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Sunday, June 30, 2019

Notes to Myself...Danaher Spinoff

Notes to Myself...Danaher Spinoff

DANAHER ANNOUNCES NEW DENTAL COMPANY TO BE NAMED ENVISTA HOLDINGS CORPORATION

WASHINGTONJune 27, 2019 /PRNewswire/ -- Danaher Corporation (NYSE: DHR) ("Danaher") today announced that Envista Holdings Corporation ("Envista" or the "Company") will be the name of the separate company Danaher intends to create and take public via an initial public offering in the second half of 2019.  Envista will be comprised of three operating companies within Danaher's Dental segment: Nobel Biocare Systems, KaVo Kerr, and Ormco. These businesses have significant positions in dental implants, orthodontics, dental equipment and consumables, and include brands such as Nobel Biocare, KaVo, Kerr, i-CAT, Dexis, Metrex, Pelton & Crane, Ormco, Implant Direct, and Orascoptic. Envista will be led by Amir Aghdaei, who will become President and Chief Executive Officer. Mr. Aghdaei currently serves as Danaher Group Executive with responsibility for the Dental segment.

Mr. Aghdaei stated, "Envista's name is a combination of two Latin root words: 'en', a prefix meaning to be within, and 'vista', meaning a view. Our logo of concentric circles represents our ability to collaboratively achieve endless possibilities ahead. The Envista brand reflects the forward-looking energy that embodies our company culture."

Aghdaei continued, "Envista's culture will be built on four core values: 'Better Choices, Better Outcomes,' 'Relationships Built on Trust,' 'Innovation in Action,' and 'Continuous Improvement as a Competitive Advantage.' Our Danaher heritage helped us shape these values and serves as a strong foundation for our business. The Envista Business System, which will be based on the Danaher Business System, will be our common operating model."

Envista intends to apply to list its common stock on the New York Stock Exchange. The stock symbol will be NVST. 

Envista will employ 12,000 people worldwide. The company's website is www.envistaco.com.

About Danaher

Danaher is a global science and technology innovator committed to helping its customers solve complex challenges and improving quality of life around the world. Its family of world class brands has leadership positions in the demanding and attractive health care, environmental and applied end-markets. With more than 20 operating companies, Danaher's globally diverse team of approximately 71,000 associates is united by a common culture and operating system, the Danaher Business System, and our Shared Purpose, Helping Realize Life's Potential. For more information, please visit www.danaher.com.

The dental business to be spun-off produces products used to diagnose, treat, and prevent disease and ailments of the teeth, gums, and supporting bones...This could be an opportunity...spinoffs of Danaher have historically performed very well...below is a link from a website that specializes in spinoff opportunities...it provides more gory details of the spun-off division. The huge baby boomer generation will need to have their teeth fixed (me too)...

Saturday, June 22, 2019

The Advantage of Asset Level Non-Recourse Financings

The Advantage of Asset Level Non-Recourse Financings

In this post Bruce Flatt explains how debt is handled at Brookfield Asset Management. And if you’re wondering why I’m putting so much emphasis on the Brookfield family of companies…It’s because I own the parent company as well as all four of their limited partnerships. Together they make up over half of my entire portfolio…Too much risk you think…For me risk is about not being familiar with what you own, which is one of the biggest problems with too much diversification. But that’s just me.  Every individual investor will in time have to come to terms with how much diversification is right for him or her. And speaking about being more familiar with what one owns, Bruce Flatt spells out below just how the all-important issue of the companies debt is managed at Brookfield.


We operate with debt on an asset level basis in order to reduce risk and maximize return on capital. The benefits of asset level debt, versus corporate level debt, have proven to be significant over many decades. As a result, the make-up of our liabilities is very different from many others, and our consolidated balance sheet is simply the sum of the debt on each asset and each balance sheet that we manage and consolidate. Our total debt is the summation of over 500 similar asset financings – each on average at 50% loan to value, and each of which stands on its own, with no recourse to Brookfield Asset Management.

Each financing is recourse only to the asset it finances, with no recourse to anything else. As a result, our leverage is extremely low risk and has stood the test of time over the past 30 years – including during periods of stress. We pride ourselves on being a great counterparty to those who lend us money but at the same time, we have no obligation to deal with any specific asset financing. Our debt is very carefully managed and has been a core strength, giving us confidence to go on offense when many corporate borrowers become stressed.

As an example, the Clarios financing mentioned earlier is recourse only to Clarios. It is not recourse to Brookfield Asset Management, Brookfield Business Partners, or our Private Equity fund; nor is it cross-collateralized to anything. It stands alone, like virtually all of our financings. For accounting purposes, however, we are obliged to show this non-recourse asset level debt on our Brookfield Asset Management consolidated balance sheet. This is required because we are the manager of the fund that acquired the company, but it is not corporate debt.

Lastly, at $7 billion, our corporate level debt is very modest in the context of our $50 billion market capitalization and more than $2 billion of annual corporate free cash flows.

Bruce Flatt,
Excerpt from Brookfield Asset Management’s Quarterly Letter,
May 9, 2019

Thursday, June 20, 2019

The Sun is Getting Brighter

The Sun is Getting Brighter 

Another example of the long term, visionary view of Bruce Flatt and his business team at Brookfield Asset management. A different perspective from the mass media who fixate on the noise of the day and what the Fed is currently up to. And again to brainstorm off of this scenario, think of the cottage industries that might spring up servicing this possible shift in the energy sector…True there is no guarantee that things will play out the way Flatt suggests but if your looking for certainties stay away from the stock market. But if you are interested in investing in stocks, try instead to think in terms of probabilities and the value of a long-term perspective and under-used information.


We are in the midst of a 50-year long, once in a many generation, transformation of the global power grid, from 100% fossil fuels to a good portion being renewables. We are still in the early stages, and this transformation will require very substantial capital investment over multiple decades. We estimate that replacing a meaningful part of the non-renewable capacity in our core markets with wind and solar will require over $10 trillion of investment.

This transformation is now escalating, as solar and wind power have moved from a formerly marginal resource requiring government support, to the lowest cost, easiest to build, provider of bulk power. This shift from new technology to established infrastructure has occurred at a rapid pace due to a combination of environmental regulation, subsidies, and more recently, cost declines which in the last five years have made some traditional forms of thermal generation obsolete, and therefore created widespread adoption of renewables.

Over $1 trillion of capital has been invested into renewables in the last five years, and over 1 million megawatts of new renewables have been added to the global power markets. This is equivalent to the entire U.S. electrical supply being replaced by renewables in the last five years. More importantly, despite this, renewables still account for less than 30% of global power supply, of which wind and solar account for less than 8%. Accordingly, even if the world maintains its current $200-$300 billion of annual investment into renewables, the level of penetration will remain modest for years. As a result, the opportunity to invest should be substantial for many decades.

In spite of the growth of the renewable power market, investing has been highly competitive. The numerous subsidies offered by governments, combined with low interest rates and sustainability initiatives have attracted all forms of investors. We therefore continue to be patient and strategic in building our business, but believe the prospects for growth are better than they have ever been. Furthermore, subsidies were never a sustainable way to build a power grid, but over the long term as they are eliminated, opportunities will favor those with operational expertise.

Over the last 20 years we have grown our operating capabilities, built a global business, and have been patient in deploying capital. Even so, over the last five years we have invested over $10 billion of capital into new opportunities globally, resulting in a portfolio of 8,000 megawatts of utility scale hydro, 6,000 megawatts of wind and solar facilities, and 3,000 megawatts of storage through our pumped hydro and battery facilities. In addition, we are one of the largest owners of distributed solar generation in the U.S. and are expanding this capability to key markets around the world.

From an operating perspective, we now have scale in North America, Latin America, Europe, China and India. This diversity of technology and geographic presence will help us rotate our capital across markets, looking for the best risk-adjusted investment opportunities. Moreover, our ability to operate plants, develop new projects and find customers should allow us to surface significant value from our existing portfolio over the long term.

Bruce Flatt,
Brookfield Asset Management,
Q2 2018 Letter to Shareholders

Tuesday, June 18, 2019

Automotive Battery Technology

Automotive Battery Technology

In this piece, Bruce Flatt not only discusses the bottom-up strategy involved with Brookfield's acquisition of Clarios, but over time, the top-down ramifications of the business as well. Notice the emphasis on long-term thinking and the way Brookfield manages their debt. Reading Flatt's Letter to the Shareholders gives the individual investor insight into the thinking that goes on within the Brookfield machine...One last note...Consider the possibility of the cottage industries that could spring up around this Automotive Battery Technology especially in terms of suppliers that might feed on this market.


Clarios

In our private equity business, we recently closed our acquisition of Clarios for $13.2 billion. Clarios is the global leader in automotive battery technology, manufacturing and distribution. The transaction was funded with equity and debt on very favorable terms, given the exceptional strength and stability of the business. We raised debt at a weighted average cost of 5.9% and with an average term of seven years. There are no financial maintenance covenants and there is no recourse other than to Clarios. We are pleased with this outcome as it provides us with significant flexibility to run the business and execute our plans, allowing for substantial free cash flow to be distributed to owners.

Clarios is a technology leader and an essential product supplier to an end market that is constantly growing. As a global market leader that supplies more than one third of the world’s automotive batteries, Clarios benefits from economies of scale in product development, manufacturing and recycling of used batteries. Clarios has remarkable stability in earnings, as over 75% of sales are driven by inelastic, stable demand for aftermarket battery replacement. As a result, Clarios boasts a decades-long record of consistent growth in EBITDA and unit profitability throughout business cycles.

Over the last 15 years, profitability has declined only once (in the financial recession of 2009), but quickly rebounded the following year. The aftermarket nature of the business also provides significant downside protection to our investment as cars last an average of 15 years and require three battery replacements. As a result, it would take a long time to displace or significantly impact cashflows from the business, given the current number of automobiles in the markets served by Clarios.

We believe that favorable industry trends also provide significant growth potential for the business. First, the industry expects the total number of cars on the road to grow by 30% globally over the next ten years. Clarios will provide batteries to the manufacturers of these cars, as well as replacement batteries, for decades to come. This is true even in a world where there is a higher take up of electric cars, as today every electric or hybrid car also has a traditional 12-volt battery that performs many of the same functions of an internal combustion engine car. In addition, as vehicles are increasing in complexity, the car battery is becoming even more critical in managing the increasing electrical loads in automobiles. This is driving an industry shift toward advanced batteries, where we believe our business is by far an industry leader.

Clarios also has long-term relationships with top-tier original equipment manufacturers and auto retailers in more than 150 countries, which provides us with a unique advantage in the development and supply of new products and technologies. The company has a history of innovation and has invested in an international network of laboratories with over 300 engineers focused on battery research and development to address our customers’ evolving needs as they design the next generation of vehicles.

Finally, as we do with all our businesses, we have identified opportunities within manufacturing and supply chain processes to further support profitability, and we are working closely with the management team on these and other initiatives to enhance the business.

Bruce Flatt,
Excerpt from Brookfield Asset Management’s Quarterly Letter,
May 9, 2019

Saturday, June 15, 2019

The 50-Year Infrastructure Runway

The 50-Year Infrastructure Runway

In keeping with the theme of the importance of the Letter to the Shareholders…I’ll be posting some excerpts from the quarterly letters of Brookfield Asset Management (the parent company of the Brookfield family of companies). These letters were written by Bruce Flatt, the CEO of Brookfield Asset Management. Bruce Flatt is not only a first class CEO, he is a business visionary who does not think in terms of months, or even years but in decades…The insights gained by taking the time to read these reports are incomparable to what the individual investor will find in the public media. 


We are in the early stages of the bulk of the infrastructure backbone of the global
economy being transferred into private hands from the public sector. We believe that this will translate into an opportunity of many tens of trillions of dollars over the next 50 years for the private sector. There are a number of reasons for this shift from the public to private sector, but we think there are three main reasonsThe first is that governments are highly indebted; despite this, they still need to keep up with both investment of capital into new infrastructure in the developing world, as well as the maintenance of old infrastructure in the developed world. The second is that private enterprise has proven to be far more efficient at building new infrastructure, as well as operating that infrastructure, than the public sector.

The third is that interest rates are very low(ish) by historical standards and are expected to be that way for the foreseeable future. As a result, institutions need something to replace fixed income allocations in their portfolios that has low risk but reasonable returns. Infrastructure is part of the solution.

As a result, we expect that over the next 50 years there will be both a very large supply of capital for projects, and very large demand by governments for infrastructure capital. Our goal is to continue to build our reputation for fair dealing, good stewardship, and astute investing, to the benefit of the governments/ companies we deal with, the communities that these infrastructure assets serve, and those we invest on behalf of.

Our most recent flagship infrastructure fund is $14 billion and is now over 85% invested or committed. As such, we are now raising the successor private fund. On our existing fund, we do not believe we have compromised our returns to put capital to work, and therefore we see no reason that our next fund will not be significantly larger than the last.

We are often asked why we do not have the same issues that some public equity managers have investing funds as they grow larger. The difference is that infrastructure (as well as real estate and private equity) usually becomes more attractive as investments get larger. The competition for larger acquisitions is less and the sophistication required to operate these assets increases because of their complexity, therefore favoring large and experienced managers. Lastly, the larger assets acquired are generally also higher quality – they often have better counterparties, and stronger management teams. As a result we believe that our infrastructure business can scale to many times the size it is today.

Bruce Flatt,
Excerpt from Brookfield Asset Management’s Quarterly Letter,
February 14, 2019

Thursday, June 13, 2019

Key Takeaways from Brookfield Infrastructure Partners Letter to the Shareholders

Key Takeaways from Brookfield Infrastructure Partners Letter to the Shareholders

A few things struck me when I first started to read Brookfield’s letter to the shareholders…The emphasis on a long term time horizon for their investments and the importance they put on capital allocation (capital recycling)…Think for a minute how this differs from the daily headlines the financial media spews out, who fixate on the next quarterly earnings reports and the daily movement of stock prices (algorithmic trading?)

By reading these letters the small investor can also gain added insight into the state of the economy and where Brookfield are currently putting their money. And you get this information for free on the internet but even better most investors don’t bother to look at it making it underused information (your edge on the competition).

There is more to investing than just blindly following the numbers…check out the management team who not only run the operations of the company but have to organize financing and allocate the companies capital as well…This isn’t monopoly money we’re talking about here…this is millions and in Brookfield’s case sometimes billions of dollars…real dollars, the coin of the realm.

One last point…the competition for short term information is cut-throat…extend your time horizons where there is less competition for information. As Willie Keeler once opined, ‘hit em where they ain’t’…Align yourself with good management teams who think long term…the Letter to the Shareholders will shed a lot of light as to what type of management team an investor might want to align himself with.

Sunday, June 9, 2019

Brookfield Infrastructure Partners, Letter to the Unitholders, 1st Quarter, 2019, Part Three


Brookfield Infrastructure Partners, Letter to the Unitholders, 1st Quarter, 2019, Part Three

Update on Strategic initiatives

Over the course of the last several weeks, we successfully completed the previously mentioned acquisitions of an Indian natural gas pipeline and a South American data center business. Execution of our 100-day integration plans at both businesses are progressing well.

The acquisition of the federally regulated assets in our Western Canadian Midstream business is expected to close in the third quarter of 2019 upon completion of a regulatory process.

We invested approximately $200 million for our share of Ascenty, our South American data center business. Funding also included capital for 2019 growth capital expenditures. Since closing the transaction, the business has expanded its data center business into Chile, leasing up to 6MW of capacity over the next 10 years to an investment-grade customer. This anchor contract will facilitate the construction of the facility, which is an accretive initiative that was not contemplated in our original business plan. The business is performing well, our partnership with Digital Realty Trust is generating the desired synergistic benefits we expected, and we are identifying additional prospective “tuck-in” opportunities that will grow Ascenty’s presence across South America.

Data Infrastructure Initiatives

Over the past year we have highlighted the data infrastructure segment as an area of growth for Brookfield Infrastructure. The sector continues to offer interesting investment opportunities given the large amounts of capital that need to be deployed in the space. Data has been one of the fastest growing commodities in the world. We expect this rapid growth to persist for the foreseeable future, driven by several factors including greater smartphone penetration, increasing video consumption, the advent of 5G networks and new and evolving uses, such as the internet of things, artificial intelligence and other applications that depend on low latency. We have identified this exponential growth in data usage worldwide as a significant opportunity, particularly with the largescale infrastructure investments that will be required to support data transportation and storage.

As we position our business to take advantage of this secular trend, we have decided to focus on the following investment areas – wireless infrastructure (i.e. telecom towers), fiber networks, data centers and integrated data operations. Our belief is that as people, places and objects become increasingly more interconnected, the importance and value of data infrastructure assets will continue to rise. Given the ongoing evolution and innovation taking place in the telecom sector, we are seeking to detach these assets from their corporate owners and focus on contractual arrangements that hold attractive infrastructure characteristics and bear limited technology and obsolescence risks.

Over the last few years, we have made several investments to grow and expand our data infrastructure business and today we are invested across several of the segments.

• Wireless infrastructure In 2015, we acquired a leading independent broadcast and telecom tower operator in France with over 7,000 towers and active rooftop sites. Growth in this business is driven by the requirement for mobile network operators to increase their site coverage to meet spectrum license obligations and improve network capacity to support higher data speeds and usage.

We believe investments in wireless infrastructure are attractive as these are long-life assets, which benefit from natural barriers to entry due to location scarcity and challenging permitting environments. In addition, customers are willing to enter into long-term contracts (up to 20 years), with embedded indexation to secure capacity given how critical these assets are to their wireless offering.

• Fiber networks Our investments in fiber networks to date have been through our existing portfolio companies. Our U.K. regulated distribution business is deploying fiber-to-the-home (FTTH) networks to new housing developments as part of its multi-utility offering in response to customer demand for faster and more reliable broadband solutions. Meanwhile, our French telecommunications infrastructure business is rolling out four FTTH networks to connect over 700,000 households in the next few years as part of the French government’s national broadband plan. Residential fiber networks offer utility-like characteristics due to the significant cost to build-out a dense network, which in-turn limits the risk of replication. Furthermore, like traditional utilities, broadband is becoming a basic household need, as societal demand for reliable connectivity increases.

We are also reviewing opportunities to acquire fiber networks specializing in enterprise services. We are looking for businesses with dense fiber networks, which provide a combination of dark and lit fiber offerings. The dark fiber offering provides a solid base with strong downside protection, due to the longterm, take-or-pay nature of the contracts, while lit fiber allows us to participate in demand for more data at higher broadband speeds. We believe having highly dense fiber networks provides us with substantial optionality as the world becomes increasingly interconnected.

• Data centers We have been most active with data centers over the last year, having acquired businesses on three continents. Our focus is on the retail colocation and wholesale data center models, with the key differentiator between the two being the amount of computing power required by our customers.

In our U.S. retail colocation business, we are improving the operations following the carve-out from AT&T by (i) assembling an experienced management team and dedicated sales function and (ii) repositioning the platform to become carrier neutral. Furthermore, with our global footprint, we believe there will be opportunities to enhance the portfolio by making tuck-in acquisitions to strengthen our presence in existing markets or enter new regions. In retail colocation, customer contracts are typically three to five years, with strong renewal rates, due to high customer switching costs. Customer stickiness is further enhanced through a platform effect as our customers are often in multiple sites or locations, which increases the complexity of switching given their network architecture.

Meanwhile, our wholesale platforms in South America and Asia Pacific are in regions where cloud computing is at an earlier stage of adoption. This should allow us to deploy additional capital on an accretive basis to build new data centers for large technology companies expanding their presence in the regions. The build-out of new sites is supported by anchor tenants entering into long-term, take-or-pay contracts (up to 10 years), which will allow us to achieve attractive, risk-adjusted returns within the initial contract term and significantly de-risk the investment.

• Integrated data/communications operations A potential area of opportunity for us is the acquisition of “asset heavy” integrated telecom operators. As the name implies, these are businesses that provide utility-like broadband and wireless services to customers through owner-operated tower and fiber networks. As we review potential opportunities, we have defined a list of key characteristics we are looking for:

 − Leading fixed (and wireless) player with a presence in a single market, region or country;
− Ownership of high-quality data infrastructure assets with high replacement cost;
− Markets which have demonstrated a stable operating and regulatory environment; and
− Favorable competitive dynamics which facilitate underwriting of long-term market share assumptions.

These businesses will have customer-facing activities similar to our distribution companies. For asset heavy operators, these activities represent a small fraction of the margin generated in the overall business. For certain large-scale businesses, an opportunity exists to consider separating underlying network infrastructure from the service business. However, this would need to be assessed in the context of the existing market structure. In general, we believe that managing and retaining the customer relationship is important, as it provides increased flexibility to tailor the network to meet customers’ requirements and increases customer stickiness by bundling multiple services. If the retail component has sufficient scale and credit quality, then a separation might make sense.

Outlook

We are pleased with the performance of the business so far in 2019, and the outlook for the rest of the year remains positive. We are currently operating in an environment where “main street” economic activity is strong and the threat of an economic pullback in the near-term appears low. In addition, the impetus for central banks to raise rates also appears to have waned, and thus we should enjoy lower interest rates for longer. While our business generally performs well throughout all investment cycles, low interest rates and steady GDP growth are particularly good for us.

The results of the first phase of our capital recycling initiatives are encouraging. In 2018, we raised $1.1 billion from asset sales and redeployed the proceeds into five exciting new businesses. Once we complete the second part of the Western Canadian midstream acquisition and achieve a full period of contribution from our newly acquired South American data center business and Indian pipeline, our results will fully reflect the benefits of capital recycling. These benefits include higher organic growth potential and greater diversification. Furthermore, we believe that after removing the impact of foreign exchange, our second half 2019 FFO run-rate will be approximately 22% higher than what it was at the time we sold our Chilean electricity transmission business.

As previously noted, we are making good progress on our next phase of capital recycling. We expect this phase of the program to generate between $1.5 - $2 billion by the end of 2020, the proceeds of which will be reinvested into exciting new infrastructure assets. We believe we will replicate the success from our most recent round of capital recycling initiatives and create additional unitholder value.

We thank you for your continued support and look forward to updating you further on our progress later in the year.

Sam Pollock,
Chief Executive Officer,
May 3, 2019

Saturday, June 8, 2019

Brookfield Infrastructure Partners, Letter to the Unitholders, 1st Quarter, 2019, Part Two


Brookfield Infrastructure Partners, Letter to the Unitholders, 1st Quarter, 2019, Part Two

Balance Sheet and Funding Plan

Our balance sheet remains strong, with total liquidity of approximately $3 billion at the end of the period, of which approximately $1.9 billion is at the corporate level. Liquidity was strengthened during the quarter by a C$100 million preferred share issuance, and the sale of a 33% interest and a financing in our Chilean toll road business that generated after-tax proceeds of approximately $365 million.

In-line with our capital recycling strategy, we considered this to be an opportune time to monetize a portion of our Chilean toll road investment, as the asset has reached the mature phase of its lifecycle. We acquired a 51% interest in our Chilean toll road operation through a series of transactions during 2011 and 2012, for a total of $340 million. Since acquisition, we implemented a number of initiatives to improve operating margins and raised investment-grade debt that lowered our cost of capital. This, coupled with strong traffic growth and a favorable tariff regime, has resulted in significant value appreciation. In February, we completed the partial sale of our interest and realized a multiple on invested capital of approximately three times. Additionally, as this investment is held at amortized cost under IFRS, the partial sale resulted in a $350 million accounting gain that was recognized this quarter. Since we monetized a non-controlling interest and retained control in a consolidated investment, accounting rules require the gain to be recorded directly to our unitholder’s equity balance.

Over the course of the year, we expect to further enhance liquidity levels as we execute on our capital recycling program. In this regard, we have entered into an agreement to sell our bulk European port operations, with a sale expected to be completed in June of this year, subject to regulatory approvals. We expect to receive net after-tax proceeds of $130 million from the sale, which is approximately equal to the carrying value of the business. We remain on-track to generate additional proceeds of $1.5 - $2 billion in the next 12 to 18 months from several other sales processes that are underway.

We are also focused on managing near-term maturities amidst favorable capital market conditions. In March, our Australian port operations opportunistically refinanced A$1 billion of debt, on the back of strong financial results. The offering was very well-received by lenders and annual interest costs for the business were reduced by approximately 50 basis points. We currently have no material individual maturity that will need to be refinanced in the next five years, and once we complete a number of ongoing normal course financings, our average duration across the business will be over eight years.

Sam Pollock,
Chief Executive Officer,
May 3, 2019

Friday, June 7, 2019

Brookfield Infrastructure Partners, Letter to the Unitholders, 1st Quarter, 2019, Part One


Brookfield Infrastructure Partners, Letter to the Unitholders, 1st Quarter, 2019, Part One

Overview

We are pleased to report that Brookfield Infrastructure is off to a strong start in 2019. The business generated funds from operations (FFO) of $351 million in the first quarter, or $0.88 per unit, up from $333 million in the prior year. On a per unit basis, our results were up 4% compared to the prior year, and after taking into account our recent 7% distribution increase, our payout ratio for the quarter was 71% of FFO.

Last quarter we indicated that we had committed approximately $700 million of capital to be deployed into three transactions. In the first quarter, we closed on two of these investments for approximately $430 million: a data center business in South America and a fully-contracted natural gas pipeline in India. We are also progressing the third transaction, the second phase of the Western Canadian midstream business acquisition, which is expected to close early in the third quarter of the year. As cash flows from these investments get fully reflected in our results in future quarters, our run-rate FFO will further increase.

Results of Operations

Results for the quarter reflect strong performance by each one of our operating segments, which in total delivered 10% organic growth over 2018, exceeding our annual long-term target range of 6-9%. Organic growth was generated by inflation-indexation across approximately 75% of our businesses, solid GDP-driven volume growth, predominantly at our transport operations, and contributions from accretive capital projects commissioned during the period. Our results also benefited from recently acquired businesses. These positive factors were partially offset by the impact of a weaker Brazilian real, which reduced earnings by $13 million in the quarter.

The utilities segment contributed FFO of $137 million, compared to $169 million in the prior year. Underlying performance was strong as our operating groups were able to grow results by 5% on a same-store basis over the prior year. This was predominantly driven by inflationary increases to our rate base, combined with another strong quarter at our U.K. regulated distribution business. These contributions were offset by having less capital invested following the sale of our Chilean electricity transmission business in March of last year, higher interest expense associated with a financing completed at our Brazilian regulated gas transmission operation, and a $9 million impact from foreign exchange.

Our U.K. regulated distribution business maintained its momentum, following a record year of performance in 2018. Sales and connections activity exceeded the prior year by 8% and 16%, respectively, and at the end of March, our order book stood at an all-time high of 1.1 million connections, which is 12% higher than the prior year. In particular, the multi-utility product offering continues to be attractive to developers, as evidenced by the strong results which have materialized from our fiber offering, where sales are 50% higher than the prior year.

At our Brazilian electricity transmission business, we are making good progress on the development of 4,300 km of transmission lines. The first three segments, which total approximately 1,600 km of lines, are fully operational and construction for the remaining 2,700 km is on track. In April, we exercised our first option to acquire a 50% interest in 500 km of operating lines from our partner, bringing our ownership to 100%. We plan on exercising our buyout options for the remaining operating lines later this year.

FFO from our transport segment was $139 million for the quarter, in-line with prior year results. The segment benefited from organic growth of 6%, driven by higher tariff and traffic levels across our global toll road portfolio, strong volumes at our container terminals and higher revenues at our Australian rail operations. These positive contributions were partially offset by the previously announced sale of a 33% interest in our Chilean toll road operation that closed in February and the expiry of one of the state concessions at our Brazilian toll road business. FFO for this segment was also reduced by $4 million as a result of foreign exchange, primarily the result of a decline in the Brazilian real.

Despite uncertainty over Brexit, our U.K. port operation is thriving. Container and bulk volumes remain robust, exceeding the prior year by 45% and 5%, respectively. Volume increases from our bulk and unitized customers have been driven by new contract wins and strong organic customer growth. With our container terminal nearing capacity, we are now proceeding with the fourth phase of its expansion, comprising a total capital investment of $17 million. This will increase throughput capacity by a further 20% by mid-2020.

The energy segment contributed FFO of $107 million, which represents a 62% improvement from the prior year. This step-change increase is attributable to organic growth and contributions from two recently acquired North American businesses. Our North American natural gas transmission business delivered another strong quarter, generating FFO that was 23% higher versus the prior year. Results for this business are benefiting from robust demand for transport services and contributions from the first phase of its Gulf Coast expansion project. At our gas storage operations, FFO was 43% above last year as the business earned higher spreads related to cold weather conditions.

Within our distributed energy operating group, several new growth initiatives are underway at our recently acquired North American residential energy infrastructure business. We recently partnered with multiple homebuilders to be the exclusive provider of smart home technology for over 3,000 new homes. This offering will create opportunities for the sale of additional products and services to this new customer base. We are also currently progressing a partnership with a utility in Texas for a pilot program that will offer our residential infrastructure products to a subset of its existing clients. If the pilot is successful, the program has the potential to generate meaningful sales leads when we roll out this offering to the full customer base.

FFO for the data infrastructure segment was $28 million, up from $19 million last year. Recent investments in our global data center portfolio contributed FFO of $7 million for the quarter. FFO from our French telecommunications infrastructure business grew by 13%, due to inflationary increases and new points-of-presence added to our tower network.

Commercialization of the second of four fiber-to-the-home concessions held by our French telecommunications infrastructure business has commenced, with a level of take-up above underwriting and market averages thus far. Our build-to-suit tower program continues to grow, with over 300 towers built over the last 12 months. We currently have a contracted backlog of over 900 towers, which are expected to be delivered over the next three years, providing us with strong visibility into the next phase of organic growth for the business.

Sam Pollock,
Chief Executive Officer,
May 3, 2019

Thursday, June 6, 2019

The Letter to the Shareholders


The Letter to the Shareholders

Not all public companies write a letter to their shareholders but they should. It provides the company with the opportunity to communicate to their shareholders the current affairs of their company. Not to mention the prospects for the future of their business and how the management team plan to achieve their goals for the future.

The fact that most public companies don’t bother to do this should tell the investor something about the company. If they can’t be bothered to write the letter, then why should I be bothered about investing in the stock of their company?

The companies that do take the time to write the letter tend to be more shareholder-friendly towards their investors and it can make for fascinating reading…Certainly much more valuable than the mindless knee-jerk reactionary news of the public media.

Lastly, the letter to the shareholders have wager value (see earlier posts about this), in that it is under-utilized information that most people are not aware of. It can often be very educational as the investor who takes the time to read these reports can get a free education from the front lines of a real company conducting their affairs in the business world.

In the next few posts I will pass along the Letter to the Shareholders from the company that holds the biggest position in my investment portfolio, Brookfield Infrastructure Partners (BIP.UN on the TSX, BIP on the NYSE)

Monday, June 3, 2019

Stephen Takacsy on BNN-Bloomberg’s Market Call – June 3, 2019

Stephen Takacsy on BNN-Bloomberg’s Market Call – June 3, 2019

MARKET OUTLOOK

Markets rebounded strongly this year from oversold conditions as fears of an impending recession faded, central banks stopped raising interest rates and the U.S.-China trade war was pushed out. We took some profits, raising 10 per cent cash as the stock market was getting expensive amid slowing global growth and trade war uncertainty. Now that a U.S.-China trade deal failed to materialize and tariffs are being imposed, we're even more cautious as corporations start getting impacted. Also, IPOs such as Uber priced at ridiculously high valuations signal a market top. Nevertheless, we still see many good long-term opportunities in the neglected and mispriced Canadian small- and mid-cap sector.

UPDATE

Grande West Transportation (bought at $1.66): sold 50 per cent of our position around $0.80 as new orders have been slower than anticipated.

TOP PICKS


Burnaby, B.C.-based Swiss Water (formally called Ten Peaks) is the world’s only chemical-free processor of decaffeinated coffee. It also provides coffee storage and handling services. They sell to large chains like Tim Horton’s and McDonald’s and specialty roasters such Third Wave specialty coffee shops and global importers. International demand for chemical-free decaf is growing, so the company is building a new plant to double capacity which should be completed this fall. First-quarter results were very strong, showing continued double-digit volume growth and gross margin expansion. The stock is very cheap at roughly 10 times price-to-earnings and 8 times earnings before interest, tax, depreciation and amortization (EBITDA) for a high barriers to entry, global growth and cash-flow-generating business. Pays an attractive 4.4 per cent dividend.

POLLARD BANKNOTE (PBL.TO 0.27%)

Pollard is the second largest supplier of printed instant lottery tickets in the world. North American ticket sales have been growing at a compound annual growth rate of 6 per cent for over 20 years. Barriers to entry are very  high with only three players licensed in North America. Scientific Games has 70 per cent market share while Pollard has around 22 per cent and IGT 8 per cent. Pollard has been gaining share with state lotteries by creating innovative content on tickets and also focusing on technology and lottery management. Pollard has also expanded into charitable gaming, iLottery and display merchandising. Pollard has been growing profits organically and by acquisition and plans on being even more acquisitive and increasing its public float, which should drive its stock price much higher over the next few years. We recently purchased more shares around $22.

BLACKBERRY (BB.TO 1.32%)

Many investors don’t realize that BlackBerry is now a pure software company with a growing double-digit recurring revenue base from three streams: Enterprise security software for mobile communication, which the company is traditionally known for and it's transitioning into a software-as-a-service model; the QNX operating system, the gold standard for the automobile industry for infotaiment and advanced driver assistance systems and for which BlackBerry gets a royalty per car (120 million cars so far); and a large patent licensing business. BlackBerry also just acquired Cylance, a leading cybersecurity software firm that uses AI and machine learning technology to predict and prevent cyberattacks before they happen. The stock trades at only 3.5 times revenues. We expect BlackBerry to be acquired within a few years at 7 to 10 times revenue by the likes of Microsoft for $20 to $30 per share.

Stephen Takacsy, Lester Asset Management