Southland Holdings, Inc. Q2 FY2025 Earnings Call

Good morning. My name is Tina, and I will be your conference operator today. I would like to welcome everyone to the Southland Second Quarter 2025 Earnings Conference Call. Alex, you may 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 Renda, President and Chief Executive Officer; and Keith Bassano, 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 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 a discussion of some of the risks that could affect results, please see the Risk Factors section of our Form 10-K for the year ended December 31, 2024, that was filed with the SEC on March 5, 2025, and discussion on Form 10-Q for the quarter ended June 30, 2025, that was filed with the SEC last night. We will also refer to non-GAAP financial measures, and you will find reconciliations 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 US 1 Jupiter Federal Bridge, a project that will improve transportation for the region. We also successfully started driving the first 60-inch piles for the Shands Bridge project, a critical step forward on the new bridge over the St. John's River. In Toronto, our team successfully flooded the Ashbridges Bay Outfall Tunnel, a major achievement that marks the nearing completion of this multiyear 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 Wolf 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 of $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 impact 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 disciplined bidding strategy and our team's 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 2 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 in the back half of this year. So far in the third quarter, we have executed a $77 million contract in our Transportation segment for a bridge rehabilitation 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 are 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 are 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 if passed in November by voters, will unleash $20 billion for water infrastructure development projects across the state over the next 2 decades. This is a significant investment in one of our core markets. We are well positioned to help rebuild and expand Texas' 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 a strong pipeline of opportunities from private and public clients, we have excellent visibility into future demand. 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 and Phase 3 of the Winnipeg North End Sewage Treatment Plant. We are currently constructing Phase 1 of the program and are in the preconstruction phase of Phase 2 of the program. We also expect to propose on the ALCOSAN 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, and 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 10-Q last night. Revenue for the quarter was $215 million, down $36 million from the same period in 2024. Gross profit was $13.4 million, an increase of $53 million from the same period in 2024. Gross 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 preconstruction 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, nondeductible expenses and state and local tax adjustments. We reported a net loss of $10.3 million or a net loss of $0.19 per share in the quarter compared to a net loss of $46 million or a net loss of $0.96 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 let's 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 a 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, a 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 & 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 M&P 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 3 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 M&P legacy backlog is now $40 million, down from $59 million last quarter. Excluding the impacts of M&P and unfavorable adjustments in our non-M&P legacy backlog, gross profit in the quarter in both Transportation and Civil segments produced 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.

Our first question comes from Kevin Gainey with Thompson, Davis.

It's Kevin on for Alex. Frank, you mentioned the two awards that were secured at the beginning of Q3, and you also shared some potential opportunities for the future. I'm curious, are these opportunities more focused on the second half of the year, or could they extend into 2026?

Yes, we're excited about the second half. So there is a lot coming in the second half, but also in 2026. 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.

That sounds good. And then Civil margins, if you guys can maybe touch on how you feel that may trend in the second half of the year given the strong first half?

The 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, I'd expect Civil margins to be in the mid-teens. We have a great deal of confidence in both the Civil and Transportation segments. We see internally on a job-by-job basis, how our new core projects are performing and the strong margins in our backlog. However, some large unexpected swings from disputes and older projects have overshadowed these results. And it's going to 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.

I like the sound of that. And then just a quick one on cash flow. What are you guys thinking for operating cash flow in the back half? And is there any chance that could swing positive Q3, Q4?

Yes. No. So speaking of cash flow, 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 the peak construction season right now.

And your next question comes from the line of Christian Schwab with Craig-Hallum.

So my first question has to do with the commentary regarding the higher-margin short-duration work. Can you just elaborate on that a little bit further, the increased opportunities that you're seeing there? And is that something that you expect to continue on a multiyear basis? Or are you just being opportunistic in the short term?

We see significant opportunity in the civil market currently, Christian. There are numerous projects available in key markets with owners we have previously collaborated with and built strong relationships. Additionally, on the CMR side, there are many prospects as well. We view this as a near-term opportunity and plan to concentrate on those higher-margin, short-duration projects. Furthermore, we believe the robust civil market will persist into next year and beyond.

Great. We haven't talked about this in a while on our conference calls, but now that we're nearing the completion of the necessary work and have many business opportunities ahead, with a focus on increasing margins rather than significantly boosting revenue growth, what operating margin range do you believe the company can achieve beyond 2026 as the three projects come to an end?

We haven't bid in the public market for an extended period of time, Christian, but we've been doing this for a couple of decades now, and we couldn't be more excited about the long-term opportunities. We look at some of the programs that are out there and the infrastructure needs here in North America. And there are so many opportunities for us to pick up meaningful projects that will increase our margin. So we're going to stay disciplined. What we've done and gone through the past couple of years really should set us up for long-term success. So we have the right crews available. We have tailwinds in our business and really expect to increase our margins and hopefully, those mid-teen Civil margins and low-teen Transportation margins will be out there in the near future for us.

Fantastic. And then my last question, can you give us an update on potential timing or resolution in some form or fashion of the massive amount of unresolved contracts that are in dispute?

Yes, we are making gradual progress in resolving legacy claims, but there are no significant updates this quarter regarding larger claims. We are actively working to collect all the funds owed to us and anticipate positive cash flow from these claims in the upcoming quarters. It is important to note that most of this effort began around 2017, 2018, and 2019, so we are closer now to reaching agreements than we were last quarter, and some owners are now engaging in discussions. We won't drag this out indefinitely; we will continue to advocate for every dollar we have rightfully earned, especially considering how many projects we have had to self-finance that the owners are benefiting from.

And your next question comes from the line of Julio Romero with Sidoti & Company.

Frank, my ears perked up a little bit when I heard you mentioned Civil segment's expertise on executing complex high-value projects. Can you give us a refresher of Southland's value proposition with regards to complexity and handling complexity and what you guys bring to the table?

Absolutely. I think we're a very unique company 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 marine work. And we pride ourselves on cross-training 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 we'll manufacture some of our own TBMs, 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 1 or 2 bidder situations on these civil projects.

And those are tunnel boring machines.

Helpful. Historically, you guys have been about 80% tied to public spending in terms of the projects you target. Have you seen any change in the pace of awards on the public side? And you mentioned IIJA funding. How much runway do you think is left for projects you would target that would have IIJA funding and kind of help us think about Southland's exposure to federal versus state and local and other funding sources?

Yes. So first, on the IIJA question. I think we see less than 50% of the IIJA money has been spent to this point. We kind of mentioned in the prepared remarks, it really takes some time for these projects to work through the design and permitting before people like us, the contractors, get involved. We're optimistic that this funding will be reauthorized next year. We mentioned the resolution in Texas, which will 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 a bit for decades. You can look at the different end markets we are in, and the stats are just incredible. Roughly 7% of the nation's 623 bridges are in poor condition. 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, meaning there's a likelihood of harm to residents if the dams were to fail. You can see stats like this across different infrastructure end markets, and they're really hard to believe. So the bottom line is, we believe it's critical to the country of success that we improve the aging infrastructure. So we feel there will be sustained long-term demand for what we do. And what we do has historically been 80-plus percent in the public market. We're going to continue to focus on the public market. But if private opportunities arise in the same type of work that we do, that could shift over time. But there's pretty good demand on the private side and really good demand on the public side right now in our market.

Great context there. Last one for me, if I may, is just on the Civil segment, given the shorter duration project focus of Civil, should we still be looking at kind of a quarterly high single-digit backlog conversion run rate going forward?

So with the Civil segment, can you clarify the backlog conversion?

Yes. I'm just dividing your sales figure by the backlog and back it into about 9% for this quarter, 8.5% for last quarter. Also, I'm looking at 8% this quarter, 11% last quarter.

Yes. 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 of projects that encountered some impacts during the quarter, 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 significant.

And our final question comes from the line of Jean Veliz with David Davidson.

Could you provide more detail on the revenue impact for each segment due to weather? Additionally, do you expect more revenue catch-up in the third quarter, or will it be more evenly distributed in the second half?

Yes. So let me speak to the revenue decrease here to start. So as I mentioned, we did have those couple of delays, not necessarily weather driven by those two, but those both have been since resolved. We do anticipate revenue to normalize in the back half of the year. Again, we're in peak construction season, so we anticipate certainly a pickup over where we were in Q2. We really don't disclose as far as weather impacts by segment. That said, weather in the South has been wet for us, and we did see some impacts there to the business.

No problem. Based on your comments, should we expect to see at least mid-teens margin for the full year 2025? Am I understanding this correctly?

Yes. We have shown mid-teen margins over the past couple of quarters, and considering the effects from the legacy Civil work, we anticipate seeing that trend continue.

Perfect. No problem. And then just one last question from me. Regarding Transportation and focusing on Materials & Paving, is there a chance to catch up in the second half of 2025 a bit quicker, or do you plan to adhere to the guidance you provided earlier?

So 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, and some projects' final completion date slipped just a bit and expect 3 projects to completely wrap up in the first half of next year. But the impact to overall results continues to get smaller each quarter. If you look at legacy burn, at the end of last year, we had $246 million of total legacy backlog, and we're down to $139 million at the end of this quarter. So we've worked down approximately $107 million so far through the first 2 quarters. We are making good progress, but it will just take some time before this is completely behind us. And we're getting closer every day. We expect most of this to burn off again in the next 2 quarters with a couple of tailing into next year.

And with no further questions in queue, I will hand the call back to Frank Renda for closing remarks.

I appreciate everybody joining. 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 5 years will be significantly different from what we've seen in the past few. Appreciate your support, and we look forward to talking to you next quarter. Thanks, everyone.

Thank you again for joining us today. This does conclude today's conference call. You may now disconnect.