Southland Holdings (SLND) Q3 2025 earnings call transcript

Good morning, everyone. Welcome to the self-land third 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, Keith Bessano, 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 uncertain and outside of selfless control. Selfless actual results and financial conditions may differ purely from those projected and forward-looking statements.

Therefore, you should not rely on any of these forward-looking statements, or discussion with some of the risks that could affect results, so you see the risk factor section over Form 10K for the year ended December 31st, 2024, that was filed with the SEC on March 5th, 2025, and discussion on Form 10Q for the quarter ended September 30th, 2025 that was filed with the SEC last night. We also refer to non-gap financial measures and you'll find reconciliation in the press release related 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 Southwest's third-quarter 2025 conference call. Before we jump into this quarter's results, I'd like to highlight that this quarter marked the five-year anniversary of our acquisition of American Bridge Company. This quarter, we also achieved substantial completion on the last of the 27 highly technical projects assumed to be acquisition.

These projects included the Queensbury Crossing in Scotland, Edmonton Valley Light Rail in Canada, Queensborough Bridge in New York, and the SR 520 Montlake Project in Washington. Closing out this final construction phase of the Legacy AB backlog is a major accomplishment, and testament to our operational expertise, technical knowledge, and ability to successfully execute some of the world's most complex infrastructure projects.

Now to turn to this quarter's results. We reported third quarter revenue of $213 million in gross profit of $3.3 million.

In a solidated gross profit margin was 1.5%, an increase from negative 29.5% in the prior year period. The improvement was driven by strong performance in our new core work and fewer impacts from legacy projects in this quarter or in the same quarter last year. Our new core work continues to perform at double-digit gross margins.

Our civil business continues to perform very well with 10.5% gross margin in this quarter. This was inclusive of unfavorable non-cash adjustments from dispute resolutions that impacted revenues and gross profit by $8 million in the quarter.

We continue to make progress resolving smaller disputes. A vast majority of our contract assets balance consists of money we are owed from legacy projects that were started prior to COVID where construction is complete. We expect our contract assets balance to continue to decrease and to collect a significant amount of cash from these legacy disputes.

We have a clear plan to finalize the remaining legacy projects and are making progress toward their completion. As this work wraps up, we expect to significantly de-risk our earnings profile as we progress through next year. We have some more work to do, but we are getting closer to putting these projects completely behind us and focusing solely on our high quality new core backlog.

During the quarter, we added approximately $151 million in new awards and contract adjustments. This was led by a $77 million bridge rehab contract in our transportation segment for a private client in the Pacific Northwest and a $53 million water resource contract that are civil segmented in Texas.

Bringing our total backlog to approximately $2.26 billion. All indications are that the robust demand for infrastructure will continue for years to come. Our outlook on the market remains positive. We continue to successfully execute our strategy of targeting short duration, high margin projects in both public and private markets. In private markets, we are seeing strong demand for large scale data centers.

We have been carefully evaluating data center opportunities over the last couple of years, maintaining a highly selective and disciplined approach to ensure we remain within our core capabilities. Many new data center sites are very large and are being built in rural areas, resulting in an ongoing need to build additional water resources to support these buildouts. Utility packages on the data center projects are getting larger, and the margin of potential is very attractive.

We are in discussions on several data center opportunities to leverage our utility and site development capabilities. The construction activities we are pursuing are very similar to the scopes in our existing core backlog and match our teams expertise very well. We expect to convert some of these opportunities to backlog in the coming quarters. While data center projects present a unique opportunity, our strategy remains the same and we will continue to pursue a mix of private and public market opportunities.

We continue to see strong demand for public market projects from federal, state and local levels. The IIJA is well underway in driving strong demand for public market projects. Significant opportunities remain across our core business with hundreds of billions and authorized funds still to be spent under the IIJA. At the state level, last week, Texans voted in favor of Proposition 4, the amendment proposed by the House Joint Resolution 7, which will allocate $20 billion to the Texas Water Fund over the next two decades.

This is a major commitment to one of our core markets, and we are positioned well to help expand Texas' water resources. Upcoming public market opportunities include numerous water resource projects in the Midwest and the Southwest. We are also excited about several bridge opportunities in the Southeast. We have great visibility into future demands. We will continue to be focused on improving margins first, then growing backlog and revenue.

We will ensure we have the right resources to build the work and continue to pursue projects that align with our core capabilities.

In closing, as we reflect on the quarter, we have a similar message to the past few quarters. While we have more work to do to get the legacy projects completely behind this, our core business is performing well. As we wrap up legacy projects, we expect to deliver strong and consistent results with robust opportunities across our end markets.

We expect to win our fair share of high margin projects. We maintain confidence in our long-term outlook and future direction of our business. With that, I'm now starting to call over the key for a financial update.

Thank you, Frank. Good morning, everyone. I'll discuss an overview of our financial performance during the third quarter for 2025.

You can find additional details and information in the financial statements, footnotes and management, discussion and analysis that were filed on Form 10Q last night.

Revenue for the quarter was 213.3 million, up 40 million from the same period in 2024. Revenue in the quarter was lower than anticipated due to the timing of new project starts, impacts from dispute resolutions and project delays.

Whereas profit was 3.3 million, an increase of 54.4 million from the same period in 2024. Gross profit margin in the quarter was 1.5% compared to negative 29.5% in the prior year. Selling general and administrative costs in the third quarter were 14.6 million, a decrease of 2.9 million compared to the same period in 2024. The decrease was primarily due to lower compensation expenses as well as a reduction in legal and professional fees compared to the same period in 2024.

Interest expense for the quarter totaled 9.2 million, up 1.6 million from the prior year. This increase was primarily driven by an increase in interest rates on external borrowings. We anticipate interest expense to average approximately 9.5 million per quarter going forward. Income tax expense was 57.2 million for the quarter compared to income tax benefit at 17.1 million in the same period last year.

Included in this quarter's income tax expense was a 57.3 million one-time non-cash expense from evaluation allowance placed on our net deferred tax assets. This evaluation allowance is required under US GAAP. However, this does not limit utilization of the respective tax assets in the future. We expect our effective tax rate for 2026 to be in the 15 to 20 percent range based on current forecasts.

We reported a net loss of 75.2 million or net loss of $1.39 per share in the quarter compared to a net loss of 54.7 million or a net loss of $1.14 per share in the same period last year.

It is important to note that approximately $1.06 per share of this quarter's loss was due to the one-time non-cash tax expense related to the evaluation allowance.

In the third quarter, we produced even the negative 3.5 million compared to even the negative 58.7 million for the same period in 2024. Now the touch on segment performance for the quarter. Our civil segment had revenue of 99.5 million compared to revenue of 55.8 million in the same period in 2024. Our civil segment gross profit was 10.4 million, an increase of 28.7 million from the same period in the prior year.

As a percentage of revenue for the quarter, our civil segment had gross margin of 10.5 percent compared to negative 32.8 percent in the same period in 2024. In the quarter, we had unfavorable adjustments from dispute resolutions on two projects in our civil segment that impacted revenue and gross profit by $8 million. These resolutions resulted in cash collections of approximately 6.5 million in the quarter with an additional 3 million expected in the coming months.

For the quarter, our transportation segment had revenue of 113.9 million, a decrease of 3.6 million from the same period in 2024.

Our transportation segment had a gross loss of 7.2 million, an increase from a gross loss of 32.8 million in the same period in 2024. As a percentage of revenue for the quarter, our transportation segment had negative gross margin of 6.3 percent compared to a negative gross margin of 27.9 percent for the same period in 2024.

The materials and paving business line contributed 22.9 million to revenue and 3 million in gross loss in the third quarter. At the end of the quarter, we had approximately 89 million of remaining M&P backlog. This is down from 99 million at the end of last quarter. I'd like to highlight that one M&P project's contract value was increased by 21 million in the quarter.

This was a result of ongoing discussions with the owner and there's a positive outcome as we expect to get paid more to complete the remaining scope of work on this contract.

Last quarter, we noted that we expected three of these projects to tail into 2026. We now expect the final four paving projects to be increased by the end of the quarter. The transportation segment margin was also impacted in the quarter by an unfavorable adjustment of 7 million on a legacy purge project in the Midwest.

The project experienced delays and has significantly impacted results over the past several years. Our remaining non-M&P legacy backlog is now 32 million down from 40 million last quarter, excluding the impacts of from M&P unfavorable adjustments in our non-M&P legacy backlog and dispute resolutions, gross profit in our core business produced double-digit margins.

We expect legacy projects to have less impact on the overall results in 2026 as we continue to wind down these projects.

We finished the quarter with approximately 2.26 billion of backlog of which we expect to burn approximately 39% over the next 12 months.

Now to touch on the balance sheet. We are exploring debt solutions that would provide us with an offer flexibility and accelerating work on the legacy backlog. We are currently in discussions and expect to be able to close a facility before we report next quarter's results. We will share more details as this process progresses.

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

Good morning, Adam. I want to start with your comment on data centers. I was curious if you were looking at anything else on the private side. And what is the scope that or how big are those packages potentially for you?

So what we're looking at Adam is, you know, stuff that's in our core market. So there are some larger data centers out there. You know, the data centers are obviously a very active market right now. Just tons of opportunities across the country. You know, the past couple of years, these developments have just exploded. You know, so we've spent time getting our arms around the scopes and, you know, they're very similar to what we've done for public owners.

But now it's just just for a slightly different customer base. The opportunities on the public market side are still really strong. You know, we see data centers as an opportunity to supplement our existing work and really turn, you know, turn some cash quickly. So we're excited about the potential and hope to talk more about these here soon. As far as other, you know, work on the private, private side, you know, we've always had a mix of private and public, you know, more heavily weighted, you know, to the public sector.

But there's a lot of opportunities with, you know, new manufacturing coming to the U. S. that we're looking at as well. But our scope specifically would be, you know, not water, wastewater, site development, type of market on those developments. Got it. And then, so you took an $8 million hit to gross profit from that. But that's going to lead to 9.5 million in cash. So not a terrible trade off there.

I'm just here. And Frankie sounded like you had a little better sense and you had a little bit more momentum or it seemed like you had a higher confidence that maybe a lot more of these legacy claims will get settled, call it in the next 12 months. Is that fair to say?

Yeah, you know, we've made, you know, we've made some small progress this quarter on some of the smaller disputes, which leads to some optimism. It's good to see, you know, our contract assets, balances coming down. But now we're, you know, these things can't wait to be settled forever. We're at the table on numerous, numerous claims. And so yes, we expect to see some progress, some real progress over the next 12 months.

And then just a last one for me. The project delays that impacted you in Q3. Have those projects started in Q4?

And I know you're not getting guidance, but just curious if you kind of expect to end the year on a higher note.

Yeah, so as it relates to some of the delays that we've encountered, you know, we would, so it's delays. And then we also had some derecognition and the revenue just due to some of the adjustments that we'd be talking the quarter. I would expect a Q4 to be, you know, pretty similar to Q3 with maybe a slight uptick.

I'll turn it over.

Thanks, Adam.

Thanks. Wanted to talk about the free cash flow outlook for the fourth quarter. Just given the decrease in the contract assets, which is certainly notable, but also the increase in the receivables. I believe you called out the 3 million in cash collections expected in the fourth quarter, but, you know, just I keep looking at that increase in receivables and just trying to, you know, see if you could help us out with kind of a finer point on free cash for the fourth quarter.

Absolutely. So we did generate positive cash flow from offs in the quarter and we're there in recent Q4 and Q1 of 2026, but we do expect to see some positive cash flow overall from offs in 2026.

Well, you broke up a little bit there. Could you just repeat that?

You broke up as well. I couldn't hear you.

Yeah. Now, civil margins have been strong and we expect this to continue. You know, this quarter, civil margins were 10 and a half percent, which included impacts of $8 million from dispute resolutions. If you look, year to date, gross margins are roughly 17%, which is very strong, so overall we're excited about the success we're seeing in the civil market and we really like those $50 to $150 million quick-turning cash projects on the civil side and that the bill that Texas passed, you know, adding another $20 billion, you know, it's critical water projects. Rips should be, should provide some great deal with for us.

But it'll take you through that $40 billion to be deployed.

No, no, no. You're fine.

Yeah. So, so there are, you know, quite a few tunnel jobs out there. You know, they're, we feel like we have a significant advantage producing our own tunnel boring machines in some cases and we have a, we have a really good fleet, you know, probably one of the largest fleets in, in the United States of existing TBM. So hopefully we're able to really take advantage of the tunnel opportunities bidding, you know, over the next 12 to 24 months. So excited about that, Marjorie, as well.

Thank you.

Yeah. So, so for us, Christian, we're looking for data centers that are, that are close to where we have existing projects, you know, in that water, water waste, water market. But you know, you can see projects as small as probably 15 to $20 million, you know, and as far as the top end, you know, we're going to steal the market out, you know, around that 50, 75 million dollar range maybe to start, but they could make it grow from there.

Yeah. So, you know, 25, as we talked about was, was kind of that, that reset year, we're really going to focus on cleaning up legacy projects, you know, and use that as a springboard into 2026, getting into more of our core work. And then 2027, as you stated, being completely into our core market. And, and we're excited to really improve profitability and.

In the years to come.

Thank you.

Thanks, everyone, for joining us. Look forward to speaking with you all next quarter.