Brookfield Business Partners L.P. (NYSE:BBU) Q1 2023 Earnings Call Transcript

Brookfield Business Partners L.P. (NYSE:BBU) Q1 2023 Earnings Call Transcript May 5, 2023

Operator: Welcome to Brookfield Business Partners’ First 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. I’d now like to turn the conference over to Alan Fleming, Head of Investor Relations. Please go ahead, Mr. Fleming.

Alan 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 are Cyrus Madon, our Chief Executive Officer; and Jaspreet Dehl, our Chief Financial Officer. We’re also joined today by Mark Wallace, our Chief Executive Officer at Clarios, our advanced energy storage operation.

Cyrus will lead off and provide an update on our business, followed by Mark, who will discuss our strategic initiatives and recent developments at Clarios. Jaspreet will finish with the review of our financial results. The team will then be available to take your questions. And with that, I’ll pass the call over to Cyrus.

Cyrus Madon: Thank you, Alan, and good morning everyone. Thanks very much for joining us on the call today. We’ve had a great start to the year. Adjusted EBITDA increased over 25% compared to last year, and our adjusted EBITDA margin increased over the year from 17% to 19%, so pretty significant uplift. It’s been an eventful few months in the capital markets as you know, fortunately, our business has not been affected by recent U.S. regional banking issues, and governments have acted quickly to stabilize confidence in the broader financial system. We’re now seeing banks begin to selectively lend for buyout activity again. Bond yields in the U.S. have tightened, and European credit markets are also slowly recovering from the fallout.

A flight to quality credit is serving our business as well. The market price of debt at our largest companies like Clarios, Scientific Games and CDK Global to name a few, is trading at or near par and we’ve been able to refinance existing borrowings and issue new debt at good terms. As an example, just a few weeks ago, Clarios sought to refinance $1.5 billion of its debt in order to extend its maturities through 2030. Not only was it successful in doing so, but the exceptional demand for its debt enabled us to upside this offering to $3.5 billion at an overall cost of about 7%. We achieved this with virtually no increase to the overall cost of its borrowings. This is a phenomenal outcome and evidence of financing available for high quality businesses like the many that we own today.

Turning to capital recycling, as you know, it often takes several years for us to implement improvements, reposition our operations, and build value in our businesses, all else being equal in the short-term. This means the earnings and cash flows of businesses we buy are usually lower than those of the more mature businesses we sell. To put this in context, we’re working to close the sale of Westinghouse, our nuclear technology services provider for total enterprise value of about $8 billion. We used proceeds from Westinghouse to fund the acquisition of three great businesses last year: Scientific Games, CDK Global and La Trobe. And over the next few years, we expect to drive improvements to these businesses, which should nearly double the share of free cash flow we are giving up from the sale of Westinghouse.

In the near-term, the Westinghouse sale proceeds will repay the financial obligations we assumed to fund our substantial acquisition activity last year, which will support our free cash generation later this year. So all in all, our business fundamentals remain strong. We’re making great progress on initiatives to continue building value in our operations, and that’s a great segue to pass the call over to the Mark, who has joined us today to talk about all the great things we’re doing to drive growth at Clarios. Over to you, Mark.

Mark Wallace: Thank you, Cyrus. Good morning, everyone. As a reminder, Clarios is the world leader in low voltage batteries, powering one in three vehicles globally with unmatched scale and geographic reach. We are five to six times larger than any of our nearest competitors and we’re only the true global player. We have the number one market position in the Americas and Europe and are currently number three in Asia. To put this in context, we ship over 150 million batteries per year. And when the business was acquired by Brookfield, EBITDA was approximately $1.6 billion. We set a record year of earnings in fiscal 2021 and we continue to make strong progress in fiscal 2023 and plan to exceed $2 billion of EBITDA over the next few years.

And depending on how much we reinvest in the growth, the business should generate at least $500 million or more of free cash flow each year. Approximately 80% of the volume is driven by the high margin resilient aftermarket demand. We’re also the go-to partner for virtually every automaker in the world, and in many cases have majority share, bringing the right levels of technology to solve for their challenges of today and the future. An important point to remember is that every single car, whether a full battery electric, hybrid, start/stop, our internal combustion engine requires a low voltage battery like the ones we sell. The demand placed on these low voltage batteries continues to increase with a shift toward electrified vehicles. Clarios is the leader in enabling technologies for electric and autonomous vehicles with a full portfolio designed to support our customers’ growing needs.

We’re now partnering with over 130 electric vehicle platforms globally, including over 80 new full battery electric platforms launches during the last 12 months. This puts us more than halfway toward our goal of winning over 200 full battery electric vehicle platforms within the next five years. The automotive industry is rapidly transforming to help the world achieve its carbon reduction targets. We believe that by 2030 nearly 90% of all new vehicle production will represent some form of new energy vehicle from start-stop, hybrid, or full battery electric vehicles. Even more important, we estimate that nearly 1.6 billion cars in the park by 2030. Over half will offer new energy features to reduce greenhouse gas emissions, leading to an increased power demands on the low voltage system, and driving double-digit growth of advanced low voltage batteries to serve these expanding needs.

This shift in technology represents a significant tailwind for our business today and long into the future as these new energy vehicles enter the aftermarket for multiple battery replacements. In fiscal 2022, 24% of our total units sold represent advanced batteries, which is up more than 2 times from only 10% in 2015, and we expect this growth trend to continue. By 2027, we expect 35% of our total battery volume will be advanced. This tailwind will continue to be a source of revenue margin expansion for years to come as advanced batteries drive 50% to 80% higher revenue and double the profitability dollars of a standard low voltage battery. We continue to invest in capacity to serve these growing advanced battery needs. To date, Clarios has deployed more than 50% of the world’s capacity for AGM advanced batteries, and we’re adding more as we speak.

Investing over $500 million in North America and Europe through 2025, in addition to leveraging the startup of our new state-of-the-art plant in China. We’re also expanding our portfolio to meet the growing requirements of new vehicle platforms, including full battery electric vehicles where we have recently launched our first fully branded product strategy Clarios xEV. Clarios xEV batteries tailored to each automaker’s electrified vehicle load requirements will work hand in hand with the high voltage traction battery to provide the right power as well as the right levels of functional safety. This portfolio supports batteries for automakers now, but also positions us to prepare our aftermarket customers for the future. As part of this portfolio, there are some automakers looking for low voltage lithium ion solutions.

Today, we are a leader in this space with an application for a global automaker on multiple platforms. Leveraging our global capabilities as well as our 15 years of lithium ion software and systems expertise, and actively working with OEM customers to develop their future requirements. We also develop a brand new technology called Smart AGM. There is nothing like it in the world. Smart AGM is designed to reduce internal failure, provide continued power supply, and monitor the powertrain battery performance in real time. Smart AGM also allows for predictive maintenance in the aftermarket. One of the most interesting applications where we are seeing significant customer interest is in truck fleets where battery failures is a top cause for truck downtime.

In addition to our advancements in new technologies, we are growing our presence in new markets including China. China is already the largest auto production market in the world, and more importantly, the largest EV market representing more than two-thirds of the global battery electric vehicle production in 2022. With a full launch of our third Chinese plant, we will represent more than half of the installed AGM capacity in the country and expect to double the volume of our China platform in the medium-term. Our global market leading position and value-added customer relationships have enabled us to implement significant pricing actions and offset the unprecedented levels of inflation. In addition, we continue on – our focus on driving margin expansion through operational excellence and cost reduction discipline.

To date, our team has achieved approximately 60% of the targeted $400 million of operational improvements in the business on a gross basis. This year, we are tracking to achieve an additional $50 million in cost savings driven largely by the enhancements of our U.S. operations as we realize the benefit of investments in automation and the optimization of transportation, supply chain, and overhead cost to drive performance and productivity. Overall, it’s an exciting time for Clarios. The rapid transformation to new energy vehicles creates a significant tailwind for our business. As we invest for the future, our earnings and cash flow will continue to grow. We are primed for sustained and profitable growth through our advanced technology portfolio, durable cash flow generation position, and a leading global market position.

With that, I’ll hand the call over to Jaspreet and I’ll be available to answer questions during the Q&A session.

Jaspreet Dehl: Thanks, Mark, and good morning, everyone. We generated strong first quarter financial performance, adjusted EBITDA increased to $622 million compared to $486 million in the prior year. Adjusted EFO of $381 million included $130 million of net gains related to the sale of public security and our residential property management operation. Taking a look at segment performance, our Industrial segment generated first quarter adjusted EBITDA of $219 million. This compares to $217 million last year. Adjusted EFO increased to $162 million and included the $64 million of net gains on disposition. Performance at our advanced energy storage operations was strong generating increased adjusted EBITDA of $129 million for the first quarter.

Higher overall battery volumes, ongoing pricing initiatives and continued operational improvement are contributing to results. Engineered components manufacturing contributed $44 million to adjusted EBITDA this quarter. The business is performing well, despite reduced volumes in North America and Europe. We’re supporting the business’s commercial and cost optimization initiatives, which continue to support improved margin performance. Moving to infrastructure services, adjusted EBITDA for the first quarter was $225 million compared to $208 million last year and adjusted EFO was $86 million for this quarter. Our lottery services operation is performing well, generating $34 million of adjusted EBITDA. Lottery fundamentals have remained extremely resilient with U.S. instant ticket lottery sales continuing to grow at low-single digit rates to start the year.

Input cost pressures are starting to ease and results benefited from continued progress on commercial strategy and supply chain optimization. Modular building leasing services contributed $37 million to adjusted EBITDA, supported by strong demand for higher margin value add products and services, as well as resilient utilization rates in Asia Pacific. And finally, our business services segment generated first quarter adjusted EBITDA of $212 million, an increase compared to $94 million last year. Adjusted EFO increased to $213 million and included a net gain of $67 million. Our residential mortgage insurer generated $47 million of adjusted EBITDA and is performing in line with expectations given a more normalized Canadian housing market. While higher mortgage rates have led to reduced housing affordability and lower sales activity, unemployment levels across Canada continue to remain near historically low levels.

Home prices are still more than 30% above pre-pandemic levels, even after falling 15% from peak levels in early 2022. These two factors have contributed to overall mortgage delinquencies remaining low. Our business can readily manage an expected increase in losses on claims and still generate positive cash flows. Our dealer software and technology services business generated adjusted EBITDA of $49 million. Performance during the quarter benefited from recent optimization initiatives and continued growth of the business’s subscription based revenue. Turning now to our balance sheet. We ended the quarter with approximately $2.7 billion of pro forma corporate liquidity after accounting for the plan syndication of our recently closed acquisitions and expected proceeds from the sale of Westinghouse.

And with that, I’d like to close out our comments and turn the call back over to the operator for questions.

See also 10 Best Brewery and Distillery Stocks To Buy Now and 12 Best Performing Dividend ETFs in 2023.

Q&A Session

Operator: Thank you. And our first question comes from the line of Geoff Kwan with RBC Capital Markets.

Geoff Kwan: Hi, good morning. My first question is, I know it’s a BAM issue, but is there any color you can give on the fundraising at BCP VI? But also if you can comment on BBU’s commitment to that fund dollars or percentage, however you look at it.

Jaspreet Dehl: Hi, Geoff. It’s Jaspreet. I could start and then Cyrus can add. So we don’t really comment on BAM’s fundraising activities. But I think from the last discussion that BAM had with regards to the latest private equities fund, which is the Brookfield Capital Partners Fund VI, as you said, BCP VI were over $8 billion in capital raise. And we’re still in fundraising and we expect we’ll raise additional commitments from that $8 billion that Brookfield’s talked about. In terms of BBU’s commitment, we’re typically about a third of the fund is what we’ve typically done. And we don’t expect that BCP VI will be any different.

Geoff Kwan: Okay. And just my other question was, I think you’ve got a preference of returning to being debt free at the corporate level. But is it also fair to characterize it that you would likely prioritize deploying capital in the current environment given this would seem to be an attractive time to be making acquisitions, but also if monetization markets don’t materially improve this could see your corporate debts and our preferred share kind of total levels increase from where they are today.

Cyrus Madon: That’s complicated – it’s Cyrus here, Geoff. Complicated question. But as always, we will consider all the opportunities in front of us, all the things we have slated that will likely be sold. And cost of capital and sources of capital, and take all of that into consideration. But I’ll start with that, but tell you, yes, if we found something that we’ve thought was highly, highly additive to BBU, I’m quite confident we would raise the capital for that on reasonably attractive terms.

Geoff Kwan: Okay. Actually, maybe if I can ask one last question. You talked about doing debt refinancing at a number of your companies. When you take a look at the portfolios today, like, would there be other – how much more – do you think you might either have to do or where you think there’s a window to opportunistically extend term at a reasonable cost?

Jaspreet Dehl: Yes. So Geoff, we’re constantly kind of watching the market and we like to be opportunistic where we can. But just in terms of kind of our overall debt profile. So the weighted average maturity on the debt today is 5.5 years. Mark touched on the recent refinancing that we did at Clarios that actually extends our maturities now to 5.8 years. And in the next 12 months, we’ve got 5% debt maturing of our overall debt. So there’s not a whole lot that’s very imminent for us. But we will be opportunistic wherever we can and take advantage of market windows. If we can do things at reasonable costs and kind of extend out the maturity on any of our debt. And given the quality of a lot of the businesses that we own, we think with the right market conditions, we could get outcomes similar to Clarios, where we were able to upsize and refinance at kind of virtually the same cost, because I think like 25 basis points difference.

Geoff Kwan: Okay. Great. Thank you.

Operator: Thank you. And our next question comes from the line of Andrew Kuske with Credit Suisse.