Knife River’s 2026 Earnings Call: Contradictions in Margin Recovery Timing and Aggregate Expansion Targets Clash

Date of Call: Aug 4, 2026

Financials Results

• Revenue: Up 13% year-over-year, with Q2 revenue driving an increase in full-year guidance to $3.4-$3.6 billion.
• Gross Margin: Aggregate gross margins down slightly for Q2 due to increased delivery volumes and higher fuel costs, but expected to be up for the year. Other product lines saw improvements: ready-mix margin up 80 bps, asphalt margin up 50 bps.

Guidance:

• Raised revenue guidance for 2026 to $3.4-$3.6 billion.
• Reaffirmed adjusted EBITDA guidance range of $520-$560 million.
• Expect second-half contracting service margins to improve year-over-year.
• Anticipate aggregates volumes up high single digits for the year.
• Expect normal weather and continued strength in operations to support outlook.

Business Commentary:

Operational Performance and Revenue Growth:

• Knife River Corporation reported a 13% increase in revenue year over year for the second quarter.
• The company's materials product line saw double-digit volume growth, contributing to this revenue increase.
• This growth was driven by pull-through demand from contracting services and contributions from recent acquisitions.

Aggregate and Ready-Mix Performance:

• The company's aggregates product line saw a 14% increase in volume and a 12% increase in gross profit over the previous year.
• Ready-mix volumes increased by 15%, with a gross margin improvement of 80 basis points.
• These improvements were attributed to increased internal demand, acquisitions, and optimized pricing and cost control initiatives.

Asphalt and Contracting Services Dynamics:

• Asphalt volumes increased by 24%, driven by a 44% increase in internal asphalt volumes.
• Contracting services revenue grew by 20%, but gross margins were affected by market dynamics and project timing shifts.
• The impact on margins was due to the type and timing of work, including delays from adverse weather and construction schedules.

External Headwinds and Financial Impact:

• External factors, including higher energy costs and project timing shifts, resulted in an estimated $24 million impact on adjusted EBITDA.
• Higher diesel prices increased costs by about $10 million, with partial recovery through fuel surcharges.
• Weather-related delays in Texas, Hawaii, and Alaska impacted project volumes and shifted expected revenue to later periods.

Strategic Growth and Investments:

• Knife River Corporation raised its revenue guidance to a range of $3.4 to $3.6 billion.
• The company continues to focus on acquisitions and organic investments, with plans to expand aggregate reserves and develop new markets.
• Growth is supported by strong public funding and expanding opportunities in private sectors like data center development and energy infrastructure.

Sentiment Analysis:

Overall Tone: Positive

• "Our strong operational performance in the second quarter... the fundamentals of our business are strong." "We are raising our revenue guidance... we are encouraged by the underlying strength of our business." "We remain laser-focused on our self-help initiatives... we are controlling what we can control."

Q&A:

• Question from Catherine Thompson (Thompson Research Group): Regarding SG&A and gains on asset sales, how did that impact first half optics and what is expected in the second half?
  Response: SG&A, excluding $10M in gains on asset sales last year, was up 3.5% and expected to be comparable as a percent of revenue. Adjusted EBITDA, excluding gains, was up 7% YOY, indicating underlying operational strength.

• Question from Catherine Thompson (Thompson Research Group): What is driving the fundamental gains in the quarter by region or product mix?
  Response: Central segment led with 21% EBITDA growth driven by third-party sales, North Dakota DOT budget, and Strata integration. TexCrete acquisition contributed to strong ready-mix volumes. Multiple data centers and other end markets supported double-digit volume growth.

• Question from Brent Thielman (Oppenheimer): Given first-half headwinds, can you still reach the upper end of 2026 guidance, and what seasonality is built in?
  Response: Headwinds of ~$24M (including $10M in delayed projects and $8M in market dynamics) will push some benefit into 2027, guiding more to the midpoint of the original range. Seasonality similar to prior year: ~55% of adjusted EBITDA expected in Q3, remainder in Q4.

• Question from Brent Thielman (Oppenheimer): Will contracting services margins recover to last year's second-half levels?
  Response: Yes, margins expected to be in line with last year's second half, offset by legacy project impacts, diesel cost recovery, and performance bonuses from asphalt paving.

• Question from Trey Grooms (Stevens): What is the impact of energy costs on aggregate margins and the 200 bps expansion target for the year?
  Response: Fuel surcharges at cost impacted margins; expect ~100 bps expansion for the year instead of 200 bps. Variable operating costs down 1% YTD shows effective cost control.

• Question from Trey Grooms (Stevens): Is the competitive bidding backdrop affecting contracting services margins, or are headwinds transitory?
  Response: Competitive dynamics in Oregon and elsewhere pressured margins, but the company intentionally bids more aggressively to secure work and benefit from higher-margin material pull-through.

• Question from Timna Tanners (Wells Fargo): Clarify recoupment timeline for Texas project delays and any impact from recent wildfires.
  Response: Most missed volume from Texas projects pushed into 2027. Wildfires in Spokane did not impact the indoor pre-stress facility, and weather impacts in July were not material.

• Question from Rohit Seth (B Riley Securities): Why was West revenue down and backlog down 16%? What changed from February's outlook?
  Response: West weakness due to Hawaii ($3M project delay), Alaska (late start), Oregon competitive dynamics, and limited new bid lettings. Portland aggregate sales remain strong (+20-30%). Expect Oregon broadly in line with last year, not the improvement anticipated earlier.

• Question from Rohit Seth (B Riley Securities): How do you see pricing trends evolving, especially with mix adjustments?
  Response: Aggregates: product-mix-adjusted pricing up 8%; expect mid-single-digit as-reported growth for the year. Ready-mix pricing impacted by geographic mix (TexCrete). Asphalt pricing influenced by input costs, with headwinds expected next year.

• Question from Yvonne Yee (Wolf): What was organic aggregate volume growth in Q2 and full-year expectation?
  Response: Organic volume growth was ~75% of total, driven by legacy operations and increased asphalt paving pull-through.

• Question from Yvonne Yee (Wolf): What is the expected gross margin trajectory in Q3 and Q4?
  Response: Aggregate margins expected to expand ~100 bps for the full year. Contracting services margins to improve. Ready-mix and asphalt may see margin compression due to energy costs, lower-margin work, and higher depreciation.

• Question from Garrett Greenblatt (JP Morgan): Why is EBIT guide lower after backing out higher DDNA expectation, and when do lower-margin legacy projects roll off?
  Response: EBITDA guide lower due to margin compression in some product lines and work type. Lower-margin legacy projects primarily roll off in Q3.

Contradiction Point 1

Contracting Services Margin Outlook for H2 2026

Guidance on margin recovery timing and drivers appears inconsistent.

Brent Thielman (Oppenheimer) - Brent Thielman (Oppenheimer)

2026Q2: Contracting services margins in H2 2026 are expected to be comparable to those in H2 2025, aided by recouping diesel costs and performance bonuses... - Brian Gray(CEO)

Will contracting services margins in H2 2026 approach last year’s levels, or will acquired lower-margin projects continue to impact them? - Brent Thielman (Oppenheimer)

2026Q2: Contracting services margins in the second half of 2026 are expected to be comparable to the second half of 2025. - Brian Gray(CEO)

Contradiction Point 2

Recapturing Impact from Delayed Projects

Contradiction on whether delayed project benefits shift to 2027 or are recaptured within 2026.

Brent Thielman (Oppenheimer) - Brent Thielman (Oppenheimer)

2026Q2: Most of the delayed project volume will spill into 2027. - Brian Gray(CEO)

Given the first-half headwinds, do you still expect to reach the upper end of your 2026 guidance, and how has seasonality and your acquisitive nature influenced this guidance? - Brent Thielman (Oppenheimer)

2026Q2: Most of the delayed project benefits will shift to late Q4 2026 or early 2027. - Brian Gray(CEO)

Contradiction Point 3

Full-Year Aggregate Margin Expansion Target

Guidance on achievable margin expansion target appears to have shifted.

Trey Grooms (Stevens) - Trey Grooms (Stevens)

2026Q2: The 200 bps margin expansion target is now seen as ambitious; a safer expectation is ~100 bps for the full year. - Brian Gray(CEO)

What was the energy cost impact on aggregates, and is the 200 bps margin expansion target still achievable this year? - Trey Grooms (Stephens)

2026Q2: A safer expectation is ~100 bps of margin expansion for the year. - Brian Gray(CEO)

Contradiction Point 4

Impact of Acquired Projects on Margins

Expectation for when legacy acquired projects will cease to negatively impact margins.

Garrett Greenblatt (JP Morgan) - Garrett Greenblatt (JP Morgan)

2026Q2: There is some margin overhang from legacy projects acquired in the mountain segment... The bulk of the lower-margin legacy work from acquisitions is expected to be completed in Q3 2026, primarily in Utah. - Brian Gray(CEO)

When will legacy acquisition projects with lower margins fully phase out? - Kathryn Thompson (Thompson Research Group)

2026Q1: The three Q1 acquisitions... contribute to upper-half guidance. - Brian Gray(CEO)

Contradiction Point 5

Outlook for Oregon's 2026 Performance

Contradiction on whether Oregon will achieve growth or just flat results in 2026.

Rohit Seth (B Riley Securities) - Rohit Seth (B Riley Securities)

2026Q2: Oregon’s performance for the first six months was in line with expectations, but Q2’s limited new bid lettings caused disappointment. - Brian Gray(CEO)

What factors caused the West region's ~9% revenue decline and ~16% backlog decrease compared to your earlier outlook, particularly in Oregon? - Ethan Roberts (Stephens Inc., on for Trey Grooms)

2025Q4: Oregon's 2026 results are expected to be broadly in line with 2025, not growing year-over-year. - Brian Gray(CEO)