Brookfield Infrastructure Partners L.P. (NYSE:BIP) Q3 2023 Earnings Call Transcript

Brookfield Infrastructure Partners L.P. (NYSE:BIP) Q3 2023 Earnings Call Transcript November 1, 2023

Brookfield Infrastructure Partners L.P. misses on earnings expectations. Reported EPS is $0.03 EPS, expectations were $0.73.

Operator: Thank you for standing by and welcome to Brookfield Infrastructure Partners Third Quarter 2023 Results Conference Call and Webcast. At this time all participants are in listen-only mode. After the speakers’ presentation there will be a question-and-answer session. [Operator Instructions] As a reminder, today’s program is being recorded. And now I’d like to introduce your host for today’s program. David Krant, Chief Financial Officer. Please go ahead, sir.

David Krant: Thank you, operator and good morning, everyone. Welcome to Brookfield Infrastructure Partners’ third quarter 2023 earnings conference call. As introduced, my name is David Krant and I’m the Chief Financial Officer of Brookfield Infrastructure. I’m also joined today by our Chief Executive Officer, Sam Pollock. For the call this morning, I’ll begin with a discussion of our strong financial and operating results. I will then touch on our balance sheet strength and the success we’ve had in our asset sale program this year. I’ll then turn the call over to Sam, who will provide an update on our strategic initiatives and capital allocation. Following our commentary, we will be joined by Ben Vaughan, our Chief Operating Officer for question-and-answer period.

At this time, I’d like to remind you that in our remarks today, 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 would encourage you to review our Annual Report on Form 20-F, which is available on our website. Beginning with our financial and operating results, we’re pleased to report another quarter of excellent financial results due to good operating performance and the successful execution of our asset recycling strategy. Funds from operations or FFO for the quarter was $560 million, an increase of 7% compared to the same period in 2022. Results benefited from our businesses unique ability to capture current inflation levels, combined with the commissioning of nearly 1 billion of capital projects over the last 12 months.

Looking ahead, we are well positioned for a strong end of the year, considering that our European hyperscale data center platform was the only new investment to contribute this quarter, with the remaining $1.6 billion of new investments having closed at quarter end or shortly thereafter. Taking a closer look at our results by segment, our utilities businesses generated FFO of $229 million, an increase of 17% from the comparable period last year. Organic growth for the segment was over 10% reflecting inflation indexation and the commissioning of approximately $500 million of capital into rate base during the last 12 months. Current quarter results benefited from the expansion of our residential decarbonization infrastructure platform in North America and Europe following the acquisition of HomeServe earlier this year.

This positive contribution was partially offset by the sale of our interest in our Australian regulated utility in August of this year. Moving to our transport segment, FFO for the quarter was $205 million, with organic growth of 7% compared to the same period last year, rates at each of our businesses have increased reflecting the positive impact inflation has on our results. Specifically, our global toll road tariffs have increased 8% and our rail networks are passing through rate increases of approximately 7% relative to last year. Overall, volumes remain consistent across our portfolio reinforcing the criticality of our assets despite softness in the broader global transportation network. A bright spot within our transport statement is VLI, our integrated route and logistics provider in Brazil.

Brazil’s competitive advantages in the export of key agricultural commodities such as soy, corn and sugar, combined with strong fertilizer imports have supported growing rail volumes and tariffs. Over the past decade, we have been able to realize average annual volume and tariff increases of 5% and 9% respectively. As a result, EBIT has increased nearly 6x during our ownership. Our midstream segment FFO was $163 million, a decrease of 5% compared to the prior period. This was due to the partial sale of our interest in a U.S. gas pipeline in June, and the normalization of market sensitive revenues at our Canadian diversified midstream business. Results were supported by increased utilization and higher contracted cash flows across the segment compared to last year, as well as the initial contribution from the Heartland Petrochemical complex.

During the third quarter, Heartland ramped up production and sold over 200 million pounds of polypropylene. We’re operating at target production levels, and we expect to continue with these levels into 2024. All commercial arrangements underpinning approximately 70% of the capacity are in service and the fourth quarter is expected to provide a full period contribution to results. Lastly, FFO from our data segment was $66 million, representing an increase of 10% from the same period last year. The increase is attributable to the acquisition of a European telecom tower operation in February of 2023, and a European hyperscale data center platform this August. The prior period included contributions from a New Zealand integrated data distribution business that we sold in June of this year.

At our data center businesses, we continue to experience strong industry tailwinds driving elevated demand for capacity. In North America, our U.S. retail colocation business had record capacity bookings during the past two quarters, and recently initiated a densification program to create incremental capacity at existing sites. At our U.S. hyperscale platform we acquired a 200-acre site in Chicago that can accommodate 200 megawatts of capacity. Chicago is a fast-growing Tier-1 market for data centers with under 5% vacancy rates and we have already received advanced indications of interest from major hyperscale customers. In the Asia Pacific region, we commercialize our inaugural data center development in Seoul, South Korea. We executed a 15-year contract with a global hyperscaler for 13 megawatts of capacity that has built in inflation escalation and a pass-through of electricity costs.

Construction has commenced and as forecast to be completed by the end of 2025. In India, Reliance Industries are joining our existing joint venture on an equal basis. The current development platform includes two land parcels in Chennai and Mumbai, with total capacity potential of up to 160 megawatt. Transitioning from our resilient and growing financial results into remarks on our balance sheet and liquidity position. The fundamentals of our business remain strong as the benefit of inflation escalation and a disciplined financing approach have largely insulated us from rising rates. Furthermore, the Debt Capital Markets have been extremely favorable for infrastructure assets providing an overall net positive backdrop to business conditions.

We have proven our ability to deliver on our strategy through market cycle, sourcing several value-based investments during this period of capital dislocation, while completing our annual capital recycling objectives. In total, we have raised nearly $2 billion of proceeds this year from our program. Achieving our capital recycling objectives has required additional focus as the current market backdrop favors buyers. We continue to execute in this environment as we benefit from owning a high-quality and diversified asset base across sectors and geographies that we leverage to monetize assets at the highest valuations. We also tailor the size and structure of our assets to attract the most suitable buyers. Our capital recycling success has resulted in a strong liquidity position.

At the end of Q3, our corporate liquidity was approximately $2.1 billion, which reflects the funding of all announced transactions. This available liquidity combined with our target $2 billion of asset sales in 2024 provides a solid foundation for us to capitalize on the current investment landscape that favors well capitalized buyers with access to capital. That concludes my remarks for this morning. I’ll now turn the call over to Sam.

Sam Pollock: Thank you, David, and good morning, everyone. From my remarks today, I’m going to provide an update on our strategic initiatives and conclude with a brief discussion on the operating environment and our favorable outlook. The market environment we’ve been operating in has created a strong environment for capital deployment. We’ve surpassed our annual new investment objective for the third year in a row, closing the acquisitions of two marquee data center platforms, as well as the leading global logistics business, Trade international. The risk adjusted returns we expect to generate and these investments are well in excess of our targets and are represented of the value entry points that can be achieved in this market.

The take-private of Triton closed on September 28. We invested approximately $1.2 billion for a 28% interest that was funded primarily using new BIPC shares as transaction consideration. We expect to generate a base case IRR above our targets thrive largely from the in-place cash yield. The leading market position and highly cash generative nature of the business provides strong operational flexibility to invest in fleet replacements and growth during favorable markets or to harvest cash in less attractive markets. We’re also very excited about the opportunities across our data center platform, which has grown significantly following the acquisitions of Data4 and Compass, which closed in August and October respectively. Overnight, we signed an agreement to acquire portfolio data centers out of bankruptcy from Cyxtera.

We believe we will generate strategic value by combining Cyxtera with Evoque to create a leading retail colocation data center provider with over 330 megawatts of capacity deployed in high demand areas across North America. The combined platform will have the scale, assets and capabilities required to provide critical infrastructure reports over 2500 customers to support the exponential increase in demand from industry tailwinds, including artificial intelligence and cloud deployments. Funding has been fully secured for the transaction, which is expected to close in the first quarter of 2024. Touching briefly on the current operating environment, it is clear that there are considerable impacts from geopolitical and macroeconomic factors. Also of note is that we are witnessing diverging economic conditions in several of our key markets.

For instance, in Brazil, interest rates are expected to decline as the inflationary pressures have waned. In the U.S., a relatively strong economic background will likely result in interest rates at current levels for a while longer. Other regions seem to be somewhere in the middle. Our global footprint should allow us to arbitrage varying economic circumstances to write recycled capital on favorable terms in certain markets, while taking advantage of capital scarcity and others. This has always been our playbook, and we will continue to execute the same business strategy which has been successful over many years. I’d like to make a few comments in relation to our share price. Despite achieving solid financial results throughout the year, and delivering on our strategic initiatives, Brookfield Infrastructure’s unit price is disappointingly underperformed recently.

This is not unique to us. As utility infrastructure companies have generally traded off its investors focused on credit or other sector strategies. As we’ve noted in the past, the utility and infrastructure sectors are highly resilient asset classes that generate growing and sustainable cash flows. Indicative of those attributes, we have grown FFO per unit and distributions per unit at compound annual rates of 11% and 8%, respectively, over the past decade. Now looking ahead, there are several elements to our current situations that are worth highlighting. First, our sizable organic growth consists largely of embedded inflationary escalators and secured capital expansion projects. This benefit compounds over long periods of time and provides us with a natural hedge to higher interest rates.

Also, our capital backlog is largely self-funded from a combination of committed CapEx facilities and retain cash flows. And secondly, we have exceeded our new investments target for three consecutive years. As a result, we have substantial built in growth that provides us the flexibility to pace our investment activity in accordance for capital recycling achievements. Third, we have locked in interest rates for over 90% of our debt, with an average maturity of approximately seven years. This provides us with great visibility into our cash flow going forward. Fourth, in light of our strong conviction and the intrinsic value of our business and its growth trajectory, we see the merit in deploying capital to repurchase our equity. During the quarter, we began repurchasing equity and have bought close to 1 million units under our normal course issuer bid.

Going forward, we will consider further buybacks in conjunction with our ability to earn strong risk adjusted returns by deploying capital and new investment opportunities. In summary, we have demonstrated our ability to use our size, scale and diversification to continue recycling capital at good valuations, while earning higher returns in our new investments. On recycling, over the last three years, we’ve generated approximately $4.5 billion of proceeds from 16 asset sales. Each was completed at a premium to the IFRS carrying value at the time of sale, and the combined gain over book value was approximately 70%. On deployment, our 2023 investments are expected to provide us with some of the best risk adjusted returns we have seen in the last decade.

Combining these acquisitions with our existing platform investments provides significant embedded growth in our business today. We remain committed to providing unitholders the stable and growing distribution within the 5% to 9% range annually, while maintaining a payout ratio between 60% and 70% and a strong balance sheet. We have a track record of returning capital to investors with nearly $9 billion of distributions paid to unitholders. Ultimately, we believe providing strong cash flow and income growth creates unitholder value, which will be reflected in our unit price over time. This concludes my remarks. And I’ll now pass it back to the operator for questions.

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Q&A Session

Operator: Certainly. [Operator Instructions] Our first question comes from line of Cherilyn Radbourne from TD Cowen. Your question please.

Cherilyn Radbourne: Thanks very much, and good morning. I was wondering if you could start by expanding on your comments in the letter on the investment landscape in terms of where you’re seeing the most attractive opportunities by geography and by sector, and also how you think about pacing your investments in an environment where the stress associated with higher interest rates, arguably hasn’t been fully absorbed yet?

Sam Pollock: Hi, Cherylin. Thank you for those questions. I think there’s two of them in there. I think the first is just where we see value and just the tone of the market. And then the second one, just on our own pacing of investments. On the first portion of your question, we do see attractive opportunities in most regions that we operate in. Frankly, we’ve probably focused our attention in North America and Europe in the past year or two. And obviously, given our base currency being U.S. dollars, it’s always favorable for us to invest in U.S. dollar businesses. So that we don’t have to deal with FX issues. And so we tend to focus in this market when we see great opportunities, but we are seeing interesting opportunities.

coming our way in Asia at the moment. We do have a new team and a focus in South Korea in particular. We’ve also have had done generally very well, in Australia and because of the team we have down there. Have hit above our weight, I guess in terms of the amount of capital we’ve been able to deploy in that market. So I think, in the next little while, I’m optimistic that we will find some very interesting opportunities in those two markets. But I’d say as a general comment, we do see good opportunities pretty much everywhere. As far as sectors, as I probably said, on the previous call, and maybe the couple of calls before that, the best value tends to be in those businesses that need capital for growth, a lot of companies are starved for growth capital and sectors particularly the telecom sector, have tremendous capital projects in front of them.

And so they need capital and that’s, frankly, where we can invest for value today. But we are seeing interesting opportunities across transportation and utilities as well. So I realized I’ve covered up almost the whole universe of the infrastructure sector, but I do think there’s value to be had pretty much across the board. And as far as our own pacing, as we mentioned in our letter, we have been very successful in recycling capital and using our liquidity to invest boldly when we’ve seen good opportunities in the last couple years. I think we’re going to benefit from that for the foreseeable future. And as far as, what we will do in the future, I think it will be similar, if we see some amazing opportunities, we will find the capital to take advantage of them.

But at the same time, we don’t feel any pressure to invest and reduce our liquidity, except in those circumstances where we see exceptional opportunity. So I think you’ll see us being patient, but also investing boldly if we see a great opportunity.

Cherilyn Radbourne: Great. That’s a great overview. I’ll keep my second one short since that one had a few inside it. With respect to your pipeline of assets sales for 2024, would Some of that pipeline have debt that is portable to the prospective buyers, which is presumably an advantage in this market?

David Krant: Yes. Hi, Cherilyn. I would say the vast majority of the ones that we’re selling have portable debt. And yes, that’s one of the characteristics that we do look for at the moment in order to be selling businesses, because I think that is embedded value in those capital structures and allows us to continue to create value in this market environment.

Operator: And our next question comes from the line of Robert Kwan from RBC.