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spk01: Good morning, my name is Joelle and I will be your conference operator today. At this time, I would like to welcome everyone to the Southland first quarter 2023 earnings conference call. All lines have been placed on mute 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 one on your telephone keypad. If you would like to withdraw your question, please press star 2. Thank you. Alex, you may begin your conference.
spk06: Good morning, everyone, and welcome to the Southland First Quarter 2023 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 Gallardo, 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 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 Southland's 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 a discussion of some of the risks that could affect results, please see the risk factors sections of Form 10-K for the year ended December 31st, 2022 and filed with the SEC on March 21st, 2023. Our annual report filed on amended Form 8-K and filed with the SEC on March 22nd, 2023. and our form PENQ for the quarter ended March 31st, 2023, that was filed with the SEC last night. We will also refer to certain non-GAAP financial measures. Reconciliations of these non-GAAP financial measures can be found in the earnings release that was filed on Form 8K last night and on the investor relations page of our website. With that, I'll now turn the call over to Frank.
spk02: Thank you, Alex. Good morning, everyone. To start the call, I would like to thank the nearly 3,000 Southland employees across North America and the Caribbean that are building some of the most critical infrastructure projects for our communities. Their dedication to constructing quality and safe projects were recently highlighted during National Safety Week. Seeing our teams reflect on safety successes while continuing to empower each other through our Protect My Family culture was incredible. Turning to our results, we started the year on a positive note, with revenue increasing 6% from last year to $275 million, driven by an increase in new project starts in the first quarter. It is important to note that we typically expect the first quarter to be seasonally slower for us. We anticipate increased quarterly revenue as we progress through the middle to back half of the year. We are encouraged by another quarter of increased year-over-year margins. Our gross profit margin increased from 2% last year to 7% this quarter, and our gross profit increased from $5 million to $19 million this quarter. This was driven by a more favorable mix of new higher profit work starting this year. This includes the $243 million US-19 elevated roadway in Clearwater, Florida, the $42 million Atoka water pipeline and the $50 million slip lining pipeline rehabilitation project in Detroit for the Great Lakes Water Authority. Additionally, we have begun construction on an innovative $70 million tunnel project for Denver International Airport. The operating environment is starting to show signs of stabilizing and is more favorable than we experienced in the last two years. We are experiencing shorter wait times on materials and equipment, and overall availability has improved. While the labor market remains tight, wages are starting to stabilize, which is a positive trend. We expect to benefit from the improving operating environment and continued robust demand for our services. During the first quarter, we had $170 million of new awards, which compares to $41 million of new awards in the first quarter last year. Our backlog decreased slightly from $3 billion at the end of 2022 to $2.9 billion at the end of this quarter. This was expected due to a typically slower pace of bidding opportunities for the first few months of the year. Year over year, our backlog increased 43% from $2 billion at the end of the first quarter last year, which is very encouraging. We expect new awards to accelerate in the second half of the year, similar to last year. Our core end markets are thriving and we remain very optimistic about their potential. The signature bridge, marine, water pipeline, water and wastewater treatment, and tunnel markets are showing strength right now. These end markets continue to be our main focus and we are excited about the robust demand and limited competition in these areas. We are also seeing unique opportunities from federal funding and competing on projects that we did not compete on in years past. We won two broadband projects, like recently announced District 1 middle mile broadband network project for Caltrans. This project includes installing 210 miles of the middle mile broadband network. It is expected to create an affordable broadband infrastructure, enabling network connectivity and equitable high-speed service to unserved and underserved communities. We were selected for pre-construction services, and the construction phase is expected to be valued between $65 and $80 million and added to our backlog in 2024. Installing broadband aligns well with our core capabilities and is a natural extension of our existing skill sets. Increased state and federal broadband spending have created a valuable opportunity for us to leverage our world-class underground expertise and establish a strong presence in this space. We feel there is an incredible opportunity from the federal spending from the capital projects funds and the IIJA, which have allocated more than $75 billion to expand broadband infrastructure across the country. In the near term, we see promising opportunity in California, as the state has moved more quickly to utilize state and federal spending on broadband compared to other states. Approximately 15% of households in California do not have access to broadband, And the state plans to spend $6.5 billion to mitigate this problem. Each state is set to receive at least $100 million for broadband infrastructure from federal spending. And we anticipate further opportunities to develop across the country as other states leverage this funding. We also continue to target alternative delivery contracts, like the CMGC model used by Caltrans. where we win projects based on factors other than just low price. Our diverse in-market experience is attractive to our customers and gives us a true competitive advantage in alternative delivery projects. We also believe working with our customers early in the project life cycles will be beneficial to everyone involved. As we mentioned on the seeing strong demands on the private client side for manufacturing semiconductor plants, data centers, EV battery plants, and sports stadiums. We do not expect a slowdown in demand from our private clients for the foreseeable future. We are pursuing over two dozen large private programs with a pipeline of over $100 billion. We did not see these type of opportunities in years past. Recent commentary and excitement about artificial intelligence technology from companies such as Meta, Alphabet, and Taiwan Semi highlights the increased need for semiconductors and data centers to support the computing power and storage requirements AI demands. Geopolitical tensions overseas coupled with federal spending from the CHIPS Act and the IRA give us confidence that many blue chip private clients will continue to invest in their domestic capabilities and we are at the beginning stages of a substantial build-out of manufacturing facilities in the U.S. This creates a great opportunity for us. Although the customers are different than in years past, the scope of work is consistent and fits our core capabilities perfectly. Many of the new semi-plants and data centers are being built in rural areas where there's not enough capacity from existing infrastructure. Most of these facilities need on-site water treatment plants, water pipelines to connect to local water systems, and additional enhancements to local water treatment plants. We are well positioned to provide these critical solutions to our private customers and expect this market to drive growth for our business. In summary, the first quarter was a good start to the year. We maintain our positive outlook for the business and are tracking the largest opportunity pipeline we have ever seen. We also continue to find innovative ways to expand our capabilities while leveraging our existing skill sets that will create long-term value for our stakeholders. With that, I will now turn the call over to Cody for a financial update. Thank you, Frank, and good morning, everyone.
spk03: I will discuss additional components of our financial performance for the quarter ended March 31, 2023. Last night, we filed on Form 10Q our financial statements and footnotes and management discussion and analysis. You can find additional information related to Southland and our first quarter 2023 results in that filing. We are encouraged by our recent results for the first quarter and improved performance over the first quarter of 2022. Revenue for the first quarter of 2023 was $275 million, an increase of 16 million or 6% from the same period in 2022. was primarily due to new project starts and increased existing project activity in our transportation segment in the quarter compared with the first quarter of last year. Gross profit for the first quarter was $19 million, an increase of $14 million for the same period in 2022. This was primarily attributable to higher volume in the first quarter and the absence of certain negative project adjustments in our transportation segment in the first quarter of 2022. Gross profit margin in the quarter increased to 7% from 2% in the prior year. Selling general and administrative costs in the first quarter were $15.6 million, an increase of $1.3 million compared to the same period in 2022. With that said, we incurred approximately $1 million of non-recurring costs during the quarter 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 quarter would have been 5.3%. Operating income in the quarter was $3.4 million, up $12.7 million from an operating loss of $9.4 in 2022. Interest expense for the quarter was $3.3 million, an increase of $1.3 million compared to the first quarter of 2022. The difference was attributable to increased borrowing costs on our variable rate revolver facility and conversion of preferred stock to debt as part of closing our merger. Income tax expense for the first quarter was 1.8M. This represents an effective negative tax rate of 70%. This unusual tax expense on a loss before taxes of 2.5M was attributable to certain of our subsidiaries voluntarily revoking their S-corporation tax status as a result of the merger, effective January 1, 2023. This change in our U.S. consolidated filing structure resulted in income tax expense due to recording certain deferred tax assets and liabilities related to entities that were previously not subject to income tax. On a go-forward basis, we expect that the tax rate will be in the 20 to 24 percent range depending on certain tax credits, non-deductible items, and certain state and local taxes. We recorded a GAAP net loss of $4.7 million, or negative 11 cents per share. This compares to a net loss of $13.6 million in the same period last year. Basic and diluted net loss per share was the same for the quarter because the inclusion of potential shares in the diluted share count would have been anti-dilutive for the quarter. We would have expected our diluted share count to have been 47.9 million shares this quarter had their effect not been anti-diluted. We presented an adjusted net loss of 1.5 million in the quarter, or negative 3 cents per share. This compares to an adjusted net loss of 13.6 million for the first quarter of 2022. Please refer to the adjusted net loss reconciliation included in the press release we filed last night on Form 8K. The adjustments included $1 million of transaction related expenses and a $3 million non-cash other expense related to the change in fair value of a contingent liability resulting from the company hitting its 2022 base earn out target. When we closed our merger, the contingent earn out considerations were valued on our balance sheet based on the probability of attaining certain EBITDA targets. At close of the merger on February 14th, we recognized a 90% probability of obtaining the 2022 base earn out. As a result of obtaining the 2022 base earn out, we needed to recognize the remainder of the liability as an expense in the first quarter, which was the primary driver of the $3 million other expense. It is important to note we currently have a percentage of the 2023 base earn out as a liability on our balance sheet and have not recorded a liability associated with the 2023 bonus earn out. As the year progresses, we will reevaluate the probability of hitting the 2023 base and bonus earnouts each quarter. Given that a material amount of non-cash other income or expense may occur from changes in our assessment of the probability of hitting these earnout targets and our ability to meet these targets at the end of this year, we will be adjusting net income or loss to reflect what we believe is a useful representation of Southland's continuing operating results. We also produced an adjusted EBITDA of $12.7 million in the quarter, which represents an increase of $11.3 million from $1.4 million in the first quarter of 2022. Please see the additional detail and reconciling information on Form 8K we filed last night. Now to touch on our segment performance. For the quarter, our civil segment had revenues of $73 million, a decrease of $2 million from the first quarter of 2022. Our civil segment gross profit was $9 million, an increase of $2 million from the first quarter of 2022. As a percentage of revenue for the first quarter, our civil segment had a gross profit margin of 12%, an improvement from 9% for the first quarter of 2022. For the quarter, our transportation segment had revenues of $202 million, an increase of approximately $18 million from the first quarter of 2022. Our transportation segment gross profit for the quarter was $10 million, an increase of 12 million from a $2 million net loss for the first quarter of 2022. Our transportation segment had a gross profit margin of 6% for the first quarter, an improvement from negative 1% for the first quarter of 2022. Turning to the balance sheet, as of March 31, 2023, we had net debt of 252 million, inclusive of cash and restricted cash of 44 million. We paid down 12 million on our secured notes this quarter. Thank you for your time and interest in Southland. I'll now pass the call back to Frank for closing remarks.
spk02: Thanks, Cody. To briefly summarize, we started 2023 on a positive note with revenue increasing 6% to $275 million and our gross margin improving to 7% from 2% in the first quarter last year. Our backlog increased 43% to $2.9 billion from $2 billion at the end of the first quarter last year. We believe the federal infrastructure bill, reshoring efforts, and increased state and local budgets will be drivers for our business over the next . Continue to be innovative and dynamic, shifting our resources to capitalize on new opportunities that will create long-term value for our shareholders. Thank you. With that, I will turn the call over to the operator for questions.
spk01: Thank you, ladies and gentlemen. We will now begin the question and answer session. Should you have a question, please press star followed by the one on your touchtone phone. You will hear a three-tone prompt acknowledging your request and your questions will be pulled in the order they are received. Should you wish to decline from the pulling process, please press star followed by the two. If you are using a speakerphone, please lift the hands up before pressing any keys. One moment, please, for your first question. Your first question comes from Adam Thalmer with Thomas Davis. Please go ahead.
spk08: Hey, good morning, guys. Nice quarter.
spk02: Thanks. Morning, Adam. Good morning.
spk08: You said you expect new awards to accelerate in the back half. Where do you think backlog can go? What's your backlog capacity?
spk02: We had a really good year picking up backlog last year, Adam, and this year we see the market and the choices in the civil transportation, really every segment that we work in to be better than we saw last year as far as projects to select from. So we're really optimistic about what that backlog could be.
spk08: Okay. And next one wanted to ask on cash flow. What's the What's the cadence you expect for cash flow this year?
spk03: Yeah, Adam, I think when you look at Q1, typically being a drag on cash flow from ops for us, you can see the changes, especially in accounts receivable, making up pretty much the entire year over year change contributing to the negative cash flow this year. We typically see that start to unwind and fund working capital needs more in Q2 and then pick up and turn positive later on in the year. But that's typically the normal cadence we see.
spk08: Okay. And then can you opine just gross margins in Q1, kind of where they were versus your expectations and how you think that trends for the rest of the year?
spk03: Yeah, I think gross margins coming out of Q1, again, being seasonality, seasonally slower than subsequent quarters. We did see improvement. period over period, which is positive and indicative of some of the higher margin work that we're seeing available out in our market in the current bidding environment we're in. We do believe that has the potential to pick up, particularly as we finish off some of the lower margin legacy projects.
spk08: Okay.
spk01: Thanks, guys. Talk to you soon.
spk03: Thanks, Adam.
spk01: Your next question comes from Julia Romero with Sidoti and Company. Please go ahead.
spk07: Thanks. Hey, good morning, Frank, Cody, Alex. Maybe if we could start on the broadband opportunity and how California has moved more quickly than other states. What other states other than Cali do you maybe see an opportunity for broadband for you guys there?
spk02: You know, really every state has got some type of allocation, at least, you know, at least $100 million worth. And we haven't seen this opportunity. since around 2000. This is a market that we've, you know, we've participated in before. We have the right skill set for and, you know, really, really excited about the opportunities all across the country.
spk07: Okay, that's helpful. And then what are you seeing with regards to funds flowing to state and local governments? Some of your peers have cited some slowing from agencies hesitating due to funds taking longer than expected. What are you guys seeing on that front?
spk02: Yeah, so on a lot of our projects, due to population shift, we've actually seen some projects move up. And we've seen about $200 billion of funding so far from the IIJA funds. We continue to see our core markets being really hot, whether it's the transportation segment, the civil segment. There are so many projects for us to select from right now. We're not seeing as much of a slowdown. I think bidding has increased in the first quarter of this year versus the first quarter of last year, and we expect that to pick up even more as the year goes on.
spk07: Okay, really helpful. And then maybe just a modeling question here. That tax expense that you realized in the quarter from subsidiaries revoking the S-Corp status, is that expected to also impact you in the second or third quarters?
spk03: The impact of the amount of the expense in the first quarter will drag on, but the incremental rate in subsequent four quarters, we expect to stabilize in that 20% to 24% range.
spk07: Really helpful. Thanks very much, guys. I'll pass it on.
spk01: Thank you. Your next question comes from Christian Swab with Craig Hallam. Please go ahead.
spk04: Hey, guys. So, good quarter. So, the commentary earlier, Frank, about revenue growth being up sequentially, I assume you're talking from March to June, you know, but are you expecting sequential revenue growth through the entire calendar year? I guess that wasn't clear what was stated there.
spk03: Yeah, Christian, thank you. And thank you everybody for bearing with us through the technical delay there. So Christian, I think when we, our commentary in the prepared remarks was all dressed from two angles, you know, sequentially up quarter over quarter from Q1 of 2022, of course. And then the increase in really in subsequent quarters, you know, we just expect our seasonality trends, to produce lower revenues in Q1 versus quarters Q2, 3, and 4. So it was not incremental sequentially that 2 was more than 1, 3 more than 2, and 4 more than 3, commentary just being we expect larger contributions top line in the remainder of 2023. Okay.
spk04: And then as far as the top like growth rate, are you still expecting to see, you know, approaching 20% revenue growth, you know, for the year? given the strong backlog?
spk02: Yeah. So as far as, as far as revenue, you know, we're, we're really excited about the, the prospects out there, Christian, uh, for margin expansion. You know, we talked about the $1.9 billion of work that we won last year with the limited competition that we faced. A majority of those projects that we picked up, you know, are one and two bidder situations. We've seen this to continue into this year, so we're very optimistic about the bidding environment, you know, right now. As far as, you know, revenue from a timing standpoint, I don't, you know, you could see some revenue slide into subsequent quarters. And so, you know, we may have some timing issue on some of the revenue, but as far as the bottom line and the amount of work out there, we're extremely optimistic on how that's shaping up this year.
spk04: Okay. And then the movement, you know, potentially to do some broadband work, is that with, you know, utilities? Is this with, you know, private equity? Is this with small-scale broadband guys? Or is this you know, with household broadband names?
spk02: Yeah, so, you know, starting out with Caltrans and some direct owners, you know, dealing a little bit with private equity. As far as what we're looking at is just what offers the best opportunity for a margin return. If it fits us perfectly, you know, if we have the named crews to do it, you know, that's going to check the first box. And in the second, we're just looking for the best, you know, best return on our resources, Christian. And we haven't seen this opportunity since, you know, really like the 2000s. We would put in a mile or two, you know, on a stretch of pipeline that we would have. But now you're seeing these two, three, four, 500 mile pipelines again. It's very attractive for us. And we're just going to make sure that we select the perfect job with the right owner and right client.
spk04: Great. Thank you. No other questions. Thank you.
spk02: Thanks, Christian. Thanks, Christian.
spk01: Your next question comes from Brent Thielman with DA Davidson. Please go ahead. Hey, great.
spk05: Thanks. Good morning. Hey, Frank, some of the comments about the private sector pursuits, I was curious about wondering if you think this could increase as a percentage of the business in the coming years as you go after more of these opportunities in manufacturing and elsewhere. And then I guess as part of that, are the economics and the margins of those projects more attractive to you than you know, what you see on the public side?
spk02: Yeah, great question, Brent. You know, we see the public side, really, we think the public side is a really great market for us right now. We're just looking for the best return on our resources. And when you look at the private markets right now, and the CHIPS Act alone has provided $54 billion in grants. So what that's translated into is that $260 billion of production plants currently in planning or construction stages in Arizona, New Mexico, Texas, and numerous states. And they have the water needs that fit us perfectly. They need new water resources, new water treatment plants, water pipelines that just fit our core market perfectly. And so I don't know if this is going to change the shift in how much private work we have versus public work, but it gives us a great opportunity for expansion. Like I said, I know I keep repeating this, but we have the resources to
spk05: uh do this type of water pipeline and all all the other water pipelines and whatever brings us the best opportunity for margin uh return we're gonna you know we're gonna continue to focus on okay and frank imagine some of these projects that come from chips act are pretty large um are there are there manufacturing projects being a lot of different things happening in that sector that that aren't logical To you, I don't know, from a size perspective, I imagine there's some other things beyond the CHIPS Act you're looking at as well.
spk02: Yeah, for sure. When we talk about the manufacturing sector, we're looking for a component on these projects. They need site work. They need steel erection. They need water pipelines, wastewater pipelines. you know, cooling water facilities, and that's exactly what we do. So we're looking for, you know, just a component in these projects. And a lot of these components, though, they're worth seven, $800 million as far as new plants and cooling water facilities and pipelines. I don't know if that answered your question exactly, Rick.
spk05: No, it does. That's helpful. Thanks, Frank. I guess just another question would be in terms of this competitive environment, Frank, you talk about, it sounds like there's not a lot of folks competing at the end of the day for some of the stuff you're after. Your ability to kind of build in contingencies into these new awards, how you feel like you're sort of covering yourself from a risk perspective in this environment.
spk02: Yeah, I think right now with the amount of work out there, it's almost the perfect storm. So we're making sure that we have the right team, the right resources, and we're the best market we've ever been in. So we're in a unique position where demand for our services is so great. We can really pick and choose where we can get the highest return for our resources. And so with those type of opportunities, we're making sure that we think through everything. You know, that we're putting contingencies in our work, in our projects, based on what we've seen over the last couple of years with, you know, supply issues and a tightening labor market. So we're making sure that, you know, we're well focused on that and taking advantage of this opportunity in front of us.
spk05: Yeah. Just one last one. I guess you're a public company for a few months now. I have a question for Frank or Cody, maybe just a refresh on where your focus is strategically right now, what you're thinking around the balance sheet. What are you all emphasizing now that you're beyond the combination? You obviously have this good market behind you. Just be good to get a refresh of strategic priorities here.
spk03: Brent, let me address the balance sheet side that Frank can comment operationally. We're really sensitive where we're at with the current interest rate environment we're in and what's been going on in the banking industry. We're fortunate enough to have refinanced a lot of our debt structure before the interest rate environment took off, so we're looking forward to maintaining That advantage and just making sure we've got the right debt structure, capital structure, and positioned well for all the work that's coming. I hope that answers your question on the balance sheet side.
spk02: If not, please point me in the right direction. As far as on the operational side, we're making sure that we have the right capacity to build these projects. And we're focused on our core market. So we're focused on our core market of operations, which is building the highly technical bridge projects, water and wastewater pipelines. And then always focused on personnel. We continue to invest in our people with our Next Gen Up program for our craft and field personnel and Southland University for engineers and operational management. We also continue to have a deep bench of engineering support staff and project management that have joined the Southland family. And that's the key for us in our success is making sure that our training programs are top-notch and that we focus on the right resources to build these jobs and the generational rebuild that we're in right now.
spk05: Okay. Very good. Thanks, guys. Thanks, Brent. Appreciate you.
spk01: Ladies and gentlemen, as a reminder, should you have a question, please press star followed by the one. Your next question comes from Christian Schwab with Craig Hallam. Please go ahead.
spk04: Hey, guys. I just had one quick follow-up. You know, given that the demand is greater than supply and there's new markets that could use your skill force and your workforce and we're, you know, bidding diligently, I mean, what should we assume is the ultimate goal and objective on an even a margin business then? If we're focusing, you know, on generating the best margins, is there a range that you're trying to bid all of the work at?
spk03: Yeah, Christian, great question. And I hope you'll respect and appreciate my rear view mirror answer on this one. You know, we're in an environment that's extremely conducive towards the higher end of potential margin attainment, and we've published quite a bit of our historical track record on what we've been able to achieve in years past when we were in this more favorable environment. So, you know, we do see and expect, you know, room for margin improvement, but aren't going to provide any specific guidance at this time.
spk04: Great. Bob, thank you.
spk01: There are no further questions at this time. Please proceed.
spk02: Thank you everyone for joining us today and look forward to talking to you again next quarter.
spk01: Ladies and gentlemen, this concludes the conference call for today. We thank you for participating and ask that you please disconnect your lines.
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