Q1 2022 Brookfield Business Partners LP Earnings Call
Welcome to the Brookfield business Partners' first quarter 2022 results conference call and webcast.
All participants are in listen only mode.
It's being recorded.
After the presentation, there will be an opportunity to ask questions.
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Now I'd like to turn the conference over to Alan Fleming Senior Vice President of Investor Relations. Please go ahead Mr. Fleming.
Thank you operator, and good morning, before we begin I'd like to remind you that in responding to questions and talking about our growth initiatives and our financial and operating performance. We may make forward looking statements. These.
These statements are subject to known and unknown risks and future results may differ materially for further information on known risk factors I encourage you to review our filings with securities regulators in Canada, and the U S, which are available on our website.
On the call with me is Cyrus Madden, Chief Executive Officer, and Jasper Riedl, Chief Financial <unk> Financial Officer. We're also joined today by Patrick fragment, Chief Executive Officer of Westinghouse Electric company, our nuclear technology services business.
I'll first turn the call over to Cyrus to share an update on our business and then Patrick will discuss our strategic priorities and recent developments at Westinghouse Jesper will finish with a discussion of our financial results.
And then be available to take your questions and with that I'll pass it over to Sarah Thanks.
Thanks, very much Alan.
Good morning, everyone. Thanks for joining us today, we've had a great start to 2022.
Adjusted EBITDA increased 30% over the prior year and were continuing to be very pleased with the overall performance of our operations.
Most of our businesses, our global providers of essential products and services, they're scale pricing power and durable market positions are serving us well in a volatile environment.
We've had a busy few months since our last update.
Ensing, several meaningful acquisitions, and committing $1 $6 billion of equity across seven new investments.
Each of the businesses, we acquired were at reasonable valuations and are either market leaders or businesses with exciting growth potential that we can scale.
These new businesses should contribute to our growth and the substantial levels of cash flows our operations are generating today.
In April we agreed to acquire CDK global for $8 $3 billion.
CDK is a leading provider of technology services and software solutions that help automotive dealers run their businesses better.
This is a very high quality market, leading business in exactly the type of opportunity we've been looking for it to continue.
Our presence in the technology area.
We're going to leverage our operating capabilities to enhance that business is services and productivity to grow margins and cash flows and improved cdk's value proposition to its customers.
The other technology services investment, we announced during the quarter was mcnally.
Leading technology enabled payment solutions provider in the middle East, we're investing $65 million in partnering with the seller to help enhance the businesses technology offering and accelerate its growth.
In March we entered into a partnership to acquire Nielsen.
The global leader in third party audience measurement data and analytics across all forms of media and content.
Nielsen provides essential measurement data to the $100 billion video and audio advertising industry as the media landscape continues to evolve Nielsen is really well positioned to lead the way in providing a unified measure viewership across all media platforms.
We're making our investment through preferred equity, providing us with governance and a level of downside protection, while also enabling us to fully participate in the company's upside potential.
We also announced the acquisition of Latrobe, and Australian Nonbank lender and asset manager.
<unk> plays a critical role in lending to a growing proportion of high quality borrowers in Australia, who require specialized underwriting expertise. It also manages credit funds on behalf of high net worth retail investors.
We're investing about $250 million for 35% ownership and plan to support Latrobe growth by diversifying its product platform to grow its asset management business.
During the quarter, we made two non control investments in companies to help finance their growth and May we provided chorus aviation with $374 million of financing to help its growth plans. We also agreed to subscribe for $267 million of convertible preferred shares and Jindal.
And India based flexible packaging company, our share of both commitments is about $100 million.
Now apart from growth, we're moving forward with initiatives that will meaningfully enhance our liquidity and crystallize value for our business. We're currently progressing efforts to monetize our interest in Westinghouse and we're positioning <unk> for possible sale or public listening.
Conditions to support the dispositions or for an IPO of each of these businesses have improved markedly over the last couple of years and the proceeds we expect to generate from these sales will fund our growth for years.
What has changed since we pursued a public offering of <unk> shares last summer.
Investor focus has rotated from growth back to businesses with underlying profitability and cash flows and <unk> performed exceptionally well generating record financial performance paying down debt and executing on its operational improvement plans all of this progress should help us opt.
Is the execution of our future IPO.
To remind you every single car, whether it's a full battery electric hybrid stop start or internal combustion engine requires a low voltage battery solution. The demand placed on these batteries only continues to increase with the shift toward electric vehicles <unk>.
As the leader in advanced battery technologies, largely designed to support the needs of electric vehicles over the last 12 months alone <unk> partnered on over 30, new full battery EV platforms and.
And expects to be delivering solutions on nearly 200 full battery EV platforms within the next five years.
Westinghouse our nuclear technology services company is a business of similar exceptional quality Pat.
Patrick is going to talk more about what's going on in the business, but I'll just say that Westinghouse has really come into its own over the last few years. The business is benefiting from exceptionally strong industry tailwind and is in a great position as the global leader in nuclear technology, and we invite you to ask Patrick.
Any questions you have.
As you know our objective is to build long term growth and intrinsic value per unit. We've had a very successful start to the year working toward this objective our focus over the coming months is to close our recently announced acquisitions and advance our monetization initiatives. We look forward to updating you on our pro.
Aggress and thank you for your continued support with that I'm going to turn it over to Patrick.
Thank you Cyrus good morning, everyone.
A reminder, Westinghouse literally pioneered the nuclear commercial industry half of the nuclear reactors operating the world hub.
Hough Westinghouse technology is the global leader.
Of proof to provide mission critical technologies products services across all three phases of the nuclear power it lifecycle.
At the design stage nuclear design engineering. So this is for new reactors of various sizes.
<unk> and maintenance with fuel maintenance and engineering services for operating reactors.
At the end of the lifecycle decontamination and decommissioning of reactors, we treat the endo, which reached the end of their personal life.
Nuclear power has always been a phenomenal option.
A reliable source of clean energy for many countries. There are more than 400 reactors operating in the world today, the convergence of macroeconomic energy market and geopolitical factors are creating significant tailwind for both the nuclear industry in general and for Westinghouse in particular.
Governments around the world are making ambitious commitments to a net carbon future.
And going into the implementation of those objective they realize that nuclear power is currently the only form of clean base load power that can help them to achieve these goals over the last 50 years nuclear has displaced more than 60 giga tonnes of cotwo emissions over.
Which for context represents about two years' worth of total global energy related C O two.
Two emissions going forward, it's estimated that the average annual nuclear power generation output, mainly to more than double by 2040 to meet global climate goals.
This demand for clean.
Baseload the spatula nuclear power is leading to likely extension of existing nuclear power plants as well as our renewed focus on the development of new reactors in new plants.
In addition.
As we so currently in recently in the U S. As we sold through in Belgium or in Korea.
There is a tendency to reverse or freeze decisions to stop or shut down existing nuclear plants.
Apart from decarbonization, the increasing price of fossil fuels recent geopolitical uncertainty and the drive for energy security and energy dependence accelerated by the current situation in Eastern Europe is created and is creating an immediate need for energy security.
The simple reality is that if a country does not have its own natural gas all large hydro potential nuclear on engie is virtually the only way to guarantee suffering to yogurt energy in the long run 24, seven the U S as well as nations across Europe , or evaluating cleaner energy solutions, including nuclear to re.
Use their dependency on foreign energy producers Aldo.
Other nations are considering alternatives to reduce their dependency on a Russian entity service providers today Westinghouse is the only alternative to Russian to the Russian companies to supply fuel to Russian reactors outside of Russia, and we already an intense discussions to provide fuel to several operators of those restaurants.
Reactors in eastern Europe , including in the EU.
As the global leader in nuclear technology, as Westinghouse is uniquely positioned to support its customers with the solutions required to service and extend the operating life of reactors and support the development of new reactors that will be critical to many countries you know that.
To meet their climate goals and reduced our reliance on foreign energy producers and fossils.
Starting with our operating plan service business Westinghouse technology.
Effectively as the foundation for half of the operating reactors in the world.
As the leading OEM, we provide nuclear operators with fuel outage and maintenance services instrumentation and control systems engineering services spare parts required not only to upgrade their plans safety, but to continuously improve the performance of their plants over time.
Our long term customer relationships.
Combined with the mission critical nature of our technology products and services underpinned our strong recurring revenue resilient cash flow and the overall stability of our financial performance.
As renewed interest in nuclear capacity is accelerating Westinghouse continues to pursue a long term new planned strategy to support the development the licensing and the engineering of new nuclear kickoff cities around the world of technology portfolio includes our AP 1000 plants.
First the Thailand proven dolphin megawatts reactor with unique fully passive safety features that makes it the safest most innovative.
And <unk>.
Performing reactor in the World for AP 1000 are in operation in China for additional AP 1000 reactors have recently been announced in China to move forward.
For full buildup to AP 1000 plants are nearing completion in the U S with additional opportunities under discussion in several countries throughout Europe .
To give you an illustration of a newbuild contract each of those newbuild programs represents about 20% increase in the size of Westinghouse when we talk about volume.
We're also at the leading edge of developing new technologies, such as micro reactors.
Our innovative eating sheet micro reactor is a game changer, it's a new carrier battery currently.
Under development.
It's 100% factory built.
Hundred percent factory fueled.
Hundred percent factory assemble assembled before being shipped to site and each will operate 365 24 748 to 10 years.
Once commercialized, we expect <unk> to sort of as a diverse and reliable energy source for remote communities in mining sites.
Hydrogen production industrial power Maritime energy applications off grid applications. The list is very long and will definitely grow overtime.
Over the long term, we see the potential market opportunity for advanced reactors and EBIT to be in excess of $100 billion.
In addition to these growth opportunities, we're continuing to support investments in innovation and M&A to further strengthen westinghouse capabilities and enhance the value we deliver to our customers.
Since 2019, the business has completed seven small yet strategically important add on acquisitions.
Acquisitions.
Most recently Westinghouse signed an agreement to acquire <unk>.
BHI energy, a leading provider of maintenance and other services to nuclear plants in the U S.
<unk> is highly synergistic with our existing coal plants servicing operations.
We're enhancing our outage maintenance capabilities and increasing the suite of customer offerings globally.
We also see a robust and actionable pipeline of M&A opportunities that we will continue to explore moving forward.
A key area of focus of ours is our environmental services, where today, we have significant capabilities in decommissioning and decontamination, we're already pursuing additional opportunities to augment those existing skills through targeted M&A.
In addition to investments and M&A. We also maintain a strong focus to continue to invest in innovation, which is the DNA of the company. We are currently developing exciting solutions in the areas of advanced nuclear fuels additional technologies medical isotopes.
Duration energy storage and high temperatures Timberlake choices since two bolt of hydrogen production everyone has in mind that hydro will be key to decarbonize the transportation sector moving forward.
Overall, it is an incredibly special special time at macroeconomics.
Energy markets on geopolitical factors, all converge to create significant tailwind for nuclear power power in general and Westinghouse in particular these factors combined with the Companys, leading global market position advanced technology portfolio earnings growth and M&A investment capabilities positioned well with thing else for sustained and profitable.
Sure.
With that I'll hand, the call to Geoff Street, and I'm available to answer.
Yes.
Thank you Patrick and good morning, everyone.
Cyrus mentioned, we're off to a really strong start to the year adjusted EBITDA increased to 506 million from $387 million last year with improved contributions from each of our three operating segments.
We also completed the creation of a parent corporate entity B B C to help expand our investor base and support opportunities to grow our business.
I thought I would start with a few comments on the overall operating environment, particularly the impacts of inflation and supply chain bottlenecks.
We've not been immune to these impacts and like most companies, we're seeing higher freight costs in both common career carrier truckload shipments and oversee container cost.
Higher labor cost and price pressures across various commodity.
As essential product providers and market leaders in their industries, our focus across our operations is on implementing price increases, where we can or leveraging the strength of our contractual relationships to pass on the impact of higher cost.
Labor is one area, where we're generally seeing blanket increases across our operations.
It is possible that Hy Vee treats result in a structural increase to costs.
In some cases, we have mechanisms that are helping us manage through a tight labor market.
This is the case and I'll work access services operation.
They're utilizing the embedded cost in margin a scope escalators built into our customer contracts to pass on wage rate increases.
In other cases, we're prudently planning for higher wages.
For example, within our construction operations, where pricing in expected wage rate hikes into the contract value for new but.
Most of our largest operations have strong competitive positions.
And we've been focused on leading with price and.
In other operations, we have contractual arrangements that allow for inflation adjustments or pass through of higher costs.
For example, at our recently acquired engineered components manufacturer.
And at our advanced energy storage operations.
We've been successful in implementing global price actions to keep up with rising transportation labor and material cost input.
In other cases like at our water and wastewater services operation in Brazil.
Of contracted revenues and cash flows with cost escalators, providing us with an opportunity to directly pass through higher input costs to our customers.
So far we've been able to manage the impacts that the situation, particularly with the Lockdowns in China remains fluid.
And we're working with all of our management teams on initiatives to continue to support our margins.
I'm now going to turn to our segment performance for the quarter.
Within infrastructure services, adjusted EBITDA increased more than 50% to 208 million benefiting from our recent acquisitions and the resilience of our operations.
Adjusted <unk> improved to 139 million for the quarter.
Nuclear technology services continues to perform well generating adjusted EBITDA of 81 million for Q1.
Results were driven by the timing of fuel deliveries and increased customer outage and maintenance activity in the Americas.
We're focused on cost saving initiatives and new business opportunities to offset potential near term disruption to our operations in Ukraine.
Work axes services contributed 17 million and adjusted EBITDA utilization rates within the business are improving driven by increased customer maintenance spend.
Turnaround activity in our core industrial markets.
Commercial end markets have been slower to recover and they're reviewing broader regions and opportunities in that sector.
Offshore services operations reported adjusted EBITDA of $70 million performance during the quarter benefited from continued profit sharing arrangements tied to the higher price of oil and production volumes at our customers.
Now moving onto our industrial segment first quarter adjusted EBITDA increased to 217 million adjusted <unk> was $122 million compared to 421 million in the prior year.
Last year, our adjusted EBITDA included $328 million of gain from the partial sale of our investments in graphite electrode operations as well as in public securities that we held <unk>.
Excluding the gains adjusted <unk> increased approximately 30% in line with the adjusted EBITDA.
Our advanced energy storage operations reported adjusted EBITDA of 112 million for the quarter.
Continued strong aftermarket demand for both advanced batteries in the Americas was offset by lower volumes in Europe and reduced original equipment battery day, Matt <unk>.
Primarily due to the ongoing global auto production slowdown.
While below prior year current quarter volumes are in line with expectation.
Last year Q1 was a record quarter for <unk>.
In the prior year, the business benefited from prolonged cold weather impacts and pent up demand, particularly in Europe as lockdowns are lifted on economies reopened.
We continue to generate strong margins and expect the combination of recent pricing actions and the continued execution of our operational improvement plans to offset the impact of inflation and higher input costs through the balance of the year.
And finally within our business services segment, we generated first quarter adjusted EBITDA of $114 million and adjusted <unk> of 80 million.
Our residential mortgage insurer contributed adjusted EBITDA of 71 million benefiting from their resilient Canadian housing market, which resulted in low mortgage default rates and increased premiums aren't.
During the quarter the business paid a dividend of approximately 320 million of which our share was $130 million.
The business maintained a strong credit rating and is very well capitalized to manage through an expected normalization in Canadian housing market activity and home price appreciation.
Performance at our Indian Nonbank financial services operation was impacted during the quarter by a higher level of provisions recorded.
Two adequately reserved for potential losses on the commercial vehicle loan portfolio.
At our healthcare services business in Australia, we generated adjusted EBITDA of $13 million.
<unk> was impacted by government restrictions on elective surgeries that win pace for most of the quarter.
As restrictions lift admissions at our hospitals are expected to rebound and we've seen this happen before.
We're optimistic that the worst of the pandemic related headwinds are behind us.
Now turning to liquidity our balance sheet is in good shape, and we ended the quarter with $3 billion of corporate liquidity.
Subsequent to quarter end Brookfield asset management commit it for an additional $500 million of 6%.
Perpetual preferred equity securities.
This long term non diluted perpetual financing further enhances our liquidity and provides us with an attractive cost of capital to continue funding our growth.
We're very well positioned to manage through the current rising interest rate environment nearly all our large scale businesses are financed with long dated maturities.
And over the last few years, we've taken advantage of altera low interest rate environment to derisk their balance sheet.
Approximately 60% of our nonrecourse borrowings are either fixed or hedged and the weighted average interest rate.
These borrowings is 5% with a weighted average term of approximately five years.
And with that I'd like to close our comments and turn the call back over to the operator for questions.
Thank you as a reminder to ask a question you will need to press star one on your telephone.
Withdraw your question press the pound key.
Please stand by while we compile the Q&A roster.
Our first question is from Devin Dodge with BMO capital markets. Your line is open.
Thanks Juan.
To start with some questions on Westinghouse.
Might be for Cyrus or Josh could to start with but you know in the past I think you've targeted an EBITDA range of $7 million to $800 million.
I think youre close to that or at least the bottom end of that range on a trailing four quarter basis.
But I think Patrick was talking about some improvement opportunities in the base business. There is upside from recent acquisitions can you frame, how we should be thinking about the earnings power.
Of this business.
Everything in the portfolio now or perhaps.
<unk> EBITDA range is being used in the marketing process to prospective buyers.
Well look I don't think we're going to get into what we're providing in the marketing process, but as to our shorter.
Shorter medium term targets I think Patrick as best places to speak to that.
I think.
As far as the existing performance we've seen for 'twenty 'twenty. One is concerned we have already.
<unk> reached the range that was mentioned.
So definitely given the opportunities we have in the pipeline we can now.
Our site on the Hong Goldman enabling to improve that performance. So we have already reached that range last year.
And it's Cyrus here.
We have told you that.
We're targeting a $7 million to $800 million.
Over the next few years that continues to be our.
Our target.
Longer term.
There's lots of opportunity in this business with which again.
Patrick maybe you want to comment on that no. Indeed, there are lots of opportunities some of them be incremental and the recurring nature.
For instance, we discussed the situation of the.
The fuel we're definitely the current situation in central and Eastern Europe offers of both entities that will be long lasting and there are some of them which might be.
It might be more problematic for instance on AP 1000 program will immediately create a step up which will spread over 10 to 15 years, and which will be substantial I was mentioning one of those programs alone can create an uplift of 15% to 20% in terms of magnitude compared to the current size of Westinghouse would disappear.
Meaningful.
Okay. That's good color.
And maybe another one for Patrick I really like to.
The rundown you gave in the prepared remarks lost to chew on there, but anytime you're in something that Josh was talking about you know a lot of companies.
Struggling to find labor covering wage inflation through pricing.
How big of a challenge is this for for Westinghouse and can you speak to how quickly you were able to adjust prices.
The book of business just to cover off.
Inflationary headwinds.
So I would say first it is the fact that the large chunk of their business is linked to multiyear type of agreements with our customers, which have already embedded some contractual provisions enabling to take into account.
Commodity prices or things like this whenever some commodities are in line. So there is a form of already relationship we have with our customers, which enables to give visibility to both parties. It would be fair to say that as far as labor is concerned we are using we are in the knowledge type of business, we're using very specialized labor, whether it's white collar or blue color.
People, who have a great amount of loyalty to the company.
Even the companies we're acquiring they usually have people who have who have a lot of interest in the company and I would say in terms of the traction the current tailwind behind the nuclear energy, we see it in the number of people who apply to join our businesses is only growing as well so I must say so far so good.
We are we are offering nice opportunities.
In all the countries, where we work and therefore, we are not too impacted so far by by attention, which can affect of those sectors.
Patrick would it be fair to say no on the maintenance work that we do we typically bill based on the volume of work that we've identified and we'll do it looks like that said that would be at our current cost yeah, absolutely just breakdown, we have a way to manage our own resources on external resources.
<unk> way, so that we flex effectively for the most efficient model.
Okay. Thanks for that and maybe just one last one.
We saw that B R K.
Fly to become a category a issuer in Brazil can you can you speak to the implications of the motivations for that change and whether we should use us as a.
At least is that a potential precursor to an IPO.
Yeah.
Devin it's Jess create you know we've owned B RK for a number of years, there's been a lot of hard work.
That's been put into that business to do the original Carphone stand it up.
We've grown the business quite a bit over the last few years as well through organic growth.
Implementing our capex programs.
We acquired quite a significant concession last year in Masseter war, which increased the size and scale of PRT.
So it's definitely one of our more mature assets and.
Cyrus side.
We're always looking to make sure that we're maximizing value and at the right price.
We want to monetize these assets and reinvest into new opportunities.
And it's one of the options to be Archie and we wanted to make sure that we're maintaining full flexibility.
In terms of monetizing the business at the right time.
Alright makes sense, thanks, I'll turn it over.
Our next question comes from Geoff Kwan with RBC capital markets. Your line is open.
Hi, good morning Cyrus.
<unk> question for you first.
You had talked about I guess, it was a little over a year ago with the plans to monetize Westinghouse and <unk> stock.
Stock jumps, but ultimately neither was completed last year and maybe partly explains.
The decline in the stock.
By talking about both potential monetization again today do you have greater line of sight that you feel like these deals can be done.
And I mean in terms of timing or these things. He did think could be done at some point this year.
Look on on Westinghouse.
<unk>.
To be a little more specific what we had talked about some time ago was selling a minority interest in the company.
And while we received interest it wasn't at a level that was just attract.
Attractive.
For Btu.
All the things you heard today from Patrick.
Today, we see pretty significant tailwind that have become more apparent.
For Westinghouse and.
Where we're now considering a monetization of all.
The business.
And that's a very different I think that's a very different value proposition for a potential buyer.
So.
Hence I would say our confidence is much higher this go around.
As for <unk>.
You're well aware, we tried to do a public offering we didn't.
Get we didn't get a value we were comfortable with.
Lot has changed as I mentioned earlier in my comments.
It's become very apparent that <unk> is the leader in electric vehicles today.
And that is only going to continue.
So again I think there are.
Perceive tailwind schools will be much stronger for that business.
What we are highly focused on now is deleveraging the business as a path toward a potential IPO.
The more we did deleverage at the higher certainty, we will have us of success because if we if we only need to raise a little bit of capital.
We can have almost 100% certainty that we will have a successful outcome. So that that's really what's changed.
Change Jeff.
<unk>, we will work on deleveraging first and consider an IPO.
Maybe later towards the end of this year perhaps.
Latest early next year, we will see.
But we are highly focused on both these initiatives.
Okay now Thats helpful and then on back.
Back on Westinghouse those that 25, Russian technology nuclear power plants.
Okay.
Did westinghouse reach out to those and try to convince them to switch or was it them approaching Westinghouse and if it was a mix between the two kind of like what that what that mix kind of look like.
So the total number of react of Russian reactors outside of Russia, and Belarus is 33 reactors were already supplying eight of those 33, which which leads indeed.
Two to 20 plus reactors.
It would be fair to say that the sooner.
Conflict the tragic conflict in Ukraine broke out.
The customers on us immediately reached out to each other.
It started this.
Small knitted family.
The companies are very close closely connected and we have regular contact with each of those customers in any case.
Fairly immediate need of companies starting to work together to try to find solutions and and we were readily available too.
Work out those solutions for our customers. It has already started to materialize, you've probably seen that a.
A few days ago chess the operators in Czech Republic has announced an award to Westinghouse for fueling the permanent implant.
As of 2024.
And we expect that this is only the start of this triangle football communities that will materialize in the next months.
And in terms of that transition if you like are there.
Abilities for those customers to switch over to Westinghouse immediately I don't know if theres any financial penalties are you kind of have to wait until those contracts are at and then they switch over to Westinghouse So usually what happens is.
There are two factors, which may affect the timing. The first one is some of those customers hub on inventory of existing fuels and it doesn't make sense for them to use that value to burn that fuel before they moved to another fuel. The other thing is there is usually a country specific process in order to introduce a new fuel.
It's called the licensing process, which is usually a tripartite exercise where westinghouse the customer and the new care regulator are together.
Making sure that the fuels can be inserted safely into given the reactor we have the product.
For a full most of those plants, we are fine tuning the product for the remainder of those plants.
And definitely we have already didn't know how the experience under references to address those reactors. So it's really a matter of executing those plans.
And if I can just sneak in one last question I mean, you talked about the broader <unk>.
<unk> interest and renewed interest in.
Nuclear energy when you kind of take a look at it over the next five to 10 years I mean are there certain countries or regions, where you see.
Haps could be the key drivers of growth in nuclear energy beyond what you would have seen before this whole Russia, Ukraine situation. So it's a great question on even before central Europe Central and Eastern Europe was was a region, which <unk> already combined the seeds for such a move why because it's it's a region which was heavily.
Fulfilled intensive.
Coal gas.
Currently it's a region, which has very little of its own resources, what what the tragic events in Ukraine hopped on his behalf Catalyzing accelerated thinking.
So definitely we see a regional approach to be made and in central and Eastern Europe , but it's also the case in the U K I mean, you've probably seen the announcements of the Prime Minister Johnson, a few weeks ago announcing eight sites one of them being one of the sites that are where we have made some proposals for AP 1000 reactors and we do expect also that.
U K will go hard on strong.
Nuclear energy in the near future.
Okay, great. Thank you.
Our next question comes from Gary Ho with Desjardins Capital you may begin.
Great Thanks, and good morning.
Maybe just sticking with that Patrick just.
Wondering if you can elaborate on some of your recent acquisitions at Westinghouse.
And maybe could you provide some color on valuation range. What those were done at for these tuck ins as well kind of what else are you looking at that you would that's on your wish list.
So I mean, we usually don't disclose.
Transaction prices and so on but maybe what I what I can give you is a little bit of color on the impact of those of those businesses.
What we have done so far is is acquisition that were fairly small in volume, but enabled really too to bridge. Some gaps geographical gaps portfolio gaps, which were which were incremental in the range of a few percent of our annual revenues.
Our EBITDA.
With BHI, it's a different story.
It's a larger its a larger company more established and this is a company.
Effectively represents to give you a range, 5% to 10% of our annual profit levels. So it gives you a perspective on how we're scaling up.
On the size of those acquisitions.
We are looking essentially at companies, which are well performing <unk> stock best performing in their market segments.
And that definitely for ease of integration and speeds up the aggression of those of those companies inside with Neil financial.
Okay got it and then.
Second part of that.
No small modular reactor really intriguing.
I'm wondering if you can provide a bit more detail in terms of kind of mix.
Revenue or EBITDA today, and where that could go to.
Five years out and where are you seeing the greatest opportunity in terms of regions in our discussions with.
Okay.
Great question I'll try to be brief on that there are various types of smaller reactors, you'll have the micro reactors like the eating sheet, which where they will opinion. So a few megawatts.
Game changer think of it as a as a nuclear technology.
A few years ago, we were saying its midterm now we're saying, it's becoming short term we're developing it for the end of the decade.
So this is something that we believe will effectively create a demand fairly quickly.
As we finalize as we complete.
The development, which includes the licensing of the reactor you'll have larger reactors. We are part of several programs. They also called SMS.
Then you have the generation four type of reactors. We have currently one type of development.
Our portfolio of whats called lead test reactor and then therefore.
With the support of UK government.
So all of these combined give us.
Full portfolio, which enables us to be positioned not only industrial terminals. So in the long term the generation four reactors all react towards that more or less will come on the market around the 2040. So it's really a long range type of Opdivo.
Okay.
Great, Okay, and then I.
I have a couple of questions on staging as well just given the higher mortgage rates and slowing housing activity here in Canada.
The implication for earnings.
And looking out and also if you can provide more color on the MBA mortgage guarantee Corp.
And whether you are looking at other other regions as well as to expand.
Yeah, Hey, it's dress freed I'll I'll take that and then cyrusone to comment on expansion and I'll pass it on to him.
Since the acquisition of Sage and the business has been performing exceptionally well.
2020 and 'twenty, one were both record years in terms of transactional volume and we're definitely planning for normalization and expecting lower volumes of premium written for this year relative to the last couple of years.
But we're not expecting that this is going to have any immediate impact on earnings because the premiums that we've written over the last couple of years will get amortized into earnings over the next five year period.
And you know you're exactly right. The housing activity has slowed down by that hasn't really resulted in higher losses for the business and we're expecting that losses will continue to remain low for at least the foreseeable future.
And that's really due to home prices.
They've stabilized, but there is still supply shortages.
In the country, so that'll provide a floor at some resiliency for.
For home pricing.
The economy is now reopened and we're continuing to see a recovery.
And the quality of the portfolio is very strong so we're not expecting in the near term losses are going to spike over the longer term.
You'll go back to a trend level of losses.
The other thing that's interesting about sei Jin is that with slower activity and low losses.
Actually frees up cash within the business.
As you need less cash to reinvest into new underwriting.
So even if activity slows down it will free up some cash that can then be used at the bu level for them.
Other growth activities. So I'd say all in all I'm stage and continues to perform well.
The India acquisition.
It's small and we've.
Just do we just announced it and we think there's an opportunity set there.
If it's a new industry for the country and we think CGM can provide.
Provide value and it'll be accretive to the business overall, but it's very small today.
It's small, but it could grow a lot Cyrus here it could grow a lot and thats why we were intrigued by the opportunity so.
Stay tuned on that we're not looking at any other regional expansion at this time.
Okay.
Great and then my last question, sorry, as well have you just going back to the monetization discussions.
Maybe I can ask it this way.
Under what conditions may the monetization that Westinghouse will not take place I know, it's kind of choppy markets out there I think in your last Investor Day, you mentioned kind of nine to 10 times multiple for these businesses and your intrinsic value.
What if you don't get those multiples.
Would that mean the monetization so when appropriate.
Well look obviously, there's a point at which we wouldn't sell right.
Price levels are ridiculously low but.
We're pretty confident on Westinghouse.
We've actually had some inbound interest.
I don't want to go into too much detail, but we're reasonably confident on Westinghouse.
<unk> will in part be dependent on capital market conditions.
At the time, obviously today there are no ipos today as we sit here.
So that'll be dependent on capital market conditions, but.
Again, our confidence level.
For <unk> has grown too only because of what I said that it's become apparent.
Apparent now that it is the leader in electric vehicles.
12 volt batteries systems.
That may not have been as clear.
Outside the company a year ago as it is today.
Okay got it okay. Those are my questions. Thank you very much.
Okay.
Thank you as a reminder, we exited you please limit yourself to one question and one follow up to ask a question at this time. Please press Star then one our next question comes from James <unk> with National Bank. Your line is open.
Yes. Thanks.
I guess another one on the on the Westinghouse in.
Potential monetization here.
Listening to the answers it sounds like there's a lot of good things in the pipeline.
But those good things are perhaps likely not to really materialize until maybe 24 or beyond.
Or is are there some other some other factors that that might take some of the tailwind out of those revenue initiatives, whether it's input costs competitive dynamics.
Other factors that could like.
It can reduce some of those tail winds that sounded like a really really good momentum in the business.
Maybe maybe a few elements to it.
And answer to your question.
Look there are a certain number of things that I believe we will start materializing not in the next years, but it's in the next months.
Discussions we are having on fuel for Russian reactors as I was saying a first contract as Greg was already announced.
The first award was already announced a few days ago. When we do we expect more more awards to be announced in the coming months.
Newbuild.
It is well known publicly that we are proposing our AP 1000 reactor to several countries in eastern Europe , We do expect decisions to be made before the end of the euro at least in one of those countries. So in terms of of materializing.
Fully definitely some of those programs will spread over years, but there should be decisions that will give.
Give strong indications in nature and the very next homes.
Okay.
And for Cyrus I guess on the Westinghouse.
Given given.
Given these tailwind.
I guess, it's obviously a more attractive asset.
So but.
On the other hand, why not why not let this the sub side play out internally within within Btu.
Yes. It is.
It's a great question, it's something we debate all the time, it's such a great company. It really would be nice stone this forever.
But the reality is we just have so many other incredible opportunities that we see every day you have seen how active we've been buying things.
Yeah.
Look we've made many times our investment in Westinghouse, we've already pulled out more than our invested capital just through regular dividends and a few value on any reasonable range of value was made multiples of our original investment.
And I would say our job is sort of done here and we're onto the next five great investments, where we think we can replicate the same type of outcome to do that though we need to recycle capital generate capital that's our business at <unk>.
Alright fair enough. Okay last one for me just.
Thinking about all of the deal activity.
That's that's been underway and in financing. These these deals in.
In the public markets through the public markets.
So I'll just recently got it looked like one deal one public debt deal might have been pulled and replaced with some term financing from one lender.
Can you just talk about the market.
The market dynamic for financing.
These recent transactions.
Yeah. So so.
It's a it's a very interesting dynamic.
There are points in time, where there is demand from bond buyers there are points in time, where theres more demand from term loan buyers.
And we're always trying when when we buy a business and we're financing them, we're always considering.
Which of those buckets provides the best opportunity for us to have the best execution.
On financings I will say today that although in general.
The U S loan market is pretty supportive today.
There is lots of demand today for floating rate.
That and.
That's that's that's what we're executing on so thats, what youre, saying.
Chesapeake has any other comments yeah, no I think that's exactly right. Cyrus you know we've been able to obtained committed financing to support the acquisitions that we've done.
The U S loan market.
Are supportive of new LBO activity, but also of refinancings and.
As long as you've got quality credit and and the businesses that we have been buying.
Good businesses.
We are maximizing the use of floating rate instruments.
Just because that is kind of best execution and they've got a minimal call protections.
And there is more investor demand.
And then you know I I touched on this before but we're obviously very mindful and we wanted to make sure.
Where it's appropriate where then turning around and hedging or managing kind of the risk.
The increasing rate environment I'd say in Europe .
It's a little bit different you know the the high yield market.
It's basically shot.
And we've seen an increasing shift to loans there. So that's kind of where we're focused.
Okay. Thank you.
Our next question comes from Nick <unk> with CIBC capital markets. Your line is open.
Yeah. Thanks.
I think most of my questions on the topic of monetization have been answered.
Maybe more of a high level question here, but how do you think about the relationship between private equity buyout multiples and <unk>.
Rapid Lee rising interest rates like you've been quite active on the acquisition friendly. So are you factoring in a multiple compression over the investment horizon to the IRR that you underwrite new deals on or how are you thinking about that in general.
When we buy something we take a very long term view, we assume we're going to own something for at least 10 years.
And that sort of mutes the impact of.
Multiple expansion or compression.
When you look at investment and it needs to hit our target returns.
We need to factor in a prudent level of leverage with the appropriate interest rates, we need to factor in what the likely refinance rates going to be in five years or seven years. So.
So we do all of those things when we're coming up with.
The price.
We need to pay and still earn the appropriate return.
Don't know if I fully answered your question, but that's how we look at things.
Yeah, Okay fair enough.
That's it for me thank you.
Our next question comes from Dmitry <unk> with Meredith Your line is open.
Hi, Thanks for taking my question I have my first question is two parts, we can if I may.
How exposed is westinghouse to fixed price construction risk.
Hi, Dmitry, great question in which and the answer will be a fairly straightforward.
Our business model is effectively too.
To not take any construction risks and liabilities in particular on the Newbuild contracts. So the way we approach them is effectively to take the lessons from the past we are a great technology company.
We are great to supply engineering products on equipment.
We're not a construction company.
Got it okay. Thank you.
I wouldnt hold as Westinghouse and decommissioning.
Waste management business, perhaps if you can if you can disclose what percentage or what part of the business.
Driven by <unk>.
<unk>.
Yeah.
Great question as well Dmitry. So it used to be a small fraction of the business. It has been growing in posture in the last years with a with a new leadership in place. So that business. We have very specialized services on decontamination decommissioning to give you an idea we have about 50% of the market in Europe for spec.
Specialized services to decommission, the <unk> zone and the nuclear reactors.
Part of that business is also services that we offer environmental services that we offer to governments like.
In the U S. So our U K U K government.
Cleanup southern sites sold to do nuclear material management, it's a business, which has a great potential it's a business, where we want to continue to invest organically inorganically and we have we have already in the pipeline and the acquisition pipeline or in the investment pipeline quite a few quite a few things.
To make this business, even more sizable at the scale of Westinghouse.
Are you considering potentially partnering.
With companies that are.
Provide these types of services for example, lessens the Loveland.
I think the discussion on partnering is is really dependent on specific situations project by project. There are cases for instance for contracts, where we already partnering with companies such as.
The once you have in mind after that it depends on the situation, sometimes where a partner sometimes we're competitors.
We have harvest very flexible approach to those.
Yes.
Awesome. Thank you.
And then I have a question that's unrelated to Westinghouse.
That's probably to Cyrus if I may.
Hey.
Yeah, and it has to do with.
Collateral potential collateral monetization that you're considering.
A partial sale or an outright sale of the entire stake.
Look I think the likely exit as an IPO.
That said at the time, we will consider a full or partial scale a sale as well.
At the same time.
But just given the size of the business.
Given how attractive this company should be.
As a U S public company, the likely exit probably as an IPO.
Got it.
Last question.
Don.
You cannot provide.
If you can provide any.
Any update on <unk>, how is it doing maybe if you can touch on.
Populating results as possible.
Yeah, Hi, Dmitry, it's dressed create I'll take that.
Two cardona as you know.
Challenged.
Investment for US we were a very we're very focused on kind of operational turnaround there I.
And I'd say the team has done a great job on the operational front.
And we're seeing really really good progress there.
Dave.
We revamped the organizational structure there.
There has been improvement in commercial strategy being able to take pricing actions, especially in.
In the current environment.
Also winning new business with customers that in the past have moved away from Cardona and they've now come back and just seeing the ability of the business to execute on the higher fill rates that they've been able to provide.
We've also been focusing the business on more higher margin.
Products, So I'd say.
On the operational front things are progressing as we would like.
The team is doing.
It's kind of going according to plan.
What's still continues to be challenging there is.
<unk>.
Broader kind of environment. This is a miles driven business.
And it was impacted by Covid when people start driving.
And we started to see some recovery, but now with the higher oil prices miles driven.
Alex driven hasnt quite recovered to where we would like so.
That is going to be important to really start to see.
That positive momentum for Kerr Dawn.
Got it thanks, a lot just grateful that and maybe you can elaborate just a little bit on the.
Revamped organizational structure M D.
<unk> commercial strategy.
Sue.
We've put in place a new management team since we started to kind of get more involved and recapitalize the business.
We've got a new CEO , we've got a new CFO now in the business.
These are folks that are very operationally focused have been in these type of situations before we've also reoriented the organizational structure to be more focused on commercial activities. So there's someone kind of leading that side of the organization now.
Building back our relationships with our customers.
Order to wind back orders.
Orders from customers that we've lost.
I as well as focusing refocusing the commercial strategy on the higher margin products and really I think when we took over this business. They they had 40 or 50000 skus.
And really.
Focusing the attention on where we're making money.
Which skus should we be selling.
Those are some of the things that the business has been working on.
Thank you.
That's it for me.
Our next question comes from Matthew <unk>.
Capital markets. Your line is open.
Hi, Thanks for taking my questions I think I just wanted to ask about some of the newer businesses to come into the portfolio and contribute.
Exco and module there I'm just wondering so far from what you've seen and are those businesses performing.
In line with expectations and what sort of trends are you seeing on the demand side.
Fair and and in terms of executing the operational improvement plans.
Tuck in strategy is for those.
Yeah look there they are both performing well, they're bullish performing as or better than expected and we.
We see tremendous opportunity for both of them.
A N and improving operations and be tuck in acquisitions. So on both fronts, we see great opportunity.
Okay. Thanks, that's it for me thanks.
Okay I think.
That concludes our call today. Thank.
Thank you very much for joining us we hope you hope you were enlightened on their nuclear industry by Patrick. Thank you Patrick for joining US today. Thank you everyone and look forward to speaking to you next quarter.
This concludes today's conference call. Thank you for participating you may now.
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