Southland Holdings, Inc.

Good morning, ladies and gentlemen. My name is Sergio, and I will be your conference operator today. At this time, I would like to welcome everyone to the Southland fourth quarter and Fuji 2022 earnings conference call. All lines have been placed on you to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star, followed by the number one on your telephone keypad. If you would like to withdraw your question, please press star, too. Thank you. Alex, you may begin your conference.

Good morning, everyone, and welcome to the Southam fourth quarter and full year 2022 earnings conference call. This is Alex Murray, Director of Corporate Development and Investor Relations. Joining me today are Frank Renda, President and Chief Executive Officer, and Cody Gallarda, 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 meeting of Section 27A of the Securities Act of 1933, Section 21E of the Securities Exchange Act of 1934, and the Private Securities Litigation Reform Act of 1995. Forward-looking statements are neither historical facts nor assurances of future performance. Forward-looking statements are uncertain and outside of Southwest control. Southland's 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, and we do not undertake any duty to update these statements. For discussion of some of the risks that could affect the results, please see the risk factor section of our Form 10-K for the year ended December 31, 2022, and filed with the SEC on March 21, 2023. We also refer to non-GAAP financial measures. You will find reconciliation in the earnings release relating to this conference call, which could 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 Southland's first call as a publicly traded company. I want to start off by thanking the generations of hardworking individuals that made Southland who we are today and helped us to get to this historic milestone as a public company. I recently had the opportunity to ring the opening bell at the New York Stock Exchange with some of our longest tenured employees to celebrate this milestone. It was a great moment for all of our employees whose dedication has put Southland in an optimal position to succeed for many years to come. Turning to our 2022 results, we executed on our strategic initiatives and achieved record financial results amid a challenging macroeconomic backdrop and uncertainty. Our success is a testament to our employees' persistence and expertise navigating challenging environments, along with the increased demand for our services and strong secular tailwinds driving growth in our industry. We remain in a unique position as a company in an industry that has proven and continues to prove to be resilient through economic downturns. Our employees, alongside our customers, accomplished a lot this past year. I'd like to reflect on some of our success in 2022. We achieved the highest net income in EBITDA and company history. We completed SunTracks Connected, an automated vehicle test facility in Florida. We also finished tunneling one of the largest water drainage tunnels in North America and a water pipeline project in New Mexico that brought ready access to water for many parts of the Navajo Nation for the first time. We're also successfully executing our strategy and seeing increased margins as a result. Our gross margin improved from 9% in 2021 to 12% in 2022. Although our year-over-year revenue decreased 9% from approximately $1.3 billion in 2021 to $1.2 billion in 2022, we're encouraged by the improved profitability with EBITDA increasing 23% to $128 million. We will remain focused on margins and sustainable growth over the long term. We believe this is the best approach to create value and long-term returns for our shareholders. We're seeing increased bidding opportunities with fewer competitors, but we continue to be diligent and selective. We are pursuing projects with increased bid margins than in previous years. We had $1.9 billion of new project awards in 2022, which is the largest amount in any year in company history. This represents an increase of 220% compared to 2021. We ended 2022 with record backlog of nearly $3 billion, which is up 34% year over year from $2.2 billion. We booked a quarterly record of $874 million of new projects in the fourth quarter alone, and our backlog increased 25% sequentially from $2.4 billion at the end of the third quarter. We want a great mix of new projects ranging across our end market and geographies that we expect to continue to ramp up as we head into the spring and summer months. As a result of recent new awards, record backlog, and a robust pipeline, we expect revenue to increase in 2023 and beyond in line with our historical growth rates previous to 2022. We recorded approximately $500 million of new project awards in our civil segment, including several water resource projects in Oklahoma and the Southwest. We were also awarded a $70 million tunnel project for the Denver International Airport's West Gates expansion, and a $155 million water treatment plant filter complex in Dallas, Texas. In our transportation segment, we booked approximately $1.4 billion of new project awards during the year. We won two projects in Florida, including the $596 million SR23 Shands Bridge, and the $243 million U.S. 19 Pinellas County Elevated Roadway. We're also awarded two gate and lock replacement projects for the U.S. Army Corps of Engineers, totaling approximately $200 million. We're off to a great start in 2023 with $150 million of publicly announced awards as well. We could not be more excited about our outlook and the opportunities in our market. On the public client side, we're starting to see an increase in bidding opportunities as funds have begun flowing to state and local governments from the $1.2 trillion bipartisan IIJA bill that was passed by Congress. We expect this to be a catalyst for our business over the next several years. In the coming months, we expect to bid on the Golden Gate Bridge Rehab Project in California and the Livingston Bridge Project in New York. We also expect a large opportunity to bid on packages from the $20 billion Texas Gulf Coast Resiliency Flood Protection Program. We're seeing an increase in the amount of water pipeline project lettings across the Southwest as local water authorities are developing plans to increase ready access to water for their communities. We're also seeing a shift in the way our public customers are delivering projects versus previous years. Some customers are moving away from the low bid model and using an alternative delivery method. We believe this could lend to a more cooperative relationship, allowing us to partner with our customers earlier in project life cycles. Alternative delivery contracts typically get awarded based on a number of factors, including price, schedule, resume, and technical score. Roughly half of the new awards we won in 2022 in terms of dollar value. included another factor other than price in determining the project award. We believe our resume and over 120-year history of delivering specialty infrastructure projects will continue to position us well to compete and win alternative delivery projects in the coming years. On the private client side, we are seeing a strong demand from recent reshoring efforts for manufacturing semiconductor, electric vehicle, and electric vehicle battery plants. We're also seeing increased demand for several data centers and stadiums across the U.S. We expect to bid on packages from the $4 billion Panasonic electric vehicle battery plant in Kansas and the $5 billion Rivian plant in Georgia. We're also seeing opportunities to bid on packages from the new Tennessee Titans and Buffalo Bills football stadiums. In summary, 2022 was a challenging but record year for Southland. We remain optimistic about our outlook and the robust opportunities in our markets. We feel the diversity in our service offerings, along with self-performing capabilities, position us well to capitalize on the greatest infrastructure rebuild of our generation over the next several years. With that, I will turn the call over to Cody for a financial update.

Thank you, Frank, and good morning, everyone. I will discuss an overview of our financial performance during 2022. Last night, we filed on Form 8Ka our management's discussion analysis and audited financial statements and footnotes. You can find additional information related to Southland and our 2022 results in that filing. Further, we filed on Form 10K last Tuesday evening additional information about Southland's operations, business environment, risk factors, and other information. We were encouraged by our recent results for the 2022 fourth quarter and for the full year ended December 31, 2022. We achieved record net income of $61 million for the full year 2022. This was up 56% compared to $39 million for the year ended 2021. Revenue for the fourth quarter was $295 million, down $69 million from the same period in 2021. Our full year revenue was $1.2 billion, down $118 million from the full year 2021. This was primarily due to the timing between older project closeouts and new project starts. During the COVID-19 pandemic, there were fewer projects out for bid, which created a gap in new projects coming online and resulted in lower revenues for the year ended 2022. As Frank mentioned earlier, we're seeing increased opportunities from years past, being awarded a record amount of work over the last year. We believe that the current market we're in will continue to support our recent growth trajectory, and we have more line of sight into continued increased infrastructure spend than we've had in a long time. Gross profit for the fourth quarter of 2022 was $36 million, down from $40 million for the same period in 2021. This was primarily due to lower volume in the fourth quarter. Gross profit margin in the quarter increased to 12% from 11% in the prior year. Gross profit for the year ended December 31, 2022 was $141 million, an increase of $27 million or 23% compared to the prior year. Our gross profit margin increased from 9% in 2021 to 12% in 2022. The main driver was attributable to a larger volume contribution from higher margin projects, some of which were recently awarded. We also had several lower margin projects close out or reach substantial completion in 2022. Selling, general, and administrative costs in the fourth quarter were $14.8 million, a decrease of $1.3 million compared to the same period in 2021. SG&A costs for the year ended December 31, 2022 were essentially flat compared to the full year 2021. SG&A costs as a percent of revenue were 5% for the year ended December 31, 2022 compared to 4.5% for the full year 2021. With that said, we incurred approximately $2.3 million of costs during the year ended 2022 recorded in SG&A related to Southland becoming a public company. Adjusted for these costs, our SG&A as a percentage of revenue for the year ended 2022 would be 4.8%. Operating income in the quarter was $21 million, down $2.4 million from 2021. Operating income for the year was $83 million, which was up 48% from $56 million in the prior year. Interest expense for the year ended December 31, 2022 was $8.9 million, an increase of $1.6 million compared to 2021. The difference was attributable to increased borrowing costs on our variable rate revolver facility. Income tax expense for the year was $13.3 million, which represents an effective tax rate of 17.6% and a decrease of $2.3 million compared to the prior year. The primary difference from the federal statutory rate of 21% were non-taxable earnings of $2.1 million due to the S-elections made by multiple of our entities and the utilization of foreign tax credits of $2.5 million from the inclusion of foreign income, which decreased the worldwide effective tax rates by 2.8% and 3.3%, respectively. On a go-forward basis, we expect the tax rate to be in the 20 to 24 percent range, depending on certain tax credits, non-deductible items, and certain state and local taxes. Now to touch on our segment performance. For the full year ended December 31, 2022, our civil segment had revenues of $305 million, a decrease of $86 million from full year 2021. Our civil segment gross profit for the year was $45 million, a decrease of $5 million from the full year 2021. As a percentage of revenue for the full year ended 2022, our civil segment had gross profit of 14.9%, an improvement from 10.4% from the prior period. For the full year ended December 31, 2022, our transportation segment had revenues of $856 million. a decrease of approximately $32 million from the full year 2021. Our transportation segment gross profit for the year was $95 million, an increase of $22 million from full year 2021. As a percentage of revenue for the full year ended 2022, our transportation segment had gross profit of 11.2%, an improvement from 8.3% from the prior period. Turning to the balance sheet, as of December 31, 2022, we finished the year with net debt of $202 million, inclusive of cash and restricted cash of $72 million. We paid down $11 million on our secured notes in the fourth quarter. We also increased our revolver capacity from $75 million to $100 million. We drew an additional $20 million on our working capital facility in the quarter. As part of the closing of our transaction, we converted previous preferred stock of $24.4 million to debt. Thus, pro forma, using December 31, 2022 figures and the preferred stock conversion, at December 31, 2022, we have pro forma $226 million in net debt. This compares with pro forma net debt of $231 million as of the end of the third quarter of 2022. At this time, we will not be providing guidance for future periods. We will continue to evaluate the decision to provide or not provide guidance in future periods. And finally, we are pleased to announce that our record earnings before interest, taxes, depreciation, and amortization of $128.2 million plus $2.3 million of costs related to Southland becoming a public company total $130.5 million. This securely achieves our base earn-out target and will result in an additional 3.4 million shares being issued to the former ownership group. Thank you for your time and interest in Southland. I'll now pass the call back to Frank for closing remarks.

Thanks, Cody. To briefly summarize, we finished 2022 with record net income of $61 million and EBITDA of $128 million. Our backlog increased 34% to a record of nearly $3 billion. We look out to an unprecedented pipeline of new work opportunities across our end markets. We believe the federal infrastructure bill will be an additional catalyst for more growth for our business as funds are allocated over the next few years. I'm very optimistic about the future of Southland and am confident that we are positioned well to achieve even greater success in 2023 and beyond. Thank you.

With that, I will turn the call over to the operator for questions.

Thank you.

Ladies and gentlemen, we will now begin the question and answer session. As previously mentioned, should you have a question, please press the star followed by the number one on your touch-tone phone. Should you wish to decline from the polling process, please press star followed by the number two. Your questions will be polled 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. Your first question comes from

Adam Thamia from Thomson Davis. Please go ahead.

Hey, good morning, guys. Congrats on a solid Q4. Hey, Frank, you said that 2023 revenue growth will revert to pre-2022 levels. What is that in your view?

You know, we just, you know, we see the prospects of what we picked up Adam in the fourth you know last year and then in the fourth quarter uh really is a is a great backlog and and uh expect uh expect some good things from revenue this year so what how do you think that plays out from a oh go ahead Frank I'm sorry I cut you off oh no that was it Adam

Okay. Hey, and then how does that kind of shake out from a seasonality standpoint? Because I know there's some bigger jobs on that list. When do those really get ramped up?

Adam, so we're seeing the impact of some of the recent awards that were picked up, hit in Q4 of 2022. Expect those to contribute significantly as we get into 2023 with obvious seasonality trends that you're accustomed to seeing in the industry.

Okay. And then on margins, is it kind of the inverse of revenue? Like maybe you revert back to kind of 2021 levels as you're in the early stage of these jobs? Or how does that shake out?

Yes, I think what you're seeing, Adam, you know, we have a historical growth trajectory that's going to continue to be supported by the backlog that we picked up. in the best bidding environment that we've seen. So we do believe the work that we have will significantly contribute to maintaining our historical performance and look forward to delivering on that in 23. Okay.

I'll turn it over. Thanks, guys. Thanks, Adam.

Thank you. Your next question comes from Gene Ramirez from DA Davidson.

Please go ahead.

Hi, good morning. How are you? Good morning. Good morning. For my first question, I know you guys touched a little bit on this, but could you provide some color on what contributed to the stronger margins this quarter despite the lower revenue?

Yes, I think, and there's additional commentary on this and information in the MD&A that we filed last night. And we saw a pickup of an impact and higher margin work that factored into 2022, as well as the closeout and substantial completion of profit projects that had lower margin earlier on in the year.

All right. And could you talk about any plans for the balance sheet over the near term or longer? Is it all influencing which projects you're prioritizing and pursuing today?

Do you clarify or point me a little bit more in the right direction of what part of the balance sheet you're asking about?

Oh, just overall. I guess the one way to rephrase this is regarding the balance sheet, how is it influencing the type of projects you are prioritizing today? Are you looking for larger work or is it all based on just better margins?

Yeah, you know, as far as the work that we're looking at, you know, we think the balance sheet suits what we're looking at pretty well. All sectors are great, and we're going to focus first and foremost that we have the right team for the job in the right area for a quality owner. If those boxes are checked, then it's all about where we get the best return. Does that answer your question?

Yeah, no, that makes sense. I guess one last one, if I could. I know you're not providing any sort of guidance, but could you perhaps maybe talk about expectations for EBITDA in 2023? Does the company still see $150 million in adjusted EBITDA? Is that still attainable?

You know, we're really excited about the business. We think that the work that we have is great. Prospects are even better. Couldn't be more excited about the backlog that we have.

And I think there's additional disclosures we make about expected burn off of the backlog that we are carrying, your record backlog at year end. We typically burn off about 50% of that in the following year. So like Frank said, feel very good about heading into 2023. Great.

I appreciate your time. I'll hop back in the queue. Thank you. Thank you.

Thank you. Ladies and gentlemen, as a reminder, should you have a question, please press star one. Your next question comes from Julio Romero from CLOD. Please go ahead.

Hey, good morning, Frank, Cody, Alex. I guess to start off on maybe more of a strategic question, you mentioned you're seeing increased bidding opportunities and you also talked about bidding across a broad swath of in-markets. Can you maybe speak to project selection You know, what specifically are you looking for in terms of the projects you'd like to bid on and compete for?

You know, it really seems like right now every sector that we operate in has really, you know, got a tremendous amount of work in the pipeline. And so we're going to continue to stay focused on working for owners that we know staying in our – in our home markets where we have the resources to do the work and then being extremely selective to try to maximize return. But, you know, transportation is great. Water resources are great right now. And we self-reform, try to self-reform 90% of the critical path work that, we look at. So if it checks all those boxes, you know, we're going to move forward.

Okay. No, that's helpful. And just thinking about the operating environment, how does the operating environment compare today as to, say, you know, how you exited December?

As far as the kind of supply chain in regards to supply chain labor and whatnot? across the board supply chain labor um a catch-all kind of question yeah so you know we're starting to see the supply chain uh stabilize more and more you know suppliers are starting to uh to get their schedules out and get get closer on uh on delivery uh we you know we have a large equipment fleet so uh That helps us out quite a bit, owning our own equipment. We don't have to depend on others to get new equipment or to rent. So that helps us control our schedules a little bit better. As far as labor, it is an issue. It's going to continue to be an issue. We think we have a great training program with our next gen up. And we build some of the most iconic projects around. We love what we do. feel that our people feel that energy and want to be a part of that. And, you know, we are starting to see a cooling in the housing market, which helps on the unskilled, you know, labor front as well.

Understood. And, you know, it's clear that you're not providing guidance. Just, you know, maybe in your words, what would a successful 2023 look like to you?

everybody safe and accounted for and continuing to build some of the most iconic projects around, picking up some really good work and performing the way that we have in the past and the way that we know we can perform.

Okay.

And then maybe just last one is just any thoughts on CapEx expectations for 23 at all?

Yeah, so our CapEx on a long-run basis will approximate our depreciation. It's been low in recent years as our project awards had a little bit of a lull. We do expect CapEx to pick up in line with the significant increase in backlog that we've had at the end of the year.

Okay, very good.

I'll hop back in queue. Thanks very much. Thank you. Thank you.

Thank you.

Your next question comes from Adam Donimer. Tom Thompson, ladies. Please go ahead.

Oh, hey, Cody, I guess that was my question on the CapEx, but I was going to say good free cash flow in the back half of 22. So if I pull it down to free cash flow for 2023, maybe you can give us some high-level thoughts.

Yeah, I mean, we've... The bidding environment we're in, we're very excited about the position we're in for favorable billing milestones, and you saw that in the pickup in BIE that we had coming into the close of the year. So we do see that continuing to improve and look forward to delivering on that in 2023.

And then is there anything from – you don't have much left from the kind of legacy American Bridge projects, but you have a little. Just curious how that might impact 2023. Okay.

Yeah, the legacy portfolio, I don't expect to have a material impact. 90% or plus of those jobs have been satisfactorily completed and closed out. We have some impressive new awards that have been picked up by the American Bridge team and are really excited about those.

We're probably even more excited about what's out there in the bench that brought us at it. Okay.

Last one for you, Frank. I mean, you've been doing this a long time, and I perked up when you talked about alternative delivery, and that was half of the projects that you won last year weren't just because you were the low-priced bidder. And you also said you're seeing fewer bidders per job, so maybe you can just kind of high-level opine on whether you've seen this before or how long this might last or what the ultimate impact of this is.

I've never seen a market like this before. You know, you come into a year and you've got five or ten projects that fit you really well. You think it's going to be a pretty good year. We've just got so many more projects than that that fit us perfectly. And to your point, you know, we have over 120 years' experience, you know, have one of the best resumes in the business. And to be able to capitalize on that, on these alternative delivery projects, projects and programs are going to be extremely beneficial to us. So really excited about that. Excited about every every sector we work in.

How does alternative delivery work? I mean, do they reach out to how early are they reaching out to you?

You know, pretty early right now, but, you know, we're also seeing some programs move up, you know, so pretty early when they're on the schedule. projects in florida due to population shifts that have kind of moved up a couple of projects on the west coast that that have moved up but very early on typically in the process they'll reach out and you know from the west coast you'll see a cngc where you'll get involved and you know kind of help develop design uh design builds uh you know a little bit later in the process but uh very early on in the process and with our resume i think we get calls uh sooner than a lot of people went to tap in our engineering ability, engineering and technical ability. Got it.

Okay.

Thanks again.

Thanks Adam. Thanks Adam.

Thank you. Your next question comes from Jean Ramirez from DA Davidson. Please go ahead.

Hi. Thank you again. So with all these new opportunities coming on and you talked about the type of works that you're selecting, how is the bidding activity looking like? Is it more competitive or are you strategically choosing work that fits all your boxes that you may have an advantage compared to your competitors? Thank you.

Definitely, you know, if we don't feel we have a competitive advantage right now, you know, we're not moving forward. You know, we picked up about $1.9 billion worth of work, and typically that was in a one-two bidder situation. So less competition, but we're going to continue to be extremely selective, and the prospects of work out there are just incredible. So I feel really, really good about that. about being able to continue to be extremely selective and bid on a lot of work while doing so, which should improve margin.

And is there one type of sector in the work that you're bidding that is what, quote, unquote, your sweet spot, or is just generally with all your capabilities, nothing's – Everything's kind of like plain level.

Yeah, you know, you have to evaluate every project, you know, at the project level. So, you know, we love the water market right now. We love the transportation segment, the underground segment, the marine segment. You know, everywhere's got a lot of prospects. So it's hard to answer that on a high level, but getting into, you know, we get into the details on the specific projects, but there's no sector that, you know, we see as being exponentially better than another right now. And we self-perform in every area, do all the specialty work. So we think we're suited well in all right now.

Got it. Thank you. I appreciate your time. Thank you.

Thank you. There are no further questions at this time.

You may proceed.

Thank you, everyone. Thank you for your interest in Southwest.

Thank you, everyone. I appreciate it.

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect.