in terms of kind of the cadence for the rest of the year. So we did raise our revenue guidance in part due to acquisitions and the strength of the quarter on revenue and then holding adjusted EBITDA margin range similar to what we gave earlier in the year, and Brian went through a lot of the pieces for that.

So we are guiding more towards the midpoint of our guidance range that we gave earlier in the year. And as you're looking to see how to model that for your look-forward pieces, we're very similar actually to what we see in the prior year in terms of when EBITDA will be recognized. So we're actually looking at about 55% of our adjusted EBITDA to be generated in the third quarter and the remainder, of course, into the fourth quarter.

The last thing I'll say just from an administrative standpoint is these guidance ranges are based on normal weather. Last year, we did have a pretty good fourth quarter and as well as energy costs continuing the way they are without a major change in those as far as upward side on diesel, for example, and operating conditions remaining relatively the same. And of course, no impact to future acquisitions. So Brent, hopefully, that helps you on the modeling side as well.

Okay. I appreciate all of that. Maybe just as a follow-up on contracting services. Should we be thinking about margins closer to what you saw a year ago as we work through the second half? Or is there still some overhang? I think you talked about some acquired business that you still have to work through, which carries lower margins. There's still some overhang there that might prevent that?

Yes. No, Brent, you're right. There is some overhang with some legacy projects that we brought on from recent acquisitions that will have an impact on margins for the second half of the year. We also plan to recoup some of those diesel costs that I talked about that we incurred in the second quarter. That will help offset that in the second half of the year. And then like I mentioned, we have a lot of asphalt paving and that asphalt paving typically has performance and quality bonuses that get paid towards the end of those projects. That will help offset that. So yes, I think you can look at our margins in the second half of last year and that we should be in line with those margins in the second half of this year in our contracting services.

Your next question comes from Trey Grooms with Stephens.

Quickly on -- I guess, just on the energy impact, thanks for some of the detail there. But any way to kind of parse out specifically impact on the aggregate side, kind of how you're navigating that? And then I know there was a target for this year, 200 basis points of margin expansion there in aggregates. Is that still on the table for this year, just kind of given the headwinds and we've seen from energy, et cetera?

I appreciate the question, Trey. And yes, the increased energy costs, specifically fuel, did have an impact on our aggregates for the quarter. Frankly, more so on the margins, like Nathan mentioned, we did a good job at charging our customers a fuel surcharge to cover most of that cost. Now when we do that, it's at cost. And so there is no margin on that. And we actually delivered a lot more materials this year than we did last year to the tune of -- I think it was 40% -- yes, delivery was up 41% -- delivery volume was up 41%. So when we deliver materials, as you know, our margin is -- it's an all-in margin, just like our pricing is all-in.

Our delivery typically is at a lower margin than our aggregates are at the plant. And then with these fuel surcharges being at cost, that had an impact on our margins for the quarter. And we see that going forward, and we do see that going forward. So we fully expect to have margin improvement in aggregates. I don't know that we're going to be able to hit the 200. I would say that a safer bet right now would be in that 100 basis point range based on what we're projecting for the continued impact on fuel, the fuel surcharge, the increase in delivery, some of the other headwinds. But like I've mentioned before, we like what we're seeing on pricing. I like the KPIs and looking at our variable operating costs and aggregates being down 1% in light of these headwinds year-to-date. And so the KPIs, the PIT crews and our dynamic pricing is helping us certainly navigate those headwinds.

Got it. Okay. And then there's a lot of noise in the quarter, especially on contracting services. And just to be clear, and there's a lot of stuff going on, clearly. But is there -- are you having to get more aggressive to win work? Is there a more competitive kind of backdrop as far as the bidding process goes? Or is this all just a lot of these things just kind of happening at the same time that has created a lot of these headwinds that are largely transitory?

No, that's a great question, Trey. And I appreciate you asking that. And every market and every product line is different. But yes, I mean, there are competitive dynamics that are feeding into that lower margin, specifically on contracting services. We've talked a lot in the past about Oregon. Unfortunately, Oregon's bid lettings did not result in any additional paving that we secured. There was only literally less than $5 million of bid lettings in Oregon for asphalt paving. That caused contractors in that region that are highly mobile to travel to adjacent states, that could be Northern California, Idaho, Montana.

So yes, there is bidding dynamics that are happening in the bid room that would be putting some pressures on our contracting services margins. There's other markets that -- we have very healthy DOT budgets that are helping offset that. And so I would say that the bidding dynamics are competitive. We made the conscientious decision. We've talked about this previous quarters, to get more aggressive because we know there's a benefit of the pull-through of those higher-margin materials. You can see that our gross profit had double-digit increases in all of our upstream materials. And that partly was a result of that conscientious decision to bid asphalt paving at a more competitive margin to go out and secure that work. So I think it was the right decision, and we'll continue to monitor that and be very transparent with you guys about that.

Your next question comes from Timna Tanners with Wells Fargo.

I wanted to actually really ask about some of the dynamics in terms of the rains you talked about in Texas, I think you were able to recoup in Q3? Or was that also pushed out? And on the fires, I know Spokane has been hit really hard and Oregon, I hear a lot about. So I just -- I hope your teams are all safe and wondering if you have any impact from those as well.

I appreciate that, Timna. And the devastating fires in Spokane in the last couple of days, we do have operations in Spokane. I talked to our General Manager, Vice President. And fortunately, our team is safe, but it did not have an impact on our production at our prestress facility, is an indoor facility. And so -- but certainly, the fires and the smoke and the heat can have an impact on paving projects and working outside. I would say that's not been material for the month of July, and we've been able to navigate that fairly well.

Your first question -- what was your question, Timna, I apologize?

I think same -- I was just trying to understand, so you said that Hawaii and Alaska might have to spill over into 2027 to recoup. And I was just wondering if -- just to clarify any of the other impacts like Texas, in particular, if you can recoup lost volumes by the end of the year.

Yes. No, I would say that in Texas that our crews were scheduled to pave on those 2 large impact projects for 7 or 8 more months starting in that second quarter. We were planning on being very busy. And so that volume that we missed in the second quarter due to schedule changes and weather delays, most of that work on those 2 particular jobs will be pushed into 2027. We still plan on being very busy in Texas, having a very solid year in Texas.

Part of that is because we had such good backlog down there that we really have been scheduled. We have some capacity left to take on additional work there. But I'd just say that the majority of that missed opportunity, specifically in Texas, as it relates to contracting services on those 2 impact projects, most of that would be get pushed into 2027.

Your next question comes from Rohit Seth with B. Riley Securities.

Just on the West revenue, it was down about 9%. It says there's less public work in Oregon in the West and your backlog was down 16% or so. In February, you said the 2026 Oregon outlook would look more or less like last year and the backlog had recovered. So just curious on what's changed heading into the second half here?

Yes. Certainly, the West performance was not all related to Oregon. And so I'll talk about each one of those states separately. I'll start -- I mean, we've talked about Hawaii, the delayed P209 project, we think had about a $3 million impact. The wet weather we had late in the first quarter that carried into the second quarter in Hawaii certainly impacted our cement and ready-mix sales. So definitely an impact in Hawaii that did not meet our expectations for the quarter. Same with when you don't open up the roads to dump trucks and ready-mix trucks until June 15 in Alaska, that had several million dollar impact to us in the quarter. If you look at our West results this quarter versus last year, certainly had an impact.

And then what's going on in Oregon and the impact it's having on Northern California and the competitive dynamics that those market dynamics did have an impact for the quarter. And so we had been talking that Oregon was stabilized and that we expected that their performance from the operations to be broadly in line with last year. That was the case for the first half of the year. We were slightly up in the first quarter. We were slightly down from what our expectations were. And so I could say that for the first 6 months that we were broadly in line with our expectations, which was to be similar to last year.

So for the second part, which kind of feeds into the guidance, because we were very disappointed with the amount of work and the type of work that bid, the very limited amount of work that was new that we were expecting to pick up and have some better improvements in that DOT and other public agency work, that did not come to fruition in the second quarter. And so I would say that from our expectations of being broadly in line for the entire year, that I think that we're going to be slightly down from that. I would say there's some good signs in Oregon that is important for us to look at. And as we continue to look at aggregate sales specifically in the Portland, Oregon market, those -- that's a good indicator of what's going to happen in the state. Usually, they're about a year ahead of what happens down in Southern Oregon and over in Central Oregon.

And we continue to see solid sales that are up 20%, 30% in volumes in that Portland, Oregon market. And so that is a positive sign. The last thing I'd say is in prestress in Oregon. That's part of our Oregon operations. They picked up a very large, very good contract with the semiconductor facility in Idaho, and we expect that to begin construction and see some improvements and impact to our EBITDA later this year and primarily into the beginning of next year. So some good things going on there. So that's kind of what happened in the West.

Okay. And then just on the mix on pricing trends, you had a pretty wide gap between reported and mix adjusted. I know that's affecting aggregates, maybe to some degree, your concrete with the acquisitions layering in and asphalt ASP is down a bit. So maybe you can talk about how do you see pricing trends trending over the next couple of quarters, how that mix adjusted sort of unwinds and gravitates towards reported? Any color would be helpful.

Yes, I'll let Nathan address that one.

So yes, you're right. There are some differences there that are worthy of additional explanation. So as reported, we had -- and I'll talk aggregates first. We had average selling price of 3.2%, I think, was the number. In that number, and I talked about this in my prepared remarks, and Brian mentioned it just a moment ago, we did have a sizable amount of natural fines that we sold, 630,000 tons. It's part of an effort for commercial strategy, but it does have an impact on average selling price. And so what we did with the product mix adjusted is we took a look and said, what are the products actually doing on a per product basis? Are we seeing the price increases that we talked about earlier in the year? And what that indicates is that we are.

So on a product mix adjusted basis, kind of like-for-like, what would this look like if I sold the same last year as I did into this year with the pricing increases, we're up 8% on a product mix adjusted basis. For the rest of the year, what we're giving as guidance is we are doing it on an as-reported basis. So as we continue to optimize our pricing, we see those revenues come in from surcharges and delivery. We expect our average selling price to be up mid-single-digits on an as-reported basis for aggregates.

On ready-mix, you just mentioned, you noticed the pricing there. A good portion of that does have to do, and we've talked about this a little bit in the past, is just related to the geographic mix. Brian talked about Texcrete having the residential lower spec material. That does come at a different pricing. Still good margin work for us, but it is a different pricing profile. And so as Texcrete and Texas ramp up relative proportionately to the rest of the company, we do see that average selling price change, again, but not indicative that we're not getting the price increases that we're looking for in those particular markets.

So on a go-forward basis, not necessarily giving guidance on ready-mix or hot mix because there's a lot of contingency there with what cement prices do, what asphalt prices do. But what we've seen so far is positive. And again, on aggregate side, seeing good pricing dynamics for us going forward.

Okay. And what about asphalt?

On asphalt, I think Nathan mentioned, that's heavily influenced by the input cost, the energy costs specifically for natural gas and liquid asphalt. So we like our price over cost spread for the quarter. I think you might see some headwinds in that into next year as we start to -- we used a fair amount of lower priced secured asphalt in our mix last -- the first half of this year. That will begin to change. So I think you'll see those costs and prices be reflective of that input increase from specifically liquid asphalt.

Your next question comes from Ivan Yi with Wolfe.

Starting on the aggregate side, what was organic aggregate volume growth in second quarter? And what are you expecting for organic volumes in full year '26 relative to your guidance for total ag volumes up high-single-digits?

Yes. We had about 75% of the growth in volume come from our legacy operations. And I think that's indicative of the -- a lot of the asphalt paving that we did and the pull-through benefit of being vertically integrated. And about 25% came from our acquisitions. Part of that is selling aggregate from those new acquisitions, but also in Texcrete's case, we were able to switch their aggregate supply internal, whereas before they were buying it external. And so that also improved our aggregate sales. So about 25% from recent acquisitions and 75% from the legacy business, primarily driven by the increased asphalt paving.

Great. And then you've talked in great detail about the gross margin, the headwinds in second quarter. Can you comment on the expected trajectory of total gross margins in 3Q and 4Q? I know you don't give quarterly guidance, but just any color on sort of the shape of that in the back half?

Yes. We were pleased with our margin expansion in all the product lines. Year-to-date, we've got margin expansion in aggregates, ready-mix and asphalt. Obviously, we had those headwinds that we've discussed that impacted aggregates for the year. Some of those headwinds are going to continue. I mean, obviously, the energy and some of the market dynamics that we talked about, specifically in Oregon, that's having an impact on some of those adjacent states, will continue to have some downward pressure on the margin.

So I'll let Nathan specifically talk about the second half of this year, what we expect.

Yes. If we take a look at this on a product-line basis, and we've talked about some of the pieces already. So from an aggregate standpoint, we are seeing margin expansion for the full year. And so in the latter half of the year, as you can take a look at what we've done for the first half, that would tell you, like Brian said, for the full year, about 100 basis points. So an improvement there.

Contracting services, we did talk about that as well having comparable margins to last year and a little bit of a lift there. The other 2 product lines that you're maybe getting at that we haven't discussed, but we've kind of talked about the pieces that impact it. Very proud of the performance through the first half of the year. But we've talked about there could be some margin compression in those 2 product lines, ready-mix and asphalt hot mix, that would be driven by higher energy costs, there is some lower margin work that Brian mentioned and higher depreciation expense related to our recent acquisitions. And the fourth quarter was better weather this year. Like I said in my guidance comment, we're anticipating normal weather this year for the second half. And so those could put some margin compression on those 2 product lines. But like we said, overall, the gross profit increase for aggregates, ready-mix, hot mix, those material product lines, we do see higher year-over-year.

Your next question comes from Garrett Greenblatt with JPMorgan.

If we look at your EBITDA guidance and kind of back out the increased expectation for DD&A, it implies that the EBIT guide is down about $20 million versus prior. I wonder if you can talk us through the pieces of that. I know it's probably related to these projects being pushed out to 2027, the Oregon weakness as well as energy costs. But trying to really debate which portion of this is recapture as we look into 2027.

Yes. I think a piece of that does relate, as we talked about, we did have higher DD&A. We noted that in the guidance that it is up mid-teens as before it was mid-single-digits. A piece of that really does have to do, we've updated our forecast relative to our recent acquisitions, also our revenue, as you noticed. And so actually, if you look in the full year, as it relates to DD&A, the percent of DD&A relative to revenue is about the same year-over-year. Does that answer your question on the increase in DD&A?

More so I'm talking about the -- if we back out that higher DD&A expectation now from the maintained EBITDA guidance, it implies a lower EBIT guide. So I'm just curious what's driving that operating side of things.

Yes. I think part of that has to do with, as I just shared, we've got a couple of our product lines that we do anticipate having some margin compression due to the reasons I listed there. And so that's probably a piece of it. And then, of course, the type of work we're doing could have some margin impact as it relates to those upstream product line materials.

Got you. And then as we think about the legacy projects that are lower margin from the acquisitions, when do we expect those to fully roll off?

Yes. I would say primarily in the third quarter as when we perform most of our revenue. That would be some legacy work, specifically in Utah. And so that would be primarily in the third quarter.

This concludes the Q&A session. I will now turn the call back to Mr. Brian Gray for closing remarks.

We appreciate everyone joining us today. Thank you for the questions, and we look forward to speaking with you all again next quarter. Thank you.

This concludes today's call. Thank you for attending. You may now disconnect.

Good morning, everyone, and welcome to the Knife River Corporation First Quarter Results Conference Call. [Operator Instructions] Also, today's call is being recorded.

At this time, I would like to hand things over to Dara Dierks, VP of Investor Relations. Please go ahead, ma'am.

Good morning, everyone, and thank you for joining Knife River Corporation's First Quarter Results Conference Call. 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 reference 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, and thank you for joining us. We had a strong start to the year, and I look forward to discussing our first quarter in more detail. Also today, we'll spend some time highlighting key components of our growth strategy and what we see ahead in 2026.

Starting with our first quarter results. I'm pleased to report we improved revenue by 16% and adjusted EBITDA by 16% year-over-year, while expanding adjusted EBITDA margins by 290 basis points. We saw increased activity in our markets, which helped drive double-digit volume growth across our product lines. Combined with our efforts to lower costs and optimize pricing, we realized margin growth for aggregates, ready-mix and asphalt.

On the contracting services side, revenues were up, and we have secured record quarter backlog of $1.2 billion. We are just now entering the start of our construction season, and we're doing so from a position of strength. Lastly, we completed 3 aggregates-based acquisitions during the quarter. We expanded into Utah with a platform operation in Salt Lake City, and we strengthened our footprint in Montana.

I'll talk more about our acquisition opportunities in a few minutes. We are growing. Our competitive edge initiatives are working, and we believe we are well positioned for another successful year. We're excited about 2026, and we're confident in our ability to deliver continued growth. Supporting that confidence is a clear improvement strategy that we believe makes us the employer, supplier, acquirer and investment of choice.

Turning to Slide 4 in the deck, you can see the 4 pillars of Knife River's growth strategy. First is our midsized higher-growth markets. Second is vertical integration. Third is the opportunity for self-help to improve margins. And fourth is our Life at Knife culture and relentless drive for excellence. We recently conducted a perception survey that provided a lot of encouraging feedback, including that investors value our strategy and want to learn more about it. Today, I will spend more time discussing 2 aspects of our strategy, our markets and vertical integration.

Starting with our unique footprint, we believe our strong position in midsized, higher-growth markets presents a competitive advantage. Over the past decade, population growth in Knife River states has outpaced that of non-Knife River states, and this trend is expected to accelerate. From 2025 through 2050, our states are projected to grow 2x faster than that of non-Knife River states.

More people equates to more demand in our markets on essentials like transportation, housing, water and energy infrastructure. You can see that demand already this year, as our states are investing in road and bridge infrastructure faster than other states. Collectively, DOT budgets in Knife River states increased approximately 15% this year compared to flat in non-Knife River states.

With this strong funding environment and clear need to continue repairing the nation's roads, we expect state and federal infrastructure funding to continue increasing over the long term. This represents a significant opportunity as Knife River states collectively include over 3 million lane miles of roads. That is almost 40% of all U.S. lane miles.

Further, roads in our states are exposed to harsh conditions. As a result, they require routine maintenance, creating ongoing demand. In addition to public infrastructure, heavy materials demand across our markets is supported by a diverse set of structural drivers. Some of these drivers include energy projects, military spending and data center development.

We believe midsized markets like ours present an increasingly attractive opportunity for data center growth. We have some of the lowest cost industrial power in the country, greater availability of land and water and attractive livability and affordability to support an expanding workforce. Over the last 2 decades, GDP in Knife River states has grown at roughly twice the pace of non-Knife River states, highlighting a proven track record of outperformance and a strong foundation for continued growth.

Lastly, an important reason we like our markets is our position within them. Nearly 90% of our aggregates volume comes from markets where we have a leading position. This scale, in addition to our aggregates reserves and vertical integration gives us a competitive advantage and enables better purchasing, pricing and reliable supply chain. To put our unique footprint into context, we thought it would be helpful to take a closer look at our 3 geographic operating segments and how they support our overall strategy.

Starting with the West on Slide 6. This segment includes California, Oregon, Washington, Alaska and Hawaii. Over the next 25 years, this market is expected to grow its population by approximately 12%, which we believe will support sustained infrastructure investment and commercial activity. In 2026, state DOT budgets across the segment are approximately $34 billion, reflecting a 13% year-over-year increase.

In addition to population growth and robust funding for public infrastructure, the West benefits from military spending, the build-out of data centers and other market-specific growth opportunities. We are a preferred materials vendor for a data center and hyperscaler that is active in this region, and we continue to work with them on a number of ongoing developments.

Also throughout the Pacific Northwest, we are a premier supplier of prestressed concrete products, including the data center projects for multiple repeat customers. In Hawaii, we are currently working on a large Navy project at Pearl Harbor, and the state is also seeing increased private investments on Maui and Oahu.

In Alaska, we continue to see elevated levels of military and airport investments. We are supplying materials up to the North Slope, where energy and mining-related projects are driving our optimism for growth in Alaska. Taken together, increased federal spending and improving economic activity across the West underpin our confidence in long-term demand in this segment.

Turning to the Mountain segment. This includes Idaho, Montana, Wyoming and our recently added operations in Utah. This segment benefits from some of the strongest demographic trends in the country with population expected to grow 26% by 2050. These states are among the most desirable places to live in the U.S., supported by strong inbound migration and in the case of Utah, one of the highest growth rates in the nation. This growth drives long-term demand fundamentals.

Mountain has long been a leading asphalt paving market for us, and this segment also represents one of our strongest commercial construction profiles. It benefits from significant investment in wind and solar, data center development and military infrastructure, along with advanced manufacturing growth. In Idaho's Treasure Valley, large-scale semiconductor investments are helping establish Boise as an emerging technology hub. With our strong footprint and local capabilities, we are well positioned to support these growth projects.

Finally, turning to our Central segment. This includes Iowa, Minnesota, North Dakota, South Dakota and Texas. This segment is also benefiting from strong population growth with our states expected to grow 21% over the next 25 years. Texas, North Dakota and South Dakota rank in the top 10 in birth rates in the nation. This sustained expansion is driving broad-based growth across private and public markets.

From an infrastructure standpoint, the Central segment has a large and expanding public funding footprint. For 2026, total state DOT budgets across the region are approximately $31 billion, a 16% increase from last year. In North Dakota, the state's construction budget for 2026 is more than double that it was in 2025. With our strong operating presence, we are well positioned to capture increased opportunities.

Meanwhile, Texas also represents an exciting opportunity within Knife River. Our operations are strategically positioned within the Texas triangle, giving us strong exposure to the high-growth markets between Dallas, Houston and San Antonio. Our triangle within the triangle enables us to serve some of the fastest-growing midsized markets in the nation. Development in these high-growth corridors is accelerating, and infrastructure demand is expanding beyond established urban boundaries.

Overall, the Central segment combines strong demographic tailwinds with a well-funded infrastructure pipeline. It has attractive growth opportunities across energy, commercial and transportation sectors. We expect the region to remain an important contributor to our long-term value creation.

The final point I'll make about our markets today is that we see substantial runway for growth through M&A. These markets are still highly fragmented with vertically integrated family-owned businesses, creating hundreds of potential opportunities at attractive multiples.

Knife River has completed nearly 100 acquisitions. We are well known, well respected and trusted. When a family-owned business decides it wants to sell, they often contact us first. They value our people-first culture and our commitment to the communities where we live and operate. We believe this combination of culture, credibility and capabilities makes us the acquirer of choice. We are well positioned to continue expanding our distinct footprint through disciplined value-accretive acquisitions.

Moving from our markets to vertical integration, this is another part of our strategy that makes Knife River unique. We believe our aggregates-based end-to-end operating model drives value creation. First, it enhances our financial performance by being a profit multiplier. This is achieved in 2 significant ways.

One, we are able to capture higher margins on the pull-through of upstream materials to our construction projects. And two, being vertically integrated creates meaningful synergies across business units, including equipment utilization, overhead absorption and labor efficiencies, all of which contribute to industry-leading margins on our downstream product lines.

Our balanced mix of aggregates, ready-mix, asphalt, liquid asphalt and contracting services also supports resiliency across economic cycles. It enhances our ability to flex between public and private work and gives us more opportunities to provide our products and services. For our customers, vertical integration represents a one-stop shop that translates into greater supply chain reliability, improved coordination at the job site and more consistent execution across multiple projects.

Moving to Slide 11. You can see how vertical integration also gives us more opportunities to win profitable work. On any given construction project, we can have over a dozen distinct pathways to capture profit. This can be as a general contractor or as a subcontractor that performs asphalt paving, site development, grading or other construction services or it can be by supplying materials directly to ourselves, to the project owner, to another prime contractor or to a competing producer of downstream materials. Every one of these entry points gives us another chance to compete and another way to create value.

Vertical integration also gives us flexibility to adapt to our markets and position ourselves where we have the most opportunity for growth, both organic and through M&A. On the organic growth side, we can expand our market position by adding complementary products and services to an existing footprint.

In Texas, for example, we greenfield our Honey Creek quarry near Austin a few years ago as a means of providing high-quality aggregates to our downstream product lines and to third parties. Today, that investment makes it possible for us to support our newly expanded asphalt plant in Bryan, where we have added capacity to serve a large paving job on Highway 6. Honey Creek is also providing materials for our recently acquired Texcrete ready-mix operation in College Station, allowing us to expand our operations in this dynamic market.

On the acquisition side, being vertically integrated also gives us more opportunity as we aren't limited to a single product line to grow. While our M&A strategy will continue to be focused on aggregates-based opportunities, we have a healthy acquisition pipeline that includes all product lines, including aggregates, ready-mix, asphalt, prestressed concrete and contracting businesses that we believe would enhance our portfolio and support long-term growth.

Thank you for letting me provide more detail on our strategy, in particular, why we're confident in the markets where we operate and the advantage of the vertical integration. Next, I'll quickly recap the quarter results for our segments.

Starting with the West, the segment benefited during the quarter from higher private market activity, which drove increased aggregate volumes. For the third straight quarter, Oregon continued its recovery, meeting our expectations for the start of the year. We expect this trend to continue and believe the segment is well positioned for ongoing growth.

Performance in the Mountain segment benefited from higher available backlog, better weather and solid execution. The team delivered improved cost discipline across all product lines while optimizing material pricing. In addition to strong organic performance, the Mountain segment completed 3 acquisitions during the quarter, Morgan Asphalt in the Salt Lake City market and both Sparrow Enterprises and Donaldson Brothers Ready-Mix in Montana.

Performance in the Central segment reflected impacts from acquisitions completed in 2025. The addition of Texcrete helped the region nearly double its ready-mix volumes. These benefits were partially offset by 2 additional months of expected seasonal losses at Strata in January and February. During the quarter, we continue to make meaningful progress on strengthening operational execution, and we ended the second quarter with strong backlog, positioning the business for further growth as the year progresses.

Lastly, turning to Energy Services. Favorable market conditions in our Western states supported higher sales volume and improved fixed cost absorption during the quarter. We also continue to capture synergies by merging our West Coast operations and ended the quarter with a 40% improvement in EBITDA. All in all, we had a strong performance in the first quarter and continue to be well positioned for growth in 2026.

With that, I'll turn the call over to Nathan to walk through our product line financial results.

Thank you, Brian. As mentioned earlier, we are off to a good start and very pleased with the momentum carried forward from last year. That was evident in our product lines as we achieved volume, revenue and gross profit improvement in aggregates, ready-mix and asphalt.

Starting with aggregates, our 26% volume growth, coupled with price increases and cost controls, drove strong margin improvement. Oregon led the way on volumes with an increase in third-party sales related to more commercial, industrial and residential construction. Mountain also positively contributed to our volume increase with continued favorable weather providing the opportunity to work on record backlog, creating pull-through demand of aggregates.

Importantly, we also reduced our per unit production costs by more than 10%, a direct result of process improvements and last year's investments in our operations. As reported, pricing was up 1% compared to last year due to geographic mix. The Mountain region had nearly 70% higher aggregates revenue than last year, had pricing and costs meaningfully lower than other regions. Normalizing for geographic mix, pricing was up 4.1%. We remain confident in our full year guidance of mid-single-digit pricing improvement on an as-reported basis and at least 200 basis points of aggregate margin expansion.

Ready-mix saw a 33% increase in volumes for the quarter. The acquisition of Texcrete was the largest contributor to this increase with our Texas operations more than doubling their first quarter volumes. Consolidated pricing and margins were up for the quarter as the price/cost spread continues to improve for ready-mix. We see these contributions continuing into this year with expected full year volumes up mid-teens over last year.

Turning to asphalt. Activity levels were positive with volumes increasing 42% year-over-year. As a reminder, the first quarter accounts for less than 5% of full year volumes, so the majority of our work is yet to come. We continue to maintain our guidance of mid-single-digit volume growth.

Contracting services delivered higher revenues during the quarter with contributions coming from all segments. Central saw the largest increase, led by our Texas and North Dakota operations. Margins were down for the quarter, but similar to asphalt, the first quarter historically represents a small portion of annual contracting services revenue. Therefore, project timing, type of work and geographic mix can have a disproportionate impact on first quarter margins.

Turning to backlog. First quarter levels were strong at approximately $1.2 billion, with about 75% expected to be completed in 2026, providing good visibility into future activity. As we work through our backlog, we continue to expect higher gross margins in contracting services in 2026, supported by increased self-performed asphalt paving. This type of work can drive margin gain through successful project execution and the bonuses that get paid to contractors for quality performance.

In addition, the increased asphalt paving in our backlog also provides the benefit of pulling through our higher-margin upstream materials, positively impacting product line gross margins. We are excited about the year ahead, and we'll continue our focus on cost controls across our business.

Regarding energy costs, we are utilizing a number of mitigating activities in our materials and services product lines, including the prepurchase of diesel, energy escalation clauses in construction contracts and fuel surcharge clauses in material deliveries. These efforts, along with dynamic pricing, help reduce the potential impact associated with oil prices and position us well to maintain our margins.

Moving to SG&A. We continue to expect the full year to be comparable with 2025 as a percent of revenue and then begin trending lower in future years as we scale and fully capture synergies from recent acquisitions.

Switching to capital allocation. We are committed to our disciplined approach, including maintaining fixed assets, improving operations and growing the business. In the first quarter, we spent $42 million on maintenance and improvement CapEx, largely on the replacement of construction equipment and plant improvements. Additionally, we spent $209 million on growth initiatives, including $174 million on the 3 acquisitions mentioned earlier and $35 million on aggregate expansions and greenfield projects.

We continue to maintain our focus on having a strong balance sheet with capacity available to support these growth initiatives and future investments. Keep in mind that as we enter the second quarter, we will reach the peak of our annual borrowing needs as we build working capital for the construction season. As we look to the full year, we expect to end 2026 with no borrowing on our revolving credit facility of $500 million and have cash on hand, resulting in an anticipated net leverage near our long-term target of 2.5x.

Turning to our guidance. As we have indicated in the past, we generally do not make revisions until the construction season gets into full swing. Therefore, we are reaffirming the guidance we presented in February. Based on our good start to 2026 as well as the addition of 3 aggregates-based acquisitions, we are confident in our guidance and currently expect 2026 to trend toward the upper half of our revenue and adjusted EBITDA ranges for the year.

With that, I'll now turn the call over to Brian for closing remarks.

Thank you, Nathan. We are off to a strong start this year, building on the momentum we established in the second half of 2025. We are just now entering the construction season, and we are doing so with record backlog and a proven growth strategy. We are meeting increased demand across our unique growing markets with disciplined cost control, pricing optimization and the benefits of vertical integration.

Our competitive edge initiatives are driving real improvements. Our acquisition strategy continues to enhance our results, and our teams are performing at a high level. I'd like to thank our 7,400 team members for their commitment to working safely and advancing our growth efforts. We believe the progress we're making today positions Knife River to generate profitable growth in 2026 and well beyond. We are excited about the opportunities ahead, and we are focused on creating value for our shareholders.

Thank you for your time today, and we'll now open the call for questions.

[Operator Instructions] We'll take the first question from Trey Grooms, Stephens.

Congrats on a great start to the year. So I guess, Brian, maybe to begin, can you talk about some of the puts and takes around the aggregates pricing in the quarter? You mentioned some pretty significant mix headwinds there. But if you could maybe go into a little more detail, is it geographic, product? Is it both?

And then kind of reiterating that mid-single-digit pricing guide for the year on reported ASP. Can you talk about maybe the trajectory there and how we should be thinking about how you kind of get to that mid-singles for the year given the tougher start out of the gate?

No, I'd be happy to, Trey. I'm actually very pleased at where we're at and what I'm seeing with pricing and the impact it's having on our overall margins in the aggregates group. So we reported just slightly 1% -- prices were up about 1% for the quarter. And as you know, our average selling price, it includes freight, it includes delivery and includes other revenues.

And so if you just normalize just for one thing, which is the segment mix, our average selling price would be up 4.1%. So when I talk about geographic mix, I mean, we have 3 geographic regions that sell aggregates, the West, the Mountain and the Central.

In the Mountain region, because it was favorable weather and the amount of backlog they've got there, aggregate revenues for the quarter in the Mountain region were up 70 -- almost 70%, 69%. And in the Mountain region, their cost structure is much lower than it is in the other regions, therefore, has a much lower pricing structure as well. And the reason that is, is that the downstream operations, the ready-mix plants, the asphalt plants, they are sitting on our aggregate reserves, and we have very little to -- practically no materials transfer in that mountain region compared to other regions like the Central, we're railing materials to aggregate yards and to downstream product lines.

We're doing that in North Dakota. We do that some in Oregon by barge and rail. And so the cost structure in those other regions is bigger than it is in the mountain. And so because they have such a lower cost structure, their prices are also lower. And when you sell 70% more in the quarter, that alone would bring our average selling price up if you just make that one adjustment to 4.1%.

The other thing that we do in the Mountain region is the type of work that we do there, they consume and utilize a lot more unprocessed materials. They literally -- they use about 2x annually the amount of pit run or bar run for large heavy civil fill type of projects. That also has an impact in product mix.

And so, I look at our sales dashboards frequently, and I can tell you and reassure you that what I see for the same product coming out of the same plant that I'm very comfortable guiding to mid-single digits. Frankly, we saw mid-single digits this quarter if you make those adjustments.

Yes. Okay. Got it. That's all very helpful. As my follow-up, with the 200 basis points of margin improvement in ags that you're targeting, especially with the diesel headwinds is particularly impressive. So any additional color on how you're kind of navigating these higher costs? And what gives you the confidence to reiterate that 200 basis points of margin improvement, especially given how much diesel inflation we've seen?

Yes. It's really the continuation of the good work that our PIT Crews are doing and some of the benefits that we're now beginning to realize weighs into this initiative with our PIT Crews. We enjoyed -- our gross profit margins in aggregates was up 390 basis points for the quarter. And we didn't really begin to see those energy headwinds until later in the quarter, really in March.

But as Nathan mentioned in his prepared remarks, I mean, we have had existing mitigation practices in place for years, and those practices are working. The fuel surcharges that we charge on materials delivery, we've got the escalation clauses in construction contracts, which also can come back and help us on aggregates. And so where we don't have protection, Trey, we do a good job at doing some fixed forward contracts on diesel.

And probably the most important tool that we've got in our toolbox, and this is relatively new for a big part of our company, that's dynamic pricing. And so we are able -- we don't need to wait for a midyear increase to come out. We are literally pricing diesel costs, current diesel costs into our current bids going out on a daily basis. And so -- we do feel comfortable.

To put it all into perspective, the amount of diesel that we use in a year, a full year is about 20 million to 25 million gallons of diesel. And that diesel is used primarily in 2 different ways. One is for on-road vehicle deliveries or vehicles. That's about 50% of that. And the other 50% is used in the yellow iron, either at the aggregate sites or out on construction projects.

And if you take a look at all of that, we feel like we are protected through one of our mitigation practices on about 80% of that diesel. And so that kind of maybe helps you put it into context of the potential exposure we have on a full year.

The next question today comes from Kathryn Thompson, Thompson Research Group.

I wanted to shift gears and focus on M&A. And if you could clarify the -- how we should think about the contribution and cadence of the recently acquired companies that you've announced?

Yes, Kathryn, we're very excited about the 3 acquisitions we completed in the first quarter. They were all aggregates-based operations. They had downstream materials. And in the case of Morgan Asphalt, it came with the services downstream opportunities as well. All 3 of those deals are very -- they look very similar to how we've done deals in the past. They were negotiated deals directly with the owners and that we were able to negotiate high single-digit multiples on those 3 acquisitions.

And so, if you look at that contribution on a full year, that would suggest it was towards the upper half of our current guidance. I want to just touch a little bit on the importance and how excited we are on the Morgan Asphalt operation in Salt Lake City, Utah. This is not a new market for us. We've done work in Utah out of our Boise, Idaho group for years.

We've been looking very closely for an opportunity to enter that market with an aggregates-based platform operation that we can continue to build from. And Morgan Asphalt fit that bill through a key, very good cultural fit, very strong reserve position, with a team that is very good at asphalt paving. And so, very excited about all 3 acquisitions. Really the most meaningful, the largest of the 3 would be the Morgan Asphalt opportunity in Salt Lake City.

Okay. And then following up on that, maybe [indiscernible] about how these play into your kind of the profit multiplier thesis that you discussed and how this -- how we should think about that going forward? And also what reasonably should we expect in terms of synergies, either be from cost or from revenue?

Yes. So I mentioned the profit multiplier in my prepared remarks as it relates to vertical integration. And so I'll use 2 examples on that. Texcrete, the operations that we bought late last year, down in College Station, Texas and in that area, more than doubled our ready-mix volumes for the quarter out of Texas.

They were purchasing a lot of third-party aggregates before we purchased -- acquired that company. And because we're vertically integrated in Texas, we now are able to rail materials into College Station and self-supply that, which is just an opportunity to, again, earn more profit on that acquisition through the profit multiplier by being vertically integrated.

Morgan is probably even a better example of that. Morgan comes with a very high-quality, strategically positioned reserve. We will bid materials on any kind of DOT type of project. We'll bid aggregates to subcontractors. We will self-perform and use those own aggregates. We'll sell aggregates to other non -- to other producing competitors downstream. And so we have an opportunity to win work on the aggregate side.

But most likely, we're going to sell those aggregates to ourselves and to another profit center, which is our asphalt -- our hot mix asphalt plant. And then we will sell that hot mix asphalt to, again, either ourselves or to a competitor on the job and allow them to go do the paving themselves. But likely, we would self-perform that work as a subcontractor or as a prime contractor. And so that being vertically integrated really does allow us to have multiple opportunities to earn profit.

On the synergies, I'll let Nathan touch on the synergies from the acquisitions.

Kathryn, good to hear from you. We've probably talked about this a little bit in the past as we bring in these operations, and there's multiple ways in which we can get synergies as they become a part of Knife River.

First, we've talked about purchase price power, and that can relate to cement, oil, equipment. And so as they become part of Knife River, become part of a larger organization, they get to take a part of that or advantage of that. The other is on the operational side. These are good companies. We're proud to bring them into Knife River, exciting for us. But just like with Knife River, we have PIT Crew out there that are looking to make Knife River better.

And as these acquisitions come in, there's an opportunity for us to share the Knife River PIT Crew, the EDGE initiatives with them and improve their operational efficiencies as well. And then the last thing I did mention it in my prepared remarks, as they come on board and bring their SG&A, I talked about us last year building our SG&A to grow the company. And as we grow, as we build the scale, we see an opportunity for synergies combining the 2 companies on the back office side of the equation as well. So I think there's a number of things we look at when they come in throughout the first year, sometimes within the first week as they become part of Knife River that we can capture some of these synergies.

Up next is Garik Shmois from Loop Capital.

I was hoping you could provide an update on where you stand on dynamic pricing, where you think you are within your different regions. And I asked that just because of the higher oil-based costs that are coming through and certainly one of the levers that you have to offset. Just curious as to the ability to push through additional pricing in some of the regions that have lagged in the past?

Yes, Garik, our commercial excellence teams have done a fantastic job of training and implementing dynamic pricing through all of our legacy operations. And so we are in the later innings at this point in time, which is coming to be a very good benefit with the current energy situation that we're able to price not just aggregates, but also ready-mix and asphalt at current cost structures and provide daily pricing out for those materials.

And so we have a number of different dashboards that we're currently using and technology that helps our sales teams manage through that process. Where we don't have full implementation of dynamic pricing would be in our recently acquired companies. And as we've talked about in the past, we honor their current quotes. And in anything that's new, we quickly get them on track to start utilizing the dynamic pricing. And we're currently doing the training as it relates to dynamic pricing with those recently acquired companies. But that would be the only place right now that we have some limited exposure.

Great. That's helpful. Follow-up question is just on the comment you made that you expect to be at the upper half of revenue and EBITDA guidance for the year. I just want to clarify, is that solely because of the acquisitions that you spoke to earlier? Or is there anything organically that you're pointing to that's tracking towards the mid-to-upper end of the range that's giving you confidence right now?

Yes, there's a number of things that give me confidence in that upper half of the range. I mean -- and the acquisitions certainly are part of that. But our volumes and our backlog right now, I really like the position that we're in. The record backlog of $1.2 billion, up 25% from last year, and that backlog has a lot of asphalt paving in it. And with that comes the ability to pull through higher-margin upstream materials. So, that gives me a lot of -- good confidence.

That's a very visible contracted work that we've got that we'll be outperforming that work this summer. And so that gives me good confidence. And then frankly, I just -- I continue to see traction that we're getting with our PIT Crew. You saw some of that early in this first quarter, even though our volumes are very low relative to the full year. We can't dismiss the work that the PIT Crews are having in all of our product lines. So that gives me good confidence on that upper half of our current range.

Your next question is from Timna Tanners, Wells Fargo.

I wanted to follow up on the discussion just now of the dynamic pricing and also the ability to have energy escalation. Do you have a sense of -- in your discussions with customers that how this compares with some of the competitors and how they're handling energy costs? Just curious if there'll be any challenges if some of the peers are taking a different tactic?

Yes, Timna, as you know, a lot of our competitors and our unique markets are some of -- more family-owned operations. We have some overlap with some of the larger national peers. But a lot of our competitors are local, regional-based family-owned operations that also have margin expectations. And I can tell you that I believe that we've pre-purchased and managed our energy costs better than our local competitors and that they, too, are going to need to do something. And so, I think most of them are passing along their fuel costs through similar fuel surcharges on delivered materials. And so I think it's -- I don't think we are out of the norm when it comes to fuel surcharges and collecting that compared to our competitors.

Okay. Helpful. And then if I could follow up on the M&A strategy, clearly off to a strong start and in line with the comments on not expecting an extended revolver by the end of the year. What does that mean for further M&A this year? What do you think you have the bandwidth for as we look out for the rest of the year?

I'll let Nathan take that. I'll just preface it with, our pipeline is strong. And we mentioned the pipeline 3 months ago that it looks to be similar to last year's type of pipeline. And so we're off to a good start this year and we feel like we certainly have opportunities in the pipeline and that Nathan has a balance sheet that also allows us to continue to grow. So, I'll let you talk about that, Nathan.

Yes. Thanks, Brian. Timna, just as he said, I mean, we do focus on maintaining that strong balance sheet so that we do have the bandwidth and the cash flows coming from our operations, which are strong as well. So, first, just what I'll reiterate here is that we have about $190 million, almost $200 million of available liquidity when you look at our revolver. That's important from the standpoint that allows us to react quickly if an opportunity does come up.

The other thing is not to forget the cash flows that we get from our operations. We have about a 2/3 conversion rate, which means from EBITDA to cash flow from operations, we convert about 2/3 of that to cash flows from operations, which we put to work in the company.

The thing that I stated in the prepared remarks that's probably important for your bandwidth question is our balance sheet capacity or net leverage. I indicated on the call there that as we get towards the end of the year and pay down that revolver, have those cash flows comes in, we think we're going to be at or below that net leverage of 2.5x.

That creates bandwidth for us because as I talked about before, Timna, for a short duration for the right deal, we'd be willing to be close to near 3x for a while. And so we do have the liquidity, the cash coming in from operations and the bandwidth on the balance sheet to continue to support the -- our growth program that Brian talked about. So I think we're in a good position.

Your next question is from Ivan Yi, Wolfe Research.

First, what was the organic or mix-adjusted aggregates volume growth in 1Q? And I get that you don't normally adjust guidance after the first quarter. But after such a strong growth in 1Q, why not raise the full year aggregates volume guidance at all? Are you sensing any weakness at all or is it just conservatism?

No, I think we're being prudent. We still have 90% of our construction season in front of us. And so it's very early. And so, unless we saw something just jump off of the page, Ivan, I mean, you're going to see us most likely after the first quarter continue to reaffirm that guidance.

I like where we're at with the volumes and what we're seeing in the markets. And that volume increase, in particular, on aggregates, over 1 million tons of aggregate volumes, which is up 26% for the quarter. Half of that came from legacy and the other half came from operations that we acquired in the last -- since this time last year.

In other words, Texcrete and Strata's 2 months of operations that were new to us, 2 months of Strata and then the Texcrete acquisition, which is ready-mix, but because we're self-supplying those aggregates, that was very positive for us. And so, about half of that increase is coming from legacy operations, the other half from Texcrete and Strata specifically. And we'll continue to update you as the year progresses on that -- on the volumes.

Great. Very helpful. And then my follow-up, we've seen several states declared gas tax holidays and there's proposed legislation for federal suspension of the gas tax through October. What impact would this have on future infrastructure spending? And how material would this be to you all?

Ivan, you broke up a little bit at the very beginning of that question, and it was pretty low. I couldn't hear it exactly. So could you repeat the beginning of that?

Yes. Just on the gas tax holidays that have been mentioned about, how material of a headwind would that be if the reduction in infrastructure spending that would come with that?

Yes. I think with -- I would say that's immaterial, and that's not something that we're concerned about. We've got record backlog, $1.2 billion, 25% up over last year. We continue to look at the strong DOT budgets, up 15% year-over-year in our markets. And with that comes the bid letting schedules, and what I'm seeing at the local state level, really no concerns around the gas tax holidays.

[Operator Instructions] Up next is Garrett Greenblatt from JPMorgan.

I was wondering if we could just dive a little more into the regional disparity between aggregates, how aggregate margins in each region trend or if you rather grow in gross profit per ton? And then maybe the organic pricing growth per region that got you to the underlying 4.1% consolidated?

Yes. I'll start with -- at a high level, and I'll let Nathan add if there's any other additional detail. But, Garrett, what I'd tell you is that if you -- I talked about the differences in our cost structure and our pricing structure as it relates to transferring materials around and having rail yards, redistribution aggregate sales yards, having downstream plants sitting either on the site or off-site where you have to rail or barge. That does change our cost structure, therefore, creating a different pricing structure as well.

But if you actually look at the margins over the last 2 years for each one of those regions, they're very similar. They're not that different. And so they're doing a good job. Even though they may have lower pricing, what we look at, obviously, is the price/cost spread. And I think that we're pretty close in each region.

Now each state is different, and that's going to depend on the market positions that we've got, the type of materials that we're selling and the amount of market share that we have, just different things have changed there by each state. But generally speaking, if you look at the last 2 or 3 years, for aggregate margins specifically, they're very similar in all 3 different states.

Nathan, is there anything that you want to add to that?

You mentioned the most important thing, Brian, is that over the course of the year, they're comparable. I would just remind folks that at the beginning of the year, there can be some differences in margin: West, you have more activity; Mountains had a good first quarter here, so that's improved their margins; Central is still in the early season and not getting started.

So if you were looking at just the first quarter here, you might see some differences, but it's more important to look at it the way that Brian shared from that full year margin perspective.

Great. And then can you talk a little bit more of the margin contraction in contracting services and how we should think about that trending for the rest of the year?

Yes. Nathan, do you want to take that one?

Yes, there is a couple of things with that. I mean, first of all, just for the first quarter and I'm starting to sound too similar here, but I mean, it is just similar. I mean, for contracting services margin in the first quarter, it's about 10% of our full year revenue. So you can have some -- like I said in my prepared remarks, you can have some geographic mix. You can have, for example, this year, we did do some more revenue in the Central, but that is the first part of the year, like as it pertains to Strata, where that revenue is not enough to cover some of the overhead or indirect costs.

So that's what you've got going on in the first quarter. As you look to the full year, it's just important to remember that we are saying that our contracting services margins will be higher. And we talked about this back in February that a lot of that has to do with -- we're anticipating more paving work in 2026 than we had in 2025.

Now that can start off at the beginning of the year that you're getting moved, you're getting ready. But as that work progresses through the year, we start to see improvement in margins related to our performance, very good at paving. Two, we see it in terms of incentives that come along with the project and bonuses.

So, as we do more paving work in the year than we did last year, we anticipate those margins to increase because of that. And then like we talked about, the add-on benefit that Brian talked about in our prepared remarks with the profit multiplier that, that has pull-through demand to have liquid asphalt, asphalt, aggregates. And so we look forward to what it will also do for the upstream product lines as well.

The next question is from Rohit Seth from B. Riley Securities.

Can you provide us an update on the Oregon DOT issue?

Yes. Fortunately, Rohit, that situation, I believe, is stable. So we have baked into our current guidance that the measure that's being voted on in Oregon on May 19, most likely is going to fail. I think everyone is expecting that. And -- but the good thing is the DOT already has an existing budget, and it's 2% lower than it was year-over-year, but that's the total budget. The construction budget is actually up a little bit. And so we have taken all those things into consideration into our current guidance that Oregon stabilize and looks to be broadly in line with last year's results.

Okay. Great. And then on the EBITDA guidance, could you maybe provide a cadence for the year, second quarter, third quarter, fourth quarter, given what's going on with the energy shock, I just want to understand your expectation for 2Q.

Yes, I'll let Nathan take that one.

Yes. I can give you an idea of, from a seasonality perspective, how we look at each quarter from a revenue basis, which I think will help you with your modeling. And so like we've talked about a few times this morning, the first quarter, generally around 10% of revenues. Second quarter, we get into maybe about 25%. And then as we all know, the third quarter is where we see a higher amount of our revenues and then fourth quarter, depending on how long fourth quarter goes, that will be the higher part. So the latter half of the year would be where we see the higher portion of revenues. So that's kind of the breakout or anything else with seasonality.

Rohit, does that help kind of give you an idea of how -- the cadence of the year?

That was on revenue, but does EBITDA follow the same sort of...

Yes. For the most part, other than -- I mean, the first -- there are some peculiarities, right? In the first quarter, we do experience a seasonal loss. And so then you would anticipate as you get to that third quarter, you would anticipate a higher amount of EBITDA coming as that's the main part of the season for us.

Yes. Because a lot of our backlog is asphalt paving, that work is typically done in the summer months. And when you start to close out those jobs is when you would get paid those job site incentives and quality bonuses, which often would come late in the third quarter or the fourth quarter. So that would impact EBITDA positively without necessarily the revenue to go in line with that later in the year. So I can -- that would be the only nuance as it relates to EBITDA, I think, for contracting services.

And everyone, at this time, there are no further questions. I'd like to hand the call back to Mr. Brian Gray for any additional or closing remarks.

I appreciate everyone joining us today. We're very excited about the year ahead, and we look forward to speaking with you guys again in the next quarter. Thank you.

Once again, everyone, that does conclude today's conference. We would like to thank you all for your participation. You may now disconnect.

Good morning, ladies and gentlemen, and welcome to the Knife River Corporation Fourth Quarter and Full Year 2025 Results Conference Call. [Operator Instructions] This call is being recorded on Tuesday, February 17, 2026. I would now like to turn the conference over to Dara Dierks, VP of Investor Relations. Please go ahead.

Thank you, and welcome to everyone joining us for the Knife River Corporation Fourth Quarter and Full Year Results Conference Call. My name is Dara Dierks, VP of IR at Knife River, I'm joined by our President and Chief Executive Officer, Brian Gray; and Chief Financial Officer, Nathan Ring. 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 reference 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. For today's call, first, Brian will begin with an overview of our 2025 results, followed by a segment recap and areas of focus for 2026 and beyond. After that, Nathan will provide quarterly details, a capital update and our 2026 guidance. At the conclusion of our prepared remarks, we will open the line for a question-and-answer session. With that, I'll turn the call over to Brian.

Thank you, Dara. Good morning, everyone, and thank you for joining us. 2025 was a year of meaningful strategic progress. At the start of the year, I mentioned 3 focus areas. And today, I'm pleased to report strong progress in all of them. First, we said that we are in a position to have our most profitable year ever, and we did growing adjusted EBITDA 7% to $497 million. Second, we highlighted that our acquisition program was ramping into full swing. We completed 5 deals in 2025 and expect to have another busy year in 2026. And third, that we will continue to invest in our competitive EDGE initiatives to support long-term growth. We have, and our results reinforce that this strategy is working.

There's no question we are a better company today than we were a year ago. While 2025 started slower than anticipated, we finished strong. Our team advanced our EDGE initiatives throughout the year, building momentum in the second half that resulted in a very good fourth quarter. We entered 2026 with confidence and clear sense of momentum. We believe we are well positioned to continue growing our business. We have built the right team. We operate in the right markets, and we're executing the right strategy. There are 4 components to our growth strategy that we believe differentiate Knife River as the employer, supplier, acquirer and investment of choice. First is our markets. Second is vertical integration. Third is the opportunity for self-help to improve margins. And fourth is our Life at Knife culture and relentless drive for excellence. These factors are key to growing our business and creating long-term shareholder value. Let me tell you how.

First, our markets. Knife River states are forecasted to grow twice as fast as non-Knife River states over the next 20 years. Our strong position in these higher-growth areas present many opportunities for expansion, whether as through the organic growth as people migrate to our states or grow through M&A. There are literally hundreds of opportunities to expand within our territory as family-owned vertically integrated companies look to sell. Often, Knife River is the first call as they want to work with the company they know and they trust. 2025 was an active year for acquisitions, and we expect an equally busy year in 2026. We've completed 1 bolt-on deal already in Montana and expect they will be announcing more deals before the busy construction season starts.

We will maintain a disciplined focus on aggregates-based, vertically integrated opportunities in midsized higher-growth markets. Knife River is truly the acquirer of choice in our expanding markets. Moving from markets to vertical integration. We believe our strategy to be an aggregates-based end-to-end provider enhances our value. Our balanced mix of aggregates, ready-mix, asphalt and contracting services supports resiliency through economic cycles. In addition, being vertically integrated gives us multiple opportunities to win work, either as a general contractor, subcontractor or materials provider. For our customers, being vertically integrated means greater supply chain reliability and improved job site coordination. For us, it enhances our financial performance by generating more gross profit and capturing higher margins on the pull-through of upstream materials.

Vertical integration also provides more acquisition opportunities as we look to add aggregates, ready-mix and asphalt companies to our integrated portfolio. Our next focus area is self-help. We believe in continuous improvement all aspects of our business. We are taking actions intended to drive EBITDA growth and margin expansion for all of our product lines. We are standardizing best practices, optimizing prices and controlling costs. Our commercial excellence teams are utilizing our pricing and quoting tools to get the most value for our materials.

Our dynamic pricing strategy helped drive 9% improvements in aggregates in 2025, and we'll continue to focus on optimizing pricing in 2026. At the same time, we are intent on managing our costs. In the West and Mountain segments, our aggregates cost per ton were down in the second half of 2025 compared to the same period last year. We continue to find opportunities to lower variable operating costs in aggregates and this is a major focus of our PIT Crews and production teams in 2026. Finally, what differentiates Knife River and makes this company so special to me is our Life at Knife culture. We believe that putting people first will retain and attract team members who are driven to win and who are committed to helping us be excellent in everything we do.

We believe an engaged team is a safer team and a more profitable team. We just had our safest year ever, and I look forward to the ideas, improvements and growth opportunities that our engaged team will help us achieve in 2026 and beyond. Combined, we believe these factors will help us generate unprecedented growth for Knife River. Moving from our strategy to our markets, we continue to enjoy a favorable backdrop. In addition to population growth, we stand to benefit from increased federal, state and local funding to maintain and rebuild America's infrastructure. Our states are investing in infrastructure at record levels. DOT budgets across our segments are very healthy. And in our 14 states, approximately 46% of IIJA funding remains to be dispersed.

Strong public budgets provide multiyear visibility, and we fully expect Congress to reauthorize another long-term infrastructure bill. Because of these strong budgets, we entered 2026 with record backlog of $1 billion, a 38% increase from this time last year. While approximately 90% of our backlog is public work, we're beginning to see more private opportunities. This includes data centers as well as distribution and manufacturing facilities. But again, the bulk of our backlog is lower risk public paving projects with contract values of less than $5 million.

Next, I'll discuss what we see ahead in each of our segments. Starting with the West, we're excited with the progress we made in 2025. Record profitability in our Legacy Pacific operations more than offset a softer economy in Oregon. We continue to view the West as being well positioned for growth in 2026. In California, Alaska and Hawaii, we are seeing elevated levels of public activity including heightened military spending. An example of this is the P209 dry dock project in Hawaii, where the Navy is investing approximately $3 billion on much needed infrastructure improvements. We began supplying cement and ready-mix to this project in the fourth quarter and anticipate strong volumes in 2026.

We're also seeing opportunities on the private side, including residential in California and work on the North Slope in Alaska. Moving to Oregon, I'm happy to report that our financial results were once again better this quarter than a year ago, and EBITDA margins for the year remained above 20%. The DOT funding landscape continues to be fluid, but Oregon's approved construction budget for 2026 is comparable to 2025 and the state forecast is similar amounts of asphalt paving this year. The legislature is currently discussing the future of infrastructure funding. And although there are differences of opinion on the next steps, they agree on one thing. Oregon needs funding to fix its deteriorating roads and bridges. Meanwhile, we are seeing encouraging signs in the private market including increased activity in data centers, warehouses and pockets of residential development. We will continue monitoring conditions closely. But based on what we know today, we expect Oregon's performance in 2026 to be broadly in line with 2025 results, while the remainder of the West segment continues to grow.

In the Mountain segment, we closed out 2025 with a strong fourth quarter. This was driven largely by good weather, which allowed us to work late into December. Construction revenue was up almost 20% for the quarter, compared to the same time last year. The work performed include asphalt paving, which positively impacted our Upstream Materials division. Asphalt margins for the quarter improved 400 basis points, and we stand to benefit from record backlog entering 2026 which contains more asphalt paving than we performed in all of 2025. We also had a strong quarter in ready-mix. Pricing outpaced costs, resulting in margin improvement of 400 basis points. We continue to strengthen our leadership team with more materials focused talent, and we believe these actions have put the region in an even better position to perform work on a growing list of private projects.

In particular, data center work in Wyoming and semiconductor construction in Idaho by creating significant new bidding opportunities for the Mountain region. Turning to the Central segment, 2025 was a pivotal year. We completed 3 acquisitions, combined the legacy North Central and South regions and made important progress on several competitive EDGE initiatives. These efforts are enhancing operational success and setting the stage for improved performance this year. The addition of Strata was Knife River's largest acquisition ever and we are pleased with the integration. We expect Strata to continue performing well in 2026 as we fully leverage our synergies and take advantage of North Dakota's record DOT budget. We're also expecting meaningful volume growth from the addition of Texcrete, our new ready-mix operations in Central Texas.

The central region continues to see improved public infrastructure spending, is expected to have its busiest contracting services a year ever, as our teams start construction on the $112 million Highway 6 project in Texas and the $62 million Highway 85 project in North Dakota. Lastly, turning to Energy Services, this segment remains margin accretive and an important component of our vertically integrated business model. We look forward to the second full year of operations at Albina Asphalt as we begin to fully implement and realize the operational improvements we've been making. Also in 2026, we'll continue targeting the sale of higher-margin value-added products, which we manufacture through 1 of our 9 terminals. All in all, we are well positioned for growth in 2026. With that, I'll turn the call over to Nathan to walk through our financial results for the fourth quarter.

Thank you, and good morning, everyone. As Brian mentioned, we finished 2025 with an impressive fourth quarter that produced 47% higher adjusted EBITDA and a 340 basis point improvement in adjusted EBITDA margin. Across our product lines, gross profit was up 27% for the quarter, and we achieved a record gross margin of nearly 19%. These positive results were driven by a combination of our cost controls, acquisition contributions and more favorable weather. The quarter was especially strong for aggregates, with volumes increasing by 17% partly related to our recent acquisitions, along with improved market conditions in the West. Aggregates pricing increased by 8%, supported by the Strata acquisition. Even without Strata, prices at our legacy operations would have had a solid increase of mid-single digits and aggregates gross margins increased by 200 basis points related to our ongoing PIT crew improvements and recouping preproduction costs incurred earlier in the year.

For 2026, we expect our aggregates volumes to grow mid-single digits as market demand continues to improve and the amount of our internal paving work increases. We also expect that pricing will increase mid-single digits as we continue our dynamic pricing discipline. With this backdrop and the continued focus on cost control and operational efficiencies, we anticipate continued aggregates margin expansion in 2026 of approximately 200 basis points. Moving to ready-mix. We saw strong volume increases in the quarter of 20% in gross margin lift of 230 basis points. Similar to aggregates, the volume increase was supported by improved market conditions in the West as well as the acquisitions of Strata and Texcrete in the central. We see these contributions continuing into this year with volumes improving in the mid-teens.

Margin improvement was balanced across all geographic segments with Mountain showing the strongest gains driven by the implementation of operational efficiencies identified by our PIT crews. Asphalt benefited from more paving work in the quarter, producing an increase in internal sales volumes of more than 8%. Lower input costs of liquid asphalt put downward pressure on pricing. However, we manage the price cost spread effectively and maintain margins comparable to the prior year. Looking ahead, we anticipate volumes will increase mid-single digits as we expect more paving work in 2026 than we performed last year. In contracting services, revenue grew 15%, with many locations enjoying favorable weather and availability of work. Mountain had the largest upside related to this extended season with almost 20% more contracting services revenue.

Overall, we did experience an anticipated decline in contracting services gross margin, largely related to lower margin on backlog as well as the timing of project completion and job performance incentives compared to last year. Looking forward, backlog increased 38% to approximately $1 billion, with 75% expected to be completed in 2026. While expected backlog margins are lower than a year ago, we anticipate higher gross margin in contracting services in 2026 as we expect to self-perform more asphalt paving, which typically results in project performance gains and the opportunity for quality incentives. The increased paving in our backlog also provides the benefit of pulling through our higher-margin upstream materials, positively impacting product line gross margins.

Switching to SG&A. The increase over fourth quarter last year was in line with our expectations and primarily related to business development costs associated with acquiring companies and the administrative costs that came with those acquisitions. In 2026, we expect SG&A to be in line with 2025 as a percentage of revenue and then begin trending lower in future years as we scale and fully capture synergies from acquisitions. Continuing with our growth strategy and capital deployment, we had a very productive year as we invested $789 million across our growth initiatives, including 5 acquisitions, 4 aggregates reserve expansions and multiple organic projects. We expect these investments to be accretive to our margin profile and help us achieve our EBITDA targets for 2026 and beyond.

We also allocated capital to maintain our rolling stock and plants as well as invest in improvements to increase production and efficiency. Our maintenance capital expenditures of $170 million or 6% of revenue were in line with our range of 5% to 7%, given earlier in the year. For the full year 2026, the company expects capital expenditures for maintenance and improvement to remain between 5% and 7% of revenue and organic growth projects and reserve additions to be approximately $131 million. Capital expenditures for future acquisitions and new organic growth opportunities would be incremental to the outline capital program. Because of our disciplined capital management, we are in a strong position to continue our strategic growth program. We ended the year with almost $75 million of unrestricted cash, approximately $475 million available on our revolving credit facility and a net leverage position of 2.2x, which is below our long-term target of 2.5x.

Looking at 2026, we have solid cash flow, balance sheet capacity and liquidity to support our growth strategy. Turning to our guidance. As Brian mentioned, we have a lot to be excited about for this year. With a strong infrastructure backdrop, ongoing self-help initiatives and the continued growth of the company. For 2026, we expect consolidated revenue between $3.3 billion and $3.5 billion. and adjusted EBITDA between $520 million and $560 million, which implies an adjusted EBITDA margin of approximately 16% at the midpoint. As usual, this guidance assumes normal weather, economic and operating conditions. With that, I'll turn the call over to Brian to share his closing comments.

Thank you, Nathan. Knife River enjoyed considerable growth over the last 3 years with revenue improving by 24%, adjusted EBITDA by 58% and adjusted EBITDA margin by 340 basis points. Our growth strategy has been working, and we believe we are just getting started. We like our growing markets, which present both organic and acquisition opportunities. We believe vertical integration enhances our value by supporting resiliency and being a profit multiplier. We have opportunities to keep improving our operations and our laser focus on controlling costs and optimizing prices, and we have a skilled team dedicated to making it all happen.

We have built good momentum, and we are well positioned to deliver solid growth in 2026 and beyond. I am very excited about our future. We'll now open the call for questions.

[Operator Instructions] Your first question comes from Brent Thielman with D.A. Davidson.

Congrats on a great finish to the year. Brian, I guess first question was just on -- I mean, look, you've got a great backlog here entering 2026. But the West does carry the highest margins for you and was a bit lower. Maybe you could just talk about the opportunities to build on that backlog for that particular region just given its relevance to margins.

Yes, Brent. We like the position we're in right now, record backlog, up 38% at $1 billion, but you're right. We definitely have seen a shift, a geographic shift of that work more in Mountain with a record backlog and Central with a record backlog, but we have very solid funding in California, Hawaii and Alaska. Now we don't perform per se, contracting services in Hawaii and Alaska, but we definitely supply a lot of contracting materials to subcontractors and suppliers -- contractors up in those states in Hawaii, Alaska. California, we benefited from a great year in California, and that momentum and funding is continuing in our markets. Oregon was down and it continues -- our backlog is down. But like I mentioned in my prepared remarks, the fortunate thing is the DOT budget in Oregon is about flat, slightly up a little bit and the asphalt paving tonnage is also slightly up for this year in 2026 versus '25. And we're out looking for work. And our crews have shown this last year to be nimble and pursue work that fits them.

And you can see that in the strong second half that Oregon had. And so I'm not worried, Brent, about the backlog in the West, but there definitely is a geographic shift of that backlog to states in the Mountain and the Central region.

Okay. Understood. And I guess my follow-up, Brian and Nathan, I mean this is the second year in a row, you've been able to drive aggregates average pricing at 9%. I know there's M&A sprinkled in there and yours and the industry expectations in the mid-single-digit range here for 2026. But maybe if you could just talk about the potential levers to outperform that, just given what you've been able to do here in the last couple of years on the pricing front?

Brent, this is Nathan. I'll take the first part of that question with the increase that we've seen here in 2025 on the aggregate pricing and then turn to Brian for the levers that we see going forward. You're right, very strong year for us in terms of aggregate pricing, high single digits. And as you may be heard in the prepared remarks, part of that has to do with Strata. Strata does have higher pricing. Now part of that does relate to the way which we account for delivery revenue. So they do have areas that they reach and there's revenue included in their average selling price. So it is higher as Strata laps itself here year-over-year, that's what I mentioned in the prepared remarks, we see that still continuing mid-single digits so very strong core ongoing operations, but you're at high single digits this year, mid-single digits next year, part of that just has to do with Strata overlapping or lapping itself year-over-year.

As far as the levers that we'll pull on, I'll turn that over to Brian.

Brent, our commercial excellence teams have been very active, implementing the new dashboards and bidding tools to support our dynamic pricing. And we spent a fair amount of time in the classrooms this year going through a lot of training focused on commercial excellence. So as you know, our dynamic pricing allows us to bid work throughout the year, and so we don't have a single letter that goes out in November, December or second ones midyear. We'll do that throughout the year and continue to optimize prices. And so that rollout has been very successful. All of our legacy sites now have fully implemented dynamic pricing as we bring on acquisitions roll that out into those new sites. But right now, very good traction on our dynamic pricing going into 2026.

[Operator Instructions] The next question comes from Trey Grooms with Stephens Inc.

Brian, Nathan, this is Ethan on for Trey. I wanted to dive further into the puts and takes on the margin outlook that's baked into the guidance because the full year guidance seems to imply relatively modest EBITDA margin improvement. I know you mentioned that there's a geographic mix shift within the backlog, but it sounds like materials margins will be strong and services margins will also see a step up. And then of course, we know weather was a pretty large headwind to 2025. So any more color on the puts and takes on the margin guidance for 2026 would be helpful.

Yes. I'll take that one. And so good talking to you. Yes, our EBITDA mid-margin for the midpoint is going up 10 to 20 basis points from last year. And so if you look at our individual product lines, gross profit, as Nathan mentioned, we're expecting to see somewhere in that 200 basis point margin improvement in aggregates. And frankly, we're seeing margin improvements in our budgets in all of our product lines. And that really is coming from our dynamic pricing model and our PIT crew initiatives fitting into that. Because of the shift, we've mentioned Oregon being flat this year, Energy Services being flat, we're definitely shifting more of our EBITDA contribution as a percent of total contribution to the Mountain and the Central regions. And those have slightly lower EBITDA margins, even though they too are seeing a good traction and good movement in margin expansion in those regions, they are at a lower margin than the West. And so that's what's going on with that. But good traction, good movement on all of our product lines for gross profit improvements.

Got it. That's super helpful. And for the follow-up, quickly, just a question on Oregon. So at what point could we return to year-over-year growth in Oregon? And how important is funding clarity to achieving this sort of leveling out given that the easy comps, especially in the 2Q and the 3Q of 2025. And also considering the private side in Oregon seems to be doing pretty well. So any more color there would be helpful.

Yes. The private side definitely rebounded well in the late third quarter and benefited us well into the fourth quarter and was a big part of the success that we had in Oregon quarter-over-quarter improvements in the fourth quarter and the third quarter. Public funding is a big part of our success also in Oregon and clarity on that will be important. I think, relatively safely say that we don't expect any major shifts at all at this point in time for 2026 and a stable budget in Oregon with the tons that have already either been let or in the bidding schedule to be relatively flat to last year. And so I feel comfortable saying that the results for Oregon in 2026 should be in line with what we had in 2025. And so yes, we're very hopeful the legislature is currently discussing infrastructure funding, literally in their short session, it's in session now and expect that, that conversation will really build into next year's longer session where we anticipate they would have a robust conversation and pass a longer term, much larger build than the $4.3 billion stop gap that they passed earlier that should happen in 2027 if you talk to the legislatures in the state of Oregon.

The next question comes from Kathryn Thompson at Thompson Research Group.

You had in your prepared commentary, talked a bit about self-help versus pricing and transitioning from not just focusing on pricing, but also acute focus on cost controls to drive margins. When you look at a regional standpoint for both your West and your Mountain divisions, which showed barely outsized performance in the quarter. What drove these outside gains? And how much was self-help versus pricing?

I appreciate that, Kathryn. Yes, we had a fantastic fourth quarter. It was up 47% over last year. And I would say, Kathryn, I think you could just put that in 3 big buckets that variance year-over-year. The first one is we certainly had favorable weather. And in particular, in the Mountain region, which allowed us to do more asphalt paving. We also -- it benefited really a lot of our regions as it relates to just staying out and working aggregate sales, ready-mix sales were solid. We were able to utilize our equipment pool more efficiently in that fourth quarter. And so one of those large benefits and variances for the fourth quarter was definitely favorable weather.

The second one was we had good contributions from our acquisitions, led by Strata, but we also had another -- 4 other very nice acquisitions last year. Texcrete came in mid-December and very excited about that acquisition and the other contributions from the acquisitions. That was part of our positive variance for the fourth quarter. And the last one was you mentioned just the operational execution and implementing EDGE initiatives. Now, we obviously had a partial benefit of recouping some of those preproduction costs that we incurred earlier in the year, those came back to benefit us in the fourth quarter. But more importantly, it was our teams executing on our EDGE initiatives and really looking at their cost and controlling our costs very tightly and very proud of the team and the work they did and the focus on cost controls that really are going to bleed into this year is a big part of our focus in 2026 to continue those cost control measures. And looking at KPIs and just really focus specifically on aggregates, but frankly, all the product lines will benefit from that this year.

Okay. Great. I also talked about getting called capital allocation or capital planning capital to deploy into calendar 2026. Could you just tell us a little bit more or give some broader stroke color on what you're seeing in your pipeline for M&A so inorganic. And then other organic initiatives that you're hoping to execute and to share.

Yes. We're very excited about our growth strategy, and I'll start off talking about the pipeline and the organic opportunities then turn it over to Nathan to talk about our strong balance sheet and capacity to go out and continue our growth strategy. So we have a very disciplined approach, and we're looking for strategic fits that fit both our cultural fit and a financial expectation that we'd have all the deals we did last year, Kathryn and the deals we're looking at our pipeline. In our pipeline, when I say it looks very similar to last year. I'm talking about the types of deals in there, the size of the deals and the location of the deals. They're aggregates-based many of them are vertically integrated. Most of them are infill bolt-ons to our existing operations.

We certainly will look at states adjacent to our current footprint or current states or regions that we do business in. They're in these midsized higher-growth markets, and we are looking to continue to balance our portfolio. And the nice thing about this is it all starts at the local level with local relationships. And just like all of the deals we did last year, they are negotiated deals directly with the sellers at those high single-digit multiples, very attractive multiples. So the pipeline is robust. The pipeline is full. I've talked about the hundreds of opportunities in our states that we do business in and because we're vertically integrated where we will look at aggregates, ready-mix, asphalt and contracting services opportunities as long as we can continue to focus on the supply of aggregates to those operations, either from new resources or from our existing resources.

I would say that the last thing before I turn it over to Nathan, that is a very important part of this process. is just a playbook that is proven and one that we've been using for over 30 years. We continue to refine it. We've done almost 100 deals now since the early '90s.

And really, it's just very focused on getting the right deals in the pipeline being very disciplined at the deals we put in the pipeline and going out and courting those relationships. The second part of that is doing a very thorough job, disciplined job of due diligence. And both of those activities are led by our local regional teams, which then feeds into the third phase, which is integration. And that is also heavy influence with the local team at the regional level with oversight and support from corporate. And so very proud of our M&A program, our growth strategy, what we've done in the last 2 years since the spin. Organically, we have identified a number of very exciting projects that have, frankly, higher returns than even our M&A opportunity and continue to go out and execute on the organic growth. We are entering new markets in Idaho. We've expanded our capacity as we see more asphalt paving coming on. We've added capacity to Texas, in South Dakota. So it's certainly spending some money organically as well. So with that, maybe, I'll just let you talk a little bit about the capacity.

So good news here is that to support the capital deployment, all the good things we've got going on that Brian talked about. We've been disciplined in how we've maintained our balance sheet and we have solid cash flow. So Kathryn, I'll put it into 3 buckets for you that give me confidence in what we've got from a balance sheet or a support perspective for this growth that we've talked about. First, we have the liquidity to act quickly. As I mentioned, we've got -- ended the year with $75 million of cash on hand, $475 million available on our revolver.

So as deals come up, we have the ability to move quickly on them. Secondly, we expect solid cash flows from our operations. In fact, for this year, 2026, we expect our cash flow from operations to be about closer to the historical average of 2/3 of EBITDA. And so we've got cash flow coming from operations. And then the third part is the balance sheet itself, the net leverage position. We ended the year at 2.2x net leverage. As I share before, our target is 2.5x so we're below that. And I think for the right deal, fits our strategy, has the right financial metrics with it, we'd be willing to go higher than that, maybe closer to 3 for a short duration and then see that long term go back to 2.5. So we got the liquidity, the cash flows and the balance sheet, all the support deals, and that's where we want to put our capital to work is growing this company that Brian outlined for us.

The next question comes from Garik Shmois at Loop Capital.

Congrats on the quarter. First off, just on SG&A, just to piggyback off on the last set of questions. How should we think about SG&A inflation this year, both from an underlying standpoint plus any incremental that you have with respect to the inorganic growth plan?

Yes, I'll take that one. Garik, good to hear from you. So SG&A, the first part here is we take a look at 2025 and the increase that we had this year. I'll just identify the key buckets there, and we talked about them in a fair amount throughout the year. And kind of back to the last question. They all relate to growing this company, which is the exciting part of it. So the largest increase that we had, the largest bucket for the increase we had in SG&A was really related to the administrative costs that came with our acquisitions, did 5 acquisitions last year, and they brought some SG&A with them. So that was the largest piece.

The second largest also relates to growth, and we talked about this throughout the year, that onetime step-up related to our business development team and getting them in place to pursue acquisitions as well as our EDGE teams to pursue like the PIT crew and the opportunities they're going after. So the 2 largest components really of our SG&A increase relate to growing the company. The next piece really is, as I shared before, the ongoing costs, I'll call it of the operations or the SG&A grew mid-single digits, which is what I shared at the beginning of the year.

So Garik, '24 to '25, those are the 3 buckets that cause the increases. As we look forward, I mentioned earlier that we expect SG&A as a percent of revenue to be in line year-over-year. If you look closer at that, again, similarly, the ongoing costs in there, we see growing mid-single digits, very comparable to what we see throughout the organization, a mid-single-digit increase in cost, maybe towards the lower end of that range. And if you're wondering well, what else could be impacting that. One thing that I'd add to it is that in '25, we did have higher gains on the sale of assets, most notably that East Texas sale that we started a few years ago, we finished that. So that's a gain that we don't obviously anticipate for '26 that would be part of the increase you see going from '25 to '26 but outside of that, the underlying costs increasing mid or maybe on the low end of that mid-range single digits. Hopefully, that's helpful.

No, that is. My follow-up question is on volumes. Your guidance is considerably stronger than other public peers. I was wondering if you can unpack that a little bit more. You talked a little bit about the regions, a little bit about some of the infrastructure projects and the pull-through from contracting services. Wondering if there's anything else maybe on the private side? And then also, is there any weather catch-up considering there was such a headwind, particularly through the first 3 quarters of '25.

Garik, we had that benefit a little bit in the fourth quarter with positive -- favorable weather in the fourth quarter. And so I would say that the backlog that we've got going into next year would not be a lot of delayed work. It certainly impacted at the beginning of the year and caused us some challenges at the beginning of the year, but we had a strong fourth quarter and have good backlog going into next year. The volumes being up mid-single digits for aggregates. I'll start with that one. Really is also related to ready-mix volumes being up mid-teens. The addition of Texcrete more than doubles our supply in the Texas Triangle. And so that would be a large part of our mid-teen increase and being supplying aggregates to that operation would also be part of the mid-single-digit increase on aggregates. But it's not just Texcrete, Nathan and I talked about the additional asphalt paving that we have in our backlog as we see strong pull-through of aggregates going into our asphalt plants and then the aggregate sales are just -- are becoming stronger in markets like Oregon.

And you saw that again in the fourth quarter results those higher-margin third-party aggregate sales in the metropolitan market in Portland certainly benefited us. So we continue to focus additional third-party sales in Central region. So I would say all of those factors gives me good confidence in our volume projections of mid-single digits for aggregates and the mid-teens on ready-mix.

The next question comes from Ian Zaffino at Oppenheimer.

Why don't you just kind of drill in on the comment about data centers, can you give us a little bit more color there, be it growth rates that you're seeing kind of portion of the backlog you're seeing or maybe how quickly these jobs convert? So what's happening as far as backlog into conversion? And then any other kind of margins? And any other type of color you could give us on that mix.

Yes. Thanks, Ian. I would say that virtually 0 amount of dollars in our backlog related to data centers. We have a lot of data centers that we're working on right now, but most of that would be on the material supply of the business. Have some very small paving projects, but that would not move the dial at all on our record backlog of $1 billion. We are currently working on 21 data centers. And again, most of that would be through the supply of aggregates or concrete mostly to those projects. And I think that is the tip of the iceberg. If you look at the amount of work that we have out there pending, bids that are out there that we have provided in the last, say, 2 months is significantly more than what we currently have supply contracts for. And so a very big upside. Each one of our states, several of our states are, Wyoming has a lot of opportunities. North Dakota is currently working on some data centers, Oregon is working on data centers. So we're in the heart of our -- some of our home operations where we have local aggregates and ready-mix plants, data centers are being built.

And so we see that as a very bright spot, frankly, all -- anything that we would be securing as new work would be on the upside of our range as a guidance. And so we've not baked in any expectations for our mid point of our guide on data centers. But I can tell you that in my career, I mean, just in the last 2 years, we've never seen this level of pending work and bids that we've got out there and very good negotiations going on right now.

And they're higher-margin upstream materials. For the most part, it's aggregate supply, ready-mix supply with either an on-site batch plant or a local batch plant close by, and then asphalt paving going into some of these new greenfield sites. So very excited about the opportunities in data centers.

Okay. So then how do we then think about just margins going forward, right? So you're getting a favorable mix from this, you're getting your success on the EDGE program. There's a lot of other initiatives that are kind of firing on, call it, all cylinders. And so how do we kind of put this all together as you try to hit your 20% margin target? Is this -- are you accelerating it? Or when do we actually kind of see you achieve those levels?

Yes. I think we are proud of the progress we've made in call it, 2.5 years since we've spun in 3 years, really since we started implementing our EDGE initiatives. And let me just give you the success some numbers here of the progress we've made in those 3 years. For gross profit margins on aggregates, we've improved 450 basis points in 3 years. On ready-mix, we've improved 300 basis points, asphalt 570 basis points, liquid asphalt 450 basis points and contracting services 280 basis points from the end of 2022 to the end of 2025. And so Ian, I mean I think we've been pulling hard on obviously, the pricing dynamic, commercial excellence levers, shifting our attention more focused on the operational excellence and the cost controls and it's not linear. As you know, you pick up some lower-hanging fruits sometimes. And so we do expect margin expansion to continue in all of these product lines. And we're very excited about that. Now yes, I just -- I would leave it at that.

[Operator Instructions] The next question comes from Garrett Greenblatt from JPMorgan.

Just as we think about 2026 and the outlook you provided, I was wondering if you could go into a little more detail or quantification around the impact of acquisitions you did in 2025 and what that organic assumptions look like in 2026?

Yes. So I think the acquisition that we did late in the year, Texcrete, you could look at the contributions from Texcrete in 2026, all of 2026 to offset the seasonal losses that we did not incur earlier in the year last year in the first quarter from the acquisition of Strata that was in March. And so that comes with a headwind in the first 3 months that we will experience this year and the benefits of the full year of Texcrete more than offsets that. And so if you look at our growth year-over-year, really, you could look at all of that growth as being organic at this point in time. I mean we've not included any future acquisitions in our guidance. And our guidance of midpoint of $540 million would imply about a 9% growth rate really on that organic business. And then I've mentioned that Oregon is going to be flat. And you take Oregon being flat, that would imply that we're mid-single -- mid-teens 14%, 15% on the remainder part of that business, which would be Central Mountain, Legacy Pacific.

And so we see solid growth going into this year as it relates to the organic business and the contributions from the acquisitions we did last year.

The next question comes from Ivan Yi at Wolfe Research.

Yes. Now I know you guys don't provide quarterly guidance, but can you give some color on the trajectory of your full year guidance for '26. What should we expect in terms of ag volumes, price or margins in 1Q specifically. Anything outside of normal seasonality? Any additional color would be great.

I'll start with the seasonality piece of that, and then we can get into the ag volumes and the outlook for the maybe quarter and for the year. So we did share last year at this point, Ivan, you might be able to go back and take a look of the seasonality change that we did have coming with Strata. And so that did increase at that time we said 8% would be the seasonal loss that we have for the first quarter now with Strata in place. Now Brian just mentioned 2 pieces that do kind of offset each other. He mentioned Texcrete for the full year. But he had mentioned that we do have that loss with Strata, that was baked in last year. So maybe some of the benefit from Texcrete this year softens that 8%. But that does give you an idea of what the seasonality would be for the first quarter. And then the benefit of that coming later in the year, probably predominantly in the third quarter, maybe a little bit in the fourth.

Yes. As my follow-on. You've got -- you provided guidance on the volumes for ready-mix and asphalt. Can you give more color on our expectations for the pricing for those 2 segments?

Yes. So as you know, the input costs have a pretty big impact on our cost, and therefore, pricing. And so on ready-mix, the 2 biggest factors that really are outside of our control is the cement pricing and then the products that our customers are asking for, which would be mixed design, different mix designs. And so you could look at a job like we have right now, that P209 project that I mentioned in Hawaii. The price of that material is much, much higher than it would be for, let's say, residential, which is a lot of what the Texcrete acquisition does. And so what I can tell you on ready-mix pricing and asphalt pricing because it's a big influence by liquid asphalt is that our commercial excellence initiatives, our teams, our sales teams are totally focused on optimizing prices.

They're continuing to use dynamic pricing and we see that momentum that we've had in the previous years continue forward as we roll out and continue to implement the new dashboards and tools that we've given to our sales team. So solid traction on pricing going forward, but heavily influenced by product mix and by input costs such as cement and liquid asphalt.

We have no further questions. I will turn the call back over to Brian Gray for closing comments.

Well, thank you again for joining us today. Thank you to our Knife River team members, a fantastic job last year. We really appreciate that. We have good momentum going into 2026. I'm excited for what we accomplish in the year ahead. With that, I'll say goodbye. Thank you.

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating, and we ask that you please disconnect your lines.

Good morning, ladies and gentlemen, and welcome to the Knife River Corporation's third quarter results conference call. [Operator Instructions]. This call is being recorded on Tuesday, November 4, 2025.

I would now like to turn the conference over to Nathan Ring. Please go ahead.

Thank you, and welcome to everyone joining us for the Knife River Corporation Third Quarter Results Conference Call. My name is Nathan Ring, Chief Financial Officer of Knife River, and I'm joined by our President and Chief Executive Officer, Brian Gray. Today's discussion will contain forward-looking statements about future operational and financial expectations. Actual results may differ materially from those projected in today's forward-looking statements.

For further detail, please refer to today's earnings release and the risk factors 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.

Brian will begin today's call with an overview of our third quarter 2025 results, followed by a segment recap and an update on our competitive EDGE plan. Following his remarks, I will provide a product line summary, a capital update and a review of our 2025 financial guidance. At the conclusion of our prepared remarks, we will open the line for a question-and-answer session.

With that, I'll now turn the call over to Brian.

Thank you, Nathan. Good morning, everyone, and thank you for joining us. The third quarter is typically our most profitable, and we're pleased to report record financial results. Our revenue of $1.2 billion and adjusted EBITDA of $273 million were all-time quarterly highs, thanks to strong contributions from our recent acquisitions. M&A is a core component of our competitive EDGE strategy to drive long-term value.

Another pillar of our EDGE plan is to optimize prices and control costs. I'd like to thank our Knife River team members for making important strides in this area during the quarter. Their efforts helped us grow adjusted EBITDA margin to 22.7% for the quarter. And equally impressive, we also improved gross margins across our aggregate, ready-mix and asphalt product lines.

We did all this while facing headwinds that we didn't have last year, including wet weather, a sluggish Oregon economy and less asphalt paving across our segments. Delivering improved results in adverse conditions points to the fundamental strength of our business. Even without the addition of Strata Corporation, which is our largest acquisition ever, our third quarter revenue and adjusted EBITDA would have been records.

Looking ahead, we're excited about our future. We're still in the early innings of our self-help initiatives, and we certainly expect the organic business to continue to grow as we fully implement dynamic pricing and operational improvements. We also continue to pursue strategic acquisitions, and our team currently has multiple deals in the pipeline.

We have record third quarter backlog with more pull-through of higher-margin asphalt paving materials than we did last year. And our states continue to invest in public infrastructure at record levels. All in all, we expect the combination of our EDGE strategy and market fundamentals will continue to allow us to achieve profitable growth for our shareholders.

As we look more closely at our third quarter results, I'll start with an update on Oregon. We don't typically provide financial results for an individual state, but there's been a lot of attention on Oregon, so I wanted to follow up with some additional detail. During the quarter, I'm pleased to say we saw year-over-year improvements in the state. As previously reported, this market was down in the first half of the year. And during that time, we moved quickly to right-size our team and reposition our crews to where the work is. We continue to optimize pricing to control costs, and we benefited from the financial contributions of recent acquisitions.

In addition, we began to see aggregate volumes improve as third-party sales resumed on several jobs that have been delayed earlier in the year. Finally, our current contracting services backlog in Oregon is approximately 90% of where it was last year at this time. These factors led to third quarter financial results in Oregon, that were higher than last year, suggesting the headwinds are beginning to calm.

In addition, the recent passing of a 10-year $4.3 billion transportation funding package helped provide additional [ clarity ] in Oregon. One of the long-term fixed lawmakers originally proposed, we expect the bill at a minimum will help maintain current funding levels and improve upcoming bid schedules at the local agencies. Half of the funding is earmarked for cities and counties for the types of projects we most often perform. The other half of the new revenue stream will be added to Oregon's DOT budget. Total funding for the next biennium is now projected to be $6.1 billion, slightly below the record $6.2 billion from the previous 2-year cycle.

Given the new funding, our improving aggregate sales, management's commitment to keeping costs in check and ongoing contributions from M&A, we expect the stabilization to continue and currently anticipate overall 2026 results in Oregon will be similar to this year.

Switching from Oregon to Mountain, this segment remains one of the fastest-growing areas in our footprint, and we continue to enjoy record backlog here. However, third quarter results were impacted by less asphalt paving, related to project timing, type of work, competitive bid dynamics, and delays caused by weather and project phasing. We experienced more scheduling delays this year than last year.

The overall decrease in asphalt paving in the segment not only impacted contracting services, but also had a ripple effect through hot mix asphalt, aggregates, and the utilization of our equipment pool. Fortunately, this work remains in our backlog, and we continue to add paving tonnage for next year. DOT budgets are strong, backlog is at record levels, and we've added capacity in an effort to capture even more work heading into 2026.

Continuing with our segments recap, let me move to the West. Since I already touched on Oregon, I'll focus on California, Hawaii and Alaska. In these states, we saw healthy demand with pricing discipline and strong execution driving our results. We had increased ready-mix volumes and pricing in California where we added capacity, and improved delivery efficiency. We also had higher contracting revenue margin in California, where we continue to see strong public agency demand. In Hawaii and Alaska, we had increased aggregate and ready-mix volumes, and we stand to benefit in both states from some large impact projects that are just beginning construction. With the stabilization in Oregon, we are optimistic about continued growth in the West in 2026.

In the Central segment, our results were supported by the integration of Strata, which contributed to volume and margin improvement. Third quarter revenue and EBITDA were up substantially, and EBITDA margin was 23%, an all-time record. The strong quarter in Central could have been even better if not for the rain. The wet weather we reported in the second quarter continued into third, particularly in July and September, which delayed projects and negatively impacted operating conditions.

Still, we achieved a record quarter and are excited about the year ahead. Backlog in this segment is up 83% year-over-year, driven primarily by an increase in Texas. We are seeing strong commercial and public work opportunities in our Texas footprint, and our teams there have secured major highway projects in the College Station area.

In North Dakota, we are also set up favorably for 2026 with new infrastructure funding driving bidding opportunities and supporting the Knife River and Strata combined operations. The North Dakota state DOT intends to bid about $750 million of construction work in 2026, which is more than twice the $345 million they put out for bid in 2025. Throughout the Central segment, our markets appear poised for growth and our expanded teams are working closely together.

And finally, at Energy Services, the segment delivered a strong quarter with revenue up 34% and EBITDA up 18%, primarily due to the acquisition of Albina Asphalt, and the new polymer modified liquid asphalt plant in South Dakota. The segment continues to benefit from vertical integration and disciplined bidding, and is on track to have another solid year. While 2025 has had its share of challenges, we continue to focus on our EDGE strategy and the opportunities we have to improve our performance and finish the year strong.

As mentioned, EDGE includes acquisition growth, which contributed to our improved results for the quarter. M&A will remain an integral part of our strategy, and our corporate development team continues to add quality opportunities to the pipeline. We are focused on aggregates-led margin-accretive targets in our midsized high-growth markets. But M&A is just one component of EDGE.

During the quarter, our process improvement teams, and field personnel were also hard at work, implementing efficiencies across our operations. At the same time, our sales teams continue to emphasize our dynamic pricing model, helping to better capture the full value of our products. These tandem efforts resulted in third quarter improvements to our aggregates, ready-mix and asphalt gross margin. While we're improving our processes, we are also improving our safety performance.

I'm proud of the advancements our team continues to make on the I Choose Safety program. We believe a safe and engaged team is vital to our success. Combined, we expect each of the ongoing efforts in our competitive EDGE plan will help drive consistent EBITDA growth and enable us to achieve our long-term goal of 20% adjusted EBITDA margin.

Before I turn the call over to Nathan, I'd like to take just a moment to reinforce our track record of meeting our goals. In our 30-year history, we have had 4 distinct periods. The first was to build scale. The second was to enhance our vertical integration and generate industry-leading return on invested capital. The third was to position Knife River to become an independent publicly traded company. And the fourth is where we are today, implementing our competitive EDGE strategy in an effort to grow EBITDA, and improve margins. We accomplished our goals in each of the first 3 phases, and we are on track to meet our EDGE goals as well.

Over the past 3 years, on a trailing 12-month basis, we have grown revenue by 22%, adjusted EBITDA by 56% and adjusted EBITDA margin by 320 basis points. EDGE is working and the fundamentals of our business are only getting stronger. All this gives me great confidence that our dedicated team members will continue delivering profitable growth and create long-term value for our shareholders.

With that, I'll turn the call over to Nathan.

Thank you, Brian. As we take a closer look at our financial results, you'll see that it was also a positive turning point in the year for our materials product lines. In particular, aggregates, ready-mix, and asphalt saw margin improvement over the third quarter last year.

In aggregates, prices increased 8% and margins improved 50 basis points. As we mentioned last quarter, we anticipated that the early season pre-production work and our team's ongoing efforts to create operating efficiencies would begin to produce improved financial results. We're taking these efficiencies and scaling them. As we assess our operations, we believe the upside in margins for aggregates provides one of the most compelling opportunities for earnings growth. Volumes also increased in the quarter, thanks to contributions from Strata, as well as Alaska and Hawaii.

Looking at the full year, we expect volumes to be flat as a result of the increased rainfall and less paving work performed earlier in the year. We anticipate that pricing will remain strong, and increase high single-digits for the full year.

Switching to ready-mix, we had one of our best quarters ever. We had price increases of almost 6%, volumes were up 16% and margins improved 160 basis points over third quarter last year. Much of the improvement comes from our dynamic pricing model, along with operating efficiencies at the batch plants and product delivery. Volumes were up mainly due to the addition of Strata's 24 ready-mix plants, and also because of increased commercial work in Alaska, California and Hawaii. We expect full year volumes to be up by low double-digits and pricing to increase mid-single digits.

The asphalt product line was directly impacted by less paving work in contracting services. Almost 70% of asphalt volumes are sold internally, and internal sales were down approximately 7% for the quarter. Prices were also down compared to last year, directly related to lower liquid asphalt input costs. Despite the lower volumes and pricing, we have been able to manage our cost structure and slightly improve margins over third quarter of last year. For the full year, we expect volumes and pricing to be down by low single-digits.

In contracting services, the revenue and gross profit declines were largely related to less paving work for the quarter. Our contracting services margin was also down due to slightly lower at margin available on the backlog work we performed, fewer project bonus opportunities because of the type of work, and delays in job site challenges from adverse weather.

Looking ahead, our backlog is 32% higher than last year with significantly more paving work secured, and we are also seeing additional paving jobs in the upcoming bid schedule from what we did at this time last year. Even though the expected margin in our backlog is slightly lower year-over-year, we expect this will be more than offset by the anticipated benefit of additional volumes of upstream higher-margin materials.

Moving to SG&A, the increase over third quarter last year is primarily related to overhead that came with acquisitions we have made in the last 12 months. Although costs are higher year-over-year, they are coming in lower than we had forecast, partly due to the benefit of higher gains recognized on the sale of assets and lower payroll incentives. As we look forward, we anticipate that fourth quarter SG&A will be higher than last year by mid-single digits, plus increases from the recent acquisitions.

As we look at our balance sheet, we ended the quarter with a net leverage position of 2.6x and $457 million of borrowing capacity on the revolver. For capital deployment, we have invested $664 million on growth initiatives through the third quarter, including acquisitions, aggregates expansion, and greenfield projects. For the remainder of 2025, we expect to spend approximately $32 million on organic growth projects.

For maintenance and improvement, we continue to expect capital expenditures to be between 5% and 7% of revenue for the full year. Our balance sheet remains strong with available financial capacity for future acquisitions and new organic growth opportunities, which will be incremental to our outlined capital program.

As we consider the full year, we are narrowing our financial guidance. Our updated guide is based on normal weather, economic and operating conditions for the remainder of the year, and includes consolidated revenue between $3.1 billion and $3.15 billion, and adjusted EBITDA between $475 million and $500 million. Our teams have done an excellent job managing through the challenges we faced this year, and the third quarter results proved that the fundamentals of our operations are strong. Our EDGE strategy is working. The markets we operate in have solid public funding. Our PIT Crew initiatives are producing financial results, and we believe Knife River is well positioned to deliver long-term value to our shareholders for years to come.

I would now like to open the call for questions.

[Operator Instructions] Your first question comes from the line of Brent Thielman from D.A. Davidson.

Maybe just, Brian on, I guess, a shorter term question, just kind of backing into the math for the fourth quarter with the revised guidance here implies decent year-on-year growth in EBITDA. Just wanted to maybe get a little more context of what you're seeing on the ground right now that kind of gives you confidence in that year-on-year growth range? I know there's been challenges through the year, and delays and pushouts with weather, but any more context there would be helpful?

No, I appreciate that, Brent. And so, yes 3 factors really. The Oregon stabilization and their ability to actually produce more profit for the third quarter, that momentum will continue. That stabilization in Oregon will continue. A few of those jobs we talked about earlier in the year that were delayed have resumed construction, and so, that is part of the fourth quarter guide.

The other thing is our record backlog, and the additional paving that we have in our backlog with favorable weather, and I would say that we had a good October as far as weather. And so, we obviously have 2 more months left, that begins to change on us. But if we get a couple more weeks of good weather, that gives us confidence we can get that work done.

And so really, it's the turn, the stabilization in Oregon, the strong backlog that we've got that has additional pull-through of those higher-margin asphalt paving materials and then normal weather, and we had a good month in October.

Got it. And then, I appreciate all the detail on kind of what's going on in Oregon. I guess, Brian, the -- I think you said you anticipated results would be similar in 2026 to what you should see this year. What are you looking for over the next several months that might dictate maybe something more than stable, maybe possibly some sort of rebound in Oregon next year? Just curious kind of the things you're looking at that might drive that?

Yes. I'm real pleased, Brent, with the management's reaction and quickly rightsizing to the new level of work there, repositioning crews within the state where we're busier, and there's pockets within Oregon that are still healthy. Obviously, the Portland market is the large driver of our volumes.

And so, we're still looking for some additional market stability in there. I think the trade talks that are going on has an impact on that Portland economy with the imports, and along with some of the larger employers in the state that are impacted by tariffs. And so, I think looking for some stability there. The governor needs to sign, which we fully anticipate will happen, the transportation bill.

We need to see the bid lettings come out that, that 50% is going to the counties and cities that we expect will benefit us. We're heading into our busier time of the year as far as bidding. So, looking for some stability there. So there's still, I mean -- I think there's a lot of positive signs in Oregon over the last 90 days. And I think we want to see that momentum continue into next year. And then when we get to February, we'll give better guide. But at this point in time with what we see, we feel comfortable that Oregon [ is ] [ stabilized ] and the results next year in 2026 should be flat with this year.

Okay. Just last one on Strata, realize that conditions have been sort of atrocious in that region, probably tough to get to that $45 million bogey for this year. But maybe kind of what's under the hood that you're seeing, that you really like about that business? And as we think about a year where we don't have some of these challenges from weather is $45 million sort of contribution to EBITDA from that business is still very, very reasonable to you?

Yes. Brent, we're very pleased with what we've seen, extremely pleased with the integration that our team and their teams are coming together as one. You look at the DOT budget in North Dakota, more than double than what we had this year, and we are well positioned to take advantage of that.

You look at our ready-mix results for this quarter, and Strata is a large contributor to that success. And so they absolutely are performing as we had modeled, as we anticipated, with the one exception that you mentioned was a very wet summer for those days.

But other than weather, they absolutely are on track, both to capture the synergies that we modeled. The volumes are in line with what we modeled, and it's really performing very well, and we're excited about next year with the North Dakota bid letting schedule coming up.

Your next question comes from the line of Kathryn Thompson from Thompson Research Group.

I just want to dig a little bit more into backlogs, had a nice increase, very solid contribution from public, as is typical. But could you give a little bit more color in 2 different buckets; one, the type of projects, really more color specifically on contracting? And then the type of product, the asphalt type jobs and what this means for margins overall on a go-forward basis?

Yes, let me start with the margins in our backlog. Nathan mentioned that we have slightly lower margins. And I'll start by saying that we -- I'm very proud of our teams, and we have industry-leading margins to begin with. And I know that the margins that we have in our backlog, that come from our pull-through of the downstream materials. So, when we're doing asphalt paving, and we have a lot of asphalt paving in our backlog, Kathryn, I'll talk about that next.

But that more than offsets those margins in aggregates, those margins in asphalt. That's not part of contracting services, those margins more than offset the slight decline that we have in our backlog margins. So, if you look at it from an enterprise level, from a consolidated level, our backlog has more gross profit in it than it has in the past, even with the slightly lower margins in contracting services, more than offset by the benefits we get of higher volumes of asphalt paving, because of that pull-through of the higher-margin material.

So, Nathan also mentioned that we have significantly more asphalt paving in our backlog. And we did not secure the amount of work that we had anticipated for this year. And we also didn't perform it, partly because of weather, partly because of delays. The good news is that backlog, I mean, is still -- that work is still in our backlog. And so we have significantly more asphalt paving with those higher-margin pull-through that will benefit the asphalt, the liquid asphalt, the equipment pool, the aggregates business line.

So just to put it in perspective, the Mountain region today -- I'm sorry, at the end of September, so end of the quarter, has 23% more backlog of asphalt paving than we performed all of this year in the Mountain region. So that's one data point to kind of give you some context in our backlog.

The Central region, we obviously picked up some very large jobs. Their backlog is up 83% in the Central region. And they have more than 2 times the amount of asphalt paving in their backlog that they'll perform next year than they had in their backlog 1 year ago. And so that's just 2 data points to kind of reemphasize the amount of substantially more asphalt paving that we have in that backlog. So the slightly lower margins does not concern me at all because of the strong benefit that we'll receive from the downstream higher-margin material.

So -- and the last point I'd make is we're really just entering the busiest time of the year for us as it relates to bidding. And so, we have 32% more backlog than we did 1 year ago, and we're heading into the heart of our bidding season with some strong DOT budgets, most of them at record or near record levels. And so I really like the position that we're in right now, Kathryn, as it relates to our backlog.

Okay. Great. And then, if you were to look at -- once again, just kind of a follow-on with that backlog. How do you feel about your backlog, the mix of your backlog today versus, say, 1 year ago? I mean, are you kind of with that balance, what are some differences in type of mix that you're seeing today? And if not 1 year ago, even 6 months ago, is there anything changing in terms of that mix overall?

Yes. I think the change is what I've mentioned is, we have a lot more of that higher margin pull-through of materials in our backlog. The other thing that's changed is we've added some larger jobs over the last couple of quarters. And so our burn rate has changed over 1 year ago. And so, we typically burn about 90% of our backlog off in 12 months. And so, with the larger amount of backlog we have, some of those larger jobs are multiyear jobs. And so that burn rate now is at 77%.

But if you do the math, I mean, we still have an 11% increase in expected revenue in our backlog, even with that lower burn rate. And so stronger revenue projections with a larger percentage of that work being directed towards asphalt paving, which does benefit our downstream materials in asphalt and aggregates.

Your next question comes from the line of Trey Grooms from Stephens.

So I guess starting off, asphalt paving in Mountain, seeing some challenges there. Sorry if you touched on this, but you mentioned the competitive bid dynamics. Has that intensified in this market? Is this something that's expected to continue? And then also, is this isolated to the region? Or are you seeing it kind of creeping into other markets? Or how widespread is it?

Yes. Great question, Trey. And I would just -- I would say that you know our business is very local. It's a really regional business. And so the same headwinds that we face this year, whether that's timing of work, type of work, phasing of work, weather, our lack of asphalt paving, our local competitors would be in the same boat. And so, yes, that has slightly changed the bid dynamics in the bid room. We've obviously secured our fair share of work, having backlog that's still up 32% with more asphalt paving.

But we didn't do the asphalt paving that we had anticipated and hoped for this year in the Mountain region. And then weather is certainly impacted us in the Central region. Specific to the Mountain region, we talked about this on the last call. I mean there's just -- it's really a type of work that was being let out. It's the timing of the work that's getting built, and the kind of the phasing of those large, heavy civil interstate jobs that started off with a lot of [ dirt ] work that has paving in it, and we have a lot of that paving on our books.

And frankly, we thought some of that work was going to go. There was one job even in Idaho that had 70,000 tons of paving on it, that we thought would go this summer, that's gotten pushed a little bit into the fourth quarter depending on weather and then into next year. The location of work was not necessarily right in our core markets in the Montana area, we talked about that last time. The type of work, again, the DOTs, they rotate the dollars between bridges, heavy civil, asphalt paving. And so, I think this is a temporary problem challenge that we faced in Montana and frankly, in pieces of Idaho and Wyoming, so that Mountain region.

The good news is that Mountain region, it has record backlog. I mean it has $100 million of more backlog than it had 1 year ago, and it's still one of our faster-growing regions. And so I'm not concerned about the future of that. but we certainly lacked asphalt paving to keep our crews and really to keep the asphalt plant and aggregate plants busy. We didn't have that this summer, and it's more related to timing type of work than it is a structural issue.

In the bid room, we're dynamic. I mean we can move quickly, and we've made those adjustments. But the market dynamics as far as new competition, has not changed much. And our margins being slightly lower, again, are more than offset with the benefit of the higher pull-through of materials. So not structural, nothing that we can't adapt to and any kind of major problems going forward.

Yes. Okay. That's helpful. And then on the ready-mix business, your margins there are up nicely year-over-year. I'm sure there's some benefits from acquisition and whatnot. But as we're thinking about the ready-mix business looking -- kind of going forward, what's your thoughts around kind of the puts and takes on price cost as you look at that? I mean asphalt is kind of -- it's facing its headwinds, which we've talked about, but ready-mix seems to be performing pretty well given the tough operating environment that's out there?

If you look at our margins of 20% for the quarter, those are going to be industry-leading margins. So very proud of the work that our teams are doing. Our PIT Crews and our dynamic pricings have a lot to do with that success. So obviously, Strata is a large contributor to that. But even without Strata, we had very good numbers in our ready-mix business units. So we do see that momentum carrying into next year.

Our dynamic pricing model is being embraced both -- internally, and our customers have received that modeling well. As long as we're providing the value of the materials through quality and customer service, they will pay the prices that we are asking for, our dynamic pricing. And you couple that with dispatch efficiencies, some new KPIs, and dashboards we're putting in place to help us manage our costs. You look at the purchasing power we have in our regional markets for our input costs. I think I like the position that we're in for ready-mix going forward with prices exceeding costs.

If I could just sneak one more in there. Aggregates pricing very, very good. There's been, I guess -- several of your larger competitors have been in the market kind of commenting on high-level expectations for aggregates around pricing and volume. Just given the markets you're in, is there anything that maybe you could give us just from a maybe high-level standpoint around how to think about pricing or volume or anything around your aggregates business looking into next year?

Yes. I would say, I've mentioned on previous calls, that we think that with our commercial excellence and dynamic pricing model, that mid-single digits for aggregate pricing is something that's sustainable. We've enjoyed high single-digit price increases this year, and that has a lot to do with the acquisition of Strata and their pricing cost structure up in that market with the rail. Keep in mind, our average selling price includes delivery and freight. And so the addition of Strata pushed that up to high single-digits this year. But Trey, our legacy operations are continuing to perform at mid-single digits, and we do feel like that is sustainable going forward.

The volumes, that's been a little bit of a different story this year. The addition of Strata has given us positive volume growth for the quarter, but our legacy operations are still down, and that is primarily due to, again the 2 factors, the less asphalt paving and the pull-through that, that brings and then the weather. And so you look at the DOT budgets, you look at our backlog going forward, I look forward to providing specific guidance on volume during the next quarter's call.

Your next question comes from the line of Garik Shmois from Loop Capital.

You there, Garik?

Hi. Can you hear me?

Yes, we can hear you now.

Sorry.

You're a little bit [indiscernible]. You're a little bit -- we can't hear you -- understand you, Garik. Sorry.

Okay. Sorry. Okay.

We got either [Technical Difficulty].

Apologies. I wanted to ask on the fourth quarter guidance. What's going to have to happen for you to hit the upper end or lower end of the guidance range?

Yes. I would say that we've based our midpoint on normal weather plus the successful weather that we had, favorable weather for October. And so, weather in November and December in our footprint 1 or 2 weeks can take us, swing us to the high end or the low end of that. And so weather is a big factor on that. I think the continuation of the Oregon stabilizing, and that work that third-party private work continuing into the fourth quarter would be -- would help us. And we saw that in October, and we anticipate that will continue in November and December.

We've got some projects. I mean, with the backlog, we have a lot of work to go perform this year. And so, I think it really does come down to weather. We've got some larger impact projects. We're currently providing a lot of stone on the project down in Southern California called Pier G, the P209 project in Honolulu at Pearl Harbor. That was supposed to begin pouring concrete to that dry dock facility in the third quarter, and it got pushed to the fourth quarter. We're still not in full production on that.

And so that right now could -- if they get going and actually exceed their production rates, that would push us to the high end. If it continues to be slow to get going, that could be on the low end. So there's a few things there. Nathan, did I forget anything that you would want to add?

Give it all [indiscernible].

I mean, I think I got most of those, Garik.

Okay. That's helpful. Follow-up question is just on some of the private construction projects. You had earlier in the year spoken to non-residential delays in particular. You sound a little bit more positive on that based on your prepared remarks. Just want to confirm that and if you could speak to some of those projects that are trying to come back?

Yes. There was close to a dozen projects that we had secured purchase orders, actually had begun construction on some of them early in the year. I mean this was back in January, February, then were delayed. And -- so we've talked a lot about that kind of in the first quarter, second quarter and now here we are in the third quarter. A few of those projects resumed construction. And so I think there's a good slide in our deck that shows that our aggregate volumes in Oregon year-over-year were down 3%.

And if you look at that in the prior quarters, we were down 25% -- 26% quarter-over-quarter last -- in the second quarter. In the first quarter, year-over-year, we were down 26% also. And for the third quarter, we're only down 2%. And so, we have seen that begin to stabilize the quarter-over-quarter comps. I mean, some of those headwinds, we were starting to feel those a little bit starting about this time last year, frankly, in the fourth quarter.

And so, that kind of gives me confidence that aggregate volumes are beginning to stabilize, and that we will continue some of that work on that private work. And specifically, our large market that drives most of the volume for aggregates is in Portland, Oregon, and we have a very strong market position. And we are seeing some of that work resume construction.

Your next question is from the line of Ian Zaffino from Oppenheimer.

On Oregon, can you maybe tell us what the pricing that you realized in the past quarter? Just trying to understand this because it's -- to me, it's always been viewed, I guess, as an optimized area, which I would imagine the pricing would be more optimized, but maybe kind of give us a little bit of color on that?

And then also on the funding package, right, the funding package is 1/3 of what it should have been. So does that then mean just given kind of your near-term guidance that we would see like a faster roll-off of that business? Or was just the business supposed to be up so much with a $12 billion package, and now it's just kind of, like you said, flattish, give or take, versus previously?

Yes. I'll start with that one. So -- and I'll let Nathan talk about the pricing in Oregon. We don't provide specific pricing results and guidance by state, obviously, but there's certainly momentum, and a lot of positive things that come from our dynamic pricing that was really born in that region. And so good news there. As far as the Oregon -- and that's a 10-year bill. And it's substantially less than what the legislature wanted. It's substantially less than what is needed to maintain the current level of repair in Oregon, which is not great.

And so to start making progress. I mean, they need a lot of funding -- additional funding each year going into that. So yes, it's substantially less. Really, you take ODOT gets half of that gas tax. The other half of that $4.3 billion. So over 10 years, and you start doing the math, it's $430 million. If you just did it evenly, it's not always exactly even.

Half that goes to the states, and the other half goes to the cities and counties. The half that goes to the cities and counties, we expect that will benefit us beginning next year. Those are real jobs, real benefits in small communities, midsized markets that we operate in throughout the entire state. And those are those $2 million to $5 million overlay type of projects, some small bridge repairs that are $2 million to $5 million, that is really our bread and butter. We do a lot of that work in a lot of our states, frankly. So that will have an immediate impact to us next year, not as much as we had hoped with a larger bill at $12.1 billion, but meaningful, that will help us out.

The other half of that revenue stream going to ODOT, I frankly don't see that improving the construction that much. It really is without it, they would have had to lay off hundreds of DOT workers that really are maintaining the roads, plowing the snow. So, I would say I would look at the $4.3 billion as a stop gap at the state level. And will require the legislature and the governor and the taxpayers to continue having the conversation as how do we add more dollars to the budget through another transportation bill in order to start making progress on the deferred maintenance that's been happening in Oregon for years.

The roads -- I live there. And I can tell you, they need fixed. And I'm driving on a lot of very old bridges that are well past their design life. And so the Oregonians, we need to fix this problem. So with that, I'll just turn it over to Nathan to talk about pricing real quick.

Good to hear from you. On the pricing, first, just as Brian said, I mean, we don't necessarily give the pricing for any particular market. But maybe to help you understand how the markets are performing. So, Brian talked a moment ago about some of the key markets that are impacting volumes year-over-year. If you look at those markets, they are seeing pricing improvement over last year. And if you look at Oregon overall, including both the larger key markets like you mentioned in the Portland area, but even the other ones, you'll see that Oregon overall is up in its pricing. So an indication that, that dynamic pricing model is working even in those markets where you may see downward volumes.

Okay. And then maybe just touch on M&A. As you look kind of at the landscape over the next 12 months, what type of M&A activity do you think we'd see from you guys? And where would it be? I mean, would it be infills? Would it be new markets? Any other kind of color on what you're thinking about as far as future M&A?

Yes. I would say I'll start with the -- looking just for a second in the rearview mirror, and the success that we've had at integrating the acquisitions that we've done when we restarted our program. I really could not be happier with the due diligence process that's being done at the local regional level that then feeds into our integration. And that playbook has worked well for us and gives me good confidence going into next year in that there are more opportunities.

Our business -- our corporate development team, I talked about a robust pipeline. And there are ample opportunities in the markets we're currently in. Our #1 priority is to continue to infill our existing markets, but also look at markets that are adjacent to our current states. We're going to be focused on the higher-margin materials-led type of companies, specifically aggregates. We continue to like the midsized high-growth markets that we're in.

And I would just tell you that with the addition of Strata, we've been talking about seasonality in the first quarter and second quarter, that I want to level out that seasonality and look at some of the states that we're currently in, in the southern part of our footprint, along with states that we're not currently in, in the southern part of our footprint. So I think our strategy has been pretty consistent and clear from when we first laid out our capital deployment strategy, and very happy to report that there are ample opportunities that continue to come our way. All the deals we've done so far have been negotiated deals. They've all been with multiples that have been very attractive and kind of meet our disciplined modeling criteria.

And so I would say that the future is going to look a lot like the past. If you look at the step-up this year that we spent in SG&A, it was primarily to support our M&A activity. That $20 million step-up in SG&A was primarily for M&A, and we project that same dollar amount to continue forward into future years. So I think that would kind of give you an indication of what we're looking at as far as the amount of capital deployment and number of deals we're looking at.

[Operator Instructions] The next question comes from the line of Ivan Yi from Wolfe Research.

First, can you discuss what were organic aggregate volumes and pricing in [ 3Q-ex ], any acquisitions?

Yes. I would say -- so on the pricing, we -- on the aggregate specifically, and that's where I'll kind of focus on, that's the largest piece of the -- what we all talk about. Our pricing continues to be at that high single with the addition of Strata. Our legacy operations would be in mid-single. And I think that's a sustainable look ahead. We like that mid-single, and we enjoy that in most of the markets that we're in right now.

On the volume, we show for the quarter that we were up 4%. I would say that if you look at legacy operations, because of the headwinds related to the lack of asphalt paving, weather, and the Oregon headwinds that we faced in the first half of this year, we are down, and we continue to be down with those legacy operations. I think you offset that even by looking at our backlog, and the local DOT budgets. That gives me a good hope that, that's beginning to turn at the legacy operations. And just with some normal weather, I think our -- you've seen our aggregate business lines performing much better from a volume standpoint.

Great. That's helpful. And also, we appreciate that you're breaking out the Oregon volumes by quarter. Any insight into 4Q at all? Have you reached an inflection here given the nice improvement we saw in 3Q?

Yes. I think that, when we say that Oregon has stabilized, I'm certainly looking at what happened in October, and what we project continuing to move forward. As I look at and provide a little bit of a look ahead into 2026, and having flat, that we do feel good about where we're at in Oregon. Really, this comes down to the -- how quick our team was able to navigate these headwinds, and change kind of where crews were stationed and moving equipment around, rightsizing the team and the crews, being creative, and finding work that maybe we would traditionally not bid if we had strong DOT budgets.

We had an acquisition in July that performed better than we actually had even modeled for. And so that's good, strong momentum. It's a nice well paving company in Central Oregon. Central Oregon is one of the hottest spots within Oregon. So yes, there's a number of things that we like that's going on in Oregon, that gives us confidence to talk about the stability that, that state is now enjoying, and then kind of look ahead into '24 or '26.

There are no further questions at this time. So I'd like to turn the call back to Mr. Brian Gray for closing comments. Sir, please go ahead.

I just want to thank you all again for joining us today. Just equally importantly, I want to thank our team for delivering record results in the third quarter. Our EDGE plan is working. The fundamentals of our business are strong, and we believe we are well positioned for long-term success. We appreciate your continued interest and support. And with that, we'll turn the call back over to the operator.

Thank you, sir. Ladies and gentlemen, this concludes today's conference call. Thank you very much for your participation. You may now disconnect.