Earnings Call: Q2 2021

Aug 6, 2021

Welcome to the Brookfield Business Partners Second Quarter 2021 Results Conference Call and Webcast. As a reminder, all participants are in listen only mode. And the conference is being recorded. After the presentation, 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. 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 On the call with me today is Cyrus Madden, Chief Executive Officer Dennis Turcotte, Chief Operating Officer and Jaspreet Dell, Chief Financial Officer. I'll turn the call first over to Cyrus to provide an update on our business, and then Dennis will discuss recent activities at our Advanced Energy Storage operations. Jaspreet will finish with a review of our financial results. We'll then be available to take your questions. And with that, I'll pass the call over to Cyrus. Thanks very much, Alan. Good morning, everyone, and thanks for joining us today. So we've had a busy few months since our last call. We had a great Q2, we continue to be pleased with the performance of our business. We generated strong growth in EBITDA and FFO, and we're seeing positive momentum across our operations. We've also been executing on a number of initiatives to build long term value across our business. Earlier this week, we announced the launch of a structure, which will give investors the option to invest in BBU either through corporate shares for our existing limited partnership units. Brookfield Business Corporation or BBUC will be a paired entity with our limited partnership, but also a separately traded publicly listed corporation with an expected initial market cap of around $2,500,000,000 Turning to our acquisitions. Over the last few months, we've committed About $1,000,000,000 to acquire 3 high quality businesses. Each of these share the qualities we look for. They're industry leaders. They provide essential products and services. They're cash generative and provide generate strong returns on capital. In June, we agreed to acquire Modulair Group for $5,000,000,000 Modulair is a leading provider of modular building leasing services in Europe and Asia. This is a business we've come to know over the years as a customer of our construction operation. It has an excellent value proposition as a large scale operator with an established branch network. We're acquiring modular For about 9.5 times normalized EBITDA, which we think is reasonable value considering its financial profile, its growth outlook and market leadership position. We've identified opportunities to improve its operations and leverage our commercial relationships in the infrastructure, real estate and industrials markets to help grow this company. We're investing $500,000,000 for a 30 percent ownership interest with the balance funded by our institutional partners. In July, we acquired we agreed to acquire Dexco Global for $3,400,000,000 DEXCO is a leading provider of highly engineered components, primarily for industrial trailers and to total equipment manufacturers. DEXCO has a reputation as a solutions provider for its customers and holds leading market positions across North America, Europe and Australia. Like many of our operations, DEXCO's business has durable cash flows due to its strong competitive position and flexible cost structure. We're paying about 10 times normalized EBITDA to acquire this business, and we believe there are We're investing $400,000,000 for our 35 percent ownership interest with the balance funded by our of institutional partners. We plan to support opportunities to both enhance margins and accelerate growth in partnership with Dexco's management team. Finally, earlier this week, we agreed to acquire Aldo. Aldo is a leading Brazilian distributor of solar power kits and large network of resellers. We're funding about $115,000,000 of a $320,000,000 equity investment for 35 percent ownership interest. The purchase includes an earn out dependent on meeting certain targets, which we expect the business to self fund. We also continue to progress our capital recycling initiatives. During the quarter, we generated about $130,000,000 of net after tax proceeds from the sale of common shares of GrafTech. Over the last 3 years, we've generated about $1,800,000,000 from the monetization of this investment, which we've used to help fund our growth. We're exploring options to monetize some of our other mature businesses and hope to complete 1 or 2 of these by the end of the year. Over the last few months, we were exploring a public offering of our advanced energy storage operations. And as Dennis will touch on later, we decided not to move forward with an offering at this time due to market conditions. We'll look to revisit a potential offering in the future, but we're in a position to be patient. And in the meantime, we'll continue focusing our efforts to enhance this business further. Looking ahead, our focus is on completing the initiatives underway between now and the end of the year, while continuing to improve our existing operations. Our balance sheet is in excellent shape. We're well positioned to continue building on strong performance in the second half of this year. So with that, I'm going to hand it over to Dennis. Thanks, Cyrus. Good morning, everyone. Our business operations team is continuing to work closely with the management teams across all our operations to advance their business plans by providing support and expertise to unlock value, enhance cash flows and grow their businesses. We've made good progress executing on our plans at our Advanced Energy Storage operations, and I wanted to spend some time today highlighting our activities there. It has been 2 years since we acquired Clarios, one of the world's largest suppliers of energy storage solutions. It sells more than 150,000,000 batteries each year to original equipment manufacturers and aftermarket customers. Despite a challenging operating environment last year, we've continued to execute on key priorities and transformed the business through a combination of growth and business improvement initiatives, particularly focused on its U. S. Operations. We have worked with the company to strengthen its of Procurement and Process Engineering. To date, we've generated $175,000,000 of annual earnings improvement, primarily focused within our US based battery manufacturing operations by debottlenecking assembly plants, optimizing the transportation network, reducing costs in general and improving the efficiency of our closed loop recycling system. The success of these initiatives has enabled us to increase our total profit improvement target by $100,000,000 to over $400,000,000 annually. The rapid growth in vehicles with nonconventional powertrains globally is driving volume growth and a mix shift at Clarios to advance batteries. From a products and engineering perspective, we have repositioned the business to successfully pursue Significant opportunity we see in these higher margin advanced batteries, and today, we have about 50% of global production capacity. Our advanced products are well positioned to enable the increasing electrical load requirements seen in nearly all vehicles entering the market today. We are at the forefront of advanced technology development and our leading global position with original equipment manufacturers allows us work closely with each of them during the development of future platform launches, designing energy storage technologies that will cost effectively help them meet increasing environmental safety and vehicle electrification requirements. We sell our products to almost every major OEM vehicle platform is manufactured by almost all electric vehicle manufacturers. We have a clear product road map Reliability and Sustainability. We are partnered on a global basis with both established and emerging battery EV manufacturers on their new product launches and now have over 40% market share in battery electric vehicle platforms in the rapidly expanding China market. As the world's preeminent supplier of low voltage batteries, we are best positioned to provide a full spectrum of solutions for our OEM partners. As Cyrus mentioned, the positioning of this business and success of our operational improvement efforts supported exploring a public offering of Clarios over the last few months. Given market conditions, we decided not to move forward with an IPO at this time. We have an exceptional business with stable aftermarket Profitability and exposure to high growth automotive electrification trends. Our view of value in this business is unchanged, and we'll look to revisit an offering in the future. In the meantime, we'll continue to focus on advancing our plans to unlock value and position the business to maximize its long term success. With that, I'll hand it to Jeffrey. Thanks, Dennis, and good morning, everyone. As Cyrus mentioned, we reported strong performance in the 2nd quarter, generating company EBITDA of $381,000,000 compared to 380 $6,000,000 last year. Company FFO, including gains on the sale of our GrafTech shares during the quarter, increased to $356,000,000 or $2.40 per unit compared to $173,000,000 or $1.15 per unit last year. Excluding gains, company FFO for the quarter was $207,000,000 or $1.40 per unit. Q2 last year was significantly impacted by the economic shut If we compare current quarter company FFO, excluding gains on dispositions, to Q2 2019, which would have been the pre pandemic period. On a per unit basis, FFO has increased from $1.06 per unit in Q2 2019 to $1.40 per unit in 2021. This is a CAGR or a compounded annual growth rate of 15%. Before providing an overview of segment performance for the quarter, I wanted to spend a few minutes on the launch of our corporate structure. This is an important step in our ongoing efforts to broaden our investor base. We hope BBUC will attract new that may be preferable for some investors. As a corporation, BBUC should be eligible for broader index inclusion, which should also add to the growth of our ownership base with passive index investors. BBUC will be created through a special distribution that's effectively the same as a unit split. Existing unitholders will receive 1 share of BBUC for every 2 BBU units held. Following the spin off, we intend to pay an identical dividend on every unit and every share of $0.25 per annum, which will be paid out quarterly. This will equate to a 50% increase in dividends paid. As a paired entity, BBUC shares will be structured to be economically equivalent to BBU units and have identical distribution. The shares of the newly created corporation will be exchangeable into BBU units anytime at the option of the shareholder. This exchange feature mirrors the structures of the recent corporate spin out of Brookfield Infrastructure and for fuel Renewable, which trade well and have been well received by the market. We are hoping to obtain the necessary regulatory approvals to complete the special distribution of BBUC shares by the end of the year. I'll now turn to segment performance for the quarter. Within Business Services, we generated company EBITDA of 145,000,000 This was a meaningful increase compared to last year. Our residential mortgage insurer contributed company EBITDA of 74,000,000 Results benefited from strong housing market activity in Canada and loss ratios that remain well below normal. Home sales volumes have started to level off following recent regulatory measures that should support maintaining reasonable risk levels in the industry. Healthcare services in Australia performed well in the 2nd quarter and generated company EBITDA of $19,000,000 Despite short term lockdowns in Australia, demand for elective surgeries remained strong and increased surgical volumes offset at higher than normal operating costs. We're investing in our mental health facilities to grow to meet the growing need of an underserved area of the market as well as in several of our flagship hospitals to strengthen our position as a leading acute health care provider in Australia. Our construction business reported company EBITDA of $20,000,000 for the 2nd quarter. We benefited from strong project execution and normalized productivity level. During the quarter, we secured 6 new projects, including the Greenfield at Sydney Airport. This brought our backlog to $7,800,000,000 from $6,800,000,000 in the prior quarter. Moving now to our Industrial segment. We generated company EBITDA of $145,000,000 for the 2nd quarter. Our Advanced Energy Storage operations reported strong performance and company EBITDA of $106,000,000 in the quarter. Battery volumes increased 18% year over year, driven by normalized demand in both aftermarket and original equipment manufacturing channels as well as increased demand for higher margin advanced batteries. As part of our broader initiative to consolidate our business, we sold down part of our interest in an Indian battery manufacturer and use the proceeds to reduce operating level debt. Performance at our water and wastewater operation in Brazil remains stable. We're progressing our capital expenditure programs to build out our service network. In July, we began providing water services to the city of And we're developing plans to build approximately 3,000 kilometers of pipeline and install 400,000 new customer connections, which we expect will be funded through ongoing operating cash flow. And finally, our Infrastructure Services This segment generated company EBITDA of $125,000,000 for the Q2 of 2021. Nuclear Technology Services reported company EBITDA of $57,000,000 Results in the quarter were in line with the timing of to broaden our nuclear technology offering and strengthen our operational presence in the Canadian market. Offshore Oil Services contributed company EBITDA of $43,000,000 this quarter with lower activity levels. In July, we announced steps to strengthen the capital position of this operation, including an exchange offer for debt holders, which will extend maturities and reduce cash interest payments for the business. These steps will enhance liquidity as we reposition the operations. And finally, our Work Access Services business contributed $25,000,000 in company EBITDA for the quarter. This is a 25% improvement over Q2 as activity levels slowly recover. Turning to liquidity. We're in a great position with $1,500,000,000 of available liquidity after accounting for our recent funding commitment. We have spent the last year refinancing borrowings at the operating level and capitalizing on favorable credit markets to drive to continue to support our business and fund our growth activities. With that, I'd like to close our comments and turn the call back over to the operator for questions. Thank Our first question comes from Geoff Kwan with RBC Capital. Hi, good morning. My first question was just with it seems like there's early cases, I guess, COVID Counts increasing again. Are there any of your businesses that are seeing any sort of early impacts in terms of if There is nothing material, and that response is influenced by the fact that we've been in this For 18 months now, and we acted very quickly to make sure each business was hyper focused on not only the direct impacts COVID, but what are the secondary and tertiary implications of it. So they all remain hyper focused and in fact they are all Moving more and more back to work and conducting more of their businesses in their offices. So Try and travel is up, ourselves included. So I'm always worried, of course, about things like this. You never know how it's going to unfold, but We haven't seen anything related to this kind of 3rd or in some cases, I guess, in the U. K, even the 4th wave. Maybe, Jeff, I'd just add one comment. What we are seeing is in Australia, we are seeing some Lockdowns in some of the regions just as they've had spikes in COVID cases and That is impacting the hospitals, where it reduces the elective surgeries we're able to do. As Dennis said, we're not seeing a significant kind of impact on EBITDA today, but we are monitoring that. And we continue to have The agreements in place with the government to the extent that we're not able to do elective surgeries, we could go back and rely on those Government agreements. Okay. And just my second question was on Sajan. Previously, you had talked about Is that something the company is still planning on pursuing? So The business has been performing really well and they've had record levels of underwriting and transactional So we'll look to explore kind of other growth areas. But I think for now, we're just focused on the current book. Okay. Thank you. Thank you. Our next question comes from me with Desjardins Capital Markets. Your line is open. Thanks. Good morning. First question maybe for Dennis, just on Clarios, you increased the profit improvement target by $100,000,000 Can you give us a bit of color kind of where that's coming from? You mentioned kind of U. S. Operations or is that kind of elsewhere? And can you comment on the timing in terms of when that full $400,000,000 may Sure. Well, the $100,000,000 was incremental to the $300,000,000 that I think we've discussed in a variety of calls. But the North American operation, we found the reconfigured management team there is really strong. And they are looking at everything from OEE rates across the plant system. There is a bunch of supply chain And purchasing improvement initiatives underway, reorganizing the business has also The net effect, we reorganized to make it more efficient and the net effect is you reduce the headcount and that's happening across the System started in January and is unfolding over the as we speak and over the next couple of quarters. So It's really across the system, but predominantly around operations and reorganization. And then timing expectations? Well, this original $300,000,000 target was to be achieved over a 3 year This incremental $100,000,000 will be from day 1, say, through year 4, which is kind of incremental 2 years From this point. Got it. Okay. And then maybe staying with Clarios, just on the $1,000,000,000 IPO, what was Pushback there, was it the leverage or valuation on your end? Just want to gauge kind of what could be done before the Go ahead. Look, it's Cyrus here. I think the feedback we got is That the market was very busy. It became choppy. A number of IPOs were pulled. And there was no one specific factor that caused us to pull the IPO. We probably could have proceeded at a lower amount, perhaps at a lower But just like we try to be disciplined when we're buying things, we want to be disciplined when we're selling things. And we're in no rush whatsoever to take this company public. The opportunity arises and we can get in the future, we get A value which we think is reasonable for our unitholders, we'll reconsider it, but Otherwise, we won't. Okay. And then maybe on a related topic, we talked about the potential Clarios and Westinghouse monetization Last quarter on the call, I know you're still fairly comfortable capitalized with $1,500,000,000 liquidity, But with the delay here, does that change how you view monetization of Westinghouse or other assets? Just want to get some color on how you think about monetization versus other capital deployment opportunities here? Yes. No, it doesn't. Look, we should be clear. We have no need to sell any of our larger businesses. So we'll just start with that. We've got lots of levers to pull here, Including up financings at the companies, cash generated at the companies, you've seen us pull out Regularly large scale dividends of some of our businesses, we'll keep doing that. So it doesn't put any pressure on us to sell anything if we don't want to. That said, you should assume we are constantly assessing the market With most of our businesses for opportunities to realize proceeds where the values are acceptable. Okay, got it. Thank you. Thank you. Our Next question comes from Nick Prieke with CIBC Capital Markets. Your line is open. Yes, thanks. I just wanted to ask a few questions about a pair of Just looking at Westinghouse's EBITDA contribution was a bit lower in the second quarter. And I know the recognition of earnings can display some variability there Based on the timing of customer outage cycles and it sounds like you're confident that the second half will be stronger. Just wondering if you could give us a bit of color on how Maybe year to date results are compared relative to plan and whether you're still expecting growth for the full year there? Yes, Dennis here. So no doubt there was a slower start to the year. And again, as for my earlier comments, It's indirectly a function of COVID and the fact that customers last year and through this year because they plan the routeages well in I've kind of pushed things off a little bit, but we're looking forward to a strong back half of the year And in fact, expect that the full year results will be probably modestly better than last year. So We're looking forward to the order book we have. Okay. And then my second question, just with respect to Sejin. I think that business, premium growth has benefited over the past year from CMHC tightening its qualification criteria. Just wondering if I could kind of canvas your thoughts on CMHC's decision to walk back those changes and just get a sense of how Maybe how defensible you think recent market share gains might be? Well, we can't comment on what CMHC is doing and what their It's quite possible they'll take back some of the market share That they lost, but we expect to keep some of our gains for sure going forward. Thank you. Our next question comes from Dmitry Kumanovsky with Veritas. Your line is open. Yes. Hi, everyone, and thanks a lot for taking my call. So first question that I have is on EverRise and Intostar. Just wondering, When you made those investments, what was the original or expected FFO yield on the going in FFO yield on those? Dmitry, I don't think we I'm not going to ask just to read the question, but I don't think we actually Published an FFO yield when we made those acquisitions. And maybe you can perhaps comment on their Contribution to this quarter's EBITDA and FFO? Yes. Hi, Dmitry, it's Jaspreet. So again, we don't disclose kind of specifically our Verizon, EndoStar EBITDA or FFO contribution, they are small relative to the size of our overall business. And maybe I could provide you a little bit of color on kind of underlying performance of the 2 businesses. Indostar, which is our the India lending business, they did have a difficult quarter this year just Given the COVID impact on the business, India was going through a second week of COVID and that did impact disbursements and collections in the business. So performance is probably below where we would have liked for this quarter. But I'd say even in January this year. And that business is performing very well and in line with our expectations. They've won a couple of new contracts. We're starting to service more of the U. S. Customers through offshore locations, which is accretive to margins. Again, it's early days, but things are quite positive in that But again, the overall contribution of the 2 businesses is fairly small to EBITDA today. Understood. Thanks, Jaspreet. And I wonder if you can comment On Cardone, what are the trends that you are seeing there? And how is the turnaround progressing? Any comments on that would be helpful. Sure. Sanath here. The turnaround is on track. It was, as you remember, a difficult situation and job 1 at the beginning was to put in place a Conventent management team, we feel very good about the team. We see not only their efforts, but we see their results In repositioning the product mix, and of course, there has been a spring back in demand in a variety of their product categories. There is a bit of softness in some of their product categories, but the good news is that tends to be the lower margin part of our mix. In the higher margin elements, we're actually growing at a rate above our internal targets. So All in all, we're confident. We're on track. And we're optimistic We're going to meet plan, but this is work and it will take time. Okay. Thank you. Understood. And I wonder if you can comment on Brand Safeway. In terms of what was the impact of shutdowns on that business in Q2 last year? So maybe it's Jess Greed, Dmitry. Maybe I can start and then Dennis can add. So we did see a significant impact Last year as brand through the depth of the COVID crisis, especially in the U. S. And as you can appreciate, this is a people heavy business, and we typically have a lot of people on the ground when we're doing work. So maintaining kind of some of the social distancing and the safety measures became more difficult. So that had an impact on We also saw last year deferral of some maintenance work as well as Some large scale capital projects from our customers, specifically in the oil and gas industry. And so that impacted kind of activity levels and performance in Q2 last year. What we're seeing now is, as I mentioned, kind of a slower recovery. There's only So long, you can push out maintenance work, especially for large scale kind of industrial operations. So we are seeing some of that starting to come back. The new construction maybe has been a bit Lower, but I'd say year over year, we're definitely seeing a pickup in activity. And Looking into the back half of this year and early next year, it should continue to recover. No, I think you did a great job. There's not a lot to add other than I would Say on the growth front, the conditions that were difficult for us over the last year indirectly are creating We've got a good pipeline of acquisition targets underway, and we've got a couple of things Very developed in that regard and should probably be able to announce over the next couple of quarters At least one, if not a couple of acquisitions. And yes, so every difficulty indirectly then creates an opportunity for a company of this size given its market positioning. Understood. Okay, thanks a lot. And last question, I've been asking a lot of So I apologize for that. But and that's the last one. I wonder if you can talk more about the recent acquisition, the Modelair And that's cool. Maybe perhaps more specifics about plans going forward, Any potential, maybe revenue synergies, etcetera, from the other businesses that you own that could benefit from that, etcetera? Look, Dmitry, it's Cyrus here. The plans for these businesses is we're going to treat them just like all our other acquisitions. We have an onboarding plan. We'll develop a detailed plan of how we're going to hit the ground running over the 1st few months, Put in place our capital allocation strategy, look for growth opportunities, look for productivity improvement opportunities, All of which we identified before we bought it, but we'll refine those strategies and start executing. Thank you. And this concludes the question session. I would now like to turn the call back over to Cyrus Madden for closing remarks. Well, thanks very much for joining us, and we look forward to speaking with you next quarter.