Prepared remarks
Good morning, everyone, and welcome to the Knife River Corporation Third Quarter Results Conference Call. Please be aware that this call is being recorded today. I will now turn the conference over to Nathan Ring, Chief Financial Officer. Please proceed.
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 significantly from those projected in today's forward-looking statements due to various risks and uncertainties, including the risks described in our periodic reports filed with the SEC. For further detail, please refer to the legal disclaimers contained in today's earnings release and other public filings, 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 the appendix to today's presentation. These materials are also available on our website. Brian Gray will begin today's call with a high-level overview of our third quarter 2024 results, followed by an update on our competitive edge plan and a segment recap. Following his remarks, I will provide a product line summary, a capital update and a review of our revised 2024 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.
Average sales prices of aggregates for the quarter improved 7.6% from 2023. We rolled out new tools and training across each region to emphasize our dynamic pricing model and track progress. We see pricing momentum continuing into 2025, and we expect to benefit from price increases exceeding costs. At the same time, we are finding efficiencies and improvements at our plants. Our process improvement teams, or PIT Crews did 26 plants in the third quarter, continuing to identify opportunities for us to remove production bottlenecks, increase plant capabilities, improve uptime and control costs. They have now been to 58 plants in 2024, standardizing best practices, developing field training and building on the momentum from last year's success. Our local management teams wholeheartedly support our PIT Crews and feel there's significant margin expansion opportunity to be realized from this initiative.
While the material side of our business was busy optimizing prices, finding efficiencies and sharing best practices, our contracting services teams were actively pushing margins in the bid room and out in the field. Gross profit margin for contracting services improved 120 basis points in the quarter compared to last year. We continue to bid strategically and find opportunities in the field to successfully execute on work and maximize margins. The third quarter is our busiest of the year, and I'd like to thank our teams for their hard work and for truly doing a tremendous job. For the sixth consecutive quarter, we have seen year-over-year contracting service margins improve. This dates back to the launch of our Edge plan, and we could not have accomplished it without fitting discipline, job execution and our dedicated construction crews. Price optimization, cost controls and margin improvement are key components of our Edge strategy, so is growth, both organic and through acquisitions.
We have closed on 6 deals so far in 2024 focusing on aggregate reserves and construction materials. In September, we acquired the assets of Frank B. Markison, a small aggregate producer in California's Central Valley. In October, we acquired the assets of 2 additional aggregate producers: Rock Products Inc. in Central Oregon and a high-quality standard reserve to support our operations in Sioux Falls, South Dakota. Also in October, we finalized a lease agreement to operate 3 existing ready-mix plants in California, where we'll be able to leverage our local aggregates. Just 2 days ago, we acquired the assets of Albina Asphalt. Albina is a liquid asphalt supplier with terminals in Washington, Oregon and California. Albina has a leading market position and will increase the capacity of our Energy Services segment by approximately 25%. This is an exciting deal that expands the footprint of our high-margin liquid asphalt business on the West Coast and supports our vertical integration.
With these acquisitions, we are adding strategic assets to our portfolio that enhance our market positions and align with our strategy of acquiring materials-based companies within or adjacent to our current operations. These acquisitions are expected to generate an attractive financial return with purchase multiples between 6 to 8x the projected 2025 EBITDA. We have several other deals in our pipeline that range in size and our focus remains on material-based acquisitions in midsized, high-growth markets. As we did in the third quarter, we expect to see higher corporate development costs in the fourth quarter compared to last year. While closing on deals during the off-season can create a headwind, we have accounted for those costs in our updated guidance, and we view these expenses as an investment in our future. The pipeline of acquisition opportunities remains strong in our markets, and we look forward to continuing our business development activity.
In addition to acquisition growth, our existing operations are performing well and are benefiting from our Edge initiatives and strong funding for public projects. Each of our segments have seen continued opportunities to bid on projects with record or near-record budgets at our state Departments of Transportation. We have a very good schedule of DOT bid lettings coming up for 2025 across our states, including some sizable projects with significant pull-through of aggregates, ready-mix and asphalt. With about 50% of IAG funding yet to be allocated, public work continues to be the main driver for our contracting services. We believe we are still at the beginning of what looks to be a long period of growth in the construction industry. The roads, bridges, and airports that are so vital to our economy need fixing, and that doesn't happen overnight. We expect to continue benefiting from the build-out of the nation's infrastructure for years to come.
Each of our segments had a solid third quarter. Our geographic segment's price increases helped drive our record revenue. Again, in total, these segments achieved record EBITDA and EBITDA margins. I'll briefly discuss a few highlights from each segment. In the Pacific, third quarter revenue increased to a record $165 million, driven by price increases across all product lines and continued construction activity in Northern California. There is strong funding support for road and highway projects where wildfires have damaged the local infrastructure and rebuilding is underway. We have a significant backlog of work there, which includes an emphasis right now on more earthmoving and heavy construction than it does paving. This has contributed to a temporary asphalt volume decline in the segment. As I mentioned, we added to our ready-mix capacity and added aggregate reserves in California. In the Northwest, revenue was up 4% and EBITDA was up 15% to a quarterly record of nearly $56 million.
This region had strong public agency work, primarily in Central and Southern Oregon. Gross margin for contracting services in the Northwest improved 490 basis points from the same period last year. The region also benefited from having its prestress plant fully operational. Efficiencies at the plant in Washington, combined with demand for prestressed projects positively contributed to both EBITDA and EBITDA margin. On October 18, the region purchased the assets of Rock Products, Inc., bolstering its aggregate reserves in Central Oregon and adding a new ready-mix operation. Switching to Mountain. Revenue and EBITDA were in line with last year's records. For the first 9 months of the year, EBITDA in the Mountain region is up 12% year-over-year. Record revenue in the quarter was driven by higher pricing and continued contracting activity. Idaho Falls had several jobs that drove revenue growth, including highway work and the de-icing project at the Jacksonville Airport.
Backlog is also up 12% year-over-year and continues to grow with a very strong bid schedule. Overall, the work is there, and this continues to be one of our fastest-growing markets. In our Central segment, we have fully embraced the Edge initiatives. This segment continues to see the most improved EBITDA margins with trailing 12-month EBITDA up 200 basis points compared to the same period last year. For the quarter, EBITDA margins had an all-time high of 22.5%. Pricing improvements outpaced costs and contributed to a 7% increase in EBITDA for the quarter. Also contributing to a record EBITDA and a pickup in margin was disciplined project bidding and favorable project execution on contracting services. We're looking forward to several good bidding opportunities across the segment, including positive news from Iowa, Nebraska, Minnesota, and Texas, which have all pointed to more projects and more total paving tonnage for the 2020 season.
This vision has identified several organic growth opportunities, and we look forward to sharing more information on these exciting projects at the appropriate time. Finally, our liquid asphalt product line is having its second-best year ever. It, in fact, hit its EBITDA guidance for the full year. For the quarter, revenue and EBITDA were both down from record highs, primarily driven by lower raw material costs and subsequent lower pricing. We have a strong book of business for 2025 and we anticipate adding to it during the fourth quarter as our state adds more paving projects to the bid schedules. Over the past weekend, we purchased the assets of Albina Asphalt, a liquid asphalt business with terminals in Washington, Oregon, and California. As I mentioned earlier, this expands our footprint within markets where we have aggregates and asphalt operations, further strengthening our vertical integration.
We are very excited to welcome Albina's 80 team members to Knife. Before turning the call over to Nathan, I'd like to reiterate that we believe we are in the early days of a long infrastructure build-out in our country. Knife River is well positioned to capitalize on this growth. The work our teams do is essential for our cities, states, and the nation. We are performing at record levels, and we are taking intentional depth to keep getting better. We are focused on optimizing prices and controlling costs. We are focused on strategic bidding and solid project execution. We are focused on growing our company, both organically and through acquisitions. Our strategy is working, and we're looking forward to a strong conclusion of 2024 and good things in the years to come. I'll now turn the call back over to Nathan for his remarks.
Thank you, Brian. I'd like to begin with an overview of our consolidated results and product line performance, then provide a summary of our capital position as well as capital allocation priorities and then by outlining our updated 2024 guidance. As we look at our consolidated results, we reached another third quarter record with revenue increasing to $1.1 billion. This includes record revenue at our geographic segments. We are proud of these records as our operations continue to focus on higher profit and higher-margin work. This is further demonstrated by our record gross profit of $273 million for the quarter, driven by a 7% improvement across the geographic segments. Adjusted EBITDA was down for the quarter due to the expected decline in Energy Services as well as higher SG&A costs. SG&A for the quarter was $64 million, a $5 million increase over the prior period. Approximately half of the increase was related to acquisition costs that Brian mentioned.
Looking ahead to the fourth quarter, we anticipate a similar increase in our SG&A expenses of $6 million, primarily from due diligence costs currently in progress. Moving to product line performance. Our core product lines continue to benefit from the adoption of our Edge initiatives. Aggregates, ready-mix, and asphalt have all seen healthy pricing improvements for the quarter and for the year. Year-to-date, average selling prices for aggregates increased 8%, ready-mix 10%, and asphalt 2%, driven by our dynamic pricing effort. With the continued adoption of dynamic pricing across our footprint, we are confident in our ability to optimize pricing and profitability beyond 2024. As anticipated, our initiative to capture pricing over volume led to volume declines across our product lines for the quarter and the year. Year-to-date, we have seen aggregate volume decline 5%, ready-mix 10%, and asphalt 5%.
In addition to the effects of our pricing strategy, we have seen some private work get delayed as developers navigate interest rates and uncertainty in the market. We expect that money will come back into play as rates improve. All in all, as we look ahead to 2025, we see volumes beginning to increase again now that we have mostly completed the hard work of resetting our customer base and narrowing the type of projects we bid. Despite the lower volumes, strong pricing improvement and cost control initiatives led to improved gross margins in the quarter, including a 120 basis point improvement in ready-mix and a 230 basis point improvement in asphalt. Although aggregates gross margin was flat for the quarter due in large part to lower volumes, our aggregates gross profit per ton increased 7.7% for the quarter and 11.5% year-to-date. Moving from materials to contracting services. Gross margins improved 120 basis points year-over-year to 12.9% in the third quarter directly related to our pursuit of higher margins on bid day and then once in hand, successfully executing on this work to capture the value.
Our backlog as of September 30 was $755 million, a 3% increase year-over-year at slightly higher expected margins. 87% of the backlog is public work with secure funding that has already been dedicated. We believe the type of work we do, coupled with this reliable public funding lowers our overall risk profile and provides pull-through demand for our upstream higher-margin product lines. Moving to our balance sheet and capital allocation priorities. We ended the quarter with $220 million in unrestricted cash and no amount drawn on our $350 million revolver. Year-to-date, we have generated approximately $150 million in cash from operations and anticipate this number will grow through year-end as we tend to generate more cash flow in the fourth quarter than the other quarters. Additionally, our teams have done a great job bringing down our days sales outstanding from 38 days in 2023 to 34 days in 2024, which also contributed to improved working capital and our cash position.
With our available liquidity and a net leverage position of 1x trailing 12-month adjusted EBITDA, we are in a strong position to execute on our capital allocation priorities. We look at those priorities in 2 major categories, which align with our edge strategy. The first category is disciplined use of capital, which includes maintenance of fixed assets and internal improvements from our edge initiatives. We estimate 2024 capital expenditures for our disciplined category to remain between 5% and 7% of revenue with $127 million spent as of September 30th. The second category is growth, which includes organic and acquisition opportunities. Brian highlighted our recent acquisition activity and our investment of $129 million through today. He also noted that we have additional deals in our near-term pipeline that would be incremental to this amount. Also within the growth category, we anticipate spending $23 million for the remainder of 2024 on the initial stages of greenfield projects.
Lastly, we remain focused on quality investments that will help us achieve our edge goals. Based on our third quarter results, and what we see ahead in the fourth quarter, we are revising our full year estimates to account for the increased SG&A costs, which are largely related to corporate development and health care expenses. We are tightening our consolidated revenue guidance range to $2.85 billion to $2.95 billion. For adjusted EBITDA, we are being at the top end of our guidance, which now reflects a range of $445 million to $465 million. This consists of geographic segments and corporate service contributions between $390 million to $405 million, and Energy Services remains unchanged with contributions between $55 million and $60 million. Our full year 2024 guidance includes the following assumptions: We anticipate average selling prices for our aggregates and related product lines to increase high single digits and asphalt pricing to be up low single digits.
We expect aggregate and asphalt volumes to be down mid-single digits and ready-mix down high single digits. And finally, guidance is based on normal economic and operating conditions for the remainder of the year. In conclusion, we are proud of the work our teams have done in the third quarter, and we look to finish the year with another adjusted EBITDA record. Our geographic segments are producing excellent results. We have a strong backdrop of dedicated infrastructure funding, and we're excited about the contributions we expect to see from our acquisitions. Knife River is growing, and we are committed to achieving our edge goals and delivering long-term shareholder value. With that, I'd like to open the call for questions.
Questions and answers
And your first question will be from Kathryn Thompson at Thompson Research.
Solid geographic performance in the quarter. And you noted that the quarter saw an EBITDA gain just from your geographic specific performance. How did EBITDA margins perform in Q3 for your geographies? And how has that trended year-to-date?
Appreciate the question. Yes, so when we talk about geo segments, just a quick level set. We're talking about the Pacific region, the Northwest region, the Mountain region, and the Central region. And that houses all of our products other than energy services liquid asphalt. And so you're right, our EBITDA was up 6% for the quarter. And within that, if you look at our EBITDA margins in those geographic segments alone, actually improved 90 basis points for the quarter. If you look at for the full year for through 9 months, our actual EBITDA contribution is up 15%, and the EBITDA margin in those geographic segments is up 170 basis points. And so we're both performing on the EBITDA and EBITDA margin at that geographic segment. And obviously, that's been partially offset by the headwinds that we knew about at Energy Services coming into this year. So performing very well in those geographic segments and all of the major product lines.
Okay. And a follow-up and more of a clarification on some of the growth initiatives in the quarter. What are or not included in terms of the type of assets acquired? And you noted that the increase in SG&A was related to M&A and health care cost. If you could segment what was M&A related versus health care related.
Yes. So just to clarify, so year-to-date, we have purchased about $129 million of new companies that consist of 6 companies. Two of those were back in the second quarter, the White in Bakken, the Graves Operation. In the third quarter, we closed on FP Marks and Sons, an aggregates operation in Central California. And then as of late here in the fourth quarter in October and November, we closed on the sand operation there in South Dakota Rock products, which is a quarry in ready-mix operation in Central Oregon. And then just over this past weekend, closed on the assets of Albina Asphalt. It's got the 4 terminals, 1 in Washington, 2 in Oregon, and 1 in California. So we have continued to be focused on aggregates-led materials-based companies that are within or adjacent to our existing markets, which are those midsized, high-growth markets. You're right. We did have some additional SG&A expenses this quarter. And I'll just let Nathan touch specifically on the SG&A bucket that you asked about, Kathryn.
Kathryn, thank you for the question. Yes, for the SG&A piece, the corporate SG&A piece, it is up 8%, as I shared in the prepared remarks. About half of that relates to our acquisition costs, as Brian talked about. The other half does relate to healthcare and claims that are higher in the quarter. It’s probably important to note that as we look at the third quarter and going forward, we really are now comparing like-for-like. What I mean by that is if you think back to last year, third quarter, that’s when we set up these departments that were previously provided by MDU. And so we have those set up successfully with that coming in at lower-than-expected costs. So now you have a fair comparison year-over-year, but we are up it really is of that 8% split between those 2 main categories of acquisition costs, about half of that and health and wealth are about half of that. As we look into the fourth quarter, as I shared earlier, probably pretty comparable to that in terms of about $6 million compared to the $4 million in the fourth quarter of higher corporate SG&A costs.
Most of that relates to the acquisition costs that we’ve been talking about that are due diligence for the quarter, some integration costs for the acquisitions we made here in the beginning of the fourth quarter and the end of the third quarter. So Kathryn, hopefully, that helps you give you a little more color on the split of the SG&A, both for the third and fourth quarter.
Next question will be from Trey Grooms at Stephens.
I wanted to discuss the guidance. If you look at the aggregates, the volume guidance for both aggregates and ready-mix has been slightly reduced. The current volume is in the mid-single digits, and aggregates are projected to be flat to low single digits, while ready-mix is anticipated to be low single to mid-single digits. Can you elaborate on some of the factors influencing this? I understand you're prioritizing pricing over volume, but you've also mentioned that some projects may be delayed. If you could help clarify these points, that would be appreciated.
No, I appreciate that. You're correct. Most of our volume decreases this year have been intentional. We prioritize the quality of work over quantity, which has played a significant role in this shift. We've undertaken the challenging task of resetting our customer base and focusing on specific types of projects for bidding. As we look ahead, particularly in the fourth quarter and into next year, we need to establish a baseline and consider the year-over-year comparison since much of our hard work is now behind us. For example, we have two portable asphalt plants in the central region that, last year, were pursuing higher volume, lower margin work. We have since transitioned those plants to stationary operations, resulting in around 300,000 tons less volume this year compared to last. They will remain in the same location next year, so the year-over-year comparison for 2025 will represent a new baseline.
Most of the claims have been deliberate, and we have closely adhered to our guidance on this. However, there have been some timing issues with projects, including several larger impact jobs that we had last year which are not in play this year, like a significant windmill project in Wyoming that has been deferred to next year. At the start of the year, we were very active with favorable weather, achieving a 22% increase in our EBITDA performance after the first half of the year. The timing of projects has had an effect, along with a softening in demand for aggregates used in ready-mix, which has impacted our aggregates operations. We are observing this decline mainly in the private sector work. Fortunately, we are not heavily exposed to private work, especially in our contracting services. However, we are noticing trends in ready-mix. Regarding our contracting services, this quarter, we engaged more in heavy civil and dirt work than in paving, particularly in California and Idaho markets.
There is nothing alarming with our backlog and future outlook. The positive news is that we believe the hard work we invested in resetting our customer base and refining the types of projects we bid on is now behind us, and we anticipate more favorable comparisons going into next year, which should align better with the overall market that remains strong.
Okay. That's helpful. Is it fair to say that the revision to the volume guide is primarily due to a softening in the end market or actual demand rather than increased difficulties in the competitive landscape for pushing prices? Is that a reasonable assumption? I’m trying to understand how much of the reduction is related to the challenges in pushing prices compared to before.
No, I don't think it's more difficult to push our price. What you're seeing is that through nine months, our volumes are down 5%. We've maintained that for the rest of the year at 5%. As you know, our fourth quarter, due to seasonality, is not going to shift those numbers very far from their current position. So, I believe that our year-to-date guidance for the full 12 months accurately reflects our situation after nine months. Additionally, after reviewing our October sales, we feel confident that the volume projections for the full year remain valid, considering the fourth quarter has a minimal effect on our year-to-date standings.
That's helpful. Regarding acquisitions, you've certainly increased your activity with several deals in the past few quarters. Could you explain how these acquisitions align with your long-term strategy and how they contribute to dynamic pricing? Also, any insights on how we can estimate their contribution to EBITDA based on the multiple you provided, as well as any additional details, would be appreciated.
I appreciate that. We're very excited about our recent activities. The acquisitions we've made in the past 9 to 10 months have us looking forward, and our pipeline remains robust. Our team is actively engaged in due diligence this quarter, and we’re thrilled about both the pipeline and the deals we’ve finalized. These deals align perfectly with our goals: they focus on materials-based aggregates in our established markets. Most of them are smaller acquisitions, which we excel at integrating and leveraging for immediate synergies, including our capability for dynamic pricing. Looking at the White Bakkin, Grays, EpiMarks and Sons, Parker Pit, and Rock Resources, all these transactions emphasize our material strengths and are positioned in our strategic market areas. They will enhance our ongoing efforts related to dynamic pricing and other synergies in these existing markets. The deal we completed over the weekend in Energy Services is one we've been eyeing for a while.
As noted in our performance metrics, liquid asphalt is one of our most profitable segments. This acquisition is significant as it is based in the Northwest, where we have terminals in Washington and Oregon—some of our most profitable regions in terms of EBITDA margins. This will certainly enhance our vertical integration in asphalt and contracting services. Albina will be a tremendous addition to our family of companies, and we are very excited about it.
Next question will be from Garik Shmois at Loop Capital.
Wondering if you could speak to in a little bit more detail just your observation that you expect pricing to remain above costs moving forward. As we get closer to 2025, any thoughts as to how you expect pricing and costs to track next year?
So yes, I can share what we've mentioned in our prepared remarks, and we'll provide more detailed guidance in February. The fundamentals for demand are still strong. Our backlog is up overall, and when we look at the funding levels at state and local public works departments, the budgets are solid. The demand environment remains very healthy. The challenges we faced this year regarding volumes stemmed from a fundamental shift in how we approach work, the jobs we bid on, and the customers we engage with. We needed to realign our focus on quality over quantity while also increasing our material prices in the high single digits. We see this momentum continuing. We have been working hard to reset our customer base and streamline our project portfolio, and we will maintain a disciplined approach to bidding, prioritizing quality. We are still in the early stages of implementing dynamic pricing and refining our sales training and dashboards.
This self-improvement focus is very important to us at Knife River. We believe that volumes will start to better reflect the overall market, which is looking strong based on our backlog and DOT budgets. Coupled with our pricing momentum, there are opportunities emerging from the efforts of our teams. Our local management teams indicate that there is potential for further margin expansion from our PIT Crew activities, which are concentrating on production costs and minimizing downtime. This focus is as crucial as our dynamic pricing strategy. Overall, we feel very confident that next year we will see a recovery in volumes and that our pricing discipline will exceed cost increases.
That's encouraging. Then just 2 volume follow-ups. One, was there any weather impacts in the quarter just given it's been such a theme here over the last several weeks and earnings season? And then just a clarification on the revenue guidance. You kept the midpoint unchanged. Is it fair to assume that the acquisitions in the fourth quarter are kind of the offset for the lower volumes?
We have operations in Texas, and as you may know, the weather there has been very wet and problematic recently. Our sales forecasts, which we updated at the end of the second quarter, were affected by lower sales from our Honey Creek facility. Both our ready-mix and contracting services, along with asphalt production in Texas, experienced some impact. While it's not a large part of our overall portfolio, it did contribute to the lower volumes we reported for the quarter. Regarding the acquisitions, Nathan, would you like to address that question?
Yes, Garik. I think your question was along with the revenue guide. We do have that still at the same midpoint. So the question there acquisitions, do we see revenue in the fourth quarter? Really, as we talked about a little bit in the prepared remarks in the fourth quarter for us when we bring these deals on, oftentimes, this is towards the end of the year, the off-season for us. So the revenue related to those acquisitions would be nominal in the fourth quarter.
The next question will be from Ian Zaffino of Oppenheimer.
Wanted to ask you on the M&A front. As you're looking and as you're talking, how do we think about maybe the mix of potential acquisition targets that you're looking at? Is it going to be more services, materials, if so, what type of materials? Is it going to be vertically integrated? Maybe any color you could kind of give there so we know where the business is heading?
Thanks, Ian. We have a slide in our presentation that illustrates our pipeline in terms of deal size and markets, so I’ll focus on the specific product lines we are considering. We maintain a strong pipeline with deals ranging from smaller ones under $25 million to larger ones exceeding $200 million, and we have completed due diligence on several of these. Our focus remains on markets where we currently operate or those adjacent to our existing areas. Typically, our local competitors consist of regional family-owned, vertically integrated companies. We are not intimidated by contracting services; in fact, we welcome these opportunities because they often involve existing aggregates that come with the deal, which we can enhance with our operations. The pipeline is diverse in project size, with potential deals in every region we serve, encompassing various product lines including aggregates, ready-mix, asphalt, and contracting services. Recently, we have also focused on liquid asphalt. All of these are part of our current pipeline, and our strategy has consistently emphasized growing our higher-margin upstream material businesses, with aggregates leading the way. This provides a snapshot of our pipeline and strategy.
Okay. And then I guess we're kind of touching upon a 20% margin in this past quarter, obviously, it's a strong part of the year seasonality. But how are we thinking now about that 20% margin, both in what you've been able to generate? And then margin expansion you're looking to do, but then maybe offset by some of these higher SG&A costs and some other costs.
Yes. Well, I think we continue to be very pleased with the progress we’re making with the Edge initiatives. We laid out that we wanted to be at 15% by 2025, and we achieved that goal 2 years early. If you look at our year-to-date performance, we’re up 50 basis points year-to-date overall. And obviously, we’ve had the headwind that we knew about in Energy Services. If you take out Energy Services and look at the geographic segments, our EBITDA margin improvement for the 9 months has been 170 basis points. We definitely feel committed that the 20% target that we’ve set for our long-range goal is achievable. I can tell you that all of our initiatives internally are geared to drive towards that flag of 20%. We’ve talked about there’s multiple paths to get there. We’re focused on all of them. Growth is a part of that. Our PIT Crews is a big part of that. Continuation of dynamic pricing is a big part of that. We’re looking at all regions, all product lines. And yes, we are committed to that 20% long term, knowing that we continue to make progress this year and have made tremendous amount of progress in the short amount of time since we’ve really rolled out the Edge initiative. So very focused on that, Ian.
Next question will be from Sherif El-Sabbahy at Bank of America Merrill Lynch.
I just wanted to touch on capital allocation. You noted that the M&A pipeline is quite robust and diverse. But with leverage as it stands well below the long-term average target and substantial cash on hand, should we think of that as earmarked for M&A that you have in the pipeline, or is there any shifts on the margin with regards to capital allocation priorities?
Yes. Thank you for the question. So first of all, again, very excited about what we’ve seen here in the third and fourth quarter with where we’re putting our dollars and putting those to work with, both maintaining our assets and improvements for them and then as well as the growth that we’ve got identified. So the question being, do we anticipate any shift in where those dollars will go to with what we’ve got as far as net leverage and cash on the balance sheet. As I mentioned in the prepared remarks, very strong position for the company to put those dollars to work in both of those categories. So what you’ll see going forward, most likely is for us to continue to maintain our assets in those improvements, and we’ve indicated that, that’s 5% to 7% of revenue for the year and then also looking to grow. We mentioned the $129 million for our acquisitions and then $20 million for organic, incremental to that. So for the fourth quarter, if we have additional acquisitions coming in, that would be incremental to the $129 million. As far as shifting to capital returns, cash returns, I think the best dollars for us to spend are those on maintaining our business and growing our business with the opportunities we see forward.
Next question will be from Chris Ellinghaus at Siebert Williams Shank.
Brian, can you just talk about the Northwest backlog? And what's contained in the decline, is it timing? Is there some product mix? What's going on there?
Yes. So we had a large impact job down in Southern Oregon called the Foothills project. And so really, if you look at our last year's backlog, it's the one that's abnormally high. You look at where we were at in '22 at the end of the third quarter or '21, we're actually higher today than we were in those years. It's not alarming that where our backlog is at. I think as we're comparing it to a year where we had a large impact project down in Southern Oregon. Our teams are very focused. The work that we've got is very diverse in the Northwest region. We talked about before, Chris, we have that unique ability to flex between the private and the public work. We also have a lot of work right now coming up out of our prestressed facilities. Nothing alarming on where we are as it sits today on backlog.
Okay. Do you have any color on when this Wyoming wind project might come back around?
Yes, it's not been canceled. It's just been delayed. We thought we were going to start some aggregate production and supply in the third quarter. Typically, in the fourth quarter, that part of the world, you're not doing a lot of work anyway. Sometimes you might get a little bit of work in there, but it's really just been shifted into next year, Chris.
Yes. So our funding strategy really does relate to 2 areas as of now. As we've talked about, first, we've got cash on the balance sheet. We started the year with $200-and-some million in cash. We produce cash flows from operations. I think you can use EBITDA as a guide for that where we have utilized a good portion of that for the 2 buckets I talked about earlier. So anticipating ending the year here, absent any incremental acquisitions we do, with cash on hand. That would be 1 funding source. Ended the quarter at 1x net leverage, our target there is 2.5x. So again, having that availability of utilizing the balance sheet and debt to grow. When we look at other options and that if the deals were large or if the owner was interested in that, that's a hypothetical we potentially would. But really, our funding sources would come from cash sitting on the balance sheet, but that to work and then moving towards our target of 2.5x as we grow our acquisitions.
I guess another way to ask the question. Historically, you've done a lot of these family-owned businesses, right? There must be some tax considerations in how they're seeking to be paid. Are they looking for any stock in their transactions or other tax advantages?
We have had instances in the past where we have done deals that some owners have shown interest in stock. We have accommodated that. So if there was an owner that came forward with that interest again, we would take a look at it or if the deal, but we'll certainly be looking at the metrics of the transaction to make sure that it makes sense for us. But yes, there are times when that makes sense. Maybe for them too, to have a continued interest if they're part of it, the deal going forward to see how we perform and benefit from that as well. So yes, Chris, we are open to that also.
Okay. One last question. Regarding the due diligence and M&A fee expense from the last few periods, have you thought about excluding those from your calculations since they are irregular and not consistent?
Yes. I think if a deal was transformational or there were certain adjustments that needed to be made for GAAP purposes, we would maybe consider doing adjusting. For the deals that we currently have, those are right within the size that we would expect, as Brian mentioned earlier, and so for those, they're recurring as we take a look at the rules. We have not done an adjustment, but Chris, going forward, depending upon the size of the deal, we take a look at that and of course, communicate that to the investing public as to why we're making that change of that adjustment.
Your next question will be from John Ramirez at D.A. Davidson.
Looking ahead, could you discuss your four or five largest states and identify where you anticipate growth for 2025, as well as the challenges you foresee, particularly regarding large DOT projects being announced and your focus on pricing over volume?
Yes, John, I appreciate that. We're focusing on price over volume and continuing to implement our dynamic pricing across all 14 states. The Northwest region is the furthest along in this initiative, but we're rolling it out in all major product lines, including aggregates, ready-mix, and asphalt. Regarding contracting services, our slide on backlog shows that the Mountain region has a very healthy bid letting schedule, with 12% more backlog compared to last year. States like Nebraska, Iowa, Minnesota, and Texas have strong DOT budgets. Overall, all 14 states are at or near record funding levels, though there may be timing issues with DOT budgets as they navigate legislative challenges and increase funding in states like Oregon, which could lead to a temporary slowdown. However, it's crucial to remember that road and bridge repairs are essential. The infrastructure scorecard in these states reflects strong needs discussed with DOT directors.
While IAG funds are beneficial, they’re not sufficient to address all issues. States experiencing slight dips are actively collaborating with legislators to secure funding for upcoming projects, as seen in Texas and Minnesota. Virtually all states show solid infrastructure funding potential. We also benefit significantly from military spending in Hawaii and Alaska, which remains a positive influence. Some projects anticipated to begin this year, like the submarine dry dock in Hawaii, face minor delays, but they are not canceled — just postponed. These projects, along with military and public funding and developments in data centers and wind energy, suggest robust growth next year, with a return to favorable market conditions anticipated.
Got it. And you mentioned something about your prestress activity contributions. Could you talk more about that and see what the ramp looks like going forward?
Yes. No, we're very excited about the progress the new facility in Spokane, Washington has been making. We commissioned that earlier in the year. It's up to full operation. I think it's actually outperforming some of the models that we put together both from a capacity standpoint, our labor costs. The good news with that is that the demand continues to be strong in pre-manufactured concrete building solutions, whether that's for structural bridge builders or architectural wall panels. We are really seeing contractors gravitate towards that as a very affordable, sustainable building solution. Anxious to host our Board of Directors actually out in Spokane, Washington next week and show off that facility. It's performing exceptionally well and is really helping contribute to those record EBITDA margin, EBITDA performance in the Northwest region.
And 1 before I get to Nathan, the industry has suggested mid-single digits in 2025. What's your view on this comment?
Yes. I think directionally, we would agree that the pricing momentum that we've seen this year and the continuation of our dynamic pricing focus in markets that we enjoy a #1 or #2 market position in, which is about 75% of our volume, I think we would agree that, that pricing momentum is going to continue into 2025 and that we feel that it will outpace inflationary costs.
Yes, it does take into account what you guys spent on acquisitions during that month of the last month in September.
And do you see, oh sorry, go ahead.
So I was going to say, you can see from there, we spent essentially $15 million in CapEx through September, and the remainder of the $129 million we mentioned would have been spent in October and November, if that kind of helps you with the numbers, the $115 million then.
And at this time, Mr. Gray, we have no other questions. Please proceed, sir.
I just want to thank everyone again for joining us today. We’re proud of our results and are excited about the long-term opportunities at Knife River. We continue to make good progress on our edge goals and are well-positioned to grow our company and deliver long-term value for shareholders. We appreciate the interest and support. And with that, I’ll turn the call back over to you.
Thank you, sir. Ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending. And at this time, we do ask that you please disconnect your lines. Enjoy the rest of your day.