管理層發言
Good morning, ladies and gentlemen, and welcome to the Knife River Corporation Fourth Quarter and Full Year 2024 Results Conference Call. At this time, all lines are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. Also note that this call is being recorded on Thursday, February 13, 2025. And now I would like to turn the conference over to Nathan Ring, Chief Financial Officer. Please go ahead.
Thank you, and welcome to everyone joining us for the Knife River Corporation fourth quarter and full year results conference call. My name is Nathan Ring, Chief Financial Officer of Knife River, and I'm joined by our President and Chief Executive Officer, Brian Gray. Today's discussion will contain forward-looking statements about future operational and financial expectations. Actual results may differ materially from those projected in today's forward-looking statements. For further detail, please refer to today's earnings release and the risk factors discussed in our most recent filings with the SEC, which are available on our website and SEC website. Except as required by law, we undertake no obligation to update our forward-looking statements. During this presentation, we will make references to certain non-GAAP information. These non-GAAP measures are defined and reconciled to the most directly comparable GAAP measure in today's earnings release.
These materials are also available on our website. Brian Gray will begin today's call with a high-level overview of our 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 2025 financial guidance. At the conclusion of our prepared remarks, we will open the line for a question-and-answer session. With that, I'll now turn the call over to Brian.
Thank you, Nathan. Good morning, everyone, and thank you for joining us today. In 2024, we completed our first full year as a publicly traded company and again achieved record results. Over the last two years, we grew our adjusted EBITDA by 48% and our adjusted EBITDA margins by 360 basis points. This is a testament to the success of our competitive Edge strategy and the dedication of the entire Knife River team. I continue to be excited about the opportunities we have in front of us to grow and create long-term value for our shareholders. With that, let me recap Knife River's record 2024 results and share a preview of what we see ahead in 2025, including progress on our Edge plan and an update on our pending acquisition of Strata Corporation. Starting with 2024 performance, we achieved record full year revenue, adjusted EBITDA and adjusted EBITDA margin. In 2024, our efforts to optimize prices drove annual price increases of 7% for aggregates and 10% for ready mix.
At the same time, we focused on controlling our costs. Our process improvement teams visited 58 plants, continuing to improve our operational efficiencies. This helped drive margin improvements across our aggregates, ready-mix and asphalt product lines. On the contracting side of our business, we improved our industry-leading gross margin by 160 basis points, a result of disciplined bidding and solid project execution. Looking at growth, we invested $131 million on six acquisitions last year with a focus on materials-led opportunities. We look forward to a full year of EBITDA contributions from our 2024 acquisitions, which we expect to be approximately $16 million to $20 million in 2025. Lastly, we are committed to excellence, and we strive to be the best in everything we do. We recently created the position of Chief Excellence Officer to oversee our relentless drive to become best-in-class.
This role will focus on expanding our PIT Crews and leading our standardization efforts to implement best practices. Combined, all of these Edge efforts helped us achieve record results, and we continue to improve our adjusted EBITDA margin to our long-term goal of exceeding 20%. Looking ahead to 2025, we are starting the year with a strong backlog. And we continue to add new work. Our backlog of $746 million is 13% higher than the same point last year. With our selective bidding, we are very pleased with the strong margins we achieved with our backlog in 2024 and expect to see our 2025 backlog deliver similar margins. The majority of our contracting backlog is public work, building and paving roads and highways, which provides a trough or upstream materials. As a prime example of this, we recently secured a $96 million, three-year road construction project in Idaho. This job includes the reconstruction of five miles of highway, two bridge replacements and 10 miles of concrete pathways.
In total, it will utilize one million tons of aggregates, 145,000 tons of asphalt and 20,000 cubic yards of ready-mix. While we are seeing more large projects coming out for bid, most of our jobs are under $5 million and will be completed in less than one year. Across our footprint, local, state and federal infrastructure spending remains at or near record levels. In our 14 states, nearly half of the IAG funding has yet to be obligated. The majority of our bidding takes place in the fourth quarter and the first quarter. And we continue to see active bid schedules from our publicly funded customers. In addition, we are beginning to see increased opportunities in private work, as projects that have been delayed for macroeconomic reasons are starting to bid again. On top of robust infrastructure spending and improved backlog, we are ending 2025 with several line of sight opportunities in our EDGE plan.
Starting with the G and EDGE growth, we are excited about our acquisition pipeline. We have several deals in various stages of development, including Strata Corporation. In December, we announced our definitive agreement to acquire Strata for $454 million. Like Knife River, Strata is an aggregates-led vertically integrated construction materials company. It will provide infill growth in our Central segment, adding well over 30 years of aggregate reserves for its operations, along with 28 ready-mix plants, three asphalt plants and the contracting services division. We expect the transaction to close in the first half of this year, subject to customary closing conditions. In addition to Strata, our corporate development team is working diligently on numerous other acquisition targets in the pipeline. We have potential deals ranging from single site bolt-ons to larger multi-location platform companies.
And we are in a strong financial position to invest in these opportunities. Knife River is the acquirer of choice in our markets, with strong business relationships and a good local reputation. Over the course of 90 acquisitions, we have developed a proven playbook for due diligence and integration. And we look forward to additional acquisition announcements throughout the year. Equally important as our M&A strategy, we are also investing in multiple organic projects to grow our business. These include an aggregates expansion project in South Dakota, which is expected to significantly increase our production capabilities in the rapidly growing Sioux Falls market and add rail services for distribution. The project is scheduled to be finished in 2027, but we anticipate seeing partial returns prior to going into full production. We are also launching new operations in Twin Falls, Idaho, starting with a ready-mix plant, small office and equipment yard.
In the past, we have performed a lot of work in this part of Idaho with our portable crews. With this new site, we will now have a fixed base to work from and can begin building a local team in this mid-sized high-growth market. Another example of organic growth is in our Energy Services segment, where we will bring a new polymer modified liquid asphalt production facility fully online this spring. We have started taking delivery of feed supply at the plant. And we are already seeing benefits from this project in the form of transportation savings and additional market capacity. We currently have approved approximately $70 million in 2025 for organic growth projects. Along with acquisitions, organic growth has been an integral part of Knife River's success over the past three decades and is a vital component of our competitive edge strategy. We look forward to discussing updates on all of our growth projects as the year progresses.
At the same time, we are equally excited about the excellence initiatives we are undertaking, which is another key aspect of our edge strategy. In 2025, we expect to see even more momentum from our expanded PIT Crews. As a reminder, we have gone from one materials-focused PIT Crew to over a dozen teams that are now focused on three key areas: commercial excellence, operational excellence, and standardization. Our newly appointed Chief Excellence Officer, Glenn Pladsen, is leading this process, which we believe will drive continued improvements at our current operations while also allowing for quicker integration of our acquisitions. We also continue our efforts to optimize pricing and drive margin expansion. We are deep into the rollout and execution of our company-wide sales training program, and we continue to enhance our curriculum. Complementing this, we are in the early phases of introducing new software to manage our customer service and coating processes.
Each of these opportunities, from acquisitions to organic growth to the self-help from dynamic pricing in our PIT Crews is an investment in our future. And combined, they represent our blueprint for achieving both our near-term and long-term growth goals. To help support our teams and facilitate the adoption of our initiatives, we have streamlined our segments from five to four. In 2025, our reported segments are West, Mountain, Central and Energy Services, with the former Pacific and Northwest segments combining into the newly formed West segment. We believe this allows us to provide enhanced regional support for our local teams as they implement EDGE and pursue growth opportunities. You will see this change in reporting segments, starting with our Q1 earnings report. Finally, I will share an update on our segment performance in 2024 and what we see ahead in our markets in 2025. Our geographic segments had a record year, achieving $455 million in EBITDA, a 15% increase year-over-year.
Starting in the Pacific, full year revenue and EBITDA both increased 7% from last year. This was driven by price increases across all product lines and strong contracting services activity in Northern California. Looking ahead, we see opportunities in 2025 for military projects in Hawaii, energy development in Alaska, marine construction in Southern California and increased private and commercial work in Northern California. The Northwest region continued its success in 2024, improving its EBITDA by 24% to an all-time record of $150 million. The region also improved its EBITDA margin to 21.6%, an increase of 340 basis points from the prior year. Strong public agency work helped drive these record results, along with efficiencies at our new prestress plant in Spokane, Washington. The plant came online in February 2024 and generated $2 million in labor and raw material savings and improved our gross profit by more than 40%.
We see continued success at our prestress operations in 2025. Looking at the region as a whole, we are also seeing an increase in private work slated for the second half of this year, particularly data centers, railroad projects, and commercial and residential developments. In the Mountain region, higher pricing and strong demand for contracting services drove record revenue and EBITDA. We also improved our EBITDA margin to a full-year regional record of 17.1% through disciplined bidding and solid project execution. This region continues to benefit from population growth and strong budgets for both public and private construction work. We have record backlog here to start the year and continue to add to it. As it relates to public work, we are seeing an increase in residential subdivision bidding, especially in the Boise and Idaho Falls markets. There’s also increased commercial and industrial spending throughout the region, particularly in Cheyenne, Wyoming and throughout most of Idaho.
In Central, we achieved record EBITDA and EBITDA margin, led by price increases and strong contracting services activity. We entered 2025 with a higher backlog than a year ago, including a strong DOT bidding environment in Texas, Minnesota, Iowa, and Nebraska. We expect to benefit from more projects in these states as we are seeing funding targeted more directly to asphalt paving in our markets. We also expect to benefit from acquisition growth and organic growth in this region, including improved uptime and rail shipments from Honey Creek Quarry in Texas. At Energy Services, revenue and EBITDA were down from our record year in 2023, as anticipated, but we believe we are in a good position to grow. We're excited about the addition of Albina Asphalt. That integration is going smoothly, and we look forward to a full year of EBITDA contributions from the four terminals in Washington, Oregon and California.
In terms of vertical integration, Albina's footprint covers Knife River’s highest concentration of liquid asphalt demand. While Albina’s pre-acquisition backlog is at lower margins than what we typically see at Energy Services, we expect the margins to improve as we utilize our EDGE concepts of disciplined bidding and operational improvements. In 2025, we expect Energy Services will remain accretive to Knife River's overall adjusted EBITDA margins. In conclusion, we are proud of our accomplishments in 2024. We achieved record financial results while also improving our safety performance. Our EDGE strategy is working, and our Knife River team is delivering on it. We have a lot to look forward to in 2025 and beyond, including strong markets, excellent growth opportunities and the continued evolution of our EDGE efforts to drive long-term profitable growth. With that, I'll turn the call over to Nathan.
Good morning. As Brian stated, we are very pleased with our record 2024 results. These results include strong fundamentals in each of our product lines. Starting in aggregates, we continue to see solid price improvement with the annual average selling price increasing 7% over the prior year. This increase was directly related to our EDGE initiatives of taking on less work, but at higher prices, which we call quality over quantity. Along with improving our pricing, we improved our aggregate gross margin to a record 21%. We have mostly completed the hard work of resetting our customer base and narrowing the type of projects we bid. As we look ahead to 2025, we anticipate volumes will increase low single digits over 2024 and be more reflective of economic growth in our markets. We believe pricing momentum from the past two years will continue and expect mid-single-digit price increases for 2025.
Moving to the ready-mix product line, we saw improvement in the average selling price with a 10% annual increase over the prior year period. Our gross margin increased to a record 16%. These are impressive numbers, considering our volumes were down 9%, primarily related to our EDGE pricing initiatives and less demand in the private market. Similar to aggregates, we have reset our customer base and expect volumes to increase low single digits in 2025. We are seeing increased demand for commercial and industrial projects, including several large infrastructure projects taking off in the second half of this year. We also expect price increases to continue in 2025 with full year improvement of mid-single digits. Moving to asphalt, we realized a 2% price increase in 2024 and despite lower input costs that normally would put downward pressure on pricing, we focused on higher-margin work, resulting in a 180 basis point improvement in gross margin, the highest increase among our product lines.
Based on our current backlog and visibility into future bid lettings, we anticipate asphalt volumes and pricing to increase low single digits for 2025. At our contracting services product line, we continue to see strong revenue, margins, and backlog. We had record revenue in 2024 of $1.4 billion and a record gross margin of 13%. The improvement in margin is directly attributable to our disciplined bidding and successful execution at the job site. Along with the record results of 2024, we are seeing higher construction backlog compared to the same time last year at similar margins. As Brian mentioned, federal and state funding is at or near record levels and nearly half of the IIJ funds have yet to be obligated in the states where Knife River operates. Additionally, in 2024, six of our states passed valid measures for transportation investments with more than $7 billion in new and renewed funding.
We believe this level of funding will continue, creating demand for our contracting services and pull-through utilization of our upstream materials. Moving from operations to administration, SG&A increased 5% over the prior year as anticipated due to higher labor costs and third-party expenses related to our acquisition program. These costs were partially offset by higher gains on asset sales and lower incentive payments. In 2025, in addition to the standard year-over-year inflationary increases of mid-single digits, we will be investing approximately $20 million to support our acquisition program, PIT crews and other EDGE initiatives that are driving our long-term growth. This step-up in investment is included in our overall guidance, and we are confident these initiatives will generate strong returns. As we look to the balance sheet and our capital allocation, we believe we are in a solid position to grow our business.
In 2024, we invested $170 million for maintenance and improvement for our fixed assets, including aggregate reserve replacements and plant and rolling stock upgrades. Additionally, we invested $131 million on six construction materials acquisitions. After investing $300 million in 2024, our net leverage remains healthy, having improved to 1.0 at year-end with a long-term target of 2.5x and $237 million of unrestricted cash, we are in a strong position to support our capital priorities. For 2025, we expect our capital expenditures for maintenance and improvements to be between 5% and 7% of revenue, with the maintenance portion in line with depreciation and depletion. For growth capital expenditures, we have approved $522 million, including organic projects related to increasing aggregate reserves and ready-mix production as well as the pending Strata acquisition. Future acquisitions and organic projects would be additional to this amount.
We are on track to close our acquisition of Strata Corporation in the first half of the year. To help finance this acquisition, we plan to raise approximately $500 million of additional debt. Lastly, as we look to 2025, we expect another year of record revenue and adjusted EBITDA, including consolidated revenue between $3 billion and $3.2 billion and adjusted EBITDA between $485 million and $535 million, including geographic segments and corporate services between $420 million and $460 million and Energy Services between $65 million and $75 million. In conclusion, we are proud of the work our teams have done to achieve record results in 2024 and position us for further success in 2025 and beyond. Our segments are producing excellent results. We have a strong backdrop of dedicated infrastructure funding, and we are excited about the contributions we expect to see from our acquisitions across both our geographic segments and Energy Services.
Knife River is growing, and we are committed to achieving our EDGE goals, serving our customers, being the employer of choice and delivering long-term shareholder value. I would now like to open the call for questions.
分析師問答
Thank you, sir. One moment for your first question, which will be from Brent Thielman at D.A. Davidson. Please go ahead.
Thanks, good morning. Congrats on a great finish to the year. I guess first question, Brian, when you look into 2025 and you sort of think about all the different initiatives you're putting in place, within the company, which of the regions are you expecting to see sort of more meaningful improvement in profitability and margins? And then similarly, from a product line standpoint, where do you think there's some good potential for kind of margin enhancement just based on the initiatives you're executing and obviously exclusive of what Strata is going to do for you.
Thank you, Brent. I think we're pretty consistent and very focused on the Edge initiatives. Obviously, we've been focused a lot on dynamic pricing and maximizing our bid margins in the bid room. We're going to continue to do that. We deployed the initial materials PIT crew and saw the successes that we were having just identifying those operational efficiencies. And so, we've significantly improved that initiative and added 11 or 12 more teams in there. Where I say that we're focused, I mean it continues to be on our PIT Crew and the self-help as it relates to our operating efficiencies. We've identified some real areas that we can continue to improve on specifically in our aggregate site. They've been focused on the aggregate sites, but it's time to go back around to some of the larger sites that we started with two years ago. And we see that our margin expansion in aggregates is probably the one product line that we see the most opportunities in.
We see opportunities in all of them, frankly, in ready-mix, asphalt, our liquid asphalt, our quality control team that we put together recently, our maintenance and our shop PIT crews are going out and looking at that. Contracting Services, we've had some significant margin expansion in the last two years, but we're not done there either. And so, I think the aggregates have probably got the most margin expansion opportunities there, Brent. As far as regions, again, all of our regions are improving. I'm very excited with the resegmentation and really combining the Northwest and the Pacific into the West. And we've got some momentum in the Pacific region right now. I think we've turned the corner, and we see some very exciting impact projects in Hawaii, up in Alaska. We've got strong backlog up in Northern California. We're starting to see more marine construction opportunities down in Southern California.
And so, as far as one specific geographic region, I think they're all going to improve. I think they all have their eye on that 20% EBITDA margin long term. But I see that there's probably the most upside in the Pacific region, Brent.
Yes, that’s very helpful. Brian, could you elaborate on the opportunities related to entities and private work that you mentioned? I'm also curious about the reasons for pursuing these now and any current challenges the business might be facing.
I'd say that there's a lot of talk. There are actually some very specific bidding that's going on. I would say that when we look at the private work coming back into play, I think that we're really looking at that in the second half of this year. We certainly have some line of sight projects that will help us in the first half of the year. But I would say the majority of those are in the second half of the year. Back to the Pacific region, I had our General Manager there give me a list of over a dozen subdivision jobs they've bid since the election, I mean over $70 million just since the election. And so, there is a lot of activity on the private side of the market. Data centers, obviously, have been a key part of our business and the success in the past. We continue to see those opportunities throughout our footprint in Oregon, in Idaho, in Wyoming, and South Dakota. And so there's a number of specific projects, some energy in the North Slope.
We've got some very specific contracts up there that's going to benefit us in Alaska next year. And then the big job at Pearl Harbor in Hawaii. We talked about that. It's been a little bit delayed from last year, but we're mobilizing the ready-mix plant on to site and expect to see some volumes that will benefit us again a little bit later this year, but certainly in 2025. So a fair amount of talk and a fair amount of actual bids, not a lot of volume going out on those jobs yet, Brent, but I fully expect that, that will happen in 2025.
Really helpful. I will pass it on. Thank you.
Right. Thanks, Brent.
Thank you for taking my questions today. I wanted to circle up on the $20 million step-up related to acquisition costs. I appreciate that color in your prepared commentary. But just to clarify for SG&A in the quarter, with that $20 million step-up in acquisition-related costs, it would be helpful to know what is or isn't included in that, for instance, is Strata included or not included in that? I guess more importantly, how should we think about it going into 2025? And how is this move different than what you had been doing previously? Thank you.
Yes. Kathryn, I'll start just with the excitement that we've got in those $20 million of initiatives, and then I'll turn it over to Nathan really to help you model and look at 2025 as it relates, specifically to that $20 million bucket and the SG&A. You know that we've started and we're active in our robust pipeline of opportunities in business development. We saw some of those costs kind of later in the year this last year at the third quarter and fourth quarter of 2024. And so a large part of that $20 million step-up is related to our ongoing 12 full months of a robust pipeline of opportunities and really help us execute our growth strategy, both for organic growth and for our M&A activity. The other parts that are in that really is to kind of help us expedite and accelerate our Edge initiatives and staff up those teams, purchase some software and provide additional tools to our teams to really embrace and track our Edge initiatives. And so, I think it really is a good investment for the long-term shareholder value. I'm very excited about it and super confident that they will have a return on invested capital on those investments. So with that, I'll turn it over to Nathan, maybe to walk through the fourth quarter SG&A that you asked about and then how to model SG&A going into 2025.
Yes. Thanks, Brian. Good morning, Kathryn. Thanks for calling. Appreciate it. So for the fourth quarter, you asked if there was cost associated with what Brian mentioned, maybe it's helpful to understand a little bit more about the fourth quarter because we did have actually $75 million in costs last year, 2023 compared to $70 million in 2024. There are three things that I want to talk about with you in 2023 that help understand this variance of why did you go down in SG&A costs year-over-year. The first one is in 2023, in the fourth quarter, we had higher incentive bonus paid out, which was about $4 million. You also may recall that we talked about these onetime asset impairments that were about $6 million. And then lastly, these are all in the fourth quarter of 2023. We also had onetime costs still in the fourth quarter of 2023 of about $4 million. So all told, in the fourth quarter of 2023, we had about $14 million of what I'll call these onetime-like costs.
If you take that into account and compare 2024 and 2023, we were actually higher in 2024, and it relates to the acquisition program costs that we talked about in the third quarter of about $5 million. The additional increase is really related to normal annual inflationary costs that we would see year-over-year. So hopefully, that kind of helps understand the fourth quarter, what was in it. We did have higher costs associated with our acquisition program, as we shared with you. As we look to 2025 and what we expect there, I think we can look to 2024 as a starting point. I mean I talked about a few variances in the fourth quarter. There's probably variances throughout the year in 2024. But 2024 is probably a fair starting point for your modeling. And on top of that, I would say, just similar to what we did at the beginning of last year, we talked about SG&A costs being up mid-single digits in that year.
We're seeing the same thing here. So you start with $254 million. And then on top of that, we're expecting mid-single digits for normal annual inflationary costs. And then with that, the $20 million that we talked about in the prepared remarks and Brian went through. Very excited about it. This is all included with very excited in terms of what we have going on there. It's included within our guidance. And I'll just end with saying with that in our guidance, you can see that our adjusted EBITDA and our adjusted EBITDA margin are up, including these costs. So maybe that helps you understand the fourth quarter, Kathryn, and what we kind of expect going into 2025 for SG&A.
It does. Thank you. Also sticking to a little bit of forward-looking and backwards-looking. I know you've been spending a lot of time on the contracting services revenue segment overall in margins. And you give a lot of detail for aggregates, concrete and asphalt, but maybe a little bit over and you have given some color in terms of backlogs for 2025 that would impact contracting services. But more color on the guide for contracting services. Also, you noted it in your prepared commentary, just how much has happened over the past couple of years since going public. Maybe just putting into perspective how Edge has flowed through for numbers for this segment in particular and other segments which you think would be important.
Thank you, Catherine. Our contracting services are a vital component of our company, representing about 39% to 40% of our total revenue. As you noted in your reports, we are in a significant phase of rebuilding America's infrastructure. The fundamentals that support our contracting services remain strong, with record or near-record budgets from the Department of Transportation in all states where we operate. We have a unique capability to work with both public and private projects, with 86% of our work being public. This funding is substantial and sustainable, not just for the next couple of years but over the next decade as we aim to catch up and rebuild. You mentioned that our backlog has increased by 13%, which does not directly indicate our revenue for the year. This backlog includes a $96 million project that will unfold over three years, allowing for phased execution. Additionally, we experienced a more typical timing of bid lettings this year, benefiting from a strong fourth quarter, which contributed to our backlog improvement.
We are actively bidding on new work in the first quarter as well. In summary, the fundamentals are solid, and our backlog is robust. Although we do not provide specific guidance for contracting services, I encourage you to look at our performance from last year, specifically our revenue growth and margins. This aligns with our expectations for contracting services, which mirrors our volume outlook for materials. We anticipate low single-digit volume increases for aggregates, ready-mix, and asphalt, with our contracting services driving demand for these materials. I’m excited to outline the efforts behind our EDGE strategy, which we initiated early in 2023 following our public listing in June. From the end of 2022 to the end of 2024, we have improved our adjusted EBITDA by nearly $150 million, reflecting a 48% growth in margin—from 12.4% to 16%. The EDGE strategy is proving effective. Notably, we have raised our aggregate prices by 20% and our ready-mix prices by 24%, achieving this while taking on less work overall in these categories.
Our long-term goal is to exceed a 20% EBITDA margin, and a key aspect of our EDGE strategy is to achieve best-in-class status across all operations. I'm particularly enthusiastic about the six acquisitions we completed last year, which will enhance our EBITDA starting in 2025, especially the Strata acquisition that we plan to finalize in the first half of this year. We are also focused on internal initiatives involving our front-line teams, emphasizing safety and operational excellence. There’s a lot happening, and we have made significant progress with the EDGE strategy over the past two years.
Great. Thank you. Best of luck.
Thank you.
Yes. Good morning, and thanks, Brian and Nathan. Nice work in the quarter.
Thank you.
Could we delve deeper into Strata? Specifically, what draws you to these geographic markets, how do they compare to the overall enterprise in terms of pricing and demand outlook, and what opportunities do you see for implementing your EDGE strategy and other initiatives?
Yes. No, we're very excited about that opportunity, Trey. And as you know, we're going through the customary regulatory approval process right now. And I’d just tell you that we are on track for that and it's going good. This is one of those acquisitions that, frankly, it checks all of the boxes of our edge strategy and our growth strategy. It's aggregates-led, it's vertically integrated. It's in mid-size, high-growth markets. It's accretive to Knife River's margins. It's in markets that we know really well. It's an infill into our markets. It's got a very qualified and high-quality well-respected management team led by their owner, Jim Bradshaw. It's a cultural fit to Knife River. Our life at Knife core values of people, safety, quality environment are very much in line with theirs. They've got a great market reputation for high-quality materials. They were really very thoughtful decades ago and started looking at how can they efficiently move aggregates by rail.
And they're really, frankly, ahead of their time. And so this fits our model of looking at how can we move aggregates, multimodal in these high-growth markets, and frankly, in markets that we know well. North Dakota is our home state and they've got operations throughout North Dakota, throughout Minnesota. So this one is a company that we've looked up to for a long time, and it's going to provide long-term value for our shareholders for really decades to come. So, something that we're really excited about.
All right. Very good. Thanks for that color, Brian.
Yes.
And maybe shifting gears to ready-mix. You guys are still putting up some really good margins there in the ready-mix business. You're looking for additional pricing in ready-mix this year. So I guess the question is, what is the outlook for raw material inflation in your ready-mix market? And how are you thinking about price cost in this segment?
Yes. I think we've done a fantastic job at really re-looking at our customer base there. And taking on, again, less work and making more money per yard overall margin, overall EBITDA. It really has been very intentional, and we've raised our prices over the last two years by 24%. We do see that moderating to a more sustainable level of those mid-single digits, Trey. And so, as you know, most of the ready-mix that we supply would be into the private market. And we do see some opportunities with warehousing and data centers and residential eventually coming back. I think that's all upside as it relates to our ready-mix markets. As far as input costs, we supply most of our aggregates. And so that increase in market pricing is going to go to Knife River as well. And so there'll be a mid-single-digit increase as far as cost there. Our cement suppliers, we have a number of different suppliers in each one of our markets. I think that has stabilized, and we've built those price increases into our costs going forward. And I can just say that our mid-single-digit price increases will outpace our costs in ready-mix, and we'll continue to see margin expansion in ready-mix.
That's good to hear. If I could ask one more question, perhaps for Nathan, regarding a housekeeping matter. Inventory increased slightly during the quarter. Could you elaborate on that and share your expectations for working capital and inventory for this year? Anything noteworthy? Thank you.
The main point to highlight is that a significant factor is our acquisitions from last year, which Brian just mentioned. Those acquisitions occurred toward the end of the year, so we took on their balance sheet at that time. A large part of the increase in inventory is associated with integrating these materials-led businesses we acquired, specifically Albina, a liquid asphalt business, and our aggregate reserves. Most of their balance sheet is reflected in the inventory line. We also face annual cost increases, which contribute to our inventory changes. Additionally, we have seen a slight increase in volumes in terms of the tons of rock we have on the ground. These are the three main factors contributing to the situation. Furthermore, when we incorporate the full balance sheet from those acquisitions, it has led to an increase in working capital, which might explain the uptick in the year-over-year percentage of working capital. As we move into 2025 and the impact of these operations is realized, I expect to see working capital stabilize again due to these acquisitions. Does that clarify things for you, Trey?
Yes. Absolutely. That was super helpful. Thank you for the color. That all makes sense to me. So I'll pass it on and best of luck. Thank you.
Thanks, Trey.
Next question will be from Garik Shmois at Loop Capital. Please go ahead.
Hi. Thanks. Thanks for having me on. I wanted to ask just first on how the cadence of the year is expected to play out. Is there anything notable, whether it's first half or second half EBITDA growth? Also recognizing, I think, in the first quarter, you had very strong aggregates price growth a year ago. I think some of that was project timing. So just wondering if there's anything to call out to help us model how the shape of the year should progress?
Yeah. Good morning. Garik, traditionally, it's important to remind everyone that because of our footprint, having a northern exposure, that our first quarter, we've historically over the last five years, we have about a 5% of our annual EBITDA that we lose in that first quarter. And I'd say that we don't see that changing very much. I think when I talk about the second half and some of the opportunities and very specific opportunities and contracts that we have and some jobs that we see starting in that May, June, July timeframe, I think will benefit us a little bit more in the second half of the year. I wouldn't say that it's material enough that you really probably need to look very differently at our cadence, kind of that five-year average, the first quarter losses of 5%. We make about one-third of our EBITDA in the second half and in the second quarter. The third quarter is always our peak.
It's a large quarter for us. And that's traditionally in that 50% to 60%. I don't see that changing very much. And then for us, weather can impact us in that fourth quarter. And we've had very good weather over the last two years. Frankly, that was part of the reason, part of the peak that we had this last fourth quarter in 2024. And that was against a comp in 2023 that was also very favorable weather. A couple of extra weeks of work does certainly help us out. But no, I don't think it's material, but I do see more private opportunities, subdivision work, data center work, railroad work, warehousing that could positively impact us more in that second half than normal.
Okay. That's helpful. And then a follow-up question is just on aggregates pricing. I was wondering if you could maybe provide an update on where you stand with implementing dynamic pricing across your network. And anything to think about, I think we heard from an aggregate producer yesterday that indicated some more markets we're shifting to price increase a little bit later than what they saw a year ago. Just wondering if there's anything from a timing standpoint that we should think about for aggregates pricing this year.
No, I don't think there's anything different on timing on our end. I mean the dynamic pricing, as you know, is that we're bidding jobs specifically throughout the year that there's not an annual increase that goes out at the beginning of the year or in April 1 or June 1; that we're dynamically pricing our materials based on the proximity of the jobs to our locations and what our real-time costs are. And so that will continue. We have had good adoption throughout our regions of that initiative last year. We're continuing that process and providing our sales teams additional tools for dynamic pricing. And so I think that our guidance of mid-single digits is a sustainable increase that I think could become the new norm. I think the high single digits and even the double digits we had two years ago was a catch-up from '22. But I think that we have good pricing momentum going into next year with all the tools in place to help us implement that throughout the year. So, nothing real specific on first half, second half cadence on pricing.
Okay. That makes sense. Thanks for the help and best of luck.
Thank you.
Hey guys. This is Isaac Sellhausen on for Ian. Thanks for taking the question. Just on the 2025 guidance, the EBITDA margin expansion, I guess, 20 to 70 basis points compared to 24%. What would it take for, I guess, margins to get to the high end of the guide? I guess, is there anything to call out on the commercial side, like you spoke about on dynamic pricing or operations such as the PIT crew initiatives. That's maybe a particular focus for the playbook this year. Thanks.
Yes. I believe the midpoint of our guidance reflects about 50 basis points of improvement. This encompasses 70 basis points in additional investments we've made in our edge-related business development initiatives aimed at enhancing our growth and performance. The anticipated 50 basis point improvement in our guidance accounts for these additional costs. To achieve the high end of our guidance, several factors come into play. I've mentioned before the private projects we are starting to see materialize in the bidding process. There are promising opportunities on the private side, particularly impacting our material segment, especially aggregates and ready-mix, where we expect to see significant benefits. We are also rolling out our PIT crew initiatives, and the self-help measures we have implemented over the past two years have proven to be impactful. Many of these were operational improvements that incurred costs last year, but we expect to see the benefits this year.
On the revenue side, reaching the higher end of our guidance entails leveraging many opportunities. Currently, we are in one of the busiest periods for bidding, and we remain active in this area. We need to stay disciplined and uphold our margin expectations while considering benefits from upcoming bids and the volume of work available in states like Texas, Iowa, Nebraska, Minnesota, and Idaho. We have the capacity to take on additional work, but we will continue to prioritize discipline to ensure we meet our margin targets. Ultimately, there is potential for upside in both revenue and EBITDA within our guidance framework.
Okay. Thank you. That's very helpful. And then just a quick follow-up on Strata. It might be too early to comment, but I have to ask anyway, if you have any additional color on margin profile of the business and potential accretion for the deal?
We're eager to share more details once the regulatory review and approval process is finished. You can think of Strata as being quite similar to Knife River, as both are materials-led businesses. Approximately 40% of our revenue is generated from contracting services and materials, with 60% from materials and 40% from contracting. Strata tends to be slightly more focused on materials than Knife River, making it a larger materials company. When you consider the margin profile of our materials business, particularly in aggregates and ready-mix—its two main products—the margins contribute positively to our overall margins. So, I believe that's the perspective to take, and we're looking forward to integrating them in the first half of the year.
Okay awesome. Thanks so much.
Yeah.
And at this time, we have no other questions registered. Please proceed.
All right. Well, thanks, everyone, for joining us again today. We're excited about our EDGE plan and what we see ahead in 2025 and the years beyond that. We appreciate your continued support of Knife River, and we'll now turn the call back over to the operator.
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.