Q3 2017 Bird Construction Inc Earnings Call
Nov 09, 2017 AM EST
BDT.TO - Bird Construction Inc
Q3 2017 Bird Construction Inc Earnings Call
Nov 09, 2017 / 03:00PM GMT
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Corporate Participants
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* Ian Jeffrey Boyd
Bird Construction Inc. - CEO, President and Director
* Wayne R. Gingrich
Bird Construction Inc. - CFO and Assistant Secretary
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Conference Call Participants
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* Frederic Bastien
Raymond James Ltd., Research Division - SVP
* Maxim Sytchev
National Bank Financial, Inc., Research Division - MD and AEC-Sector Analyst
* Michael Tupholme
TD Securities Equity Research - Research Analyst
* Tom Boswell
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Presentation
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Operator [1]
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Welcome ladies and gentlemen, to the Bird Construction Third Quarter 2017 Financial Results Conference Call. We will begin with Mr. Ian Boyd's presentation, which will be followed by a question-and-answer session. (Operator Instructions) As a reminder, all participants are in listen-only mode and the conference is being recorded. (Operator Instructions)
Before commencing with the conference call, the company would like to remind those participating that certain statements which are made express management's expectations or estimates of future performance and thereby constitute forward-looking statements. Forward-looking statements are 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. In particular, management's formal comments and responses to any questions may include forward-looking statements. Therefore, the company cautions today's participants that such forward-looking statements 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 these forward-looking statements. Forward-looking statements are not guarantees of future performance. The company expressly disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, events or otherwise.
At this time, I would like to turn the conference over to Mr. Ian Boyd, President and CEO of Bird Construction. Please go ahead, Mr. Boyd.
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Ian Jeffrey Boyd, Bird Construction Inc. - CEO, President and Director [2]
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Thank you. Good morning, everyone. Thank you for taking the time to participate in our Third Quarter 2017 Conference Call. With me today is Wayne Gingrich, our CFO.
In the third quarter the company advanced progress in the execution of our Build Bird 5-Year Strategic Plan, which features 3 core pillars, including build the business, build the team and build the relationships, highlighted by several key milestones. The company's strategic focus as detailed in our build-the-business goals to achieve diversified and profitable growth by securing projects in markets with higher profit margins, which in 2017 and 2018 will consist of P3 and large design-build projects in the institutional sector, as well as smaller midstream capital projects in the industrial sector, where the company can self-perform a higher proportion of the scope of work.
Aligned with the build-the-business goal and the safe-production strategic initiative, the company completed an organization-wide safety culture assessment in the third quarter, which will form the basis for the development of a long-term safety strategy for the organization.
During the third quarter of 2017 the company generated a net income of CAD 5.5 million on construction revenue of CAD 385.1 million compared with net income of CAD 6 million and CAD 407.7 million of construction revenue in 2016. The year-over-year decline in the amount of third quarter net income is reflective of the lower construction revenues in the quarter.
At September 30, 2017 the company was carrying a backlog of CAD 1.35 billion, representing an increase of almost CAD 210 million from the CAD 1.14 billion carried at the end of 2016, and an increase of almost CAD 103 million from June 30, 2017.
In the quarter the company announced that it was part of the Niagara Falls Entertainment Partners consortium that had executed a contract to design, build, finance and maintain an entertainment facility for the Ontario Lottery and Gaming Corporation in the City of Niagara Falls. The company will design and build the project and has taken a minority equity interest in the concession responsible for the design, construction, financing and maintenance of the project through Bird Capital, a wholly owned subsidiary.
In September 2017, the company announced it had acquired 50% of the outstanding shares of Stack Modular Structures Limited and 50% of Stack Modular Structures Hong Kong Limited, hereinafter referred to as Stack. The purchase price and related transaction expenses were funded with existing working capital. Stack is a modular construction company with production operations in China. Stack produces steel frame modules for permanent construction. The modules are suited for the hotel, senior housing, office space and general housing sectors in the North American market. Bird and Stack have complementary knowledge, resources and expertise that positions them well to serve the permanent modular construction market in Canada and the United States.
The company has completed CAD 10.5 million of equity investments to the end of September 2017. These investments generally relate to fulfilling our obligations as an equity partner in multiple P3 projects and is an example of how our portfolio of these projects are moving through the project life cycle. Our participation as a partner in the concessions related to P3 projects supports our core construction services and serves to diversify our earnings base by earning income from the investment. It also provides the opportunity for the company to sell its equity position in the secondary market once the projects are de-risked, thereby freeing up additional capital to invest in new P3 projects in the future.
Through its equity investments in associates to the end of September 2017, the company has realized equity income of CAD 1.55 million compared with equity investment losses recognized during the same period in 2016.
At yesterday's board of directors meeting the board declared monthly eligible dividends of CAD 0.0325 per common share for November 2017, December 2017, January 2018 and February 2018.
Nine months ended September 30, 2017 compared with 9 months ended September 30, 2016. In the first 9 months of 2017 the company recorded net income of CAD 6.9 million and construction revenue of CAD 1.04 billion compared with net income of CAD 19.2 million and CAD 1.16 billion of construction revenue recorded in the same period of 2016.
In the current year, construction revenue was CAD 118.5 million, or 10.2% lower than that recorded in the comparable period a year ago. As expected, the company's industrial revenues declined relative to those recorded in 2016, primarily owing to a reduced work program resulting from the successful completion of several large-scale projects in late 2016 and the general state of the market and the low commodity price environment. The company continues to successfully execute on a significant commercial and institutional work program, including multiple P3 projects.
The company's gross profit of CAD 49.9 million in the first 9 months of 2017 was CAD 18 million, or 26.5% lower than the CAD 67.9 million recorded in the comparable period a year ago. In 2017 the gross profit percentage of 4.8% realized through the end of September compares to 5.9% recorded in the comparable period in 2016. The decrease in the amount of gross profit in the first 9 months of 2017 is reflective of the low volume of industrial project backlog carried into 2017, as several large-scale industrial projects were substantially completed in the fourth quarter of 2016. In the first 9 months of 2016 the company benefited from a higher portion of industrial work than in 2017, which was predominantly characterized by more commercial and institutional projects.
Current year results to the end of September were further negatively impacted by carrying the expense associated with key resources required for future work identified in the industrial market.
In the first 9 months of 2017 general and administrative expenses of CAD 42.6 million, or 4.1% of revenue, compares with CAD 42.9 million, or 3.7% of revenue in 2016. In the first 9 months of 2017 the company spent CAD 3.4 million in third-party pursuit costs, which is CAD 1.9 million higher than the amount recorded in the comparable period a year ago. However, this was more than offset by a reduction of employee compensation expense.
Finance income in the first 9 months of 2017 of CAD 3 million is comparable to the CAD 3.3 million recorded in the same period of 2016. Finance and other costs of CAD 0.9 million through the end of September, 2017, were CAD 1.5 million lower than the CAD 2.4 million reported in the comparable period for 2016. The decrease is primarily due to the company observing a year-over-year improvement in equity income from P3 projects where the company has an equity position in the first 9 months of 2017.
Current year income tax expense of CAD 2.6 million to the end of September was CAD 4.1 million lower than the CAD 6.7 million expense recorded for the comparable period in 2016, consistent with lower earnings in the first 9 months of 2017.
Three months ended September 30, 2017, compared with 3 months ended September 30, 2016. During the third quarter of 2017 the company generated net income of CAD 5.5. million on construction revenue of CAD 385.1 million compared with CAD 6 million and CAD 407.7 million, respectively, in the comparable quarter of 2016. The decrease in the amount of third quarter 2017 earnings is primarily due to the lower gross profit realized on lower quarterly construction revenue. Construction revenue of CAD 385.1 million was CAD 22.6 million, or 5.5%, lower than the CAD 407.7 million recorded in the third quarter of 2016. The decrease in construction revenues has been driven by a reduction in the company's industrial work program. As expected, the company's industrial revenues declined relative to those recorded in 2016, primarily due to the reduction in capital spending programs of many of our industrial clients in response to low commodity prices.
Commercial and institutional revenues grew marginally year over year.
The company's third quarter gross profit of CAD 21.6 million was CAD 1.5 million, or 6.3%, lower than the CAD 23 million recorded year ago. The decrease in the amount of third quarter 2017 gross profit is primarily due to the lower total gross profit realized on lower quarterly construction revenues.
The company's third quarter 2017 gross profit percentage of 5.6% compares to 5.6% reported a year ago, characterized by year-over-year improvement in the gross profit percentage on the commercial and institutional work program, offset by a decline in the gross profit percentage realized in the industrial work program.
In the third quarter of 2017 general and administrative expenses of CAD 15 million, or 3.9% of revenue, was comparable to the CAD 15.4 million, or 3.8% of revenue, in 2016. In the third quarter of 2017 the company spent CAD 2.4 million in third-party pursuit costs, which is CAD 1 million higher than the third quarter of 2016. This increase was more than offset with lower compensation expense year-over-year. Coupled with lower year-over-year revenue, general and administrative expenses as a percentage of revenue was comparable to 2016.
Finance income in the third quarter of 2017 of CAD 1.1 million was comparable to the CAD 1.2 million recorded in the same period of 2016. Finance and other cost were CAD 0.7 million lower than the CAD 0.7 million reported in the comparable period of 2016. The decrease was primarily due to the company observing a year-over-year improvement in equity income from P3 projects where the company has an equity position in the third quarter of 2017.
In the third quarter of 2017 income tax expense of CAD 2.1 million was comparable to 2016.
Outlook. I will now provide some brief remarks about our outlook for the fourth quarter of 2017 and for 2018.
At September 30, 2017, the company was carrying a backlog of CAD 1.35 billion, which has grown in the first 9 months of 2017. The primary driver of the increase in backlog was the award of the mental health facility and energy center at the Royal Columbian Hospital and, more recently, the Niagara Falls Entertainment Center. In addition, the company has been successful in securing smaller but strategic projects, including a bio-solids management facility in Hamilton.
The current backlog is characterized by a higher composition of commercial and institutional work compared with the last several years, a result of the success in securing a significant number of contract awards in the sector since 2015. As anticipated, the backlog attributable to the industrial work program has declined over the past several years as clients continue to limit capital spending in response to the low commodity price environment.
The company expects activity in the industrial and resource sectors to remain modest through the remainder of 2017. The improvement in commodity prices experienced later in 2016 has fluctuated through the first 9 months of the year and the environment remains challenging. Despite this fact, the company has observed an increase in bidding activity, particularly in the midstream oil and gas market in western Canada and for mining opportunities in eastern Canada.
For opportunities that are available to bid in the industrial market sector, competition is heightened, placing downward pressure on fees and the awards cycle is more drawn out as clients continue to have a measured approach to spending. The company, however, is beginning to realize success in its efforts to diversify its industrial work program, successfully securing design-build contracts for an administration building and a warehouse for a client in the nuclear industry in Ontario. In addition, the company has been awarded several mechanical-process-related contracts, including a maintenance contract for an oil sands client in northern Alberta. In eastern Canada the company has been successful in securing mining-related work with a new client, a result of focused business development efforts.
With respect to the commercial and institutional market sector, there is a healthy pipeline of opportunities anticipated in 2017 and 2018, characterized by numerous P3 projects. As of September 30, 2017, the company was actively pursuing 8 P3 projects and had submitted its proposal for 1 other project. In addition, there are 2 more P3 opportunities that the company has been short-listed on and is waiting the issuance of the request for proposals, and a third that the company has responded to the request for qualification and is waiting confirmation of the short list of proponents. These are all indications that the anticipated activity in this market sector is materializing generally as expected. In addition to the growth in volume of work expected from this activity, the company anticipates that margin opportunities in this sector will also improve.
Overall, the results in the fourth quarter of 2017 are expected to compare favorably to the unadjusted results recorded in the same period in 2016.
Looking towards 2018, the company expects to benefit from its strong position in the P3 market, while experiencing tangible progress in our diversification efforts, particularly for our industrial resource and modular service offerings. The company anticipates moderate revenue growth in 2018, coupled with third-party pursuit costs at historically high levels, a byproduct of a robust P3 market.
The company will continue to make investments in both people and technology as it executes on the Build Bird Strategic Plan, with diversification of our earnings base remaining a key area of focus. While management does not expect earnings in 2018 to outpace those achieved in 2016, the company's financial performance is anticipated to improve relative to our expectations for the current year, as the company continues along its path of rebuilding its earnings base.
With that, I'll now turn the call over to the conference call operator who will take your questions in turn.
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Questions and Answers
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Operator [1]
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(Operator Instructions) Our first question comes from Maxim Sytchev of National Bank Financial.
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Maxim Sytchev, National Bank Financial, Inc., Research Division - MD and AEC-Sector Analyst [2]
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I was wondering if you don't mind maybe talking a little bit about the nuclear client for whom you are building, I believe, a warehouse facility. You know, how meaningful it is, is there more of that type of stuff that you could do? Because as I think investors know, there's obviously Darlington, Bruce doing a bunch of refurbishment. So I'm trying to think if it actually can become a bigger business for you guys down the line.
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Ian Jeffrey Boyd, Bird Construction Inc. - CEO, President and Director [3]
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Yes, sure. In terms of the actual contracts awarded, I wouldn't call them material in nature in the sense of how we normally look at materiality. But we do look at them as being very strategic in the sense that it really involves what I would call our industrial expertise, working on a power site. So from that standpoint it will get us a foothold for future work opportunities. And interesting to keep in mind, I mean, really going back to what we are really good at, it's just geographically kind of been an expanse of what we were doing previously. So these are industrial, what I would call industrial buildings, so design-build, which we prefer buildings that we're really experienced on, and really in the development of a new client with a future work program, that's exciting. So I think from that standpoint it really helps us and goes to what we're trying to do with our diversification effort is one of those elements is expanding our current service offering, but just expand it to different clients and geographic regions. And that's where we're excited about that particular opportunity and what it may lead to as we move forward.
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Maxim Sytchev, National Bank Financial, Inc., Research Division - MD and AEC-Sector Analyst [4]
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Yes, absolutely. And then, in terms of mining, talking about diversifying your iron ore presence, what are you bidding on right now? And should we expect any material additions over the next kind of 3 to 6 months, because obviously the commodity environment has gotten better?
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Ian Jeffrey Boyd, Bird Construction Inc. - CEO, President and Director [5]
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Yes. I would say that mostly what we're seeing is steel core clients. They are busier. When we say we see an increase of bidding activity, some of that is with our iron ore clients, our current clients. And in fact the new client that we've developed is within the iron ore sector as well. So from that standpoint it is still sort of Labrador Trough region. Where we are seeing more opportunities, the more geographic expanse, is more into the Quebec and northern Canada areas. And we're seeing gold to be pretty active and we're seeing lithium still, some activity associated with that. So there's where most of our opportunities -- and we continue to have a pretty, I would call, a very dedicated and focused business development effort to position ourselves to be able to take advantage of when those new tenders are coming out. I can't speak to the size of the opportunities, because I still believe right now there's not a significant number of, I'll call them, multiyear contracts that are necessarily being tendered at this point in time. It tends to be more of what's happening in the next 12 months type of tendering that's still happening, although there may be the odd tender that we're going to see coming up here that could be multiyear. But still most of it is, I would say generally speaking, is within that 12-month timeframe, which just goes to show you, as much as there's improvement there is a commitment to spend on the capital side of things, but I also think that it's still relatively measured.
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Maxim Sytchev, National Bank Financial, Inc., Research Division - MD and AEC-Sector Analyst [6]
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Right. And so just to clarify, is it on mine support or site construction that we should expect the additions?
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Ian Jeffrey Boyd, Bird Construction Inc. - CEO, President and Director [7]
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I would say mine support.
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Maxim Sytchev, National Bank Financial, Inc., Research Division - MD and AEC-Sector Analyst [8]
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Mine support.
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Ian Jeffrey Boyd, Bird Construction Inc. - CEO, President and Director [9]
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Mining support work, so where we would involve pretty much our heavy equipment fleet. That's where we're seeing the opportunities more so. There are some opportunities in terms of, I'll call it, infrastructure otherwise within the mining sites. And we've worked on some of those mines here even in the last year, and we see opportunities. And that's where some of our, I would say, synergies between our industrial west operations and our Bird Heavy Civil operations. That's where some opportunities present themselves to be able to work together a little bit more closely. But the majority of work that we're seeing right now is associated with our heavy equipment, so it's what I would call mining support. And you can see just in terms of what we've done in sort of the more recent history in the quarter, we're confident enough in what we're seeing in the marketplace that we've invested in some equipment to be to address what we see as increased activity.
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Maxim Sytchev, National Bank Financial, Inc., Research Division - MD and AEC-Sector Analyst [10]
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And do you have enough equipment to be able to service all these opportunities?
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Ian Jeffrey Boyd, Bird Construction Inc. - CEO, President and Director [11]
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Yes. I would say right now I would say we do. But, again, we're looking at the opportunities and where we see the opportunities to be able to address any opportunity that may require more of a fleet. Then we'll address it. But right now I would say our fleet is pretty well sized for what we see as the opportunity.
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Maxim Sytchev, National Bank Financial, Inc., Research Division - MD and AEC-Sector Analyst [12]
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Okay, that's helpful. And last question. One of your bigger competitors right now is potentially becoming a part of a Chinese entity. Do you envision any changes or trouble in the competitive environment because of this?
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Ian Jeffrey Boyd, Bird Construction Inc. - CEO, President and Director [13]
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No. I mean, certainly I've thought about that and we have discussed it. It's hard to predict right now. I think you want to look at maybe what they've done with John Holland in terms of Australia, with that particular acquisition. Certainly I know they've grown. And we're trying to just sort of get a sense of how that growth has taken place and what kind of market sectors have they gone into, different market sectors. The reality is is that with that particular competitor we don't necessarily compete head to head on a regular basis. Certainly in the transportation side of things where we get more involved, I would call, what is more their core work, then we see each others as competitors. But from the standpoint of what our core business is, right now I would say not necessarily. I don't see big impacts. But, again, we're still trying to sort of analyze what that looks like. But certainly I would say, categorically, from a Canadian construction participant, it's a risk for everybody, I think, in the industry.
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Maxim Sytchev, National Bank Financial, Inc., Research Division - MD and AEC-Sector Analyst [14]
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Right. Don't disagree there.
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Operator [15]
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Our next question comes from Michael Tupholme, TD Securities.
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Michael Tupholme, TD Securities Equity Research - Research Analyst [16]
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Ian, can you just -- on the awards prospects pipeline still sounds very robust. Just wondering if you can talk a little bit about the timing and what we should expect. I guess specifically, is there anything that could come through in terms of awards prior to year-end out of the list of projects, or the 3Ps in particular that you talked about being in pursuit of? And then secondly, as we look to next year, how does the timing look, I guess, particularly in the early part of the year?
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Ian Jeffrey Boyd, Bird Construction Inc. - CEO, President and Director [17]
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Yes. I would say that right now the one project that we did I think within the third quarter had submitted, was the RER, so Regional Express Rail Stouffville Corridor project. We haven't had any results on that. I expect that that would be known shortly. With respect to sort of subsequent to quarter-end, we also submitted on the Kipling bus terminal. Again, no results but I expect before the year-end that you would understand who is the preferred proponent on that. Corner Brook long-term care facility is one that we submitted post quarter-end, and that was a relatively quick, I'll call it, evaluation. It was a very quick tender period, quite frankly, and a smaller opportunity. In that case we just got notification late last week that we were not the preferred proponent on that. So that's one we know about right now of the 3 that were submitted. And then just as recently as last week we submitted on CRD biosolids in Victoria. And certainly -- I'm not sure of the timeline there, but I expect that that may be early in the new year before you hear anything formally in terms of preferred proponent. The other opportunities that are more immediate I would say are Abbotsford courthouse and OPP Phase 2, but both are submitted in early Q1, or at least they are scheduled right now, early Q1 of 2018. I expect to hear -- it usually takes a couple months before you hear on these things, so by submission date. And then ultimately as it relates to actually closing on one of those, it would end up being somewhere in that May timeframe I would think, if you're successful in either one of those. So that's kind of the timing that's happening more immediately on the P3 projects.
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Michael Tupholme, TD Securities Equity Research - Research Analyst [18]
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Okay, no, that's helpful. Just as far as RER and Kipling bus terminal, can you talk at all about how sizeable those opportunities are? I realize you may not be able to give specific dollars, but just sort of any way you can attempt to sort of quantify those for us?
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Ian Jeffrey Boyd, Bird Construction Inc. - CEO, President and Director [19]
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Yes. I would say that the -- and both of those are being done in joint venture with Kiewit, so it wouldn't be all our volume if you were able to secure those projects, but somewhere in that CAD 100 million to CAD 250 million range for each of those projects. So that's kind of the range of volume or revenue you would secure if you were able to get that award.
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Michael Tupholme, TD Securities Equity Research - Research Analyst [20]
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Right. And that would be your share or that's the entire --
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Ian Jeffrey Boyd, Bird Construction Inc. - CEO, President and Director [21]
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No. No, that's the entire amount.\
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Michael Tupholme, TD Securities Equity Research - Research Analyst [22]
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Okay, that's helpful. Just as far as pursuit costs, I think you said you were $3.4 million year-to-date. What should we be expecting in the fourth quarter? And then how do you think pursuit costs look in 2018 for full year?
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Ian Jeffrey Boyd, Bird Construction Inc. - CEO, President and Director [23]
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Yes, I think that in the fourth quarter we're going to expect that we spend $3.4 million is correct in terms of the number year-to-date, which is more than what we spent last year. I would say that you're probably, just given the level of activity right now, I suspect you're going to be perhaps in the range of another $2 million to year-end. And then I think that you're going to end up being what we said was historically higher P3 costs even into 2018 just by the way that the timing is shaping up. I think that's what happened even in the current year is some of these projects, particularly the early transportation, like, the RER Stouffville Corridor project was originally scheduled to close in Q1, late Q1. Obviously didn't close until really Q3. And then Kipling was in a similar timeline a little later and it didn't close until post-Q3. So some of those have shifted, which has shifted that third-party pursuit cost to later in the year. And some of that is just generally happening, I think, in the P3 project pipeline that it's just shifted a little bit. So 2018 I expect is going to be pretty robust in terms of the activity and the expense, just by the way the timing has shaped out through the course of this year and what is actually happening in through 2018. As you can see, with 8 currently under pursuit, with 2 more that we're just waiting for the RFPs on, like, those ones that obviously will kick into gear, those 2 others will kick into gear here in the latter part of 2017 and will be in full pursuit mode in the first half of 2018. So you start talking that level of activity, we've got a lot of pursuits on right now that will add up to higher third-party pursuit costs in the next sort of 6 to 8 months for sure.
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Michael Tupholme, TD Securities Equity Research - Research Analyst [24]
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So if you're sort of CAD 5 million, close to CAD 5.5 million in 2017, I understand you're north of that next year, but, like, maybe a couple million dollars more. Or is it even more material than that?
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Ian Jeffrey Boyd, Bird Construction Inc. - CEO, President and Director [25]
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No, I think it's somewhere in that range, CAD 1 million to CAD 2 million. Sometimes it's a little hard to predict how these all shake out in terms of what the actual expense is. But I would say that that's -- CAD 1 million to CAD 2 million in addition to what we expected to spend in 2017.
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Michael Tupholme, TD Securities Equity Research - Research Analyst [26]
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Okay, thanks. Just on the subject of your diversification efforts, any update on what you are doing, or looking to possibly do with respect to expanding your presence in the transportation sector?
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Ian Jeffrey Boyd, Bird Construction Inc. - CEO, President and Director [27]
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Yes, I mean, right now our strategy has been to be able to partner with key firms that are more entrenched in the horizontal side of things and where we can leverage our P3 expertise as well as our vertical construction expertise. And so that's been the strategy so far. It doesn't mean that we'll stay necessarily within that strategy and strategic modeling. We may end up looking to do more self-perform operations, which means enter a little bit into that horizontal space. But it would be pretty selective. We'd have to do that through M&A as well, in my view.
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Michael Tupholme, TD Securities Equity Research - Research Analyst [28]
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Okay, that's all great. And then just lastly, you talked a bit about industrial and resources. A lot of it sounds like it's more mining-related. But any update on what you are seeing in the oil and gas arena?
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Ian Jeffrey Boyd, Bird Construction Inc. - CEO, President and Director [29]
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Yes. Oil and gas I think -- here's how I would characterize it. I think that with the last several years, say, 3 years in which our owners have really tried to control costs, I think they've gotten to a point where they've controlled costs. I think they have more stability in the energy prices right now. So oil prices stayed relatively stable through the course of 2017. So when you look at that, I think what they have is now a structure in which they have a little bit more stability and expectation on the price on the revenue side of things. I think they've controlled their costs. So I think they're more -- while the spend is, I would say, better than it has been in the last several years, what we're anticipating, and that's evidenced in the more bidding activity, you're not seeing any significant projects. So it's definitely in that sustaining capital and maintenance side of things, where they're still trying to drive efficiencies in their plants and getting their costs per barrel down. But we are seeing more commitment to actually spending the capital expenditures that they plan on. So there's more certainty, I would say, in the overall spend. And that's what we're getting. But projects certainly and the opportunities certainly are much smaller and shorter in duration in terms of what is available in the marketplace. There is a good level of activity and for us that diversification side of things where we want to self-perform more of those opportunities ourselves with our civil and our concrete operations, add to that our mechanical process, add the fabrication modular-size facility outside Edmonton. So those are where the opportunities where we can drive more margin out of -- despite the fact they're smaller projects and shorter in duration, we can drive more margin out of them. So that's a strategy right now. But it is, I would say, just a little bit more confidence in the marketplace that they're going to have capital dollars to spend. And they are spending them.
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Operator [30]
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Our next question comes from Frederic Bastien of Raymond James. (Operator Instructions)
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Frederic Bastien, Raymond James Ltd., Research Division - SVP [31]
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I was wondering if you could provide a bit more detail on Stack, first, how this opportunity came about, how you're planning to package the product into your service offering. And lastly, how big of a business opportunity could that become for Bird?
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Ian Jeffrey Boyd, Bird Construction Inc. - CEO, President and Director [32]
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Yes, originally how did it come about, it was through as, I'll call it, most things perhaps in Canada, maybe elsewhere, we were looking at different opportunities, became aware through just personal relationships of an individual that was working with Stack and working to develop opportunities within the Canadian marketplace. And so we had a personal relationship, somebody within our organization that knew somebody within their organization. Started to get a little bit more in contact and look at opportunities where we could jointly work together. So ultimately that's how it started. And we had done some research on the modularized, I'll call it, for more commercial applications in permanent modular construction. In the last 2 years we'd actually sent over, I'll call it, a delegation of our group that went over to Europe to try to investigate a little bit further in terms of the opportunity that may be there in permanent modular construction. And so had been sort of in the mindset of trying to add this as another service offering for us. And so as we got to know Stack a little bit more, we developed sort of an interest in being able to work more closely together and then ultimately being able to help develop that product even further. And to do that, in our minds, you needed to own at least 50% of that to help drive that sort of the continual improvement process, which essentially this is. This is a manufacturing kind of process. So from our standpoint that was how it all started. How does it work in with our current program? Right now I think it is definitely a product that we feel as though is going to be more and more attractive to certain owners, given circumstances. And whether that's a highly urbanized area in which it's more difficult to actually do the construction and therefore bringing in a permanent modular solution would actually work if it's remote -- those sorts of things. But it's not for every project that we're going to have for every client. But we certainly see it as being very, very attractive for the hotel industry, for the long-term care facilities, and really for -- and we don't do a lot of this -- for kind of that residential side of things. And that's where we're seeing most of our opportunities as we look to develop the client base in the permanent modular side of things. Then in terms of the opportunity, how big could it be? It's hard to put numbers on it. You never want to put numbers on it, but as -- we see it, obviously, as a growth opportunity for us. And I think it's a growth opportunity to be able to develop clients that we aren't necessarily working for on a regular basis today. So just to give you an example, like, the ideal client for is a hotel client that's committed and wants to do and pursue permanent modular construction. And they have a build of 5 or 6 of these hotels that they want to do. And they want to do a certain number of those in Canada and want to do a certain number in the U.S. And guess what? They want a partnership relationship. And that's the kind of, I'll call it, the ideal kind of client that we would foresee for the Bird and Stack team to go after.
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Frederic Bastien, Raymond James Ltd., Research Division - SVP [33]
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Great, that's super useful. Just going to try to press you on Q4. You did suggest that your results would compare favorably to the unadjusted results posted a year ago. How do you reckon they will fare against the adjusted results posted a year ago?
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Ian Jeffrey Boyd, Bird Construction Inc. - CEO, President and Director [34]
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And there's probably not a significant amount of difference in those 2 numbers. Wayne's -- what was the difference between the unadjusted and adjusted?
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Wayne R. Gingrich, Bird Construction Inc. - CFO and Assistant Secretary [35]
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I think we were $8.5 million adjusted last year, versus $5.8 million including the impairment, which I think the impact was $2.7 million on the net income basis.
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Ian Jeffrey Boyd, Bird Construction Inc. - CEO, President and Director [36]
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Right. So from my standpoint, I think it all depends on how things shake out at the end of the year. I don't think it's a bridge too far, I would call it, in that category. But as with anything, it's how do things shake out. And there's certain things that need to happen favorably in order for that to happen. But I wouldn't say unattainable, is how I'd put it. But certainly our guidance would suggest [that] more of our expectation is the unadjusted.
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Frederic Bastien, Raymond James Ltd., Research Division - SVP [37]
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Okay. So more like within that range.
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Ian Jeffrey Boyd, Bird Construction Inc. - CEO, President and Director [38]
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Yes.
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Frederic Bastien, Raymond James Ltd., Research Division - SVP [39]
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Okay.
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Operator [40]
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The next question comes from Tom Boswell of Boswell Capital Management.
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Tom Boswell, [41]
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So it's clear you're in the midst of some big projects and that's really good to hear. But I'd just like to touch on something that I asked you about 3 months ago. And that has to do with the earnings of the company going well through this year and how they are affected by deferred tax assets that you have on the books. So I think this question is more for Wayne, perhaps, than Ian. But if I could just walk you through what I see for the last -- starting, well, from the beginning of 2017. This deferred tax asset was CAD 6.7 million and by the March it was up to CAD 9.8 million. By the end of June it was CAD 11.6 million and by the end of September it was CAD 13.2 million. And each quarter this past -- it appears from Note 12 in every quarterly report that a certain amount of the deferred tax asset was used up. So my question is just -- are you utilizing these deferred tax assets as effectively as possible? Or are you reserving some part of them for other purposes down the road? And if you are reserving them for some other reasons, how would that affect -- how would that have affected your earnings, particularly the most recent ones?
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Wayne R. Gingrich, Bird Construction Inc. - CFO and Assistant Secretary [42]
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Well, I would say we are using them as they're available to us. We're not holding anything in reserve for that. We would certainly leverage any opportunity we have on the tax side when we can.
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Tom Boswell, [43]
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Okay. So just to be clear, there's no effort whatsoever to sort of set aside any part of these deferred tax assets quarter by quarter. Is that right?
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Wayne R. Gingrich, Bird Construction Inc. - CFO and Assistant Secretary [44]
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Yes. We don't set aside assets on a quarter-to-quarter basis. No.
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Tom Boswell, [45]
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So -- okay. And second question has to do with -- as a follow-up to the one asked by the fellow from National Bank. He mentioned I think, if I'm not mistaken, there was a comment activity on the East Coast was getting better and that was probably good news for O'Connell. That was the area where there'd been a write-down of some amount I think in 2015. And now it sounds like things are beginning to percolate a little bit better than they have been. So does that affect the write-down that was taken at all?
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Ian Jeffrey Boyd, Bird Construction Inc. - CEO, President and Director [46]
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No. I wouldn't say -- and, Wayne, you can jump in here. I would say that you're doing -- the write-down or the goodwill impairment and intangible asset impairment charge that we took, we do an analysis on an annualized basis on any of the goodwill and intangible assets we have on our balance sheet. So ultimately that annual test is a forward-looking test. And so we would do that forward-looking test, that test, and ultimately would be audited and all those good things that happen at the year-end. And at that point in time we just saw the environments for the foreseeable future being such that you could -- there was an impairment on the overall, I guess, future earning power of that business unit, is essentially what it comes down to. And so while things improving are obviously good, I don't know that you're ever in a circumstance -- number one, I don't think they're in -- while improving is obviously a good measure, I don't know that they're at a point where they would be -- you'd do a reassessment and then analyze that and say, "Oh, okay, then we can add the goodwill back on in terms of --" It is what it is at this point. It's done and doesn't come back on the balance sheet. And I don't even know -- when you did that analysis right now, just because it's a very measured -- while there's more activity, it's a very measured amount of activity. It's not suddenly exploded anywhere in the industrial market, whether that's our mining opportunities or energy opportunities or otherwise. Ultimately what it is is a very measured improvement to where it was. And that's kind of our commentary. And even doing that, if you even looked at, I would say, philosophically and said, "Could you add back in the good will," I think when you do that test again you're still going to come up with the same conclusion, that it's the asset from a future earnings perspective is still not going to support the goodwill intangible assets that we had on our balance sheet at that time, nor would you write them off that this time.
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Wayne R. Gingrich, Bird Construction Inc. - CFO and Assistant Secretary [47]
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Yes, I would just add that when you do an impairment analysis you run multiple scenarios. And I would say the improvement that we're seeing in the market is consistent with many of the scenarios that we have run, but still led to the answer that the goodwill was impaired. So I don't see anything occurring now in the market that's different than what we'd assumed when we wrote that down in Q3 2015.
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Ian Jeffrey Boyd, Bird Construction Inc. - CEO, President and Director [48]
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Right.
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Tom Boswell, [49]
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Sure. I understand. But let's just be hypothetical about it and positive for a moment. I mean, supposing, just supposing there was another [Voisey's Bay] or something and there's this massive nickel deposit or whatever. And you guys are well known to the companies that are maybe going to be able to capitalize on that. And that could really do great things for your business. Surely you would not say that, "A couple years ago goodwill was written down and -- but now that things are terrific, we're still going to just ignore that." Is that correct?
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Ian Jeffrey Boyd, Bird Construction Inc. - CEO, President and Director [50]
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(inaudible)
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Tom Boswell, [51]
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I mean, if things suddenly become excellent, would that not be a reason to reconsider the write-down?
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Ian Jeffrey Boyd, Bird Construction Inc. - CEO, President and Director [52]
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I guess if you're looking at that scenario, it never -- I guess once you write down the asset, a goodwill intangible asset, I don't know that you ever write them up, is philosophically how I'd look at it. But I guess you take the benefit -- I mean, obviously if that scenario happens what you're going to do is you're going to have better earnings and you're going to have better earnings that are going to lead to presumably higher equity in the business. Right? And so you're going to build up your equity from that standpoint as opposed to from a standpoint of writing up a noncash sort of goodwill and intangible asset up on the books. That's the way I would look at it.
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Wayne R. Gingrich, Bird Construction Inc. - CFO and Assistant Secretary [53]
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I mean, generally speaking, IAS 36 would prohibit the reversal of taking losses on impairment for goodwill. So even if market conditions improved because something occurred that we didn't factor in, that had a high probability during our scenario testing, we wouldn't be able to reverse I think the decision on the goodwill anyway.
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Ian Jeffrey Boyd, Bird Construction Inc. - CEO, President and Director [54]
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From an accounting standpoint.
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Wayne R. Gingrich, Bird Construction Inc. - CFO and Assistant Secretary [55]
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Yes. It's a noncash loss that we took at the time. I'm not even sure, even if you could I'm not even sure there'd be a big benefit to doing it, but.
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Tom Boswell, [56]
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So -- I'll just get back in the queue.
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Operator [57]
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There are no more questions at this time. I will now hand the call back over to Mr. Boyd for any closing remarks.
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Ian Jeffrey Boyd, Bird Construction Inc. - CEO, President and Director [58]
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Thank you. So thanks again to everyone for your participation in the Bird Construction 2017 Third Quarter Conference Call. I hope we've been able to provide you with some further clarity to our results and our expectations for the balance of the year and for 2018, allowing you to evaluate your interest in Bird. As always, we are available if additional information is required, so please do not hesitate to get in touch with us at our office. Thank you, and I hope everybody has a good day.
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Operator [59]
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This concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.
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