Sherif El-Sabbahy

Sherif El-Sabbahy questioned Centuri about the factors limiting cash flow from operations, specifically within working capital, and the company's plans for improvement. He also asked about the target for cash from operations as a percentage of sales or free cash flow conversion of adjusted EBITDA.

Answer

Chris Brown, President and CEO, stated that the primary focus for 2026 to improve free cash flow, beyond capital efficiency, is reducing Days Sales Outstanding (DSO) and improving billing and collection processes. He indicated a longer-term target of 50% free cash flow conversion of adjusted EBITDA, aligning with peers.

Sherif El-Sabbahy asked about the parts of working capital currently limiting cash from operations flow-through, plans for improvement, and the expected cash from operations as a percentage of sales in 2026.

Answer

Chris Brown, President and CEO, Centuri, stated the primary focus for 2026 is reducing Days Sales Outstanding (DSO) by billing and collecting quicker. He targeted a longer-term free cash flow conversion of adjusted EBITDA at 50%, aligning with peers.

Sherif El-Sabbahy asked for the gross margin of the Non-union Electric segment excluding storm work to better understand the impact of fixed cost absorption. He also inquired about the typical seasonality of MSA renewals and historical Q1 backlog trends.

Answer

CFO Greg Izenstark clarified that storm work was not overly material, at about 10% of the segment's revenue, and that margin improvement was driven by higher crew counts and increased work hours. President and CEO Christian Brown added that MSA renewals are typically heaviest in Q4, with Q3 being the quietest period, and that the current year's bookings cadence reflects this pattern.

Sherif El-Sabbahy of Bank of America Corporation sought clarification on the 2026 EBITDA outlook, specifically how the $230 million expansion, including $190 million from synergies, reconciles with market commentary on positive pricing, stable local markets, and mega-project growth, especially considering the Q1 lapping of H&E.

Answer

Mark Humphrey, SVP and CFO, explained that pro forma EBITDA is expected to be down year-over-year in Q1, then improve as the company exits the Q2 shoulder period, ramping into growth in the second half of the year, aligning with the deployment of incremental synergy fleet and optimized branches.

Sherif El-Sabbahy from Bank of America questioned the EBITDA guidance, pointing out an implied 30% YoY decline for H&E in the second half seemed to contradict claims of revenue stabilization. He also asked about a significant increase in expenses at the Cinelese division.

Answer

SVP & CFO Mark Humphrey clarified that the EBITDA decline reflects nearly 100% negative flow-through from H&E's revenue drop during the ongoing business transition. For Cinelese, he explained the expense increase was driven by a non-cash impairment charge to fair value the assets, not a change in operational costs.

Sherif El-Sabbahy asked which of the free cash flow scenarios presented at Herc's Investor Day is most relevant to the current 2025 outlook.

Answer

CFO W. Humphrey indicated that the current outlook aligns with the 'more moderated rev growth scenario' from the Investor Day presentation. He also reiterated that the company expects to be a federal cash taxpayer in 2025 for the first time, which will impact free cash flow.

Sherif El-Sabbahy inquired about the outlook for EBITDA flow-through, particularly given the current pace of M&A. He also asked for the relative magnitude of the margin impact from M&A and greenfields versus the slowdown in local markets during the third quarter.

Answer

CFO W. Humphrey explained that while 2023 was a year of high flow-through, the current environment is different. He anticipates that Q4 2024 flow-through will be better than Q3 2024, partly due to an easier comparison. He did not quantify the specific margin impacts but noted that M&A currently constitutes a larger portion of revenue growth, which is dilutive to margins in the short term.

Sherif El-Sabbahy inquired about the specific components of brand building expenses in the Tools Group and their expected future trajectory. He also asked for a quantification of the 53rd week's financial impact.

Answer

Nick Pinchuk, President, CEO, and Chairman of the Board, Snap-on Incorporated, indicated that brand building expenses included training, advertising, software development, and social media initiatives for franchisees, but declined to provide exact cost breakdowns or future projections. He explained that the 53rd week generated approximately $7 million in extra profit for financial services but was a slight negative for operating companies due to fixed expenses during a holiday period, with an overall non-significant impact.

Sherif El-Sabbahy asked for details on the brand building expenses within the Tools Group, including what these costs entail and their expected future trajectory.

Answer

Nick Pinchuk, President, CEO, and Chairman of the Board, Snap-on Incorporated, explained that brand building expenses included investments in training, advertising, software development (benefiting both Tools and RS&I), and enhancing social media usage among franchisees. He did not provide specific cost figures or a future outlook but implied these are ongoing strategic investments. El-Sabbahy also inquired about the overall financial impact of the 53rd week in the fiscal calendar. Pinchuk clarified that it was a significant benefit for the financial services segment, adding approximately $7 million in extra profit, but generally a slight negative for the operating companies due to fixed expenses during a low-sales holiday period, though not materially significant overall.

Sherif El-Sabbahy from Bank of America questioned the demand cadence within the Tools Group during the quarter and asked whether the shift to quicker payback items was intensifying or if demand for those items was also weakening.

Answer

CEO Nicholas Pinchuk described the quarter's weakness as 'more uniform' rather than showing a specific negative trend. He explained that while specific quicker payback products were successful 'hits,' the overall 'underlying base' of demand dropped due to pervasive uncertainty. This drop in general demand 'outran' the progress made with the company's product pivot strategy.

Sherif El-Sabbahy inquired about the drivers behind the decline in financial services originations, asking whether it was primarily a function of product mix or if customers were financing a smaller portion of their overall purchases.

Answer

CEO Nicholas Pinchuk attributed the decline in originations principally to lower sales of big-ticket, longer-payback items like tool storage. He added that the strategic pivot to smaller hand tools and the introduction of the lower-priced APOLLO+ diagnostic tool, which are often paid for with cash or on shorter-term revolving accounts, also contributed to the reduction in extended credit originations.

Sherif El-Sabbahy asked about the midpoint of guidance indicating a lower price mix in the second half of the year versus the first half, considering the commercial chassis product, tariff impact, and EV weighting, and if there are other factors influencing the H1 versus H2 price and mix.

Answer

CFO Razvan Radulescu explained that the new price increase will primarily impact the tail end of the fiscal year. He noted that numerous factors, including product mix and fleet mix, are incorporated into the forecast, with generally flat pricing expected aside from the price increase. Razvan Radulescu highlighted tariffs as a wildcard, as Q4 tariff charges have not yet been communicated, but reiterated the forecast for strong EBITDA margins.

Sherif El-Sabbahy questioned the guidance indicating a slightly lower price mix in the second half of fiscal 2026 compared to the first half. He asked for clarification on any other factors, beyond the commercial chassis product in Q4 and potential tariff impacts given the second-half weighting of EVs, that should be considered regarding the first-half versus second-half price and mix.

Answer

CFO Razvan Radulescu explained that the price increase mentioned would primarily impact the tail end of the fiscal year. He noted that numerous factors, including product mix and fleet mix, are incorporated into their detailed forecast. He stated that overall, they anticipate relatively flat pricing apart from the announced price increase, with tariffs remaining a wildcard. He reiterated that they are forecasting strong EBITDA margins and will update guidance as needed.

Sherif El-Sabbahy asked if Quanta Services would consider shifting its M&A focus to acquire smaller service providers to complement its craft labor pool, or if internal labor growth initiatives are sufficient to meet future workload demands.

Answer

President and CEO Duke Austin clarified that Quanta's M&A strategy is purely strategic, not for capacity, aimed at filling strategic gaps and enhancing its vertical supply chain. He mentioned 10 ongoing projects to improve the vertical supply chain and emphasized that acquisitions prioritize cultural fit, strategic alignment, and then financials, citing past acquisitions like Cupertino and Blattner as examples.

Sherif El-Sabbahy asked if Quanta would consider shifting its M&A focus to acquire smaller service providers to complement its craft labor pool, or if internal efforts are sufficient to meet workload demands.

Answer

President and CEO Duke Austin clarified that Quanta's M&A strategy is purely strategic, not for capacity, focusing on filling strategic gaps like vertical supply chain and fabrication. He emphasized the importance of culture and strategy over financials in acquisitions, alongside ongoing internal investments in the craft skill workforce.

Sherif El-Sabbahy from Bank of America asked if the strong backlog has led to more favorable contract terms or increased project selectivity, and sought color on customer conversations regarding the long-term pipeline for large transmission projects.

Answer

President & CEO Duke Austin confirmed that Quanta's solutions-based approach and self-perform capabilities provide certainty, leading to longer-term, programmatic discussions with customers about work extending into 2026-2028. He noted that while the base business remains around 85%, larger programs are stacking up, with Limited Notices to Proceed (LNTPs) at record levels, indicating a robust, compounding build-out of large transmission is in its early stages.

Sherif El-Sabbahy asked how the underlying assumptions for the full-year guidance have changed, given that the initial outlook was based on a residential rebound and pricing momentum that now appear challenged.

Answer

CEO Bill Zarkalis explained that while they now expect residential softness to continue, this is being offset by accelerating strength in their infrastructure and commercial project order book. He reiterated that results were always expected to be second-half weighted due to easier weather-related comparisons from the prior year, giving them confidence to reaffirm the guidance.

Sherif El-Sabbahy asked about the Q2 top-line outlook, questioning if the historical sequential volume decline in Q2 is expected this year. He also inquired about the expected cadence for delivery and installation revenue.

Answer

CFO Matthew Jacobsen clarified that they do not expect a sequential volume decline in Q2, as Q1 is typically the seasonal bottom and activity builds into Q2 and Q3, especially for modular units. He added that delivery and installation revenue should grow with this increased activity, potentially in the 10% range in the second quarter.

Sherif El-Sabbahy from BofA Securities asked whether WillScot expects its free cash flow margin to expand or remain consistent in 2025 compared to 2024.

Answer

Chief Financial Officer Matt Jacobsen clarified that the free cash flow margin is expected to see a slight reduction in 2025. He attributed this to two key factors: a roughly $30 million increase in net CapEx at the midpoint of guidance and a $30 million increase in cash taxes as the company becomes a partial federal cash taxpayer.

Sherif El-Sabbahy asked about the drivers of margin expansion in the Americas on lower volumes and requested more detail on regional performance, particularly the 'lull' in North America.

Answer

CEO Shyam Kambeyanda attributed the margin strength to a combination of net pricing, EBX initiatives, and a favorable product mix shift toward equipment and gas control, all achieved while continuing growth investments. He described the North American market as being in a 'wait-and-see' mode, contrasting it with optimism and strength in Europe, India, and the Middle East.

Sherif El-Sabbahy requested a breakdown of the cost buckets contributing to the guided 80 basis points of margin expansion, given the 400 basis points of price realization.

Answer

G. Bohley, COO, CFO & Treasurer, provided a bridge, stating that the 400 bps of price adds about 250 bps to margin. This is offset by the negative impact of lower volume (decrementals on ~$100M of revenue) and cost increases from purchased components, which are driven by both raw materials and supplier value-add. He reiterated that engineering and SG&A are guided relatively flat, with manufacturing costs down year-over-year.

Sherif El-Sabbahy from Bank of America inquired about capital allocation, asking if the company's substantial cash position and low leverage are primarily reserved for the robust M&A pipeline or if there might be a shift in priorities.

Answer

CFO Nathan Ring affirmed that the company's capital allocation priorities remain unchanged. The primary focus is on disciplined capital use for maintaining assets (5-7% of revenue) and funding growth through both organic projects and acquisitions. He stated that spending on maintaining and growing the business is currently the best use of capital, implying no near-term shift to other returns.