Brookfield Business Partners LP (BBU) 2016 Q3 法說會逐字稿

Thank you for standing by. This is the Chorus Call conference operator. Welcome to the Brookfield Business Partners 2016 third-quarter results conference call and webcast. As a reminder, all participants are in listen-only mode and the conference is being recorded. (Operator Instructions). At this time, I would like to turn the conference over to Mr. Craig Laurie, Chief Financial Officer. Please go ahead, Mr. Laurie.

Thank you. Good morning, everyone. Thank you for joining us for Brookfield Business Partners' 2016 third-quarter conference call. With me today are Cyrus Madon, our Chief Executive Officer and [Jess Brudell] our Senior Vice President, Finance.

I would at this time remind you that in responding to questions and in talking about new initiatives in our financial and operating performance, we will make forward-looking statements, including forward-looking statements within the meaning of applicable Canadian and US Securities laws. These statements reflect predictions of future events and trends and do not relate to historic events. They are subject to known and unknown risks and future events may differ materially from such statements. For more information on these risks and their potential impact on our Company, please see our filings with the Securities regulators in Canada and the United States and the information available on our website.

We are pleased to report that Brookfield Business Partners made significant progress on a number of operating initiatives during the quarter. We reported net income attributable to unitholders for the three months ended September 30, 2016 of $20 million. We generated company FFO of $50 million for the quarter compared with $58 million in 2015. Our overall results were consistent with the same period in 2015.

The additional contribution from our Western Australia energy operations, which was acquired part way through last year and realized gains on the disposition of a portion of our investment securities, were offset by the impact of lower natural gas prices on our Canadian energy operation and lower construction margin during the quarter.

Our other business services segment generated company FFO of $18 million during the quarter compared to $17 million in the third quarter of 2015. Company FFO is primarily generated from real estate services and our facilities management businesses. Our global relocation services business won several new contracts, including renewal of a contract with the Government of Canada.

Our results in 2015 included income earned on the sale of several real estate franchise agreements, which was not repeated this year, partially offsetting increased operating performance during the quarter. Our construction services segment generated $16 million of company FFO in the third quarter compared to $20 million in the third quarter of 2015. The decrease this period is due to reduced margin on a project in Australia, partially offset by lower general and administrative costs. In this segment, margins and results may be impacted from quarter to quarter based on the timing and completion of projects, supply chain performance and other factors.

Our energy segment generated company FFO of $12 million for the quarter compared to $16 million in the third quarter of 2015. We generated strong results from our oil and gas operation in Western Australia where we've hedged a significant portion of our oil production and substantially contracted our gas production. While our Canadian operation continues to be impacted by pricing weakness, we've begun to see improvement recently due in part to a reduction in North American gas supply. From time to time, we will lock in forward prices with hedges at our Canadian operations, as well to increase cash flow certainty.

Our other industrial segment delivered company FFO for the quarter of $11 million compared to $5 million in the third quarter of 2015. The increase in company FFO is due to gains realized on the sale of securities and strong performance at our bath and shower products manufacturer, which continues to benefit from the steady recovery in the US housing sector and the successful launch of new products. This increase was partially offset by an expected negative contribution from our graphite electrode operation as we continue to implement our operational turnaround.

Moving to our balance sheet, as at September 30, 2016, our assets totaled $8.1 billion. In late August, we secured $150 million revolving facility from a group of banks further strengthening our balance sheet. We ended the third quarter of 2016 with approximately $800 million of liquidity at the corporate level, consisting of our new revolving facility, our $500 million facility at Brookfield Asset Management and approximately $200 million in cash.

This liquidity is targeted to fund acquisitions and shorter-term working capital needs whereas our longer-term financing is at the operating company level. Our consolidated net debt to capitalization ratio is 23%. As we work towards our longer-term goal to create new operating platforms, which can grow over many years, we are actively seeking to invest in businesses with high-quality assets and barriers to entry where we can leverage our experience as an owner and operator of real assets and where the Brookfield Firm provides us with a competitive advantage.

We've been able to evaluate a variety of capital resources for acquisition activities, including cash generated from our operations, proceeds from the sale of mature assets and equity and debt financings over the long term. We believe our business is well-positioned with permanent capital, a global footprint and diversified operations providing us the cash flow and asset coverage to maintain a strong balance sheet, ample liquidity and a prudent capital structure.

I will now pass the call to Cyrus to speak to our strategy and growth initiatives.

Thank you, Craig and good morning, everyone. As Craig mentioned, we made significant progress on a number of operating initiatives this quarter. Our primary focus continues to be to execute on the strategic and operational steps necessary to create long-term value across our business. We continue to benefit from a strong North American housing market within our real estate brokerage business. We are seeing strong organic growth in our facilities management business from existing clients in both North America and Australia.

We are currently focused on successfully integrating our recent acquisition of a data center facilities management company, which marks a key milestone of our entry into the US and it supports further expansion in this business with servicing the cloud as a major growth area for us.

Fundamentals in our construction services segment remain strong. During the quarter, we brought to completion over $800 million of residential office and retail projects and secured about $300 million of new work. Our current backlog is approximately $6.6 billion and we expect this backlog to remain strong for the balance of the year given advanced negotiations on several new contracts.

Geographic and sector diversification across our workbook is one of our primary goals and our focus remains on key clients who are looking to build high-quality residential, office, retail, student accommodation and hotel projects. Within our energy segment, production in our Canadian operation continues to outperform original third-party engineering forecasts and active cost management and operational improvements over the last few years have reduced operating costs.

In addition, in both Australia and Canada, we are involved in ongoing exploration and development initiatives to enhance base production and solidify future growth.

Since I spoke at some length on GrafTech last quarter, I wanted to provide you a brief update on that operation. GrafTech is our manufacturer of graphite electrodes used in the steelmaking-process, which we acquired for about $1.25 billion in August of last year. We reported a loss of this business this quarter, which is as expected as we continue to implement our operational turnaround plan.

The positive signs are that the order book for this business is now firming and our three plants are now operating at near full capacity following the temporary closure of our US facility last quarter. We remain focused on operating improvements at these plants to reduce costs and increase efficiency.

We know from experience that underperforming or distressed companies, which we buy, like GrafTech, often generate minimal or even negative earnings at the outset, but following an operational restructuring, they have the potential to generate substantial gains over the longer term.

Our bath and shower products manufacturer is a good example of this. We acquired this business in 2008 just as the US housing market entered its deepest downturn in history. During those lean years, we changed management, rationalized manufacturing capacity, implemented new systems and invested in new product development and now as the underlying market conditions for housing have improved and the US housing sector is showing continued steady recovery, we have seen increased volumes; we were able to implement price increases on many of our products and our new products have launched successfully. This business is now highly profitable and has a great future.

Our operations and the wider Brookfield Firm provide us the ability to invest globally. In addition to North America, Europe and Australia, we are actively reviewing opportunities in Brazil and India. We continue to believe in Brazil's long-term potential and that the current scarcity of capital makes for an attractive investment environment.

We recently announced that Brookfield Business Partners, together with institutional clients at Brookfield Asset Management, entered into a definitive agreement to acquire a 70% controlling stake in Odebrecht Ambiental, Brazil's largest private water distribution, collection and treatment company. The transaction includes the core water, wastewater and industrial water treatment businesses of Odebrecht Ambiental.

Odebrecht Ambiental is an exciting opportunity for us to invest in a water services platform in an emerging market with leading scale and growth potential, particularly its municipal water and wastewater business. It is a great addition to our diversified portfolio of high-quality businesses with solid long-term fundamentals and is backed by our long-term and long-time expertise in the Brazilian market.

Given Odebrecht Ambiental's operational footprint and technical capabilities, we believe it is well-positioned to provide a growing share of the water and sewage improvements planned in Brazil over the next two decades and will enable us to generate strong and stable long-term returns for Brookfield Business Partners.

This is a deep value, opportunistic acquisition and should contribute meaningfully to our value per unit over the long term. The transaction provides for an initial purchase price of $768 million with an additional $125 million of capital to be contributed to the business for working capital requirements and to support the expected growth of the business.

Brookfield Business Partners' share of the purchase price and additional capital for the business is $400 million and $65 million respectively. And we may syndicate some of this total commitment to our institutional partners while retaining an ownership of at least 30% in the Brookfield-led consortium stake.

Moving on from Brazil, I just want to talk very briefly about India. In India, the banks are taking a hard line on underperforming loans given regulatory pressure and we believe this should create great opportunities for us. This quarter, Brookfield Business Partners, together with institutional clients at Brookfield Asset Management, closed a $68 million secured loan to Peninsula Land, a leading Indian homebuilder in part of the Ashok Piramal Group. Peninsula Land is a publicly-listed company and it has a leadership position in the high-end central Mumbai market. And while this was a relatively small investment, we believe it is only the start of what we may be able to pursue in India.

That completes our review of the results for the quarter. Thank you for joining us on the quarter-end conference call and I will now turn the call back to the operator to moderate questions.

(Operator Instructions). Bert Powell, BMO.

Good morning, Craig. Good morning, Cyrus. Question on Odebrecht, if I am saying that right, can you just give us some insight just in terms of the capital structure? I'm assuming the $768 million is all equity. Is there any debt on the asset?

There is debt at the asset, Bert, which is typical for these concessions. The Company operates in an industry where they are able to raise financing at the asset level on very favorable terms. So there is debt at the asset level, which would be at a typical level of debt for a business of this kind.

So think about it as kind of a 60/40 debt to equity kind of structure?

60/40 is not out of line. 50/50 may not be out of line. It really depends on the asset at the end of the day, at the asset level.

Okay. And then just thinking about this kind of asset, like doing water, wastewater and lining that up with the strategy for Brookfield Business Partners going forward, would you put this in the camp, Cyrus, of being a platform? Is this something where there's other opportunities to go and leverage the knowledge you are going to have here inherently in the business and add more water capabilities, or is this an opportunistic acquisition and there's some opportunity to operationally improve this and then move on?

I would say we bought this opportunistically just because the seller is looking to raise capital, but I would tell you we very much view this as a platform investment that -- it's a great sector, it's a really great sector in Brazil with immense long-term growth opportunities, not only embedded in the projects that exist in the Company today, but in the country in general, there is a major push by the government to enhance water distribution and sewage collection and treatment in the country. So we very much view it as a platform with lots of growth opportunity.

So what's the organic growth, if you will, just the capital backlog to go and make investments in the existing business, leaving aside any feature stuff that's maybe some optionality? What's there today to (multiple speakers)?

That's a great question. The way the business generally works is a municipality that is cash strapped will end up signing a long-term concession with an operator like Odebrecht Ambiental. Odebrecht Ambiental will inherit the project and in return agree to increase service levels; it will agree to increase penetration to the population; it will agree to expand the network where necessary for population growth; and all of that is a long-term endeavor. It's not something that happens overnight. It could take 10 years and for that reason, there's a fair bit of capital to be invested in the redevelopment of existing -- and expansion of existing concessions. And our expectation is all of that can be funded from within the business because it is a highly cash generative business today, but that really forms a fundamental part of the thesis. So there is a lot of embedded growth here.

Okay. That's great, Cyrus. Thank you. And then just a quick question on the construction business in Australia in the quarter. Was that just a one-off issue with respect to the margin impact, a project that maybe didn't go according to plan, or is there something -- is it just timing of how that project is evolving? Just to understand a little bit better what happened there.

Yes. Look, we certainly hope it's a one-off issue, just to answer your question very directly. I will tell you that, in this business, you are going to see movements in FFO up or down from time to time just based on the state of completion of a project, how the supply chain is doing and a number of other factors. But we do believe this to be a one-off issue.

That's great. Thank you, Cyrus.

There are no more questions at this time. I would now hand the call back over to Mr. Madon for closing comments.

Thanks very much, everyone, for participating today and we look forward to talking to you next quarter. Thank you.

This concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.