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DATE
Thursday, Nov. 5, 2026
CALL PARTICIPANTS
- Vice President of Investor Relations - Nathan Tetlow
- President and Chief Executive Officer - Christian Ian Brown
- Chief Financial Officer - Kelly D. Youngblood
TAKEAWAYS
- Revenue -- $1.2 billion, representing a 40% increase driven by new bid work, MSA contracts, and the inclusion of the JJ White and Connect acquisitions.
- Gross Profit -- $113.4 million, increasing 45% compared to the prior year period due to workforce productivity and contract pricing initiatives.
- Gross Profit Margin -- 9.5%, up from 9.2% last year, reflecting higher operating efficiency in the U.S. Gas segment.
- Adjusted Net Income -- $42.5 million, more than doubling the $16.7 million reported in the previous year's third quarter.
- Adjusted EPS -- $0.42, compared to $0.19 in the third quarter of 2025.
- U.S. Gas Revenue -- $576 million, growing 40% year over year as a result of increased bid work and volume under new and existing MSAs.
- U.S. Gas Gross Profit Margin -- 8.2%, improving from 4.2% in the second quarter of 2026 following productivity gains from earlier workforce expansions.
- Union Electric Revenue -- $354 million, a 65% increase year over year driven by electric and industrial projects and the JJ White acquisition.
- Non-Union Electric Revenue -- $175.4 million, rising 18% year over year due to storm restoration services and increased MSA activity.
- Canadian Operations Revenue -- $98.5 million, up nearly 33% year over year primarily from the Connect acquisition.
- Backlog -- $6.2 billion, up 5% from the prior year and including expanded scopes of work from utility customers.
- Opportunity Pipeline -- $19 billion, growing 46% year over year, with $12 billion in electric distribution and transmission projects.
- Outstanding Bids -- $4.8 billion, more than doubling from $2.5 billion at the end of the second quarter, primarily within the electrical segment.
- 2026 Revenue Guidance -- $3.8 billion to $3.9 billion, assuming no storm restoration contributions in the fourth quarter.
- 2026 Adjusted EBITDA Guidance -- $290 million to $300 million, reflecting updated expectations for second-half profitability.
- 2027 Revenue Outlook -- Over $4.4 billion, supported by visible coverage of $3.7 billion and mid-teens percentage growth.
- 2027 Margin Targets -- 8.5% to 9% overall gross profit margin, aligned with target incremental margins of 12% to 15%.
- Net Debt to Adjusted EBITDA Ratio -- 2.6x, decreasing from 3.8x a year ago following deleveraging efforts.
- Free Cash Flow Guidance -- $25 million to $50 million for 2026, lowered from prior estimates due to higher working capital requirements from rapid revenue growth.
- Data Center Backlog -- $200 million, out of approximately $370 million in total data center work booked to date.
- JJ White Performance -- $8 million in gross profit delivered since closing on July 20, 2026, against a full-year expectation of $20 million.
- Headcount Growth -- 300 employees added in the third quarter, following a workforce expansion of 1,800 in the first half of the year.
- Capital Expenditures Guidance -- $60 million to $70 million for the full year 2026.
- Book-to-Bill Ratio -- At least 1.3x expected for 2026, exceeding the previous target of 1.2x.
- Storm Restoration Revenue -- $21.3 million during the third quarter, with an additional $6.1 million in gross profit.
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RISKS
- Youngblood warned that the full year free cash flow expectation was lowered to a range of $25 million to $50 million, citing the higher working capital requirement as revenue growth has consistently exceeded forecast.
- Brown stated, "Q4 is a difficult time in many ways to be absolutely accurate in one's forecast. It's hard to determine exactly what customers have got budget exhaustion as we get towards the end of the year," noting potential volatility in year-end utility spending.
SUMMARY
Centuri Holdings, Inc. (NYSE:CTRI) reported record performance for the third quarter, supported by productivity improvements from earlier workforce investments and strong demand across gas and electric end markets. Management stated that the company successfully transitioned from a period of capacity building to improved operating efficiency, particularly within the U.S. Gas segment. The company reported a significant expansion in its opportunity pipeline and outstanding bids, which management attributed to modernization, resiliency, and grid hardening requirements in the utility sector. Financial focus remains on deleveraging the balance sheet and supporting organic growth, with a stated target to reduce the leverage ratio below 2.0x over time. Management provided early guidance for 2027 that outpaces previous multiyear targets, reflecting confidence in sustained infrastructure investment across North America.
- The company reported that its workforce expansion is largely complete, with CEO Brown stating, "I do not believe adding 1.8 thousand to the headcount in a first half year is likely" in future periods as the business seeks more linear growth.
- Management is implementing operational tools to identify margin opportunities at the customer and geographic levels, specifically focusing on benchmarking productivity across 80 line items in the gas business.
- The company is taking a cautious approach to data centers, with Brown noting that projects must have committed funding and defined scopes of work before being included in financial forecasts.
- Strategic priorities include reducing seasonality by driving more activity into warmer geographies and increasing pricing to reflect cost escalation in fuel and fleet.
- CFO Youngblood indicated that capital allocation will prioritize organic growth and tuck-in acquisitions over share buybacks or dividends for the near term.
- The company expects to renew approximately $2 billion of MSA contract value by the end of the year, often with increased scopes of work and longer contract periods.
INDUSTRY GLOSSARY
- AGA: American Gas Association, a trade organization representing local energy companies that deliver natural gas.
- Grid Hardening: Physical improvements made to the electric grid to make it more resistant to outages caused by extreme weather or other threats.
- Integrity Management: Inspection, maintenance, and repair programs designed to ensure the safety and reliability of utility pipelines.
- MSA: Master Service Agreement, a long-term contract defining the terms and scopes of ongoing maintenance and repair work for utility providers.
- Union/Non-Union Electric: Segments of the company's workforce categorized by their labor affiliation, providing services to electric utilities.
Full Conference Call Transcript
Operator: Thank you for joining us, and welcome to the Century third quarter 26 earnings call. After today's prepared remarks, we will host a question and answer session. If you would like to ask a question, please press star 1 to raise your hand. To withdraw your question, press star 1 again. Will now hand the conference over to Nathan Tetlow, Vice President of Investor Relations. Nathan, please go ahead.
Nathan Tetlow: Thank you, and good morning, everyone. Today, we issued and posted to Century Holdings website our third 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 the 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 statement except as required by law.
Also, given the increased scale of our business over the last year, in order to simplify reporting, we are no longer presenting the non GAAP measures of base revenue, and base gross profit which were measures that adjusted for storm restoration work. Today's call is 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 Ian Brown, President and Chief Executive Officer; and Kelly D. Youngblood, Chief Financial Officer. I will now turn the call over to Christian.
Christian Ian Brown: Thank you, Nate. And thank you, everyone, for joining our third quarter earnings call. We are extremely proud to have delivered quarterly revenue of $1.2 billion and record quarterly gross profit of $113 million. Adjusted net income for the quarter was $42 million more than double the $17 million we reported a year ago. This is remarkable top line and growth and profit growth. And reflects the dedication of our teams across the US and Canada. Let's start with our third quarter operating performance, which I believe demonstrates the progress we have made across the organization and the benefits of the investments we made earlier in this year.
As we transition during the first half of 26, we invested to build greater scale and capacity across the business. Including meaningful additions to our workforce. We expected those investments to begin translating into stronger productivity and improved operating efficiency as those employees became fully integrated into our operations. Which is exactly what happened in the third quarter. In addition to leveraging the benefits of scale and capacity, we have been focused on driving contract pricing to reflect market cost escalation, including fuel and the cost of fleet. This effort began earlier in the year with new bid work, new MSAs, and MSA renewals, all reflecting updated pricing and market conditions.
In addition, all $4.8 billion of outstanding bids including $2 billion of expected renewals by year end reflect updated pricing. By this time next year, we expect the vast majority of our backlog to reflect the updated market pricing. In terms of results, delivered record quarterly revenue, while at the same time driving meaningful improvement in profitability. Which led to record quarterly gross profit. Our gross profit margin increased to 9.5% in the third quarter, up from 7.2% in the second quarter. The progress was particularly evident in U.S. Gas, where our workforce expansion was the most significant. Gross profit margin in U.S. Gas improved to 8.2% from 4.2% in the second quarter.
In terms of incremental margins, we had achieved a 10.4% incremental gross profit margin on a $342 million year over year revenue increase. Gross profit margin, U.S. Gas gross profit margin and incremental gross profit margin all exceeded expectations. And prior external communications. We have been focused on building a more scalable and sustainable operating platform that can support the level of demand we see across our end markets and allow us to grow the business while continuing to improve profitability. There is more work ahead, but the third quarter represents an important step towards and gives increased confidence in the earnings power of our business.
As we continue executing our Vision 1 Centuri's strategy, our focus remains on translating strong customer demand and revenue growth into higher productivity, greater operating efficiency and ultimately stronger margins and cash flow over time. And now for the commercial update. Q3 was an exceptionally active quarter. Across our core and adjacent end markets. Third quarter bookings were approximately $730 million bringing our year to date bookings to approximately $2.9 billion and our outstanding bids more than doubled in the quarter to $4.8 billion. This is up from $2.5 billion at the end of the second quarter 26. The majority of these bids, as expected, are within our electrical segment.
And even so far in the fourth quarter, we booked approximately $275 million split evenly between big work and MSAs. We booked nearly a $100 million in MSA renewals and a $185 million between new MSAs and growth from existing MSAs. The mix being about 60% from the electric end market customers and 40% from our gas customers. Demand for our core MSA work including expanded scopes of work remains extremely strong. In terms of bid work, we booked approximately $445 million during the quarter, which included the third phase of the natural gas infrastructure project and several electric transmission awards each in the $10 to $20 million project size range.
Our backlog was up 5% from prior year and now stands at approximately $6.2 billion. And even more notable is that our opportunity pipeline continues to expand. And now sits at approximately $19 billion. Up 46% from last year, demonstrating the additional strength of our end markets and our ability to position Century for future profitable growth. Included within our $4.8 billion of outstanding bids, is approximately $2 billion of MSR renewals which we expect to renew by the end of the year. This is higher than our previous expectation as discussions with customers are leading to increased scope of work, longer contract periods.
When we add in the projected bid work awards, we also see our book to bill ratio for 2020 for 2026 of at least 1.3x, which is exceeding the target earlier communicated. of 1.2x. Looking ahead, we now have over $3.7 billion of revenue coverage for 2027, which combined with our pipeline gives us visibility to mid teens percentage revenue growth for 2027. Our outlook is supported by durable investment across North American utility infrastructure markets. US investor owned electric utilities are expected to invest approximately $1.4 trillion from 2026 through 2030. Of which over 50% is dedicated to modernization resiliency, reliability, and grid. This end market is our core electric business.
At the same time, replacement of aging gas infrastructure remains a long term safety driven priority. With approximately 45% of the gas distribution main and service lines being over 35 years old or of unknown origin. AGA estimates that natural gas utilities are investing about $37 billion each year to enhance the safety of distribution and transmission lines. Together, increasing power demand grid modernization, population migration, and the continued replacement of aging infrastructure are supporting sustained investment across Centuri's core electric and gas markets. As we further build upon our efficient 1 Centuri delivery model. Our business remains strong regardless of the political environment.
And we continue to grow our business and capabilities to serve our customers and deliver affordable solutions. Before turning the call over to Kelly, I would like to briefly discuss data centers, particularly given the significant amount of market attention data centers are receiving. At Century, as we have said many times before, we have taken a disciplined approach to what we include in our opportunity pipeline and within our forecast. Any data center project opportunity must have a defined scope of work with a clear estimate of the contract value and margin and we must have a solid understanding of the customer and the project must have committed funding.
Specific to data centers, by the time we enter the bidding stage. The projects are generally well advanced and fully permitted. With design and engineering substantially complete and in many cases, initial civil work complete construction already underway. In short, the data center projects that we evaluate are large, derisked by the time we start investing time, or resources into formally bidding for the opportunity. Data centers remain an attractive opportunity for Century. Allowing us to just deploy our existing capabilities into a growing end market. Though we have booked approximately $370 million of data center work in aggregate. With approximately $200 million remaining in backlog.
Whilst meaningful, we continue to believe that data center work will not exceed 10% of our overall annual revenue. I will now turn over to Kelly to discuss the financial results. Kelly?
Kelly D. Youngblood: Thank you, Christian, and thank you, everyone, for joining the call today. Third quarter 26 consolidated revenues totaled $1.2 billion, a new quarterly record and was a 40% increase compared to Q3 of 25. Consolidated gross profit was $113 million, also a new quarterly record. And gross margin was 9.5% in the quarter. The incremental gross profit margin compared to last year was 10.4% for the quarter. Net income attributable to common stock in the third quarter was $27 million or $0.27 per share, compared to net income attributable to common stock of $2 million or $0.02 on a per share basis in the same period last year.
In the third quarter, adjusted EBIT was $73 million, 79% higher year over year and adjusted EBITDA was $108 million, a 44% increase over the same period last year. Adjusted net income in the third quarter came in at $42 million or $0.42 on a per share basis compared to $17 million or $0.19 per share in the prior year period. Now to our segments. U.S. Gas revenue was $576 million, an increase of 40% compared to the prior year. This growth was driven by increased bid work in 8.2% in the quarter, up from 7.7% last year and an increase of 400 basis points sequentially compared to last quarter.
As previously mentioned, the improvement in third quarter margins for US gas was primarily driven by the scale and capacity investments made earlier in the year which translated into higher productivity along with the initial benefits of our contract pricing initiatives. Canadian operations revenue was $98 million, up nearly 33% from prior year period primarily from the inclusion of the Connect acquisition. Operational performance in this segment remains strong against a backdrop of sustained favorable demand as evidenced by the 19.6% gross profit margin in the quarter.
Union Electric revenues, $354 million, an increase of 65% year over year driven by strong growth within our electric and industrial projects in addition to the inclusion of JJ White which joined Century at the end of July 26. Gross profit margin for the Union Electric segment was 8.9% in the third quarter. Nonunion electric revenue in the third quarter was $175 million, an increase of 18% year over year. This growth was driven by our storm work in the current year and increased MSA activity. Gross profit margin in the nonunion electric segment was 8.7% in the current period compared to 7.1% in the prior year period. Now turning to our cash flow and balance sheet.
Net cash used in operating activities during the third quarter was $28 million and free cash flow was a negative $30 million. We expect cash collections to accelerate in the fourth quarter as we begin converting the recent revenue growth into cash. Our current full year free cash flow expectation is between $25 million to $50 million down from our prior estimate and driven by the higher working capital requirement as revenue growth has consistently exceeded forecast. However, it is noteworthy to clarify that any shortfall in free cash flow this year is simply a timing issue and will translate into higher cash flow generation for 2027.
We ended the quarter with a net debt to adjusted EBITDA ratio of 2.6x which was down from the 3.8x a year ago. We forecast net debt to adjusted EBITDA to be in the low 2x range by year end. Finally, turning to our outlook. As outlined in today's earnings release, we have updated our full year 2026 guidance including revenue expected to range between $3.8 billion and $3.9 billion, adjusted gross profit of $305 million to $315 million, adjusted EBITDA of $290 to $300 million, adjusted net income of $80 to $90 million, and net CapEx of $60 to $70 million. Of note, the guidance assumes no contributions for storm work in the fourth quarter.
Looking ahead, and as Christian highlighted, our revenue coverage for 2027, outstanding bids and opportunity pipeline gives us confidence in the mid teens revenue growth for 2027 which is expected to put us above $4.4 billion in revenue in 2027. In addition, we expect the top line growth to be accompanied by continued margin expansion. We are aiming to achieve an overall gross profit margin of 8.5% to 9% in 2027. Which is aligned with our near term target incremental gross profit margins of 12% to 15%. Relative to the 2029 targets established earlier this year, our preliminary 2027 outlook has us outpacing on both revenue and gross profit growth.
I will now turn it back to Christian to wrap up our prepared remarks. Christian?
Christian Ian Brown: Thank you, Kelly. As we close, I want to reiterate our confidence in the opportunities ahead of us. Our core business remains anchored by long term MSA agreements. Supporting our utility customer sustainable capital programs. Beyond the continued improvement in the business, we remain focused on executing against the margin expansion opportunity we have consistently outlined. Reducing seasonality, increased pricing to reflect cost escalation, growing the mix of bid work, and advancing operational excellence, particularly within our U.S. Gas business. We are making tangible progress across each of these areas.
We are pursuing and securing higher margin work, achieving pricing improvements, to reflect the market across our portfolio, driving additional activity into warmer geographies to improve seasonality, and using new operational tools to identify margin opportunities at the customer scope of work and geographic levels. We are encouraged by the progress we have seen across the organization and remain confident in our ability to drive margins higher as we move into 2027 and beyond. We appreciate everybody's and interest today. Operator, let's begin the Q&A.
Operator: We will now begin the question and answer session. Limit yourself to 1 question and 1 follow-up. If you would like to ask a question, please press star 1 to raise your hand. To withdraw your question, press star 1 again. We ask that you pick up your handset when asking a question to allow for optimal sound quality. If you are muted locally, please remember to unmute your device. Please stand by while we compile the Q&A roster. Your first question is from the line of Manish Somaiya from Cantor Fitzgerald. Your line is now open. Please go ahead.
Manish Somaiya: Thank you. Congrats, Christian, Kelly, Nate. Good job. Couple of questions. 1, Christian, you mentioned that the incremental in the quarter was 10.4%. I was hoping to get that incremental excluding diesel fuel cost pass throughs?
Kelly D. Youngblood: This is Kelly. I will I will take the first part of this, and Christian can certainly chime in. Listen, for. You know, we had guided on the last phone call that the quarterly impact, the net impact of fuel would be approximately $5 million and that is almost exactly where we ended up for the quarter. And, you know, we have been pushing through the additional cost of fuel, additional cost related to our fleet transition to more leasing, All of these items, we have been very successful in pushing that cost into our pricing with customers.
You know, as Christian pointed out in the prepared remarks, there is even another $2 billion worth of contracts being renegotiated before the end of the year. Well, those will all be incorporating the higher cost that we have had from fuel and other items. And so you know, as far as the incrementals, you know, we are really gonna stop quantifying, I think, at this point, the absolute dollar value of fuel. We have incorporated that into our guidance going forward. You know, the 10.4% we had this quarter very much stronger than what we had in Q2.
And if you look at our implied guidance for 2027, that shows incremental margins are gonna be definitely within that 12 to 15% range that we talked about on the on the phone call. So, I think, you know, just I think that is really good for the recap, Christian. I do not know if you have anything else to add.
Christian Ian Brown: No. Nothing's right there.
Kelly D. Youngblood: Kelly.
Manish Somaiya: Yeah. I mean, listen. The performance, obviously, is very strong. No doubt about that. But I just wanted to sort of understand that math, but I appreciate it. I guess, maybe, Kelly, you might have alluded to this that some of the 29 targets you are running ahead of the margin expectations. Maybe a question for Christian as to clearly, we are seeing momentum in U.S. Gas. Perhaps if you can just kind of frame that logic for us for 27. And I guess when would you feel comfortable updating your 29 targets since obviously you have gathered momentum and execution seems to be on track. Thank you.
Operator: Manish, thanks for your question.
Christian Ian Brown: Look, we. As you know, we have we have put a lot of effort into defining and getting real time data on what we have in backlog, what we have in our pipeline and accuracy around the forecasting. So as I look to next year, we were trending with currently got 3.7 billion as we have said in our scripted notes. A backlog coverage for next year. We think we are trending towards $4 billion by the end of the year. And that is really what is giving us the confidence around the $4.4, $4.5 billion we have we have alluded to within our within our commentary.
I think as we as we look at the revenue, we have got a very, very good handle on our pricing and our margin in our system now, so we feel very good about giving you a range of 8.5 to 9% on the margin, which if I look to what we committed to within the 2029 targets, We are about 10-12% ahead on revenue of where we thought we would be. And we are a little bit ahead of where we are on where we said we would be on the margin. So that. that is really put in the context of where we are against the 2029 targets we rolled out in May.
So your final question, Manish, is, you know, when are we gonna refresh the targets? I think it will be commensurate as we close out the budget and the planning for next year and issue next year's guidance in full. that is probably where we would look to give an update on the 2029 targets I do expect the 2029. 2029 targets to be higher, not lower than what we have already communicated just based on the market opportunity within our core markets. And our drive to drive margin expansion in the business.
Manish Somaiya: Wonderful. I will get back in the queue. Thank you so much, guys.
Christian Ian Brown: Thanks, Manish. Appreciate it.
Manish Somaiya: You.
Operator: Your next question comes from the line of Justin Hauke from Baird. Your line is now open. Please go ahead.
Justin Hauke: Oh, great. So, yeah, thanks for all the color on the call and the details on the award and the outlook and everything. I wanted to ask a little bit about the guidance implied for the fourth quarter and it looks like your EBITDA guidance at least, you kind of narrowed the midpoint and implying a little bit lower margin than you had previously. Third quarter was kind of ahead of plan. So I do not know if that is just a reflection of lack of storm or maybe you could just talk a little bit about the moving pieces in that. Thank you.
Kelly D. Youngblood: Yeah. it is a great point. Yeah. Q 3, obviously, a big beat compared to consensus and what we. Even our own internal budgeting Q4 looks a little bit light compared to consensus. But if you look at the full second half of the year, we have a beat pretty much across the board. We may be a little bit light on EBITDA margins to your point, and I think that is really more an effect of our change in, kind of leasing methodology or having more CapEx, so you are not getting the benefit of that depreciation. And if you look.
The way we are forecasting that, just to give you a number, if you look at full year 2026 versus 2025, just this change in methodology is about a 90 basis point impact to our EBITDA margins. But, again, when you look at, you know, whether revenue, GP, you know, EBITDA, absolute dollars, all the profitability metrics for the full second half of the year you know, we were above consensus, above what our budget was internally, so we are very happy with that. And then as we have mentioned, you know, the 2027 guidance on top of what we just provided is kind of the end of the year for 2026.
Is gonna take us over 4.4 billion mark, which is above the 2029 expectations that we had laid out earlier in the year.
Justin Hauke: Okay. Thank you for that. And I guess my second question here, I guess, Christian, for you, but your pipeline, you are talking about, you know, 40-plus data centers now and the aggregate value is, like, almost 5 billion. And last year, it was. Or last year. Last quarter, it was 25 and 2 billion. So I appreciate your comments on the election impact, but I guess maybe you could just give a little bit more context of what markets is that coming from It just. The increase sequentially, where are you seeing kind of the bulk of that activity? Thank you.
Christian Ian Brown: Yeah. I mean, the pipeline has increased to 19 billion I will give you some headline mix on that. 12 billion of that is on the electric side. Of which 10 billion is distribution and transmission. So core businesses. 7 of the 19 billion sits on the gas side of the business. So that is the overall mix between the 2 end markets we serve. When it comes to data centers, I think we. We have only got 1 data center that we are looking at within my home state here in Texas. The remainder of the data centers are actually, are in the North.
And as I said in my, as I said in my earlier scripts, we do not assume any data center in our financial forecast unless it is got funding unless it is got permitting, unless it is got all of the execution plan We know the customers got capital in place. So I would say most of the data centers are emanating up in the Atlantic Midwest area of the U.S. 1 will actually just sit in Texas. that is helpful. Thank you.
Kelly D. Youngblood: Thanks for your question.
Operator: Next question is from the line of Sangita Jain from KeyBanc Capital Markets. Your line is now open. Please go ahead.
Sangita Jain: Good morning. Thank you for taking my questions. 1 is on the 4Q guide. Kelly, you mentioned that there is no storm included in that guide. So I am wondering if you did any work for Hurricane Helene, I take it. And if so, is that going to be on top of the guide that you have given us?
Christian Ian Brown: Hi, Sangita. I will probably answer that first question, and then Kelly will note out, maybe add something to it. The answer to your question is, yes. We did do some work at the beginning of October, and, yes, that would be additive to what we have communicated within our overall full year guidance. So that is correct. And specifically around Q4. Q4 is a difficult time in many ways to be absolutely accurate in 1's forecast. that is where we often take a conservative approach.
And why is it difficult it is hard to determine exactly what customers have got budget exhaustion as we get towards the end of the year. it is also hard to determine which customers have surplus budget they want us to actually, expand and deliver services for. So we kind of do not get a good view on that. Until probably November. Mid November, even coming back after Thanksgiving. So that is why you see sort of a conservative approach of what we believe we will secure for Q4. It does not include storm, and, yes, we have had a little bit of storm at the early part of October.
I am not sure what we have this week, but certainly the beginning of October. And if customers as they did last year, choose to allocate more work because they have got surplus budget coming into the year. We will absolutely help them deliver on those services.
Sangita Jain: Got it. that is very helpful. Thank you. And then 1 more on gas margins have obviously done very well, and you have talked about improvements in the operations there. Can you tell us what tools you are putting together to get your electric margins to the same strong level I need to.
Christian Ian Brown: I think we have spoken about at great length and, you know, there is an element of 3 or 4 components to driving the gas margins up. There is the seasonality. As you know last year, and the prior year and historically, we have had a massive rundown in work that we execute starting about Thanksgiving, running all the way through to spring break, mid--you know, all the way through the first quarter. We have repositioned the business. We have got more leadership staff with a nice and big smile. And actually cross selling more work into those customers that spend around the year.
And as you saw last year, we cut the $16 million loss down to $6 million, so we believe looking into 2027 we will be profitable in the gas business in the first quarter of the year. So that is 1 tool, if you would like to use, which is dri-- We refer to, which is driving performance through the business development and sales. Secondly is, we have now sort of standardized around the way we capture the cost across all of our businesses. And that is allowed us to fundamentally see where there is areas of opportunity to reflect new pricing that reflects current cost of fleet and fuel and other items.
Insurances have all gone up into the business. Into the cost of the business. So we are able to see where our pricing, a real granular level, a specific call off is below where it should be. For the current market conditions. So we now have that and we have had that probably the quarter. And then finally, operational excellence. Which often takes a lot longer. You know, we you know, we were a roll up of a number of businesses that really operated as a as an operating company to a hold-co structure.
We are now fully integrated in the way we approach the market We are becoming fully integrated in how we benchmark and drive performance into the business. We can see how parts of the gas business perform against other parts of the organization because we have now got tools around specific leading indicators and specific absolute productivity against task level across all 80 something line items within the P&L. So that is the margin improvement productivity tool I referred to in previous calls. that is now effective. Thanks so much for the color, Christian.
Sangita Jain: Thanks, Sangita.
Operator: Your next question comes from the line of Zachary Schechtman from Wells Fargo. Your line is now open. Please go ahead.
Zachary Schechtman: Hey, good morning, guys. Thanks for taking my question. I am just wondering your next phase of growth, obviously, mid teens revenue growth next year is very good. Can this next phase of growth avoid another labor ramp headwinds Just wondering how fast you can grow without having to reaccelerate headcount growth again.
Christian Ian Brown: Thanks for your questions. Yeah. I do not believe adding 1.8 thousand to the headcount in a first half year is likely I think we will continue to find new business that needs more resources But as we get rid of seasonality in the business, it will become more linear across the 12 months of the year. I do not foresee that we will have such large ramp ups in any quarter or any half of the year. I think we added about 300 people in the last quarter, give or take, which is significantly less than the 1.8 thousand we added in the first half of the year.
So I think we are a little bit more normalized up around mobilization purely driven by not just the tools we have in place across the broader group now, but more importantly about the size and scale of the organization and our efforts to mitigate the seasonality and the sudden sharp downturn of people driven by the weather in Thanksgiving through to spring break. So do not think you are gonna see that in the future.
Zachary Schechtman: Got it. Thank you. And then 1 follow-up just on data centers. I know it is not your main area of focus, but looks like the pipeline, that growth from 16 last quarter to 19 this quarter, I think that was all driven by data center pipeline, Looks like $70 million of awards was picked up in 3Q.
Christian Ian Brown: Just kinda wondering, like, how quickly those awards turn to revenue and, you know, given the strength in the pipeline build, should we expect a decent acceleration from that $70 million? We are going to continue, Zach, to be really cautious with data centers, and not just because of all the headlines you read in the news. At the end of the day, we have got a very diligent approach. With all of our customers. To be sure that if we are bidding work, it needs to be funded. We need clarity on scope. We need clarity that it is funded and that we are not gonna put resources that ultimately slow down or need to be demobilized.
We want consistency, stability in the business. So specifically to the data centers, I think most of the data center work, the 200 million that remains in backlog, will burn off next year. I think that is accurate. I doubt much of it will go into 2028. So it is it is it is it is left us on a 5% or so of what we think revenue will be next year. It comes to other data centers, I mean, clearly, political environment during the course of this year did not just start yesterday. It started long before that.
So we have we have always been extremely cautious on where we would put capital And even though they have gone into the pipeline now, and we have got vision on exactly whether they funded and whether they are permitted. We will continue to be very cautious on which contracts we actually do sign we do book, and that caution will be all around. Are they funded? Is there any risk to the permit? And if there is, we will take a very steady approach about what we are putting into our forecast. So I cannot answer you know, on a call like this exactly when those things will. When those bids and opportunities will convert I just cannot.
What I what I would say to you is data center array has some risk to it, then maybe that is not a piece of stuff, not a scope of work that we will continue to follow. But if it is got funded and we can see it is gonna be invented, we possibly will. But there are lots of other adjacent end markets that we service and I remind everybody on the call the people that deliver our services to data centers are the same skills, same capabilities, same that we deliver to other adjacent markets where we see lot of other activities.
So if data centers are not a strong component deliver margin expansion, there are other markets that will. Understood. Thank you, guys.
Zachary Schechtman: Thanks, Matt.
Operator: Your next question is from the line of Kevin Gainey from Thompson Davis. Your line is now open. Please go ahead.
Kevin Gainey: Morning, Christian, Kelly and Nate. Great quarter, guys. Thank you. I think I wanted to take a look at the acquisition of JJ. You have got about 3 months, and it looks like it is meaningfully contributing. How's the integration going there? And how do you feel about the targets you set out with for them? And then maybe if you could talk about if you ran into some cross selling opportunities thus far.
Christian Ian Brown: it is. So it is Christian, and I will I will answer the answer the question and see whether Kelly's got anything to add here. Think JJ White has with the Connect acquisition and prior year. Exceeded all of our expectations. I think you will recall the intention was the operational component of JJ White is very complementary. To our existing union business and we folded that within the within the union electric business that slipped by Steven's dermatitis and our and Rick's distillate. A lot of the integration has already been done. We have we have been able to integrate a lot of the operational people The back office, I think, is more or less through its integration.
We are actively out in the market together as a as a as 1 as a 1 company approach. there is a number of opportunities in the pipeline that we think will convert in the near term. I referred in the script earlier. We have got 4.5. 4.8 billion of opportunity that we are currently outstanding and negotiating. that is up from the 2.5 billion in the first quarter. there is a. there is there is a. there is 4, 5 hundred million of that actually JJ White related renewals. That we expect to win. So I would say JJ White and I think we closed July 20 has delivered everything we expected it to deliver. The team is great.
The leadership is great. The operationals are exceptional. Customer feedback has been fantastic. I think everybody will recall we paid about 62.5 million with the usual adjustment due to working capital on the basis of 20 million of gross profit during the year. I think so far, we have delivered about 8 million of gross profit out of the So it is a little better than we thought. We are very pleased with the business. And I would expect some conversion of new awards beyond what already disclosed in the coming weeks and months. So that is a good Sounds good on that.
Kevin Gainey: And then I just wanted to maybe highlight the billion of MSA renewals you talked about. Maybe you could talk about whether it is existing customers or if it is and how the pricing flow through that you guys mentioned. Is working for that.
Christian Ian Brown: I do not wanna get into pricing on a on a on a call. Specific about renewals, but that. They are all renewals, which means they are all existing customers. They are they are all multi years. it is 2 billion clearly not 2 billion out of the 4 point a And negotiations with the customers are progressing as we expect them to progress. Customers typically recognize there is been a lot of cost inflation driven by fuel and fleet. And we are trying to get that aligned with our overall price for the services we offer. I would say that the discussions are going very well.
Kevin Gainey: Appreciate all the color. Thanks, guys.
Christian Ian Brown: Thank you for the questions.
Operator: Your next question comes from the line of Lauren Sullivan from UBS. Your line is now open. Please go ahead.
Lauren Sullivan: Good morning. This is Lauren on for Steven Fisher. First, just wanted to ask how you are thinking about the election impact on utility spending and planning and if that is affecting your own planning at all.
Christian Ian Brown: Thank you for the question. The power business has been around for a 150 years, and it is not driven by data center capital. Programs. Our business is driven by long term multiyear MSAs and relationships with public utilities and look how. We are focused on you know, services and projects that support reliability, resilience, grid hardening, integrity management, modernization, on both gas networks as well as the grid. So, you know, the critical mass of the work we execute is non data center related. it is. It was all long before the data center search began the thing that we all wanted to talk about.
It does not matter who is in the Governor's Mansion or in the White House our services will be needed to deliver on those requirements of reliability, resiliency, grid hardening, as well as integrity management across the gas systems. We do we do drive a focus on opportunity, margin opportunity, and the adjacent end markets, and data centers are 1 of them. But as you see, we have only got 200 million of backlog in data centers, and we have maintained that it would never be above the 10%. In fact, I think it will be less than 10% of our revenue going forward.
So I think the political environment that has changed recently but it is slowly been moving in a certain direction. During the course of the year will have little to no impact upon us because our business and the services we offer are needed by the ultimate customer. And it does not matter whether it is a blue or a red, leading our leading our political environment. Got it.
Lauren Sullivan: Thank you. And then just my second is on if you are seeing any more interest from customers in consolidating their contractor base. And if that creates any opportunity for Accenture to take a larger share. Thank you.
Christian Ian Brown: I think. I do not know how customers really look at it, but what I see as a as a service provider to our customers is affordability is absolutely crucial, particularly on the gas side. And that, of course, is an opportunity with our site and scale as you have seen in our gas margins. And it also translates over to the electric side. Where it is more about building our capacity to be able to service customer needs. But I would say that the more scale we can add through people, through fleet and resources allows us to cross sell the broader century.
It allows us to bring more value to our customers reduce their costs, driving affordability to the consumer, and allows us to be able to deliver better return to our shareholders. And the strategy we laid out is within our Vision 1 Centuri, and we will continue to do more of that. And more.
Also, we announced during the quarter, which seems to get forgotten is we brought in a new head of growth development, and his mission in life is to do exactly that, which is to cross sell our business gas electric, union, nonunion, behind the meter power energy transition services, to our customers so that we can deliver more drive affordability into our customer and drive better returns for our shareholders.
Operator: Your next question comes from the line of Sherif Al Sabahi from Bank of America. Your line is now open. Please go ahead.
Sherif Al Sabahi: Hi. Good morning. Thank you for the comments. On free cash flow. It seems like conversion is similar to last year at about 13% at the midpoint of guide. I understand you are expecting improvement in 2027, but does that improvement get you back to the historical conversion rates of 25 to 30%, or how should we be considering that improvement next year?
Kelly D. Youngblood: Yeah. This is Kelly. I will take that 1. Well, listen. We are still I know we said that it could be a timing issue of cash going into 2027. We are pushing. You know, we are kind of a full court press right now trying to get collections in this year so that we get closer back to what we had originally guided to on the cash for the year.
But so we will see where we end up, you know, the last couple of months And, you know, I am new to the company, but I have looked over the last couple of years the trend of the company has been to get a lot of the cash collection during the month of November and December, so we will see where that ends up. But to. You know, more specific to your question on the conversion ratio, you know, we have outlined that to 2029, we are targeting to get to a 40 to 50% conversion.
And there is nothing at this point that, you know, makes me believe that, you know, we are gonna need to back off on that at all. We are gonna continue to progress and increase the percentage, kinda stair step it up every year between now and 2029. Understood.
Sherif Al Sabahi: And looking at the bid work project sizes, it looks like they are up about 38% from third quarter of last year. Is this more of a function of pursuing bigger projects? Or is it just that the projects in the pipeline are structurally larger given what utilities are trying to accomplish?
Christian Ian Brown: Sherif, again, for the question. It goes back to the basic strategy we laid out with everybody in there, which is we want to continue to grow our MSAs, but if we want to have margin expansion, we wanna deliver on 15% revenue growth with high margins, we will need to do more bid work. So the dynamic in the in the revenue and the dynamic in the margin is all driven by that mix. It is. It really is as simple as that. Understood. Thank you.
Operator: Your last question comes from the line of Manish Samaya from Cantor Fitzgerald. Your line is now open. Please go ahead.
Manesh Samaya: Thank you again. Christian, obviously, the organic growth is quite strong. I was hoping to get some clarity on how you guys are thinking about inorganic growth What are sort of the potential opportunities that you are seeing out there that could make sense? And which of the segments would those fit in? And then secondly, with obviously the share markets in dislocation, your own shares at a very sort of attractive level, 1 would say. How do you guys think about share buybacks? How is the Board thinking about capital allocation? If you can also give us some sense of how those discussions are being thought about. Thank you.
Christian Ian Brown: Anish, I will cover the M&A market, then I will ask Kelly to jump in on the share buyback and capital allocation priorities. Our focus on M&A we look at M&A in support of our Vision 1 strategy. Which we consistently rolled out And we look. We are looking to invest in businesses that are mainly tuck in acquisitions that unlock more growth potential on the electric distribution transmission side of our business. With a heavy T, less of a D.
And we are looking at opportunities all the time as you would expect us to do to identify more opportunities that look like Connect and JJ White that will untap positioning in the market with customers to drive the electric transmission and distribution. Could find a situation, and, again, I will repeat what I have said on prior calls with many of you. You know, you could find opportunities on the in the south of the country that has of the country that has got both gas and electric that we would be very willing to look at.
If it unlocks opportunity with customers to deal with seasonality as well as gives us a position with customers to push more on the transmission and distribution side recognizing the entry point maybe through gas. So that. that is what I would say on M&A.
Kelly D. Youngblood: Capital allocation. Yeah. Yeah. In terms of capital allocation, I think we have said this at recent conferences. Our primary focus right now is delevering the balance sheet, you know, supporting the organic growth opportunities that we have, You know, Christian just talked about, you know, evaluating tuck in M&A opportunities, which we will continue to do. But specific to buybacks or dividends, you know, I think, you know, our priority right now is just to focus on the organic growth we have and funding that. And getting our leverage ratio lower. You know, we talked about in our guidance, we think we will be in the low twos. Ideally, we would like to get that leverage ratio below 2x.
You know? And that may periodically go back to above 2 depending on M&A opportunities. But, you would mostly always want to see a track record of that kind of, you know, heading back down below 2x. So that is really the priorities for the moment. You know, give us some more time. Let us get the leverage ratio down. And then maybe we will have that discussion. But right now, the timing's just not right for us.
Manesh Samaya: And just, Kelly, as a follow-up, as you think about leverage, what do you think is the ideal target leverage for the company?
Kelly D. Youngblood: Yeah. When you say less than 2x, you know, is it 1.5? 1? Well, listen. I am, you know, I am the--I am an accountant, conservative CFO. The lower, the better, right? But definitely below 2x. I think if we were ranging between 1.5 to 2 times, that is a very healthy place to be for our company. And as I said, you know, we may periodically go above that with M&A that we are doing. But we would always like to see that path back to a more normalized you know, less than 2. But, but, yeah, that is kind of the range we are thinking about.
The lower, the better, but I think that is kind of the way we are thinking about it.
Manesh Samaya: Okay, great. Thank you so much, guys. Thank you, Manish.
Operator: We have reached the end of the Q&A session. I will now turn the call back to Nathan for closing remarks.
Nathan Tetlow: Thank you, everyone, for joining today, and thank you for your interest in Centuri. Please feel free to follow-up with me with any questions, and that concludes today's call.
Operator: Thank you for attending. You may now disconnect.
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