Earnings Transcript for BHP - Q4 Fiscal Year 2020

Mike Henry: Thank you for joining Peter Beaven and me. We are proud to have safely delivered a strong set of operational and financial results. Today, we are going to talk with you about three things that build upon the operational excellence and portfolio of the future agenda that I spoke with you about in February. Firstly, a very strong set of operational and financial results for the year past, which aligns to the resolve I spoke about for BHP to further improve performance and to be unquestionably the industry’s best operator in order to drive value and returns. Underpinned of course by our commitment to social value. Secondly, our further steps to create more options in future facing commodities, while investing in near term growth in existing options and in ensuring that we continue to focus the portfolio for value and upside exposure. And finally, a few changes that we are making to how we organize ourselves and what we prioritize to achieve our performance and portfolio agenda. In the past half, the world has been confronted with the tragedy and disruption of COVID-19, and we have also experienced unprecedented volatility in oil and gas prices. It’s therefore all the more encouraging that BHP completed the year safer, lower cost, more reliable and more productive. In the second half, we further reduced average unit costs at our major assets, building upon our first half momentum. We produced strong free cash flow that has kept net debt at the bottom of our target range, and allowed us to return over US$6 billion to shareholders for the third year in a row. This performance is a direct result of our consistent efforts to strengthen the portfolio, maintain capital discipline, and improve capability and culture. It also required our people to step up. They’ve worked with purpose, focus, speed and decisiveness. I would like to extend my gratitude to them. Their performance and our resilience through the pandemic is benefitting all BHP stakeholders. In the face of the global disruption to economies and livelihoods, we and our industry have been able to continue to provide regional jobs, business opportunities for others, support for communities, and revenues for governments. We define BHP’s purpose as – bringing people and resources together to build a better world – something underscored this past year like no other. I want to touch briefly on how we are responding to the COVID-19 pandemic and our actions over the past six months. We knew we’d have to be dynamic, and work in partnership with others. Consistent with our values and ways of doing business, our priorities were to keep our people and communities safe; to look for ways to support those who rely on us to cope with the crisis; and to keep our operations running reliably. People right across BHP rallied in line with our purpose and values. They have shown extraordinary resilience and commitment along the way. The 1,000-odd people who moved interstate in one weekend to keep our operations running, is a remarkable, and yet not untypical, example. Crucially, the strength of our balance sheet and diversified portfolio also allowed us to stay focused on the things that matter most. We take our responsibilities seriously and social value helped guide our decisions. So, we shortened payments terms of small, local and indigenous suppliers; we committed US$50 million to social and health programs in our communities globally; we hired 1,500 more people temporarily; and the BHP Foundation has funded vaccine research, to name but a few. And we are working with state and federal governments, and community organizations, to ensure we can continue to operate safely and generate returns for all our stakeholders. More than anything else, our experience through the pandemic has powerfully reinforced for me what’s possible when we work with purpose, are focused on the few things that matter most, and act in partnership with others. Naturally, we’ll embed these learnings and some of the changes we’ve made, where it improves how we perform. Turning to the numbers. The quality of our portfolio and the performance of the team meant we delivered a strong set of financial results. Margins were resilient at 53%. Return on capital employed was a solid 17% And our operating cash flow and disciplined approach to capital allocation enabled us to generate free cash flow of US$8.1 billion, while also investing in value growth. Our balance sheet remains strong and we have announced a final dividend of US$0.50 per share bringing our full year dividend to US$1.20 per share. These results were underpinned by our ongoing improvements in operational performance. Most importantly, we were safer. We had no fatalities for the year, in fact for the past year and a half, and our other leading and lagging safety indicators improved. We will never be complacent here, safety remains our first focus. We were also more operationally reliable, a result of our relentless focus over several years on maintenance, engineering, asset integrity, and capability. This added up to record production in a number of our operations. This consistent focus also helped lower average unit costs at our major assets, and accelerated reductions in overheads. Meanwhile, our major development projects are progressing well. Both South Flank and Spence will see first production in the next 12 months. We’ve also, in July, realized first production from Atlantis Phase 3. And we added to, and advanced, our options in future facing commodities. I touched on social value earlier. The past six months have brought into even sharper relief the important link between the creation of social value, and the creation of shareholder value. And we’re making this present in all of our considerations, activities and decisions. We are creating a workforce that will enable us to achieve exceptional performance, and which is aligned with community expectations. We've continued to increase permanent employment through Operations Services. Today there are 4,000 more women working at BHP than four years ago - around 40 per cent of whom joined in the past year. We continue to make strong progress towards our target of a gender balanced workforce by 2025. In Australia, we’re on track to meet, and in some cases exceed, our employment and procurement targets in our Reconciliation Action Plan. Our Indigenous workforce increased by 16 per cent last year, to 6.5 per cent. And we made significant progress in how we manage water, which is critical to our operations and host communities. We’re also very conscious that the value BHP creates extends beyond our business, into the communities, business partners, governments and economies we work with. This includes payments of US$9 billion in taxes, royalties and other payments to governments around the world, on top of US$4 billion in wages to our workforce, and US$15 billion to our supply partners. This matters to me and my colleagues, and we are proud of the contribution we are able to make. We’re equally aware of our ‘footprint’ on the world, so on the 10th of September, we will publish BHP’s climate change report, and host a briefing to take you through our plans to support decarbonization. These will include

Peter Beaven: Thanks for your kind words, Mike. This was a strong result, achieved through exceptional operating performance. Underlying EBITDA of US$22 billion – at a margin of 53 per cent – demonstrated again the strength of our focused, low cost, diversified portfolio. After an effective tax rate of 42 per cent including royalties, Underlying attributable profit was US$9.1 billion. And with the positive impact of last year’s buy back, we increased our Underlying earnings per share by two per cent year-on-year. This year, we saw an exceptional charge of US$1.1 billion after tax, attributable to BHP shareholders. This consists of, a net charge of US$176 million related to Samarco. We provided additional amounts for higher expected costs, and this was partly offset by US$490 million of insurance proceeds and the weaker Brazilian real. We recorded a US$500 million charge due to cancelled power contracts in Chile. The replacement contracts will allow us to lower our energy costs as we transition our power supply to 100 per cent renewables in Chile by the mid-2020s. We incurred direct COVID-related costs of US$130 million. And we had an impairment of around US$500 million for the Cerro Colorado mine due to the decision to reduce throughput and lower its operating cost base. Around US$200 million of these charges were related to non-controlling interests. Including these, our attributable profit was US$8 billion. The EBITDA waterfall demonstrates our ability to effectively manage market volatility, including extraordinary events such as COVID-19. The Underlying EBITDA of US$22 billion is a great result. Lower prices reduced EBITDA by US$1.1 billion, but this was offset by foreign exchange gains and the impact of IFRS 16. Operationally, a strong performance across the board was offset by natural field and grade decline in petroleum and copper, and significant weather events in Australia. Our cost performance was again strong. We reduced unit costs at our major assets by 9 per cent. And our baseline functional costs have come down by more than US$400 million, or 26 per cent, since 2018, with more to come in FY21. We have reduced unit costs over the past five years by 17 per cent in the face of serious headwinds from grade and field decline, and increased strip ratios. In FY21 we will continue to lower underlying costs but will also see further resource headwinds. With COVID restrictions in Chile and a stronger Australian dollar, unit costs may be slightly higher in FY21 than the excellent FY20 outcomes. The resource headwinds will abate. We are looking forward to production declines reversing from FY22, as new Petroleum projects come on stream. Grades are expected to increase at Escondida from FY23 as push backs currently underway are completed. And strip ratios at BMA will peak in FY21, and reduce thereafter. Our non-cash and other costs increased due to deferred stripping depletion at Escondida and an increase in our closed mines provision, associated with more expected spend on tailings dams. Our results were underpinned by a strong performance from all our assets. Western Australia Iron Ore generated EBITDA of US$14.6 billion, with a margin of 70 per cent, the highest since 2012. Our team was able to deliver record production, despite COVID-19 and two tropical cyclones in the March quarter. The team fully captured the benefit of high iron ore prices with an annualized run rate of 300 million tonnes in the final quarter of this year. Costs continue to be well managed. We lowered our C1 costs excluding royalties to US$11.82 per tonne for the full year, with a second half result of US$10.96 per tonne. On an FOB basis, costs were US$12.63 per tonne, excluding 30 cents of COVID-related costs treated as exceptional. Guidance for FY21 FOB costs is US$13 to US$14 per tonne, reflecting the stronger Australian dollar. In Copper, EBITDA of US$4.3 billion was driven by record concentrator throughput at Escondida, which more than offset the impact of grade decline, and the measures put in place to manage COVID-19. The biggest impact on production from COVID was felt in Chile. We moved 25 per cent less material than planned in quarter four across Escondida and Spence as we had to reduce manning levels. Despite this, record throughput and effective cost control allowed us to reduce unit costs at Escondida to US$1.01 per pound, below full year guidance. Costs in FY21 are expected to be between US$1 and US$1.25 per pound, reflecting COVID impacted volumes, and lower grades. Our Met Coal business contributed EBITDA of US$1.9 billion, at a margin of 36 per cent. A strong underlying performance delivered records at Poitrel and Caval Ridge. However, this was more than offset by a 27 per cent reduction in price, and the impact of major planned wash-plant maintenance and port shutdowns. As a result of major weather events this year, peak stripping has been pushed into FY21. Combined with additional spend on tailings dams, we expect higher unit costs in FY21. Costs are expected to reduce to between US$58 and US$66 per tonne over the medium term. This will be driven by a lower strip ratio, ongoing productivity gains in volumes and costs and a market responsive approach to bringing new tonnes to market. And finally, even with a 26 per cent reduction in realized oil prices, our Petroleum business achieved an EBITDA of US$2.2 billion, at a margin of 55 per cent. Lower price-linked costs, and reduced maintenance activities more than offset the impact of lower volumes from field decline, and drove lower unit costs. Unit cost guidance for FY21 is US$11 to US$12 per barrel, reflecting lower volumes due to field decline and the deferral of growth CapEx. Over the medium term, costs will remain below US$13. We generated US$15.7 billion of net operating cash flow. For the 10th time in 11 years, this was in excess of US$15 billion. Our results continue to demonstrate how our diversified, high quality portfolio substantially reduces underlying volatility of cash generation. This included a number of large movements in working capital, essentially incurred in the first half of the year. We rebuilt US$ 700 million of inventory to support operational stability, following outages in FY19. The change in legislation in Chile regarding payment terms reduced our accounts payable by US$200 million. After continued investment in our suite of high returning projects, our free cash flow of US$8.1 billion represents another strong performance. With some supportive commodity prices, a stable, low cost operating base, and disciplined investment we are in a great position to continue to generate strong cash flows in FY21. As you know, our Capital Allocation Framework informs every financial decision we make. Our capital expenditure this year was US$7.6 billion, slightly below guidance of around US$8 billion, due to the slowdown of work required at some projects due to the pandemic. CapEx guidance for next year is approximately US$7 billion – a US$1 billion reduction from previous guidance reflecting deferrals in Petroleum projects. Deferring this spend will ensure greater value, as the projects will enter production in more favorable price environments. CapEx is expected to be approximately US$8.5 billion in FY22, reflecting catch up from the project deferrals, and continued spend on our high quality suite of minerals projects. We saw the benefit of our strong balance sheet play out as COVID-19 hit. Our net debt target range is set to ensure we can withstand price shocks, from whatever source. Our net debt is US$12 billion, right at the bottom of our target US$12 to US$17 billion range – where it has been for the past three years. Off the back of our strong results, today we announced a final dividend of 55 US cents per share, or US$2.8 billion, demonstrating the ability of our business to continue to be able to provide excellent cash returns, through cycles. This equates to a payout ratio of 72 per cent, 22 per cent over the minimum provided in our payout ratio policy. Including the dividend announced today, over the past five years, we have returned around US$36 billion to shareholders. Our return on capital employed for the year was 17 per cent – another solid number. The efforts of the team to improve the underlying business and allocate capital effectively have been very successful. At constant 2017 prices, our return on capital is almost 40 per cent higher than in 2016. This year, we have delivered more in the way of underlying improvements. In volumes and lower costs, these added around two per cent to ROCE. On the other side of the ledger, however, the impact of geological headwinds from field and grade decline, along with weather, COVID and IFRS 16 reduced ROCE by around two per cent. As usual we have a spread of returns across our assets. WAIO’s 56 per cent return on capital was the standout performance. Despite productivity gains, our copper, coal and petroleum assets have been impacted by lower prices, especially in the second half of the year. So, where to from here? We are, as I mentioned earlier, looking forward to the reversal of some of the big resource headwinds in the next few years. In addition, the ongoing productivity drive never ends, the positive impacts of which are reflected in our medium term cost and volume guidance. Our project suite is disciplined and very strong, and is delivering additional low cost tonnes and barrels. A number of our commodities, such as oil, the coals, potash, LNG and nickel are currently trading well down from where we expect them to be in the medium and long term. We are very confident that returns will continue to be excellent in the future. In summary, these results reflect the strong focus we’ve had on operational improvement over the past few years, the effective application of our capital allocation framework and the heavy lifting we’ve done setting up our portfolio and balance sheet. There is no doubt this is a very strong organization. Thank you.

Mike Henry: Thank you, Peter. As you’ve just heard, we’ve delivered a strong set results this year. And our foundations are solid. Now let me now take you through