KNF

Overall Quarterly Performance

• Total company revenue increased 13% YoY, with all product lines recording double-digit volume growth. Excluding asset sale gains from 2025 and 2026, adjusted EBITDA increased 7% YoY; as-reported adjusted EBITDA was flat due to transitory external headwinds totaling ~$28 million in the quarter.
• Three main transitory headwinds impacted Q2 results: higher energy costs (a $10 million YoY cost increase, with only $4 million recouped via fuel surcharges in Q2), weather and project schedule delays pushing volume to future periods (an estimated $10 million EBITDA impact), and project mix/timing of performance incentives (an estimated $8 million EBITDA impact). None of the delayed projects were canceled, with most shifting to later quarters in 2026 or 2027.

Operational Efficiency Initiatives

• Aggregate variable operating costs decreased 1% YoY year-to-date, despite inflation and higher energy costs.
• ReadyMix improved cubic yards per delivery hour by 12% YoY, driving production cost reductions.
• Pricing optimization initiatives delivered 8% product mix-adjusted price increases for aggregates, supporting margin retention despite input cost headwinds.

Long-Term Growth Strategy

• Acquisitions: Acquisitions are a core growth driver, with 16 acquisitions completed and integrated since the 2023 spin-off. The focus remains on materials-led transactions in fragmented mid-sized markets within or adjacent to the company's footprint, with a particular emphasis on aggregates opportunities. The Strata acquisition in the central region is outperforming original projections, with 2026 EBITDA expected to exceed initial forecasts by more than 15%. The company maintains a healthy pipeline of potential acquisition targets from fragmented family-owned businesses.

• Organic Growth: Over the past 18 months, the company has invested ~$140 million in organic projects, focused on aggregate reserve expansion and greenfield development that meets the same return hurdles as acquisitions. Key examples include:

  • A $85 million rail-served quartzite quarry development near Sioux Falls, South Dakota, with 70 million tons of reserves and access to two Class I railroads. Phase 1 is expected to be operational in H1 2027, expanding market reach and reducing long-term delivery costs.
  • A pre-stress concrete facility in Spokane, Washington, which enabled the company to win a large contract supplying components for an Idaho semiconductor facility in Q2, with additional growing demand from data centers, advanced manufacturing, and infrastructure projects.

• Safety: Q2 2026 was the safest quarter in the company's history, reflecting the company's focus on safety culture.

• Full-year 2026 revenue guidance was raised to $3.4 billion to $3.6 billion, up from prior guidance, driven by stronger than expected revenue growth and the addition of recent acquisitions.
• Adjusted EBITDA guidance is maintained at $520 million to $560 million, with management now expecting full-year results to land near the midpoint of the range due to transitory Q2 headwinds, a portion of which will not be recouped in 2026.
• Aggregate full-year margin expansion is now expected to be ~100 basis points, down from the prior target of 200 basis points, due to higher fuel costs and increased lower-margin delivery volume.
• SG&A as a percentage of revenue is expected to be broadly in line with 2025, after adjusting for 2025 asset sale gains.
• Capital expenditure for maintenance and improvements is expected to be 5% to 7% of full-year revenue, with acquisition and organic growth investment incremental to this range.
• Net leverage is expected to end 2026 near the company's long-term target of 2.5x, with no outstanding borrowings on the $500 million revolving credit facility and adequate cash on hand.
• ~55% of full-year 2026 adjusted EBITDA is expected to be recognized in Q3, consistent with historical seasonality.

1. Aggregates: Volume grew 14% year-over-year (YoY), with gross profit increasing 12% YoY. Full-year volumes are now expected to be up high single digits. Reported pricing increased 3% YoY, while product mix-adjusted pricing increased 8% YoY. Full-year as-reported pricing is expected to increase mid-single digits. Gross margins declined slightly in the quarter due to higher delivery volumes and fuel costs, but full-year gross margins are still expected to increase YoY. Aggregates contributes approximately 30-35% of total gross profit based on quarter performance.
2. ReadyMix: Volumes increased 15% YoY, driven by the TexCrete acquisition. Full-year volume growth is forecast to be mid-teens. Gross margin improved 80 basis points YoY, with production costs down 6% per cubic yard, leading to a 21% YoY increase in gross profit.
3. Asphalt: Volumes increased 24% YoY, with internal volumes for contracting paving up 44% YoY. Full-year volumes are now expected to be up high single digits. A strategic purchasing/storage strategy reduced input costs, cutting production costs 10% per ton, leading to a 50 basis point gross margin increase and 24% YoY gross profit growth.
4. Contracting Services: Revenue increased 20% YoY, driven by higher asphalt paving volume. Gross margins declined in the quarter due to project timing, the early-stage status of most current paving projects (where performance incentives are paid near completion), lower-margin legacy projects from recent acquisitions, and competitive bidding dynamics. Gross margins are expected to improve in the second half of 2026.

• Adverse weather can delay construction projects, shifting revenue and earnings to future periods and creating variability in quarterly results. A short construction season in Alaska and excessive rain in Texas led to significant delays in Q2 2026.
• Higher energy and fuel costs increase operating costs, and while most costs are passed through to customers via surcharges and escalators, pass-through is often lagged, and surcharges are applied at cost with no margin, creating near-term margin pressure.
• Competitive bidding dynamics in the Pacific Northwest (particularly Oregon, where limited public bid lettings have driven increased competition from mobile contractors) have created pressure on contracting services margins.
• Lower-margin legacy projects from recent acquisitions create near-term margin headwinds that will persist until these projects are completed, expected by the end of Q3 2026.
• Volatility in liquid asphalt and cement input costs can create margin pressure for asphalt and ReadyMix product lines if input costs rise faster than selling prices can be adjusted.
• U.S. federal infrastructure funding extension is dependent on a congressional continuing resolution, though current expectations are that funding will be maintained at current levels.

Q: How do asset sale gains impact Q2 2026 results, and what is driving underlying fundamental gains this quarter? / A: Last year Q2 included $10.3 million in asset sale gains, mostly from a Texas property sale, compared to just $600,000 in gains this year. Adjusting for this difference, core SG&A only increased 3.5% YoY, and adjusted EBITDA is up 7% YoY, showing solid underlying performance. The biggest driver of strong underlying results is the central segment, where third-party aggregate sales are up 34% YoY, driven by demand from data center projects and the fully integrated Strata acquisition that is outperforming projections. TexCrete in Texas is also performing well, with early synergies captured from purchasing power after acquisition. All regions are seeing double-digit volume growth across product lines, driven by broad-based demand from both public infrastructure and private end markets.

Q: Given Q2 headwinds, can the company still hit the upper end of 2026 adjusted EBITDA guidance, and how will contracting margins trend in the second half? / A: The ~$28 million in Q2 headwinds will not all be recouped in 2026, with much of the delayed project volume shifting to 2027, so full-year results are now expected to land near the midpoint of the guided $520-$560 million range. While lower-margin legacy projects from recent acquisitions will create some ongoing margin overhang in contracting services, the company expects to recoup most uncollected fuel costs in Q3, and performance incentives for the large volume of early-stage asphalt paving projects will be recognized in the second half. Management expects second half 2026 contracting margins to be in line with second half 2025 levels.

Q: Is the current contracting margin pressure from increased competition, or just transitory factors? What is the strategic approach to competitive bidding? / A: While most Q2 headwinds are transitory, there are ongoing competitive dynamics in the Pacific Northwest, where very limited public asphalt paving bid lettings in Oregon have driven mobile contractors to adjacent states, increasing bidding pressure. The company has made a deliberate strategic choice to bid asphalt paving more aggressively to secure work, because this creates pull-through demand for higher-margin upstream materials like aggregates, which offset lower contracting margins. This strategy is reflected in the double-digit gross profit growth the company saw across all material product lines in Q2.

Q: What has changed for the West segment, where revenue and backlog are down year-over-year, after management previously expected 2026 performance to match 2025? / A: The Q2 decline is driven by transitory project delays: the P209 project in Hawaii was pushed back, and Alaska's construction season started over a month late due to a cold winter, combining for a several million dollar EBITDA headwind in the quarter. In Oregon, while first half performance was broadly in line with expectations, very limited new public bid lettings in Q2 missed expectations, leading to full-year results now expected to be slightly below prior projections. Positive long-term signs remain, including 20-30% aggregate volume growth in the Portland market, which is a leading indicator for future activity, and a large new pre-stress contract for an Idaho semiconductor facility that will contribute revenue starting late 2026.