Q3 2022 Brookfield Business Partners LP Earnings Call

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Okay.

Yeah.

Welcome to the Brookfield business Partners' third quarter 2020 results conference call and webcast. As a reminder, all participants are in listen only mode and the conference is being recorded.

After the presentation, there will be an opportunity to ask questions.

Joining the question simply press Star one one on you touched on the phone.

Now I'd like to turn the conference over to Alan Fleming Senior Vice President of Investor Relations. Please go ahead Mr. Fleming.

Yeah.

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 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 the <unk>.

Charities regulators in Canada, and the U S, which are available on our website.

Joining me on the call today is Cyrus Madden, Chief Executive Officer, Denis Turcotte, Chief operating Officer, and Josh Readout, Chief Financial Officer, Jos will start with an update on our strategic initiatives and Dennis will then provide some perspective on what we're seeing in the current operating environment.

<unk> will finish with a discussion of our financial results and will then be available to take your questions with that I'll pass it over to Satish.

Alan and good morning, everyone. Thanks, very much for joining us today.

While we are operating in a challenging environment, we had a strong third quarter we generated.

Record adjusted EBIT EBITDA.

$630 million up more than 40% over the prior year.

We're really pleased with our results.

As many of you know in October we reached an agreement to sell Westinghouse.

Through our strategic consortium led by chemical.

Corporation, and Brookfield renewable partners for $8 billion.

This was a major milestone for our business that meaningfully advances our capital recycling and supports our growth.

We expect to generate about one $8 billion of net proceeds to <unk>.

And crystallized a six times multiple on our investment.

When combined with all the distribution that we've received to date.

We're very pleased with this outcome.

And over the last few weeks.

Unit holders, who hold more than half of the votes eligible to be cast have provided us their support in favor of the transaction.

We hope to close the sale in the second half of next year.

Looking forward, we have other large scale businesses that will reach a mature state and eventually we sold the.

The timing will of course depend on how far along we are in our business plans and broader market conditions.

We've invested a lot of capital a significant amount of capital over the last few years to acquire Super high quality large scale businesses, which should generate very substantial proceeds for BB. When it comes to monetize them several years from now.

I want to turn to our growth initiatives.

In October alongside our partner, we completed the privatization of Nielsen.

As many of you know Nielsen is the market leader in third party audience measurement.

As the media landscape continues to evolve the business scale and customer relationships position us really well to provide a unified measure of audience viewership.

We're excited about making this investment look forward to supporting the business growth strategy.

We've also continued to focus on opportunities to grow our existing business.

Last month, our engineered components manufacturer completed the acquisition of a leading distributor of axles and other trailer components, which provides us opportunities to continue growing and scaling our distribution operations.

And our Brazilian fleet management operation completed the acquisition of <unk>, a leading full service rent a car platform, which doubles the size of our existing fleet management business and provides meaningful opportunities to reduce costs and increase our scale.

As our business continues to grow the cash flows our operations generate are also continuing to increase.

To put this in context in the last 12 months, our operations have generated about $800 million.

Free cash flow.

This is after this is after interest taxes required maintenance capex and depletion all that our share which to put into context means our units today are trading at around 6% a six times multiple of free cash flow.

As we approach the end of the year, our focus is on continuing to build value within our operations.

And before wrapping up.

Want to thank all of you that were able to join US in September at our annual Investor day for any of you that missed at the webcast is available on our website.

With that I'm going to turn it over to Dan.

Sure.

Thanks, Cyrus good morning, everyone. As most of you are aware, we're a global business today with operations that span across North America, Brazil, Europe , and Asia Pacific, we own and operate large scale businesses touching nearly every facet of the global economy, which gives us a unique perspective and being able to monitor.

<unk> anticipate and respond to changes in the global operating environment.

With that context.

What I would spend a few minutes today to talk about several of the key themes, we are seeing across the global operating environment and how we're responding to support our businesses.

I'll start first with inflation.

Categories that form our cost of delivery, whether it would be raw materials transportation logistics labor energy remain elevated and above pre COVID-19 levels. The good news is we see many of these areas resetting back to trend line over time.

Some of that has already happened steel prices.

Common material and a large number of our businesses. As an example are down 60% from levels. This time last year and likely to drop further we see this happening with other materials as well.

Global container rates have also softened from previous highs, making international shipping options and costs, both land and sea more favorable. However, we are still seeing shortages or constraints in certain supply chains and associated higher cost.

We have been focused on diversifying our supplier networks, optimizing our inventory levels and mitigating both direct and indirect costs and risks where we can.

More broadly we think the greater localization and re shoring of key inputs will support continued easing on global supply chains.

Global Labor markets continue to be tight and are not yet showing signs of easing in labor costs may very well be structurally higher for longer across both services and manufacturing sectors labor.

The labor attrition rates in some of our operations have had up to 30% or more in certain cases and like most were encountering similar challenges in the professional workforce.

Compensate we're putting more emphasis on ensuring we have strong management teams in place across all our operations with the right requisite organizational structure and associated compensation arrangements to both attract and retain key talent.

Similarly energy availability and cost in particular in Europe have been an increasing focus of ours as the year has progressed, while the price of oil may present increased margin opportunities that some of our businesses. This is by exception and not sustainable more broadly the price and availability of natural gas.

Gas is a major feedstock for many global production processes have significant implications on both production and cost levels, which may drive decisions to idle or cut back capacity to optimize cost structures in certain regions.

Within this inflationary context, we're determined to maintain our margin performance. So far we've done a fairly good job of increasing prices, which has been required in this type of environment simply to recover from inflationary cost pressure and to maintain margins the nature of the larger businesses, we own providers of.

<unk> products services and market leading positions.

Our well positioned to pass through impacts of inflation with minimal impact to demand over time, though there are situations with timelines given broader macro forces.

There have been pockets, where this has been an advantage for us whether it's at <unk> or at some of our smaller operations like Green energy, but it has been a continuous effort over the past year and in some cases, we are only now starting to see the benefit of pricing actions fully catch up to the pace of cost escalation.

We're also increasingly looking at opportunities that may emerge driven by both higher prices and rising interest rates.

In particular as the replacement cost of our asset intensive businesses increase we should be in a strong position to participate in a repricing of contractual rates to enhance our cash flows the buy versus rent equation for customers is also changing as capital becomes scarcer and more expensive.

<unk> fortunate to have businesses, whether it's our returnable packaging business or modular building leasing services operation in Europe that are well positioned to align with evolving customer buying behavior that ultimately will strengthen our longer term competitive position.

We look forward to taking any of your questions later and with that I'll hand, it over to Jeff Sprague.

Thanks, Dennis and good morning, everyone.

<unk> strong financial results in the third quarter and continue to be pleased with the performance of our business.

<unk> EBITDA increased to $627 million from $443 million last year.

Adjusted <unk> increased to $339 million from $276 million last year.

We saw improved contributions from each of our three operating segments.

Starting with our business services segment, adjusted EBITDA increased by 40% to $229 million and adjusted <unk> improved to $152 million.

Our residential mortgage insurer generated $69 million of adjusted EBITDA.

Primarily driven by higher premiums earned following strong underwriting activity over the last few years.

Continue to see lower levels of mortgage default rates in the <unk>.

Business as well.

New underwriting activity is moderating and we expected that.

But the business remains very well positioned to manage through a period of normalizing housing activity.

In July we closed the acquisition of our dealer software and technology services operation, which contributed $49 million of adjusted EBITDA during the quarter.

The team is pleased with what we're seeing in the business so far.

Still or you, Dave maybe you have a high degree of confidence in achieving the value creation plan.

Healthcare services contributed $16 million of adjusted EBITDA during the quarter.

Results continue to be impacted by higher rates of surgery.

<unk> and elevated operating costs.

And the labor environment is slowly improving.

Theism cyclically and overtime are all trending towards normal levels.

We're working closely with the management team to support the business.

<unk> performance to improve as the operating environment normalizes.

Moving to our industrial segment.

Good EBITDA with $228 million compared to $171 million last year.

Adjusted <unk> increased to 131 million and included a $11 million after tax net gain on the partial sale of our investment in public securities.

Advanced energy storage operations during the quarter generated adjusted EBITDA of $122 million, which was in line with last year.

Higher selling prices and a favorable mix of higher margin advanced battery sales contributed to results during the quarter.

We are seeing impact of higher labor and input costs and the best of luck.

Increased overall battery volume benefited from stronger original equipment manufacturer or OEM demand.

<unk> production challenges are starting to use here in the quarter.

Our engineered components manufactured generated $32 million of EBITDA adjusted EBITDA.

Performance benefited from the contribution of recent add on acquisitions as well as pricing.

The business is focused on cost saving opportunities to support margin and offset the impact of reduced volumes in the current environment.

And finally in infrastructure services, we generated adjusted EBITDA of $205 million compared to $140 million last year.

Adjusted <unk> was 102 mills.

Nuclear technology services performed well in the quarter generating $63 million of adjusted EBITDA.

Contributions from the recent BHI energy acquisition was <unk>.

Offset by reduced volume in part due to disruptions caused by the conflict in Ukraine.

The business remains on track to generate strong full year, adjusted EBITDA and cash flow.

Lottery services generated adjusted EBITDA of $39 million in the third quarter.

<unk> has remained resilient and we are helping the business on initiatives.

And mitigate the impact of higher input costs and supply chain challenges.

Modular building leasing services contributed adjusted EBITDA of $37 million.

Strong demand in Germany, and Asia Pacific is helping support overall utilization level.

Performance also benefited from increased penetration of higher margin value added products and services as well as pricing actions.

We're continuing to assist the business in reviewing potential add on acquisition opportunities to enhance this offering an expanded geographic footprint.

We ended the quarter in a strong capital position.

With $2 8 billion pro forma corporate liquidity.

This takes into account the planned syndication of our recently closed acquisition as well as the expected proceeds from the sale of our investment in Westinghouse.

This provides us with significant flexibility to manage our balance sheet.

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

Thank you.

To ask a question you will need to press star one one on your telephone please standby, while we compile the Q&A roster.

Our first question comes from the line of Gary <unk> with.

With Desjardins Your line is now open.

Thanks, and good morning for somebody for Simon just in your letter to shareholders you hinted at further monetization.

I guess my question, how do you balance between the current choppy environment to monetize so maybe perhaps lower and new your valuation versus perhaps kind of investments in your pipeline that you can also buy at attractive valuations.

Hi, Gary Cyrus here.

I think in the letter what we said is.

In the fullness of time, we expect to have large scale monetization and we are really giving some context to the fact that over the last couple of years, we've invested a lot of capital many billions of dollars of capital.

And that in the fullness of time 567 years from now.

Those acquisitions will likely generate in the order of $12 billion of proceeds for us.

That's the context, we are trying to get.

As to the environment today.

Sure.

I would just say that strategics in general are well capitalized certain industries are very well capitalized and they could be buyers just I'll just say generally.

But we didn't have anything specific in mind in our letter.

Okay.

Got it that's helpful and then why have you.

I just wanted to go back to superior plus investment.

You add the perhaps that generate 7% a quarter.

Cash dividend yield and fulfill also participate in the equity offering those returns are quite a bit off your 15% to 20% that you typically target for investments.

How should we look at this are you content with keeping mistake, adding to itself and all brands.

On that one.

Look we're very happy with our investment we do we do get a 7.25% coupon on our preferred share investment we participate in the upside.

The share price as far as we're concerned the company is performing well.

We're very pleased with that and.

We're happy with the position we have.

Okay.

And then just last one maybe for just pre.

Your U S dollar reporting with global businesses.

Does the stronger U S dollar impacted your results was that a negative this quarter.

And how how should we model that out.

Yes, Hi, Gary Thanks for the question.

I think when you think about it.

And currency exposure for the business is really kind of two levels of exposure to think about the first.

Just in terms of.

Our invested capital in the equity behalf in the businesses.

And.

Hey.

Just kind of.

Wrapping back dairy.

In all of the acquisitions that we've made over the last three to five years.

Majority of them and I'd say about 65% of the capital. We've deployed has been in U S dollars.

And the balances then.

Either in developing <unk>.

Increase in <unk>, Brazil, which is a small piece of the book, which we always hedge.

And then in other developed countries the exposure Israeli Canadian.

Aussie dollar or euro.

And on our invested capital.

We have a hedging policy and we typically hedge our capital going in.

And it's an active program, where we are constantly monitoring the hedges rolling things are crystallizing, where it makes sense.

So that's kind of how we think about the equity that we put into the business.

Pes is around.

Underlying operation.

We've got operations in.

Countries outside of the U S either where we've made investments like module there.

Or large global businesses like <unk>, which has operations kind of across the globe and currency exposure.

In those cases again.

We've got active hedging programs within the company and we will typically look to hedge exposures are.

Cash flows from the operations within the business does.

<unk>.

Today.

Got a significant portion of that exposure hedged, which is not to say that we haven't been impacted by some of the.

The U S dollar strategy.

And specifically.

In some of our larger businesses like <unk>.

We've seen now currency headwind and a large portion of that is from the euro. So there is.

Tom.

Forex exposure.

Is that it creates in the results.

But if you step back overall.

<unk> level, it hasn't been material and some of the businesses a bit larger.

Then kind of a step back and look at that.

Yes.

So I think in summary, we've got active hedging program most of our foreign currency exposure is hedged.

But there are some headwinds specifically from the Europe that we are seeing but non material to BBB.

Okay, great. Thanks for the color.

Okay.

Thank you. Our next question comes from the line of Jamie <unk> with National Bank. Your line is now open.

Yes.

Yes. Thanks.

First question just.

Thinking about.

Organic growth.

And.

I guess operating leverage on an organic basis.

Have you.

Have you given it.

Or do you have any ability to provide some disclosures or additional color around how you're thinking about organic growth rate in the underlying operating businesses and they are operating leverage is that something you can.

It's a little bit of that.

Range around let's say.

Hi, Jeffrey.

I'll take a first crack at midnight Denison cyrusone to add to it.

Hi.

When we invest in our businesses the large part of our investment thesis is around operational improvement.

Businesses.

And improving EBITDA.

Usually the bulk of that comes through cost initiatives that we've got plan.

Revenue growth is typically not a large part of the equation there are.

Smaller investments that we've made.

Which we think of more platform investments, where we are seeing very strong organic growth and that is a focus area.

As well as accretive M&A.

And we gave a little bit of color on that.

In our Investor day at the end of September .

On a same store basis, if you kind of normalize or take out the acquisitions that we've been doing.

So far same store results.

I've been pretty visibility and we've seen same store growth both in revenue and EBITDA across the portfolio on a year over year basis, but.

Dennis.

It in his opening remarks, the operating environment in some areas is challenging and we're very focused on kind of continuing to enhance and support underlying margins. Okay. Dennis anything you want to add.

Sure, Jeff Sprague I'd add to that by saying Youre right in the sense that in environments like we're in where we're entering.

Potentially recessionary environments at least in some sectors.

As.

Not by loss of market share, but just simply a reduction in orders whether it be products or services clearly were working against the operating leverage in that regard, but again as Josh freed mentioned not only do we focus on costs very intensely we also focus on applying the capacity.

We have in a smarter way, we do a lot of profitability analysis byproduct by customer.

And geographically and that three dimensional analysis, often puts us in a position where we see the old 80, 20 rule apply where 20% of our our sales in effect are.

Not as well placed as could be given fixed amounts of capacity and what translates then in those cases, you end up getting.

Higher revenue you get but more importantly, higher margin. So it doesn't look directly like organic growth in unit count, but it absolutely translates into higher revenue higher EBITDA and higher free cash flow.

Okay, Great and then.

A follow up to that in terms of free cash flow and.

That.

The growth in operating free cash flow how are you thinking about.

The ability of the operating businesses too.

De lever.

Do you have any any forecast as to what you would expect for maybe an absolute dollar basis.

Net debt to EBITDA basis, any any additional color like that.

That can sort of walk us through the elaborate of the operating companies over the next several quarters.

Yes.

I can take a shot at answering that and then.

Yes.

Add to it.

Bill.

When we think about leverage within the business, we really think about it from.

The perspective, each of our operating companies that in every business is different.

Some businesses where.

We've always operated them with a very low level of leverage just given kind of the underlying profile of the business.

And there's others, which are kind of more stable.

Contractual.

Some pieces of inflation linked businesses that have the ability to service the higher level of debt.

We were obviously very closely monitoring.

The impact of higher interest rates.

On kind of the serviceability of that in each of our portfolio company.

And also just in terms of.

Deleveraging will refinancing where it's appropriate.

The business is generating a lot of free cash flow today.

So it gives us with a lot of flexibility to be able to kind of manage that.

As it comes up.

B.

Based on the current.

<unk> profile and the debt that we have in place.

75 basis points impact has about 60.

<unk> 5 million impact on the full and considering.

The run rate, that's a very small percentage. So we think the portfolio is very well set up to kind of manage through that there will be.

Some businesses that come up for refinancing.

That will have to work through but nothing that.

Concerns us at this point.

Manageable.

And maybe it's just Cyrus yeah, I'll just add one comment.

Okay.

If you look at what we've done consistently for years now.

We're able to increase free cash flow.

Pretty well across the board across our.

All of our companies and.

What that really means is the businesses are deleveraging.

Earnings are going up the level of debt stays the same so.

EBITDA debt to EBITDA is actually coming down over time.

Through improved earnings.

Okay.

Great. Thanks for the thanks for the color I appreciate it.

Okay.

Thank you that's all the time, we have today for questions I would now like to turn the call over to Cyrus Madden for closing remarks.

Yeah.

Thank you very much for joining us today, we look forward to speaking to you next quarter.

This concludes today's conference call. Thank you for your participation you may now disconnect connect.

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