Centuri Third Quarter 2026 Earnings Call - CENTURI HOLDINGS INC

Explicit Guidance:

• Full-Year 2026: Revenue guidance updated to $3.8–$3.9 billion (previously implied higher); Adjusted Gross Profit $3.05–$3.15 billion; Adjusted EBITDA $290–$300 million; Adjusted Net Income $80–$90 million; Net Capex $60–$70 million. Guidance explicitly excludes Q4 storm work contributions.
• Full-Year 2026 Margins: Targeting overall gross profit margin of 8.5%–9.0%.
• Full-Year 2026 Free Cash Flow: Expectation lowered to $25–$50 million (down from prior estimate) due to working capital timing; full-year FCF shortfall expected to translate to higher 2027 cash flow.
• 2027 Revenue: Expect mid-teens percentage growth (implying revenue >$4.4 billion), supported by $3.7 billion backlog coverage (trending toward $4.0 billion by year-end) and pipeline.
• 2027 Margins: Outpacing 2026 with continued expansion; target incremental gross profit margins of 12%–15%.
• Capital Allocation: Priority is debt deleveraging to reach net debt-to-adjusted EBITDA ratio in the low-two times range by year-end 2026, with long-term target below 2.0x (ideally 1.5x–2.0x). No share buybacks or dividends currently anticipated; timing contingent on leverage reduction.

Business-Segment Outlook:

• U.S. Gas: Margin expansion momentum continues; targeted to achieve profitability in Q1 2027 (moving from Q4 loss to Q1 profitability) via reduced seasonality and leadership repositioning south of the Mason-Dixon line.
• Union Electric: Strong growth trajectory driven by J.J. White integration (added end of July 2026) and electric/industrial project volume; margins improved to 8.9% in Q3.
• Canadian Operations: Strong performance driven by Connect acquisition inclusion; gross margin of 19.6% in Q3.
• Non-Union Electric: Margins expected to improve via storm work mix and MSA activity; 2026 target margins aligned with overall 8.5%–9.0% range.
• J.J. White Integration: Integration proceeding ahead of schedule; delivered $8M gross profit so far (vs. 2026 guidance of $20M), with $450M in related renewals expected to be won in near term.

Market and Competitive Outlook:

• Backlog & Pipeline: Outstanding bids at $4.8B (up 46% YoY), including $2.0B in MSA renewals expected by year-end; backlog at $6.2B. Opportunity pipeline expanded to $19.0B (up 46% YoY).
• Book-to-Bill: 2026 ratio expected at ≥1.3x, exceeding the prior 1.2x target.
• End Market Demand: Durable investment in North American utility infrastructure; U.S. investor-owned utilities expected to invest ~$1.4T (2026–2030), with >50% dedicated to modernization, resiliency, and grid harmony. Natural gas distribution replacement is a $37B annual opportunity driven by aging infrastructure (45% of lines >35 years old).
• Data Centers: Pipeline includes ~$2.5B in value; $370M booked, $200M in backlog. Revenue contribution capped at <10% of total annual revenue ($200M backlog expected to burn off in 2027).
• Pricing: $4.8B outstanding bids reflect updated pricing for fuel/fleet cost escalations; $2B in renewals expected to close by year-end with scope expansions and longer terms.

Macro / Industry Outlook:

• Political/Regulatory: Minimal impact anticipated from U.S. election outcomes; core revenue derived from long-term MSAs and reliability/resiliency requirements (grid hardening, integrity management) deemed independent of political cycles.
• Cost Inflation: Fuel and fleet costs fully incorporated into pricing; future renewals and bids will continue to reflect these escalations.
• Storm Work: Q4 2026 guidance conservative (no storm work assumed); actual Q4 storm activity (e.g., Hurricane Isaias in Oct) will be additive to guidance if customers utilize surplus budgets.

Strategic Initiatives:

• Vision One Century Strategy: Focus on organic growth, margin expansion, and seasonality reduction; targeting 12%–15% incremental margins by 2029.
• Capacity & Workforce: Significant workforce expansion in H1 2026 (1,800 hires) complete; normalized hiring expected in 2027 (~300/quarter) as seasonality is reduced and operations become more linear.
• M&A Strategy: Continued focus on tuck-in acquisitions (primarily Electric Transmission/Distribution) to unlock growth and address seasonality; active search for opportunities similar to Connect and J.J. White.
• Operational Tools: Implementation of real-time data analytics, standardized cost capture, and task-level productivity benchmarks to drive granular margin identification.
• M&A/Capital Allocation: Leverage reduction prioritized over buybacks; potential for periodic leverage increases above 2.0x to fund M&A, with trajectory returning to <2.0x.

Risks and Headwinds to Outlook:

• Cash Flow Timing: Revenue growth exceeding forecast requires higher working capital; free cash flow timing risk for 2026 resolved in 2027.
• Storm Work Volatility: Q4 revenue and storm work are difficult to forecast due to customer budget exhaustion or surplus visibility (often not clear until Nov/Dec).
• Data Center Uncertainty: Strict "funding/permitting" filter applied; political or execution risks could delay conversion of pipeline to backlog/revenue.
• Seasonality: Winter (Thanksgiving to Spring Break) historically impacts execution; efforts to mitigate via geographic diversification and leadership repositioning.
• Cost Escalation: Fuel and fleet cost increases continue to drive pricing adjustments; failure to fully pass through costs could impact margins (though management asserts success in pass-through).

Management Tone on the Future:

• Confidence Level: High confidence in 2027 revenue growth (>4.4B) and margin expansion; management states they are "running ahead" of 2029 targets and expect to update the 2029 targets higher upon next year's guidance.
• Execution: Strong belief in "One Century" delivery model and operational integration (J.J. White, Connect) delivering value.
• Hedges: Conservative approach to Q4 storm work forecasting; strict criteria for data center inclusion in forecasts (funding, permitting, scope defined).
• Capital Discipline: Emphasis on "disciplined approach" to data centers and M&A; prioritizing deleveraging and organic growth over share return programs.

Miscellaneous:

• Non-GAAP Measures: Ceased presenting "base revenue" and "base gross profit" due to increased business scale.
• Data Center Exposure: Pipeline growth from $16B to $19B noted, but management reiterates data centers will remain <10% of total revenue, with the majority of pipeline ($12B) in core Electric (Distribution/Transmission) and Gas.
• Acquisition Performance: J.J. White integration described as "exceeding expectations"; Connect acquisition previously integrated successfully.