Jaspreet Dehl - MD, Private Equity Craig Laurie - CFO Cyrus Madon - Senior Managing Partner.

Alan Fleming - Citigroup Geoffrey Kwan - RBC Capital Markets Steven Ko - Starvine Capital.

Welcome to the Brookfield Business Partners' Second Quarter 2018 Results Conference Call and Webcast. [Operator Instructions]. Now, I'd like to turn the conference over to Jaspreet Dehl, Managing Director of Finance. Please go ahead..

Thank you, operator, and good morning. Welcome to Brookfield Business Partners' 2018 Second Quarter Conference Call. On the call today are Cyrus Madon, our CEO; and Craig Laurie, our CFO. Craig will start off by discussing the highlights of our financial and operating results for the quarter, and Cyrus will then give an update on the business.

After our formal comments, we'll turn the call over to the operator and take your questions. At this time, I'd like to remind you that in responding to questions and in 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 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. Thank you, and I will now turn the call over to Craig..

Thank you, Jaspreet, and good morning. We reported strong company funds from operations or FFO of $177 million or $1.37 per unit before incentive distributions. This compares to $43 million for the same period in 2017. Net income attributable to unitholders for the quarter was $119 million compared to a net loss of $6 million in 2017.

Starting with our industrial segment, where we reported company FFO of $94 million, up from $8 million last year. GrafTech's meaningfully, improved results contributed significantly to our company FFO this quarter.

In addition, we realized proceeds from GrafTech of almost $1.5 billion during the quarter, of which Brookfield Business Partners' share was $500 million, comprised of, first, the sale of share representing approximately 30% of the company to an initial public offering on the NYSE in April; second, $750 million promissory note repaid by GrafTech; and third, cash dividends.

North American Palladium, our Canadian palladium producer, also reported strong results this quarter, as the company continues to record increased production volumes and benefit from stronger market pricing per palladium.

Since we acquired the company 3 years ago, we have enhanced the consistency of production and palladium production has increased by 25% to approximately 218,000 ounces per year. We've also focused on exploration and expanded the company's proved and probable reserves by 90% to 39 million metric ton.

Our industrial segment also benefited this quarter from the contribution from BRK Ambiental, our water treatment and distribution operation in Brazil, which we acquired in April of last year. Moving to our business services segment, which generated company FFO of $61 million in the quarter, up from $17 million in 2017.

Our results included an after-tax net gain per unitholders of approximately $46 million, with the sale of our U.S. residential real estate services joint venture to the co-owner.

Results at our road fuel distribution and marketing business were weaker, due to lower contributions from our Brazil operations, partially offset -- partially as a result of truckers strike over the fuel price increases, which significantly distribute -- disrupted the supply chain.

This is the first full quarter contribution from our gaming operation One Toronto, which operates 3 gaming facilities in the Greater Toronto area. We recorded strong results with increased gross gaming revenue at all 3 facilities.

We made considerable progress during the quarter on our development plans, and they've received all major municipal and provincial approvals required for the redevelopment of these sites into modern, multiuse facilities.

The first-stage renovation work has already started at Woodbine, which is our largest site located adjacent to the Toronto National Airport, as part of a two-stage redevelopment. Our construction services segment contributed $5 million of company FFO in the quarter compared to $12 million in 2017.

Operating results were meaningfully improved, but offset by an increase in tax expense. Our Australian operations reported strong and stable performance, as we continue to return to more normalized operations in these regions.

We expect our refocused business in the Middle East to be more profitable over a long term, where our business there is smaller and more bespoke.

As an example -- is our UAE project called the Etihad Eco Residents, which we've built to be one of the most resource-efficient buildings in the Middle East region, and in June it received the prestigious Green Residential Building award endorsed by the World Green Building Council.

New activity was particularly strong in Australia, and our backlog at the end of the quarter was $8.5 billion.

Major new projects secured during the quarter included 1 Denison, our commercial tower in Sydney for AUD 330 million, Queen’s Place Tower 1, a residential tower in Melbourne for AUD 350 million, and 300 George Street, a residential tower in Brisbane for AUD 290 million, which we are already developing -- where we are already developing a hotel and office tower.

Our energy segment company FFO was $31 million in the quarter compared to $11 million in the second quarter of 2017. Our results benefited from the incremental contributions of Teekay Offshore, our provider of marine oilfield services, which we acquired in September last year.

This was partially offset by lower results from Ember, a Western Canadian national gas operation. Ember is an -- is operating in very challenging pricing environment with near-term natural gas forward pricing at about $2 per mcf. Turning to the balance sheet.

We increased our revolving, unsecured credit facility with consortium of global banking relationships to an aggregate of $825 million. This brought our liquidity to approximately $2.2 billion with all of our corporate credit facilities undrawn. I'll now pass the call to Cyrus to speak to our strategic and growth initiatives..

Thanks very much, Craig, and good morning, everyone. We are very pleased with our performance this quarter, in particular, the exceptional results in our industrials segment. GrafTech's results this year have been nothing short of spectacular.

As Craig mentioned during the quarter, we continued the process of monetizing our investment with the partial IPO, which reduced Brookfield Business Partners' interest in the company to 30%.

This equates to a current market value of about $1.8 billion and at this valuation, including the proceeds we've realized to date, our original $295 million investment 3 years ago is now worth about $2.7 billion. I wanted to also provide you today with an update on our activities at Teekay Offshore, which we acquired in September last year.

This company is a market leader in offshore production services, controlling approximately 40% of the global fleet in the shuttle tanker market and is amongst the largest players in the FPSO market focused on midsized projects.

We like this business as its fee based, servicing high quality, primarily investment-grade counter parties and has limited direct commodity exposure. During the quarter, the company completed a $500 million bond offering, which yields 8.5% comes due in 5 years.

This offering refinances existing notes in the company and substantially extends the company's debt maturities. Brookfield Business Partners' subscribed for $226 million of the offering and provides us with a considerable, incremental return over -- return on cash today.

Following the recapitalization of Teekay last year, we were holding a $200 million promissory note due from Teekay, $84 million of that was Brookfield Business Partners' shared. We also converted this note into the same series of bonds. These bonds are all marketable, public securities, which we can sell as and when we have an alternative opportunity.

With the completion of this offering, we were able to exercise an option in July to take a controlling ownership of Teekay Offshore. Teekay's business plan is to substantially deleverage over time, which is, support stronger debt and equity valuations. We also made significant progress in the quarter on our previously announced transactions.

Starting with our acquisition of Schoeller Allibert, which closed in May. Schoeller is one of Europe's largest manufacturers of returnable plastic packaging systems.

Returnable packaging is a growing segment that has favorable long-term trends, driven by an increased focus on sustainability and with the increasing complexity and automation of supply chain logistics. Our plan is to grow Schoeller both organically, by entering new markets and developing new products and through bolt-on acquisitions.

And earlier this week, we closed our acquisition of Westinghouse Electric Company, which we purchased with our institutional partners for about $4 billion. Brookfield Business Partners funded $405 million of the $920 million equity purchase price to acquire 44% of the business.

And the rest of the capital was funded with approximately $3 billion of long-term debt financing. This is a really exciting opportunity for us. Westinghouse is one of the world's leading suppliers of infrastructure services to the nuclear power industry.

It provides critical maintenance and repair services as well as highly engineered fuel spare parts and equipment to nuclear generating facilities, located around the world. Last year, Westinghouse was forced to seek bankruptcy protection after the failure of its noncore construction business.

And that construction business is no longer part of the business we acquired following its emergency from bankruptcy. So we had the opportunity to sponsor this company's exit from bankruptcy and acquire a world-class business. Westinghouse has some characteristics that we believe make it a fantastic opportunity.

First, it's a market leader with high barriers to entry. It is the global technology leader with approximately half of the world's nuclear reactors running on its technology. This makes it the preferred provider of services to these facilities.

With it's highly skilled workforce, intellectual property and the significant regulatory requirements in the nuclear industry, Westinghouse maintains the largest or second-largest market share in most of its markets.

Second, Westinghouse has stable and predictable revenue, over 80% of its revenue is generated from recurring services, primarily under long-term contracts. The infrastructure services it provides are largely nondiscretionary and are critical to sustaining a customers' operation.

So customers are disinclined to jump ship and Westinghouse enjoys high customer retention rates with blue chip counterparties. Finally, we often look for opportunities to improve profitability. Westinghouse generated adjusted EBITDA of about $440 million in it's latest fiscal year, which ended in March of this year.

During its bankruptcy, its been undertaking a large cost reduction program to improve its profitability and focus. We have identified significant, additional operational improvements, which we intend to pursue with the management team and believe have the potential to meaningfully increase EBITDA.

We think we've been conservative in our approach to making this investment, building in the assumption of a decline in customer nuclear facilities over the next 50 years. And even in this scenario, we believe we will earn a very attractive return on our investment, given the strong cash flow generation of this business.

And we think, there's up side in addition to that. As a linear, more focused organization, Westinghouse is well positioned to grow within the nuclear sector through additional cross selling and service offerings, and we will look to expand into new and underserved markets.

Global demand for electricity is forecasted to grow driven by population and economic growth, and nuclear is a growing form of clean energy along with renewables. In closing, our business has performed well during the first half of the year, and we continue to build and diversify our operations.

Our focus through the second half of the year will be on on-boarding Westinghouse, progressing capital recycling initiatives and servicing new investment opportunities. Thank you very much for joining us today. With that, I'll turn it back to the operator for any questions..

[Operator Instructions]. Our first question comes from the line of Alan Fleming with Citigroup..

I'll start with Westinghouse. I appreciate the color you provided there. I know it's -- you closed on the deal a few days ago, so it's early. But maybe can you walk us through the first 100-day plan or so? And what you hope to accomplish with the management team? You've talked a little bit about synergies there, it is a world-class business.

What should we be looking for in terms of opportunities from an operational standpoint?.

Yes. So it's a good question, Alan. First of all, I should tell you that the company's been very cooperative with us, and we've had a team of people inside the company working with management already.

And our go forward plan is really to focus on organization structure and to make sure it's the most effective structure that we can have in the place, focus on supply chain, focus on procurement and focus on commercial strategy. Those are the 4 major areas that we'll be focusing on immediately..

Okay, appreciate that. I'll follow up with a question on your liquidity. I see you increased your credit facility in the quarter, you have a close to $1 billion of cash at the corporate level ahead of closing the Westinghouse deal, subsequent to the quarter end.

Maybe if you can just -- talked about the cash balance, what are you comfortable with today? Do you expect to fund Westinghouse with cash on hand? And I did notice that you continue to build cash at the construction operating unit level.

Maybe talk about how much cash you need to run that business efficiently? And can you think about dividend -- dividending some of that cash back up to the BBU corporate level?.

So, Alan, I'm going to throw that over to Craig..

So in terms of our corporate cash, as you mentioned, it was $927 million at the end of the second quarter. In terms of what we think that targeted level should be or it -- we don't necessarily have a specific number in mind.

We are always mindful of our liquidity and believe we have sufficient liquidity available to execute on our strategic initiative. We have a number of sources for our cash, as you mentioned. Obviously, there's cash on the balance sheet, there's cash from operations, there's the revolvers.

But then there's also recycling capital, which we've done a number of times over the years. So we certainly believe we do have sufficient liquidity at this point to execute our plan. As it relates to Multiplex, you're right, I think, there's over $300 million of cash within that segment. There really does sort of two parts.

It somewhat comes down to timing, I would say, it's just -- it's probably a little bit higher than normal just based on timing of working capital and payables and those types of things. I would say, at this point, we're not expecting a dividend in the very near future.

But to your bigger point, certainly, over the years, we have received sort of regular dividends over the years. So I would expect one again in the future..

Okay. And Cyrus maybe I can squeeze one more in on Teekay. You gave some good overview there. Maybe just talk about the thought process for the actions you took in the quarter.

And can you -- should we expect to see any change in terms of how you're managing the business going forward now that you have a controlling interest?.

Yes. So look, on the second question, I don't think anything really changes. We have a 60% interest in the company. The Board of Directors has been exceptionally cooperative with us. We had one of our own people in as CFO, and we are -- we've been helping the company with strategy, capital management and project management.

We'll continue doing that going forward. So the way we manage it won't change. Our thought process on assisting the company is simply -- this is one of our businesses. We will always support our businesses.

I think, they issued a bond offering during a relatively choppy time for high-yield bonds, and we simply wanted to provide them with assistance and part of the reason is we are highly, highly confident this company continues to deleverage. It has amortizing debt at the, I'll call it, at the vessel level.

And for that reason over 2 or 3 years, the leverage of this company will drop very substantially. The credit profile will look very, very different from where it is today, and we just thought perhaps it was a little bit misunderstood in the market place. We're very close to it. So we're highly confident..

Our next question comes from the line of Geoff Kwan with RBC Capital Markets..

First question was just -- maybe start off on Multiplex.

Are you still on track to -- on terms of expectations on improvement financially in the second half of this year and onwards in line with what you've previously talked about in terms of your expectations of improvement in that business?.

Yes, very much so, Geoff. I think, what we've told you guys is we won't be fully recovered this year. But going forward, after that, we expect to be back into our regular profitability levels.

I would say that, generally, our businesses in Australia and Europe are more or less fully recovered, and we've just got the final effects of a couple of projects left over we're working through. And in the Middle East, we still have some issues, we're working through that. That's the smallest part of our business.

But that all being said, we're highly confident that we're back to normal..

Okay, thanks for that. And then on the Greenergy issues in Brazil.

Are you able to say, like, how much who've hit that had negatively impacted the company EBITDA in Q2? And then also is this really more of a Q2? Maybe it drags in a bit of Q3 issue such that, like whatever number you might have modeled out for 2019 for that business, like that's unchanged.

In other words, this is just pure noise? Or is there other impacts that we need to think about?.

Yes. So the number was substantial. We haven't disclosed it individually, but relatively substantial, given the size of the business, and -- but I would -- and we think we'll have some lingering effect in the second half of the year. But it's not as big an impact. And going forward, after that, it should not be an impact..

Okay, okay.

But there's no number you can give in, as to how it hurts the business services EBITDA in the quarter?.

No, I don't think we've disclosed that, Geoff..

Okay. I would say that, that inner credit transaction was announced on the BIP side. I know that there was a comment about, kind of, a lower return profile as to maybe giving him as to why it might not have been done through BBU.

Was that it? Or was there any other issues why it was more obvious of a fit for BIP over BBU?.

So once in a while and very rarely, we [indiscernible] comes across the transaction that might fit in either BIP or BBU. And when that happens, we sit down and we think about what the most appropriate home for it is.

In this particular case, just given the exceptionally strong, current cash flow characteristics, we just couldn't get to the return threshold we need at BBU, given -- we'd be quite happy to take the return on the growth of that business, but given where it needed to transact and did ultimately transact, it just didn't work from a return profile for BBU.

And our understanding is the parties that we're looking at this business were primarily infrastructure style investors. And in fact, there was a similar business called Reliance that sold recently and it was sold to an infrastructure buyer as well..

Okay, thanks. And if I can sneak in one last question. Just the broader-deal pipeline.

How does it, kind of, stack up today? And maybe how does that compare versus what it might've been a quarter, two quarters ago?.

I think it's pretty consistent, Geoff. There are a few things that are in late-stage diligence or negotiations. Unfortunately, we had a couple of deals where we put a lot of that work and effort into, we just, ultimately, couldn't reach an understanding on valuation, but we are confident in our pipeline.

It's always pretty robust and it's a global pipeline. So we're pretty confident. I can't tell you when we're going to close anything or announce anything, but we've got a pretty robust pipeline today..

Our next question comes from the line of Stephen Ko with Starvine Capital..

My question is on BRK Ambiental. I don't -- I didn't notice any kind of high-level comments in the disclosure or it's all -- there was also come together with all the industrials. So I was wondering if you just could give a high-level overview on how this investment is working out for you? First of all.

The reality on the ground versus your expectation when you're doing the due diligence..

Yes, thanks, Stephen. So look, I'd say, we're in our first year of ownership. We have a new CEO that's put in an entirely new senior management team in place. So it's very early days for us. And I'd say, we're generally performing as we had hoped. If there's an area where we would like to see some improvement, it's just on growth opportunities.

Given the political situation in Brazil, not many new concessions have come to market, but we expect that to change as the political environment improves..

Interesting. And also the last conference call, you made some reference to decentralization of the management and a change in capital allocation.

Can you give some color on the implications of that? So, for instance, what decentralization means on the ground? And also on the capital allocation? How that is being handled differently by current management versus previous owners?.

So, look, one of the things we did when we bought the company is we centralized a lot of the functions that were previously decentralized. So the new management team has been doing that and has achieved that. That's just the way they're going to run the business going forward.

And as for capital allocation is, our long-term view is, over time, we should be able to attract, I will say, infrastructure-style capital for our more mature assets once they've reached a mature state, and most of them have not, yet.

But we still have work to do and our objective is to finish that work, bring concessions to a mature stage, and there's a possibility we can bring in then new capital into those concessions at a highly accretive valuation to Brookfield Business Partners.

And take that capital and reinvest it into, what we would refer to as, more development-type projects..

Okay.

So if I'm understanding you correctly then, as these assets reach a certain level of maturity, you'll be able to recycle the capital, say, lower cap rates, and reinvest it into new opportunities?.

Correct..

Okay. And if I could just get one last question in. On Westinghouse, understandably, it might be early days, but understand that $440 million kind of run rate or 12 months trailing EBITDA, if you will, that is incorporating already some amount of cost out that was already underway.

So I'm just curious, if you could, to whatever extent possible, elaborate on what kind of run rate exists for cost out in dollar amounts, that would be helpful definitely in the medium term.

And also if you have any other aspirational targets in the midterm for these operational improvements, if you could have a ballpark figure on any of these synergies?.

Yes, so look, it's too early for us to start throwing out numbers. What I'll tell you is in our mind, the improvement opportunity is meaningful -- very meaningful. And we're working on it. I think at our Investor Day in September, our plan is to provide a preview of where we -- what we think the possibility is for this business. So stay tuned please..

There are no further questions at this time. I'll turn the call back over to you..

Well, thanks very much, everyone. We appreciate your attendance and look forward to speaking to you next quarter..

That concludes today's conference call. You may now disconnect..