Q4 2023 Southland Holdings Inc Earnings Call
Good morning, My name is Joana and that will be a conference operator today at.
At this time I would like to welcome everyone to the self-made fourth quarter and full year 2023 earnings conference call.
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After the Speakers' remarks, there will be a question and answer session. If you would like to ask a question. During this time simply press star followed by the number one on your telephone keypad if.
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Thank you Alex you May begin your conference.
Good morning, everyone and welcome to the Southland <unk> fourth quarter and full year 2023 conference call.
This is Alex Murray director of corporate development and Investor Relations.
Joining me today are Frank render President and Chief Executive Officer, Cody Guevara, Executive Vice President and 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 27 a.
The Securities Act of 1033 621 E of the Securities Exchange Act of back to 34.
In the private Securities Litigation Reform Act of 995.
Forward looking statements are neither historical facts, nor assurances of future performance.
Forward looking statements are uncertain and outside of softens control.
Cellphones 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-K for the year ended December 31 two.
2023 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 related to this conference call, which can be found on the Investor Relations page of our website.
I'll now turn the call over to Frank.
Yes.
Thank you Alex good morning, and thank you for joining <unk> fourth quarter and full year 2023 conference call.
Before discussing our quarterly and annual results I'd like to take a moment to extend my gratitude to our exceptional teams throughout North America, our employees subcontractors and clients have achieved significant milestones in the past year.
Let's take a moment to highlight some of our operational successes in 2023, we completed the construction of 28 bridges as part of the expansive Brightline rail project in Florida market and the much anticipated started rail services from Miami to Orlando, We received multiple awards for our outstanding work, including Eni.
Our Merit project of the year awards for our son tracks connected automated vehicle test facility and the San Juan lateral water supply project, Our Bear Creek total rehabilitation project in Michigan also secure the AWD UAE project of the year award showcasing our proficiency in emergency repair.
Where our corporate equipment team was also honored by T mobile for our excellence in employee enablement during the year.
These accomplishments underscore the commitment and capability of our teams across North America, demonstrating our unwavering dedication to delivering the highest quality work.
Turning to our fourth quarter and full year results, we reported $316 million of revenue at a gross profit of $21 billion in the fourth quarter.
Revenue for the year was $1 2 billion and gross profit was $36 million.
We posted mixed results in the fourth quarter, driven by positive cash flow from operations of $26 million.
And strong performance in our civil segment offset by impacts in our transportation segment from unfavorable charges from our materials and paving business.
We have brought the remaining MSP backlog down to approximately $240 million or eight 5% of our backlog.
And expect to complete a substantial portion of the remaining work in 2024 with a smaller amount of work to be completed in 2025.
We acknowledge the challenges from our legacy projects persists and we continue to face headwinds completing this work we continue to make progress on completing these projects and expect to have the opportunity to settle a considerable number of legacy claims with a focus on generating cash in 2024.
We also continue to gain momentum with new projects in our core business, which are demonstrating strong performance. We anticipate this trend to continue bolstering our confidence in sustained success moving forward.
The projects that we won late in 2022, we're ramping up and we expect them to contribute a larger amount to overall results in 2024.
Paired with <unk> 2023.
This includes the $596 million ASR 23, or <unk> bridge in Jacksonville, Florida.
The $70 million Denver International Airport, Westgate Fund expansion project of $42 million of Toco water pipeline project in Oklahoma, the $243 million U S 19, Pinellas County project in Clearwater, Florida.
$155 million <unk> water treatment plant filter complex in Dallas, Texas.
We also continue to win work at a very favorable bidding environment with limited competition, we had $1 billion of New project Awards. In 2023, we ended the year with $2 8 billion of backlog on our last call. We mentioned, we had over $2 billion of bids and proposals pending we did a great job converting on those.
<unk> opportunities and booked $600 million of New awards in the fourth quarter alone.
Our backlog increased 12% sequentially from $2 $5 4 billion at the end of the third quarter.
In our transportation segment, we booked approximately $460 million of New awards during the quarter.
This included the Robert F. Kennedy Bridge Rehab project in New York City that was discussed on our last call. We constructed the original bridge, formerly known as the Triborough Bridge and $19 36. We were also awarded the San Francisco Oakland Bay Bridge main cable and suspender ropes rehab project in California.
We also built the original Western expanded this bridge and $19 36 and completed the eastern standard This bridge in 2014.
These two projects demonstrate the need to upgrade and rehab. The structures that were originally built nearly 100 years ago, we're seeing opportunities like this from aging infrastructure across the country.
In our civil segment, we booked approximately $140 million of New awards. During the quarter. This included a $77 million phase of the Red River Valley water supply project in North Dakota.
This project is an initial phase of the over $1 billion program. We also were awarded a tunnel project in Dallas and several water resource projects during the quarter.
We continue to see a healthy bidding environment in all of our end markets.
Local and state agencies are spending on critical infrastructure projects across the country. We.
We have also seen an uptick in bidding opportunities in the past few months from the $1 two trillion dollars bipartisan II JA Bill.
That was passed by Congress, but are still in the early innings of the impact from this spending.
Recently announced allocations from this bill include the $5 $8 billion of funding for clean water infrastructure.
<unk> provides $50 billion of funding to support upgrades through the nation's water and wastewater infrastructure.
This is the largest investment in clean water in American history, and less than half of the funding has been allocated.
The Biden administration also recently announced $16 4 billion allocation from AI JA to repair and replace rail infrastructure in the northeast to support 25 bridge and tunnel projects for Amtrak's Northeast corridor.
We expect to bid on certain packages from these recent allocations as they come out to bid in the coming years. We're also tracking several components of large programs in some of our key geographical markets in the south, including Texas and Florida.
These states are expanding transportation and water resource infrastructure in response to strong population growth in recent years.
States are utilizing substantial budget surpluses and grants from federal funding to expand critical infrastructure for their communities.
In the coming months, we expect to bid on several billion dollars of work. This includes the San Juan lateral water treatment clinic, which we expect to bid in March. We also expect to bid on packages from the Galveston may talks have been passed in Texas and the SAR 30, Dupont Bridge in Florida.
In summary, 2023 was a challenging year for Southland, but I'm proud of the operational successes. Our teams accomplished our results were way down primarily by issues in our materials and paving business, which we continue to wind down we look forward to putting these legacy issues behind us in the coming quarters and focusing solely on the great opportunity.
<unk> in our core business, we maintain a positive outlook about the robust opportunities in our markets and are excited about what local state and federal spending will have on our business over the coming years with that I will now turn the call over to Cody for a financial update.
Thanks, Frank and good morning, everyone.
We'll discuss an overview of our financial performance during the fourth quarter and full year ended 2023, you can find additional details and information in the financial statements footnotes and management's discussion and analysis that were filed on Form 10-K last night.
With respect to the fourth quarter revenue was $316 million up $21 million from the same period in 2022 gross profit for the fourth quarter was $21 million down from $36 million for the same period. In 2022. This was primarily due to unfavorable charges in the quarter.
A $16 million in our materials and paving business.
Most profit margin in the quarter was six 7% compared to 12, 2% in the prior year.
Selling general and administrative costs in the fourth quarter were $20 million, an increase of $5 1 million compared to the same period in 2022.
This was mainly driven by additional public company expenses compensation related expenses, including noncash stock compensation.
And bad debt expense.
Interest expense for the quarter was $6 million, an increase of $3 1 million compared to the same period in 2022.
The difference was attributable to increased borrowing costs and higher debt balances.
Sure.
Income tax expense was $3 million for the quarter compared to a tax benefit of 500000 in the same period last year.
While we recognized an income tax expense in the quarter on a pre tax loss. This was due primarily to the true up of forecasted year end results used in interim periods during 2023.
As discussed in prior earnings calls our 2022 tax status included numerous sub chapter S elections, which were no longer available to us in 2023.
More information around the relocation of the selections valuation allowance changes guilty inclusion and more can be found in our recently filed Form 10-K.
We reported a net loss of $6 million or negative <unk> 12 per share in the quarter compared to net income of $20 million in the same period last year.
In the fourth quarter, we produced EBITDA or earnings before interest taxes, depreciation and amortization of.
Of $9 million compared to EBITDA of $32 million for the same period in 2022.
Now to touch on segment performance for the quarter, our civil segment had revenues of $108 million in.
An increase of $24 million from the same period in 2022.
Our civil segment gross profit was $24 million, an increase of $7 million from the same period in the prior year as.
As a percentage of revenue for the quarter, our civil segment had gross profit margin of 23% compared to 20% the same period in 2022.
For the quarter, our transportation segment had revenues of $208 million, a decrease of $3 million from the same period in 2022.
Our transportation segment gross loss was $3 million.
A decrease from a gross profit of $19 million in the same period in the prior year.
As a percentage of revenue for the quarter. Our transportation segment had a gross profit margin of negative one 6% compared to positive eight 9% for the same period in 2022.
The materials and paving business line contributed $46 million to revenue and negative $16 million to gross profit in the fourth quarter.
The additional charges in <unk> were primarily driven by a projected change order on a paving project in Texas that impacted past current and future segments of work our core operating results in this segment, excluding materials and <unk> would have been $162 million of revenue and $12 million of gross prop.
Fit for our gross profit margin of seven 6%.
Consolidated core results in the quarter.
<unk>, excluding materials and paving.
Had been $270 million of revenue and $37 million of gross profit for a gross profit margin of 13, 7%.
Now to touch on full year 2023 results.
Our full year revenue was $1 $2 billion flat for the full year 2022.
Gross profit for the year ended December 31, 2023 was $36 million.
A decrease from $141 million in the prior year, our gross profit margin was 3% in 2023 compared to 12% in 2022. The main driver was attributable to unfavorable charges of $87 million from the materials and paving business during the year.
SG&A costs for the year ended December 31, 2023 were $67 million, an increase of $9 million compared to the prior year the.
The increase was primarily driven by $5 million increase in compensation related expenses, including noncash stock compensation expense too.
$2 million.
And public company costs and $2 million increase in bad debt expense.
SG&A costs as a percentage of revenue were five 8% for the year ended December 31 2023.
Compared to 5% for the full year 2022.
Interest expense for the year ended December 31, 2023 was $19 million, an increase of $10 million compared to 2022. The difference was attributable to increased borrowing costs and higher debt balances.
We reported an income tax benefit for the year of $9 million on a pre tax loss of $27 million, which.
<unk> effective tax rate of 30%.
This compares to tax expense of $13 million on pretax income of $76 million.
Our effective tax rate of 18% in 2022.
As discussed in prior calls our 2022 tax position included numerous subchapter S elections, which were no longer available to us in 2023 more information around the relocation of the us elections valuation allowance changes, you'll see inclusion and more it can be found in our recently filed Form 10-K.
On a go forward basis, we expect the tax rate to be in the $20 to 24% range, depending on certain tax credits nondeductible items, and certain state and local and international taxes.
We reported a GAAP net loss of $19 million or negative <unk> 41 per share in the year compared to net income of $61 million last year.
We reported an adjusted net loss of $39 million or negative <unk> 82 per share in the year. 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 $61 million last year.
Now to touch on our segment performance for the full year ended 2023.
For the full year ended December 31, 2023, our civil segment had revenues of $338 million.
An increase of $32 million from full year 2022.
Our civil segment gross profit for the year was $51 million.
A decrease of $6 million from the full year 2022.
As a percentage of revenue for the full year ended 2023, our civil segment had gross profit margin of 15, 3% an improvement from 14, 9% for the prior period.
For the full year ended December 31, 2023, our transportation segment had revenues of $823 million.
A decrease of approximately $33 million from full year 2022.
Our transportation segment and gross loss for the year was $15 million compared to a gross profit of $95 million for full year 2022.
As a percentage of revenue for the full year ended 2023, our transportation segment had gross profit margin of negative one 9% compared to 11, 2% last year.
Materials and paving business line contributed $188 million to revenue and negative $87 million to gross profit in the year. Our core operating results in this segment, which excludes materials and painting would have been $635 million of revenue and $72 million of gross profit.
Alright gross profit margin of 11, 3%.
Consolidated core results for the year, excluding materials and paving would have been $972 million of revenue and $124 million of gross profit gross profit margin of 12, 7%.
Turning to the balance sheet.
As of December 31, 2023, we finished the year with net debt of $237 million.
Inclusive of cash and restricted cash of $64 million, we paid down $9 million or so.
Sure notes this quarter net of new borrowings as part of closing our transaction early in 2023, we converted previous preferred stock of $24 $4 million to that.
Pro forma using December 31, 2022 figures and the preferred stock conversion, we had $226 million of net debt at the end of 2022. This compares with net debt of $237 million.
End of 2023.
We ended 2023 with $283 billion in backlog, we expect to burn approximately 40% of this backlog in 2024 as Frank highlighted in his prepared remarks, we remain encouraged with our bidding outlook and New award potential.
For your time and your interest in Southland I'll now pass the call back to the operator for your questions.
Okay.
Thank you.
Ladies and gentlemen, we will now begin the question and answer session should you have a question. Please press the star followed by the one on your Touchtone phone.
Rachel path acknowledging your request if you will.
Like to withdraw your question. Please press star followed by Kim.
If you are using a speaker phone please lift the handset before pressing any keith.
Our next question comes from Adam Thalheimer from Thompson Davis. Please go ahead.
Hey, good morning, guys.
Good morning, Adam.
I wanted to start on the MMP jobs.
Sorry to do that because there are a lot of positives in the quarter, but MSP jobs.
Do you think the losses stop in 2024 or at least slow and then my follow up question is like as analysts should.
Should we start to bake in some further losses on those jobs this year.
Yeah, Thanks, Adam so.
We've recorded reduced margins and loss contingency for all the known items.
We've maintained our estimated completion date for the MLP of the Middle of 2025, we expect the bulk of the work to be completed this year.
As we're all aware completing completed we've last handful of projects has been challenging and will continue to do everything we can get these jobs completed.
Any additional issues that may impact margins positively or negatively will be reported at the time is known.
We still Adam have some headwind headwinds to finish this work, but we have a solid plan to get it the specific challenge in the fourth quarter was primarily due to a change order that was denied in a project in Texas and we're going to pursue claims for the money that we feel like we do from the owner.
But we took the charge now to reflect that.
<unk> denied change order going forward.
We expect.
We expect that.
None.
We expect to.
Continue to execute our plan.
We we.
It'll be less and less of our backlog growing going forward.
Adam and this might be one of your follow up question is about $240 million left the backlog and the piece that we're down to.
Less and less than nine 5% of our total backlog.
Your question of what should you guys model at all.
For you all on that.
We recorded a charge in <unk>.
Done our best to be transparent on the reason for those charges.
Quarters, three and four subsequent to the initial Q2 take.
Okay.
That's why we get paid the big Bucks.
We'll figure out.
And then you you had a comment which is one of my follow up question is anyway on.
Generating cash from claims in 2024, what are your thoughts on that.
Approximately half of our Cie balance is comprised of change orders and claims on legacy projects that are substantially complete or entirely complete.
Demobilize from the site.
And so that being said obviously the jobs are jobs are finished.
We're off site. So the claim should be getting a little bit closer Adam.
During COVID-19 as we've talked about previously a lot of the owners just werent in the office and we had to fund these projects.
And so now they're complete now we're starting to get to the table with owners.
Hopefully these settlements are getting closer we're attacking them every day.
As far as it is trying to get in touch with owners get Mediations set up.
Quite claims or claims are getting closer and half are finished.
Okay.
And just last for modeling Cody thoughts on SG&A in 2024 came in a touch higher than I was looking for in Q4.
Yes, we think when we look at what a normal run rate for us on SG&A is going to be it's going to be a net.
By 65%.
A few range.
If we just take what it was in Q4 there were some.
Items in Q4 that are nonrecurring in nature, we mentioned some of those in our MD&A that we filed last night.
I think that.
That's about what our run rate should look like for 2024.
Perfect. Thanks, guys.
Thanks, Adam.
Thank you. The next question comes from question Schwab, Craig Hallum Capital Group. Please go ahead.
Hey, great. Thanks for taking my question.
Follow up on the gross margins as we get to the vast majority of the $240 million legacy project work.
When we go into 2025.
We had strong double digit gross margins.
On the business call it the $2 6 billion.
Youre going to work through a decent portion of this year.
Forward that the projects that.
We talked about bidding on throughout calendar 'twenty four.
Is that the right assumption, we should be under or is that too aggressive.
We're really excited about the backlog that we've picked up.
We touched on in the in the prepared remarks the projects that we won in 2022 are going to continue to ramp.
144, and start to show more of the projects that we picked up late in 2023 should.
Should start to ramp mid 'twenty for Christian and really start to show up in 'twenty five we continue to.
Strongly operate and show strong results in our in our civil segment in core markets and so we're extremely optimistic about the backlog that we have.
Going into 'twenty, four and 'twenty.
25.
Christian just to maybe reiterate what we shared in some of the opening remarks.
MMP basis, we're in that low.
Low double digit.
Margin range. So we've obviously been able to produce those types of results.
In the past look forward getting back to that as we as we work through the legacy legacy backlog burn off.
And then I mean.
The type of work that.
And the backlog, we touch about 40% burn of that backlog.
Number.
Throughout the course.
Throughout the course of the year I mean is there any smaller projects that don't kind of being done.
Intra year.
The backlog.
Kind of what can do faster or not.
We definitely see some potential for that particularly on the civil side those projects are by their nature.
Usually shorter shorter burden and quicker start than some of our longer lead transportation projects.
So we do believe there is some potential for that.
Particularly inside of New awards that we may pick up here early in 2004.
Great and then what should be the appropriate expectation.
That we should be assuming for new awards or or backlog wins.
Calendar 'twenty four and some of the things you've highlighted things Youre combi.
No.
St minus the $2 40.
Legacy software, even including that.
Should we see backlog would you be disappointed in the backlog wasn't didn't have a three handle on it.
All three plus billion dollars base, how we exit.
24, and go into 'twenty five a lot of those monies finally being released.
Yes.
See numerous opportunities out there Christian we're sitting sitting near record backlog right. Now we are pursuing an incredible pipeline of opportunities and expect to pick up a good share of.
Of new work in 2024 and beyond and if you remember.
On the last call, we talked about $2 billion sitting out there.
Pending bids we were able to convert that $2 billion and the $600 million worth of contract wins.
And we see the environment continuing to stay extremely healthy in all the segments that we operate in.
So we're very optimistic about winning good work.
Our focus is going to be to remain disciplined and focus on profitability.
And then been growing sustainably.
Great. Thank you no other questions. Thanks, guys.
Thanks, Thanks, Jason.
Thank you. The next question comes from Jim Ramirez at Jay Davidson. Please go ahead.
Hi, good morning.
Good morning, Jay.
Alright.
So nice levels on the free cash flow.
What are your expectations for free cash flow in 2024, and do you expect some working capital drag early in the year.
Okay.
Yes, so cadence wise with respect to seasonality because theres always the potential for that work starts to ramp up.
Going into and through Q1, when you look at the trend of our year over year cash flow from operations continued to improve we.
We made some significant headway headway in Q4 was positive $25 million cash flow from ops, and we think that net draw to the effect. There is one on our working capital.
Naturally naturally reverse itself out over the course of the year and.
Frank mentioned, we've been focused on selecting projects that have a favorable cash flow curves and expect that to come to fruition as we go through 2024.
Yeah.
Thank you.
A lot of companies have talked about poor weather across the country to start the year.
Having a neutral impact on your business here in Q1, how should we handicap that.
Yes.
We had a pretty a pretty wet January but.
Yes, we expect to.
To pick up here in the coming months, so it could be a little bit of a little bit of a drag.
Thank you.
And one last for me.
You talked about about the cash claims and sorry, if I missed that.
What what are the big ticket items embedded.
With the new claims balance and.
Do you mind, providing a little more color on when we can potentially see some resolutions.
Yes so.
Great question with respect to the larger drivers of that.
To close some of that information historically, we do have several questions out there that had been built up over the years that we are seeing significant progress on we do expect the opportunity to settle some of these in 2004.
But are going are going to be responsible in determining what price we're willing to settle those.
We completed a lot of great projects in a very difficult time and deserve to be compensated for that so no additional.
Color or expectations as far as individual potential settlements go, but we do expect to get to the resolution table on some of the exploration work.
Yeah.
Got it and if I could one more.
Could you talk about the potential cadence of backlog in 2024.
Should we expect the company to build off of these current levels.
We had an impressive book to bill pick up in Q4.
John.
When you look on a year over year basis.
To maintain near record backlog ample opportunity in the pipeline.
But we're going into all of these opportunities are wide open with respect to best return profitability or cash flow.
So.
With that.
That we do see the potential for backlog to increase but are going to be very responsible about doing so.
Frankly anything you'd add to that.
No.
Yes.
Great. Thank you I appreciate the time I'll hop back in.
Thank you thanks for your interest appreciate it.
Thank you and the next question comes from Julio Romero Sidoti <unk> Company. Please go ahead.
Hi, Good morning, Frank Cody and Alex This is Alex Hockman on for Julio.
Okay.
First of all good morning.
Thanks.
Good morning, guys.
The first question is just a quick clarification on the MMP side would you say the loss is more a function of procurement risks or was it the actual execution from John.
Are you speaking specifically to Q4 of this or just an MMP in general.
Yes, <unk>, yes.
Yes Q4.
Yes.
Q4.
I guess, if you were choosing between those options you could say it was.
Execution risk there is a specific change order that drove the bulk of that charge in Q4, we will continue to pursue recovery through other contractually available means as we work to complete that project.
But this was.
The Q4 charges were worse specific a specific event to change.
The change order negotiations.
Got it thank you.
And just zooming out a bit so on the transportation segment could.
Could you help us get a better sense for how core transportation is performing ex MMP American Bridge Midwest Bridge.
Yes, sure the breakout of MMP from Transportation Q4 transportation MMP was just under 8% margins.
Full year <unk> was a little over 11%.
So not not where we see the potential for margin performance in that business, but.
Certainly.
Sure.
Certainly reflects a lot of the good work that we do have in that segment.
Great. Thank you for the color and last one from me just on interest expense.
Should we be assuming for 2024 for you guys.
Yes, I think when you look at interest expense hit in the.
In the fourth quarter.
We're just under that $6 million a quarter March.
We see base rates somewhat stabilizing.
Ultra will decrease over time, so I think where we were in Q4 with our current debt structure is probably a good starting place for modeling out 2024.
Great. Thank you very helpful. That's all for me.
Thank you thanks, Alex.
Thank you there are no further questions I will now turn the call back over for closing comments.
Got it.
Thanks for joining thanks for joining the call today, everyone I appreciate your time.
Ladies and gentlemen, this concludes your conference call for today, we thank you for participating and we ask that you. Please disconnect your lines.
Hum.
Okay.