Good afternoon, and welcome to the HC2 Holdings Third Quarter 2018 Earnings Call. All participants will be in listen only mode. After the today’s presentation there’ll 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.

Thank you, Jimmy, and good afternoon, everyone. And I'd like to thank you for joining us to review HC2's third quarter 2018 earnings results. 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 with our webcast presentation, which can be accessed on the HC2 website, again, in the IR 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 1949939. 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 our most recent earnings press release which is also available on our website. And finally, as reminder, the 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. Thanks for joining us. Once again, we are going to try to keep the prepared remarks brief so we have a bit more time for Q&A. Today, I'll focus my comments on the solid performance across the portfolio during the quarter that also saw us complete the acquisition of Humana's long-term care insurance business. We'll also discuss a few important milestones that took place after the end of the quarter, including the decision to explore strategic alternatives for Global Marine and delever the Company post any transaction, which is our goal with that announcement. MediBeacon, the entity -- the Company that we have in the Pansend Life Sciences unit receiving a breakthrough device designation from the FDA for its real-time kidney function management system, which is a quite remarkable invention -- innovation that has the potential to help millions of people around the world. And I'll briefly touch on our pending note offering, the proceeds of which will be used to redeem the 11% senior secured notes due to 2019. Turning to Slide 5 quickly. You'll see the summary of our adjusted EBITDA by segment, and for our insurance segment, pretax insurance AOI. Turning to the Slide 6, third quarter highlights. I want to run through these briefly and give you a good snapshot of what's happening here and why we continue to be very excited about the operation in the underlying businesses. Third quarter, first, with DBM Global, the third quarter adjusted EBITDA of $16 million. They clearly had another solid quarter, $41.5 million on a year-to-date basis. Based on these results and our current view of the business, we again remain comfortable with our full year 2018 guidance range of $60 million to $65 million of adjusted EBITDA for DBM. At end…

[Operator Instructions] And the first question comes from Matt Vittorioso with Jefferies. Your line is now open.

I thought I'd just start out with -- on the DBM side of things. You mentioned that the backlog's slowly creeping a bit lower and that the ideal spot would be somewhere in the $500 million to $600 million range. Just as we think about the broader market trends, can you just give us a sense for what bidding activity looks like? You talked about more smaller projects. Are there a number of projects out there to bid for? Just trying to get a sense for the market outlook here domestically for these kinds of projects and how this business will kind of shape up over the next few quarters.

Okay. Well, I think for one the movement in backlog is no indication of what we're seeing in the overall marketplace. I think it's a function of where we're focusing our business. And what I mean by that is you have -- we've made a conscious effort to focus on the $50 million projects which turn quicker. And quite frankly, you'd probably make more money -- you do make more money on them. And your backlog and your burn, as the result, changes. And burning off some of the bigger projects, which were something that we've experienced over the last 12 months as being the big part of our portfolio, it's just kind of switching around our portfolio, but it's by no means a trend in the overall environment. In fact, the environment is extremely strong. There's a lot of building in the tech market and the tech space, of course, healthcare. And these are companies that weren't around 10 years ago. So it's been very healthy for the Company to build some of these relationships, and they're all super high-quality relationships and super high-quality clients. But again, we made a concerted effort to get our backlog back down to a kind of more normalized 550 million, 600-ish million.

And then as you get back down to that optimal level of backlog, you mentioned that you operate that business at something like 170% of capacity. As you get back towards a more normalized level of backlog, does that imply that there may be some upside to margins as you have to pay fewer contractors and other service providers as you come back down closer to your own capacity?

Yes. I think in general, the strength in that mid-market, we're seeing a lot of strength in that and they're not mid-market companies. They're just smaller builds. As that market continues to grow or build, margins tend to increase because the market tightens up a bit. So in general, yes, as your swing capacity comes down, just instinctively you can do a bit more within your operations. We'll still be well north of 100%, but these projects will turn more, turn faster, you will see some margin improvement. And in general, I think, just by virtue of the number of opportunities in the 25 million to 50 million space, will increase the overall pricing in the marketplace.

Just switching gears to Global Marine. I think, clearly, for existing and future bondholders, the potential sale of that asset is a meaningful potential event. So it sounds like you started the official process in the last few days. Any sense for timing or any comments you can make around the depth of discussions you've had thus far? Again, trying to get a sense for when the transaction might take place. And similarly, if there are any thoughts on valuation, that would be helpful as well.

Well, I don't think we want to talk about valuation. We continue to be very bullish on this company. But the pre-sale diligence was pretty extensive, and certain discussions that were in the marketplace gave us a lot of comfort that there is a real legitimate opportunity here. Today is actually our first official day from a timing perspective. Boy, there's a lot of moving parts. So it just depends on the enthusiasm, in fact, as strong as we think it is. And again, is no reason to think it's not. But it's just tough to say from a timing perspective. We're focused a lot on buyers. And obviously, the European marketplace, very diverse group, DBM, ABN have put together a pretty extensive package. And the Company is well known. It's been on the ground for 100-plus years. It's well known in the market. And keep in mind with every maintenance contract, that contract is not just with one person, it's with a consortium of major telcos. So Global Marine is well known in the business, and having three of those contracts in different areas of the world gives them a real, pretty exciting global reach. So we're excited about it. We're -- we'd be sorry, I guess, to see it go, but at the same time, I think from a delevering and value-added proposition, it would be nice to get another feather in our cap with that.

Makes sense. Another quick, I suppose, timing question. Not sure how much detail you can provide. But for those of us who are less familiar with the medical device industry and the Pansend portfolio, in general, the MediBeacon opportunity looks pretty interesting. This breakthrough device designation, what exactly does that mean? Does getting that designation kind of alert potential buyers to the validity of MediBeacon? You talked about potentially monetizing that asset in 2019. Is this designation sort of the first step to almost advertise this as a real business? Or how does that work?

Well, I think, one, the reality of it is that there's a massive market for this. It's -- again, it's a device that looks like a blood pressure monitor and monitors your kidney function real-time. And we believe that -- and when you think about the operating rooms or ICUs and the potentially cost savings aspects of not having to draw blood, take it to the lab, etcetera. The thing works, and it's been tested, and the team has gone through a number of pilot testing. And the breakthrough designation devices, not something you go out and ask for, per se. It's -- this is coming from the FDA. And what that means is it's really a value-added product, a value-added device for the industry. And it can tend to mean fast-track for FDA approval, but it's something that clearly opens people's eyes up when things like this happen. And it does, I think, bring a tremendous amount of credibility to the product. But not that we needed it, it's just kind of free advertising. And again, coming from a -- coming from the FDA, I think, is a big coup for the MediBeacon team.

Yes, makes sense. And then last one, just sticking on the Pansend side. You talked about the BeneVir potential progress payments that could be coming down the pipe. Any sense for the progress that's being made there? I suppose Johnson & Johnson has to continue pushing that towards milestones. How do we feel about that progress and when additional payments could come through on BeneVir?

Well, there's a number of different milestones -- or a number of different aspects to it. But clearly, as we've said all along, the amount of money that has to go into this and the commitment on behalf of Johnson & Johnson is, I think, indicative of the potential of this product and what it can do. And we haven't talked publicly about the milestone payments, but there's no reason to believe that it won't happen. It's still relatively early in the process, but I think what is encouraging is the fact that this is not a first-time drug for anybody in the biotech space that takes -- that needs FDA approval. When you have something unique, it tends to take some time. This is not a first-time drug, which I think was -- and I can't speak for J&J, but I think this is one of the other aspects that was very intriguing to -- for the acquisition. And it gives us reason to believe that the early milestones -- or the earlier milestones could be and should be in hand for us. So kind of all these different dynamics play that role in getting these milestone payments. But the fact that -- the blue-chip behind the thing is -- gives us a lot of comfort that it's going to get done.

And our next question comes from Sarkis Sherbetchyan with B. Riley FBR.

Yes, so just wanted to touch off on insurance first. It's nice to see the ability for HC2 to get some management fees from this insurance platform now that it's gained scale. Can you maybe discuss, Phil, how we should think about these annual management fees? I think you said to the tune of about $15 million per annum?

Yes, I mean it's not something that's new in the industry. If you look at the Apollo and Athene model, what's -- essentially what's been done there, we have a separate team under the CGI umbrella that's managing the money, and it's either done in-house or outside. And why pay outside sources when you've got the expertise in-house to do it and the team that's doing it. So we can expect that as the assets increase over time and as we do more deals, that just will continue to increase. And yes, it's a fantastic thing because of -- when you think about that insurance business, especially the LTC business, which is much longer duration than the fixed annuity business, it's a very interesting asset for us.

Got it. That's helpful. And just switching gears to the broadcasting assets. It's nice to see that you're getting the broadcasting segment closer and closer to breakeven. Definitely nice sequential progress here. Maybe if you can discuss the specific action plans the management team there has kind of undertaken. And I think you mentioned getting to breakeven in the first half of '19, which seems to be a quicker time frame versus the end of '19 previously communicated. Just maybe some color on that, please.

Yes, a lot of the -- obviously, there were certain transactional expenses there, but the losses that we incurred were a function of the Azteca acquisition on the network side. And we've cut the business back a bit and trimmed it down and tightened it up, and that's where the bulk of the -- in fact, that's not all the losses were. So we kind of ramped that up a bit quicker than initially -- than we initially thought we could and has moved, I think, forward nicely while still maintaining a decent business there. We still have some little bit of wood to chop, but we made a ton of progress on that. So we're happy about the trend there from an EBITDA perspective.

Understood. And just one more on broadcasting. As you kind of integrate the assets and get closer to breakeven, maybe mention some of the things you can do to generate similar revenues over time.

Well, this is all about a distribution platform, and there's a number of different business propositions that you could think about here. The easy one is upon integrating all of your stations, and I think on a pro forma basis, we have about 164 covering major markets, that's capacity for people. And that's an outlet for content providers. When you think of a cable network, a cable channel that all of a sudden is losing eyeballs, how do they get out into the marketplace? They have to, I guess, advertise and hope that somebody searches for them on broadband or they could lease capacity on our distribution platform and be broadcast over the air. And I think what's happening there, from a technology perspective, the market, I think, is going to be very surprised to see how one will be able to broadcast over the air to mobile devices. So that will -- marketplace is changing. It's changing very quickly But as I've in the past, people have to think about us as the pipe. And you can -- we do have a tremendous amount of capacity, but there's a tremendous amount of content out there. So I think marrying our pipe with high-quality content, one, there's already discussions. We're already having discussions is -- I think, it's a very, very, very exciting proposition. And it's also, two, as I try to explain to people, if you have one independent station in, I don't know, pick a state, Oklahoma or Alabama, what's that one station worth? But now, you take that station and you kind of package it with 163 other stations around the country, all those pieces of the puzzle are worth a lot more as a whole than on an independent basis. Because one station is not going to attract a high-quality content provider, but a multitude with phenomenal geographic distribution will. And that's what our focus is.

Our last question comes from Kurt Hoffman with Imperial Capital. Your line is now open.

You made some comments around sources of cash for the holding company. I just wanted to clarify those. Is it your expectation that the holding company can cover its cash interest in corporate overhead expense with the existing group of assets and on a steady state, not including any one-timers, like the broadcasting intercompany?

Yes, absolutely. There's no question about it.

Perfect. Good. Okay. And I think the first question that was asked, a bit around bid activity DBM is seeing over the last several months. I'm not sure I caught the answer to that. Any change, one way or the other there?

No. Well, other than kind of focusing on the $25 million to $50 million projects. And again, when I talk about a $25 million to $50 million project, you have to think about it as a $50 million, it's $50 million of steel at an overall project, so they're still sizable projects. It's just isn't just a steel portion. So it's a different part of the market than one would think. And it's not residential build or multifamily build or a condo build. These are sizable enterprises that we're building for some of the biggest in the world, and there's an ongoing need for that. So from a bidding perspective, just the team is going to focus on that. Listen, getting the LA Rams is a nice headline, doesn't come without its headaches, though. So there's the dynamic of focusing on some of these other things, I think, is the real sweet spot and very attractive from a margin perspective for the Company.

And given they cycle through backlog more quickly, can we expect DBM's top line to be somewhat stable over the next several quarters, despite the lower backlog number?

Yes, I think, it's a good question. One would think that with the backlog dropping, your top line would drop. No, it's not the case at all. It's just turning projects more often. We'd had LA Rams in our backlog now for quite some time versus you do a $25 million project, you can turn that around quite quickly. It's just turning projects around a bit more. So no, we're still -- if you talk to Rustin, with the amount of business that he's seeing out there, he still thinks we're relatively early in the cycle. I know you are always hearing cyclicality, cyclicality, cyclicality. I mean it's -- it gives me a headache after a while because it's just -- it's -- yes, I mean, are there cycles? Sure. But these guys have lived through every cycle possible, including some of the worst in the history, as recently as 2008, and came out with flying colors. So it's how you manage the business. Your fixed cost overhead is very critical, which is why we've always talked about swing capacity. But Rustin, continues to be excited about the prospects, and can't keep his feet on the ground. He's so excited about it, and flying here, flying there, looking at this, looking at that. In addition, with the acquisition -- the small acquisitions of Mountain States Steel and one of the acquisitions we did in South Carolina, it's also getting us into the bridge business. We stuck our toe in the water there. That's a -- that infrastructure dynamic is always very exciting. But listen, they have more things that they can -- more things that they're looking at that they can shake a stick at. And Rustin, I think, was asked the question while we were on the road. He thinks we're at the fourth inning of a 9-inning game, so that's -- I don't know what's happening with some of the other companies out there, but we're not seeing it here.

Well, Rustin has been right for the last four years, so hopefully, that will continue. Congrats on getting the deal done.

All right. Appreciate it. Thanks.

And thanks, Phil, thank you all again for joining us. As always, if you have any questions, please feel free to give me a call directly at 212-339-5836. Jimmy, can you go ahead and give the replay instructions.

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 1949939. This concludes your call, and you may disconnect.