Brookfield Business Partners L.P.

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 11 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.

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 Madden, our Chief Executive Officer, Dennis Turcotte, our Chief Operating Officer, and Jaspreet Del, 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 Jaspreet will finish with a review of our financial results. The team will be then available to take your questions. And with that, I'll pass the call over to Cyrus.

Thanks, Alan. 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, 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've refinanced nearly a third of our non-recourse borrowing 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. We'll 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 to Brookfield Corporation last year, and the balance will go toward reducing the borrowings on our bank credit facility. We also recently reached an agreement to sell a portion of our interest in EverEyes, our technology-enabled business outsourcing operation. We acquired EverEyes just over two years ago and we've made substantial progress growing the business and improving margins. The sale of our interest values the business at just over a billion dollars which represents 3.5 times what we paid for the business just two years ago. We'll generate around $120 million of proceeds for the interest we sold, and we'll continue to own about 17% of the business alongside a new partner that can support its growth. Separate from any monetizations, And despite higher interest costs, our operations are generating substantial cash flow that we can reinvest to support growth or use to deleverage. To put this in context, Clarios, 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 BBU and our partners, the business has been deleveraging, and during the quarter, it paid down an additional $700 million of debt. As a result, the net leverage of the business has come down to around 4.5 times EBITDA compared to 6.5 times when we acquired it. Stepping back, BBU is a very valuable business today. Yet 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, Cyrus, and good morning, everyone. Our operations span across North America, Brazil, Europe, and Asia Pacific, and touch nearly every facet of the global economy. This provides us with a unique perspective in 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're seeing in the operating environment today, and highlight a few examples of the progress we've achieved 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, reset to 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 rates have also normalized to pre-COVID levels, making international shipping options, both land and sea, more favorable. However, we are still seeing elevated supply constraints and higher associated costs of delivery that have been slower to normalize. In these situations, we've been focused on diversifying our supplier networks and leveraging our scale to optimize our delivery costs. Global labor markets remain tight, unemployment levels in economies 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 management 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, 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. So I was speaking about energy and talking about the cost and 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 risks that could arise given the heightened geopolitical tensions 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 at Clarios, our advanced energy storage operations which 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 US production facilities. We've been working with the management team to execute on a wide range of initiatives to enhance its US operations by optimizing its transportation network and leveraging its global supply chain to drive performance and productivity improvements. In addition, accelerating demand for higher margin advanced batteries continues to position Clarios at the forefront of automotive electrification trends, 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% of the business's much larger and more profitable aftermarket business. as natural replacements in the aftermarket are only now beginning to catch up with first-bit sales into the OEM channel. We're also continuing to make great progress at Dexco, 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-oriented North American segments of the market, margins have continued to improve. The business is focused on initiatives to optimize its manufacturing footprint, improve productivity, and leverage 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 facility rationalization and commercial actions to improve customer service levels. Lastly, at Altera, our 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 Altera 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 FPSOs. 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 Canar and Voyager FPSOs onto new field developments. In both cases, the respective customers are funding substantially all of the incremental 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's capital investment requirement and associated risk. Each of these marks a major milestone for the business and provides increased certainty to long-term earnings and cash flows, forecasted to be in excess of $750 million in aggregate over the firm contract periods covering these two assets. If the auction on the canary is exercised, cash flows will exceed these levels. With that, I'll hand it over to Jaspreet, who will provide an update on our financial performance during the quarter.

Thanks, Dennis, and good morning, everyone. Adjusted EFO 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 well as net gains related to the sale of public securities and the majority of our automotive after-parts remanufacturing operation. Excluding gains, adjusted EFO for the quarter was $218 million. Adjusted EBITDA for the third quarter was $655 million, an increase of 7% over the prior year, supported by 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 and resilient performance at our modular building leasing services operations. 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 at our engineered components manufacturing operations, both of which Dennis just touched on, were offset by lower contributions from graphite electrode operations 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 constructions operations were lower during the quarter compared to prior year, and performance at our road fuels 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, we have flexibility to continue to opportunistically manage our maturities over the next few years. Only about 7% of our non-recourse borrowings are coming due in the next 12 months, and nearly a third of these borrowings are related to Westinghouse, which we will have off our books within the next week. The remaining debt outstanding is primarily related to businesses where refinancings are part of their normal course of operations, as well as other smaller refinancings which can be readily managed. We're continuing to take a balanced approach to capital allocation. Our 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 11 on your telephone and wait for your name to be announced. If you wish to remove yourself from the queue, press star 11 again. One moment, please. Our first question comes from the line of Gary Ho with Desjardins Capital Markets.

Thanks and good morning. Congrats on getting the regulatory approvals on the Westinghouse transaction. Cyrus, you mentioned 50% going to repaying band preps and then the other 50% on corporate debt. Just wondering if you've given any other capital allocation considerations, either greater or faster buybacks or an SIB just given the wide discount in that.

Yeah, look, we have been buying our shares back. We're going to continue doing that as part of our normal course issuer bid. and we haven't given any consideration at this time to doing anything else.

Maybe just, Gary, if I can add, you know, last year we bought back about 2.5 million units. This quarter we bought back an additional about 55,000 units under the NCIB. So, you know, that program is active and we'll continue to buy back.

Okay, and then, Jaspreet, while I have you here, If you take the $1.5 billion proceeds, that reduces, I think, your debt roughly by 40%, 45% on the corporate debt side. Has your views changed on not carrying any corporate debt? And should we continue to see that balance grind down over time from future monetizations or distributions?

Yes. So, look, our long-term goal continues to not have any permanent corporate debt at the BBU level. And you've seen over the last year, we've sold a number of our smaller operations. The cash that's being generated, we're using it. We're paying down the debt, and that continues to be the focus. So that view hasn't changed.

Okay. And then my next question, maybe for Dennis, on the Clario side, I guess two questions there. 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 risk 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 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 inventory levels we'd like to have to make sure our service levels don't suffer.

so so far nothing uh really material is has impacted us and it's allowed us to catch up on the business okay and as a follow-up um i guess good the leveraging efforts on the clear front down to four and a half turns where what do you think you'll need to get to before there's market appetite for uh for an ipo there it's cyrus here look um

Once we get in the something that is around the four range ourselves, then we don't need to raise much money in order to get the leverage into something that's 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. You know, of course, 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 investors would have an appetite, probably a strong appetite at that level.

Yeah. And, you know, the deleveraging area is going to come through both continuing to pay down debt, but also continuing to enhance EBITDA.

Yeah. Okay. Makes sense. Those are my questions. Thank you.

Thank you. One moment, please. As a reminder, to ask a question, please press star 1-1 on your telephone. And our next question comes from the line of Nick Preeb with CIBC Capital Markets.

Yeah, thanks. Just a quick question on the Clarios EBITDA contribution in the quarter. Looks like it was up by healthy magnitude sequentially and year over year. Was there anything one time in nature there, you know, any add-on acquisitions contributing, or is that just purely a product of organic growth in that business? I just want to drill into that headline earnings figure a little bit.

Yeah, that's fundamentally organic growth, and it ends up being a fairly strong quarter for us. There is some seasonality. Got it. Okay, that's good. And then just a point of clarification on the Ever-Rise sale. I'm just wondering if you could provide a little bit of color on why

you know, in that situation you opted to sell, you know, a portion of the business as opposed to a full sale?

Well, look, we had a party that was very interested in the business and we considered all the alternatives available to us and we thought we could take our money off the table and then some. We actually are going to realize twice the capital we invested and we still get to ride half the upside on the business. So we just thought from a 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 in the business.

Yeah, okay. And then one quick follow-on. The partial sale, I think you referenced a 3.5 times MOC return. 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 3.5 and the two times multiples just reflect the fact that it's a partial sale?

Yeah, it's just that's exactly right. So on a cash basis, we'll have kind of two times the initial equity that we put in back out. And then the unrealized value of the 17% that we continue to hold makes up that difference from the two times to the three and a half times MFC.

I got it. Okay. All right. That makes sense. I'll pass the line. Thank you.

Thank you. One moment, please, for our next question. Our next question comes from the line of Jane Gloin with National Bank.

Yeah, thanks. Just wanted to get a little bit more color on the use of the proceeds from the Westinghouse and, you know, half going to the BAM preferred, half going to corporate. You know, what's, I guess, maybe what's the BAM perspective here on taking in the proceeds? half of that exposure. You know, are there changes in how they're thinking about financing the BBU investment here at the preferred level? Maybe a little bit more color as to how that decision came about.

Yeah, well, it's Cyrus, and why don't I start? Jaspreet can add on any comments if she has any. But look, BAM and Brookfield Corp, to be specific, is our... are very supportive of BBU. We needed capital to continue growing at a point in time where we saw some incredible opportunities, but didn't have the long-term capital in place. And so what they agreed to do was subscribe for these preferred shares, which only came due on the sale of one of our businesses. So if we didn't sell anything, we didn't have a maturity wall in front of us. extremely favorable from a BBU perspective. Given the sale of Westinghouse now, contractually, BN, obviously, Brookfield Corp has the right now to be fully redeemed out of it. But in order to provide BBU with continued capital flexibility and liquidity to do other things, what they've agreed is to retain half of it, half half of it,

effectively repaid so that's that's where we've landed it and is the view that uh you know on a potential attractive acquisition they they stand ready to uh to re-advance that amount um or did the total capacity shrink with this repayment well look i would put it this way that

Brookfield Corp is a very supportive shareholder, and I don't think that's going to change. Our objective at BBU is to have it stand on its own two feet over time. I think that's better for all sorts of reasons and everybody, but Brookfield Corp will be a very supportive shareholder.

Okay, great. And then secondly, just going to the Clarios business, You know, very, very strong results here. Was there anything more nuanced than just a little bit of favorable mix shift to the more profitable advanced batteries that would have driven such a large result? And 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 repeat the question?

Yeah, sure. It's just on the Clarios 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 this level of profit is something we can use as a base going forward for Q3, or was there some other factors, maybe a pull forward or something along those lines? Anything nuanced 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, you know, I guess we don't provide forward guidance, but I'm 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.

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 to disclose directly. Should we expect to see like that kind of activity continue where you're generating, you know, a couple of smaller deals? Like how many are left to sell that can generate some additional gains? You know, it looks like, you know, pretty substantial gains in this quarter from those small sales. 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 handful at this point left. And you should expect us over time to sell those. And then, of course, as capital markets improve and capital market conditions improve, we'll start selling some of the larger businesses as well. But selling the smaller businesses is something we have been focused on for a couple of reasons. A, it gives us capital, makes Jaspreet happy. And B, it lets us focus our time and attention on the much larger businesses we have where we can really drive

value improvement for bbu okay that's great thank you thank you and i'm 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 dis