Bird Construction Inc

TSX:BDT

Earnings Call Transcript 2019-Q4

[Operator]

Welcome, ladies and gentlemen, to the Bird Construction Fourth Quarter 2019 Financial Results Conference Call. We will begin with Mr. Teri McKibbon's presentation, which will be followed by a question-and-answer session. [Operator Instructions] The conference 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 involves 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. McKibbon.

[Terrance Lloyd McKibbon, President, CEO & Director]

Good morning, and thank you for participating in Bird Construction's Fourth Quarter and Fiscal 2019 Conference Call. Copresenting with me today is Wayne Gingrich, CFO. In the fourth quarter of 2019, the company continued to execute a more diverse work program and delivered improved net income and adjusted EBITDA both quarter-over-quarter and year-over-year. Adjusted EBITDA and adjusted EBITDA margin in the fourth quarter of 2019 were $16 million and 3.81%, respectively. Adjusted EBITDA increased $4.2 million or 36% from $11.8 million in the fourth quarter of 2018. Adjusted EBITDA margin increased 75 basis points from the 3.06% recorded in the fourth quarter of 2018. Adjusted EBITDA and adjusted EBITDA margin for the fiscal 2019 year was $32.3 million and 2.35%, respectively. Adjusted EBITDA increased $21.4 million or 196% compared to $10.9 million in fiscal 2018. Adjusted EBITDA margin increased 156 basis points from the 0.79% recorded in fiscal 2018.We are pleased with the continued progress completing our challenging legacy projects and the impacts of our efforts to diversify our revenue stream across a portfolio of both geographic and balanced risk profiles. Subsequent to year-end, the company achieved substantial performance on a PPP project, the Niagara Falls Entertainment Centre. We continue to be encouraged by the growth of our pending backlog, of which many are in a delivery model that supports more traditional portfolio risk balance of Bird in our overall work program and our earnings base has begun to reflect this. While Bird saw some headwinds in the first half of 2019, it reached a more steady state in operations for the back half of the year. And on behalf of the company, I want to thank and recognize all the employees of Bird for their continued hard work and dedication during our earnings rebuild. In the fourth quarter of 2019, the company executed a subcontract with East West Connectors, the consortium contracted by the city of Ottawa to design, build and finance the Stage 2 Confederation Line Extension, CLE, project, in Ottawa, Ontario. Bird will construct 7 Confederation Line Stage 2 light rail transit stations and 1 light maintenance and storage facility. Substantial completion of the East Extension is expected in 2024 with the West Extension to achieve substantial completion in 2025. At yesterday's Board meeting -- Board of Directors meeting, the Board declared monthly eligible dividends of $0.0325 per common share for March of 2020 and April of 2020. Wayne will now take us through the financial performance for the quarter and year-to-date compared with the prior year.

[Wayne R. Gingrich, Chief Financial Officer]

Thanks, Teri. I will now discuss the 3 months ended December 31, 2019, compared with the same period 2018. During the fourth quarter of 2019, the company recorded net income of $8.2 million on construction revenue of $420.6 million compared with net income of $6.4 million on $385.9 million of construction revenue in 2018. The year-over-year increase in revenue in the fourth quarter of 9% was driven by growth in the industrial work program more than offsetting a decline in the institutional work programs. The year-over-year increase in fourth quarter net income is reflective of the improvement in earnings attributable to the mix of higher-margin industrial work program in the fourth quarter of 2019.The company's fourth quarter gross profit of $26.4 million was $3.8 million or 16.2% higher than the $22.7 million recorded a year ago. The increase in the amount of fourth quarter 2019 gross profit is driven by the higher quarterly construction revenues year-over-year. In addition, the increase in gross profit is due to a higher-margin work program as revenue contribution shifted from predominantly institutional and commercial projects to a more balanced work program in 2019. Gross profit percentage in the fourth quarter of 2019 was 6.3%, which was 0.4% higher than the gross profit percentage of 5.9% recorded a year ago. Gross profit percentage in 2019 improved due to a larger volume mix of revenue recognized from the company's higher-margin self-perform operations in its industrial work programs.Income from equity-accounted investments in the fourth quarter of 2019 was $0.7 million compared with $1.5 million in the same period of 2018. The income in the fourth quarter of 2019 and 2018 was primarily driven by the margin earned from a project in Eastern Canada. The income in fourth quarter 2019 was lower year-over-year due to losses from some P3 equity-accounted entities, which were anticipated at their stages of the project life cycle. In the fourth quarter of 2019, general and administrative expenses of $16.3 million or 3.9% of revenue were $1.1 million higher than the $15.2 million or 3.9% of revenue in the comparable period a year ago. The company had additional third-party pursuit costs, which were $1.2 million higher than the amount recorded in 2018. In the fourth quarter of 2019, the company also had a lower foreign exchange gain compared to a foreign exchange gain of $0.9 million recorded in 2018. Offsetting these negative variances, compensation expense was $1.3 million lower than the amount recorded a year ago, primarily due to the gain recorded on the total return swap program in 2019. Finance income of $0.8 million in the fourth quarter of 2019 is comparable to the $0.5 million recorded in the same period of 2018 due to higher cash balances. Finance and other costs of $1.6 million were $0.4 million lower than the $2 million reported in the fourth quarter of 2018. The decrease was due to a gain on interest rate swaps and a decrease in other financing costs. In the fourth quarter 2019, income tax expense was $1.9 million compared to income tax expense of $1.2 million recorded in the fourth quarter of 2018. I will now discuss the fiscal year ended December 31, 2019, results compared with the prior fiscal year. In fiscal 2019, the company recorded net income of $9.5 million on construction revenue of $1.376 billion compared with a net loss of $1 million on $1.382 billion of construction revenue in 2018. Although volume was stable year-over-year, the mix of revenue was more diversified as the company's higher-margin industrial work program has ramped up throughout the year. The year-over-year income improvement was primarily driven by the increase in gross profit from the shift in the mix of revenue in 2019. While the total revenue was essentially flat year-over-year, the company's revenue from industrial work programs increased year-over-year throughout 2019. This essentially offset the reduction in the institutional work program and provided the company with more balance in its overall work program. The company's 2019 gross profit of $71 million was $13.4 million or 23.2% higher than the $57.6 million recorded a year ago despite lower revenues. The increase in the amount of gross profit was driven by higher-margin projects as a result of a shift in the mix of revenue from institutional projects to more self-perform industrial projects in 2019. The company's gross profit percentage in 2019 of 5.2% was 1% higher than the gross profit percentage of 4.2% recorded in 2018. Gross profit percentage in 2019 improved due to a larger volume mix of revenue recognized from the company's higher-margin self-perform operations in its industrial work programs. Income from equity-accounted investments in 2019 was $2.7 million compared with $1.9 million in 2018. The increase in income in 2019 was primarily driven by the earnings from non-P3 equity-accounted entities. In 2019, general and administrative expenses of $58.7 million or 4.3% of revenue was $0.2 million lower than the $58.9 million, but the same 4.3% of revenue in 2018. In 2019, the company incurred net $2.6 million in third-party pursuit costs, which was $0.4 million lower than the $3 million incurred in 2018. And while net compensation expenses were $0.2 million higher year-over-year, it is primarily due to the company incurring $2.9 million of severance costs and $3.8 million higher phantom share program expenses being mostly offset by a $6.2 million reduction in the total return swap expense. Finance income in 2019 of $2.6 million was $1.2 million higher than the $1.4 million recorded in 2018 due to higher average cash balances year-over-year. Finance and other costs of $5.6 million in 2019 was $1 million higher than the $4.6 million recorded in 2018. Most of the year-over-year increase was due to $0.9 million of interest costs recognized upon adoption of IFRS 16. There was also $1 million of interest costs associated with nonrecourse project financing. However, this was offset by a gain on interest rate swaps of $0.9 million. In 2019, income tax expense was $2.5 million compared to an income tax recovery of $1.7 million recorded in 2018. The year-over-year increase in income taxes was consistent with the income taxes associated with the income before income taxes in the current year. I will now turn the call back over to Teri to comment on the future operating performance for the company.

[Terrance Lloyd McKibbon, President, CEO & Director]

Thank you, Wayne. The company remains focused on investing in both people and technology and in diversifying its earnings base with a stronger margin profile. The mix of revenue in 2019 differs from that of 2018, as evidenced by the increase in the industrial work program relative to work performed in the institutional and commercial sectors. This trend is expected to continue through 2020. Institutional market contributed 43% of 2019 revenues versus 53% in 2018. The industrial market sector contributed 39% of 2019 revenues versus 30% in 2018. The retail and commercial sector contributed 18% of 2019 revenues versus 17% in 2018. At December 31, 2019, the company was carrying a backlog of $1.547 billion, which is 19.4% higher than that recorded a year ago. The company expects to recognize 66% of the remaining performance obligations over the next 12 months, with the remaining balance to be recognized beyond 12 months. This expectation is based on management's best estimate that contains uncertainty as it is subject to factors outside of management's control. In the fourth quarter, the CLE project was recorded into backlog and is expected to span across 4 fiscal years, which provides some long-term visibility into the company's work program. The embedded margin in backlog improved throughout 2019, driven by several factors, including the positive impact of new contract awards with higher entry fees, the addition of agency fees in construction management contracts, combined with the diminished influence of selected dilutive contracts that were either completed in the fourth quarter or nearing completion. The $1.628 billion of new contract awards and change orders secured in 2019 are across a broad range of markets and contracting methods that will help the company achieve a more diversified work program and a more balanced risk profile.In addition, the company has greater than $625 million in pending backlog as of the end of the fourth quarter of 2019. Included in pending backlog is the Advanced Nuclear Materials Research Centre in Chalk River, CNL. The validation phase of the CNL project, which will be delivered under an IPD delivery model, is expected to extend into the first half of 2020 before converting into backlog. The remaining pending backlog projects are geographically diverse, span multiple sectors and are expected to be recorded to backlog in the first half of 2020. The longer-term pipeline remains healthy and falls within our targeted risk-averse tolerance. The company will be selective on prospective pursuits, ensuring that the available talent matches the risk profile of the project and the overall work program. 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 oil and gas sectors. The award of any of these projects will benefit the second half of 2020 and beyond. In 2020, the company expects to sell 3 of its 7 equity investments in PPP projects. This is consistent with the company's strategy to recycle equity in these types of contracts into future project opportunities. The company expects to benefit in 2020 from having more balance in terms of the contractual risk profile of the work program coming into the year. This can be seen in the disaggregation of revenue in the company's 2019 annual financial statements whereby revenue earned in higher-risk contract categories, such as PPP, alternative finance and complex design projects, comprise 20% of total revenue in 2019 versus 23% in 2018. The proportion of higher-risk revenue will decrease further in 2020. Diversification over the past several years into LNG, nuclear, public transit, modular and environmental sectors with lower-risk contract types will help stabilize earnings with more balance in the work program. Based on the risk profile and margins embedded in the current contract backlog and in pending backlog, the company believes it will achieve higher levels of profitability and consistency in earnings in 2020. This concludes the prepared remarks section of the conference call. I will now turn the call over to the conference call operator who will take your questions in turn.

[Operator]

[Operator Instructions] The first question comes from Yuri Lynk with Canaccord Genuity.

[Yuri Lynk]

With the problem projects more or less complete and your diversification efforts are well underway, what's the long-term potential, guys, for gross margin? Back a few years ago, that was a high single-digit number. Obviously, there's been lots of changes since then. So what's realistic to expect, not talking this year, but as you guys ramp up towards where you want to take the company?

[Terrance Lloyd McKibbon, President, CEO & Director]

I think we can return to the levels seen in the past, Yuri. It may not be in 2020. It may take a couple of years to ramp up there, but certainly, that's what we're focused on.

[Yuri Lynk]

Okay. Because I think in the past, that was driven by a lot of -- a lot more design build. I think the mining assets that I think you still have were probably higher utilized than they are now. So where would you be picking up margin vis-à-vis the shift in work away from those areas?

[Terrance Lloyd McKibbon, President, CEO & Director]

I think in general, we're looking at getting more self-perform work across our entire work program.

[Yuri Lynk]

Okay.

[Terrance Lloyd McKibbon, President, CEO & Director]

I think the mix of industrial as well. As you look at the sectors we're in, Yuri, you're seeing we're across a very diversified sector of industrial work that we wouldn't have been in years past. So you're seeing a very broad industrial program that's growing. So it's obviously very accretive to that increase in gross profit.

[Yuri Lynk]

Okay. Just switching to free cash flow. So obviously, a nice improvement in EBITDA this year, but you're still negative on free cash flow, almost $50 million. Wayne, what are your working capital requirements for 2020? Should we see some more normalized working capital needs? And also, any guidance on CapEx would be helpful.

[Wayne R. Gingrich, Chief Financial Officer]

Yes. The first comment I'd make on the free cash flow, I think, if you're just doing a straight calculation of the cash flow statement, one of the adjustments you may want to consider making is that the -- that calculation includes the growth in the contract asset in the OPP Phase 2 modernization project, which is an alternative finance project. So while you're growing the contract asset there, the cash that's received from the nonrecourse project financing is included in the financing section. So if you're going to include the growth in the contract asset, we also like to include the financing associated with it, and that will be cleared, obviously, at the end of the project life cycle. So when factoring in that, I think there's a $72 million adjustment to the free cash flow cycle so that we're about $21 million in positive free cash flow in 2019. And then I think in terms of our working capital needs for the year, I think we're still going to see growth in our noncash working capital through the course of the year. I think our trend that we saw in 2019 will probably be reflected again in 2020, where Q1 is going to be a quarter where we use cash. And then towards the end of the year, we'll see that cash move out of noncash working capital and back into cash balances.

[Yuri Lynk]

And CapEx?

[Wayne R. Gingrich, Chief Financial Officer]

CapEx, I think, will be consistent with prior years as well, unless there's a project-specific capital requirement that we need to make.

[Operator]

Our next question comes from Mark Stuebing with TD Securities.

[Mark Stuebing, Associate]

It's Mark on the line for Michael here. You mentioned that in 2019, Bird derived 39% of your revenues from industrial. Can you comment on what proportion of this is related to oil and gas? Is it primarily LNG-related work? Or is there a meaningful share due to oil and gas?

[Terrance Lloyd McKibbon, President, CEO & Director]

So if you split across the 3 acronyms of oil, gas and LNG, there's certainly on the oil side a very small percentage, probably in our backlog today, it's less than 1%. When you look at what we're doing is more sustaining capital MRO-type opportunities, we're very busy with various gas-related initiatives where you're increasing capacity of existing lines, building facilities. We have been quite busy in that space. We had, had a higher -- some higher oil demand with projects like Line 3 that we're through that, and most of that capacity now is consumed on gas. And then obviously, the LNG side where you're also -- you're building assets -- long-term assets for the longer -- the development of LNG in Canada. So that's kind of the mix. So it's tricky to split gas from LNG. But I mean it's easy to split oil from LNG and gas.

[Mark Stuebing, Associate]

That's helpful. I was wondering if you could provide an update on the Stack Modular business and comment how that operation has been affected by the coronavirus, if at all.

[Terrance Lloyd McKibbon, President, CEO & Director]

Yes. So it's still -- obviously, when you have something that's quite, call it, disruptive to the traditional construction style of building, it does take you time. We've had good success in our early projects, and it continues to evolve, continuing to see new opportunities. There's a longer -- I'd say, a longer phase of evolution in that space. Just because of the nature of it, it's considerably different to build a building with modules versus stick build. So I'd say there's a bit more time that we're spending on this. And we're finishing very successfully there. The first project we got underway. The second one is midstream. We have a third one evolving. We'll see if it gets beyond early design work. But -- and then as far as the impact on our facilities, the -- we were impacted, certainly late January by COVID-19. And it occurred in a time frame that would traditionally be Chinese New Year for us. So we had that block planned in our production. So Chinese New Year for us is usually an impact of about 4 weeks between shutdown and commute and ramping back up. So we're ramped back up now to meet our expected demands. So for us, obviously, first and foremost, always concerned about the health and safety of our workers and our team in China, but we really haven't had or expect to have any material impact.

[Mark Stuebing, Associate]

And I guess the last one for me is, would you be able to provide an update on your activities in the Ontario nuclear market? I know you mentioned the CNL project in Chalk River is expected to be converted into backlog in half 1. And I was wondering, how quickly does that work ramp up? Is it expected to be...

[Terrance Lloyd McKibbon, President, CEO & Director]

Well, you can imagine that being a complex nuclear lab, it's probably a little slower evolution with materials and things like that. So I'd say the ramp-up would be slower than a typical construction project just because you're going through a lot of permitting and a lot of things like that. So I'd say it's probably slower than other activities. We've been working through this IPD model, which is a very effective model for this type of work, where you have really complex delivery and it's been really effective. We have a number of IPD projects now in Canada that we're using. We like this model. It's very similar to alliance-type models because -- and I think any time you do a project with complexity of scale, if you can have the construction team on the front end of it for a significant period of time, you're spending a lot of time refining the design and whatnot. So -- but beyond that, other nuclear sites, we're pretty much on every nuclear site in Ontario with some level of activity, ebbs and flows, depends on timing of things. But I think we have a good résumé and continuing to explore new opportunities and obviously very robust demands in that sector across the various activities in nuclear in Ontario and Canada. But -- so we expect to be in that space for some period of time.

[Operator]

[Operator Instructions] 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]

Thank you again for participating in Bird Construction's Fourth Quarter and Fiscal 2019 Conference Call. We are pleased with the sequential quarter-over-quarter and year-over-year performance improvement and expect a more stable execution of our growing and more diversified backlog where the risk profile of backlog is more within our targeted range. We look forward to celebrating the century mark for our company with our clients, shareholders and employees through 2020. As always, Wayne and I are available if additional information is required, so please do not hesitate to get in touch with us. Have a nice day. Thank you.

[Operator]

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