Southland Holdings, Inc. (ASE:SLND) Q2 2023 Earnings Call Transcript
Southland Holdings, Inc. (ASE:SLND) Q2 2023 Earnings Call Transcript August 17, 2023
Operator: Good day, ladies and gentlemen, and welcome to the Southland Holdings, Inc. Second Quarter 2023 Earnings Conference Call. [Operator Instructions] This call is being recorded on Tuesday, August 15, 2023. I would now like to turn the conference over to Alex Murray. Please go ahead.
Alex Murray: Good morning, everyone. This is Alex Murray, Director of Corporate Development and Investor Relations. Welcome to the Southland Second Quarter 2023 Conference Call. Joining me today are Frank Renda, President and Chief Executive Officer; and Cody Gallarda, Executive Vice President and Chief Financial Officer. I'd like to begin with a gentle reminder. 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 section of our Form 10-Q we filed last night and 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, and you will find reconciliations in the earnings release related to this conference call, which may be found on the Investor Relations page of our website. With that, I'll now turn the call over to Frank.
Frank Renda: Thank you, Alex. Good morning, and thank you for joining Southland's Second Quarter 2023 Conference Call. We had a disappointing second quarter with revenue of $257 million, a decrease of $16 million compared to last year. We reported a gross loss of $34 million in the quarter, which compares to a gross profit of $38 million in the same period last year. In this quarter, we generated $24 million of operating cash, driven by new project starts, which are performing well. We faced adversities this quarter, primarily driven by unfavorable charges related to the legacy materials production and paving component of our transportation segment. We made the decision to exit this business so that we can focus on the unprecedented opportunities in our core market.
We are pursuing work in key markets with teams that have historically executed well and are no longer pursuing large-scale paving work or aggregate production. Our core business is strong and we remain confident in our backlog. It is important to provide insight into our Materials & Paving business and the changes we have made as a company over the past few years. In 2016, we developed a plan to produce our own asphalt and concrete to sell to third parties and to support our paving business. We made large CapEx investment in aggregate quarries, pits, and batch plants while pursuing large-scale roadway paving projects. By the end of 2019, our paving projects accounted for approximately 39% of our then, $2.3 billion backlog. Over the last several years, our Materials & Paving business underperformed due to poor execution, unprecedented inflation, challenging geographical locations, and supply chain issues.
This end market became increasingly less attractive and we decided to substantially shrink the size of this business to focus on more profitable end markets. At the end of the second quarter of this year, our large-scale paving work was only 12% of our $2.7 billion backlog. In the second quarter, in an effort to wind down our Materials & Paving business, we disposed of several assets, including asphalt batch plants, which supported a small amount of third-party sales and multiple large-scale paving projects. As a result, we recognized unfavorable charges in the quarter related to additional expected future cost to complete these projects. These additional costs are related to procuring, transporting materials from third parties. We did these paving projects several years ago with the intention to produce our own materials.
Now that we are no longer producing materials for the existing paving work, we must pay elevated and inflated market prices from vendors. We took the charges this quarter for the future expected cost of completing the work. It was best to lock in prices with vendors now and mitigate the long-run cost uncertainty associated with producing our own material. Large scale materials production tied up our key people, including members of our management team and would require significant resources to maintain. We have also shrunk the paving business to the point that it no longer made sense to continue to operate the production assets. Ultimately, divesting from large-scale materials production and reallocating resources to our core operations is best for the long-term success of the business.
We look forward to putting this legacy work behind us as we focus on the unprecedented opportunities in our core business. As a result of record awards last year, our backlog increased 36% to $2.7 billion from $2 billion at the end of the second quarter last year. Now turning to upcoming bidding opportunities in our Transportation segment. We've been shortlisted on 3 large projects in the Northeast with combined engineers' estimates exceeding $1.5 billion, which include; the Livingston Avenue Bridge replacement in Albany, the RFK Suspended Span Retrofit in New York, and Connecticut River Bridge for Amtrak. We expect these projects to bid in the fourth quarter of this year. Two of these projects only have 2 bidders shortlisted. We are also pursuing over $2.5 billion of new pursuits on the West Coast, some of which include the earthquake ready Burnside Bridge in Oregon, which is expected to bid this month and the Golden Gate Bridge seismic retrofit in California.
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Notable opportunities in our Civil segment with combined engineers' estimates of approximately $1.4 billion include; the San Juan Lateral Water Treatment Plant for the Bureau of Reclamation bidding in late summer; the Department of Defense Ansol Tank Farm Facility project bidding this fall; and Phase 2 of the North End Treatment Plant project in Winnipeg. We are currently working on Phase 1 of this project. We continue to be excited about what new federal funding will do for our business over the next decade. That being said, the new federal spending is yet to have a major impact on our financial results. We have seen an elevated amount of bidding, but have not seen a large impact in our backlogs from these funds. At this point, we expect to begin to see the impact to revenue in late 2024 into 2025.
With that, I will now turn the call over to Cody for a financial update.
Cody Gallarda: Thank you, Frank, and good morning, everyone. My prepared remarks will cover our financial performance for the second quarter of 2023. You can find additional details and information in the financial statements, footnotes, and management discussion and analysis that was filed on Form 10-Q last night. I would first like to address the select preliminary financial information we pre-announced last Thursday evening. As you are aware from previous filings with the Securities and Exchange Commission, or the SEC, there were a significant number of shares issued in private placements to certain founders of Legato Merger Corp. II, now known as Southland Holdings, Inc., prior to or in connection with the initial public offering of Legato Merger Corp.
II. We refer to these shares as sponsor shares. In addition, there were a significant number of shares issued to the sellers of Southland Holdings LLC as part of the business combination with Southland Holdings LLC. We refer to these shares as target shares. Pursuant to the terms of their respective agreements, the sponsor shares and the target shares were subject to lockup provision that expired 180 days after the closing of the business combination, with respect to the sponsor shares and 6 months after the closing of the business combination with respect to the target shares. As a result, the first trading day on which markets were opened after the expiration of these lockup provisions was yesterday, Monday, August 14, and the company had reason to believe that non-affiliate shareholders may have had a desire to sell sponsor shares upon such expiration of the lockup period.
Pursuant to a registration rights agreement that was executed in connection with the business combination with Southland Holdings LLC, we were obligated to file and maintain an effective resale registration statement on Form S-1 with the SEC, which we filed on March 31, 2023, and which went effective on May 15, 2023. As we previously announced, the company plan to, and subsequently did, file the second quarter's earnings information and Form 10-Q after trading hours yesterday on Monday, August 14. In order to preserve the availability of this resale Form S-1 for selling shareholders on Monday, August 14, after the expiration of the lockup period, the company decided to pre-announce select preliminary financial information on Thursday in order for the market to have enough time to properly digest the information.
Now to discuss our financial results for the period. Revenue for the second quarter of 2023 was $257 million, a decrease of $16 million or 6% from the same period in 2022. Both of our segments contributed lower period-over-period revenues. We won a record amount of new awards last year and this work and these new starts continue to make an impact, albeit at a slower pace than initially expected as we progress through the year. As we mentioned on the last call, we always have the risk of revenue slipping into subsequent quarters from project delays, weather, permitting and many other factors. Given the slower progress we have made through the first half of the year and certain unfavorable charges that significantly impacted revenue in the second quarter, it will be difficult to grow revenue for the full year 2023 as compared with last year.
Gross profit for the second quarter of 2023 was negative $34 million, a decrease of $72 million from the same period in 2022. Our gross profit margin was negative 13% in the second quarter. The majority of this decrease was driven by our decision to discontinue the Materials & Paving line of business. Selling, general and administrative costs in the quarter were $16 million, an increase of $3 million from the same period in 2022. This increase was primarily driven by costs related to being a public company. Operating income for the second quarter was negative $50 million, a decrease of $74 million from the same period in 2022. The majority of this decrease also was driven by our decision to discontinue the Materials & Paving line of business.
Interest for the quarter was $4 million, an increase of $2 million from the same period in 2022. The majority of this increase was driven by increased borrowing costs and higher debt balances. Income tax benefit for the second quarter was $19 million compared to an income tax expense of $2 million for the same period in 2022. The primary driver for the income tax benefit was negative gross profit from operations, as previously discussed. I'd like to point out that the majority of Southland subsidiaries had an S-corp tax selection in 2022 and earlier years, resulting in non-comparable tax treatment when comparing 2023 to prior years. On a go-forward basis, we expect the tax rate to be in the 20% to 24% range, depending on certain tax credits, non-deductible items, and certain state and local taxes.
We recorded a GAAP net loss of $13 million or negative $0.27 per share in the second quarter compared to net income of $19 million in the same period in 2022. Our weighted average basic share count was 46.9 million shares. Today, our basic shares outstanding are 47.9 million. We recorded an adjusted net loss of $35 million or negative $0.76 per share 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 $19 million in the same period in 2022. In the second quarter, we produced EBITDA or earnings before interest, taxes, depreciation and amortization of negative $19 million and adjusted EBITDA of negative $42 million after reversing out the benefit from changes in the fair value of the earn-out liability for 2023 and transaction-related expenses.
This compares to EBITDA and adjusted EBITDA of $35 million for the same period in 2022. Now to touch on segment performance. For the quarter, our Civil segment had revenues of $66 million, a decrease of $9 million from the same period in 2022. Our Civil segment gross profit was $6 million, a decrease of $6 million from the same period in 2022. As a percentage of revenue for the quarter, our Civil segment had a gross profit margin of 9% compared to 17% in the same period in 2022. For the quarter, our Transportation segment had revenues of $191 million, a decrease of $7 million from the same period in 2022. Our Transportation segment gross profit was negative $40 million, a decrease of $65 million from the same period in 2022. As a percentage of revenue for the quarter, our Transportation segment had a gross profit margin of negative 21% compared to 12% for the same period in 2022.
The Materials & Paving business line contributed $37 million to revenue and negative $49 million to gross profit in the second quarter. Our core operating results in this segment or results excluding Materials & Paving, would have been $154 million of revenue and $9 million of gross profit for a gross profit margin of 6%. Turning to the balance sheet. As of June 30, 2023, we had net debt of $230 million, inclusive of cash and restricted cash of $54 million. We paid down $15 million on our secured notes this quarter before considering additional borrowings. Regarding backlog, our backlog decreased slightly from $2.9 billion at the end of the first quarter to $2.7 billion at the end of this quarter. During the second quarter, we had $92 million in new awards, which compares to $255 million in new awards in the second quarter last year.
For the first half of the year, we had new awards of $262 million. This compares with $295 million in the first half last year. Year-over-year, our backlog increased 36% from $2 billion at the end of the second quarter last year. Thank you for your commitment and time in Southland. I'll now pass the call back to Frank for closing remarks.
Frank Renda: I would like to express my gratitude to the incredible men and women who are part of our team and are making it happen day in and day out. We remain confident and positive on the outlook for our industry. Southland has deep-rooted industry experience, and I put our capabilities in specialty infrastructure, construction up against all others in our industry. Our history in bridges, tunneling, transportation and facilities, [marine], steel structures, water and wastewater treatment, and water pipeline end markets is second to none. I'll now pass the call back to the operator for questions.
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