Gentlemen to the Bird Construction second 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 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 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.
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 the Bird Construction second quarter 2019 conference call. Co-presenting with me today is Wayne Gingrich, our CFO. Before we begin the discussion on the quarterly results, since this is my first earnings call for Bird Construction, I would like to mention that I'm honored to assume the role of Chief Executive Officer of a trusted, respected, and well-respected company that in 2020 will celebrate its 100-year anniversary. I'd also like to thank and acknowledge the support and assistance I have had over the past two years from Ian Boyd, who's made the transition into the company and into my new role to be seamless. The 2019 year began with a continuation of the performance challenges that we faced in 2018.
As the third quarter begins, we are pleased with the progress completing our challenging legacy projects and in the impacts of our efforts to diversify our revenue stream across a portfolio of both geographic and balanced risk profiles. We are very 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 for Bird in our overall work program. We are beginning to see our earnings base reflect this. Although 2019 will continue to be a transition year, we are pleased to see the directional trend of our performance and thank the many employees of Bird for their hard work and dedication to the company.
In the second quarter of 2019, the East West Connectors consortium achieved financial close and entered into a project agreement to design, build, and finance the Confederation Line Extension project in Ottawa. The company, as a preferred subcontractor to the consortium, will lead the construction of several light rail transit stations and a maintenance and storage facility. Subsequent to the quarter end, the company announced that it has signed multiple contracts for services for an undisclosed amount at an LNG facility in northwestern British Columbia. The contracts include a site civil works program in 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.
Both the Confederation Line extension and the recently announced LNG facility work programs contributed to an increasing amount of our awarded, or in which the company was named primary negotiation proponent that were yet to be contracted to over CAD 750 million at July 30th, 2019. At yesterday's board of directors meeting, the board declared the monthly eligible dividends of CAD 0.0325 per common share for August, September, and October of 2019. Wayne will now take us through the financial performance for the quarter and year to date compared with the prior year.
Thank you, Teri. For the three months ended June 30th, 2019, compared with three months ended June 30th, 2018. During the second quarter of 2019, the company recorded a net income of CAD 1 million on construction revenue of CAD 315.4 million, compared with a net loss of CAD 5.3 million on CAD 321.1 million of construction revenue, respectively, in 2018. Revenue growth has been impacted by higher volume of pre-construction activities on construction management projects and the LNG project was ramping up to the second quarter of 2019. 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 second quarter gross profit of CAD 14.4 million was CAD 6.1 million, or 72.6% higher than the CAD 8.4 million recorded a year ago. The increase in second quarter 2019 gross profit is primarily due to a higher margin work program as a result of the mix of revenue beginning to shift from predominantly institutional and commercial projects to more self-perform industrial projects in 2019. The company's second quarter 2019 gross profit percentage of 4.6% was 2% higher than the gross profit percentage of 2.6% recorded a year ago. In terms of active projects, the company is realizing lower margins in certain components of its institutional work program that are scheduled to achieve substantial completion in 2019. In the second quarter of 2019, the company experienced some further erosion on a PPP project and remains subject to ongoing commercial negotiations.
On a comparative basis, year-over-year, second quarter gross profit and gross profit percentage in 2018 were negatively impacted by lower volumes recognized in the company's higher margin self-perform operations in both the industrial operations in Western Canada and mining operations in Eastern Canada as a result of project delays and a labor strike at one of the company's primary mining clients. In the second quarter of 2018, the company incurred a significant amount of repair and maintenance costs on its heavy civil mining fleet to take advantage of the equipment downtime due to that labor strike. In addition, in the second quarter of 2018, one of the company's offices was experiencing difficulty in the execution of several projects, primarily due to design-related issues.
The company had recorded provisions to account for the expected increase in construction costs on these projects, which have also negatively impacted the 2019 growth profit percentage realized. The company had taken steps to mitigate further impacts on results and is actively seeking recovery. Income from equity accounted investments in the second quarter of 2019 was CAD 1 million, CAD 0.6 million higher than the CAD 0.4 million in the same period of 2018. The income in the second quarter of 2019 was primarily driven by earnings from non-PPP equity accounted entities. In the second quarter of 2019, general and administration expenses of CAD 13.2 million, or 4.2% of revenue, were CAD 2.3 million lower than the CAD 15.5 million or 4.8% of revenue in the comparable period a year ago.
During the quarter, the company had minimal 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 0.9 million lower than the amount recorded in 2018. Also in the second quarter, a foreign exchange gain was CAD 0.6 million higher, partially offsetting higher consulting fees of CAD 0.3 million compared to the prior comparable period. Finance income of CAD 0.5 million in the second quarter of 2019 was CAD 0.2 million higher than the CAD 0.3 million recorded in the same period of 2018. Finance and other costs of CAD 1.3 million were CAD 0.3 million higher than the CAD 1 million reported in the second quarter of 2018. The increase is due to higher interest costs associated with loans and borrowings, non-recourse project financing, and right of use liabilities.
In the second quarter of 2019, income tax expense was CAD 0.5 million compared to an income tax recovery of CAD 2.1 million recorded in the second quarter of 2018. Six months ended June 30, 2019, compared with the six months ended June 30, 2018. During the first half of 2019, the company recorded a net loss of CAD 5.5 million on construction revenue of CAD 577.2 million, compared with a net loss of CAD 11.8 million on CAD 614.5 million of construction revenue in 2018. Although volume declined 6.1% year-over-year, the mix of revenue has changed as the company's higher margin industrial work program has increased. The first half of 2019 results 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 half 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 half of 2019. This extended pre-construction phase, which was 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 growth profits. However, the company's industrial work programs have begun to increase year-over-year, and the more diversified mix helped reduce the net loss experienced in the first half.
The company's 2019 first half growth profit of CAD 20.8 million was CAD 5.3 million or 34.1% better than the CAD 15.5 million recorded a year ago. The increase in the amount of growth profit in the first half 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 growth profit percentage in the first half of 2019 was 3.6%, was 1.1% higher than the growth profit percentage of 2.5% recorded a year ago. In the first half of 2019, there was one PPP project that incurred additional costs due to design-related scope growth and acceleration expense to meet the scheduled substantial completion date, and as described previously, there were substantial changes to the scope of the project requested by the client that are currently under commercial negotiation.
Further impacting gross profit and gross profit percentage in 2019 was harsher than expected winter conditions experienced in Central Canada. By comparison, the first half of 2018 was impacted by a PPP project that achieved substantial completion late in the first quarter of 2018. While the company incurred additional escalation costs and financing costs from lenders, the company was more significantly impacted by the change in treatment of variable consideration. Commercial negotiations are ongoing related to this project. Also contributing to the loss in the first half of 2018 was a lower volume due to a labor strike at a client in the mining sector. At the time, the company incurred a significant amount of repair and maintenance costs on its heavy civil mining fleet to take advantage of the equipment downtime realized due to the labor strike.
In the second quarter of 2018, it became apparent one of the company's offices was experiencing difficulty in the execution of several projects, primarily due to design-related issues. The company had recorded provisions to account for the expected increase in construction costs on these projects, which also served to lower the future margins earned on these projects, some of which are ongoing in 2019. Income from equity accounted investments in the first half of 2019 was CAD 1.7 million, compared to CAD 0.7 million in the same period of 2018. The income in the first half of 2019 was primarily driven by the earnings from non-PPP equity accounted entities. In the first half of 2019, general and administration expenses of CAD 20.2 million or 4.9% of revenue were CAD 2.9 million lower than the CAD 31.1 million, or 5.1% of revenue in the comparable period a year ago.
During the first half, the company had minimal 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 2.3 million lower than the amount recorded in 2018. Also, foreign exchange gains were CAD 0.2 million higher, and consulting fees were CAD 0.3 million higher compared to the first half of 2018. Compensation expense was comparable to the amount recorded a year ago. However, in 2019, the company recorded CAD 1.9 million of severance costs in compensation expense that is partially attributable to the restructuring of an underperforming office. Finance income of CAD 1.1 million in the first half of 2019 was CAD 0.5 million higher than the CAD 0.6 million recorded in the same period of 2018 due to higher average cash balances year-over-year.
Finance and other costs of CAD 2.8 million were CAD 0.8 million higher than the CAD 2 million reported in the first half of 2018. The increase is due to a CAD 0.3 million higher loss on the mark to market of interest rate swaps, which will reverse back to income through the life of the derivative tied to project completion. In addition, interest costs increased due to higher loans and borrowings and interest rates and interest costs recognized upon adoption of IFRS 16. In the first half of 2019, income tax recovery was CAD 1.9 million compared to a recovery of CAD 4.5 million in the first half of 2018. I will now turn the call back over to Teri to comment on the outlook for the company in fiscal 2019.
Thanks, Wayne. At June 30th, 2019, the company was carrying a backlog of CAD 1.38 billion, which is 6.5% higher than that recorded at December 31st, 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 several lower-margin institutional projects that are nearing completion. The CAD 661 million of new contract awards secured to the end of June are across a broad range of markets that will help the company achieve a more diversified work program as well as a more traditional balanced risk profile. The company has greater than CAD 750 million in projects that have been awarded, of which the company was named as the primary negotiation proponent that were yet to be contracted as of the end of the second quarter of 2019.
Included in this figure are projects that subsequent to quarter end, the company had signed multiple contracts for services for an undisclosed amount at an LNG facility in Northwest British Columbia. These contracts include a site civil works program and 16 administration and service buildings. This program will consist of a combination of pre-engineered and modular buildings. The contracts will start immediately and continue into 2022. The majority of the remaining balance of awarded projects not included in backlog are in Ontario. They include the Advanced Nuclear Materials Research Centre for the Canadian Nuclear Laboratories, CNL, 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.
In addition, the company is in the pre-construction phase for over CAD 200 million in 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 short-term results due to the allocation of key resources to projects that are not yet generating gross profits. These projects are expected to contribute positively to the future earnings of the company once contracted. With respect to the PPP and design-build market, the company will continue to be selective on prospective projects matching our skill set and available resources.
The longer-term opportunity pipeline of major projects remains healthy, although the bidding activity is expected to trend lower in the second half of the year due to the procurement stages of the opportunities the company is pursuing and due to the selective nature of our approach. The near-term opportunities will primarily consist of smaller environmental projects and mid-size social infrastructure projects. As of June 30th, 2019, the company was in active pursuit of an ambulatory care project in Atlantic Canada and is shortlisted and awaiting the request for proposals on two smaller environmental projects and an administration building for the federal government. The company is also actively preparing a response to a request for qualifications on one other project. The award of any of these projects or opportunities will benefit 2020 and beyond.
In terms of active projects, the company is realizing lower margins in certain components of its institutional work program that are scheduled to achieve substantial completion in 2019. In the second quarter of 2019, the company experienced some further erosion on a PPP project that remains subject to ongoing commercial negotiations. There is risk that this project could experience additional margin erosion in the year if a series of owner-directed changes are not resolved satisfactorily, which could negatively impact overall results. The project is scheduled to achieve substantial completion this year. Despite the financial headwinds realized year-to-date, the company expects to have a work program in the second half of 2019 that is more balanced and diversified than it has been over the past several years, supporting progress towards higher levels of profitability and growth.
Management expects the work on the Cedar Valley Lodge to be at full production through the second half of 2019 and anticipates an improvement in earnings attributable to its higher-margin, self-performed industrial program through the remainder of the year, including contributions from the two recently awarded projects at LNG Canada's export terminal facility. Due to the combination of timing of bid submissions and generally the smaller scale of projects anticipated to be in active pursuit in 2019, the company expects third-party pursuit costs to remain at modest levels. Taking into consideration the company's current backlog and the pending conversions of awarded projects into contracts, the company expects to achieve a backlog near record levels in the second half of 2019. This concludes the prepared remarks section of the conference call. I will now turn the call over to the conference call operator, who will take your questions in turn.
Thank you.
Certainly, sir. 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're 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 comes from Michael Tupholme of TD Securities. Please go ahead.
Thanks. Good morning.
Good morning.
Good morning, Michael.
Teri, can you talk about how we should think about the ramp-up of work at Cedar Valley Lodge in the second half, as well as the new LNG awards that you recently announced?
LNG has got off to a very good start. We hit the ground in April, and I would say we're nearing a steady state of production. Obviously, this is a large-scale project with 4,500 units. I'm really pleased with the performance at the site. We've had good weather. We've had our partners throughout the project performing very well, and I think that performance is giving our clients confidence for more awards. We're very pleased with that. I would say as we open August, we're at a pretty steady run right now that'll take us right through the completion of the project, and we're very pleased with the progress to date.
Great. You did touch on it just briefly there, but I was going to ask about the potential for additional awards on this project. I realize you won a fair bit already relative to many others that may be seeking work on this project. Are there additional opportunities, and what would be the timing associated with those?
There remains new opportunities that are in the early planning stages. Like I said, you get access to these opportunities based on your performance, and our performance has been stellar on all fronts in safety and execution and progress to date. The team has worked incredibly hard to get us to where we are today. We're very confident that there'll be a steady pipeline of opportunities in the sector. As that sector evolves and generally in LNG, we're optimistic to see new opportunities in LNG beyond current sites that we're working on today.
Okay. Regarding the CAD 750 million of awarded but not yet contracted work that you talked about in the MD&A in the prepared remarks, can you just talk about the risk associated with the conversion of that work into a contracted format? I realize you've talked about an expectation for backlog hitting near record levels in the second half. I think that must sort of speak to your level of confidence. Is there any risk associated with any of that CAD 750 million that for one reason or another, it is either delayed or, for whatever reason, doesn't actually contract?
There's always risk that these things take a little longer. I don't feel that the majority of the CAD 750 million, I would say 75% of it is very solid even in terms of timing. The balance, the remaining maybe 25% might get extended into the first quarter. These are projects we've worked on for some time, and they're not barring some catastrophe. No one's going to hit the brakes on this stuff, in my opinion.
Just a clarification, the CAD 150 million of LNG work that is understood is in that CAD 750 million number, that has now been contracted?
We didn't disclose the dollar value of the LNG work. Yes, those two contracts that we fresh released, those have been contracted in the third quarter and in the third quarter will be part of our backlog and obviously will come out of that CAD 750 million number as we press release.
Got it. Okay. Just lastly, Teri, I realize although you're new to the role as president and CEO, you've certainly been with Bird for a little bit of time already before assuming that position. Just wondering, now that you've assumed that role, is there anything that you've sort of looked to do differently from a project oversight, execution perspective? Anything that's changed on that front, I guess, since you've assumed the role of CEO?
Well, certainly, with any change, with any leadership, leaders have different styles and have a somewhat different approach. For me, I'd say that I've been in this business over 35 years, and I've seen a lot of different things, and you build off that portfolio of experience. I'd say that I think my reputation has been a very calculated, careful approach to risk, and I'm very focused on having a very balanced portfolio and not getting ourselves over our skis in areas where sometimes can put a real strain on your company. We have a great team here at Bird.
I didn't know a lot about Bird when I first joined the company and had a couple of years to get to know the 900 employees across the organization coast to coast, and it really is an outstanding team with tremendous loyalty and history, and a 100-year-old company, obviously. Yeah, nothing but impressed. I think we are very calculated in how we're taking the business forward. We've got a very robust program of backlog. We're moving our business into new fronts and new areas of technology. We just completed our first modular build in Canada this week, or last Friday, actually, up in Iqaluit, a couple of weeks ahead of schedule. 70 modules came in with our stack initiative. We've got some really exciting things we're working on that are longer term.
Yeah, couldn't be more pleased with this opportunity and the team and we've had some challenges that we're working through. We understand how we got there, and we are very determined not to see that happen as we move forward.
Okay. Thanks very much.
The next question comes from Frederic Bastien of Raymond James. Please go ahead.
Hi. Last quarter, it was mentioned that the expectation for earnings in the range of CAD 25 million had shifted into 2020 with no mention of it this quarter. Is there any reason this guidance was removed, and is this still a feasible target for next year?
I'll maybe answer that. Coming in new as the CEO, I've worked in public companies my entire life, and I've never provided guidance. As this is my first quarter as a CEO, I've taken the position that we won't be providing guidance going forward.
Okay. Thank you.
The next question comes from Maxim Sytchev of National Bank Financial. Please go ahead.
Hi, just Adam filling in for Max this morning. With the increase in industrial backlog into the current backlog, how does that affect the working capital seasonality for the back half of this year?
Yeah, I think historically the trend would see our cash balances increase in fourth quarter. I think this year what we're going to see is more an investment in our non-cash working capital in the back half of the year as the self-perform industrial work starts to ramp up. I think that'll be a little bit different trend than we've seen in the last three or four years.
Okay. All right. That's it for me. Thanks.
There are no further questions at this time. I will now hand the call back over to Mr. McKibbon for closing remarks.
Well, thank you for participating in Bird Construction 2019 second quarter conference call. Wayne and I are available if additional information is required, so please do not hesitate to get in touch with us. Have a good day. Thank you.
Thank you.
This concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.