HC2 Holdings' (HCHC) CEO Phil Falcone on Q2 2016 Results - Earnings Call Transcript

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HC2 Holdings, Inc. (NYSEMKT:HCHC)

Q2 2016 Earnings Conference Call

August 9, 2016 05:30 pm ET


Andrew Backman - Managing Director, Investor Relations and Public Relations

Phil Falcone - Chairman, President and Chief Executive Officer

Mike Sena - Chief Financial Officer

Keith Hladek - Chief Operating Officer


Sarkis Sherbetchyan - B. Riley and Company

Kurt Hoffman - Imperial Capital


Good afternoon and welcome to the HC2 Holdings Second Quarter 2016 Earnings Call. All participants will be in listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note this call is being recorded.

I would now like to turn the conference over to Mr. Andrew Backman, HC2's Managing Director of Investor Relations and Public Relations. Please go ahead.

Andrew Backman

Great, thank you, Valeria and good afternoon, everyone. And thanks for joining us this afternoon to review HC2's second quarter 2016 earnings. With me today are Philip Falcone, Chairman, President and CEO of HC2; Mike Sena, our Chief Financial Officer, Keith Hladek, our Chief Operating Officer. This afternoon's call is being webcast on our website at hc2.com in the Investor Relations section. We also invite you to follow along our webcast presentation, which can be accessed on the HC2 website again in the Investor Relations section. A replay of this call will be available, approximately an hour to two hours after the call. The dial-in for the replay is 1855-859-2056 with a confirmation code of 49610865.

Before I turn the call over to Phil, I would like to remind everyone that certain statements and assumptions in this earnings call, which are not historical facts, will be forward-looking and are being made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to certain assumptions and risk factors that could cause HC2's actual results to differ materially from these forward-looking statements. The risk factors that could cause these differences are more fully detailed in our filings with the SEC. In addition the forward-looking statements included in this conference call are only made as of the date of this call and as stated in our SEC reports.

HC2 disclaims any intent or obligation to update or revise these forward-looking statements except as expressly required by law. During the call, management will provide certain information that will constitute non-GAAP financial measures under the SEC rules such as pro forma net revenue, adjusted EBITDA and adjusted operating income or AOI. Certain information required to be disclosed about these non-GAAP measures, including reconciliations with the most comparable GAAP measures, is available in the most recent earnings press release, which is available on our website. And finally as a reminder, this call cannot be taped or otherwise duplicated without the Company's prior consent.

Now, I would like to turn the call over HC2's Chairman, CEO and President, Philip Falcone. Phil?

Phil Falcone

Thank you, Andy, and good afternoon to everyone and thank you for joining us on the call today. On the agenda today, I will start with a brief recap of the results for the quarter, provide a few operational highlights from our primary operating subs and then can finish up with a Q&A.

So looking at Slide 4, which you'll see the heading second quarter highlights and recent developments. Overall, we executed extremely well during the second quarter is evidenced by the strength and stability of our core operating subs, driving sequential growth. During the quarter we saw very solid performance in our manufacturing segment which is Schuff due largely to margin expansion and strength in the Midwest and Southeast regions. Stable maintenance results in marine services along with strong performance from our JV's, the HMN and SBSS and continued growth and scale in customer relationships in the telecommunication segment and continued expansion of compressed nat gas fueling stations in the American Natural Gas segment.

The adjusted EBITDA from our core operating subs, which includes manufacturing marine, utilities and telecom totaled $27.1 million in the second quarter versus $12.7 million in the first quarter. Consolidated cash, cash equivalents and investments were $1.6 billion at the end of the second quarter, which of course includes our insurance segment. Corporate cash was essentially unchanged from a prior quarter at $40.3 million as of June 30, 2006 and one other line item that I wanted to highlight is the consolidated cash net of insurance which is $134.5 million, so that's essentially the corporate cash at the holding company, the cash up to Schuff, Global Marine, etc.

I want to turn to Slide 5 which will give you the segment overview as many of you have seen or will continue to see to give you a glimpse of how we look at the business and how we look at the operating entity. These are the reportable segments as you can see the core operating subs again are Schuff, Global Marine, American Natural Gas, PTGi and of course, we have the financial services sub the insurance company. And then we have early stage another holdings including the Pansend investments and NerVve and DMR Racing or DMR, the racing entity where we have a north of 50% ownership in that company. The NerVve and DMR investments are relatively small, while we do have a pretty optimistic numbers for those two different subs. They're clearly not part of the core operating subsidiaries and how we are looking at our day-to-day business and where we see the most growth.

Now turning to Slide 6 which is the detailed synopsis of the adjusted EBITDA for core operating subs. As I mentioned the core operating subsidiary EBITDA was $27.1 million for the second quarter versus $12.7 million in the first quarter. As you'll see every one of our core operating businesses were up versus the first quarter 2016 and with our Life Sciences platform a non-operating corporate essentially unchanged to slightly better quarter-over-quarter.

Adjusted EBITDA at Schuff was up $1.7 million from the first quarter. Global Marine was up $11.3 million. American Natural Gas was up slightly and PTGi was up $1.2 million for the quarter. Again very solid performance by each of the core operating subs. One thing I do want to point out and which is a point that we continue to focus on as we manage our day-to-day business was the non-operating corporate expenses and this is an area, where when we think about managing the business, it's managing growth and being prudent with our cost at the same time with managing a growing business, I think that's something that you have taken into consideration when looking at that number.

I mentioned in the past that, we would look to cut that number down to a $16 million, $17 million run rate. When I think about our business and when I think about the growth aspect to it, I think it's more important and very important for everybody to focus on the fact that, we are a growing business that we are really managing very lean at the holding company and we do have some ancillary expenses in there, that we fully expect to come down overtime. But keep in mind as we grow the business in especially the salary and benefits line, is very tough to cut when you're in a growing environment, we see a lot of positive things happening here and we've been beefing up various departments and especially in the finance area. We've beefed up that area and feel like that's a necessary expense for us to incur, but I think overall we've been managing our cost extremely well, we will continue to be very prudent with that line item and make sure that we continue crossing T's and dotting the I's there, but I think overall we've done an excellent job of managing the cash and managing that line item.

Well our objective is to kind of keep it as low as possible there are certain expenses in there that we will have to incur as we grow business, but for the most part we feel pretty good about where we are there. Clearly our deal costs have come down for the quarter and if you think about our total SG&A for the quarter was about $7.6 million and you're not seeing that on the screen. The $7.6 million versus total of $10.3 million for the first quarter of 2016, so you can see that as I mentioned in the past the deal expense aspect did result in a double-digit expense number, but now it's down pretty nicely coming in around $7.6 million number for total SG&A for the quarter.

Turning to Slide 7 and focusing for starters on Schuff. Schuff experienced still another very strong quarter with second quarter adjusted EBITDA coming in at $13.2 million versus $11.5 million in the previous quarter. Gross profit margins were again very strong in this quarter. Schuff continues its strategy to focus on complex and sophisticated projects that makes them very unique in the industry and looking at some of the projects that we've built and that they've been focused on over the past number of years I think, we are really second to none in that business and we are very, very happy with what Rustin Roach and the team have done there.

Backlog at the end of the second quarter was approximately $344 million and this number is versus the $415 million for the first quarter, but I think what's really important to think about as we look at the Schuff business, is you have to take into consideration the contracts that are awarded but not yet signed and that includes projects, awards in the Pacific region including a very large tech company in North California as well as large project in the Midwest to cite a few. The backlog would be up over $522 million versus that same apples-to-apples comparison in the first quarter of $480 million, so that number continues to move in the right direction where we continue to believe and as we talked to a number of you, have mentioned - the environment in that area and which is very specific to the core strength of Schuff continues to do very well and we continue to believe that number will continue to be very strong.

We continue to see a number of large opportunities in that sector, totaling over $400 million and new projects to be awarded over the next three to four months, which are not in our backlog. These projects include various new sporting arenas or stadiums as well as new healthcare facilities in commercial office building. So the next number of month could continue to be very strong for Schuff. We like what we see there, we think that we should clearly build on this existing backlog that we've already been awarded. There continue to be numerous opportunities out there.

Looking ahead Schuff will continue to increase and diversify its structural steel fabrication and erection sales pipeline and we're also exploring opportunities to expand the overall product offering which may include offering higher margin services inclusive of planning design build, building integration management, services in detailing as well as other diverse value added services.

We continue to scour the landscape to look for opportunities across the board. We do believe that we have our sights set on businesses that we think will be very value added to our existing product line and we're not looking at biting off more than we can chew there, we're really we and team down at Schuff are being very methodical in terms of thinking about how to build this business.

We believe, we could be a $1 billion revenue company over the next three to five years and that's how we're thinking about it and we a plan mapped out as to how we're going to get there, that we believe will continue to diversify that top line and branch out into value added service type businesses that we think can be complementary across the board, but that's how we're thinking about it. This is a very core part of our overall business. Our objective is to get to the $1 billion mark in the next three to five years and we believe we can do that and we do have the right team in place to get there with Rustin and the team that he has built in Phoenix.

I'm turning to Slide 8, the Marine Services business Global Marine. Global Marine's adjusted EBITDA came in at nearly $12 million for the second quarter that's significantly higher than the previous quarter. Keep in mind, that we had the $5 million adjustment in the first quarter, but even taking that into consideration that one-time event their [ph] company did have a very solid quarter, which was really nice to see and as we talked to people, as we have explained on our calls. There is some lumpiness in this business but for the most part we are very happy with how the team is doing and the new prospects there.

This quarter's results benefited from a full quarter contribution from our Seawind acquisition, where we are starting to see significant traction, at Seawind in both O&M and construction opportunities as the European market continues to target significant investments in renewable energy. We've been a believer and a big believer in what's happening in that marketplace and wanted to capitalize on that and feel like with the Seawind acquisition we were able to do that pretty effectively and we're expecting some big things from Seawind.

The JV's continue to be shining stars under the Global Marine umbrella. These JV's are with Huawei Marine and SBSS China Telecom. These entities were up significantly for the first quarter and continue to see growth in the overall market share through these JV's. Again as I've explained in the past calls that the JV's and especially the HMN JV is really something we're very, very excited about. This is 49% owned JV with Huawei Technologies, you kind of know what kind of power that they have around the globe and we're very pleased with what we're seeing there on the top line and on the profitability side of that JV.

Maintenance performance again was again very strong in the second quarter with telecom maintenance revenues coming in at nearly $30 million up 35% year-over-year and nearly 20% sequentially. Installation revenues in the second quarter were exclusively telecom and while lumpy in nature, we continue to believe long-term prospects in the telecom installation market especially a significant worldwide broadband growth is expected to grow between 40% to 50% per year from emerging markets data [indiscernible] applications, smartphone usage etc.

And in addition system wide redundancy demand for lower latency in [indiscernible] transmission as well as new entrants in the market as a result of deregulation. Wanting to own and control their own fiber optic cables as well as just a general upgrades of obsolete cables will continue to drive long-term demand.

As most of you are well aware that oil and gas market has been pretty rough in and around the installation area. Fortunately we have not had a lot of and did not have a lot of exposure there, so we were very pleased with the performance, the overall performance we didn't have the oil and gas segment as a big part of our budget, it hasn't been a big part of the company in the past. That being said, it's taken I think the industry in general has pushed some capacity into some of the telecom's market place in the vessel area as well as in the offshore power market space and it's effected a capacity a little bit which unfortunately has affected Global Marine, but I have to say that despite what you hear in the shipping market and in that area in general, this company has done exceedingly well. They continue to hold their own and I think it's part and parcel to their longstanding reputation and strong management and ability to execute which is clearly a very critical part and when you're installing and maintaining communication cable.

So I think the team and strength of the team is really a very important part of this business because it is not a commodity business and I think our results and we've seen despite the shipping business in general globally being under a little bit of pressure we continue to perform I think quite well.

And one of the things that I want to highlight that I think is really important and when you think about Global Marine and what's happened and what the team has done, they've done a great job significantly reducing debt and pension obligations by over $50 million since September, 2014 and we haven't really talked about that in the past, but when we bought the company the total debt and pension on day one of the acquisition back in September, 2014 was approximately $125 million to $130 million plus or minus, that number is down to $80 million.

So despite certain pressure in the vessel market, I think the performance really speaks for itself and I think this net debt reduction of $50 million in debt and pension speaks significantly to strength of Global Marine and the abilities to really generate cash and generate cash in the type of marketplace that we've been experiencing. So if anything, we've really taken the opportunity and we'll continue to take the opportunity to upgrade the capacity to improve the capacity, to increase the capacity and I think with overall vessel pricing coming down. I think we're looking at it as more of a positive for us, than a negative and it's clearly an opportunity for us in a way to increase our capacity, but I think I wanted to just highlight that $50 million reduction in debt and pension, since the acquisition date in September, 2014.

One of the questions that we've continually been asked has been the potential impact of the recent BREXIT decision. And based on a review of the business, we do not see any long-term risk primarily due to the currency denominations of the contracts, which are essentially all in US Dollars as well as the diversification of the businesses and I think that's again a key part where, we have a very diversified client base, we have the JVs, we have a different product offering which contributes to the overall strength of Global Marine as a core competitor in the overall marketplace.

I will note that because almost all of our contracts are US Dollar denominated and our fixed overhead cost are on Sterling, we would expect to see a slight benefit to during fiscal year 2016. So again very, very happy with what we're seeing at Global Marine and I think the debt pay down is indicative, the top line and the EBITDA is clearly holding its own and the we continue to expect, that we are seeing the telecom market pick up, do continue believe there is some real great opportunity in the offshore power market, so we're very excited about what's happening at Global and Dick and the team are doing.

Turning quickly onto Slide 9, in the utility space, American Natural Gas continues to make great progress in the quarter. This sub currently owns and operates 17 compressed natural gas fueling stations, this is up from 11 stations that we discussed during our last earnings call. Again this is a company that for those you, who are not as familiar design builds and operate the compressed nat gas fueling station, this is not for retail. This is for commercial, industrial continue to see real, real opportunity here.

During the second quarter alone ANG acquired couple of stations from an affiliate of Southwestern Energy Company in Arkansas. Also during the second quarter, the company opened fueling stations in Saratoga Springs, Albany New York and Georgetown. Couple weeks ago ANG commissioned a fueling station in Rochester New York and just yesterday announced that it acquired Krug Energy's public compressed nat gas station in Arkansas and with the acquisition of this station ANG signed a long-term fueling agreement with Triple Transport, which is an established Arkansas based hauling transportation company.

During the second quarter ANG also entered into a $6.5 million delayed draw term loan in $1 million working capital line of credit with Pioneer Bank. We felt a very solid step considering that when we first made the investment in this company, it only had three stations, but the fact now that we're getting third party financing at very attractive terms is I think indicative of the growth potential here and not only the growth potential but the smart build, the smart build where we are seeing positive EBITDA. So this capital, we will continue to expect to see continued expansion including the station, construction as well as maybe an acquisition or two.

We are very pleased, clearly very pleased with the progress Drew and team are making at ANG and expect them to own and operate 20 plus stations by the end of this year, many of which are currently in the various stages of planning designing construction. Again it's an area that is we believe there is a number of the Class 8's distribution companies that are moving towards compressed nat gas, I think that from an operating and engineering perspective that the team we have in place which is exceedingly critical when you think about a company moving into compressed nat gas, that they are partnering with a team that knows what they're doing and I think the experience that we have, and have had at ANG is kind of indicative of how we've been able to grow, to the number of stations that we have today.

And you know there were a lot of people that were questioning like well, with oil down at $30 or $35 or $40. Will they see the benefit and will there be continued growth? And will there be a continued move into the compressed nat gas? And you know the question without hesitancy is absolutely. We're still seeing substantial savings on a per gallon basis, we're seeing the aside from the emissions benefit. the fuel continues to be a very important part of distributions companies overall the cost and expenses of operating their business and where they can get savings and if you look at the CNG business and how moving towards CNG cannot only, they can benefit from a substantial cost savings, you do have the added benefit of tax credits as well as being green. So we're very excited about this and I'm a big believer in this space and fully expect that we will continue to grow accordingly.

Our objective is to really build on this platform that we have because there is a nationwide I think a huge, huge opportunity here. Just quickly again moving on to Slide 10 in the telecom space. PTGi again delivered another solid quarter, marking its fifth consecutive quarter of profitability with adjusted EBITDA coming in at $1.5 million for the quarter up from $1.2 million from the previous quarter. This significant increase was due to growth at wholesale traffic volumes, resulting from the focus and expansion in the scale and number of customer relationships as well as increase in traffic in the Middle East region and part delivered by the religious holidays.

Keep in mind that when we acquired PTGi or the entity or took control of the entity, this company was negative EBITDA and you look at how focused on management and putting the right people and structure and mindset in place, what these guys have done without an incremental acquisition. It was a just a function of focus and that's where we believe, we continue to be at the holding company, value added propositions for the operating subs, but these guys have turned around the business which was a business that you probably couldn't give away two years ago to something that's now you look at the run rate EBITDA. This company is going to be worth something and it is worth something quite frankly. So I think what the management team has done is done very, very positive here at PTGi.

Slide 11; insurance. As a reminder six months ago we completed the acquisition of the Texas based, United Teacher Associates Insurance Company and Ohio based Continental General Insurance Company which service the platform for one off long-term care books of business. We bought this platform and one of the attractive aspects to it was the ability to service and the team that we acquired 75 plus people in Austin. It is I believe chomping at the bid for additional business that they feel we could manage pretty effectively and that's one of the beauties of this thing that we do have the platform that we don't have to outsource book of business, as we drop them into this portfolio. So I think that's one of the value added propositions and looking at our ability to grow this business.

Recently we initiated the process of merging the two companies into one single legal entity that will be domiciled in Texas. We expect this to be completed by the end of the year. We believe the merger result and the merger of their two existing operating subs under one umbrella, but we believe that this merger result in number of benefits including meaningful administrative and compliance savings.

In addition the combined entity, we require a less statutory capital and then of course that's a positive for RBC, where the risk based capital ratio. Looking at the platform as of June 30, 2016 CIG had approximately $2.1 billion in total GAAP assets and $77 million of stat surplus. On a reported basis, adjusted operating income from our insurance business was a loss of $4.7 million and this is mainly due to a $5.3 million non-cash tax charge excluding this non-cash charge AIO for the second quarter would have been a positive $600,000. So I think that's something that you have to keep in mind, in terms of how you're looking at the business and while there are number of different ways people look at insurance.

I think the important thing here is that we keep a very close eye on stat capital and of course you have to have to pay attention to GAAP assets, but and I'm making sure your claims are in line and you keep your expenses in line and how you manage left side of the book, the left side of the portfolio where we are working and continue to work on or I should say the team continues to work on, capitalizing some of the things in overall portfolio.

I think in general when we bought the company it was a very short-term based asset book, where you could really look at extending on the curve and picking up some basis points pretty substantial basis points, without taking any incremental credit risk that's a one thing I think the team is continues to focus on and looks to capitalize on considering that the duration of the overall portfolio. And the team needs to continue, we'll continue to focus on that and capitalizing on that because that's, as they say it's kind of free money out there, so you'll continue to see that happen in the overall portfolio.

We are clearly in the early stages of building this platform and things are going as planned. We continue to focus on building out the infrastructure including accounting and administrative support in Austin, Texas where the base of operations is. In 2016 alone, we've added a number of new hires in Austin including several key personnel additions in finance, actuarial, IT and compliance. As we continue to build out and strengthen the overall platform and create the ability to really observe additional books of business that we're looking at and we continue to think that there is a real opportunity here and that there is going to be a continued opportunity quite frankly to pick up some books to business as some of the diversified insurance companies look to pare down their books in the long-term care space.

So we're excited about the opportunity as you know, we hired Jim Corcoran, he's a Former New York State Superintendent who and in fact managed this entity and manage this unit and he's working very closely with another couple of the team members here Justin Myers and Dave Watters, who really I think the three of them as well as the team in Austin have done a superb job, but I think we all believe internally there continuous to be real opportunity to build on this. It's going to take a little bit of time and as you know, getting acquisitions done in the insurance space you have to do a lot of, cross a lot of T's and dot a lot of I's and we want to be methodical and make sure that we buy the right books and we are looking at right books because I think overall and in general, the books of business that we bought from American Financial was a pretty solid book and really kind of skewed on the left towards more conservative book than anything.

So we want to continue with that approach and make sure that we are very methodical in how we think about growing this business overall. Quickly on Pansend Life Sciences in Slide 12, it gives you a little bit of detail on the early stage holdings of the Pansend business. Really the main pieces for these investments continues to be the ability to really offer significant upside, but real optionality and real optionality within each business. These are not sizable individual investments, its compared to our other core subs. However in most instances Pansend has a majority equity position. I think the objective continues to be diligence, diligence, diligence and we've got couple people in management there that are really fantastic and have done a very good job of building this platform.

Any incremental capital associated with these investments are typically milestone driven. And the Pansend team is very hands on, I should say and off an involved in creation of what the companies are doing and it maintains very close and direct relationships with management and have critical governance rights and responsibilities, but the four, five underlying investments are very, very exciting here. Tough to go through each one in detail but it's funny when I talk about them. I talk about the different ones, it seems like every time I'm in a meeting and I get equally excited about, I don't know which ones to talk about because everyone is exciting as the next.

So we're thrilled with where we are and again, the important thing is that, these are not massive capital investments and are very - any incremental capital associated with each of these means progress and that's progress in the right direction. So we feel like we've got a very solid portfolio right now and well, we'll continue in, we'll continue to look for other opportunities in the marketplace. This is not about reinventing the wheel however and I think, if you talk to Sharene [ph] and David, they'll tell you that, they continue to discover the landscape and feel like the portfolio that they have assembled is fantastic.

We do believe however that one or two of these companies will achieve significant milestones this year and that's primarily in the MediBeacon which is the kidney monitoring entity as well as R2 in the Dermatology space where, we have applied for 5, 10-K approval to the FDA. So we're very, very excited about the progress of all of the companies we made, I think of anything. We do expect some good things to happen in the short-term on MediBeacon and R2.

And just turning quickly to Slide 13, two additional highlights within our segments of other investments and that's NerVve Technologies which continues to build on its technologies, it's video search capabilities that are really second to none in the market place. I think the key turnaround for them is then the ability to focus on how to make money with technology and I think there is some number of different things happening there that hopefully we'll be able to talk about over the next few months.

DMR, which is Dusenberry Martin Racing which is the - has the rights to NASCAR mobile and desktop games and that's a pretty powerful license when you really think about it. But the company has announced that during the second quarter, the new NASCAR Heat Evolution game scheduled to be released on September 13. The game's commercial trailer was released last month and made its television debut as part of the NBC's broadcast of the Coke Zero 400 at Daytona. So I think that is albeit small turning out to be a pretty solid investment for us and really like the prospects there.

Just quickly and lastly on Slide 14, just couple of quick notable financial updates. First given an increase in the value of HC2 portfolio, we exceeded our and really a function of performance by the individual entities. We exceeded our two times collateral coverage under our 11% secured notes at the end of the second quarter and again, these are valuations of our various underlying subs that are done by third parties, this is not us monitoring, of course we monitored but not as valuing the underlying subs. But given the performance, the values continue to move up and as a result again, we exceeded the collateral coverage as a result our maintenance liquidity was reduced to six months from 12, showing [ph] up an incremental $19 million of cash.

Excluding our insurance segment consolidated cash, I mentioned the $134 million, number which included just the cash portion of insurance, I should have been more specific with that, but I'll take that opportunity to bring that up here. But I think this is an important number excluding our insurance segment. Consolidated cash was over $105 million at quarter end and that is again the cash at holdings Schuff, Global Marine and PTGi.

So we feel pretty comfortable about where we are there and as you may have seen during the last week, we're able to reduce the cumulative outstanding balance of our preferred by approximately $10 million, we remained focus on improving our capital structure and reducing our cost of capital, which is very important. I know we had to start somewhere within 11% and while we weren't' and I'm not happy about paying and a 11% coupon. Now the proof is in the pudding [ph] and I believe that overtime we will have, there will be reason to believe that our cost to capital will go levered as that is our key objective.

The preferred has been an area of focus for us as well. I think reducing that preferred balance from $53 million to $43 million was a good step in the right direction and we're hoping, we continue to see that and we're continuing to press on that as we go forward. So overall a very, very, very good quarter, very happy with what's happening on the operating side and one of the things that I've tried to highlight as I go through these slides and talk about the business and I could probably talk for hours on this stuff, but the strength of the underlying management teams and that's the most critical thing.

From telecom to manufacturing, marine utilities, life sciences, etc. Very, very solid human beings and very solid managers and stewards of their businesses, they're experts in their underlying businesses and they're seeing it and you will continue to see it and that's how we think. And that's the objective is to really partner with, not only good businesses or acquired good businesses. But acquire businesses and bring in management team or acquire businesses with solid, an existing solid management team because that is the most, the critical thing in good times and in bad. But needless to say, that we're really running on all cylinders right now and very excited about this past quarter and continue to expect to see and believe that will not change and things are continuing to move in the right direction and thinking about the opportunities that manufacturing and how Global is really turning around and has, I don't want to say stabilized there was nothing wrong there, but just the overall dip in the market. We see enough strength in that market kind of picking up again and the growth in utilities and the turn around that Craig and team have done at Telecom and of course the opportunity in life sciences and insurance.

So management team very strong, great numbers. With that, I kind of probably gone over my time here but there is a lot to talk about and I've tried to jam it all in under an hour. So let's move it on to Q&A, if anybody has any questions. We can do it, we can't answer those questions and if we don't answer them tonight, we can answer them anything because one of the guys, somebody is always here. In fact, the team here has done a superb job of really I think building a really solid and tight holding company and operating platform.

So with that, I will turn it over the Q&A. The operator if there is any questions lined up, we'll do the best that we can to answer them today or if not today again in the future. So thank you again and let's move past to the operator.

Question-and-Answer Session


[Operator Instructions] our first question comes from Sarkis of B. Riley and Company. Your line is open.

Sarkis Sherbetchyan

Phil, can you maybe dive a bit further and help us understand this statement in press release regarding the company's focus on the capital structure, liquidity optimization and the active management of your portfolio?

Phil Falcone

Yes, you know when thinking about this portfolio or this capital structure. We have to think about how we can continue to lower that cost of capital and we believe that whether it's performance or monetization of assets, it's really a critical and key part of getting our cost to capital lower. And aside from operating from what the guys are doing on the operating side. We have to get out and really explain to people and walk people through the value that we see in our overall and underlying businesses. And I think once people see that, that in an off itself lower the cost to capital but I think people will see the value there and allow us to do certain things with the capital structure that we believe, we should be able to do with the assets that we have today.

I think that there are because we kind of, I don't want to say grew, so fast but we did assemble and effectively assembled a very solid platform. It takes time for people to understand the underlying value here. And we can talk about how the operations are doing and people think the numbers and I think part of the other, the other investments and the other assets that we're not getting credit for what's happening there and I think, as you will see the value creation from the Pansend business for instance, I think will prove to be a inflection point or one of the inflection points of getting us to our end game of lowering our cost to capital and lowering that 11% rate to more marketable rate. But I think overall too, we want to continue focusing on the preferred and continuing to be creative with what we've done in the last couple of weeks have reducing that preferred position from 53 to 43 and we have to get that down. And that is one of the main areas of focus for me.

And we are looking at number of things that we can do to get there. But at the same time, one of things that I did was, I eliminated my personal non-dilutive agreement. Where and I think that was kind of a sign of okay I want to aligned with shareholders, we're all in this together and as a steward of capital, I do believe that we are very undervalued. We have to take and we have to do the right things from a management of cash, from an acquisition, from a possible monetization of assets down the road, all things is kind of collective piece, collective collaborative piece of strategy that we have to deploy to get our cost to capital down and if the debt is for me is too high 11%, again we had to start somewhere and want to do something with the preferred.

I have to also think about how, what we do from a capital perspective going forward and I think we're in very good shape and we do have a certain strategy. But I don't want to sell stock because I think it's too cheap down here and so I have to think about those things and have to really think about how we can be creative with our underlying subs and doing some different things with our subs where that could be third party capital coming into our subsidiaries, that reflect the real valuation, which I think will ultimately translate into a better cost to capital.

So I guess as I think about there is a long waited answer, but I think about managing our cash and capital the things that we have to do are kind of all of the above and kind of collective approach to continuing to improve our capital structure.

Sarkis Sherbetchyan

Thanks for that Phil and one more from me, if you guys don't mind. One thing that stood out especially was the backlog that's growing within Schuff and that manufacturing segment. You did mention that are there are bunch of unsigned contracts and you know the backlog here will be over $500 million and that there is other large opportunities that totaled over $400 million. Can you maybe just touch upon the incremental opportunities there?

Phil Falcone

Sure. You know you have in that space, when we talk about adjusted backlog of contracts that were awarded, but not yet signed they area convention center, the [indiscernible] casino, names that I can go down the list of that have been awarded that have contributed to what we, how we look at our backlog. But also to from an opportunities that going forward the clearly the west and the southwest is from a healthcare perspective as well as inter-gaming perspective is really moving in the right direction, there are number of spot arenas and stadiums, there's more opportunities out there than you can kind of shake a stick at.

Quite frankly when you think about capacity being utilized and used up in the industry, you could even see margins improvement as a result because of the number of opportunities and number of entities that are building, now we don't have that built into our model, but I think that's kind of the basic economics 101. But there are from the stadiums alone a number of opportunities that we think, we will be able to capitalize on that will really continue to build on our backlog.

Sarkis Sherbetchyan

Thanks for that all. I'll hop back in the queue.


Thank you. Our next question comes from Kurt Hoffman of Imperial Capital. Your line is open.

Kurt Hoffman

Just quickly to follow-up on Schuff. Saw last month the Turner Construction was selected to build the new Rams Stadium. Can you talk about Schuff's relationship with Turner, where Schuff may have worked with him in the past and how that could maybe help us here?

Phil Falcone

Yes, I mean we do have a pretty good relationship with Turner. They've have turned to us in the past for projects of this sort. It's very difficult to comment further on that, but we are clearly we think very - one of the companies I should say that Turner thinks very highly of and very capable of doing that type of project. So we were excited to see that happened and that announcement.

Kurt Hoffman

Okay, will stay tuned on it. On Global Marine you've spoken extensively on this Huawei joint venture in the past. Can you give us a little more granular sense of how it's performing versus last year? I think in 2015 we saw about $190 million in revenue and I think it was $14 million of profit. Do you have any idea where you - is it really where we would see that winding up this year.

Phil Falcone

Yes, we can't give any projections on that but just from a growth perspective, when we closed on this. I believe the top line was $60 million and with zero profit and just the short spend of the number of 18, 19 or 20 months we're seeing here have seen a significant growth and I believe that, we fully expect that with the growth in the data business around the globe and the strength of Huawei in some of the emerging economies that we have no reason to believe that will change, that growth of trajectory will change so we - I think the significance of where we were when we bought it and quite frankly the value that we put on it and I personally kind of put on it, I always thought it was great to have, but I didn't think we would be where we are with that from a top line perspective and I clearly didn't bank on the our value proposition that we have today with that entity.

So it's been a real pleasant surprise that is not, some companies had a relationship and has had that subsidiary for a long time. So it was kind of serendipitous there, our timing worked out where we were able to acquire global and oh, by the way that the business kind of took off just as we made the acquisition and I think it's been a, I don't want to say pleasant surprise. I think that's understating it, but very, very exciting proposition there, that we will continue to expect to see grow at the rates that we have seen.

Kurt Hoffman

Okay, all right. Perfect. And then just more generally on Global Marine. I think pro forma for the one-time event in the first quarter. The subsidiary generated about $17 million of EBITDA in the first half of the year here. How do you think about that over the full year?

Phil Falcone

Yes you know and that's one of the things when I talked about the competition in the market place and what was happening in oil and gas, even though we didn't have a lot of exposure in the oil and gas market, just by virtue of some capacities coming online and into our segments has effected margins per se, which put a little bit of pressure on EBITDA. With that being said, we really held our own. I think the data market or the telecom market was a little bit slower to turn around than we expected and we are now finally starting to see that. The performance in the second quarter was probably more in line with, what we had been thinking of full year 2016. 2016 first quarter was a little bit weak and I don't want to say disappointing but it was a little bit more lumpy than we would have hoped, but now we've got the momentum kind of coming back a number of projects ticking in and I think the Seawind is in that offshore power market is really helping.

So we are, the first six months were okay. I think we can do better and I think expecting to do better. Does that answer it?

Kurt Hoffman

Yes, that's perfect. Well last question, smaller investment, this is NerVve I thought it was intriguing and maybe you can speak about what it could mean for you guys. I saw it was used in Wimbledon and I saw it was also used to the Major League Baseball Star Game. How do we think about what the value can be at this, with this entity?

Phil Falcone

You know the funny thing about this one is, I think the technology that these guys have is really second to none, if you talk experts in the industry and of competing technologies. The video search capabilities that they have is really phenomenal and quite frankly, it is the preeminent technology in the marketplace. The critical part for them has been how to take that technology and commercialize it. And that's been the $64,000 question and the movement and again this is kind of where we kind of put our heads together and really helped the company, really focus on the natural thing was advertising, the sports and entertainment advertising. The branding from an advertising perspective during the sporting events, where these companies or these machines have to send their information to companies that manually review the games to determine how many times during that game, the brand will show up.

Well now you have the technology that could be essentially instantaneous and I think that is new to the industry and the ability of the company to tailor their technology to what some of the, as you mentioned the major sporting leagues and have really looked at this as and quite frankly are embracing it as a very exciting change to the business, which allows them to analyze their ad space and advertise their business in general. But that ability to really move just a pure technology where and what's been commercialize to really focusing on major league sports and there are number of things that these guys are doing that we unfortunately can't discuss and are extremely exciting. But as you mentioned, it's now being used where number of months ago, it wasn't being used.

So there is a real value again value added proposition. I think we're helping them come to table with and really exploiting their technology.

Kurt Hoffman

It will be exciting to see where that ends up. Okay good, Phil thanks so much and keep up the good work.

Andrew Backman

Valerie, we have time for one more questions, please.


Thank you. Our final question from Umesh [ph]. Your line is one.

Unidentified Analyst

Maybe, Phil, just on the Schuff business. The difference between the sort of the signed contracts and then the one sort deal that has been awarded. I mean is there any sort of risk that doesn't get signed, I mean what is sort of the risk on that?

Phil Falcone

We don't view that as a risk from a GAAP perspective that how you have to report. But in thinking about like last quarter how we went from signed to 415 to 480, when these contracts are awarded, they're awarded and you know I guess things can happen in a contract that's even signed, but we haven't had the experience where and the company's has not had the experience where they get awarded something and it doesn't get signed, if that's any indication. It hasn't been experienced that the company has dealt with.

Unidentified Analyst

Got it, that's helpful. And then, this $400 million of sort of potential opportunities that is not the backlog yet. Maybe you can help us sort of think through that in terms of you what amount is sort of you think of probably you have a very high confidence that you can get it, maybe you know just use [ph] whatever many buckets you may want to use, but fairly give us some sense of confidence in terms of like realizing in the backlog.

Phil Falcone

Well you know I think we tried to be conservative with in looking at the potential new projects. I can't go into detail about how and what we think we will get, but we feel pretty good this backlog number going higher and we've been very conservative in our approach and thinking about okay where could the backlog go because there is a number of opportunities in that 400, in the overall marketplace that we will clearly work to capture that could result in a substantially higher number that. so it's always subjective and you never know what can happen but I think we feel like there are enough opportunities out there that we will be able to build off of our existing backlog by a pretty good amount and this is just on the West Coast there's a ton of opportunity out there and really right in the catering to the strength of shops [ph].

Unidentified Analyst

I think you guys have done a pretty decent job in terms of growing the backlog. When do you think we should start seeing some inflection in the revenue in terms of year-over-year growth on the sub side of the business?

Phil Falcone

It is about quality rather than quantity. And you always want higher value added in a higher margin business. So we do believe and as I mentioned we have a plan to get to the $1 billion, mark that will take time and we kind of look at it as a three to five-year plan. But there is obviously a number of things that we have to do and whether that's and that's both organic and inorganic, but I think in general we are really moving in the right direction and we're seeing improved margins and that's what we really want to focus on, with that being said. Just by virtue of the backlog and by virtue of the opportunity such. We have no reason to believe that revenue will go, the opposite way.

We continue to feel pretty good about that number increasing, no it's not going to double over night but it's our objective to get that thing to double. But it will take time and the key for us is the blocking and tackling as to what these guys are doing. But there is just a number of positive things happening with Schuff's and that number will continue to tick off. But the key is to focus on profitability and they've done a phenomenal job with that.

Unidentified Analyst

Great. And one final question from me and just in terms of monetization of some of your life sciences business. I think last time we met, you really talked about MediBeacon and sort of having in the sort of last being in the final stages of sort of qualification and any update there in terms of [indiscernible] there could be some potential monetization by the end of the year?

Phil Falcone

Yes, I think when I talk about monetization I think about maybe it's realization, not monetization and realization is the progress point of getting a FDA approval on the dermatology business which quite frankly leads to the next step there is commercial operation, commercial sale. The completion of pilot two for MediBeacon which is a big step from a value added realization and when you hit these levels, there is an opportunity to bring additional investors. Quite frankly may not appreciate or understand the value that was there yesterday but once the project is a bit de-risk, it kind of - I don't want to say opens up the flood gate but I think how we're looking at it is de-risking these and being there from day one and walking through the de-risking period is an opportunity for we believe phenomenal realization of value not monetization from a sale perspective, but realization from a possible third party investment perspective and but you have to hit these hurdles and I think these two are in the lead from that point.

Unidentified Analyst

Great, thank you very much. That's very helpful.

Andrew Backman

Thank you, Umesh [ph]. And thank you everybody for joining us today. As always our management team is available to speak, if you have any question. You can feel free to give me a call directly here in New York at 212-339-5836. Valerie, would you please go ahead and provide the conference call replay instructions once again. Have a great day.


Thank you, Mr. Backman. As a reminder, this conference call will be available for replay beginning approximately one hour after this call. Dial-in for the replay is 1-855-859-2056 with the confirmation code of 49610865. Again, dial-in for replay is 1-855-859-2056 with the confirmation code of 49610865. This concludes our call. You may now disconnect.

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