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- **Legacy Cleanup Complete**: Final legacy project closure reduces risk, freeing focus on $2.26 billion backlog of high-margin work.
- **Profit Recovery**: Q3 gross margin improved to 1.5%, Civil segment at 10.5%, despite $8M dispute hits. 2026 legacy impact expected to drop 70%.
- **Data Center Expansion**: Pursuing $15-75M utility/site dev packages, with Texas $20B water funding driving Civil growth. Tunneling fleet positions for $50B+ pipeline.
- **Tax Headwind**: One-time $57M tax expense, but 2026 tax rate to 15-20%. Q4 cash flow stable, 2026+ positive.
- **2027 Vision**: Full shift to core work with potential margin expansion, targeting short-duration, high-margin public/private projects.

**【CEO Summary Section】**
- **Legacy Project Completion**: Marked the completion of the last of 27 legacy projects, including high-profile infrastructure projects like the Queensferry Crossing and SR 520 Montlake. This milestone reduces operational risk and allows focus on new core work.
- **Q3 Financial Performance**: Reported revenue of $213 million and gross profit of $3.3 million, with a gross margin improvement to 1.5% (from -29.5% YoY). Civil segment achieved 10.5% gross margin despite $8 million in noncash dispute adjustments.
- **New Awards and Backlog**: Added $151 million in new contracts, including a $77 million bridge rehab project and a $53 million Texas water resource contract, bringing total backlog to $2.26 billion.
- **Data Center Strategy**: Exploring data center utility and site development opportunities, targeting $15-75 million projects aligned with core capabilities. Texas Proposition 4 ($20 billion water funding) creates tailwinds for Civil segment.
- **Future Outlook**: Expect legacy projects to derisk earnings by 2026, with focus on high-margin, short-duration work in public and private markets.

**【CFO Financial Commentary】**
- **Revenue and Profit**: Q3 revenue up 21% YoY to $213.3 million, driven by new core work. Gross profit improved by $54.4 million YoY, with Civil segment leading at 10.5% margin.
- **Cost Management**: SG&A expenses decreased 17% YoY to $14.6 million, reflecting cost control efforts. Interest expense rose to $9.2 million due to higher borrowing rates.
- **Tax Impact**: One-time $57.3 million noncash tax expense for valuation allowance. 2026 effective tax rate expected at 15%-20%.
- **Segment Performance**: Transportation segment faced challenges with $7 million unfavorable adjustments, while Materials & Paving (M&P) backlog decreased to $89 million.
- **Legacy Project Progress**: Remaining legacy backlog reduced to $32 million, with 39% of total backlog expected to be completed in the next 12 months.

**【Q&A Highlights】**
- **Data Center Opportunities**: Targeting $15-75 million utility and site development packages for data centers, leveraging core capabilities. Texas Proposition 4 funding supports Civil segment growth.
- **Cash Flow Expectations**: Q4 free cash flow expected to be similar to Q3, with positive 2026 outlook. $9.5 million in cash collections from Q3 dispute resolutions.
- **Project Delays**: Q3 delays impacted revenue timing, but Q4 is expected to show slight improvement. Legacy project completion remains a priority.
- **Competitive Advantage**: Large fleet of tunnel boring machines positions the company for tunneling projects, with $50+ billion in pipeline opportunities.
- **2027 Outlook**: Full transition to core work by 2027, with potential for margin expansion as legacy projects are fully derisked.

Southland Holdings, Inc. (SLND) Q3 2025 Earnings Call Transcript

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SLND

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