Brookfield Business Partners (“BBU”) generated strong earnings in the third quarter. During the quarter we announced the acquisition of a controlling interest in Genworth MI Canada (“Genworth”), an investment in BrandSafway and we reached agreement after the end of the quarter to acquire the common equity interests in Teekay Offshore LP (“Teekay Offshore”) which we do not already own. In addition, we advanced our capital recycling activities with the sale of North American Palladium (“NAP”) which we expect to close by the end of the year. These strategic initiatives, together with on-going progress across our operations should continue to enhance the value of BBU.
Progress on Strategic Initiatives
Quality of Operations
Our capital recycling initiatives have been enhancing the overall quality of BBU, with the sale of smaller businesses being replaced by larger ones with global operations, stronger barriers to entry and more consistent cash flows. Our largest businesses today are market leading providers of essential products and services. These operations benefit from highly recurring demand or operate under long-term contracts. We believe the resilience of our overall business has improved which should support relatively stable performance across economic cycles.
Genworth
In August we entered into a definitive agreement, together with institutional partners, to acquire a 57% controlling interest in Genworth for tangible book value. Genworth is the largest private residential mortgage insurer in Canada and an essential service provider of mortgage default insurance to the Canadian banking industry. The business has significant scale through a well-established national footprint, and long-term relationships with high quality customers. It operates in a highly regulated industry that presents natural barriers for new entrants, and the company has generated strong earnings and cash flows throughout business and housing cycles. Decades of conservative risk-taking by lenders, coupled with increased regulatory oversight has maintained the stability of the Canadian housing sector and consistently low mortgage delinquency rates.
Genworth operates a profitable mortgage insurance underwriting business and also earns income on its $5.5 billion investment portfolio. The company generates a ~13% return on equity, which is strong for a business with a debt-to-capital ratio of only ~10%, and we hope to enhance Genworth’s returns over time by leveraging Brookfield’s residential real estate expertise and relationships to grow market share. In addition, we see opportunities to optimize the capital structure and enhance the returns earned on its investment portfolio. We look forward to working alongside Genworth’s management team to generate long-term value for our unit holders.
We expect to fund the acquisition with $1.8 billion of equity, of which BBU has committed to invest up to $700 million. The transaction is subject to certain regulatory approvals and is expected to close by early 2020.
BrandSafway
At the end of the quarter, together with institutional partners, we reached a definitive agreement to acquire a 45% ownership interest in BrandSafway for $1.3 billion (BBU’s share is expected to be $400 million). BrandSafway is a leading global infrastructure services company, providing access and scaffolding systems, forming and shoring solutions, and specialized services to more than 30,000 global customers in the industrial, infrastructure and commercial property markets.
BrandSafway is the largest operator in a fragmented market and has established itself as a leader in safety and innovation. Given its size, scale and ability to invest to expand its competitive advantages, the company is well positioned to sustain its industry leadership position. The vast majority of BrandSafway’s revenue is derived from ongoing maintenance requirements of its global customer base, resulting in highly recurring demand for its services and relatively consistent cash flows across economic cycles.
We have identified efficiencies that leverage the company’s larger scale following the integration of several legacy acquisitions. In addition, Brookfield has a long history partnering with BrandSafway across its various businesses and our investment will enable BrandSafway to draw on Brookfield’s global reach and commercial relationships to support growth initiatives.
Teekay Offshore
In October, together with institutional partners, we entered into an agreement to acquire all outstanding publicly held common units of Teekay Offshore not already owned by us for an aggregate investment of $170 million, of which BBU is expected to fund approximately $75 million. As an alternative, unit holders will have the option to exchange one publicly traded unit of Teekay Offshore for one new economically equivalent unit in the private company, which provides an opportunity for Teekay Offshore investors to continue to invest alongside us in the private company. The transaction is subject to certain customary approvals and is expected to close by year end.
North American Palladium
Subsequent to quarter end, we reached an agreement to sell our controlling interest in NAP, a pure play palladium producer, for gross proceeds of approximately $570 million. The sale will generate $130 million of net proceeds after taxes for BBU. Since acquiring NAP in 2015, we worked with management to transform the business including implementing a new underground mining method and increasing mill throughput to achieve more than a 40% increase in palladium production per annum.
As market demand for palladium increased and prices trended upwards, the company generated increasingly robust cash flows, paid down debt, and increased its dividend. NAP’s improved performance created an opportunity for us to monetize our investment at an attractive level. When combined with distributions received, the net proceeds will equate to 3.3 times our invested capital generating an IRR of approximately 26%. We expect to close this transaction before the end of 2019.
Overview of Operational Performance
Brookfield Business Partners’ Company EBITDA was $368 million for the third quarter 2019 and Company FFO was $219 million, or $1.46 per unit. Results in the quarter benefited from strong operational performance and contributions from businesses acquired over the past year in both our Industrials and Business Services segments.
Our Infrastructure Services segment generated Company EBITDA of $139 million. Westinghouse reported Company EBITDA of $89 million with strong contributions from fuel services related to the fall outage season at customer facilities and contributions from new plant operations in the U.S. and China. The company is tracking toward a run-rate EBITDA of approximately $600 million by the end of 2019 and continues to identify longer-term enhancements that should result in annual EBITDA of $700 to $800 million over time. During the quarter Westinghouse completed its acquisition of NA Engineering Associates and announced its acquisition of Rolls-Royce’s Civil Nuclear Systems and Services business. These bolt-on acquisitions, while relatively small, should support the growth of Westinghouse’s global presence and enhance its service offering capabilities. Both acquisitions were funded with existing liquidity within Westinghouse.
Teekay Offshore, our service provider to the offshore oil production industry, reported performance in-line with the third quarter last year. The company continues to work through challenges associated with the redeployment of certain FPSO vessels where redeployment opportunities have been slower to materialize in the current market environment. The shuttle tanker operational performance has been stable and the company continues to renew its shuttle tanker fleet with seven new tankers expected to be delivered in late-2019 through early-2022.
Our Industrials segment generated Company EBITDA of $189 million. Clarios, our global manufacturer of automotive batteries, reported Company EBITDA of $92 million. As a market leader, Clarios is benefitting from stability in aftermarket battery demand despite impacts from lower auto production levels in China. We are pursuing operational improvements to optimize our U.S. operations, targeting over $300 million in EBITDA enhancements. At our U.S. manufacturing facilities, we are debottlenecking production and assembly to increase capacity utilization and productivity while reducing costs. During the quarter, Clarios reached an agreement to acquire the 20% ownership interest held by Robert Bosch GmbH in its European battery manufacturing and sales operations, giving it 100% ownership of this business which positions Clarios well to take advantage of growth opportunities in the European market.
GrafTech, our global manufacturer of graphite electrodes, generated Company EBITDA of $67 million. GrafTech sales volumes were slightly lower this quarter but its long-term, take-or-pay contracts for approximately two-thirds of production capacity provide the company with continued earnings resiliency. The company remains highly cash generative, and in July announced a $100 million share repurchase authorization.
Our Business Services segment contributed $64 million of Company EBITDA in the second quarter, with Multiplex, our construction services business, reporting Company EBITDA of $19 million. Multiplex’s Australian and European operations reported strong performance, and during the quarter it secured five new projects including the Phase 1 development of Queen’s Wharf in Brisbane valued at $550 million and 308 Exhibition Street in Melbourne valued at $390 million.
Healthscope reported Company EBITDA of $16 million. In addition to onboarding activities, during the quarter we worked with the company’s management to initiate several projects aimed at enhancing operations. We are developing initiatives aimed at improving performance at the Northern Beaches hospital, increasing capacity utilization across Healthscope’s broader hospital portfolio, and capitalizing on procurement and other operational cost saving opportunities. In early September, Steven Rubic joined as Chief Executive Officer. Steven has over 30 years of experience in leadership roles in the healthcare sector and we look forward to working with him and his management team to enhance value at Healthscope.
Liquidity
We have total corporate liquidity of $2.8 billion. Given the substantial growth in our overall business, we increased our corporate debt facilities by approximately $500 million after the end of the quarter. We will, from time to time, make use of our debt facilities to bridge funding of acquisitions or working capital needs. We also remain confident in our ability to generate significant liquidity for BBU from our existing businesses, both from cash generated within each business and from monetization of business interests, which will continue to support our growth.
Looking Forward
Our outlook for the year remains positive and our financial position remains strong. We believe BBU is well positioned to generate stable cash flows across economic cycles and for continued growth. Our primary focus for the balance of the year is to work toward closing our announced transactions, while continuing to work with our management teams to enhance the value of our operations.
In September, we held our annual Investor Day where we provided additional insight into initiatives we are undertaking to create value across our business. If you missed it, the webcast is available on our website at https://bbu.brookfield.com/en/events-and-presentations.
On behalf of everyone at BBU, thank you for your ongoing interest and support.
Sincerely,
Cyrus Madon
Chief Executive Officer
November 2019
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS AND INFORMATION
This letter to unitholders contains “forward-looking information” within the meaning of Canadian provincial securities laws and “forward-looking statements” within the meaning of Section 27A of the U.S. Securities Act of 1933, as amended, Section 21E of the U.S. Securities Exchange Act of 1934, as amended, “safe harbor” provisions of the United States Private Securities Litigation Reform Act of 1995 and in any applicable Canadian securities regulations. Forward-looking statements include statements that are predictive in nature, depend upon or refer to future events or conditions, include statements regarding the operations, business, financial condition, expected financial results, performance, prospects, opportunities, priorities, targets, goals, ongoing objectives, strategies and outlook of Brookfield Business Partners, as well as the outlook for North American and international economies for the current fiscal year and subsequent periods, and include words such as “expects,” “anticipates,” “plans,” “believes,” “estimates,” “seeks,” “intends,” “targets,” “projects,” “forecasts” or negative versions thereof and other similar expressions, or future or conditional verbs such as “may,” “will,” “should,” “would” and “could.”
Although we believe that our anticipated future results, performance or achievements expressed or implied by the forward-looking statements and information are based upon reasonable assumptions and expectations, the reader should not place undue reliance on forward-looking statements and information because they involve known and unknown risks, uncertainties and other factors, many of which are beyond our control, which may cause the actual results, performance or achievements of Brookfield Business Partners to differ materially from anticipated future results, performance or achievement expressed or implied by such forward-looking statements and information.
Factors that could cause actual results to differ materially from those contemplated or implied by forward-looking statements include, but are not limited to: the impact or unanticipated impact of general economic, political and market factors in the countries in which we do business; the behavior of financial markets, including fluctuations in interest and foreign exchange rates; global equity and capital markets and the availability of equity and debt financing and refinancing within these markets; strategic actions including dispositions; the ability to complete and effectively integrate acquisitions into existing operations and the ability to attain expected benefits; changes in accounting policies and methods used to report financial condition (including uncertainties associated with critical accounting assumptions and estimates); the ability to appropriately manage human capital; the effect of applying future accounting changes; business competition; operational and reputational risks; technological change; changes in government regulation and legislation within the countries in which we operate; governmental investigations; litigation; changes in tax laws; ability to collect amounts owed; catastrophic events, such as earthquakes and hurricanes; the possible impact of international conflicts and other developments including terrorist acts and cyber terrorism; and other risks and factors detailed from time to time in our documents filed with the securities regulators in Canada and the United States.
We caution that the foregoing list of important factors that may affect future results is not exhaustive. When relying on our forward-looking statements, investors and others should carefully consider the foregoing factors and other uncertainties and potential events. Except as required by law, Brookfield Business Partners undertakes no obligation to publicly update or revise any forward-looking statements or information, whether written or oral, that may be as a result of new information, future events or otherwise.
CAUTIONARY STATEMENT REGARDING THE USE OF NON-IFRS MEASURES
This letter to unitholders contains references to Non-IFRS Measures. When determining Company FFO and Company EBITDA, we include our unitholders’ proportionate share of Company FFO and Company EBITDA for equity accounted investments. Company FFO and Company EBITDA are not generally accepted accounting measures under IFRS and therefore may differ from definitions used by other entities. We believe these metrics are useful supplemental measures that may assist investors in assessing the financial performance of Brookfield Business Partners and its subsidiaries. However, Company FFO and Company EBITDA should not be considered in isolation from, or as substitutes for, analysis of our financial statements prepared in accordance with IFRS.
References to Brookfield Business Partners are to Brookfield Business Partners L.P. together with its subsidiaries, controlled affiliates and operating entities. Brookfield Business Partners’ results include publicly held limited partnership units, redemption-exchange units, general partnership units and special limited partnership units. More detailed information on certain references made in this letter to unitholders will be available in our Management’s Discussion and Analysis of Financial Condition and Results of Operations for the third quarter ended September 30, 2019.