Q2 2023 Southland Holdings Inc Earnings Call
Good day ladies and gentlemen and welcome to the Stealth and Holding Sink 2nd quarter 2023 earnings conference call. At this time, online sign is enabled. Following the presentation, we will conduct a question and answer session. If at any time during this call you require a meet the systems, please press R0 for the operator.
get production. Our core business is strong and we remain confident in our backlog. It is important to provide insight into our materials and paving business and the changes we have made as a company over the past few years.
In 2016, we developed a plan to produce our own asphalt and concrete to sell the third parties and to support our paving business.
We made large capex investment in aggregate quarries, pits, and batch plants while pursuing large scale roadway paving projects.
By the end of 2019, our Paving Project accounted for approximately 39% of our then $2.3 billion backlog. Over the last several years, our materials and Paving Business underperformed due to poor execution, unprecedented inflation, challenging geographical locations, and supply chain issues. This in-market became increasingly less attractive.
and we decided to substantially shrink the size of this business to focus on more profitable in markets. At the end of the second quarter of this year, our large scale paving work was only 12% of our $2.7 billion backlog. In the second quarter, in an effort to wind down our materials and paving business, we dispose of several assets, including
additional expected future costs to complete these projects. These additional costs are related to procuring and transporting materials from third parties.
We did these paving projects several years ago with the intention to produce our own materials.
Now that we are no longer producing materials for the existing paving work, we must pay elevated and inflated market prices from vendors.
We took the charges this quarter for the future expected cost of completing the work.
It was best to lock in prices with vendors now and mitigate the long run, cost uncertainty, associated with producing our own material. Large-scale materials production pied up our key people, including members of our management team, and would require significant resources to maintain. We have also shrunk the paving business to the point that it no longer makes sense.
is best for the long-term success of the business.
We look forward to putting this legacy work behind us as we focus on the unprecedented opportunities in our core business. As a result of record awards last year, our backlog increased 36% to $2.7 billion from $2 billion at the end of the second quarter last year.
Now turning the upcoming bidding opportunities in our transportation segment. We've been shortlisted on three large projects in the Northeast with combined engineers estimates exceeding $1.5 billion.
which include the Livingston Avenue Bridge replacement and Albany, the RFK Suspended Span Retrofit in New York, and Connecticut River Bridge for Amtrak. We expect these projects to bid in the fourth quarter of this year. Two of these projects only have two bitters shortlisted.
We are also pursuing over $2.5 billion of new pursuits on the West Coast, some of which include the earthquake, ready, burn side bridge and organ, which has expected to bid this month, and the Golden Gate Bridge, seismic retrofit in California.
Notable opportunities in our civil segment with combined engineers estimates of approximately $1.4 billion include the San Juan Lateral Water Treatment Plant for the Bureau of Reclamation, Bidding in late summer, the Department of Defense, Ensole, Tank Farm Facility Project, Bidding this fall, and Phase 2 of the North End Treatment Plant Project in Winnipeg.
We're currently working on phase one of this project. We continue to be excited about what new federal funding will do for our business over the next decade. That being said, the new federal spending is yet to have a major impact on our financial results.
We have seen an elevated amount of bidding, but have not seen a large impact in our backlog from these funds. At this point, we expect to begin to see the impact to revenue in late 2024 or in the 2025. With that, I will now turn the call over to Cody for a financial update. Thank you, Frank, and good morning, everyone.
My prepared remarks will cover our financial performance for the second quarter of 2023. You can find additional details and information in the financial statements, footnotes, and management discussion and analysis that was filed on form 10Q last night.
I would first like to address the select preliminary financial information we pre-announced last Thursday evening.
As you were aware from previous filings with the Securities and Exchange Commission or the SEC, there were a significant number of shares issued in private placement to certain founders of Legato Merger Corp 2, now known as Southland Holdings Inc. Prior to or in connection with the initial public offering of Legato Merger Corp 2, we refer to these shares as sponsor shares.
In addition, there were a significant number of shares issued to the sellers of Southland Holding LLC as part of the business combination with Southland Holdings LLC. We refer to these shares as target shares. Pursue it to the terms of their respective agreements, the sponsor shares and the target shares.
We're subject to lock up provisions that expired 180 days after the closing of the business this combination.
with respect to the sponsor shares and six months after the closing of the business combination with respect to the target shares.
As a result, the first trading day on which markets were open after the expiration of these lockup provisions was yesterday, Monday, August 14th. And the company had reason to believe that non-affiliate shareholders may have had a desire to sell sponsor shares upon such expiration of the lockup period.
in which were effective on May 15, 2023.
As we previously announced, the company planned to, and subsequently did, file at second quarters earning information and form 10Q after trading hours yesterday on Monday, August 14th.
In order to preserve the availability of this resale form S1 for selling shareholders on Monday, August 14, after the expiration of the lock up period, the company decided to pre-announce select preliminary financial information on Thursday in order for the market to have enough time to properly digest the information.
Now to discuss our financial results for the period. Revenue for the second quarter of 2023 was $257 million, a decrease of 16 million or 6% from the same period in 2022. Both of our segments contributed lower period over period revenues. We won a record amount of new awards last year and this work and these new starts continued to make an impact albeit at a slower pace than initially expected as we progressed through the year.
Gross profit for the second quarter of 2023 was negative $34 million, a decrease of 72 million from the same period in 2022. Our gross profit margin was negative 13% in the second quarter. The majority of this decrease was driven by our decisions to discontinue the materials and paving light of business. Selling general administrative costs in the quarter were $16 million, an increase of $3 million from the same period in 2022. This increase was primarily driven by costs related to being a public company. Operating income for the second quarter was negative $50 million.
A decrease of 74 million from the same period in 2022. The majority of this decrease also was driven by our decision to discontinue the materials and paving line of business. Interest for the quarter was $4 million, an increase of 2 million from the same period in 2022. The majority of this increase was driven by increased borrowing costs.
and higher debt balances. Income tax benefit for the second quarter was $19 million compared to an income tax expense of $2 million for the same period in 2022.
The primary driver for the income tax benefit with negative gross profit from operations as previously discussed.
On a go-forward basis, we expect the tax rate to be in the 20 to 24% range, depending on certain tax credits, non-deductible items, and certain state and local taxes. We recorded a gap net loss of $13 million, or negative 27 cents per share in the second quarter, compared to net income of 19 million in the same period in 2022. Our weighted average basic share count was 46.9 million shares.
Today, our basic shares outstanding are $47.9 million. We recorded an adjusted net loss of $35 million or negative 76 cents per share after backing out other income from changes in the fair value of the earn-out liability for 2023 offset by transaction related expenses. This compares to an adjusted net income of $19 million.
and transaction related expenses. This compares to EBITDA and adjusted EBITDA of $35 million for the same period in 2022. Now to touch on segment performance. For the quarter, our civil segment had revenues of $66 million, a decrease of $9 million from the same period in 2022. Our civil segment gross profit was $6 million, a decrease of $6 million from the same period in 2022. As a percentage of revenue for the quarter, our civil segment had a gross profit margin of 9% compared to 17% in the same period in 2022. For the quarter, our transportation segment had revenues of $191 million.
The materials and paving business line contributed $37 million to revenue, a negative $49 million to gross profit in the second quarter. Our core operating results in this segment, or results excluding material and paving, would have been $154 million of revenue, and $9 million of gross profit for a gross profit margin of 6%. Turning to the balance sheet, as of June 30, 2023, we had net debt of $230 million, inclusive of cash and restricted cash of $54 million. We paid down $15 million on our secured notes this quarter before considering additional borrowings. Regarding backlog, our backlog decreased slightly from $2.9 billion at the end of the first quarter to $2.7 billion at the end of this quarter.
During the second quarter, we had $92 million of new awards, which compares to $255 million of new awards in the second quarter last year. For the first half of the year, we had new awards of $262 million. This compares to $295 million in the first half last year. Year over year, our backlog increased 36% from $2 billion at the end of the second quarter last year. Thank you for your commitment and time in Southland.
I'll now pass the call back to Frank for closing remarks. I would like to express my gratitude to the incredible men and women who are part of our team and are making it happen day in and day out. We remain confident and positive on the outlook for our industry. Southland has deep rooted industry experience and I put our capabilities and specialty infrastructure construction up against all others in our industry.
Our history in bridges, tunneling, transportation and facilities, marine, steel structures, water and wastewater treatment, and water pipeline in markets is second to none. I'll now pass the call back to the operator for questions. Thank you.
Your questions will be pulled in the order they are received.
If you are using a speakerphone please lift the handset before pressing any keys.
One moment please for your first question.
first question comes from Adam Thallner from Thompson Davis
from Thompson Davies. Please go ahead.
Hey, good morning guys, tough quarter. Hey, how are you, Frank? Can you, Frank, can you talk about, you said you're no longer going after large, saving jobs? It might be helpful if you just break down what you mean by that and how that differs from your ongoing focus, you know, after this incident. Yeah, thanks Adam. So large paving job where we have to produce our own materials. They're just roadway projects.
We're not going after. We're going to stay in our core markets on the transportation side and focus on highly technical bridges and structures. Okay.
So those projects are not done. So on one of those projects, Adam, we started the project and we had to go to a different method to get into this project. Both of these projects were bid pre-COVID, they're legacy projects and we expect them to be winding down over the next year or so. Adam, maybe to further bucket the
the impact there, you know, we picked up 2.2 billion of our 2.7 billion over the last six quarters. And so you can infer into the rest of that, you know, 500 million or so the pre-COVID pre-inflation era. And we expect that the large majority of that to burn a 0% margin over the duration of those project laps. Okay, that's good color, Cody.
I sort of missed, we kind of went fast and furious to the bidding in the back half of the year. Maybe you can just kind of sum that up for us and bracket where you think back log could end the year.
You know, so we're really, really excited about the.
About the market we talked on on the prepared remarks 3 bridge opportunities in the northeast 2 on the West Coast.
several in the Midwest and the civil side as well.
Those projects are starting to come out, but those are just a few of the few of the highlight projects that we're really looking at. Adam.
On some of these larger contracts, you don't know exactly when they're going to award, but the projects are out for bid in the third and fourth quarter. We also had six jobs that totalled around $400 million that we were the low bidder on. Five of these jobs, we were the only bidder on that did not get awarded in the quarter as well.
And we expect those to be out. Why is that? You can. There are a few different reasons they didn't get awarded. We were the only bidder on the majority of these projects. And some of our customers are required to re-avortize these projects one more time before awarding some of these projects for bid with engineers, estimates, you know, set almost with pre-
correct. And we expect these jobs to come out for rebid. Two of them, like I said, are already out for rebid. We're in communication with the with the owners. So these these jobs aren't aren't going away. It's unusual for this many jobs not to award.
But we feel confident that budgets are being adjusted quickly and especially on the highly technical projects that we're pursuing next two quarters. Then our Jessie Joseph said, thisplanned for
Okay, and lastly, I'll turn it over. Cody, can you just talk a little bit about the back half of the year in terms of free cash flow expectations? Certainly. So, you know, this quarter we generated $24 million of positive cash flow from operations. The timing on free cash flow conversion is really dependent on so many different items with respect to building milestones.
as well as change order settlements. So difficult to predict. You heard in our opening comments that it will be difficult to have you over your revenue growth.
But we do look forward to continuing the trend of positive cash flow from operations.
to continuing the trend of positive cash flow from operations.
Thanks Adam. Thank you. Your next question comes from Christian Strav from Craig Hallam. Please go ahead....
Hey, great. Thanks for taking my questions. So just on the remainder of the Legacy Backlog, you know, thanks for the color and how much is left, but how, you know, is all of this stuff done by the end of 24?
So we shared the M&P work is about a one to two year completion horizon audit. So that would take us out to mid 25 with the tail being towards the end of that two year period, Christian. The rest of that work is in a similar category. We have one project that may tail off beyond that, but we expect substantially all of it to be complete within the next 12 to 24 months. Okay. And then, you know.
There's always surprises in large construction projects and the bidding process. Do we believe that the remaining backlog has been?
you know, vetted and bid as profitable as you think it was when you originally bid it? Or is there, you know, any potential geographies or work that may not be in line with kind of historical even at Target?
Yeah, thanks Christian. Great question.
So the 2.2 billion of the 2.7 backlog that we have remaining, we've picked up over the last six quarters. We picked that up at a time frame coming off of record inflation, coming out of COVID, so much uncertainty in a very limited bidding field. We're just literally in our tun eath across the protein line,
We knew exactly what our crews were producing on the jobs and in the areas with owners that
that we knew and it had successfully completed projects with in the past. So we're extremely confident in that work. The remaining work, you know, the legacy projects that we have, we kind of touched on. We've got those at a zero margin go forward, but as far as vetting the backlog that we have.
for the 2.2 billion and the remaining work at completion. We're confident in being able to bring that home at the numbers that were bid or adjusted to. I think, Christian, maybe just add a little bit of color on the cadence of the burn. Imagine the 12.
Takeover just just.
didn't see those projects ramp up and have the activity at the time, in the timeframe we expected, still coming, still feel very positive about that new work.
Okay. And you know, last quarter we talked about, you know, the TIPS Act and the infrastructure, you know, and middle mile work and lane fiber and the potential to use your crews and your skill set for that even though you...
didn't have a material business doing that previously. We didn't hear much about that on this conference call. You know, is that, should we take that as, you know, we're not gonna pursue that as aggressively and stick to the knitting kind of like we just talked about and not get into projects we don't understand like potentially we got over our skis and paving or.
or how should we be thinking about that? Now for some of these projects, the chip manufacturers continue to move forward.
Christian, we're not going to do anything that's not in exactly in our core competencies right now. So the portions of these plants that we're looking at are the pipelines, you know, the excavations, the water wastewater treatment plants. And that's exactly what we do. These jobs are moving forward as far as the middle, you know, the middle.
large water pipeline or something.
something of that nature. But with the amount of money that is gonna be spent in these areas, we're geared up for it, we're ready to go. We haven't picked up a lot of these projects as of yet, but it helps us when our competition, when these projects move forward, it helps us in these areas where our competition.
ways as well right now. Yeah and then Chris, Cody, I'd also add you know the skill set crossover between the underground work Frank mentioned in the Middle Miles stuff is is fairly is much more homogenous than being in large scale paving work. There's also a risk mitigation component on the contract deliveries on the project delivery side of these contracts where they're geared to CMGC awards.
We're not locked into completing the scope of work beyond the design phase. It's likely, and we will certainly take a hard look at pursuing it, but we're not locked into a several hundred million dollar contract in these middle mile awards under a CMGC model. Okay. Great. Great teller. Thank you. No other questions. Thanks. That was a great issue. Thank you. Your next question comes from Brent Tillman from VA Davidson. Please go ahead. Great. Thanks. Thanks for your time.
Hey, Frank or Cody on that zero margin backlog going forward Can you give us any sense for the average size of those jobs? You're still working to complete? I'm just trying to understand You have some relatively larger projects embedded in that is a series of smaller projects Just as we think about kind of the future potential cost risk as you continue to work through these Yeah, great question. Let me ask a clarifier. Are you talking about initial contract size or remaining backlog on each individual project? I Guess I'd say remaining Cody Yeah, there there. It's a fairly even distribution There isn't anyone that has a larger a larger number of trying to get a sense around that Yeah, so that backlog burn off or that that RUPO liability
dollars with a negative margin as projects were completed of 32 million and year to date being 95 with a 59 million dollar loss as disclosed in the queue. So there's certainly a component of that reduced top line volume that we'll have to replace in our other end markets as we pick up new awards to Frank's point. And the timing around those awards can slide from one quarter to the next as we discuss.
Okay, I guess just the last one, Cody, just looks like you made some changes to the capital structure subsequent to the end of the quarter. Maybe you could just talk through that, how that gives you sort of adequate liquidity for what you need to do going forward. Just be helpful to hear those changes. Okay.
So normal cadence for us as you'll see financing and refinancing equipment because we do have a significant amount of consistent dependable value in our construction equipment. Got it. Okay. Thank you. Was there any component of that, Brent, that I didn't answer? No, Cody. I'm sure we could talk offline but appreciate the update. Thank you. Your next question comes from Julio Romero from CWD and Company. Please go ahead. Thanks. Hey, good morning Frank and Cody. You know, I appreciate the color you guys gave on the historical M&P business but was hoping for a...
with a negative margin of 32 million. That was entirely within our transportation segment in both periods. And year to date with 95 million in revenue with negative gross profit of 59 million. So you can take that and that'll get you those numbers you were looking for. Okay, got it, really helpful. And I guess, you know, you mentioned you locked in prices with vendors now for...
some of the materials for the M&P business, but as far as the other costs that you've estimated within that 49 million, I guess just, how would you have us think about?
the confidence in that number fully capturing the potential variable costs. Yeah, good question, Julio. We do feel confident. We look at all known and estimable impacts and take that assessment on future work. The nature of these being firm third party price commitments.
There are no further questions at this time. Mr. Rhonda you may proceed. Thank you all for for joining us today. Talk talk to you next quarter. Thanks everybody.
Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.