Brookfield Business Corporation (BBUC) Earnings Call Transcript & Summary

Thank you. Thank you. 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. To join the question queue, simply press star 1 1 on your touchstone phone. 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 our known risk factors, you to review our filings with the securities regulators in Canada and the US which will be 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, Global Head of Business Operations, to talk more about a few of our recent acquisitions. Desprey Dell, our Chief Financial Officer, will finish with a review of our financial results for the quarter. After we conclude our prepared remarks, the team will be available to take your questions. With that, I'd like to now pass the call over to Anoush.

Thanks, Ellen, and good morning, everyone. Thank you all for joining us on the call today. Halfway through the year, the value of our business continues to compound, which is exactly what we set out to do. Over the past six months, we generated $1.2 billion in proceeds from asset sales and distributions, including an agreement we reached last month to sell Multiplex for about $650 million. Multiplex marks one of the last years of our business. significant legacy assets left on our balance sheet from the spin-out. Over the past several years we've monetized these assets and put that capital back to work in larger higher quality businesses that are more closely aligned with our long-term strategy of compounding capital. Consistent with that strategy, during the quarter we also committed over $300 million to acquire two market-leading industrial and services businesses and close our strategic investment in the OpenAI Deployment Company, or DeployCo, which I'll come back to in a moment. Today, our balance sheet is as strong as it has ever been. As our business continues to scale, we recognize the importance of having our shareholders participate in the value we generate when we sell or monetize assets. Since we launched our buyback program early last year, on the back of our strong capital recycling activity, we have repurchased more than $300 million of our own shares at a nearly 50% discount to net asset value. From the capital recycling activity during the quarter, we were allocating $150 million of proceeds to additional repurchases while our shares continue to trade at a meaningful discount to intrinsic value. Stepping back, we created BBUC a decade ago to give public investors access to Brookfield's global private equity capabilities. Since then, we have compounded net asset value per share at a mid-teens annual rate by applying the same playbook that we have refined over more than 25 years, buying high-quality, market-leading businesses, improving their operations and cash flows, and recycling capital when the time is right to reinvest and continue growing our business. Today, investors are placing a greater premium on resilience. The market used to pay up for businesses that could scale fast and is now paying up for businesses that can't be tipped over. Businesses like ours, with hard-to-replicate assets and capabilities, critical relationships and durable cash flows are becoming more valuable. Against this backdrop, we continue to see attractive opportunities to deploy capital where our capabilities can create significant value. In industrials, large conglomerates are simplifying their operations and divesting high quality businesses that are no longer core to their strategies, creating a growing pipeline of attractive carve outs. These transactions are often complex, which can create opportunities to acquire excellent businesses at reasonable valuations. Our experience executing carve outs about allows us to take on that complexity, improve performance and unlock meaningful value. Similarly in essential services, many end markets remain fragmented with mission critical providers benefiting from recurring demand and longstanding customer relationships, but lacking the scale, technology or investment required to reach their full potential. These conditions can allow us to acquire strong businesses with untapped potential, where our hands-on operating expertise can help build scale in fragmented markets and accelerate growth through focused investment and operational improvement. Turning back to deploy go, AI is allowing us to transform businesses faster than ever. This investment gives us access to leading models and world-class technical talent. Combined with the change management expertise of our operating teams, it allows us to accelerate the implementation of AI across our operations. We have real momentum heading into the second half of the year as we continue to invest for growth, return more capital to shareholders, and compound the value of our business. And with that, I'll turn it over to Adrian.

Thank you Anuj and good morning everyone. It's great to be joining you on the call today. As Anuj mentioned, we committed over $300 million to acquire two market leading businesses, World Freight Company or WFC and Gregg Distributors. Although they operate in different markets, both businesses have strong competitive positions providing admission-critical products or services, and benefit from occurring customer demand, and offer multiple levers for operational improvement and growth. Spend a few minutes discussing what attracted us to each business and where we see the opportunities to create value. Let me start with WFC, which is the world's largest general sales and service agent for the air freight industry. WFC represents more than 300 airline customers across over 70 countries, helping them sell and manage cargo capacity in geographies where they lack commercial and operating capabilities. Managing cargo operations across international markets requires local expertise, strong relationships with freight forwarders and on the ground execution. For airlines, outsourcing this non-core activity to WFC enables them to grow cargo revenues while maintaining a flexible cost structure. WFC's leading global network allows it to provide airlines with a single partner across geographies, together with access to data, capacity, and routing options that smaller operations cannot replicate. BFC benefits from longstanding customer relationships and operates an asset-light model with attractive margins and strong cash conversion. Alongside those strong fundamentals, we also see a clear opportunity to create a more integrated operating platform. BFC has grown through a collection of regional brands and today operates with a relatively decentralized model. Our focus will be expanding shared services, standardizing core processes and using automation and AI across high volume workflows such as quoting, booking, customer service and invoicing to improve productivity. Technology should enhance rather than displace WFC's core service, which continues to depend on local relationships, physical execution, and the management of complex time-sensitive cargo flows. In addition to these operational improvement levers, we see an opportunity to accelerate WFC's acquisition strategy. The company has a proven track record of acquiring regional operators, integrating them into its network and improving their performance. We believe WFC is well positioned to continue consolidating this fragmented market. Turning to Greg Distributors, Greg is a leading maintenance repair and operations distributor in Western Canada. The company supplies more than 150,000 SKUs, including tools, safety equipment, industrial chemicals, fleet products to approximately 25,000 customers across a wide range of industries. Greg's products are generally low cost, but essential to keeping its customers' facilities and equipment operating. Because the cost of downtime often far exceeds the cost of the products themselves, customers place a premium on availability, speed and service. Greg's broad product offering, local branch network, and high touch service model enable it to provide same day or next day order fulfillment. capabilities have supported a strong long-term track record of organic growth, resilient margins and cash flow generation. Greg has been founder-owned for several decades, and our immediate focus will be to manage the ownership and leadership transition carefully while preserving the culture and operating capabilities that have made the business successful. We've identified a number of opportunities to position Greg for its next phase of growth. These include strengthening its commercial capabilities, increasing share of wallet with existing customers, improving pricing discipline and using its purchasing scale more effectively across a large and fragmented supply base. We plan to support these initiatives with targeted investments in technology and operating systems while maintaining Greg's customer-first approach. We're excited to partner with both management teams and look forward to updating you on our progress in the quarters ahead. With that, I'll hand it over to Jaspreet for a review of our financials. Thanks, Adrian, and good morning, everyone.

We generated second quarter adjusted EBITDA of 587 million compared to 591 million in the prior period. Current year results reflect the impact of lower ownership in three businesses following the partial sales of our interests and include $23 million of contributions from new acquisitions. Excluding the impact of acquisitions and dispositions, adjusted EBITDA was up approximately 5% compared to the prior year. Adjusted ESO for the quarter was $289 million compared to $234 million in the prior period. Current period adjusted EFO included $40 million net gain primarily related to proceeds from the sale of securities during the quarter. Turning to segment performance, our industrial segment generated second quarter adjusted EBITDA of $323 million compared to $305 million last year. On the same store basis, adjusted EBITDA increased 6% over the prior year. Performance at Clarios, our advanced energy storage operation, was supported by ongoing commercial action and growing demand for higher margin advanced batteries. Strong cash generation enabled the business to repay $500 million of debt during the quarter, further strengthening its balance sheet while accelerating its multi-billion dollar U.S. investment program. Adjusted EBITDA in our engineered components manufacturer increased approximately 5% on the same store basis, benefiting from cost optimization and strong commercial execution, which more than offset the impact of soft-end market conditions. In April, the business refinanced its capital structure, extending maturities of its borrowings by approximately three years, which will provide added flexibility to manage through an eventual recovery in end market demand. Moving to our business services segment, we generated second quarter adjusted EBITDA of $204 million compared to $205 million last year. On a same-store basis, adjusted EBITDA increased by 6% over the prior year. Results included resilient performance at a residential mortgage insurer, which continues to benefit from the durability of first-time homebuyers' demand despite a weaker overall Canadian housing market. Higher losses on claims during the quarter reflect the impact of reserve strengthening, which represented approximately one-third of the reported loss ratio. Performance at our dealer software and technology services operation was supported by contractual annual price increases, continued cross-sell and up-sell activity, and cost optimization initiatives, which are offsetting the impact of elevated churn. Finally, our infrastructure services segment generated second quarter adjusted EBITDA of $96 million compared to $109 million last year. Current year results reflect the impact of a partial sale of a work access services operation completed in July 2025. Performance at both our modular building leasing services operation and work access services business was stable during the quarter. Results at our lottery services operation included the impact of a contract penalty payment at a joint venture and increased investment spend, more than offsetting revenue growth. We're accelerating strategic initiatives to expand cross-sell and up-sell opportunities with existing customers and executing on a strong pipeline of new commercial opportunities. Turning to our balance sheet and capital allocation priorities. We ended the quarter with approximately $2.8 billion of pro forma liquidity at the corporate level, including the fair value of units we received in exchange for the sale of partial interest in three businesses last year. We repurchased approximately 50 million of our shares during the quarter and will renew our NCIB in the next few weeks. As I need to mention, we intend to be active under the program if our shares continue to trade at a meaningful discount to intrinsic value. With that, I'd like to close our prepared remarks and turn the call back to the operator for questions.

Thank you. As a reminder, to ask a question, please press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1-1 again. One moment, please. Our first question comes from the line of Devin Dodge with BMO Capital Markets.

All right, thanks. Good morning. I wanted to start with a question on CDK and apologies in advance. It's a bit of a long one. You know, the debt has been trading at, we'll say, kind of distressed levels here, you know, I think it was put on negative watch by at least one of the credit rating agencies. And I think there were some media reports earlier this month about negotiations with lenders. So I think we all recognize that there are some moving parts with CDK, like, you know, technology upgrades, churn litigation, etc. But wondering if you provide an update on and how the underlying business is performing, how we should think about the sustainability of the current capital structure, and if we should expect Brookfield to need to put in additional capital into the business to reinforce the balance sheet.

Hi, Devin. It's just great. Maybe I'll start and then Adrian or Anuj can comment. So first, I say you kind of said this, so we can't really comment on media reports, really. related to kind of discussions with the lenders or others. But what I can tell you is that, we definitely continue to believe that CDK is a strong business. Overall kind of business performance as you would have seen from the results continues to be stable. The team is quite focused on the modernization initiatives and is continuing to progress that, which will enhance the overall product capabilities. And that will support kind of retention, help us manage the elevated churn. The liquidity profile. in the business is quite strong and the business has generated positive operating cash flows over the last 12 months. So, you know, we, as you know, with all of our businesses, and we talked about the fact that we extended the maturities at Dexco, you know, we did a refinancing repricing at Chemilex, like we're constantly evaluating opportunities to optimize the capital structures of our companies. companies. So I think that's really kind of an overview of where the business is at.

Okay, thanks, Jaspreet. Okay, maybe just switching gears. scientific game. I'm not sure who wants to take this. It might be Adrian, but it's It's been about, I think, 12, 18 months since the business was realigned with a dedicated management team for the digital business. I'm not sure if this is related to that increased investment spending that weighed on earnings in Q2, but can you provide an update on that restructuring and when you expect to see those benefits show up in the earnings of the broader platform?.

So if you focus, I think some of the elevated spend that you are talking to does refer to investment. A lot of that investment though is around data and analytics. We're continuing to pursue growth in the digital business. and we are seeing some positive signs. There's still some discussions going on with some of the licensors as to how we will implement that. But we still remain positive that that is a big opportunity for the business.

Okay, thank you. I'll turn it over. Our next question comes from the line of Bart Zyarski with RBC Capital Markets.

Great, good morning. Thanks for taking the questions. I wanted to ask on Sajan. We saw the loss ratio ticking up again this quarter to 17%. I know that's at the midpoint of the long-term pricing, 15% to 20%, but could you maybe dive into a bit more details as to the trend that's driving that? that and also what we should expect for the core loss ratio going forward. Thanks.

Hi, it's Jaspreet again. So, look, I'd say if I just step back, you know, overall underwriting activity at Sage and still continues to be quite strong. There's good demand for mortgage insurance. Now the overall kind of addressable market for the business is larger today than it was when we bought it and it's a function of two things. The regulatory changes that increase the amortization period to 30 years for insured mortgages, as well as the increase in the cap on home prices from a million to one and a half million. So like the top line revenue underwriting demand is there, the time is higher and we're seeing kind of growth. The loss ratios, just to your question, have gone up and they're ticking towards kind of the more normalized levels, which we always anticipated that the business would get to. If you look back, the long-term average kind of of loss ratios are more in that 15 to 25%. Now, since our acquisition, we've been in kind of a very low, in a loss ratio environment, but that was never kind of sustainable over the long term. And look, I'd say what's driving that was kind of appreciation we saw in home prices. And now we've seen home prices come down and start to normalize, which has resulted in kind of higher claims and lower cure rates in the business. Yes. Like what I'd say in terms of expectations as we're looking forward, You know, the 15 to 25% is kind of where we think the business will stabilize kind of long term and that's what we should expect. the team is constantly looking at kind of where the expected lifetime loss is tracking for the entire book. So they look at kind of the expected lifetime loss by vintage and then overall for the business. And if you look at kind of where we are now, that's where we're expecting the long-term average to be for the books that we've underwritten. So I think where we are now is kind of where you can expect losses to continue to trend in the short term. the cure rates that we had seen historically, which really refers to people being able to cure out of a delinquent mortgage, that has gone down. So people aren't able to cure as much as they were able to before. And that's a function of the fact that they don't have as much equity because of the depreciation in home prices. What we are seeing is a level of stabilization in home prices, where a lot of the markets are kind of going moving more into balanced markets as opposed to buyers market. So hopefully that signals some kind of stabilization and overall depreciation, which should also kind of support the cure rates not deteriorating further. But I'd say overall, based on what the team is seeing and the expected lifetime ratios, it's kind of tracking to where we are this quarter. So I think you should kind of expect that loss ratios will trend towards the historical averages.

on the Brookfield Evergreen Fund, BPE, so fair value of the remaining units is just south of $500 million. Maybe just walk us through kind of the fundraising momentum that you're seeing that's driving those repayments, and then should we expect that to be largely paid down by, I think we have until April 27.

Would love your thoughts there, thanks. Yes, sure, it's Anuj here, I'll take that one. So first is we launched BPE. We purposely launched first on Canadian platforms. We've now been distributing as well on an American platform and continue to add more US platforms and are in the early stages of working on and getting on some international platforms. What I would say is for the platforms we are on or we are distributing, fundraising is going well and we are punching above our weight. And so the story is resonating, banks like the story, the clients like the story, I'd say the product works. We are adding platforms as we go, and it does take time to get fully active and live on these platforms. And so that's been why it's taking probably a bit longer, but it is happening and the story is working. And so we're very confident in the overall total fundraising that we'll achieve from these channels. Of course, as and when it gets redeemed, within that 18 month period, it does, it's great. We get the cash flow in BBU, but we own these businesses. We're happy with these businesses. and we're happy with the continuing compounding of the value of these assets. Post that 18 month period, that discount would go away and that actually is over a long term framework also positive for BBU. So we're still very happy overall with the mechanism. as it continues to work its way through some of these distribution channels. Very helpful. Thanks, Anuj.

Thank you. Our next question comes from the line of Bill Katz with TD Cowan.

Hi, good morning. It's Bradley Hazon from Bill Katz. On DeployCo, at announcement, the expectation was around $150 million in investment, but this quarter it was announced at about $100 million. Was that a downsize or perhaps co-invest or maybe a future tranche and maybe an update around how you're thinking about the impact across the platform?.

Sure, I can start and then Anuj can maybe answer the second part of your question. So, you know, we'd originally kind of committed up to $150 million into DeployCo. And look, it's a great investment and we've got a guaranteed return investment. and within our kind of targeted returns. But the bigger reason for making this investment was more strategic and the strategic value of the partnership. And we achieved that, whether we have 100 million investment or 150, and we had very strong kind of demand from our institution partners on this. So we ended up kind of syndicating some of our investment down. And the 100 million, I think, is a reasonable investment for us. And it gives us kind of the strategic advantage that we get of being part of deploy coal. So that's why we were comfortable at 100 million Maybe I'll pass it on to Anuj to answer the second part of the question.

the actual opportunities we see within the portfolio or the strategic benefits of this investment. It's going very well so far. So we have noticed a long time ago, and I think continue to realize that the real bottleneck in true industry is not just technology but actually more so deployment of that technology at scale which is why we liked investing in this business so much. a great working relationship with OpenAI, having access to the talent that is actually quite limited out there to actually deploy these solutions in a customized fashion in true industrial and heavy asset oriented businesses. That's been really, really valuable. And broadly, I'd say as Brookford field in our AI Value Creation Office, we're seeing over, I mean, we're seeing thousands of true use cases across the business, hundreds of millions of dollars of run rate cost savings if we can use the technology appropriately, and we've been making a lot of progress across this portfolio. So OpenAI remains a great partner. The deploy co-opportunity is, we think, going to add real value to our portfolio. It's still early, but we're seeing the benefits already in terms of engagement and getting them in front of our portfolio companies.

Very helpful, thank you. And so given you're now at around $2.8 billion in pro forma liquidity, how are you thinking about using some of the proceeds from recycling and maybe a little color on the cadence of the buyback?.

Yes, I'll start and then happy for Just Be Radio to chime in. So look, our business, It's always been about investing in great companies, improving their operations and cash flows, and at the right time, monetizing those companies and recycling those proceeds. And we always look to do what's best for shareholders, which has been a balanced combination of investing in growth, deleveraging and returning capital to shareholders. We, at the end of the day, want to share the success of these monetizations with shareholders. And to be honest, at the current stock price, buybacks make a ton of sense. And as you can see, in the past year, we've managed to buy, in the past story since early last year, we've managed to buy back $300 million, which was at a 50% discount to NAV. And that's enormously. accretive for the business. And so, look, at this stock price, at this level, buying back continues to be one of the best uses for our capital. And as you rightly said, we've managed to generate quite a bit of liquidity recently, so we'll continue to pursue that strategy.