Good morning. My name is Sergio and I will be your conference operator today. At this time, I would like to welcome everyone to the Southland Third Quarter 2023 Conference Call. All lines have been placed on mute to prevent any background noise. [Operator Instructions] Thank you. Alex, you may begin conference.

Good morning, everyone. This is Alex Murray, Director of Corporate Development and Investor Relations. Welcome to the Southland Third 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 will also refer to non-GAAP financial measures, and you will find reconciliations in the earnings release relating to this conference call, which can 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 Third Quarter 2023 Conference Call. Revenue for the quarter was $312 million. This is a decrease in revenue compared to the third quarter in the prior year of $335 million. The decrease in revenue in the quarter was driven by the timing of new project starts and the continued effort to close out legacy materials and paving projects. We are making good progress and have decreased the remaining M&P backlog to approximately $290 million, which is a decrease of 14% from last quarter. Gross profit margin for the quarter was 9.5%. Our core business had a strong performance, but was offset by challenges in our legacy projects. Although, we still have more to do finishing out these legacy backlog, we have made significant strides this quarter to complete this work. We recognize that while we have made progress on this legacy work and have made the necessary operational changes, challenges remain as we work towards completion. We are on track to putting this work behind us and focusing slowly on the core business which continues to perform well. We finish the quarter with $2.54 billion of backlog, this is an increase of 7% from $2.37 billion at the end of the third quarter last year. During the third quarter, we had $150 million in new awards, which included a marine project in our Transportation segment for a private client in the Caribbean. We have a strong track record of completing technical marine projects and have a strong presence in the region. This project is very similar in scope to the existing project that we are currently building for another private client in the region. The new project is in the design phase and is anticipated to start by the…

Thank you, Frank, and good morning, everyone. My prepared remarks will cover our financial performance for the third quarter of 2023. You can find additional details and information in the financial statements, footnotes and management's discussion and analysis that was filed on Form 10-Q last night. Revenue for the third quarter of 2023 was $312 million, a decrease of $23 million or 7% from the same period in 2022. This was driven by a decrease of $42 million in our Transportation segment, offset by a $19 million increase in our Civil segment. Gross profit for the third quarter of 2023 was $30 million, a decrease of $33 million from the same period in 2022. Our gross profit margin was 9.5% in the third quarter. The majority of this decrease was driven by the decreased profit contribution from the large backlog of takeover work related to the American Bridge acquisition as more of that work was completed in the third quarter of 2022. Selling, general and administrative costs in the third quarter were $15 million, effectively flat compared to the same period in 2022. Operating income for the third quarter was $14 million, a decrease of $33 million from the same period in 2022. Interest expense for the quarter was $6 million, an increase of $4 million in the same period in 2022. This increase was driven by increased borrowing costs and higher debt balances. Income tax expense for the third quarter was $5 million compared to an income tax expense of $11 million for the same period in 2022. The primary driver for the increased income tax percentage was the impact of valuation allowances on certain federal and state net deferred tax positions and changes in the expectation of pretax profit for the full year tax period. I'd like to…

[Operator Instructions] Your first question comes from Adam Thalhimer from Thompson Davis.

Frank, I missed -- you gave a lot of numbers in your remarks. I was just curious kind of how you think that all shakes out with regards to where backlog ends the year -- could end of the year?

So right now, Adam, we have several large bids going in around the same time. So it's difficult to say. But nearly $2 billion of proposals that were submitted and we're still waiting to hear on the results on those proposals. We also expect to submit on $1 billion of work over the next 2 months where we're shortlisted on. And that doesn't even include the regular hard bid opportunities where there is no short list. So just -- it's a timing issue as to exactly when some of these actually bid or have the possibility to turn into contract. So it's hard right now to give you an exact number on where backlog could end up. But with all the demand out there, we expect to win our fair share of projects.

Okay. Sounds good. And Cody, the -- so the gross profit impact in transportation in Q3. I guess that wasn't expected because of the charge you took in Q2. My question was going to be, how are the M&P projects progressing versus expectations? It sounds like it was a touch worse in Q3.

Yes. That's correct, Adam. We had 2 subcontractor issues in Q3 that we had to take over source of work and procurement. That obviously produces some downstream effects, but were known items at the end of Q2. We're excited about the core margin results from the Transportation segment to absorb that, and still being able to put up a 9.5% gross profit number in the quarter.

Got it. Okay. And Cody, what are your expectations on free cash flow for the year? Any chance we'll get closer to positive?

We believe so. If you look at the main driver of the negative cash from ops end of the third quarter, it was -- the majority of that was the large increase in accounts receivable, which you would expect coming out of our seasonally busiest quarter of the year. So we expect that to naturally reverse over the next couple of quarters and get back to -- and report positive cash flow from operations.

Positive cash from operations for the full year, okay.

Next question comes from Oliver Chornous from D.A. Davidson.

Have you seen a lot of backlog growth in the last couple of years, but it's been slow to convert to revenue. Why is that? And when do you anticipate more of an impact on your revenue?

Yes. So with the large pickup of awards that we had at the end of '22 there, Oliver, some of that was skewed by a very -- a larger bridge project, the Shands bridge that we announced in Florida, which is about a $600 million project for the longer term. You may recall from prior remarks we've made, we had a role in bidding pursuits as we completed off a large portion of the American Bridge backlog, which drove to the significant year-over-year delta. So we're looking forward to the newer work that we've been awarded picking up. And as Frank mentioned in his prepared remarks, a significant amount of proposals that will fund results back on over the next couple of quarters, and I think that, that will convert into revenue as early as mid '24 and beyond. So you'll see the greater pickup from those larger jobs naturally as activity increases and the larger awards contribute.

Awesome. Great, guys. And then I'll follow that up with, should you get some working capital release in the fourth quarter as activity slows down, which boosts your cash flow? Or is the ramp on jobs going to make sure that, that's less likely to happen?

Yes. So let me just talk about the seasonality a bit, and then Frank can talk about our bidding strategy on the cash flow side. Naturally, we are going to see a slowdown in the fourth quarter, like you mentioned. And we think that despite a change in accounts receivable at the end of Q3 will naturally unfold, back to Adam's question, we expect most of that will come in Q4, some of it could come in early Q1. But certainly, we'll see some of the seasonality slowdown contribute to improve the working capital. Frank, do you want to talk about our project identification a little bit there?

Yes. So we've talked about in the past, our rigorous go/no-go process. One thing that we're really excited about is some of these pipeline projects that we've picked up that are short-term projects, where we'll be able to get in there and turn some cash fairly quickly. So that should help with the cash position as well.

Great. And then one last quick one, if I could. Why was the tax rate so high on positive pretax earnings?

Yes. So the -- it's a weird tax year for us coming off of the destock where we lost S-corp election. So that was a big driver of that. And we also -- with the beat in Q3, had to change our estimated full year pretax income, which -- that adjustment is recorded in the period of May, so that contributed to the much higher effective tax rate in Q3, expected to be about 30%, 35% effective tax rate on the year and will normalize in 2024 back to that 22% to 25% range.

Your next question comes from Christian Schwab from Craig-Hallum Capital Group.

Great. So Frank, on the $2 billion of bids that we have outstanding, last quarter, we kind of highlighted a funnel of $5.5 billion that we were looking at. Can you give us an update on -- would you decide to bid on $2 billion of that $5.5 billion or are those still outstanding? Or I think you talked about 3 large transportation projects, a ton of work on the West Coast, and a bunch of still will work, as a quick reminder.

Yes. So as far as the 3 projects, we've submitted on 2 of those projects in the Northeast. We're still awaiting one. It pushed back a little bit, Christian. That's the Connecticut River Bridge and it's going to bid sometime in January now. On the West Coast, one of those projects was the Burnside bridge, and we announced that we were the low bidder on that on the CM/GC side. As far as total dollar values, those -- that $2 billion and the $1 billion we referenced, those are projects that we're shortlisted on. We bid a lot of other projects during the quarter that were not in that shortlist process. So as far as the $5 billion, that might have been over the next couple of quarters, but there is a ton of demand out there and the pipeline sure has not slowed down, Christian.

Yes. And just a quick follow-up on that, Frank, given kind of the ton of demand that's out there, what do you think your -- what is the capability of backlog over a 12- to 24-month time frame that you think you could support. Is it materially bigger than the backlog today? Any color there would be great.

Yes. So we have a great talent pool. We have resources in the Northeast, Pacific Northwest that we're waiting to deploy with some of the pending awards. We could be close to record backlog if a couple of those come through, but we have the resources. We're vigorously training labor and to be able to grow the business. But we're going to always continue to be disciplined and bottom line focused, Christian.

Your next question comes from Julio Romero from Sidoti & Company.

Maybe did the Midwest bridge or the American bridge post any profit losses in the third quarter that were in addition to the gross loss taken in the second quarter?

Yes. So there were some small movements on that job in the Midwest, Julio, none that were material enough to qualify for disclosure. That project continues to work towards completion, and we made a lot of good progress in Q3.

Okay. That's helpful. And then, Frank, you talked about the Burnside bridge work and the broadband work. Why do those projects not entered your backlog until you start working on them?

So they're CM/GC contracts, and it's a newer alternative delivery method that we're seeing more than in the past. And these projects are awarded based on the best value of qualifications, technical ability and experience. So you're able to get in there with the owner and start negotiating and helping on the front end design in the planning stages. Cody, if you want to talk about…

Yes. So Julio, we see some variation across our peer group on this, there is a potential on the CM/GC process that we get through the integrated design and constructability phases with the owners, but it doesn't turn into a contract for one reason or another. It's unlike -- I'd say, unlikely that, that happens. You typically do see the -- both of those phases being awarded, but we have not executed a contract for the construction phase, and that's why we're not including it in backlog at this time.

Okay. That's helpful. And I know the majority of your projects that you bid on are publicly funded. But just curious, given the higher interest rate environment, if you're seeing any effect on the private funded side in regards to the projects you guys are bidding? And if that potentially shifts your mix -- your customer mix even further to the public side going forward?

Yes. As you mentioned, we're probably 80% public, 20% private, and the blue-chip private clients that we work for. We've not seen a major effect. We're bidding on quite a few projects that are in the pipeline, and it sure doesn't seem to be slowing down. I think the reshoring effort, some of these manufacturers is really helping demand on the water side for us.

Okay. Got it. And then just last one for me is just on the balance sheet. The secured notes you have that mature in '24, just remind us how much that is from a dollar perspective and what's the current fixed rate you're paying on the '24 notes?

Good question, Julio. So we've got the maturities of notes in there. I have to go back and look at that. We -- I don't believe any of our equipment notes are an immaterial amount of our equipment that's mature in 2024. There is a smaller number of some unsecured notes payable that do mature in 2024. And if necessary, we expect to sub-roll those for another term. The interest rate on those is currently a sub-5% and would be renegotiated at market rates.

Your next question comes from Adam Thalhimer from Thompson Davis.

I'm serious about getting back in the queue. I'm curious, the way The Street is modeling 2024. I wonder if that's the right way to look at it because they're modeling 15% revenue growth, gross profit of almost 130. I wonder if the gross profit forecast is right. So if you guys haven't -- with the M&P revenue coming off, I wonder if revenue is more flattish, but margins are higher?

Yes. I think, we're unfortunately, we get to give you limited information. You get the ratio model off that. We've disclosed that we expect over the next 12 months, leading to 3 quarters of 2024, obviously, we'll burn 42% of our current backlog. That doesn't include pickup from new awards that may contribute. So pending the significant amount of awards that we have outstanding, we could be flat, we could add. It's still too early to tell, and we look forward to having more color on that in our next call as we get some -- as we find out the results on these bids outstanding.

Okay. What's the timing on the [SR 23] done in Florida?

So that -- if you're referring to the [Shands] bridge, we're continuing on the -- we're continuing on the design, and we're getting close to starting to break ground on the project. And once we do over the next -- next few years, it's a fairly linear projects, and we should be able to kind of project that out. But we're really, really excited about what the team has done there, the design process, what we have in place and excited to get it started on the construction here very shortly.

Okay. And Cody, do you have -- lastly, do you have any thoughts on interest expense in Q4?

We had a large equipment note refinance that we've talked about already on some of our equipment that's fully amortizing at a higher rate. I think you're going to see us be in that 5.5-ish, 5.5, 6-ish range in Q4.

There are no further questions at this time. Please proceed with your closing remarks, Mr. Murray.

Thank you, everyone, for joining the call. If you follow us, please reach out.

Thank you, everyone.

Thanks, everybody.

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