Good morning. My name is Nicole, and I will be your conference operator today. At this time, I would like to welcome everyone to the Southland Second Quarter 2024 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. [Operator Instructions] Thank you. Alex, you may begin.

Good morning, everyone, and welcome to the Southland second quarter 2024 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 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 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 on March 4, 2024, and discussion on Form 10-Q for the quarter ended June 30, 2024, 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 second quarter 2024 conference call. We reported mixed results in the second quarter with revenue of $252 million, down from $257 million last year. We reported a gross loss of $40 million, which compares to a gross loss of $34 million in the same period last year. Despite the challenges in the quarter, we had several positive leading indicators, including strong cash flow from operations of $27 million and new awards of $375 million in the strong bidding environment we've discussed in prior quarters. Our second quarter's income statement was negatively impacted by unfavorable adjustments of $40 million from the decision to settle disputes on legacy projects. While we were disappointed by the impact this had on our results this quarter, we will significantly strengthen our balance sheet by collecting $58 million from these disputes in the third quarter. This is in addition to the strong positive cash flow from operations of $27 million in the second quarter. Earlier this year, on our fourth quarter 2023 conference call, I mentioned that we expected to have the opportunity to settle a considerable number of legacy disputes with a focus on generating cash in 2024. Our focus has been to quickly negotiate settlements that accelerate cash collections and minimize the risk and uncertainty associated with prolonged and extensive settlement pursuits. While we are disappointed about having to make the decision to settle for less than we believe that we were entitled to in certain circumstances, it was the best decision for Southland's long-term outlook. With the recent dispute settlements and other initiatives to strengthen our balance sheet, we are in a much stronger position today to negotiate our remaining legacy disputes, and we will continue to vigorously pursue all the money…

Thank you, Frank, and good morning, everyone. I will provide an overview of our financial performance during the second quarter of 2024. You can find additional details and information in the financial statements, footnotes, and management's discussion and analysis that were filed on Form 10-Q last night. Revenue for the quarter was $252 million, down $5 million from the same period in 2023. Gross loss for the second quarter was $40 million compared to a gross loss of $34 million for the same period in 2023. Gross profit margin in the quarter was negative 16% compared to negative 13% in the same period of the prior year. Selling, general and administrative costs in the second quarter were $15.7 million, a decrease of $700,000 compared to the same period in 2023. Interest expense for the quarter was $6.7 million, an increase of $2.4 million compared to the same period in 2023. The difference was attributable to increased borrowing costs and higher debt balances. Income tax benefit was $16 million for the quarter compared to a benefit of $19 million in the same period last year. We expect our 2024 annual effective tax rate to be in the 20% to 24% range, depending on certain tax credits, nondeductible items, and certain state and local taxes. We reported a net loss of $46 million or negative $0.96 per share in the quarter compared to a net loss of $13 million or negative $0.27 per share in the same period last year. We reported an adjusted net loss of $46 million in the quarter or negative $0.96 per share, which compares to an adjusted net loss of $35 million or negative $0.76 per share in the same period last year after removing the noncash benefit from eliminating the contingent earn-out liability and transaction-related expenses…

[Operator Instructions] Our first question is coming from Adam Thalhimer from Thompson, Davis.

Wanted to ask about the Civil segment. Nice sequential increase in backlog there. When does that start to flow into revenue?

Yes. I think we're starting to see more and more on the Civil side. In third and fourth quarter, we expect upticks from the Civil business starting to flow into revenue in those quarters beyond so getting closer on the new work. We also continue to see the business performing really well. Revenue is up 21% from last year in this segment. Margins were up from 9% to 11.5% this year, and the Civil backlog is up 38% from year-end. So all these trends, we expect to start showing revenue in the coming quarters, Adam.

And then the remaining M&P backlog, do you have any sense -- should we just straight-line the recognition of that over the next 4 quarters or does it flow through differently from that?

Adam, it will be heavier weighted towards Q3 and Q4 as we expect some of those remaining projects will be substantially complete by year-end with a small number trailing into 2025. So of that $200 million in backlog left, it's definitely weighted closer rather than further.

And then I don't know how much detail you can give but the $58 million is great news. Just curious if you can touch on the ongoing discussions and the potential for more settlements in the coming quarters.

Yes. $58 million helps a lot on claims that we've talked about in the past. A lot of these disputes have built up as a result from COVID. A lot of the owners weren't in the office, and we had to self-finance a lot of these projects through COVID. And we are going to go after all the money we have earned. We're starting to really make progress on getting to the table on a lot of these claims. We have a mediation with the city of Charlotte, which is one of the larger claims this week and several more as we progress into the back half of the year. Approximately half of our CIE balance is on projects we are substantially complete on. So we believe we're going to generate a significant amount of cash from these in the coming quarters. I mean, this -- the money that we've collected is going to allow us to vigorously pursue these claims.

Our next question will be coming from Christian Schwab from Craig-Hallum Capital.

Just for the clarity on the disputed contracts, we talked about maybe $100 million of the $200 million is close to be done, and you mentioned Charlotte. I'm just trying to get an idea of how many projects and how many people do you have to negotiate with for clawbacks for cash on that $200 million? Is it 3 or 4 people, 3 or 4 projects? Is it 8 or 9 projects? I guess that was never really clear.

Yes. We haven't disclosed the number of projects. We have a handful of claims related to our legacy portfolio. It is a little lumpy. We did disclose additional details about the CityLYNX project that Frank just mentioned. That's one of the larger funds that we have out there, and we do expect to be at the table to potentially settle those over the next couple of quarters here.

So as far as that $200 million, is there any way for us to roughly mack truck, semi-truck the range of cash that we could generate between now and the end of 2025 and that $200 million worth of work?

Yes. So if you look at our contract assets balance, we've called approximately $500 million. We shared about half of that is related to claims on projects that are substantially complete. The largest we have out that we disclosed is the $115 million against city of Charlotte. So we do expect that everything that we have recorded, we will convert into cash and we're going to vigorously pursue these claims.

So it sounds like you're meeting with them shortly, so the lion's share of of your work done in essence, thanks for that clarity, is in essence just 1 dispute, which we might get clarity on sooner than later, cross our fingers. Is that fair?

We hope and expect so, Christian. We've had very favorable developments on each and every one of these claims over the last couple of quarters. We expect for that to continue as owners have now run out of appeal options and are going to have to settle down and get to the table and get these taken care of. With that said, the timing is uncertain, but we're doing everything we can to collect on the money that we've earned as quick as possible.

And then my last question is, as we think about organic growth, ex legacy COVID disputes, et cetera, given the tremendous funding that we've talked about in government stimulus and healthiest bidding project time frame in some time, how should we think about just organic growth on a 3- to 5-year basis now that it seems like we're potentially hopefully in the final innings of getting rid of the disputes?

Yes, absolutely. All the markets continue to be really healthy. Civil, we talked about the last question with the backlog being up 38%. We think there's a really good chance to extend our Civil business and profile contracts are getting larger on that side. There's a lot of private work still out there on the Civil side that we've touched upon that we really haven't pursued in the past. You've got the IIJA really just in the early innings, and so we expect to see growth potential from that as well.

Christian, I would just add on to that, I expect the market we're in right now is definitely supportive of expanding book-to-bill ratio for the foreseeable future. It's really just a matter of being selective and getting the best return we can and choosing the right projects to go after that are out there.

And then when you guys came public, you talked about on some of the Civil stuff, in particular, kind of a low win rate and kind of focusing on the work you want to do where we got the machines and the people, et cetera, and the infrastructure in place. Has anything changed in that or would you say that still remains a core competency of the company?

No, still remains a core competency of the company. There's a tremendous amount of supply. So we're really able to get into the best contract terms for owners that we've worked for in the past with limited competition. We rarely see more than 1 or 2 bidders now. So since we've become public, the bidding field has gotten even better, but we remained extremely disciplined.

Next question in line will be coming from Julio Romero from Sidoti & Company.

Maybe staying on the contract disputes for a little bit. You talked about the mediation with Charlotte going on this week. That seems like there'll be some resolution in the near term. Just help us think about what are the chances that these contract disputes get settled in year '25 instead of year '24 and thus lead to gross losses in '25?

Julio, to backtrack a little bit, most of these claims, almost all of these claims actually are from projects that were bid in 2018 and 2019. So like Cody mentioned, we've gone through the appeals process. We're getting closer and closer and are going to continue to fight for all that we've had to self-finance and all the money that we've earned on these projects.

And then I guess back to Adam's question from earlier, the amount of revenue burned from M&P this quarter was only $9 million. Just why was that again?

Yes. So part of the settlement that we discussed resulted in lowering the percentage of completion on the project, which causes a derecognition of revenue from prior periods. So that's an artificially lower number that does not correlate to the operational progress we made on the M&P portfolio. We still expect to be substantially complete with all M&P by mid-2025.

And then assuming there's no further derecognition from the contract resolutions in the third quarter, a good portion of it gets taken out in 3Q. Is that fair?

That's correct.

Of what's remaining? Okay, okay. And then congrats on the term sheet signed for the $110 million of refinancing. Assuming that closes, how does that affect your GAAP interest expense dollars for maybe the fourth quarter, for example?

Yes. So we'll have more information as that unfolds and we finalize that transaction. As we disclosed on the prior call, we're looking at structures that preserve cash flow for debt service that in this environment may come at the risk of higher interest rates or would naturally come with higher interest rates but will support our working capital position better than the existing fully amortizing term note structure as we've had in the past.

And then last one for me is just a lot of the companies are calling out a weather impact. Did you guys see any weather in either the second quarter or beginning of third?

We did see some higher-than-normal rain events in some areas, which definitely did impact our work.

Notable you can call out for July or...

No, nothing to add at this point. We'll see how we continue in through Q3 and expect to make a tremendous amount of progress on all the projects we have out there.

[Operator Instructions] Last question in line will be coming from Brent Thielman from D.A. Davidson.

Cody, could you just level set us on the balance sheet, I guess, with all the moving pieces and cash collection since the end of the quarter, the sale leaseback, the settlement, I guess, you get the real estate transaction? Are you like kind of $175-plus million on a pro forma basis?

Yes. So the real estate transaction as well as the settlement where the cash was not collected in Q2 was reflected -- the settlements were reflected in the income statement. That cash was received subsequent to quarter end. So if you look at where we are on a pro forma basis, some of that will go back into working capital to support ongoing operations. But we don't have any further pro forma guidance on that at this point. As Frank mentioned, as part of the real estate transaction, there was a $16 million reduction in debt so that transaction netted after debt paydown fees and expenses about $25 million to the balance sheet.

And then on the Transportation segment, it looked like there might have been some other projects that worked against you to some degree outside of the M&P portfolio. Maybe just an update what's happening there, time lines to completion?

Yes. Brent, we have a bridge in the Midwest that we still estimate to be substantially complete with our legacy work in mid-2025. We've gotten through the major milestones on the Midwest bridge project, which had a write-down in the quarter. We had an increase in the estimated cost to finish the project from increased subcontractor cost and feel we've captured all the costs associated with this project, with the adjustment in the quarter. But it's been a challenging project. There's another 1 that we did prior to COVID, but the bridge is scheduled to be open early November.

All right. And then you're back to the just kind of $200-odd million in M&P backlog left to be executed. I guess after these dispute settlements, I mean, what are the remaining risks here associated with kind of executing that work over the next 12 months? Is it change orders, weather, inflation? I'm just trying to think about how we ought to handicap some risks still associated with that.

And Brent, just to clarify, your question's specific to M&P?

That's correct, yes.

Yes. So we definitely think over the long run, there's potential cash upside on M&P. The substantial completion of the operational work in the field being done by mid-2025, I do expect there will be ongoing claim pursuits beyond that, but that will be after the projects are completely demoed. So there is risk and settlement on any claim, but we fully expect to collect what we recorded on the balance sheet and think that, that will support the overall cash upside potential with M&P, albeit it will come after the completion of the work.

There are no further questions at this time. I'd now like to turn the call back over to Mr. Frank Renda for final closing comments.

Thank you all for joining us today. I want to express my appreciation to our employees for their hard work and commitment to safety and also like to thank our shareholders for their continued trust in us. I'm excited about our growth outlook in the second half of the year and beyond. Thank you, everyone.

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