BHP Group Limited (BHP) Earnings Call Transcript & Summary

Okay. So good morning, everybody, good afternoon to those of us in Europe, and good evening to people who are listening from Asia. I'm Jason Fairclough. I run EMEA Metals and Mining Research at Bank of America. With me is my counterpart in Australia, James Redfern. We jointly cover the dual-listed companies, BHP and Rio, and we're pleased today to introduce our first company on this track, BHP. Mike Henry is the recently appointed CEO of BHP. He's formerly Head of Minerals Australia. He's former Group Executive Health, Safety, Environment and Community, and he was also Head of Marketing. So very pleased to welcome Mike to our Global Metals and Mining Conference for the first time. And Mike, thanks so much for supporting us in this unusual format. In terms of today's program, Mike will make some opening comments, no slides, and then we'll have a fireside chat. There's also an opportunity for investors to ask questions, and this can be done via the Veracast website. So with that, Mike, over to you for your opening comments.

Thanks very much, Jason. Ours is an industry that has seen some extraordinary events over times, but fair to say nothing like what we've seen in the past few months. And as with everyone on this call, I'm very conscious of the devastating effect the pandemic is having on live society and on the economy. And in the face of this, people across BHP have rallied in line with our purpose and values in a way that's seen them stay safe and it's kept the business running and performing strongly. And this has had an even higher purpose during these times. Our industry supports not only our workforce but also communities, customers and countries around the world with the jobs, business and materials that are going to help us navigate and then come out the other end of the crisis and then rebuild. Our people have stepped up. They've been working with particular purpose, focus, speed and decisiveness. And what they've been able to achieve in terms of operational performance and external leadership has certainly reinforced my views of what's possible. At our interim results in February, I spoke about BHP's strong foundations. I also talked about a number of things that we will change, strengthen and focus on in order to unlock more of our potential to further address the challenges coming at us and to capitalize on the opportunities that will reveal themselves over time. We're aiming to be a leaner -- to be leaner and high performing in all parts of BHP, lower cost, more reliable and more productive and to be even safer. We must also create and capture more options in future-facing commodities to help us continue to protect and grow value. In order to unlock our true performance potential, we're focused on 5 specific levers: culture, capability, an asset-centric focus, technology and capital allocation. And our focus on these remains unchanged by COVID-19. And in many respects, the pandemic has allowed us to both demonstrate and accelerate our intent, and I'm going to come back to that in a moment. Operationally and financially, we're performing well. We carried good momentum into the new calendar year and delivered another strong underlying operational performance in the March quarter. We leaned into the triple challenges of heavy weather in Australia, unrest in Chile and the impacts of COVID-19 globally. We kept our people safe and operations performing well. For the 9 months ended March, we achieved record year-to-date production at Western Australia iron ore and at Caval Ridge, Escondida production increased, supported by record concentrator throughput and we stacked record material expense. So what's enabled this? I'll put it down to 3 things: people, focus and capability. Firstly, great people. 72,000 people across BHP have stepped up with commitment and ingenuity to deal with some unprecedented challenges. And I've seen so many examples of people going the extra mile. Nearly 1,000 people, 1,000 people elected over the course of 1 weekend to up and relocate themselves, and in many instances this was with their families, across Australia in order to keep the business running. Secondly, focus. Everyone has made it their mission to enable our assets to keep people safe and our operations performing. And this asset-centric focus has resulted in much sharper prioritization of effort, stronger team alignment and very fast decision-making. We've been moving at pace. This has been supported as well by the steps we've taken to free up our front-line supervisors to spend more time in field. And finally, capability. We've been building capability for some time now through multiple channels. The maintenance and engineering center of excellence, operation services, our functionalized model and the BHP operating system. And it's telling that at both the [ Wale ] port and the Escondida concentrators, they've been supported by early deployment of the BHP operating system as well as targeted effort from the maintenance and engineering center of excellence. And this has resulted in substantial improvement in car dumper reliability and trained turnaround time at Port Hedland and increased reliability and throughput at Escondida's concentrators. We've continued to ramp up operation services, and it now has over 2,000 people, on track for 3,000 by the year end. This has enabled us to respond more nimbly to some of the workforce challenges that have arisen through COVID-19. As with our businesses, our functions are also consistently striving to be better, more efficient and even higher performing. I remain confident that we're on track to unlock well in excess of $0.5 billion in overhead savings by 2021 relative to last financial year while also improving the service delivery of our functions. And in the past few months, we've already restructured our technology team and efforts to enable us to be more targeted, faster and lower cost. So Jason, operationally, things are running well and our agenda to improve reliability, efficiency and productivity is intact. While markets, of course, remain uncertain and under pressure to varying degrees, we continue to move all of our product and payment performances has remained strong. We benefit clearly from our diversified portfolio, high-quality products and strong relationships with customers. The obvious question, though, is where to from here. The G20 nations have committed more than USD 7 trillion of fiscal stimulus. This has gone some way to cushioning the damage to underlying economies and commodity demand, and it's going to help support a faster recovery. We're also now beginning to see the progressive relaxation of some of the COVID constraints. Even so, other than in China, where a V-shaped recovery appears to be underway, we think the recovery elsewhere is likely to be more protracted. Tens of millions of people have lost their jobs across developed economies. More than 1 billion workers in the informal labor markets of developing economies have had their livelihood affected and reestablishing these livelihoods will take time, and consumption will be inevitably constrained, making a V-shaped recovery less likely. By the end of calendar year '21, our base case has the global economy roughly 4% smaller than it would have been if COVID-19 had not happened. We do think so that if China avoids a second wave, Chinese pig iron production still has the potential to grow slightly this year. As for the rest of the world, though, it's likely that pig iron production will experience a double-digit decline. We expect that copper demand will also fall, but that it will be more resilient than steel with the impact of COVID-19 on the supply side providing a degree of support for prices. Oil products demand is expected to begin to recover in line with the easing of mobility restrictions, but the level of demand is unlikely to fully recover before the end of calendar year '21. It's, of course, too early to say anything definitive about the longer-term impacts of COVID-19, but what I can say is that the underlying demand drivers, population growth, urbanization, industrialization and increased standards of living, they remain the same. The fundamental need for our commodities remains. We anticipate that global steel and primary energy demand will both grow slightly faster than population growth for decades to come, while copper, nickel and potash will do a little bit better than that again. Our commodity attractiveness framework, which takes into account a range of factors, not just demand, leaves us both comfortable with what we have but also committed to increasing our exposure to future-facing commodities. In terms of our very near-term plans, our portfolio balance sheet and operations enable us to weather times like these. But we will, of course, make decisions about what level of capital and exploration expenditure is warranted in the coming year given market circumstances. We'll look to defer somewhere that makes sense, and we'll have further detail on that at the full year. To sum up, the past 4 months have combined challenge and tragedy in ways that none of us foresaw. But our strengths have shone through, and we continue to perform. We have a simple, diversified portfolio of large high-quality assets where we have the ability to create value at scale. Our balance sheet strength is underpinned by the disciplined application of our capital allocation framework. We're in one of the industries, which has continued to operate. And with our strong financial position and low-cost operations, we have the capacity to generate solid cash flow and returns to shareholders through this period and to emerge well placed as the global economy recovers. Indeed, the team and I are committed to locking in and building upon the focus, energy and speed that we've realized in recent months, such that we exit this period stronger and accelerate on the agenda that I've spoken about previously. So Jason, that's it for my opening comments, and I'm happy to turn to questions.

Okay. Well, that's great. Well, let's move to the next stage in the program, which is the fireside chat. So Mike, in a pre-COVID world, this is where we'd invite you to come and join us on a very comfortable white leather sofa. So today, you just have to imagine that. I'll just pause. James and I will alternate on the question. So I'll start. So why don't we start with you? So you've recently taken over as CEO of BHP. It's a big seat. It's a big responsibility. And I guess for investors, how should we think about BHP under Mike Henry? And how it will be different to BHP under Andrew Mackenzie?

Thanks, Jason. Well, look, yes, it's a big job. BHP is a great company with strong foundations. Now Andrew and I are naturally different people and different leaders. But we do have some things in common. A couple of them would be strong values and a real kind of unwavering belief in both BHP's people and its potential. I've inherited quite strong foundations from Andrew, and I've spoken about that previously. We've got great people, an inclusive culture, a simple portfolio of some of the world's best assets and a positively differentiated strategy and operating model. Per my opening comments, I'm very focused on building on these foundations to deliver exceptional operational performance and long-term value and returns. I want us to be even safer, leaner and higher-performing and with more options for the future. Now part of this will see us have a much higher proportion of the workforce who are BHP employees. We'll also have better enabled frontline leaders with lower spans of control and who are able to spend more time in field. So I want us to be a faster, more nimble and more commercially minded company. The times demand it, and we've certainly seen that in recent months. We'll also harness people and technology to create and secure more options for the future through exploration, with a focus specifically on future-facing commodities. And I think this is a winning formula. We harness the strength of the foundation we've spent a decade establishing. Reliably -- we'll reliably deliver industry-leading results. We'll have great relationships with those around us through our commercial orientation and our focus on social value, and we'll build for the future through creating and securing more options. And we'll deliver great value growth and returns for shareholders. And you see us bringing much of this intent to bear in our response to COVID. I think we've demonstrated our discipline, responsiveness to the world around us, decisiveness and bias to action. And above all, our focus on the safety and well-being of our people, communities and partners has shone through.

Well, look, actually, just before James asks the next question, I actually have a quick follow-up question on that. You mentioned the response to COVID. And I've got a question here from an investor on the line, Mike. You say, is it getting easier or harder to manage operations under COVID restrictions? So on the one hand, you've got potentially people learning how to cope and on the other hand, these longer rosters, these 4-week rosters, isn't that tough for people? So that's a question from an investor here.

Okay. Look, there's a lot wrapped up in this. So interestingly, under COVID, we've seen some of our best operational performance. And it's -- now we did have the momentum prior, but we haven't seen the sort of disruption to operational performance that some people might think would be there. Now a lot of that comes back to the quality of the people that we've got and the way that they've kind of really doubled down in ensuring that we all stay safe and that we perform well. Now some of the changes that have been put in place, of course, have created challenges for us, and that can be the need for greater social distancing, some of the time that's needed to be spent on things like hygiene and so on. But credit to the teams, they've sought to offset that through bringing their own ingenuity to bear and effort to bear in maintaining productivity and keeping a lid on cost. I do -- coming back to the question -- your question, Jason, around whether longer rosters are creating challenges for people, yes, they are. And that's something that we are really, really attuned to. And it's both the longer rosters, but frankly, and this has been one of the learnings for me through this process, even for those people who are needing to spend more time working from home, that brings with it a certain kind of mental weight or can impact on mental well-being. So we've been paying a lot of attention to what's happening on the front line of our business. And early -- what have we done, we've stood up regular surveys where we've had -- I can't remember what the numbers are, but it's well over, I think, 20,000 or 30,000 people responding to these surveys now, which give us a sense for what they're experiencing. We then take management actions on a short-cycle basis to address the concerns that are being raised. And we've also put in place a kind of a question-and-answer hotline or an information hotline so people can get any of their concerns addressed quickly.

Mike, it's James Redfern here. Over the past few years, BHP has consistently returned to its capital allocation framework. Will we see any changes to this framework with yourself now as CEO? And how much flexibility do you have to reduce CapEx?

James, look, thanks. In short, no change. I am a very firm believer in the capital allocation framework and the discipline that it instills. I've seen what it's brought to BHP. It's perfectly suited to the industry. It recognizes cyclicality. It ensures we have a strong balance sheet and that we balance returns between -- we strike a balance between returns to shareholders and then reinvesting in the business at all points in the cycle. I think it's made us much stronger and it's made us a more disciplined company. It's underpinned the strong position that we're in today or that we've carried into COVID with our business resilient and well positioned for the current environment. It's driving higher returns as well. This approach to the CAF is driven -- has seen our net debt half from $26 billion in 2016 to $12.8 billion as at -- the end of the last half, and it's also gotten our CapEx down to manageable levels. Now over this same period, we've returned $33 billion in cash to shareholders and we've invested $31 billion as we've developed a suite of organic growth options. So I spoke -- I mentioned earlier, the balance between returns to shareholders and investing in the business, and you see that over the past few years. Now on the second part of your question, which was around flexibility with our CapEx. Just before I come to answering that directly, I do just want to call out the fact that our capital allocation framework and our strong balance sheet enable us to invest countercyclically and in doing so to create -- to grow value. We are also looking at our plans for the next year in light of the current environment. And we have a number of levers available to us. Our current financial year ends next month, but we've already been able to reduce our petroleum exploration spend by a quarter during the second half. So that's about $100 million. And there will be some deferment of spend given the impacts arising from COVID-19 on a few of our projects. As we outlined in our third quarter operational review, we already expect our capital spend for FY '21 to be lower than the around $8 billion we've previously guided to, and we've got a number of levers available to us too to achieve that. In Petroleum, we've deferred the Scarborough FID into the middle of next year. We have the flexibility to reduce petroleum exploration spend next year by $200 million, about 1/3 of our spend over recent years. And we're currently evaluating what petroleum activities we can defer to preserve value or capture value by shifting production to a window where we anticipate stronger oil prices. And in minerals, we're also assessing whether there's any things we should do for value. We'll provide updated numbers and guidance around that at the full year results in August. So just back on -- if I just say a final word on the capital allocation framework, it's been a game changer for us. It's given us greater focus and discipline. It's made us stronger. It's made us more resilient, and it's helped us to drive higher-quality growth and returns. So it's not going anywhere.

Let's just talk a little bit more generally about growth, Mike. So how do you think about the growth issue? And I guess one thing I've been struggling with a little bit in the last couple of years is this idea, are big miners now too big to grow? Would you ever consider inorganic growth? It used to be a major sort of plank of the growth strategy for large mining companies.

Well, okay, we should be clear about what we mean by growth, Jason. So the only growth that matters is value growth, and we are never too big for that. We're driving safer, more reliable and lower cost and more productive operations. And in fact, I would say our size enables us to grow value at scale. And I'm certainly intensely focused on ensuring that we can accelerate our improvement cycle. Now sometimes value growth does come through volume growth. We'll do so when market circumstances warrant it and when we can get attractive returns. For the next 5 to 10 years, we are well stocked in terms of organic opportunities. But as I've said, beyond that, we know that we need more options in future-facing commodities. That will help us grow value for decades to come. Now these options will come both from within our existing footprint and through securing more resources through exploration and early-stage entry or at least that's the first focus. It's to secure options through getting more out of what we have or through early stage -- exploration and early-stage entry. But we do have to be alive to M&A opportunities. I want to highlight, though, that we are very selective about the commodities and the assets we want to own. We've made no secret of that. And we have to be disciplined in sticking to that. The assets must align with our strategy. They have to pass or the opportunity has to pass our capital allocation framework, which means that these opportunities have to compete against the alternative opportunities that we already have in the portfolio, and that includes buybacks. And our experience to date has been that these sorts of assets and opportunities are the ones that others, not surprisingly, like to hang on to. And when they do come available, there's lots of other people who want them, so they'll be hotly contested. And that's why our first focus on securing more options is through exploration and early-stage entry. But if the right opportunity presented itself, we do have the balance sheet strength to allow us to pursue it. We just have to be really disciplined about it.

Mike, it's James here again. Can you please talk a little bit more about petroleum? The well-timed exit of U.S. Onshore was obviously a positive given the recent decline in the oil price. The petroleum business is now much smaller than it used to be accounting for 11% of EBITDA last year. I guess my question is, is petroleum really a core business for BHP? And will products such as Scarborough and Trion be able to compete for capital with other options in the business?

Thanks, James. Well, thanks for the recognition on the timing of the shale exit. On your question around -- talking more broadly about petroleum. Look, I think we -- we have a quality petroleum business and a great team. It's on strategy and it remains core, too, to BHP. We like the commodity. We've got great assets with growth potential, and we have a proven track record in terms of our operating capabilities. The other fundamentals are there for success as well. We've got a strong balance sheet as a company. We have a diversified portfolio. That allows us to invest countercyclically. So we can continue to invest when pure plays might not be able to. And this was -- if we think back a few years, this was our advantage back in 2016, when we continued exploration spend when others couldn't, hence our petroleum growth options today. So I do believe that petroleum offers competitive, attractive opportunities to grow value and returns for shareholders. Now notwithstanding the current market challenges, we believe the long-term supply and demand fundamentals remain sound. And I know that some people have questions about long-term demand given climate change perhaps exacerbated by what happened in the past few months as a result of COVID-19. And we accept the science of climate change, and we've shown leadership on this for a long time. Well, let's frame this. Even low case forecasts are for the world to consume another 1 trillion barrels of oil over the next 30 years. And that's relative to 900 billion barrels over the past 30. Also, conservative estimates put natural field decline at, say, 3% per annum. And this means that unless demand is falling consistently at a rate greater than that, the world is going to need investment in fresh supply, which will support prices. And I have to say, it's hard to see demand falling year in and year out at greater than 3% per annum. However, what's really important to understand in terms of our approach to investments is that under the capital allocation framework, we rigorously test downside. And we're not overly led by spot prices, either high or low. So we assess our investments against a range of potential outcomes. Now you asked, James, about Trion and Scarborough. On those specifically, we think Trion is going to be attractive, but it's still early. On Scarborough, we're continuing to work on strengthening the returns and risk profile. But together with our partner, we've elected to delay FID, as I mentioned. We do have the benefit of flexibility in our projects. So the timing of some of our capital spend will change in petroleum taking into account current markets. We're managing the business with one eye on near-term volatility, but we do continue to see the petroleum business as having upside and potential to generate some great returns and value growth.

Well, I'm just watching the time and it's just flying by here, Mike. So I did just want to talk briefly about ESG, and we've got about 4 or 5 minutes left here. In a former role, you were the Group Head of HSEC, so Health, Safety, Environment and Community. And I guess without maybe getting into climate change, but how do we think generally about ESG as both a threat but then also an opportunity for BHP?

Look, I see it as a powerful differentiator. And we've spoken at length about this in our social value briefing late last year. We believe it can bring us competitive edge through better ability to access resources, better ability to attract great talent and to maximize access to capital markets or to secure a lower cost of capital. And we have a long track record in this of making great or sound decisions. You've seen that play out in the way that we've handled COVID, renewable power in Chile, which, by the way, has both reduced our emissions footprint quite markedly or it will, and it's created direct shareholder value through lower prices. So a long track record of success, we see this as a positive differentiator for BHP, and we're pretty committed to it.

Mike, just following on from that, sticking to ESG. How does that thinking extend to climate change? And has this changed in the current crisis?

So no change. No change to either our beliefs nor our commitment. And again, we recognize the longer-term role that fossil fuels will continue to play, but we also recognize the risks associated with climate change. And we've been taking action on this for decades. Now we've recently spoken about the commitment that we have for further reductions in operational emissions, and we'll come out later this year with a science-based 2030 target. And we've also stood up a $400 million climate investment program to support our work with others in the supply chain, including our customers to reduce their emissions. We'll also come out later in the year with updated portfolio analysis to include a well below 2 degrees scenario. And we're strengthening the link between climate performance and executive pay. So no change to our commitment to this, and we'll be meeting the commitments to come up with further on this later in the year.

Okay, Mike, we're running out of time, but we'll see if we can squeeze one last one in. Just super briefly, could you just talk a little bit about what BHP has done to support the communities and the people who immediately surround you sort of through this current COVID crisis?

Sure. So I'll keep it very brief, Jason. We've kept operating. That's the single biggest thing that's contributed to those around us. But in addition to that, we've provided -- we put funds in place to support local communities across all of our regions. We've supported our business partners. We've provided funding into research for COVID, and we've shortened payment terms for some of our small, local and indigenous suppliers. So quite a range of things. We want to support those who support us.

That's great, okay. Well, look, we've run out of time, and I can't believe how quickly that went through. But anyway, Mike, again, thanks so much for working with us in this unusual format. And we hope to welcome you in person to our conference in Barcelona next year. So thanks again.

I look forward to it, Jason. And thank you, Jason and James.

Thanks.

Thank you.