24 February 2020
BMO Global Metals & Mining Conference
Mike Henry, CEO
Slide 1: Title page
Thank you, Ed.
Good morning, all. It’s a pleasure to be here.
This is a great event for the industry. It’s my first time speaking here and I’m honoured by the opportunity to open the conference. Ofcource there’s been a few firsts for me in recent weeks have having landed in role on January one.
I have been massively fortunate as an incoming CEO. Not only because I inherited a very clean set of results that I’ll speak to later, but because I take up the reigns, from Andrew, with the company’s foundations strong. I’ll speak more about our foundations shortly, but
Slide 2: Disclaimer
Before I go further Please note the usual disclaimer and its importance.
Slide 3: Exceptional performance in a dynamic world
I am going to talk about how the company has gone financially and operationally in the past half, but before I go there I thought I’d spend a few minutes sharing some of how I see the company today and the future.
I’ll talk about the company’s current strengths, the company I would like us to be and what we will focus on to get there
Today, we have a positively differentiated strategy in terms of where to play – with fewer commodities, exposed to different markets and points in the economic development cycle.
We have some of the world’s best assets – big, low on the cost curve and in jurisdictions we like. This supports high margins and it gives us plenty of high-returning organic growth options.
We have secured a strong balance sheet, which supports resilience in the face of the volatility we all need to deal with and also our ability to invest counter-cyclically.
This is backed up by the discipline and competition stimulated through our capital allocation framework, which has driven better decision making and capital efficiency.
And we have organised ourselves in a way that will support sustainably high performance and will prove to be an advantage over time.
Our foundations are strong but there’s much further to go on the performance front and we also need to be thoughtful and deliberate about portfolio.
We live in an uncertain and changing world. We cannot stand still. We will need to be faster-paced and more commercial in our approach.
To unlock more of our potential, to further address the challenges coming at us, and to capitalise on the opportunities that the environment will present over time, there are some things we must strengthen.
Without question, we must become even safer. We have been reducing the rate at which people are being seriously injured or worse, but this isn’t good enough. We must focus on eliminating fatalities and high potential injuries.
I also believe that in the face of market uncertainty and slowing rates of growth for commodity demand, a greater proportion of our opportunity for value growth will come from an unrelenting focus on being great at what we do. We must be lean and high performing across all parts of BHP
We’ve come a long way, but to unlock our true potential, we will focus on five specific levers.
- First, Culture. BHP has established a distinctive, inclusive culture. We will build on this foundation with strengthened self-accountability, performance edge, hunger to learn and improve, and a greater commercial mind-set.
- Second, Capability. Exceptional performance requires exceptional capability. We’ll invest in people and the capability required to support consistently high performance and to unlock options. This includes achieving a gender balanced workforce.
- Third, we will instil an Asset-centric or business centric focus throughout BHP. I know that this sounds super obvious, but the reality is that we are a big, global company that’s been going through significant change. At times it can feel like people are pulling in different directions or aren’t focusing on the most important things. Everyone across BHP will understand and fulfil their role in making our assets safer, lower cost and more reliable. The main game.
- Fourth, Technology. This is fundamental to BHP’s future. The opportunity is significant. We will restructure, reorient and build capability to apply technology at scale, at lower cost and for value.
- And finally, capital allocation. Near and dear to many in this room I suspect. I am totally committed to continuing the discipline that we’ve created through our Capital Allocation Framework. It is driving better decision-making and it is making us more productive through the way in which it stimulates focus and competition.
What does this all look like in action? Let me touch on just a few examples
- In technology, in addition to realigning our technology structure to our assets and streamlining our processes, we will increase our leverage of external providers of infrastructure, systems and services. We will sharpen our portfolio of technology projects and shift our weighting towards opportunities that generate higher returns, earlier. Faster paced and more commercial.
- We’ve spoken publicly previously about our multi-year effort to make our functions more efficient and more effective. We’ve already reduced our overheads by a billion dollars in the past few years and we are accelerating delivery of more, bringing forward some efforts that were otherwise to be delivered two years later. Faster paced.
- This, and our changes in Technology, are expected to reduce overheads by well over half a billion dollars by 2021, relative to last financial year. Just as importantly, it will better enable and free up those working on the front-line of the business. So, lower cost, more productive.
- We are also supporting front-line leadership through further streamlining administrative processes – this is going to enable them to spend more high-quality time in field. And we’re also reducing average spans of control – particularly for our supervisors.
- On the capability front, we will have a workforce that is committed to BHP and who we can invest in. We are moving from 30 to 40 per cent of our people being permanent BHP employees, to double that.
- I will create a senior role on my team that will be accountable for leading technical and operational excellence, and will help stimulate performance across the company
We will be safer, lower cost, more productive and more reliable. This will generate value and returns.
Slide 4: We have a Strong Foundation
Coming to portfolio, there is an obvious question is about future fit.
We have a strong and resilient portfolio for today and for the foreseeable future. Big, low cost assets, in commodities with steep cost curves and resilient near term demand.
We have a large copper business with near term valuable production growth and long-term options.
We have an iron-ore business that is performing well, also with near term value growth through productivity – both production creep and cost reduction.
We have a large business with the best portfolio of high quality coal for steel making, and it is going to take decades to progress the decarbonisation of the world’s steel making industry.
Metallurgical coal will be needed for a long time yet, and there’ll be an increasing focus on high quality coal that will support blast furnace efficiency at lower environmental impact. We are also growing value in this business through creeping production and lowering costs.
And we have a strong oil and gas business, with some great assets and high returning growth options. Some of this growth is in execution and will come on line in the next year. We also believe oil will remain attractive for some time yet. The steep decline curves that are a feature of oil mean that ongoing global investment in new production will be required even if the decarbonisation trend accelerates and demand flattens or starts to decline.
We have been very thoughtful and deliberate about the construct of our portfolio over many years.
Now, clearly, the world trend is towards decarbonisation. We’ve been active advocates for this and have been taking tangible action on the things that we control.
Some of you may be aware that we have recently announced we are moving towards fully renewable power in our Chilean business.
This will reduce our carbon footprint there by 60%, and BHP’s overall footprint over the next few years by 15%. We are looking at similar opportunities elsewhere.
Notably, we already produce some of the products that will support the transition to a lower carbon economy and will continue to prosper in a decarbonised world.
Looking to the future though, I intend for BHP to deliver great value and returns to shareholders for decades to come. And this will require us to create and secure more options in future facing commodities. Options where we can deploy capital and capability to continue to grow value.
These options will come from both within our existing footprint, as well as through securing more resources through exploration and early stage entry, all supported by our disciplined capital allocation framework.
This effort will also help us address one of our other portfolio challenges. We have a good pipeline of high returning growth options on the 5-10 year horizon. Beyond that however the cupboard starts to look a bit bare. We will secure more longer-term options and they will be aligned to future markets and demand.
We will build upon our strong foundations and we will make the changes required to create a safe, lean, high performing and future-facing BHP.
With that, let me recap on some of the highlights from our half year results, which we released last week.
Slide 5: H1 FY20 financial highlights
Underpinned by strong operational performance, good cost control and supportive markets, we delivered a healthy set of financials for the half.
Underlying EBITDA was up 15 per cent, to 12 billion US dollars; margins expanded to 56 per cent; underlying EPS grew by 46% and return on capital employed grew to to 19 per cent.
Continued solid operating cash flow, combined with disciplined investment in our high quality projects, generated free cash flow of 3.7 billion US dollars.
And we finished the period with net debt of 12.8 billion US dollars – at the lower end of our target range.
With our balance sheet strong, we declared an interim dividend of 65 US cents per share – our second highest ever.
Slide 6: Capital allocation
Our Capital Allocation Framework informs every capital decision we make. It frames how we determine where to direct cash, and this slide shows how we’ve done that. We invest first in maintaining our assets, keeping our balance sheet strong and a balanced return to shareholders by way of a minimum 50% payout ratio. Beyond that, the Framework guides our decision making and enables us to maximise value and returns.
I’m a firm believer in the power of this disciplined way of thinking. I’ve seen first-hand how effective it has been for BHP in driving high quality decision making, value creation and returns.
We had 7.4 Billion in net operating cash flow this half. More than half has been returned to shareholders
We will continue to apply this framework across our business and will in fact apply the same principles to how we think about and allocate all of our spend.
Slide 7: H1 FY20 operational highlights
Operationally, our performance during the half was strong.
We maintained production and reduced unit costs, despite field decline in Petroleum, grade decline in copper and significant planned maintenance in the half.
- In Iron Ore, we lowered our C1 costs to just 12 dollars 75 cents per tonne. We were neck and neck in the half for pole position as the world’s lowest cost Iron Ore producer. We were pipped at the post by two cents this half, which from my perspective is great, as it helps me to drive this sense of competition and performance edge that I want to see in BHP
- Escondida set new records in concentrator throughput. Despite grade decline and the increased use of desal water, we reduced unit costs. This continues a trend that has seen us maintain production and costs over the past five years, in spite of a 35-40% decline in grade. The team there is doing a wonderful job.
- Our Queensland Coal business which produces coal for steel making is breaking records in stripping – the bottleneck – amid a period of higher strip ratios. Despite this, and major planned maintenance during the half, we kept costs flat.
- And, despite our natural field decline of around 5 per cent, unit costs for our Petroleum business fell by 14 per cent.
We also progressed our major projects over the period, and expect two of these – the Spence Growth Option and Atlantis Phase 3 – to deliver first production within the next 12 months.
The most important part of our work, however, is keeping our people safe. It is, without question, our highest priority.
Our safety record reflects the quality of leadership, the culture of the organisation and how disciplined we are when it comes to planning and performance.
Over the period, we reduced our Total Recordable Injury Frequency by 2 per cent.
However, the reality is we are not yet consistently where we need to be.
The rate of high potential injuries rose by 5 per cent due to an uptick in our Minerals Americas business.
At Samarco, resettlement remains a priority of the Renova Foundation, and is progressing well. And across all our operations, we continue to invest in the integrity of our dams.
We are also taking action on climate change. A couple of highlights are that we are on track to meet our 2022 target for greenhouse gas emissions and as I mentioned earlier we have signed contracts to move to 100 per cent renewable power at Escondida and Spence.
Slide 8: Investment proposition
To recap then
We have a compelling investment proposition.
We will maximise cash flow and we will continue our track record of disciplined allocation of capital.
Our foundations are rock solid, and our strong first half performance is indicative of our momentum.
And, we will reliably deliver sector-leading operational performance, financial returns and social value in the years ahead.
Slide 9: Exceptional performance in a dynamic world
I intend for BHP to be unquestionably the industry’s best operator – safer, lower cost, more reliable and more productive.
I also intend for BHP to have a portfolio that is fit for the future and with opportunities for longer term growth. Together these will drive value and returns
Thank you. Ed, over to you