Q3 2023 Southland Holdings Inc Earnings Call
Good morning, My name is Sergio and I will be your conference operator today.
At this time I would like to welcome everyone to the self on third quarter earnings Conference call.
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Alex you May begin your conference.
Good morning, everyone. This is Alex Murray director of corporate development and Investor Relations.
Welcome to the <unk> third quarter 2023 conference call. Joining me today are Frank Brenda President and Chief Executive Officer, and Kony, Colada Executive Vice President and Chief Financial Officer.
I'd like to begin with a gentle reminder, this conference call may contain forward looking statements within the meaning of section 27 a M.
Of the Securities Act of 1933.
Section 21 E.
Of the Securities Exchange Act of 1034.
And the private Securities Litigation Reform Act of 1095.
Forward looking statements are neither historical facts, nor assurances of future performance.
We're looking statements are uncertain and outside of cell phones control.
<unk> 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. 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-Q, we filed last night.
Our Form 10-K for the year ended December 31, 2022 filed with the SEC on March 21 2023.
We will also refer to non-GAAP financial measures you will find reconciliations.
The earnings 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 <unk> third quarter 2023 conference call revenue for the quarter was $312 million. This is a decrease in revenue compared to the third quarter in the prior year of $335 million.
The decrease in revenue in the quarter was driven by the timing of New project starts and the continued effort to close out legacy materials and paving projects.
We're making good progress and a decrease the remaining <unk> backlog to approximately $290 million, which is a decrease of 14% from last quarter.
Gross profit margin for the quarter was nine 5% our core business had a strong performance, but was offset by challenges in our legacy projects.
Although we still have more to do finishing out these legacy backlog, we have made significant strides this quarter to complete this work.
We recognize that while we have made progress on this legacy work that have made the necessary operational changes challenges remain as we work towards completion, we are on track to putting this work behind us and focusing solely on the core business, which continues to perform well we.
We finished the quarter with $2 $5 $4 billion of backlog. This is an increase of 7% to $3 7 billion at the end of the third quarter last year.
During the third quarter, we had $150 million in New awards, which included a marine project in our transportation segment for a private client in the Caribbean.
We have a strong track record of completing technical marine projects and have a strong presence in the region.
This project is very similar in scope to the existing project that we are currently building for another private clients in the region.
A new project is in the design phase.
Anticipated to start by the second quarter of next year.
The timing works well as the existing Marine project is expected to wind down by the second quarter of next year, and we will start mobilizing crews to the new project at this time.
Also included in the hydro $50 million of New awards in the third quarter was the utility relocation project in our civil segment for the city of Dayton, Texas.
We have started mobilizing crews and expect construction to start late this year.
We're off to a great start for New awards in the fourth quarter yesterday, we announced the $77 million water pipeline project that we were awarded in North Dakota. The project includes installing over eight miles of 72 inch diameter pipe.
This project is an initial phase of the over $1 billion Red River Valley water supply project.
The project is expected to provide a sustainable water supply to a community that has experienced periods of drought and the total program is expected to benefit nearly 50% of the state's population.
We anticipate there will be additional opportunity to bid on remaining packages from this program over the next several quarters.
Im also pleased to announce the south with the joint venture has been selected as construction manager or general contractor or CMG C for the earthquake ready Burnside bridge in Portland, Oregon.
SaaS subsidiary was part of the fabrication team for the original Burnside Bridge in 1926, and we're excited to work with our partners and the county to help upgrade an essential route for the community.
We will work collaboratively with the owner through the design phase over the next two years, we anticipate our portion of the total contract to range between $200 million to $300 million.
The construction contract execution is expected in late 2025, or early 2026 and will be added to backlog at that time.
I would also like to remind you that a different software and joint venture was selected at CMG C. For a broadband project in May of this year.
Conversations with the owner have progressed, well and we anticipate booking our $40 million portion of this total expected.
$80 million project into backlog in the second quarter of 2024, when construction is expected to start.
This brings our total pending <unk> contracted approximately $300 million.
Which are not included in our $2 $5 $4 billion backlog today.
We feel highly confident the CMG see pre construction contracts will turn into construction awards as they typically do we also believe the total dollar amount of these projects can grow as we finalize the pre construction phases.
Early in the fourth quarter. We have also completed several small emergency water and bridge repair projects in our key markets in the southeast and in Sunbelt States. These types of emergency projects are a reflection of our diverse capabilities and strong relationships with our clients in key markets.
As anticipated we had a significant bidding activity in the back half of the year. We currently have nearly $2 billion of bids and proposals pending we anticipate being notified if we will be selected for these projects over the next several months.
This concludes the lock and dam 25 projected Missouri for the U S. Army Corps of Engineers, which has received partial funding from the IRS.
We are also awaiting notification on two projects submitted last week, including the RFK suspended spanned retrofit New York and phase II of the North in treatment plant project Winnipeg. We're currently working on phase one of this project.
We also continue to see robust demand across our end market, despite macroeconomic uncertainty and higher cost of capital.
As we have stated previously approximately 80% of our revenue is generated from public agencies that are well funded have essential infrastructure projects that must be completed and are not materially impacted by higher borrowing costs.
Federal infrastructure spending has also yet to have a major impact on backlog today, although we are seeing increased bidding activities and expect to see more opportunities in 2024, and 2025 as II JA funding continues to flow at a federal state and local agencies. We believe this funding will.
US with consistent opportunities and to be a sustainable tailwind for the next decade.
Additionally, we continue to see strong demand from Blue chip private clients over the next two months, we expect to bid on over $1 billion of projects, where we are shortlisted. We will compete for these projects opportunities against the very limited number of competitors.
In summary bidding activities have increased in the second half of the year and we are awaiting final notification of a significant number of bids we continue to be optimistic about the exciting opportunities in front of US there continues to be a high level of demand for a wide breadth of bids for structure services.
Macroeconomic uncertainty and the rising cost of capital with that I will now turn the call over to Kelly for a financial update.
Thank you Frank and good morning, everyone. My prepared remarks will cover our financial performance for the third quarter of 2023, you can find additional details and information on the financial statements footnotes and management's discussion and analysis that was filed on Form 10-Q last night.
Revenue for the third quarter of 2023 was $312 million.
A decrease of $23 million or 7% from the same period in 2022.
This was driven by a decrease of $42 million in our transportation segment offset by a $19 million increase in our civil segment.
Gross profit for the third quarter of 2023 was $30 million.
A decrease of $33 million from the same period in 2022, our gross profit margin was nine 5% in the third quarter.
The majority of this decrease was driven by the decreased profit contribution from the large backlog of takeover work related to the American Bridge acquisition as more of that work was completed in the third quarter of 2022.
Selling general and administrative costs in the third quarter were 15 million effectively flat compared to the same period of 2022.
Operating income for the third quarter was $14 million a decrease of $33 million from the same period in 2022.
Interest expense for the quarter was $6 million, an increase of 4 million. The same period. In 2022. This increase was driven by increased borrowing costs and higher debt balances.
Income tax expense for the third quarter was $5 million compared to an income tax expense of $11 million for the same period in 2022.
The primary driver for the increased income tax percentage was the impact of valuation allowances on certain federal and state net deferred tax positions and changes in the expectation of pre tax profit for the full year tax period.
I would like to point out that the majority of Safran subsidiaries at an S Corp tax election in 2022 and earlier years, resulting in a non comparable tax treatment.
<unk> 2023 to prior years.
We expect full year 2023 effective tax rate to be between 30% and 35% given one time impacts from losing Es core collection and other changes in deferrals.
Going forward on a long term basis, we expect our annual effective tax rate to be in the 22% to 25% range, depending on certain tax credits nondeductible items and certain state and local taxes.
We recorded a GAAP net income of $4 million or <unk> <unk> per diluted share in the third quarter compared to net income of $35 million in the same period in 2022.
Our weighted average basic and diluted share count was 47 9 million shares.
In the third quarter, we produced EBITDA or earnings before interest taxes, depreciation and amortization of $22 million compared to EBITDA of $60 million for the same period in 2022.
Now to touch on segment performance.
For the quarter, our civil segment had revenues of $91 million, an increase of $20 million from the same period in 2022.
Our civil segment gross profit was $12 million, an increase of $3 million from the same period in the prior year.
As a percentage of revenue for the quarter, our civil segment had gross profit margin of 14% compared to 13% in the same period of 2022.
For the quarter, our transportation segment had revenues of $222 million.
A decrease of $42 million for the same period in 2022, our transportation segment gross profit was $17 million a decrease of $36 million from the same period of the prior year.
As a percentage of revenue for the quarter, our transportation segment had a gross profit margin of 8%.
3rd% to 20% for the same period of 2022.
The material and paving business line contributed $48 million to revenue and negative 11 million to gross profit in the third quarter.
The additional charge in MMP was primarily driven by the impact of taking over certain scopes of work and related procurement from subcontractors on to paving projects.
Our core operating results in this segment our results excluding material and paving would have been $173 million of revenue and $28 million of gross profit gross profit margin of 16%.
Turning to the balance sheet.
As of September 32023, we had net debt of $262 million inclusive of cash and restricted cash of $47 million.
With respect to backlog our backlog decreased slightly from $2 7 billion at the end of the second quarter to.
The $2 5 billion at the end of this quarter year.
Year over year, our backlog increased 7% from $2 4 billion.
At the end of the third quarter last year.
Thank you for your commitment and time in Scotland, I'll now pass the call back to the operator for questions.
Thank you.
Ladies and gentlemen, we will now begin the question and answer session.
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One moment. Please for your first question.
Your first question comes from Adam <unk> from Thompson Davis. Please go ahead.
Hey, good morning, guys.
Good morning, Adam.
Hey, Frank I missed.
You gave a lot of numbers in your remarks I was just curious kind of how you think that.
All shakes out with regards to where backlog ends the year could end of the year.
So right right.
Right now Adam we have several large bids going in around the same time, so it's difficult to say that nearly $2 billion of proposals that were submitted and we're still waiting to hear on the results on those proposals. We also expect to see.
A bit on a $1 billion of work over the next two months were shortlisted on and that doesn't even include the regular hard hard bid opportunities where there is no sure sure.
Short list.
Yes, just.
As a timing issue as to exactly when some of these actually bid or have the possibility to turn into contract. So it is hard right now to give you an exact number on where backlog is good.
Yes.
<unk>.
With all the demand out there we expect to win our fair share of projects.
Okay. It sounds good and Cody.
Yeah.
Sure.
So the gross profit impact and transportation and.
In Q3, I guess that wasn't expected because of the charge you took in Q2. My question was going to be how are the MMP projects progressing versus expectations. It sounds like it was a touch worse in Q3.
Yes, Thats correct, Adam we had two subcontractor issues in Q3 that we had to take over scopes of work in procurement.
Obviously produces and downstream effects.
Work note items at the end of Q2.
We're excited about the core margin results from the transportation segment to absorb that and still being able to.
5% gross profit number on the quarter.
Got it okay and.
What are your expectations on.
Free cash flow for the year any chance, we'll get closer to positive.
We believe so if you look at the main driver of the negative cash from ops at the end of the third quarter. It was.
The majority of that was the large increase in accounts receivable, which you would expect coming out of our seasonally busiest quarter of the year. So we expect that naturally reverse over the next couple of quarters and get back to you and report.
Our record of positive cash flow from operations.
Positive cash from operations for the full year, Okay got it.
I'll hop back in queue. Thanks, guys.
Thanks, Adam.
Thank you.
Your next question comes from Oliver <unk> from D. A Davidson. Please go ahead.
Hey can you guys hear me. Thanks, so much for having me on the call.
Thanks Oliver.
Are you seeing a lot of backlog growth in the last couple of years, but it's been slow to convert to revenue.
Why is that and when do you anticipate more of an impact on your revenue.
Yes, so with the large pickup of awards that we had.
And the end of 'twenty two there Oliver.
Okay. So some of that was skewed by a very a larger bid bridge project a chance break shop that we announced in Florida, So about a $600 million project with a longer burn.
You may recall from prior remarks, we have made we had a lull.
Bidding pursuits, as we completed off a large portion of the American bridge backlog, which drove the significant year over year Delta.
We're looking forward to the newer work that we've been awarded picking up and as Frank mentioned in his prepared remarks, a significant amount of proposals that will fund results back on over the next couple of quarters.
With that we will convert into revenue as early as mid 'twenty four.
So youll see that the greater pickup from those larger jobs naturally as activity increases.
And the larger awards contributed.
Awesome, Great guys, and then I'll follow that up with should you get some working capital release in the fourth quarter as activity slowed down which boost your cash flow.
Or is the ramp on jobs going to make sure that that's less likely to happen.
Yes, So let me just talk about the seasonality a bit and then Frank can talk about our bidding strategy on the cash flow side.
Naturally we are going to see slowdown in the fourth quarter like you mentioned and we think that.
Spike of.
Change in accounts receivable at the end of Q Q3 will naturally unfold back back to Adam's question.
Most of that will come in Q4, some of that could come in early Q1.
Certainly we will see some of the seasonality slowdown contribute to improve.
Working capital frankly, let's talk about our project identification of a little bit there, yes. So we've talked about in the past our rigorous go no go process.
One thing that we're really excited about is some of these pipeline projects that we've picked up that are short term projects, where we'll be able to.
Get in there and.
In terms of cash fairly quickly so that should help with the cash position as well.
Great and then one last quick one if I could.
Why was the tax rate so high on positive pre tax earnings.
Yes, so the.
It's a weird tax year for us coming off of the destock, where we lost sales as core collection.
So that was a big driver of that and we also with the beat in Q3 had a change in our estimated full year pre tax income, which that adjustment is recorded in the periods may so that contributed to that but much higher effective tax rate in Q3 expected to be about 30%, 35% effective tax rate on a year.
And it will normalize in 2024 back to that 22% to 25% range.
Excellent. Okay. Thanks, so much guys I'll jump back in queue.
Thanks Oliver.
Thank you.
Your next question comes from Christian Schwab from Craig Hallum Capital Group. Please go ahead.
Hi, great. Thanks for taking my question so great.
The $2 billion of bids that we have outstanding last quarter, we kind of highlighted.
A final one $5 5 billion that we're looking at.
Can you give us an update on <unk>.
Did you decide to bid on $2 billion of that $5 5 billion or are those still outstanding.
Talked about.
Three large transportation projects and tunnel work on the West coast and a bunch of scope of work.
A quick reminder.
Yes so.
So as far as the three projects.
We've submitted on two of those projects in the northeast.
We're still awaiting one it pushed back a little bit Christian that's the Connecticut River bridge and its going to bid.
Some time in January now.
On the West Coast.
Those projects was the Burnside bridge.
We announced that.
We were the low bidder on that on the <unk> side as far as total dollar values.
No.
Those two that $2 billion and the $1 billion that we referenced those are projects that were short listed on we bid a lot of other projects during the quarter.
We're not.
In that short list.
Process, so as far as the $5 billion that might've been over the next couple of quarters, but.
There is a ton of demand out there.
The pipeline sure has not slowed down Christian.
Okay, and then just a quick follow up on that Greg.
Given kind of a ton of demand thats out there.
What do you think you are.
What is the capability of backlog.
Over a 12 to 24 months timeframe.
That you think you could.
It's important.
Is it materially.
Bigger than that.
The backlog today and any color there would be great.
Yeah. So so we have a.
We have a great great talent pool, we have resources in northeast specific northwest.
We're waiting to deploy with some of the pending pending awards, we could be.
B close to record backlog in a couple of those come through but we have the resources.
We're vigorously training labor.
To be able to.
Grow the business, but we're going to always continue to be disciplined and bottomline focused Krishna.
That's great no other questions. Thank you.
Thank you thanks Christian.
Thank you.
Your next question comes from Julio Romero from Sidoti and company. Please go ahead.
Thanks, Hey, good morning.
Maybe.
Did.
In the Midwest for age of the American Bridge post any profit losses in the third quarter that were in addition to the gross loss taken in the second quarter.
Yes. So there were some small movements on that job in the Midwest Julia none that were material enough to qualify for disclosure that project continues to work towards completion of a lot of good progress in Q3.
Okay. That's helpful and then.
Frank you talked about the Burnside bridge work and the broad broadband work why do those projects not into your backlog until you start working on them.
So there so theyre CMG see contracts.
It's a newer alternative delivery method that we're seeing more than in the past.
These projects are awarded based on the best value of qualifications technical ability and experience so youre able to get in there with the owner.
Start negotiating and helping them on the front end.
Design and the planning stages.
Cody if you want to talk about.
Why.
Revenue Julio you see some variation across our across our peer group on this.
There is a potential of the <unk> process that we get through the integrated design and construct ability phases with the owners.
It does it turn into a contract for one reason or another.
Unlike I would say unlikely that that happens you typically do see the both of those phases being awarded but we have not.
Secured a contract for the construction phase and that's why we are not including it in backlog at this time.
Okay, that's helpful and.
I know the majority of your projects that you bid on our publicly funded but.
But just curious given the high interest rate environment, if youre seeing any effect on on the private funded side.
In regards to the projects you guys are bidding and if that potentially shifts your mix customer mix, even further too.
<unk> side going forward.
Yes.
As you mentioned, we're probably 80% public 20% private and the Blue chip.
Clients that we work for we've not seen a major effect, we're bidding on quite a few projects.
That are in the pipeline and it sure doesn't seem to be slowing down and I think the re shoring effort some.
Some of these manufacturers as really helping demand.
On the water side for us.
Okay got it and then just last one for me is just on the balance sheet.
The secured notes you have that mature in 'twenty four just remind us how much that is from a dollar perspective and what's the current fixed rate you are paying on the 24 notes.
Okay.
Good question Julio So we've got the maturities.
Notes in there.
I'll have to go back and look at look at that.
I don't believe any of our equipment notes or an immaterial amount of our equipment notes mature in 2024, there is a smaller number.
So the unsecured notes payable that do mature in 2024.
If necessary, we expect to roll those for another another term interest rate on those.
Currently.
Sub 5% would be renegotiated at market rates.
Okay really appreciate the color guys I'll pass it on.
Thank you.
Okay. Thank you.
Your next question going from Adam <unk> from Thompson Davis. Please go ahead I'm serious about getting back in the queue.
Okay.
Yes.
I'm curious the way the Street's modeling 2024, I wonder if that's the right way to look at it because their modeling.
15% revenue growth.
Gross profit of almost 130 I wonder if the gross profit forecast is right.
But with you guys, having with the MLP revenue coming off I Wonder if revenues more flattish margins are higher.
Yes, I think Brett Unfortunately, we get to give you a limited information you get to base your model off that we've disclosed that we expect over the next 12 months, leading to three quarters of 2024, obviously will burn 42% of our current backlog.
That doesn't include pick up for more awards that may contribute.
So pending the <unk>.
<unk> amount of awards that we have out.
Outstanding.
We could be flat, we could add thats still too early to tell and we look forward to having more color on that in the next call as we get some.
As we find out the results on these bids outstanding.
Okay, well, what's the timing on that.
Our 23 down in Florida.
Okay.
So if you're if you're referring to the.
The <unk> <unk> bridge, we're continuing on the.
We're continuing on the design.
We're getting close to.
Starting to break ground on the project.
Once we do over the next.
The next few years.
In a fairly linear linear projects and we should be able to.
Kind of project that out, but really really excited about what the team has done there the design process, what we have in place and excited to get started on the construction here very shortly.
Okay and do you have.
Lastly, do you have any thoughts interest expense in Q4.
We.
We had a large equipment note refinanced debt.
And we've talked about already on some of our equipment is fully amortizing at a higher rate I think youre going to see it as being that five and a half ish 5566 ish range in Q4.
Okay.
Great. Thanks, guys.
Thanks, Adam.
Thank you.
There are no further questions at this time please.
Please proceed with any closing remarks to Mr. Mori.
Thank you everyone for joining the call. If you have follow ups. Please reach out.
Thank you everyone for everybody.
Ladies and gentlemen, this concludes your conference call for today, we thank you for participating.
Please disconnect your lines.
<unk>.