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spk00: Good morning. My name is Joanna, and I will be your conference operator today. At this time, I would like to welcome everyone to the Southland fourth quarter and full year 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 number one on your telephone keypad. If you would like to withdraw your question, please press star followed by two. Thank you. Alex, you may begin your conference.
spk06: morning everyone and welcome to the southland fourth quarter and full year 2023 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 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 31st, 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. With that, I'll now turn the call over to Frank.
spk09: Thank you, Alex. Good morning and thank you for joining Southland's 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, marking the much anticipated start of rail services from Miami to Orlando. We received multiple awards for our outstanding work, including E&R Merit Project of the Year Awards, for our SunTracks Connected Automated Vehicle Test Facility and the San Juan Lateral Water Supply Project. Our Bear Creek Tunnel Rehabilitation Project in Michigan also secured the AWWA Project of the Year Award, showcasing our proficiency in emergency repair work. 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 and a gross profit of $21 million 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 M&P backlog down to approximately $240 million or 8.5% 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 persist, 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 and sustained success moving forward. The projects that we won late in 2022 are ramping up and we expect them to contribute a larger amount to overall results in 2024 compared to 2023. This includes the $596 million SR23 or Shands Bridge in Jacksonville, Florida, the $70 million Denver International Airport Westgate Fond Expansion Project, the $42 million Atoco Water Pipeline Project in Oklahoma, the $243 million U.S. 19 Pinellas County Project in Clearwater, Florida, and the $155 million Elm Fork Water Treatment Plant Filter Complex in Dallas, Texas. We also continue to win work in 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 opportunities and booked $600 million of new awards in the fourth quarter alone. Our backlog increased 12% sequentially from $2.54 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, in 1936. 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 span of this bridge in 1936 and completed the eastern span of this bridge in 2014. These two projects demonstrate the need to upgrade and rehab these structures that were originally built nearly 100 years ago. We are 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's 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've also seen an uptick in bidding opportunities in the past few months from the $1.2 trillion bipartisan IIJA 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. The IIJA provides $50 billion of funding to support upgrades to 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 a $16.4 billion allocation from the IIJA 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. The 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 Plant, which we expect to bid in March. We also expect to bid on packages from the Galveston Matox of Dean Pass in Texas and the SR 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 weighed 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 opportunities 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.
spk04: Thanks, Frank, and good morning, everyone. I will 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 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 of $16 million in our materials and paving business. Gross profit margin in the quarter was 6.7% 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 non-cash 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. Income tax expense was $3 million for the quarter, compared to a tax benefit of $500,000 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 subchapter S elections, which were no longer available to us in 2023. More information around the revocation of the S elections, valuation allowance changes, GILTI inclusion, and more can be found in our recently filed Form 10-K. We reported a net loss of $6 million, or negative 12 cents 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 $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, 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 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 1.6% compared to positive 8.9% 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 M&P were primarily driven by a rejected change order on a paving project in Texas that impacted past, current, and future segments of work. Our core operating results in and paving would have been $162 million of revenue and $12 million of gross profit for a gross profit margin of 7.6%. Consolidated core results in the quarter, results excluding materials and paving, would have 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 from 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 increase was primarily driven by a $5 million increase in compensation-related expenses, including non-cash stock compensation expense, $2 million in public company costs, and $2 million increase in bad debt expense. SG&A costs as a percentage of revenue were 5.8% 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 represents an effective tax rate of 30%. This compares to tax expense of $13 million on pre-tax income of $76 million, or an 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 revocation of YES elections, valuation allowance changes, and GILTI inclusion, and more, 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 percent range, depending on certain tax credits, non-deductible items, and certain state, local, and international taxes. We reported a GAAP net loss of $19 million, or negative 41 cents 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 82 cents 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 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 gross loss for the year was $15 million compared to a gross profit of $95 million from full year 2022. As a percentage of revenue for the full year ended 2023, our transportation segment had gross profit margin of negative 1.9% compared to 11.2% last year. The 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 paving, would have been $635 million of revenue and $72 million of gross profit, for a gross profit margin of 11.3%. Consolidated core results in the year, excluding materials and paving, would have been $972 million of revenue and $124 million of gross profit for a 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 on our secure 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 debt. Thus, 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 as of the end of 2023. We ended 2023 with $2.83 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. Thank you for your time and your interest in Southwind. I'll now pass the call back to the operator for your questions.
spk00: 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. You will hear a three-tone prompt acknowledging your request. If you would like to withdraw your question, please press star followed by two. If you are using a speakerphone, please lift the handset before pressing any keys. First question comes from Adam Thalheimer from Thompson Davis. Please go ahead.
spk01: Hey, good morning, guys. Good morning, Adam. I wanted to start on the M&P jobs. Sorry to do that because there were a lot of positives in the quarter. But M&P jobs, do you think the losses stop in 2024 or at least slow? And then my follow-up question is, like, as analysts, should we start to bake in some further losses on those jobs this year?
spk09: Yeah, thanks, Adam. So... You know, we've recorded reduced margins and lost contingency for all the known items. We've maintained our estimated completion date for the M&P of the middle of 2025. We expect the bulk of the work to be completed this year. As we're all aware, completing these last handful of projects has been challenging and we'll continue to do everything we can to get these jobs completed. Any additional issues that may impact margin positively or negatively will be recorded as time is known. We still, Adam, have some headwinds to finish this work, but we have a solid plan to get it done. The specific challenge, you know, 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're due from the owner. But we took the charge now to reflect the the denied change order. Going forward, we expect the known – we expect to continue to execute our plan, and we – it'll be less and less of our backlog going forward.
spk04: Yeah, Adam, and this might be a One of your follow-up questions, about $240 million left of backlog at M&P, so we're down to less than 9%, about 8.5% of our total backlog. Your question of what should you guys model in, I'll defer to you all on that. We've recorded charges and have done our best to be transparent on the reason for those charges in quarters three and four subsequent to the initial Q2 take.
spk01: Okay. That's why we get paid the big bucks. We'll figure it out. And then you had a comment, which is one of my follow-up questions anyway, on generating cash from claims in 2024. What are your thoughts on that?
spk09: Approximately half of our CIE balance is comprised of change orders and claims on legacy projects that are substantially complete or entirely complete that we've demobilized from the site. And so that being said, you know, obviously the jobs are, jobs are finished. Uh, we're, we're offsite. So the claim should be getting a little bit closer, Adam. And during COVID, as we've talked about, uh, previously, you know, a lot of the owners just weren't in the office and we had to fund these projects and, uh, and did so now, now they're complete. Now we're starting to get to the table, uh, with, with owners and, uh, You know, hopefully these settlements are getting closer. We're attacking them every day, you know, as far as trying to get in touch with owners, get mediations set up. And, you know, claims are getting closer and half are finished. Okay.
spk01: And just last for modeling, Cody, thoughts on SG&A in 2024? It came in a touch higher than I was looking for in Q4.
spk04: Yes, you know, 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 in that, you know, probably 65, you know, plus a few range. If we just take, you know, what it was in Q4, there were some items in Q4 that, you know, are non-recurring in nature. You know, we mentioned some of those in our MD&A that we filed last night, but think that, you know, that's about what our run rates should look like for 2024.
spk03: Perfect. Thanks, guys. Thanks, Adam.
spk00: Thank you. The next question comes from Christian Schwab at Craig Hallam Capital Group. Please go ahead.
spk05: Hey, great. Thanks for taking my question. Just a 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, Could we have strong double-digit gross margins on the business, call it the $2.6 billion that you're going to work through a decent portion of this year and going forward and the projects that you talked about bidding on throughout calendar 24? Is that the right assumption we should be under, or is that too aggressive?
spk09: You know, we're really excited about the backlog that we've picked up, you know, as we touched on in the prepared remarks. The projects that we want in 2022 are going to continue to ramp in 2024 and start to show more. The projects that we picked up late in 2023 should start to ramp mid-24, Christian, and really start to show up in 25. We continue to strongly operate and show strong results in our, in our civil segment and core markets. And so we're extremely optimistic about the backlog that we have going, going into 24 and 25.
spk04: I think Christian, just to, to maybe reiterate what we shared in some of the opening remarks, you know, on an X M and P basis, we're in that low, low double digit, you know, uh, margin range. So we've obviously been able to produce those types of results in the past, you know, look forward to getting back to that as we work through the legacy backlog.
spk05: I mean, the type of work that in the backlog, we talked about 40% burn of that backlog, you know, number throughout the course of the year. I mean, is there any smaller projects that will kind of be done, you know, entry year with, you know, the backlog and they're just, you know, kind of book and do faster or not?
spk04: We definitely see some potential for that, particularly on the civil side. You know, those projects are, by their nature, usually shorter burn and quicker starts than some of our longer lead transportation projects. So we do believe there's some potential for that, particularly inside of new awards that we may pick up here early in 24.
spk05: Great. And then what should be the appropriate expectation that we should be assuming for new awards or backlog wins throughout calendar 24 and some of the things you've highlighted and other things you're coming? I mean, you know, say minus the 240 and the... You know, legacy stuff or even including it, you know, should we see backlog, you know, would you be disappointed if backlog wasn't to have a three handle on it, you know, three plus billion by the time we exit 24 and go into 25, a lot of this money is finally being released.
spk09: Yeah, you know, we see numerous opportunities out there, Christian. We're sitting near record backlog right now. We're pursuing an incredible pipeline of opportunities and expect to pick up a good share of new work in 2024 and beyond. And you remember, you know, on the last call we talked about, you know, $2 billion sitting out there and, you know, pending bids. We were able to convert that $2 billion into $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. And, you know, our focus is going to be to remain disciplined and focus on profitability first and then growing sustainably.
spk05: Great. Thank you. No other questions. Thanks, guys. Thanks, Chris.
spk00: Thank you. The next question comes from Gene Ramirez at DA Davidson. Please go ahead.
spk07: Hi, good morning. Good morning. Hi. 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? Yeah.
spk04: Cadence-wise, with respect to seasonality, there's always the potential for that as 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, it's continued to improve. We made some significant headway in Q4 with positive $25 million cash flow from ops. And we think that the net draw to the effect there is one on our working capital will naturally reverse itself out over the course of the year. And as Frank's mentioned, we've been focused on selecting projects that have favorable cash flow curves and expect that to come to fruition as we go through 2024.
spk07: Thank you. A lot of companies have talked about poor weather across the country to start the year. Is it having an unusual impact on your business here in Q1? How should we handicap that?
spk09: Yeah, we had a pretty wet January, but we expect to pick up here in the coming months. So it could be a little bit of a drag.
spk07: Thank you. And one last from me. You talked about the cash claims. And sorry if I missed it, but what are the big ticket items embedded within the claims balance? And do you mind providing a little more color on when we can potentially see some resolutions?
spk04: Yeah, so great question. With respect to the larger drivers of that, we've disclosed some of that information historically. several claims out there that have been built up over the years that we are seeing significant progress on. We do expect the opportunity to settle some of these in 24, but 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, you know, color or expectations as far as individual potential settlements go, but we do expect to get to the resolution table on some of the N24. All right.
spk07: 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?
spk04: You know, we had an impressive book-to-bill pickup in Q4. You know, that was, you know, 1.9. You know, when you look on a year-over-year basis, we're close to maintaining near-record backlog, ample opportunity in the pipeline. But we're going into all of these opportunities, you know, eyes wide open with respect to best return, profitability, and cash flow. So, you know, with that, you know, we do see the potential for backlog to increase, but are going to be very responsible about doing so.
spk02: Frank, anything you'd add to that?
spk07: Great. Thank you. I appreciate the time. I'll hop back in.
spk03: Thank you. Thanks for your interest. Appreciate it.
spk00: Thank you. And the next question comes from Julio Romero at Sidoti & Company. Please go ahead.
spk08: Hi, good morning, Frank, Cody, and Alex. This is Alex Handman on for Julio. Good morning, Alex. Good morning, guys. First question is just a quick clarification. So, on the M&P side, would you say the loss was more a function of procurement risk or was it the actual execution of the job?
spk04: Are you speaking specifically to Q4 of this or just M&P in general? yeah for that yeah q4 yeah i would q4 you know i i guess if you were choosing between those options you could say it was um you know execution risk you know there was 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 uh you know but this this was that you know the q4 charges were were a specific event to change order negotiation.
spk08: Got it. Thank you. And just zooming out a bit, so on the transportation segment, could you help us get a better sense for how core transportation is performing, ex-M&P, American Bridge, Midwest Bridge?
spk03: Yeah, I can share the breakouts of M&P from transportation.
spk04: In Q4, transportation M&P was just under 8% margins. Full year X M&P was a little over 11%. So not where we see the potential for margin performance in that business, but it certainly reflects a lot of the good work that we do have in that segment.
spk08: Great, thank you for the color. And last one from me, just on interest expense, what should we be assuming for 2024 for you guys?
spk04: I think when you look at interest expense hit in the fourth quarter, we're just under that $6 million a quarter mark. We see base rates somewhat stabilizing, hopefully 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.
spk08: Great. Thank you. Very helpful. That's all from me.
spk03: Thank you. Thanks, Alex.
spk00: Thank you. There are no further questions. I will now turn the call back over for closing comments.
spk09: Thanks for joining the call today, everyone.
spk03: Appreciate your time.
spk00: Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and we ask that you please disconnect your lines.
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