Brookfield Business Partners Q1 2025 Earnings Call Transcript

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May 2, 2025

There are 9 speakers on the call.

Operator

and welcome to the Brookfield Business Partners First Quarter twenty twenty five 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. Now I would like to turn the conference over to Alan Fleming, Head of Investor Relations. Please go ahead, Mr.

Operator

Fleming.

Speaker 1

Thank you, operator, and good morning. Before we begin, I'd like to remind you that in responding to questions and 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 risk factors, I encourage you to review our filings with the securities regulators in Canada and The U. S, which are available on our website.

Speaker 1

We'll begin the call today with an update on business performance and our strategic initiatives from Anuj Ranjan, our Chief Executive Officer. Adrian Letts, Head of our Business Operations team, will then be on to share some perspective on the current operating environment. We'll end the call with Jaspreet Dell, our Chief Financial Officer, providing a review of our financial results. After we finish our prepared remarks, the team will be available to take your questions. And with that, I'd like to now pass the call over to Anuj.

Speaker 2

Thanks, Alan, and good morning, everyone. Thank you all for joining us on the call today. We've had a good start to the year, generating over $1,500,000,000 from our capital recycling initiatives and committing $370,000,000 to acquire two market leading industrial businesses. We've significantly reduced our corporate borrowings and also bought back nearly million of our units and shares. As you may recall, we announced a $250,000,000 repurchase program earlier this year and we have already returned $140,000,000 to shareholders as part of that.

Speaker 2

While the market fluctuations we've seen play out over the past month can be unsettling, our strategy is exactly the same, to own great businesses with market leading positions and execute on our plans to enhance their underlying performance and cash flows. This has allowed us to compound value through periods of uncertainty in the past, and gives us confidence as we manage through the current evolving environment. The reality is that most businesses, including ours, won't be entirely insulated from the impacts of tariffs or potential downturn in global growth. However, having experience in navigating economic cycles and the operational capabilities to adapt will allow us to position our business for continued value creation. Regardless of where policy changes shake out, it does feel like the broader themes of relocalization and digitalization are here to stay.

Speaker 2

Capital will flow to these areas as companies look to reduce dependency on cross border trade, strengthen supply chains, and invest in domestic capabilities. The United States remains an extremely attractive destination for capital. We have been investing in the backbone of The U. S. Economy for years, building a track record as an owner and operator of great businesses.

Speaker 2

Today, the growth of many of these businesses is accelerating as technology, relocalization, and policy changes converge. Advancements in artificial intelligence, automation and robotics are ushering in a new era and will create immense opportunities to buy and completely transform many of these industrial companies at a much more rapid pace. Growth in Europe has lagged behind The US for years, but the region is uniting around a pro growth agenda with governments signaling that they are willing to play a part in easing regulation, promoting productivity and supporting spending. Meanwhile, India remains a bright spot in the global economy and The Middle East, specifically the Gulf countries continue to thrive, largely insulated from current geopolitical dynamics, which is supporting a highly conducive deal making environment and opportunities for us to strategically grow our presence or monetize businesses there over time. Over the years, we've made some of our best investments during periods of significant dislocation.

Speaker 2

Being global with a local presence and having strong access to capital puts us in a great spot to both accelerate buybacks and take advantage of growth opportunities. Just recently we reached an agreement to acquire Antilia Scientific, a leading manufacturer and distributor of critical consumables and testing equipment serving life sciences and environmental labs. Antilia has a sticky customer base, providing essential products which support the accuracy and repeatability of processes in labs. The business has historically grown through a series of acquisitions and we see a lot of opportunities to improve its manufacturing, commercial strategy and supply chain to capitalize on key growth opportunities. A lot has changed since the start of the year, but our commitment to compounding long term growth for our investors remains the same.

Speaker 2

We're prepared for some uncertain days ahead, but are equally optimistic and confident in the quality of the businesses we own, the strength of our operational capabilities, and the increased flexibility of our balance sheet to support our growth. With that, I'll pass the call over to Adrian Letts, who oversees our global business operations team and is going to spend some time talking about how we're positioning our business in the current operating environment.

Speaker 3

Thank you, Anuj. Good morning, everyone. I'm happy to be on the call today. As many of you are aware, today we have more than 30 dedicated operating professionals located around the world with a broad range of backgrounds, functional expertise and domain knowledge. Having senior executives on the ground in all the regions where we operate to support our management teams is critical to allowing us to respond quickly to an evolving global operating environment like the one we've seen over the past few months.

Speaker 3

I'm sure the topic of tariffs and trade is top of mind for most of you. And like many, we're continuing to assess the impacts on our business, our businesses, as well as the broader risk that changing policy decisions may have on global economic growth. Our work is ongoing, but as we pass through the noise, we do not anticipate the tariffs will have a material impact on the cash flows of our businesses. While we're global, many of our businesses source, manufacture or provide services in a region for region. For the most part, this means that they're not heavily reliant on cross border trade and our exposure is limited with most of our manufacturing and operating presence being in The US, Europe, Mexico and Canada.

Speaker 3

Where we do have some exposure, we expect the impacts to be manageable and limited to a handful of industrial operations. At Clarios, our advanced energy storage operation, a portion of its US batteries are manufactured and recycled in Mexico. However, these should fall under a USMCA exemption that remains in place and the impact of tariffs on the business is not expected to be material. We are working through some expected impacts at Dex our engineered components manufacturer related to tariffs on imports from China. However, on a relative basis, DexCo should fare better than most of its competitors given its sourcing and manufacturing footprint.

Speaker 3

Over time, we expect most of the impact on Dexco's business can be mitigated through commercial and sourcing opportunities. More broadly, we're leaning into our operational capabilities and evaluating proactive measures across each of our businesses to ensure we're best positioned to mitigate any headwinds and prepare for scenarios that may arise as the environment changes. Where we can, we're evaluating opportunities to near shore production capacity, exploring alternative supplier arrangements, utilizing contract pass through clauses, and accelerating cost optimization initiatives. Measured pricing actions will almost certainly be a lever to support margin performance in a potentially inflationary environment, but will need to be balanced in our commercial actions. As we're working through all of these opportunities, we're also very focused on the relative impacts to our competitors and how that may shape demand and market dynamics across industries and end markets we operate.

Speaker 3

For the most part, volumes across our businesses have held up well despite some demand headwinds we're dealing with in parts of Europe and some softness related to more discretionary related demand. That said, it's too early to assess the secondary impacts tariffs could have on a broader slowdown on economic and global growth. On balance, the longer term impacts from US trade policy could be positive for businesses that we own, but we recognize the risk of potential near term disruption. As a result, we're preparing for a more uncertain outlook over the next twelve to eighteen months as both businesses and consumers adapt behavior and purchasing decisions in the current environment. Fortunately, most of our larger businesses are global market leaders providing essential products and services that are critical to their customers in any environment.

Speaker 3

There's always a market for these types of businesses, and their strong, durable competitive advantages generally enable them to pass through higher costs and underpin stable cash flows. We've seen this resilience demonstrated through past cycles, including during the pandemic, and our goal is to ensure we can improve the positioning of our businesses as we go through the current period of volatility. With that, I'll hand it over to Jaspreet to review our financial results and be available to take any questions after prepared remarks.

Speaker 4

Thanks, Adrian, and good morning, everyone. First quarter adjusted EBITDA was $591,000,000 compared to $544,000,000 in the prior period. Adjusted EFO of $345,000,000 during the quarter included $114,000,000 of net gain related to the sale of offshore oil services shuttle tanker operation and $34,000,000 in withholding tax expense related to the distribution received from our advanced energy storage operation. Turning to segment performance. Our Industrial segment generated first quarter adjusted EBITDA of $3.00 $4,000,000 which included $72,000,000 of tax benefits at our advanced energy storage operation and contributions from our electric heat tracing manufacturer, which we acquired in January.

Speaker 4

Results at our advanced energy storage operation benefited from growing demand for higher margin advanced batteries, ongoing commercial actions and the execution of optimization initiatives. The impact of end market weakness and lower volumes at our engineered components manufacturer were reflected in results as the business continues to actively manage costs to support margins and cash flows. Moving to our Business Service segment, we generated first quarter adjusted EBITDA of CAD213 million, dollars an increase compared to $2.00 $5,000,000 in 2024. Prior period results included $6,000,000 of contributions from our road fuels operations that was sold in July. Strong performance at our residential mortgage insurer and improved project execution at our construction operation contributed to segment performance during the quarter.

Speaker 4

Results at our Dealer Software and Technology Service operation reflect the impact of higher costs associated with the acceleration of planned technology modernization initiatives as well as customer churn. Finally, our Infrastructure Services segment generated first quarter adjusted EBITDA of $104,000,000 compared to $143,000,000 during the same quarter last year, which included contributions from our offshore oil services shuttle tanker operations, which we sold in January. Stable performance at our modular building leasing services and our lottery services operations was offset by the impact of weak market conditions in work access services. Now turning to our balance sheet and capital allocation priorities. We ended the quarter with liquidity of approximately CAD2.3 billion at the corporate level, which is pro form a for recently announced acquisitions and realizations.

Speaker 4

Buying back our units at a significant discount to intrinsic value is an excellent use of our capital. As Inuj mentioned, in January, we launched a $250,000,000 repurchase program. And since then, we've bought back almost 6,000,000 units and shares spending a total of 140,000,000 We will continue to execute our repurchase program under our existing NCIB, which we plan to renew once it expires in August. With that, I'd like to close our prepared remarks and turn the call back to the operator for questions.

Operator

Thank you. Our first question comes from the line of Gary Ho with Desjardins Capital Markets.

Speaker 5

Thanks. Good morning. Maybe just start off with Dexco. Mentioned there's volume improved in North America, but softness in international. You also mentioned some tariffs implications.

Speaker 5

Are you able to maybe quantify that perhaps impact to EBITDA near term? And are Dexco competitors also affected by tariffs as well? Just trying to see how easily you can pass through potential price increases there.

Speaker 3

Yeah, look, thank you for the question. So performance in Q1 was in line with plan. There's some sign of recovery in North America in Q1, but the market remains pretty muted. Trailer registrations in North America, which are a leading indicator of outlook, remain at a multi year low. But I think the most important thing to point out is the business has done a great job on cost and capital management and actually improved margins in a down market.

Speaker 3

We're still passing through the impacts of tariffs and putting appropriate plans in place. But to your question on competitor impact, there is going to be impact on our competitors. And I think proportionately, Dexco's well placed to manage through this.

Speaker 5

Okay, great. And my second question on Clarios. Can you walk us through kind of where you stand with the 45X filing? There's many policy changes in the past couple months. Any pivots in how you think about these credits Clarios is entitled to today?

Speaker 4

Hi, Gary. It's Jaspreet. I'll take that. So to answer your last question first, there's really no change in terms of our views around the tax credit. And it's kind of in line with we've said.

Speaker 4

The business did file their tax return for the 2024 year at the January. And it's our understanding it's being processed in the normal course. And we are expecting that the tax benefits and the credit we will get from the 2024 return in the near term.

Speaker 5

Okay, great. And then just the last one, if I can. In your letter to shareholder, you mentioned to generate proceeds from monetization, you look at additional ways to accelerate plans to return capital to shareholders. Can you maybe talk us through kind of what that might look like? Is it a bigger share buyback program?

Speaker 5

Are you perhaps referring to the potential Latrobe monetization in those remarks? Any comment there would be helpful.

Speaker 2

Sure, hi, Sanuj here. So as we've always done, we've always continued to look for opportunities to monetize or generate realizations in the market. We've done a pretty good job over the last couple of years returning across the private equity group about $10,000,000,000 over two years, which is significant portion of which went to BBU. The nice thing is great businesses that generate significant cash flow always have options and we've tended to be quite creative getting those monetizations or distributions. So whether it was EverRise or Altera or Green Energy or even Clarios, use different approaches.

Speaker 2

So I just say that while I can't comment on any specific a company that may be mentioned in the media, I think we are always looking at opportunities especially when we have great businesses that are getting appropriately valued. There's also a secondary market out there for private equity investments which has been healthy. And so if we are able to generate further monetizations or realizations, we do have continued capacity in our buyback which is already currently going until August. We would look to renew that in August and afterwards continue to take our balanced approach of deleveraging, returning capital to shareholders and new investments.

Speaker 5

Okay, great. Thanks for those comments. That's it for me.

Operator

Thank you. And our next question comes from the line of Devin Dodge with BMO Capital Markets.

Speaker 6

All right. Thanks. Good morning.

Speaker 7

The unitholder letter, there was mention of a realignment at Scientific Games. Just wondering if you could provide some additional context and how you think this will enhance value of the business.

Speaker 3

So thank you for the questions, Adrian. We're continuing to invest in digital, and we're excited by the digital opportunity that we see. We think there's a significant opportunity to digitize the near 100,000,000,000 lottery ecosystem globally. And this opportunity extends well beyond online games and mobile games, and it's embedding the technology into everyday customer interactions. To support this vision, we've already begun deploying a number of innovative technologies, including advanced retail vending solutions, cashless payment systems, mobile wallets, to support a growth in omnichannel and customer engagement.

Speaker 3

And to accelerate that, we've stood up a dedicated team. In October 2024, we appointed a new head of digital, an accomplished leader with extensive experience in digital, including stints at Amazon and Symantec and Albertsons. We're actively expanding the team. And at scale, we believe this has a significant opportunity to continue to grow EBITDA.

Speaker 7

Okay. Excellent color. Thanks for that. Maybe second question. We saw that Brookfield recently announced an agreement to invest in Barclays payments business.

Speaker 7

Just given your current presence in the sector, should we assume that BBU participates in that transaction? And then more broadly, can you speak to that investment pipeline that you see in the payment sector and where you think Brookfield can enhance the value of these businesses?

Speaker 2

Sure, it's Anuj here. I'll take that. The answer is yes, BBU will participate in the Barclays investment. It's exactly in line with what we've already done in network and Magnati, which have both been excellent businesses where we've continued to make great progress in operations. Stepping back a little bit, Barclays is a great example of the types of opportunities we're looking at in financial infrastructure, where we feel that the broader global financial backbone it does need a lot of investment and does need real operational capability to turn it around.

Speaker 2

Often the incumbents that own these businesses have challenges making those investments today on their own balance sheet and it's opened up a lot of opportunities for us to step in and either acquire or partner with those incumbents in transforming those businesses. We've done this very successfully in Magnati, we're continuing to do it successfully now in network and I think we're going to apply a very similar operational value creation plan with Barclays and just broadly there many, many more opportunities like that out there. So I think you can expect to see BBU continue to participate in these kinds of investments as we make them.

Speaker 7

Okay, interesting. Thanks for that. And then just one last one. Earlier this week, we saw that Solar Alabert reached an agreement to work with IPL. We recognize this is one of your smaller investments.

Speaker 7

But just wondering if that agreement provides Brookfield and BPU with an eventual exit.

Speaker 3

Thank you, Sid. Look, as you rightly pointed out, we announced an agreement to merge the shoulder business with IPL Plastics, which is a leading plastic manufacturer in North America and The UK, which has a very complementary product and geographic customer portfolio. IPL was privatized by Madison Dearborn, a private equity firm in 2020. And the merger presents a substantial opportunity to create an international sustainable packaging producer at scale, including 27 locations across The UK, Europe, and North America. The transaction does not require any additional funding from BBU and its institutional partners.

Speaker 3

Following a debt funded distribution to IPL shareholders, the capital structure will be 54% to Madison Dearborn and 45% to Shola Alaba shareholders. And we expect the transaction to close in Q3 of this year. To your question, given that we are now creating an international sustainable packaging producer with substantial scale, we think it presents a tremendous opportunity for value creation over the next few years.

Speaker 7

Okay. Excellent. I'll turn it over. Thank you.

Operator

Thank you. And our next question comes from the line of Jamie Gloyn with NBF.

Speaker 8

Yes, thanks. First question just on the CDK. I guess the sub pack called out a little bit of churn still going through. I was wondering if you could frame that for us. Have you seen improvements?

Speaker 8

Is it stabilizing and deteriorating? What can you tell us about how customers are still behaving with respect to the CDK business?

Speaker 4

Yes, sure. It's Jaspreet. Maybe I'll start and then Adrian can add. So I'd say, just generally, if you look at the business performance year over year, the current year performance is lower. The majority of that is due to the technology investments that we've been doing in our products at CDK.

Speaker 4

And these costs are, we're not able to capitalize them and we need to expense them. So they flow through EBITDA. And that is really the biggest piece of kind of the year over year performance difference. In terms of your question, churn, churn is higher and where we're seeing that is more around customers that have a single product like a CRM or a single technology that they use from our stack. The customers that are core DMS customers or across multiple products and tech stacks of CDK, the churn there is stabilizing.

Speaker 4

And what we are seeing is that the impact of the overall churn is also being mitigated by commercial actions as well as extension of contracts. So I'd say overall, there's still work to be done, but the kind of broader core DMS churn does feel like it is stabilizing.

Speaker 3

And then just to build on that, the investment in technology, we're taking a very customer led approach. And we believe that that will really set us up well to enhance our overall market position, and as we look forward over the next ten years, consolidate the strong position that we have.

Speaker 8

Okay. Something we don't hear too much about, but it still contributes meaningfully in business services is Unidos. Can you give us a quick update on the performance of that business and the underlying market? And are there any are you seeing any other potential macro impacts affecting that business?

Speaker 4

Sure, it's Jess Fried again. I'll start and then Adrian can add. Unidas is our fleet management and rental business in Brazil. And I'd say overall the operating performance of the business has been fine. The two parts of the business on the fleet management side, these are kind of medium term lease contracts that we have with customers.

Speaker 4

We've got the ability to kind of price the contracts in line with inflation, quite stable, just given that this term on the contracts of the lease contracts. So that business has been doing well. It's been continuing to grow. The other side of the business is the car rental side. And again, the business is doing fine from an operating perspective.

Speaker 4

We've spent a lot of time just on transformation activities within the business since we bought it. It's got a number of branches, so maximizing kind of utilization of the branches, sharing best practices, just improving underlying kind of operating performance. We did see over the last couple of years, the used car prices, which on the car rental side, we buy new vehicles, we'll use them over a couple of years and then we sell them in the market. There was some pressure on used car prices, but we have seen that start to ease. So I'd say overall operating performance at the business is quite good.

Speaker 4

The interest rates in Brazil have been going up. I think they're kind of over 14% now. So that has had an impact on kind of just the interest costs in the business, which impacts EFO. So we are kind of managing that, but the business is free cash flow positive. Look, I think the long term, we're quite excited about this opportunity.

Speaker 8

Okay. And lastly, wanted to go back to a comment around managing through some of the potential tariff impacts, accelerating cost optimization initiatives and then pushing, I guess, some pricing action through. Are there are these actions underway in any of the business lines? And maybe focus more on the pricing side, or is this just a playbook waiting to be deployed?

Speaker 3

I'll start. It's Adrian. So no, we are underway in terms of the actions that we can take, the pricing that we can put through. I think it's important to go back to the statements I made at the beginning. We're passing through the noise.

Speaker 3

We're really trying to understand the situation as it unfolds. We're preparing, but we're also taking action where we can.

Speaker 8

Can you elaborate on where that action may be taking place at this point?

Speaker 3

Look, I think there's a broad range of things that we're doing. Pricing is clearly something that we're looking at.

Speaker 4

Yeah, I could just add a little bit of color there. If we step back to Adrian's earlier comments, like there's really only two businesses where we expect any kind of first line impact from tariffs. The one is Clarios. And at Clarios, most of that impact is between Mexico and The US, where we have some lead recycling that happens in Mexico. And again, Adrian spoke to this earlier, with kind of the current tariffs that are in place, we don't expect that that's going to be any material impact.

Speaker 4

And then the second business is Dexco. And again, Adrian touched on this already and we're looking at Dexco, we're looking at mitigation strategies, including commercial and pricing actions. And just relative to how our competitors source a lot of the end products, Dexco is in a good position. And if we do need to take pricing actions to mitigate the impact of tariffs, I'd say we'd be in a much stronger position to do that, just given kind of our manufacturing footprint and how we source our products. So those are really the only two businesses and it's not a very like Dexco is the only one where we think there'll be more mitigation required if things do kind of continue down the path that they are.

Speaker 2

Okay.

Speaker 8

Yeah, understood. Thank you very much.

Operator

Thank you. And our next question comes from the line of Nick Prie with CIBC. Okay, thanks. Just going back

Speaker 6

to Clarios for a moment. Has the company had any interaction or dialogue with the IRS about the 2024 tax filing specifically and the credits that were recognized last year but haven't been converted to cash on balance sheet? I'm just wondering if you have any visibility on how the review of that tax filing is progressing and maybe when you'd expect to hear back on it.

Speaker 4

Look, I think the kind of process around filing the tax return is in the normal course. Like there's nothing unusual about the way the process is progressing for this tax return relative to others that they filed in the past. I'd say anecdotally, we've heard of others that have been receiving payments against the tax benefit credits, like others in the industry. So we still feel quite confident that Clarios qualifies under the regulations and that we will receive payment in due course.

Operator

Got it. Okay, that's helpful.

Speaker 6

And then just at Sage, the higher mortgage insurance cap became effective in December. Is there any early indication year to date what impact that might have on transactional premiums? I'm just wondering what proportion of transactional premiums would be on those properties valued between $1,000,001,500,000

Operator

You can stop me if that's too detailed, but

Speaker 6

I'm just looking for a kind of a general sense of what it does to the size of the total addressable market for that business.

Speaker 4

Sure, I can start and then others can add to it. What I'd say is that the overall performance at SageM continues to be very strong and it's supported by kind of the resilience in the housing market. We did see a significant increase in kind of transactional volume this quarter from first time homebuyers even and I'd say the increase in volumes for Sage and kind of outpaced the general kind of market, the housing market performance. And it was driven by the regulatory changes that we saw come through, one of which you referenced, the increase in the cap from a million to 1 and a half. But then the second thing was the extension of the amortization period for first time homebuyers to up to thirty years.

Speaker 4

So it's a both of those things, the increased amortization period as well as the increased cap did lead to higher transactional volumes. I don't have the exact numbers, but I think the number of kind of mortgages underwritten with the thirty year amortization was higher than the number that they saw come through from the higher kind of price cap increase.

Operator

Oh, interesting. Okay, that makes sense

Speaker 6

actually. Okay, that's it for me. Thanks very much.

Operator

Thank you. And I'm showing no further questions at this time. So with that, I'll hand the call back over to CEO, Anuj Ranjan, for any closing remarks.

Speaker 2

Thank you all for joining our call today, and we look forward to speaking with you next quarter.

Operator

Ladies and gentlemen, thank you for participating. This does conclude today's program, and you may now disconnect.

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