Earnings Call Transcript - KNF Q4 2025

Operator, Operator

Good morning, ladies and gentlemen, and welcome to the Knife River Corporation Fourth Quarter and Full Year 2025 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. If at any time during this call you need assistance, please press 0 for the operator. This call is being recorded on Tuesday, 02/17/2026. I would now like to turn the conference over to Dara Dirks, VP of Investor Relations. Please go ahead. Thank you, and welcome to everyone joining us.

Sarah Dirks, VP of Investor Relations

for the Knife River Corporation Fourth Quarter and Full Year Results Conference Call. My name is Sarah Dirks, VP of IR at Knife River. I'm joined by our president and chief executive officer, Brian Gray, and chief financial officer, Nathan Ring. Today's discussion will contain forward-looking statements about future operational and financial expectations. Actual results may differ materially from those projected in today's forward-looking statements. For further detail, please refer to today's earnings release and the risk factors disclosed in our most recent filings with the SEC available on our website and the SEC website. Except as required by law, we undertake no obligation to update our forward-looking statements. During this presentation, we will make reference to certain non-GAAP information. These non-GAAP measures are defined and reconciled to the most directly comparable GAAP measure in today's earnings release and investor presentation. These materials are also available on our website. For today's call, first, Brian will begin with an overview of our 2025 results followed by a segment recap and areas of focus for 2026 and beyond. After that, Nathan will provide quarterly details, a capital update, and our 2026 guidance. At the conclusion of our prepared remarks, we will open the line for a question-and-answer session. With that, I'll turn the call over to Brian. Thank you, Dara.

Brian Gray, CEO

Morning, everyone, and thank you for joining us. 2025 was a year of meaningful strategic progress. At the start of the year, I mentioned three focus areas, and today, I am pleased to report strong progress in all of them. First, we said that we were in a position to have our most profitable year ever. And we did, growing adjusted EBITDA 7% to $497,000,000. Second, we highlighted that our acquisition program was ramping into full swing. We completed five deals in 2025, and expect to have another busy year in 2026. And third, that we will continue to invest in our competitive edge initiatives to support long-term growth, we have, and our results reinforce that this strategy is working. There's no question we are a better company today than we were a year ago. While 2025 started slower than anticipated, we finished strong. Our teams advanced our edge initiatives throughout the year, building momentum in the second half that resulted in a very good fourth quarter. We entered 2026 with confidence and a clear sense of momentum. We believe we are well positioned to continue growing our business. We have built the right team. We operate in the right markets. And we're executing the right strategy. There are four components to our growth strategy that we believe differentiate Knife River as the employer, supplier, acquirer, and investment of choice. Versus our markets. Second is vertical integration. Third is the opportunity for self-help to improve margins. And fourth is our life and Knife culture, a relentless drive for excellence. These factors are key to growing our business and creating long-term shareholder value. Let me tell you how. First, our markets. Knife River states are forecasted to grow twice as fast as non-Knife River states over the next twenty years. Our strong position in these higher growth areas presents many opportunities for expansion, whether it's through organic growth as people migrate to our states, or growth through M&A. There are literally hundreds of opportunities to expand within our territory. As family-owned vertically integrated companies look to sell, often, Knife River is the first call they want to work with a company they know and trust. 2025 was an active year for acquisitions, and we expect an equally busy year in 2026. We've completed one bolt-on deal already in Montana, and expect that we'll be announcing more deals before the busy construction season starts. We will maintain a disciplined focus on aggregates-based vertically integrated opportunities in mid-sized higher growth markets. Knife River is truly the acquirer of choice in our expanding markets. Moving from markets to vertical integration, we believe our strategy to be an aggregates-based end-to-end provider enhances our value. Our balanced mix of aggregates, ready mix, asphalt, and contracting services supports resiliency through economic cycles. In addition, being vertically integrated gives us multiple opportunities to win work. Whether as a general contractor, subcontractor, or materials provider. For our customers, being vertically integrated means greater supply chain reliability and improved job site coordination. For us, it enhances our financial performance by generating more gross profit and capturing higher margins on the pull-through of upstream materials. Vertical integration also provides more acquisition opportunities as we look to add aggregates, ready mix, and asphalt companies to our integrated portfolio. Our next focus area is self-help. We believe in continuous improvement in all aspects of our business. We are taking actions intended to drive EBITDA growth and margin expansion for all of our product lines. We are standardizing best practices, optimizing prices, and controlling costs. Our commercial excellence teams are utilizing our pricing and quoting tools to get the most value for our materials. Our dynamic pricing strategy helped drive 9% improvements in aggregates in 2025, and we'll continue to focus on optimizing pricing in 2026. At the same time, we are intent on managing our costs. In the Western Mountain segments, our aggregates cost per ton decreased in 2025 compared to the same period last year. We continue to find opportunities to lower variable operating costs in aggregates, and this is a major focus of our pit crews and production teams in 2026. Finally, what differentiates Knife River and makes this company so special to me is our life at Knife culture. We believe that putting people first will retain and attract team members who are driven to win and who are committed to helping us be excellent in everything we do. We believe an engaged team is a safer team and a more profitable team. We just had our safest year ever, and I look forward to the ideas, improvements, and growth opportunities that our engaged team will help us achieve in 2026 and beyond. Combined, we believe these factors will help us generate unprecedented growth for Knife River. Moving from our strategy to our markets, we continue to enjoy a favorable backdrop. In addition to population growth, we stand to benefit from increased federal, state, and local funding to maintain and rebuild America's infrastructure. Our states are investing in infrastructure at record levels. DOT budgets across our segments are very healthy, and in our 14 states, approximately 46% of IIJA funding remains to be dispersed. Strong public budgets provide multiyear visibility, and we fully expect Congress to reauthorize another long-term infrastructure bill. Because of these strong budgets, we entered 2026 with a record backlog of $1,000,000,000, a 38% increase from this time last year. While approximately 90% of our backlog is public work, we're beginning to see more private opportunities. This includes data centers as well as distribution and manufacturing facilities. But again, the bulk of our backlog is lower-risk public paving projects with contract values of less than $5,000,000. Next, I'll discuss what we see ahead in each of our segments. Starting with the West, we are excited with the progress we made in 2025. Record profitability in our legacy Pacific operations more than offset a softer economy in Oregon. We continue to view the West as being well positioned for growth in 2026. In California, Alaska, and Hawaii, we are seeing elevated levels of public activity, including heightened military spending. An example of this is the P209 dry dock project in Hawaii, where the Navy is investing approximately $3,000,000,000 on much-needed infrastructure improvements. We began supplying cement and ready mix to this project in the fourth quarter, and anticipate strong volumes in 2026. We're also seeing opportunities on the private side, including residential in California and work on the North Slope in Alaska. Moving to Oregon, I am happy to report that our financial results were once again better this quarter than a year ago, and EBITDA margins for the year remained above 20%. The DOT funding landscape continues to be fluid, but Oregon's approved construction budget for 2026 is comparable to 2025, and the state forecasts a similar amount of asphalt paving this year. The legislature is currently discussing the future of infrastructure funding, and although there are differences of opinion on the next steps, they agree on one thing: Oregon needs funding to fix its deteriorating roads and bridges. Meanwhile, we are seeing encouraging signs in the private market, including increased activity in data centers, warehouses, and pockets of residential development. We'll continue monitoring conditions closely, but based on what we know today, we expect Oregon's performance in 2026 to be broadly in line with 2025 results while the remainder of the West segment continues to grow. In the Mountain segment, we closed out 2025 with a strong fourth quarter. This was driven largely by good weather, which allowed us to work late into December. Construction revenue was up almost 20% for the quarter compared to the same time last year. The work performed included asphalt paving, which positively impacted our upstream materials division. Asphalt margins for the quarter improved 400 basis points, and we stand to benefit from record backlog entering 2026, which contains more asphalt paving than we performed in all of 2025. We also had a strong quarter in ready mix. Pricing outpaced costs, resulting in margin improvements of 400 basis points. We continue to strengthen our leadership team with more materials-focused talent, and we believe these actions have put the region in an even better position to perform work on a growing list of private projects. In particular, days under work in Wyoming and semiconductor construction in Idaho are creating significant new bidding opportunities for the Mountain region. Turning to the Central segment, 2025 was a pivotal year. We completed three acquisitions, combined the legacy North Central and South regions, and made important progress with several competitive edge initiatives. These efforts are enhancing operational success and setting the stage for improved performance this year. The addition of Strata was Knife River's largest acquisition ever, and we are pleased with the integration. We expect Strata to continue performing well in 2026, as we fully leverage our synergies and take advantage of North Dakota's record DOT budget. We're also expecting meaningful volume growth from the addition of Texcrete, new ready mix operations in Central Texas. The Central Region continues to see improved public infrastructure spending and is expected to have its busiest contracting services year ever, as our team starts construction on the $112,000,000 Highway 6 project in Texas and the $62,000,000 Highway 85 project in North Dakota. Lastly, turning to energy services, this segment remains margin accretive and an important component of our vertically integrated business model. We look forward to the second full year of operations at Albina Asphalt, as we begin to fully implement and realize the operational improvements we've been making. Also in 2026, we'll continue targeting the sale of higher margin value-added products, which we manufacture through one of our nine terminals. All in all, we are well positioned for growth in 2026. With that, I'll turn the call over to Nathan to walk through our financial results for the fourth quarter.

Nathan Ring, CFO

Thank you, and good morning, everyone. As Brian mentioned, we finished 2025 with an impressive fourth quarter that produced 47% higher adjusted EBITDA and a 340 basis point improvement in adjusted EBITDA margin. Across our product lines, gross profit was up 27% for the quarter, and we achieved a record gross margin of nearly 19%. These positive results were driven by a combination of our cost controls, acquisition contributions, and more favorable weather. The quarter was especially strong for aggregates, with volumes increasing by 17%, partly related to our recent acquisitions, along with improved market conditions in the West. Aggregates pricing increased by 8%, supported by the Strata acquisition. Even without Strata, prices at our legacy operations would have had a solid increase of mid-single digits. Aggregates gross margins increased by 200 basis points related to our ongoing pit crew improvements and recouping preproduction costs incurred earlier in the year. For 2026, we expect our aggregates volumes to grow mid-single digits as market demand continues to improve and the amount of our internal paving work increases. We also expect that pricing will increase mid-single digits as we continue our dynamic pricing discipline. With this backdrop and the continued focus on cost control and operational efficiencies, we anticipate continued aggregates margin expansion in 2026 of approximately 200 basis points. Moving to ready mix, we saw strong volume increases in the quarter of 20% and gross margin lift of 230 basis points. Similar to aggregates, the volume increase was supported by improved market conditions in the West, as well as the acquisitions of Strata and Texcrete in the Central. We see these contributions continuing into this year with volumes improving in the mid-teens. Margin improvement was balanced across all geographic segments, with the Mountain showing the strongest gains driven by the implementation of operational efficiencies identified by our pit crews. Asphalt benefited from more paving work in the quarter, producing an increase in internal sales volumes of more than 8%. Lower input costs of liquid asphalt put downward pressure on pricing; however, we managed the price-cost spread effectively and maintained margins comparable to the prior year. Looking ahead, we anticipate volumes will increase mid-single digits as we expect more paving work in 2026 than we performed last year. In contracting services, revenue grew 15%, with many locations enjoying favorable weather and availability of work. Mountain had the largest upside related to this extended season, with almost 20% more contracting services revenue. Overall, we did experience an anticipated decline in contracting services gross margin, largely related to lower margin backlog as well as the timing of project completion and job performance incentives compared to last year. Looking forward, backlog increased 38% to approximately $1,000,000,000 with 75% expected to be completed in 2026. While expected backlog margins are lower than a year ago, we anticipate higher gross margin in contracting services in 2026, as we expect to self-perform more asphalt paving, which typically results in project performance gains and the opportunity for quality incentives. The increased paving in our backlog also provides the benefit of pulling through our higher margin upstream materials, positively impacting product line gross margins. Switching to SG&A, the increase over the fourth quarter year was in line with our expectations and primarily related to business development costs associated with acquiring companies and the administrative costs that came with those acquisitions. In 2026, we expect SG&A to be in line with 2025 as a percentage of revenue and then begin trending lower in future years as we scale and fully capture synergies from acquisitions. Continuing with our growth strategy and capital deployment, we had a very productive year. As we invested $789,000,000 across our growth initiatives, including five acquisitions, four aggregates reserve expansions, and multiple organic projects. We expect these investments to be accretive to our margin profile and help us achieve our EBITDA targets for 2026 and beyond. We also allocated capital to maintain our rolling stock and plants, as well as invest in improvements to increase production and efficiency. Our maintenance capital expenditures of $170,000,000 or 6% of revenue were in line with their range of 5% to 7% given earlier in the year. For the full year 2026, the company expects capital expenditures for maintenance and improvements to remain between 5%-7% of revenue and organic growth projects and reserve additions to be approximately $131,000,000. Capital expenditures for future acquisitions and new organic growth opportunities would be incremental to the outlined capital program. Because of our disciplined capital management, we are in a strong position to continue our strategic growth program. We ended the year with almost $75,000,000 of unrestricted cash, approximately $475,000,000 available on our revolving credit facility, and a net leverage position of 2.2 times, which is below our long-term target of 2.5x. Looking at 2026, we have solid cash flow, balance sheet capacity, and liquidity to support our growth strategy. Turning to our guidance. As Brian mentioned, we have a lot to be excited about for this year. With a strong infrastructure backdrop, ongoing self-help initiatives, and the continued growth of the company. For 2026, we expect consolidated revenue between $3,300,000,000 and $3,500,000,000 and adjusted EBITDA between $520,000,000 and $560,000,000, which implies an adjusted EBITDA margin of approximately 16% at the midpoint. As usual, this guidance assumes normal weather, economic, and operating conditions. With that, I'll turn the call over to Brian to share his closing comments.

Brian Gray, CEO

Thank you, Nathan. Knife River has enjoyed considerable growth over the last three years, with revenue improving by 24%, adjusted EBITDA by 58%, and adjusted EBITDA margin by 340 basis points. Our growth strategy has been working, and we believe we are just getting started. We like our growing markets, which present both organic and acquisition opportunities. We believe vertical integration enhances our value by supporting resiliency and being a profit multiplier. We have opportunities to keep improving our operations, and our laser focus on controlling costs and optimizing prices. And we have a skilled team dedicated to making it all happen. We have built good momentum, and we are well positioned to deliver solid growth in 2026 and beyond. I am very excited about our future. We'll now open the call for questions.

Sarah Dirks, VP of Investor Relations

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. To participate in the polling process, please press star followed by two. One moment for your first question.

Brent Edward Thielman, Analyst

Your first question comes from Brent Edward Thielman with D. A. Davidson. Please go ahead.

Nathan Ring, CFO

Hey. Thanks. Good morning. Congrats on a great finish to the year. Brian, I guess, question was just on, I mean, look, you got a great backlog here entering 2026. But the West does carry the highest margins for you. It was a bit lower. Maybe you could just talk about the opportunities to build on that backlog for that particular region, just given its relevance to margins.

Brian Gray, CEO

Yeah, Brent. We like the position we're in right now. Record backlog up 38% at a billion dollars. But you're right. We definitely have seen a shift, a geographic shift of that work more in the mountain with a record backlog and central with a record backlog. But we have very solid funding in California, Hawaii, and Alaska. Now we don't perform contracting services in Hawaii and Alaska, but we definitely supply a lot of contracting materials to subcontractors and supplier contractors in those states. We benefited from a great year in California, and that momentum and funding is continuing in our markets. Oregon was down and continues to see our backlog decrease. But like I mentioned in my prepared remarks, the fortunate thing is the DOT budget in Oregon is about flat, slightly up a little bit, and the asphalt paving tonnage is also slightly up for this year in 2026 versus '25. And we're out looking for work. And you know, our crews have shown this last year to be nimble and pursue work that is available. And you can see that in the strong second half that Oregon had. So I'm not worried, Brent, about the backlog in the West, but there definitely is a shift of that backlog to states in the mountain and central region.

Nathan Ring, CFO

Yep. Okay. Understood.

Brent Edward Thielman, Analyst

And I guess my follow-up Brian or Nathan, this is the second year in a row you've been able to drive aggregates average pricing at, you know, 9%. I know there's M&A sprinkled in there, and yours and the industry expectations in the mid-single digits range for 2026. But maybe if you could just talk about the potential levers to outperform that, just given what you've been able to do here in the last couple of years on the pricing front?

Nathan Ring, CFO

Yes, good morning, Brent. This is Nathan. I'll take the first part of that question with the increase that we've seen here in 2025 on the aggregate pricing and then turn to Brian for levers that we see going forward. You're right, very strong year for us in terms of aggregate pricing. Pricing was high single digits. And as you may have heard in the prepared remarks, part of that has to do with Strata. Strata does have higher pricing, and part of that relates to the way in which we account for delivery revenue. So they do have areas that they reach, and there's revenue included in their average selling price. So it is higher as Strata laps itself year over year. That's what I mentioned in the prepared remarks. We see that still continuing mid-single digits. So very strong for ongoing operations, but you're right. High single digits this year, mid-single digits next year. Part of that just has to do with Strata overlapping or lapping itself year over year. As far as the levers that we'll pull on, I'll turn that over to Brian.

Brian Gray, CEO

Yeah, Brian. Our commercial excellence teams have been very active implementing the new dashboards and bidding tools to support our dynamic pricing. We spent a significant amount of time in the classrooms this year going through a lot of training focused on commercial excellence. So as you know, our dynamic pricing allows us to bid work throughout the year, and we don't have a single letter that goes out in November, December or second ones mid-year. We'll do that throughout the year and continue to optimize prices. And so that rollout has been very successful. All of our legacy sites now have fully implemented dynamic pricing. As we bring on acquisitions, we'll roll that out into those new sites. But right now, we have good traction with our dynamic pricing going into 2026.

Nathan Ring, CFO

Okay. Thank you.

Sarah Dirks, VP of Investor Relations

Just a reminder to limit yourself to one question and one follow-up. The next question comes from Trey Grooms of Stephens Inc. Please go ahead.

Nathan Ring, CFO

Yes. Hey, Brian and Nathan. This is Ethan on for Trey. Thanks for taking the question. I wanted to dive further into the puts and takes on the margin outlook that's baked into the guidance because full year guidance seems to imply relatively modest EBITDA margin improvement. I know you've mentioned that there's a geographic mix shift within the backlog, but it sounds like materials margins will be strong and services margins will see a step up. And of course, we know weather was a pretty large headwind to 2025. So, any more color on the puts and takes on the margin guidance for 2026 would be helpful.

Brian Gray, CEO

Yeah. I'll take that one. And so good talking to you. Yes, our EBITDA margin for the midpoint is going up, you know, 10 to 20 basis points from last year. If you look at our individual product lines, gross profit, as Nathan mentioned, is expecting to see somewhere in that 200 basis points margin improvement in aggregates. And frankly, we're seeing margin improvements in our budgets in all of our product lines. That really is coming from our dynamic pricing model and our pit crew initiatives feeding into that. Because of the shift, I mean, and that's it, we've mentioned, Oregon being flat this year and energy services being flat. We're definitely shifting more of our EBITDA contribution as a percentage of total contribution to the mountain and the central regions. And those have slightly lower EBITDA margins, even though they too are seeing good traction and good movement margin expansion in those regions. They are at a lower margin than the West. And so that's what's going on with that. But good traction, good movement on all of our product lines for gross profit improvements.

Nathan Ring, CFO

Got it. That's super helpful. And for the follow-up, quickly, just a question on Oregon. So at what point could we return to year-over-year growth in Oregon, and how important is funding clarity to achieving this sort of leveling out given that the easy comps, especially in the Q2 and Q3 of 2025? And also considering the private side in Oregon seems to be doing pretty well. So any more color there would be?

Brian Gray, CEO

Thank you. Yeah, the private side definitely rebounded well in the late third quarter and benefited us well into the fourth quarter. It was a big part of the success that we had in Oregon year-over-year improvements in the fourth quarter and third quarter. Public funding is a big part of our success also in Oregon, and clarity on that will be important. I can, I think, relatively safely say that we don't expect any major shifts at all at this point in time for 2026. A stable budget in Oregon with the tons that have already either been let or are in the bidding schedule should be relatively flat. To last year. And so I feel comfortable saying that the results for Oregon in 2026 should be in line with what we had in 2025. Yeah, we're very hopeful. The legislature is currently discussing infrastructure funding literally in their short session. It's in session now. We expect that conversation will really build into next year's longer session where we anticipate they would have a robust conversation and pass a longer-term much larger build in the $4,300,000,000 stop-gap bill they passed earlier. That should happen in 2027 if you talk to the legislators in Salem, Oregon.

Kathryn Ingram Thompson, Analyst

Got it. That's very helpful. Thank you, and I'll pass it on.

Sarah Dirks, VP of Investor Relations

Thank you. The next question comes from Kathryn Thompson at Thompson Research Group. Please go ahead.

Kathryn Ingram Thompson, Analyst

You had in your prepared commentary talked a bit about self-help versus pricing and transitioning from not just focusing on pricing, but also an acute focus on cost controls to drive margins. When you look at a regional standpoint for both your West and your Mountain divisions, which showed outsized performance in the quarter. What drove these outside gains? And how much was self-help versus pricing? Thank you.

Brian Gray, CEO

I appreciate that, Kathryn. Yes, we had a fantastic fourth quarter. It was up 47% over last year. I would say, Kathryn, you could put that in three big buckets that variance year-over-year. The first one is we certainly had favorable weather, and in particular in the mountain region, which allowed us to do more asphalt paving. It also benefited really a lot of our regions as it relates to just staying out working. Aggregate sales and ready mix sales were solid. We were able to utilize our equipment pool more efficiently in that fourth quarter. So one of those large benefits and variances for the fourth quarter was definitely favorable weather. The second one was we had good contributions from our acquisitions, led by Strata, but we also had another, you know, four other very nice acquisitions last year Texcrete came in mid-December, and I'm very excited about that acquisition and then other contributions from the acquisitions. That was part of our positive variance for the fourth quarter. The last one was just operational execution and implementing edge initiatives. We had a partial benefit of, you know, recouping some of those pre-production costs that we incurred earlier in the year. This came back to benefit us in the fourth quarter. More importantly, it was our teams executing on our edge initiatives and really looking at their costs and controlling our costs very tightly. I'm very proud of the team and the work they did and the focus on cost controls that will continue into this year.

Kathryn Ingram Thompson, Analyst

Okay, great. Thanks. Also talked about you know, getting capital allocation or capital. Plenty of capital to deploy into calendar 2026. Could you just tell us a little bit more or give some broader stroke color on what you're seeing in your pipeline for M&A for inorganic and then other organic initiatives that you're hoping to execute and share? Thank you.

Brian Gray, CEO

Yeah, we're very excited about our growth strategy, and I'll start off talking about the pipeline and the organic opportunities and turn it over to Nathan to talk about our strong balance sheet and capacity to go out and continue our growth strategy. We have a very disciplined approach and we're looking for strategic fits that meet both our cultural fit and financial expectations that we'd have. The deals we did last year, and the deals we are looking in our pipeline. When I say it looks very similar to last year, I'm talking about the types of deals in there, the size of the deals, and the location of the deals. They're aggregates-based. Many of them are vertically integrated. Most of them are infill bolt-ons to our existing operations. We certainly will look at states adjacent to our current footprint or current states or regions where we do business. They are in these mid-sized higher growth markets, and we are looking to continue to balance our portfolio. The nice thing about this is it all starts at the local level with local relationships. Just like all of the deals we did last year, we negotiated the deals directly with the sellers at those high single-digit multiples that are very attractive. So the pipeline is robust. The pipeline is full. I've talked about the hundreds of opportunities in our states that we do business in. Because we're vertically integrated, we are looking at aggregates, ready mix, asphalt, and contracting services opportunities as long as we continue to focus on the supply of aggregates to those operations, either from new resources or from our existing resources. The last thing before I turn it over to Nathan that is a very important part of this process is just a playbook that is proven and one that we've been using for over thirty years. We continue to refine it. We've done almost 100 deals now since the early nineties. It's very focused on getting the right deals in the pipeline, being very disciplined with the deals we put in the pipeline and going out and courting those relationships. The second part of that is doing a very thorough, disciplined job of due diligence. Both of those activities are led by our local regional teams, which then feeds into the third phase, which is integration. And that is also, you know, heavily influenced by the local team at the regional level with oversight and support from corporate. I'm very proud of our M&A program and our growth strategy, what we've done in the last two years since the spin. Organically, we have identified a number of very exciting projects that have frankly higher than even our M&A opportunities and continue to go out and execute on organic growth. We've entered new markets in Idaho, and we've expanded our capacity as we see more asphalt paving coming on. We've added capacity to Texas and South Dakota. So it's certainly spending some money organically as well. With that, Nathan, I'll just let you talk a little bit about the capacity.

Nathan Ring, CFO

Yeah, good morning, Catherine. So good news here is that to support the capital deployment, all the good things we've got going on that Brian talked about, we've been disciplined in how we've maintained our balance sheet, and we have solid cash flow. I'll put it in the three buckets for you that give me confidence in what we've got from a balance sheet or support perspective for this growth that we've talked about. First, we have the liquidity to act quickly. As I mentioned, we ended the year with $75,000,000 of cash on hand, and $475,000,000 available on our revolver. So as deals come up, we have the ability to move quickly on them. Secondly, we expect solid cash flows from our operations. In fact, for this year 2026, we expect our cash flow from operations to be about close to the historical average of two thirds of EBITDA. So we've got cash flow coming from operations. And then the third part is the balance sheet itself, the net leverage position. We ended the year at 2.2 times net leverage. As I've shared before, our target is 2.5 times, so we're below that. I think for the right deal, fits our strategy and has the right financial metrics with it, we'd be willing to go higher than maybe closer to three for a short duration and then see that long term go back to 2.5. So we've got the liquidity, the cash flows, and the balance sheet to support these deals, and that's where we want to put our capital to work is growing this company that Brian outlined for us.

Kathryn Ingram Thompson, Analyst

Great. Thanks very much for that color. Good luck.

Brian Gray, CEO

Thank you. The next question comes from Garik Shmois at Loop Capital. Please go ahead.

Garik Shmois, Analyst

Congrats on the quarter.

Nathan Ring, CFO

Just to piggyback off the last set of questions. How should we think about SG&A inflation this year, both from an underlying standpoint plus any incremental that you have with respect to the inorganic growth plan? I'll take that one. Good morning, Garrett. Good to hear from you. So SG&A, the first part here is we take a look at 2025 and the increase that we had this year. I'll just identify the key buckets there. We talked about them a fair amount throughout the year. Getting back to the last question, they all relate to growing this company, which is the exciting part of it. So the largest increase that we had, the largest bucket for the increase we had in SG&A was really related to the administrative cost that came with our acquisitions. We did five acquisitions last year, and they brought some SG&A with them, so that was the largest piece. The second-largest also relates to growth, and we talked about this throughout the year, that one-time step up related to our business development team and getting them in place to pursue acquisitions as well as our edge teams to pursue the opportunities they're going after. So the two largest components really of our SG&A increase relate to growing the company. The next piece is as I shared before, the ongoing costs, so call it, of the operations or the SG&A grew mid-single digits, which is what I shared at the beginning of the year. So Garrett, from '24 to '25, those are the three buckets that caused the increases. As we look forward, I mentioned earlier that we expect SG&A as a percentage of revenue to be in line year over year. If you look closer at that, again, similarly, the ongoing costs in there, we see growing mid-single digits, very comparable to what we see throughout the organization. A mid-single digit increase in cost, maybe towards the lower end of that range. If you're wondering what else could be impacting that, one thing that I'd add to it is that in '25, we did have higher gains on the sale of assets, most notably that East Texas sale that we started a few years ago and finished that. So that's a gain that we don't obviously anticipate for '26. That would be part of the increase you see going from '25 to '26. But outside of that, the underlying cost increasing or maybe in the low end of that mid-range single digits. Hopefully, that's helpful.

Garik Shmois, Analyst

No, that is. Thank you. My follow-up question is on volumes. Your guidance is considerably stronger than other public peers. I was wondering if you could unpack that a little bit more. You talked a little about the regions, a little bit about some of the infrastructure projects and the pull-through from contracting services. Wondering if there's anything else maybe on the private side. And then also, is there any weather catch-up considering there that was such a headwind particularly through the '25?

Brian Gray, CEO

Garrett, this we had that benefit a little bit in the fourth quarter with positive, you know, favorable weather in the fourth quarter. I would say that the backlog that we've got going into next year would not be a lot of, you know, delayed work. It certainly impacted the beginning of the year and caused some challenges but we had a strong fourth quarter and have good backlog going into next year. The volumes being up mid-single digits for aggregates, I'll start with that one, really is also related to ready mix volumes being up mid-teens. The addition of Texcrete more than doubles our supply in the Texas Triangle, and that would be a large part of our mid-teen increase. We are supplying aggregates to that operation, also a part of the mid-single digit increase on aggregates. But it's not just Texcrete. Nathan and I've talked about the additional asphalt paving that we have in our backlog as we see a strong pull through of aggregates going into our asphalt plants. The aggregate sales are becoming stronger in markets like Oregon. You saw that again in the fourth quarter results with those higher margin third-party aggregate sales in the metropolitan market in Portland certainly benefited us. So we continue to focus on additional third-party sales in the Central Region. I'd say all of those factors give me good confidence in our volume projections of mid-single digits for aggregates and the mid-teens on ready mix.

Garik Shmois, Analyst

Great. That's helpful. Thank you very much.

Operator, Operator

The next question comes from Ian Alton Zaffino at Oppenheimer. Please go ahead.

Nathan Ring, CFO

Yeah, great. Thank you very much. Why don't you just kind of drill in on the comment about data centers? Can you give us a little bit more color there? You know, be it growth rates that you're seeing, kind of portion of the backlog you're seeing, or maybe how quickly these jobs convert? So, what's happening as far as backlog and into conversion? And then the other kind of margins and any other type of color you could give us on that? Thanks.

Brian Gray, CEO

Yes, thanks, Ian. I would say that virtually zero amount of dollars in our backlog are related to data centers. We have a lot of data centers that we're working on right now, but most of that would be in the material supply of the business. We have just some very small paving projects, but that would not move the dial at all on our record backlog of a billion dollars. We are currently working on 21 data centers. Most of that would be through the supply of aggregates or concrete mostly to those projects. I think that is the tip of the iceberg. If you look at the amount of work that we have out there pending, bids that are out there that we have provided in the last two months is significantly more than what we currently have supply contracts for. Very big upside; each of our states, several of our states are Wyoming, has a lot of opportunities. North Dakota is currently working on some data centers. Oregon is working on data centers. We're in the heart of our home operations where we have local aggregates and ready mix plants. Data centers are being built, and we see that as a very bright spot. Anything that we would be securing as new work would be on the upside of our range as guidance. We've not baked in any expectations for our midpoint of our guide on data centers. But I can tell you that in my career, I mean, just even the last two years, we've never seen this level of pending work. We're in very good negotiations going on right now. Higher-margin upstream materials, for the most part, it's aggregate supply and ready-mixed supply with either an on-site batch plant or a local batch plant close by. We're very excited about the opportunities in data centers.

Kathryn Ingram Thompson, Analyst

Okay. Thanks. So, how do we then think about just margins going forward, right? You're getting a favorable mix from this. You're getting your success on the edge program. There are a lot of other initiatives that are firing on all cylinders. When do we actually see you achieve those levels? Thanks.

Brian Gray, CEO

Yeah. I think we are proud of the progress we've made in the last two and a half years since we've spun and three years really since we started implementing our edge initiatives. Let me just give you some success results, you know, some numbers here of the progress we've made in those three years. For gross profit margins on aggregates, we've improved 450 basis points in three years. On ready mix, we've improved 300 basis points. Asphalt, 570 basis points, liquid asphalt 450 basis points, contracting services 280 basis points from 2022 to 2025. I think we've been pulling hard on obviously the pricing dynamic commercial excellence levers shifting our attention more focus on the operational excellence and cost controls. It's not linear. As you know, you pick up some lower-hanging fruits sometimes. So we do expect margin expansion to continue in all of these product lines, and know we're very excited about that.

Ian Alton Zaffino, Analyst

Alright. Thank you very much.

Nathan Ring, CFO

As a reminder, should you have any questions, please press 1. The next question comes from Garrett Greenblatt from JPMorgan. Please go ahead.

Garik Shmois, Analyst

Hi, good morning. Thanks for taking my question.

Nathan Ring, CFO

Just as we think about 2026 and the outlook you provided, I was wondering if you could go into a little more detail or quantification around the impact of acquisitions you did in 2025, and what that organic assumption looks like in 2026?

Brian Gray, CEO

Thanks. The acquisition that we did late in the year, Texcrete, you could look at the contributions from TEXCRETE in 2026, all of 2026, to offset the seasonal losses that we did not incur earlier in the year last year in the first quarter from the acquisition of Strata that was in March. That comes with a headwind. In the first three months, we will experience this year. The benefits of the full year of Texcrete more than offset that. If you look at our growth year over year, you could look at all that growth as being organic at this point in time. We've not included any future acquisitions in our guidance. The midpoint of our guidance of $540 million would imply about a 9% growth rate on that organic business. I've mentioned that Oregon is going to be flat, and you take, you know, Oregon being flat, that would imply that we're mid-single mid-teens, you know, 14-15% on the remainder of that business, which would be Central, Mountain, Legacy Pacific. We see solid growth going into this year as it relates to the organic business and the contributions from the acquisitions we did last year.

Ian Alton Zaffino, Analyst

Yes. Good morning. Thanks for the time. Now I know you guys don't provide quarterly guidance, but can you give some color on the trajectory of your full-year guidance for '26? What should we expect in terms of aggregate volumes, price, or margins in Q1 specifically? Anything outside of normal seasonality? Any additional color would be great. Thanks.

Nathan Ring, CFO

Yeah, I'll start with the seasonality piece of that, and then we can get into the volumes and the outlook for the maybe quarter and for the year. We did share last year at this point, Ivan, you might be able to go back and take a look at the seasonality change that we did have coming with Strata. That did increase at that time. We said 8% would be the seasonal loss we have for the first quarter now with Strata in place. Now Brian just mentioned—two pieces that do kind of offset each other. He mentioned Texcrete for the full year. But he had mentioned that we do have that loss with Strata. That was baked in last year. So maybe some of the benefit from Texcrete this year softens that 8%. But that does give you an idea of what the seasonality for the first quarter. The benefit of that is coming later in the year, probably predominantly in the third quarter, maybe a little bit in the fourth.

Brian Gray, CEO

Thank you. Is that it?

Ian Alton Zaffino, Analyst

Yes.

Nathan Ring, CFO

You provided guidance on the volumes for ready mix and asphalt. Can you give more color and expectations for the pricing for those two segments?

Brian Gray, CEO

Ready mix has a significant impact from input costs, which affects pricing. The two biggest factors outside of our control are cement pricing and the product mix that customers are asking for, which would be mixed design, you know, different mixed designs. You could look at a job like we have right now that P209 project that I mentioned in Hawaii, the price of that material is much higher than it would be for, let's say, residential, which is a lot of what the TEXCRETE acquisition does. What I can tell you on ready-mixed pricing and asphalt pricing, because they're influenced by liquid asphalt, is that our commercial excellence initiatives, our sales teams are fully focused on optimizing prices. They're continuing to use dynamic pricing, and we see that momentum that we've had in previous years continue forward as we roll out and continue to implement the new dashboards and tools that we've given our sales team. So solid traction on pricing going forward, but heavily influenced by product mix and input costs such as cement and liquid asphalt.

Ian Alton Zaffino, Analyst

Great. Thank you.

Brian Gray, CEO

Well, thank you again for joining us today. Thank you to our Knife River team members. A fantastic job last year. We really appreciate that. We have good momentum going into 2026. I'm excited about what we accomplished in the year ahead. With that, I'll say goodbye. Thank you.

Operator, Operator

Ladies and gentlemen, this concludes your conference call for today. Thank you for participating, and we ask that you please disconnect your lines.