HC2 Holdings, Inc.
Q3 2018 Earnings Call Transcript

Published: 10 Nov 2018

[Operator:]

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.

[Andrew Backman:]

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 [phone] 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?

[Philip Falcone:]

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 of the third quarter, DBM continued to maintain a very robust backlog and continued to execute on key projects. In fact, they recently began final erection activities for the major roof sections for the new LA Rams, Chargers Stadium, which has been a nice project for the Company. To give you some perspective on the size and scope of this project, these sections are quite large, weighing approximately 1,200 tons each and are assembled on-site and erected as one piece. And that's one the things that makes DBM a bit different and a great choice for the vendors. They continue to perform as expected and get these things done quite to the amazement of anybody that works with them. DBM finished the quarter with the backlog of $615 million and adjusted backlog of $632 million. And this is even after burning through $195 million of backlog in the quarter, which was driven by work on some of their large projects, including the as-mentioned LA Rams, Chargers Stadium, Loma Linda Hospital and Google Bay View. As I mentioned, last quarter, we expect backlog to continue trending down over the coming quarters as DBM continues to work through some of the larger projects I just mentioned. And going forward, our focus and DBM's focus is on increasing the proportion of small- to medium-sized projects in the backlog. This will allow for faster completion and turnaround time, higher point of sale margins and more efficient capacity utilization. Backlog. In addition to backlog at these more normalized levels, $550 million to $600 million, means a lower working capital requirement, and it clearly benefits the free cash flow of this business. So we made a -- this is one of -- has been one of our focuses on DBM. The backlog was pretty high and using a lot of working capital early in the year, and we made this a key part of our focus going forward to get the backlog down at the more normalized levels. Keep in mind that we're still operating at 170% capacity utilization, so we have a lot of flexibility there. But if we can get our backlog kind of bouncing around between $500 million and $600 million, I think in the short term, you'll see some very nice cash flow generation here. And finally, as we announced a few weeks ago, DBM will be acquiring GrayWolf Industrial, a specialty maintenance, repair and installation services provider with over 40 years of experience, serving the petrochemical, pulp and paper, oil refinery, and power end markets in a transaction valued at $135 million. We like this transaction for several reasons. First, GrayWolf diversifies and expands DBM's service offering into heavy maintenance and repair, which will help offset some of the cyclicality of the commercial construction market, and that's due to the long-term and reoccurring nature of GrayWolf's maintenance and service contracts. Second, the acquisition is expected to be accretive to DBM's annual adjusted EBITDA by just over 20 million, and given the minimal CapEx requirements here, will provide a strong free cash flow. Third, DBM will be able to offer more complete value proposition to existing customers while also cross-selling Gray Wolf's list of blue-chip customers. So we kind of looked at this as a very good acquisition for us. We have been looking at a number of different things for the DBM business for the industrials to continue building out as an industrial services entity. As we've said all along, our goal here is to get to 100 million of EBITDA and $1 billion top line, and this gets us there with a very solid business and one with a very good reputation in fact, great trepidation like DBM. And the maintenance aspect is a very exciting area for us because of its recurring revenue and contracting aspect there. So it eliminates some of the lumpiness that you might tend to see in the DBM side of the business. So overall, I think on a number of different points, it's a value-added acquisition for us that we're very excited about, and of course, the DBM team is very excited about as well. The acquisition will be financed with a combination of 80 million term loan financed at the DBM Global operating level for which they have secured financing commitments. Keep in mind, while buying this thing at 135 million, there's an existing 80 million of debt on the Company, so it's essentially like assuming 80 million of debt. And the combination of the two entities and having this as part of the overall DBM strategy, the overall DBM balance sheet gives us a lot more flexibility there. 15 million of the 135 million will be coming from either DBM's existing facility or cash on the balance sheet, depending on the absolute timing of the close. And 40 million of the balance will be coming from existing cash from HC2 and certain of our subsidiaries via an indirect investment in DBM Global. So we've got that all wrapped up. As I mentioned, we looked long and hard for the right acquisition and really feel very excited about getting GrayWolf under our belt and really gets us closer to what our short-term goals were there. And that's 100 million of EBITDA as an industrial services entity. And you put the two companies together, you've got 81 million, 82 million of EBITDA. You've got deminimis CapEx, you've got very little debt, you've got a tremendous amount of free cash flow as both of the business are not capital intensive. So that's how we looked at this and continue to believe that adding businesses like this will continue to grow the parameters around our cash flow objectives over the long-term. Turning to Global Marine, still on Page -- or Slide 6. Global is coming off one of the strongest quarters. Global reported adjusted EBITDA of approximately $8 million for the third quarter and nearly $26 million on a year-to-date basis. This quarter's results were again driven by strong performance in the HMN equity investment, offset by some higher-than-expected costs on certain offshore power construction project and an increase in unutilized vessel costs attributed to recently acquired marine assets and the timing of new project work as these assets are being deployed. And my point of coming off one of the strongest quarters, that second quarter was a very solid quarter for Global. You might look at this as like, wow, $8 million. It's a big drop. And there's ongoing lumpiness in this industry with this company, but it clearly doesn't change the long-term opportunity here and the long-term proposition for continued growth in EBITDA and cash flow. Global Marine's backlog remains strong, coming in at $358 million at the end of the third quarter, with backlog -- in addition, backlog at Huawei coming in at just over $350 million. Based on our current view of the business, we continue to believe that Global will come in within the full year guidance range of $45 million to $50 million. This quarter, after many years of delevering -- delivering value to the shareholders of Huawei, Marine approved a new long-term annual dividend policy which is a big step forward for the Company. This new policy recognizes the sustained success of this investment and its strong position in the market. As a result of the new dividend policy, Global received a $9.8 million special dividend during the quarter. They will receive 2 additional special dividends, $4.9 million in the fourth quarter as well as $4.9 million in the second quarter of next year. And in addition, each year going forward, Huawei will annually distribute a minimum of 30% of cumulative distributable net profits as dividends which is a testament to the success of the business. I know we've talked a lot about that subsidiary and one of the -- don't want to say issues -- but one of the aspects of that entity is the ability to extract value, the ability to point to value. You can see EBITDA and performance continuing to go up, but historically, HMN did not pay a dividend and did not distribute the cash. And these dividends that I just mentioned just comes from the cash and the balance sheet. Clearly, we want to keep the Company in a good financial position, so there is additional cash on the balance sheet. But this is a very good step in terms of being able to point to a real value and a real value proposition for that subsidiary. So we think it's -- was a huge success by the management team, and they're working with Huawei. So very excited about that. In addition to recently winning and completing its first oil and gas contract since the downturn in that market, Global's other key milestones during the third quarter included securing a new 5-year cable repair framework agreement with a leading offshore wind power developer, covering their European assets; winning several offshore power contracts, including successfully installing an 18-kilometer export cable to a floating offshore wind turbine, a first for the business; and lastly, completing 2 fiber-optic cable installations, bringing vital high-speed connectivity to oil and gas platforms in the U.K., North Sea and Norwegian sector. So one of the things that we've talked about in the past is Global's prospects going forward. We feel like we've really done a very good job of repositioning that company, especially for the offshore power market -- renewables market. Clearly, an upgrade of some of the vessels over the past few years, taking an opportunity to buy on the dips, if I may say, as well as the -- adding some of the trenching equipment via the Fugro transaction. So that company is quite well positioned now and really moving in the right direction. You may ask why we've decided to put the Company up for sale, which we recently did. It was a function here of a number of inbound inquiries and -- regarding the JVs and the various parts of the business, and we just kind of made the decision, especially with the new dividend policy, that the timing could be right and -- especially with our objective of focusing on delevering. The delevering comes with monetization of assets. We do like this business a lot and its -- I get a little bit torn from time to time, but I think it's the right thing to do. And as a result, we've engaged Deutsche Bank and ABN AMRO as joint advisers to lead the process. We did officially launch that process today, so we're very excited about that proposition going forward. But since the acquisition 4 years ago, the -- I can't emphasize enough how the management team has really done a phenomenal job of repositioning and strengthening the Company, and most importantly, continuing to successfully renew all 3 of its critical long-term telecom maintenance agreements, which really represent approximately half of the world's contracted telecom maintenance zones. Very big thing, it's a very attractive business. Again, they are long-term contracts, and we continue to have and see success in rolling these contracts from time to time as they come up. So having that last one kind of check the box was, I think, a real feather in the cap of the management team. And as I mentioned, taking advantage of the market downturn, great progress in renewing the fleet of marine assets, and all while substantially reducing debt that was assumed at the time of the acquisition. And I don't want to under-emphasize that fact that this company has generated a good deal of cash over the last number of years. If you look at an apples-to-apples basis, the Company, along with some different acquisitions, has paid down about $70 million of debt. So I think it's a unique time. I think it's -- and it's an industry that we continue to be big believers in. Of course, we have to get the right price on it, but there's no reason to think that we won't. But the long-term objective -- or our objective as a holding company and as fiduciaries and looking at how we think over the next five years, key is reducing our overall leverage, which has been a top priority, and monetizing this asset in using the proceeds to reduce any of the holdco debt -- HC2 holdco debt outstanding, I think, is a very, very key step in delevering the overall company. Just quickly moving on to Energy and PTGi. ANG reported adjusted EBITDA of $1 million for the third quarter and $4.7 million on the year-to-date basis as Drew and the team seek to increase existing station utilization and increase the percentage of renewable natural gas flowing through the network. As such, we remain extremely encouraged about the significant gross prospects -- growth prospects for this business and -- especially with oil where it is. And if you do the back of the envelope now, quite frankly, it's a no-brainer if you have any capital tied up in the trucking industry -- especially in, of course, the class A trucks that I continue pounding the table on, that it's a very, very attractive value-added proposition to have nat gas or compressed nat gas vehicles today versus spending the capital -- or spending the money on diesel fuel. So we continue to be big believers there. Meanwhile, PTG -- PTGi-ICS continue to remain a consistent dividend contributor during the -- to HC2 during the quarter. Recently signed a deal to acquire a company by the name of Go2Tel, a small tuck-in acquisition, which we believe will help continue to support the continued dividend here back to HC2. As we flip to Slide 7, you will see our pretax AOI for the insurance segment was a loss of $11.3 million for the quarter and a loss of $8.7 million for the year-to-date period, both in the -- both the quarter and year-to-date pretax AOI were driven by the addition of Humana's long-term care business, which saw a higher proportion of new claims as well as additional claim incidences from the CGI block. This was partially offset by increases in net investment income, both due to the additional assets acquired in the Humana block as well as additional reinvestment into higher-yielding assets. It is also worth noting that as part of the Humana transaction, we received north of 750 million of cash in the portfolio. I think at the time, it was almost 900 million. So this quarter's earnings don't reflect the full earnings power of the business that we acquired from Humana. As we continue to deploy this cash, the results in the insurance segment will continue to ramp up, reflecting the significant additional net investment income from this portion of the portfolio. As a result of the completion of the acquisition of the LTC business, we now have over 4.1 billion of cash and invested assets, and we've more than tripled our total adjusted capital base from 85 million to 330 million. In addition, we've increased the recurring investment management fee streamed to HC2, which is expected to be north of 15 million when all cash from the assets when all cash assets from the transaction have been reinvested. So overall, this business is really moving in the right direction for us to have a TAC, i.e., the total adjusted capital base of 330 million. It's a real business now. The 4.1 billion of assets, I just don't think people, quite frankly, are paying attention to it because if they did, they would see the value that has been created here. And hats off to the team and management team who continue to perform very well and really streamlined operations. So we continue to think that this is a very big area of growth for us, and we'll continue to focus on adding smartly where we can. Moving on to Life Sciences, where we recently received some very exciting and meaningful news regarding MediBeacon, which is one of the Pansend portfolio companies. Specifically, the FDA has granted MediBeacon breakthrough device designation for its kidney function measurement system. This is outstanding news for the Company as this the designation by the FDA clearly validates how important and necessary to the market the MediBeacon technology is in addressing patient needs. This designation will also accelerate the FDA approval process and really enhance the value of the Company. We believe that the MediBeacon FDA designation and our recent sale of BeneVir to Janssen Biotech, Johnson & Johnson, for up to 1.4 billion are clear examples of the value inherent in the Pansend platform, and look forward to potentially monetizing one or more of these investments in 2019. Again, with the BeneVir transaction, with what's happening with MediBeacon, I don't think, again, people may not understand the news behind that or may not understand the value of MediBeacon and what it can do and what it can potentially be worth. But we're very excited about that. It's one of those investments, again, that we think we're going to be -- that are going to be -- kind of raise a few eyebrows in terms of valuation and what we've done with it. So again, continue to be excited about, not only MediBeacon, but R2. Moving on to broadcasting. We saw significant improvement in the results this quarter. Our focused restructuring cost-cutting efforts drove sequential improvement in adjusted EBITDA of $3.8 million to a loss of $2.4 million as compared to $6.2 million last quarter. As I mentioned on the call, the goal of our OTA strategy here is to build a cohesive, technologically advanced distribution platform that will ultimately reach more than 80% of the U.S. markets. I think this will be a very compelling alternative distribution option for content providers and a challenge with losing more and more eyeballs as consumers content -- continue to cut the cord and move away from cable and satellite TV subscriptions. We are already seeing the value that this platform offers to content providers. For example, we recently signed an agreement with The Christian Broadcast Network for the launch of The CBN News Channel, which is the first 24-hour Christian television news channel, which is now being broadcast over our OTA network. The team continues to be laser focused on reducing costs as they push forward with the integration of the broadcasting business and assets. So with all these disparate acquisitions, the key is bringing them all under one umbrella and being able to then turn around and talk to quality content providers who are looking for an alternative to broadband -- I should say the cluttered broadband market and trying to get eyeballs and hope that people search for their product on broadband. This is a very unique alternative, and it was also all about critical mass and geographic coverage. And we did it, and we got there. And now, we're tightening it up and again, putting it all under the umbrella -- one umbrella. So we have a super high-quality station group, and then, go out lease capacity. We don't have to go too far because we're getting a number of incoming phone calls on this. And we have a tremendous amount of capacity here, which we did via the acquisitions over the past couple of years. Lastly, on Slide 8, as I've discussed throughout today's call and as you've hopefully seen over the past few quarters, I want to highlight the progress we made so far in 2018 on key priorities I outlined for you earlier this year. First of all, we've monetized a Pansend portfolio asset with the sale of BeneVir, and that resulted in a nice upfront cash payment. There's substantial amount of dollars in milestone payments and -- to the tune of approximately $900 million. And quite frankly, there's no reason to expect that we will not receive those overtime. So that is out there. We're believers in what happening in that space, in the immunotherapy space in general. And having sold to a super high-quality entity such as Johnson & Johnson, I think, is a feather in our cap as well. We closed on our acquisition of Humana's long-term care business, and in doing so, significantly increased our book of long-term care assets and total adjusted capital. Going from $85 million to $330 million, I think, is a phenomenal step. And as you can see, obviously, the synergies there, as we continue -- as you build out that insurance and merge these portfolios together is there, is real and will continue to happen. We announced the evaluation of the strategic alternatives for Global Marine, which could result in further key very exciting monetization within the portfolio. And as we've said, we have to get the right price for this. There is no rhyme or reason for just kicking it out of the portfolio. We like it a lot. We think there's a lot of potential. We're thinking about the overall structure as we think of exiting Global Marine. In addition, we announced the expected completion of DBM's acquisition of GrayWolf, which is an accretive acquisition that we believe adds immediate value to the portfolio. And continue to execute on our OTA broadcast strategy with strategic station acquisitions, continued integration efforts there and significant progress towards getting that business back to breakeven and cash flow positive. As -- one of the things that I failed to mentioned is based upon the progress that we've made to date with that business, we expect to be breakeven on an adjusted run rate EBITDA basis in the first half of 2019. So significant progress across the table. Finally, we continue to focus on the pricing our senior secured debt offering, hopefully soon, to redeem our existing 11% notes. Under the Securities Act, we cannot really comment any further on the offering at this time. But looking ahead, we believe we have several diverse and meaningful sources of cash to meet our obligations

[Operator:]

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

[Matt Vittorioso:]

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.

[Philip Falcone:]

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.

[Matt Vittorioso:]

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?

[Philip Falcone:]

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.

[Matthew Vittorioso:]

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.

[Philip Falcone:]

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.

[Matt Vittorioso:]

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?

[Philip Falcone:]

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.

[Matt Vittorioso:]

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?

[Philip Falcone:]

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.

[Operator:]

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

[Sarkis Sherbetchyan:]

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?

[Philip Falcone:]

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.

[Sarkis Sherbetchyan:]

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.

[Philip Falcone:]

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.

[Sarkis Sherbetchyan:]

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.

[Philip Falcone:]

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.

[Operator:]

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

[Kurt Hoffman:]

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?

[Philip Falcone:]

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

[Kurt Hoffman:]

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?

[Philip Falcone:]

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.

[Kurt Hoffman:]

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?

[Philip Falcone:]

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.

[Kurt Hoffman:]

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

[Philip Falcone:]

All right. Appreciate it. Thanks.

[Andrew Backman:]

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.

[Operator:]

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.