Brookfield Business Corporation (BBUC 5.17%) Q2 2022 Earnings Call Aug 05 2022, 10:00 a.m. ET
Contents:
Prepared Remarks:
Welcome to Brookfield Business Partners’ second quarter 2022 results conference call and webcast. [Operator Instructions] The conference is being recorded. See the article : 5 tips from travel experts to deal with inflation this summer. [Operator Instructions] I would now like to turn the conference over to Alan Fleming, Senior Vice President of Investor Relations. Please enter forward, sir.
Alan Fleming – Senior Vice President of Investor Relations
Thank you, operator, and good morning. Before we begin, I want to remind you that when we answer questions and talk about our growth initiatives and our financial 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 known risk factors, I encourage you to review our filings with the securities laws in Canada and the United States, which are available on our website.
On the call with me today is Cyrus Madon, chief executive officer; Denis Turcotte, Chief Operating Officer; and Jaspreet Dehl, Chief Financial Officer. We’re also joined today by Stuart Levings, chief executive officer of Sagen, our Canadian residential mortgage insurer. I will first turn the call over to Cyrus to give an update on our business, and then Stuart will talk about recent developments at Sagen. Jaspreet will conclude with a discussion of our financial results.
We are all available to answer your questions. And with that, I’ll turn the call over to Cyrus.
Cyrus Madon – Chief Executive Officer
Thank you, Alan. Good morning, everyone. Thank you for joining us today. We had a great quarter.
We generated over $540 million of adjusted EBITDA and continue to be very pleased with the resilience of our operations. We are well positioned in the second half of the year, and we continue to take initiatives to crystallize significant value. I thought I’d start with some comments on the operating environment before turning to an update on our initiatives. Like most, we have faced inflation and supply chain challenges across our businesses, but the durability of our earnings has been a significant advantage for us.
With a few exceptions, the volumes are holding well over our operations. We continue to make progress to either pass higher costs or raise prices to support margins. In fact, on a same business basis, our EBITDA is up 10% over last year. It is too early to predict when these inflationary headwinds will ease and some may not for some time, but we continue to work with our management teams to take appropriate action to support performance when the environment deteriorates.
Since our last update, we have closed three of our recently announced acquisitions, including the $8.5 billion acquisition of CDK Global, our technology services and software solutions provider for the automotive dealership industry. This is a high quality business with recurring contractual revenue, low current capital requirements and high margin potential. Even with the recent widening of credit spreads, we were able to finance the transaction at the most favorable rates. We are now implementing our value creation plans to grow margins and cash flow.
We also completed the acquisition of an Australian residential mortgage lender and a slate roofing products supplier. In addition to growth, we focused on initiatives that should generate significant revenue and crystallize value for our business. In May, we initiated a process to sell Westinghouse, our nuclear technology services operation, which generated good interest from potential buyers. Due diligence is ongoing, and we are optimistic that this will lead to us reaching an agreement to sell the business.
In the meantime, we were able to complete a dividend recapitalization of this business, which generated approximately $800 million in proceeds, of which BBU’s share was $315 million. We look forward to providing you with an update as the sale process develops. There are other businesses that we own today that may be candidates for monetization. The timing of any sale depends on many factors, including market conditions.
Our water and wastewater operation in Brazil is one example. Since our acquisition five years ago, we have made significant progress in building value in the business. We are now investigating options to monetize our investment. Like many of you, we are disappointed with the trading price of our units and shares.
However, we are confident that if we execute our plans and continue to build long-term value in our business, the trade discount will close over time. We continued to repurchase our units as they were trading at levels materially below our view of intrinsic value. With that I will hand over to Stuart, but first I just wanted to thank Stuart and his team at Sagen, who have done a wonderful job for us. And I hope you will take this opportunity to ask Stuart any questions you may have about the business he runs.
Stuart Levings – Chief Executive Officer
Thank you, Cyrus, and good morning, everyone. Sagen had another strong quarter as it continued to produce solid operating results in a favorable economic environment. Our interest rates are rising and the housing market is slowing down. Our proven business model, disciplined risk management and high-quality insurance portfolio position us well to manage through economic headwinds in the coming months.
Sagen is a market leader operating in a concentrated, highly regulated industry with natural barriers to entry. We offer insurance to mortgage lenders against homeowner default in exchange for an upfront non-refundable premium. Our business model produces an attractive financial profile, generating strong margins, earnings and cash flow that have proven resilient through previous housing and economic cycles. In Canada, mortgage insurance is mandatory for home purchases with a down payment of less than 20%.
Our product is limited to owner-occupied homes under CAD 1 million with a maximum loan-to-value of 95% and amortization of 25 years. We primarily underwrite first-time home buyers with strong income and credit profiles, looking to purchase entry-level homes with an average price of approximately CAD 420,000. These buyers are often double-income families, 25 to 45 years old with growing household income. Our portfolio includes mortgages originated across the country, concentrated around large urban areas, resulting in a regionally diversified loan underwriting book, which limits exposure to correlated economic risks.
Our business has performed exceptionally well in recent years, benefiting from record levels of new underwriting activity, strong home price appreciation and low loan default rates. Today, we have approximately CAD 2.8 billion of unearned premium reserves, representing cash premiums already collected but not yet recognized in earnings. These premiums are amortized into profits over the next five years, providing the business with predictable revenue and the ability to absorb higher default rates as the housing market and the economy slow. Over the past two and a half years, we have worked with the Brookfield team to execute on a value creation plan, including increasing our market share, improving our cost ratio, increasing the return on our investment portfolio and optimizing our Balance sheet and capital efficiency.
These improvements improved our return on equity to 20%, enabling the business to provide meaningful distributions to shareholders, including BBU. Looking ahead, we expect to see a more challenging environment with reduced levels of home sales and some price expansion. Rising interest rates, high consumer inflation and the expectation of slowing economic activity have led to a growing consensus for home prices in Canada to fall 10% to 15% from their peak in the first quarter of 2022. This represents a modest retreat from the approximately 50% gain in home prices seen due to the pandemic, and we believe that several factors, including continued undersupply of housing and positive immigration trends, including the goal of welcoming over 400,000 new immigrants per year to Canada will act as a floor for home prices.
The quality of our insurance portfolio is the strongest it has ever been. Increasingly strict underwriting criteria have contributed to higher quality loans with an average credit score above 750 across the portfolio. About 80% of the insurance portfolio is supported by fixed interest rates, which provide borrowers with payment stability in a rising mortgage rate environment. The majority of the remaining variable rate mortgages have constant payments, where only the mix between principal and interest is affected by fluctuations in rates, thereby providing a similar degree of payment stability.
In addition to the quality of our insurance portfolio, strong supervision and regulation, including mandatory loan amortization, full loan reminders and debt servicing stress test for all insured borrowers served to reduce the risk of loan default. For example, all insured borrowers in Canada are subject to a stress test that builds a cushion for affordability in a rising rate environment. Borrowers must qualify for the mortgage with a minimum qualifying rate, which is the higher of the benchmark rate, currently 5.25% or their lender’s rate plus 200 basis points. This means that all insured mortgages have been qualified and approved in recent years with an interest rate of at least 5%.
In addition, insured borrowers experiencing financial hardship as a result of significantly higher mortgage renewal payments can extend their amortizations under our loan modification program. Therefore, rising rates are not typically a driver of mortgage delinquency. Unemployment, which sits at historic lows with the consensus forecast for moderate increases over the next few years, typically has a more pronounced impact on mortgage delinquency. While unemployment drives the frequency of delinquencies, changes in house prices affect the probability of claims and the degree of loss indicated by default.
That said, due to the significant level of house price appreciation in recent years, our portfolio has an average loan-to-value of 60%, meaning many borrowers today have significant embedded equity in their homes. This allows them to absorb a material correction in housing prices and still sell their property without loss in the event of default. For example, even in house prices decreased by 40% and unemployment reached 10%, both of which would be far beyond the current consensus forecasts, the business will continue to generate positive net operating income and cash flow. With that, I will hand it over to Jaspreet.
Jaspreet Dehl – Chief Financial Officer
Thank you, Stuart, and good morning, everyone. As Cyrus mentioned, we had an excellent second quarter, generating adjusted EBITDA of $543 million, compared to $381 million last year, with stronger results across all three operating segments. In Infrastructure Services, we generated adjusted EBITDA of $205 million, compared to $125 million last year. Adjusted EFO increased to $124 million.
Our nuclear technology services operations had a good quarter. Adjusted EBITDA of $58 million was in line with expected seasonality. The business is managing through disruptions caused by the conflict in Ukraine and remains on track to generate strong full-year results. In May, the business completed the acquisition of BS Energy to enhance its outage and maintenance service capability.
It finances the transaction for the combination of committed debt financing and existing liquidity on it. In April, we completed the acquisition of our lottery services and technology operations, which contributed $25 million to adjusted EBITDA in the quarter. Business is benefiting from resilient demand despite some impacts from higher input costs and supply chain costs. We have also secured several new customer wins since completing our acquisitions, including a 10-year contract for products and services to the U.K. operator.
National Lottery. Modular building with services contributed adjusted EBITDA of $41 million. The overall demand environment remains stable, and we continue to benefit from high utilization levels on existing units on the way. We are also making progress in increasing the penetration of value-added products and services, which will help improve margins.
Moving on to our industrial segment. Second quarter adjusted EBITDA increased to $204 million and adjusted EFO was $101 million, compared to $216 million in the prior year. Adjusted EFO in the prior period included a $148 million after-tax gain on the partial sale of our investment in common stock from our graphite electrodes operation. Advanced energy storage operations generated adjusted EBITDA of $105 million.
Prices and a favorable mix of increased margins on advanced battery sales contributed to results despite the impact of higher labor, commodity and transportation costs. Total battery volumes are further influenced by the ongoing production requirements at car manufacturers. Also, just as a reminder, the previous year’s results benefited from very strong aftermarket demand as global slowdowns and travel restrictions eased. Our engineering component maker generated adjusted EBITDA of $44 million.
Strong performance was driven by commercial price actions and contributions from recent acquisitions. We work closely with the management team to take appropriate pricing and cost actions to support volume and margins through the balance of the year. And finally, our Business Services segment generated second-quarter adjusted EBITDA of $166 million, compared to $145 million last year, and adjusted EFO of $151 million for the current quarter. While Australian Healthcare Services generated improved adjusted EBITDA of $21 million this quarter, the operating environment remains challenging.
High labor costs and high COVID-19 infection rates of patients and staff lead to cancellations of planned surgical procedures, which have an impact on overall performance. We hope that activity levels in the business will improve as the COVID-19 infection rates in Australia decrease. Finally, our Brazilian fleet management operations continue to perform well. And in June agreed to buy Unidas, a leading full-service rental of our platform in Brazil.
This platform became available because local regulators demanded and still for antitrust purposes. We were able to acquire the business for value, doubling the size of our existing fleet management platform in Brazil and supporting our growth plan. Move to liquidity. We ended the quarter with $3.1 billion in corporate liquidity.
As Cyrus mentioned, during the quarter we generated a dividend from a nuclear technology services operation that was paid to all shareholders. This effectively accelerates some of the revenue we would generate from each potential sale. Our share of the $800 million dividend was approximately $315 million. Pro forma liquidity is approximately $1.1 billion after accounting for all announced and recently closed transactions.
With that, I would like to conclude our comments and return the call for questions to the operator.
Questions & Answers:
[Operator Instructions] Our first question comes from the line of Geoff Kwan with RBC Capital Markets. Read also : Farm Capital Tax.
Geoff Kwan – RBC Capital Markets – Analyst
First question was on Westinghouse. So if you are able to come to an agreement on a deal, who are the key entities that need to approve it? And would any of them have more, name it, specific criteria that could influence the preference or the type of buyer to say Westinghouse?
Cyrus Madon – Chief Executive Officer
Geoff, thanks for joining us today. Yes, Geoff, there are nuclear regulatory bodies that would have to approve it. If it’s a foreign buyer, we have to go through a US CFIUS process.
And then a number of regulatory approvals would also be required outside the United States. So the typical range of what we deal with in any type of such – such a transaction. But at the top of the U.S.
nuclear regulators would also have to approve it.
Geoff Kwan – RBC Capital Markets – Analyst
OK. And then at the BRK Ambiental you made a reference and then it was possible to take that file public. But is a sale also a possibility or is an IPO the more likely option for the –
Cyrus Madon – Chief Executive Officer
Look, it’s possible. We just wanted to be ready when the capital markets open, they will open at some point. We wanted to be prepared to turn it into a public company because we think this type of business will gain a strong following for all kinds of reasons. So we think it’s just a good alternative to have and be ready.
Geoff Kwan – RBC Capital Markets – Analyst
OK. And just if I can ask one last question for Stuart. Sagan, if you take a look at – back to the 1990s size reduction, I think your combined ratio has risen to about 90%. Today we are still at extremely low combined ratios, I think in Q2 you have a negative loss ratio.
But if we have this housing need that some people think we will have, what kind of do you think the ballpark range do you think the combined ratio might look like? And what would be the main reasons that you would say it would differ from what was experienced in the 1990s?
Stuart Levings – Chief Executive Officer
Yes, Geoff, thanks for that question. I think our expectation is that we will see our performance return to our long-term expectations. So as you heard us say earlier, in that $0.15 to $0.25 loss ratio range, that would imply a sort of 35% to 45% combined ratio range, which is still very, very profitable. The differences are mainly that our premium rates are now much higher and that is because we hold more capital.
But we get a lot more pricing power and more margin because the price rate has gone up so much since that previous downturn back in the 90s and certainly even the global financial crisis and that’s the main difference. The other difference is of course the portfolio quality. As you know, we had a lot of products back then that were riskier, led to a lot of our losses, and we just don’t underwrite those these days because we’re not – we can’t. We are not allowed and we certainly – we appreciate that because our portfolio quarter is much better.
Our next question comes from the line of Devin Dodge with BMO.
Devin Dodge – BMO Capital Markets – Analyst
All right. How should we instill confidence in the Westinghouse sales process with the –
Jaspreet Dehl – Chief Financial Officer
Devin, you are cut out. We can’t hear you.
Alan Fleming – Senior Vice President of Investor Relations
Operator, maybe we’ll move on to the next question and then come back to Devin.
Our next question comes from the line of Nik Priebe with CIBC.
Nik Priebe – CIBC World Markets – Analyst
Yes. OK. Thank you. Since you have incorporated a healthy discussion around Sagen, I wanted to ask a few questions about the end game for this investment.
I think the first one is just after three years of ownership, how far do you feel with respect to the value creation plans there?
Stuart Levings – Chief Executive Officer
Yes. I think the value creation is now very much in the field. We have improved our ROE from 13% as a public company to consistently around 20% now, and our expectation is to be able to sustain it. And in terms of the kind of value over time, we’re generating strong distributable cash right now with a 20% ROE, and we should be able to sustain that with the leverage that we have in place and some of the other changes that we’re making. with Brookfield being on board as owners.
As for the – any further plans, I think that will be back to Cyrus.
Cyrus Madon – Chief Executive Officer
Yes. So for Sage and specifically this business generates 20% cash return to us. There are very few investments that we make that actually generate a 20% annual return for us. So we are happy to keep it.
So obviously, the things that would go through our minds are what we can sell it for if we want to sell it. If we get a very large premium on our entry prices, it could become attractive, what are alternative uses of capital, everything we think about in capital allocation. It’s a great company. The team has done a phenomenal job, and we think these types of returns should be sustainable over a cycle.
There will certainly be bumps in the road because of exposure to the residential portrait industry and all that stuff. But otherwise, that’s the kind of thing we think about.
Nik Priebe – CIBC World Markets – Analyst
Yes. OK. Fair enough. And it’s maybe a little too early to even have this discussion, but I’ve always felt like public market investors, when Sagen was public, struggled to price in the left tail risk and associated with an advertising shock and that’s why it really never attracted the multiple that you would otherwise have expected, also, just based on the level of underwriting margins that could reach in a buoyant housing market environment.
I guess if you think about this a few years down the line, do you feel an outright sale to a sponsor or a strategic one is more likely than some kind of an IPO route? And again, that might be a little too early in this discussion, but I just wanted to flesh it out a little.
Cyrus Madon – Chief Executive Officer
I think if we can continue to show the high returns that we have demonstrated, it is possible that this is related in the public markets compared to where it has been traded. You also have to reflect on the fact that its former controlling shareholder was in some form of, I will say, financial stress, if not distress and I think that probably weighed quite heavily on the sale price of Sagen. So I think all options are on the table if and when we get to that point.
Nik Priebe – CIBC World Markets – Analyst
Yes. Yes. That is a good point. OK.
And then just the last one for me. I noticed that the equity check written for CDK was a little higher than initially expected. Just, given the crowded fundraising environment that we’re seeing in private equity, do you find it harder at all to reach co-investors to syndicate some of these deals?
Jaspreet Dehl – Chief Financial Officer
Nik, it’s Jaspreet. Maybe I’ll start and then the stars can’t. Look, our decision about CDK is really based on the fact that it’s a great business. We really like the business.
We now own that. We closed the transaction in early July. So we have a chance to really get into the nitty gritty that we do onboarding. And everything we see kind of supports our initial due diligence and assessment.
And when we did — we talked about the fact that we did a dividend recap at Westinghouse, and that allowed us to free up some cash. So from the perspective of capital allocation, we made the decision that it would be a good idea to allocate some capital from BBU to CDK. I would say a little more broadly about your question about co-investment and syndication. So far this year we have made several deals, and the talks have been constructive.
So we continue to engage people, talk to people who look at the deals. And some sort of co-investment interest is still there, maybe it will take a little longer, but we haven’t seen any kind of significant deterioration in that interest from LC.
Cyrus Madon – Chief Executive Officer
And I’ll just add that in the institutional world, investing is kind of the holy grail of what institutions want. So there is a lot of interest in co-investment. Yes, some institutions may have slowed down a bit. But in general there is a very high interest in their co-investment.
Our next question comes from Devin Dodge with BMO.
Devin Dodge – BMO Capital Markets – Analyst
All right. Let’s talk again. Sorry for the technical difficulties. So I wanted to start with Cyrus on how we should reconcile the confidence in that Westinghouse sale process with the broader challenges of the financial markets and the slowdown in private market transactions referenced in the letter.
Cyrus Madon – Chief Executive Officer
That’s a great question. On the one hand, we see a significant loss of funding for private equity transactions. Certainly, in North America and in Europe, the banks just slowed down. The banks made a bunch of commitments.
They have to work through those commitments over time before they can free up the capacity to make a number of new deals, and they’re not yet through that and as a result of that city to make a number of new deals, and they’re not yet through that. And as a result of that, I would say, general transactional activity or private equity for financial sponsors is slow overall. On the other hand, for high-quality loans for investment-grade loans, for infrastructure buyers, there is a lot of financing available. So it really depends on what you’re buying and what kind of buyer you are and what financial level you’re at.
Devin Dodge – BMO Capital Markets – Analyst
OK. That’s good color. After that, the dividend recap at Westinghouse and the recent Bolt-On acquisition, can you remind us where the leverage stands after those two transactions?
Jaspreet Dehl – Chief Financial Officer
Yes. So as a Westinghouse level we have approximately — the $3.7 billion, $3.6 billion in leverage and then plus the $100 million dividend recap.
Devin Dodge – BMO Capital Markets – Analyst
OK. OK. And then maybe a question for Stuart. Can you speak to the competitive environment for mortgage insurance in Canada, I think we see CMHC loose some market share over the last few years.
And I’m wondering if you’ve seen them get a little more aggressive in the intent to regain at least some of that lost market share?
Stuart Levings – Chief Executive Officer
Yes. Thank you, Devin. It is very apparent that CMHC have decided to reverse course somewhat in terms of the underwriting changes they have made, and they are intent on recapturing some market share. What they find and admit publicly is that it is not easy at all.
We are a very competitive market. At Sagen, we are very confident in our position and our offering in terms of customer service and differentiation. And the fact that their withdrawal allows us to really step in and demonstrate even more of the value we can bring to our clients. Right now, what they’re hearing, what CMHC is hearing is that we’re not just going back to the levels of sharing that we had with you before.
So I think they try. They are certainly loved, but they do not find it so easy. And frankly, we don’t think they’ll ever get back to where they were. I think the landscape has now changed from a competitive dynamic, and we are confident that we will maintain our market share in that range of 36% to 38%.
Our next question comes from the line of Jaeme Gloyn with the National Bank.
Jaeme Gloyn – National Bank Financial – Analyst
Yes, thank you. And, Stuart, good to hear from you again. I’ll actually start with you. When you think about the ROE outlook, you mentioned 20% as sustainable normalized periods.
I’m just trying to square that right actually with loss ratios that have recently been flat like 0% to negative those 20% ROEs lead to a more normalized loss ratio environment of 15% to 25%. I would assume that the ROE would go down a bit from there. Maybe just talk through how your — what other factors are driving the sustainable 20% ROE in the business?
Stuart Levings – Chief Executive Officer
Yes, Jaeme, absolutely, and great to talk to you again. The reality is that I would say we have achieved 20% consistently now 20% plus. But actually, in a year like this and in last year’s environment, we’re probably honestly more like a 23%, 24% ROE. So there is room for that to come down and still be at about 20 as the loss ratios normalize.
The other factor is that beyond capital efficiency, we have some room to go, right? Of course, coming through the pandemic, you know us, we put some moratoriums on dividends. They moved past that, we were able to get more dividends out. But at the same time, there is some room on that in terms of being a little more capital efficient, and that also helps offset some of that increase in the loss ratio.
Jaeme Gloyn – National Bank Financial – Analyst
OK. understood. As we think about the Sagen business and Brookfield’s recent acquisition of Latrobe, are there longer-term potential synergies for these two businesses linked to mortgage markets in different countries?
Cyrus Madon – Chief Executive Officer
We have no plans to merge the two together.
Jaeme Gloyn – National Bank Financial – Analyst
OK. And then last on Sagen. Stuart, some of the headlines I read today are about default rates on variable rate mortgages. What is your assessment of variable rate mortgages in the Sagen portfolio? How close would borrowers be to default? How is this process implemented by the banks and do the mortgage insurers have a say and how is this processed and managed?
Stuart Levings – Chief Executive Officer
Yes. So, Jaeme, first of all, the majority of our portfolio is still fixed rate. We are probably about 80% fixed rate. Of the remaining 20%, the lion’s share is uncapped variable, but the payments do not change, right, because the rate increases until they meet a trigger rate or term renewal.
We did an analysis. We think we’re probably a good 100, 150 basis points away before we start hitting some trigger rates. And even at that time, when those lenders have to reset the payment, the fact of the matter is, as you know, maybe some previous discussions, we can deploy some of our loan modification tools to address any payment shocks like the extension, etc. So we don’t really see that as a pressure point or a driver of short-term delinquencies.
Our next question comes from the line of Gary Ho with Desjardins.
Gary Ho – Desjardins Capital Markets – Analyst
First question for Cyrus. You talked about Westinghouse and BRK. Maybe you can give us an update on Clarios and how this monetization initiative is progressing?
Cyrus Madon – Chief Executive Officer
So Clarios, it’s early days. We have filed a registration statement with the securities, and we want to, I say, keep that fresh and alive when market conditions turn positive. That’s going to be — that’s not going to be a short-term event for us, as we said on the last call, simply because we want to de-leverage the company before we can think about monetization. But we are ready for it or when the time –
Gary Ho – Desjardins Capital Markets – Analyst
OK. Perfect. And then second, maybe for Stuart. Can you provide a little more, I guess, more perspective in the hotter housing markets the last few years, GTA, Vancouver area, etc.
Any concerns there? And do you have any kind of LTV specific to these regions?
Stuart Levings – Chief Executive Officer
Yes. So look, the markets were almost everywhere. Early enough, some of the more urban and suburban markets were even hotter than core centers like Toronto, Vancouver as the pandemic effect played out and people moved outlets – but ultimately we were always playing at the lower end of that range, given our $1 million cap. So price sensitivity is driving some of the softening in housing markets.
The more expensive homes are now seeing larger corrections or declines in prices, lower-end properties in terms of price range. There is always enough sideline demand that there is some floor for those. So we’re seeing prices soften, absolutely. We still have huge amounts of embedded equity in the portfolio.
So these will probably mean borrowers don’t have 50% of the equity. Now they have 30% of the equity still enough to get them out of trouble and sell them. And our outlook is that this will remain the case even as we go through the rest of this year and into next year. That’s our base case.
Gary Ho – Desjardins Capital Markets – Analyst
OK. And then I want to talk a little bit about scientific rates. So my understanding of the business is that the government contracts are pretty much kind of long term and mostly fixed rate. So I want to get a little more color on the kind of businesses that are getting squeezed on the margin side, maybe if you’re going to re-enter some of those contracts, just because of the spike in inflation?
Cyrus Madon – Chief Executive Officer
Maybe we can get Denis to answer that.
Denis Turcotte – Chief Operating Officer
Yes. Sorry, I’m just leaving. Denis Turcotte here. There is no doubt that we will see some inflation, paper and ink being the primary drivers in this case.
But frankly, in both situations they are cyclical in nature, and we expect that to come naturally. But we also address ourselves with all our customers, where we can pass the increases. So it’s early stages in this situation because we’re only three months into it but our 100-day plan is — has been executed exactly as expected. We work with the management team and drive – start driving these value creation levers.
So at this point, we’re actually optimistic and we’ve committed to Cyrus, we’re going to beat our underwriting in this case.
Gary Ho – Desjardins Capital Markets – Analyst
OK. That’s great. And then maybe only if I can talk in one more just on BRK. Can you give us a little more detail about how much debt there is in that investment, maybe in total or your proportional share?
Jaspreet Dehl – Chief Financial Officer
I’m going from memory and then we can circle back and give you a more precise one, but I think we have about 3 billion BRL of debt within BRK. And that is on a total basis, not on a proportional basis.
That concludes today’s question-and-answer session. I would like to turn the call over to Cyrus Madon for closing remarks.
Cyrus Madon – Chief Executive Officer
Thank you, everyone, for participating, and I look forward to speaking with you next quarter. Thank you.
Call participants:
Alan Fleming – Senior Vice President of Investor Relations See the article : Four ways a successful business can regularly challenge the status quo.
Cyrus Madon – Chief Executive Officer
Stuart Levings – Chief Executive Officer
Jaspreet Dehl – Chief Financial Officer
Geoff Kwan – RBC Capital Markets – Analyst
Devin Dodge – BMO Capital Markets – Analyst
Nik Priebe – CIBC World Markets – Analyst
Jaeme Gloyn – National Bank Financial – Analyst
Gary Ho – Desjardins Capital Markets – Analyst
Denis Turcotte – Chief Operating Officer
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