Centuri Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
July 29, 2024

There are 13 speakers on the call.

Operator

Good day, everyone, and welcome to Century's Second Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr.

Operator

Jason Wilcox, Chief Legal and Administrative Officer and Corporate Secretary for Centuri. Please go ahead,

Speaker 1

sir. Thank you, Bo, and hello, everyone. We appreciate you joining our call. This morning, we issued and posted the Centuri Holdings Web site our Q2 2024 earnings release. The slides accompanying today's call are also available on Century Holdings' Web site.

Speaker 1

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 on what the future holds, but are subject to several risks and uncertainties, including uncertainties surrounding the impacts of future economic conditions and regulatory approvals. This cautionary note as well as a note regarding non GAAP measures is included on Slides 2 and 19 of this presentation, today's press release and our filings with the Securities and Exchange Commission, which we encourage you to review. These risks and uncertainties may cause actual results to differ materially from statements made today.

Speaker 1

We caution against placing undue reliance on any forward looking statements, and we assume no obligation to update any such statement. 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 Bill Furman, outgoing President and CEO of Centri Holdings Hall Cudill, incoming Interim President and CEO of Century Holdings Gregory Eisenstark, Chief Financial Officer of Century Holdings and other members of the Century Holdings management team. I'll now turn the call over to Bill.

Speaker 2

Thank you, Jason, and thank you all who have joined Century's 2nd quarter 2024 earnings call. Shortly, I'll discuss the quarter and recent developments. First, being that this is our inaugural earnings call, I'll spend a few minutes about our organization, how we're differentiated and our compelling value proposition. During the Q2, Century concluded its initial public offering at at a concurrent private placement. We listed on the New York Stock Exchange and raised just under $330,000,000 It was a special occasion to join colleagues at the New York Stock Exchange a few weeks later to ring the opening bell and commemorate this important milestone for our company.

Speaker 2

I again want to thank all my colleagues at the company for their dedication and commitment. Through completion of the IPO, we are proud to have brought to market a leading pure play North American utility infrastructure services company. We partner with our customers to maintain, upgrade and expand North American energy networks. Our risks go back more than a century with our company well known for delivering world class safety and quality performance. For these reasons, Centuri has earned the trust and partnership of a well established blue chip utility customer base.

Speaker 2

The average tenure for our top 20 customers is 23 years. We deploy our services across the scale platform that spans natural gas and electric infrastructure and is in 43 states and 2 Canadian provinces. In both our gas and electric market segments, we have historically focused on and continue to target local distribution work primarily through master service agreements or MSAs in which smaller portion of our revenue is currently focused on smaller scale bid work. This means we lean primarily into the blocking and tackling maintenance and smaller scale construction work our customers need. Our approach helps us form sticky relationships with customers and on a historical basis has provided us with a recurring revenue profile and visibility over their longer term spending plans.

Speaker 2

Over the last decade, Centuri has delivered consistent and resilient growth. And perhaps more importantly, as we look ahead, we see multiple levers to pull, which will drive continued expansion. Demand for utility CapEx growth and in turn for our services is underpinned by multi decade secular tailwinds spanning gas, electric and renewables. We are extremely energized by this backdrop and are keenly identifying, capturing and expanding opportunities being forecasted in energy and utility infrastructure. To that end, we experienced ongoing commercial momentum during the Q2 of 2024 across MSAs, which represented 83% of the quarter's revenues and bid work, which comprised the remaining 17%.

Speaker 2

Bid work historically accounts for 15% to 20% of our annual revenues as we maintain a very selective risk adjusted criteria for the work we pursue. Illustrating our long term customer relationships, we secured 7 customer awards in the 2nd quarter with a total multi year estimated revenue potential of more than $250,000,000 through MSA extensions, including an early renewal with one of our top customers. The quarter continues our track record of never having lost a material customer at MSA. During the period, we also secured an estimated $150,000,000 in bid project awards. Combined with our MSA work, this represents more than $400,000,000 in estimated revenue and brings our total current backlog to $4,700,000,000 We were pleased to secure the 230 kV Cardiff substation expansion job for Atlantic Shores Project 1.

Speaker 2

This work has an estimated value of $105,000,000 in revenues and delivers critical infrastructure to connect New Jersey's 1st offshore wind project. While offshore wind work remains a de minimis part of our business mix, this project highlights the ancillary infrastructure required to connect renewables to the grid and ultimately to end customers and taps into our core capabilities. Also during the Q2, we were awarded a $35,000,000 gas project, replacing 30 miles of 20 inches steel pipe and building support stations as part of a major system upgrade in the Midwest. While small to start, the total scope of work to be done under future phases of this project will result in a revenue potential that is several multiples higher and we look forward to participating in future bids. These wins are examples of early successes in our strategy to selectively expand our bid work while staying within our core competencies.

Speaker 2

We have no plans to pursue cross country transmission work. However, doing work in areas such as substations, generators, interconnections and utility scale transmission projects as well as larger diameter pipe for gas utilities can be attractive from a margin and returns perspective. When needed, it can also nicely balance any slowdowns in MSA volumes. Now to our results. Several factors contributed to our financial performance in the Q2.

Speaker 2

As reports from the financial community have observed, there has been a broad based slowdown in transmission and distribution construction spending since the beginning of the year. In recent weeks, commentary has suggested a widespread deepening in this slowdown during the Q2 and particular softness in gas and electric distribution, which is our main focus area. At Centuri, we experienced this dynamic during the period. Several customers across multiple regulatory jurisdictions across our territories, including Illinois, California and Maryland among others experienced delayed or unfavorable rate case decisions. This drove lower than expected MSA customer spending, which in turn resulted in sluggish crude growth for Century.

Speaker 2

Further, we were impacted by delayed bid work and a bid job that was canceled by a customer. Despite these revenue headwinds, our adjusted EBITDA margin was in line with historical second quarter levels, evidencing our strong focus on cost control. Further, we tightened controls on CapEx spend and continue to focus on capital allocation. Our focus has resulted in significantly less CapEx spend versus the prior year period. Together, these initiatives help drive solid free cash flow conversion on adjusted EBITDA during the period.

Speaker 2

Moving on to our cost focused strategic initiatives and the progress we made during the quarter on these fronts. With an aim to drive efficiencies and improve bottom line results, earlier this year, we commenced the process of identifying significant overhead cost reductions as well as optimizing our supply chain and fleet management systems. During the Q2, we finalized our 2 phase review of corporate and operating company overhead. In total, we identified approximately 2.20 $9,000,000 in annualized savings for 2025, split between non revenue generating functions and activities at the corporate level and overhead in our operating companies. We've seen very strong buy in from our leadership team.

Speaker 2

They are energized by our focus on streamlining Century's organizational structure and the efficiencies and accountability that are enabled by structure where there is direct reporting of operating company presidents to the CEO and daily line of sight into and across our businesses. We also made headway on our fleet and supply chain savings initiatives by leveraging our scale at the century level to secure better contract pricing across the business. During the period, we negotiated 10 major supply chain contracts with another 5 contracts currently under renegotiation. This work resulted in contract discounts on average of approximately 10%. The savings achieved today represent approximately 17% of the spend with our top 100 vendors and reflects only the beginning of this process as we work toward becoming a more capital efficient organization.

Speaker 2

Before turning the time over to Greg for more details on second quarter results, it's important to spend a few minutes discussing the leadership transition. As announced on June 26, I will be stepping down as President and CEO of Centuri. My last day is Wednesday, July 31. I have enjoyed my time here tremendously. This is an incredible organization and I'm proud of what we have achieved together.

Speaker 2

My decision to leave was a tough one, but ultimately reflects a once in a career type of opportunity to take on the Chief Executive role at 1 of the nation's largest publicly traded utilities. To be clear, I have no concerns with the company, the Board, management team or overall business strategy that will drive a very successful future for the business. Centuri has a seamless transition plan in place with Paul Cuddell set to take over as Interim President and CEO later this week. Paul is uniquely and expertly situated to step into this role at this time. He is a highly experienced utility executive having served previously as CEO of NV Energy, part of the Berkshire Hathaway family among other roles.

Speaker 2

He is a prior Century Advisory Board and was most recently a special advisor to me and an architect of the cost reduction and efficiency programs I just spoke about. Over to Paul now for a few words.

Speaker 3

Thanks, Bill, and hello to all of you on the call today. I'm excited for the opportunity to lead Century Forward after Bill steps away from the CEO role. As Bill alluded to, I have an in-depth understanding of this organization, having partnered closely with him to design and execute on the cost and efficiency focused strategic initiatives we are discussing today. I look forward to picking up where Bill left off as there is more work to do, particularly around the areas of capital efficiency. I'm also aware of the importance of strategically growing the business.

Speaker 3

I intend to spend a substantial amount of my time portfolio, while at the same time making inroads with new customers and markets. I've made clear to the Board of Directors that I'm available to serve as interim CEO as long as necessary. And I look forward to meeting with our analysts and shareholders once I'm officially in the seat.

Speaker 2

Back over to you, Bill. Thanks, Paul. I know the company will be in great hands under Paul's leadership. And looking ahead, the Board of Directors engaged a search firm in mid July to identify the next permanent CEO. This will allow the company the benefit of time to find the optimal individual to take over the role, while continuing to drive Sensory forward under our aforementioned business strategy.

Speaker 2

We're looking at both internal and external candidates and while we can't provide a timeline on our expected decision, we are very encouraged by our early discussions. Further, I will continue to be involved with Centuri as a non employee director and intend to support Paul in any way I can. I did not bring in any other outside senior leaders during my tenure and we have not seen any departures of key personnel beyond the initial removal in January of management layers intended to enhance CEO line of sight into the business. Rather as part of improving efficiencies across the organization, we have made several notable strategic appointments to bolster our focus on strategic growth and sharpen our internal financial planning processes to improve profitability. We are very excited about the impact these changes will have going forward.

Speaker 2

I'll return later in the call to talk about the bright future ahead for Centuri. But first over to Greg Eisenstark, Centuri's CFO to discuss our Q2 results. Greg?

Speaker 4

Thank you, Bill. This morning, we reported 2nd quarter 2024 consolidated revenue of $672,100,000 compared to $805,800,000 in the Q2 of 2023. Consolidated gross profit was $60,500,000 on a gross profit or a gross profit margin of 9% compared to gross profit of $90,000,000 or a gross profit margin of 11.2% in the prior year quarter of 2023. On a GAAP basis, net income in the 2nd quarter came in at $11,700,000 or diluted earnings per share of $0.14 down from $17,100,000 or diluted earnings per share of $0.24 in the prior year period. Total company adjusted EBITDA, a non GAAP figure in the Q2 of 2024 was $68,600,000 down 26.1 percent from the prior year quarter.

Speaker 4

Adjusted EBITDA margin was 10.2% for the quarter, while down from the prior year quarter's 11.5%, it remains above the 2nd quarter adjusted EBITDA margins over the last 3 years, which averaged 10.1% and points to higher profitability ahead as revenue grows. Non GAAP adjusted net income in the 2nd quarter came in at $17,000,000 or an adjusted diluted earnings per share of $0.20 down from $25,000,000 or an adjusted diluted earnings per share of $0.35 in the prior year period. Before turning to segment results, I'll highlight our storm restoration efforts. In the first half of twenty twenty four, we dispatched more than 2,000 employees to respond following severe weather events. This generated $45,600,000 in revenues in the first half of twenty twenty four.

Speaker 4

Subsequent to the end of the second quarter, Hurricane Barril made landfall in Texas as a Category 1 storm in the 2nd week of July. In a coordinated response across our businesses, we mobilized more than 650 union and non union employees to address the estimated 2,700,000 people that were left without power in the wake of the storm. We have generated an estimated $22,000,000 in storm restoration revenues through the 3rd week in July. The Q3 is the heart of the hurricane season and therefore typically when we have greatest storm opportunity. With barrel, we have already performed considerable work while it is still early during the hurricane season.

Speaker 4

Moving on to our reportable segments. Revenue from our U. S. Gas segment totaled $340,700,000,000 reflecting a year over year decrease of 13.1%. This was largely due to delayed or unfavorable regulatory decisions based by key customers across multiple jurisdictions, which slowed or paused their spending plans and thus contributed to a reduction in net volumes under existing customer MSAs.

Speaker 4

This segment also benefited last year from a large natural gas bid project that has since been completed. Gross profit margin decreased to 7.4% in the current period from 11.2% in the same period from the prior year, again negatively impacted by these revenue factors and one time severance costs in the current quarter. Revenue from our Canadian Gas segment totaled $41,000,000 reflecting a decrease of 14.8% compared to the Q2 of 2023. This decline was driven by a reduction in net volumes under existing MSAs. Segment gross profit margin increased to 22.8% for the Q2, primarily due to a customer contract renewal in late 2023 and favorable changes in the mix of work.

Speaker 4

In our Union Electric segment, revenue was $164,200,000 a decline of 24.8% year over year. This largely reflects the completion of offshore wind project in New Jersey, which was canceled in October 2023. Gross profit margin in the Union Electric segment decreased modestly to 7.4% in the Q2 of 2024 as compared to 7.8% in the Q2 of 2023. This segment is a little more big focus than other segments, which enables better margin preservation combined with the benefits of certain cost reduction means taken earlier this year. Non Union Electric segment revenue totaled $120,500,000 a 9.8% year over year decline.

Speaker 4

This decrease was primarily driven by a reduction in net volumes under existing MSA existing customer MSAs caused in part by delays in rate case decisions impacting certain customers. Partly offsetting these declines was a modest step up in transmission work. Segment gross profit margin decreased to 13.5% in the current period versus 15.4% in the same period from the prior year. Profitability was negatively affected by lower work hours for existing crews, which contributed to under utilization of fixed costs. Resulting from our focus on capital discipline, we reported net capital expenditures during the quarter of $20,000,000 compared to $29,000,000 in the prior year quarter.

Speaker 4

This drove a healthy conversion of adjusted EBITDA to free cash flow of 71%. Moving to our balance sheet highlights. We closed our IPO on April 22, issuing 16,900,000 shares of common stock in the process, inclusive of a $2,600,000 concurrent private placement. Net proceeds after factoring in transaction fees was $328,000,000 which was used to reduce outstanding debt. Prior to the IPO, we also used $92,000,000 in cash to acquire the remaining 10% outstanding non controlling interest in Linetec Services.

Speaker 4

Beginning with the Q2, our financial statements reflect 100% of Linetec's results. On a trailing 12 month basis, our net debt to adjusted EBITDA ratio was 4.38 times. Our leverage is largely in line with the same period last year and down from the Q1 of 2024. We ended the quarter with $31,000,000 in cash and cash equivalents on the balance sheet and remain focused on delevering the business to be in line with peers. Turning now to our outlook.

Speaker 4

Today, we introduced a full year 2024 outlook for revenue of $2,500,000,000 to $2,700,000,000 adjusted EBITDA margin percentage of 9 percent to 9.6 percent and net capital expenditures of $90,000,000 to $99,000,000 At the midpoint of our guidance, we expect our year end leverage be in the mid-3s. With that, let me turn it back to Bill.

Speaker 2

Thanks, Greg. Fundamentally, the dynamics that drive our business have not changed. Utilities deliver growth by increasing their spend to build, maintain and repair the infrastructure used to produce and deliver energy to their customers. Volatility from quarter to quarter is a characteristic we face with our MSA model given there are no guaranteed volumes And unfortunately, it was more pronounced to the downside in the Q2. That said, the strong secular tailwinds we have previously discussed are very much in place and we look forward to some normalization in our customer spending going forward.

Speaker 2

As we all know, today's North American infrastructure needs are immense and they only grow as our aging infrastructure gets even older. Low demand growth from emergent technologies picks up momentum and as clean technology deployment continues to pick up steam and require grid connectivity. Utilities continue to plan 1,000,000,000 of dollars in CapEx spend to replace natural gas and electric infrastructure. We see more than half a century of work to replace the existing miles of natural gas means that are more than 50 years old across the United States. Similarly, U.

Speaker 2

S. Electric transmission lines are on average 50 years old. Paired with growing offshore wind capacity and demand driven by load from data centers and advanced manufacturing, we plan to be a long term partner to our utility customers for many years to come. Beyond the macro, there are several critical strategic initiatives in place that we expect to drive growth and profitability for Centuri. We have spoken in the past about senior leadership driven growth with core customers and a need to grow wallet share with total customers while driving revenue synergies from cross selling.

Speaker 2

We're also taking a focus and coordinated approach across our businesses to pursue opportunities in adjacent high growth service lines. We have made great strides in identifying cost savings and we'll continue to implement our plan thoughtfully to deliver the savings initiatives discussed today. Our progress on supply chain and fleet optimization savings and implementation is in the earlier innings and we will continue to report updates in future quarters. This work will not stop. Our focus on cost, both operating and capital, will continue to support margins that are broadly consistent with historical trends and drive healthy free cash flow generation.

Speaker 2

Although longer term, we'll pursue accretive bolt on M and A, our near term focus will be on reducing debt and bringing our leverage more in line with our peers. We thank you for your time today and we'll now turn the call over to our operator for Q and A.

Operator

Thank you, Mr. We'll go first today to Steven Fisher with UBS.

Speaker 5

Thanks. Good morning. Just want to understand a little bit about these MSA dynamics, if I could, please. And it seems like there was further incremental step down in that MSA activity. Could you just talk about what really was the driver of that?

Speaker 5

Was it sort of spreading to new states or getting worse in the states that were problematic over the last couple of quarters? What was really the incremental concern here by the regulators? It's still about inflation? And then what do you think the key drivers are of getting this dynamic to be better for you?

Speaker 2

Sure. Well, thank you, Steve, and good morning. Good to hear from you. Well, as we reported during the first half of the year, customers really have significantly underspent relative to the expectations, particularly the expectations that were communicated to us during the Q1, which seemed to change as we moved into the Q2. There's a very strong broad base of caution within our customers and there's very clear regulatory challenges in certain jurisdictions, particularly Illinois, California and Maryland.

Speaker 2

For example, in the second quarter, we had a customer cancel a $30,000,000 project and obviously that had an important impact on our overall results. Now we do anticipate an increase in spending in the medium to longer term, which will also offset the shortfall in the first half of the year through communication with our customers. Unanticipated lower interest rate environment should help with reducing the overall customer caution. And we clearly expect our results over time to evidence the strategic initiatives that we have in place and our growth. And so, we're confident in our second half outlook.

Speaker 2

That's informed in part by a series of conversations that we've had with our customers. And of note, our outlook doesn't assume any significant changes in the macro environment, new business opportunities or anything beyond the savings that we've already discussed in this call. And so overall, it really is a point of caution with customers and for us with Illinois, California and Maryland being very key states for us having regulatory challenges there were very significant for us. But we see those beginning to soften moving into the second half of the year.

Speaker 5

Great. Thanks, Bill. And just to follow-up on your commentary on the second half of the year, just to understand sort of the assumptions and the risk going forward. Can you just give us maybe what do you think the cadence of Q3 versus Q4 would be perhaps from an EBITDA perspective. I think Q3 is generally going to be higher, but do you need to kind of win any more particular bids out there?

Speaker 5

Where do you see the kind of the risk factors for the second half of the year?

Speaker 2

Sure. Yes. Thank you for that question. Well, to start off, we do see a few positive indicators to note as we head into the second half of the year. 1, we're starting to see some pockets of normalization in spending, particularly around electric.

Speaker 2

So that's very good news for our company and for our business. Obviously, we're starting to factor in the cost savings that we've talked about. And then there was the early start to the storm season. And clearly, the forecasts are for more significant storms unfortunately heading towards the country, but we'll be ready to respond to those. And our electric business is seeing more RFP activity in 2024 and beyond.

Speaker 2

And then finally, I would say that the biggest driver perhaps is that the certain delays in rate case decisions are starting to get settled out and we're beginning to see work getting released. We're also right now seeing a pretty good flow of work from customers that were impacted in the first half of the year. They're beginning to add crews. And so, I think if you analyze second half of twenty twenty four versus second half of twenty twenty three, you'll need to factor in the cost savings that we've had as well as the fact that one, we've only performed $22,000,000 in storm work in the second half last year and through July 21 this year, we already have $22,000,000 for the month. So very critical point as you're looking at quarter over quarter and year over year.

Speaker 2

And then Q4 2023 already showed some softness as we've talked about in the past And I know you're familiar with the big projects that were the big tailwinds in the Q2 of 2023 and the Q3 of 2023 were already wrapped up in the Q4. And so at that point, again, we saw some of the sluggishness in spending under our MSA where it creep in. So we're feeling good about what we're seeing. And I think that the customers are beginning to really look at releasing works that they can hit their capital spend requirements for the year.

Speaker 5

Okay. Thank you, Bill.

Speaker 6

I'll turn it over and best wishes to

Speaker 2

you. Okay. Thanks, Stephen. Take care.

Operator

Thank you. We go next now to Mark Strouse with JPMorgan.

Speaker 6

Yes. Thank you very much for taking our questions. When you think about the lower than expected spending in 2Q, can you just kind of talk about how you're thinking about that kind of potential timing of that coming back? Or does it come back at all? Or does it simply get delayed?

Speaker 6

Is there any reason to think that that could lead to potential upside to what you were thinking kind of looking out to 2025?

Speaker 2

Well, as I just mentioned in response to Stephen's call, we are beginning to see customers start to release work, start to order back in a stronger showing of crews. And just going to again the fact that for these customers who are blue chip utilities, for them to meet their earnings, they will have to deploy capital. And so while there was a slowdown in the first half of the year, we do expect to see an improvement and an increase going into the second half of the year so that these customers can meet their earnings requirements and their spend. And so we anticipate an increase in spending in the medium to longer term, which will we think offset the shortfall in the first half of the year. And then obviously, what we're hearing through the Fed and anticipated lower interest rate environment, I think will also help with reducing overall customer caution.

Speaker 6

Okay. Thanks, Bill. And then my follow-up, the CapEx guidance of $90,000,000 to $99,000,000 that was lower than what we were looking for. Is that simply a function of the 2024 revenue outlook being a bit lower? Or are you signaling that there's something more structural there with your CapEx spending?

Speaker 2

So we've talked about from the very beginning that we would have a much more disciplined focus on capital allocation than that. The capital would be viewed as a significant asset of the company and would be used in particular for growth opportunities. As part of that, as we've talked about in the past, we're reevaluating our fleet under our prior ownership with Southwest. Our fleet was essentially bought with 100% CapEx. We're now looking at a buy rent lease type of strategy for our fleet, which will positively impact our capital spend.

Speaker 2

And so with the discipline that we have imposed and the opportunity to continue optimizing our fleet, we will see a continued decrease in our CapEx spend over time. And this is just the start of it that you're seeing today.

Speaker 6

Okay. Very helpful. Thanks, Bill. And I'll add my best wishes as well on your next chapter.

Speaker 2

Yes. Thank you so much.

Operator

We'll go next now to Sangeeta Jain with KeyBanc Capital Markets.

Speaker 7

Yes. Thank you. Good afternoon and thanks for taking my questions. If I can ask between gas revenues and electric revenues, it looks like gas revenues held up closer to expectations, but the softness is more pronounced on the electric side. Can you maybe elaborate on that?

Speaker 7

And do you see the same trend in the second half? Or should we see some kind of offset?

Speaker 2

Yes. Thank you so much for the question. I'll have Greg answer that question. Greg?

Speaker 4

Good morning. So, yes, I mean on the electric side, our nonunion business saw a continuation of lower crew hours or lower work hours. As Bill alluded to, we have seen some positive momentum as we've gotten into the second the third quarter, especially given the storm work that we did already in July. When you look at our union business, it is a little bit more bid focused. The RFPs have started to come out in greater volume and frequency, but they are a little delayed from what we had anticipated and what we had seen in last year.

Speaker 4

So we are seeing some momentum there and we'll obviously be looking to expand and increase that as we get through the second half of the year.

Speaker 7

Great. And if I can follow that up with one question on storm work. You told us what the storm work was to date in 3Q. Can you also help us understand what's in your guidance for second half? I

Speaker 4

mean, we do we have forecasted storm work during the seasonal period in which it's most common to occur. It's a fairly modest amount of storm work and obviously given what we've done thus far, it's we're off to a good start.

Speaker 7

Got it. Thank you.

Operator

Thank you. We go next now to Justin Hauck at Robert Baird.

Speaker 8

Great. Thank you for taking my questions this morning. I guess I just wanted to ask on the guidance question maybe one more time. So I mean it looks like the midpoint of the guidance basically if you assume that EBIT is flat year over year in 3Q and 4Q that kind of gets you the midpoint and that's coming off of the Q1 it was down 60% and the 2nd quarter was down 25 percent. And I know you had these discrete kind of a weighing on that.

Speaker 8

But I guess I just want to understand the visibility that gets to that outlook between the cost savings, the MSA is picking up and I guess just confirming that you are assuming that the MSA work does get better and just kind of the bracketing of the assumptions on why it could be flat year over year?

Speaker 2

Sure. Well, clearly on the MSA side, as we've discussed, we are beginning to see customers begin to release work. There's a significant amount of bid work under those MSAs that we have engaged with and we're awaiting decisions on award. And so from that perspective, we do see a better second half of the year. Maybe for some of the details, I'll turn it over to Greg to add some color to this.

Speaker 4

Yes. I would add, we talked Bill mentioned we did $22,000,000 of storm work in the back half of last year. We've already done $22,000,000 of storm work here through the 1st 3 weeks of July. Forecast projected increase in storm activity, see what that transpires or what transpires from that. But as you said, we did have a couple of items in the second half of the year or last year that kind of winded down in the second half of the year.

Speaker 4

And so that will kind of be behind us. And obviously, our Q4 last year included some pullback already on the electric side consistent with what we've seen in the first half of this year. So we think we've leveled out.

Speaker 8

Okay. Second question, just you didn't give an adjusted EPS guidance. Can you help us for thinking about kind of the updated thoughts for interest expense and your D and A assumptions for 2024 just so we can kind of bridge to that?

Speaker 4

Regarding D and A, and A, I'd say it's going to be fairly consistent with what we reported in the first half of twenty twenty four. And with regards to interest, I just remind you that we paid off a significant piece of debt in April of this Q2. And so you need to factor that in as you kind of think about the last 6 months of the year.

Speaker 8

Okay, Great. Thank you very much.

Operator

Thank you. We go next now to Sherif El Sabahi at Bank of America. Hi, thanks for taking the question.

Speaker 9

I realize rate cases have pushed out some work. Is there a risk that elections also push or delay some of the work in the second half?

Speaker 2

I don't actually think so. In my view, when we look back at both the prior Trump administration and the Biden administration, they both have pushed significant investment in infrastructure and both of them pushed 1,000,000,000 and 1,000,000,000 of dollars out into the market and everything that I've seen at least signaling coming out of the Trump presidency campaign has been continued investment in infrastructure and in some cases required investment in infrastructure. And of course, if the Harris campaign wins, they've been very strong on infrastructure spend, renewable spend and such. And so all of those line up very well for us with regards to our core capabilities and we're very much ready to take that work on. And so I think either way, our business will catapult regardless of the wins.

Speaker 9

Understood. And just to follow-up on leverage, you said your expectation is to be in the mid-3s by year end. It's in the low-4s as of this quarter. Can you just provide us how a sense of how comfortable you feel there? You've talked about some of your expectations for the second half.

Speaker 9

And I realize you have cost savings underway. Are there any other levels levers on capital allocation that you could pull to if we see spending further delayed?

Speaker 2

Sure. Well, on debt, as we've said, we ultimately are pushing to get ourselves really in line with where our peers are at. And so while we'll be in that mid-three range by the end of the year, that's not where we ultimately want to land. We'll continue to focus on leverage reduction over the next several months. And once we get into a better spot on leverage, obviously, that will begin to open up the opportunity for M and A.

Speaker 2

But 1st and foremost, we're going to drive our leverage down. And just on the CapEx side and other levers, we are just in the early innings around significant work on supply chain and significant work on our fleet. The fleet is $1,000,000,000 of asset. There's a lot of opportunity there. It's just taking us some time to thoughtfully go through those assets and determine what makes the most sense for us.

Speaker 2

For instance, we have a lot of our assets up in cold weather territories where work significantly slows down over that period of time and being able to move those assets down into the warmer regions of the country where work continues to pick up during that period. It's those types of things that we're looking at versus perhaps just buying equipment for both of those regions and have some of it sit without really being used efficiently. And so I would say that beyond the capital allocation and the discipline that we're applying to our capital, meaning when it gets pushed out into the operating companies, we're now putting a cost of that capital on it that the YOPCOs will have to cover. And when that gets returned, they'll have to be a return of and a return on the capital. And so that type of discipline will support more efficient use of that money.

Speaker 2

And then again, just a very hard focus on our fleet and our supply chain is going to open up additional levers for us to pull going forward.

Speaker 9

Understood. And just given where leverage is, could you remind us where your covenants stand?

Speaker 4

We're in compliance with our covenants.

Operator

Thank you. Thank you. We go next now to Joe O'Dea with Wells Fargo.

Speaker 10

Hi, thanks for taking my questions. Just looking at the year over year revenue bridge on Slide 12, some helpful breakdown there. It seems like kind of 4 buckets of headwinds, a couple of them really tough comps and then a couple of them maybe a little bit more the operating environment. But in the roughly $33,000,000 of just lower volumes under MSAs, can you elaborate on this a little bit more? What type of project work is getting pushed out?

Speaker 10

How long it is that utilities can push this type of project work out? And then just like related and how the business works, I mean, obviously, downside surprises here in the first half of the year, but does it tend to be pretty symmetrical and you could get these upside surprises in the back half? Or just how does that work in terms of visibility and conversations with customers?

Speaker 4

So regarding the other category of $33,000,000 or so, this is largely just MSA work and some of it is timing and delays that our customers have communicated to us. And then also slightly lower work hours, especially on the electric side, like we mentioned already. And so this is all work that can flow from quarter to quarter, and we're obviously heading into the second half of the year, which from a third quarter perspective is a seasonally higher period for us. And so this is work that ultimately will come at some point. It is but it is dependent on how the customer releases work and such.

Speaker 4

What was your second question? I'm sorry, Joe.

Speaker 10

It was just in terms of over time and as you observe surprises relative to plan from quarter to quarter, trying to understand the scope for the back half of the year to come in notably above plan. I would say first half, if we characterize that as notably below plan and just the way the business works, what is the scope for customers to do a lot more than you think they're going to

Speaker 4

We're here to service the customers any way they need. And if they come to us and ask for additional crews and additional work and additional hours, we'll make sure we accommodate that request. I think we've talked about a little bit that we have seen an uptick in bid RFP flow compared to the first half of the year. We've already touched on the storm activity and where we stand there. And so we are seeing some increased movement and that does encourage us as we look to the back half and obviously.

Speaker 10

And then also just wanted to ask on the cost savings. So the $29,000,000 of annualized savings, is that something that should be fully realized in 2025? And how much of that is in 2024? And then also just supply chain and fleet savings, any quantification of the potential savings there?

Speaker 4

So the annualized $29,000,000 is expected to be realized in 2025. We talked we've been making we initially started in the corporate office in the Q1 and have moved to the operational side of the house in the second half during the second quarter. So you will start seeing that benefit in the second half of the year and then fully realized going forward into 2025. From a supply chain and fleet perspective, we think there's a lot of opportunity. We are in the early stages, in the early innings of that analysis and that work.

Speaker 4

We have made some progress already with some of our key suppliers, but that's something that we'll continue to put focus on as we move throughout 2024 and 2025.

Speaker 10

But is it like $15,000,000 of that $29,000,000 that you get in 2024?

Speaker 4

Related to the $29,000,000 I'd probably say it's maybe a third.

Operator

Great. That's helpful. Thank you. And we'll go next now to Chris Ellinghaus at Seabert, Williams and Schenkel.

Speaker 2

Hey, everybody. How are you today? Great. Thanks, Chris. Well,

Speaker 11

Bill, there's always some short term gyrations relative GRC outcomes. Are there any, A, commonalities that you've heard from your customers related to their rate case outcomes that influence your results? And secondly, what are they telling you for, say, next year? It sounds like you think things are starting to normalize. So does that sort of suggest what you're hearing from customers is more back to plan for 2025?

Speaker 2

Yes. Thanks for the question, Chris. I'll start and then I'm going to hand it off to Jim Connell, who has tremendously strong relationships with our customers. As I stated, there's certain jurisdictions, in particular Illinois, California and Maryland, which I would say issued pretty onerous rate case outcomes. And there's a commonality across those, I would say, a little bit.

Speaker 2

And in our case, those are very large states for us with regards customers. And so I would say the cases that came out had an outsized influence on our results. That said, those customers have all communicated that, again, for them to meet their earnings, they ultimately will have to deploy capital in these areas. And so we are beginning to see movement. Jim, what's your take on this?

Speaker 12

Yes. Chris, thanks for the question. Generally, when we speak to these customers, which span from coast to coast, the executives are telling us that they're settling into their new normal. And that will come with more of a steady flow of work in future years. Many of them have been more volatile in their own business here in the short run due to some of these fast moving, very dynamic changes in their business.

Speaker 12

But to be clear, the work that we are doing and the work that is being spent under these plans are safety mandated, required to ensure the safe and reliable delivery of both gas and electric. And so we look forward to that settling in, in the near future.

Speaker 2

Okay.

Speaker 11

The significant storm restoration work thus far, does that suggest that relative to your guidance view that you're expecting 3rd quarter margin to have a little more weight to the second half?

Speaker 4

Greg? Yes. I mean, we are a seasonal business and across both our gas and electric businesses, the Q3 tends to be the most active from a volume and a workload perspective. So not just storm, which obviously is most concentrated in the Q3, but just across our business, the 3rd quarter tends to be our most active.

Speaker 2

So that's correct.

Speaker 11

Right. But this year, you're expecting that shape to maybe be a little more deviated versus the Q4?

Speaker 4

I mean, we're definitely off to a strong start in July. The forecasts are what they are and we'll see what the rest of the quarter holds, but we're definitely off to a fast start.

Speaker 2

Right. Okay. All right. Good luck, Bill.

Speaker 4

Thank you.

Operator

And gentlemen, it appears we have no further questions today. Mr. Furman, I'll turn things back to you, sir, for any closing comments.

Speaker 2

All right. Thank you. I appreciate everybody's attendance on the call today. Obviously, I'm moving on AEP, but I want you to know that the company is in great hands. The company is poised to go after all of this work that's going to be coming our way.

Speaker 2

No, there's no issues here. I'm I purely went to AP because of an opportunity for me to do something that I'm very passionate about. But with Paul's leadership here, he and I have been colleagues for close to 3 decades. We think alike, we manage alike, we lead alike. And so I'm very comfortable that the strategy we have here in place will continue to move forward.

Speaker 2

And so we really appreciate your time today, and we look forward to further discussions. Thank you all and take care.

Operator

Thank you, Mr. Furman. Ladies and gentlemen, that does conclude today's Century's Q2 2024 Earnings Call. Again, thanks so much for joining us everyone and we wish you all a great day. Goodbye.

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Key Takeaways

  • Centuri completed its initial public offering, raising $330 million and listing on the NYSE as a leading pure-play North American utility infrastructure services provider.
  • Q2 revenue totaled $672.1 million, down from $805.8 million year-over-year due to delayed rate case decisions, while adjusted EBITDA margin held at 10.2%, matching historical second-quarter levels.
  • The company secured over $400 million in Q2 awards—83% under MSAs and 17% bid work—including a $105 million offshore wind substation project and a $35 million Midwest gas pipeline upgrade—bringing backlog to $4.7 billion.
  • Identified $29 million of annualized overhead savings for 2025 and achieved average 10% discounts on major supply chain contracts, with further fleet and supply chain optimizations underway.
  • Announced a CEO transition: Bill Furman steps down July 31, Paul Cuddell becomes Interim CEO, and a board-led search is in progress for a permanent successor.
AI Generated. May Contain Errors.
Earnings Conference Call
Centuri Q2 2024
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