Southland Holdings (SLND) Q4 2024 earnings call transcript

Good morning everyone and welcome to the Southland Fort Quarter and Full Year 2024 conference call. This is Alex Murray, Director of Corporate Development and Investor Relations. Joining me today are Frank Ronda, President and Chief Executive Officer, and Cody Galarvis, Executive Vice President and Chief Financial Officer.

Before we 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 Mitigation 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 controls.

Southland's actual results and financial conditions 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 need to take any duties to update these statements.

For a discussion of some of the risks that could affect results, we see the risk factor section will form 10k for the year ended December 31st, 2024, that was filed with the FCC last night.

We also refer to non-gapped financial measures, and you will find reconciliation of these non-gapped financial measures 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 fourth quarter and four-year 2024 conference call. As we reflect on the year, I'd like to highlight and commend how our team has continued to push forward despite challenges, delivering key projects, maintaining operational excellence, and reinforcing our commitment to safety and community impact. We have successfully delivered several high-profile projects during the year.

We completed the SR80 Bridge in Palm Beach, Florida, also known as the Marlago Bridge. We also recently opened the East Adam Bridge in Connecticut, improving connectivity and regional access. We completed a cruise destination project for a private entertainment client in the Caribbean, which demonstrates our ability to deliver complex infrastructure that enhances local economies. In our Water Resources Group, we continue to expand our reach with the completion of the San Juan Lateral Project for the Bureau of Reclamation, providing essential water infrastructure to support communities in need.

We also completed the Romeo Arms Lift Line project in Detroit, Michigan. Beyond our technical expertise, our strong safety culture makes these successes possible. I'm pleased to report that multiple projects, including Ashbridge's Bay Outfall Tunnel, SELA 26, and No Creek Drainage Relief Tunnel, have each surpassed 1 million safe work hours without a lost time incident. A testament to the dedication of our teams and our unwavering commitment to safety as the foundation of everything we did.

Additionally, this year marked the 50th anniversary of two of our subsidiaries, a milestone that not only honors our rich history, but also the strong foundation. We have established over many decades, which sets us up well to succeed for years to come. While this has been a demanding period, our teams resilience and ability to execute at a high level have positioned us for future success. I want to thank our employees and stakeholders for their commitment and continued trust in us.

With that, let's turn to the quarter's results. Fourth quarter revenue was $267 million with a gross profit of $8 million, excluding unfavorable adjustments from the M&T business and certain legacy projects. Our gross profit in the quarter was $35 million. The unfavorable adjustments negatively impacted our results by $27 million. The unfavorable adjustments were driven by dispute resolution and increased completion costs on certain legacy projects.

At the end of the quarter, we had approximately $163 million remaining M&T backlog and approximately $83 million of non-M&T legacy backlog. We are encouraged by the continued strong performance of our new core projects, which delivered double digit margins in the quarter. We ended the quarter with $2.57 billion of backlog. I'd also like to note that we currently have approximately $750 million of pending alternative delivery contracts, not included in backlog, for which preconstruction phases are already underway.

Notable alternative delivery projects include the earthquake ready Burnside Bridge in Portland, Oregon, and phase two of the North End Treatment Plant in Winnipeg. We are currently working on phase one of this project.

Our new core work makes up approximately $2.3 billion of backlog. We have several new core projects that we expect to ramp up this year and create a more significant impact on results. This includes the $600 million Shands Bridge in Florida, the $410 million Robert F. Kennedy Bridge Rehab in New York, and the $243 million US 19 project in Florida, which we are in the early stages of their project life cycle.

We also have several quicker burn water resource projects with strong margins that we expect to have a meaningful impact on 2025 results.

We booked approximately $105 million in new awards during the quarter. This included a $60 million wastewater treatment plant in the Southwest. Several water resource emergency projects and a broadband project for a private client. We continue to see a large pipeline of opportunities, particularly from our longstanding federal, state, and local clients. The ongoing capital infusion from the infrastructure investment and jobs act combined with historically strong state and local infrastructure programs. Providing the favorable tailwind for our business of the years ahead.

Texas and Florida remain at the forefront of state driven infrastructure investment with record setting funding levels aimed at addressing critical transportation, water, and resilience needs. Given the sustained economic growth and population expansion in these areas, we anticipate continued prioritization of large scale infrastructure projects. With our established presence and deep expertise in these key markets, we are well positioned to capitalize on these opportunities.

In recent years, the timing of new project awards has been somewhat uneven with the tendency to ramp up in the back half of the year. We anticipate a similar pattern this year as project timelines and funding cycles influence the flow of opportunities. The demand in our core markets remains robust, driven by ongoing infrastructure needs and strong public and private sector investments.

Given its favorable environment, we remain disciplined in our approach, prioritizing projects that align with our strategic goals, operational strength, and margin expectations. Our extensive pipeline of opportunities positions as well to secure a healthy share of projects while maintaining a selective quality over quantity approach to bidding. As we move forward, we are confident in our ability to capitalize on the right opportunities and drive long term success.

We are also tracking the $600 million Jordan Lake Water Supply Program in North Carolina and additional phases of the Winnipeg North End Treatment Plant in Canada. In our transportation segment, we also expect a bit on the Verasano Narrows Bridge Rehab in New York and the Washington Bridge in Providence, Rhode Island. During the fourth quarter, we also successfully executed another strategic initiative to bolster our balance sheet.

We converted $20 million of certain promissory notes due to myself and the two other founders of Southland. Tim Nguyen is leaving to come and stop. We feel strongly about the long term potential of Southland. This transaction reinforces our confidence in the business while improving the balance sheet.

In closing, our strong new core backlog pipeline and the continued strong execution of new core projects give us confidence in our long term trajectory. We are focused on delivering operational excellence, maintaining a disciplined approach to project selection and driving sustainable profitability over the long term. As we move into 2025, our strategic priorities remain clear, executing our core projects with precision, winding down legacy work and strengthening our position in our core markets.

With a talented and dedicated team and a favorable industry environment, we are well equipped to deliver long term value to our stakeholders. With that, I will now turn the call over to Cody for a financial update.

Thanks Frank. Good morning, everyone. I will discuss an overview of our financial performance for the fourth quarter and full year ending 2024. You can find additional details and information in the financial statements, footnotes and management, discussion and analysis that were filed with the Securities and Exchange Commission on Form 10K last night. With respect to fourth quarter, revenue was $267 million, down 49 million from the fourth quarter of 2023.

Gross profit for the fourth quarter was $8 million, down from 21 million for the fourth quarter of 2023. Gross profit margin in the fourth quarter of 2024 was 3% compared to 6.7% in the fourth quarter of 2023.

Selling general and administrative expenses for the fourth quarter were $16 million, a decrease of $4.2 million compared to the fourth quarter of 2023. This reduction was primarily driven by reduced compensation expense.

Interest expense for the fourth quarter was $9.6 million, an increase of $3.9 million compared to the fourth quarter for 2023. The increase was attributable to higher debt balances and elevated borrowing costs.

As previously discussed, we expect interest expense to remain in the $9.5 million per quarter range going forward. Income tax benefit was $14 million for the quarter compared to an income tax expense of $2.9 million in the same period last year. This was primarily driven by changes in our effective tax rate, the recognition of certain deferred tax liabilities, and the cumulative catch up impact of adjustments to forecasted versus actual year end results.

More information regarding the changes in our effective tax rate, valuation allowance adjustments, deferred tax liabilities, and the impact of prior tax election changes can be found in our Form 10K filing.

We reported a net loss of $4 million or negative $0.09 per share in the fourth quarter, compared to a net loss of $6 million or negative $0.12 per share in the fourth quarter of 2023. In the fourth quarter, we produced EBITDA or earnings before interest, taxes, depreciation, and amortization of negative $3 million compared to EBITDA of $9 million for the fourth quarter of 2023.

Now to touch on segment performance for the fourth quarter. Our civil segment had revenues of $104 million, a decrease of $4 million from the fourth quarter of 2023. Our civil segments gross profit was $8 million, a decrease from $25 million from the fourth quarter of 2023. As a percentage of revenue for the quarter, our civil segment had gross profit margin of 8%, compared to 23% in the fourth quarter of 2023.

For the quarter, our transportation segment had revenues of $163 million, a decrease from $208 million from the fourth quarter of 2023. Our transportation segment's gross loss was $0.4 million, an improvement from a gross loss of $3 million in the fourth quarter of 2023. As a percentage of revenue for the quarter, our transportation segment had a gross profit margin of negative 0.2%, compared to negative 1.6% for the fourth quarter of 2023.

Within the transportation segment, the M&P business line contributed $36 million to revenue and approximately negative $8 million to gross profit in the fourth quarter. Our core operating result in this segment, which excludes M&P, would have been $127 million of revenue and $8 million of gross profit for a gross profit margin of approximately 6%.

Consolidated core results in the quarter, which excludes M&P, would have been $231 million of revenue and approximately $15 million of gross profit for an approximate gross profit margin percentage of 6.5%. Now to touch on results for the full year ended December 31, 2024. Our full year revenue was $980 million down from the full year 2023. Gross profit for the full year ended December 31, 2024, was negative $63 million, a decrease from a positive $36 million from the full year 2023.

Our gross loss margin was negative 6.4% in 2024, compared to a positive 3.1% in 2023. SG&A expenses for the year ended December 31, 2024, were $63 million, a decrease of $4 million compared to the prior year. The decrease was primarily driven by a decrease in compensation related expenses. SG&A expenses as a percentage of revenue were 6.5% for the year ending December 31, 2024, compared to 5.8% for the full year 2023.

Interest expense for the year ended December 31, 2024, was $30 million, an increase of $10 million, compared to 2023.

The difference was attributable to increased borrowing costs and higher debt balances. We reported an income tax benefit for the year of $47 million on a pre-tax loss of $152 million, which represents an effective tax rate of 31%. This compares to a tax benefit of $9 million on a pre-tax loss of $27 million, also for an effective tax rate of 31% in 2023.

As discussed on prior calls, our 2023 tax position was impacted by numerous revocations of subchapter S elections, which were no longer available to us. More information around the revocation of the S election, valuation allowance changes, guilty inclusion, and more can be found in our recently filed form 10K. On a go-forward basis, we expect the tax rate to be in the 20-24% range, depending on certain tax credit, non-deductible items, and certain state, local, and international taxes.

We reported a gap net loss of $105 million, or negative $2.19 per share in the year, compared to a net loss of $19 million, or negative $0.41 per share last year. For the year ended December 31, 2024, we reported an adjusted net loss of $105 million, or negative $2.19 per share. This compares to an adjusted net loss of $39 million, or negative $0.82 per share in 2023, after backing out other income from changes in the fair value of an earn-out liability for 2023, offset by transaction-related expenses.

Now to touch on our segment performance for the full year ended 2024. For the full year ending December 31, 2024, our civil segment had revenues of $323 million, a decrease of $14 million from full year 2023. Our civil segment grossed profit for the year with $17 million, a decrease from $52 million from full year 2023. As a percentage of revenue for the full year ended 2024, our civil segment had grossed profit margin of 5.2%, compared to 15.3% for 2023.

For the full year ending December 31, 2024, our transportation segment had revenues of $657 million, a decrease of approximately $166 million from full year 2023. Our transportation segment grossed loss for the year was $80 million, compared to a gross loss of $16 million from full year 2023.

As a percentage of revenue for the full year ended 2024, our transportation segment had grossed profit margin of negative 12%, compared to negative 1.9% in 2023. Within the transportation segment, the M&P business line contributed $101 million to revenue and negative 83 million to gross profit in 2024. Our core operating results in this segment, which excludes M&P was $556 million of revenue and $3 million of gross profit.

Consolidated core results in the year, excluding M&P would have been $879 million of revenue and $20 million of gross profit. As of December 31, 2024, M&P backlog makes up approximately $163 million and non-M&P legacy work makes up approximately $83 million of backlogs. That differently, our legacy and M&P backlogs makes up less than 10% of our total backlogs, and we are optimistic about the results expected to be produced from $2.3 billion of new core backlogs.

Turning to the balance sheet, as of December 31, 2024, we finished the year with net debt of $213 million, inclusive of cash and restricted cash of $88 million. We ended 2024 with just under $2.6 billion in backlogs, and we expect to burn approximately 39% of this backlogs in 2025.

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

Morning, Adam. Hey, Cody, I just wanted to follow up on or start where you left off, which is the 39% of the backlog burns in 2025. Curious how you see the book and burn work trending this year? Yeah, so I'll start and then let Frank lead into where he sees the bidding activity going. Obviously, we had a lower lower than one book to burn ratio in Q4, but are excited about the $100 million that we did pick up. We do expect to see that backweighted cadence that we've seen in prior years and are looking forward to announcing some impressive wins in 25.

Yeah, Adam. And I guess, you know, this is a place to kind of address the, you know, maybe why not more awards as we see the market, you know, is really healthy. And we don't see the demand slowing anytime soon. You know, we've been winding down a business unit that was over 30% of our backlog at our focus was on completing, you know, this transition and returning to higher profitability.

We're adding work in a disciplined manner, ensuring that we have the right resources for the projects and prioritizing high quality backlog in our core markets, where we have historically poor performed very well. Demand is really good and we expect this trend to continue. We're confident in winning our fair share of new projects, and we remain committed to protecting margins rather than pursuing growth at any cost. The timing of these new awards, you know, could be can be a little bit uneven, and we expect new awards to really pick up in the back half of the year.

We also have approximately $750 million in pending alternative and delivery contracts and, you know, we're confident that these will convert into in the construction awards.

Got it. And then just thinking about how the street and myself are going to model EBITDA this year. As we sit here in March, I mean, it's the expectation for the full year that we'll have positive EBITDA and maybe you can comment on how you see the quarterly cadence, shake it out.

Yeah, so I'll echo some of what we mentioned on our last call, Adam, is, you know, we expect to return to positive EBITDA numbers by the end of this year. Whether that means, you know, Q1 looks positive, Q2 looks positive. They're leading to your question. There are some unknowns around the cadence of that. But with the decreasing legacy and M&P backlog, which is down to less than 10%, what we've picked up in new work and potential and expected new awards going into the end of the year, we were looking forward to a much stronger finish to 25.

Great. And then just lastly, for me, the process of bringing down contract assets, does that really ramp up as 2025 progresses?

So there's a couple of different ways to look at that question, Adam. I want to address it from both the contract asset side in the context of the net contract position side, which takes out contract liabilities. When you look at where contract assets has been over the last couple of years, we've had meaningful decreases with collections, you know, as well as some of the unfortunate profit trades that we've had. But I really want to highlight the significant growth that we've seen in contract liabilities, which offsets that net balance sheet position.

So looking at it from a net perspective, you know, we're slightly over $200 million of net contract position at year end. So I bring that up to say, to prove, to make two points. The first being, you know, everything that Frank has commented and we've shared and been talking about publicly on new work, having positive upfront cash flows is being realized.

But then also to directly answer your question, there can be an increase in contract assets as we pursue closing out some of these troubled jobs where there are where there are claim pursuits. So want to be transparent on both sides of that equation.

Yeah, and I think on the on the claims Adam, you know, most of these, these claims were on jobs that happened in 2017 18 and 19. And so, yeah, we're at the table and a lot of those claims and, you know, we continue to work through and make small progress on settling the legacy claims.

Not a no major updates, I guess, on larger claims to report this quarter. But we do expect a significant amount of cash flow from these claims in the coming quarters. And that should take that number down.

Thanks, guys. Good luck in Q one. Thanks Adam.

Good morning. Maybe just start a good morning on the civil segment, you know, solid performance there at a nice sequential rebound from the third quarter. Can you maybe just talk about the drivers of the gross profit there? And I guess you did realize less issues on non M&P legacy work in the fourth quarter compared to the third quarter.

Yeah, I guess first on the civil margins, you know, really excited about the civil where we picked up some some great. Civil projects over the over the last couple of quarters and. You know, unfortunately we had an unfavorable ruling on a dispute on a legacy civil project that significantly impacted results this quarter. But the core work continues to produce strong double digit margins. We also continue to pick up smaller quick burning civil projects that are producing strong margins and just feel really, really good about. About where we're at in the civil sector.

On the legacy updates, you know, our non M&P legacy backlog has been reduced to around $80 million. And a significant portion of the challenges we faced in this portfolio during 2024 stems from a bridge project in the Midwest. We recently achieved the major miles milestone by opening this new bridge. There's some demolition work that remains, but reaching this milestone was a significant step forward for us and it meaningfully reduces the risk of further project made on this project.

Got it. That's helpful. And then, you know, that non M&P legacy number went down by 22 million compared to the last quarter. Is that is that due to the unfavorable ruling on the dispute you just mentioned, or is that due to the bridge project in the Midwest? Just trying to think about that number there.

Are you speaking specifically to the civil segment, Julio?

Okay.

So we were down for. Yeah, so. So five last quarter. Yeah, so for progressing work. And as time moves on, that number is going to continue to dwindle from a from a backlog perspective. And then if I understood, maybe a nuance of the other part of your question, there's some additional detail into the profit activity and the M&P five last night.

So we do expect to complete the majority of the non legacy M&P work by the end of 2025. There is one project that can tail into 2026 that we're working to accelerate, but no additional commentary beyond that at this time.

Yeah, so we certainly do expect to produce strong cash flow from operations in 25 as you see that that turn over time happening. There's definitely going to be seasonality that you see with cash flow more weighted towards the back half of the year. Think of the meaningful driver behind that is going to be new core project contribution that continues to contribute at very healthy margins, but can be swayed by dispute resolution on some of our legacy projects.

But all of that being said, we expect to generate strong cash flow from operations this year.

Good morning, Christian. Great. Great question. Listen to, you know, kind of listen to the administration speech last night and heard some some really positive things in there and, you know, some things that they got you thinking. But the good thing about the kind of work that we do is it benefits a lot of communities and both sides of the aisle and we all know how critical this work is for our country. You know, we put it off for a long time.

As we sit today, we do not, you know, we don't expect any recent spending cuts from from those to materially impact our business. In fact, you know, we're we're optimistic about the ideas coming from this administration about cutting down and some of the red tape to get these projects off the ground. You know, if they're able to come through with that, it'll be beneficial to our business. And we're in the we're in the middle innings of IIJ spending and we expect that to be a tailwind for our business for many years to come.

And even at the state level of Texas and Florida just continue to have historic levels of spending. You know, overall, we just feel really good about the pipeline and opportunities out there and expect to win our fair share of them. You know, the other, the other things that, you know, we heard last night were manufacturing and bringing some of that back and, you know, maybe some tax cuts on that end. But one thing that we do, Christian, that a lot of groups don't do is, you know, we manufacture our own TBM's. We manufacture our own steel support, you know, some gates, false work. And if, if there were to be, you know, some, some cutbacks and tariffs, I think that's a, that's an avenue that we have a real advantage on as well.

Thanks, Chris. I appreciate it.

Yeah, thanks. Good morning. You know, on tariffs, the good thing about a majority of our projects is we're required to procure made in America materials already. So we're already purchasing products in the US. And we really have minimal cross border exposure. We, we try to lock in our material pricing large, large purchase orders at the beginning of projects, but, you know, we're monitoring the new developments here and taking it into consideration on new bids.

Overall, we do not expect this to have a material impact on the business, you know, of course, on, on some materials and parts for equipment, you know, we've got a little bit of exposure out there. But again, don't expect it to have a material impact on the, on the business at this point.

Yeah, a couple of things, you know, obviously we had a, you know, we had a couple of storms kind of come through.

You know, we've had some unusual weather pattern, I guess, that has affected us a little bit. But, you know, as far as seasonality, you know, we expect a, we expect an uptick in new work starts and really getting into some of the larger projects. You know, that I kind of touched on in the remarks, like the Shans Bridge and the Kennedy Bridge there in New York to really start producing some material results later on in the year.

And I would say, I would say that what we can continue to and expect to continue to be impacted by weather and various geographies in which we work. But I think if you look at the dispersion of projects that we have currently active, we don't, we don't expect all areas of the country in North America that we work in to be hit at the same time. So, you know, hopefully there are minimal disruption across the industry for us and for all of our competitors with respect to weather.

But to the extent, you know, there likely will be, you know, we believe we'll certainly have continuing operations in other areas that are unaffected.

Brett, about the last thing that I expected going into this year was 11 inches of snow on the ground in Beaumont, Texas and Lake Charles, Louisiana. It was, it was quite a scene on our two projects out there.

Thanks, everyone, for joining today and thanks for your interest in Southland and look forward to talking again next quarter. Have a great day.