Welcome, ladies and gentlemen, to the Bird Construction Third Quarter twenty nineteen Financial Results Conference Call. We will begin with Mr. Terry McKibbin'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. 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. Terry 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 twenty nineteen conference call. Co presenting with me today is Wayne Dingbidge, our CFO. In the third quarter of twenty nineteen, 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 ADCO Structures continues to progress on-site construction work for the LNG Canada Cedar Valley Lodge.
Construction commenced in the 2019 and is planned to continue through the spring of twenty twenty one. Throughout the third quarter, modules were delivered and installed on-site and core buildings continue to be erected and enclosed. The facility is being built to house workers involved in 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 preconstruction and in a delivery model that supports a more traditional portfolio risk balance of Bird and our overall eWork program, and our earnings basis begin to reflect this. While saw some headwinds in the first half of twenty nineteen, it has now 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 of the employees of Bird for their hard work and dedication. During the third quarter of twenty nineteen, 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 Westward 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 $140,000,000 But due to the agency nature of the contract, only the Construction Management Services portion has been added to backlog at September 3039.
The previously discussed Confederation Line Extension and the Advanced Nuclear Materials Research Center for Canadian Nuclear Laboratories work programs remain in the amount of awarded in which or in which the company was named the primary negotiation proponent that is yet to be contracted, which is over $600,000,000 as of the end of September 3039. At yesterday's Board of Directors meeting, the Board declared monthly eligible dividends of $0.03 $25 per common share for November, December, January 2020 and February 2020. Wayne will now take us through the financial performance for the quarter and year to date compared with prior year. Thank you, Terry. During the third quarter of twenty nineteen, the company recorded net income of $6,800,000 on construction revenue of $378,600,000 compared with net income of $4,400,000 on $381,400,000 of construction revenue in 2018.
Revenue growth has been slowed by higher volume of preconstruction activities and construction management projects. The extended preconstruction 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 $23,800,000 was $4,400,000 or $22,700,000 higher than the $19,400,000 recorded in 2018. The increase in third quarter twenty nineteen 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 twenty nineteen 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 2019 was $300,000 which is $600,000 higher than the loss of $300,000 in the same period of 2018. The income in the 2019 was primarily driven by the earnings from non PPP equity accounted entities. In the third quarter of twenty nineteen, general and administration expenses of $14,200,000 or 3.8% of revenue were $1,500,000 higher than the $12,700,000 or 3.3% of revenue in the comparable period a year ago. Pursuit costs were $700,000 compared to a minimal amount recorded in 2018.
Also, compensation expense was higher by about $800,000 year over year, primarily due to the mark to market on the total return swap valuation and variable compensation. Finance income of $700,000 in the 2019 was $400,000 higher than the $300,000 recorded in the same period of 2018 due to higher cash balances. Finance and other costs of $1,200,000 was $500,000 higher than the 700,000.0 reported in the third quarter of twenty eighteen. The increase is due to higher interest costs associated with nonrecourse project financing and right of use liabilities. In the third quarter of twenty nineteen, income tax expense was $2,500,000 compared to $1,700,000 recorded in the third quarter of twenty eighteen.
Nine months ended September 30 compared with nine months ended September 3038. During the nine months of 2019, the company recorded net income of $1,300,000 on construction revenue of $955,800,000 compared with a net loss of $7,400,000 on $995,900,000 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 twenty nineteen 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 clients that are currently under commercial negotiation.
The reduction in revenue in the 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 preconstruction activities on construction management projects throughout the first September. This extended preconstruction 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 44,600,000.0 was $9,700,000 or 27.8% better than the $34,900,000 recorded a year ago despite lower revenues. The increase in the amount of gross profit in the 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 twenty eighteen with the labor strike at a client in the mining sector. Income from equity accounted investments in the nine months of 2019 was $2,000,000 compared with $400,000 in the same period of 2018. The income in the nine months of twenty nineteen was primarily driven by the earnings from non PPP equity accounted entities. In the nine months of twenty nineteen, general and administrative expenses of $42,400,000 or 4.4% of revenue were 1,400,000 lower than the $43,800,000 or 4.4% of revenue in the comparable period a year ago. During the first three quarters of twenty nineteen, the company had lower third party per shoot costs due to an honorarium recognized for a PPP per shoot where the team was notified it was not the preferred proponent.
As a result, per shoot costs were $1,600,000 lower than the amount recorded in 2018. Gains on disposable of assets are $500,000 higher than 2018. Offsetting some of the year over year reductions in general and administrative expenses was an increase in compensation expense of $600,000 primarily due to the company incurring $1,900,000 of severance costs. Finance income of $1,800,000 in the nine months of 2019 was $900,000 higher than the $900,000 recorded in the same period of 2018 due to higher average cash balances year over year. Finance and other costs of $4,000,000 were $1,400,000 higher than the $2,600,000 reported in the same period of 2018.
The majority of the increase is due to $700,000 in interest costs recognized upon adoption of IFRS 16 as well as $300,000 in interest costs associated with nonrecourse project financing. There is also a year over year increase of approximately $200,000 of band charges and borrowing fees. In the nine months of 2019, income tax expense was $600,000 compared to a recovery of $2,900,000 in the same period of 2018. I will now turn the call back over to Terry to comment on the outlook for the company in fiscal twenty nineteen. Thank you, Wayne.
At September 3039, the company was carrying a backlog of $1,440,000,000 which is 11.2% higher than that recorded at December 3138. 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 $1,100,000,000 of new contracts and change orders secured to the 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. In addition, the company has greater than 600,000,000 in projects that have been awarded or in which the company was named the primary negotiation proponent that are yet to be contracted as of the end of the third quarter twenty nineteen. Included in this figure are the Advanced Nuclear Materials Research Center for 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 is which is being delivered under an IPD delivery model is now expected to extend to the 2020 before converting into backlog, and the Confederation Line Extension project is expected to be contracted in the fourth quarter of twenty nineteen. In addition, the company is in the preconstruction phase for over $200,000,000 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 preconstruction activities broadly ongoing that have yet to convert into contracts. This extended preconstruction 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, midsized social infrastructure projects and a range of projects in the LNG sector. As of September 30, 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 and selective dilutive contracts that are scheduled to achieve substantial completion in the near term. One active contract remains subject to ongoing commercial negotiations, and 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 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, and 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 II 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 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. Our first question is from Michael Kapole with TD Securities. You
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? So 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 revenue split. So 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 in the last several years. We don't expect that to exceed 50%, I don't think, for this year.
But we are seeing a very healthy pipeline of industrial related projects. So we expect that favorable work mix to continue 2020 and beyond.
And then 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 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.
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 higher volume of preconstruction 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 preconstruction phase and begin to have a more favorable impact on revenue and driving growth as we look forward here? I mean 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 side, 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 the project is $140,000,000 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. So 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? Because that would be separate from the issue you just discussed in terms of the construction management work.
Yes, that's true. I'd say, what's driving some of our backlog growth is multiyear projects, though. So in terms of 2020 or I guess maybe I'd say, if you look at the projects we booked in Q3, including the nonprocessed buildings, that's a three year contract. So while we're seeing a lift in 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.
And the same will be with Confederation Line. We expect that to contract in fourth quarter. But again, that's a project that's going to stand three plus years.
Okay. Just lastly, the higher pursuit Project Pursuit costs that you've talked about in the fourth quarter, can you provide a little bit more specificity around what you're expecting? It was 700,000 in the third quarter. How much of an increase are we looking at?
It's about $1,000,000 Michael, in the fourth quarter, approximately.
That's right. That's or that's the increase versus Q3?
The increase. That's the increase versus Q3.
Okay. And then if we look out to next year, I mean, 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 evolved that we get into pursuit by third quarter, fourth quarter that we don't we don't know about today. Typically, we have a pretty long lead time on these things. But, you know, I I'd say that it's probably gonna 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.
You mentioned in the MD and 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, but they're evolving. I'd say that one is certainly evolving quicker because it's got less design and whatnot, but yes, evolving. So as you typically expect, they extend out to 2022, so longer back end to it. So that's 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 team has worked very hard, and we're very pleased with those opportunities as they continue to evolve. And 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 is this are you expecting to Yeah. The light through
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.
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 has seemed more that much more significant than you've historically seen?
Yes, I'd say so. And also the scale of some of these opportunities is quite significant as well. Obviously, a project at the scale of our Westwood development is quite significant at that size that it's in the profile that it's in. And we're balancing the risk profile as we've been communicating across a series of contract types. We're really pleased with the way that's evolved within the past year or more importantly, the past two years where we we had were a much heavier risk profile to the backlog as we opened 2018 compared to how we'll open in 2020.
We're really pleased with that. 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. So when we think of margin progression, maybe in 2020, we should expect like a reduced drag from sort of the P3 jobs that you're completing, sort of a better shift because better mix because of the industrial work and then that Centimeters should also contribute positively to your margin, correct?
Yes. And I'd say that on the P3 side, we're being very, very selective. We have experienced assignments that, quite honestly, weren't suitable to BP3s. And we felt the pressure of those. So we've got considerable discipline as we approach the various contract types that carry higher risk.
This concludes the question and answer session. I'll now hand the call back over to Mr. McGibbon for closing remarks.
Thank you. And thank you again for participating in VERTE's twenty nineteen 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 if 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.