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. Analysts and institutional investors who wish to ask a question should have their webcast muted when dialing into the conference number provided. At any time during the presentation today, you may press the star and one on your telephone to be placed into the question queue. You will hear a tone acknowledging your request. When we are ready for questions, you will be introduced into the conference in the order that you were received. If you wish to remove yourself from the question queue, you may press star and two. As a reminder, all participants are in listen-only mode and the webcast is being recorded.
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.
Good morning, everyone. 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. Thank you once again to all of those who have 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 two 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 two 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 this 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. We are proud that Bird has delivered eight sequential quarters of improved trailing 12-month adjusted EBITDA percentage. Net income for the third quarter of 2020 was CAD 8.8 million on construction revenue of CAD 345.1 million, compared with a net income of CAD 6.8 million on CAD 378.6 million of revenue in 2019. Basic and diluted earnings per share of Q3 2020 was CAD 0.20, improving from CAD 0.16 in 2019. Adjusted earnings and adjusted earnings per share in the second quarter of 2020 were CAD 12.4 million and CAD 0.29, respectively, improving in comparison to adjusted earnings and adjusted earnings per share in the second quarter of 2019 of CAD 6.8 million and CAD 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 the acquisition of Stuart Olson and incurring CAD 3.8 million of pre-tax 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 CAD 22 million and 6.39%, respectively. Adjusted EBITDA increased CAD 8 million from the Adjusted EBITDA of CAD 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 two 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. 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 CAD 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.
CAD 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 CAD 996.1 million of new contract awards and change orders and executed CAD 949.5 million of construction revenues. Through the acquisition, CAD 995.7 million of backlog was added at financial close during the third quarter of 2020. Backlog of CAD 2.59 billion at September 30th, 2020 increased 79.8% from the CAD 1.441 billion backlog year-over-year. Backlog increased by CAD 1.042 billion or 67.4% from the CAD 1.547 billion of backlog recorded at December 31st, 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 CAD 157.2 million and working capital at CAD 118.5 million. With the improving financial performance and healthy balance sheet position, the board has declared an eligible dividend of CAD 0.0325 per share, common share for the months of November, December, January, and February 2021. Integrating the two 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 CAD 25 million of earnings before tax synergies as a result of the business combination. The annualized adjusted EBITDA synergies of CAD 10 million are expected to ramp up through 2021. The annualized interest savings target of CAD 10 million was achieved as of the closing date, and the depreciation and amortization synergies target of CAD 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 CAD 700,000 of adjusted EBITDA savings, with CAD 2.5 million in interest savings and CAD 1.2 million in depreciation and amortization savings. Expanding further on my point of integration and cross-selling, I would highlight on slide seven 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 lifecycle services, as well as ongoing maintenance and on-call services to clients. Added to this is improved expertise in construction management contracts to offer to clients. The Centre for Building Performance supports smart building technology and 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 to the construction industry as each provincial government has responded with different measures to address the threat to public health. Unfortunately, we're 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 that 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 were also impacted with delays in the conversion of some projects and 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 CAD 3.1 million related to the Canada 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 a second wave. However, the company remained 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 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.
Thank you, Teri. Before I get into the details of the financial results of the third quarter 2020, I will briefly discuss slide number nine, which shows the trailing 12 months revenue and adjusted EBITDA for historical periods back to 2017. You will 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 months revenue to CAD 1.37 billion. Turning to slide 10, I will discuss the three months and nine months ended September 30th, 2020, compared with the three months and nine months ended September 30th, 2019.
During the third quarter of 2020, the company recorded net income of CAD 8.8 million on construction revenue of CAD 345.1 million, including five days of Stuart Olson revenue and cost of construction, compared with net income of CAD 6.8 million on CAD 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 Quebec 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 CAD 27.4 million was CAD 3.6 million higher than the CAD 23.8 million recorded a year ago.
The increase in gross profit is due to the higher margin industrial work program, as revenue continues to shift from institutional and commercial projects to a more balanced work program, including industrial. Gross profit earned in Quebec and Atlantic Canada had been significantly impacted year-over-year by COVID-19 pandemic, resulting in project delays. The company accrued CAD 2.5 million of Canada Emergency Wage Subsidy and 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 CAD 4.1 million, compared with CAD 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 two of the company's investments in equity accounted entities totaling CAD 2.7 million in the quarter. In the third quarter of 2020, general and administrative expenses of CAD 17.7 million, or 5.1% of revenue, were higher than the CAD 14.2 million, or 3.8% of revenue, in the corresponding period a year ago. The company recognized CAD 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 CAD 1.1 million lower pursuit costs, lower travel and other discretionary costs of CAD 1.7 million, and lower foreign exchange costs of CAD 0.2 million than the amounts recorded a year ago. Offsetting these reductions in expenses were CAD 4.4 million of acquisition-related professional fees and higher compensation and stock-based compensation expenses of CAD 0.4 million than the amounts recorded in 2019.
Finance income of CAD 0.2 million in the third quarter of 2020 was lower than the CAD 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 CAD 1.1 million were comparable to the CAD 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 CAD 4.1 million, compared to CAD 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 nine months of 2020, the company recorded net income of CAD 15.6 million on construction revenue of CAD 949.5 million, compared with net income of CAD 1.3 million and CAD 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 nine months gross profit of CAD 64.8 million was CAD 20.2 million higher than the CAD 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 CAD 2.5 million of Canada Emergency Wage Subsidy and gross profit in the first nine months of 2020. The first nine 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 nine 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 nine months of 2020 was CAD 8 million, compared with CAD 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 CAD 3.1 million. In addition, equity income increased year-over-year from several equity accounted investments across Canada. In the first nine months of 2020, general and administrative expenses of CAD 46 million, or 4.8% of revenue, were higher than the CAD 42.4 million or 4.4% of revenue in the corresponding period a year ago. During the first nine months, the company had lower compensation expense of CAD 0.7 million, of which CAD 0.6 million related to CEWS, CAD 0.6 million lower pursuit costs, and gains on sale of property and equipment were CAD 1 million higher than the amounts recorded a year ago. Travel, conference, and other discretionary spend was also lower by CAD 1.5 million as a result of the company's response to COVID-19.
Offsetting these reductions in expenses were professional fees of CAD 6.2 million, including CAD 5.1 million related to acquisition and integration activities, higher foreign exchange costs of CAD 0.6 million, and higher technology-related costs of CAD 0.4 million. Finance income of CAD 1.3 million in the nine months of 2020 was lower than the CAD 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 CAD 5.8 million were CAD 1.8 million higher than the CAD 4 million reported in the nine months of 2019. The increase was due to CAD 0.6 million higher interest expense on loans and borrowings and right of use liabilities, and CAD 2.1 million higher interest on non-recourse 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 CAD 0.5 million each.
In the nine months of 2020, income tax expense was CAD 6.8 million, compared to CAD 0.6 million recorded in the nine months of 2019. The increase in income tax expense was in line with the year-over-year income 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 1.14 times are within our target range. Post-acquisition, 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, non-restricted 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 non-restricted cash at September 30, 2020, was CAD 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 on secured credit or equipment facilities, totaled CAD 73.2 million at September 30, 2020.
The September 30th, 2020, balance includes CAD 35 million drawn on the committed term loan facility related to the acquisition of Stuart Olson. Excluding non-restricted cash, the adjusted net debt of CAD 18.5 million results in a 0.33 adjusted net debt to TTM adjusted EBITDA ratio. At December 31st, 2019, the company had an adjusted net debt to TTM adjusted EBITDA ratio of 0.14x . 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, number 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 nine months of 2020 compared to the first nine months of 2019.
31.9 million compared to the CAD 14.7 million respectively. CapEx of CAD 8.2 million in the first nine months of 2020 is lower year-over-year as we've delayed some 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.
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 in design-build finance. Complex design-build being the next highest risk type, stipulated sum, unit price, and specified design build being medium risk, and construction management, 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 nine months of 2020 compared to 22.1% in the nine months of 2019.
We will continue to be very selective in pursuit of higher risk contract types. 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 30th, 2020, the company was carrying a combined backlog of CAD 2.6 billion, including approximately CAD 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 30th, 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 comprised 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 CAD 1.3 billion in pending backlog as of September 30th, 2020.
Due to the pandemic, projecting the timing of converting some of these projects into contracts has become more difficult, and several have 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 CAD 600 million, which represents a recurring revenue stream over the remaining two to six 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, mid-size 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 balance 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.
Thank you. We will now begin the question and answer session. Analysts and institutional investors who wish to ask a question may press star and one on their touchtone telephone to join the question queue. You will hear a tone acknowledging your request. If you are using a speakerphone, please ensure you lift the handset before pressing any keys. If you wish to remove yourself from the question queue, you may press star and two. Anyone who has a question may press star and one at this time. The first question is from Jacob Bout with CIBC. Please go ahead.
Good morning.
Morning, Jacob.
Morning, Jacob.
Sounds like the integration of Stuart Olson is going along well. What are some of the next major milestones that we can expect over the next 12-18 months?
The big gating item that has a longer duration for the integration is on the technology side. Obviously, we're integrating two businesses that, on a standalone basis, have been evolving in the construction industry in the last few years, especially has accelerated the use of technology. That's a longer-term piece of the integration. We have a 100-day plan to basically complete the bulk of the integration. You'll see in the longer term, revenue synergies, cross-selling opportunities. You'll see harmonization of employee benefits and compensation. As you indicated, we're quite pleased with the progress to date, and it's gone very well.
The cost synergies, what does the ramp of the EBITDA synergies look like in 2021? How conservative do you think you've been with this CAD 25 million in cost synergy?
I think the interest and amortization pieces of that, the CAD 10 million and the CAD 5 million, 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 expect to earn about CAD 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'll take a while 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. That still could be 18 months out before that happens. For 2021, we're just very focused on the CAD 10 million and think we have a path to achieve that.
On the backlog, you said there was CAD 1 billion of Stuart Olson in the consolidated at the end of the third quarter. I think it was CAD 1.6 billion for Stuart Olson in the standalone in Q2. What was the difference? Was that just that MRO work that was reclassified?
Yeah, that's right. We recorded a lot of the MSA work for the MROs into the pending backlog, which was about just short of CAD 700 million, I think, in total. The CAD 1 billion in backlog was recorded. In total, it was CAD 1.7 billion between our two definitions of backlog.
Okay. there's been no cancellation of any Stuart Olson projects at this point?
That's correct.
Okay. Then any of the Stuart Olson project disputes that they had historically, are they fully resolved, or is there any outstanding at this point?
I would say, obviously, the majority are resolved. In our industry, there's always issues that percolate no different at Bird than at Stuart Olson. Yeah, the majority of anything that we inherited was resolved.
Okay. 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?
Yeah, 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.
Through 2020.
All right. Thank you.
The next question comes from Chris Murray with ATB Capital Markets. Please go ahead.
Thanks, folks. As we think about, again, following on a little bit on Jacob's question. A couple 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 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 2021, and how you think that the margin profile continues to shape as we go forward?
I think from a SG&A perspective, we've worked hard 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 six months, including inheriting a strong leadership team at Stuart Olson, but we've added new leadership, a new chief technology officer, a new 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. 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 stipulated sum and obviously design build type projects inside the same shop.
That's unique, and Rob has extensive experience in that space. That's been a real key. Worked very hard on the leadership team. I'm quite confident that the business now is scalable as we get through COVID and we get a little more strength in the economy and demand and, obviously, with that strength of leadership, you anticipate improvements in margin performance.
Okay. From what you're seeing in the bid pipeline in terms of margin?
It's a mix. As Wayne referenced in his comments, on the commercial institutional side, probably a little heavier shift to the right. You think about projects in maybe a more of an urban environment. Those are shifting a bit. I'd say our industrial projects are less impacted in terms of any kind of a shift, but they tend to have specified durations, and they're well developed in advance before you're into construction. You have considerably longer lead time in a lot of cases. I would say that's how we would look at it.
Okay. Fair enough. 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. 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 non-recourse debt and how we should think about flow of funds and what the balance sheet should look like as we finish the year?
Yep. Absolutely. I can take that. If you look at the balance sheet in Q3, you can see that we have contract assets, alternative finance projects identified, we also have non-recourse debt identified as a separate line as well. Both of those accounts relate directly to the OPP project. There's no other alternative finance project. For contract assets, that CAD 140 million, we're going to bill the entire project in December, we would expect to be paid that. We will also repay the full non-recourse project financing in December as well. You'll see both of those accounts clear off the Q4 balance sheet. Obviously the differential in cash will be the profit that remains in the company.
Okay. It's also fair to think you've already recognized, as you've been going everything through the P&L, so there's just going to be no P&L impacts as well, though, right?
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 billing it on a monthly basis. It continues to build up this contract asset. That CAD 140 million that you see on the balance sheet, that's the project to date revenue earned.
Okay. We should also see, I guess it also follows next year, your reported interest cost should drop out because you won't have the non-recourse debt, correct?
Yeah. That's exactly right.
Okay, cool. All right. I just wanted to double-check. Thank you.
Thank you.
The next question comes from Frederic Bastien with Raymond James. Please go ahead. Frederic, your line is live.
Thank you for reminding me. I was on mute. Good morning to you both.
Good morning, Frederic.
Guys, you're now five or six weeks into the integration of Stuart Olson. I was wondering if you had found anything under the hood that surprised you positively or negatively.
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. 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 pretty quick. It's as anticipated, I would say, Frederic. It's what you would expect, because ultimately you wouldn't expect to see positive surprises. You sometimes expect to see a few negative surprises, but we haven't seen that.
Wayne, have you seen the same thing on your side, on the financial side?
Yeah, that's correct. Because of the level of due diligence that we were able to accomplish, even though we only had five 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.
Okay. I believe you, Bird and Stuart Olson are operating under two different systems. Have you given any thought on whether you'll run both on a go-forward basis, or you'll try to merge things?
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.
Okay.
Right to the last detail of what we're using across every single district and business unit. The focus now is sort of marrying up those various systems and applications and getting an optimized framework of what we have. Then we'll decide whether we need to add anything supplementary to that. Lots of experience. 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. It's been a good effort, and I think we're focusing on ensuring that we're taking advantage of systems that'll be nimble and systems that'll be efficient to use.
Lots of lessons learned across all of our organizations around different products, different applications, different solutions.
Yeah. Super. The last question on Stuart Olson. It did not contribute meaningfully to your results in Q3 given the timing of the close. I was wondering if you could provide any color on how the actual business performed in the third quarter on a standalone basis.
I don't mean this to be a bit of a non-answer, it performed as expected. Stuart Olson still continued to do a good job delivering its projects. We were happy with the state of the balance sheet that we were working with for our purchase price accounting. It performed well.
Thanks.
The next question comes from Michael Tupholme with TD Securities. Please go ahead.
Thanks. 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?
I'll take the second part of that first. I don't think the current environment is affecting that so much. I think 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. Certainly some new leadership in place. It'll take a little bit of time for those new leaders to certainly understand who's who in the group, and that's probably 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're developing a very deep resume on IPD. 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. On 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. In my experience on larger industrial projects, clients are tending to look for that so that they have, obviously, a much tighter interface with the contractor that's performing a much broader array of solutions and much higher self-perform, better control when you have that kind of delivery. We're seeing a lot of that, and I think it's leveraging Bird from where it historically would've been with more facility-oriented industrial work to a much broader array of mechanical, electrical on industrial sites, concrete formwork, earth grading.
A much broader suite of services with a much higher margin profile when you have that mix. Yeah, 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. But very pleased. And it starts with a well-thought-out leadership team that is designed to hit high levels of collaboration.
Thanks for that. That's a great answer. A lot of detail, Teri. Just maybe one quick follow-on. With a 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?
That's a good question. I would think second quarter you'll see some of that. It depends on the business. Larger industrial projects sometimes are 12 to 18 months in development, smaller ones less so. The verticals side of our business and our building business is shorter duration, you'll certainly see some of that certainly quicker on having integrated collaborative teams with different levels of service in some of those projects. That'll be a bit faster. I'd say, I think you'll start to see some evidence of it in the second quarter.
Okay, thanks. 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? Specifically also, just wondering if we can get a bit of an update on the Advanced Nuclear Materials Research Centre project and where that stands.
Yeah. I'll tackle that one on the nuclear side. This is a weapons-grade uranium nuclear facility, so complexity is very high. 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. Good progress on that. I think we're nearing the conclusion of this phase and we should be moving forward to contracting. As you can well imagine, in a nuclear environment such as this, it does take time to get various approvals and permitting levels, but our team has been working extensively through this for the past number of months so.
Maybe, Michael, just on the rest of your question there. On the CAD 1.3 billion of pending backlog, I think we identified about CAD 600 million of that related to MSAs that would span between two and six years. 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 CAD 700,000, this [audio distortion] project Teri was just talking about, that's been in there for a while and obviously taking a bit to get to contractual closure. Just 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 two or three quarters to get to close.
We do review every single project in there every single quarter. We are confident that they all will contract at some point here. Just it's taking a little bit longer than I think in a pre-pandemic environment they would have.
Okay, great. Thanks, Wayne. Just lastly, in terms of the CEWS benefit, you outlined what it was in the quarter. I guess my question is really just about the fourth quarter. We're going to actually see not only whatever additional benefit legacy Bird receives, but also there's the Stuart Olson piece and I guess it's that piece that I'm sort of wondering if you can provide any color on how we should think about that.
Yeah. In our financial statements, we added a new note called the government assistance note. In there, we talk about the CAD 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 CAD 10.1 million of CEWS claims that the legacy Stuart Olson business would have submitted. 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 CAD 3.1 million that we've claimed to date, because that was a Q2 and Q3 claim that we had put together. 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 scale down proportionately as well.
Okay, that's helpful. Thanks.
The next question comes from Maxim Sytchev with National Bank Financial. Please go ahead.
Hi. Good morning, gentlemen.
Hi, Max.
Morning, Max.
Just a quick question, in relation to Stuart Olson and core. Were they profitable in Q3 ex-CEWS, and what do you expect in terms of performance for Q4?
I think, just figuring out which part of your question to start. I think on Q3, we're not disclosing what the Stuart Olson results were in the third quarter. 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.
Okay. When you talk about income, like net income, not EBITDA, right?
That's right. Yeah. Net income. Thank you.
Okay. Great. Thanks. In terms of, Teri, I think in the past, when you talked about the LNG opportunity, CAD 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? What are your thoughts there on this one?
Yeah. It's really early days, but we are evaluating those opportunities as they evolve, and some of them will be later in the contracts phasing. 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's 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. Other aspects of the project based on the performance we've had, but I'd say still early days in terms of fully developing capacity and understanding capacity and understanding the client's expectations.
Right. Is it fair to say, I mean, this is kind of maybe a calendar 2022 event in terms of the potential awards that could come to fruition? Yeah.
Likely. Yeah. You're right. Ultimately, maintenance as well. They have, I would say, one of the top resumes in the country in MRO. Obviously, that's a big opportunity for us as well.
Okay. On the same site?
Yes.
Okay. That's great. In terms of, I don't know if you can remind us, was Canem doing any work in data centers? I mean, I presume so.
Yes
this end market is experiencing right now.
Yes, they are. That's an exciting opportunity for us.
Okay, excellent. Obviously, lots of chatter in terms of modular buildings and things like that. Was wondering if you don't mind refreshing your perspective in terms of how your go-to-market strategy has evolved to attack potentially these projects?
We've got two large projects now under development in Canada, and you certainly do develop synergies, and you develop expertise too, and you also educate the environment and the industry on this type of capability. We're continuing that evolution. In a business like this that is largely a startup, 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. We're evaluating those as they evolve. We're also seeing some of our more developed opportunities shift to the right in hotels. It's another certainly big opportunity for us with our delivery. We've built a hotel up at Iqaluit, as you know. The hotel space, obviously under tremendous pressure, so you're not seeing investment in that area currently.
The demand has some peaks and valleys in it, but I'm certainly pleased to see the government focused on long-term health and also affordable housing across the country with the federal government's programs. We're in the middle of that as we speak.
Okay. That's helpful. I guess the same applies for some of the water, wastewater in terms of capabilities.
Yeah.
This is right in your wheelhouse, right?
That's all right in the wheelhouse. 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 especially in Eastern Canada on mechanical, electrical, and some of the site work, foundation work, things like that out of our new Sudbury location.
Okay. That's very helpful. Just one last quick one from me. In terms of the mining clients, is everybody up and running right now or there's still some sites where it's very restricted and production levels have not gotten back to what's called pre-COVID levels?
Yeah. We're more heavily, obviously, in hard rock mining and predominantly iron ore and certainly gold opportunities as they evolve. Certainly iron ore, which is a core of our business, is still under a lot of pressure. They're certainly not at even remotely close to operating levels as far as their reliance on third-party contractors and 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. We're not seeing much demand there at this point. 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, which we were through Rio Tinto. Those sites, we're not seeing the opportunities really evolve. When they do, they're quite small.
Okay.
There's still lots of pressure there, Max, and I think that'll take a full COVID recovery and a full economic recovery to get some strength back in iron ore. Others, like gold, we're seeing IAMGOLD evolve
now with a number of opportunities for us to pursue. That's a very large project with a lot of different components that all suit Bird's capabilities. Obviously, the close proximity to Stuart Olson's group in Sudbury obviously makes it certainly in our core market area.
Okay. That's very helpful. Thank you very much, that's it for me.
Once again, if you have a question, please press star then one. The next question comes from Frederic Bastien with Raymond James. Please go ahead.
Hi. Thanks again. Bit of a loaded question here. 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. If we look at the good old days, the margins used to be as high as 7%, 7.5%. My question to you is, where do you think you can get the margins to over the foreseeable future?
Yeah, I think certainly our focus on margins, we've had a big focus on that over the past 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. Some of the margins they have, obviously 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. It's kind of hard to come out with an exact number at this point. 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. Yeah, 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 then improving those margins going forward.
Right. Obviously, lots of moving parts here, but obviously with the increased nuclear work that you're targeting, that should also help, correct?
Yes. Yeah, for sure. Anything that's got that industrial sophistication helps for sure in the mix and the timing. COVID recovery is certainly also something 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 without a linear ratio of revenue. Much higher self-perform capability. That's a big plus as well.
Awesome. Exciting. Thank you very much.
Thank you.
There are no further questions at this time. I will now hand the call back over to Mr. McKibbon for closing remarks.
I want to thank all of our employees for their resilience and for the sacrifices they've made to ensure the company not only remains healthy in our 100th year of operation, but also continuing to improve profitability while we close 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 on what impact it will have on our company.
However, the discipline and focus of the team, that 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 its 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 of 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 Q3 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.
This concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.