Brookfield Business Partners L.P. (NYSE:BBU) Q1 2024 Earnings Call Transcript May 3, 2024
Brookfield Business Partners L.P. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Welcome to the Brookfield Business Partners’ First 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 a question-and-answer session. [Operator Instructions]. Now, I would 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 would 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. We’ll begin the call today with an update on our business and initiatives from a Anuj Ranjan our Chief Executive Officer. Anuj will then turn the call over to Adrian Letts, Managing Partner on our business operations team, who will share some perspective on our value creation initiatives and progress at DexKo. We’ll end the call with Jaspreet Dehl, our Chief Financial Officer, discussing our financial results for the quarter.
The team will then be available to take your questions. And with that, I’d like to now pass the call over to Anuj.
Anuj Ranjan: Thanks, Alan, and good morning. Thank you all for joining us on the call today. We had a good start to the year. Adjusted EBITDA was $544 million, and our overall adjusted EBITDA margin increased from 19% to over 20% for the quarter. We’re pleased with these results and the continued performance of our largest and highest quality operations, which are contributing to our resilient earnings. Apart from our financial results, we’re continuing to make good progress on our capital recycling initiatives. Since the start of the year, we’ve generated about $300 million of proceeds through both distributions from our operations and agreements we reached to sell two of our smaller businesses. We have now monetized a total of 20 businesses since taking BBU public and generated about $6 billion of proceeds from these sales, realizing a three times average multiple on those investments and a composite IRR of over 30%.
These strong returns clearly demonstrate our track record of building real intrinsic value in our businesses. As you’re aware, it’s been an eventful few months in the global capital markets. Markets still seem to be functioning well, but sticky inflation and increased geopolitical tensions have contributed to more volatility. That being said, activity levels seem to be picking up. At BBU, we continue to be able to refinance our operations and have favorable access to capital. Just last month, with BrandSafeway, our work access services operation, we completed the repricing of a $1.3 billion term loan and ultimately reduced the interest rate spread on the debt by 100 basis points, saving us $13 million annually. Strong demand also allowed us to upsize the offering by $150 million.
In some cases, we’ve been able to prudently up finance borrowings to fund distributions, which we did at our Canadian entertainment operation during the quarter and expect to see more opportunities like these as the earnings of our largest operations continue to increase. Stepping back, our global presence and the types of businesses we own gave us a very unique vantage point to stay on top of emerging opportunities across the world. The biggest of these today seems to be the rapid rise of artificial intelligence, or AI. What we’ve been doing over the last few years, exploring where machine learning can benefit our business, experimenting with ideas and building capabilities. We created an AI value creation office comprised of leaders across the organization with the purpose of leveraging the best ideas and the scale of the broader Brookfield ecosystem to build real value in our business.
Its early days, but the number of ways we’re using AI across our operations are tangible and growing. To give you a few examples, our dealer software and technology services business recently launched an AI virtual assistant tool that uses machine learning, natural language processing and generative AI to automate certain tasks for its customers. Other operations are exploring more opportunities to automate processes and improve efficiency, such as our lottery services business, which is using AI tools to draft responses to new customer proposals. Our residential mortgage insurer on the other hand, is developing predictive models based on decades of proprietary housing data to help it assess risk and adjust its underwriting criteria. The base of change being driven by AI is also giving rise to new risks, and our primary goal is to ensure we are identifying those areas and factoring the risk of disruption into everything we do.
Over time, the integration of AI as a productivity tool is likely to enhance virtually every aspect of our business, and our job is to stay on top of it, but what AI is unlikely to do is replace the human judgment that underpins our investment philosophy. I now want to pass the call over to Adrian Letts. Adrian joined us about two years ago as a senior leader on our business operations team, and has been working closely with Dennis looking after the global operations of our business. We’re excited to have him on the call today, and to give some perspective on our value creation plans.
Adrian Letts : Thanks so much for the introduction Anuj, and good morning, everybody. It’s a pleasure to be joining you on the call today. I thought I’d spend some time talking about key areas we’re focused on to drive value creation across our businesses, and specifically touch on a few value drivers at our engineered components manufacturer, DexKo, which is one of the larger businesses in our industrial segment. As many of you know, we have a dedicated operating team of operating professionals around the globe with a broad range of backgrounds, functional expertise, and industry knowledge. Many of these people are senior executives who are experienced in repositioning and running businesses. Each of them is on the ground working closely with management teams to execute operational improvement plans, drive business performance, and unlock value.
What’s interesting is that while our businesses operate across very different sectors and regions around the world, there tend to be a lot of similarities in the levers we’re pulling to drive value creation. In almost all cases, we’re consistently focused on the same four or five key things. These include ensuring we have the right management team in place, getting the operating model right, optimizing supply chain and procurement, improving the cost structure, and focusing on pricing and commercial execution to drive growth. Priority areas may change from business to business, but having a clear framework supports our ability to drive repeatable outcomes across our operations. As I mentioned before, a great example of this practice is at DexKo, our engineered components manufacturer.
DexKo is a leading manufacturer and distributor of engineered components for industrial trailers and a broad range of towable equipment providers. The company offers a broad portfolio of axle assemblies, hydraulic components, chassis, tow bars, and aftermarket parts that are critical to a diverse set of end markets. It sells its products to OEMs, global distributors, as well as directly to customers through its own distribution network. For decades, DexKo has been providing best-in-class service, driven by the ability to deliver quality, performance, and on-time delivery. When we acquired the business in 2021, we saw an opportunity to leverage our operational expertise to build value across three main areas, which included improving manufacturing efficiency, enhancing the supply chain, and optimizing integration with recent acquisitions.
We’ve achieved significant progress across all three of these pillars. The business has completed 16 add-on acquisitions across North America and Europe, of which three were completed just this quarter. These acquisitions have materially grown the distribution network, expanded the business’s presence in growing markets such as tow bar and hydraulics, and we’ve created value through synergies achieved by integrating the businesses into the DexKo platform. DexKo has consistently improved margins year-over-year as it has continued to deliver on operational efficiencies and driven a positive relationship between commercial pricing and material costs. Today we’re seeing elevated inventory levels following a period of reduced demand post the COVID pandemic, resulting in softness in end markets in which the business operates.
Despite this challenging environment, the business continues to execute exceptionally well. DexKo’s broad diversification across end markets, global footprint and variable cost structures have supported a resilient performance. Internationally, performance in the growing tow bar, hydraulics and electronics business is also contributing to results. Looking forward, DexKo continues to make strategic add-on acquisitions to expand its own distribution network as well as expand its e-commerce offerings and portfolio products. As customer inventory levels return to normalized levels, the profitability of the business should recover supported by DexKo’s strong brand recognition, industry leading products and unmatched customer delivery and service model.
In addition, DexKo’s highly variable cost structures conducive to meaningfully positive operating leverage as the economic backdrop improves and key end markets return to constructive long-term growth. With that, I’ll hand it over to Jaspreet for a review of our financial performance.
Jaspreet Dehl: Thanks Adrienne and good morning everyone. First quarter adjusted EBITDA was $544 million compared to $622 million in the prior period. Excluding contributions from our nuclear technology services operations as well as some of the other smaller operations that we sold last year. Prior period adjusted EBITDA was 548 million. Adjusted EFO of $331 million this quarter included $62 million of net gains primarily related to the sale of public securities in our industrial segment. Turning to our segment performance, our industrial segment generated first quarter adjusted EBITDA of $228 million, which increased compared to $219 million in 2013. Strong performance at our advanced energy storage operation driven by increased volume and sales of higher margin advanced batteries was partially offset by reduced contributions from our engineered components manufacturing operation given lower volumes as Adrienne just discussed.
Adjusted EFO increased to $180 million and included approximately $47 million of net gains during the quarter. Moving to business services, the segment generated first quarter adjusted EBITDA of $205 million. Results benefited from increased contribution from our dealer software and technology services operation and continued strong performance at our residential mortgage insurer. This is partially offset by underperformance at our construction operation where we recognized additional costs primarily due to weather-related construction delays at one project in Australia. This project is expected to be completed by mid-year this year. Finally, our infrastructure services segment generated first quarter adjusted EBITDA of $143 million compared to $225 million during the same quarter last year.
Last year included $75 million of contributions from our nuclear technology services operation which we sold in November 2023. Resilient performance of work access services and lottery services was offset by reduced contribution from offshore oil services due to lower fleet utilization from our shuttle tanker operations. Turning to our balance sheet, we ended the quarter with approximately $1.6 billion of liquidity at the corporate level and have no significant debt maturities coming due over the next 12 months. This provides us with flexibility as we continue to optimize our balance sheet and grow the business. With that, I’d like to close our comments and turn the call back over to the operator for questions.
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