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    Brookfield Business Partners LP (BBU)

    Q2 2024 Earnings Summary

    Reported on Feb 18, 2025 (Before Market Open)
    Pre-Earnings Price$20.75Last close (Aug 1, 2024)
    Post-Earnings Price$19.75Open (Aug 2, 2024)
    Price Change
    $-1.00(-4.82%)

    What went well

    • Clarios is performing exceptionally well, with expected EBITDA of approximately $2 billion for the full year. BBU is exploring strategic alternatives, including a potential IPO, which could unlock significant value.
    • BBU has successfully refinanced over $11 billion of debt, reducing the spread by an average of 50 basis points, which will reduce annual interest expense by approximately $15 million at BBU's share, enhancing financial flexibility as rates decline.
    • Sagen has returned 85% of the capital invested through dividends. BBU has received back approximately $725 million from an $855 million investment, leaving about $130 million of equity at risk, demonstrating strong cash flow generation and investment returns.

    What went wrong

    • Operational risks due to cybersecurity incidents: The recent cybersecurity incident at CDK Global led to one-time costs and caused BBU's stock to decline 10% over several days during the outage. This highlights potential exposure to operational risks in BBU's portfolio companies, impacting financial performance and investor confidence.
    • Challenges in monetizing investments: Difficult market conditions, such as the stalled IPO market in Brazil, are affecting BBU's ability to monetize investments like BRK Ambiental. No new IPOs or equity capital market activity have been seen in Brazil, which may hinder BBU's capital recycling initiatives and impact liquidity and growth plans.
    • Market softness affecting performance: DexKo is experiencing lower results due to reduced volumes and market softness in North America and international markets. If conditions do not improve as expected, this could lead to sustained underperformance for BBU.

    Q&A Summary

    1. CDK Incident Impact
      Q: Will CDK incident have future financial impacts or market share loss?
      A: Management expects no additional material financial impact from the CDK incident going forward, as the bulk of costs have been captured this quarter. Contracts are multiyear agreements averaging 3-5 years with high customer retention rates, so risk of market share loss is minimal.

    2. Clarios IPO and Performance
      Q: How is Clarios's IPO process and financial performance?
      A: Clarios is performing exceptionally well, generating substantial free cash flow used to pay down debt. Management is encouraged by progress on strategic alternatives, including an IPO, and feels positive about recycling capital from this investment for BBU. EBITDA is expected to be around $2 billion on a U.S. GAAP basis for the full year.

    3. BRK Ambiental Monetization
      Q: What are the monetization options for BRK Ambiental?
      A: While an IPO remains an option, the IPO market in Brazil is difficult with limited activity. Management is exploring other options, including partnering with strategics interested in parts of the business or more mature concessions, to monetize and generate proceeds for BBU.

    4. CDK Cybersecurity Focus
      Q: What lessons were learned from CDK's cyber incident?
      A: Management emphasizes the need to increase focus on information security across all portfolio companies, treating cybersecurity as an industry-wide priority.

    5. CDK Capital Needs and Legal Risks
      Q: Will CDK require capital infusion or face legal action?
      A: CDK does not anticipate needing any capital downstreaming, as it generates strong free cash flow and has significant liquidity. The company has cyber insurance, which has been drawn on to address the incident, but potential litigation from dealerships may not be covered by insurance; management is assessing and believes there is limited merit to these lawsuits.

    6. Interest Savings and Rate Hedging
      Q: What are the interest savings from refinancing and hedging strategy?
      A: The recent refinancing resulted in $15 million annual interest savings for BBU's share. Approximately 70% of debt is hedged, and management expects to benefit from potential rate cuts as hedges roll off.

    7. Sagen Dividends and Capital Recovery
      Q: How much capital has been recovered from Sagen dividends?
      A: BBU has received 85% of its invested capital back from Sagen, totaling dividends of approximately $755 million out of the $855 million initial investment, leaving around $100 million equity at risk.

    8. DexKo Performance and Outlook
      Q: How is DexKo managing lower volumes and outlook into 2025?
      A: Despite market softness, particularly in North America, the team is managing costs to offset volume declines and expects the market to recover towards the end of this year and into 2025.

    9. Nielsen Profit Improvement
      Q: What's the update on Nielsen's profit improvement plan?
      A: Nielsen has achieved 400 basis points margin improvement, with early wins in digital and streaming; however, there's still work to be done to deliver the best offering in an evolving market.

    10. Acquisition of nVent
      Q: Is BBU involved in acquiring nVent?
      A: BBU has signed binding agreements to acquire nVent, a carve-out industrial business, expected to close in 4-5 months. The decision to proceed will depend on liquidity and capital allocation priorities at that time.

    11. BrandSafway EBITDA
      Q: Can you disclose BrandSafway's EBITDA over the past 12 months?
      A: BrandSafway contributed approximately $30 million in EBITDA to BBU's share, and it's accounted for in the Infrastructure Services segment.

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