Q4 2022 Brookfield Business Partners LP Earnings Call

February 3, 2023

Welcome to Brookfield business Partners' fourth quarter 2022 results conference call and webcast. As a reminder, all participants are in a listen only mode and the conference is being recorded after the presentation. There will be an opportunity to ask questions to join the question queue simply press star one.

One on your telephone right 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 to everyone.

Before we begin I'd like to remind you that in responding to questions and talking to them.

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

Joining me on the call today are Cyrus Matin, our Chief Executive Officer, Dennis <unk>, Our Chief operating officer, and Josh <unk> our.

Our Chief Financial Officer.

Cyrus will start with an update on our strategic initiatives and Dennis will then discuss progress on our business improvement plans.

<unk> will finish with a discussion of our financial results and then will be available to take your questions.

With that I'll pass the call over to.

Thanks, very much Alan.

Everyone. Thanks for joining us on the call today too.

2022 was a great year for our business, we made excellent progress on our growth and capital recycling initiatives.

Adding $2 7 billion to acquire several high quality market, leading businesses that should contribute meaningful value to our business.

We also generated $2 $3 billion from distributions and business sales, including an agreement to sell Westinghouse.

We're also pleased with our solid financial performance continued resilience of our operations.

Adjusted EBITDA increased to $2 3 billion.

And free cash flow increased to a record $3 <unk> per unit for the year.

Stepping back like many are business has experienced a lot of volatility in the operating environment over the past year.

Inflation has been persistent.

<unk> change continued to be stretched labor markets remain tight and energy costs in many developed markets. We operate in are far higher than a year ago.

And we all know that interest rates are also higher than global growth is decelerating.

Despite this despite this backdrop our business has continued to perform very well adjusted EBITDA is up 30% compared to last year and up 3% on a same store basis, which after adjusting is after adjusting for the impact of acquisitions and dispositions our EBITA margin.

<unk> has also continued to improve to a record 19% up from 11% just three years ago.

This improvement is driven by both the quality of the businesses, we've been acquiring over the last few years and the progress we've achieved on our improvement plans.

And Dennis is going to talk to you about that more shortly.

The value we are building in our business contribute to adjusted free cash flow of $740 million an increase.

<unk> of nearly 20% on a per unit basis compared to last year.

We will use this cash flow to fund our growth reinvest in our operations and pay down debt.

As we look forward our business should continue to generate strong performance in all market environments. Our balance sheet is also in good shape and we ended the year with nine over $9 billion of available liquidity across our operations.

At the corporate level, we have drawn on our credit facilities to bridge the timing of our growth activities. This is temporary knowing that at some point, we'll be in a position to repay these borrowings with the proceeds we expect to generate from our capital recycling activities and to that point as many of you know we reached an agreement to sell Westinghouse.

Last year, we will generate about $1 8 billion in proceeds for <unk> when the sale closes in the next few quarters, which will substantially reduce our borrowings at the corporate level.

This sale also demonstrates that even in difficult markets.

High quality businesses like many we own today are readily saleable, especially to strategic buyers.

At any given time, we are progressing sales process for a handful of our businesses several of which are substantial which will be sold in due course and generate significant proceeds for btu.

While we're pleased with our business fundamentals were equally disappointed in our trading price performance, which has become materially disconnected from the value of our business.

All right.

To put that in context today, we're trading at about eight times annual EBITDA.

This is a massive discount to the S&P 500, that's trading at 13 times.

And businesses generating margins on par with ours that are trading at 15 times or more in.

In our view it is.

A great entry point for <unk>, we're going to continue building value in our business as we execute on our improvement plans and as a result <unk>.

<unk> should out earn the underlying performance of our operations.

The discount between our trading price and intrinsic value narrows.

With that I want to hand, it over to Dennis.

Thanks, Iris and good morning, everyone core capability of our organization is the ability to provide incremental support to our portfolio of companies and even take a hands on approach as required to ensure systematic focus and adjustment to changing economic conditions.

With that in mind I wanted to spend a few minutes today, providing an update on the progress we've achieved at a few of our businesses over the last year illustrating in more detail how we do this.

Last July we acquired CDK global.

The leading provider of technology and software services to automotive dealers.

Our value creation plan for the business is straightforward.

Just the commercial strategy to refocus CDK on the core product and service offerings that drive the most value for its customers and improve the efficiency and effectiveness of its operations by adjusting the organizational structure reengineering, a few core processes and introducing a new cadence of focus and.

<unk>.

Fundamentally this is the same strategy, we executed at Westinghouse and other portfolio companies, which enabled us to generate a step change in the business and phenomenal returns on our investments.

We have made tremendous progress at CDK within the first six months of acquiring the business to provide some specifics.

We've organized a core team of Brookfield personnel and established a transformation team with management to ensure focus and intensity through the closing process, we recruited and redesigning the organization to be in a position to appoint a new senior leadership team immediately after closing and within several months right side.

The organization by reducing global head count by 15%.

We've also sold or exited some non core product and service offerings and are working closely with management to optimize the customer product and service offerings.

While there is still more to come the steps have already taped that we've already taken are targeted to improve the businesses EBITDA by approximately $200 million annualized once fully implemented.

After adjusting for the impacts of these improvements are buying multiple of less than 10 times pro forma EBITDA is exceptional value for our high quality market, leading software and technology business.

Now pivoting our focus on modernizing the businesses technology stack and improving its user interface and functionality.

Which will enhance the value of cdk's solution to its customers.

Moving to our investment in Nielsen the global leader in third party audience measurement across all forms of media as a reminder, we privatize the business alongside our partner last October Vince.

Since then we have worked closely with our partners in management and made considerable progress supporting the businesses advancement of our value creation plans to improve profit profitability and positioned for long term growth.

Last month, the business reached a critical milestone with the launch of Nielsen one ads it's.

It's cross media measurement service, which unifies audience measurement data for advertisers across all platforms and devices.

The business itself also focused on enhancing its.

Existing AD supported streaming capabilities.

Customer wins, such as Netflix with its new AD supported video tier are validation of Nielsen value proposition as the leader in third party audience measurement.

In addition, we are working on several work streams to improve nielsen's operational efficiency and optimizing its organizational structure, resulting in significant cost reduction and a more focused go to market strategy.

Apart from our recent acquisitions, we're making similar progress in other areas of our business.

<unk> our business process outsourcing company is a great example, and just over two years, we have built considerable value by scaling the businesses servicing capabilities by growing revenue and increasing margins through increasing head count by more than 50% and shifting a significant portion.

<unk> of its delivery capabilities to lower cost offshore locations.

We've also executed on meaningful cost reduction initiatives around it.

Human resources in certain areas and facility management costs, while growing the businesses addressable market in the healthcare sector to cater to adjacent sectors, including <unk>.

Providers health systems and distributors.

The impact of these improvements has contributed more to more than a doubling of EBITDA in the two years since we've owned the company and it continues to grow.

This is another great example of how we build value across the sectors and regions in which we operate through the application of our playbook and the systematic approaches that focus on adjusting product and market strategies to dynamic market conditions, reducing business model complexity reorganizing to simplify operation.

Eliminating non value added activities and driving supply chain improvements to improve margins and optimize the capital deployed in these businesses all ultimately driving cash flow return on investment.

With that I'll hand, it over to Jeff and he'll be available for questions later.

Thanks, Dennis and good morning, everyone.

We generated strong financial performance in 2022.

Adjusted EBITDA increased to $2 3 billion compared to $1 8 billion in 2021 with strong results across each of our three operating segments.

Adjusted <unk>, excluding gains increased 15% to $1 3 billion during the year.

Our industrial segment generated full year, adjusted EBITDA of $879 million compared to $713 million in 2021.

<unk> with 473 million and included $29 million after tax net gain on the sale of on the partial sale of public security.

Some of the businesses I'll highlight some of the businesses performance within the industrial segment, our advanced energy storage operation generated adjusted EBITDA of $482 million for the year.

Overall volumes benefited from increased demand for higher margin advanced batteries and a recovery in the original equipment manufacturer demand as auto production challenges continue to ease during the year.

Pricing actions and progress on our operational improvement plan helped to offset the impact of inflationary headwind, particularly later in the year as ongoing price action caught up to a higher input cost.

Our engineered components manufacturing operation generated adjusted EBITDA of $141 million.

Performance benefited from commercial initiatives and cost reductions despite volume softening in North America and Europe .

The business is focused on fully integrating its recent add on acquisitions to drive efficiency scale and value creation.

Moving to infrastructure services, adjusted EBITDA for the year with $872 million compared to $613 million last year adjusted.

Adjusted <unk> increased to $513 million compared to $396 million.

Lottery services generated $98 million of adjusted EBITDA in 2022.

Demand has been stable and the business continues to execute on initiatives to offset inflationary cost headwinds, including increased material costs.

Recent customer wins and supporting an improving outlook for the business and we expect to largely complete our carve out activity during the first half of this year.

Our nuclear technology services operations generated strong performance in 2022, contributing 300 million to adjusted EBITDA.

Germany is in line with expectation.

Modular building leasing services contributed $158 million of adjusted EBITDA.

<unk> levels supported by increased demand in Germany, and Asia Pacific more than offset softer market conditions in the U K the.

The business recently closed the acquisition of a leading rental provider in the U K, which increases the scale and diversification of its product offering in the region.

And finally, our business services segment generated 2022, adjusted EBITDA of $722 million compared to $561 million last year.

Adjusted <unk> increased to $508 million in 2022.

Our residential mortgage insurer had a strong year generating $277 million of adjusted EBITDA in 2022, driven by higher levels of premium.

And low claims on losses.

During the year the business provided us with approximately $200 million in dividends.

While claims and losses are expected to increase from historically low levels. The business should continue to generate positive earnings and cash flow.

Hosing market normalizes.

Our dealer software and technology services operations generated adjusted EBITDA of $89 million in 2022.

Strong subscription based revenue growth and progress on our value creation plan contributing to improved margin performance.

Healthcare services operated in a challenging environment during the year contributing 64 million to adjusted EBITDA.

Performance was impacted by temporary the high rates of surgery cancellations.

And higher operating costs as Australia dealt with it's flu season.

Thanks.

We ended the quarter with $1 6 billion of liquidity at the corporate level, which provides us with ample capacity to support our operations.

I thought I'd end with a few comments on our capital structure today, we have about $15 billion of proportionate net borrowings across our business.

Which includes our proportionate share of non recourse.

Borrowings within our operation.

Based on our current hedge position of 50 basis points increase in overnight borrowing rates would result in less than a $50 million.

Our annual interest expense, which.

Which we believe is readily manageable with the cash flows our operations generally.

As our operations de lever and we repay a portion of our corporate borrowing when the sale of Westinghouse closes later this year the impact will be more muted.

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

Certainly ladies and gentlemen, if you have a question at this time. Please press star one on your telephone. If your question has been answered and you'd like to remove yourself from the queue simply press star one one again, one moment for our first question.

And our first question comes from the line of Gary Ho from these are then you question. Please.

Great. Thanks, and good morning, Cyrus could you give us an update on the monetization plans over the next 12 to 18 months you've mentioned <unk> in your letter.

Shareholder what market conditions do you need to see that IPO and maybe maybe also touch on Everest.

That's been in the news.

As well.

Yes look.

Wouldn't want to comment on anything specific I will just say that you should expect we are constantly evaluating businesses that have reached a state of maturity.

For eventual sale.

<unk>.

And constantly testing the market obviously.

Obviously, we're not going to sell anything or IPO anything unless we get a value that makes sense for us.

Relative to.

The earnings and the intrinsic value of the underlying business.

So specific to those two businesses I wouldn't want to say anything more than that.

What we've said to you about <unk>.

Just to clarify that we're making great progress.

On many fronts and the business continues to improve its position as a potential candidate for an IPO.

To get there, we need we need and want to do some things within the business to strengthen its position were.

We're making great progress in doing so we also want to deleverage the business and.

And Thats underway, given just how strong the cash flow generation of the company is.

We're not there yet, but we're making good progress.

Okay, Great and then maybe as a follow on to that.

Looking at are you spending more time on and monetization opportunities or.

<unk> deployment into new investments or vice versa.

Well.

Today.

We're constantly looking at monetization opportunities constantly looking at acquisition opportunities but.

Where we're really focused today is on all of the businesses. We bought over the last year 18 months as you know we've added a number of great companies.

To be Bu, and we're really focused on enhancing the value of those businesses implementing our operating plans that is our number one priority today.

Okay. That's very helpful. And then maybe you can sneak in one more.

You've been very clear on your valuation disconnect message.

Investor Day, and also today in your prepared remarks.

What else can you guys do to help narrow the gap versus the intrinsic value and would you be open to maybe publishing a quarterly NAV or at some point or anything else that youre thinking.

Yeah, Gary It's a great question and it's one we as you can imagine we agonized over everyday here, we really.

Are frustrated and and we realize that our shareholders. Our unitholders are more frustrated.

Because we see the value of the business improving in.

And the discount to NAV just getting wider.

Look.

We don't think publishing a quarterly NAV will actually make any difference.

And.

I think what we need to do is just continue demonstrating that the businesses, we owner Super resilient.

And that we're continuing to generate increasing EBITDA and cash flow and therefore value.

And ultimately as sentiment shifts.

And the market.

And the fear of recession.

Is no longer there we think.

That will probably create the catalyst for a step change improvement in our valuation multiple.

And obviously as we grow we will also increase our float.

And that will help a lot too.

But I don't think of Nast publication is going to make a more a more regular naphtha location is going to make a difference.

Okay, great. Thanks, Thanks for sharing your thoughts that's it for me.

Thank you once again, if you have a question at this time, Please press star one one.

One moment for our next question.

And our next question comes from the line of Jimmy <unk> from National Bank. Your question. Please.

Yes, thanks, good morning.

My first question is what.

What kind of tied to the performance of <unk> that really does look like the the pricing initiatives. There are running well ahead of the inflationary pressures on on expenses could.

Could you I guess.

Confirm that and then also.

Do you see that trend in any of the other.

Key businesses, where pricing is starting to get ahead of inflation and we should see we should see the kind of margin improvement that Clarion has delivered especially in this quarter.

Dennis here, if I heard the beginning of your question right. It was related to the pricing in <unk> and your observation is correct.

Rising initiatives have started to.

Get some traction there and if anything though it's been in effect responding to significant price increases.

Cost increases as it relates to inflation in particular on the led side.

In General do you see that same phenomenon right whenever you have.

Rapid rises in inflationary inputs. It takes some time because of course customers resist market's resist in general.

So it takes a bit of time.

But you are starting to see that kick in in a whole host of different businesses, we own globally. There are always regional unique.

Unique situations for example in the UK as I'm sure all reporting issuers are commenting the markets. There the macroeconomic environment is soft. So you end up if demand is instantaneously a little bit weak, it's a little harder to put a price increase through but in other areas, Germany as an example of.

Surprised to the upside France remains strong the U S in particular.

Youre seeing those price increases go in too as a minimum offset inflation. We also try to focus on adjusting our product mix to provide more value to our customers. So that we can get actual margin expansion as well while doing so.

Okay, great and are there any specific.

Businesses, you would highlight.

The apex of that term.

Nothing.

They're all they're all experiencing this kind of phenomenon again, there are always unique examples of where things go either way with the oil and gas push for example, our rates across the altera.

Our very strong and capacity utilizations, improving so pricing is improving.

We will have little segments for example, exco the RV.

Trailer.

Segment in North America, as you might imagine in this environment is softening a little bit so pricing is a little bit more difficult there, having said that steel prices have fallen significantly. So you get the cost advantage as well.

They are maintaining your margins, even when youre not increasing pricing. So there are unique circumstances, but on average that's what's happening.

Okay, Great and second question I suppose for <unk> III, just thinking about the.

The interest expenses and the sensitivity you've provided around 50 basis points increase would lead to an increase in interest expense of about $50 million.

Just thinking about the last quarter and the number of increases that we had in Q4.

Yes.

<unk> were to stay at the level today.

How much how much more of an interest expense increase should we expect.

So the idea is just trying to get a sense as to like how much of the rate environment that we see today is showing up in your financials at this stage.

Sure. Thanks for the question.

Total interest expense for the quarter was about $249 million on our nonrecourse borrowings and then about another $20 million on our corporate.

So in total about $269 million.

And.

Outside of the 25 basis point rate hike that.

It happened in January .

The Q4.

Interest expenses fully loaded so it has the impact of all of the previous rate hikes and part of our book is floating and part of it is fixed so.

Q4 interest cost is fully loaded.

So with the 25 basis point increase we gave you as you noted.

The sensitivity that are 50 basis points, a $50 million to 25, it's about half.

So we'd expect to see that increase but I'd say on balance.

We should see this year is as we get the proceeds coming in from Westinghouse will use those to pay down our corporate borrowing.

And that should not.

<unk> overall interest cost for the business so.

So I'd say, while Q4 is fully loaded they are higher for corporate borrowings than we would expect for the full year 2023 and then.

The other pieces are Westinghouse.

The interest costs were higher so those will come out.

Our results once the sale closes.

On balance I would expect the full year 2023 to be lower than.

The Q4 run rate.

But it'll be more of the back half of the year once the western hotels.

Understood got it and last one is.

With the with the proceeds from from Westinghouse coming in.

And correct me, if I'm wrong, but it looks like the Bam preferred equity is now at the $1 5 billion.

Is there.

Is there an ability to repay that that preferred equity down what's the appetite from I guess both sides.

Of that of that piece of paper that paid down and I guess, what's the strategy around that.

So look I can't speak for Bob.

But from our perspective.

Our drawn on Rcs then as you noted we are drawn on the preferred security as the preferred securities are perpetual based on maturity.

Great.

But there is an option that Bam has so.

Two loss per redemption.

If we have monetization so.

As we get closer to the closing we will have those discussions but for now either way it will overall kind of lower.

The.

Interest costs that we have in that preferred distribution that we're making.

Even if you add the two rcs on the.

Yeah.

The preferred securities.

Getting the Westinghouse proceeds were pretty much cut it and close to half so it'll be it'll be good for the business.

Okay great.

Great. Thank you very much.

Thank you one moment for our next question.

And our next question comes from the line of Matthew Weekes from Industrial Alliance. Your question. Please.

Good morning, Thanks for taking my question just wondering as we think about sort of the higher interest rate environment here in kind of uncertainty as to when the fed might start cutting beyond.

Proceeds from Westinghouse and sort of repaying debt the corporate credit facility.

Your thinking changed at all in terms of capital allocation at the <unk>.

A portion of that level and at the company level in terms of the amount of proportionate.

Proportionate borrowings that you want to hold within business is long term.

Look.

Cyrus here I'll start and Jeff.

Anything.

That she feels appropriate but as we've said many times, we set up our company so that they can withstand.

Volatility in earnings volatility in the market interest rate increases and every every business every operation is unique.

Some of them have more financial leverage some of them have less some of them have no financial leverage because they have very volatile earnings so.

That thinking Hasnt changed and we think its appropriate irrespective of the interest rate environment. We're in at the corporate level, we really will.

Over time, we really do want to repay.

The facilities that we've drawn on and we believe we'll be able to as we monetize our larger investments.

I don't have a timeframe to achieve that but with Westinghouse.

We're certainly getting a large way there.

Okay. Thank you I appreciate the comments I will turn it back thanks.

Thank you once again, if you have a question at this time. Please press star one on your telephone.

And this does conclude the question and answer session of today's program I'd like to hand, the program back to Cyrus Madden for any further remarks.

Thank you very much for joining us we appreciate it and we'll look forward to speaking to you.

Next quarter and in the meantime, if any of you have any thoughts or ideas for us we are we'd be grateful to hear them. Thanks very much.

Thank you, ladies and gentlemen for your participation in today's conference. This does conclude the program you may now disconnect good day.

The conference will begin shortly two reasons lower Johan during Q&A, you can dial one one.

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

Thank you operator, and good morning to everyone 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.

You to review our filings with the Securities regulators in Canada, and the U S, which are available on our website joining.

Joining me on the call today are <unk> Matin, our Chief Executive Officer, Dennis <unk>, Our Chief operating officer, and Jasper Dale Our Chief Financial Officer.

Cyrus will start with an update on our strategic initiatives and Dennis will then discuss progress on our business improvement plans Jesper will finish with a discussion of our financial results and then will be available to take your questions.

With that I'll pass the call over to Scott.

Thanks, very much Alan.

Everyone. Thanks for joining us on the call today.

2022 was a great year for our business, we made excellent progress on our growth and capital recycling initiatives committing to $7 billion to acquire several high quality market, leading businesses that should contribute meaningful value to our business.

We also generated $2 $3 billion from distributions and business sales, including an agreement to sell Westinghouse.

We're also pleased with our solid financial performance continued resilience of our operations adjusted EBITDA increased to $2 3 billion.

And free cash flow increased to a record $3 <unk> per unit for the year.

Stepping back like many are business has experienced a lot of volatility in the operating environment over the past year.

Inflation has been persistent supply.

<unk> continued to be stretched labor markets remain tight and energy costs in many developed markets. We operated are far higher than a year ago.

And we all know that interest rates are also higher than global growth is decelerating.

Has also continued to improve to a record 19% up from 11% just three years ago.

This improvement is driven by both the quality of the businesses, we have been acquiring over the last few years and the progress we've achieved on our improvement plans.

And Dennis is going to talk to you about that more shortly the.

The value we are building in our business contribute to adjusted free cash flow of $740 million.

An increase of nearly 20% on a per unit basis compared to last year.

We will use this cash flow to fund our growth reinvest in our operations and pay down debt.

Last year.

We'll generate about $1 8 billion in proceeds for <unk> when the sale closes in the next few quarters, which will substantially reduce our borrowings at the corporate level.

This sale also demonstrates that even in difficult markets.

High quality businesses like many we own today are readily saleable, especially to strategic buyers.

At any given time, we are progressing sales process for a handful of our businesses.

All of which are substantial which will be sold in due course and generate significant proceeds for BVA.

While we're pleased with our business fundamentals were equally disappointed in our trading price performance, which has become materially disconnected from the value of our business.

I wanted to put that in context today, we're trading at about eight times annual EBITDA. This is a massive discount to the S&P 500, that's trading at 13 times and.

And businesses generating margins on par with ours that are trading at 15 times or more.

In our view, it's a great entry point for <unk>.

We're going to continue building value in our business as we execute on our improvement plans and as a result.

<unk> should out earn the underlying performance of our operations.

As the discount between our trading price and intrinsic value narrows.

With that I want to hand, it over to Dennis.

Thanks, Iris and good morning, everyone a core capability of our organization is the ability to provide incremental support to our portfolio of companies and even take a hands on approach as required to ensure systematic focus and adjustment to changing economic conditions.

With that in mind I wanted to spend a few minutes today, providing an update on the progress we've achieved at a few of our businesses over the last year illustrating in more detail how we do this.

Last July we acquired CDK global.

The leading provider of technology and software services to automotive dealers.

Our value creation plan for the business is straightforward.

<unk>.

We have made tremendous progress at CDK within the first six months of acquiring the business to provide some specifics.

The organization by reducing global head count by 15%.

We've also sold or exited some non core product and service offerings and are working closely with management to optimize the customer product and service offerings.

While there is still more to come the steps have already taped that we've already taken are targeted to improve the businesses EBITDA by approximately $200 million annualized once fully implemented.

Now pivoting our focus on modernizing the businesses technology stack and improving its user interface and functionality.

Which will enhance the value of cdk's solution to its customers.

Moving to our investment in Nielsen the global leader in third party audience measurement across all forms of media as a reminder, we privatize the business alongside our partner last October Vince.

Last month, the business reached a critical milestone with the launch of Nielsen one ads.

It's cross media measurement service, which unifies audience measurement data for advertisers across all platforms and devices.

The business itself also focused on enhancing existing AD supported streaming capabilities.

Customer wins, such as Netflix with its new AD supported video tier are validation of nielsen's value proposition.

Leader in third party audience measurement.

Apart from our recent acquisitions, we're making similar progress in other areas of our business.

Its delivery capabilities to lower cost offshore locations.

We've also executed on meaningful cost reduction initiatives around it.

Human resources in certain areas and facility management costs, while growing the businesses addressable market in the health care sector to cater to adjacent sectors, including <unk>.

Providers health systems and distributors.

The impact of these improvements was contributed more to more than a doubling of EBITDA in the two years since we've owned the company and it continues to grow.

With that I'll hand, it over to Jeff Street, and I'll be available for questions later.

Thanks, Dennis and good morning, everyone.

We generated strong financial performance in 2022.

Adjusted EBITDA increased to $2 3 billion compared to one 8 billion in 2021 with strong results across each of our three operating segments.

Adjusted <unk>, excluding gains increased 15% to $1 3 billion during the year.

Our industrial segment generated full year, adjusted EBITDA of $879 million compared to $713 million in 2021.

<unk> with 473 million and included a $29 million after tax net gain on the sale of on the partial sale of public securities.

Some of the businesses I'll highlight some of the businesses performance within the industrial segment, our advanced energy storage operation generated adjusted EBITDA of $482 million for the year.

Overall volumes benefited from increased demand for higher margin advanced batteries and a recovery in original equipment manufacturer demand as audit production challenges continue to ease during the year.

Our engineered components manufacturing operation generated adjusted EBITDA of $141 million.

Performance benefited from commercial initiatives and cost reductions despite volume softening in North America and Europe .

The business is focused on fully integrating it suites and add on acquisitions to drive efficiency scale and value creation.

Moving to infrastructure services, adjusted EBITDA for the year with $872 million compared to $613 million last year adjusted.

Adjusted <unk> increased to $513 million compared to $396 million.

Lottery services generated $98 million of adjusted EBITDA in 2022.

Demand has been stable and the business continues to execute on initiatives to offset inflationary cost headwinds, including increased material costs.

Recent customer wins are supporting an improving outlook for the business and we expect to largely complete our carve out activities. During the first half of this year.

Our nuclear technology services operations generated strong performance in 2022, contributing 300 million to adjusted EBITDA performance was in line with expectations.

Modular building leasing services contributed $158 million of adjusted EBITDA utilization levels supported by increased demand in Germany, and Asia Pacific more than offset softer market conditions in the U K Division.

The business recently closed the acquisition of a leading rental provider in the U K, which increases the scale and diversification of its product offering in the region.

And finally, our business services segment generated 2022, adjusted EBITDA of $722 million compared to $561 million last year.

Adjusted <unk> increased to $508 million in 2022.

Our residential mortgage insurer had a strong year generating $277 million of adjusted EBITDA in 2022, driven by higher levels of premium earned and low claims on losses.

During the year the business provided us with approximately $200 million in dividend.

While claims and losses are expected to increase from historically low levels. The business should continue to generate positive earnings and cash flow.

Hosing market normalizes.

Our dealer software and technology services and operations generated adjusted EBITDA of $89 million in 2022.

Strong subscription based revenue growth and progress on our value creation plans are contributing to improved margin performance.

Healthcare services operated in a challenging environment during the year contributing 64 million to adjusted EBITDA.

Performance is impacted by temporarily higher rates of surgery cancellations.

And higher operating costs as the Australia dealt with its fifth season and the pandemic.

We ended the quarter with $1 6 billion of liquidity at the corporate level, which provides us with ample capacity to support our operations.

I thought I'd end with a few comments on our capital structure today, we have about $15 billion of proportionate net borrowings across our business.

Which includes our proportionate share of non recourse borrowings within our operation.

Based on our current hedge position, a 50 basis point increase in overnight borrowing rates would result in less than a $50 million in.

Annual interest expense.

Which we believe is readily manageable with our cash flows our operations generally.

As our operations Delever and we repay a portion of our corporate borrowings when the sale of Westinghouse closes later this year the impact will be more muted.

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

And our first question comes from the line of Gary Ho from these are then you question. Please.

Great. Thanks, and good morning, Cyrus could you give us an update on the monetization plans over the next 12 to 18 months, you've mentioned <unk> in your letter shareholder what market conditions do you need to see that IPO and maybe maybe also touch on FRS.

That's been in the news.

As well.

Yes look.

Wouldn't want to comment on anything specific I will just say that you should expect we are constantly evaluating businesses that have reached a state of maturity.

For eventual sale.

And.

And constantly testing the market, obviously, we're not going to sell anything or IPO anything unless we get a value that makes sense for us.

Relative to.

The earnings and the intrinsic value of the underlying business.

So specific to those two businesses I wouldn't want to say anything more than that.

What we've said to you about <unk>.

Just to clarify that we're making great progress.

On many fronts and the business continues to improve its position as a potential candidate for an IPO.

To get there, we need we need and want to do some things within the business to strengthen its position we're.

We're making great progress in doing so we also want to deleverage the business.

And Thats underway, given just how strong the cash flow generation of the company is.

We're not there yet, but we're making good progress.

Okay, Great and then maybe as a follow on to that.

Looking at are you spending more time on and monetization opportunities.

<unk> deployment into new investments or vice versa.

Well.

Today.

We're constantly looking at monetization opportunities constantly looking at acquisition opportunities but.

Where we're really focused today is on all of the businesses. We bought over the last year 18 months as you know we've added a number of great companies.

To be Bu, and we're really focused on enhancing the value of those businesses implementing our operating plans that is our number one priority today.

Okay. That's very helpful. And then maybe you can sneak in one more.

You've been very clear on your valuation disconnect message.

Investor Day, and also today in your prepared remarks.

What else can you guys do to help narrow the gap versus the intrinsic value and would you be open to maybe publishing it quarterly NAV or at some point or anything else that youre thinking.

Yeah, Gary It's a great question and it's one we as you can imagine we agonized over every day here, we really.

Are frustrated and and we realize that our shareholders. Our unitholders are more frustrated.

Because we see the value of the business improving.

And the discount to NAV just getting wider.

Look.

We don't think publishing a quarterly NAV will actually make any difference.

And.

I think what we need to do is just continue demonstrating that the businesses, we owner Super resilient.

And that we're continuing to generate increasing EBITDA and cash flow and therefore value.

And ultimately as sentiment shifts.

In the market.

And the fear of recession.

Is no longer there we think.

That will probably create the catalyst for a step change improvement in our valuation multiple.

And obviously as we grow we will also increase our float.

And that will help a lot too.

But I don't think a NAV publication is going to make a more a more regular naphthol location is going to make a difference.

Okay, great. Thanks, Thanks for sharing your thought that's it for me.

Thank you once again, if you have a question at this time, Please press star one one.

One moment for our next question.

And our next question comes from the line of Jimmy <unk> from National Bank. Your question. Please.

My first question is what.

What kind of tied to the performance of <unk>. It really does look like the the pricing initiatives. There are running well ahead of the inflationary pressures on on expenses could.

Could you I guess.

Confirm that and then also do.

Do you see that trend in any of the other.

Key businesses, where pricing is starting to get ahead of inflation and we should see we should see the kind of margin improvement.

<unk> has delivered especially in this quarter.

Dennis here, if I heard the beginning of your question right. It was related to the pricing of <unk> and your observation is correct pricing initiatives have started to get.

To get some traction there and if anything though it's been in effect responding to significant price increases.

Cost increases is as it relates to inflation in particular on the led side.

In general you see that same phenomenon right whenever you have.

Rapid rises in inflationary inputs. It takes some time because of course customers resist market's resist in general.

So it takes a bit of time.

But you are starting to see that kick in in a whole host of different businesses, we own globally. There are always regional unique.

Unique situations for example in the UK as Im sure all reporting issuers are commenting the markets. There the macroeconomic environment is soft. So you end up if demand is instantaneously a little bit weak, it's a little harder to put a price increase through but in other areas, Germany as an example of.

Surprised to the upside France remains strong the U S in particular.

Okay, great and are there any specific.

Businesses you'd highlighted.

The APAC for that term.

Nothing.

They're all they're all experiencing this kind of phenomenon again, there are always unique examples of where things go either way with the oil and gas push for example, our rates across the old Tara.

Hmm.

Our very strong and capacity utilizations, improving so pricing is improving.

We will have little segments for example, exco the RV.

Trailer.

We are maintaining your margins, even when youre not increasing pricing. So there are unique circumstances, but on average thats whats happening.

Okay, Great and second question is.

Polls for <unk> III, just thinking about the.

The interest expenses and the sensitivity you've provided around 50 basis points increase would lead to an increase in interest expense of about $50 million.

Just thinking about the last quarter and the number of increases that we had in Q4.

If rates were to stay at the level today.

How much how much more of an interest expense increase should we expect.

So the idea is just trying to get a sense as to like how much of the rate environment that we see today is showing up in your financials at this stage.

Sure. Thanks for the question.

Total interest expense for the quarter was about $249 million on our REIT nonrecourse borrowings and then about another $20 million on our corporate.

So in total about $269 million.

And.

Outside of the 25 basis point rate hike that you have.

And in January .

The Q4.

Interest expenses fully loaded so it has the impact of all of the previous rate hikes in and part of our book is floating and part of it is fixed so.

That Q4 interest cost is fully loaded.

So with the 25 basis points increase we gave you as you noted.

The sensitivity that are 50 basis points, a $50 million for 25 to about half.

So we would expect to see that increase but I would say.

On balance.

What we should see this year is as we get the proceeds coming in from Westinghouse.

Use those to pay down our corporate borrowings.

And that should.

Lower overall interest cost for the business.

I would say while Q4 is fully loaded they are higher for corporate borrowings then we'd expect for the full year 2023 and then.

The other pieces are Westinghouse.

The interest costs were higher so those will come out.

Our results once the sale closes.

On balance I would expect the full year 2023 to be lower than.

The Q4 run rate.

But it'll be more of the back half of the year once the Westinghouse Phil.

Understood got it and last one is.

With the with the proceeds from from Westinghouse coming in and.

And correct me, if I'm wrong, but it looks like the Bam preferred equity is now at the at the $1 5 billion.

Is there.

Is there an ability to repay that that preferred equity down what's the appetite from I guess both sides.

Of that of that piece of paper that pay down.

What's the strategy around that.

So look I can't speak for Bam.

But from our perspective.

Our drawn on Rcs then as you noted we are drawn on the preferred security at the preferred securities.

<unk> perpetual there's no maturity.

Good day.

But there is an option that Bam has so.

<unk> two loss per redemption.

If we have monetization so.

As we get closer to the closing we will have those discussions but for now either way it will overall kind of lower.

The.

Interest costs that we have in the preferred distribution that we're making.

Even if you add the two large CF on the.

Yeah.

The preferred securities.

Getting the Westinghouse proceeds will pretty much cut it and close to half so it'll be it'll be good for the business.

Okay great.

Great. Thank you very much.

Thank you one moment for our next question.

And our next question comes from the line of Matthew Weekes from Industrial Alliance. Your question. Please.

Good morning, Thanks for taking my question just wondering as we think about sort of the higher interest rate environment here in kind of uncertainty as to when the fed might start cutting beyond.

Proceeds from Westinghouse and sort of repaying debt corporate credit facility.

Your thinking changed at all in terms of capital allocation at the <unk>.

A portion of that level and at the company level in terms of the amount of propel.

Proportionate borrowings that you wanted to hold within business is long term.

Look.

Cyrus here I'll start and Jeff.

Anything.

That she feels appropriate but as we've said many times, we set up our company so that they can withstand.

Volatility in earnings volatility in the market interest rate increases and every every business every operation is unique.

Some of them have more financial leverage some of them have less some of them have no financial leverage because they have very volatile earnings so.

That thinking Hasnt changed and we think its appropriate irrespective of the interest rate environment. We're in at the corporate level, we really will.

Over time, we really do want to repay.

The facilities that we've drawn on and we believe we will be able to as we monetize our larger investments.

I don't have a timeframe to achieve that but with Westinghouse.

We're certainly getting a large way there.

Okay. Thank you I appreciate the comments I will turn it back thanks.

Thank you once again, if you have a question at this time. Please press star one on your telephone.

And this does conclude the question and answer session of today's program I'd like to hand, the program back to Cyrus Madden for any further remarks.

Thank you very much for joining us we appreciate it and we'll look forward to speaking to you.

Next quarter and in the meantime, if any of you have any thoughts or ideas for us we're we'd be grateful to hear them. Thanks very much.

Thank you, ladies and gentlemen for your participation in today's conference. This does conclude the program you may now disconnect good day.

Q4 2022 Brookfield Business Partners LP Earnings Call

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