Brookfield Business Partners L.P.(BBUC)Q2 2025 法說會逐字稿

Welcome to the Brookfield Business Partners Second Quarter 2025 Results Conference Call and Webcast. The conference is being recorded. Now I'd like to turn the conference over to Alan Fleming, Head of Investor Relations. Please go ahead, Mr. Fleming.

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 both available on our website. We'll begin the call today with Anuj Ranjan, our Chief Executive Officer, who will provide an update on our strategic initiatives. Anuj will then turn the call over to Adrian Letts, Head of our Business Operations team, to share an update on the global operating environment. Jaspreet Dehl, our Chief Financial Officer, will then discuss our financial results for the quarter. After we finish our prepared remarks, the team will be on and available to take your questions. With that, I'd like to now pass the call over to Anuj.

Thanks, Alan, and good morning, everyone. Thank you for joining us on the call today. We had a great quarter. Our business continues to compound value and six months into the year, our overall per unit value is higher. Over the past few months, we realized more than $800 million from asset sales and distributions and invested $300 million to acquire two market-leading businesses. We continue to buy back under our repurchase program, which has returned nearly $160 million to our owners at the start of the year. We also generated strong financial results with adjusted EBITDA increasing to $591 million, supported by resilient margins and improved performance of our existing operations. As our business continues to scale, finding new ways to surface value will provide us flexibility to execute our playbook and the growth of the secondaries market has become one of the options at our disposal.

In simple terms, secondaries are the sale or transfer of a private investment from one investor to another, often at a 10% or more discount to net asset value as a way for an existing investor to get liquidity. If you think about BBU, it's really just a large private equity secondary, which is publicly listed and should trade at a much narrower discount than it does. This should prove itself out as we continue to surface value in accretive ways including the secondary sale of interest in our businesses at values that are accretive to our trading price. To that point, last month, we sold a portion of our interest in three of our businesses to the new evergreen fund managed by Brookfield. In exchange, we took back units of the new fund that have an initial redemption value of $690 million, which represents an aggregate 8.6% discount to the NAV of the interest that we sold. At these values, the transaction is highly accretive to the market value of BBU.

As the units are redeemed, the cash will provide us added flexibility to accelerate buybacks, reinvest in growth and reduce debt, all of which will increase the per unit and share value of our business. We've also been putting capital to work. Earlier this week, we agreed to privatize First National Financial Corporation, a leading Canadian residential and multifamily mortgage lender. First National is an essential service provider to the Canadian housing market, serving a critical role across the mortgage life cycle from underwriting and origination to funding, distribution, servicing and loan renewal. Its highly resilient earnings and strong cash flows are supported by the fees and income it earns on a large and growing base of mortgages that it services. Alongside our partners, we see opportunities to upgrade its systems, streamline operations and strengthen its service model in a private setting, which should enhance its already strong track record of returns and cash flows.

BBU's share of the equity investment is expected to be about $145 million. Stepping back, we've made great progress since the start of the year, and the reasons to own BBU have arguably never been clearer. First, we trade at a material discount to the private market value of our assets. Second, those assets are mission-critical providers of products and services. We generate strong cash flow across economic cycles. And lastly, every dollar that is recycled and redeployed is done so by the same Brookfield team, which has generated tremendous returns on capital for decades. With that, I'll now pass the call over to Adrian Letts, our Global Head of Business Operations, to provide an update on the operating environment.

Thank you, Anuj, and good morning, everyone. It's great to be joining you on the call today. With the first half of the year now behind us, I wanted to provide some observations on how the operating environment has evolved over the past few months and how our businesses have been responding. The global economy today is in a much different spot than the outlook most had expected at the start of this year. With inflation in check, unemployment levels low and many central banks moving toward an easing cycle, growth expectations across most developed markets were high heading into the year. However, tariffs, rising global trade tensions and geopolitical conflicts have introduced much more uncertainty in a relatively short time. While this continues, we do see signs that it is stabilizing. However, we remain cautious. The U.S. has been very resilient. GDP expectations for the second half of the year have stabilized.

Unemployment remains low and consumer sentiment has inched higher in the past few months. In Europe, although it will take a while for things to play through, stimulus spending is increasing, including Germany greenlighting a $500 billion infrastructure fund and other countries such as the U.K. have put forward plans to reduce barriers to competition and accelerate delivery of infrastructure projects. Outside of Europe, it remains very clear that the GCC markets where we operate in the Middle East are very strong, and India remains a growth economy. Growth is very important to our value creation plans. And while our businesses have not been immune to slowdowns over the past few months, our principles are serving us very well. We deliberately buy high-quality market-leading businesses that have strong competitive advantages and provide mission-critical products and services. This means they generally have pricing power, which has enabled us to pass through the direct effects of tariffs in select cases where we're seeing some impact in our operations.

It also means that notwithstanding some pockets of softness, our volumes and activity levels on balance have held up well in spite of the backdrop. Most importantly, we're not standing still. We have continued to make significant progress in our value creation plans across the business. As a result, we've been able to maintain and, in some cases, increase margins in more difficult near-term environments while continuing to strengthen the long-term positioning of our businesses. For example, at DexKo, while volumes have contracted, margins have increased approximately 200 basis points since our acquisition due to the phenomenal job the business has done to rightsize its cost structure, strengthen its market position and optimize productivity. Similarly, at Modulaire, where utilization levels have been impacted by overall sluggish capital investment in Europe, the team is continuing to drive growth in value-added products and services and streamline the organizational structure, which has contributed to resilient margins, which are higher than when we bought the business four years ago.

Even at Clarios, where performance continues to exceed expectations, overall battery volumes have seen some impact from a slowdown in global automotive production levels, yet margins, which exceeded 20% through the first half of the calendar year, continue to increase, supported by improved service levels, increased operational effectiveness and a higher mix of technologically advanced batteries. These are just a few examples of the work underway across each of our businesses, including our more recent acquisitions like Network International and Chemelex, where our integration and value creation plans are off to very strong starts. As Anuj said, we're really pleased with the progress we've made over the past six months. We've been through cycles like these before, and our playbook is tested. All the work we've done to optimize the operating platform should amplify performance when a broader-based recovery does take hold. With that, I'll hand it over to Jaspreet for a review of our financial results, and we'll stay on the line to take any more questions after prepared remarks.

Thanks, Adrian, and good morning, everyone. Second quarter adjusted EBITDA of $591 million increased compared to $524 million in the prior period. Results reflected improved underlying operating performance, tax benefits and contribution from recent acquisitions. Adjusted EFO of $234 million during the quarter benefited from lower interest expense due to a reduction in corporate borrowings compared to the prior period. Turning to segment performance. Our Industrial segment generated second quarter adjusted EBITDA of $307 million, an increase compared to $213 million in 2024. Results included $71 million of tax benefits at our advanced energy storage operation and contributions from recent acquisitions, including our electric heat tracing systems manufacturer, which we acquired in January. Strong performance at our advanced energy storage operations benefited from growing demand and increased volumes of advanced batteries as well as continued strong commercial and operational execution.

Volumes at our engineered components manufacturer improved across many international and North American end markets, which contributed to increased contributions during the quarter. Moving to Business Services segment, which generated second quarter adjusted EBITDA of $205 million, an increase compared to $182 million last year, which included the impact of $38 million related to one-time costs at our dealer software and technology services operation. Our residential mortgage insurer is benefiting from increased volumes of new insurance premiums written and low losses on claims. Results during the quarter reflect the timing impact of slower revenue recognition under IFRS 17 accounting standards due to revised model assumptions given the current macroeconomic uncertainty and consensus view of the Canadian housing market. At our dealer software and technology services operation, stable performance included costs associated with the ongoing investments in product modernization and technology upgrades.

This is expected to continue over the next 12 to 18 months. Finally, our Infrastructure Services segment generated second quarter adjusted EBITDA of $109 million compared to $157 million during the same quarter last year. This reflects the sale of our offshore oil services' shuttle tanker operation early this year. Industry fundamentals at our lottery service operations remain resilient despite the impact of fewer hardware deliveries and lower lottery jackpot sizes compared to prior year. Turning to our balance sheet and capital allocation priorities. Our strong balance sheet provides us options to support our capital allocation. We ended the quarter with approximately $2.9 billion of corporate liquidity pro forma for announced acquisitions and realizations, including the expected redemption value of the fund units we received in exchange for the sale of a partial interest in three businesses last month.

During the quarter, we continued to maintain an increased pace of repurchase activity under our buyback program. As Anuj mentioned, since February, we've acquired 6.5 million units in shares, returning nearly $160 million to our owners, including $56 million returned during the quarter. Buying our own units and shares well below their fair value is an easy and efficient way for us to generate returns for our investors and increase the per unit value of our business. We plan to renew our normal course issuer bid later this month, which will provide us capacity to repurchase an additional 8 million units in shares over the subsequent 12 months. With that, I'll close my remarks, and we'll open up the call for questions.

Our first question comes from Devin Dodge with BMO Capital Markets. We returned $56 million to our owners during the quarter. Buying our own units and shares well below their fair value is an easy and efficient way for us to generate returns for our investors and increase the per-unit value of our business. We plan to renew our normal course issuer bid later this month, which will provide us capacity to repurchase an additional 8 million units or shares over the subsequent 12 months. With that, I'll close my remarks, and we'll open up the call for questions.

So I wanted to start with Scientific Games. When we look at the earnings from this investment over the last 12 months or so, the trajectory has been flat to down. The business is having some nice commercial wins, and I'm sure there's a lot of work being done in the background to improve the operating performance. But it often seems like this progress gets offset by other factors. We've seen hardware deliveries, lower jackpots, inflation was a challenge at one point. It just made it harder to assess the earnings power of the business. So the question for you is just how is Scientific Games performing relative to your underwriting assumptions? And when do you expect all the work that's being done to show up in earnings?

Thanks, Devin. It's Adrian. If you look at the results this quarter, you're absolutely right: hardware deliveries were lower this year, and we saw some impact from a performance penalty at one of our joint ventures. But if you adjust for those impacts, EBITDA performance was flat. Stepping back, the industry remains very resilient, which was central to our original investment thesis. At the same time, overall industry growth has been a bit slower than we expected. We're continuing to scale up and put our shoulder behind digital capabilities, and we continue to see a high-growth segment of the market. We've realigned the business with digital, giving it its own reporting line under new leadership and hired a new business leader in that part of the organization who brings strong depth of experience. It takes time for the legislation to be put in place in the U.S., which will allow lottery operators to introduce digital lottery, but we've been winning our fair share including a significant digital lottery as part of the contract we were recently awarded for the U.K. Today, we're the largest digital lottery service provider globally.

While we've been winning these new opportunities, some of the contract awards have been slower to ramp up, and we're working to strengthen our capability to accelerate these. As the contracts ramp up over the next 12 months, we fully expect to flow through to earnings and cash flow. So it's in line with our investment thesis. It's a little bit behind where we'd like, but we're still incredibly positive on the business and see a big opportunity.

Okay. That's really good color there. I appreciate that. Second question, BrandSafway. I think the letter to unitholders mentioned the repositioning of the business towards higher growth markets. Can you provide a little more color behind that initiative and how easily you can pivot the business toward those markets?

Yes. Lower expected volumes across all segments, particularly in the rental business, which is higher margin. North American industrials are recovering, but the commercial markets remain soft. We do see pockets of opportunity. We've begun to reposition the business to strengthen the regional focus, and we're starting to see some upturn, although it's early. Management is focused on executing the transformation plan. Pricing continues to be a bit challenging in the market given some demand challenges and volume softness, which we expect to continue through the second half of the year. But as we start to reposition into some of the growth markets we see, we do have cautious optimism heading into next year.

Our next question comes from Gary Ho with Desjardins.

A few high-level ones here for me. Maybe start with Anuj. I listened in on one of your recent interviews and you mentioned leveraging AI to improve productivity in your businesses, improving margins of those businesses. I think some of the examples you gave were automation, customer service, robotics. I'm wondering if I can pick your brain on several of these larger projects you have ongoing in your portfolio, maybe highlighting ones that have more meaningful financial impact or provide a bit more competitive moat or strengthen your market positions in those assets.

Sure, Gary. We definitely see AI as a great tool. Stepping back, we've always bought leading industrial businesses and improved their margins with operations, and AI is another tool in that toolkit to achieve results more dramatically and much faster. In terms of use cases, there are probably hundreds of use cases we're running across the portfolio. A couple that are higher impact in some of our bigger operations: In Clarios, we've been implementing a way to optimize order intake to have an executable shipment plan to all our servicing plants while optimizing service performance. We automated the analysis of many business processes, which saved millions from customer service penalties, improved the quantity we can fulfill by about 10% and delivered a 14% improvement in overall service performance. We're also working on larger-scale automation with robotics in some manufacturing facilities.

In Everise, we've enabled AI-driven agent recruiting, screening, hiring and training at scale. This business employs over 14,000 people, so there's significant HR work to automate. We reduced training time by about 20%, reduced the cost of hiring an FTE by about 40%, and increased the speed to offer or hire across five countries by about five times. At CDK, we launched AVA, an AI virtual assistant integrated into core software offerings, which helps dealers respond conversationally to consumers in real time, answer every call, schedule appointments, uses intuitive conversations, supports 50 languages and provides a GPT-like experience. We saw a fourfold increase in touch points per lead and a 47% increase in sales calls per lead, improving the dealer experience. At Nielsen, we've reduced manual effort required in video segmentation for our ad intelligence operations, moving away from manual video coding performed by about 1,000 people.

We've accelerated market launches, improved data quality and projected about $10 million in annual run-rate cost savings with roughly 80% accuracy across segments. It's faster and more scalable, reducing delivery from months to days. These are just a few key case studies; there are hundreds more across the portfolio.

That's great. Second one I have: now that the big bill has been signed, have your team done some work on the potential read-through either positives or negatives? Obviously, you have the 45X. If you can elaborate on the status and what you hope to receive at Clarios. And then second, how does the accelerated depreciation impact some of your businesses in the U.S.?

Gary, it's Jaspreet. The team is working through all of the provisions in the bill—it's about 1,000 pages—so we're still going through it. Overall, our assessment is that it's a net positive. There are a number of tax changes and extensions. You mentioned bonus depreciation. Specifically for our industrial businesses in the U.S.—Clarios being the largest, followed by DexKo and now Chemelex—that should help with accelerated depreciation. They're restoring the deduction on R&D, which will be helpful to CDK. Across most businesses, enhancements to the deductibility of interest will also be helpful because a number of our businesses were capped on interest deductibility and that cap being increased is beneficial. While we're still working through the exact details, we expect it's net positive. Regarding Section 45X, we're still waiting on the check for last year's filing. With the changes in the bill, all benefits remain intact, and we're not expecting any change in our filing or entitlement to the tax benefit. It's mainly a matter of time to get it processed; tax processing has been slower than normal this year, but we fully expect to get paid.

Okay. Great. And then while I have you, it sounds like you're committed to renewing your buyback later this month. We've seen your BBUC shares versus unit spread widen out. Remind me: you look at both structures economically the same and any thoughts on narrowing that discount? I believe your IDR is tied to the unit price and not the corporate shares.

Yes, that's right; the IDR is tied to the unit price. From a buyback perspective, we've been buying back whatever is available in the market on both the units and the shares. There are limitations on what we can buy on a daily or weekly basis with trading volumes, so we've been buying equally on both BBU LP units and BBUC shares. I don't think the buyback is necessarily driving any discrepancy between the price of the units versus shares. The rationale for setting up BBUC was to attract a broader base of investors, and we've seen some net new investors buying into both structures, which may explain some of the relative moves. Both the shares and the units have been trending in a good direction, and at these levels we'll continue our buyback program because it remains accretive relative to intrinsic value.

Our next question comes from Bart Dziarski with RBC Capital Markets.

Just wanted to talk about the secondary transaction. Could you give us some color as to how you decided on the three assets that were vended in versus, say, other portfolio investments? How did those three come about?

Bart, it's Jaspreet. We went through a process and identified investments where we had an outsized share through co-investment and where we would be open to selling down some equity. We put a list together, looked at valuations, and had discussions with the team running the new fund strategy. We set up an independent special committee of our Board to oversee the process. The team managing the evergreen fund reviewed the assets against the fund's requirements and indicated which assets they'd be open to buying. We had valuation discussions and considered where secondaries trade, which led to the deal we did. The independent committee hired financial advisers to provide a third-party fairness valuation. That's how we arrived at the approximate 8.6% discount, which we think is very accretive for BBU given our units trade at closer to a 50% discount relative to our view of NAV. Monetizing these assets at that discount, getting cash in the door and redeploying it—whether to buy back units, pay down debt or fund future accretive investments—made sense. We still like these businesses and have retained significant ownership in all of them, so we expect to continue to participate in their upside through our retained ownership.

Very helpful. If I could follow up on the mark: the 9% discount to NAV is accretive to your unit price. When we look at secondary pricing, pricing improved last year to about 6% on average, and I would think BBU with your alpha versus other buyout players would warrant a smaller discount. Can you help us understand how that 9% was calibrated and triangulated against the market?

There's a wide range of discounts that secondaries trade at, depending on many factors: the age of investments, maturity, types of businesses, control versus non-control stakes, vintage, and so on. Discounts vary quite a bit; broadly over time about a 10% discount is normal on average. Some years a particular transaction narrows the average, and some years it's wider. Based on the work we did, we were comfortable that around that 10% range was a reasonable market-based discount for secondary trades.

Our next question comes from Jaeme Gloyn with National Bank Financial.

Just wanted to follow up on the secondary theme. You talked about significant demand in secondaries increasing over the past several years. Curious about the decision to place it with Brookfield Asset Management. Are you receiving other inbounds? Is it a case of the bid-ask being too wide from other third-party players? Walk us through how this increase in secondary demand is starting to flow through into the BBU businesses that you might look to monetize.

Thanks for the question. I wouldn't say we were actively looking to monetize through secondary transactions when this opportunity arose, although that could change in the future. The opportunity presented itself and was unique: BAM, with its brand and capability in retail wealth markets, was able to provide something we thought was accretive to our shareholders and at probably a better discount to NAV than we believed could be achieved in the broader secondary markets, given factors like timing and maturity of investments. It was opportunistic, and there are definitely other secondary market opportunities we could explore in the future if we chose to.

Understood. Shifting into operations: looking at the Business Services line, nice step-up in growth there. Can you talk to the organic drivers and which businesses are supporting that result in the Business Services segment?

Jaeme, it's Jaspreet. The biggest impact is coming through our construction operations. Last year we had a couple of projects in Australia that were challenged with cost overruns, which we booked through EBITDA. Those projects are now completed and behind us, and the construction business overall is performing well, so you're seeing normalized EBITDA performance come through. Some other businesses are marginally better as well, partially offset by the sale of our road fuels operations, which contributed to last year's results but is not in this year's results.

On buybacks and broader capital allocation: I believe you mentioned targeting $250 million of share buybacks in 2025. Does that guidance still hold? And how are you viewing the Brookfield preferred share and paydown of corporate borrowings as part of the use of liquidity today, which I believe is at high levels for BBU?

We've always talked about capital allocation in three priorities: pay down corporate leverage to preserve flexibility at the BBU level; fund growth with accretive acquisitions; and repurchase units when buybacks are accretive. We've progressed on all three this year. We paid down our corporate line by about $1 billion. With the First National announcement, that's a third acquisition for BBU, and on each acquisition we've committed roughly $150 million to $200 million. Regarding repurchases, the $250 million repurchase program we announced earlier this year remains our reference. We've bought back $160 million of that $250 million so far. We're approaching our normal course issuer bid limits, and that NCIB will renew mid-August; when it renews, we'll continue the buyback program, so we're still committed to the $250 million target.

Quick comment on the preferred share?

On the preferred shares, we've paid down half of them and still have the other half outstanding. Brookfield does have the right to ask for a redemption of those shares from either equity issuances or monetization activity, so we continue to have an ongoing dialogue with Brookfield. They're a very supportive and our largest shareholder, so we'll continue those discussions as proceeds are generated. Our priorities remain as I outlined earlier.

Last one: can you refresh on refinancings at the operating company level? Where are you on the debt maturity schedule and how do upcoming maturities compare to the current environment?

We don't have any large-scale debt maturities in the next 12 months; we've been proactive and gotten ahead of those. Debt maturing over the next 12 months is mostly operating company level debt, such as at La Trobe in Australia, which refinances regularly. For larger businesses, there's nothing material maturing in the next 12 months. Recently, we extended maturities at Modulaire, which was maturing in 2028 and was extended by about three years, and at Clarios we extended maturities that were due in 2027 by five years. At Chemelex we were able to reprice and tighten the spread from SOFR plus 350 to SOFR plus 300, which reduces interest expense. We're active in managing maturities; the portfolio's weighted average maturity is just shy of six years and a significant portion of our debt is hedged, so we feel comfortable managing debt across the businesses.

That concludes today's question-and-answer session. I'd like to turn the call back to Anuj Ranjan for closing remarks.

Thank you all for joining, and we'll see you next quarter.

This concludes today's conference call. Thank you for participating. You may now disconnect.