Brookfield Business Partners LP (BBU) 2018 Q1 法說會逐字稿

Thank you for standing by. This is the conference operator. Welcome to the Brookfield Business Partners L.P. First Quarter 2018 Results Conference Call and Webcast. (Operator Instructions) And the conference is being recorded. (Operator Instructions)

At this time, I would like to turn the conference over to Ms. Courtney Burke, Vice President, Investor Relations and Finance. Please go ahead, Ms. Burke.

Thank you, operator, and good morning, everyone. Welcome to Brookfield Business Partners 2018 First Quarter Conference Call. On the call today are Cyrus Madon, our Chief Executive Officer; Craig Laurie, Chief Financial Officer; and Jaspreet Dehl, Managing Director of Finance.

Craig will start off by discussing the highlights of our financial and operating results for the quarter, and Cyrus will then give an update on the business. After our formal comments, we'll turn the call over to the operator and take your questions.

At this time, I'd like to remind you that in responding to questions and in 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.

Thank you, and I will now turn the call over to Craig.

Thank you, Courtney, and good morning, everyone. We began the year with strong results in the first quarter. Company funds from operations, or FFO, totaled $138 million, representing $1.07 per unit before incentive distribution. This compares to $95 million for the same period in 2017. Net income attributable to unitholders for the quarter was $74 million compared to $66 million in 2017.

I'll start with our industrials segment, where our first quarter results improved significantly over Q1 2017, with the exceptional performance at our graphite electrode manufacturing business, GrafTech. Company FFO in this segment was $98 million, up from $79 million last year. GrafTech's significantly higher contribution this quarter was a result of stronger spot pricing and new take-or-pay sales contracts that came into effect in 2018. The average realized price for the quarter was $10,100 per metric ton, $7,800 per metric ton higher than in the first quarter last year, or an increase of over 300%.

North American Palladium, our Canadian palladium producer, also generated strong results this quarter and benefited from significantly increased palladium production and pricing over last year. Based on its improved competitive position, we are reviewing strategic alternatives for this business, including a potential sale.

BRK Ambiental, our water treatment and distribution operation in Brazil, also contributed positively to our results in the first quarter. We've been working on improving capital allocation in operations and reestablishing the company as the preferred partner to municipalities.

The business services segment generated company FFO of $8 million in the quarter, up from $4 million in 2017. Our results benefited from the initial contribution from our gaming partnership after we assumed the operations of 3 Greater Toronto area gaming facilities in January.

Our global facilities management business, BGIS, performed well during the quarter. And our financial advisory business generated improved results compared to the first quarter of last year. Results in this segment were partially offset by lower contribution from our real estate services business due to a slow start to the year at our relocations company.

Our construction services segment contributed $9 million of company FFO in the quarter compared to negative $3 million in 2017. We should start to return to more normalized operating results as a few projects with challenges come to an end.

In Australia, a substantial majority of projects are relatively new and should generate strong margins. In the U.K., we have a robust pipeline and continue to win new projects at healthy margins.

We are consolidating our business in the Middle East, refocusing it into a smaller, more bespoke business, and we have strengthened our commercial strategy in the region.

New business activity continues to be strong. During the quarter, we secured over $1 billion of new work: most notably, the Quay Quarter Tower, a 50-story, $600 million commercial tower development in Sydney; Melbourne Grand, a $200 million residential development; and the third tower of Transit City, a $90 million residential development in Toronto. Our backlog remains close to a record high of $9 billion.

Our energy segment's company FFO was $38 million in the quarter compared to $20 million in the first quarter of 2017. Ember, our Western Canadian energy operation, is focused on sustainable cost reduction and maximized realized pricing through hedging and diversifying its market. Our Australian oil and gas joint venture, Quadrant, continues to benefit from its long-term fixed-price customer contracts for natural gas. This quarter, the company paid a dividend of $100 million, or $9 million to Brookfield Business Partners. We have now recovered over 80% of our invested capital on Quadrant through dividends since the start of this joint venture in 2015.

Teekay Offshore, our provider of marine oilfield services, contributed positively to our results this quarter. During the quarter, the company completed 3 growth projects. We expect these projects to contribute positively to our results through 2018, and our plan is to deleverage the company over the next 3 years.

Turning to the balance sheet. In May, we increased our revolving unsecured credit facility by $325 million to an aggregate of $575 million. This brought our liquidity to approximately $1.7 billion after accounting for our closed and announced transactions as well as the dividend from GrafTech. We'll use the liquidity primarily to fund announced transaction and future growth opportunities.

At the corporate level, our facilities are currently undrawn, and our intention, at this time, is not to use corporate debt except as a bridge for acquisitions or working capital needs. We intend to place longer-term debt at the operating company level.

I'll now pass the call to Cyrus to speak to our strategic and growth initiatives.

Thanks, Craig, and good morning, everyone. We're happy with the improved performance in all of our segments this quarter. We have stronger fundamentals, greater scale, more diversification compared to a year ago in our business. And the businesses we recently acquired are contributing to our results and, of course, we continue to work with the management teams of all of our businesses to enhance value. The largest improvement was in our industrials segment with exceptional performance at GrafTech, and this is the first quarter where our results fully reflect the benefit from the contracting and operational initiatives we've implemented at GrafTech over the last 2 years.

As a reminder, we acquired this company in 2015. BBU's share of the equity purchase price was $295 million for a 34% stake in the business. We bought this business close to the trough of graphite electrode pricing and, while the market was down, our management team reduced our operating costs by over $100 million and improved productivity. As markets recovered, our management team negotiated multiyear take-or-pay agreements for much of GrafTech's production at a weighted average contract price of $9,700 per metric ton and that's over the next 5 years. And that is also about double historical average pricing.

With those contracts in place, GrafTech successfully raised capital through a debt issuance of $1.5 billion and then IPOed on the New York Stock Exchange. GrafTech also issued a note payable of $750 million to us prior to the IPO and will issue a cash dividend this week. Including this week's dividend, Brookfield Business Partners has received $610 million in cash and a $259 million note receivable from GrafTech. And all of this compares to our acquisition cost of $295 million less than 3 years ago. What is perhaps more remarkable is that the business is worth $7 billion at the IPO price, representing a gain of 6.5x to us. And we continue to own 30% of this business, which is worth $1.4 billion at the IPO price, and the price has moved up a little bit since that IPO.

Moving on to our business services segment. Our residential real estate brokerage business operates in both the U.S. and Canada through owned brokerages and franchise operations. And over the years, we've found this business to be remarkably stable. In the U.S., we operated primarily through a joint venture with Berkshire Hathaway, called Berkshire Hathaway Home Services. In February Berkshire Hathaway chose to exercise their option to acquire our 1/3 interest in this business. We closed this transaction in April, and we've received proceeds of approximately $130 million.

As I mentioned, we like this business and, under normal circumstances, we'd choose to continue the joint venture. However, this arrangement was made several years ago in the context of a broader, very successful real estate services initiative. And I'll try to provide a little bit of color on that and our long history in this segment.

After holding a controlling interest in Canadian real estate broker Royal LePage for more than 10 years, we privatized that company in 1999. We then transitioned the operation to a franchise model, which reduced risk. And we subsequently monetized most of the business by taking it public and then selling its commercial brokerage operations. In 2006, the residential real estate market in North America entered a multiyear decline, at which point we executed a series of highly complementary acquisitions of U.S. franchise and brokerage companies, including GMAC and Prudential Real Estate and Relocation.

We tripled the size of our real estate services business through the bottom of the housing cycle. In 2012 we sold our U.S. franchise business to Berkshire Hathaway for $119 million in cash and a 1/3 ownership of the combined Brookfield-Berkshire U.S. operations. This transaction returned almost all of the cash we invested through the downturn and provided us with an expanded global employee relocation business as well as the 1/3 interest in the U.S. operations.

In total, we've invested $225 million into real estate services. And based on what we believe the remaining operations are worth, we've generated an IRR of more than 25% over a 20-year period. With our Berkshire partnership successfully transitioned, we now have the opportunity to grow this business in the U.S. much like we did in facilities management when our jobs and controls partnership ended.

I'm now going to move on to give you an update on our strategic initiatives where we've made pretty good progress. We closed our transaction with the Ontario Lottery and Gaming Corporation to operate 3 Toronto area gaming facilities and successfully transitioned the operations of these sites to our new partnership. We secured about CAD 1 billion of financing to transform these sites into attractive premier entertainment destinations. In April, we received approval from the city to redevelop Woodbine, our largest site, into a multiuse development with enhanced gaming, hotels, a performance venue, restaurants and retail shopping. At our 2 smaller sites, plans and approvals are more advanced, and we expect our first redevelopment to be completed by the end of the year.

Following our announcement in January 2018 of our agreement to acquire Westinghouse for a purchase price of about $4.6 billion, we've been working through the regulatory approval process and bankruptcy court procedures necessary to close this transaction. Westinghouse, as a reminder, is among the world's leading suppliers of infrastructure services to nuclear power generating facilities, providing engineering, maintenance, facilities management and repair services to its global customer base. Most of its profit is generated from regularly scheduled services provided under long-term contracts. Westinghouse has exited its unsuccessful construction business, which had forced it to seek bankruptcy protection last year. In March, we received court approval for the amended plan of reorganization, which is a significant milestone and we expect to close during the third quarter.

We're also working to close our acquisition of Schoeller Allibert for a total consideration of EUR 205 million, with the minority interest remaining to be held by the Schoeller family. Brookfield Business Partners will fund approximately EUR 40 million of this transaction on closing. As one of Europe's largest manufacturers of returnable plastic packaging systems, Schoeller Allibert has a strong competitive position serving a diverse customer base, and we believe our global platform will help drive value and grow the business. We expect to close this acquisition during the second quarter.

In closing, we've had a very successful first quarter. We're very pleased with the performance of our operations as well as the progress we've made on our strategic initiatives. Thanks very much for joining us today. And with that, I'll turn it back to the operator for questions.

(Operator Instructions) Your first question comes from Geoff Kwan of RBC Capital Markets.

The first question I had was the increase in the credit facility you have, and I know you've mentioned that it's undrawn. But just was wondering if -- what the thought process around increasing it, given liquidity seems to be quite good right now and even, I would say, fine in the context of also needing some of that for the Westinghouse transaction.

Geoff, this is Craig. I mean, to your point, we, obviously, did have a strong liquidity position. And this certainly just, frankly, makes it stronger and better positions us to continue to grow the company and make acquisitions. As we've always talked about, it's not our intention to have corporate debt for anything other than the acquisitions or working capital needs. We tend to put the actual debt within the operating companies. But it just puts us in a much stronger position.

Okay. And then just on the Westinghouse side, you've talked about willing to commit up to $500 million. Do you have any update in terms of what might get syndicated to third-party investors?

We're still working through that, Geoff. So we don't have a definitive update for you yet.

Okay. And if I can maybe ask a couple of questions on the GTA bundle. I think right now as the process is working through, let's call, Phase 0. If I remember correctly, Woodbine's got about 3,000 slots, but -- and no tables. With this Phase 0 development, do you have information on what is going to be added in terms of slots and/or tables while you do the bigger redevelopment?

Yes. So at Woodbine, specifically, our plan is to add an additional 1,000 slots and 100 table games. And so when it's finished, it would have up to 5,000 slots and 400 tables.

I'm sorry, the 5,000 and the 400 is after the bigger redevelopment is done. Is that correct?

That would be upon completion of the entire redevelopment. And what's happening, Geoff, is there's, I'll call it, an interim stage as well, an interim expansion and development that's going on now within the existing venue. And that would add an additional 1,000 slots and 100 table games. And when the full expansion is complete, it would be up to 5,000 slots and 400 table games. That compares to, as you rightly said, 3,000 slots today and no table games.

Got it. And then the other question I had on the bundle was, I think Toronto City Council filings kind of suggest, as I mentioned, this kind of Phase 0 should be done by Q3 '18. Just wanted to get a sense like is that -- within that timing, if it is accurate, is that something where it's, say, by the end of September? Or is it something that might be August or some other timing potential there?

Yes. I can't tell you specifically other than that's -- our understanding is what you've just said.

Okay. So at least -- the plan is by at least the end of September would still be the intent. Okay, okay. Maybe if I can ask one last question is just if you can talk about BRK, just the progress in terms of, since the acquisition, any sort of new concessions, expanding current concessions and anything else you think is actually relevant. Kind of talk about in terms of a progress update on that investment. I'll admit it's a little bit tougher for me, as Portuguese is not my first language.

Yes. So first of all, operationally, we've made enormous progress at BRK. We've centralized a lot of the operations that were previously decentralized. We've changed, virtually, the entire senior management team, really brought a lot of discipline to capital allocation. And we're very happy with our progress. As to growth opportunities, we are now turning our attention to that. We are starting to see -- starting to look at several opportunities. We will pursue 1 or 2 or 3 of them if we can find the right value there.

Perhaps what's more interesting is just more broadly in the country, the NDS is helping manage a process whereby many state water companies will be privatized over the next several years. So that's a longer-term initiative that's happening in the country. But it's very much in line with our thesis here that this is a great vehicle and a growth platform -- and a growth industry in that country.

(Operator Instructions) There are no further questions at this time. I'll return the call to our presenters.

Thanks very much, and look forward to speaking to you next quarter.

This concludes today's conference call. You may now disconnect.