Bird Construction Inc

TSX:BDT

Earnings Call Transcript 2020-Q3

[Operator]

Welcome, ladies and gentlemen to the Bird Construction Third Quarter 2020 Financial Results Conference Call and Webcast. We will begin with Teri McKibbon, President and Chief Executive Officer's presentation which will be followed by a question-and-answer session. [Operator Instructions] And the webcast is being recorded. [Operator Instructions] Before commencing with the conference call, the company reminds those present that certain statements which are made express management's expectations or estimates of future performance and thereby constitute forward-looking information. Forward-looking information is necessarily based on a number of estimates and assumptions that, while considered reasonable by management, are inherently subject to significant business, economic and competitive uncertainties and contingencies. Management's formal comments and responses to any questions you might ask may include forward-looking information. Therefore, the company cautions today's participants that such forward-looking information involve known and unknown risks. Uncertainties and other factors that may cause the actual financial results, performance or achievements of the company to be materially different from the company's estimated future results, performance or achievements expressed or implied by the forward-looking information. Forward-looking information does not guarantee future performance. The company expressly disclaims any intention or obligation to update or revise any forward-looking information, whether as a result of new information, events or otherwise. At this time, I would like to turn the conference over to Mr. Teri McKibbon, President and CEO of Bird Construction. Please go ahead, Mr. Teri McKibbon.

[Terrance Lloyd McKibbon, President, CEO & Director]

Good morning, everyone, and thank you for participating in Bird Construction's third quarter 2020 earnings call. Co-presenting with me today is Wayne Gingrich, CFO. Today, before we begin our call on Remembrance Day, we will pause and share a minute of silence to give thanks and to remember the servicemen and women who have volunteered, sacrificed, served, fought and died to give us and others around the world, hope and freedom. We thank you for your service and for your courage, courage that should inspire us all to continue our efforts to build a better world. [Audio Gap]Thank you once again to all of those who had sacrificed for our freedom.This is the first earnings call where we can officially welcome the Stuart Olson employees to the community at Bird. There's been a tremendous amount of work leading up to the financial close of the acquisition. And there continues to be even more work as we integrate 2 impressive organizations. The Board, Wayne and I truly appreciate all the efforts that our employees have contributed to get us in the position we are today, to be combining 2 amazing 100-year-old companies that have been building Canada for over a century. We look forward to continuing to help build communities throughout Canada, together for many years to come. With the number of active cases on the rise across the country, we hope our employees, clients and the investment community are continuing to stay safe and healthy during the second wave of the COVID-19 pandemic. With that, we will begin our presentation using the updated format of our earnings calls utilizing a webcast and a supplementary slide deck. In the third quarter of 2020, the company continued to execute a more diverse work program and delivered significantly improved net income, adjusted earnings and adjusted EBITDA year-over-year. And we are proud that Bird has delivered 8 sequential quarters of improved trailing 12-month adjusted EBITDA percentage. Net income for the third quarter of 2020 was $8.8 million on construction revenue of $345.1 million compared with a net income of $6.8 million on $378.6 million of revenue in 2019. Basic and diluted earnings per share of Q3 2020 was $0.20, improving from $0.16 in 2019. Adjusted earnings and adjusted earnings per share in the second quarter of 2020 were $12.4 million and $0.29, respectively, improving in comparison to adjusted earnings and adjusted earnings per share in the second quarter of 2019 of $6.8 million and $0.16, respectively. The year-over-year increase in second quarter adjusted earnings is primarily attributable to the mix of higher-margin industrial work program. The earnings improvement is particularly noteworthy, considering the pandemic that has had global impacts in addition to closing of the acquisition of Stuart Olson and incurring $3.8 million of pretax transaction and integration-related expenses in the quarter. Again, we cannot thank our employees enough, not only for improving operational execution, but also for completing this transformational acquisition. Adjusted EBITDA and adjusted EBITDA margin in the third quarter of 2020 were $22 million and 6.39%, respectively. Adjusted EBITDA increased $8 million from the adjusted EBITDA of $14 million in the second quarter of 2019. Adjusted EBITDA margin increased 269 basis points from the adjusted EBITDA margin of 3.7% recorded in the third quarter of 2019. The year-over-year improvement was driven by an increase in gross profit due to the revenue mix and the gain on sale of 2 equity investments, which is normal course in Bird Capital's investment approach to P3 concessions. We are very pleased with the continued progress completing our challenging legacy projects and in the positive impacts of our efforts to diversify our revenue stream across the portfolio of both geographic and balanced risk profiles, and Stuart Olson adds diversification of service and capabilities to offer our clients throughout the country. We continue to be encouraged by the growth of the pending backlog. Pending backlog of $1.3 billion at the third quarter 2020 is comprised of delivery models that support a solid portfolio of balanced risk in Bird's overall work program and earnings base has begun to reflect this. $698 million of pending backlog has been added via Stuart Olson, with the majority being estimated MRO work orders covering the remaining MSA period. Projecting the timing of converting pending backlog into contracts has become more difficult as a result of the pandemic, and several have shifted to the second half of 2020 and into 2021. In 2020, the company secured $996.1 million of new contract awards and change orders and executed $949.5 million of construction revenues. Through the acquisition, $995.7 million of backlog was added at financial close during the third quarter of 2020. Backlog of $2.59 billion at September 30, 2020, increased 79.8% from the $1.441 billion backlog year-over-year. Backlog increased by $1.042 billion or 67.4% from the $1.547 billion of backlog recorded at December 31, 2019, despite awards and project delays as a result of the COVID-19 pandemic. Post close of the acquisition, our balance sheet remains strong and healthy with cash at $157.2 million and working capital at $118.5 million. With the improving financial performance and healthy balance sheet position, the Board has declared an eligible dividend of $0.0325 per share common share for the months of November, December, January and February 2021. Integrating the 2 large organizations has been a priority since closing the deal. Our approach has been to take the best of both organizations with regular communications and updates to the entire company. Our focus is on people, organizational structure and technology needs, and our teams have been identifying new cross-selling opportunities to maximize value for our clients and stakeholders, which will help us grow relationships and create new ones from coast to coast. As an update on synergies, progress has been made in identifying the previously announced $25 million of earnings before tax synergies as a result of the business combination. The annualized adjusted EBITDA synergies of $10 million are expected to ramp up through 2021. The annualized interest savings target of $10 million was achieved as of the closing date and the depreciation and amortization synergies target of $5 million annualized is expected to be achieved by the end of the fourth quarter of 2020. In the fourth quarter of 2020, the company expects to realize $700,000 of adjusted EBITDA savings with $2.5 million in interest savings and $1.2 million in depreciation and amortization savings. Expanding further on my point of integration and cross selling, I would highlight on Slide 7 the additional diverse services and enhanced service offering of the combined business. We have expanded our self-perform capabilities in areas such as insulation, metal siding and cladding, ductwork, asbestos abatement, mechanical, electrical and instrumentation and high-voltage testing and commissioning. The Commercial Systems business is one of Canada's largest electrical and data systems contractors. Services include design-build and installation of core electrical infrastructure, resulting in high-tech, high-performance buildings. Also providing the services and systems that support information management, building systems integration, data centers, security, risk management and life cycle services as well as ongoing maintenance and on-call services to clients. Added to this is improved expertise in construction management contracts offered to clients. And the Centre for Building Performance supports smart building technology and integration -- integrated construction delivery. Stuart Olson also has a very highly regarded MRO service offering, which increases our revenue mix from recurring revenue streams, which helps provide a more stable platform for profitable growth. To update you on the company's response to the COVID-19 pandemic, the pandemic has added uncertainty into the construction industry as each provincial government has responded with different measures to address the threat to public health. Unfortunately, we are observing the number of active cases in the provinces we operate. Prevention measures remain in varying degrees across the country. The duration continues to be unknown and the corresponding impacts to our workforce, supply chain and project sites are key variables and continue to have uncertainty as a result. Financial results of the third quarter 2020 were impacted by the COVID-19 pandemic as the company experienced temporary project shutdowns and reduced productivity on project sites. We are also impacted with delays in the conversion of some projects in pending backlog to backlog, delays in project tenders and awards. The health and safety of employees is paramount. And as a result of the pandemic, the company has increased health and safety initiatives such as physical distancing and added additional measures to normal safety protocols. In the third quarter of 2020, the company recorded $3.1 million related to the Canadian Emergency Wage Subsidy program established by the Federal Government. The COVID-19 situation remains extremely fluid, and it is clear that the country is now in the second wave. However, the company remains resilient to the challenges presented by the first wave and is well positioned to respond to fluctuating scenarios in the near term. Again, on behalf of the executives and Directors of Bird, I want to acknowledge the efforts and dedication that our employees have made to ensure that the company continues to operate safely and effectively, especially our field workforces who continue delivering upon our project commitments through these unprecedented and straining times for everyone. Wayne will now walk us through more details on the financial results for the third quarter and year-to-date 2020.

[Wayne R. Gingrich, Chief Financial Officer]

Thank you, Teri. Before I get into the details of the financial results of the third quarter of 2020, I will briefly discuss Slide #9, which shows the trailing 12-month revenue and adjusted EBITDA for historical periods back to 2017. You'll see that thanks to the eighth sequential quarter of improving TTM adjusted EBITDA, TTM adjusted EBITDA margin has increased to 4.23% despite the slight decline in trailing 12-month revenue to $1.37 billion. Turning to Slide 10. I will discuss the 3 months and 9 months ended September 30, 2020, compared with the 3 months and 9 months ended September 30, 2019. During the third quarter of 2020, the company recorded net income of $8.8 million on construction revenue of $345.1 million, including 5 days of Stuart Olson revenue and cost of construction, compared with net income of $6.8 million on $378.6 million of construction revenue, respectively, in 2019. The year-over-year decrease of revenue in the third quarter of 8.9% was driven by projects that have been temporarily slowed down by clients as a result of the COVID-19 pandemic, primarily in Québec and Atlantic Canada, despite a year-over-year increase in the industrial work program. The year-over-year increase in third quarter net income is primarily attributable to the mix of higher-margin industrial work program. The company's 2020 third quarter gross profit of $27.4 million was $3.6 million higher than the $23.8 million recorded a year ago. Increase in gross profit is due to the higher-margin industrial work program as revenue continues to shift from institutional and commercial projects to more balanced work program, including industrial. Gross profit earned in Québec and Atlantic Canada had been significantly impacted year-over-year by COVID-19 pandemic resulting in project delays. The company accrued $2.5 million of Canada Emergency Wage Subsidy in gross profit in the third quarter of 2020. Gross profit percentage in the third quarter of 2020 was 7.9% and 160 basis points higher than the gross profit percentage of 6.3% recorded a year ago for the same reasons as gross profit. Income from equity accounted investments in the third quarter of 2020 was $4.1 million compared with $0.3 million in the same period of 2019. The increase represents additional equity income earned from several equity accounted investments across Canada. Included in the third quarter of 2020 were net gains on sale of 2 of the company's investments in equity accounted entities totaling $2.7 million in the quarter. In the third quarter of 2020, general and administrative expenses of $17.7 million or 5.1% of revenue were higher than the $14.2 million or 3.8% of revenue in the corresponding period a year ago. The company recognized $0.6 million of Canada Emergency Wage Subsidy in general and administrative expenses as a reduction to compensation expense. During the quarter, the company had $1.1 million lower pursuit costs, lower travel and other discretionary costs of $1.7 million and lower foreign exchange costs of $0.2 million than the amount recorded a year ago. Offsetting these reductions and expenses were $4.4 million of acquisition-related professional fees and higher compensation and stock-based compensation expenses of $0.4 million than the amount recorded in 2019. Finance income of $0.2 million in the third quarter of 2020 was lower than the $0.7 million recorded in the same period of 2019. Interest rates earned on average cash balances during the quarter were lower compared to the prior year. Finance and other costs of $1.1 million were comparable to the $1.2 million reported in the third quarter of 2019. The increase in interest costs associated with alternative project financing was offset by the gain on mark-to-market of interest rate swaps year-over-year. In the third quarter of 2020, income tax expense was $4.1 million compared to $2.5 million recorded in the third quarter of 2019. The increase in income tax expense was in line with the improvement in year-over-year income before taxes. In addition, certain expenses associated to the business combination with Stuart Olson are nondeductible for tax purposes, which increased the effective tax rate. During the 9 months of 2020, the company recorded net income of $15.6 million on construction revenue of $949.5 million compared with net income of $1.3 million on $955.8 million of construction revenue, respectively, in 2019. The year-over-year decrease in revenue was driven by declines in the commercial and institutional work programs as a result of COVID-19 pandemic delays in new tenders and awards. The year-over-year increase in net income is reflective of the mix of higher-margin industrial work program in addition to less margin erosion on a challenging PPP project. The company's 2020 first 9 months gross profit of $64.8 million was $20.2 million higher than the $44.6 million recorded for the same period last year. Despite the lower construction revenues year-over-year, the gross profit increase is due to a higher-margin work program, as revenue continues to shift from institutional and commercial projects to a more balanced work program, including industrial, which has a higher gross profit profile. The company accrued $2.5 million of Canada Emergency Wage Subsidy in gross profit in the first 9 months of 2020. The first 9 months of 2019 was negatively impacted by a PPP project that incurred additional cost due to design-related scope growth and acceleration expenses. Gross profit percentage in the first 9 months of 2020 was 6.8% and 210 basis points higher than the gross profit percentage of 4.7% recorded a year ago for the same reasons as gross profit. Income from equity accounted investments in the first 9 months of 2020 was $8 million compared with $2 million in the same period of 2019. The primary driver of the year-over-year increase was net gains on sale of certain investments in equity accounted entities of $3.1 million. In addition, equity income increased year-over-year from several equity accounted investments across Canada. In the first 9 months of 2020, general and administrative expenses of $46 million or 4.8% of revenue were higher than the $42.4 million or 4.4% of revenue in the corresponding period a year ago. During the first 9 months, the company had lower compensation expense of $0.7 million, of which $0.6 million related to CEWS, $0.6 million lower pursuit costs and gains on sale of property and equipment were $1 million higher than the amount recorded a year ago. Travel, conference and other discretionary spend was also lower by $1.5 million as a result of the company's response to COVID-19. Offsetting these reductions in expenses were professional fees of $6.2 million, including $5.1 million related to acquisition and integration activities. Higher foreign exchange costs is $0.6 million and higher technology-related costs is $0.4 million. Finance income of $1.3 million in the 9 months of 2020 was lower than the $1.8 million recorded in the same period of 2019. Interest income earned on deposits has been impacted by lower variable interest rates in 2020. Finance and other costs of $5.8 million were $1.8 million higher than the $4 million reported in the 9 months of 2019. The increase was due to $0.6 million of higher interest expense on loans and borrowings and right-of-use liabilities and $2.1 million higher interest on nonrecourse project financing, only partially offset by the year-over-year gain on the mark-to-market of interest swaps and in other interest expenses of $0.5 million each. In the 9 months of 2020, income tax expense was $6.8 million compared to $0.6 million recorded in the 9 months of 2019. The increase in income tax expense was in line with the year-over-year income taxes before taxes improvement. Let's move to Slide 11. Throughout the pandemic, the executive management team and our Board have been laser-focused on maintaining the strength of the balance sheet. The company's long-term debt-to-equity at 33.3% and current ratio of 1.14x are within our target range. Post-acquisition, the leverage continues to be one of the industry's lowest. The strength of our balance sheet enables the company to invest in long-term growth opportunities, both organic and inorganic. It also allows us to continue to invest in technologies to support enhanced service delivery to our clients and to support safety, productivity and efficiency for our project teams. On Slide 12, nonrestricted cash is the cash we have available for general operating purposes. Restricted cash includes cash held in trust as required by the Construction Act of Ontario as well as cash pledged for letters of credit and commitment letters. Cash held in joint operations accounts is used as working capital for the specific project and not available for general operating purposes. However, it can be made available through distribution when agreed to by other joint venture partners. On this chart, you will see that nonrestricted cash at September 30, 2020, was $54.3 million, which is an improvement from both December 31, 2019, and year-over-year from September 30, 2019. Looking at the bottom table on this slide, the company's loans and borrowings, which represents draws and secured credit or equipment facilities, totaled $73.2 million at September 30, 2020. The September 30, 2020 balance includes $35 million drawn on the committed term loan facility-related to the acquisition of Stuart Olson. Excluding nonrestricted cash, the adjusted net debt of $18.5 million (sic) [ $18.9 million ] results in a 0.33 adjusted net debt to TTM adjusted EBITDA ratio. At December 31, 2019, the company had an adjusted net debt to TTM adjusted EBITDA ratio of 0.14x. So post acquisition, Bird's ratio remains one of the lowest in the engineering and construction industry. The low leverage provides us with the flexibility to profitably grow the business organically or through acquisitions and mergers. On the cash flow slide, #13, we have highlighted operating cash flow, cash utilized for CapEx and dividends and the ratio of CapEx plus dividends as a percentage of operating cash flow. Operating cash flow improved significantly in the first 9 months of 2020 compared to the first 9 months of 2019, $31.9 million compared to the $14.7 million, respectively. CapEx of $8.2 million in the first 9 months of 2020 is lower year-over-year as we've delayed some pending -- spending as a result of the pandemic. The monthly dividend has been maintained year-to-date in 2020. As a result of the strong cash generation year-to-date in 2020, the ratio of CapEx plus dividends as a percentage of operating cash flow has improved to 65% from 164% in 2019. I will now turn the call back over to Teri to comment on the outlook for the company.

[Terrance Lloyd McKibbon, President, CEO & Director]

Thank you, Wayne. On Slide 14, over the past several quarters, we've been very conscious and selective on the opportunities we pursue. The P3 contracting method, being the highest risk and design-build finance/complex design-build being the next highest risk type, stipulated sum, unit price and specific design -- specified design-build being medium risk and construction management, or CM, cost plus and integrated project delivery, IPD, being the lowest risk contract types. As a result of our focused efforts to lower the contribution from higher risk contract types, the mix of revenue from P3 has declined to 1.7% in the third quarter of 2020 compared to 7.7% in the third quarter of 2019. Our revenue base has shifted from the higher risk contract types to 11.3% in the 9 months of 2020 compared to 22.1% in the 9 months of 2019. We will continue to be very selective in pursuit of higher risk contract types. And with the addition of Stuart Olson, we do expect the percentage mix of higher risk contract types to continue with the downward trend. Trend for the company, over the past several years, towards a growing proportion of industrial project revenues is expected to continue throughout 2020. Diversification into the LNG, nuclear, public transit, modular and environmental sectors with lower risk contract types will help stabilize earnings with more balance in the work program. At September 30, 2020, the company was carrying a combined backlog of $2.6 billion, including approximately $1 billion from the business combination. The company expects to recognize 61% of the remaining performance obligations over the next 12 months compared to 69% at September 30, 2019. This expectation is based on management's best estimate but contains uncertainty as it is subject to factors outside of management's control. Consolidation of the Stuart Olson backlog means that when compared to prior years, the backlog is more diversified across a broad range of markets and contracting methods with a more balanced risk profile. Revenue earned in higher-risk contract categories such as PPP, alternative finance and complex design-build projects comprise 11.2% of total revenue year-to-date in 2020 compared to 22.1% in the same time period in 2019. The proportion of revenue earned from higher risk contract types is expected to remain lower in 2020 compared year-over-year. Outside of the MRO projects portfolio, the company has minimal direct exposure to projects in the oil sector in its backlog. The future work program will benefit from $1.3 billion in pandemic backlog -- in pending backlog as at September 30, 2020. Due to the pandemic, project projecting the timing of converting some of these projects into contracts has become more difficult and several has shifted into 2021. Pending backlog now includes a greater proportion of MSA contracts from Stuart Olson. These contracts are typically with industrial clients that span multiple years for MRO services and comprise approximately $600 million, which represents a recurring revenue stream over the remaining 2 to 6 years. The company expects to convert a portion of these MSAs to backlog as purchase orders are received. The company continues to be selective on prospective pursuits, ensuring that the available talent matches the risk profile of the project and overall work program. Project cancellations in the pursuit pipeline have been minimal to date. However, the company did see projects in the pursuit phase shift further out, which will have a modest impact on revenue in the second half of 2020. New projects in the pursuit pipeline have slowed somewhat coming into the third quarter, which may impact 2021. In the near term, opportunities will primarily consist of smaller environmental projects, midsized social infrastructure projects and a range of projects in the LNG and mining sectors. The award of any of these project opportunities will primarily benefit 2021 and beyond. In planning for both the transaction and managing through the pandemic, the company has been focused on maintaining a strong balance sheet. This enables the company to invest in long-term growth opportunities as well as sustaining its dividend. Bird continues to identify opportunities to further diversify its work program, both organically and through additional acquisitions. The company expects to benefit in the fourth quarter of 2020 through 2021 from having a healthy backlog with strong margins and more balanced in terms of the contractual risk profile of the work program. Based on information known at this time, coupled with the impacts from the pandemic already experienced and projected for the coming quarter, the company anticipates that it will achieve considerably higher levels of profitability for fiscal 2020 than seen in recent years. With the addition of Stuart Olson's operating results in the fourth quarter of 2020, year-over-year revenue is expected to surpass Bird's 2019 revenue, although pressure on revenue may persist through the early stages of 2021. The higher levels of profitability are result of the company's record backlog, a strong margin profile in the work program and an expectation that the Stuart Olson acquisition will contribute positively to the business in 2021. This concludes the prepared remarks section of the conference call. I'll now turn the call over to the conference call operator, who will queue your questions.

[Operator]

[Operator Instructions] The first question is from Jacob Bout with CIBC.

[Jacob Jonathan Bout]

It sounds like the integration of Stuart Olson is going on well. What are some of the next major milestones that we can expect over the next 12 to 18 months?

[Terrance Lloyd McKibbon, President, CEO & Director]

So the big sort of gating item that has longer duration for the integration is -- it's on the technology side. Obviously, we're integrating 2 businesses that, on a stand-alone basis, have been evolving in the construction industry in our last few years, especially has accelerated the use of technology. So that's a longer-term piece of the integration, but we have a 100-day plan to basically complete the bulk of the integration. And -- but you'll see sort of longer-term revenue synergies, cross-selling opportunities. You'll see harmonization of employee benefits and compensation. And as you indicated, we're quite pleased with the progress to date, and it's gone very well.

[Jacob Jonathan Bout]

And the cost synergies, how much of the remaining -- what is the ramp of that -- the EBITDA synergies look like in 2021? And how conservative do you think you've been with this $25 million in cost synergy?

[Wayne R. Gingrich, Chief Financial Officer]

I think the interest and amortization pieces of that, the $10 million and the $5 million, I mean, those are pretty locked in. There's not a lot of additional opportunity above those levels. On the EBITDA side, I think in the fourth quarter, we said we earned about -- or we expect to earn about $700,000 in EBITDA synergies, and that's going to ramp up through next year. We've certainly identified more opportunities than that, but it will take a while to -- for those to phase in. I think, as Teri mentioned, on the technology side, that might give us another bit of a step function in terms of harmonizing the cost structures, but that still could be 18 months out before that happens. So for 2021, we're just very focused on the $10 million and think we have a path to achieve that.

[Jacob Jonathan Bout]

And then on the backlog, you said there was $1 billion of Stuart Olson in the consolidated at the end of the third quarter. I think it was $1.6 billion for Stuart Olson in stand-alone in Q2. What was the difference? Was that just that MRO work that was reclassified?

[Wayne R. Gingrich, Chief Financial Officer]

Yes, that's right. We recorded a lot of the MSA work for the MROs into the pending backlog which was about just short of $700 million, I think, in total. And then the $1 billion in backlog was recorded, so in total, it was $1.7 billion between our 2 definitions of backlog.

[Jacob Jonathan Bout]

Okay. So there's been no cancellation of any Stuart Olson projects at this point?

[Wayne R. Gingrich, Chief Financial Officer]

That's correct.

[Jacob Jonathan Bout]

Okay. Okay. And then any of the Stuart Olson project disputes that they had historically, are they fully resolved? Or is there any outstanding at this point?

[Terrance Lloyd McKibbon, President, CEO & Director]

I would say there's -- obviously, the majority are resolved. There's always -- in our industry, there's always issues that percolate no different at Bird than at Stuart Olson. But yes, the majority of anything that we inherited was resolved.

[Jacob Jonathan Bout]

And last question here, nice move on the margin side, clearly, benefiting from the sales mix. When you think about the legacy business in 2021, do you expect a continued move higher in margins?

[Wayne R. Gingrich, Chief Financial Officer]

Yes. I think when you look at the legacy mix of the Bird business, if we call it that, on the industrial side, I think we're still going to continue to earn very healthy industrial margins on the diversified work program that we have in place. I think the commercial institutional side, we will see margins improve a little bit year-over-year as well, but maybe not to the same extent that we've seen ramp up through 2020.

[Operator]

The next question comes from Chris Murray with ATB Capital Markets.

[Christopher Allan Murray]

So as we think about -- again, following on a little bit on Jacob's question, so a couple of things. With what you've got in the backlog today, and I think what you've got in your pipeline in terms of new bids, just thinking about the margin progression, and I'm thinking about this from a couple of different perspectives, both the gross margin perspective and your EBITDA margin perspective. Can you talk a little bit about how you feel about your ability with SG&A to support additional growth into '21? And how you think that the margin profile continues to shape as we go forward?

[Terrance Lloyd McKibbon, President, CEO & Director]

I think from a SG&A perspective, we have -- we've worked hard to, over the past 12 months or so to assemble a very professional team. That is certainly very scalable. We've added a number of new leaders, especially over the last 6 months, including inheriting a strong leadership team at Stuart Olson where we've added new leadership, a new Chief Technology Officer, a the Chief People Officer, a new Leader of Safety. And one, really important add on the operational side, we added Rob Otway as EVP of our Western Building business, so the combined Bird and Stuart Olson business, which gives us a 25-year veteran of the industry coming out of PCL. And so we really have positioned the business for scale and growth. And most importantly, the mix of a business that is running both construction management and also stip sum and obviously, design-build type projects inside the same shop. And that's unique, and Rob has extensive experience in that space. So that's been a real key. So very -- we worked very hard on the leadership team. So I'm quite confident that the business now is scalable as we get through COVID and we get a little more strength in economy and demand. And obviously, with that strength of leadership, you anticipate improvements in margin performance.

[Christopher Allan Murray]

Okay. And from what you're seeing in the bid pipeline in terms of margin?

[Terrance Lloyd McKibbon, President, CEO & Director]

It's a mix, like, as Wayne referenced in his comments, the commercial and institutional side, probably a little heavier shift to the right, projects -- you think about projects in a -- maybe a more of an urban environment, those are shifting a bit. I'd say our industrial projects, less impacted in terms of any kind of a shift, but they tend to have specified durations and they're well developed and advanced before you're into construction. So you have considerably longer lead time in a lot of cases. So I would say, that's how we would look at it.

[Christopher Allan Murray]

Yes. Fair enough. And then my other question, I don't know who wants to take this one, but I think if I've read this correctly, the OPP contract should be substantially complete in Q4. Can you -- Wayne, maybe on the balance sheet, can you walk us through some of the puts and takes we should be expecting as we go into Q4 on the repayment of the nonrecourse debt and how we should think about flow of funds and what the balance sheet should look like as we finish the year?

[Wayne R. Gingrich, Chief Financial Officer]

Yes, absolutely. I can take that. So if you look at the balance sheet in Q3, you can see that we have contract assets, alternative finance projects identified. And then we also have nonrecourse debt identified as a separate line as well. So both of those accounts relate directly to the OPP project. There's no other alternative finance project. So for contract assets, that $140 million, we're going to build the entire project in December, and we would expect to be paid that. And then we will also repay the full nonrecourse project financing in December as well. So you'll see both of those accounts clear off the Q4 balance sheet. And then obviously, the differential in cash will be the profit that remains in the company.

[Christopher Allan Murray]

Okay. And -- but it's also fair to think you've already recognized as you've been going everything through the P&L. So there's going to be no P&L impacts as well, right?

[Wayne R. Gingrich, Chief Financial Officer]

That's right. There's no big margin uptick at the end of this project because we present complete revenue recognition on it. It's just -- we're not building it on a monthly basis. It continues to build up this contract asset. So that $140 million that you see on the balance sheet, that's the -- it's a project-to-date revenue earned.

[Christopher Allan Murray]

Okay. And then we should also see -- I guess, it also follows next year, your interest cost should -- your reported interest cost should drop out because you won't have the nonrecourse debt, correct?

[Wayne R. Gingrich, Chief Financial Officer]

Yes, that's exactly right.

[Operator]

The next question comes from Frederic Bastien with Raymond James.

[Frederic Bastien, MD & Equity Research Analyst]

Guys, you're now 5 or 6 weeks into the integration of Stuart Olson. I was wondering, if you had found anything under the hood that surprised you positively or negatively?

[Terrance Lloyd McKibbon, President, CEO & Director]

So we haven't found anything negative. We found a lot of positive, certainly, very impressed with the team. As you can well imagine, doing a public-to-public transaction, you don't get a ton of time to cross a lot of employees because of the sensitivity of that. And in that regard, we're very impressed. There are some really talented leaders and employees in the business. We did a pretty thorough due diligence of the contracts. And ultimately, they're in the same business that we're in, and we've got some pretty talented people that can have a pretty good lens and get into detail of a project to and pretty quick. So we haven't -- it's as anticipated, I would say, Frederic, which you would expect because, ultimately, you wouldn't expect to see positive surprises. Sometimes, you expect to see a few negative surprises, but we haven't seen that.

[Frederic Bastien, MD & Equity Research Analyst]

And Wayne, have you seen the same thing on your side, on the financial side?

[Wayne R. Gingrich, Chief Financial Officer]

Yes. That's correct. Because of the level of due diligence that we're able to accomplish, even though we only had 5 weeks to get the draft of the purchase price accounting done, I think our team did a really good job pulling that together, working with the Stuart Olson team, and it's kind of as expected.

[Frederic Bastien, MD & Equity Research Analyst]

Okay. I believe you, Bird and Stuart Olson, are operating under 2 different systems. Have you given any thoughts on whether you'll run both on a go-forward basis? Or you'll try to merge things?

[Terrance Lloyd McKibbon, President, CEO & Director]

We will try to merge things. Right now, we've finished as part of our sort of first 45 days, has been a complete analysis of the architecture of both companies, right to the last detail of what we're using across every single district and business unit. And the focus now is sort of marrying up those various systems and applications and getting an optimized framework of what we have. And then we'll decide whether we need to add anything supplementary to that. But lots of experience. I mentioned earlier, we have a new Chief Technology Officer that joined us, Rick Begg, 35 years in the industry, very experienced individual with this type of thing. He joined us sort of a week before we closed, and he's been very focused on analyzing that framework with his extensive background. So it's been -- yes, it's been a good effort. And I think we're focusing on ensuring that we're taking advantage of systems that will be nimble and systems that will be efficient to use and lots of lessons learned across all of our organizations, around different products, different applications, different solutions.

[Frederic Bastien, MD & Equity Research Analyst]

Super. And the last question on Stuart Olson. It did not contribute meaningfully to your results in Q3, given the timing of the close. But was wondering if you could provide any color on how the actual business performed in the third quarter on a stand-alone basis.

[Wayne R. Gingrich, Chief Financial Officer]

I mean I don't mean to be a bit of a nonanswer, but it performed as expected. Stuart Olson is still continuing to do a good job, delivering its projects. We were happy with the state of the balance sheet that we are working with for our purchase price accounting. So it performed well.

[Operator]

The next question comes from Michael Tupholme with TD Securities.

[Michael Tupholme, Research Analyst]

Just -- you noted in the release that you continue to assess and look to identify new cross-selling opportunities. I'm just wondering if you can provide an update on that, a little more detail. And also, just in the current environment, does that make it harder to capitalize on opportunities that you thought might exist? Or is that not really proving to be an issue?

[Terrance Lloyd McKibbon, President, CEO & Director]

I'll take the second part of that first. I don't think the current environment is affecting that so much. I think you -- with the technology that we all have available to us, we're using that extensively. And the groups are working across multiple platforms, multiple districts and divisions within the business and getting a better understanding of the groups. And certainly, some new leadership in place. It will take a little bit of time for those new leaders to certainly understand who's who in the group. And that's probably the -- a bit of a gating item to a certain extent. I'd say that it is certainly a nice package of tools. When you think on the building side, we can offer a client now a full spectrum of deliveries across complex, sort of higher risk projects right through to lower risk projects. We were developing a very deep resume on IPD. And I think the capacity and the scale of the business now gives us ability to offer a much broader service offering to clients on the building side. The industrial side, we're just picking up more and more diversification and more and more product offerings or service offerings that you can couple together. And in my experience, on larger industrial projects, clients are tending to look for that so that they have obviously a much tighter interface with a contractor that's performing a much broader array of solutions and much higher self-perform, better control when you have that kind of delivery. So we're seeing a lot of that. And I think it's leveraging Bird from where it historically would have been with more facility-oriented industrial work to a much broader array of mechanical, electrical and industrial sites, concrete formwork, with grading. So much broader suite of services with a much higher-margin profile when you have that mix. So we're pleased. We're tracking a lot of things, projects that either company was already in pursuit of. We're coupling together pieces of the business to add more value and more control of the delivery. So -- but very pleased. And it starts with a well-thought-out leadership team that is designed to hit the high levels of collaboration.

[Michael Tupholme, Research Analyst]

Okay. That's a great answer, a lot of detail, Teri. Just maybe one quick follow-on. With the transaction of this nature, what would be a reasonable expectation for when you might expect to start to see some of the cross-selling opportunities flow through and result in additional revenue?

[Terrance Lloyd McKibbon, President, CEO & Director]

That's a good question. I would think second quarter, you'll see some of that. Typically -- again, it depends on the business. So larger industrial projects sometimes are 12 to 18 months in development. Smaller ones less so. The vertical side of our business and our building business is shorter duration. So you'll see -- you certainly see some of that certainly quicker on having integrated [ collaborative ] teams with different levels of service in some of those projects. So that will be a bit faster. But I'd say, I think you'll start to see some evidence of it in the second quarter.

[Michael Tupholme, Research Analyst]

Okay. And then just the commentary around the pending backlog and there being a slower conversion of that pending backlog to hard backlog. Is that a general comment that sort of applies across the board? Or is this a select number of projects where you've seen that happen? And then specifically also, just wondering, if you can get a bit of an update on the Advanced Nuclear Materials Research Centre project and where that stands.

[Terrance Lloyd McKibbon, President, CEO & Director]

Yes. So I'll tackle that one on the nuclear side. So with any -- [ Chandos ] is a weapons-grade uranium nuclear facility. So complexity is very high. So it -- that continues to evolve. And one of the positive attributes of using an IPD delivery is you spend extensive time on the planning and design and redesign and working through to optimize the client's budgets, and so good progress on that. And I think we're nearing the conclusion of this phase, and we should be moving forward to contracting. But as you can well imagine, in a nuclear environment such as this, it does take time to get various approvals and permitting levels. And -- but our team has been working extensively through this for the past number of months.

[Wayne R. Gingrich, Chief Financial Officer]

And maybe, Michael, just on the rest of your question there. So on the $1.3 billion of pending backlog, I think we identified about $600 million of that related to MSAs that would span between 2 and 6 years. So that piece, obviously, will take more time to contract as we get POs. We'll load it into backlog, but it's going to be a longer duration than typically what Bird has had in our pending backlog, historically. Of the other $700,000, the CNL project Teri was just talking about, that's been in there for a while and obviously taking a bit to get to contractual closure. But there are some other projects, some more medium-sized projects are in there just instead of closing in, say, one quarter that you would normally expect, some are taking 2 or 3 quarters to get to close. But we do review every single project in there, every single quarter. And we are confident that they all will contract at some point here. It's just is taking a little bit longer than, I think, in a pre-pandemic environment they would have.

[Michael Tupholme, Research Analyst]

Okay. Great. And then just lastly, in terms of the CEWS benefit, you outlined what it was in the quarter, so I guess my question is really just about the fourth quarter, we're going to actually see not only whatever additional benefit Bird -- legacy Bird receives, but also there's the Stuart Olson piece. And then I guess it's that piece, so I'm sort of wondering, if you can provide any color on how we should think about that.

[Wayne R. Gingrich, Chief Financial Officer]

Yes. So we -- in our financial statements, we added a new note called the government assistance note. And in there, we'll talk about the $3.1 million that Bird recognized in Q3. But also in there, it would highlight that, on the opening balance sheet, we have in other receivables I think $10.1 million of CEWS claims that the legacy Stuart Olson business would have submitted and that eventually will be converted to cash here probably in the fourth quarter. I think the Bird application amount will be most likely less than our $3.1 million that we've claimed to date because that was a Q2 and Q3 claim that we had put together. So that number is going to scale down. I think you'll also see the order of magnitude of the Stuart Olson claims that they had, also scaled down proportionately as well.

[Operator]

The next question comes from Maxim Sytchev with National Bank Financial.

[Maxim Sytchev, MD & AEC]

Just a quick question in relation to Stuart Olson and CEWS. So were they profitable in Q3 ex CEWS? And what do you expect in terms of performance for Q4?

[Wayne R. Gingrich, Chief Financial Officer]

Yes. So I think particularly which part of your question -- [ Teri ], I think on Q3, we're not disclosing what the Stuart Olson results were in the third quarter. But looking ahead to Q4, we do expect Stuart Olson to be in the black, so to speak, and generate positive income in the fourth quarter.

[Maxim Sytchev, MD & AEC]

Okay. And when you talk about income, like net income, not EBITDA, right?

[Wayne R. Gingrich, Chief Financial Officer]

That's right. Net income.

[Maxim Sytchev, MD & AEC]

Okay. Okay. Great. And then in terms of -- Teri, I think in the past, when you talked about the LNG opportunity, kind of $1 billion of addressable market for you guys. And I think that was pre-Stuart Olson transaction. And given their electrical capability, do you think you can actually grow the addressable pie on the site? Like what are your thoughts there on this one?

[Terrance Lloyd McKibbon, President, CEO & Director]

Yes. Certainly early days, but we are evaluating those opportunities as they evolve. And some of them will be later in the contracts phasing. But yes, certainly, do expect with combined entity, and we've had good success there in terms of performance and in terms of schedule and safety, team has done a great job. And so we do expect opportunities to evolve that would cover, as you referenced, electrical, mechanical, insulation. Stuart Olson is one of the larger insulators in the country. And so other aspects of the project based on the performance we've had were -- but it's still early days in terms of fully developing capacity and understanding capacity and understanding the client's expectations.

[Maxim Sytchev, MD & AEC]

Right. And is it fair to say, I mean, this is kind of like maybe, a calendar '22 event in terms of the potential awards, if it come to fruition?

[Terrance Lloyd McKibbon, President, CEO & Director]

Yes. Likely. Yes. You're right. And then ultimately, maintenance as well. They have a, I would say, one of the top resumes in the country in MRO. So obviously, that's a big opportunity for us as well.

[Maxim Sytchev, MD & AEC]

Okay. On the same site?

[Terrance Lloyd McKibbon, President, CEO & Director]

Yes.

[Maxim Sytchev, MD & AEC]

Okay. That's great. And then in terms of -- I don't know if you can remind us, was Canon doing any work in data centers? I mean I presume so, just given the kind of the growth curve that this end market is experiencing right now.

[Terrance Lloyd McKibbon, President, CEO & Director]

Yes, they are. So that's -- it's an exciting opportunity for us.

[Maxim Sytchev, MD & AEC]

Okay. Excellent. And then, obviously, lots of chatter in terms of modular buildings and things like that. I was wondering, if you don't mind refreshing kind of your perspective in terms of how your go-to-market strategy has evolved to attack potentially these projects.

[Terrance Lloyd McKibbon, President, CEO & Director]

Yes. So we did 2 large projects now under our belt in Canada, and you certainly do develop synergies and you develop expertise to -- and you also educate the environment and the industry on this type of capability. So we're continuing that evolution. In a business like this, it is largely a start-up. You go through some hills and valleys in demand. I'd say that there's some exciting opportunities evolving in both long-term care and affordable housing in Canada for us. And we're following those as they are evolving and we're also seeing some of our more developed opportunities shift to the right in hotels. It's another -- certainly a big opportunity for us with our delivery. We've built a hotel over Iqaluit as you know. And so the hotel space is obviously under tremendous pressure. So you're not seeing investment in that area currently. So the demand has some peaks and valleys in it. But certainly pleased to see the government focused on long-term health and also affordable housing in -- across the country with the federal government's programs. So we're in the middle of that as we speak.

[Maxim Sytchev, MD & AEC]

Okay. That's helpful. And I guess, I mean, the same applies for some of the kind of water -- wastewater interim capabilities. I mean this is kind of like a new built house, right?

[Terrance Lloyd McKibbon, President, CEO & Director]

Yes, that's all right. And we're doing a lot of environmental projects in Canada right now, a lot of pursuits. We've developed a very extensive resume end-to-end and adding Stuart Olson, as I referenced earlier, adds extensive self-perform capacity in -- especially in Eastern Canada, mechanical, electrical and some of the site work, foundation work, things like that out of our new Sudbury location.

[Maxim Sytchev, MD & AEC]

Okay. That's very helpful. And just one last quick one for me. In terms of the mining clients, is everybody up and running right now? Or there are still some sites where it's very restricted and production levels have not gotten back to kind of, let's call it, pre-COVID levels?

[Terrance Lloyd McKibbon, President, CEO & Director]

Yes. We're still like -- we're more heavily, obviously, in hard rock mining and predominantly iron ore and certainly, gold opportunities has evolved. But certainly, the iron ore, which is a core of our business, is still under a lot of pressure. So they're certainly not at even remotely close to operating levels as far as their reliance on third-party contractors in that. They always have their own ability to function, to support their actual mining efforts. We -- as contractors pick up all the auxiliary work to support that, but we're not seeing much demand there at this point. And again, it would depend on where you were in the cycle and what sites you're on. We're on pretty mature sites at ArcelorMittal and IOC, with Rio Tinto. So we -- those sites, we're not seeing the opportunities really evolve. When we do, they're quite small. So that's -- still lots of pressure there, Max. And I think that will take full COVID recovery and a full economic recovery to get some strength back in iron ore. Others like gold, we're seeing iron and gold evolve now, a number of opportunities for us to pursue. And that's a very large project with a lot of different components that all suit Bird's capabilities. And obviously, the close proximity to Stuart Olson's group in Sudbury obviously makes it certainly in our core market area.

[Operator]

[Operator Instructions] The next question comes from Frederic Bastien with Raymond James.

[Frederic Bastien, MD & Equity Research Analyst]

A bit of a loaded question here. But your EBITDA margins are 4.2% on a trailing 12-month basis, and that's obviously a big improvement from what we saw just a few years back. But if we look at the good old days, the margins used to be as high as 7%, 7.5%. So my question to you is, where do you think you can get the margins to over in the next -- over the foreseeable future?

[Wayne R. Gingrich, Chief Financial Officer]

Yes. I think certainly, our focus on margins, we've had a big focus on that over the last couple of years. We're going to continue to have focus on that. We've got to really understand the Stuart Olson business in terms of the impact it's going to have. I mean some of the margins they have are in a bit of a different profile than, say, the industrial work program at Bird. Their MRO program is going to be different. I think the weighting mix between the industrial group like, the combined industrial group and then the combined commercial institutional groups. And then you've got the Commercial Systems group as well. We have to look at what that weighting mix is going to be. So it's kind of hard to come out with an exact number at this point. Like as you can imagine, we're finalizing our budgets for 2021. We're going to be doing work on a combined strategic plan commencing here in January. But yes, we're going to have to take a look at what our new baseline weighted average margins are. And suffice to say, we're going to have a big focus on them improving those margins going forward.

[Frederic Bastien, MD & Equity Research Analyst]

Right. Obviously, lots of moving parts here, but obviously, with the increased nuclear work that you're targeting, that should also help, right?

[Terrance Lloyd McKibbon, President, CEO & Director]

Yes. Yes, for sure. Yes. Anything that's got that industrial sophistication helps for sure and the mix and timing and COVID. The COVID recovery is certainly also something too difficult to predict right now as far as how confidence returns to the business. We have a much higher self-perform capacity today. Our employee base grew from 2,000 employees to 5,000 employees with a linear ratio of revenue. So much higher self-perform capabilities. So that's a big plus as well.

[Operator]

There are no further questions at this time. I will now hand the call back over to Mr. McKibbon for closing remarks.

[Terrance Lloyd McKibbon, President, CEO & Director]

So I want to thank all of our employees for their resilience and for the sacrifices they have made to ensure the company not only remains healthy in our 100th year of operation, but also continuing to improve profitability, while we closed the largest and most transformational acquisition in the company's history. Our field staff deserve a special recognition for having continued to work on our projects with the utmost professionalism and dedication while quickly embracing new safety practices and procedures. Our number one concern is always the health and safety of our employees, their families and the communities in which we live and work. The third quarter of 2020 represents the eighth sequential quarter where our trailing 12-month adjusted EBITDA percentage has improved. The pandemic has certainly made it very difficult to have any type of forecast and what impact it will have on our company. However, this were the focus of the team. The team has developed over the past several years on reducing the risk profile and increasing diversification of the work program, will help the company emerge from this crisis with a healthy backlog and maintain a strong balance sheet. We have sufficient cash and liquidity to support our anticipated work program, while maintaining the current dividend based on our current expectations of the impact to COVID-19. We look forward to our bright future, now that we have joined forces with Stuart Olson, creating a premier construction and infrastructure company. Together, we also look forward to continuing to service Canadians for the next 100 years delivering exciting, innovative and challenging new projects. Thank you, again, for your time on Remembrance Day to participate in Bird's Third Quarter 2020 Earnings Conference Call. Wayne and I are always available, if additional information is required, so please do not hesitate to contact us. Have a good day, stay safe and healthy.

[Operator]

This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.