Andrew Kuske - Credit Suisse Geoffrey Kwan - RBC Capital Markets.

Welcome to the Brookfield Business Partners' First Quarter 2019 Results Conference Call and Webcast. As a reminder, all participants are in a listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions.

[Operator Instructions] Now, I would like to turn the conference over to Jaspreet Dehl, Chief Financial Officer. Please go ahead Ms. Dehl..

Thank you and good morning, everyone. Welcome to the Brookfield Business Partners' 2019 first quarter 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 Denis Turcotte, Managing President of our Operation’s Team. I will pass the call over to Cyrus to provide an update on our strategic initiative after which Denis will provide an operational update on our activities at -.

And finally, I will review our financial results for the first quarter. We will then be available to take your questions. I will now pass the call over to Cyrus..

Thanks Jaspreet and good morning everyone. I'm pleased to announce that yesterday we closed our acquisition of the world’s leading automotive battery manufacturing distributor. We renamed this business Clarios Power Solutions.

Clarios is a global market leader that supplies more than one-third of the world’s automotive batteries and benefits from economy of scale and product development, manufacturing and recycling of used batteries. The total purchase price was $13 billion which includes $3 billion of equity and $10 billion of debt financing.

Once we finalized the participation of our institutional partners we expect our share of the equity funding to be above $715 million for 25% ownership interest.

Given the exceptional strength and stability of this business, we were able to finance the acquisition with $10 million dollars of long-term debt and weighted-average cost of 5.9% and an average maturity is seven years. The financing has no recourse back to BBU and there are no financial maintenance covenants.

As a supplier of essential products to end-market that is growing, Clarius has remarkable stability and earnings in a decade long record of consistent growth in EBITDA and unit profitability throughout business cycles. More than 75% of the Company's sales are to the replacement market where demand is both stable and inelastic.

In fact, the aftermarket nature of this business provides significant downside protection to our investments. On average, a car has three battery replacements over its life span and given the current numbers of cars in the market serviced by Clarius, it would take a very long time to displace or significantly impact cash flows from this business.

We believe that favorable industry trends also provide Clarius with significant potential. First industry forecast suggest the total number of cars on the road will grow by up to 30% globally over the next 10 years. Clarius will continue to provide batteries to car manufacturers and subsequently serve the replacement market for decades to come.

Second, as vehicles are increasing in complexity, the car battery is becoming more criminal than ever before to manage the increasing electrical loads in automobiles. This is driving an industry shift towards advanced batteries where our business is by far the industry leader.

Finally, Clarius has long-term relationships with top tier OEMs retailers and auto retailers in more than 150 countries, which provide a unique advantage in the development and supply new products and technologies. The business is deeply involved with OEMs and the design of next generation batteries.

During the quarter, we reached a definitive agreements to acquire HelioScope for $4.1 billion. HelioScope is the second largest private hospital operator in Australia. It is a market-leading business and its cash flow generation is stable. Our expertise in constructing hospitals has been great advantage in our due diligence of this opportunity.

The transaction will be funded with $1 billion of equity of which approximately $250 million will come from BBU. We have received regulatory approval for our transaction and are now awaiting a shareholder vote targeting a close in the second quarter. In April, we recapitalized Cardone Industries. Cardone is the largest privately held U.S.

re-manufacturer of automotive aftermarket replacement parts, the biggest focus area for the Company is replacement brake pads. You may remember we made an initial loan to Cardone in October of last year we have now acquired 85% controlling interests in this business for $195 million.

BBU’s share is a 35% ownership interest for an investment of approximately $80 million and to be clear this includes a previous loan that we advanced.

In addition to these initiatives to grow our business, during the quarter, we progressed a number of monetization activities that will enhance our strong liquidity position and generate approximately $450 million of cash for BBU in the near term.

In early March, we reached an agreement to sell our facilities management company BGIS which will generate net proceeds of a $180 million for BBU. We’ve grown this business over the years both organically and through acquisitions and doubled EBITDA.

This performance and gross potential generated strong interest from buyers and create an opportunity for us to monetize this business at a favorable price. When combined with distributions received, net proceeds from the sale are 3.5 times our original investments and an IRR of about 45% and I should add net proceeds are also net of taxes.

We expect to close this transaction in June 2019. We also reached an agreement to sell our executive relocations business BGRS, which will generate net proceeds of $230 million for BBU. BGRS provides executive mobility services to corporate and government clients globally.

We’ve owned this business for many years, but relative to our overall operations it is one of our smaller businesses that generates modest free cash flow for BBU. So we decided to sell this business and recycle the proceeds into the investments we’ve talked about. And we expect to close this transaction in the second quarter as well.

In April together with our institutional partners, we sold approximately 5.7 million shares of North American palladium for $10 a share generating net proceeds to BBU of approximately $15 million.

North American palladium is the only pure play palladium producer in the world and since acquiring control of the company we have successfully sponsored it’s turnaround.

The turnaround together with the continued strength in demand and pricing for palladium presented an attractive opportunity for us to begin monetizing our investment and at offering price our BBUs remaining stake is worth about a $120 million which also presents future source of funding for investment activities.

That completes my update on our strategic initiatives. I now want to hand the call over to Denis Turcotte who is going to speak about Westinghouse, also want to give - be aware that Denis has been appointed our Managing Partner and Chief Operating Officer for BBU and the private equity group at Brookfield Asset Management.

So with that Denis over to you..

Thanks Cyrus. I will now provide a brief update on our activities at Westinghouse since we acquired the business in August last year.

as you’re aware Westinghouse is one of the world’s leading suppliers of infrastructure services to the power generation industry, including mission critical maintenance and repair services and the provision of high engineered fuel, spare parts and equipments.

Coincident with the closing, we have established a board with wide depth and breadth of relevant experience to support, guide and provide insights to the management team.

We also established a working executive oversight committee to facilitate integrating Brookfield professionals and advisors with the management team focused on executing all aspects of our holistic plan to align costs and drive further profitability in the business.

While Westinghouse longer constructs nuclear power plants they continue to provide engineering and procurement services to new plant builds. On the new projects front, the business has had a good success in implementing its AP1000 technology.

Last year the world’s first three power plants using Westinghouse AP1000 technology began commercial operations in China and a fourth facility achieved commercial operation early in 2019. We continue to look for ways to lever Westinghouse’s leading technologies in the global new build space while ensuring we don't take undue risk while doing so.

In the core business, Westinghouse has performed well since our acquisition with strong performance across the various business units, supported by the generation of strong cash flow last year and a significant liquidity at year end, the company issued a $315 million distribution to shareholders of which BBU received $140 million.

This returns about one-third of the capital we invested in the business less than a year ago, over the last few months, we've been working with the management team to implement a business plan focused on enhancing profitability and cash flow conversion of the company.

[indiscernible] core initiatives in this regard has the gradual adjustment of the business model intended to move decision making to the appropriate levels of the organization in the various regions we compete, clarifying accountability across the business and installing a management operating system aligned with these changes to ensure focus and follow-up on core initiatives and associated objectives.

The other core initiatives are related to internalizing the ownership of a broad-based transformation plan, improving commercial operations and execution management, supply chain management, globalization and optimization and conducting a first cut review of the corporation strategies at the business unit level.

All of these work streams have been underway since closing and are on-track of underwriting and progressing well. We are optimistic, we will achieve or exceed our internal targets.

To provide a few specifics, at the beginning of the year, we announced the first stage of organizational changes to enhance the focus on customers and to strengthen Westinghouse's global services and supply-chain management capability.

Some of the key enhancements included creation of customer focused business unit service serving the niche operating fleet with single points of accountability for both sale and delivery for existing nuclear operating plants.

Development of a new business unit with accountability for key growth areas including new plant delivery, plant deconstruction, decommissioning and remediation and government services.

The establishment of an operations delivery functions to build the best-in-class global supply chain organization that will support the business units through a robust procurement organization.

This function will also provide global engineering, manufacturing and other technical capabilities in order to ensure our customers receive the full breath of Westinghouse’s global products, innovations and technical capabilities.

We believe these changes will continue to strengthen the Company's core business with a focus not just on profitability, but also on enhanced standards of excellence and quality, safety and client service.

More broadly the Company continue to implement cost saving initiatives and the business is tracking towards the EBITDA targets that we laid out last September.

In the absence of unexpected events, we remain confident that we will get to the higher end of the target and hope to achieve an annualized EBITDA run rate of $600 million by the end of this year. Back to you Jaspreet..

Thank you Dennis. Brookfield Business Partners reported company FFO for the first quarter of 2019 of $205 million or $1.59 per unit compared to $138 million or $1.07 per unit in 2018. Net income attributable to unit holders for the first quarter was $62 million, compared to $74 million in 2018.

Net income per limited partner unit was $0.48 compared to a net unit loss of $0.53 in 2018. I will now go through each of our segments and talk about Company FFO and the results in comparison to last quarter. Starting with infrastructure services, we generated company FFO of a $102 million compared to $22 million in the first quarter of 2018.

Results benefited from contributions from Westinghouse, which we acquired in August last year. The business performed well in the quarter with strong performance in fuel operations and new plant project.

Fuel operations results benefited from the shipment of the significant number of fuel assemblies in the first quarter of 2019 to support the spring outage season at Customer plus. Westinghouse typically shifted customers in the late Q1 and early Q2 for the spring outage season.

In 2019 a high number of fuel assemblies were delivered in the first quarter contributing to strong Q1 results. In addition, results for the quarter benefited from the provision of project specific engineering services for new plants that Westinghouse is currently engaged to perform.

The business also continues to benefit from productivity gains as a result of the improvement initiatives that are underway. The other business within infrastructure services is TK.

TK Offshore experienced improved performance across its operations this quarter, specifically higher fleet utilization into operations and contributions from recent growth projects supported strong results.

[indiscernible] together with institutional partners we agreed to acquire all of TK Corporation’s remaining interest in TK Offshore including the 49% GP interest that we did not hold as well as LP units. The transaction is expected to close in the second quarter. Moving on to our industrial segment.

In our industrial segment, we reported company FFO of $81 million for the quarter compared to a $114 million in 2018. Results were impacted by lower contributions from past - quarter and the sale of Quadrant in November last year. These were partially offset by stronger performance at our palladium mining operations.

GrafTech continues to generate robust company FFO and benefit from multi-year take or pay contract, which provides stability to its operating results.

Following our monetization activities last year, BBU’s ownership of GrafTech is 27% compared to 34% in the first quarter of 2018 and as a result our proportionate share of GrafTech’s company FFO is lower this year.

North American palladium reported strong results in the quarter, benefiting from higher sales volume and continued strength in palladium pricing which trended above $1500 per average during the quarter.

Analyst forecast such as - strength in prices over the next few years reflect continued strong demand expectations for palladium from the automobile industry. Moving on to our business services segment. In business services we generated company FFO of $32 million in the first quarter compared to $17 million in 2018.

Previous year results included our U.S. brokerage joint venture which was sold in the second quarter of 2018. Results this quarter benefited from higher contributions from our real estate services business and construction services business.

Our construction services business generated company FFO of $18 million in the quarter and performed well in Australia and the UK. During the first quarter multiplex delivered six projects and performed approximately $1.1 billion of work.

Significant contract wins during the quarter included two residential projects in the [indiscernible] UK which is approximately $300 million and Junction House in Canada. Our backlog at the end of the first quarter was $7.6 million, 85% of which is in Australia and in the UK.

Our road fuel distribution and marketing business results for the first quarter were positively impacted by improvement in UK bio-fuel margin. Also, during the quarter, we initiated distribution of marine fuel, which is a new product line for us and that will continue to support additional volumes. I'd like to end with an overview of our liquidity.

We ended the first quarter with liquidity of $2.2 billion at the corporate level. This is comprised of cash and marketable securities of approximately $820 million and an undrawn credit facility of $1.3 billion.

We believe we have significant liquidity to support our near-term funding commitment as well as to provide support to our operating units if and when needed. If we do end up growing on our facilitates, we think it will be modest amount for a short period of time to bridge some cash outflows with inflows and monetization.

Our intention is not to utilize corporate debt for any extended period of time. Cyrus spoke to some of our capital recycling initiative, which will generate additional liquidity for us.

I would like to add that as we look forward, we are confident in our ability to generating liquidity as there continues to be opportunities within our operations whether to partial monetization or full monetization of businesses or through distribution of cash flow generated by various operations.

With that, I'd like to close our comments and turn the call back to the operator for questions..

Thank you. [Operator Instructions] Our first question comes from Andrew Kuske with Credit Suisse. Your line is now open..

Good morning guys. I guess keeping with Denis on the line, it would be helpful to may be to dive into Westinghouse just a little bit given what you delivered in the quarter and then as to your outlook statements just EBITDA generation over the course of the year.

So, how should we think about just the future quarters given this year fuel assemblies that you had in Q1, how does the rest of the year look?.

Well, again, I think as Jaspreet mentioned, there is a natural seasonality that revolves around the fuel business, people take power plant down in the spring and fall to refuel them and do related maintenance. So there is that natural seasonality that induces some lumpiness.

There is also a little more extended cyclicality in the sense that different levels of work are done on each of these shut downs, so what a plant does this year the next time it refuels in 18 months or 36 months, the scope of work may be a little bit less or more depending on what they need to do. So, that induces a little variation as well.

So, really there is no practical way of providing guidance in that regard. It is just the nature of the work and you should expect things to continue really the way they have over the next probably 18 months as a minimum..

Okay that is helpful and I do appreciate the details on the game plan at Westinghouse now that you have closed off the Johnson deal and this probably more a question for Cyrus is how is the Clarios deal and the game plan there similar to what you did at Westinghouse or different?.

Similar and that we do have a plan around operation improvements, supply chain, capacity utilization at the plants, longer term some commercial improvements as well. So it’s similar playbook that we would be looking to Andrew..

And finally just maybe for Jaspreet and just on liquidity. So you have had just shy of $0.5 billion of capital recycling activities to BBU. 750 up to work for the JCI deal or 45 for TK.

What level of cash do you want to stick at the top of the house and what sort of preferred and then obviously there is a lot of cash sitting in the underlying businesses that could be upstream to BBU.

So how do you think about that dynamics when you got [indiscernible] closing in few more weeks or a month or so?.

It’s a Jaspreet, Andrew. So we don’t have a target level of cash that we want to be holding, but we definitely want to have sufficient liquidity at the corporate level so that we can be nimble and we can execute all the fee initiatives that we have underway.

We ended the quarter with $2.2 billion of liquidity and if you kind of factor in all of the amount transactions including [indiscernible] as well as all of the monetization activities that Cyrus highlighted, we will still have kind of 1.5-ish billion of liquidity available to us.

So we feel quite comfortable and then you know the second part of that as you mentioned there is cash within the underlying operation and we are constantly finding and looking at all of our businesses and looking to realize value and potential monetization to get distributions up to the corporate level.

So we are feeling very comfortable about the level of liquidity that we have and confident in being able to generate more as we needed to grow the business..

Got it and that is great. And one final one if I may. So just on HealthScope I think the prior statements were U.S.

billion equity and that is a total amount how much do you anticipate for BBU?.

Currently we are anticipating about $250 million from BBU for HealthScope and as you are aware there is institutional capital that gets invested alongside us, so that number might move a little bit based on institutional partner participation but it’s about 250..

Okay, that is great. Thank you..

Thank you. And our next question comes from Devin Dodge with BMO Capital Markets. Your line is now open..

[Technical Difficulty].

Devine, Devine we cannot hear you. I'm sorry..

Can you hear me better now?.

A little bit..

Okay so this is actually [indiscernible] on behalf of Devine.

Could you share what led you to acquire TK for remaining interest in TK Offshore? And what - core supporting TK Offshore any from operationally?.

The answer to second question, there is a little bit of corporate services that are being provided that overtime will be fully transitioned in TK Offshore.

We have transitioning it overtime and we are almost done, Dennis?.

I would say with a majority of elements, yes, the outstanding issue will be IT system, which we have focused on will probably take a 12 to 18 months period, but we have understanding with TK how that is going to be managed. We are confident..

And what was the first part of your question?.

Well, basically what led you to acquire the stake was it TK corps coming to you and said we need the liquidity or were you more proactive [Technical difficulty]..

So, we have ongoing discussion with them and I think they are at a point in time where they just wanted focus on other things and offered up their share to us and it seemed like a reasonable transaction for us. So that is what happened..

Thank you. And our next question comes from Geoff Kwan with RBC Capital Markets. Your line is now open..

Hi. Good morning. Just going back to liquidity. So I think the [indiscernible] said I was getting with this different puts and takes pro forma was netting to $140 million of cash.

Just trying to understand I guess how to think about that in the context of how you would describe the current deal pipeline today, and also to as I think have done in a couple of equity offering in the past like what would drive you to do that again? Is it something where you don't have the cash on hand to either pull other companies or what you have got on the balance sheet and you got investment opportunities that you don't want to be tapping into the bank debt for multiple kind of quarterly period, is that the way to think about or?.

So, maybe I will break your question up into two parts. The first on the current liquidity. So, I'm not exactly sure on the math on 140 so we could talk about that. But high as I kind of highlighted, we had $2.2 billion, which include the cash-on-hand.

The marketable securities which are liquid and which we can sell and kind of convert to cash on a pretty short-term basis and the lines. So with all of the puts and takes that we have talked about we think the $2.2 billion goes to $1.5 billion. On the second part of your question around potential offering, we have no need to do an offering at BBU.

We have got sufficient liquidity today, we don't want to draw on the lines for a long-term basis, but they are available to us to kind of provide a bridge facility if we needed. So, there is no need to do an equity offering and there is a lot of magnetization activity that we are looking at within our operations all the time.

If we do, do any kind of capital markets activity, it would have to be on an accretive basis and build value for unit holders..

Okay. So, if I understanding you right, I have the same number in terms of $700 million delta there. If you are not looking to raise capital then that you are looking at other monetization opportunities for what your deal pipeline looks.

Cyrus I don’t know if you are able to comment on how the pipeline looks today, obviously you have done a lot of transactions....

Yes, you know I hate answering the question this way, but it kind of looks like it looks a year ago and six months ago, we are looking at lots of different things around the world, we try to make a couple things happen, we just couldn’t get there on valuation. Hopefully one or two of those things will happen this year.

But there is nothing eminent happening, but that said we are always looking for opportunities Geoff..

Okay and then on Westinghouse, I just want to understand this better because I think it was a couple of quarters ago, you mentioned from a revenue perspective at Westinghouse Q2 and Q3 tend to be the stronger one. Q1 a bit less so Q4 tends to be the seasonally weakest part, but also the Q1 results were quite good.

Just trying to understand I guess how much of the shifting on the field assembly shipment might have shifted into Q1 from Q2 and as a result like what is the operating leverage in maybe thinking about seasonality from an EBITDA perspective how to think about it?.

I think the way you have characterized the norm is accurate with where the strongest quarters are. What really drove bump up in Q1 was more related to our new project business, which again is lumpy not because of seasonality, it’s more related to project activity.

So you really ended up with strong Q1 because of that not the core business and that lumpiness is much more random as I mentioned, because it’s related to the execution of project work..

And would any project have typically higher margins in the core business or would it be lower?.

Yes. They are typically at or above the average margin of the business..

Okay.

Last question I had was with the pending sales of BGIS and BGRS, I can understand that if you don’t want to provide the specifics on each company, but are you able to give a rough ballpark on the revenues and EBITDA for both of them combined on an annual basis?.

So, Geoff we typically you know kind of talked about revenue and EBITDA on a segment basis. I think Cyrus in his letter had talked about the relocation business in particular has generated modest free cash flow for us. So it wasn’t a big contributor to EBITDA in the segments..

Okay.

So I think there is nothing much you can give more in terms of the aggregate - just from a modeling perspective how we might want to be adjusting our numbers?.

Yes. It’s not going to significantly change things and once we close HealthScope that will be accretive to business services. So I think overall it’s not going to be significantly different..

Okay..

Just given the evolution of our business over three years, these have become quite small in the scheme of things both of them had become very small..

Okay. Perfect. Thank you..

Thank you. And I'm not showing any further questions at this time. I would now like to turn the call back to Cyrus Madon for any closing remarks..

Thank you everyone for your attendance and support and we look forward to speaking to you next quarter..

Ladies and gentleman, thank you for participating in today's conference call. This does conclude today's program. And you may all disconnect. Everyone have a wonderful day..