Innovate Corp (VATE) 2017 Q3 法說會逐字稿

Good afternoon, and welcome to the HC2 Holdings Third Quarter 2017 Earnings Call. (Operator Instructions)

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.

Great. Thank you, Brian, and good afternoon, everyone. And thank you for joining us to review HC2's third quarter 2017 earnings. With me today are Philip Falcone, Chairman, President and CEO of HC2; and Mike Sena, our Chief Financial 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 1 hour after the call. The dial-in for the replay is 1-855-859-2056, with the confirmation code of 99349087.

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

Thanks, Andy, and good afternoon, everyone, and thank you for joining us. We've got a lot to cover today. So I'll try to get through it as briefly as possible and make sure I touch on everything at the same time.

So just turning to Slide 4, I wanted to include this slide to, as you really take a step back, kind of what are we -- how are we thinking about the business and how are we thinking about our holding company and what are we trying to do and you, as both bond and equity investors, what are you looking at.

And I think to begin with, we do feel like we have a pretty diversified portfolio of uncorrelated assets and investments, which I think is relatively unique in the marketplace. And the actively managed perspective that we are taking at holding company is we're not just making acquisitions, we are really getting involved from a financial engineering perspective. Clearly, we're letting people do what they do best at the subsidiary level, but how we look at our job is to really drive asset and capital appreciation, which we hope and ultimately think that the market will follow.

We continue to push and drive organic and inorganic growth at the subsidiary level. Keep in mind we've been at this now for 3 years, and this was a shell company. And the focus is on growing that top line, but at the same time making sure that EBITDA is growing along with the asset base. And we've taken it essentially from zero to, call it, on a run rate basis about $1.5 billion of top line and mid-$70s million through the first 9 months of the year on our core operating subsidiary EBITDA level, which we are very pleased with.

The objective, too, is to just stay positioned to opportunistically capitalize and build the platform in both the public and private markets, and I think we've tried to be as methodical as possible there. The market is pretty strong right now from an acquisition perspective and the multiples are relatively high, and we want to make sure that we are buying right. I've always looked at both investing and acquisition that you make your money on the buy, and we feel that we've got a very disciplined approach as to how we look at it. We continue to believe that there is opportunities on a subsidiary level to capture and to build each individual platform. And as we look to build out an additional platform, again have to make sure that we are buying right.

Ongoing commitment to realizing synergies across all the different entities, from a legal, from a human resources perspective, et cetera. We feel like we've really contributed and continue to contribute a lot of value to our subs.

And again it's really about an applied controller control perspective from an acquisition and from an investment aspect. We want to make sure that we can dictate our future. We want to drive the bus and not sit in the middle of the seat and be driven around. And I think based on where we are today, we feel very comfortable and confident that we do have the appropriate controls and all the bells and whistles and are really driving each of the businesses from a financial perspective.

Clearly, the key focus for us, as I mentioned, is both cash flow with a focus on cash flow. And of course we do have and continue to like the option value perspective. And doing a little bit of that on the broadcasting side. But be that as it may, I'll kind of walk you through a little bit of what we're doing there. But we fully expect that business to be generating cash and generating top line, and this is not just buying assets.

So we do have a plan there, not quite ready to lay it out yet. We're looking at a couple of different things, but there is, again, a methodical approach to how we're looking at that business. I know a couple of people have been asking us about it, and we continue to be very excited about the valuations there. And again, it kind of goes back to buying at the right values, and we feel like we're doing that on that end.

And clearly, from an active management perspective, we look to not only create but extract and monetize value where and when necessary, and we are continuously looking at the portfolio. I'm less comfortable with the status quo. I don't want to do things just for the sake of doing them, but we have to make sure we keep our hand on the pulse and make sure that from a return perspective that we are fitting in kind of the parameters that we kind of think about up at holdings in terms of allocating capital. We want to make sure we allocate capital where there's growth opportunities and, ultimately, again that will drive both cash flow as well as asset appreciation.

So just quickly now, on to Slide 5, I wanted to present just a boiler plate consolidated financial snapshot to give you an idea, because while we do obviously have a diversified portfolio, we continue to think of the entity on a consolidated basis and tweak it accordingly. But we feel pretty good about, again, where the numbers are and where we've come from and what the future holds.

But as you can see that we do have year-to-date well over $1 billion of operating revenue and, clearly, core operating adjusted EBITDA of a solid $73 million. So both continue to improve, and we fully expect to see those numbers continue moving in the right direction.

Turning to the Slide 6, the third quarter highlights and recent developments. Over all, we've been extremely busy since our last call. From the top going down, the DBM team again posted a record backlog of $656 million for the third quarter, adjusted backlog of approximately $900 million. And as stated in our press release, we were awarded a major contract for the LA Rams and the LA Chargers and recently completed an important tuck-in acquisition in the bridge and infrastructure market. So, clearly, a lot is happening on that end.

We have some very good visibility, clearly, with the sizable backlog that we have right now of $900 million. And if I'm not mistaken, I think that's an all-time record. So a lot of things to do there, and we continue to expect some very good performance there.

In addition, we just announced last week that DBM will pay a $5 million dividend later this month, of which HC2 will receive approximately $4.5 million. There is an additional tax sharing arrangements, et cetera, that are utilizing our NOL. So we are clearly taking advantage of the strength of DBM across a number of different levels.

Global Marine, the backlog there at the end of the third quarter was the highest backlog since the acquisition of HC2 in September 2014. The Huawei JV posted backlog close to their historic highs, with a very strong pipeline of opportunities.

Global Marine also announced the acquisition of Fugro's trenching and cable laying business, which further positions the company for what we believe are significant offshore power market opportunities. That's one thing that we emphasized in the second quarter, how excited we were about the opportunity set in that market. And again, that is the offshore -- when we talk about offshore power, it's the offshore of the wind turbines, and there's been a tremendous amount of growth there. And we have no reason to believe just based on the activity there that that will slow down any time soon.

In addition, Global was recently awarded a 5-year renewal for the SEAIOCMA maintenance zone, which is the #3 of the 3 that we wanted to wrap up. Very, very good business to get.

PTGi delivered its fifth consecutive cash dividend to HC2 in the quarter.

And of course ANG continued to integrate the stations they acquired last year and working hard to ramp up volumes across the platform.

And a very exciting transaction in the insurance space. Our insurance team, we signed a deal acquiring a $2.3 billion portfolio of long-term care assets from Humana. This significantly increases the cash and invested assets to over $3.5 billion and of course leverages the insurance platform that we assumed through the acquisition of Continental General from American Financial.

For the third quarter, adjusted EBITDA from core operating subs was $27.3 million, versus $31 million in the third quarter 2016. Not a significant variance and mostly attributed to again the timing of projects in DBM Global and Global, as we discussed last quarter. But a very nice bump from what we experienced in the second quarter.

So we are well on track internally and again haven't changed our internal budgets. And as we explained during the second quarter that one or two of these situations was timing and it was just a function of catchup, and now we're seeing that happen.

And still, finally, on a year-to-date basis, adjusted EBITDA was up slightly versus the year-ago period. So continuing to see even with the timing on some of the larger projects a continued improvement year-to-date, and again no reason to believe that that will change.

Turning the slide quickly is one of the templates that we like to show, but just how we think about the portfolio. And when we talk about core operating subs, DBM, Global, American Natural Gas, PTGi, of course the insurance sub, and then we've got the early stage and other holdings. And I will get to Pansend a little bit later in the call. But again, I think there's some phenomenal value in what the team has done with that entity.

Turning to Slide 8, the segment financial summary, you'll see the segment detail. A couple of quick points here on some of the meaningful variances. For DBM, we saw a sequential and year-over-year increase in third quarter as we continue to gain momentum from the previously delayed projects we discussed earlier in the year. We're down slightly on a year-to-date basis, again mainly due to the project delays and a strong prior-year performance. But again, this is strictly timing. This is no aberration in the business and fully expect to see this thing be where we expected it to be once we get to year-end.

For Global Marine, we saw a sequential increase, as well, but down slightly versus the year-ago quarter due, in part, to declines in telecom install revenues. And if you recall back in, I think, even first quarter and even possibly fourth quarter, we talked about how we didn't expect telecom to be too robust in 2017 and that that was going to start picking up again in '18. So it's kind of playing out like we expected.

On a year-to-date basis, however, Global was up slightly, and due to continued strong performance in the JVs and, in particular, Huawei Marine.

Life Science expenses were up for the quarter and year as the companies within the Pansend platform, primarily R2, MediBeacon and BeneVir, continued to increase scale and ramp up operations to meet critical clinical developmental and operational milestones.

As a reminder, we and other shareholders that are involved typically fund these investments as they meet critical milestones, and each company uses those funds to ramp up operations as necessary. So it's not -- how we account for it is not essentially cash burn for us in that particular period, even though the way we account for the adjusted EBITDA. We want to try and be as transparent as possible and show people how these various businesses could be spending money and how they're ramping up the expenses. But again, it's essentially in line for what we fully expect and anticipated earlier in the year and when we started building out that platform.

Non-core operating expense, we're slightly higher this quarter but does not represent a run level of expense. Increase is mainly due to compensation-related expenses associated with some senior management changes that we announced during the quarter. For the full year, we still expect non-operating corporate expense to be around $25 million, maybe a couple of million higher given the increased expense we incurred in this past quarter because of the comp-related expenses, but again in line.

Turning to Slide 9, getting a bit more into detail on what's happening at our underlying subs, beginning with DBM Global. A couple of key points here. First, another record backlog for the quarter, coming in at $656 million, more than doubling the reported backlog from the year-ago quarter. Adding in awarded but unsigned contracts, backlog for the third quarter would have been approximately $900 million, an increase of $400 million, or 73%, from the third quarter of last year. Very, very robust business. A lot of activity in that marketplace right now.

In addition, clearly from a visibility perspective, there are other situations that are going up. I think we are really in the sweet spot there and trying to capitalize it at the same time without putting ourself in a strain. So we are again very well positioned.

As we've said before, we believe the backlog is a meaningful and appropriate way to look at the business, especially as it relates to DBM. You can't really look at these on a quarter-over-quarter basis, and as we've explained before, that can vary a bit due to a number of factors, whether it's the delays on behalf of a third party who is associated with the complex projects or weather, as we've seen sometimes in Global. I think the backlog is a good indication, especially of visibility, but of how robust the businesses are.

You can see as to how this works from a sequential increase in adjusted EBITDA each quarter this year, as we started to see momentum building and have recognized revenue in some of those projects that were delayed earlier in the year. So again I want to emphasize that when we say "delay," it's not a cancellation, but it's just from a pure timing perspective.

As a result of the delays, to give you an idea, approximately $7 million of adjusted EBITDA in 2017 has been and will be moved to 2018, just based on in the first 6 months of the year. We don't expect the delays in the second half obviously in the third quarter and as we get into the fourth quarter. That was primarily as a result of what we saw in the first half. But things still move in the right direction there.

As we mentioned, we believe that the backlog provides a very good view of the runway of the business. In the case of DBM, you're looking at a good 18 to 24 months of visibility given the current reported and adjusted backlog, which is really nice to see and, quite frankly, something the business hasn't seen at least since we bought it and I know earlier than that. So good construction -- larger infrastructure construction spending right now.

As I mentioned, DBM was recently awarded a major contract to construct the shell and roof assembly of the new LA Rams and Chargers stadium. That is included in our backlog numbers. It's a good one to have. It's a very complicated project, and I think it's part and parcel to the high quality of management that we have and the capability of getting these complicated projects done, which is always very good to see. Again not just a pure commodity entity, but a lot of design and engineering that the team brings to the table. And it's no magic to why we are where we are from a backlog perspective. We're getting that for a reason.

Finally on DBM, last week we completed the acquisition of Candraft VSI. This is a Canadian-based detail modeling company. This tuck-in acquisition was completed using DBM's cash on hand. It fits nicely with DBM's prior acquisitions of BDS VirCon and PDC and expands the service offering into the bridge and infrastructure markets, which we continue to be believers in.

We don't want to get too focused on continuing to build our vertical business there. We continue to be, again, opportunistic buyers to build out that platform and are focused on some different nuances as it relates to just staying with the stadium type build. We do like the bridge and infrastructure and the modeling type aspects and, hence, those are acquisitions that we've focused on over the last couple of years.

In the Marine Services, Global Marine. As I mentioned, a sequential improvement in adjusted EBITDA for the third quarter, but still slightly down versus third quarter last year. And this decrease was due primarily to the anticipated decline in telecom installation this year and some timing on project work at the Huawei Marine business. As we've said before, we believe this telecom installation business and, given a long lead time for these large projects, should pick up nicely in 2018 and 2019. So look for that specific part of the business to rebound there.

On a year-to-date basis, Global was up slightly versus last year, mainly due to the strength of the JV with Huawei. And similar to DBM, which we believe it's very meaningful to look at backlog as a key measurement of the Global Marine and Huawei businesses, versus quarter-over-quarter results, at the end of the third quarter Global's backlog was a record of $456 million. This is an increase of nearly $130 million, or 40%, versus the prior quarter, mainly due to the renewal of the SEAIOCMA 5-year maintenance agreement.

This is the third and final of Global's 3 long-term maintenance contracts we've renewed since the beginning of last year. The NAZ contract was announced in March of 2016, and the ACMA contract was announced in January. These are the 3 contracts that were up that we anticipated we would be able to renew. It's never done until it's done, and very happy to get these contracts locked and loaded, because they are very nice to have and are essentially annuities in thinking of how we look at that maintenance business.

I will also note that this is the highest backlog Global has had since the acquisition by HC2 in September of 2014. In addition, the telecom installation backlog at Huawei remained close to historic highs, with a very strong pipeline of opportunities.

Before moving on, I'd like to summarize some of the key points of the pending Fugro acquisition where Global is acquiring the trenching and cabling business. Total consideration is approximately $73 million and consists of the following. We paid in 23.6% of equity interest in Global Marine, valued at $65 million. And if you kind of do the math on this thing, this puts the pre-money equity value of Global at $210 million. And this is the $65 million plus a $7.5 million one-year secured note.

We did this. This was a strategic and key acquisition. We had been circling the wagons on this for some time and really kind of look at is as a significant upgrade of the fleet of installation and maintenance vessels with the addition of the Symphony, which was built in 2011. And looking at the cost, and I don't want to think of just replacement cost, but as I mentioned in previous calls, we want to be opportunistic and especially as it relates to capitalizing on some of the depressed prices in vessels.

But needless to say, the Symphony when it was built in 2011 was a very substantial amount of money when it came right out of the shop. So this is a phenomenal vessel acquisition for us. And in addition, we'll add 2 valuable trenchers and 2 work-class ROVs.

This acquisition, importantly, eliminates $70 million of CapEx that we previously thought about and had planned for 2018 and '19. And finally, through this acquisition we'll gain and lever a well-respected partner in Fugro, who has many longstanding European relationships. And clearly, we didn't do this just from an asset perspective, as this acquisition will also contribute on an EBITDA basis and will be a nice business to add to our existing arsenal in 2018. We expect that this business is going to close in 2017.

So it does a number of things for us. It represents a very attractive value for Global on an equity basis through a reputable third-party entity. Make the company more competitive in the offshore wind market in Europe and other regions. And in fact, are already seeing positive momentum from the announced transaction. So very nice business all along. It took us some time to cross the t's and dot the i's, but I'm very happy with how that played out.

American Natural Gas, just quickly turning to Slide 11. Primary focus of Drew and his team have been continued integration of the 18 stations acquired from Questar and Constellation. It's taken a little longer than originally planned. As a result, ANG increased station downtime and incremental expenses as evidenced by the sequential decline in adjusted EBITDA, but no need to raise any flags there because we understand and understood what we were getting into with these things. And again looking at it more from the long term.

But Drew and the team are working very hard to bring all these stations up to ANG's high standards and increase gallon of gas equivalents throughout the nationwide network.

As I mentioned last quarter, ANG is currently operating at less than 20% of their total station capacity and still generating positive EBITDA. So the key to really seeing this business explode is getting additional volumes, and we fully expect as this network has ramped up that that will happen.

We continue to also remain hopeful that we'll see incremental impacts from energy credits, which have yet to be renewed or implemented and are clearly not in our numbers. So I think that's additional gravy that we could expect to see and believe and remain hopeful that that will happen.

Finally, just from a 50,000-feet level, that recent upward trends in oil breaking $60 a barrel for the first time in quite some time, we continue to remain confident in long-term opportunities for this business. The thing about it is the natural gas marketplace, there's not a lot of volatility in the price at the pump from a CNG basis. And very attractive commodity pricing that we're getting and that we fully continue to expect to get.

So it's -- from an economic perspective and from a back of the envelope perspective, really believe that there's some opportunities here over the long term. But it's a business that we've gone from essentially nothing to now 40 stations and are easily in the top 4 or 5 in the marketplace in this and with #1 not being too far away from a total station count.

The other thing that I think the team has done well is Drew and team have made the conscious decision to really build high-quality stations (i.e., the appropriate lanes, the appropriate speeds at the pump, et cetera) and at the same time minding the cost. If you know Drew, he manages nickels and dimes quite well.

So I think from an equipment perspective and from an operational perspective, we are well positioned in that business.

Just moving on to Slide 12 in the PTGi space. Again this is a business that Craig and his team have really turned around. And I sound like a broken record talking about it because it just continues to do the basic blocking and tackling and paying dividends, and literally paying dividends, and that's clearly what we like to see. So this is another steady quarter despite fluctuations in traffic volumes which are typically par for the course in the business, tend to cause some variability from time to time.

On a year-to-date basis, sales were about even, with nice improvements in adjusted EBITDA given operating efficiencies across the business. We continue to see IoT and OTT trends putting some pressure on wholesale telecom traffic but, for the most part, the traditional voice business is not going away.

PTGi's strategy has been to focus on smaller Tier 2 and Tier 3 global accounts versus the larger PTTs, which along with their operational efficiencies are bridging the success.

In addition, Craig and the team are focused on select geographic expansion in Latin America. So if you think about the business, in general, where we could get growth in this, we haven't done a lot of business in Latin America, and we think there's especially an opportunity for expansion in that area, as well as Asia.

So there's a lot of opportunity to growth, albeit being in a relatively mature business. But I have full confidence that you're going to continue to get these guys capitalizing on that and, as I mentioned, continuing to pay dividends. These guys have been extremely consistent with that, which is really nice to see in a business that was nearly written off when we acquired the company back in 2014.

On the Insurance side, over all, another good quarter for Continental Insurance, with top line results being driven primarily by higher net investment income as well as higher premiums due to the continued implementation of successful rate increases that not only us but others are seeing in the long-term care space, which is again a very nice thing to see.

Looking at the platform as of September 30, 2017, CIG had approximately $2.1 billion in total GAAP assets, approximately $1.3 billion in cash and invested assets and $73 million of stat surplus and $84 million of total adjusted capital. The RBC ratio as the end of September again exceeded the 400%, which was the agreed upon minimum. So continued strong performance, over all, and solid performance, over all, at that entity.

A couple of key points on the announcement yesterday. This was I think a very good deal for both parties. It's taken quite some time and this is relatively complicated, but as we had discussed, the objective with Insurance was to use this as a platform. And by virtue of the acquisition that we made when we bought CIG from American Financial, we did acquire the platform, and that platform was it's not just a run-off business but people who could perform the administrative function. And it was key and critical for us to find the right addition to the overall structure, and we feel we've done that with this acquisition of Humana, which is about $2.3 billion of long-term care book of business.

We expect this to close by the third quarter of 2018, at which point Humana will make a $203 million cash capital contribution to strengthen the reserves. So we've worked very -- and the team has worked very hard on this, and Justin and team have done a spectacular job of crossing the t's and dotting the i's. And this was about turning over as many rocks as possible in a diligence process. So, hence, it's taken quite some time. But an excellent acquisition for us. But again, I think both parties accomplished what we wanted to accomplish.

Transaction will be immediately accretive to Continental's RBC and stat capital, which is again very key. It gives us a lot of flexibility. But once completed, the consolidated Continental will have over $3.5 billion of cash and invested assets, with an opportunity to meaningfully increase the investment portfolio yield of the acquired Humana assets. That's how we are thinking about the business, making it a bit more efficient.

And when you think about how these businesses are typically run, oftentimes they are not the core part of an insurance entity and, rightly or wrongly, they have other businesses, other insurance businesses, that are, fortunately for us, more important for them. So now as it relates to it being under our umbrella, it is a key focus for us, and we feel like with it being the key focus there are certain things that we can do from a platform perspective and, clearly, from an asset perspective on the team aspect that will benefit everybody across the board, including policy holders.

So we do think that there is a real exciting strategic aspect to this. And it took us a while, but we did, I feel, find one that was somewhat transformational for us, a good solid portfolio and, clearly, be allowed to lever on an operating basis the insurance platform that we acquired, as I mentioned earlier, through the American Financial acquisition.

The reality of it is that the platform and the entity that we had was a key advantage in the bidding process for the Humana business versus financial sponsors without a platform. So our thesis proved to be correct in the sense that we utilized our platform and the effectiveness of how we've run the insurance business to really capture some synergies and to be a strategic bidder in this process, whereby others who did not have the platform could not, in a number of different ways, compete with us.

So we're very happy with how this turned out, and this puts us on a different level. To now have 2 acquisitions from phenomenally reputable third parties in the insurance business under our belt is very key for us, and we believe that there will be a number of opportunities that will be at our doorstep as a result of really closing this second transaction. As we perused the marketplace and kind of kicked the tires on a number of different things with some obviously very legitimate insurance entities, a lot of people were like -- well, really wanted to see us get another under our belt, and this one from an entity such as Humana was very important for us.

Quickly moving on to Slide 14, Pansend, we continue to be encouraged regarding the progress of some of the different investments and developments at the entities we've made (i.e., a BeneVir, an R2, a MediBeacon). All moving in the right direction from an operational perspective. Dave and Cherine continue to remain focused on optimizing these investments in the platform.

And specifically as it relates to R2, MediBeacon and BeneVir, there are, without going into too much detail, we want to and continue to be a very important sponsor, but at the same time want to stick to our strategy of not funding these things through commercial deployment. Some of them, that's a long way off.

But at the same time, there's a delicate balance between being a very good sponsor and being in the biotech business or in the medical device business. And we have to continue to be supportive, and we are huge believers in the underlying investments. And at the same time also, it's important from an investment perspective that we know our limitations from a business perspective with regards to the complexity of some of these businesses. And clearly, getting strategics involved, 1 strategic or 2 strategics, can be very value-added.

So it's something that we are and we keep in mind as we think about these businesses. But we're taking our time. There is no rush. The key is being prudent and not doing something and sacrificing value. I think if you really lifted up the hood here on some of these, you would see the huge potential. And again, there's a delicate balance between monetizing and maximizing and not being hasty in our decision making process, and we don't feel like we need to be hasty in that.

So we're trying to be as prudent as possible and be good stewards from an investment perspective, from a shareholder perspective, as well as from a management perspective. So we're doing exactly what I expected we would do on all of these investments and hopefully have some exciting things to talk about over the next number of months.

So just turning to Slide 15, some quick financial updates. Again continue to exceed our 2x collateral coverage under our secured notes. Excluding the Insurance segment, consolidated cash was again $100 million, over $100 million, at the quarter-end.

During the third quarter we received another cash dividend from PTGi, and on a year-to-date basis we've received a little bit north of $25 million in dividends and tax sharing from DBM and PTGi. In addition, we expect to receive another $4.5 million from DBM.

As many of you know or most of you know, if not all of you know, we've been focused a bit on the broadcasting space. We announced the acquisition of Mako Communications which will build on the DTV America announcement that we made during the second quarter. And we expect that both DTV and Mako will close within the next couple of weeks. And we do have financing arranged, and the objective on this was to work on and focus on trying to finance this at the broadcast level and from a bridge perspective. That's where we're focused.

We continue to believe that these will be -- these are operating businesses and that there will be some synergies here and there will be some top line growth and there will be some value from an asset perspective, all in one.

Again at some point I will walk you through what our vision is and our view is and what our objectives are. And we are not doing this in anticipation of changing around the business model, at all, or expecting any change in license parameters, et cetera. These are broadcasting assets. We believe that there's an opportunity here, and these are businesses that have been around for quite some time and have channel utilization from a leasing perspective that we will assume; meaning that there are revenues here, they're not just financial asset purchases.

So we're very excited about the valuations on these things here and being very strategic as we look at that. And as we stated in our press release, there is a $75 million bridge loan to finance these acquisitions. Obviously, that's not all going to get drawn at once. So keep that in mind. It's not drawing $75 million on day one.

But we do believe that we want some flexibility to be opportunistic and look at and continue to look at other opportunities. Again, we feel like we've got a very good core now and can build around that. So that's a very key part of our focus.

As I've said before, we continue and, as I think about that first slide that we talked about, look for ways to optimize our liquidity and improve our capital structure and balance acquisitions and balance cash flow, this is something that's very, very important for me. We are not quite there yet, but I think we're making a lot of progress. And we are being very hands-on to make sure we are managing this process very effectively and are trying to think about it from a timing perspective as a number of things kind of play out with our strategic view and our strategic vision.

So we're not sitting on our hands. We're not keeping our fingers crossed. There is a methodology here. And as I've stated before and I will keep talking about, our objective is to get our debt cost of capital down. I'm not happy with our stock price where it is, but it is what it is. And we have been very busy with on acquisitions. And I think over time that will play itself out.

And from a both asset appreciation or capital appreciation, from a strategic value, from a cash flow perspective, I'd like it to be a lot higher than where it is, as I believe it should be, but that will find its course and find its way over time. And the key for us from a holdings perspective is to continue to focus on executing on and crossing the t's and dotting the i's as we think about executing.

So with that, I know I've had you here for quite some time now. I want to move on and see if we can move to a brief Q&A on the quarter. So with that, Andy, you want to bridge that gap there and move to the Q&A section?

Sure. Thanks, Phil. Brian, can you go ahead and give the Q&A instructions and then we'll queue up?

(Operator Instructions) Our first question will come from the line of Sarkis Sherbetchyan, of B. Riley.

So a few questions here. I'll start with the Construction segment. It seems like some of the delays kind of (inaudible) here, and I appreciate the color on how much shifted into Fiscal '18. Can you maybe describe the composition of the backlog in the Construction segment? Maybe if you can talk about what your team is seeing with regards to duration? Is that increasing or decreasing over time, for example? Maybe even if you can get into the level of project profitability you're seeing and has that been kind of increasing or decreasing in that backlog?

As we discussed that there is, as you get into these larger and more complicated projects like the Loma Linda Hospital or an LA Rams stadium, there's a number of different entities involved in these projects, and they may affect the entire project from A to Z, and it's essentially out of our control sometimes, I shouldn't say "sometimes," but when you have a third party that is doing something different or making a change in some way, shape or form. But they are the larger projects like the Loma Linda Hospital, the LA Rams stadium. And the delay, if anything, doesn't concern us since, clearly, we'll be on the project for longer than we expected. So, if anything, it could benefit us over time. The longer the situation plays out, typically the better off we are.

Understood. That's helpful. Kind of thinking about the same for Marine Services, looking at the backlog I think the number was $456 million at the end of this quarter. Maybe if you can talk a little bit about the same analysis there, like the composition or kind of what you're seeing?

If you think about that detail, as we mentioned, that increased by about $130 million alone just from the SEAIOCMA deal, which was a 5-year deal that we signed recently. The additional backlog was from the -- a portion of it was from the other 2 cable maintenance zone contracts. I don't have the detail on what those 2 contracts contributed to backlog offhand. Let me see if I can dig them out somewhere. Typically, I don't want to say "typically," but between the 2 of them, they're each maybe $120 million to $150 million. So a good chunk of that $456 million is from the maintenance contracts, which is, again, from a timing perspective is super high quality business. And that's the bulk of -- it's the NAZ, the North American, the IOCMA and the SEAIOCMA are the bulk of the $456 million. And they range from each $120 million to $140 million or $150 million. The other increase that we've seen that we mentioned is in the sea wind business, which is up nicely for the year, for the year-to-date 2017. So between those 4 situations, those are the majority, well north of the majority of the $456 million. And just the fact that the maintenance contracts are kind of from a consortium perspective, that's a super-attractive business and we, you know, it's a business that we really wanted. We wanted to renew that. We felt it was important from a reputational perspective. And the fact that we did I think is, again, kind of part and parcel to the underlying platform. You know, you can't have somebody with a rowboat being part of your maintenance crew on some on these mission-critical telecom/telecommunications cables, and there's a tremendous amount of expertise and engineering that plays a key role here. And you know, I think it's another reason why, when you think about the business, because of the complexities around it, because of the contracts, when you think about the business, it's a very value-added contract but a very value-added business, over all, that I think would probably from a valuation perspective be a number of iterations higher than, you know, three, five, or six multiple. This is an engineering-critical, mission-critical aspect that we own here and that we control, and having these 3, I think there's only 4 in total, sorry 6 in total. To have 50% of the marketplace, I think that's a good feather in our cap for and speaks volumes to people's trust in the abilities of Global Marine.

That's very helpful. And if I can stick with Marine Services, I mean, I think the transaction with Fugro seems pretty interesting on multiple fronts. If maybe you can give us a better picture on what that meant from, you know, projected CapEx perspective on Marine Services? I think you mentioned it avoids approximately $70 million in CapEx. Just maybe any incremental color or comments you can give us to frame that?

Yeah, you know, when you think about the vessel business, albeit it's a little bit different when you think about CapEx on a plant and building out a plant, but your capacity is your vessel, like your capacity is your plant, and in this particular case, we want to continue growing this business. We want to continue not only growing the business but upgrading our fleet, and I think we accomplish that. In fact, I know we accomplish that with this acquisition by virtue of having now this vessel being part of our fleet. There's a lot of flexibility on what this vessel can do, and you know, a vessel new, this vessel new is easily $130 million, $140 million. Now the market has come under a bit of pressure and, as we said 2 years ago, or a year and a half ago, we are looking to try to capitalize on it, and you know, I think from Fugro's perspective, they realize, and I don't want to speak for them, but in looking at their willingness to take equity I think says something about their belief in the business and about not wanting to just get rid of this thing at what could be trough levels. So I think they could walk away thinking that, "You know what? We cut a good deal, and oh, by the way, if the market rebounds and returns like we think it will, we will participate without having the noose around our neck and thinking that the vessel valuations are going to snap back and this thing now being worth $140 million again." I think that would be tough for anybody to stomach. So I think we accomplished what we wanted to accomplish, and they did, as well, because it does expand our business, it does upgrade our business, as well as give us flexibility on the trenching side. And opportunistically, it gives us some ability to move some of these assets around to different parts of the world and maybe even monetize something that we now have more than one of. So I think it was a good acquisition, over all, and we -- I remember talking to the team about it in the summer, how they thought it would be a good acquisition from a transformation perspective to help our overall business. This is not just an asset purchase. And I want to emphasize that, that there is a business here, there are people here that are coming along with this business and will expand our top line at the same time. So I think we crossed the t's and dotted the i's on a number of different fronts with this acquisition. And clearly, from a cash perspective, as I talked about, you want to grow your business? You've got to spend the money, and this was an alternative to us really cutting a check if we wanted to grow our business, or upgrade our business. So again, this does a lot of things for us on a number of different fronts.

That's very helpful. Moving to the Life Sciences component, you know, on last quarter's call, you did mention that the data room is being set up for some of these assets. It sounds like the team is taking time to negotiate, you know, the right value for these assets, and we can certainly appreciate that. So just want to get a sense for perhaps the next few milestones we should be looking for, from either a strategic perspective or a value creation perspective?

Yeah, I think as it relates to the absolute -- the commitment to put in additional capital, I think we've reached all our milestones on that end. And suffice to say, we want to be good sponsors, but there's no demand on the behalf of the underlying entities that they could make that contractually obligate us to commit to putting more capital in. You know, that being said, you make a business decision. If you think you can support the business while you're going through these processes of dealing with strategics, you want to do that in the right circumstance. You don't want to put good money after bad, but this is not even remotely the case with any of these investments. They are on the upswing here. But as it relates to the milestones that we talked about, they are not -- there's no additional formal obligation on behalf of HC2 to continue funding. Opportunistically, we will look at it, and we're very close with each and every one of the operating management team (i.e., from Cherine and Dave's perspective) of, again, being actively involved and actively managing. So like any situation, but I think the good news here is if we didn't want to put money in, we wouldn't have to.

Perfect. And if I may switch gears here and talk a little bit about Insurance, certainly thought that was an interesting acquisition here from that segment. It did seem like a win-win for policy holders, the seller and also for your division. Assuming the deal closes, can you give us a sense for how the team could leverage the infrastructure you've built since the acquisition of AFG? I know you kind of talked about it from the prepared remarks, but any incremental info we can kind of glean on that?

Yeah, I think in looking at the team, keep in mind there's 100 people down in Austin right now, plus or minus. And obviously, to administer a portfolio like this, which I think there's a tremendous value-add from a relationship perspective, and it's one of the big plusses that we're not a financial buyer that will then have to go out and pay somebody from a servicing perspective. So there's that value-add from not having to go to third party from a servicing perspective. And then you've got 100 people down in Austin that you are, again, over doubling the size of the portfolio without having to materially increase any headcount. So, this is a classic case of capturing synergies at the platform perspective and was extremely critical for us, as I discussed all along, to leverage that platform. When I talk about leverage, it's the operating leverage and, clearly, this one will get us there and still give us flexibility. So we are going to continue to cross the t's and dot the i's on the landscape, because there is an opportunity here. And there's an opportunity here of in this space, where we will, oh, by the way, become a 100%-focused as opposed to -- and again, no offense to how people run their business. It's just when people have a diversified operation on the insurance side, they may focus and have their bread and butter in one area and not the other. So we kind of look at it as this is our space, we're going to focus on it, and we're going to try to capitalize on it. And we think, as a result, we can create some efficiencies there that one would otherwise not see and, especially, one would otherwise not have if they were just a financial buyer.

That's very helpful. Just want to switch gears and talk about LPTV a little bit. I know you maybe didn't want to dive too much into strategy yet, but just want to kind of pick your brain and understand, you know, with regards to the assets, right, I mean, what's the opportunity in broadcasting? Do you expect those assets to perhaps be cash-flowing? And then if I can kind of add a question alongside that, I mean, it sounds like there's going to be a bridge loan here. You know, obviously, it would probably require a credit agreement, but would that be short-term debt or long-term debt, and perhaps would it be at the sub level?

Well, the sub -- the entity that is signing the bridge is the HC Holdings broadcasting sub. We fully expect that this is a short-term strategy and it will clearly and already looking at putting the proper capital structure and financing in place for this. So as it relates to this bridge, and again, it's a bridge, you have to think about it as a bridge to something more permanent down the road. And as we continue to build out this space, I think the strategy will become more clear. But also, too, it's not, with the acquisitions that we've signed up, it's not drawing $75 million on day one. I don't think we've made public what that number is, but it's not near the $75 million. That's really to give us that additional flexibility. But there is a strategy here. Listen, the opportunity is on a number of fronts, without going into too much detail, but this is about having critical mass in the broadcasting space, about taking advantage of the fragmentation in this marketplace today, and about having the ability to broadcast into a substantial number of households across the country. So it's no secret what's happening in the media space. Just without getting into too much detail, the rationale when you think back to the basics, you had over-the-air television back in the '70s and '80s being the primary method and means of viewing television, and then you moved into cable for really 2 reasons: content and, I'm blanking on the word, I must have said this about 48 times today already, content and reception. You had to have cable to get proper reception. Today, that's not the case. The business has changed. The technology has changed. And oh, by the way, the content is there. So scratch those 2 off, there's no reason to believe that the dynamic of over-the-air television, and oh, by the way, I have one in my office in New York City, and I get 40 channels that are crystal clear. You know, part of the problem has been the content. And again, there's a real business here, and there's a business that can be a super-attractive, even niche business without thinking you have to take a big chunk of what's happening out there. But there's a phenomenal number of content providers that have no means or method to get eyeballs, and that's, if anything, it's becoming more difficult as more and more content, as more and more people, eliminate their cable. I'm not saying that we think cable, that business is going from 20% or 25% to 50%. I don't think that's happening. But the opportunity is there for every individual or for every entity or individual that does go through the cord-cutting, they will ultimately have over-the-air and OTT. And again just based on the critical mass we have and the valuations, we don't have to have a $5 billion business plan for this thing to be successful and to generate some real attractive valuations. So with that, without getting into too much detail, I think you'll see this thing play out pretty effectively for us. We do have our sights set on a couple of other different things, but nothing, no anomaly as it relates to what you've already seen. And we just wanted the flexibility and have been working on a financing package. But it is a bridge, and we will get to at some point over the next 2, 3, 4 months something more permanent. So that's the thesis, the short-term thesis, in a quick nutshell there.

Thanks, Sarkis. We appreciate it.

And we're bumping up against time. So thank you, Phil, and thank you, everyone, again for joining us today. As always, our management team is available to speak. Should you have any questions or follow-ups, please do not hesitate to call me directly here in New York, at (212) 339-5836.

Brian, could you please go ahead and provide the conference call replay instructions once again? Have a great evening, everyone.

Thanks, everybody.

Thank you, Mr. Backman. As a reminder, this conference call will be available for replay beginning approximately 2 hours after this call. Dial-in for the replay is 1-855-859-2056, with the confirmation code of 99349087. Again, dial-in for replay is 1-855-859-2056, with the confirmation code of 99349087. This concludes the call. You may disconnect.