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Brookfield Business Partners L.P. (BBU 0.41%)
Q1Â 2019 Earnings Call
May. 01, 2019, 11:00 a.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Welcome to the Brookfield Business Partners First Quarter 2019 Results Conference Call and Webcast. (Operator Instructions) And the conference is being recorded. (Operator Instructions) Now I would like to turn the conference over to Jaspreet Dehl, CFO. Please go ahead, Ms. Dehl.
Jaspreet Dehl -- Managing Partner, Private Equity
Thank you, and good morning, everyone. Welcome to Brookfield Business Partners 2019 First Quarter Conference Call. Before we begin, I would like to remind you that in responding to questions and in talking about our growth initiative 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 risks, I would encourage you to review our filings with the securities regulators in Canada and the U.S., which are available on our website.
On the call with me, today is Cyrus Madon, Chief Executive office; and Denis Turcotte, Managing Partner in our operations team. I will pass the call over to Cyrus to provide an update on our strategic initiatives, after which Denis will provide an operational update on our activities at Westinghouse.
And finally, I will review our financial results for the first quarter. We will then be available to take your questions. I will now pass the call over to Cyrus.
Cyrus Madon -- CEO and Senior Managing Partner
Thanks, Jespreet, and good morning, everyone. I'm pleased to announce that yesterday we closed our acquisition of the world's leading automotive battery manufacturer and distributor. We renamed this business, Clarios Power Solutions. Clarios is a global market leaders that supplies more than 1/3 of the world's automotive batteries and benefits from economies of scale and product development, manufacturing and recycling of used batteries. the total purchase price was $13 billion , which includes $3 billion of equity and $10 billion of debt financing. Once we finalize the participation of our institutional partners, we expect our share of the equity funding to be about $750 million for 25% ownership interest.
Given the exceptional strength and stability of this business, we were able to finance the acquisition with $10 billion of long-term debt at a weighted average cost of 5.9% and in an average maturity of 7 years. The financing has no recourse back to BBU, and there are no financial maintenance covenants. As a supplier of essential products to an end-market that's growing, Clarios has a remarkable stability in earnings and a decade long record of consistent growth in EBITDA and unit profitability throughout business cycles. More than 75% of the company's sales are to the replacement market where demand is both stable and inelastic. In fact, the aftermarket nature of this business provide significant downside protection to our investment. On average, the car has 3 battery replacements over its lifespan. And given the current number of cars in the market serviced by Clarios today, it would take a very long time to displace or significantly impact cash flows from this business. We believe that favorable industry trends also provide Clarios with the significant growth potential. First industry forecast suggest that total number of cars on the road will grow by up to 30% globally over the next 10 years.
Clarios will continue to provide batteries to car manufacturers, and subsequently, serve the replacement market for decades to come. Second, as vehicles are increasing in complexity, the car battery is becoming more critical than ever before to manage the increasing electrical loads in automobiles. This is driving an industry shift toward advanced batteries where our business is by far the industry leader.
Finally, Clarios has long-term relationships with top tier OEMs and auto retailers in more than 150 countries, which provide a unique advantage in the development and supply of new products and technologies. The business is deeply involved with OEMs in the design of next-generation batteries.
During the quarter, we reached a definitive agreement to acquire Healthscope for $4.1 billion . Healthscope is the second largest private hospital operator in Australia. It is a market-leading business, and its cash flow generation is stable. Our expertise in constructing hospitals has been a great advantage in our due diligence of this opportunity. The transaction will be funded with $1 billion of equity of which approximately $250 million will come from BBU. We have received regulatory approval for our transaction and are now awaiting a shareholder vote targeting a close in the second quarter.
In April, we recapitalized Cardone Industries. Cardone is the largest privately held U.S. remanufacture of automotive aftermarket replacement parts, the biggest focus area for this company is replacement brake pads. You may remember, we made an initial loan to Cardone in October of last year. We have now acquired 85% controlling interest in this business for $195 million. BBU share is a 35% ownership interest for an investment of approximately $80 million. And to be clear, this includes the previous loan that we advanced. In addition to these initiatives to grow our business, during the quarter, we progressed a number of monetization activities that will enhance our strong liquidity position and generate approximately $450 million of cash for BBU in the near term.
In early March, we reached an agreement to sell our facilities management company, BGIS, which will generate net proceeds of $180 million for BBU. We've grown this business over the years, both organically and through acquisitions, and doubled EBITDA. This performance and growth potential generated strong interest from buyers and creating an opportunity for us to monetize this business at a favorable price.
When combined with distributions received, net proceeds from this sale are 3.5x our original investment and an IRR of about 45%. And I should add net proceeds are also net of taxes. We expect to close this transaction in June 2019. We also reached an agreement to sell our executive relocations business BGRS, which will generate net proceeds of $230 million for BBU. BGRS provides executive mobility services to corporate and government clients globally. We've owned this business for many years, but relative to our overall operations, it is one of our smaller businesses that generates modest free cash flow for BBU. So we decided to sell this business and recycle the proceeds into the investments we've talked about. We expect to close this transaction in the second quarter as well.
In April, together with our institutional partners, we sold approximately 5.7 million shares in North American Palladium for $10 a share generating net proceeds to BBU of approximately $15 million. North American Palladium is the only pure play palladium producer in the world. And since acquiring control of the company, we have successfully sponsored its turnaround. The turn around together with the continued strength in demand and pricing for the Palladium presented an attractive opportunity for us to begin monetizing our investment. And at the offering price, our BBU's remaining stake is worth about $120 million, which also presents a future source of funding for investment activities.
That completes my update on our strategic initiatives. I now want to hand the call over to Denis Turcotte who is going to speak about Westinghouse. I also wanted you to be aware that Denis has been appointed Managing Partner and Chief Operating Officer for BBU and the Private Equity Group at Brookfield Asset Management. So with that, Denis, over to you.
Dennis chart Turcot -- Managing Partner and Chief Operating Officer
Thanks, Cyrus. I'll now provide a brief update on our activities at Westinghouse since we acquired the business in August last year. As you are aware, Westinghouse is one of the world's leading suppliers of infrastructure services to the power generation industry, including mission-critical maintenance and repair services and the provision of highly engineered fuel, spare parts and equipments. Coincident with the closing, we have established a Board with wide depth and breadth of relevant experience to support, guide and provide insights to the management team. We also established a working Executive oversight committee to facilitate integrating Brookfield professionals and advisors with the management team focused on executing all aspects of a holistic plan to align cost and drive further profitability in the business.
While Westinghouse no longer constructs nuclear power plants, they continue to provide engineering and procurement services to new plant builds. On the new projects fund, business has had a good success and implementing its AP 1000 technology. Last year, the world's first 3 power plants using Westinghouse AP 1000 technology began commercial operations in China and the fourth facility at chief commercial operation early in 2019.
We continue to look for ways to lever Westinghouse's leading technologies in the global new build space while ensuring we don't take undue risk while doing so.
In the core business, Westinghouse was performed very well since our acquisition with strong performance across the various business units. Supported by the generation of strong cash flow last year and significant liquidity at year-end, the company issued a $315 million distribution to shareholders of which BBU received $140 million. This returns about 1/3 of the capital we invested in the business less than a year ago.
Over the last few months, we've been working with the management team to implement a business plan focused on enhancing profitability and cash flow conversion at the company. One of 5 core initiatives in this regard has been the gradual adjustment of the business model, intended to move decision-making to the appropriate levels of the organization in the various regions we compete, clarifying accountabilities across the business and installing a management operating system aligned with these changes to ensure focus and follow up on the core initiatives and associated objectives. The other core initiatives are related to internalizing ownership of a broad-based transformation plan, improving commercial operations and execution, supply chain management, globalization and optimization and conducting a first-cut review of the corporation strategies at the business unit level. All of these work streams have been under way since closing and are on track to underwriting and progressing well. We are optimistic we will achieve or exceed our internal targets.
To provide a few specifics at the beginning of the year, we announced the first phase of organizational changes to enhance the focus on customers and to strengthen Westinghouse's global services and supply chain management capability.
Some of the key enhancements included creation of customer-focused business unit service, serving the existing nuclear-operating fleet with single points of accountability for both sales and delivery for existing nuclear operating plants. The development of a new business unit with accountability for key growth areas, including new plant delivery, plant deconstruction, decommissioning and remediation services and government services. The establishment of an operations delivery function to build the best-in-class global supply chain organization that will support the business units through a robust procurement organization. This function will also provide global engineering, manufacturing and other technical capabilities in order to ensure our customers receive the full breadth of Westinghouse's global product, innovations and technical capabilities. We believe these changes will continue to strengthen the company's core business with a focus not just on profitability but also on enhanced standards of excellence and quality, safety and client service.
More broadly, the company continues to implement cost-saving initiatives and the business is tracking toward the EBITDA targets that we laid out last September. In the absence of unexpected events, we remain confident that we will get to the higher end of the target and hope to achieve an annualized EBITDA run rate of $600 million by the end of this calendar year.
Cyrus Madon -- CEO and Senior Managing Partner
Jaspreet?
Jaspreet Dehl -- Managing Partner, Private Equity
Thank you, Denis. Brookfield Business Partners reported company FFO for the first quarter of 2019 of $205 million or $1.59 per unit compared to $138 million or $1.07 per unit in 2018. Net income attributable to unitholders for the first quarter was $62 million compared to $74 million in 2018. Net income per limited partnership unit was $0.48 compared to a net unit loss of $0.53 in 2018.
I'll now go through each of our segments and top of our company FFO and their results and compare them to last quarter. Starting with infrastructure services, we generated company FFO of $102 million compared to $22 million in the first quarter of 2018. Results benefited from contributions from Westinghouse, which we acquired in August last year. The business performed well in the quarter with strong performance in fuel operations and new plant projects. Fuel operations results benefited from the shipment of the significant number of fuel assemblies in the first quarter of 2019 to support the spring outage season at customer plants. Westinghouse typically ships to customers in late Q1 and early Q2 for the spring outed season. In 2019, a high number of fuel assemblies were delivered in the first quarter contributing to strong Q1 results.
In addition, results for the quarter benefited from the provision of project-specific engineering services for new plants that Westinghouse is currently engaged to perform. The business will continue to benefit -- the business also continues to benefit from productivity gains as a result of the improvement initiatives that are under way.
The other business within infrastructure services is Teekay. Teekay Offshore experienced improved performance across its operations this quarter. Specifically, higher fleet utilization in towage operations and contributions from the recent growth projects supported strong results. Earlier this week, together with the institutional partners, we agreed to acquire all of Teekay Corporation's remaining interest in Teekay Offshore, including the 49% GP interest that we did not hold as well as LP units. The transaction is expected to close in the second quarter.
Moving onto our industrial segment. In our industrial segment, we reported company FFO of $81 million for the quarter compared to $114 million in 2018. Results were impacted by lower contributions from GrafTech this quarter and the sale of Quadrant in November last year. These were partially offset by stronger performance at our palladium mining operations. GrafTech continues to generate a robust company FFO and benefit from the multiyear take-or-pay contracts, which provides stability to its operating results. Following our monetization activities last year, BBU's ownership of GrafTech is 27% compared to 34% in the first quarter of 2018. And as a result, our proportionate share of GrafTech's company FFO is lower this year.
North American Palladium reported strong results in the quarter benefiting from higher sales volume and continued strength in palladium pricing, Which trended above $1500 per ounce during the quarter. Analyst forecast for sustained strength and prices over the next few years reflect continued strong demand expectations for palladium from the automobile industry.
Moving on to our business services segment. In business services, we generated company FFO of $32 million in the first quarter compared to $17 million in 2018. Previous year results included our U.S. brokerage joint venture which was sold in the second quarter of 2018. Results this quarter benefited from higher contributions from our real estate services business and construction services business. Our construction services business generated company FFO of $18 million in the quarter and performed well in Australia and the U.K.
During the first quarter, Multiplex delivered 6 projects and performed approximately $1.1 billion of work. Significant contract wins during the quarter included 2 residential projects, Chelsea Barracks in the U.K., which is approximately $300 million of work and Junction House in Canada. Our backlog at the end of the first quarter was $7.6 billion , 85% of which is in Australia and the U.K.
Our road fuel distribution and marketing business results for the first quarter were positively impacted by improvements in U.K. biofuel margins. Also, during the quarter, we initiated distribution of marine fuel, which is a new product line for us and that will continue to support additional volumes. I'd like to end with an overview of our liquidity. We ended the first quarter of the liquidity of $2.2 billion at the corporate level. This is comprised of cash and marketable securities of approximately $820 million and an undrawn credit facility of $1.3 billion . We believe we have significant liquidity to support our near-term funding commitments as well as to provide support to our operating units if and when needed.
If we do end up drawing on our facilities, we think it will be a modest amount for a short period of time to bridge some cash outsource with inflows and monetizations. Our intention is not to utilize corporate debt for any extended period of time. Cyrus spoke to some of our capital recycling initiatives, which will generate additional liquidity for us. I would like to add that as we look forward, we are confident in our ability to generate liquidity as there continue to be opportunities within our operations whether through partial monetizations or full monetizations of businesses or through distributions of cash flow generated by our various operations. With that, I'd like to close our comments and turn the call back to over to the operator for questions
Questions and Answers:
Operator
(Operator Instructions) Our first question comes from Andrew Kuske with Credit Suisse. Your line is now open.
Andrew M. Kuske -- Credit Suisse -- Analyst
Good morning.I guess given we have Denis on the line, it would be helpful to maybe dive into Westinghouse just a little bit given what you delivered in the quarter. And then also your outlook statements on just EBITDA generation over the course of the year. So how should we think about just the future quarters given the skew of fuel assemblies that you had in Q1? And how does the rest of the year look?
Dennis chart Turcot -- Managing Partner and Chief Operating Officer
Well, again, I think, as Jaspreet mentioned, there is a natural seasonality that revolves around the fuel business. People take power plants down in spring and fall to refuel them and do related maintenance. So there is that natural seasonality that induces some lumpiness. There is also a little more extended cyclicality in the sense that different levels of work are done on each of these shutdowns. So what a plant does this year, the next time it refuels in 18 months or 36 months, the scope of work may be a little bit less or more depending on what they need to do. So that induces a little variation as well. So really, there is no practical way of providing guidance in that regard. It is just the nature of the work. And you should expect things to continue really the way they have over the next probably 18 months as a minimum.
Andrew M. Kuske -- Credit Suisse -- Analyst
Okay. That's helpful. And then, I do appreciate on the details on the game plan at Westinghouse. And now that you have closed off the Johnson deal and this is probably more a question for Cyrus is, how is the Clarios deal and the game plan there, is it similar to what you did at Westinghouse or different?
Cyrus Madon -- CEO and Senior Managing Partner
Similar and that we do have a plan around operational improvements, supply chain, capacity utilization at the plants, longer-term some commercial improvements as well. So it's this similar playbook that we'd be looking to Andrew.
Andrew M. Kuske -- Credit Suisse -- Analyst
Okay. Finally, just maybe for Jaspreet and just on the liquidity. So you had just shy of $0.5 billion of capital recycling activities to BBU, $750 million out the door for the JCI deal, $45 million for Teekay. What level of cash do you want to sit with at the top of the house? And what sort of preferred -- and then obviously, there is a lot of cash sitting in the underlying businesses that could be upstreamed to BBU. So how do you think about that dynamics when you thought HSO plays a closing in a few more weeks or a month or so?
Jaspreet Dehl -- Managing Partner, Private Equity
It's Jaspreet, Andrew. So we don't have a target level of cash that we want to be holding but we definitely want to have sufficient liquidity at the corporate level, so that we can be nimble and we can execute all of the initiatives that we have under way. We ended the quarter with $2.2 billion of liquidity. And if you, kind of, factor in all of the announced transactions, including Healthscope as well as all of the monetization activities that Cyrus highlighted, we still have kind of $1.5-ish billion of liquidity available to us. So we feel quite comfortable.
And then the second part is, as you mentioned, there is cash within the underlying operations and we are constantly planning and looking at all of our businesses and looking to realize value and potential monetizations to get distributions up to the corporate level. So we are feeling very comfortable about the level of liquidity that we have and confident in being able to generate more as we need to grow the business.
Andrew M. Kuske -- Credit Suisse -- Analyst
And that's great. And one final one, if I may. So just on Healthscope. I think the prior statements were USD 1 billion of equity that's the total amount. How much do you anticipate for BBU?
Jaspreet Dehl -- Managing Partner, Private Equity
To our -- currently, we're anticipating about $250 million from BBU for Healthscope. And as you're aware, there is institutional capital that gets invested alongside us so that number might move a little bit based on institutional partner participation but it's about $250 million.
Operator
Thank you. And our next question comes from Devin Dodge with BMO Capital. Your line is now open.
Devin Dodge -- BMO Capital -- Analyst
We can not hear you I'm sorry can you hear me better now. A little bit. Okay so this is actually on behalf of Devin. So could you share...
Cyrus Madon -- CEO and Senior Managing Partner
Devin. Devin, we cannot hear you. I'm sorry.
Devin Dodge -- BMO Capital -- Analyst
Can you hear me better now?
Cyrus Madon -- CEO and Senior Managing Partner
A little bit.
Devin Dodge -- BMO Capital -- Analyst
Okay. So this is actually Ish Senority (ph) on behalf of Devin. Could you share what led you to acquire Teekay Corps remaining interest in Teekay Offshore? And was Teekay Corp supporting Teekay Offshore in any from operationally?
Cyrus Madon -- CEO and Senior Managing Partner
To answer the second question, there is a little bit of corporate services that are being provided that over time will be fully transitioned at Teekay offshore. We have been transitioning it over time, and we're almost done, Denis. I'd say with the majority of elements, yes, the outstanding issues will be the IT systems, which we have focused on and will probably take at 12 to 18 months period. But we have an understanding with Teekay how that's going to be managed. We're confident. And what was the first part of your question?
Devin Dodge -- BMO Capital -- Analyst
Well, basically, what led to acquire their stake? Was it Teekay Corp coming to you and saying we need that liquidity? Or were you more proactive in asking to acquire their stake?
Cyrus Madon -- CEO and Senior Managing Partner
We have had ongoing discussions with them. And I think they are at a point in time where they just wanted to focus on other things and offered up their shares to us. And it seems like a reasonable transaction for us. So that's what happened.
Devin Dodge -- BMO Capital -- Analyst
Thank you.
Operator
And our next question comes from Geoff Kwan from RBC Capital Markets.Your Line is now open.
Geoffrey Kwan -- RBC Capital Markets -- Analyst
Just going back to the liquidity. So I think, the rough math that I was getting with the different puts and takes pro forma was netting out to about $140 million of cash. Just trying to understand, I guess, how to think about that in the context of how you'd describe it's current deal pipeline today and also to is , I mean, you've done a couple of equity offerings in the past like what would drive you to do that again? Is it something where you don't have the cash on hand to other pull order companies or what -- you've got on the balance sheet and you've got investment opportunities that you don't want to be tapping into the bank debt for a multiple, kind of, quarterly period. Is that the way to think about it or...
Jaspreet Dehl -- Managing Partner, Private Equity
So maybe, I'll break your question up into 2 parts. The first on the current liquidity. So I'm not exactly sure on the math on the $140 million, so we could can talk about that. But high level as I kind of highlighted, we had $2.2 billion , which includes the cash on hand, the marketable securities, which are liquid and which we can sell and kind of, convert to cash on a fairly short-term basis and then the lines.
So with all of the puts and takes that we've talked about, we think the $2.2 billion goes to about $1.5 billion . On the second part of your question around the potential offering. We have no need to do an offering at BBU. We've got sufficient liquidity today. We don't want to go on the line for a long-term basis that they are available to us to, kind of, provide a bridge facility if we need it. So there's no need to do an equity offering. And there is lots of monetization activities that we are looking at within our operations all the time. If we do any, kind of, capital markets activity, it would have to be on an accretive basis and build value for unitholders.
Geoffrey Kwan -- RBC Capital Markets -- Analyst
Okay. So if I understand you right, I had the same number in terms of $700 million delta there. If you are not looking to raise capital then that you are looking at other monetization opportunities for what your deal pipeline looks. I think, Cyrus, I don't know if you're able to comment on how the pipeline looks today, obviously, you've done a lot of transactions
Cyrus Madon -- CEO and Senior Managing Partner
Yes, I hate answering the question this way, but it, kind of, looks like it looks a year ago and 6 months ago. We're looking at lots of different things around the world. We've tried to make a couple of things happen. We just couldn't get there on valuation. Hopefully one of those -- 1 or 2 of those things will happen this year, but there's nothing eminent happening. But that said, we're always looking for opportunities, Geoff.
Geoffrey Kwan -- RBC Capital Markets -- Analyst
Okay. And then on Westinghouse, I just want to understand this better because I think, there was a couple of quarters ago, you mentioned from a revenue perspective at Westinghouse, Q2 and Q3 tend to be the stronger one, Q1 a bit less so and Q4 tends to be the season's weakest part, but obviously, the Q1 results are quite good. Just trying to understand, I guess, how much of the shifting on the fuel assembly shipments might have shifted into Q1 from Q2? And as a result, like what the operating leverage, and maybe, thinking about the seasonality from an EBITDA perspective, how to think about it?
Cyrus Madon -- CEO and Senior Managing Partner
I think the way you've characterized the norm is accurate with where the strongest quarters are. What really drove bump up in Q1 was more related to our new project business, which again is lumpy, not because of seasonality, it's more related to project activity. So you really ended up with a strong Q1 because of that, not the core business and that lumpiness is much more random, as I mentioned because it's related to the execution of project work.
Geoffrey Kwan -- RBC Capital Markets -- Analyst
And would those new projects have typically higher margins than the core business? Or would it be lower?
Cyrus Madon -- CEO and Senior Managing Partner
Yes, they are typically at or above the average margin of the business.
Geoffrey Kwan -- RBC Capital Markets -- Analyst
Okay. Last question I had was with the pending sales of BGIS and BGRS, I can understand if you don't want to provide the specifics on each company, but are you able to give a rough ballpark on the revenues and EBITDA for both of them combined on an annual basis?
Jaspreet Dehl -- Managing Partner, Private Equity
So, Geoff, we typically, kind of, talk about revenue and EBITDA on a segment basis. I think Cyrus, in his letter, had talked about the relocation business, in particular. It generated modest free cash flow for us. So it wasn't a big contributor to EBITDA in this segment.
Geoffrey Kwan -- RBC Capital Markets -- Analyst
Okay, so I guess, there is nothing much you can give in terms of the aggregate. Just from a modeling perspective, how we might want to be adjusting our numbers?
Jaspreet Dehl -- Managing Partner, Private Equity
Yes, it's not going to significantly change things. And once we close Healthscope that will be accretive to business services. I think, overall, it's not going to be significantly different.
Cyrus Madon -- CEO and Senior Managing Partner
These are -- these have -- just given the evolution of our business over 3 years, these have become quite small in the scheme of things. Both of them have become very small.
Jaspreet Dehl -- Managing Partner, Private Equity
Okay. Thank you.
Operator
And I'm not showing any further questions at this time. I would now like to turn the call back to over to Cyrus Madon for any closing remarks.
Cyrus Madon -- CEO and Senior Managing Partner
Thank you, everyone, for your attendance and support. And we look forward to speaking to you next quarter.
Operator
Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program, and you may all disconnect. Everyone, have a wonderful day.
Duration: 33 minutes
Call participants:
Jaspreet Dehl -- Managing Partner, Private Equity
Cyrus Madon -- CEO and Senior Managing Partner
Dennis chart Turcot -- Managing Partner and Chief Operating Officer
Andrew M. Kuske -- Credit Suisse -- Analyst
Devin Dodge -- BMO Capital -- Analyst
Geoffrey Kwan -- RBC Capital Markets -- Analyst
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