Welcome, ladies and gentlemen, to the Bird Construction third 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. At any time during the call today, you may press 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 conference is being recorded. Should anyone need assistance during the conference call, they may signal an operator by pressing star and zero on their telephone keypad.
Before commencing 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'd like to turn the conference over to Mr. Teri McKibbon, President and CEO of Bird Construction. Please go ahead, Mr. McKibbon.
Thank you. Good morning, and thank you for participating in Bird Construction's third quarter 2019 conference call. Co-presenting with me today is Wayne Gingrich, our CFO. In the third quarter of 2019, the company executed a more diverse work program and delivered improved net income both quarter-over-quarter and year-over-year. To provide a quick update, the company, through its joint venture with ATCO Structures, continues to progress on-site construction work for the LNG Canada Cedar Valley Lodge. Construction commenced in the first quarter of 2019 and is planned to continue through the spring of 2021. Throughout the third quarter, modules were delivered and installed on-site, and core buildings continued to be erected and enclosed. This facility is being built to house workers involved in the construction of LNG Canada's natural gas liquefaction and export facility.
The project is one of the largest accommodation facilities ever built in Canada. 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. We continue to be encouraged by the growth of the amount of awarded, but not yet contracted projects, many of which are in pre-construction and in a delivery model that supports a 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 has now reached a more steady state in operations for the back half of the year.
On behalf of the company, I want to thank and recognize all of the employees of Bird for their hard work and dedication. During the third quarter of 2019, the company announced that it has signed multiple contracts for services for an undisclosed amount at an LNG liquefaction export terminal facility in Northwestern British Columbia. The contracts include a site civil works program and the engineering, procurement, and construction of 16 administration and service buildings. The EPC buildings program will consist of a combination of pre-engineered and modular buildings. The contracts will start immediately and continue into 2022. Bird also announced that it signed a construction management contract with Westwood Construction to build a mixed-use development north of Halifax. Construction over a three-year period will include two high-rise towers and two levels of underground parking.
The full project value is approximately CAD 140 million. Due to the agency nature of the contract, only the construction management services portion has been added to backlog at September 30th, 2019. The previously discussed Confederation Line extension and the Advanced Nuclear Materials Research Centre for Canadian Nuclear Laboratories work programs remain in the amount of awarded, or in which the company was named the primary negotiation proponent that is yet to be contracted, which is over CAD 600 million as at the end of September 30th, 2019. At yesterday's Board of Directors meeting, the board declared monthly eligible dividends of CAD 0.0325 per common share for November of 2019, December of 2019, January 2020, and February of 2020. Wayne will now take us through the financial performance for the quarter and year to date compared with prior year.
Thank you, Teri. During the third quarter of 2019, the company recorded net income of CAD 6.8 million on construction revenue of CAD 378.6 million, compared with net income of CAD 4.4 million on CAD 391.4 million of construction revenue in 2018. Revenue growth has been slowed by a higher volume of pre-construction activities on construction management projects. The extended pre-construction phase, which is longer than originally anticipated on several pending construction management contracts, has served to amplify the impact on shorter-term results due to the allocation of key resources to projects that are not yet generating gross profits. The company's third quarter gross profit of CAD 23.8 million was CAD 4.4 million or CAD 22.7 million higher than the CAD 19.4 million recorded in 2018.
The increase in third quarter 2019 gross profit is primarily due to a higher margin work program as the mix of revenue shifts from predominantly institutional and commercial projects to an increasing amount of industrial projects in 2019. The company's third quarter 2019 gross profit percentage of 6.3% was 1.2% higher than the gross profit percentage of 5.1% recorded a year ago. On a comparative basis, year-over-year, third quarter gross profit and gross profit percentage in 2018 were negatively impacted by lower volumes recognized in the company's higher margin industrial operations in Western Canada and mining operations in Eastern Canada, a result of project delays and a labor strike at one of the company's primary mining clients. Income from equity accounted investments in the third quarter of 2019 was CAD 0.3 million, which is CAD 0.6 million higher than the loss of CAD 0.3 million in the same period of 2018.
The income in the third quarter of 2019 was primarily driven by the earnings from non-PPP equity accounted entities. In the third quarter of 2019, general and administration expenses of CAD 14.2 million or 3.8% of revenue were CAD 1.5 million higher than the CAD 12.7 million or 3.3% of revenue in the comparable period a year ago. Pursuit costs were CAD 0.7 million compared to a minimal amount recorded in 2018. Also, compensation expense was higher by about CAD 0.8 million year-over-year, primarily due to the mark-to-market on the total return swap valuation and variable compensation. Finance income of CAD 0.7 million in the third quarter of 2019 was CAD 0.4 million higher than the CAD 0.3 million recorded in the same period of 2018 due to higher cash balances. Finance and other costs of CAD 1.2 million were CAD 0.5 million higher than the CAD 0.7 million reported in the third quarter of 2018.
The increase is due to higher interest costs associated with non-recourse project financing and right of use liabilities. In the third quarter of 2019, income tax expense was CAD 2.5 million compared to CAD 1.7 million recorded in the third quarter of 2018. Nine months ending September 30th compared with nine months ending September 30th, 2018. During the nine months of 2019, the company recorded net income of CAD 1.3 million on construction revenue of CAD 955.8 million, compared with a net loss of CAD 7.4 million on CAD 995.9 million of construction revenue in 2018. Although volume declined 4% year-over-year, the mix of revenue has changed as the company's higher margin industrial work program has increased. The first nine months of 2019 were impacted by a PPP project that incurred additional costs due to design-related scope growth and acceleration expense to meet the scheduled substantial completion date.
There were substantial changes to the scope of the project requested by the client that are currently under commercial negotiation. The reduction in revenue in the first nine months of 2019 was primarily driven by lower volumes due to harsher-than-expected winter conditions experienced in Central Canada in the first quarter and a higher amount of pre-construction activities on construction management projects throughout the first nine months of 2019. This extended pre-construction phase, which is longer than originally anticipated on several pending construction management contracts, has served to amplify the impact on shorter-term results due to the allocation of key resources to projects that are not yet generating gross profits. However, the company's industrial work programs have begun to increase year-over-year, and the more diversified revenue mix helped improve profitability year-to-date.
The company's 2019 gross profit of CAD 44.6 million was CAD 9.7 million or 27.8% better than the CAD 34.9 million recorded a year ago, despite lower revenues. The increase in the amount of gross profit in the first three quarters of 2019 was driven by higher margin projects as a result of a shift in the mix of revenue from institutional and commercial projects to more industrial projects in 2019. The company's gross profit percentage in 2019 of 4.7% was 1.2% higher than the gross profit percentage of 3.5% recorded a year ago. Impacting gross profit in the first nine months of 2018 was a labor strike at a client in the mining sector. Income from equity accounted investments in the nine months of 2019 was CAD 2 million compared with CAD 0.4 million in the same period of 2018.
The income in the nine months of 2019 was primarily driven by the earnings from non-PPP equity accounted entities. In the nine months of 2019, general and administrative expenses of CAD 42.4 million or 4.4% of revenue were CAD 1.4 million lower than the CAD 43.8 million or 4.4% of revenue in the comparable period a year ago. During the first three quarters of 2019, the company had lower third-party pursuit costs due to an honorarium recognized for a PPP pursuit where the team was notified it was not the preferred proponent. As a result, pursuit costs were CAD 1.6 million lower than the amount recorded in 2018. Gains on disposal of assets are CAD 0.5 million higher than 2018. Offsetting some of the year-over-year reductions in general and administrative expenses was an increase in compensation expense of CAD 0.6 million, primarily due to the company incurring CAD 1.9 million of severance costs.
Finance income of CAD 1.8 million in the nine months of 2019 was CAD 0.9 million higher than the CAD 0.9 million recorded in the same period of 2018 due to higher average cash balances year-over-year. Finance and other costs of CAD 4 million were CAD 1.4 million higher than the CAD 2.6 million reported in the same period of 2018. The majority of the increase is due to CAD 0.7 million of interest costs recognized upon adoption of IFRS 16, as well as CAD 0.3 million in interest costs associated with non-recourse project financing. There is also a year-over-year increase of approximately CAD 0.2 million of bank charges in borrowing fees. In the nine months of 2019, income tax expense was CAD 0.6 million compared to a recovery of CAD 2.9 million in the same period of 2018.
I will now turn the call back over to Teri to comment on the outlook for the company in fiscal 2019.
Thank you, Wayne. At September 30th, 2019, the company was carrying a backlog of CAD 1.44 billion, which is 11.2% higher than that recorded at December 31st of 2018. The embedded margin in the backlog continues to improve, driven by the positive impact of new contract awards with higher going-in fees, combined with the diminishing influence of selective dilutive contracts that are nearing completion. The CAD 1.1 billion of new contracts and change orders secured to the end of September are across a broad range of markets that will help the company achieve a more diversified work program with a more balanced risk profile. The company has greater than CAD 600 million in projects that have been awarded or in which the company was named the primary negotiation proponent but have yet to be contracted as of the end of the third quarter 2019.
Included in this figure are the Advanced Nuclear Materials Research Centre, the Canadian Nuclear Laboratories located in Chalk River, and the Confederation Line Extension project in Ottawa, where the company will lead the construction of several light rail transit stations and a maintenance and storage facility. The validation phase of the Canadian Nuclear Laboratories project, which is being delivered under an IPD delivery model, is now expected to extend to the first half of 2020 before converting into backlog, and the Confederation Line Extension project is expected to be contracted in the fourth quarter of 2019. The company is in the pre-construction phase for over CAD 200 million of institutional projects in British Columbia, although only a relatively small fraction of this amount will be included in backlog due to the agency nature of the construction management contract delivery model.
In general, the company has a higher than normal level of pre-construction activities broadly ongoing that have yet to convert into contracts. This extended pre-construction phase, which is longer than originally anticipated on several pending construction management contracts, has served to negatively impact shorter-term results due to the allocation of key resources to projects that are not yet generating gross profits. However, these projects are expected to contribute positively to future earnings of the company once contracted. The longer-term pipeline remains healthy with respect to a broad range of project opportunities that fall within our risk tolerance expectations. The company will continue to be selective on prospective pursuits, ensuring we balance our available talent with the risk profile of the project and the overall work program.
In the near term, opportunities will primarily consist of smaller environmental projects, midsize social infrastructure projects, and a range of projects in the LNG sector. As of September 30th, the company was actively bidding a PPP ambulatory care project in Atlantic Canada, two design-build projects, one located in Ontario and the other in British Columbia, and several work packages in the LNG sector. The company is shortlisted and awaiting the request for proposals on an environmental project and an administration building for the federal government, both located in Ontario. The award of any of these project opportunities will benefit 2020 and beyond. In terms of active projects, the company is realizing lower margin in selective dilutive contracts that are scheduled to achieve substantial completion in the near term.
One active contract remains subject to ongoing commercial negotiations. There is a risk that this project could experience additional margin erosion in the fourth quarter if a series of owner-directed changes are not resolved satisfactorily. The company expects to have a work program in the fourth quarter of 2019 that is more balanced and diversified than it has over the past several years, supporting progress towards higher levels of profitability and growth. Work on the Cedar Valley Lodge is at full production. Management anticipates strong earnings attributable to its higher margin industrial work program throughout the remainder of the year, including contributions from the two recently awarded projects at our LNG export terminal facility, work in the nuclear sector in Ontario, and from the OPP Modernization Phase 2 project.
Management expects pursuit costs in the fourth quarter to increase above the level experienced in the third quarter due to the combination of the timing of bid submissions and the number of active pro pursuits. Taking into consideration the company's current backlog, the expected timing for conversion of awarded projects into contracts, and the timing of major project awards, the company expects modest growth of backlog in the fourth quarter. This concludes the prepared remarks section of the conference call. I'll now turn the call over to the conference call operator, who will take your questions in turn. Thank you.
Thank you. We'll now begin the question and answer session for analysts and institutional investors. To join the question queue, you may press star then one on your telephone keypad. You'll hear a tone acknowledging your request. If you're using a speakerphone, please pick up your handset before pressing any keys. To withdraw your question, please press star then two. Our first question is from Michael Tupholme with TD Securities. Please go ahead.
Thank you. You've talked about the mix shift in Bird's work program toward a higher proportion of industrial work as being a key driver of improved earnings performance. Is there any way to provide some additional details so we can appreciate how the mix has evolved? What the mix of industrial versus institutional and commercial revenues looks like today versus, say, last year, and then how you expect that to shift further, if at all, as we move out to 2020?
Michael, it's Wayne. In our year-end filings, we provide the actual mix of revenues split. We haven't provided that yet for 2019. Suffice to say, the amount of industrial work, or the proportion of industrial work is increasing over where it has been the last several years. We don't expect that to exceed 50%, I don't think, for this year. We are seeing a very healthy pipeline of industrial-related projects. We expect that favorable work mix to continue through 2020 and beyond.
Do you expect the mix to shift further next year or just continue at the same pace that you've seen in the third quarter and in the back half here?
I think we'll continue to see it shift somewhat through next year, maybe not to the same extent that it has shifted this year, but it will continue to head in that direction, I believe.
Right. Strong results in the quarter in spite of revenues being flattish on a year-over-year basis. You talked about revenue growth being negatively impacted by a higher volume of pre-construction activities on construction management projects. Can you talk a little bit about where you're at with those projects and any visibility you have on when you'll see some of those projects move out of that pre-construction phase and begin to have a more favorable impact on revenue and driving growth as we look forward here? Because the backlog is up 17%, so just wondering at what point we start to see that flow through to improved revenue growth trends on a year-over-year basis.
I think on the revenue growth, one thing to keep in mind is, particularly on these construction management projects where we're not necessarily flowing through the full value or the full construction value through our books on that. We're recording the backlog and agency fee for that. For example, the project that we recorded in Q3 here, while the construction value of that project is CAD 140 million, that's not the value that's going to flow through our backlog or through our revenue. We're just getting the agency fee on that. When you look at revenue growth, it is tougher to compare year-over-year on that front with that change of construction management projects because you're not getting the same volume uptick on it, but you are getting the gross profit flowing through on those projects.
Okay. That's helpful. I guess if we do look at it sort of just in terms of the backlog being up 17% year-over-year, at what point should we think about that beginning to favorably impact the year-over-year revenue growth trends? That would be separate from the issue you just discussed in terms of the construction management work.
Yeah, that's true. I'd say it's driving similar backlog growth is multi-year projects, though. In terms of 2020 or if you look at the projects we booked in Q3, including the non-process buildings, that's a three-year contract. While we're seeing a lift in our backlog, that may not necessarily drive significant revenue growth in 2020 because that's just giving us some more visibility to 2021 and beyond as well.
Okay.
The same will be with Confederation Line. We expect that to contract in the fourth quarter, but again, that's a project that's going to span three plus years.
Okay. Just lastly, the higher project pursuit cost that you've talked about in the fourth quarter, can you provide a little bit more specificity around what you're expecting? It was CAD 0.7 million in the third quarter. How much of an increase are we looking at?
It's about CAD 1 million, Michael, in the fourth quarter. Approximately.
That's right.
CAD 1 million high.
That's the term or that's the increase versus Q3?
The increase. That's the increase versus Q3.
Okay. If we look out to next year, I know these pursuit costs can be lumpy quarter to quarter, but on a full year basis for 2020, would you expect that to be much different than 2019 full year?
At this point, I wouldn't, but again, as you said, there could be new projects evolve that we get into pursuit by third quarter, fourth quarter that we don't know about today. Typically, we have a pretty long lead time on these things, but I'd say that it's probably going to be similar based on our focus. We're being very disciplined as we approach projects that have pursuit fees.
Okay. All right. That's all I have today. Thanks.
Thank you.
The next question is from Frederic Bastien with Raymond James. Please go ahead.
Hi, good morning. You mentioned in the MD&A that the Cedar Valley Lodge is now at full production. I was wondering if you could tell us where you're at with the other two work packages that you've secured for LNG Canada.
They're evolving, essentially early days, they're evolving. I'd say that one is certainly evolving quicker because it's got less design and whatnot. Yeah, evolving. As you'd typically expect, they extend out to 2022, a longer back end to them. Going well and I'm really pleased with the pace of awards with LNG just due to the performance we've had and the safety performance and the teams work very hard and we're very pleased with those opportunities as they continue to evolve. As we continue to perform at a high level, we'll continue to see new opportunities.
Are these jobs continuing into Q4 and should we expect them to slow down with weather or are you expecting to go right through winter?
I think it depends. There's one that's more site grading oriented that I'd say will slow down a bit with weather. The other, not so much, it's more facilities, so it's got less seasonality and we're in the design phase right now.
Okay. We've seen you perform construction management work in the past. I'm a bit surprised by the emphasis you're putting on the recent contract awards and their impact. Is it because the workload or the implied backlog of CM work that much more significant than you've historically seen?
Yeah, I'd say so. Also the scale of some of these opportunities is quite significant as well. Obviously, a project of the scale of our Westwood development is quite significant at that size that it's in the profile that it's in. We're balancing the risk profile as we've been communicating across a series of contract types, and we're really pleased with the way that's evolved within the past year, or more importantly, within the past two years, where we had a much heavier risk profile to the backlog as we opened 2018 compared to how we'll open 2020. We're really pleased with that. The backlog that we look at and even the awarded but not contracted backlog that we've got on our books we're really pleased with, and we really like the profile of it, and that's considerably different than it was, say, opening 2018.
Okay, when we think of margin progression maybe into 2020, we should expect a reduced drag from sort of the P3 jobs that you're completing, sort of a better mix because of the industrial work, and then that CM should also contribute positively to your margin, correct?
Yes. I'd say that on the P3 side, we're being very selective. We have experienced assignments that quite honestly weren't suitable to be P3s, and we've felt the pressure of those. We've got considerable discipline as we approach the various contract types that carry higher risk.
Great. Thanks. That's all I have.
This concludes the question and answer session. I'll now hand the call back over to Mr. McKibbon for closing remarks.
Thank you. Thank you again for participating in Bird's 2019 third quarter conference call. We're very pleased with the performance improvement this quarter and expect a more stable execution of our growing and more diversified backlog. As always, Wayne and I are available for additional information as required, so please do not hesitate to get in touch with us. Have a nice day, everyone. Thank you.
This concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.