Knife River (KNF) Q4 2025 earnings call transcript

Knife River Corporation NYSE:KNF 4Q 2025 Earnings Call Transcripts Tuesday, February 17, 2025 11:00 AM EST S&P Global Market Intelligence Estimates spglobal. com/marketintelligence Table of Contents Call Participants Presentation Question and Answer 2COPYRIGHT spglobal. com/marketintelligence © 2026 S&P Global Market Intelligence, a division of S&P Global Inc. All rights reserved KNIFE RIVER CORPORATION FQ4 2025 EARNINGS CALL FEB 17, 2026 Call Participants EXECUTIVES Brian R. Gray CEO, President & Director Dara Dierks Vice President of Investor Relation Nathan W. Ring VP & CFO ANALYSTS Brent Edward Thielman D. A. Davidson & Co. , Research Division Ethan Roberts Stephens Inc. , Research Division Garik Simha Shmois Loop Capital Markets LLC, Research Division Garrett Samuel Greenblatt JPMorgan Chase & Co, Research Division Ian Alton Zaffino Oppenheimer & Co. Inc. , Research Division Ivan Yi Wolfe Research, LLC Kathryn Ingram Thompson Thompson Research Group, LLC spglobal.

Dara Dierks Vice President of Investor Relation 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; a nd 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 webs ite. For today's call, first, Brian will begin with an overview of our 2025 results, followed by a segment recap and areas of focu s 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.

Brian R. Gray CEO, President & Director Thank you, Dara. Good morning, everyone, and thank you for joining us. 2025 was a year of meaningful strategic progress. At t he 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, 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 fin ished strong. Our team advanced our EDGE initiatives throughout the year, building momentum in the second half that resulted in a v ery good fourth quarter.

We entered 2026 with confidence and clear sense of momentum. We believe we are well positioned to contin ue 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 inv estment 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 fa mily- owned vertically integrated companies look to sell. Often, Knife River is the first call as they want to work with the compan y 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 multi ple opportunities to win work, either as a general contractor, subcontractor or materials provider. For our customers, being vert ically spglobal. com/marketintelligence 4 KNIFE RIVER CORPORATION FQ4 2025 EARNINGS CALL FEB 17, 2026 integrated means greater supply chain reliability and improved job site coordination. For us, it enhances our financial perfo rmance 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 pr icing in 2026. At the same time, we are intent on managing our costs. In the West and Mountain segments, our aggregates cost per to n were down in the second half of 2025 compared to the same period last year.

We continue to find opportunities to lower variable op erating costs in aggregates and this is a major focus of our PIT Crews and production teams in 2026. Finally, what different iates 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 at tract 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 t o the ideas, improvements and growth opportunities that our engaged team will help us achieve in 2026 and beyond.

Combined, we beli eve these factors will help us generate unprecedented growth for Knife River. Moving from our strategy to our markets, we continu e 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 ac ross 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 center s as well as distribution and manufacturing facilities. But again, the bulk of our backlog is lower risk public paving pr ojects 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 We st 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 approxim ately $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 C alifornia 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 mar gins for the year remained above 20%. The DOT funding landscape continues to be fluid, but Oregon's approved construction budget f or 2026 is comparable to 2025 and the state forecast is similar amounts of asphalt paving this year. The legislature is currentl y discussing the future of infrastructure funding. And although there are differences of opinion on the next steps, they a gree on one thing. Oregon needs funding to fix its deteriorating roads and bridges. Meanwhile, we are seeing encouraging signs in the private market in cluding 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, whi le 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 allo wed us to work late into December. Construction revenue was up almost 20% for the quarter, compared to the same time last year. T he work performed included 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 opport unities 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 Rive r's spglobal. com/marketintelligence 5 KNIFE RIVER CORPORATION FQ4 2025 EARNINGS CALL FEB 17, 2026 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 proj ect in North Dakota.

Lastly, turning to Energy Services, this segment remains margin accretive and an important component of our ver tically integrated business model. We look forward to the second full year of operations at Albina Asphalt as we begin to fully imple ment 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. Wit h that, I'll turn the call over to Nathan to walk through our financial results for the fourth quarter.

Nathan W. Ring VP & CFO Thank you, and good morning, everyone. As Brian mentioned, we finished 2025 with an impressive fourth quarter that produced 4 7% higher adjusted EBITDA and a 340 basis point improvement in adjusted EBITDA margin. Across our product lines, gross profit wa s up 27% for the quarter, and we achieved a record gross margin of nearly 19%. These positive results were driven by a combinat ion 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. Aggre gates 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 con ditions in the West as well as the acquisitions of Strata and Texcrete in the central. We see these contributions continu ing 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 quarte r, 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 ahea d, 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 ba cklog as well as the timing of project completion and job performance incentives compared to last year.

Looking forward, backlog incre ased 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 backlo g 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 busi ness 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 multipl e organic projects. We expect these investments to be accretive to our margin profile and help us achieve our EBITDA targets for 2026 a nd beyond.

We also allocated capital to maintain our rolling stock and plants as well as invest in improvements to increase production a nd efficiency. Our maintenance capital expenditures of $170 million or 6% of revenue were in line with our range of 5% to 7%, gi ven earlier in the year. For the full year 2026, the company expects capital expenditures for maintenance and improvement to rema in spglobal. com/marketintelligence 6 KNIFE RIVER CORPORATION FQ4 2025 EARNINGS CALL FEB 17, 2026 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 b illion. 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 cal l over to Brian to share his closing comments.

Brian R. Gray CEO, President & Director Thank you, Nathan. Knife River enjoyed considerable growth over the last 3 years with revenue improving by 24%, adjusted EBIT DA by 58% and adjusted EBITDA margin by 340 basis points. Our growth strategy has been working, and we believe we are just getti ng started. We like our growing markets, which present both organic and acquisition opportunities. We believe vertical integrati on enhances our value by supporting resiliency and being a profit multiplier. We have opportunities to keep improving our operat ions and are laser focused 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 o ur future. We'll now open the call for questions. spglobal.

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 opportunit ies to build on that backlog for that particular region just given its relevance to margins. Brian R. Gray CEO, President & Director Yes, Brent. We like the position we're in right now, record backlog, up 38% at $1 billion, but you're right. We definitely ha ve seen a shift, a geographic shift of that work more in Mountain with a record backlog and Central with a record backlog, but we hav e 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 contractors suppliers up in those states in Hawaii, Alaska. We benefited from a great year in California, and that momentum and funding is continuing in our markets. Oregon ’s 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 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 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.

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 yo u've been able to do here in the last couple of years on the pricing front? Nathan W. Ring VP & CFO 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 have 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. Brian R. Gray CEO, President & Director 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 co mmercial excellence. So as you know, our dynamic pricing allows us to bid work throughout the year, and so we don't have a single lett er 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 - we will roll that out into those new sites. But right now, very good traction on our dynamic pricing going into 2026.

Brian R. Gray CEO, President & Director Yes. I'll take that one. 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.

Brian R. Gray CEO, President & Director Yes. The private side definitely rebounded well in the late third quarter and benefited us well into the fourth quarter and w as 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 ex pect any major shifts at all at this point in time for 2026 and a stable budget in Oregon with the tons that hav e 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 i n line with what we had in 2025.

Brian R. Gray CEO, President & Director spglobal. com/marketintelligence 9 KNIFE RIVER CORPORATION FQ4 2025 EARNINGS CALL FEB 17, 2026 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 de finitely 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 oper ational execution and implementing EDGE initiatives. Now, we obviously had a partial benefit of recouping some of those preprodu ction 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 t he 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.

Brian R. Gray CEO, President & Director Yes. We're very excited about our growth strategy, and I'll start off talking about the pipeline and the organic opportunitie s 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 s ay 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 direc tly 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 e arly '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 t he pipeline and going out and courting those relationships. The second part of that is doing a very thorough job, disciplined job of due dili gence. And both of those activities are led by our local regional teams, which then feeds into the third phase, which is integration.

An d that is also heavy influence with the local team at the regional level with oversight and support from corpo rate. 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 adde d 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.

Nathan W. Ring VP & CFO spglobal. com/marketintelligence 10 KNIFE RIVER CORPORATION FQ4 2025 EARNINGS CALL FEB 17, 2026 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 bucket s 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 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. I n 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 ou r 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 sup port deals, and that's where we want to put our capital to work is growing this company that Brian outlined for us.

Brian R. Gray CEO, President & Director 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 increas e 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 k ind 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 t he 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 S G&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 t hat. 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 outsid e of that, the underlying costs increasing mid or maybe on the low end of that mid -range single digits.

Hopefully, that's helpful.

And then also, is there any weather catch-up considering there was such a headwind, particularly through the first 3 quarters of '25 . Brian R. Gray CEO, President & Director 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 beg inning spglobal. com/marketintelligence 11 KNIFE RIVER CORPORATION FQ4 2025 EARNINGS CALL FEB 17, 2026 of the year and caused us some challenges at the beginning of the year, but we had a strong fourth quarter and have good back log 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 backlo g 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.

Brian R. Gray CEO, President & Director Yes. Thanks, Ian. I would say that virtually 0 amount of dollars in our backlog related to data centers. We have a lot of dat a 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 pavin g projects, but that would not move the dial at all on our record backlog of $1 billion. We are currently working on 21 data ce nters. And again, most of that would be through the supply of aggregates or concrete mostly to those projects. And I think th at 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 provid ed in the last, say, 2 months is significantly more than what we currently have supply contracts for.

And so a very big upside. Each on e 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 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 tel l 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.

Brian R. Gray CEO, President & Director 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 start ed 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 2 022 to the spglobal. com/marketintelligence 12 KNIFE RIVER CORPORATION FQ4 2025 EARNINGS CALL FEB 17, 2026 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.

Brian R. Gray CEO, President & Director 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 acquisit ion 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 t he 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 m idpoint of $540 million would imply about a 9% growth rate really on that organic business. And then I've mentioned that Oregon is go ing to be flat. And you take Oregon being flat, that would imply that we're mid -teens 14%, 15% on the remainder part of that business, which would be Central, Mountain, Legacy Pacific.

Ivan Yi Wolfe Research, LLC Yes. Now I know you guys don't provide quarterly guidance, but can you give some color on the trajectory of your full year gu idance for '26. What should we expect in terms of ag volumes, price or margins in 1Q specifically. Anything outside of normal season ality? Any additional color would be great. Nathan W. Ring VP & CFO 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 t hat 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 Te xcrete this year softens that 8%. But that does give you an idea of what the seasonality would be for the first quarter. And then th e benefit of that coming later in the year, probably predominantly in the third quarter, maybe a little bit in the fourth.

Brian R. Gray CEO, President & Director spglobal. com/marketintelligence 13 KNIFE RIVER CORPORATION FQ4 2025 EARNINGS CALL FEB 17, 2026 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 menti oned 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 w e roll out and continue to implement the new dashboards and tools that we've given to our sales team. So solid traction on pric ing going forward, but heavily influenced by product mix and by input costs such as cement and liquid asphalt.

I will turn the call back over to Brian Gray for closing comments. Brian R. Gray CEO, President & Director Well, thank you again for joining us today. Thank you to our Knife River team members, a fantastic job last year. We really a ppreciate that. We have good momentum going into 2026. I'm excited for what we accomplish in the year ahead.

With that, I'll say goodby e. Thank you.