What Knife River (KNF) Said on Its Q3 Earnings Call

Key Points

• Strong aggregate performance drove Q3 growth: Revenue rose 6% to $1.3 billion, while aggregate volumes increased 10% and aggregate gross margin expanded 240 basis points to nearly 30%. Knife River expects to invest more than $125 million in its Sharper EDGE program over three years, targeting about $1 per ton in additional aggregate gross profit.
• Contracting faces near-term pressure: Competitive bidding, higher fuel costs, project delays and fewer bid lettings weighed on margins, and backlog fell to $857 million. Management expects second-half contracting margins of 8% to 9%, while noting backlog margin improved sequentially in Q3.
• Knife River updated its full-year outlook: The company forecasts revenue of $3.375 billion to $3.425 billion and adjusted EBITDA of $475 million to $505 million. It expects high-single- to low-double-digit aggregate volume growth and leverage to fall to modestly above 2.5 times by year-end.

Knife River NYSE: KNF reported third-quarter revenue growth of 6% to $1.3 billion, supported by higher materials volumes and paving activity, while adjusted EBITDA totaled $272 million and adjusted EBITDA margin exceeded 21%.

President and Chief Executive Officer Brian Gray said the quarter was marked by resilience in a challenging operating environment, with particular strength in aggregates. The company reported a record quarter for the product line as aggregate volumes increased 10% year over year, pricing rose by the mid-single digits and per-ton production costs declined.

Aggregate gross margin improved 240 basis points to nearly 30% in the quarter. Chief Financial Officer Nathan Ring said aggregates became Knife River's largest gross-profit contributor both in the quarter and year to date. Internal aggregate volumes rose 13%, aided by paving activity, while third-party sales increased 8%, supported by data-center and power-project demand. Reported average selling prices rose 4.3%, while mix-adjusted pricing increased 5.9%.

Sharper EDGE Program Targets Operational Gains

Management outlined its Sharper EDGE program, a follow-on to its existing EDGE initiatives, intended to drive operational, commercial and organizational improvements over the next three years.

Gray said the company expects to deploy more than $125 million of capital across aggregate opportunities during that period, with most of the investment directed to approximately 23 aggregate sites. Initiatives include plant reconfigurations and automation, mine planning improvements and optimization of heavy equipment. Knife River expects these investments to improve aggregate gross profit by about $1 per ton.

In the third quarter, Knife River increased aggregate plant runtime by 4% and reduced variable production costs by 5%. The company also cited a South Dakota aggregates expansion project expected to begin generating benefits in the first half of 2027. The project is expected to add more than 1 million tons annually to the regional market at what management described as highly accretive margins.

Other initiatives include bulk purchasing and mix-design optimization in ready-mix concrete, greater use of recycled materials in asphalt, and automation and rail-and-loading upgrades in Energy Services. Gray also said Knife River hired an executive in September to lead its artificial-intelligence transformation. The company has rolled out an AI bidding agent designed to help estimators search, score and rank bidding opportunities.

Materials Growth Offset by Contracting Pressure

Ready-mix volumes increased modestly in the third quarter, aided by acquisitions in Texas and Montana, though lower residential and commercial demand in the West partially offset the gains. Pricing increased, but gross margin declined because of geographic and end-market volume mix. Knife River now expects full-year ready-mix volume growth in the high-single-digit to low-double-digit range.

Asphalt volumes also increased, with internal volumes up 10% and third-party volumes up 5%. However, asphalt gross margin declined from the prior year due to increased competition for paving work and higher input costs. Liquid asphalt gross margin was 18.9%, reflecting lower sales volumes in certain markets and increased material costs.

Contracting services revenue grew 9% in the quarter, driven by higher paving activity. The company said the increased work supported demand for its upstream aggregates and asphalt operations. In its Mountain segment, Knife River shifted its bidding strategy toward asphalt paving and materials pull-through, helping lift asphalt volumes by nearly 60%.

Still, contracting margins faced pressure from competitive markets, higher fuel costs, project delays and fewer bid lettings in higher-margin areas, including Oregon. Knife River expects second-half contracting margin of 8% to 9%.

Gray said project delays affecting work in Texas and Hawaii were related to construction scheduling, permitting, engineering and job phasing rather than funding uncertainty or cancellations. He said the company expects much of that work to shift into later periods, primarily next year.

Backlog Declines as Bid Lettings Slow

Contracting backlog ended the quarter at $857 million, down from the prior year. Ring attributed part of the decline to stronger third-quarter revenue recognition, as well as reduced bid opportunities in markets including Oregon and Idaho. Gray said Idaho bid lettings were down nearly 40% for the year, while Texas lettings were down 25%.

The company said it remains focused on disciplined bidding and building higher-quality backlog as it enters its busiest bidding period, which typically runs from November through April. Management noted that backlog margin improved sequentially from the second quarter to the third quarter for the first time in five quarters.

Knife River said it expects approximately 32% of Infrastructure Investment and Jobs Act funding in its markets remains to be spent. Management also pointed to bipartisan support for BUILD America 250 and a longer-term reauthorization of the Surface Transportation Bill, which it believes would support public-infrastructure investment.

Oregon remains an important market, though Gray said its share of Knife River revenue has declined to less than 17% from approximately 24% in 2024 amid state funding challenges. He said Oregon's EBITDA margin remained above 20% and improved year over year in the third quarter, as crews right-sized operations and increased materials sales to contractors working on other projects.

Updated Outlook and Capital Position

For the full year, Knife River now expects revenue of $3.375 billion to $3.425 billion and adjusted EBITDA of $475 million to $505 million. The outlook assumes normal weather and economic conditions for the remainder of the year and excludes potential acquisitions.

The company expects full-year aggregates volume growth in the high-single-digit to low-double-digit range, mid-single-digit pricing growth and at least 150 basis points of aggregate gross-margin expansion.

During the quarter, Knife River invested $37 million in maintenance and improvement capital and $21 million in its South Dakota aggregates expansion and other growth investments. The company now expects maintenance and improvement capital expenditures of 5% to 6% of revenue for the full year, with acquisition and organic-growth spending incremental to that range.

Net leverage ended the quarter at 2.9 times, and management expects it to decline to modestly above 2.5 times by year-end. Ring said the company had $566 million of liquidity, including $118 million in cash, and remains positioned to pursue selected organic investments and acquisitions.

About Knife River (NYSE:KNF)

Knife River Corporation is a construction materials and contracting company headquartered in Bismarck, North Dakota. The company produces and sells construction aggregates, asphalt, ready-mix concrete and cement, and also provides related construction services for transportation, commercial, residential and industrial projects.

Its operations include aggregate mining and processing, asphalt and concrete production, paving, site development and other heavy-construction activities. Knife River serves public-sector and private-sector customers, including state and local governments, contractors, commercial developers and industrial businesses.

Knife River became an independent publicly traded company in 2023 after being spun off from MDU Resources Group.

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