Brookfield Business Partners LP (BBU) 2017 Q3 法說會逐字稿

Thank you for standing by. This is the conference operator. Welcome to the Brookfield Business Partners Third Quarter 2017 Results Conference Call and Webcast. (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.

Good morning, everyone. Thank you for joining us for the Brookfield Business Partners 2017 Third Quarter Earnings Conference Call.

With me today are Cyrus Madon, our Chief Executive Officer; Jaspreet Dehl, our Managing Director; and Courtney Burke.

I would, at this time, remind you that in responding to questions and in talking about new initiatives and our financial and operating performance, we will make forward-looking statements, including forward-looking statements within the meaning of applicable Canadian and U.S. securities laws. These statements reflect predictions of future events and trends, do not relate to historic events, and are subject to known and unknown risks. 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.

For the third quarter, Brookfield Business Partners generating company FFO of $46 million compared to $50 million for the same period of 2016. Our company FFO benefited from stronger results in our business services and industrial segments, offset by a $16 million loss from the sale of Insignia, our smaller oil and gas producer in Western Canada in our energy segment.

We reported net income attributable to unitholders for the quarter of $9 million compared to net income of $20 million in the third quarter of 2016, due primarily to higher depreciation, amortization and tax expenses in 2017.

Our business services segment generated company FFO of $23 million in the third quarter of 2017, up from $18 million during the same period of 2016. As the results benefited from first deposit of contribution from our road fuel distribution and marketing platform, with the acquisition of Greenergy in May 2017, and the Loblaw gas station operations in July 2017.

As well as the continued strength of our facilities management and real estate brokerage operations, partially offset by lower results at our financial advisory services business, which tends to have variability in its results.

Our construction services segment contributed $17 million of company FFO in the quarter compared to $16 million in the same period of 2016. Marginally improved results from our Australian and U.K. operations relative to prior year were partially offset by lower activity in the Middle East. Our backlog has increased to $8 billion, up from $6.6 billion at the same time last year, as we secured 7 projects during the quarter. These included One Nine Elms, a mixed-use development in London; 447 Collins Street, a mixed-use development in Melbourne; and AYKON London One, a 50-storey residential tower in London. Following the quarter end, we were awarded The Address Residence at Jumeirah Gate, a mixed-use development in Dubai; and Transit City, a residential development in Toronto, further raising our backlog to almost $9 billion. Our energy segment reported a company FFO loss of $5 million during the quarter compared to company FFO of $12 million in the prior year due to the $16 million loss on the sale of Insignia. Despite current natural gas price weakness, our Canadian operation performed better than in the same period last year, as we benefited from our hedging program. The duration of the hedges can range between 6 and 36 months, and hedges are rolled forward on a quarterly basis.

Our Australian operation continued to benefit from its long term fixed price customer contracts for natural gas. Our industrial operations segment generated company FFO of $22 million during the quarter, up from $11 million in 2016. We benefited from a full quarter contribution from our Brazilian water services operation, BRK Ambiental. Results at our palladium mining operation continued to improve with the higher palladium prices during the quarter, on the back of strong demand fundamentals and higher sales volumes. The primary use of palladium is in catalytic converters and currently there is a fundamental supply shortage of this metal, driven by automakers focused on improving emission.

This has pushed palladium prices to over $900 an ounce, an increase of about $200 an ounce from last year, and analysts are expecting demand to remain high in the next year.

In our graphite electrode operation reported company -- higher company FFO with increases in both the volume and average pricing. The tightness of graphite electrode supply and higher demand have led to substantial increase in pricing. While we realized some benefit this quarter, we believe that we will achieve significantly better results in the coming year as we finalize pricing at higher levels for 2018.

Turning to the balance sheet. Assets and liabilities increased with the acquisition described, and we successfully accessed the capital markets during the quarter. We raised $600 million of gross proceeds through an equity offering concurrent private placements with an addition of $30 million in proceeds after quarter end when underwriters exercised their over-allotment option. We also increased our revolver -- revolving unsecured credit facilities by $100 million for an aggregate of $250 million with several banks.

Bringing our total liquidity after our close and announced transactions to approximately $1 billion. And at the corporate level, our facilities remain undrawn. Our intention at this time is not to utilize corporate debt except as a bridge for acquisitions and working capital needs with longer-term debt placed at the operating company level.

And now I'd pass the call to Cyrus to speak to our strategy and growth initiatives.

Thanks, Craig, and good morning, everyone. We've had a very productive quarter, including making progress on expanding the scale and global footprint of our business. During the quarter, we progressed several strategic initiatives, including completing the acquisitions of Teekay Offshore and Loblaw's gas station operations. We were selected as a successful proponent of the largest casino concession ever awarded in Canada. And we continued to build our business in India, providing a first-lien secured loan for $123 million through an apartment developer.

In September, we closed our acquisition of Teekay Offshore, our leading provider of critical transportation and production services to the offshore oil industry. This is a well-managed business at the operating level. It experienced liquidity constraints given an over-leveraged balance sheet. We provided new capital to address their balance sheet leverage and provide liquidity to execute their strategic plan.

Teekay Offshore is a market leader in offshore production services, controlling approximately 40% of the global fleet in the shuttle tanker market, and is amongst the largest players in the FPSO, that's floating production, storage and offloading market, with a focus on midsize projects.

The company generates stable cash flows, underpinned by diverse medium to long-term fixed-rate contracts with high quality counterparties. In fact, primarily investment-grade counterparties. As a fee-based business, it has limited direct commodity exposure, and its customers have competitive operating costs, which will support continuing production even in a lower oil price environment. During the quarter and in partnership with Great Canadian Gaming Corporation, we were selected as the successful proponent by the Ontario Lottery Gaming Corporation or OLG. To operate and manage 3 gaming facilities in the greater Toronto area, which I will refer to as the GTA concession. This is the largest casino concession ever awarded in Canada and includes the Premier Woodbine location, which is located near Toronto's Pearson International Airport.

The GTA concession generates over $1 billion of gross gaming revenue today, and we have the exclusive right to operate and improve the existing sites for a minimum period of 22 years, with the option to develop a new site and extend the concession period by 10 years. The modernization will include integrated property expansions that will enhance gaming offerings and offer additional food, hotel and entertainment experiences.

We expect to close this investment in early 2018. During the third quarter, we provided a first-lien secured loan to Total Environment, an experienced Bangalore-based home builder, who has completed and delivered 3 million square feet of housing to-date. Bangalore is a growing residential real estate market because of its status as the center of India's high-tech industry. The loan will be used to fund construction of a portfolio of 5 residential projects. The loan carries a guaranteed return in addition to equity participation, which is linked to revenue from apartment sales. But importantly, it is structured as a senior secured loan, which gives us lots of downside protection.

We continue to monitor recapitalization opportunities in India through our engagement with lenders and stressed sponsors. Bank nonperforming loans are at an all-time high of about $150 billion in India today. Over the past year, we've deployed or committed approximately $3 billion of capital alongside institutional partners to acquire 5 businesses, which we believe have great long-term fundamentals and which are in various stages of on-boarding. And today, I wanted to spend a little bit of time describing our on-boarding process. When we buy businesses, we seek to enhance their value by generating higher and more sustainable operating and product margins, which result in higher and less variable cash flows. Much of this is identified prior to the acquisition. We spent time developing a comprehensive operational and financial plan tailored to the unique features of the business. We undertake margin analysis, identify contributing versus underperforming products and services and assess business processes with the aim to streamline and remove unnecessary costs.

One of our business improvement mantras is the right people in the right place. Our 30-plus years of doing what we do has taught us what a difference it makes to have great leaders in the right place. And we analyze the organizational structure carefully, ensuring we have effective people in critical roles and that the management team is appropriately in line with our objectives. The businesses we've acquired over the past year require differing levels of attention from us, and we are in various stages of bringing them on board.

For example, our carve-out acquisitions of BRK Ambiental and the Canadian gas stations required us to move quickly to build management teams with the skills and experience to lead them. In both cases, we secured CEOs early in the process and turned our focus to identifying and retaining high potential individuals from both within and outside of the organizations. At BRK Ambiental, we've instituted timely and detailed financial and operating reporting, setup government structures and initiated compliance training for our employees.

Rebranding can also be a key component of our on-boarding efforts. We expect the rebranding at BRK, BRKS's highly visible municipal water and sewage facilities in Brazil to be completed by the end of the year. Similarly, rebranding of our Canadian gas stations to the mobile brand is underway with the completion targeted for the middle of next year. Several of our businesses have growth potential, and we work with our management teams to develop growth strategies. Teekay Offshore has current growth projects in the late stages of completion, which we expect will contribute to near-term cash flow growth as well as longer-term market opportunities.

Greenenergy completed a small tuck-in this quarter to augment its growing footprint in Canada, and the company continues to plan for growth into Brazil and the; Middle East. BRK Ambiental is a scalable growth platform because of the social need in Brazil for water and sewage treatment, as well as a supportive government policy. Here, we plan to surface value from the longer-term mature projects and reinvest the capital into high returning new concessions.

The initial business plans, longer-term governments and strategies for growth represent a large part of what we do at Brookfield Business Partners to create value. Looking ahead, we remain optimistic as we believe that business conditions, particularly for our industrial operations segment, are very positive. In addition, we're well positioned to enhance the scale and global diversity of Brookfield Business Partners as we benefit from a combination of being able to source attractive acquisitions and add value post acquisition. Thank you for joining us today. And with that, I'll turn it back to the operator, who will take questions.

(Operator Instructions) The first question is from Nick Stogdill with Crédit Suisse.

If I could start with the construction services of a multipart question. So we're seeing some improvement this quarter versus the last couple of quarters. Do you think we can get EBITDA back to the level we saw in 2015, 2016, what would it take to get there? And second question, you called out the Middle East, is there a broader trend you're seeing in that region or just the lumpiness in the results? And then lastly, on construction, cash, the cash balance in the business looks like it's over 10% of the segment assets, are there any plans to upstream some of that to the corporate level in the near future?

So Nick, it's Cyrus here and I'll leave the cash question to Craig. But just to answer the first question. I think we've owned this company for 10 years, but for the last year we generated about $100 million in FFO every single year. So we fully expect to get back to that level. It may take a little bit of time, but we fully expect to get there. Your second question was on the Middle East, I believe. Is that correct?

Yes, correct. The weakness you called out the lower activity, I guess, I should say.

Yes. So our backlog in the Middle East is lower than it has been for a little while and, particularly, on a year-over-year basis it's down. And that's due to a couple of reasons. One, the residential sector has slowed quite a bit in the Middle East, where we operate. And two, we just weren't successful in winning contracts on the basis that we were comfortable with. And there are 2 parts to that consideration. One is we couldn't earn the margins that we needed to. And the second is the contractual terms were just not worth -- we just weren't able to accept the contractual terms that some of the clients were putting forward. So that's what's happened in the Middle East.

And then for Craig, I guess, on the cash at the segment level in construction.

Yes, so in terms of cash, so I'd say probably 2 things. The first one is that, certainly on a longer-term basis we do expect this is the type of business where your cash flow should roughly equal your FFO. And so certainly, to your point on the overall basis, we would expect that to receive cash from this underlying business related to this quarter and the small increase in cash that really is just timing. The cash flow is depending on working capital needs, payment of suppliers and trades and others. It certainly can bounce around. But to answer your question, we do expect cash to come from construction over the longer-term.

Is there a target level of 5% of assets something like that, you look at or is it just sort of an cash-needed, you will trim when it's appropriate?

Yes, just when it's available and appropriate, and we would look to do it.

And then my next question just going over to GrafTech. At Investor Day, you talked about pricing for Q1 '18 in the 7,500-level per metric ton. Maybe an update on what you're seeing there? And then if you could just talk about the sustainability of the current pricing environment, and are you seeing any early signs on the supply side if anything changing?

Sure. Okay. I'm happy to speak to that. So in short, the pricing environment remains very strong today. And there is still a huge shortage of electrode capacity, given where demand is today. So we aren't seeing any change there yet. And I think at our Investor Day, we told you that we would expect to realize pricing in the order of $7,500 a ton. We have no reason to believe that we won't achieve that. And again, that's a combination of much higher prices we're achieving combined with some lower pricing that was put in place quite some time ago for Q1 . But on average, it should come out to that number at least. I will tell you just for your interest, and this would be an industry first. We changed the way the pricing works quite substantially in a couple of ways. Typically in this industry, producers were priced in Q4 for the entire following next year and maybe a little bit into the next following year. Into the second year. In this case, what we've done is we've actually put some tons up for auction on a shorter-term basis and we're getting exceptionally high prices. And we wanted, and for those who are willing -- wanting a longer-term relationship, we're actually entering into contracts now on a multiyear basis and on a take-or-pay basis. So that's the first for the industry. And we've had some success in doing that, and we'll see where it all pans out. We're right in the heart of contracting as we speak. So we'll have to see where that all pans out. But we're feeling pretty good about it.

The next question is from Anthony Zicha with Scotiabank.

Cyrus, relating to GrafTech, are you experiencing any supply shortages of needle coke? You mentioned that you're getting third party purchases. Is that still the case or has it returned to normal?

Yes, so we always -- we're about 75%, self supply a needle coke. And we buy the rest in the global markets. We saw quite a bit of a shortage during the hurricanes in Texas and at our needle coke facility impacted for, I think, 16 days. But it is back to, what I would call, normal more or less. Needle coke pricing is up a lot just as graphite electrode pricing is up a lot. But there is capacity to meet our production needs.

Okay, great. And there were articles describing the global shortage of the graphite electrodes for the electric arc furnaces. Do you see this as temporary or could this last several years, there's been some industry talk that it could last several years. What's your opinion on that?

Look, it's very tough to know what will happen. There is no doubt this is a cyclical industry. It has ups and downs. We were fortunate to buy it. We think pretty well at the trough of a cycle. Average cycles in this sector tend to be in the 7-year range. So it wouldn't surprise me if we had a few strong years here ahead of us. But it's tough to know. And over the last several years, capacities been leading the system. If the pricing stays very, very strong, we would expect to see new capacity come on, but it would take a long time to come on.

Yes, not to mention the environmental barriers.

No question.

One more question. Relating to Total Environment, can you give us a bit more color about your investment there and how will it be categorized. Will it be other business services or will it be in construction and investment?

So this is our second loan that we made. And it's structured in this manner. And I think I should just step back for a minute. Broader Brookfield organization has been in the business of making residential loans in India for a long time, several years now. And we actually have a team that's highly experienced doing that. What's happened today is the market for financing for developers has dried up. The state banks In India have a very high level of nonperforming loans, and they need to deal with it. And that's caused a -- that's caused financing to dry up in the country. And what it's created is the opportunity for us to make some chunky loans that will earn really strong returns over a 3, 4, 5-year period. And we've now made 2 of those and there maybe a couple more. We don't expect that this situation will last forever in India. And when liquidity improves, borrowing costs for these new residential developments should drop as well. But that just give you a little background on what's given rise to the opportunity and we're continuing to look at others. And if we can make them on a secured basis earn an equity like return, we'll be quite happy to make these loans.

And my last question relating to BRK Ambiental. Could you give us a bit of color on the operating environment in terms of bidding activity, is everything running according to plan?

Yes, I'll give you a little update on what we've done. As I mentioned, we have -- we're underway rebranding the business. We put a new CEO in place. And she is building a first-class management team within the business. We've instituted a formal water quality program with centralized oversight and data management. We've rolled out an anti-bribery corruption program across the organization. We're quite sensitive to do that early on in the process, given who we bought the business from. And we are focused on growth opportunities. There are several with the existing concessions; and b, we think -- and b, there are several new opportunities that we see in the marketplace as well. So we're looking at all of those growth opportunities. So, so far so good as we expected. It is a great business. It’s industry dynamics are great. And today, we are one of the few water -- wastewater companies that has a capital behind it to execute a growth plan.

(Operator Instructions) We have a follow-up question from Nick Stogdill with Crédit Suisse.

Just one on the business services segment. Could you provide a bit of a color on me, the realized gain on the investment security in that segment, was it an opportunistic time to sell, I know the net gain was small. Just curious on the get out there?

So as you mentioned, it was small, net gain at our level is about $2 million. Yes, this is similar to what we've done in the past, where we will take small positions and assess the situation and see if it ends up going somewhere. In this case, it didn't end up going anywhere and so we end up monetizing for a small gain.

And following on that. I mean, you guys have a lot of liquidity still. I know you're busy adjusting some larger acquisitions. Are there any opportunities you're seeing in the market across any industries to deploy capital in these types of investments, smaller things that can build into bigger positions?

Look, Nick. That's just something we do on an ongoing basis. And it's all market dependent and situation dependent. So if we something under value that make sense for us. You might see us take a position. You may not recall, but early in 2016, I think in total we invested something like $400 million, a quarter of that roughly would've been BBU's share into distressed energy debt at the time. And we made a lot of money on that position, markets recovered and it all turned out great for us. So if we see those opportunities, we'll certainly take advantage of them, but it's situation-specific.

This concludes the question-and-answer session. I'll now hand the call back over to Mr. Madon for closing remarks.

Thanks, everyone, for joining us this quarter. And we'll talk to you next quarter. Thank you.

This concludes today's conference call. Thank you for participating, and have a pleasant day.