Q3 2023 Brookfield Business Partners LP Earnings Call

Okay.

Welcome to the Brookfield business Partners' third quarter 2023 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 Touchtone phone.

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

Okay.

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

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

Cyrus will lead off the call today and provide an update on our strategic initiatives. Dennis will then provide some perspective on the current operating environment and Jasper equal finished with a review of our financial results. The team will be available to take your questions and with that I'll pass the call over to Starz.

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

We had a solid third quarter adjusted EBITDA increased to a record $655 million and our adjusted EBITDA margin improved to 19%, which is up more than 100 basis points compared to a year ago.

We're pleased with these results and the continued strength of our business our largest operations benefit from stable demand even in an uncertain environment and this means that the volumes and activity levels for the most part have held up across our business and the progress we've achieved on our business improvement plans.

Is contributing to increased margin performance.

While higher rates are challenging for many businesses a flight to credit quality is continuing to provide us with opportunities to refinance our existing borrowings at reasonable costs.

In fact last month's CDK global our dealer software and technology services operation Repriced, its $3 $6 billion term loan at an all in cost, which was about 50 basis points cheaper than the cost of debt that was replaced.

In total we have refinanced nearly a third of our nonrecourse borrowings since the beginning of this year and we've done so with effectively no increase to our overall cost of debt.

We're also continuing to progress our capital recycling program.

This morning, we received the final regulatory approvals needed to complete the $8 billion sale of Westinghouse and we now expect to close the transaction next week will generate about $1 $5 billion of proceeds from the sale of our interest in the business half of which we'll use to repay the preferred securities we issued can Brookfield.

Corporation last year and.

And the balance will go towards reducing the borrowings on our bank credit facility.

We also recently reached an agreement to sell a portion of our interest in ever eyes are technology enabled business outsourcing operation.

We acquired over is just over two years ago, and we've made substantial progress growing the business and improving margins.

Sale of our interest values of business at just over $1 billion, which represents three five times, what we paid for the business just two years ago will generate around $120 million of proceeds for the interests. We sold and we will continue to own about 17% of the business.

Along the alongside our new partner that can support its growth.

Separate from any monetization and despite higher interest costs. Our operations are generating substantial cash flow that we can reinvest to support growth or used to deleverage.

To put this in context Clary Of's, our advanced energy storage operations is generating more than $500 million of free cash flow each year and that's after investing in new capacity to support the growth of its advanced battery operations.

While this cash could be distributed to be Bu and our partners. The business has been deleveraging and during the quarter. It paid down an additional $700 million of debt.

As a result.

Net leverage of the business just come down to around four and a half times EBITDA.

Compared to six and a half times when we acquired it.

Stepping back <unk> is a very valuable business today.

Despite the progress we've achieved the trading performance of our units on any relevant metric is materially disconnected from value.

To put this in context today, we're trading at less than eight times annual EBITDA.

And a significant discount to the broader S&P 500, that's trading at 13 times businesses that generate similar margins to ours are trading closer to 15 times.

The discount in the trading performance of our units and shares matters greatly to us because we know it matters to each of you. We are committed to doing everything we can to continue enhancing the value of our business, including continuing our buyback program, which is highly accretive to value at current prices.

With that I'm going to hand, it over to Dennis who will give you an update on our business operations.

Thanks, Iris and good morning, everyone.

Our operations span across North America, Brazil, and Europe and Asia.

And touched nearly every facet of the global economy.

This provides us with a unique perspective and being able to monitor and more importantly respond to changes in the global operating environment.

Given that context, I thought I'd spend a few minutes talking about some of the themes. We are seeing in the operating environment today and highlight a few examples of that.

Within our businesses this year.

While certain regions and sectors continue to have challenges the operating environment is improving we continue to see many of the inputs that form the majority of our cost of delivery, including raw material prices and transportation and logistics costs.

Long term trend levels with time.

Some of this has already occurred steel prices as an example down close to 25% from peak levels earlier this year.

Global container rate for both the normalized pre COVID-19 levels, making international shipping options, both land and sea more favorable.

Okay.

Still seeing elevated supply constraints and higher associated costs of delivery that have been slower to normalize in these situations. We have been focused on diversifying our supplier network.

And leveraging our scale to optimize our delivery costs.

Global labor markets remain tight unemployment levels and enemies.

Enemies continue to trend near historic lows and attrition rates at a number of our operations are still above targeted levels. While wage rates are stabilizing we're continuing to see shortages of skilled labor in certain situations.

In order to manage these impacts we have put more emphasis on ensuring we have strong teams.

Teams in place across all our operations with the right requisite organizational structure and compensation arrangements to both attract and retain key talent.

Similarly, the cost and availability of energy particular, particularly in Europe remains a significant area of focus for us.

So far energy costs broadly have remained more manageable than we anticipated at the onset of the year, but we are.

Yeah.

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Operator, I think we have lost Dennis on the line.

Please standby, ladies and gentlemen, please stand by we will return momentarily.

Okay Alan.

Yeah.

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You May now proceed.

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So I was speaking about energy and talking about the Boston availability, particularly in Europe remaining significant area of focus for us So far energy costs broadly have remained more manageable than we anticipated at the onset of the year, but we are closely monitoring and actively managing risk that could arise given the heightened geopolitical.

Pensions globally.

As many of you know we have a team of operating professionals, many of whom have deep industry and functional expertise.

Working closely with the management teams at each of our businesses.

In this environment, our hands on collaborative approach to value creation has continued to be an important differentiator for our business.

A great example of this in practice is that clarity I'll start advanced energy storage operations.

Is on track to deliver record calendar year results, despite managing through the ongoing impacts of inflationary headwinds and the disruption from a labor strike earlier in the year at one of its largest U S production facilities.

We've been working with the management team to execute on a wide range of initiatives to enhance it.

Its U S operations by optimizing its transportation network and leveraging its global supply chain to drive.

Performance and productivity improvements in addition to accelerating demand for higher margin advanced batteries continues to position <unk> at the forefront of automotive electrification trend and we continue to invest in capacity to serve these rapidly growing advanced battery needs.

Importantly, these advanced battery solutions still only represent approximately 15%.

The business is much larger and more profitable aftermarket business as natural replacements in the aftermarket are only now beginning to catch up with first fit sales into the OEM channel.

We're also continuing to make great progress on <unk>, our engineered component manufacturing operation working alongside management on similar initiatives to optimize performance and support profitability.

While volumes have declined primarily in more consumer or the north American segments of the market margins have continued to improve.

The business is focused on initiatives to optimize its manufacturing footprint improved productivity and lever its purchasing and data analytics to enhance its procurement strategy commensurate with the size and scale of its global operation.

Synergies from the integration of recent add on acquisitions are also progressing ahead of plan as management executes the facility rationalization and commercial actions to improve customer service levels.

Lastly, at Alterra or offshore oil services business. The outlook has meaningfully improved since it emerged from a comprehensive restructuring at the beginning of this year.

Over the last few years, we have worked closely with the management team at Alterra to reorganize and improve its in house capabilities required to successfully execute on the redeployment of its floating production storage and offloading vessels, commonly referred to as our Dsos on.

On the back of improving industry sentiment and higher customer activity levels.

This business recently finalized two customer approvals for the long term redeployment of the Qunar and Voyager <unk> onto new field developments in both cases, the respective customers are funding substantially all of the mental capital required to affect the redeployments.

This is a welcome development in the business model, which moves to a more appropriate balance with our customers, reducing altera is capital investment requirements and associated risks.

Each of these marks a major milestone for the business and provides the increased certainty to long term earnings and cash flows forecasted to be in excess of 750 million U S dollars in aggregate over the firm contract periods covering these two assets.

The auction on the Qunar has exercised cash flows will exceed these levels.

With that I'll hand, it over to Jeff <unk>, who will provide an update on our financial performance during the quarter.

Thanks, Dennis and good morning, everyone. Adjusted <unk> for the third quarter was $288 million and includes the impact of higher interest expense and higher current tax expenses relative to last year as.

As well as net gains related to the sale of public securities and the majority of our automotive parts Remanufacturing operation.

Excluding gains adjusted <unk> for the quarter with $218 million.

Adjusted EBITDA for the third quarter with $655 million, an increase of 7% over the prior year supported by a resilient performance of operations on a same store basis.

Looking at our segment performance infrastructure services generated third quarter, adjusted EBITDA of 228 million, which increased from $205 million last year.

Results benefited from improved performance at our work access services operations.

Resilient performance in our modular building eastern services operation.

Moving to our industrial segment adjusted EBITDA for the third quarter was $218 million compared to $228 million last year.

Strong performance at our advanced energy storage operations and increased contribution are there any other engineered components manufacturing operations, both of which Dennis just touched on.

Were offset by lower contributions from graphite electrode operation and our western Canadian energy related operations.

And finally, our business services segment generated third quarter, adjusted EBITDA of $238 million, which increased from $213 million last year.

Strong results at our residential mortgage insurer and dealer software and technology services businesses contributed to the increased performance.

Contributions from our construction operations were lower during the quarter compared to prior year.

Performance at our Roadshows operations in the UK were lower due to lower volumes and pricing.

Before I wrap up I wanted to spend a couple of minutes talking about our balance sheet.

We have no significant near term maturities and with the majority of our refinancing needs behind us yes.

Such ability to continue to opportunistically manage our maturities over the next few years.

Only about 7% of our nonrecourse borrowings are coming due in the next 12 months and nearly a third of these borrowings are related to Westinghouse, which we will have all of our blocks within the next few within the next week.

The remaining debt outstanding is primarily related to businesses, where refinancings are part of the normal course of operations as.

As well as other smaller refinancings, which can be readily managed.

We're continuing to continuing to take a balanced approach to capital allocation.

Near term focus is to reduce the borrowings on our corporate credit facility, which we had drawn to bridge the funding of a considerable growth activity over the past year.

Proceeds generated from the sale of Westinghouse will meaningfully advance these efforts and lower our overall borrowing costs.

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, ladies and gentlemen to ask a question. Please press star one one on your telephone and wait for your name to be announced if you wish to remove yourself from the queue Press star one again.

Please.

And our first question comes from the line of Gary Ho with Desjardins capital markets.

Thanks, and good morning.

Gratz on getting the regulatory approvals on the Westinghouse transaction service, you mentioned, 50% going to repaying band, perhaps and then the other 50% on corporate debt I'm, just wondering if you've given any other capital allocation considerations.

Either greater or faster buybacks or savi, just given the wide discount to NAV.

Yeah look we have been buying our shares back we're going to continue doing that as part of our normal course issuer.

Issuer bed.

And we haven't given any consideration at this time to doing anything else.

Maybe just Gary if I can add.

Last year, we bought back about two and a half million units this quarter, we bought back.

Additional about 55000 units under the in CIB.

So that program is active and we will continue to buyback.

Okay, and then just while I have you here.

If you take the $1 5 billion proceeds that reduces I think your debt roughly by 40% to 45% on the corporate debt side.

Has your views changed on not carrying any corporate debt.

And should we continue to see that balanced grind down overtime from future monetization or distributions.

Yes, so look our long term goal continues to be sure to not have any permanent corporate debt at the BV level.

And you've seen over the last year, we saw the number of our smaller operations. The cash that's being generated what are you using it with paying down the debt and that continues to be the focus of that view hasn't changed.

Okay and then my next question maybe for Dennis.

On the <unk> side.

Two questions here, one wondering if you've seen any impact from the UAW strike over the past month, and a half and can you remind us maybe the percentage of workers that are unionized there any any risks on that front.

Well, we as I mentioned in my comments, we had a strike at our Toledo plant it was fairly short.

Frankly, more I think a function of miscommunication on certain issues than anything and management did a great job getting that.

Getting through that.

That had an impact on battery production.

So in an ironic way the strike in the auto sector.

Really gives us an opportunity to get our supply chain back at the at the inventory levels that we'd like to have to make sure. Our service levels don't suffer so so far nothing really material has impacted us and it's allowed us to catch up on the business.

Okay, and then as a follow up I guess, good deleveraging efforts on the <unk> front down to four five turns.

What do you think youll need to get to before Theres market appetite for an IPO there.

It's Cyrus here look.

Once we get in the something that is around the four range.

It ourselves then we don't need to raise much money.

In order to.

Get the leverage into something Thats in the threes.

And that's probably a level that's.

Quite acceptable would be quite acceptable to the market and to investors just given the strength of this business.

Of course with with the proviso that the company would then.

Have an objective to further delever as a public company, but that's probably the range at which.

<unk>.

Investors would have an appetite probably a strong appetite at that level, yes.

Deleveraging areas to both.

Continuing to pay down debt, but also continuing to enhance EBITDA.

Yes, Okay makes sense those are my questions. Thank you.

Thank you.

Please.

As a reminder to ask a question. Please press star one one on your telephone.

And our next question comes from the line of Nik Priebe with CIBC capital markets.

Yes. Thanks.

Quick question on the <unk> EBITDA contribution in the quarter it looks like it was up healthy.

Healthy magnitude sequentially and year over year was there anything onetime in nature, there any add on acquisitions contributing or is that just purely a product of organic growth in that business I just wanted to drill into that headline earnings figure a little bit.

Yes, that's fundamentally organic growth and it ends up being a fairly strong quarter for us there is some season at this.

At this point.

Okay.

Okay.

Excuse me.

Yes.

Yes.

Please go ahead.

Scott.

Sure.

Yeah.

Got it okay. That's good and then just a point of clarification on the <unk> sale I'm. Just wondering if you could provide a little bit color on why you know in that.

Situation, you opted to sell a portion of the business as opposed to a full sale.

Well look we we had a party that was very interested in that business and.

We considered all the alternatives available to us and we thought we could take take our money off the table and then some we actually are going to realize twice.

Twice the capital, we invested and we still got to ride.

The upside on the business. So we just thought from that capital allocation and risk management perspective.

It's a very good outcome and obviously, it's a very healthy very strong return for us in a short period of time, and we continue to be able to participate in the upside of the business.

Yes, Okay and then one quick follow on just the partial sale I think you referenced at three five times MLC.

But in the note.

The letter to shareholders I think there was a reference to proceeds equivalent to two times. The initial capital investment is the difference between the three five and the two times multiples just reflect the fact that it's a partial sale.

Yes, it is Chesapeake, but that's exactly right. So on a cash basis, we will have kind of two times. The initial equity that we put in our outlook.

And then the unrealized value of the 17% that we continue to hold makes up that difference from the two times to three five times.

Got it okay, alright that makes sense I'll pass the line. Thank you.

Yes.

Thank you one moment please for our next question.

And our next question comes from the line of James <unk> with National Bank.

Yes, Thanks, just wanted to get a little bit more color on the on the.

Use of the proceeds from the Westinghouse and have gone to the band preferred corporate.

Whats I guess, maybe what's the what's the Bam.

Perspective here on <unk>.

Taking them.

After that after that exposure.

Are there are there are changes in how they are thinking about.

Financing the Bu.

Investment here at the preferred level, maybe a little bit more color as to how that how that decision came about.

Yes.

Cyrus and why don't I start Jaspery can add on any comments, if she has any but look bam.

And Brookfield Corp to be specific is are are very supportive of btu.

We needed capital to continue growing at a point in time, where we saw some incredible opportunities.

But didn't have that long term capital in place and so what they agreed to do with <unk>.

Subscribe for these preferred shares which only come only came due on the sale.

One of our businesses. So if we didnt sell anything we didn't have a maturity wall in front of us so extremely favorable from a BD perspective.

Given the sale of Westinghouse now.

Contractually beyond obviously Brookfield Corp has the right now to be fully redeemed.

Out of it but in order to provide.

<unk> with continued capital flexibility and liquidity to do other things.

What they've agreed is too.

Retain half of it half half of it effectively repaid so that's that.

That's where we've landed.

Yeah.

And then the view that.

No.

Potential attractive acquisition, they stand ready to to readdress that amount.

Or did the total capacity shrink with Ms repayment.

Our objective at BB used to have it stand on its own two feet over time.

That's better for all sorts of reasons and everyone and everybody.

But Brookfield Corp will be a very supportive shareholder.

Okay great.

And then <unk>.

Secondly, just just go on to the <unk>.

<unk> business.

Hi.

Very very strong results here or is there or was there anything more nuanced.

Just a little bit of favorable mix shift to the more profitable.

Advanced batteries.

That would have driven such a large resolved and does this is this a base for Q3 that we should be thinking about going forward.

Yeah, a little more on that please.

Dennis do you want to answer that.

I'm sorry can you can you repeat the question yes.

Yes, sure. It's just on the <unk> quarter, which was really strong I was curious if there was anything more nuanced than a favorable mix shift to the higher profit advanced battery.

And whether that's this.

Will a profit is something we can use as a base going forward for Q3 or was there some other factors.

All forward.

Or something along those lines anything nuance in there we should be thinking about or is this a good base no look no nuance just phenomenal performance. This management team is really getting their stride.

And.

Getting this business running well frankly, it's at a record level and.

<unk>.

I guess, we don't provide forward guidance, but.

Im expecting the business to do better next year than it did this year.

And more importantly management team is highly confident that's what's going to happen.

Okay. Good to hear last one actually just going back to.

Asset sales.

It seems like there's been a few smaller ones I guess, maybe not big enough to mention or two to disclose directly as this.

Should we expect to see.

That kind of activity continue where you're generating a couple of smaller deals like how many are left to sell that can that can generate some additional gains.

It looks like.

Pretty substantial gains in this quarter from those from those small cells, but like how should we think about that going forward.

Yeah, we had Cyrus here look we have a handful of smaller businesses, we still have a small a small handful at this point left and you should expect us over time.

To sell those and then of course, there's capital markets improve and capital market conditions improve we will start selling some of the larger businesses as well, but <unk>.

Selling the smaller business.

Mauler businesses is something we have been focused on.

For a couple of reasons a it gives us capital makes Jess breed happy and.

Be it lets us focus our time and attention on the much larger businesses, we have where we can really drive value improvement for btu.

Okay. That's great. Thank you.

Thank you.

No showing no further questions so with that I'll hand, the call back over to CEO Cyrus Madden for any closing remarks.

Thanks, very much for joining us this quarter and we look forward to talking to you next quarter. Thank you.

Ladies and gentlemen, thank you for participating this concludes today's program and you may now disconnect.

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