Craig Laurie - Chief Financial Officer Cyrus Madon - Chief Executive Officer Jaspreet Dehl - Managing Director.

Nick Stogdill - Credit Suisse Anthony Zicha - Scotiabank.

Thank you for standing by. This is the conference operator. Welcome to the Brookfield Business Partners' Second 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'd 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 second 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 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 Web site.

For the second quarter, Brookfield Business Partners generated Company FFO of $43 million or $0.40 per unit compared to $58 million for the same period in 2016. Our Company FFO benefited from strong results in our industrials operations segment, which were offset by lower results in our construction services and energy segments.

We reported net loss attributable to unit holders for the quarter of $6 million or $0.06 per unit compared to a net loss of $33 million in the second quarter of 2016. Our business services segment generated Company FFO of $17 million in the second quarter of 2017 compared to $15 million in the second quarter of 2016.

Results benefited from continued strength in the North American housing market and the inclusion of Greenergy, the road fuels service provider that we acquired in May. Our residential real-estate brokerage operations had strong results both in the U.S. and Canada.

During the quarter, we completed a small acquisition of a brokerage business in Quebec, enhancing our market position in the province. The positive contribution from these businesses was partially offset by lower results at our financial advisory business where actual lease started to pick up late in the second quarter.

Our construction services segment contributed $12 million of Company FFO in the quarter compared to $25 million in the same period of 2016. Contributions from our diversified portfolio were primarily tempered by a loss in a project in Australia, which is nearing completion.

We have maintained our backlog at a consistent $7.5 billion by securing six projects in the quarter. Our construction services segment is an area of our business that we expect to have some volatility in earnings during quarters due to the nature of the business and timing of project milestones.

As we complete projects, we work through settlement of final accounts with client and sub contractors, which lead to greater certainty on final project costs and the ability to secure more revenue. From time-to-time, this process results in lower or higher project profits than originally anticipated may create variability in our results.

Our energy segment generated Company FFO of $11 million during the quarter compared to $17 million in the prior year. Second quarter 2016 results included gains on opportunistic energy security investment, which has since been sold and reflected Brookfield Business Partners’ previous higher ownership position in Australia energy operation.

Our Australian energy operation continues to benefit from its hedge position for oil and long-term fixed price customer contracts for gas. Our Canadian operations benefit from slightly higher commodity prices during the quarter and a hedging program that reduces volatility and cash flows caused by fluctuation in natural gas prices.

The duration of the hedges is between six and 36 months, and is roll forward on a quarterly basis. Our industrial operations segment generated Company FFO of $8 million during the second quarter compared to $2 million in 2016.

Our graphite electrode operation reported improving in results over the same period in 2016, reflecting a reduction in average manufacturing costs of approximately $200 per metric ton. Our palladium operations also posted improved results with increased sales volume and a higher market price of palladium.

During the quarter, the Company filed an updated life of mine technical report with its nearly increase in mineral reserve and a longer mine life, and subsequently announced its plans for increased production.

Lastly, results in this segment have begun to benefit from the close of the acquisition of BRK Ambiental, our Brazilian wired services operation; although, the inclusion of related transaction expenses reduced results for the quarter.

Our liquidity remained strong with $750 million of available capital after funding the closing of BRK Ambiental, Greenergy and Loblaw gas stations acquisition. I'll now pass the call to Cyrus to speak to our strategy and growth initiatives..

Thanks, Craig, and good morning everyone. On June 20th, we’ve reached one year milestone as a public company. And at that time, we shared our vision for this business that is to be a growing business services and industrials company, generating a long term returns without undue risk.

Our strategy is to acquire and manage global operations with high barriers to entry, low production costs and the potential to benefit from Brookfield's real asset expertise, while maintaining a strong balance sheet, ample liquidity and a prudent capital structure. One year later, we're pleased with our progress in remaking our company.

Our vision and strategy remain unchanged and we continue to build and remake our portfolio. Today, I'm going to talk briefly about the current operations in our four segments, and then I'll spend more time speaking about our growth initiatives as we have been very active in pursuing and closing acquisitions since our last call with you.

Starting with our business services segment. The highlights in this segment in the second quarter were the results from our residential real estate brokerage operations and the inclusion of Greenergy. I'll be speaking about the Greenergy acquisitions later. Our residential real-estate brokerage operations had strong results, both in the U.S.

and Canada, bolstered by the continued strength of the North American housing market. In the U.S., we have a joint venture with Berkshire Hathaway, called Berkshire Hathaway Home Services, which operates a network of more than 29,000 agents operating in 28 states.

In Canada, we have a network of more than 18,000 agents operating through four brands, the largest of which is Royal LePage. In total, across both countries, we operate networks with more than 66,000 agents through owned brokerages and franchise operations.

Over the years, we found this business to be remarkably stable, and we continued expand this business as opportunities arise, both organically and through tuck-in acquisitions. And during this past quarter, we completed the small acquisition in Quebec to enhance our market position there.

As Craig mentioned, within our construction segment, second quarter results were impacted by a loss on a project in Australia, which is nearing completion. Despite this, our business is performing well. Our backlog at quarter end remained largely unchanged at over $7 billion. We have a high number of repeat clients across our operations.

With discipline around client selection, maintaining standard risk profiles and targeted margins, we generated -- this business has generated a successful track record over the last 55 years. And we believe that remains critical to our success.

During the quarter, we secured six new projects for a total value of about $1 billion, including two office properties in Australia.

And subsequent to quarter end, we continue to secure additional work, including a project called 19 Elm, a $1 billion mixed use development in the UK, which upon completion in 2019, will be one of the tallest residential developments in London.

As we move forward in the current energy environment, we continue to focus our business on lower cost operations with long life resources and contracted cash flows. We recently signed an agreement to sale Insignia Energy, a small oil and gas producer in Western Canada, which is expected to close in the third quarter.

While this sale resulted in a small impairment, we decided this with a better outcome for us than committing the additional capital this operation would have needed to maintain production.

The remaining operations in our energy segment are focused around two oil and gas exploration and production operations; one in Western Canada, and the other in Australia.

Ember Resources is Canada's leader in coal bed methane or CBM production with over 10,000 wells of predictable and scalable low cost CBM production with a current production base of approximately 280 million cubic feet per day. Ember benefits from low cost shallow drilling with long life reserves.

It's drilling is quick, efficient and has minimal land disturbance. Drilling to shallow depths takes an average of two days, costs approximately $175,000 per well compared to several million dollars for conventional gas wells.

New CBM wells produced at initial rates of approximately 90,000 cubic feet per day of natural gas, and produced for 25 to 30 years. As a result, this company has a very low production decline rate of less than 5%, which we believe to be among the lowest decline rates for natural gas producers in Canada.

Ember’s low cost structure positions into withstand periods of low prices. Ember’s all-in un-levered breakeven costs is CAD1.63 per thousand cubic feet equivalent, including transpiration costs to ACO, operating costs and G&A expenses, but before royalties, which are estimated at about 6% of ACO pricing.

Quadrant is our Australian producer it is a large scale, low cost oil and gas company, operating offshore in the northwest shelf area of Western Australia. Quadrant is one of the largest and most active Australian oil and gas companies, accounting for approximately 22% of domestic gas production in Western Australia last year.

With the acquisition of BRK Ambiental in April, equity invested in our industrial operations segment is now over $0.5 billion or 21% approximately attributable to unit holders. BRK Ambiental is our Brazilian water and sewage treatment operations, serving 15 million people.

The company has long term inflation adjusted concession contracts with municipalities, and we expect to generate stable long term cash flows. Over the next 25 years, the Company will invest significant new capital to improve and expand its networks, as part of the agreements with the municipalities it serves.

And as the Brazilian government moves on plans to extensively improve water and sewage services over the next two decades, we expect BRK Ambiental to gain a growing share of these improvements.

While our graphite electrode operation reported a small contribution for the quarter, it is a significant improvement over the same period last year, reflecting a $200 per metric ton reduction in average manufacturing cost at the operation due to our cost containment efforts.

And although much of 2017 production was contracted, I should say sales introduction was contracted at the end of 2016 in response to current very tight market and sharply rising spot prices for graphite electrodes, our Company has successfully raised prices with approximately one quarter of their customers during the quarter.

This should improve results through the remainder of this year. And if pricing remains strong, results should be dramatically better in 2018. I'll now move onto our recent activities, business development activities. As many of you know, Brookfield Business Partners enjoys wide flexibility in our mandate compared to most businesses.

And as a result, we have constraints in relation to the industries, geography, time horizon or form of investment we can pursue. During our first year as a public company, we have completed or in the process of completing, four new business acquisitions and four tuck-in acquisitions within our operations with a total value of almost $3 billion.

We pursue a wide variety of investments with an overriding objective of acquiring high quality businesses for value, meaning at a discount to a business' intrinsic value. This can include acquiring underperforming businesses where our operational expertise can improve a business, like GrafTech.

We may also acquire businesses where our global presence and real asset expertise enables them to grow. We call these platform companies and they include BRK Ambiental and more recently our acquisitions of Greenergy and the gas station operations of Loblaw.

It is possible that a platform company may grow substantially in the future, in which case, it could form a business segment within Brookfield Business Partners in its own right. In the case of Greenergy, we’re working with management to grow and further develop the business.

In this respect, we see opportunities to grow the Greenergy footprint into a large growing market such as Brazil, whereas a broader organization we have extensive operations to assist them.

Additionally, there are many tuck-in opportunities for Greenergy one of which we just completed in Ireland, where we acquired Inver Energy, an Irish based independent fuel supplier, giving it a presence in the growing Irish market for the first time.

Inver’s business activities include import and storage facilities, as well as fuel supply operations in Ireland and a retail fuel network operating under the growing Inver brand.

In the case of Loblaw gas stations and associated convenience kiosks, we've acquired a business with significant scale, strong customer loyalties for the PC plus royalty program and opportunities for further growth.

We believe we can grow this business through rebranding of existing stations, adding stations to the Loblaw Grocery Store network and adding value added services. Furthermore, our ownership of Greenergy gives us strong insight into additional gasoline retail opportunities.

And the combination of the two businesses will form a fuel distribution and marketing platform with international scope and growth potential. We expect each of these businesses to generate strong free cash flow, which should recover a capital invested within five or six years.

This has enabled us to get comfortable with the impact that increased consumer use of electric vehicles we have. We believe our forecast for these businesses reflect reasonable demand outlooks that include the projected effects of continued vehicle efficiency, hybridization of drive trains and electrification of vehicles.

Greenergy also plays a role in supplying sustainable resources as the UK's largest producer of biodiesel with ownership of over 300 kilotons of biodiesel production capacity.

These waste based fuels provide a low cost and sustainable supply of biofuel with which Greenergy can meet the UK's supply regulations, requiring that 4.75% of every liter of gasoline or diesel sold contains green renewable fuels.

Greenergy's biodiesel operations also serve an important environmental role by recycling used cooking oils from the food processing and production industry.

Subsequent to quarter end, we announced that together with institutional partners, we entered into an agreement to acquire 60% of Teekay Offshore, which is a subsidiary of Teekey Corporation, one of the world's largest marine energy transportation storage and production companies.

Teekay Offshore provides a wide range of marine services, including transportation, oil production, storage, tolling and offshore installation, maintenance and safety services to the oil industry, primarily focusing on the offshore oil regions of the North Sea, Brazil and the East Coast of Canada.

Teekay Offshore has a substantial portfolio of medium to long-term fixed rate contracts with high quality, primarily investment grade counterparties and several growth projects in the late stages of completion, which will contribute to near term cash flow growth.

As a fee based business focused on critical transportation and production services, it has limited direct commodity exposure.

Our investment represents an opportunity to acquire a high quality contracted cash flowing business, which presents in attractive markets and will enable Teekay Offshore to strengthen its capital structure and continue growing.

Today, we announced that together with our institutional partners and Great Canadian Gaming Corporation, we have been selected as the successful proponents by the Ontario Lottery and Gaming Corporation or OLG to operate and manage the gaming facilities in the Greater Toronto Area, known as the GTA Bundle.

The award of the GTA Bundle by the OLG is part of its plan to modernize its gaming operations, and is the fifth bundle to be awarded to a private operator. The GTA Bundle is the largest, and in 2016, its three facilities, Woodbine, Ajax Downs and Great Blue Heron Casino, generated gross gaming revenue of over $1 billion.

As a result of this award, we will acquire all the gaming assets in the GTA Bundle through a transition and asset purchase agreement with the OLG, and will have the exclusive right to operate these assets for a minimum period of 22 years. Together with our institutional partners, we will own a 49% equity interest in this investment.

Our partnership with Great Canadian will bring considerable gaming urban redevelopment and hospitality expertise to the operations. The Partnership plans to strategically reposition the GTA Bundle through development and modernization, which will include integrated property expansions that will increase the gaming offerings to service the GTA market.

The plan also includes developing leading world class facilities, consisting of state of the art conference facilities, hotels and premiere entertainment venues. We expect this transaction to close in early 2018.

So I think as you have heard and as you've heard us over the last year or over the past year, our business has become more diversified by industry and geography, and our organic growth opportunities are meaningfully higher. We continue to actively manage our current operations and develop prospects for organic growth.

In addition, we continue to pursue acquisitions, which will strengthen our business segments. Over the past year, we've also strengthened our teams across the globe, and have over 65 investment and operational professionals dedicated to Brookfield Business Partners. We also have the opportunity to draw on expertise from across the Brookfield platform.

I am also happy to announce that Denis Turcotte has agreed to step down from the Board of Brookfield Business Partners in order to accept the position with us as managing partner in our group where his operational expertise and experience will assist us in our business initiatives.

Similarly, we would like to welcome Anthony Gardner to our Board of Directors. Anthony is an experienced executive who has held senior positions in the U.S. and Europe with Palamon Capital Partners, Bank of America and GE Capital. And from 2014 to 2017, Anthony served as the U.S. Ambassador to the European Union.

We believe Anthony's advice and guidance will be an asset to our growing global business. Thank you very much for joining us today. And with that, I'll turn it back to the operator who will take questions..

Thank you. We’ll now begin the question-and-answer-session [Operator Instructions]. The first question is from Nick Stogdill of Credit Suisse. Please go ahead..

If I could just start with the GTA Gaming announcement this morning.

Cyrus, could you maybe talk a little bit about what attracts you to this opportunity? Should we expect returns similar to BBU's overall target of 15% to 20%? And then anything you can provide on maybe valuation or levels of capital commitment from BBU?.

We are operating under an agreement today, which somewhat restricts what we can say. But I think we can answer your questions readily. Our view, and given all the research we did along with Great Canadian Gaming, informed us that the GTA bundle operates in a very underserved market, and it has very attractive characteristics for gaming.

And it has a very limited gaming offering. So there is pretty strong growth potential here. In addition, there are very strong demographics in the GTA given population income levels et cetera to support gaming.

And we believe with improvements and expansions and additions of things like table games, the amount of gaming revenue to be had will be very, very substantial compared to where it is today. In addition, we're going to be operating under a long-term contract it was effectively an exclusive monopoly in the GTA.

And as you know, it's not often you see that type of opportunity. And if you look at the business that's in place today, it's been very, very stable and it has had consistently growing cash flows despite very limited capital and attention.

As to returns, we think this will fit very comfortably, generate very comfortably within our targeted range of 15% to 20%. And as to size of investment, it's not -- we could invest, the Partnership could invest, in total, probably $1 billion, but recognize that will be over a very long period of time. As I said, there this is 22 year concession.

And of course, we would be seeking to put some financial leverage on that. So I think that gives you some indication of the size and the scope of the opportunity..

So the $1 billion is more of a capital commitment from an investment perspective upfront plus working capital and CapEx.

Is that how to think about the $1 billion?.

I think that's right. And again, it's to be spent over a long period of time. This doesn't all happen in day one. And by the way, it's all subject to getting approvals from municipalities and the OLG on what our plans are over the longer term..

And then could this lead to more partnerships with GC in the future? I know there is number of other OLG assets that might be up for sale or for lease, or licensing..

So it could lead to additional opportunities for us with Great Canadian. It's not our firm intention to do anything else..

And then moving on to liquidity. Cyrus, you mentioned that you have ample liquidity at BBU. I think it was 750 before Teekay and may be 550 after that. And then obviously, you’ll have disinvestments in the next year. So could you just may be broadly talk about where you are on the liquidity to be at BBU.

And I mean you're a lot bigger than you were a year ago? I know you can re-lever some assets and you have a lot of cash at the operating companies.

So may be just help us think about what's the right amount of liquidity for the Company from with?.

I am going to -- Craig is going to answer the question. But just to put the OLG opportunity into perspective, remember that BBU will be 25% of 49%..

So 12 in a bit, overall..

That's right, yes..

So you're right. In terms of the liquidity, we ended the quarter after those acquisitions at about $750 million, depending on the final Teekay participation it will leave us with liquidity of between $400 million and $500 million, as you mentioned. We certainly think we could run our business at that level.

Having said that and as you mentioned, we do have a number of sources of additional liquidity; the first being the underlying cash flow of our operations; secondly, we'll be opportunistically monetizing mature assets in operations; third, will be strategically refinancing existing debt and incurring new debt.

It's also possible that, if appropriate, we could issue more equity. And on top of that, we certainly could not speak for Brookfield Asset Management but what we could say is they’re certainly very supportive of our Company and our growth. And believe if there was the opportunity that they would certainly provide us the financing to do so, if needed..

And just moving onto business services. So it looks like real estate, the real estate division, was a good driver of results this quarter. Just looking ahead, we know unit sales in Canada are down 7% through calendar Q2.

If we continue to see sales volumes slide, would that have a noticeable impact do you think on that division? And then secondly, the financial advisory business, do you have much visibility on the pipeline there, or is it pretty lumpy and hard to predict.

Is there anything you can talk on the outlook there?.

So on the real estate services business first of all it's very diversified across Canada and the U.S. So to the extent, there is a slowdown in the GTA, will be muted by that.

Second of all, the nature the vast majority of this revenue will be collected under franchise agreements, which are -- we actually get most of the fee we collect is actually a per agent fee. So as long as we have a large number of agents in our system, we're going to continue to get paid.

Of course, if the market got very, very weak, we’d have some impact. But it's the fee stream we have in place is remarkably stable. And then moving on to your second question, it is a lumpy -- that is a lumpy business but the pipeline is quite robust. So we are hoping for a better second half..

[Operator Instructions] The next question is from Anthony Zicha of Scotiabank. Please go ahead..

Cyrus, could you please provide some more insight on the graphite with an operational update, some color on the competitive landscape.

And on graphite electrode pricing, what is it year-over-year one do implement your new pricing to remainder of the clients?.

So, it really has been a remarkable turnaround in the business and a remarkable turnaround in the industry. Our cost per ton has dropped very substantially now, $200 a ton. We think we've taken out sustainably probably $100 million out of the business. So we've created a lot of value doing that.

At the same time, two other things have been happening; one, electric arc furnace steel production has recovered very, very strongly; and the weakest capacity in the graphite electrode industry has left the system. And the combination of those two things has driven pricing up to very, very strong levels, I'd say around close to trend-line levels now.

And so put it in context, last year, I think we were contracting in the $2,200 to $2,500 range. Spot prices today to the extent you can call them spot prices, but the business is contracting today at above $5,000 a ton. So as I said, if that stays stage in place, this business is going to have very, very strong results next year..

Turning over to construction operations, that $5 million settlement that's tied to an old contract.

And could we have some spillover in the subsequent quarters, or is it done once and for all?.

So $5 million settlement was in the prior year's result, I believe. So it was a one-time settlement fee related to a contract we had..

And what's your progress like the operating environment you mentioned that you have a backlog about $7.4 billion.

Is that a sweet spot, or are you comfortable with that? And my other part of the question is, could you lever your global construction expertise with today's announcement of the award in the GTA bundle?.

So answering the first question and I'll answer the second question first. We certainly could. Obviously, we have partners involved and we would have to make sure, from a governance perspective, everything was done appropriately. But we certainly have the capability to construct these facilities.

And in fact, we have constructed in the past very similar facilities in Australia, building very large scale casinos and entertainment venues. So it's not new to multiplex at all.

And can you remind me what your first question was?.

It's tied to the backlog, your $7.4 billion….

We're at a record high backlog, and we've been at that level for around a year now, and we're comfortable with that. We're not seeking to grow it substantially. We're very, very comfortable at that level..

And last part of the question, shifting to Europe, the UK particularly.

Have you seen any slowdown, or is it business as usual?.

We have not seen a slowdown in that. As I mentioned, we won a number of projects there and most recently won this $1 billion development, so that's all very, very recent. So we have not yet seen a slowdown there..

This concludes the question-and-answer session. I’ll now hand the call back over to Mr. Madon for closing remarks..

Thank you, everyone for joining us this quarter. And we look forward to speaking to you next quarter. Thank you..

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