Q1 2020 Earnings Call
As in 20 results conference call and webcast.
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Thank you operator, and good morning, everyone well come to Brookfield business partners.
When she first quarter conference call before.
Before we begin I'd like to remind you that corn you got your question.
Talking about or growth initiative, and our financial and operating performance, we may make forward looking C.
These statements are subject to known and unknown right.
Future results may differ materially.
For further information on risk factors 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 is Cyrus Madden, Chief Executive Officer, and Dennis Turpin, Chief operating officer.
I will pass the call over to Cyrus to provide you with an update on our business and how we're responding to the challenges from the global Cobot 19 pandemic.
Dennis will then provide additional insight on the actions, we're taking to position our companies in the current environment.
And finally, I will review, our first quarter financial results.
And then be available to take your questions.
I'll now pass the call over to sorry.
Thanks, Jess breed good morning, everyone and thank you for joining us today.
Our world has changed considerably since our last call and I'd like to start the call by saying that we are grateful to all those on the front lines responding to this global health crisis.
Putting many of our own employees, providing essential services and products around the world.
Oh cassette BBU over the last several weeks has been to protect the health and safety of our people and partners across our offices and portfolio companies. We're supporting relief efforts in our communities with donations of fun.
Time, as essential equipment and supplies to people and causes that needed most.
We're also working closely with management teams across our businesses to reposition operations and protect liquidity and these challenging times.
Although we're planning for an uncertain business environment this year and a slow economic recovery BBU is well positioned to face. These challenges, we have strong liquidity and businesses of exceptional quality over the last few years, we sold many of our smaller more cyclical operations to fund.
The acquisition of larger businesses with more durable cash flows.
Many of our businesses provide products and services that are essential to their customers, which means or operations should recover quickly as global activity levels resume.
That said all our businesses like most around the world are being impacted by the pandemic and related economic downturn.
We can segment the impacts to our businesses into three categories first central service provider is experiencing limited impact to operations today.
Essential service providers experiencing manageable near term impact.
And finally business is experiencing more material impacts that will require additional capital support to manage through the current environment.
Starting with our Central service provider is experiencing limited impact to operations. There are three significant businesses in this category as.
Westinghouse and essential service provider to the nuclear power industry has been relatively unaffected by the pent up.
Altera infrastructure provides essential services to the offshore oil and gas sector. Most of altera as revenues are secured under fixed price to take or pay contracts and the company has been largely unaffected by the short term drop in oil prices.
The or can be Intel is our provider of water distribution in sewage treatment services to over 15 million Brazilians residential demand for water treatment services has been very resilient and well well, we're experiencing higher near term delinquencies.
We're confident we will be paid over time for the essential service social infrastructure services, we provide.
Moving onto the next group of companies.
Essential service providers experiencing near term slowdowns in their operations, we expect to each of these businesses to have adequate liquidity to manage through the current environment.
Starting with Clarion circle manufacture of advanced automotive batteries demand has declined sharply with reductions in our global auto production and people around the world driving with their cars let.
The spread of the pandemic across the world Claire real shutting down facilities and idled production capacity as required.
In Asia, our operations are back up and running and we're already seeing a strong rebound in aftermarket battery demand.
We expect the same to happen not in other regions as global economies begin to recover.
Hello, scope, which is our private hospital operator in Australia operations are being directly impacted by the government's decision to suspend all non critical elective surgeries to preserve capacity for cobot 19 patients.
Oh scope has been finalizing arrangements with Australian government authorities to make its hospital network available to the public relief effort at cost.
This will impact profit for 2020, but we're confident in the critical role of the private hospital system in Australia, and the long term viability of health scope.
[noise] Genworth, Canada is the largest private residential mortgage insurer in Canada.
Slowing housing activity is having an impact on the business and over the longer term prolonged unemployment would increase mortgage delinquencies. Gen is very well capitalized with 15% debt to capital and a 4 billion dollar investment portfolio. The business is positioned to manage through a prolonged.
Recovery.
Few businesses within our portfolio have been meaningfully impacted by the global endemic and require additional capital support. These situations are readily manageable given the substantial liquidity MPV you.
Multiplex, our construction services company is face significant challenges with work suspensions in the UK and material reductions in project level productivity and increased costs. Although the business has no debt. We expect it will require additional cash to manage through the disruption.
The other business that will require capital is cardona and Cardona is a U.S. base remanufacture of automotive aftermarket replacement.
We recapitalized this company as a result of operational and liquidity challenges and had been effectively working to get it back on stable footing prior to the pandemic outbreak the slowdown in auto related demand brought on by the pandemic has severely impacted cardones operations and the business were really.
No.
Operational and capital support to navigate the current environment.
Well confident in the resiliency of our overall portfolio, we're preparing for a challenging business environment through the course of the year. We expect our Q2 results will be the most severely impacted by the pandemic. Our estimate is that April revenue across our business was down about four.
80% compared to last year.
Depending on how long government restrictions remain in place we could begin to see a slow recovery in the second half of the year condition. They remain too uncertain for us to predict the pace of any recovery.
As we think about investment opportunities in this market environment, where public markets have experienced extreme volatility and transaction activity in private markets has slowed in the face of heightened uncertainty our focus has been in a couple of areas.
First pursuing new investments in the public securities of high quality business.
Businesses that are trading at a significant discount to our view of intrinsic value over the last several weeks together with our institutional partners. We've invested approximately $500 million in public Securities. These public company Stakes should lead to strong returns on investment capital and May.
Addition, us to privatized businesses as markets and activity normalize.
Second we're pursuing investments at the portfolio company level be they add on acquisitions customer acquisitions or the repurchase of debt in the event the debt of any of our businesses trades down to opportunistic levels.
Like the equity trading prices of many companies are unit prices traded at levels that are entirely disconnected from intrinsic value.
Our intrinsic value is best calculated as the present value of cash flows our operations will generate in the future and while near term cash flows will be impacted longer term cash flows should be robust, we recently repurchased over 500000 or own units and as the opportunity arises will contain.
Can you buying BBU units on your behalf.
And with that I'll hand, it over to Dennis to speak to our operational response to the challenges we're facing.
Thanks IRA Thanks, good morning, everyone morning.
One aspect of our culture at Brookfield is to approach our businesses within owner operator mentality closely partnering with the management teams of our portfolio companies to balance focus on short medium and long term business success. This has never been more true than today.
Over the past several years, we've been growing BB use in house business ops team to bring operational excellence to our businesses wherever they exist and compete.
We know of more than 30 dedicated professionals in the group located around the world with a broad range of backgrounds and domain knowledge, many of whom our senior executives experienced in repositioning and running businesses in difficult times.
Our presence in the regions in which we operate combined with a systematic approach to monitoring and the interacting with our portfolio company management teams has been vital these past few months in allowing us to respond with speed to the evolving crisis in each region.
We've been working closely with management teams across our businesses to focus on the operational and financial implications in defense of the pandemic manage risks and identify opportunities.
Now open safety of our employees in the communities in which we operate customers and suppliers has been and will remain paramount.
We have restricted site access adjusted shift work and where possible have rotated the workforce and encouraged employees to work remotely we.
We have also instituted protective equipment and screening requirements.
We're focused on preserving liquidity at our businesses and are working with them to actively develop and execute on plans to reduce discretionary operating and capital expenditures managed receivables payables and inventory levels and consolidate fragmented supply chains in select case.
The heightened urgency has allowed us to accelerate broader performance improvement initiatives that were already in progress.
We're also actively managing lender relationships and facilities to preserve flexibility.
While we are predominantly focusing on managing risk. We're also continuing to be on the look for opportunities.
These may include acquiring competitors sports suppliers within the value chains of our operations and leveraging the stability in reliability of our businesses to grow market share.
The bring context to the actions we have been taking I'll speak specifically to what we have been doing a clear rios given it was one of the first of our businesses to be impacted by the outbreak of the virus in China.
In response, we quickly assembled a business continuity team comprising senior members of both our team and Clarion leadership.
Their purpose was to ensure focus and a rapid response by coordinating and communicating across regions and functions.
With the information then cascading two employees and other parties as needed.
This has been crucial and allowing clarion its operations across the world to benefit from best practices and lessons learned in each region as the vibrant spread.
From the outset, Clarion set out to collaborate collaboratively engage with all stakeholders, including local governments employees unions customers and suppliers to ensure we could safely continue to operate its critical infrastructure and when that was not possible enable us with organize reopening of.
Our operations at the appropriate time.
The company continues to follow global health guidelines on employee safety, including all of the health and safety measures I spoke of earlier.
To date, there have been less than 15 confirmed cases of the virus across clear Reos global workforce of over 16000 employees.
Clarion says work to continue to service customers and be prepared to bring back production as governments allow in demand dictates.
In the interim the company has been servicing orders with inventory on hand, where necessary.
Clearly this is also leveraging reduce production time to perform required maintenance assess inventory obsolescence and prepare a safe plant in office reopening plans.
Management is focused on mitigating financial impacts.
Adjusting production and scaling labor and other costs to demand.
At the plants. This has included eliminating overtime utilizing temporary staffing reducing shifts in lines and temporarily idling production.
There is increased focus on cash management and discretionary capital investment has been eliminated.
We're continuing to respond to changing conditions within our businesses looking to balance short term financial impacts with longer term opportunities aligned with strategy.
And with that I'll hand, it back over to Jeff screen.
Thank you Dennis.
Brookfield business partners generated company EBITDA for the first quarter 2020, 294 million compared to 266 million in 2019.
The company AFFO for the quarter was 194 million or dollar 29 per unit.
This compares to 205 million or dollar 59 per unit in the first quarter of 29.
We reported a net loss attributable to unit holders for the first quarter Twentytwenty over 126 million or a loss of 84 cents per unit.
This includes provisions impairments, an unrealized mark to market loss on financial assets that we recognized during the quarter.
Net income attributable to unit holders for the first quarter last year was 62 million or 48 cents per unit.
On the operational foreign company EBITDA increased in our industrial services segment supported by acquisitions made over the last year and this was partially offset by a decrease in that business services segment as a result at the impact of the pandemic.
Our industrial segment generated company EBITDA of 145 million for the first quarter.
Marios, our global manufacturer of automotive batteries contributed company EBITDA of 89 million.
Sales volumes in the quarter were impacted by mild winter weather in the U.S. in Europe, lower OEM production levels and lower aftermarket demand primarily in the last few weeks of the corridor.
How are you had substantial liquidity available under its bank facilities to managed through the current environment and its debt does not mature for over six years.
Graftech January this company EBITDA of 45 million with lower sales volumes in the quarter.
Overall, the Companys earnings and cash flows continue to benefit from long term supply contracts.
But given steel production disruptions as a result of the pandemic. The company expects a portion of contracted 20 tied to volume to be deferred to future years.
The business is planning for reduced profitability compared to last year, but graftech as well capitalized and generate free cash flow to appropriately to manage through this downturn.
Moving onto our business services segment. This segment generated company EBITDA of 19 million.
Multiplex, our construction business reported a company EBITDA loss of 47 million this quarter.
Now to reflect the impact of accounting for increased costs expected to be incurred on projects in the UK, where construction works with substantially shutdowns as a response to the pandemic.
The business is taking steps to actively mitigate losses and the expected to recover as project related activity resumes to more normal levels.
Genworth, Canada performed well in the quarter and reported company EBITDA of 36 million.
During the quarter Genworth extended its debt maturities by issuing 215 million of debentures, bringing its debt to capital ratio to approximately 15%.
This is in line with the company's targeted capital structure.
Proceeds from the issuance, we used to pay down debt and fun dividends.
I'd hope scope, our hospital chain in Australia results in the quarter were marginally impacted by the pandemic with lower admission rates in March the business is finding from materially lower profitability beginning the second quarter.
How scope has implemented operational readiness initiatives to prepared facilities for public used is managing the supply chain of key consumer.
In our infrastructure services segment, we generated company EBITDA of 156 million.
Westinghouse reported company EBITDA of 82 million and performed well in the quarter.
The bed business benefits from the resiliency of its core few manufacturing and servicing operations.
The business executed on all fuel reloading time during the quarter on progress continues on the new plans projects that multi that Westinghouse is supporting.
Westinghouse completed the acquisition of Rolls Royces Civil nuclear systems and services business this quarter.
This business will enhance the companys technological capability around plant automation monitoring system, I'm, providing digital engineering services to customers.
We closed the acquisition of brand safely at the end of January and our results for the quarter include two months of operations.
The business performed well in February and was impacted by reduced activity and customer facilities under curtailment of customer spend in March as a result of dependent.
We have actively been working with the management team to mitigate operational disruptions related to the current environment.
A majority of Brian Faith based profitability is derived from essential maintenance activity that we expect will recover as economic conditions improve.
I don't care infrastructure contributions increased as a result of rate increased ownership of the business.
No tanker utilization was strong and it's part of the company's shuttle tanker renewal program.
Terra took delivery of two new vessels in the quarter with the remaining five expected to be delivered over the next two year period.
And that's all of our remarks on on operations and units quickly touch on our liquidity. We're in a very fortunate position to have a strong liquidity position at the corporate level. We have approximately 2 billion of cash marketable securities and ongoing.
Capacity on our credit facility.
The majority of these facilities are backed by large global banks that continue to be highly supportive of our business.
We expect to utilize these bank facilities to bridge, the funding of new investments or to support working capital needs within our operations.
At our portfolio companies, there's an additional approximately $4 billion of liquidity, which is comprised of cash as well as available credit facility.
I just mentioned this earlier, our larger businesses should have more than sufficient liquidity to fund themselves through this downturn.
Our approach to financial risk management is designed to protect our business during challenging times. Our companies are financed with debt that has no recourse back to BBU or across other businesses.
Nearly all our large scale businesses have long dated maturities no financial maintenance covenants. So we're not forced to repeat that even if these businesses experienced a reduction in earnings.
At our companies that are more susceptible to volatility we've chosen to keep leverage levels low and in certain cases like multiplex, there's no debt at all.
This approach to financial risk management is serving us well to support our operations where needed and to continue funding our growth initiatives.
That concludes our remarks and I'll now turn the call back over to the operator to take questions.
Thank you as a reminder to ask a question warning for press Star one telephone.
The draw your question, Chris profoundly please standby away from all the Q and a roster.
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Our first question comes from the line of Devin Dodge from BMO capital markets. Your line is now why.
Part of it Devin.
We can't hear you haven't seven.
Hi, sorry about that.
Thanks, Good morning, everybody.
Let me start with a couple questions on on multiplex just is it fair to assume that the revenue mix. It multiplex is weighted more towards.
Private clients.
Just given the mix that we're seeing in the backlog and that the purse strings from those private clients or hold fairly tight in terms of compensating contractors for inefficiencies related to the stock will restart from Cowen 19.
Yeah that would be correct, most most of our clients and especially in the UK would be private brands yes.
No other other ongoing discussions to recover those extra costs just for the contract language.
Generally just not strong enough for favorable enough to support the claims from contractors like yourself.
Look I would say this is sort of unprecedented in unchartered territory, and obviously multiplex is going to.
Pushing every possible way to collect every penny that to do to it.
But but theres there is some uncertainty as to how this all plays out.
At this time, so we just can't give you a definitive answer today, because we don't know yet.
Okay fair enough.
[noise] I believe.
Multiplex in the Cardona, we're densified as businesses that maybe some capital objections are able to give us a sense.
So the scale of the investment yield maybe to kick in and as maybe as you look out to Q2 and maybe even into the back half of the year do you think there are other investments that they need some support.
So.
Look at this stage.
It's very hard to predict what happens at the back half of the year, but based on our planning. These are the only too and that's based on them.
Pretty conservative outlook.
You know for week recovery in the back half of this year.
So that answers your backend of your question.
I'll speak to Cardona, and maybe just preqin speak to multiplex, but cardona probably needs in the range of $150 million.
We are in that investment with a couple of institutional partners. So we are in the midst of.
Working through a recapitalization program and.
It may be we put in half that money and it may be we put in most of the money we're still working through those details.
But that gives you a sense of the scale of it.
And.
Just freed maybe on multiplex you can speak to that sure Hi, Def and.
Who on multiplex us Iris side. This situation is quite fluid on the ground in the UK and.
The business does have cash available, but there are number projects that are in various stages of completion and they may need support.
Over the next let a while from a working capital perspective to.
Complete those projects.
Before they can.
Start collecting undercover from clients. So we anticipate in the near term that we're going to provide about 16 million.
50 to 60 million to multiplex over the next few months.
And.
That number as I said, there's a lot of moving parts.
Could be a little bit hired could be a little bit lower but that's kind of what we're planning over the next couple of months or so.
That's helpful. I'll go back in the queue. Thank you.
Thank you Sir our next question comes from the line of Rupert Merer from National Bank. Your line is now open.
Hi, good morning, everyone.
Good morning learning so looking at the revenue that's being lost across your various business I was wondering if you can.
Characterize how much of that is permanently lost versus deferred and maybe.
Looking at the three categories that you highlighted for your businesses.
So is it fair to say that category, one, mostly you're going to see deferred revenue down to category three or you may see more.
More lost opportunity just wondering if you give a little bit of color.
Yes look I think some some of these businesses have the.
Potential to recover part of what's been lost but.
I suspect if Q2 is going to be very difficult for the world than theirs Leavitt revenue that is probably not going to be.
Recovered and.
What's the way we're looking at the business what's more important is.
Planning for this down cycle doing everything we can to maximize liquidity reduce expenses and then be in a position to recover quickly as the world to recover is generally.
So to answer to it slightly differently I don't think we don't think our businesses are going to come out of this in the long term week in a weaker position than they are today their revenues should recover fully as and when the world recovers fully.
And if we if we are effective and what we're trying to do hopefully a number of our businesses can actually come out ahead as we look for add on opportunities during this distress period.
Okay, Great and then looking at the liquidity or you mentioned you're going to.
Of course opt to recapitalize some businesses, you're looking at public markets security opportunities and add ons, how should we look at the liquidity how should evolve over the next couple of quarters and should we expect to see you. So.
Good credit picked up I see is at 280.
3 million I think.
Corridor.
Hi, it's just read I'll take that so.
You're right we ended the quarter in a strong liquidity position, we had 2 billion, which includes the availability on the lines as well that's cash and marketable securities.
Corporate level.
And we were drawn 283 million on the credit facilities.
I think in the near term you can expect to see us to continue to draw on the credit facilities where appropriate.
Where required and the size of our size and scale of the business today kind of readily support thing servicing of cost that.
As we were looking forward over the next few months and couple of quarters the only I'm.
From kind of funding is around into star, which was the Indian acquisition, we announced earlier this year that we expect will close.
Mid to late this year and so we will be funding for dot com.
Whatever capital may be required by multiplex on Cardona.
But even taking those into account, we still have significant liquidity available to pursue new opportunities like.
Public Securities another thing that we're looking to.
To expand and grow the business.
Okay and in general I, suppose you would say the.
Public securities or not.
Jason liquidity, because they are part of your liquidity.
Yes, that's that's fair and we've also got institutional partners alongside us.
Those investments.
Alright, Thanks, all I'll get back in Q.
Thank you Sir our next question comes from the line of Andrew could pay from Credit Suisse. Your line is open.
Thank you. Good morning know how do you think about just the economic returns of preserving capital for your core businesses.
The opportunities that you see in the market as you mentioned you were active in the market on effective it took a toll holds and buying back stock. Most your three questions wrapped into one but how do you think about just the balancing act of those those activities.
Well look what we did as we sat back and thought about the.
Four or five.
Public companies that we could make investments in reasonable size.
If we wanted to over the next pick some extended timeframe, let's say a year.
And what would be a meaningful position in each of those we we then thought about.
How much capital might we need to support our businesses and make sure that they can.
Not only get through this but perhaps even come out stronger at the end of this.
And we have ample liquidity.
At the BBU level to effectuate both of those deal with both of those needs and.
More than ample liquidity so much so that we can buy our units back as well so.
Approach so far has been to focus on all three.
It may be at a point in time, depending on.
Where BB used trading versus what the opportunity set is we may tilt, one way or another but at this point in time, we're looking at all three.
Appreciate the color and then just on the the toll holder the investment positions.
Should we expect to.
The effective where your other games into the future or some M&A dialogue with the company's you've taken positions on.
Okay, It would be great.
If we could end up in it and it in an M&A situation would be fantastic because the companies that that we've been spending time on or companies. We followed for years we.
We admire them, we think there great high returns on capital barriers to entry et cetera.
And if we can make that happen at a reasonable valuation.
That would probably be our preference.
And if not.
Hopefully the world will recover and.
Those security values will recover and we'll learn a great return on our capital.
That's great and one quick one final question, if I may just on Altera.
Most of that is contracted positions, but to the extent, but you have excess storage what degree to tanker rates go up or do you really act on their own books to play the contango in the market.
Yes.
I'm going to ask Dennis whose closest to altera to speak to that.
Sure we are looking at that and in effect not only looking at repurchasing some of the shuttle that we have available that are coming off contract or even looking at other creative sourcing of storage capacity and in parallel we're simply taking the approach of looking at.
Actually buying the physical and selling forward and then comparing what we would make in those cases.
With lease rates, because we've been inundated with people asking us to lease incremental capacity, so trading off the risk in effect of actually holding versus leasing capacity and weve executed with one vessel already.
That's great. Thank you.
Thank you at this time I'm showing no further questions I would like to turn the call back over to Cyrus Madden for closing remarks.
Thank you very much for joining us today, we look forward to Ah speaking to you next quarter and in the meantime, please say stay safe.
And stay home and washer hands, and all that stuff and we'll talk to you soon thank you.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
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