Q3 2025 Southland Holdings Earnings Call
Speaker #2: Forward looking are statements uncertain , and outside of Southland's control , Southland's actual results and financial condition may differ from those materially in forward projected statements .
Speaker #2: you should Therefore , not rely on any of these forward looking statements and we do not undertake any duty to update these statements .
Speaker #2: For a discussion of some of the risks that could affect results, please see the Risk Factors section of our 10-K for the year ended December 31, 2020.
Speaker #2: That Four . was filed with the SEC on March 5th , 2025 , and discussion on form 10-q for the quarter ended September 30th , 2025 .
Speaker #2: That was filed with the SEC last night . We refer to also 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 .
Speaker #2: With that, I will now turn the call over to Frank. Thank you, Alex.
Speaker #3: Good morning , and thank you joining for third quarter 2025 conference call . Before we jump this into quarter's results , I'd like to highlight that this quarter the five year marked anniversary of our acquisition of American Bridge Company .
Speaker #3: quarter , we also achieved substantial This completion on the last of the 27 highly technical projects assumed in the acquisition . These projects included Queensferry Crossing and Scotland , Edmonton Valley Light Rail in Canada , Queensboro Bridge in New York , and the SR 520 Mott Lake project in Washington , closing out this final construction phase of the legacy AB backlog is a major accomplishment testament and to our operational expertise .
Speaker #3: Technical knowledge and the ability to successfully execute some of the world's most complex infrastructure projects. Now, to turn to this quarter's results, we reported third quarter revenue of $213 million and gross profit of $3.3 million.
Speaker #3: Consolidated gross profit margin was 1.5% , increase from an prior year The improvement was driven -29.5% in the by performance in our strong new core work and fewer impacts from legacy projects .
Speaker #3: In this quarter versus the same quarter last year . core Our new work continues to perform at double digit gross margins . Our civil business continues to perform very well , with 10.5% gross margin in this .
Speaker #3: was This inclusive of unfavorable non-cash adjustments from dispute resolutions that impacted revenue and gross profit by $8 million in the quarter We . continue to make progress resolving smaller disputes , a vast majority of our contract assets balance consists of we are money from legacy owed projects that were started prior to Covid , where construction is complete .
Speaker #3: We expect our contract assets balance to continue to decrease and to collect a significant amount of cash from these legacy disputes. We have a clear plan to finalize the remaining legacy projects and are making progress toward their completion.
Speaker #3: As this work wraps up , we expect to significantly de-risk our earnings profile as progress we next through . We have some more work to do , but we are getting closer to putting these projects completely behind and focusing solely us on our high new quality backlog core .
Speaker #3: During quarter , we added the approximately $151 million in new awards and contract adjustments was led by . This a $77 million bridge rehab contract .
Speaker #3: In our transportation segment . For a private client in the Pacific Northwest , and a $53 million water resource contract that our segment in Texas , bringing our total backlog to approximately $2.26 billion .
Speaker #3: All indications are that the robust demand for infrastructure will continue for years to come . Our outlook on the market remains positive . We continue to successfully execute our strategy of targeting short duration , high margin projects in both public and private markets and markets .
Speaker #3: We are demand seeing for large private centers . We been have carefully evaluating data center opportunities last couple of over the , maintaining a highly selective and disciplined approach to ensure we remain within our core capabilities .
Speaker #3: Many new data center sites are very large and are being built in rural areas, resulting in an ongoing need to build additional water resources to support these build-outs.
Speaker #3: Utility packages on the data center projects are getting larger and the potential is margin very attractive . We are in discussions several on data center opportunities to leverage our utility and site development capabilities .
Speaker #3: The construction activities we are pursuing are very similar to the scopes in our existing core backlog and match our team's expertise very well.
Speaker #3: We expect to convert some of these opportunities to backlog in the coming quarters . While data center projects present a unique opportunity , our strategy remains the same and we will continue to pursue a mix of private and public market opportunities .
Speaker #3: We continue to see strong demand for public market projects from federal , state and local levels . The Iija underway is well and driving strong demand for public market projects .
Speaker #3: Significant opportunities remain across our core business , with hundreds of billions in authorized funds still to be spent under the Iija at the state level .
Speaker #3: Last week , Texans voted in favor of proposition for the amendment proposed by the House Joint Resolution seven , which will allocate $20 billion to the Texas Water Fund over the two decades .
Speaker #3: next This is a major commitment to one of our core markets , and we are positioned well to help expand Texas's water resources .
Speaker #3: Upcoming public market opportunities include numerous resource water projects in the Midwest and the southwest . We are also excited about several bridge opportunities on the southeast .
Speaker #3: We have great visibility into future demands . We will continue to be focused on improving margins first , then growing backlog and revenue .
Speaker #3: We will ensure we have the right resources to build the work and continue to pursue projects that align with our core capabilities . In as we closing , reflect on the quarter , we have a similar message to the past few quarters .
Speaker #3: While we have more work to do to get the legacy projects completely behind us , our core business is performing well . As we wrap up legacy projects .
Speaker #3: We expect to deliver strong and consistent results with robust opportunities across our end markets . We expect to win our fair share of high margin projects .
Speaker #3: We maintain confidence in our long term outlook and future direction of our business . With that , I'll now turn the call over to Keith for a financial update .
Speaker #2: you , Thank Frank .
Speaker #3: And good morning , everyone . I'll discuss .
Speaker #2: An overview of .
Speaker #3: Our financial . performance during the third quarter for .
Speaker #2: 2025. You can find additional details.
Speaker #4: In information in the Financial statements . Footnotes and Management's Discussion and Analysis that were filed on form 10-q last night . Revenue for the quarter was 213.3 million , up 40 million from the same period in 2020 .
Speaker #4: Revenue in the quarter was lower than anticipated due to the timing of new project starts and impacts from dispute resolutions and project delays.
Speaker #4: Gross profit was 3.3 million , an increase of 54.4 million from the same period in For 2020 . gross profit margin in the quarter was 1.5% , compared to -29.5% in the prior year .
Speaker #4: Selling, general, and administrative costs in the third quarter were $14.6 million, a decrease of $2.9 million compared to the same period in 2020.
Speaker #4: For the decrease was primarily due to lower compensation expenses as well as a reduction in legal and professional fees compared to the same period in 2020 .
Speaker #4: For interest expense for the quarter 9.2 million , totaled up 1.6 million from the prior year . This increase was primarily driven by an increase in interest rates on external borrowings .
Speaker #4: We anticipate interest expense to average approximately 9.5 million per quarter , going forward . Income tax expense was 57.2 million for the quarter , compared to income tax benefit of 17.1 million in the same period last year .
Speaker #4: Included in this quarter's income tax expense was a $57.3 million one-time non-cash expense—a valuation allowance placed on our net deferred tax assets.
Speaker #4: This valuation allowance is required under US GAAP . However , this does not limit utilization of the respective tax the future . assets in We expect our effective tax rate for 2026 to be in the 15 to 20% range based on current forecasts .
Speaker #4: reported We a net loss of 75.2 million , or net a loss of share in the quarter , compared to a net loss of 54.7 million , or a loss net of $1.14 per share in the same period last year .
Speaker #4: is It important to note that approximately $1.06 per this share of quarter's loss was due to the one time , non-cash tax expense related to the valuation allowance .
Speaker #4: quarter , we In the third produced EBITDA of -3.5 million compared to EBITDA of -58.7 million for the same period in 2020 . For now , to touch on segment performance for the quarter , our civil segment had revenue of 99.5 million compared to revenue of 55.8 million in the same period in 2020 .
Speaker #4: For our civil segment , gross profit was 10.4 million , an increase of 28.7 million from the same period in the prior year .
Speaker #4: As a percentage of revenue for the quarter, our civil segment had a gross margin of 10.5%, compared to -32.8% in the same period in 2020.
Speaker #4: For . In the quarter , we had unfavorable adjustments from dispute resolutions on two projects in our civil segment that impacted revenue and gross profit by $8 million .
Speaker #4: These resolutions resulted in cash collections of approximately $6.5 million in the quarter, with an additional $3 million expected in the months for the quarter.
Speaker #4: Our transportation segment had revenue of 113.9 million , a decrease of 3.6 million from the same period in 2020 . For our transportation segment had a gross loss of 7.2 million , an increase from a gross loss of 32.8 million in the same period in the year prior .
Speaker #4: percentage of revenue As a quarter , our transportation segment had negative gross margin of to a for the negative gross margin of 27.9% for the same period in 2020 .
Speaker #4: For . The Materials and paving business line contributed 22.9 million to revenue and 3 million in gross loss in the third quarter At the .
Speaker #4: At the end of the quarter, we had approximately $89 million of remaining backlog. This is down from $99 million at the end of last quarter.
Speaker #4: I'd like to highlight that one . MMP projects contract value was increased by 21 million in the quarter a . This was result of ongoing discussions with the owner and is a positive outcome as we expect paid more to get to complete the remaining work on this scope of contract .
Speaker #4: quarter , we Last noted that we expected three of these projects to tail into 2026 . We now expect the final four paving projects to be completed in 2026 .
Speaker #4: Our transportation segment margin was also impacted in the quarter by an unfavorable adjustment of 7 million on a legacy bridge project in the Midwest .
Speaker #4: The project experienced delays and has significantly impacted results over the past several years. Our remaining non-legacy backlog is now $32 million, down from $40 million last quarter.
Speaker #4: Excluding the from impacts MMP , unfavorable adjustments in our non MMP legacy backlog and dispute resolutions . Gross profit in our core business produced double digit margins .
Speaker #4: We expect legacy projects to have less impact on the overall results in 2026 . As we continue to wind down these projects . We finished the quarter with approximately 2.26 billion of backlog , of which we expect to burn approximately 39% over the next 12 months .
Speaker #4: Now , to touch on the balance sheet , we are exploring debt solutions that would provide us with additional capacity and offer flexibility in accelerating work on the legacy backlog .
Speaker #4: We are currently in expect to be able discussions and to close a facility before we report next quarter's We will share more details as this process results .
Speaker #4: . progresses Thank you for your time and interest in Southland . I'll now pass the call back to the operator for questions .
Speaker #1: Thank you . Nathan . Gentlemen , we will now begin question and the answer session . Should you have a question , please press the star , followed by the number one on your touch tone phone .
Speaker #1: You will hear a prompt that your hand has been raised. Should you wish to decline from the following process, please press the star followed by the number two.
Speaker #1: If you are using a speaker phone , please lift the handset before pressing any keys . One , for your moment please first question .
Speaker #1: Your first question comes from Adam Thirlmere from Thomson Davis . Please go ahead .
Speaker #5: morning guys Hey good .
Speaker #3: Hey good morning Adam . Morning .
Speaker #5: I want to start with your comment on data centers . I was curious if you were looking at anything else on the private side .
Speaker #5: And what is the scope that or how big are those packages potentially for ? For you ?
Speaker #3: Yeah . So what we're looking at , Adam , is , you know , stuff that's in in our , in our core market .
Speaker #3: So, there are some larger data centers out there. You know, the data centers are obviously a very active market right now.
Speaker #3: Just tons of opportunities across the country . The past couple of years , these developments have just exploded . You know , so we've spent time getting our arms around the scopes .
Speaker #3: And , you know , they're very similar to what we've done for public owners . But now it's just just for a slightly different customer The base .
Speaker #3: opportunities on the public market side are still really strong . You know , we see data centers as an opportunity to supplement our existing work and really turn , you know , turn some cash quickly .
Speaker #3: So we're excited about the potential and hope to talk more about these here soon . As far as other , you know , work on the private private side .
Speaker #3: You know , we've always had a mix of private and public . You know , more heavily weighted , you know , to the public sector .
Speaker #3: But there's there's a lot of opportunities with new manufacturing coming to the US that we're as well . But our looking at specifically would be , know , you water wastewater site development type market on those developments .
Speaker #5: Got it. And then, so you took an $8 million hit to gross profit from claims settlement in Q3, but that's going to lead to $9.5 million in cash.
Speaker #5: So not a not a terrible trade off . There . I'm just curious . Frank , you And sounded like you had a little better sense and you had a little bit more , I don't know , momentum or it seemed like you had a higher confidence that maybe a lot more of these legacy claims would get settled .
Speaker #5: in the Call it next 12 months . Is that fair to say ?
Speaker #3: Yeah . You know , we've made you know , we've made some small progress this quarter on some of the smaller disputes , which leads to some optimism .
Speaker #3: It's good to see , you know , our contract assets balances coming down . But now we're yeah these things can't can't wait to be forever .
Speaker #3: We're at the settled table on numerous numerous claims . And so yes , we expect to see some some progress , some real progress over the next 12 months .
Speaker #5: And then just a last one for me . The project delays that impacted you Q3 in have those projects started in Q4 , and I know you're not giving guidance , but just curious if kind of you expect to end the year on a note higher .
Speaker #4: Yeah . So as it relates to some of the delays that that that we've encountered , you know , we would so it's delays .
Speaker #4: And then we also had some recognition in the revenue just due to some of the , adjustments that we took in the quarter .
Speaker #4: I would expect Q4 to be pretty similar to Q3, with maybe a slight uptick.
Speaker #5: I'll turn it over . Thanks , guys .
Speaker #3: Thanks , Adam . Thank you .
Speaker #1: Thank you . Your next question comes from Julio Romero from and company . Please go ahead .
Speaker #5: Thanks .
Speaker #6: Hey . Good morning , Frank , Keith and Alex . I wanted to talk about the free cash flow outlook for the fourth quarter .
Speaker #6: Just given the decrease in the contract assets , which is certainly notable , but also the increase in the receivables , I believe you called out the 3 million in cash collections expected in the fourth quarter , but , you know , just I keep looking at that increase in receivables and just trying to , you know , see if you can help us out with kind of a finer point on free cash for the fourth quarter .
Speaker #4: Absolutely . So so we did generate positive cash flow ops in from the quarter . And we're there year to date . We may see a decrease in Q4 and and Q1 of 2026 .
Speaker #4: But we do expect to see some positive cash flow overall from operations in 2026.
Speaker #6: Okay . Understood . And can you help us know , pipeline for you the additional quick turn projects in the civil segment ? And and size and has the runway evolved at all since Texas passage of proposition four to water infrastructure fund projects .
Speaker #7: You broke up a little bit there. Could you just repeat that?
Speaker #6: Yeah . Can you hear me ? You broke up as well , so I couldn't hear you I was . I , just trying to see if you know the size and the runway of these .
Speaker #6: Quick turn high projects margin in the civil segment and has that changed at all since Texas passage of prop four ?
Speaker #3: Yeah . No civil margins have been strong . And we expect this to continue . You know , this quarter , civil margins were 10.5% , included which impacts of $8 million from dispute resolutions .
Speaker #3: If you look year to date , gross margins are roughly 17% , which which is very strong . So overall , we're excited about the success .
Speaker #3: We're seeing in the civil market . And we really like those 50 to $150 million quick turning cash cash projects on the civil side , and that the bill that Texas passed , you know , adding another $20 billion , you know , it's critical water projects should be should provide some great tailwinds for us .
Speaker #3: But . and are you guys 20 billion to be deployed ? Sorry .
Speaker #6: No , no , no . You're you're fine . And then you know I know last quarter you talked about those those tunnel boring machines that you have that kind of give you a competitive advantage .
Speaker #6: There . Are you guys kind of the the only game in town with those , or can you just speak to how that kind of differentiates you there .
Speaker #3: So Yeah . so there are quite a few total jobs out there . You know , there we feel like we have a significant advantage producing our own tunnel .
Speaker #3: Boring machines in some cases . And we have a we have a really good fleet , you know , probably one of the , one of the larger fleets in , in the United States have existing TBMs .
Speaker #3: So, hopefully we’re able to really take advantage of the tunnel opportunities bidding over the next 12 to 24 months. I’m so excited about that market as well.
Speaker #3: Great question .
Speaker #6: good . I'll Very pass it on . Thank you .
Speaker #3: Thank you .
Speaker #1: Thank you. Your next question comes from Christian Schwab from Craig-Hallum Capital. Please go ahead.
Speaker #1: Thank you . Your next question comes from Christian Schwab from Craig-hallum Capital . Please go ahead .
Speaker #8: Thanks for taking my questions , Frank . I'm just wondering if you could give us an idea of the size of the projects for for a typical data center that , that that you're looking into .
Speaker #7: Yeah .
Speaker #3: So so for us , Christian , we're looking for data centers that are that are close to where we have existing projects , you know , in that water , water , wastewater market .
Speaker #3: But , you know , you could see projects as as small as probably 15 to $20 million . You know , and as far as the the top end , you know , we're going to feel market the out , you around that know , 50 , $75 million range maybe to start .
Speaker #3: But they could they could grow from there .
Speaker #8: Great . And then it sounds like we're finally , you know , coming to the end of of legacy , you know , work And should .
Speaker #8: finish that up in calendar You know , as 26 . we go into , you know , 27 , you know , would you expect , you know , your core business is to run , you know , is the current you know , margin profile or do you think that could actually improve in , in 27 ?
Speaker #3: Yeah . So you know , 25 as we talked about was of that that reset was kind we really going to focus cleaning up on legacy projects .
Speaker #3: know , You and use that as a springboard into 2026 . Getting into more of our our core work . then 2027 , as you stated , being into completely our core market and and we're excited to to really improve profitability and in , in the years to come .
Speaker #8: Okay , great . No other questions . Thank you .
Speaker #3: Thank you . Christian .
Speaker #1: Thank you . Gentlemen , there are no further questions at this time . You may proceed .
Speaker #3: , everyone for Thanks joining us and look forward to speaking with you all next quarter .
