Welcome to the Brookfield Business Partners' 2018 Year-end Results Conference Call and Webcast. [Operator Instructions] Now I’d like to turn the call over to Jaspreet Dehl, Chief Financial Officer. Please go ahead Ms. Dehl..

Thank you, operator and good morning, everyone. Welcome to the Brookfield Business Partners' 2018 year-end conference call. Before we begin I'd 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 risk factors, 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 Officer; and Peter Gordon, our Chief Operating Officer. I will pass the call over to Cyrus to provide an update on the business after which Peter will provide an operational update for BRK Ambiental our wastewater business in Brazil.

And finally I will discuss the highlights of our financial results for the 2018 fiscal year. I'll now pass the call over to Cyrus..

Thanks Jaspreet and thanks everyone for joining us today. 2018 was another successful year for our business. Our strong growth reflects contribution of our most recent acquisitions as well as ongoing improvements to our business and organic growth of our business.

In addition to strong financial results, we invested about $500 million in new acquisitions during the year of which our notable acquisitions were One Toronto, our gaming operation; Schoeller Allibert manufacturer of returnable plastic packaging and our largest acquisition was Westinghouse, a global leader, in fact, the global leader in the provision of services to the power industry.

This is a truly high-quality company and we expect it to be a strong cash flow generator for many years. During the year, we generated $1.5 billion from monetization activities from a combination of company sales, IPO and distributions.

In November, we closed the sale of our Australian oil and gas business, Quadrant Energy, for net proceeds to BBU of $130 million. This was a very successful outcome for us. We also generated net proceeds of $120 million on the sale of our U.S.

brokerage joint venture earlier in the year and at GrafTech, we partially monetized our investment through the sale of shares, which together with distributions from the company resulted in total cash proceeds of $1.2 billion to BBU and we continue to own 27% of this company.

In addition to the closed acquisitions I've mentioned, we're continuing to work towards closing two new transactions. During the fourth quarter, we announced our agreement to acquire Johnson Controls Power Solutions business together with institutional investors.

This is the leading global producer of advanced batteries for automakers and aftermarket distributors and retailers for use in nearly all types of vehicles, including hybrid and electric models. We like this business because its strong fundamentals have supported its steady growth throughout business cycles.

Most of power solutions profit is generated in the aftermarket where the noncyclical nature of aftermarket demand and the company's position as a low-cost producer result in stable cash flow generation and earnings resilience and if any of you have had a car where you're battery has died, you know you really don't have a choice but to go and buy another one.

In fact the company's track record of increasing market share margins and cash flows is remarkable and it's EBITDA has increased in all but one of the last 15 years and that was during the credit crisis and it bounced back immediately in the following year.

The company has long-term customer relationships in more than 150 countries, which provides it with barriers to entry and it support future profitability.

We expect to close this transaction in middle of this year, fund it with about $3 billion of equity of which BBU share will be about $750 million and approximately $10.2 billion of long-term debt financing.

More recently, we entered into a definitive agreement together with institutional partners to acquire up to 100% of Healthscope for up to $4.1 billion of which BBU expects to fund approximately $250 million of equity. Healthscope is the second largest private hospital operator in Australia and the largest pathology services provider in New Zealand.

Over 80% of the company's funding is from private health insurers, the remainder from government and other sources. As a high quality provider of essential services, Healthscope has delivered continued growth in revenue and EBITDA for many years.

Within the highly concentrated private healthcare market there is significant advantages of scale and meaningful synergies and Healthscope is in a position to leverage its scale to create a cost advantage over most competitors.

In addition the company is well positioned to benefit from very favorable demographic trends, which are increasing the demand for private health care and from the substantial embedded growth within the company as a result of recently completed and ongoing significant developments, redevelopments and expansions.

This transaction is subject to regulatory and shareholder approvals and is expected to close in the second quarter toward the end of second quarter of this year. So that completes my update on our strategic initiatives. Before I hand the call over to Peter Gordon, I wanted to spend a little time on two topics.

One is our view of intrinsic value of BBU and the other is the use of leverage across our business.

Our approach to intrinsic value for BBU considers both the current value of our existing businesses plus the growth in value we're likely to achieve through capital recycling, meaning that the reinvestment of proceeds from mature businesses into new opportunities.

We believe our recent capital recycling initiatives have meaningfully increased the intrinsic value of our business, which will be evidenced in part by substantial growth in FFO per unit this year. Recently the discount between the trading price of our units and our view of the intrinsic value of the business became substantial.

So we began to buyback our units as it presented a very attractive use of capital. While we're conscious of short-term unit price performance, our overall objective remains the same as what it was when we created BBU in 2016 and that is to deliver an attractive long-term risk-adjusted return to unitholders, primarily through capital appreciation.

We believe that even though our cash flow and earnings maybe volatile from time-to-time as a consequence of our investment strategy, the intrinsic value of our business will continue to grow over the long term.

Moving on to our approach to the use of leverage, at BBU our financial risk management is designed to protect our overall business during challenging circumstances, maximize flexibility across our activities and utilize leverage prudently to enhance the returns we earn on our invested capital.

We do this in a few ways; first, by maintaining substantial liquidity at the parent company level. Second, ensuring that each business is financed without recourse to BBU or other businesses so that we are never forced to support a business that is impaired, although we may choose to do that.

And third, we are prudent in our use of financial leverage at the operating company level both at the time of businesses acquired and throughout our ownership of that business.

At the operating company level, we seek to borrow longer-dated debt with maturities at least five years out and at levels of debt service that the business can readily sustain.

Our goal is to have limited or ideally no financial maintenance covenants so that in the event of business experiences a reduction in earnings, we aren't forced to repay its debt.

In some cases, it may be appropriate to increase debt where business is a stable, cash flow generation operation while other businesses may require reduction in indebtedness and we have examples of both of these.

We purchased Westinghouse last year based on the recurring nature of the company's revenue and cash flow, we were able to get comfortable with what may appear to be a high level of debt being $3 billion relative to our equity investment of $920 million.

We were comfortable with this based on the anticipated go-forward cash flow generation considering reasonable assumptions on operational improvements relative to an interest rate on the debt of 6.9%, the complete absence of financial maintenance covenants, no guarantees from or recourse back to BBU and seven years to maturity.

In contrast, GrafTech, our graphite electrode operation we determined that the business required a reduction in indebtedness and we paid down debt with additional equity when we bought the business, which positioned the company to withstand challenging underlying market conditions.

We maintained those lower debt levels while we re-positioned the business and then conservatively increased debt levels, only once the business was positioned to generate a stable and predictable cash flow. Looking at our acquisition of Power Solutions, once again we'll be taking on what would appear to be a high level of debt $10.2 billion.

But we already have fully committed financing in place for this acquisition from a group of global banks. Like Westinghouse this debt has been committed on a basis we consider to be prudent, with maturities of seven years, no financial maintenance covenants and no guarantees from/or recourse back to BBU.

In addition the interest cost is very favorable and the business can readily service the debt and still generate substantial free cash flow. So we're comfortable with this transaction and confident that in partnership with its management team we'll continue to grow this world-class business. Thank you and I'll now hand the call over to Peter Gordon..

Thanks Cyrus. This morning we wanted to provide you with a brief update on our investment in BRK Ambiental. As many of you know, this is our municipal water and sewage service business in Brazil that we acquired in April of 2017. BRK is a large growth platform for us.

We operate in over 185 municipalities and provide services to approximately 15 million Brazilian citizens. Over the past two years, we've been focused on business and operational improvements.

We've recruited a new senior management team, installed a water quality assurance program that meets world standards, we've improved workplace safety performance and implemented a centralized procurement and compliance process.

We've largely achieved this operating plan and now we're shifting our focus to managing our large capital projects, which are underway that fell slightly behind our plan in 2018.

In an effort to take advantage of this large growth opportunity, we also expanded our lending relationships last year, providing diversification of counterparties and this should reduce BRK's overall cost in the longer term.

With the vast majority of Brazilians having access to water, the related infrastructure however is generally in poor condition and sewage collection and treatment levels remain at unacceptable levels.

During 2018 BRK laid 585 kilometers of network pipes and completed nearly 100,000 new connections to homes and businesses, adding more customers to our network who in turn began to pay for our services and as we noted in our disclosures materials in the fourth quarter, BRK secured a material contract amendment under an existing PPP in the City of Recife.

This is one of our largest and most valuable projects. It involves the build-out of a modern sewage network for municipality of 4 million people in the Northeastern State of Pernambuco. Under the amendment, BRK is now responsible for a greater share of the project capital.

In return for changes in the project schedule and tariff increases over the last few years. These improvements further strengthens BRK's profile and competitiveness in the country and position us well for continued growth. Now with that summary, I'll turn the call over to Jaspreet..

Thank you, Peter. Brookfield Business Partners reported company's FFO for the year ended December 31, 2018 of $733 million or $5.67 per unit compared to $252 million or $2.22 per unit in 2017. Net income attributable to unitholders for the year was $422 million compared to $24 million in 2017.

Net income per limited partnership unit was $1.11 compared to a per unit loss of $1.04 in 2017. The acquisitions and monetizations we made over the past year has significantly changed the profile of our business.

And we have adjusted our operating segments to reflect our increased activity in infrastructure services and reduced activities in the Energy sectors.

This year we made the following updates; we included our Construction Services business Multiplex, within our business services segment, we introduced our Infrastructure Services segment, which at year-end includes Westinghouse and Teekay Offshore and with the sale of our Australian oil and gas operation Quadrant Energy, we allocated our remaining Energy businesses to our industrial operation.

So getting into the results by segments, starting with our Industrial segment, we reported company FFO of $470 million for 2018, up from $163 million in the prior year.

Our results benefited from significantly stronger performance across GrafTech throughout the year and an $82 million after-tax gain on the sale of Quadrant Energy during the fourth quarter. North American Palladium also reported strong performance for the year, primarily due to stronger palladium prices.

Analyst consensus on palladium pricing continues to be over $1,000 per ounce based on a global supply deficit and continued strong demand for the metal from the automobile industry. Our Infrastructure Services segment generated company FFO for the year of $195 million compared to $21 million in 2017.

Higher results reflect contribution from Teekay Offshore. Teekay Offshore performed well in 2018 compared to the prior year. The company completed the last of its growth projects that were underway when we acquired the business, and these new vessels have driven improved financial results.

Teekay Offshore further benefited from a one-time settlement payment received from a customer in Brazil, relating to previously terminated charter contracts. Our other infrastructure services business Westinghouse has performed very well since our acquisition in August last year.

The business experienced strong performance in its nuclear fuel operation in the United States and on equipment supply projects in the Middle East and Asia. During 2018 the world's first three power facilities using Westinghouse's AP 1000 technology began commercial operations in China.

And the fourth facility achieved commercial operation early in 2019. Supported by the generation of strong cash flow during the year and a significant liquidity at year-end, Westinghouse issued a $315 million distribution, approximately $140 million to Brookfield Business Partners in December last year.

The distribution was made from excess cash on hand at the company at the end of the year. This returns approximately one third of the capital we invested in the business just six months ago.

We continue to work with the management team to implement our business plan to further enhance profitability at Westinghouse by enhancing the supply chain and the customer focus. Moving on to our Business Services segment; our Business Services segment generated company FFO of $131 million in 2018 compared to $92 million in 2017.

Previous year results included a U.S. brokerage joint venture, which was sold in the second quarter of 2018. Results benefited from contributions from One Toronto, our gaming operation, which we acquired in the first quarter of 2018.

The recent interim expansion at our Woodbine site at One Toronto is contributing incremental gaming revenue and sturdy construction work is now underway on the broader facility development at Woodbine and at our other pickling site. Our facility management business continues to perform well and contributed higher company FFO in 2018.

The company successfully grew its business in the U.S. through the year with several sizable new contract wins. Our Construction Services business generated company FFO of $30 million in 2018, an improvement over 2017 results. The business performed well in Australia and the U.K.

however, results were impacted by weakness at our Middle East operation as we complete legacy projects. New business activity remained strong at Multiplex and our backlog at year-end was approximately $8 billion with most of it about 85% being in Australia and the U.K.

These positive contributions in our Business Services segment were partially offset by weaker margins in our fuel distribution business, Greenergy. Results were impacted in 2018 by weak margins in Brazil due to changes in regulated fuel pricing as well as lower diesel purchase margins realized in the U.K.

And with that, I'd like to finally touch briefly on liquidity. We ended the year with liquidity of $2.2 billion at the corporate level. This is comprised of cash and marketable securities of approximately $880 million and undrawn credit facility of $1.3 billion.

Our intention is not to utilize corporate debt except as a bridge for acquisition or working capital needs with longer-term debt faced at the operating company level.

Our portfolio of businesses generated total liquidity of $1.7 billion for BBU during 2018 from monetization activity and distributions from our operation and there is no reason we cannot continue to generate additional liquidity through ongoing monetization activities.

As we look forward we continue to be confident in our ability to generate liquidity for our overall business that will allow us to take advantages of opportunities to grow our business. With that, I'd like to close our comments and turn the call back over to the operator for questions..

[Operator Instructions] Our first question comes from Devin Dodge of BMO Capital Markets. Your line is now open..

I just want to start with BBU's equity commitments for the JCI Power Solutions and Healthscope deals. Just seems to have come down a bit.

Just can you provide some color on the decision behind this? And if you're able to help us understand, how much is related to your proportional investment in BCP V declining as the overall fund commitment rises versus maybe more - allowing more co-investors in?.

Devin thanks for your question. It's Jaspreet. I'll add to that and then Cyrus can chime in. We [used initially close to] [ph] 30% funding for both of those deals, which was an estimate for BBU's investment and what we typically talk to in our initial announcement is the maximum commitment that BBU will be making.

And we always have some flexibility to adjust our share and on these deals in particular, we've had a lot of interest from our institutional partners who want to invest alongside us.

So when we looked at the overall deal and the allocation to BBU, we typically want to be at least 20% and with JCI and Healthscope, the $750 million and $250 million are kind of our best estimates today on BBU's share of the investment..

That makes sense. We though it was interesting to see the dividend from Westinghouse, just given how recently the deal closed.

I was just wondering if we should be expecting any more sizable dividends from Westinghouse as the - given the profitability improvement and the good cash flows from that company, just as it improves over the next couple of years..

Sure. It's Jaspreet again.

So as you indicated, the business is performing really well, the global products and services, which is kind of the base operations that is in line with our plans, the new projects business is performing exceptionally well and it's - that part of the business is higher margin and it's a bit more transactional, but we do think the current EBITDA rate is sustainable and in this year since we acquired the business, we have some high cost inventory going through our numbers and all of our cost improvement initiatives aren't in there either.

So we expect that the company will continue to generate strong cash. In terms of dividends, we expect the company will have strong cash flow and a decision on whether we take the cash and reinvest it in Westinghouse versus kind of broader BBU activity. It will be based on the opportunity set at that point..

Are you able to provide any color on how much free cash flow this business is expected to generate? You've given some targets for EBITDA, but just maybe on a free cash flow basis?.

We'll give you an estimate and I partially hesitate to tell you this as it is only an estimate and it's based on targets. So please keep that in mind.

It's not our estimate for this year, but if you think back to our Investor Day, I think Denis Turcotte had outlined a medium-term target of $600 million in EBITDA and we're certainly not there yet, but we're working on it, but if we get there, the numbers are kind of $600 million in EBITDA roughly $200-ish million of interest expense, roughly $70 million in cash taxes, might be a little lower in the earlier years, but that's sort of our longer range plan, roughly $130 million of maintenance CapEx.

I think that's sort of - those are good medium-term numbers to think about. And that would result in about $200 million of free cash coming out of the business, relative to our equity investment now of about $600 million..

Maybe just one last one. One of your sister companies was highlighting the opportunities in Brazil. I think Peter might have touched on this as well, but just I think this is - people are suggesting that the new government was signaling that more privatizations could be forthcoming.

Just can you provide any color on what this means from BBU's perspective? Just trying to get a sense for whether you expect water or wastewater concessions, those awarding activities to ramp up.

And maybe what other sectors could look interesting for BBU?.

Yes it's Peter. I would say we are optimistic based on the policies of the new President and in fact he has in his policy program made direct reference to sanitation. So we're optimistic that the trend towards privatization will continue and there will be more opportunities for BRK. So that's good news.

With respect to other opportunities for private equity in Brazil, again we remain optimistic certainly the tone and the economic trends in the country are improving and we see this as positive for our business there..

Our next question comes from Geoff Kwan of RBC Capital Markets. Your line is now open..

Just wanted to follow up with the comments that you had on the funding side. So with the JCI and Healthscope, that's kind of $1 billion there. You've got kind of $900 million of, call it, cash available.

How should we think about kind of your comments around not wanting to draw on the corporate facilities? Is it a matter of the visibility being of trying to pay it down over kind of a 2- to 3-quarter period if you did need to draw on it or you did want to draw on it? Or is it some other kind of time frame?.

Sure Geoff, it’s Jaspreet. So just to add on it, you're right, we have $88 million with our cash and securities and if we do end up having to draw on the lines it will be a small amount and it will be for a short period of time like more bridge financing.

We've always said we don't want to have long-term debt at the BBU corporate level for all of the reasons that Cyrus kind of highlighted. And there is no reason in our view that we are not going to be generating additional liquidity through monetization efforts that we have ongoing.

So we don't expect that we'll have anything on the line for an extended period of time, I just see a quarter maybe..

Yes, I'm just - sorry, just trying to reconcile here with the - you've got a couple of big deals already.

And just running through, albeit, it may not be a realistic standard, but if the markets aren't particularly conducent to say, for example, with GrafTech, you've got a lot of cash that you can use from the historic markets to support it? And just - yes..

Yes look if we draw on the line, so that's the reason we have these kind of facilities available to us, is that if there are - if we do need to bridge some monetization and cash inflows against at the facilities, so if we do end up drawing on the line and we have on there, if it's a quarter or two quarters, there is a number of monetization opportunities.

You mentioned GrafTech and GrafTech the business is performing really well. It's generating a lot of cash flow and the capital market has been volatile. But they issued a special dividend at the end of last quarter. And we'll look for opportunities to monetize that cash flow as it's appropriate between us and kind of the business needs..

And are you able to give some guideline, even if it's kind of ballpark, around CapEx and also tax rates for each of your segments?.

So on tax rate, each of the businesses paid their corporate taxes at their levels and we had optimal planning at the BBU level. We do kind of disclose the cash interest every quarter. So that's kind of a takeaway from the EBITDA. In terms - yes, the tax guide.

In terms of the CapEx, we are looking at CapEx and kind of moving forward especially with the new infrastructure services businesses and others we'll look to enhance the disclosure there..

So going back on the tax side, is - because you're always kind of buying stuff and selling stuff, and I get that there may be a mix issue, but the way you're kind of forecasting it then, would the Q4 tax rate then be somewhat indicative of how you're thinking about 2019?.

Like you said Geoff, its bit hard to predict because the tax is impacted by what we do and how we do it. So as an example if you're doing distributions from GrafTech and you're thinking about the taxes at the BBU level, that may be different from the tax rate in Australia when you sell something like Quadrant.

So it's a bit hard to kind of generalize like that..

And then on the deal pipeline, can you kind of talk about what it looks like today? Because often, when you get these markets, they tend to be a little more jittery. You can get maybe a little bit of a standoff between buyers wanting prices from a few months ago and buyers saying the market has kind of come down and it kind of stalls the market.

Is that what you're seeing? And maybe just, in general, what you're seeing in terms of like opportunities?.

Yes Geoff, I would say we're seeing exactly what we've been seen for the last couple of years. Nothing has really changed. We've got a reasonable pipeline of opportunities. There is nothing imminent but we're - as you know we're constantly looking at things and trying to move them ahead.

So I would not say there was anything unusual about the last quarter..

And if I can sneak in one very last question, the improvements in Multiplex around the Middle East, specifically in terms of that path getting back to a normalized EBITDA FFO number as well as on the Greenergy issues that you flagged with effective Brazil in the margins there, are those are turning back as you expected? Or was there was something in the Q4 that may have developed a bit of a nuance in terms of timing or magnitude?.

I think what we said is true this year. We expect to be through the bulk of our issues. And I don't think anything's changed..

And our next question comes from Andrew Kuske of Credit Suisse. Your line is now open..

I appreciate the color that Cyrus you gave on Westinghouse and the outlook there, but may be a more direct question right now is when you look at the dividend you received what would the payout ratio be on Westinghouse's current other earnings, FFO, EBITDA, whatever metric you want to pick out of those?.

Well if you think about Andrew, as I said sort of our medium-term target would be to generate $200 million a year in free cash. So we actually - the dividend was $315 million. So substantially - and that was over a 5-month period.

So obviously substantially higher and it's just because we had much - we have really good working capital management, that was a big part of it. There are some excess cash in the business when we bought it and we had a really strong five months as Jaspreet pointed out.

So while I would love to tell you we could pull out $315 million every five months, we're not going to be able to do that, but looking forward as I said a medium-term target for us internally if we can generate $200 million a year out of this, relative to the equity we have in the business, it would be a pretty phenomenal outcome..

And then just secondly on the unit repurchases that you did in the month of January, how do you think about just the repurchasing program over the course of the year as part of capital allocation when you balance that with just investments and all the opportunities you've got and related to the fund among other things?.

Yes, we balance that opportunity against everything else that's available to us and we do have many, many opportunities available to us, both new opportunities and opportunities to invest in our existing portfolio. So we balance that against our unit repurchase and the price just got so ridiculously low that it was a no-brainer for us.

We thought to start buying our units back and we'll keep doing that at those types of level..

And then just final question, it starts with Page 8 of the supplemental and it's just the deferred income tax assets, I don't know the commentary says a $106 million increase.

This is primarily due to GrafTech, is that the tax receivable agreement? Or is that something different?.

As we're kind of generating additional profits and we're looking at the forecast for the business going forward, we booked the deferred tax asset. Part of it for GrafTech would be the TRE as well as still be an associated liability for us that is, it's a combination of that as well as kind of forward-looking forecast on taxes..

And then maybe one final tax question, at the top sorry, BBU, what kind of NOLs do you have at the top of the house to effectively shield tax consequences from potential future divestitures?.

So the way to think about the NOLs, the material amount will be within the operating businesses that we kind of structure our investment that each operation kind of within its own legal entity structure and they would pay the appropriate corporate taxes or if they NOLs they will be at that level.

The meet from time-to-time on certain investments be flow-through entities and things that kind of come up to the BBU level that will kind of manage taxes on, but if you're thinking specifically about NOLs like the material amounts within the operating businesses, not at the top of the house.

At the top of the house, we kind of think about and manage our taxes is more through planning on particular investment that we're making, very strong kind of the longer-term expectation..

[Operator Instructions] And this does conclude our question-and-answer session. I would now like to turn the call back over to Cyrus Madon for any closing remarks..

Thanks all of you for joining us and we look forward to talking to you next quarter..

Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may all disconnect. Everyone have a great day..