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spk08: Welcome to the Brookfield Business Partners second quarter 2024 results conference call and webcast. As a reminder, all participants are in listen-only mode, and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. 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.
spk00: 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 will be available on our website. We'll begin the call today with a business update from Anuj Ranjan, our Chief Executive Officer. Anuj will then turn the call over to Paul Lepage, a managing director on our business operations team, who will discuss our approach to managing cybersecurity risk and the incident response at CDK Global, our dealer software and technology services operation. We'll end the call with Jaspreet Del, our chief financial officer, discussing our financial results for the quarter. Adrian Letts, a managing partner and senior leader on our business operations team, is also joining us on the call this morning. And after we finish our prepared remarks, the team will be available to take your questions. I'd now like to pass the call over to Anuj.
spk09: Thanks, Alan, and good morning, everyone. Thank you all for joining us on the call today. Through the first half of the year, we've made great progress on a number of fronts to build value in our business. Our financial results were strong, but we're impacted by a couple of one-time events in our operations. This includes a cybersecurity incident at CDK Global, our dealer software and technology services operation, and increased costs on a project nearing completion of our construction operation. That being said, we continue to progress our value creation initiatives across the business. We should be captured in earnings as these one-time events pass. Paul is going to speak a bit more about the incident response to CDK later in the call, but I would like to take this moment to commend the CDK team for their quick and successful handling of the situation and their ongoing commitment to supporting their customers. Stepping back, our business fundamentals are sound. While the global operating environment continues to be fluid, activity levels across our operations remain stable, and the progress we're making on our value creation plans is contributing to our underlying margin performance. Simply put, we think owning high-quality businesses that are mission-critical providers of essential products and services and having the deep operational capabilities to run them better is a real advantage in any environment. Another key differentiator for our franchise is our strong access to capital, which has enabled us to opportunistically manage our maturities. Over the past few months, we've refinanced more than $11 billion of debt in our operations and reduced the spread of these borrowings by an average of 50 basis points. Going forward, this will reduce our annual interest expense by approximately $15 million and will stand to benefit even further as rates decline. In addition, we've been focused on monetizing our more mature operations. While overall private market transaction activity has slowed down, we see the market increasingly as a tale of two cities. On one hand, it's much harder in today's environment to sell lower quality businesses, which have historically relied on low-cost capital to grow. On the other hand, great businesses with strong underlying fundamentals are generally sought after by investors in any environment. To that point, over the past year and a half, we have sold or reached agreements to sell 10 businesses for approximately $3 billion of total proceeds at our share. Most of the returns we've achieved have come from buying good businesses on a value basis, improving their operations, and recycling capital to support our growth. In some cases, we can do this in a relatively short period of time, and in other cases, holding a business for longer may be the best means to continue to compound value. Many of our businesses generate stable cash flows, and in some cases, we may also be able to prudently increase leverage as a viable option to fund distributions. No matter when we choose to monetize a business, our objective is to maximize value. We've built a great track record as a public company, realizing a three times MLC and a 30% IRR on the sale of 20 businesses. Today, we own great companies and we're continuing to build value as we advance our improvement plans, which should create opportunities for us to generate meaningful proceeds from our next phase of monetizations. I now want to pass the call over to Paul Lepage. Paul is a senior leader on our business operations team and spends a lot of his time working with our operations to help them build out their digital and technology capabilities. Paul, over to you.
spk12: Thanks, Anuj, and good morning, everyone. I'd like to take some time today to talk about our approach in managing cybersecurity risk, provide you with an update on the incident response at our dealer management software and technology services operation, CDK Global, and share some thoughts on how we're strengthening our protocols across all our operating companies. Managing cybersecurity is and always will be part of our sound business practices and good governance framework for all our operations. This starts with the right culture. We've always had a safety-first mindset across all of our operations. This mindset increasingly encompasses an equal emphasis placed on physical safety and information security. Cybersecurity reviews are a key part of diligence prior to acquiring a business. and this extends to the management of our portfolio companies. Post-acquisition, we established an oversight committee to ensure adherence to cybersecurity programs and standards, including the National Institute of Standards and Technology, or NIST framework, to guide how our operations manage, respond, and reduce cybersecurity risk. We also engage leading third-party industry experts, to assess the effectiveness of foundational cybersecurity controls, which includes scans for potential vulnerabilities, ongoing network monitoring, and the review of overall threat detection capabilities. Where it's needed, we support our operating companies with technical tools, processes, and resources to address the potential gaps and to assist in the remediation activities. However, The frequency and sophistication of cyber incidents globally is intensifying. To put this in perspective, more than 2,000 cybersecurity incidents are reported daily, and last year alone, cyber incidents affected over 20% of the S&P 500 companies. As we disclosed, CDK Global was impacted by a cyber incident during the quarter, CDK, as a reminder, is a leading provider of cloud-based software to automotive dealerships. It's a trusted partner to its customers, providing mission-critical services that enable automotive dealers to run their business more efficiently. We privatized the business two years ago and have been focused on the execution of a valuation plan, creation plan rather, which includes investing approximately $500 million in product and technology, R&D, infrastructure, and modernization of the software stack. Immediately after detecting unauthorized activity on its network, CDK mobilized its incident response team and shut down its systems to contain the threat. The cyber attack was orchestrated by a highly sophisticated threat actor, that infiltrated CDK's IT infrastructure. With the assistance of leading third-party experts, CDK moved to quickly begin restoring its systems with a focus on putting its customers first, limiting the disruption to customer operations, and remediating the impacts as quickly as possible. Within two weeks, CDK was able to bring substantially all its dealer customers back onto its core dealer management system, and within three weeks the business had restored substantially all its major applications and third-party system integrations. CDK continues to be focused on being a best-in-class partner to its customers. This includes supporting them as their businesses get back to normal operations, providing one-time billing credits, and rebuilding trust. As a market leader, The business is continuing to invest in its systems and technology to protect against evolving cyber threats. It's also working to support the industry, including making free tools and resources available for any dealer to help them assess their security frameworks, evaluate risk, and enhance employee cybersecurity training. On behalf of Brookfield, we want to thank all CDK customers and partners. for their support and patience during the outage. With that, I'd like to turn the call over to Jaspreet to review our financial results.
spk07: Thanks, Paul, and good morning, everyone. Second quarter adjusted EBITDA was $524 million compared to $606 million in the prior period. Excluding contributions from nuclear technology services and other small operations sold last year, prior year adjusted EBITDA was about $550 million. Adjusted EFO of $289 million in the quarter included $103 million of net gains on the sale of our Canadian aggregate production operation, as well as public securities in our industrial segment. Turning to our segment performance, our industrial segment generated second quarter adjusted EBITDA of $213 million, which increased from $196 million in 2023. Our advanced energy storage operation continues to generate strong performance, benefiting from favorable pricing, improved mix driven by the shift to higher margin advanced batteries, and ongoing operational efficiency initiatives. This was partially offset by reduced contribution from our engineered components manufacturer due to the impact of lower volume given overall reduced market demand. Moving to our business services segment, we generated $182 million of second quarter adjusted EBITDA. Performance benefited from the increased contribution of our residential mortgage insurer. This was offset by the one-time impact related to the cybersecurity incident at CDK. The total impact to adjusted EBITDA of the cost incurred at CDK was $38 million at BBU's share and included one-time billing credits provided to customers as well as remediation out-of-pocket costs. A portion of these costs were offset by an insurance recovery. Results this quarter also reflected the underperformance at our construction operation, where we recognized costs due to weather and construction delays at one project nearing completion in Australia. The project is expected to be completed later this year. Finally, our infrastructure services segment generated $157 million of adjusted EBITDA compared to $216 million during the same quarter last year. which included $60 million of contributions from nuclear technology services, which we sold late last year. Results also benefited from improved contributions from offshore oil services. Turning to our balance sheet, we ended the quarter with approximately $1.6 billion of liquidity at the corporate level and no significant upcoming near-term maturities on our debt. This provides us good flexibility to continue to support our growth and optimize our balance sheet. With that, I would like to turn the call back to the operator for questions.
spk08: Certainly. And as a reminder, ladies and gentlemen, if you have a question at this time, please press star 11 on your telephone. And our first question comes from the line of Jeffrey Kwan from RBC Capital Markets. Your question, please.
spk05: Hi, good morning. First question was just on the CDK situation. Just wondering what the likelihood of any sort of future negative financial impacts from the incident, whether or not it's in queues for your future quarters. And then similarly, you know, how would you describe the risk of the potential for market share losses? Like, you know, how, remind me how long the contract terms are, the likelihood, you know, clients may look to get some pricing concessions and the competitive environment, whether or not competitors may try to get a little more aggressive on pricing in RFPs.
spk07: Hi, Jeff. It's Jess Freed. Maybe I'll start off on the financial impact and then pass it over to Paul to address some of the balance of your questions. So we incurred remediation out-of-pocket costs as well as costs related to providing credits to our customers. All of those have been accrued in the quarter, offset by some insurance recovery. So we think we've captured the bulk of the costs associated with the incidents in the quarter, and we're not expecting that there's going to be any additional material impact going forward just from the incidents.
spk14: Hi, Jeff.
spk12: It's Paul. Just to answer a portion of your question, so most of these contracts are multi-year agreements with an average of three to five years in length. The business has benefited from high customer retention rates that are reflective of the value of the service it provides to its customers. And obviously, our focus is from a CDK perspective with the systems back up and running is to focus on continuing to be that best-in-class partner and manage the relationships with its customers. And we're going to do this by building the best and most secure platform for the industry.
spk13: Okay.
spk05: And just my second question is on a similar topic, but just more broadly speaking, the comments around using third parties on the cybersecurity front for investing companies and also supporting them, you know, with other resources to help to minimize the threat, a threat actually coming to fruition. But in light of what happened at CDK, I'm just wondering, is there anything that you've learned from it in terms of, you know, whether or not it's having the proper protections at each of your investee companies, whether that's the right third-party providers or other factors, and also, too, is having the right proper training and culture and IT personnel around cybersecurity risk for, again, the various businesses that you own.
spk14: So, hi, Jeff.
spk12: You know, what I'd say is that, you know, the emphasis, we've always had the emphasis on this, to be clear. The area that a focus, and it's a focus frankly for the whole industry, is a focus around this information security first and driving stronger on those practices. We've had a long history in doing this on security, physical security. we now have to continue to increase our focus on information security within all our portfolio companies.
spk14: Okay. Thank you. Thank you.
spk08: And our next question comes from the line of Devin Dodge from BMO Capital Markets. Your question, please.
spk02: All right. Thanks. Good morning. I want to start with a question on BRK Ambientel. I believe the recent restructuring is pretty far advanced, but there appears to be also a fair bit of investor activity in this sector lately. Just wondering if you think an IPO is still the most likely exit, or are there other options that look more probable at this point?
spk07: Hi, Devin. It's Jess. Great. I'll start and then Anuj can add if he wants. As you're well aware, we've kind of executed on our operational improvement plan at BRK. And we think that business is well set up for a monetization. The IPO was kind of a natural track to monetization for that business. But like we do with every investment that we make, we always look at all options. and we're doing the same thing at BR Gambientel. The IPO market in Brazil is still very difficult. The rates were going down. I think that's kind of stalled a little bit. We haven't seen much or I'd say even any new IPOs or real equity capital market activity in Brazil. So that is still an option, but we are looking at other options as well to monetize and get at least some proceeds back up to BBU.
spk13: Okay. Okay. Good color. Appreciate that.
spk02: And switching gears, Nielsen, this isn't an investment we talk about much, but just wondering if you can provide an update on the business and how much progress has been made toward that profit improvement plan.
spk14: Hi, Doug.
spk12: Nielsen is a $400 million DBU investment in prep security. As you know, Nielsen is a data as a service offering. It's the leading provider of audience measurement services for TV and audio, and it's got a growing presence in streaming and digital services. So our value creation plan and execution is focused around driving top line growth, but also driving at all elements of the value creation plan that we put in place. So far, the impact of that is being sort of 400 basis points in margin improvement. And the company has got a lot of early wins within the digital and streaming environment. There's still lots of work to do to deliver the best offering for this buy side and sell side advertising ecosystem in an evolving market.
spk13: Okay. Thanks, Seth. Good seller.
spk02: And then just maybe one last one. This morning, we saw Brookfield announced a carve-out of a thermal management business. Just wondering if BB was involved there.
spk09: Hi, it's Anuj here. Thanks, Evan. I'll take that. Yes, we did, I think, yesterday sign or the night before sign binding agreements to acquire Envent, which is a great industrial business that we're quite excited about. It is a carve-out of a larger corporation, so it's going to take four to five months to close. So we have some time. As you know, we've been advancing many of our capital recycling initiatives. at BBU, including many monetizations that are hopefully on the way. I would just say that in four to five months when it's time to close, depending on our liquidity and our priorities for capital allocation at the time, we'll be able to make that decision.
spk13: Understood. Thank you. I'll turn it over.
spk08: Thank you. One moment for our next question. And our next question comes from the line of Gary Ho from Dijon Capital Markets. Your question, please.
spk05: Thanks. Maybe this is the first one. I want to go to Dexco here. So we saw lower results this quarter just driven by lower volumes. Maybe can you give us some color on how you're managing through this environment and outlook for the back half and into 2025?
spk10: Yeah, Adrian, let's see. The market does continue to be affected by some softness in North America and particular parts of our international market. The team is continuing to do a fantastic job in managing costs to offset some of the volume decline. We're seeing some green shoots. But we expect the market to recover through the course to the back end of this year and into 2025. To a certain extent, when we underwrote and bought the business, we expected this to happen. We feel well set up, and the team is doing a great job, as I said, as we see the market recover through towards the end of this year and then into next year.
spk13: Okay, perfect. And my second question is,
spk05: It's around Clarios. So another solid quarter generated healthy free cash flow and was mentioned you use that to pay down debt. Also, you know, you're focused on progressing options for the business to generate proceeds. How's the IPO process progressing and or other initiatives that you plan to service value on this asset?
spk09: Yeah, hi Gary, it's Anuj here. I'll take that. So Clarius, as you said, the business has been performing exceptionally well. We're very, very pleased with how things are going at the business. We continue to evaluate all the strategic alternatives, which include an IPO. And I'll just say that we're quite encouraged by the progress we're making so far on all of those alternatives. So we're feeling pretty good about not only an IPO, but many of the different alternatives we're looking at for the business to recycle some capital for BBU.
spk13: Okay, great. And then just my last question, I want to go back to the CDK front.
spk05: Given some of the one-time billing credits to clients and whatnot, and when we look at the peak of the incident, there were a lot of questions on what is the CDK's exposure is to BBU. and we saw the stock down 10% over several days during the outage. I'm wondering if management had given some thought whether, you know, if you provided us some valuation marker on at least some of your significant investments that might have reduced the volatility on the trading of BBU stock, you know, should another event happen in the future.
spk07: Gary, just so I could frame your question, make sure I understood. Are you asking kind of how we assess how material the CDK incident was for BBU because of the volatility that you saw in the stock? Is that a fair summary of your question?
spk05: No, it's more the stock was down 10%. So which would be a significant part of, I believe, the valuation of CDK assets. So had you provided some valuation mark of what that CDK would have been worth as a percentage of your NAV, maybe your stock wouldn't have been so volatile through that period.
spk07: Yeah. Look, it's hard to comment on the volatility of the stock. As you're aware, we're not disclosing NAV, but we do give you all of the components for the NAV, and we share that with our investors. And if I just step back, at our share, CDK generates about $250 million of EBITDA for BBU today. We provide with... We provide you with proportionate debt that is on that business. And you could put the right multiple on it and get a good sense of what the value of that business is to BBU. So I'm not sure that giving investors an exact number versus giving them the components where it's easy enough to calculate that number. It would have made any directional difference one way or the other, but that has been our approach. We've been guiding people to think of BDU as a high-quality industrial services business. We've been giving you all of the inputs into calculating values for our larger businesses, including CDK. And we think that information is available to investors to assess. kind of the impact of any type of incident on value.
spk13: Okay, understood. Okay, thank you very much. Those are my questions.
spk08: Thank you. And our next question comes from the line of Jamie Gloin from NBF. Your question, please.
spk06: Yeah, thanks. Good morning. I just wanted to... clarify on the interest cost savings. I think you mentioned it was $50.5 million in savings on this recent round of refinancing. Is that a $50 million benefit to BBU or is that to the OPCOs? And then if it's the OPCOs, what would be the benefit to BBU?
spk07: So our proportionate share of that will be about a third. So on a kind of a full year basis, it'll be about $15 million. Okay.
spk14: And we're... Oh, go ahead. Sorry, Jasmine.
spk07: Sorry, I was just saying that's from the spread reduction that we were able to achieve from the refinancing. Like, as rates go down, like, that should have an additional positive impact.
spk06: Yeah, so that was going to be my follow-up, is that was this recent round of refinancing... It's all floating rate debt. Is it unhedged, I guess? Are you making a call on that to unhedge it? And I guess I also noticed that like 70% of the debt is fixed or hedged. And I think that's an increase from more like the 50% range in previous quarters. So maybe just talk through how you're thinking about the rate environment and your financing strategies.
spk07: Sure. Sure. So this 70% is actually down from 75%. And what the 70% represents is all of our debt that's fixed, that has hedges on it, so like derivative hedges, as well as debt that's naturally hedged. So the biggest part of that is our financing business in Australia. where there's the floating debt on both the asset and liability side, so there's a natural hedge there. So if you take all of those pieces together, we're about 70% hedged. Last quarter, that number was 75. The 50%, I think, that you're thinking of excludes the natural hedges in the business. And how we're thinking about rates, we do think, We're at the end of the rate hiking cycle and we should see rate cuts coming soon. Most of our hedges are on for about 18 months to three years is the typical timing of the hedges. We usually hedge based on the maturity of the debt or the whole period on our investments. And some of these hedges have been in place for a while. So as we're kind of looking forward now, as our hedges start to roll off, we'll make a decision on whether we want to continue to hedge or let them roll off and keep the debt floating. But I think we've got some hedges in place that will keep rates pretty consistent for us in the business, the base rates. for a little while, but hopefully as the rates start to come down, we're able to take some advantage of that as hedges roll off.
spk06: Okay, and sorry, was this recent round hedged or unhedged?
spk07: So, I think it's probably fair to think of that 70-ish percent. So, all of the spreads that were reduced were all floating rate debt. And we look at kind of the entire company, and based on the business, we'll hedge anywhere from 50% to 75%, 80% of the floating rate exposure. So you can think of 70% of the base rate on the stuff that we refinanced is hedged.
spk06: Okay, great. And last one, just on the Sage end. another $50 million dividend this quarter. Can you just refresh what's the cumulative dividends that have been upstream from SAGE-N and relative to the total investment in SAGE-N?
spk07: Yeah, so in total so far, we've gotten back about including the dividend that we got this quarter. We've gotten back 85% of the capital that BDU invested, and we invested $855 million. So we've got circa 100 and change, and there's an equity address still in the business.
spk08: Okay, that's incredible. Thank you. Thank you. One moment for our next question. And our next question comes from the line, Dmitry Kamelnitsky from Veritas. Your question, please.
spk04: Hi, and thank you for taking the call. So the first question is, I wonder if you can provide some disclosure about how big are the switching costs per dealership? Sorry, Dmitry?
spk07: Dmitry, you're cutting in and out. It's a bit hard to hear you.
spk04: I apologize. Can you hear me now?
spk03: Yes, sorry.
spk07: Yeah, we can hear you now.
spk04: Awesome. Again, I'm sorry. So first question on CDK. How big are the switching costs per dealership to move to another platform if they were to choose those actions?
spk12: So obviously, it depends on the dealer size, Dimitri. So a large dealer that would have multiple rooftops would have to look at a pretty long process to move from one platform to the next on the dealer management software. There is other sort of peripheral applications that may be easier in terms of shorter time to migrate. But for the most part, it's a long process. It's a process that would entitle months to move from one platform to the next.
spk07: Yeah, I think, Dimitri, if you think about kind of a core accounting system or SAP type of system in any kind of operating business and you're trying to rip that out and implement a brand-new system, kind of what that process would look like, that's probably a good process.
spk04: Thanks for that. And then switching to brand software, I wonder if you can disclose the design BFO for that business for the past 12 months?
spk07: Sure. So Brand Safeway is in our infrastructure services segment, and we actually account for Brand Safeway. So if you look at our segment disclosure, you can pick up the performance there. But the business generated about $30 million in EBITDA at our share. Approximately $30 million. I don't have the number exactly in front of me. But that's the contributions we've got.
spk03: Understood.
spk04: I think it was split into two segments. It was reclassified, I think, into two separate segments. Is that still correct?
spk07: No, it's always been in the infrastructure segment.
spk04: Oh, yeah? Okay. I'm sorry. All right, and then what other options do you consider to more impact BRK beyond a potential IPO?
spk07: So there's a number of options. It's a great business and it's a great platform for kind of water and sewage treatment in Brazil. And there's a number of strategics that might be interested in partnering with us and buying a stake in the business, either in the business as a whole or in our more mature concessions. So when you think about the business, it's got concession agreements with a number of different regions and municipalities. and those concessions are at different stages of development. Some of them are more mature than others, and there has been kind of interest on some of the more mature concessions. So it could be, you know, a partner in the whole business. It could be a partner in parts of the business on mature concessions, or, you know, if the market... better, an IPO is always an option as well. We think this would be a really good public.
spk04: Yes, understood. Okay, thank you very much. Thanks, Dmitry.
spk08: Thank you. And our next question comes from the line of Nick Preeb from CIBC Capital Markets. Your question, please.
spk11: Okay, thanks. I just want to go back to CDK for a moment. My understanding is that the internal view is that this incident won't necessitate the downstreaming of any capital to prop up the balance sheet or liquidity position there. Is that still the expectation?
spk07: Yes, yeah, that's right. I mean, this business generates a lot of free cash flow. It's got significant liquidity, and we're not anticipating providing downstreaming any capital.
spk11: Okay, that's good. And then there have been some press reports about auto dealerships bringing forward legal action in response to the outage. Is there any sort of cyber insurance coverage that would protect CDK from lawsuits stemming from an incident like that?
spk07: So the business does have cyber insurance, which we have drawn on to address the cyber incident. to the extent that there's litigation, which, you know, at this point, we're still assessing, but we're not sure there's too much merit to a lot of these. I don't think they'd be covered by insurance.
spk11: Okay, got it. And last question for me, just on Clarios. If I take the last 12 months adjusted EBITDA number and I gross it up, to 100% basis, it implies about $2.2 billion. Now, I'm cognizant that U.S. GAAP EBITDA is a little bit lower than EBITDA presented under IFRS, but as we approach the end of the company's fiscal year here in September, is it safe to say that EBITDA will exceed $2 billion on a U.S. GAAP basis for the full year? I'm just thinking about this in the context of a pricing scenario for a potential IPO.
spk07: Yeah, look, it'll be added about $2 billion. The U.S. gap to IFRS adjustments, if I just think about kind of the scale of those adjustments, it should be about a little bit over $2 billion. But, you know, there's still a quarter of performance to go, so we'll see how things kind of pan out.
spk11: Understood. Okay, fair enough. All right, thanks very much for taking my questions.
spk08: Thank you. This does conclude the question and answer session of today's program. I'd like to hand the program back to Anush Rajan for any further remarks.
spk09: Thank you, everyone, for joining this quarter, and we look forward to seeing you all at Investor Day in September.
spk08: Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.
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