Southland Holdings (SLND) Q2 2025 earnings call transcript

Thank you, Alex. You might begin your conference. Good morning, everyone, and welcome to the Southland Second Quarter 2025 conference call. This is Alex Murray, Vice President of Corporate Development and Investor Relations.

Joining me today are Frank Brenda, President and Chief Executive Officer, and Keith Bassano, Chief Financial Officer. Before I begin, I'd like to remind everyone that this conference call may contain board-looking statements within the meaning of Section 27A of the Securities Act of 1933, Section 21E of the Securities Exchange Act of 1934, and the Private Securities Litigation Reform Act of 1995.

Forward-looking statements are neither historical facts nor assurances of future performance. Forward-looking statements are uncertain and outside of Southland's control.

Southland's actual results and financial conditions may differ materially from those projected in forward-looking statements. Therefore, you should not rely on any of these forward-looking statements, but we do not undertake any duty to update these statements.

For discussion of some of the risks that could affect results, we see the risk factor exception of Form 10K for the year end of December 31st, 2024, that was filed with the SEC on March 5th, 2025, and discussion on Form 10Q for the quarter end of June 30th, 2025, that was filed with the SEC last night.

We also refer to non-GAP financial measures, and you will find reconciliation in the press release relating to this conference call, which can be found on the investor relations page of our website.

With that, I will now turn the call over to Frank.

Thank you, Alex. Good morning, and thank you for joining Southland's second-quarter 2025 conference call. I want to take a moment to acknowledge some recent operational accomplishments across North America. In Florida, we celebrated a significant milestone with the opening of the U. S. One Jupiter Federal Bridge, a project that will improve transportation for the region. We also successfully started driving the first 60-inch piles for the Shen's Bridge project, a critical step forward on the new bridge over the St. John's River.

In Toronto, our team successfully flooded the Ash Bridges Bay Outfall Tunnel, a major achievement that marks the nearing completion of this multi-year large-scale project.

Finally, our work with the Army Corps of Engineers continues to progress, as our teams have now installed the first gates on the center hill and Woof Creek Dam Gate replacement projects in Tennessee and Kentucky.

These achievements are a testament to the hard work and dedication of our employees, who are the driving force of our company. Thank you to all our teams for their unwavering commitment to safety and operational excellence.

Now to discuss our quarterly results. We reported second quarter revenue of $215 million and gross profit at $13.4 million. Consolidated gross profit margin was 6.2%, an increase from negative 15.9% in the prior year period. The improvement was driven by strong performance in our new core work and less impacts from legacy projects in this quarter versus the same quarter last year.

Our teams performed well this quarter despite unfavorable conditions, including adverse weather. It is encouraging to see the strong consistent results in our core business, as evidenced by our civil segment, which delivered a gross profit margin of 18%. This is a direct result of our discipline bidding strategy and our teams expertise in executing complex high value projects. Revenue for the quarter was lower than anticipated due to impacts from weather and timing on new project starts.

We had two water resource projects in the West, totaling over $340 million in combined contract value. That experienced delayed starts that were outside of our control. Both projects have now started and we expect them to ramp as we progress through the end of the year.

During the quarter, we added approximately $67 million in new awards. This was led by the McNeil Tunnel Project in Austin, Texas, bringing our total backlog to approximately $2.32 billion.

We are excited about the success we are having in converting high margin, short duration projects to backlog. We continue to be excited about the opportunities bidding in both segments and the back half of this year. So far in the third quarter, we have executed a $77 million contract and our transportation segment for a bridge rehab project for a private client in the Pacific Northwest.

We also have been awarded or are the low bidder on an additional $65 million of new projects that we are finalizing contracts on which we expect to convert to backlog in the third quarter.

Our outlook on the market remains unchanged. We're confident that sustained investment and robust demand for infrastructure, especially from federal and state governments will serve as a powerful tailwind for our business for years to come.

The IIJA is in full swing and continues to be a major catalyst for our industry. We're seeing robust demand driven by this federal funding. The current federal infrastructure cycle will expire in 2026, but we believe this funding will provide a strong tailwind for our business for several more years as it takes time for projects to work through design, permitting, and ultimately construction.

We're also optimistic that there will be bipartisan support to reauthorize spending to address the nation's critical infrastructure needs. State and local spending is strong in our key markets across the Sun Belt. We're also seeing state and local governments developing long-term plans to meet the demand caused by population shifts and aging infrastructure. In May, the Texas Senate passed House Joint Resolution 7, which has passed in November by voters will unleash $20 billion for water infrastructure development projects across the state over the next two decades.

This is a significant investment in one of our core markets. We are well positioned to help rebuild and expand Texas's water resources. This is just one of the many examples of the strong demand for our services, which we expect to continue for the foreseeable future. With the strong pipeline of opportunities from private and public clients, we have excellent visibility into future demands.

We continue to be selective in our approach focusing on improving profitability over top-line growth. We are excited about upcoming opportunities and have pending proposals, including the Pier 31 extension at the Naval Submarine Base in Groton, Connecticut, for the Naval Facilities Engineering Command. We also expect to propose on the Eleuthera Glass Window Bridge in the Bahamas in Phase 3 of the Winnipeg North End Sewage Treatment Plant.

We are currently constructing Phase 1 of the program, and are in the pre-construction phase of Phase 2 of the program. We also expect to propose on the Alcassan, Ohio River Tunnel, and numerous water resource projects across the Sun Belt.

In closing, our teams performed well in the quarter, despite some challenging conditions. We continue to make good progress winding down legacy work and are excited about the opportunities in all our end markets.

While we are operating in an environment of strong market tailwinds, we are also aware of the challenges in our business. Our strategy is clear. Focus on high quality, high margin work, proactively manage our cost structure, and maintain strong financial discipline. Our improved margins this year are a clear sign that this strategy is working. We are confident in our ability to continue to convert our new core backlog into profitable results and create long-term value for our stakeholders.

We remain excited about our future and the strong market position we have built. With that, I'll now turn the call over to Keith for a financial update.

Thank you, Frank. Good morning, everyone. I'll discuss an overview of our financial performance during the second quarter for 2025. You can find additional details and information in the financial statements, footnotes, and management's discussion and analysis that were filed on Form 10Q last night.

Revenue for the quarter was 215 million down 36 million from the same period in 2024. Rose profit was 13.4 million and increase of 53 million from the same period in 2024. Rose profit margin in the quarter was 6.2% compared to negative 15.9% in the prior year.

Selling general and administrative costs in the second quarter were 13.6 million, a decrease of 2.1 million compared to the same period in 2024. The decrease was primarily due to lower pre-construction expenses compared to the same period in 2024.

Interest expense for the quarter totaled 10 million, up 3.3 million from the prior year. This increase was primarily driven by an increase in interest expense related to a real estate transaction that closed in the second half of last year. Increased interest rates on borrowings and increased deferred financing costs.

We anticipate interest expense to average approximately 9.5 million per quarter going forward. Income tax benefit was 0.1 million for the quarter or an effective tax rate of 0.6% compared to income tax benefit of 16 million in the same period last year. We expect our effective tax rate to be in the 20 to 24% range subject to the impact of tax credits on the doctoral expenses and state and local tax adjustments.

We reported a net loss of 10.3 million or a net loss of 19 cents per share in the quarter compared to a net loss of 46 million or a net loss of 96 cents per share in the same period last year.

In the second quarter, we produced EBITDA of 4.2 million compared to EBITDA of negative 49.9 million for the same period in 2024.

Now the touch on segment performance for the quarter. Our civil segment had revenues of 81.5 million compared to revenue of 79.4 million in the same period in 2024. Our civil segment gross profit was 14.6 million an increase of 5.4 million from the same period in the prior year.

As a percentage of revenue for the quarter, our civil segment had gross profit margin of 17.9% compared to 11.5% in the same period in 2024.

For the quarter, our transportation segment had revenues of 133.9 million to decrease of 38.3 million from the same period in 2024. Our transportation segment had a gross loss of 1.2 million an increase from a gross loss of 49.2 million in the same period in the prior year.

As a percentage of revenue for the quarter, our transportation segment had a negative gross profit margin of 0.9% compared to a negative gross profit margin of 28.6% for the same period in 2024.

The materials and paving business line contributed 21.7 million to revenue and 3.8 million in gross loss in the second quarter. At the end of the quarter, we had approximately 99 million of remaining MMP backlog. This is down from 139 million at the end of last quarter. We anticipate to be substantially complete with these projects by the end of 2025 with three projects final completion tailing into 2026.

Our transportation segment margin was negatively impacted in the quarter by an unfavorable adjustment of $7 million on a legacy bridge project in the Midwest. This legacy project had significantly impacted our results over the past several years, and we are now down to the final remaining contract items on the project. The new bridge opened earlier this year and demolition of the old bridge is well underway.

This project is expected to be completed later this year. Our remaining non-MMP legacy backlog is now 40 million down from 59 million last quarter, excluding the impacts of MMP and unfavorable adjustments in our non-MMP legacy backlog. Gross profit in the quarter and both transportation and civil segments produce double-digit margins. We expect legacy projects to have less of an impact on the overall results as we continue to wind down these projects.

This ongoing transition to a more profitable backlog is a key part of our long-term strategy and a major driver of our improved margin profile. We finished the quarter with approximately 2.3 billion of backlog, of which we expect to burn approximately 41% over the next 12 months. Thank you for your time and interest in Southland. I'll now pass the call back to the operator for questions.

Hey, good morning, Kevin.

Yeah, we're excited about the second half. So there is a lot coming in the second half, but also in 2026. You know, overall the pipeline remains strong. We expect demand to remain strong, and while confident we can secure new projects across all of our markets, our main focus is on increasing margins, not just increasing revenue. We've really been focusing on cleaning up the legacy work and taking a measured approach to adding new work. So we want to make sure these projects fit us perfectly with all the right resources.

So civil margins have been strong, and we're excited about how our teams are performing here. The teams did well this quarter and longer term might expect civil margins to be in the mid-teens. We have a great deal of confidence in both civil and transportation segments. We see internally on a job-by-job basis how our new core projects are performing in the strong margins in our backlog.

Some large unexpected swings from disputes and older projects have overshadowed these results, and it's take a little bit more time, Kevin, for these new projects to have a meaningful impact. But we're excited about the long-term potential of both businesses.

Yes. So speaking of cash flow, so we had a use of operating cash flow here in the quarter, but we do expect that to pick up in Q3 and Q4, just normal cadence and we're in construction season right now.

Thanks, Kevin.

So we see a lot of opportunity in the civil market right now, Christian. There's tons of projects that are out there for us in core markets for owners that we've worked for in the past have great relationships with also on the CMR side. There are so many opportunities. So we see it as a near term opportunity.

We're going to continue to focus on those higher margin short duration and we also see this market, you know, this strong civil market continuing into next year and in years down the road as well.

You know, we haven't been in the public market for an extended period of time, Christian, but, you know, we've been doing this for a couple of decades now and we couldn't be excited about, more excited about the long term opportunities. You know, we look at some of the programs that are out there and the infrastructure need, you know, here and here in North America. And there's just so many opportunities for us to pick up really meaningful projects that will increase our margin. So we're going to stay, we're going to stay disciplined. What we've done and gone through the past couple of years really should set us up and is going to set us up for long-term success.

So we have the right crews available. We have, you know, tailwinds in our business and really expect to increase our margins, you know, and hopefully those mid-team civil margins and, you know, low-team transportation margins will be out there in the near future for us.

Yeah, so we continue to work through and make small progress on settling legacy claims. No major updates this quarter on larger claims. We continue to work vigorously to collect every dollar that we are owed and expect positive cash flow from these claims in the coming quarters. You know, it's important that we remember most of this work, you know, was picked up in that 2017-18-19 time frame. So, you know, we're a year closer now than we were at last quarter at this time and, you know, getting some of the, getting some of the owners to the table so it can't, yeah, can't go on, go on forever and we're going to continue to fight for every dollar that we've earned and had to finance, you know, so many of these these projects, self-financed so many of these projects that the owners are reaping the benefit from.

Thanks, Ricky.

Good morning, Julio.

Absolutely. You know, I think we're a very unique company, you know, in the civil market. We can do all aspects really of heavy civil work. We do the underground, we do the tunnels, water and wastewater treatment plants, all types of the rainworks and, you know, we pride ourselves on cross training, you know, our employees. So we have an expertise that not many people do of our size, where we self-perform about 80% of the critical path work and take on some really challenging projects. Another thing that we do is, you know, we'll manufacture some of our own 2D ends, and there's not a lot of companies around that have the manufacturing capabilities that we do, so it gives us some real competitive advantages.

And I think that's why you see us in so many one or two-bit situations on these civil projects. And those are tunnel boring machines.

Yeah, so, so first on the IIJ question, you know, I think we've seen less than 50% of the IIJ money has been spent to this point. You know, we kind of mentioned the prepared remarks. It really takes some time for these projects to work through the design and permitting before people like us, you know, the contractors get involved. We're optimistic that this funding will be reauthorized next year. We mentioned the resolution in Texas, which would deploy another $20 billion to address just the state's water needs.

So we're seeing states trying to prepare for this spend in addition to the federal money. Our country has neglected our infrastructure, you know, a bit for decades. You can look at the different end markets we're in and the stats are just incredible. Roughly 7% of the nation's 623 bridges are more conditioned. The dams in our country have an average of close to 60 years old and nearly 17,000 dams in the country are considered high hazard potential. Maybe there's a likelihood of harm to residents if the dams were to fail.

You can see stats like this across different infrastructure in markets and they're really hard to believe. So the bottom line is we believe it's critical to the country's success that we improve the aging infrastructure. So we feel there will be sustained long term demand for what we do. And, you know, what we do is historically been 80 plus percent in the public market. We are going to continue to focus on the public market, but if, you know, private opportunities arise in the same type of work that we do, that could shift over time. So pretty good demand on the private side and really good demand on the public side right now in our market.

So, you know, with the civil, I would, I guess, let me ask you this. Can you just clarify the backlog conversion?

Oh, I'm looking at eight percent this quarter, eleven last quarter. Yeah, I think we're going to be pretty consistent there.

We're going to be pretty consistent there for civil. We did have a couple projects that encountered some impacts during the quarter, you know, outside of our control. We expect those to ramp up a little bit more as we get into the second half of the year. So, we could see a little bit of an uptick, but nothing too too significant.

Good morning. Good morning.

Yeah, so let me speak to the revenue decrease here to store. So, as I mentioned, we did have those couple of delays, you know, not necessarily whether driven by those two, but those both have been since resolved. You know, we do anticipate revenue to normalize in the back half of the year. You know, again, we're in peak construction season, so we anticipate, you know, certainly a pickup over where we were in Q2. You know, we really don't disclose as far as weather impacts, you know, by segment.

You know, that said, you know, weather in the south has been, you know, wet for us and we did see some impacts there to the business.

Yeah, so we see, so we've demonstrated, you know, there's mid-teen markets or mid-teen margins here over the last couple of quarters and as did any impacts from the legacy civil work, we expect to see that going forward.

So on, you know, on M&P, we're down to just a handful of M&P projects left, which we expect to be substantially complete by the end of the year. Add some projects, final completion, state, slip, just a bit, and expect three projects to completely wrap up in the first half of the next year. But the impact overall results continue to get smaller each quarter. You know, if you look at, you know, legacy burns, the end of last year, we had 246 million total legacy backlog.

And we're down to 139 million at the end of this quarter. So we worked down approximately 107 million. So far through the first two quarters. We're making good progress, but it will just take some time before this is completely behind us and we'll get it closer every day. We expect most of this to burn off again in the next two quarters with a couple tailing in the next year.

Thank you, John.

I appreciate everybody joining, you know, the last couple of years have been challenging and we're doing the right things to set the company up for success in the long term. We haven't been a public company for very long, but we have been doing construction for a long time. Things are trending in the right direction and we believe the company's performance over the next five years will be significantly different from what we've seen in the past few. Appreciate your support and look forward to talking to you next quarter. Thanks, everyone.