Centuri Holdings, Inc. (CTRI) Earnings Call Transcript & Summary

Hello, everyone. Thank you for joining us, and welcome to the Centuri Second Quarter 2026 Earnings Conference Call. [Operator Instructions] I will now hand the conference over to Nathan Tetlow, Vice President, Investor Relations. Nathan, please go ahead.

Thank you, and good morning, everyone. Today, we issued and posted to Centuri Holdings website our second quarter earnings release and investor presentation. Please note that on today's call, we will address certain factors that may impact this year's earnings and provide some longer-term guidance. Some of the information that will be discussed today contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act. These statements are as of today's date and based on management's assumptions and are subject to several risks and uncertainties, including uncertainties surrounding the impacts of future economic conditions and regulatory approvals. A cautionary note as well as a note regarding non-GAAP measures is included in today's press release in the investor presentation and in our filings with the Securities and Exchange Commission, which we encourage you to review. Also provided are reconciliations of our non-GAAP measures to related GAAP measures. These risks and uncertainties may cause actual results to differ materially from statements made today. We caution against placing undue reliance on any forward-looking statements, and we assume no obligation to update any such statements, except as required by law. Today's call is also being webcast live and will be available for replay in the Investor Relations section of our website shortly after the completion of this call. On today's call, we have Christian Brown, President and Chief Executive Officer; and Gregory Izenstark, Chief Financial Officer. I will now turn the call over to Chris.

Nate, thank you, and thank you, everyone, for joining our second quarter earnings call. We're proud to have delivered $962 million of revenue for the quarter, a new quarterly record for Centuri. Adjusted net income for the quarter was $24.4 million, an increase of 44% from the same quarter last year. In terms of our base measures, which excludes storm work and for this quarter, a onetime pre-IPO receivable write-off. Second quarter base revenue was 36% higher than last year and base gross profit was 21% higher. For the first half of the year, base revenue was 33% higher than last year and base gross profit was 35% higher than last year. This is remarkable growth and reflects the dedication of our teams across the U.S. and across Canada. I'll start with the recently announced acquisition of JJ White, a leading provider of union industrial, mechanical and electrical maintenance and construction services. JJ White has about 1,000 employees and will be integrated into our Riggs Distler business, adding scale and in-plant construction expertise across several end markets, including data centers. This tuck-in acquisition is consistent with our strategy that we laid out earlier this year. We increased scale in the Northeast and Midwest, expanded our core business and added new customers in the electric end markets. We expect JJ White to add more than $20 million of gross profit on a full year annualized basis. The total cash consideration paid was approximately $62 million, funded from existing balance sheet liquidity. We, therefore, see no change to our year-end leverage target of 2x. And we're very much excited to welcome the JJ White team, and we look forward to the growth and their execution ahead. Now for a commercial update, where we continue to see strength in our core and adjacent end markets and more than ample opportunity to deliver sustainable growth at double-digit levels. Second quarter bookings were nearly $850 million, bringing our year-to-date bookings to over $2.2 billion. Our book-to-bill ratio year-to-date is 1.3x. And on an organic basis, for the full year, we are targeting a 1.2x book-to-bill or approximately $4.4 billion of total bookings for 2026. The successful negotiation and award of our largest data center project has demonstrated our ability to differentiate and secure complex value-added contracts into our portfolio. The $125 million award covers electrical infrastructure and utility for a multi-building data center campus. We continue to view the data center demand as robust, attractive and growing. And with the addition of JJ White, we will further increase data center backlog and the pipeline of opportunities for our company. At quarter end, we had about $2 billion of data center opportunities in our pipeline. Other bid works in the quarter include the construction of an electrical transmission and substation project for Atlantic Canada, which was a very nice award for the Connect team and also the assembly and installation of key components of the gas infrastructure for a gas infrastructure company and finally, a large significant electrical high-voltage transmission project in the Northeast of the U.S. On the MSA side, we booked approximately $250 million in renewals, which includes the gas distribution, infrastructure upgrades and expanded scopes of work for a long-standing utility customer. We also booked approximately $200 million between new MSAs and growth from existing MSAs. Demand for our core MSA work, including expanded scopes of work remains very strong. Our current backlog stands at approximately $6.4 billion, which is up 21% year-over-year. Even more notable is the opportunity pipeline has increased to approximately $16 billion, which is up 23% from the first quarter, which demonstrates the strength of our end markets and our ability to position Centuri for backlog growth. We have nearly 700 differentiated bid opportunities in the pipeline, which collectively represents 60% of the $16 billion. And in the very near term, we have $2.5 billion of outstanding bids pending at the end of Q2, which represents a 15% increase from the first quarter. This number has further increased as we moved into Q3, another positive indicator of the strength we are seeing across our end markets. Over 2/3 of these pending bids are from our Electrical segment. It should also be noted that as we bid and increased our volumes, our bid margins year-over-year have increased by more than 10%, which is fully in line with our long-term margin targets that we communicated earlier in February this year. As we've discussed over the recent months, we are focused on driving longer-term sustainability into our business through margin expansion, backlog and greater coverage for the subsequent years. Coming into 2026, we had about $3 billion of coverage for 2026 revenue, and we are now forecasting to exit 2026 with more than $3.6 billion of revenue coverage for 2027. This is a 20% organic increase. This visibility and predictability provides the foundation for sustainable growth, allowing us to plan and execute for the future. Lastly, to support customer demand and build for sustained growth over the first 6 months of this year, we have organically added approximately 1,700 employees, representing an 18% growth in headcount so far this year. In the U.S. Gas business alone, we've added over 1,200 employees, a 25% increase to support client demand emanating from our strategy to mitigate seasonality in our business and expand our gross margins. This significant capacity increase and near-term costs, which we estimate reduced second quarter gross profit by approximately $3 million. We fully expect these capacity investments to benefit Q3 '26 and the subsequent quarters as our resources generate revenue and margin expansion. We forecast approximately 7.5% gross margin for our U.S. Gas business in the second half of this year 2026. We were also affected by elevated fuel prices in the quarter relating to the ongoing conflict in the Middle East. The average per gallon cost was up 48% year-over-year and the estimated cost impact within the second quarter was approximately $6 million. Higher fuel prices and the investment associated with the additional gas resources together had a combined 95 basis point impact on the second quarter base gross profit margin. The fundamentals of our business remain strong, and we continue to invest in the future, guided by the priorities outlined within our Vision One Centuri strategy. I'll now turn over to Greg to discuss the financial results.

Thank you, Chris, and good morning, everyone. Second quarter 2026 consolidated revenues totaled $962 million, a new quarterly record and was a 33% increase from Q2 2025. Consolidated gross profit was $69 million and gross profit margin was 7.2% in the quarter. In terms of base results, which exclude the impact of storm work and for this quarter, a onetime write-off, I'll discuss shortly. Base revenue was up 36% and base gross profit was up 21%, compared to last year. Base gross profit margin was 7.9% in the quarter versus 8.9% last year. And on a trailing 12-month basis, base gross profit margin was 7.8% versus 7.4% a year ago. Net income attributable to common stock in the second quarter was $6.1 million or $0.06 per share compared to a net income attributable to common stock of $8.1 million or $0.09 on a per share basis in the same period last year. In the second quarter, adjusted EBIT was $40.5 million, 8% higher year-over-year, and adjusted EBITDA was $75.7 million, a 5% increase over the same period last year. Adjusted net income in the second quarter came in at $24.4 million or $0.24 on a per share basis compared to $16.9 million or $0.19 per share in the same period last year. As Chris mentioned, second quarter results were impacted by elevated fuel prices from the ongoing conflict in the Middle East. We estimate that the higher fuel prices in the quarter amounted to an additional cost of approximately $6 million or approximately basis point impact on margins. In the second quarter, the company wrote down all of its remaining accounts receivable and contract assets related to work that was completed prior to 2020 for the City of Chicago. The work -- the write-down reduced U.S. Gas revenue by $9 million in the quarter. We did not budget collection of this receivable in 2026, so the write-down has no impact on our cash flow expectations. We have excluded this onetime item from our non-GAAP measures, including our base metrics. Now to our segments. U.S. Gas revenue was $489 million -- $489.5 million, an increase of 45% compared to the prior year. The growth was driven by increased bid work and MSA volumes, demonstrating the underlying strength of our customer relationships and market position. Gross profit margin was 4.2% in the quarter, down from 7.8% last year. Base gross profit margin for U.S. Gas was 5.9%. As previously mentioned, second quarter margins for U.S. Gas were impacted by approximately $3 million or 60 basis points from capacity added in the second quarter. While the timing of these additions impacted Q2 costs, we expect the results scale benefits to support stronger performance in the second half of 2026 and further improve seasonality during the first quarter of 2027. On a year-to-date basis, we've seen significant growth and improvement in profitability of U.S. Gas. Base gross profit has more than doubled from last year and base gross profit margin improved by 36% over the same period last year. Canadian Operations revenue was $81.4 million, up nearly 48% from the prior year period, primarily from the inclusion of Connect. Operational performance in this segment remains strong against the backdrop of sustained favorable demand as evidenced by the 16% gross profit margin in the quarter. Union Electric revenue was $224.2 million, an increase of 23% year-over-year. Growth has been fueled by robust activity in projects serving the industrial end user segments. Gross profit margin for the Union Electric segment was 9% in the second quarter, ahead of the 8.4% recorded in the same period last year. Non-Union Electric revenue in the second quarter was $166.9 million, an increase of 11% year-over-year. Base revenues in the Non-Union Electric was $157.1 million in the quarter, which is a 15% increase from last year. This growth reflects the significant expansion we've seen in MSA activity, building on the momentum we've discussed in recent quarters. Gross profit margin in the Non-Union Electric segment was 9.1% in the current period compared to 11% in the prior year period, and base gross profit margin was 8.4% compared to 8.9% in the prior year. Turning to cash flow and balance sheet. Net cash provided in operating activities for the second quarter was $20 million, and free cash flow was negative $7 million, consistent with our expectations. For the full year, we expect free cash flow to exceed $75 million, a 25% improvement over initial expectations. We ended the quarter with a net debt to adjusted EBITDA ratio of 2.6x, which was down from 3.7x a year ago. We continue to forecast net debt to adjusted EBITDA of around 2x by year-end. Finally, turning to our 2026 outlook. We have increased our full year guidance and included expected contributions from JJ White. The full year guidance also includes approximately $5 million of forecasted incremental fuel expenses based on an assumption that higher fuel prices persist through the third quarter. As a reminder, base revenue and base gross profit are non-GAAP measures that exclude the impact of storm restoration services and the onetime write-down related to the City of Chicago. For 2026, we expect base revenue of $3.5 billion to $3.7 billion and base gross profit of $270 million to $290 million. Revenue, adjusted EBITDA and adjusted net income are measures that include storm restoration services. Guidance for these measures include storm restoration services using a 3-year average of $88 million in revenue and $28 million in gross profit. For 2026, we expect revenue of $3.59 billion to $3.79 billion, adjusted EBITDA of $285 million to $310 million and adjusted net income of $60 million to $75 million. And lastly, we are reducing our net CapEx outlook to a range of $60 million to $75 million following the sale-leaseback of select equipment early in the third quarter. I will now turn it back to Chris to wrap up our prepared remarks. Chris?

Thank you, Greg. As we wrap up today's call, I'd like to leave you with a few key thoughts. We've demonstrated our ability to capture market demand and deliver growth. Over the course of the last year and again in the first half of this year, we have successfully identified and secured opportunities across our end markets, expanded our workforce to meet our customer demand and continue to grow revenue, backlog and the opportunity pipeline. The focus now is not on only sustaining that growth, but leveraging the scale we are building to expand margins and drive stronger profitability over time. We're very pleased with our first half performance, and more importantly, encouraged by the trajectory of our business. As we outlined last quarter in our Vision One Centuri strategy, the path to achieving our 29 base gross profit margin target of 9.7% is built on 3 primary drivers: reducing the seasonality of our business, increasing the mix of higher-margin bid work and delivering operational excellence. We've already begun to see these initiatives gain traction. Our first quarter results demonstrated meaningful progress in seasonality. Our opportunity pipelines and bookings continue to support growth in bid work, and we are now advancing several operational excellence initiatives that believe will bring lasting value over time. We are increasingly confident that the right tools, processes and leadership are in place to drive sustained progress. Initiatives like our newly established PMO organization, fleet optimization efforts, working capital management and enhanced job level performance attribution and analytics are in early stages. These initiatives represent important building blocks in creating a more efficient, scalable One Centuri model. We are investing with intention, executing against our clear strategy and are encouraged by the momentum we are seeing across the business. In short, the implementation of our margin improvement plan to deliver the 2029 targets continues in line with our expectation. As we look ahead, we remain confident in our ability to deliver sustainable growth, achieve our long-term margin objectives, generate free cash flow and create significant value for all our shareholders. We truly appreciate everyone's time today and the interest that you've shown. Operator, let's begin the Q&A.

[Operator Instructions] Your first question comes from the line of Sangita Jain with KeyBanc Capital Markets.

Can I start with the JJ White acquisition? And maybe you can discuss what your key goals are with this acquisition? And what type of synergies are you hoping to achieve?

Good morning, Sangita. Yes, I can cover that. First of all, we've known JJ White as an organization for a number of years. So the cultural fit, the capability and the relationship between our respective businesses were long established. So this wasn't finding a business we did not know well. So that was number one. What JJ White brings us is more scale, more capacity to be able to deliver on growth in the Midwest and the Northeast, primarily focused on in-plant power, data center-related activities. The business has got a massive track record in developing talent within the business. It's currently 1,000 people. We believe it can flex to 2,000 people, so it brings capacity for us. Your question on synergy, we don't see cost synergy at all in the transaction. JJ White is currently mobilizing into our overall Riggs offices in the New Jersey area. We see the synergy coming from their operational capability combined with ours to do more work for our customers. That's where we see the synergy in the supply chain of people they have, supervisors as well as craft giving us more capacity in that Northeast Midwest to deliver for customers in both data centers and energy.

And that's very helpful. And then maybe I can follow up for Greg. You gave us a look into second half. You said you're factoring in $5 million on higher fuel costs. Can you give us a sensitivity on how many basis points of margin that should mean for the second half?

Good morning. Yes. So overall, for the full year, fuel from the $7.5 million to $7 million in the first half and then the $5 million that I noted in the second quarter -- in the third quarter, excuse me, it's about 35 basis points of headwind for a full year basis.

And you're assuming just for third quarter, nothing for fourth quarter yet?

We -- our assumption in our guidance assumes a $5 million headwind in the third quarter and then back to some level of normalized increase year-over-year. So our guidance at the beginning of the year did assume some normal increase that you would expect.

Your next question comes from the line of Manish Somaiya with Cantor.

Greg, I had a question for you on guidance. It looks like revenue is up about $300 million at the midpoint. EBITDA is up a little bit. Maybe if you can just help us understand the conversion, the EBITDA flow-through. And then I have a follow-up.

Yes. So maybe taking a step back, when you look at base gross profit of the increase that we've assumed in our guidance, about 2/3 of it kind of relates to organic business and then 1/3 of it kind of relates to the incremental JJ White in the 5 or so months of contribution that we'll get here in the back half of the year. From an adjusted EBITDA perspective, we've assumed that same level of base gross profit along with our storm activity. Obviously, you have the previously discussed kind of headwind from moving to a 50-50 split on leasing, which we're on target with and have revised or finalized the sale and leaseback of our existing fleet. So any future purchasing will be along those lines. So the combination of all of that gets you to adjusted EBITDA about 8.1% at the midpoint.

And Greg, I think in the slides, you have fleet investments at 60% operating lease and 40% CapEx vis-a-vis the 50-50 split that we have talked about. So I guess what is the incremental impact to EBITDA of that sort of 10 percentage point increase in operating lease this year?

So the full year impact of our leasing is about 0.5 percentage point or about 55 basis points, excuse me.

On margin?

On EBITDA margin -- 55 basis points on EBITDA margin.

Your next question comes from the line of Justin Hauke with Robert W. Baird.

So I've got 2 questions here. I'll start. I guess first one, this one is really easy, and then I've got a question on the guidance. But the first question is just JJ White acquisition. I think you said $315 million of backlog and a $2.8 billion pipeline increase. Is that pipeline increase already in the $16 billion number that you gave? Or is that something...

Just that it's not. We didn't close on JJ White until, I think, the third week in July. So it's excluded from the numbers. So it will be at [ additive ].

Okay. All right. I figured that. I just didn't know given that pipeline number backlog.

But as Greg just said, the only element you'll see of JJ White within our release is the guidance where 1/3 of the guidance increase came from JJ White for that 5-month period. That's the other thing I would stress.

Yes. Well, that leads to my second question because I guess this is what I kind of want to understand a little bit better because the organic, as you just discussed, the revenue is $200 million higher. You've got another $100 million from JJ White. You raised the EBITDA guidance by $5 million. You pick up $9 million or so from the 5 months that you have with JJ White and you offset that with the $5 million headwind from the higher fuel cost. So that basically just -- I guess I would look at that and say that it implies organically that there's no incremental margin on any of that acquired revenue. And so I guess I just want to understand that dynamic and also just the confidence in the second half base gross profit margin outlook, which is roughly 9% versus just under 8% that you did here in 2Q. I know there's seasonality, but just, I guess, help me understand some of those moving pieces a little bit better.

Let me talk about the second half, and then Greg can come to the overall guidance, just to help you map the numbers. We feel second half of the year very strongly about the volume of work and also about the 9% quoted margin. We've got total visibility on pretty much everything that we need to deliver this year is under contract. I think there's a slide within the deck that shows that to everybody. We've added the capacity we needed to add in gas. I think everybody might be speaking, but everybody will recall, we have a massive drain on margins in our first quarter, even going into April. So adding more volume into the gas business, needed people to win work, put it into the backlog, which we did. You've then got to mobilize people and we've added [indiscernible] in the quarter. As it goes, we'll stay within the headcount because we've now reached where we have to be on a capacity standpoint. So as -- we don't just look the business on a quarterly basis. The business is not -- it's just not linear like that because of the seasonality as well as the portfolio mix. So what's the point? The point is we added the capacity we needed in the second quarter. We've got full visibility of where we're going to be for the second half of this year. We're really confident in the 9% margins as quoted. And our intent now is to drive very strongly to the end of the year. And then if you look even into '27, which I know we're not into '27 yet, we've already built up the backlog for next year, which is really important when it comes to seasonality. The seasonality for the first quarter next year requires us to win work now and have resources for next year. So the bottom line is very confident in the second half of the year. We've got pretty much all of the revenue under contracts. We've added the capacity we need to, particularly in the gas business. So we feel very confident that the investment in the first quarter will have in margins in the second half of the year. I'm confident within that overall 9% for the second half of the year across the board.

And specific to the guidance, we talked about in our release that the annualized revenue profit -- gross profit contribution from JJ White being $20 million plus with margins consistent with our Union Electric business or our business as a whole. When you think about -- they also have a bit of G&A expense and they're very capital light in how they operate their business. And so very little depreciation within the business as they're very efficient from that perspective. And so taking into consideration lower depreciation within their numbers and then some level of G&A expense, you get to an EBITDA contribution that's a little bit less than where we -- what we said on a gross profit basis. You also have to remember that our EBITDA guidance includes the fuel impact. It's about $12 million on a full year basis that we forecasted. When you factor all that in, G&A expense still being in line with what we previously said, which is 4% or better on a percentage of revenue basis. And then the last thing I'd just point out on gross profit, I mean gross profit margin on a full year basis is going to be in that kind of 7.8% to 8% range.