Q3 2019 Earnings Call

Welcome to the Brookfield business partners third quarter 2019 results Conference call live webcast. As a reminder, all participants are in listen only mode and the conference is being recorded after the presentation. There will be an opportunity to ask questions to join the question Q simply press star and one on your touched on.

Thank you operator, and good morning, everyone well come to Brookfield business Partners 2019 third quarter conference call before we begin I'd like to remind you that and responding to questions and in talking about her growth initiative and our financial than operating performance. We may make forward looking statements.

These statements that subject you know an unknown risks and future results may differ materially.

For further information on <unk>.

I encourage you to review our filings with the securities regulators in Canada, and the U.S., which are available on our website.

I'll pass the call over to Cyrus to provide an update on our strategic initiatives after which I've reviewer financial results for the third quarter. We will then be available to take your questions I'll now <unk>.

Thanks, Jess freed good morning, everyone. Thanks for joining us today.

We're very pleased report we had a strong quarter from an operating perspective, and we also progress many strategic initiatives.

You know so we're requiring control of Genworth, Canada at an interesting brand Safeway as well as the common equity interests and T.K. off shore that we don't already own.

We also announced the sale of North American Palladium, or any p., which we expect to close by the end of the year.

And I thought I'd, probably do provide you with a little bit of overview on each of these transactions starting with the sale of N.A.P.R. Palladium producer required N.A.P. in 2015, we work with management over the last few years to transform this business, which included implementing a new underground mining method and improving mill throughput.

As a result palladium production has increased by more than 40%.

At the same time market demand for Palladium increased which resulted in any p. generating increasingly robust cashflows, allowing it to pay down debt and increase its dividend.

The company's improve performance created an opportunity for us to monetize the business and attractive return.

Will will generate $130 million of net proceeds for B.B.U., which when combined with distributions. We've already received equates to about 3.3 times, our original invested capital.

As I mentioned recently at our Investor day, when we sell a mature businesslike N.A.P. isn't because we don't believe in the company any more it's because we've done our job and we see better risk adjusted returns elsewhere.

[noise]. We currently have two great opportunities to invest that capital and we're working on closing these transactions the first as Genworth Canada.

We're we're acquiring a 57% controlling interest for $1.8 billion, which is about equivalent to its tangible books value.

Maybe you as committed to invest up to $700 million.

Anworth as Canada's largest private mortgage ensure that provides mortgage default insurance to banks and other mortgage lenders.

We think this is a high quality business ideally suited for B.B.U., given its scale long term customer relationships with Canadian banks, and lenders and high barriers to entry given that it operates in a highly regulated industry.

The company has generated strong earnings and cash flows through business and housing cycles.

We see great opportunities to enhance generous return overtime.

Were excited about this opportunity and believe it will be a good long term compound or value for BB. You closing of this transaction [noise] remain subject to regulatory approval and we expect to re received that this year or very early in the new year.

[noise] at the end of the quarter, we announced an agreement to acquire 45% interest in brand Safeway for $1.3 billion.

Maybe you will invest about $400 million of that brand Safeway is a leading global infrastructure services company, providing scaffolding and other work access systems and services to customers in the industrial infrastructure and commercial property markets.

Ran safe way is the largest operator and a fragmented market and most of the company's revenue is derived from ongoing maintenance requirements of its global customers. So demand is highly recurring and the company's cash flows have been relatively consistent across economic cycles.

[noise] working with our partners and the management team, we've identified opportunities to improve efficiency that brand Safeway and our investment will enable the company to drawn brookfields global reach and commercial relationships to support its growth.

We anticipate closing brand Safeway early in the new year.

Moving on to T.K. offshore in October we entered into an agreement to acquire all the outstanding publicly held common units of T.K. offshore that are not already owned by us.

As an alternative unit hate unitholders of T.K. off shore had the option to exchange one publicly traded unit of T.K. offshore for one new economically equivalent unit in the private company, which will provide the opportunity for current T.K. offshore investors to continue to invest.

Alongside us in the private company, we expect we expect to close this transaction before the end of the year.

[noise] so over the last few years as as many of you know that have been following us we've sold a number of our smaller businesses and we've replace them with larger ones that have global operations stronger barriers to entry and more consistent cash flows are <unk> largest businesses today or more.

Market, leading providers of essential products and services, we believe the resiliency of our overall business has improved which should support relatively stable performance across economic cycles and continue 10 enhance the value of BB you.

Those conclude my remarks on our strategic initiatives and I'll hand, the call back to adjust free thank you sorry.

But still business partner generated company, but after the third quarter of 368 million compared to 231 million in 2018.

Company F., a full for the period with 219 million or one dollar and 46 cents per unit compared to 170 million or one dollar in 31 cents per unit <unk>.

For the third quarter net income attributable to unitholders with 24 million or 16 cents per unit compared to 93 million, which with the R.I.D.R.S. was now per unit in 2018.

Company, but I increased across all of our business segments supported by be acquisitions made over the last here as well as improve performance in a number of our operations.

You know infrastructure services segment, we generated company, but out of 139 million compared to 170 million in Q3 2018.

There are two businesses within I infrastructure services segment Busting has and T.K. off short Oh briefly touch on to both of those.

Resting has reported company, but out 89 million for the current corridor.

<unk> benefited from the start.

From a strong start of the fall Oh did season I'd customer plants that resulted in high levels of service activity in shipments in the company's color few services business.

Oh, Oh, so benefiting <unk> this quarter was there a reversal over there as a result of the continued positive performance on projects that are getting close to completion.

Westinghouse's, new plans it doesn't it.

Over all the businesses performing well and tracking towards <unk> of approximately 600 million by the end of <unk>.

I.T.K. off shore performances in line with the third quarter last year.

T.K. Offshores shuttle tanker operational performance has been stable and the company's expecting to take delivery of seven you tank tankers in late 2019 to 2022.

The company continues to work to deployment challenges with certain S.P.S. all vessels.

Next moving onto our industrial segment I end up to a segment generated company <unk> have 189 million during the quota discussion parents do 112 million and the same period last year.

Clarion, our global manufacture of automotive batteries reported company, but out of 92 million.

<unk> impacted by higher than normal costs associated with the right up on in memory as part of our acquisition higher standalone costs related to business car vote activities and foreign currency movements, primarily you know European business.

Negative impact from the purchase price accounting adjustments was approximately 30 million I'd be be used proportionate shall we.

We do not anticipate another quarter of higher than normal costs as the inventory associated with the rate up has been sold.

In addition, lore Potter production levels in China resulted in North seagulls volume during the corner.

Business continues to benefit from the stability of after market battery demand unstable volumes in the U.S. in Canada, where our operational improvement efforts are focused.

Graftech, our graphite electrode producer generated company, but 67 million.

Volumes were slightly lower this quarter, but the company's long term take or pay contracts provide continued resilience in earnings and the company continues to generate significant cash flow from operations.

Moving onto our business services segments, but generated company, but doubts 64 million in the third quarter compared to 32 million in 2018.

I construction services and wrote few distribution operations reported improved performance.

<unk> also benefited from incremental contributions from held school and or Brushy, which we acquired this year.

2018 results included the contributions from our global relocation services and facilities management businesses, which were sold earlier this year.

Multiplex that construction services business report it company <unk> 19 million with continued strong performance in Australian operations.

During the quarter multiplex secured five new projects, the largest which was a phase one development of Queens worse in Australia valued at approximately 550 million.

<unk> at the end of the quarter with 6.8 billion.

Held scope, a hospital and pathology services provider reported company, but <unk> 16 million. This was the first full quarter of reporting for the company.

Together without scoops management, we're developing initiatives to improve performance at the northern beaches Hospital.

We're working to increase capacity utilization across the broader hospital portfolio.

Capitalize on <unk>, another operational costs saving opportunities.

I will finish off with an overview of her liquidity given the substantial growth in our overall business, we increased our corporate debt facilities by approximately 500 million. After the end of the quarter. This brings our total liquidity profarma for clothes transactions to approximately 2.8 billion.

We remain confident in our ability to generate significant liquidity from B.B.U. from our existing businesses both to cash distribution from underlying operations I'm from monetizing our business interests, which should continue to support the growth of Brookfield business partners.

With that I'd like to close that comments and turn the call back over to the operator for questions.

Certainly our first question comes from the lineup Devon Dodge from B.M.O. capital markets. Your question. Please.

Takes a good morning.

I <unk>.

Given.

<unk>.

<unk>.

Industries more stable cash flows.

Generation.

Corporate level.

Not today.

Devon, we may well draw on our corporate facilities to facilitate are ongoing acquisition activity, but at this point in time, we haven't consider that.

Okay Fair enough, maybe just switching gears.

G.K. <unk> touched on this but just looking for.

Update maybe on.

<unk>.

Financing side.

A lot of activity there, but also what kind of operating improvements.

And and growth opportunities that you're targeting.

So look on the maybe I'll, let just read speech to the financing, but on the growth opportunities management team has seen opportunities from time to time to business has been capital constrained to pursue them.

We will in all likelihood put more capital equity capital into this business d. leverage it and as those opportunities arise we'll look at them from time to time, there's nothing of a large scale that's imminent today, but we're certainly open to it.

From a financial performance perspective, Devon and the the current events elsewhere in line with last year cute three the shuttle tango businesses been quite stable and the companies actually God seven years shuttle tankers on order.

They announced one of them. This morning, when they when these two adults and they have completing a number of refinancings on financing to support the shadows tank or business, which is kind of traditionally than most people business on there are there to segments. You know the toy segment has been slow and.

It will probably has been slow there and I'm on the F.B.S. those you know where where the challenge. There is is to put back on contract. Some of the S.P.S. those that have come off contract and then you know continuing to kind of run you contracts as they come to you.

Okay.

Maybe just one last one.

Look a lot of other <unk> up in a lot more active in India.

It's just it's just a focus market for.

It. It certainly is I will tell you over the last number of years, we have looked at several opportunities. We just haven't found the one that fits and can work for us.

But I can assure you were looking continue to look at opportunities every day. There. So we do hope to be invested in India and the near term.

Okay I'll turn over thank you.

Thank you are next question comes in line, Jeff <unk> RBC capital markets. Your question. Please.

Hi, good morning, just.

Out in a bit late but on the Genworth transaction I think you guys and released mentioned closing early 2020, but you originally we're hoping.

End of 2019, I'm guessing, it's just a delay from Canadian regulator, so generous financial announced a few weeks ago around privacy concerns and if that is the case is there anything that genworth, Canada and or Brookfield, just keeping you guys have a love to experience dealing with many of these types of suppliers in terms of accelerating the time.

Line to repatriate debris services like data centres and whatnot that are being done out of the U.S. back to Canada.

Yeah.

Yeah look we are our team is all over this and working.

Hand in hand with Genworth U.S.

And we're hopeful that come up with a solution but.

You know we're we're confident this is going to happen is just a matter of is it going to happen. This year early next year.

Okay, but but the the issue is is what generally it's just write it. It's it's just we're waiting for regulatory approval.

No that Genworth U.S. the the parent company gave some description of what they believe <unk> to hold up is at the current time as far as we're concerned it's just working through the normal Aussie Minister finance approval process.

Okay.

It's it's been a little bit hectic with learning say, but I think if I was reading right. You've got 1.1 billion of cash related liquidity at quarter ends when you factor in the depending Genworth brand Safeway, T.K. and North American play D.M. that kind of brings the <unk>.

Form a cash kind of closer to zero just running isn't as my mouse right. There. If that's the case. If we also assume you you don't want to tap the credit facility.

You know may want to use it on in term basis.

I know Jasper you kinda mentioning but are there enough resources within the portfolio to replenish the cash or is it something that you might need to tap the markets again based on what your pipeline looks like.

Yeah, So I I'll answer that Jeff Hi, too I think the way to think about liquidity for B.B.U. is really you know Oh all of our resources that'd be available today, no. We have about $2.8 billion of liquidity, we increased our credit.

Facilities this quarter until we brought them out of the bank facilities from 1.5 billion. Two 2 billion and this is really to address the exactly the question the giants asking and provide kind of the ability to bridge and working capital at the corporate level to bridge between.

Acquisitions into positions. So we've got $2.8 billion of liquidity, you know profarma for the close transactions as well as funding our share Gen, where it then Brian safely.

Privatization of T.K., we'll still have about $1.7 billion. So we've got a lot of capacity to do a lot of things I think what you'll see is us more actively using the lines, but in terms of.

Punishing the cash you know, there's there's a lot of neighbors and the business on as you're well aware they can with the Genworth acquisition, they have kind of a regular dividend in place.

We've got a number of other businesses that do provide ongoing kind of dividends and distributions up to I'd, we've got ability to do some refinancings within some of our businesses where it makes sense.

And then we're also kind of actively monetizing you know my the the other point I should mention does you know, we'll be getting about 130 million and proceeds from the sale of any P. and then we have a number of other businesses that are kind of in the pipeline graph paper, because you're aware of the thing and a few other things that we're looking.

Right now so we're feeling very very comfortable today, just in terms of where we are from illiquidity perspective to kind of continued to execute what we want to do but even as we look forward you know to support them grown for the business.

Okay and just the last question and you can answer it with your last response the increase in the credit facility I mean, you've done. This you know I think it's a few times since the spin off and it sounds like from your response you know maybe part of it is because of this you're very active on investments.

And relative to where your cash position right now you might need to tap in to the credit line, it's that the way to kind of think about it from one respect but also to as the company grows that the credit facility probably grows you know what it's called the in lock step because otherwise you're just you know having all this flex.

Ability hand paying fees on it but not normally tapping the credit line.

Yeah, and like you know this size and scale of Brookfield business partners is increased a lot since our spin off and just <unk>. The the size and scale up the transactions that you're seeing us doing as increase so the credit facility really be you know we want to make sure that it's kind of aligned with what we're doing in the business and available.

To support the business.

And you know we've been very lucky and we have and yeah had to drawn to facility. But this is it's available and it's part of our liquidity and you know you'll see us drawn add to manage your working capital.

Okay perfect make it.

Yep.

Q aren't next question comes from online <unk> from National back to your question. Please.

Good morning, everyone.

I don't know some morning, a high level questions on how you're looking at your portfolio strategy you you've talked a little about how capital recycling has led to the sale of smaller businesses need replacing them with larger global ones. How do you think about the level of activity you can sustain within BB you in terms of the number of deals are looking at.

And the number of companies you you have invested that are at the early stage of development and assuming.

Drives you towards fewer and larger investments as you grow does that put any pressure on the return potential from your investments or would you say the returned potentials. The same across the spectrum of deals are looking at regardless of the size.

Yeah <unk> Oh, that's the first your last question first we are targeting 15% to 20% returns and that has not change irrespective. The size of the transactions were doing you know, sometimes it's actually easier turn or return out of a larger company than a smaller one for various reasons.

And as for our activity level I think if you look back over the last couple of years, just given the scale of our investment team and operations around the World I think it's a pretty good indicator of what you'll see going forward.

Okay.

A very good and then on the the second half of that you're looking at larger businesses and also global ones and you mentioned that you would.

You would take a look at a investing in markets like like India, but it sounds like your portfolio is becoming more a global just by the nature of where those businesses are operating how much how much exposure do you feel you have to developing markets today.

And and how how are you thinking about how much exposure you'd like to have in the business.

So so look if you if we cut through our portfolio, what we and you look at our investments over the last few years.

Sort of half of them or North American based the other half or.

Spread amongst Brazil, Australia, the UK and.

I would and and we've done a little bit in India, I think will be a little more active in India going forward, but I think that's sort of the mix. We're looking at now within the North American investments. Some of those are global businesses global operations and they individually have developing country exposure.

We don't have any targets as to how much do how far do we want to invest into developing.

<unk>.

But the businesses, we own certainly have exposure to developing economies.

I don't know if that answers your question, specifically, but we don't have a specific target.

So I suppose it at this point or exposures no so significant but.

That you need to think about either.

Think about limiting it in the future.

Yeah, No. We we don't have any certainly don't have a limitation. We have you know a couple of great investments one large one small one in Brazil today, we we have some loans in India today that we've made.

We do very much want to invest more in India weird.

You know, we made the investment into or of air J.'s small.

Rentals company industrial equipment rentals company in Brazil, we think that business can grow a lot. That's what we're focused on today.

Great only with our thank you.

[noise] Q. and distance conclude be question and answer session of today's program I'd like to hand, the program back to servicemen for any further remarks.

Thanks for joining us and we look forward to speaking to your next quarter.

But you ladies and gentlemen for your participation in today's conference. This does include the program you may now disconnect today.

[noise].