Southland Holdings (SLND) Q3 2024 earnings call transcript

Good morning, everyone, and welcome to the Southland 3rd Quarter 2024 Conference Call. This is Alex Murray, Director of Corporate Development and Investor Relations. Join me today are Frank Ronda, President and Chief Executive Officer, and Cody Gallardo, Executive Vice President and Chief Financial Officer. Before we begin, I'd like to remind everyone that this conference call may contain forward-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 condition may differ materially from those projected in the forward-looking statements.

Therefore, you should not rely on any of these forward-looking statements, and we do not undertake any duty to update these statements. For discussion with some of the risks that could affect results, please see the risk factors section of our Form 10K for the year ended December 31st, on 23th, that was filed with the SEC on March 4th, 2024, and discussion on Form 10Q for the 2024, that was filed with the SEC last night. We will also refer to non-GAP financial measures, and you will find reconciliation in the press release relating to this conference call, which could 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 third-quarter 2024 conference call. Third-quarter revenue was $173 million with a gross loss of $51 million. It is important to bifurcate our third-quarter income statement between the M&P business, certain legacy projects, and our new core business, excluding unfavorable adjustments from the M&P business, and certain legacy projects are gross profit in the quarter with $20 million. The unfavorable adjustments, which were largely non-cash in the quarter, negatively impacted our results by $71 million. The unfavorable adjustments were driven by recent dispute resolutions, scheduled delays that increase completion costs on certain projects, and reduced expected recovery on legacy projects. At the end of the quarter, we had approximately $180 million of remaining M&P backlog, and approximately $105 million of non-M&P legacy backlog.

We expect the remaining M&P backlog to be substantially complete by the end of 2025. Despite the significant impact of non-cash charges on this quarter's results, we are encouraged by the strong performance of our new core projects, which delivered double-digit margins. This result underscores the strength of our strategic initiatives, and gives us confidence in our direction. The solid performance of our new core projects aligns well with our long-term strategy, as these initiatives are not only delivering strong margins now, but also positioning us for sustained success. I'm very excited about the new core work, which makes up approximately $2.5 billion of backlog. Our new core work is the best backlog we've ever had. This work provides us with great visibility heading into 2025, as our new core projects continue to ramp up, and our legacy projects continue to burn off.

Given the strength in our new core backlog and strategic improvements to internal processes, I expect we will return to profitability in 2025. During the third quarter, we also successfully executed upon several strategic initiatives to bolster our balance sheet. We close the quarter with the strongest quarter in cash position we've ever had since going public. We closed the $42.5 million real estate transaction in July. We also closed $160 million senior secured term loan facility with Caledine commercial finance in the quarter. The initial term loan consisted of $140 million initial draw term loan, and it committed $20 million delay draw term loan. This refinance extended the maturity of a large portion of our debt to 2028. The real estate transaction and the new facility significantly strengthened balance sheet.

This strength and balance sheet gives us additional flexibility, enabling us to capitalize on new opportunities, confidently execute on our backlog, and respond swiftly to market changes. With our enhanced cash position, we are better positioned to drive higher profitability and pursue attractive opportunities in our markets.

We ended the quarter with $2.74 billion of backlog, essentially flat from last quarter, and up from $2.54 billion at the end of the third quarter last year. We booked approximately $140 million of new awards during the quarter. This included $132 million water treatment for the Bureau of Reclamation. We also have several projects which we are the apparent low bidder on and expect to convert into backlog after finalizing contract negotiations. We are thrilled with the momentum of our new core backlog, but the pipeline we are tracking is truly exceptional. The most robust and promising we've ever seen. We believe we are well positioned to capitalize on this core markets as demand for infrastructure construction services continues to outpace the supply of qualified contractors.

This imbalance has created a unique opportunity for us to bid on projects with limited competition. Moving forward, we will remain selective, focusing on projects that align well with our strengths and objectives. A key component of our strategic plan is to focus on securing smaller dollar shorter duration projects that yield quick cash flow. We are pursuing numerous shorter duration projects in the $30 million to $150 million that expect to bid over the next six months. Our civil segment market continues to be very attractive. It is a key area of focus for us to pick up shorter duration projects. We are also tracking some larger projects in our civil segment, including the $600 million I-35 CapEx, drainage relief tunnel in Austin, Texas, the $350 million hydro-1 tunnel in Toronto, Canada.

$120 million civil and utility package for Dallas Fort Worth, Airports, Terminal F, the $500 million Hudson River Gateway Tunnel in between New York and New Jersey. In our transportation segment, upcoming opportunities include the $300 million I-195 Washington bridge replacement in Rhode Island and the $1 billion Garden City Parkway Sky Bridge in Ontario, Canada. We are also actively engaging with state and local officials in the southeast to explore ways we can support and contribute to rebuilding the region infrastructure following the recent natural disasters. Additionally, we expect to have the opportunity to bid on smaller packages from large programs we are tracking over the coming quarters.

This includes the $1 billion Red River Valley Water Supply Program in North Dakota. We are currently working on an initial phase of this program. We are also tracking various packages from the approximately $7 billion GBRA water secure program. The $2 billion program for the City of Fort in Colorado. We are tracking over $20 billion of transportation projects in the northeast. We are also following projects in some of our key transportation markets including Texas and Florida, which are planning to spend tens of billions of dollars in the coming years.

This robust pipeline gives us clear visibility into long-term growth opportunities that will drive our business for years to come. With unmatched resources and expertise, we are uniquely positioned to fully capitalize on this unprecedented potential. To recap, we face several non-cash losses this quarter, largely due to the impacts of the M&P business in certain legacy projects. We are excited about how our new core work is performing and the visibility our new core backlog provides us as we head into 2025. We have also made significant strides to improve our balance sheet and into the quarter with the highest quarter in cash balance we have had since becoming a public company. The improvement in our balance sheet positions us well to perform on our great backlog and capitalize on the best pipeline of opportunities we have ever seen.

Before closing, I would like to highlight some recent achievements by our teams. Thanks to the hard work and dedication of our people, we have recently achieved several operational milestones including opening the east and westbound lanes of an aging project in Arkansas and completing the final concrete deck placement on a challenging bridge project in the Midwest. Additionally, our milk creek tunnel project team achieved an impressive safety milestone, surpassing 1.5 million work hours without a single lost time incident. Thank you to each of our team members for your unwavering commitment to safety and quality which sets us up for a strong 2025 and beyond.

With that, I'll now turn the call over to Cody for a financial update.

Thank you Frank and good morning everyone. I will provide an overview of our financial performance during the third quarter of 2024. You can find additional details and information in the financial statements, put notes and management, discussion and analysis that were filed on form 10Q last night. Revenue for the quarter was $173 million down from 312 million in the same period in 2023. Legacy headwinds and impacts from hurricanes negatively impacted production during the quarter. Additionally, the timing of project closeouts and new project starts also contributed to the decrease in revenue year over year.

We substantially completed a large marine project in the Bahamas during the second quarter of this year. This project contributed $54 million more to revenue in the third quarter last year compared to this year and delayed starts resulted in us not replacing as much revenue as anticipated in the quarter. Gross loss for the third quarter was $51 million compared to a gross profit of 30 million from the same period in 2023. Gross profit margin in the quarter was negative 30 percent compared to 10 percent in the same period of the prior year. Unfavorable charges of $72 million from legacy projects impacted results. This was the result of certain dispute resolutions, scheduled delays that increased completion costs on certain projects and reduced expected recoveries on legacy projects.

These charges had significant non-cash impacts in the quarter. Felling, general and administrative compared to the same period in 2023. Interest expense for the quarter was $7.5 million and increase of $1.3 million compared to the same period in 2023. The difference was attributable to increased borrowing costs and higher debt balances. We expect interest expense to be approximately $9.5 million per quarter on a go-forward basis. Income tax benefit was $17 million for the on a go-forward basis. We expect our effective tax rate to be in the 20 to 24 percent range, depending on certain tax credits, non-deductible items, and certain state and local taxes.

We reported a net loss of $55 million for negative $1.14 per share in the quarter compared to net income of $4 million or 8 cents per share in the same period last year. In the third quarter, we produced EBITDA or earnings before interest, taxes, depression, and amortization of negative $59 million compared to EBITDA of positive $22 million for the same period in 2023.

Not a touch on segment performance for the quarter. Our civil segment had revenues of $56 million, a decrease of $35 million from the same period in 2023. Our civil segment gross loss was $18 million compared to a gross profit of $12 million in the same period in the prior year. As a percentage of revenue for the quarter, our civil segment had gross profit margin of negative 33 percent compared to 14 percent in the same period in 2023. Unfavorable charges of $27 million from legacy civil projects impacted results in the quarter. For the quarter, our transportation segment had revenues of $117 million, a decrease of $104 million from the same period in 2023.

As previously discussed, we substantially completed a large marine project in the Bahamas during the second quarter of this year. This project contributed $54 million more to revenue in the transportation segment in the third quarter last year compared to this year. Our transportation segment gross loss was $33 million. This compares to a gross profit of $17 million in the same period in the prior year. As a percentage of revenue for the quarter, our transportation segment had a gross profit margin of negative 28 percent compared to positive 8 percent for the same period in 2023. Unfavorable charges of $44 million from materials and paving and legacy projects significantly impacted this segment's results. This segment was impacted by $18 million of charges in the materials and paving business at a $17 million charge on a bridge project in the Midwest, which was largely due to a dispute resolution.

These charges were significantly non-cash in the quarter. Turning to the balance sheet, as of September 30, 2024, we had net debt of $212 million, inclusive of cash and restricted cash of $107 million. As previously announced, we closed a $160 million senior secured term loan facility with Caledine commercial finance in the quarter. The initial term loan consisted of a $140 million initial draw term loan and it committed $20 million delayed draw term loan. This facility provided us with additional liquidity and extended our debt maturity significantly to 2028. As we move forward, we're encouraged by the potential for substantial future cash inflows from the resolution of disputes and change orders related to our legacy projects, along with the strong performance we're staying in our new core projects.

Thank you for your time and interest in Southland. I'll now pass the call back to the operator for your questions.

Hey, good morning, Adam.

So that we expect to be substantially complete by the end of 2025 with one project that will have a tail into 2026, but believe it will be immaterial at that point.

So when you look at what we've disclosed, there's approximately $71 million that were a decrease in recognized revenue based on the cumulative catch-up impacts of percentage completion accounting that contributed to the lower top line volume, the remaining contribution to the top line decrease and forgive the backward speak there, but had to do with projects being pushed out to the right on the timeline. The work hasn't gone away. We still have the $2.5 billion of great new core backlog we're excited about. But that was the decrease in contribution that led to the volume dip in Q3 in addition to that included the project and the Bahamas we specified in our opening remarks.

Yeah. So it's a balance, Adam, and we want to make sure that we have the staple project in areas and then also can maximize our resources by taking some of those 30 to $140 million projects. And so when I talk about balance, you want to balance the cash coming in, kind of maximizing resources right now to put ourselves in the best position to make sure we get the highest returns possible. And the reason I talk about all the projects is because every program right now really is really is hot, whether it's transportation, whether it's water, wastewater, disappointing tough quarter, but the pipeline is incredible out there and you kind of hit on it. The key to maximizing that return is to maximize what you can get from your resources.

And that's why we're looking at a mix of projects right now.

So we're at the table and a number of them. We've disclosed in the past that we've got half of our contract assets balance, our end claims on fully completed projects. We expect significant cash flows coming off from those settlements as owners are running out of abilities to delay, owing us money and we believe we're due, and think that will be a large part of our 2025 story and cash generation.

Thanks Adam.

Yeah. Thanks Brent. Kind of touching on those non-M&P projects that I think you're referring to. We remain really confident in the civil segment. The majority of the work performed really well this quarter in civil. It was overshadowed by those couple of legacy projects that you touched on. We had charges that had cumulative catch-up effect which drove the current period profit margin negative. Our legacy backlog is down to 105 million and is expected to be substantially complete over the next few quarters. Absent the legacy impacts, our civil produced mid-teen margins. And as far as when those projects were picked up, Brent, they were picked up in that 2018-2019 time frame. And we expect those to be wrapping up in 2025.

Yeah. So, you know, we're sitting with a near backlog of $2.5 billion in our new core backlog. That's the best in our company's history. Our surety partners are integral part, you know, it's our long-term success. And we meet with them kind of regularly to talk about all the opportunities that we are tracking. We look at the resources, you know, in regards to equipment personnel where we're at in different locations, having that $2.5 billion in core backlog total $2.754 billion in total backlog. That $2.5 billion gives us visibility into exactly what we can do over the next few years. And as far as what we can add, we're just going to be extremely selective. You know, the jobs that we're targeting have to be absolutely perfect to maximize the return that we're going to get on our resources.

We think we have the best backlog, $2.5 billion in our core market. But we see the pipeline is even a greater opportunity than we have right now. So, extremely, you know, extremely tough quarter. But we have we have completely reset. We're laser focused on our core market and exactly what we do. And we expect to return a profitability quickly in 2025.

Getting Brent, maybe just to add a little color from the balance sheet side, you know, we're sitting with the strongest cash position that we've had since going public, which is a big part of kind of where we are in this turnaround section for Saflin. Not optimal, as Frank mentioned before, you know, like a very disappointed in the corner, quarter, excuse me, but can't be more optimistic about where we're going.

Yeah. Great question. We think there's a high probability and opportunity for that, particularly as you look at kind of the leading indicators on cash flow with the increase in BIE that we have, as well as, you know, some of the decreases in CIE as we've had some settlements and work completely with the legacy portfolio. So I think when you look at the cadence of what we've announced over the last, you know, I'd say 24 month horizon on projects, you know, earlier on in that time period, we had some significant larger projects that are starting off slower than we had initially hoped for. They did provide great mode payments, which contributed to that increase in BIE and the health of our cash position.

But it's also why you've seen the more recent announcements focused on that smaller side. And getting, as Frank mentioned, some of that quicker turn work to focus on cash generation to help us bridge the gap to these larger projects really taking off and making a meaningful impact.

That's not it. That's Bruce. Thanks, Brendan.

Yeah, I think Tyler, good to hear from you. Thanks for joining. When you look at the overall volume decrease in cost of goods, and we're at that call it 60 million mark, which makes up about half of the overall shortfall, that's going to be representative of that timeline shift that we talked about where the work's still coming. It's just moved to the right on the time spectrum. The rest of it being some of the projects we mentioned earlier that contributed to the decrease in revenue. So still coming, you know, the third quarter dip is an anomaly from our perspective and what we expect going forward.

And think we'll have a good recovery volume wise in Q4, and it will extend on into 2025 as that large, you know, great backlog for us makes more of a contribution.

Yep. Appreciate you giving me the easy out there. I'll try and go a little bit beyond that. You know, we book projects as we do every quarter, you know, that number continuing to dwindle. You know, we feel very good about the new work making enough of a larger contribution to overshadow what's left of that zero margin and lower margin work in the in the 180. So hope to see that make less of an impact moving forward and really speak to the health that we see in the business, you know, mid long term.

Yeah, we're excited about both markets. Civil or typically quicker burn projects. So, you know, if we pick up five or six civil jobs, we would expect those to burn a little bit quicker. As far as transportation, you know, there's just so many opportunities out there. But, you know, specifically to next year, those might be a little bit, a little bit longer burn, but the $2.5 billion of backlog that we already have in transportation and civil, I think we'll start to see those who really show themselves in the first quarter of next year in, you know, running off in the next couple of years. So, excited about both and expected to return the profitability in 2025.

Thanks, Tyler. I appreciate it.

Yeah, so we think backlog conversion in the fourth quarter, where we expect to see some of that, the timeline shift that I referred earlier, you know, coming to fruition in Q4. You know, there's still our uncertainties around project starts, as we've always discussed. So, we do see a recovery volume wise from the dip that we had in Q3. You know, but we expect to fight through that and then getting into 2025, you know, to echo Frank's opening remarks is where we really see that return to profitability for both of our segments.

Yes, we do see volume rebounding, just given the level of charges and also their impact on the recognition of revenue from prior periods, kind of being that non-cash element we discussed. So, yes, we do expect a sequential recovery in top line numbers.

Yeah, no, that's a great question, Julio. I would not recommend a straight line. You know, there is going to be kind of work that finishes off earlier and then tapers down. There is a decent chunk of work out there that we're negotiating with the owner on what finishing that remaining backlog looks like and we'll have more information on that when appropriate. But we still fully expect to be substantially complete over the next few quarters and then hopefully plan on MMP being down to an immaterial point where we won't be discussing it after 2025.

Yeah, no, that was specific to the events that happened on the Arkansas paving job which we had announced. So, no announcements or expectations on cash conversion from claims in the MMP segment or otherwise in Q4 and beyond. Suffice to say though, as mentioned earlier, we expect significant cash inflows from claims settlements as we're near the finish line on several large claims throughout 2025, depending how those negotiations finalize out.

Yeah, so I think the shift started a couple of years back. It just takes a while on some of these projects to get started and to start paying off. But we are targeting projects in our core market and of the $2.7 billion that we talk about, $2.5 billion are in the core markets. We're looking at more and more short-term quick-hitting projects because we have a lot of the staple projects that we need in areas. You're looking for bolt-ons with higher margins. I guess the shift that I would say was getting out of the more quick-hitting civil projects. But we are focused on picking up the right projects and there's hundreds to choose from in that $30 to $150 million range in the civil segment.

So really excited about that market.

Yeah, I think also might just add on some details behind Frank's emphasis on changes we made several years ago. I really want to commend our entire procurement team starting with John Dormoon and Kinsha when the rest of their staff on really overhauling our entire procurement process and focusing on a qualitative and quantitative assessment process to make sure that we're covering all of our risk points to the best that we can. So we're set up for that long-term risk mitigation. So as Frank mentioned, it takes a while for that to flow through and demonstrate itself in our financial results. But we're confident that we'll be able to discuss that upcoming calls.

Hey, thank you.

Thank you all for your interest in Southland and look forward to speaking next quarter.