Q4 2024 Earnings Summary
- Clarios is increasing its content per vehicle by adding supercapacitors to its portfolio, capitalizing on trends towards vehicle electrification and autonomy, which is expected to boost both OEM and aftermarket revenues.
- Clarios plans to invest over $2 billion in the U.S. over the next decade to modernize facilities, increase capacity for advanced batteries, enhance recycling capabilities, and develop new technologies like sodium-ion batteries, positioning the company for future growth and leadership in battery technology.
- Brookfield Business Partners has pro forma liquidity of $2.7 billion, allowing for debt reduction and implementing a $250 million share buyback program, which is expected to be accretive to shareholders and strengthens the company's financial flexibility.
- DexKo operations are experiencing volume declines due to general market softness and inventory destocking, with expectations that this weakness will persist through 2025. Management finds it difficult to predict when volumes will recover, potentially impacting revenue and profitability.
- CDK operations are facing elevated costs due to accelerated technology modernization efforts, expected to continue over the next 18 to 24 months, which may pressure margins. Additionally, customer churn is slightly elevated, with gross retention rates currently at 90%.
- Healthscope continues to face challenges due to a mismatch between revenue growth and cost escalation, primarily driven by wage inflation, rendering the current model unsustainable. Activity levels are still below pre-COVID levels, and there is an active focus on protecting invested capital, indicating potential impairments.
| Topic | Previous Mentions | Current Period | Trend |
|---|---|---|---|
Clarios Battery Technology Expansion | Focus on AGM batteries for profitability and market share in Q1 ; no discussion in Q2 | Extensive discussion of sodium-ion, supercapacitors, AGM batteries, and connected services, highlighting new chemistries and complementary technologies | Expanded focus: Traditional AGM emphasis has evolved to include new battery chemistries and digital services, indicating a shift toward diversified technology innovation. |
Financial Flexibility and Capital Recycling Strategies | Q1 discussed monetizing smaller businesses, debt refinancing, and leverage management for Clarios ; Q2 covered refinancing, monetizations, and exploratory IPO potential | Emphasis on $2.7 billion in liquidity, debt reduction using proceeds from asset sales, and a $250 million share buyback program | Consistent focus with evolution: The topic remains central while Q4 shows more detailed operationalizing of liquidity and recycling strategies rather than IPO emphasis. |
Modernization and Capacity Expansion Investments | Not mentioned in Q1 or Q2 | Detailed plans to modernize 16 U.S. facilities by integrating automation, AI, and enhancing recycling capabilities; investments in new technologies including sodium-ion R&D | New emergence: This is an entirely new focus in Q4, reflecting a strategic pivot towards domestic technological upgrades and capacity expansion. |
Operational Challenges Across Business Units | Q1: Challenges in DexKo (market softness, post-COVID inventory), Healthscope (short-term issues), CDK modernization costs, and Multiplex overruns ; Q2: Mentioned DexKo volume declines, CDK modernization costs tied to a cybersecurity incident, and Multiplex overruns, while Healthscope was not discussed | Q4: Continues focus on DexKo’s soft market and inventory destocking, Healthscope’s cost pressures, and CDK’s modernization efforts; Multiplex overruns are not mentioned | Refined coverage: Most operational challenges remain, though there is a shift away from discussing Multiplex issues, with renewed emphasis on cost management in key units. |
Market Softness and Economic Uncertainty | Q1: Cited post-COVID elevated inventories and reduced demand, mitigated by diversification ; Q2: Noted softness in North America and internationally resulting in lower volumes | Q4: Persistent volume declines and inventory destocking due to broad market softness, with expectations for continued weakness into 2025 | Persistent concern: Economic uncertainty remains a steady challenge with similar negative sentiment, though management continues to focus on cost management. |
Cybersecurity and Technological Risks | Q1: No discussion of cybersecurity issues [–] ; Q2: Detailed coverage of a cyberattack at CDK Global, its EBITDA impact, remediation, and investments in cybersecurity measures | Q4: Alludes to elevated customer churn with possible links to cyber issues but stops short of confirming a cybersecurity incident, focusing instead on technological investment costs | Emerging then muted: Initially a major concern in Q2, Q4’s discussion is more muted and ambiguous, suggesting that while cybersecurity remains a risk, its prominence has decreased. |
Earnings Concentration and Leverage Risks in Core Businesses | Q1: Highlighted that 5 core businesses drive the majority of earnings and noted Clarios’ leverage at around 4x to 4.1x | Q4: No direct mention of earnings concentration or leverage risks in core businesses | Diminished focus: A previously discussed risk in Q1 is no longer mentioned in Q4, suggesting either resolution or deprioritization of the topic. |
Evolving Automotive Trends and Aftermarket Demand | Q1: Indirect mention through Clarios’ shift to more profitable AGM batteries and DexKo’s diversification ; Q2: No direct reference | Q4: In-depth discussion of vehicle electrification, autonomy, and the resilient aftermarket channel with long-term visibility into battery demand | New emphasis: A robust and detailed treatment in Q4 marks a growing focus on how evolving automotive trends will drive future demand, reflecting positive industry tailwinds. |
Asset Monetization and Divestiture Strategies | Q1: Extensive discussion on monetizing smaller legacy assets, generating ~$300 million in proceeds, and strategic moves for CDK and Clarios ; Q2: Focus on strategic alternatives for Clarios, BRK Ambiental monetization, and successful asset sales generating billions, reaffirming a 3x MoC and 30% IRR | Q4: Continues highlighting significant asset monetization by generating over $2 billion in proceeds, with strategic asset sales (e.g., Altera operations) and an oversubscribed Clarios upfinancing | Steady and impactful: This remains a core strategy across periods, consistently contributing to robust liquidity and value recycling initiatives for the company. |
-
Clarios Content per Vehicle
Q: How will Clarios's content per vehicle evolve?
A: Mark Wallace explained that with the addition of supercapacitors to their portfolio, Clarios has significantly increased content per vehicle. They expect this trend to continue as vehicles demand more electrical power and autonomous features, leading to multiple energy storage devices per vehicle. This growth will boost both their OEM business and aftermarket content. -
Inflation Reduction Act Tax Credits
Q: When will Clarios collect the $370M tax credits?
A: The $370 million referenced is BBU's share; Clarios's total eligibility is over $1 billion. They are filing their 2024 tax return based on finalized regulations, expect to file in Q1, and anticipate receiving the cash shortly thereafter. -
Buyback and Debt Reduction
Q: Details on the $250M buyback and debt plans?
A: Brookfield owns about 66% of BBU. The $250 million buyback targets open market purchases and will cancel the shares. Proceeds from Clarios and Altera will reduce corporate debt, aiming for pro forma liquidity of $2.7 billion. -
Healthscope Capital Protection
Q: How will you protect capital in Healthscope?
A: Healthscope faces unsustainable cost escalations outpacing revenue growth. They are actively working to improve operations, reduce costs, negotiate better funding with insurers, and engage with governments, aiming to protect and recover invested capital. -
M&A Environment and Pipeline
Q: Is it a buyer's or seller's market now?
A: Transaction activity is back, with more confidence in economies like the U.S. and India. Credit markets support cash-generating leaders like Clarios. BBU's pipeline is strong, and they anticipate more transactions without significant competition. -
DexKo Outlook
Q: What's the outlook for DexKo's turnaround?
A: DexKo volumes remain challenged due to market softness and destocking. They are planning for weakness through 2025. Management is offsetting margin pressure with cost management, positioning well for an eventual economic upturn. -
CDK Investments and Churn
Q: Explain CDK's higher costs and customer churn.
A: CDK is accelerating its technology modernization, compressing costs into a shorter timeframe of 18–24 months. Churn has slightly increased, with a gross retention rate of 90%, but new customers are joining, and churn is expected to normalize over time. -
Clarios Connected Services
Q: What's the opportunity in connected services?
A: Clarios has a contract with a European heavy-duty truck fleet, offering services that reduce idling by 40%, saving over €1,000 per truck annually. They are expanding these services in Europe and the U.S., providing real value to customers. -
OEM Transition from 12V Systems
Q: How will Clarios adapt if OEMs move from 12V?
A: Clarios provides solutions from 12V to 48V. Vehicles will need multiple voltage systems for subsystems and safety redundancies, so the low-voltage market remains vital. Clarios is well-positioned as architectures evolve. -
Scientific Games Leverage
Q: Can Scientific Games fund growth despite leverage?
A: Scientific Games generates stable EBITDA and cash flow. Operational improvements strengthen its position. New contracts, like in Ohio, are self-funded within the business, enabling growth without additional capital from BBU.