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 speakers' remarks, there will be a question-and-answer session. [Operator Instructions]. Thank you. Alex, you may begin conference.

Good 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 Gallarda, Executive Vice President and Chief Financial Officer. Before we begin, I'd like to remind everyone, 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-K for the year ended December 31, 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 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 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 ENR, Merit Project of the Year awards for our Suntrax 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 and 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 including $6 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 MMP backlog down to approximately $240 million or 8.5% of our backlog and expect to complete a substantial portion of the…

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's Discussion & 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, 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 for 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, guilty inclusion, and more can be found in our recently filed Form 10-K. We reported a net loss of $6…

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions]. First question comes from Adam Thalhimer from Thompson Davis. Please go ahead.

Wanted to start on the M&P jobs. Sorry to do that because there are 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?

Yes. Thanks, Adam. So we've recorded reduced margins and loss contingency for all the known items. We've maintained our estimated completion date for the M&P of the middle of 2025 and 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 reported the time is done. We still, Adam, have some headwinds to finish this work. We have a solid plan to get it done. The specific challenge 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 denied change order. Going forward, we expect to -- known -- we expect to continue to execute our plan, and we -- it'll be less and less of our backlog going forward.

Yes, Adam, and this might be one of your follow-up questions. We've about $240 million left in backlog in 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 of a reason for those charges in quarters three and four, subsequent to the initial Q2 take.

Okay. That's why we get paid the big bucks.

We'll figure.

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?

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, obviously the jobs are finished. We're off site, so the claims should be getting a little bit closer, Adam and during COVID, as we've talked about previously, a lot of the owners just weren't in the office. And we had to fund these projects and did so. Now they're complete. Now we're starting to get to the table with owners, and hopefully, these settlements are getting closer. We're attacking them every day as far as trying to get in touch with owners, get mediations set up, and claims are getting closer and half are finished.

Okay. And just last remodeling, Cody, thoughts on SG&A in 2024, it came in a touch higher than I was looking for in Q4.

Yes. 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 by 65 plus a few range. If we just take what it was in Q4, there were some items in Q4 that are non-recurring in nature. We mentioned some of those in our MD&A that we filed last night, but think that that's about what our run rate should look like for 2024.

Thank you. The next question comes from Christian Schwab at Craig-Hallum Capital Group. Please go ahead.

Hey, great. Thanks for taking my question. Just a follow-up on the gross margins as we get through 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 2024, is that the right assumption we should be under, or is that too aggressive?

Yes. We're really excited about the backlog that we've picked up. As we touched on in the prepared remarks, the projects that we won 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-2024, Christian and really start to show up in 2025. We continue to strongly operate and show strong results in our Civil segment and core markets. And so we're extremely optimistic about the backlog that we have going into 2024 and 2025.

Yes. I think Christian just to maybe reiterate what we shared in some of the opening remarks, on an ex-M&P basis, we're in that low-double-digit margin range, so we've obviously been able to produce those types of results in the past. Look forward getting back to that as we work through the legacy backlog burnout.

I mean the type of work that in the backlog, we touch about 40% burn of that backlog number throughout the course of the year. I mean is there any smaller project that will kind of be done intra-year with the backlog? And so they're just kind of book and due faster or not.

We definitely see some potential for that, particularly on the Civil side. 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 2024.

Great. And then what should be the appropriate expectation that we should be assuming for new awards or backlog wins throughout calendar 2024 of some of the things you've highlighted and other things are coming, I mean say, minus the 240 and legacy software even including it, should we see backlog? Would you be disappointed if backlog wasn't to have a three handle on it? $3-plus billion by the time we exit 2024 and go into 2025, a lot of this money is finally being released.

Yes. We see numerous opportunities out there, Christian. We're sitting near a 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 as you remember, on the last call, we talked about $2 billion sitting out there and 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 our focus is going be to remain disciplined and focus on profitability first and then growing sustainably, so.

Great. Thank you. No other questions. Thanks, guys.

Thanks, Christian.

Thanks, Christian.

Thank you. The next question comes from Jean Ramirez at D.A. Davidson. Please go ahead.

Hi. So next 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?

Yes. So 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 mentioned, we've been focused on selecting projects that have favorable cash flow curves and expect that to come to fruition as we move through 2024.

Thank you. A lot of companies have talked about poor weather across the country to start the year. Is it having an initial impact on your business here in Q1? How should we handicap that?

Yes. 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 drag.

Thank you. And one last for me, you talked about the cash claims, and sorry, that I've missed it, but what are the big ticket items embedded within your claims balance? And do you mind providing a little more color on when we can potentially see some resolutions?

Yes. So great question with respect to the larger drivers of that, we've disclosed some of that information historically, and we do have 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 2024, 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 color or expectations as far as individual potential settlements go, but we do expect to get to the resolution table on some of it in 2024.

Got it. 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?

We had an impressive book-to-bill pickup in Q4 I think about 1.9. When you look on a year-over-year basis, we close to maintaining record backlog ample opportunity in the pipeline, but we're going into all of these opportunities eyes wide open with respect to best return, profitability, and cash flow. So with that, we do see the potential for backlog to increase, but are going to be very responsible about doing so. Frank, anything you'd add to that?

No.

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

Thank you.

Thanks for your interest. Appreciate it.

Thank you. And the next question comes from Julio Romero at Sidoti & Company. Please go ahead.

Hi, good morning, Frank, Cody and Alex. This is Alex Hantman on for Julio.

Good morning.

Good morning.

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?

Are you speaking specifically to Q4 of this or just M&P in general?

Yes, Q4.

Yes, I would -- Q4, I guess if you were choosing between those options, you could say it was execution risk. 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. But this what -- the Q4 charges were a specific event to change order negotiation.

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.

Yes. I share the breakouts of M&P from Transportation, in Q4 Transportation; M&P was just under 8% margins. Full year ex-M&P was a little over 11%. So not where we see the potential for margin performance in that business, but certainly -- certainly reflects a lot of the good work that we do have in that segment.

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?

I think where 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, we'll 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.

Thank you. There are no further questions. I will now turn the call back over for closing comments.

Thanks for joining -- thanks for joining the call today, everyone. Appreciate your time.

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