Q4 2019 Earnings Call
Welcome to the Brookfield business partners fourth quarter, 2019 results conference call and webcast.
As a reminder, all participants are in listen only mode and the conference is being recorded.
After the prison.
<unk> will be an opportunity to ask questions.
He joined the question Q simply press Star then one on your Touchtone phone.
Did you need assistance during the call you may signal operator by pressing star than zero now I'd like to turn the conference over to Jasper Dell Chief Financial Officer. Please go ahead mr.
Thank you operator.
Morning, everyone welcome to Brookfield business Partners 2018 fourth quarter conference call.
Before we begin I'd like to remind you that well need to question and in talking about a growth initiatives.
Well, it's our financial and operating performance, we may make forward looking statements.
These statements.
Subject to known and unknown right and future results may differ materially.
For further information on the one right I would encourage you to review our filings with the securities regulators in Canada, and the U.S., which are available on our website.
On the call with me today Cyrusone <unk>.
<unk>, Chief Executive Officer, and Dennis Turcotte, our Chief operating officer.
I will pass the call over to sorry to provide an update on our strategic initiative.
After which Dennis will provide an operational updates on our activity I'd be okay, I'm being told.
Finally, I will review.
Our financial results for 2019.
We will then be available to take your question.
I'll now pass the call over to fiber.
It's very much has pretty good morning, everyone and thanks for joining us today.
We're very pleased with baby use performance last year investments in new businesses exceeded two and a half billion dollars.
We made some great acquisitions, including Clarion brand safe way in Genworth.
These are all high quality companies that we were able to acquire for value.
Over the same period, we generated over $1 billion from distributions and the monetization of mature operations.
Sales of BG.
BG Rs and North American plate him all generated very strong returns for BBU, reflecting the value that we created throughout our ownership of the businesses.
We recycled the proceeds from these sales into our new investments.
As most of you know our strategy is simple we acquire.
This is for value improve their operations, we monetize our mature investments and recycle proceeds into new opportunities.
And by executing this strategy baby use intrinsic value has increased.
This is partly evidence by the increase in our company AFFO per unit, which is more than tripled over.
Over the last two years.
As importantly, we've increased the cash flow resiliency of our business our largest businesses today, our market leading providers of essential products and services that should contribute to more stable performance that BBU across economic cycle.
In December we closed our acquisition of a 57% interesting genworth for $1.7 billion.
Maybe a share of the equity funding was $670 million for 24% ownership interest.
Genworth is the largest private sector mortgage insurer in Canada and provides mortgage.
Fault insurance to banks and other mortgage lenders.
The company has a track record of generating strong earnings and cash flows throughout business and housing cycle.
Since December the business has returned over $300 million to shareholders through special dividends.
Genworth is a great long term compound or a value for.
BBU and we look forward to supporting its initiatives to optimize the companys capital structure and improve the returns that it earns on its investment portfolio overtime.
In January we closed our acquisition of a 48% ownership interest in Brent Safeway BBU share of the 1.3 billion dollar.
As price is expected to be $400 million foreign ownership interest to 15%.
Brent Safeways a company that we've come to know well over the years as a provider of scaffolding and worked access solutions to Brookfields broader global operations. The company predominantly provides services to.
Meet customers' recurring maintenance needs, which supports resiliency of its cash flows across economic cycles.
Building on its scale and reputation as a leader in engineering innovation, We believe brand safe way has significant potential for growth in a relatively fragmented industry.
We completed the privatization of Teekay offshore in January we we've rebranded the company to Altera infrastructure. We're now working with management you execute its strategic plan to strengthen and build value in the company.
In January together with institutional partners, we signed an agreement.
Remit to acquire controlling interest <unk> Endo star and Indian financing company that primarily services they used commercial vehicle and affordable housing segment.
This continues our program to selectively build our presence in India and also leveraging Brookfield local presence.
And expertise.
Moving onto our recent capital recycling activities at Graftech. We progressed are ongoing monetization program in December executing a sale of Graftech common stock to the market and the company and that generated proceeds to BB you have about $135 million we continue.
To own 25% of Graftech.
We closed on or sale of North American Palladium, resulting in a successful outcome for this investment our sale the business in December generated net proceeds to BBU of $130 million.
Combined with dividends received we generated a 3.3 times multiple on our.
No investment and I are up 26% and finally, we also sold sold our cold storage business, Nova Cold. This too is a successful investment for us, albeit a smaller ones.
Looking ahead, we continue to focus on enhancing the overall quality of our business operations.
Our current portfolio of businesses has considerable embedded value growth that will surface through our ongoing improvement initiatives.
Westinghouse we've achieved over $150 million, an annual EBITDA improvements to date and identified opportunities for an adult additional increase of $200 million.
In EBITDA.
A clear iOS, we haven't initial target of 300 million EBITDA improvement and are developing plans for further improvements.
And then a few moments Dennis turcotte.
We'll update you on what we're doing at B.R.K. and be Intel.
Across our businesses, we have a hands on.
Approach to initiatives to enhance value and then ultimately improve cash flow generation.
And although these businesses will not all compound growth at the same rate.
If we're successful we believe our existing operations should increase baby use intrinsic value per unit.
By about 30%.
Over the next couple of years.
With that I'm going to handed over to Dennis to update you on be RK.
Thanks, Iris good morning, everyone.
We acquired B.R.K., almost three years ago, which at its core as a straightforward business.
It connects new customers to its water and sewage networks provide some with quality.
These service and receive the tariff for doing so.
Expanding its surface networks allows be arcade to connect more customers and provides a good significant organic growth opportunity.
At this stage and its evolution be arcades investing virtually all its cash flows to improve and expand its networks.
2019.
I mean, the company invested 250 million in these capital project, which resulted in over 700 kilometers of incremental pipe being added and 70000, new connections to the network, increasing EBITDA by 15% over 2018.
Going forward, the RK expects to continue to drive.
Cash flow growth by investing over 250 million per year into these existing operations.
In addition be arc has made considerable efforts since our acquisition to improve business operations and develop a high performance culture. These efforts are having a positive impact including driving of 70% reduction workplace.
Safety incident.
In terms of strategic initiatives be arcade full three industrial water treatment businesses and 29 team generating 175 million of net proceeds and the company bought out is 10% minority partner by partner in recently, one of its largest operations which has.
<unk> uncontracted growth over the next five years.
Aside from our operational performance improvement initiative, there had been two recent developments benefiting the company's business environment.
First recognizing the need to accelerate improvements in sanitation, new legislation aimed at increasing private participation in the sector.
<unk> is currently making its way through Brazil's Congress.
Should it passed we expect to see an increase in the number of new opportunities come up for bid over the next few years.
Second inflation in Brazil is now under control interest rates have dropped 10% since 2016 to around 4.5%.
Second.
On the growth is expected to be slow, but steady and in this environment. The RK with its long term contracts in inflation protected cashflows should become very attractive to investors looking to earn more inflation protective yield.
While we still have lots of work to do to fully realize the value of our investment we have.
Within the company well to compound returns over a long period of time.
And now going to give the call back to Jeff's brief to speak about BB use financial results.
Thank you Donna.
[laughter] business partners generated company.
For fiscal year, 2019, <unk> 1.2 billion compared to.
843 million in 20 <unk>.
Company AFFO for the year with 1.1 billion or $7.86 per unit.
This compares to 733 million for $5.67 per unit in 2018.
Net income attributable to unit holders for 29 team with 88 million or 62 cents per unit.
Included impairment losses recognized during the year as well as higher depreciation and amortization expense.
Net income attributable to unit holders in 2018.
422 million or $1.11 cents per unit and this included the benefit of the noncash gain.
Company EBITDA increased across all our business segment supported by the acquisitions made over the last year as well with improved performance at our existing businesses.
And I infrastructure services segment, we generated company EBITDA of 468 million.
Westinghouse reported company EBITDA of 273 million for the year and results reflect the benefit of our ongoing profit enhancement initiative strong performance in the core fuel.
Drink and service operations as well as continued execution on new plant projects.
The business is now achieving our targeted run rate EBITDA of 600 million.
One thing has recently paid a 275 million dividend of which BBU share with approximately.
The 120 million.
Since our acquisition just 18 months ago, we have received more than 250 million in dividends, which represents over 60% of our initial capital and <unk>.
I'd Altera infrastructure formally teekay offshore contribution.
Increased primarily as a result covering increased ownership.
Results for the year also benefited from increased shuttle tanker and toys utilization as well this week.
The shuttle tanker renewal program remains on track and the company took delivery of one you shuttle tanker in January with the remaining.
They are expected to be delivered over the next two year period.
Our industrial segment generated company EBITDA of 600, a 19 million for the year.
How are you are global manufacturer of automotive battery contributed company EBITDA of 200 and lapping.
This is performing well.
Our vote activities are progressing on plan, we're focused on optimizing the manufacturing footprint on the supply chain.
We're also considering alternatives related to non core activities and joint venture to position the business for further value enhancement.
In December we closed the acquisition.
Addition of boss is 20% interest in our European bad lean manufacturing and fields joint venture.
Glascock I'd refer to electric producer generated company, but Oh 284 million.
Overall, the company's earnings and cash so continue to benefit from the long term supply.
In fact.
In 29 team contributions to BBU earnings were lower due to our decreased ownership interest in the best.
Moving onto a business services segment.
We generated company EBITDA of 221 million within the business services back.
At health goals are true.
In private hospital, operator, we're working to improve the companys operational discipline, a cheap labor saving and optimize occupancy.
We recently awarded a new hub district contract to provide pathology services.
Reinforcing the pathology business its position.
And as a market leader in New Zealand.
Multiplex, our construction services business reported company EBITDA of 71 million, which is a significant improvement over the prior year.
During the fourth quarter 2019, the company secured for new projects.
Most notably West's IP.
Page two in Melbourne, which is valued at 450 million.
We ended the year with a strong backlog of approximately stopping them.
I'll finish off with an overview of our liquidity. We ended the year in a very strong financial position with 2.3 billion of corporate liquidity.
Taking into consideration announced transaction activity pro forma liquidity, it's 2.1 billion.
During 2019, we increased our corporate borrowing facilities by approximately 750 million and they all remain undrawn at your I guess.
Given the substantial growth in our overall business.
We believe our business, that's the skill and resiliency to read too we support the use of these facility.
We plan to do so I'm to find acquisition activity on our facility.
As we continue to monetize the larger businesses. We're also confident we will generate substantial.
<unk> two for their support acquisition activity under <unk>.
With that I'd like to close our common and turn the call back over to the operator for questions.
Thanks.
Ladies and gentlemen, if you have a question at this time. Please press the star followed by the number one key on your Touchtone telephone.
If your question have been answered or you wish or move yourself from the Q. Please press the pound <unk> once again to ask a question. Please press star and then one now.
And our first question comes from Devon Dodge from BMO capital markets. Your line is open.
Alright. Thanks.
Question on.
Recently.
A little more tuck ins.
On there.
Can you talk about what these businesses bring to Westinghouse and whether there are a lot more these types of deals.
For active and is that acquisition pipeline is it mostly small tuck ins or other larger opportunities that may make sense for Westinghouse.
Sure. The first couple that we've done are really about a market penetration as it relates to the Canadian acquisition, we did and then bringing in tools and capabilities as it relates to the acquisition in the UK.
And recently, our third acquisition has been announced with.
Rolls Royce, which will also give us a little bit of capability, a little bit of market share and a very a important digital platform to build off so.
The acquisitions, if you will up in small but are really tooling, it's up to expand market positioning in particular in Europe as far as the.
Line, there are a lot of a smaller acquisitions out there that again, we're looking at and thinking about from a capability point of view and wrote a and then there are a couple of larger ones that are on the rise in the though obviously, we couldn't speak too, but could potentially a give us more.
Increases in the but the <unk>.
Okay.
<unk>.
Maybe just switching gears here to Brazil.
Obviously with the weakness in the <unk> all else equal to should make Brazil.
I tried to market for capital deployment I can you just give us a sense as to how you're thinking about Brazil from a new investment.
Respective.
Are you seeing many acquisition targets a come for or is your near term focus more likely to be on investing in your and your current businesses.
Yeah. So so.
I'll give you the answer to both in reverse order in our existing businesses we are.
We're seeing many different opportunities to expand or a bear Jay.
And we're just trying to be very thoughtful about that.
But but we're hopeful there's an opportunity to put some more capital to work there.
Beer can be Intel as Dennis pointed out environment may change a.
For the positive from a new concession perspective, and if that happens there will certainly be an opportunity to put more capital to work there and we think we have a great platform there that where we can build on.
And we're constantly like any of our regions. We are constantly reviewing new opportunities.
[noise], Brazil, and India, we may be seeing more value opportunities and elsewhere right now, but we are constantly reviewing opportunities there's that theres nothing imminent, having said that.
Okay that makes sense and maybe one last one just on multiplex.
Can you provide.
Some color on the performance of that business in Q4, just seemed like the EBITDA contributions were a fair, but lower than what we've seen the last.
Several quarters do you expect any of the challenges are you experiencing Q4 to carry over into 2020.
Yeah look we did have some softness in Q4 and multiplex.
I would remind you. This this is a lumpy business from quarter to quarter.
And died encouraged we'd encourage you to look at it on a trailing 12 month basis, that's a better way to look at this business. When we look at the current Oh say at the margin in the existing backlog, we don't see anything unusual.
I.
I hope that answers your question.
Doug Thank you.
<unk>.
Thank you.
Next question comes from Andrew Kuske from Credit Suisse. Your line is open.
Thank you good morning I.
I guess my answer is gone.
Years gone by you've been involved in a bunch of energy production.
Actually businesses and you still have MBR.
Exposure quadrant was very successful I guess on a couple of allocation basis, how do you think about that value versus valuation context of.
Energy producers versus some of the infrastructure that you've never been involved with what altera.
[noise].
Look we are.
We will be very selective looking at energy producers.
Just because we want to try and avoid direct commodity exposure now having said that if we find something that is absolutely ridiculous Lee inexpensive of course will consider it.
But otherwise we're not focused in that area.
We're happy to consider.
I'll say more situations like altera, if we find the right risk return a balance.
Okay. That's helpful. And then maybe just a couple clean up questions.
This this one.
Run rate on Westinghouse 600 million.
Is the 200 million of potential opportunities to surface started that's on top of the 600.
Yes.
And then one final one just in terms of Monetizations a job assets sitting in the flagship.
Is that are approaching maturity dates.
Nothing of size, Yes, we had a couple of 'em monetizations any p. and no cold boxes from kind of a one vintage fund, but that aside with enough.
Why isn't the pipe from vintage.
Okay. That's very good thank you.
Thank you.
Question comes from Rupert Merer from National Bank. Your line is open.
Good morning, everyone.
When I retire we'll follow up.
On Westinghouse to start with so looking at this next leg of improvements.
How is that going to evolve what's the timeframe, they're looking at and know what needs to happen to Chico's schools.
Look I know what Dennis answer the question.
But but I will remind you these are.
These are targets.
That were aspiring to achieve.
And.
If we don't achieve them. This will have been a spectacularly successful and investment for us, but I just want it I just wanted I just want to lay that at some framework and Dennis.
You can answer the question more directly.
It's funny he doesn't let me off the hook like that one on one though.
Oh outside that said, we we introduced as part of our framework and and when we get involved in these businesses, what we call a stretch program, where we try to get management in a a.
Frame of mind, where they're really comfortable setting ambitious goals and objectives and that's really the case and again I remind you any a 150 million incremental run rate in an 18 month period is.
We're we're a little bit proud of that I guess I'll say, so just to put context on that but it's really over a 24 to 30.
Six month rolling period.
And these are clearly identified actionable.
Initiative that build up from 500000 dollar annualized improvement ideas through to a including several million dollar by item. So it's a.
Large number that's part of what we call our transformation program and.
So with some of those will be successful some will exceed and some a we won't achieve but we're very very confident that the momentum we've got and the the genuine you know willingness of management to put these forward.
Just kind of lay that out there that way 24 to 36 months is how you should think of it you should also know that part of that 200 stretch plan. If you will include a variety of potential acquisitions that were looking out. So there's some cost out some organic growth and some M&A activity.
Oh.
Okay very good thank you.
Turning to.
Brian Safeway wondering if you can give us more color on this business how should we be.
Modeling it in the near term in terms of the the returns that you're expecting a quarterly basis or any any seasonality, we might see and then.
Oh, how long will it take Judy do you think too.
To see improvements in that business, whether from organic growth for operational improvements.
Yeah look so with all of our investments we plan for.
Generally it would take five years before we.
He all the improvements we plan for.
And this one is no different.
In this case, we're also planning on executing a reasonable amount of broke growth. In addition to operational improvements. So it's all going to take time.
It is a relatively resilient.
Billion business, given that about a 70% of its revenue is of a recurring.
Nature.
It their customers require ongoing maintenance so think of a refinery for example, it would require annual maintenance.
Not that much seasonality to the business.
A little bit of Lumpiness as it relates to new projects, but you know the majority of the vast majority of the revenues recurring.
Right you have a target.
Return on on that.
Business I know, we can I got it it would fall yes squarely.
The long term return would squall fall squarely within our targeted threshold of 15% to 20%.
Alright, great I'll leave it there thank you.
Thank you and our next question comes from.
Oh from sea I'd be Sir your line is open.
Thank you good morning.
First question I wanted to ask and I mean, you covered it a bit at the Investor day, but that's a few months ago now in the portfolio, it's kind of changes.
As you look to maybe the next one two years in your existing <unk>.
<unk> for you.
Where do you think the greatest value creation opportunities lie is it still Westinghouse Sinclair iOS are there other names you might a highlight as well.
Well, certainly Westinghouse Sinclair iOS would be a.
Would be very big drivers, but I'm.
And I.
I think B.R.K. as Dennis talked about the RK I think we're going to start over the next.
234 years start to see the benefits from our expansion program, which is now really ramping up so you.
We had 15%.
Growth in EBITDA, we're hoping that that can continue for quite a while that type of growth. So I think you'll see it pretty meaningful improvement there.
Yeah, I would leave it at that for now.
Okay, Great [laughter] second question so.
You know you highlighted.
Just a couple times on this call that the acquisition environment is challenging but of course, the flip side of that then is the.
Monetization environment is.
Is quite positive.
What are kind of your thoughts there in terms of taking advantage of high multiples.
And in the current environment has.
Hello.
Well everything we have is always for sale at the right price and ER.
Look we always we spend a lot as I'm thinking about it for all of our companies and they're all at various stages of development in.
In our planning and.
Various stages of.
Moving along that the transformation.
Land that Dennis spoke too so as we get.
As we get to the point, where incremental cash flow is gonna get heart be harder and harder for us to achieve.
It's a good time for us to start thinking about selling that's that's broadly how we think about it there there is nothing today, where we are thinking imminently.
We should be selling because we still see a lot of upside and all of the larger businesses we have.
Got it okay. So it's not that valuations are stretched.
Got it could pull forward.
Timeframe for monetization I guess, that's kind of what does implying but you're suggesting some look if somebody approached us and gave us what we would consider to be a reasonable valuation for business, we would consider got it okay.
Last question, that's kind of I guess, what little bit of a follow up regarding.
Original question on how you're thinking about the energy.
Base, but maybe more broadly.
How are you thinking about yes, ci considerations and the investment process.
Given that.
It started to this team has started to have a potential to be a major disruptor for certain industries thermal coals. The obvious one just kind of wondering how you're thinking about that.
Hi, just freed maybe I can start and then Dennis as far as can try men I see the first thing as.
Yes, she is always kind of been embedded in everything that we do whether its health and safety within our industrial businesses, but environmental consideration. None you we've talked about energy a little bit on the call today, but it with quadrant amber as well as you know being.
Socially responsible in all the to our employees and other stakeholders will then businesses. So all of this is been embedded within our culture and within how we look at the businesses that we own and operate starting from due diligence to be identification of risks around.
Yes, she to kind of the stewardship and ownership of the business I mean to AG said on the other piece I'd say as you know from a governance perspective, we've always had a very strong kind of view on making sure we have the appropriate structures within the business.
Yeah.
One of the critical pieces of Onboarding, when we buy a portfolio company is ensuring died all the policies and procedures within a business are up to the Brookfield standard. So we'll go through and look at you know anti bribery and corrupt chip will look at the code of conduct I can keep going.
On page you got the gist of that they will look at all at the policies and procedures and pay uninsured that that's the right policy is being enforced appropriately and then we now are monitoring it on an ongoing basis.
So we've gone and then in businesses, where you know they might be a higher risk around it.
Yes, these aspect as additional resources and diligence and support like I'd be RK I'm Intel.
We bought bad business.
It's a very complex transaction the seller had challenges on the a b C side as to when we bought that business. We spent a lot of time.
For and resources not only during due diligence to identify red flag areas and protect ourselves to reps and warranties, but also post acquisition just on the business up with the REIT compliance thing and governance framework.
Maybe I don't if any comply.
Okay, great. It's all the questions I had thank you.
Okay.
Thank you and that does conclude our question and answer session for today's conference and I like to turn the conference back over to fires button for any closing remarks.
Thanks for joining us today, and we look forward to speaking to you a next work.
Ladies and.
Gentlemen, thank you for participating in today's conference. This does conclude the program you may all disconnect everyone have a wonderful day.
[music].