Good day, ladies and gentlemen and welcome to the Fourth Quarter and Full Year 2018 HC2 Holdings Incorporated Earnings Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to Garrett Edson, Senior Vice President of ICR. You may begin.

Thank you and good afternoon. We would like to thank you for joining us to review HC2’s fourth quarter and full year 2018 earnings results. With me today are Philip Falcone, Chairman, President and CEO of HC2 and Mike Sena, HC2’s 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 HC2’s 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 1855-859-2056 with the confirmation code of 3480439. 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 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 but not limited to adjusted EBITDA, insurance adjusted operating income, and insurance pre-tax adjusted operating income. 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 also available on our website. And finally, as reminder, this call cannot be taped or otherwise duplicated without the company’s prior consent. Now I would like to turn the call over to HC2’s Chairman, CEO and President, Phil Falcone. Phil?

Thanks, Garrett and good afternoon everyone. Thank you for joining us today. We are going to change things up a bit on how we present this quarter and moving forward. I am going to deliver a more high-level overview of the quarter and focus on our strategic goals and vision from both a near-term and longer term perspective. Our CFO, Mike Sena will then discuss the quarter’s financial performance in more detail and then we will open up the call for your Q&A. Overall, we had a very busy fourth quarter across the portfolio and for that matter, an extremely active and transformative 2018. In the fourth quarter alone, our construction segment performed well and we successfully acquired GrayWolf Industrial in late November. One of our Pansend Life Science investments, MediBeacon, received breakthrough device designation from the FDA for its real-time kidney function measurement system. This means that the FDA will be working with the company to provide an expedited regulatory review process providing greater potential for meaningful upside from the investment. Our broadcasting segment continues to expand its operations completing strategic station acquisitions in key markets. We recaptured another of our reinsurance treaties and booked a significant gain in the quarter and added over $2.4 billion of assets to our insurance investment portfolio with the Humana transaction. We also completed the refinancing of our senior secured debt and with new senior secured notes, extended our maturity to the end of 2021. And we announced that we are seeking strategic alternatives, including possible sale of Global Marine in our Marine Services segment. Specifically, in terms of the strategic alternatives process for Global Marine, the process remains ongoing and we expect it will continue to take time as we pursue multiple paths to maximize value. If and when we receive an…

Thank you, Phil and let’s get right into our fourth quarter performance. Consolidated total net revenue for the fourth quarter 2018 was $524.9 million, a 14.5% increase from $458.5 million in the prior year period driven by higher revenues from our telecom, insurance and construction segments as well as from the inclusion of our new broadcasting segment. For the full year 2018, revenue grew 21% to $1.977 billion. Net loss attributable to common and participating preferred stockholders for the fourth quarter of 2018 was $16.1 million or $0.36 per fully diluted share compared to a net loss of $9.2 million or $0.21 per fully diluted share in the prior year period. For the full year, HC2 reported net income attributable to common and participating preferred stockholders of $155.6 million or $2.90 per fully diluted share compared to a net loss of $49.7 million or $1.16 per fully diluted share in the prior year period. There were a number of one-time transactions during 2018, which contributed to net income, including a $102 million gain from our sale of BeneVir, a $115 million bargain purchase gain related to the acquisition of Humana’s long-term care business, KMG, a $47 million gain related to the recapture of 2 of KMG’s reinsurance treaties and a $34 million gain from the sale of the company’s investment in Inseego. At the company’s core operating subsidiaries which comprises HC2’s construction, marine services, energy and telecom segments adjusted EBITDA for the fourth quarter of 2018 was $28.5 million compared to $32.4 million in the prior year period. For the full year of 2018, adjusted EBITDA to core operating subsidiaries was $104.4 million versus $105.5 million in the prior year. Total adjusted EBITDA, which excludes our insurance segment, was $15.1 million in the fourth quarter of 2018 compared to $19.7…

Thank you. [Operator Instructions] Our first question comes from Sarkis Sherbetchyan of B. Riley FBR. Your line is now open.

Good afternoon, Phil and Mike. How are you guys? So, first question relates to the guidance, obviously you provided the guide for construction, I think it was $75 million to $80 million, can you maybe breakout the expected contribution from GrayWolf?

I think at this time we are not – we are looking at it more on a consolidated basis. Again, it’s just guidance and as we walk you through the numbers, the backlog is still extremely strong at that company. Things are going well. But we are not breaking it out between GrayWolf and DBM.

Understood. And if you kind of think about the business environment, any kind of puts and takes for construction, anything positive, any negative just kind of a little update there?

Yes. Again, this is not residential construction, these are sizable projects and we are still operating at a very strong capacity level, in fact continue overcapacity. And with the number of jobs out there, there is a lot of things to look at. I think the visibility is still no different than previous quarters in terms of 18 to 24 months. We, quite frankly, were not seeing a slowdown at all. And as you also discussed, the job type is changing a bit for us which is good news because you are probably going to see the inventory turn a bit more and not be kind of wedded to the large LA Rams type jobs. But there has been no real slowdown at all. And one of the reasons why we look at GrayWolf and so we are so keen on that is the additional stability. This is a maintenance business. We believe that there is going to be cross-selling, we are already looking at that. And from a maintenance aspect, this is – it’s an ongoing thing and it’s not something that you typically cutback. So we like the business. It’s complementary. We think there is going to be many sales process that we can really connect on between the two entities.

That’s super helpful. I guess, moving on to the Marine Services segment, I understand you are not providing guidance for ‘19 at this time, but if you kind of look at the fiscal ‘18 guide and try to bridge the gap between the second half of ‘18 delivery versus actual than kind of some of the numbers you have provided us with respect to the shift out from 4Q into ‘19 etcetera? Just kind of help us establish a frame of reference as to if anything has changed from the business as far as the macros are concerned or anything that’s from a customer standpoint or just trying to understand the puts and takes that are right?

Yes. As Mike kind of laid out the $4.4 million to $3.7 million of receivable write-down, the $4.4 million especially is out of our control, that’s an HMN project shifting issue. And again, if you look at the backlog I would listen, there is no question we were disappointed in the end result, but the business has not changed. And hopefully, people will realize that this is a strategic business. The backlog quite frankly is in an all-time high from when we bought the company. And as Mike mentioned, it’s up over 480 and you know there is no reason to believe that these guys can’t continue what they had been doing in the previous quarter. This is unfortunately, it’s a lumpy business. And I wish that was different, but it’s not, but by no means is it a reflection of the overall business environment for global at all.

No, that’s helpful. And I think the backlog in the prior Q was like $360 million, so it’s nice to see above 480 and I guess if you can kind of maybe help us understand if there is any impact from the headlines at a lot of the investment communities reading with regards to the Huawei, does it impact the global marine business, just wanted to get a better understanding and handle around that?

It’s a headline. It hasn’t really changed our sales process quite frankly, I mean, keep in mind, we only went out mid-December with the books. This is a relatively complicated business, where that’s global in scope. So – and it’s just a longer – long process, but by no means did we expect this business to be sold by now. So, it’s – and as we’ve said, both Mike and I, it’s an ongoing process.

Got it. And I think you mentioned the MediBeacon asset and R2 Dermatology as well, I know you mentioned the kind of the total cost you’ve invested so far. Maybe kind of an expectation for what you hope to accomplish from the monetization potential or just kind of the strategic partnerships you’ve outlined on the call, just kind of help us establish a frame there?

Yes, I’m – I’ve talked about Pansend a number of times, and I think if anything I might get not too excited, but kind of very excited on timing. And when you’re dealing with products like this that are very, very sophisticated and that will be in the OR and the ICU, the diligence associated with these types of situations is probably longer than what we hope. But it is as we’ve said and I think as indicated by the FDA, this is a trance – this is a product that is we think is very unique and by virtue of the number of people out there that are – that we’ve been in discussions with, it is a super high-quality product, but again, these things just take time unfortunately.

Thanks for that. I’ll hop back in the queue.

Thanks.

Thank you. [Operator Instructions] Our next question comes from Kurt Hoffman of Imperial Capital. Your line is now open.

Good afternoon. A question on the corporate level cash at year-end, $6.5 million, that’s quite a bit lower than it’s been historically. Can you talk about kind of what the liquidity situation is in the Holdco stands today and kind of the sources and uses to get through the next year?

Yes. The reality of it is we do have a number of different levers to pull. It’s kind of up and down quarter-to-quarter-to-quarter depending on the dividend aspect, but there is we are not quite frankly concerned about this at all. And one other interesting thing to note is that when we acquired the insurance company, there was a 3-year moratorium on dividends. That 3-year moratorium was up 12/31/2018. So, as we look at the cash process or the cash at the Holdco, it’s ebbs and flows. And by no means are we even kind of thinking twice about that as a result of the different levels – levers that we have and the performance of the underlying subs and the dividend streams et cetera. So, it’s not something that we’re thinking about at all quite frankly.

What type of magnitude of dividends can you get out of the insurance sub?

What is that number, Mike?

There’s statutory limitations on what you can pull up, but ours – it’s based on surplus, it’d be limited to 10% of surplus that’s about $25 million.

Okay.

Yes, our surplus has kind of moved up and down between $250 million and $280 million.

Okay. Do you have an expectation of what the cash needs will be at Pansend and Broadcasting?

The cash needs at Pansend are deminimis at this point. There’s no commitment on our part for contributing additional cash, and I think that’s very important and we’ve made that point a number of times. And as it relates to Broadcast, that’s something that we’re going to finance at Broadcast. If anything, we should be getting cash back from Broadcast, that was the objective with this and when we did the bond deal, that’s the way we structured it. So, it’s not incumbent on Holdco to be funding Broadcast build-out nor is there additional a written commitment to continue with the various investments at Pansend.

Right. Okay, last one on Global Marine. Can you refresh our memory in terms of the EBITDA that’s contributed from the maintenance contracts?

We have never broken those out, but I think without going into detail, they are very attractive contracts. But again, it’s not something that we’ve – that we’ve broken out in the past.

Okay. Thanks very much.

Thank you. And we do have a follow-up question from Sarkis Sherbetchyan at B. Riley FBR. Your line is now open.

Yes, thanks for taking the follow-up. Just want to come back to Broadcasting, you mentioned I think on the prepared remarks the breakeven may take longer than expected. Is that a shift in strategy or did you see something that’s kind of attractive from the investment angle or are just integrations taking a bit longer, maybe some more color around there, please?

Yes, no, it’s – when we acquired Azteca that’s where the bulk of the losses were based and it’s just taken a little bit longer. And sometimes when you think of longer you think of years, this is not, it is just – I don’t want to put a date on it, but it’s not monumental in terms of time and it’s not material in terms of movement from a cash perspective.

Understood. And if we kind of look at the, call it EBITDA loss this quarter, is that kind of the appropriate expectation maybe call it for the first half of the year?

You’ll see that as we mentioned –are you talking about Broadcast?

Yes, Broadcast specifically.

That we haven’t given any guidance on that, but we with our business model and business plan, we fully expect that to change. This is an integration process that – keep in mind, we just – we – our first acquisition closed in November, now we have 176 operating stations, adding people. It’s really just an integration aspect. And we haven’t gone into detail on contracts that we’ve signed and what we’ve done, but it’s – we’re very excited about it, huge opportunity here.

And – that’s helpful, Phil. I think if I were to pick your brain a little bit more there, I mean, when you get through the integration, do you have plans to maybe give us a sense for what the target financial model looks like there or just kind of an update on post-integration where you see that business going?

Yes. Well, we haven’t decided on how we’re going to really report on that specific industry or that business, but I think when you look at it, keep in mind, there’s a couple of different avenues that you have to think about and you can be a – you can either lease the capacity on the stations from a whole host of people and it’s essentially the tower – a tower model per se, and the other dynamic is getting into partnership with various programming entities, where there’s revenue share where you’re hosting specific programming channels and sharing revenue that you’re more focused on the ad-based model there. So, there’s two different aspects there that are both extremely attractive and you’ll see a mix of that, but at this point we haven’t gone into detail as to where we think we will take it from a financial perspective.

Got it. Thanks for that. That’s all for me.

Thank you. And our next question comes from Lauren Gallagher of Angelo Gordon. Your line is now open.

Hi, thanks, thanks for the time this afternoon. Question a little bit on following up on the last one with Broadcasting, I understand you’re not kind of giving a new timeline for when the business will become breakeven, but has anything kind of materially changed over the last quarter? I guess, what’s kind of caused a little bit of the integration delays and have there kind of been any new contract – content contracts signed?

There has been contracts that have been signed. The timing is really a function of the integration process. Again, it’s not material from our internal perspective and we don’t see it as something that is going to inhibit us from moving forward. It’s just really – there’s a whole heck of a lot of things to do. We’ve got the – with the pending acquisitions that we’re looking at or that we have, I mean, I’m sorry, let me take that back with the stations that we’ve acquired and the additional pending acquisitions, we’ll be up to 176 operating stations. Keep in mind, Sinclair has 190 and they lease I believe 40. In addition, we’ve got 180 licensed in silent stations that we’re in the process of determining which ones we build out and not. And over and above that we have about 300, 350 construction permits. So, we are kind of circling our arms around this thing, but from an operations perspective, it’s just kind of deploying people where we think the best to – without really hiring too many people, it’s just taken a little bit more time, but the opportunity is, every day that if – you ask if one thing has changed, yes, I think every day that goes by, we’re more excited about the opportunity.

Okay, great. Thanks, Phil, for the short color. And then on Global Marine, I guess, can you explain a little bit more about what’s caused the delays whether it be weather delays and timing of contracts kind of project starting, just a little bit more about what’s caused you to those issues?

Yes. As I – starting with HMN, I think they recognized the revenue on certain milestones and some of them that they expected to complete by the end of the year, didn’t hit until 2019, and so that’s one of the biggest pieces there. I think when we go through year-end and we had some receivables unfortunately that we wrote down from some aged projects and that’s creating a big piece there, some of them were weather claims that didn’t get approved by the customer and so that’s the biggest piece. And the rest really these are very big complex projects that the permits can get delayed things like that and that’s really moved out the piece that was at the core Global Marine business, it’s moved that out into later time periods. So, there is various different factors on that aspect.

And just to add to that, when your – as we’ve always said, your vessels are your capacity, your vessels are your plans per se. If you’re not starting a project that you expected, you still have to reserve that vessel and it’s may be delayed by 1 month or 2 months, so you’re sitting with this vessel that should have been operating because of the contract that you signed, but it’s not and you got to take that expense. So, that’s the nuance of this business that can create the lumpiness sometimes.

Got it, understood. And I guess, what generically if you could comment has caused kind of the continued delay into 1Q, 2019?

It’s really just other projects that slipped out further. So, some of the other projects that were slated for Q1 has slipped out to later in the year.

It’s not like we’ve lost contracts or anything has changed on that. It’s just timing quite frankly.

And what’s the underutilized ship time, remind us – can you build that back to the customer?

So, there’s two components to the business. So, from a maintenance perspective, we get a standby rate and that rate goes up when there’s actually a breakage in the cable. The install part of the business, which is where you’re seeing the unutilized costs that are flowing through. It’s not – this is about when we start the project and the timing. And so those can’t be built back unless you’re in a contract that you’ve committed to and the reasons of the delays are on the customer, which isn’t the case here.

Yes. It’s probably a contract to contract or job to job specific issue. And it’s the – one of the unfortunate aspects of the business that hasn’t changed over the last 50 years. I think any shipping company has the same nuance when you’re dealing with projects like this and yes it depends on your clients and your expectation with that particular project or job or contract.

Got it, understood. Okay, thank you for the time today.

Thank you. And our next question comes from Richter Yeske of Jefferies. Your line is now open.

Hi. Can you walk us through growing the insurance management fee over time and thoughts around how long that can take and what needs to happen to realize those fees?

When you say realized, we’re already getting the fees that is – that’s moved up from zero to where we are now on a run rate. And as the business – as the business grows as we expand that asset base, which we fully expect to do, there’s fees associated with every dollar that we bring on board.

Right. I see the existing fee, so, I guess the question is, is that – are we fully run-rated right now for the asset base? In other words, do you need to grow the asset base for those fees to grow?

Well, the run rate basis isn’t fully reflected yet as we acquired a sizable amount of cash in the Humana transaction and as that gets fully invested, which only was for part of the fourth quarter, that fee will continue to earn on those new investments that we make and you also see that we had about $280 million of cash at year-end, which was from recapturing some reinsurance treaties and that will get invested in the first quarter and beyond. So, as you get fully invested, the fee will get to a more run rate basis based on today’s business and then to the extent, we’re able to recapture more reinsurance treaties or acquire other blocks of business, the fee can –will grow.

Yes, but it’s not like we have booked a fee and not performed a task yet, it’s – we’ll increase accordingly as the assets grow.

Okay. And then do you mind providing an update on the timing of the $9 million escrowed with BeneVir?

It will come in September, so 15 months after the deal closed, which was last June.

Okay, thank you.

Yes.

Thank you. And ladies and gentlemen, this does conclude our question-and-answer session. I would now like to turn the call back over to management for closing remarks.

Well, again, thank you for your time today. And as we’d mentioned, we continue to be very excited about the business. We are here if you have any additional questions. And we appreciate you taking the time this afternoon and thank you again.

Ladies and gentlemen, thank you for participating in today’s conference. This concludes this program. You may all disconnect. Everyone have a great day.