Southland Holdings, Inc. 2026 Q2 Earnings Call

Good morning, everyone, and welcome to the Southland second quarter 2026 conference call. This is Alex Murray, Vice President of Corporate Development and Investor Relations. Joining me today are Frank Renda, President and Chief Executive Officer, and Keith Bassano, Chief Financial Officer. Before we begin, I would 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 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, 2025, that was filed with the SEC on March 26, 2026, and the discussion in our Form 10-Q for the quarter ended June 30, 2026, 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 will now turn the call over to Frank.

Thank you, Alex. Good morning, and thank you for joining Southland's second quarter 2026 conference call. I will provide an overview of the series of agreements we entered into with our sureties. I will then review our quarterly results, including the legacy dispute adjustments recorded during the quarter, progress on the wind-down of legacy projects, and the strength of our current pipeline of opportunities. Turning to our strategic plan and capital structure. As you know, our sureties have been providing support both through direct funding and by acquiring our term loan facility. We formalized that ongoing commitment into a financial assistance agreement and a second amendment to our term loan facility. Together, these agreements give us the runway we need to complete our bonded work while putting the company in a much more sustainable capital structure.

The financial assistance agreement governs the term on which our sureties have provided and will continue to provide financing with respect to our bonded construction projects. As part of this agreement, the terms depend on whether certain sureties are providing go-forward bonding or not. Any surety that is party to the financial assistance agreement that has provided bonds to us after the retroactive effective date and is expected to continue to issue bonds to us is considered a bonding surety. Financing provided by those sureties is referred to as bonding surety financing. Bonding surety financing bears interest at 4% per annum, with accrued interest capitalized and added to principal each year. As of June 30, 2026, total bonding surety financing was approximately $59 million. Sureties providing financing that are not providing go-forward bonding are considered non-bonding sureties, and their funding is referred to as non-bonding financing.

As of June 30, 2026, total non-bonding financing was approximately $151 million. The agreement documents the terms of our non-bonding financing arrangements with our non-bonding sureties, including the future conversion of certain non-bonding financing into senior non-voting preferred shares in accordance with a preferred share term sheet attached to the agreement. Under the agreement, each applicable surety panel has determined the expected loss for the non-bonding financing expected to fund that panel's outstanding bonded projects through completion. The preferred shares term sheet contemplates that the amount initially converted into preferred shares equals the lesser of the non-bonding financing provided as of June 30, 2026, or 50% of that panel's expected loss. Based on non-bonding financing as of June 30, we expect to convert and issue approximately $151 million of preferred shares allocated among the sureties based on their respective participation on the applicable panel.

These preferred shares carry a stated value of $1,000 per share, with a liquidation preference equal to that stated value. They rank senior to any other class or series of our equity, have a perpetual maturity, and are not convertible into any other securities of the company. We are required to issue them no later than September 30 of this year, and they cannot be primed by any other equity without the applicable surety panel's consent. The preferred shares will be adjusted upward or downward based on actual loss once the applicable surety's projects are completed, with the final preferred share amount limited to 50% of that actual loss. To the extent the amount initially issued exceeds 50% of the actual loss, that excess converts back to unsecured indebtedness. The aggregate preferred shares outstanding equals 50% of actual loss at completion.

The remaining portion of the non-bonding financing for which preferred shares are not issued will constitute unsecured indebtedness, will bear no interest, and will not be subject to mandatory amortization payments other than certain net cash flows from claims and 5% of annual operating cash flow. At time of substantial completion of surety's bonded projects, provided that we are not in default at the applicable time, each surety will forgive the portion of its non-bonding financing that is unsecured indebtedness if its bonded projects achieve substantial completion or all project dispositions with respect to such projects are consummated within 20% of the applicable expected loss amount. As part of the agreement, we also reached terms on an amendment to our senior credit facility.

So long as we remain in compliance with the facility, the amendment sets the interest rate at a fixed 4% with accrued interest capitalized and added to principal and suspends both the scheduled principal payments and the early termination premium. If that relief were to end early, the original interest rate would apply retroactively. Together, this represents approximately $27 million of cash debt service relief over the next 12 months. During the second quarter, our surety partners advanced approximately $71 million to support active bonded projects, bringing total surety advances to $210 million, exclusive of the Washington State Convention Center. Their continued support reflects confidence in both our plan and execution strategy. Turning to this quarter's results, second quarter revenue was $113 million, inclusive of a revenue reversal of approximately $102 million from non-cash adjustments related to legacy dispute negotiations and resolutions.

Gross loss for the quarter was $71 million, primarily driven by the unfavorable adjustment from legacy disputes, which impacted gross loss by approximately $94 million. We continue to actively pursue all avenues to collect the amounts owed to us and expect to make progress throughout the remainder of 2026 in resolving these matters and converting them into cash. Our legacy portfolio also continues to shrink. We are down to $46 million of material and paving backlog and $35 million of non-M&P legacy backlog remaining. The market backdrop across our core end markets also remains strong. Federal, state, and local infrastructure funding continues to translate into active procurement for water, bridge, marine, and tunnel work. Moving along the backlog, we finished the quarter with $1.68 billion of backlog, down from $2.03 billion at year-end. With the financing agreement now in place, we expect bonding support and bidding activity to continue increasing.

We expect the combination of improving financial flexibility, a shrinking legacy portfolio, and strong market demand positions us well to convert upcoming opportunities into awards over the coming months. This is evident in the recently announced Phase Three Winnipeg North End Sewage Treatment Plant award, which we secured alongside our partners Aecon and NWH, representing approximately $190 million in contract value for Southland. Active pursuits in our pipeline include additional packages at the Winnipeg North End Sewage Treatment Plant, the Claiborne Pell Bridge rehabilitation in Rhode Island, the I-10 Calcasieu approach bridges in Louisiana, the MoDOT Liberty Bend Bridge design build in Missouri, the Bermuda Swing Bridge replacement, the MTA Bronx-Whitestone Bridge rehabilitation in New York, the Outer Bridge crossing repairs for the Port Authority, and multiple tunnel, marine, and bridge opportunities across our core markets.

In summary, we have reached final agreement on a central element of the strategic plan we outlined in March. Our surety partners have provided capital to support execution. Our senior credit facility has been restructured to provide meaningful cash debt service relief, and the broader financing agreement is now in place. With that, I will now turn the call over to Keith for a financial update.

Thank you, Frank, and good morning, everyone. I will discuss an overview of our financial performance during the second quarter of 2026. 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 in the second quarter was $113.3 million, compared to $215.4 million in the same period in 2025. Gross loss in the quarter was $71.2 million, compared to gross profit of $13 million in the second quarter of 2025. This was driven by unfavorable adjustments related to claims across several legacy projects. During the three months ended June 30, 2026, we performed a comprehensive reassessment of expected recoverability of claims on several projects, including substantially completed projects, in light of recent developments and updated information available regarding the timing and the amount of potential recoveries.