Cyrus Madon - CEO Craig Laurie - CFO Jaspreet Dehl - MD.

Anthony Zicha - Scotiabank Nick Stogdill - Credit Suisse.

Welcome to the Brookfield Business Partners First Quarter 2017 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 an opportunity to ask questions. [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 Brookfield Business Partners' 2017 first quarter earnings conference call. With me today are Cyrus Madon, our Chief Executive Officer, and Jaspreet Dehl, Managing Director.

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 historical 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 first quarter of 2017, Brookfield Business Partners generated company FFO of $95 million or $0.88 per unit compared to $37 million for the same period in 2016. Our results benefited from a gain on the sale of our bath and shower manufacturing operations offset partly by ongoing repositioning initiatives at certain of our other operations.

We reported net income attributable to unitholders for the quarter of $66 million or $0.61 per unit compared to a net loss of $5 million in the first quarter of 2016. Our Business Services segment generated company FFO of $4 million for the quarter compared to $2 million in 2016.

We are starting to recognize the benefit of the two acquisitions completed in our facilities management business in 2016 and have also seen a modest improvement in our real estate services businesses with an early start to the spring selling season.

The positive contributions from these businesses were partially offset by a slow start to the year in our financial advisory business which tends to fluctuate from quarter-to-quarter.

Our Construction services segment contributed negative $3 million of company FFO in the quarter compared to $22 million for the same-period in 2016, as margin compression at three projects in Australia offset the positive contribution for the remainder of our business.

We currently have over 100 projects under construction and although negative impact on these three projects lowered the current quarter's results we are confident with the projects across our diversified business. The overall business is performing well and continues to benefit from a greater level of regional diversities than in the past.

Our Energy segment generated company FFO of $20 million for the first quarter compared to $18 million in 2016 and included $10 million of gains on the monetization of our remaining high yield debt position.

Results from our Canadian operations have improved with higher commodity prices during the quarter and we continue to benefit from the active cost management and operational improvements made over the past few years.

Our Australian operation continues to benefit from the large hedge position for oil and long-term fixed price contract for gas with our customers. This operation paid a $250 million dividend, a $25 million net to Brookfield Business Partners, during the first quarter.

Since our acquisition in June 2015, we have recovered approximately half of our capital invested. Our Industrial segment delivered company FFO for the quarter of $79 million compared to a loss of $5 million for the same period last year.

The monetization of our bath and shower manufacturing operations generated approximately $140 million of cash proceeds for Brookfield Business Partners and resulted in an $82 million gain for unitholders. Losses from our graphite electrode manufacturing operations were as expected as we continue to focus on operational restructuring efforts.

Volumes have improved significantly in 2017, but since graphite electrodes are primarily sold under annual fixed price contracts that are negotiated in the fourth quarter in advance of delivery, recent spot price movements are not expected to have significant impact on 2017 results.

Company FFO contribution from our palladium operations increased in the first quarter due to higher production volumes and with the current rebound in the market price of palladium metal, we are selling forward the majority of our near-term sales at our palladium mining operations as a means to de-risk our cash flows.

Our liquidity is strong having rates $400 million of equity in December 2016 following the closing of BRK Ambiental and the anticipated closings of Greenergy and the Loblaw gas stations we expect to have a liquidity of approximately $700 million.

We employ a conservative financing strategy with debt predominantly at the operating company level ideally laddering principal repayments over a number of years.

We believe that utilizing prudent and appropriate amounts of leverage at our operating businesses and maintaining substantial liquidity at the Brookfield Business Partners level both minimizes risk and maximizes flexibility. I'll now pass the call to Cyrus to speak to our strategy and growth initiative..

Thank you, Craig, and good morning everyone. We had an active first quarter maintaining momentum on a number of strategic initiatives to support the growth of our business. And I'm going to discuss these initiatives. But before I do that I'd like to touch on two areas within our existing business segments.

First, our construction services business which is a leading international contractor focusing on high quality construction primarily on large scale and complex landmark buildings and social infrastructure.

This quarter, as Craig mentioned, although the negative impact of margin compression at three projects in Australia significantly lowered results, the overall business is performing well. During the quarter we constructed over $1 billion in residential, office, and retail work.

We delivered six projects representing $1.8 billion of work which included a 63-storey luxury hotel in residence in Dubai, The National Library in Qatar, and a 43-storey residential tower in Melbourne. Our backlog remains strong at about $7.3 billion. We continued to replenish our workbook and secured $500 million of new work during the quarter.

We've been awarded preferred status on a number of sizable projects across our portfolio over the past few months and expect to convert these into contracts.

One such project is the University of Glasgow redevelopment in Scotland which puts us in a preferred position to deliver the university significant construction program over the next eight years. We've also secured the construction of a new 12-storey central acute services building part of the Westmead Hospital redevelopment in New South Wales.

We expect these contracts once signed to increase our backlog to a record level while maintaining targeted margins. The other segment I want to highlight today is our industrial operations. In January, we close the sale of Maax Bath and Maax Spas generating approximately $140 million of net proceeds to Brookfield Business Partners.

We believe Maax represents a great example of our ability to execute an operational turnaround strategy. After acquiring it at the beginning of the U.S. credit and housing crisis, we built Maax into an industry leader in North America with strong sales growth and efficient operation.

This in turn attracted interest from a strategic buyer at an opportune time for us to monetize this business and recycle capital into other opportunities. Our graphite electrode operation GrafTech is currently the largest business in our industrial segment and we are actively pursuing repositioning initiatives at this company.

We're still reporting losses from this operation as we expected but we are beginning to benefit from improved market strength in the industry and our operational improvement. Today we have rationalized capacity by shutting one plant and refocused efforts on the company's core electrode product.

Our management team has sustainably reduced annual fixed cost by $75 million while achieving productivity improvements at all major operating sites, improving product quality, reducing variable costs, and increasing investment in research and development.

Market conditions in the graphite electrode industry are improving after an extended period of weak pricing. Over the past six months rising steel production at Mini mills and the related increase in the consumption and restocking of electrodes has created a rapid increase in demand for electrodes.

Our Mini mill customers are returning to profitability and in addition Chinese steel exports have declined further supporting steel production outside of China. As a result, graphite electrodes industry capacity utilization has increased to 85% from a trough of about 65% early in 2016.

And this is driving a recovery in pricing with spot prices for graphite electrodes increasing by $1,000 per metric ton over the last few months with continued momentum. As graphite electrodes are primarily sold under annual fixed contracts in advance of delivery, recent spot price improvements will not have a major impact on our 2017 results.

However, if all of 2017 sales volume had been contracted at contract spot prices, GrafTech would have generated approximately $150 million of incremental FFO approximately $50 million to us, even after accounting for cost increases which we would expect to happen in a strengthening market.

While pricing has improved, it still remains below the 20-year average trend line price. So we are cautiously optimistic that this business will soon begin generating meaningful cash flow for us. And now I'll move on to our strategic initiative.

In February we entered into a definitive agreement to purchase Greenergy a leading UK provider of road fuels with over 300 kilo tons of biodiesel production capacity significant important storage infrastructure and an extensive distribution network which delivers over 18 billion liters of road fuels annually.

We believe this company offers us opportunities for growth as Greenergy is well positioned to continue expanding its service offering for its long-term UK customer base and we plan to broaden Greenergy's operations outside of the UK by leveraging our global presence.

Subsequent to the end of the quarter, together with our institutional partners, we announced that we entered into a definitive agreement to acquire 100% of the gas station operations of Loblaw Companies Limited for approximately $410 million.

Loblaw is Canada's largest grocery retailer and over 30 years has built one of the largest gas station businesses in the country consisting of 213 stations and associated convenience kiosks adjacent to Loblaw owned grocery stores.

We will be rebranding to the mobile fuel brand and are entering into an agreement with Imperial Oil to ensure that we have a highly competitive source of fuel supply across the country. This acquisition enables us to enter the business with significant scale, strong customer loyalty through the PC Plus program, and opportunities for further growth.

We expect to close this transaction in the third quarter of 2017. In April, we completed the acquisition of a 70% controlling interest in the largest private water company in Brazil, which we have renamed to BRK Ambiental or BRK. Concurrently, we are providing additional capital to BRK as well as acquiring a direct interest in related assets.

In total, the investment will be approximately $1 billion, our share of which is approximately $385 million. BRK operates water and sewage treatment systems serving approximately 17 million people just over 8% of the Brazilian population. The company has long-term concession contracts with municipalities which include an inflation adjusted tariffs.

Under these agreements BRK also invest significant new capital to improve and expand the networks typically over a 25 to 35 year period. So, we expect figure generate long-term cash flows which are not only stable but will grow over time.

While the vast majority of Brazilin do have access to water, water distribution in Brazil is generally in poor condition and sewage collection and treatment levels are low. This is a great opportunity for our business.

The federal government of Brazil has been focused on improving these service levels and has set a goal of investing more than $100 billion in water and wastewater services over the next 12 years. In addition, many state governments are cash strapped and have announced plans to privatize their water systems.

There are a few businesses with the scale of growth opportunity that BRK has due to these factors. Typically a business with stable and growing existing cash flows a leading market position and abundant growth opportunities would rarely become available to acquire.

And if it did, it would be highly sought after by multinational strategic buyers seeking to earn single-digit rates of return.

We however expect to earn significantly higher returns from our investment in BRK because there were many challenges that caused most logical buyers to not pursue this opportunity and that includes the fact that Brazil was in deep recession and its currency had weakened at the time we got involved.

The government has been mired in a corruption scandal that resulted in the President being impeached.

The seller of BRK was implicated in the same corruption scandal and forced to pay very substantial fines to authorities leaving it liquidity constraints and the transaction itself was multi-faceted given the need to deal with multiple partners and dozens of municipalities as well as execute a corporate Carve out which required us to take over management of the business immediately at closing.

Our ability to leverage Brookfield's strong presence and solid reputation in Brazil as well as our access to capital and scale of operations necessary to complete such a transaction allowed us to take a contrary in view of this opportunity and we're excited about the prospects that we believe this business offers us down the road.

So with these three additions Brookfield Business Partners has become more diversified by industry and geography and it's organic growth opportunities are meaningfully higher. Furthermore our global investment team has a strong pipeline of potential opportunities we are pursuing.

And as Craig mentioned we have very substantial liquidity and in addition we will seek to recycle capital for more mature businesses when the appropriate opportunity arises. So thank you for joining us today. That concludes my remarks. I'll now turn the call back to the operator who will take questions..

Thank you. We will now begin the question-and-answer-session. [Operator Instructions]. The first question for today is from Anthony Zicha with Scotiabank. Please go ahead..

Hi, good morning.

Cyrus, could you give us a bit more clarity with reference to the construction projects that impacted the quarter; is there any potential further drag on profitability?.

I'm going to -- I'll let Craig answer the question as it relates to accounting because it's important you understand it but before I do that I think the comments I make are, what happened are a combination of errors made in the tendering process for these three projects and escalation of costs.

And we believe the issues are isolated to these three projects the balance of the portfolio of projects are doing well. And I would also like to remind you this is a lumpy business, we will have periods of underperformance and we will have periods of over performance as well.

So that's just a bit of background on how these business operates but I think it's important for you to understand how the accounting works and Craig perhaps you could speak to that..

Sure. Hi Anthony. Multiplex records margin on each project based on a percentage of completion. Therefore there's an adjustment to expected profit, the past margin, and/or expected loss has to be written off immediately which is what occurred this quarter.

Although the negative impact on these three projects lowered the current quarter's results, it started to describe the Multiplex team is comfortable that there is not a larger issue rather excluding these three projects the business is performing well and continues to benefit from a greater level of regional diversity.

The remainder of the segments results are coming in roughly as expected..

Okay..

And just to finish off Craig's comments. So our estimates include our views of what costs are to completion, so we don't believe there will be a further drag from these projects..

Okay, excellent.

And Cyrus could you give us a bit of color of market conditions in the UK market and has there been any impact, I know we haven't seen any as of yet but Brexit?.

Yes. We have not seen anything seems materially in our business. As long as the UK is viewed as a major financial center which we -- our view is it will be for a long time to come, we don't anticipate a major significant impact to our construction business.

In fact what we are seeing I say just generally in our broader business is there continues to be very strong demand for high quality real estate in the UK and London, in particular, so that bodes well for our construction business..

And where do you see the greatest prospects over the next 12 months which markets?.

For construction?.

For construction?.

I would say we're seeing opportunities; we're bidding on work in all of our core markets Middle East with Dubai in particular, Qatar. We're very actively bidding across Australia and we're very actively bidding in the UK.

And we continue, we have I'd say more start-up like operations in Canada and India which we hope over the long-term will turn into more significant markets but that's going to take some time. But certainly in our core markets, we are bidding in all of them and we'll develop an active pipeline there..

Okay, great. And with reference to the industrial side GrafTech for instance we saw where you mentioned that we're seeing $1,000 metric ton increase on the spot market.

And how does that compare to the Q4 2016 pricing, is that baking in like a 33% price increase and just to give us a bit more of an idea like what's the average 20-year trend line like how far are we from that?.

Yes. So pricing is probably closer to 40% higher than Q4 2016. And prices were in the order of 2,200 --.

Yes..

Per metric ton and they've gone up about a 1,000 just to put it in context. And then to get to trend so takes us to roughly 3,200 and trend line would be closer to 3,600 per metric ton. That would be a long-term trend line price..

Okay. So there is a lot of torque in terms of the earnings power stemming from GrafTech..

There's a lot of torque..

Okay.

And then and my last question is with reference to Greenergy, what are the synergies that you're expecting to achieve with the acquisition of Loblaw gas stations operations?.

In the near-term, there won't be that many but as Greenergy builds that business in Canada and if we build a business of scale and we started spending the gas station business there could be more substantial synergies but that won't be in the immediate term..

The next question is from Nick Stogdill with Credit Suisse. Please go ahead..

Hi, good morning everyone. Just one follow-up in the construction services margin, how meaningful were these three projects to the overall business. I guess I'm just a bit surprised that there's overall 100 projects under construction of these three could I guess move the yield asset meaningfully..

Yes, one of them was ever more, much more significant scale and the other two were not of a huge scale. So, obviously we're -- we're also disappointed in the outcome but when we add up the losses from two projects in particular it have the impact of reducing our margins as you've seen in our results..

Okay, thank you. My second question could you may be just elaborate a little bit on the the growth opportunities you see with the Loblaw acquisition, is the thought to potentially build out new locations at existing stores and if so, what are the payback periods on new locations any color you can add there please..

Yes. So look there -- there are three -- there are three ways that we can enhance our profits in this business and grow the business. One is we think the existing business can be repositioned partly through revamp branding exercise, partly through managing the business differently, and increase the current run rate earning.

The second step would be to grow within Loblaw's existing portfolio of grocery stores and they have about a 1,000 stores across the country. So there is a pretty significant growth opportunity there. And then the third -- the third growth path for us would be to consider new stations outside of the Loblaw's network.

Possibly just building one-off stations and possibly even buying another network. So we have a few ways to grow and again we're going to build this business consistently with the way we do all our other businesses and that means we need to earn at least our targeted rate of return for BBU of 15% to 20%..

Okay.

Is one of those three buckets or anyone more important than the other in your view or the opportunity is particularly across the three of them at this stage?.

I think there are opportunities across all three of them today..

Okay.

One more if I may, looks like there's a lot of cash across your various businesses like the -- at the operating level, you would not be prepared to give you over time or is it available to you, if you need it for additional acquisitions or is it time they're going to used for reinvestment in the existing businesses at those may be $600 million across those various verticals..

Yes. So that cash moves up and down depending on what's going on in the business but we will either -- the cash will either be used for growth opportunities in a couple of cases may be debt reduction and otherwise the cash will be dividended up to the BBU level our share of the cash flow..

There are no more questions at this time. I will now hand the call back over to Mr. Madon for closing comments..

Well, that's good our call. Thank you very much for participating and we look forward to speaking to you next quarter. Thank you..

This concludes today's conference call. You may disconnect your lines. Thank you for participating. Have a pleasant day..