Southland Holdings, Inc. (SLND) Q3 2026 Earnings Call Transcript

Good morning. My name is Krystlyn, and I will be your conference operator today. At this time, I would like to welcome everyone to Southland's third quarter 2026 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during that time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, please press star 1 again. Thank you. Alex Murray, you may begin your conference.

Good morning, everyone, and welcome to the Southland Third Quarter 2026 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 meeting 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 control. Southland's actual results in 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 Factor section of our Form 10-K for the year-ended December 31, 2025 that was filed with the SEC on March 26, 2026. And a discussion in our Form 10Q for the quarter ended September 30th, 2026, that was filed with the SEC last night. We 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 Investors 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 2026 conference call. Before we review the quarter, I'd like to highlight some recent operational successes from our teams. Our Johnson Brothers team was recognized with two 2026 ENR Southeast Best Projects Awards in the Highway Bridge category. Our Jupiter Federal Bridge Replacement Project in Jupiter, Florida was named Best Project, and our Kirkman Road Extension in Orlando, Florida received an award of merit. Congratulations to both project teams on this well-deserved recognition. Turning to the overall business, I'll start with an update on our capital structure and review our third quarter results. Then I will discuss recent awards and the opportunities we see ahead in our markets. In the third quarter, we executed the financial assistance agreement and the second amendment to our term loan facility, which formalized the support our securities have been providing. As we discussed on our last call, a portion of the non-bonding financing provided under the financial assistance agreement is expected to convert into senior non-voting preferred shares. The preferred shares will have perpetual maturity. And are not convertible into any other securities of the company. We have extended the date for issuing the preferred shares to December 18th, and we continue to work closely with the sureties on finalizing the conversion. The sureties continued support reflects confidence in our plan and our execution, and that execution started to show in our results this quarter. Third quarter revenue was $234 million, and gross profit was $21 million, or 9% of revenue. The quarter's performance was driven by our civil segment, which produced a 13% gross margin, led by strong results on a data center project and a wastewater treatment plant project in the Southwest. We produced net income of $34 million in the quarter. Driven by stronger operational performance, lower SG&A expense, a lower interest rate under our amended term loan, and the Washington State Convention Center settlement, which Keith will discuss in more detail. This is an important step, but we still have work ahead as we execute our plan. As part of our larger plan, we continue to focus on bidding with discipline on new high-margin opportunities that align with our core capabilities. We finished the quarter with $1.71 billion of backlog, up from $1.68 billion at the end of the second quarter. With the financing agreement in place, our bidding activity picked up this quarter, and we began converting those opportunities into awards. In the third quarter, new awards were approximately $271 million. This was led by the $196 million Phase III Winnipeg North End Sewage Treatment Plant and a $71 million water pipeline project in the southwest. The market backdrop across our core end markets also remains positive. State and local infrastructure funding continues to translate into active procurement for water, bridge, marine, and tunnel work. At the federal level, the surface transportation authorization under the Infrastructure Investment and Jobs Act expired at the end of September, and Congress extended certain programs through December 11th. While it works on a longer-term reauthorization, the timing of a new bill remains uncertain, but a significant portion of IIJA funding has yet to be spent and should continue to support state and local programs over the next several years. We are encouraged by the bipartisan support for reauthorization, and we believe the funding environment for our core markets remains healthy. We also continue to see strong demand for data center projects, which give us additional strong margin work for our crews, which complements our core water, bridge, marine, and tunnel markets. Over the longer term, we believe that that diversity of end markets positions us well to adapt as market demand shifts. This morning, we announced a $34 million tunnel project award in the Southwest. Along with additional data center work in the Mid-Atlantic and the Southwest. The work in the Southwest is on an existing site of a data center project we announced earlier this year. The final contract value on the data center awards will depend on the amount of work performed as directed by the customer. We expect these to start as short duration, strong margin projects that can grow in scope over time. We are also completing a pre-construction contract with a major cruise facility client in the Caribbean with the intent to negotiate a progressive design build contract in the coming months. We also have several outstanding bids, including two data center opportunities, a water resource opportunity in the southwest, two bridge projects in the southeast, several marine opportunities in the Caribbean. The MoDOT Liberty Bend Bridge Design Build in Missouri, and the Claiborne Pell Bridge Rehab in Rhode Island. We expect to hear back on these pursuits in the coming months. Additional opportunities in our pipeline include the Outer Bridge Crossing repairs for the Port Authority of New York and New Jersey, the Veterans Drive Contract 2 Project in St. Thomas, The GE Booth Outfall Tunnel for the Region of Peel, a transmission pipeline in North Dakota, the Marine Creek Sanitary Sewer Interceptor for the City of Fort Worth, Brook Hollow Interceptor for Dallas Water Utilities, and Duckebush Restoration Project for the U.S. Army Corps of Engineers. We're also tracking multiple bridge dehumidification rehab projects, including the Bronx Whitestone Bridge. Throgs Neck Bridge, San Francisco-Oakland Bay Bridge, and the Claiborne Pell, and multiple other water, tunnel, marine, and bridge opportunities across our core markets. The pipeline remains strong, and we expect to win our fair share of upcoming opportunities. To summarize, we are starting to see positive momentum in the business. We delivered a profitable third quarter and booked strong new awards. Growing our backlog to 1.71 billion. Demand in our core markets with both public and private clients remain strong. We're awaiting decisions on multiple outstanding bids across our end markets that could convert into new awards in the coming months. We are encouraged by this progress, but there is more to do. Our near-term priorities remain completing the preferred share issuance, finishing our remaining legacy projects. Collecting on money we are owed on outstanding disputes, and continuing to convert our pipeline into profitable new awards. With that, I'll 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 third quarter of 2026. 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 in the third quarter was $233.8 million, compared to $213.3 million in the same period in 2025, an increase of $20.4 million, or 9.6%. Gross profit in the quarter was $20.6 million, or 8.8% of revenue. Compared to gross profit of $1.9 million, or 0.9% of revenue in the third quarter of 2025. As Frank described, the improvement was primarily driven by our new core work, including a data center project and a wastewater treatment plant in the southwest, partially offset by negative impacts from a materials and paving project and a water project in the Midwest. Selling, general, and administrative expenses in the third quarter were $13.6 million, a decrease of $1 million, or 6.6% compared to the same period in 2025. The decrease was primarily driven by a $1.9 million reduction in compensation expense, partially offset by an approximately $1 million increase in business transformation expense. Selling, general, and administrative expenses were 5.8% of revenue in the quarter, compared to 6.8% in the third quarter of 2025. Operating income was $7 million, compared to an operating loss of $12.6 million in the third quarter of 2025. Other income net was $32.4 million, compared to $2 million in the prior year period. This included a $28.7 million gain on the extinguishment of a surety payable from our settlement with one of our surety partners related to the Washington State Convention Center judgment. Interest expense in the quarter totaled $4.1 million, a decrease of $5.1 million, or 55.2%, compared to the same period in 2025. The decrease was primarily driven by a $2.8 million adjustment to previously recorded interest expense because the lower interest rate under the Second Amendment applies retroactively to March 17 of this year. On a go forward, we expect interest expense to be approximately $6 million per quarter. We recorded tax expense of $0.5 million for the quarter compared to $57.2 million in the same period last year, which reflected the valuation allowance we recorded against our domestic deferred tax assets in the third quarter of 2025. Net income attributable to Southland stockholders in the third quarter was $33.7 million, or $0.62 per diluted share. Compared to a net loss of $75.3 million, or a loss of $1.39 per diluted share in the third quarter of 2025. EBITDA in the third quarter was $43.2 million, compared to a negative $3.5 million in the third quarter of 2025. This quarter's EBITDA includes the $28.7 million gain on the Washington State Convention Center settlement we discussed earlier. Now to touch on segment performance. Our civil segment had revenue of $107.3 million, compared to $99.5 million in the same period in 2025. Civil had a gross profit of $14.3 million, or a 13.3% margin, compared to a gross profit of $10.4 million, or a 10.5% margin in the prior year period. The increase was driven primarily by a data center project and a wastewater treatment plant in the southwest, partially offset by lower contributions from a water project in the Midwest that is approaching completion. Our transportation segment had revenue of $126.4 million, compared to $113.9 million in the same period in 2025. Transportation had gross profit of $6.3 million, or a 5% margin, compared to a gross loss of $8.5 million, or a negative 7.4% margin, in the same period in the prior year. The improvement was driven primarily by bridge projects in the southeast and the midwest and two dam projects in the south, partially offset by a decrease from a materials and paving project. The materials and paving business line contributed $17.4 million in revenue and a gross loss of $10.2 million in the quarter, compared to revenue of $22.9 million and a gross loss of $3 million in the same period in 2025. We were down to $21 million of materials and paving backlog from $46 million last quarter and $27.4 million of non-M&P legacy backlog from $35 million. We finished the quarter with approximately $1.71 billion in backlog, compared to $1.68 billion at June 30th. We expect to recognize approximately 40% of our backlog as revenue over the next 12 months. Turning to liquidity, we ended the quarter with cash and cash equivalents of $35.9 million. And total cash, including restricted cash, of $46.8 million, compared to $45.7 million at the end of the second quarter. During the quarter, our surety partners advanced approximately $25 million to support ongoing project performance. At quarter end, total surety financing under the Financial Assistance Agreement was $233.9 million, made up of $65.3 million. of bonding surety financing and $168.6 million of non-bonding financing. With the financial assistance agreement executed, we reclassified $209.8 million from surety payables to debt. We expect at least $151 million of the non-bonding financing to convert into preferred shares, reducing debt. Under an amendment to the financial assistance agreement, the preferred shares are now required to be issued by December 18th of this year. We continue to monetize non-core equipment and real estate, generating approximately $13.1 million of proceeds through the first nine months of the year, and expect to further reduce debt in the coming quarters with these initiatives. Separately, a surety payable balance related to the Washington State Convention Center judgment was $55.4 million at quarter end, compared to $89.1 million at June 30. This reflects the $28.7 million gain on extinguishment of surety payable and the $5 million payment we made under the settlement previously announced. He remained in negotiation with a surety partner that funded the remaining amount. And they have agreed not to seek repayment until at least November 13, 2027. On September 23, we received notice from the NYSE American that we were not in compliance with its continued listing standards for stockholders' equity. On October 22, we submitted our plan to regain compliance by the March 23, 2028 deadline. The plan is under review by the exchange. Converting a portion of our surety financing into preferred shares, resolving our remaining legacy surety obligations, and continued profitable execution are the foundation of that plan. Consistent with what we communicated on our last call, our focus remains on closing out our legacy work, improving the balance sheet through asset monetization and our surety partnership, and executing our core business in the markets and geographies where our margins are the strongest. I'll now return the call back to the operator for questions.

We will now begin the question and answer session. If you would like to ask a question, please raise your hand now. If you have dialed into today's call, please press star 1 to raise your hand. To withdraw your question, press star 1 again. For optimal audio quality, please use your telephone handset when speaking. If your line is muted on your end, ensure your device is unmuted. Please stand by when we compile the Q&A roster. Your first question comes from the line of Julio Romero with Sudoti. Your line is open. Please go ahead.

Thanks. Hey, good morning, Frank, Keith, and Alex. Good morning, Julio. Hey, Frank, I guess the gross margin of 8.8% was very positive to see, and it was well ahead of where we were forecasting. Particularly good to see both segments post-positive gross profit here. Can you walk us through the drivers of the improvement, particularly how much reflects better execution on the underlying core portfolio versus the absence of unfavorable contract adjustments?

Yeah, absolutely. First, you know, just in general, you know, reported margins, Julio still included the legacy in materials and paving projects that we're finishing. You know, our new core work performed with strong double-digit gross margins. The legacy backlog, you know, it continues to shrink, and we have over $1.6 billion of new core backlog that's really good work. We also continue to win work with strong margins, and we believe that the long-term civil segment can produce mid-teen margins, and the transportation segment can produce low-teen margins. Keith, do you want to touch on that?

Yeah, so I guess even more before we hit the legacy, you know, we look to build on the momentum generated in Q3, you know, in both segments here. You know, hopefully expect to produce similar results here in Q4 as subject to seasonality and holidays and weather. You know, again, long term, as Frank mentioned, we hope to reach some consistency here in civil, producing mid-teen gross profit and transportation, you know, back in the low teens.

Excellent. No, that's very good to see and very good to hear. You mentioned in the prepared remarks that bidding activity picked up in the quarter, and that's certainly seen in the awards. Even if you exclude the Winnipeg project of $196 million, the awards are still positive, and to your point, Keith, appears to be civil segment-related. And then you also announced some awards this morning. I guess... Help us think about how you're thinking about the expected pace of bidding activity going forward, both in the fourth quarter into 27, particularly given the improvement and the profitability you've realized here in the third quarter.

Yeah, so overall, the pipeline remains very good. You know, we listed a number of projects that we're tracking across all of our core end markets. You know, this work is critical infrastructure and the demand continues to be really strong. So there's not a lack of opportunities. And with our sureties continued support, we expect to pick up our fair share of profitable work over the next few quarters.

So Yeah, that said, I mean, timing of booking and converting those, you know, those pipeline opportunities into awards is a little bit uncertain. But again, you know, with the cadence back to regular bidding, you know, again, we hope to hope to convert our fair share here.

Absolutely. And then could you maybe update us on the negotiation with the other shorties and then also the remaining steps required to complete the preferred share conversion by the extended deadline of the 18th of December?

Yeah, so we're continuing to work through those documents. Again, we're... We're working through, you know, multiple shorties here, and we want to make sure that we get the right classification for those preferred shares from an accounting treatment standpoint. So, again, it's taken a little bit longer than what we anticipated. However, you know, the shorties remain a partner, and we look to have those shares issued by the 18th. As it relates to the remaining payable on the Washington State Convention Center project, we continue those negotiations as well, and we look to close that matter here over the coming months.

Excellent. Last one for me, if I could, is just the, it was impressive to see the M&P remaining portion of the backlog down to 1.2% here. And you said you expect that number to be substantially, you know, lower by year end, I believe. You know, let's say we have the fourth quarter call in the typical late February, early March timeframe. Would you expect that number to be, you know? Uh, I guess, sub $10 million in, in remaining backlog by that point.

Yeah. So, you know, just, just overall, Julio, I mean, you know, we're down to $21 million of material and paving backlog. You know, the non MMP backlog finished the quarter at 27 million. So we're getting really close on the paving work, which is great to see. You know, we made good progress in the quarter on the legacy work. We just finished the last paving project in West Texas. Which was an area that we once had hundreds of millions of dollars of underperforming paving work. And to be completely out of that area is a huge milestone for us. We're down to just a couple of paving projects left that we expect to finish in the next couple of quarters. So overall, we're still seeing some impacts, but we expect less impacts as we come out of the upcoming winter months.

Excellent. Very good to see and very good to hear that the consistency remains a focus. I'll pass it on. Thank you. Thank you, Julio.

Your next question comes from the line of Christian Swab with Craig Hallam. Your line is open. Please go ahead.

Great. Thank you. Just as we think about consolidated growth margins, you know, 8.8%, you know, in the quarter, Is that kind of a realistic base one rate that we should assume the business operates in in 2027?

Well, Kristen, we see room for improvement there. You know, again, with civil in the lower teens right now, again, we think we can pull that up a bit. And just the same on the transportation, you know, with Frank's remarks here on the legacy impacts. You know, we expect a lot of that noise, you know, to be really marginalized here just as we work into 27 and through 27. So we see a little bit of room for improvement there.

Yeah, and I also think, you know, on the performance on that, you know, you can look at a few things. Legacy backlogs coming down, you know, margins on our core work and, you know, new awards and core markets, and now we have an uptick of bidding activity. You can see the progress this quarter with materials and paving backlog being down to $21 million. Our core work is earning double-digit gross margins, so less impact from legacy work. And new business, Christian, was approximately $271 million. So we're encouraged about the opportunities we're seeing out there and building off these results we have. We've had this quarter into the next couple of quarters.

Great. And then with the backlog up here at 1.71 billion, you know, how much bonding capacity remains available for future bids?

Yeah, you know, we're continuing to work closely with our surety partners. You know, bonding, you know, is no longer the constraint it was in the first half of the year. Our surety partners continue to provide the capacity that lets us pursue these new bonded work projects. You know, that's the main reason our bidding picked up and new awards reached $270 million this quarter. You know, like we mentioned in the prepared remarks, we have a lot of outstanding proposals. You know, we're waiting to hear back on and a good bit of opportunities ahead of us as we look to close out the year. So, you know, we still have capacity, and there's not a lack of opportunities out there, Christian.

Great. Thank you. I don't have any other questions. Thank you.

Thanks, Christian.

We have reached the end of the Q&A session. I will now turn the call back to Frank Renda, CEO, for closing remarks.

Thank you, everyone, for joining us this quarter and for your interest in Southland, and look forward to speaking with you next quarter.

This concludes today's call. Thank you for attending. You may now disconnect.