Rio Tinto Group (RIO) Earnings Call Transcript & Summary

Okay. Good morning, everybody. Good afternoon in the U.S., actually good afternoon in Europe. Good early morning to people in Asia. I'm Jason Fairclough, I currently run my research at Bank of America in EMEA. I'm pleased to introduce our next company, Rio Tinto. I jointly cover Rio Tinto along with my colleague, James Redfern. James is based down in Sydney, he's also dialed into our session today. Speaking for Rio Tinto, we have CEO, J-S Jacques. J-S has been a long-term supporter of our conference. J-S, we're very pleased to welcome you back again and we thank you for supporting us in this year's unusual format. I also think that it's about 1 a.m. there in Sydney. So you get extra kudos for being awake. So J-S is going to make some opening comments, and he's got some slides. The slides are available on the Veracast platform or on Rio Tinto's website. And as a reminder, this is a self-drive system. You have to flip the slides along, and I think J-S will give us some cue. And afterwards, J-S will be joining us for a fireside chat, and there's an opportunity for investors to ask questions via the Veracast system. So with that, J-S, over to you.

Thank you, Jason. Good to hear your voice. I hope that you and your family are well and the same for everyone on this call. It's great to be here this year. And I'm really, really looking forward to the conversation today. I'm sure you've seen Slide #2 quite a few times. So I'm going to jump straight to Slide #3. So in February, we talked about how we are performing today and transforming for tomorrow. Clearly, since then, the world has fundamentally changed. However, our overall approach, perform today and transform for tomorrow, underpinned by our 4P strategy is even more relevant as we navigate the COVID-19 world. And this is really what I want to talk about today. There is absolutely no doubt all industry has been impacted by the tragic recent events. However, unlike other industries who face significant impacts, the mining business continues to perform despite various challenges. And part -- and performance right now is about keeping our people and communities healthy and safe and building further resilience. As we look to the future, we believe our industry will also need to transform, to operate and thrive in a new reality, whatever this may be. It is fair to say we have already learned a lot through this crisis, and so we can adapt fast. We now need to seize the moment to create an even stronger Rio Tinto. Key to Rio's approach remains to have a portfolio of world-class assets, a strong balance sheet, a disciplined capital allocation, superior market insights and partnerships. And we are now more than ever focusing -- focused on understanding and managing our critical risk. We do also see the potential for new opportunities to emerge as history has shown great innovation often springs from difficult times. To make the most of this, we will enhance our resilience, strengthen our partnerships and continue to adapt, all with a simple aim to maintain our strong performance. Moving to Slide #4. And so far this year, we have continued to deliver. All of our assets are running and demand for key products such as iron ore and bauxite remain strong. Our Q1 production report, which we released in April, shows our iron ore assets are performing well in the strong pricing environment. We are on track to meet our 2020 iron ore guidance. We also paid the 2019 final dividend of $3.7 billion in April and continuing to invest in our business despite sagging lower CapEx for 2020 due to the impacts of the pandemic, a combination of supply chain issues, people availability and potentially permitting delays. Over the last years, we have delivered an industry-leading margin with a 18% average return on capital employed, including a 24% return on capital employed in 2019, invested $18 billion in CapEx to grow and sustain our business, returned $36 billion to all shareholders in the form of dividends and buybacks and contributed to society paying $67 billion in supplier payments and $23 billion in taxes and royalties. So we have a strong track record. And over the years, we have shown we are both robust and resilient. The key will be maintaining this in the challenging operating environment in the days, months and years ahead. So, so far, so good, but we are not complacent. Let's move to Slide #5. Indeed, as we look to the future, it is fair to say that we do not know what the world will look like, but it is absolutely clear that things have got even more complex. Just take a look at some of the rolling news headlines every morning. We have not experienced anything like this in recent history. In January, who would have thought that international travels will have almost grounded to a halt by May? 97 countries have implemented total or partial border closures according to the UNWTO report and unemployment is set to rise dramatically in most countries. As one example, I mean, the U.S. rate is currently around 15%, the highest since the great depression. And it's worth reminding ourselves that in February, it was a record low of 3.5%. So movement of people and goods will be restricted, as will the movement of data and it's likely that wealth distribution will permanently shift. So significant uncertainties will exist over the short, medium and potentially long term. In terms of the pandemic, we see it in 3 phases: response, recovery and resets. From a response perspective, different countries are in different phases. And right now, there is a lack of coordination between nations. And we are experiencing what we call a real politics world, one with the potential for rising nationalism, increasing tensions like the U.S.-China relationship and trade dislocations. In terms of recovery, many predict either W or V-shaped economic recovery. Although to be honest, it's just too early to tell. And we have prepared for you a range of different scenarios. We believe 3 key factors will shape any recovery scenario. First, the fear factor. Much will depend on how society chooses to respond, especially people's willingness to get back to work during the health crisis. Number two, the effectiveness of the health measures put in place, including the potential introduction of a vaccine. And third, the effectiveness of economic stimulus to encourage consumer spending and business investment. What is clear is that regardless of the shape of the recovery, the world will see slower GDP growth and trade impacts, both key drivers of the mining industry. Alongside these challenges, there will be also opportunities. So the question is this, are we ready to continue to compete and win in this new world? At Rio, we remain committed to our 4P strategies: performance, people, portfolio, partnerships. And we are developing action plans with 3 key outcomes in mind. One, how to enhance resilience; number two is how to strengthen partnerships; and last but not least, how to ensure our business adapts quickly. All with the aim to deliver shareholder value in the short, medium and long-term and continue to positively contribute to governments and communities. Our partnership to operate is absolutely critical. We need to win the hearts and minds of our local communities and governments. Moving to Slide 6. Enhancing the resilience for us is really about resilience of performance from safety to free cash flow. Strengthening our partnerships and quickly adapting will be key to any transformation effort. Each of our assets and commercial teams are stress testing their businesses against these 3 dimensions in terms of both current and future performance as well as new opportunities. I will quickly share some thoughts on each of them. Let's move to Slide #7, starting with resilience. There is absolutely no doubt that higher volatility and uncertainty in our business environment is the new norm. As recent events have shown, we need to expect the unexpected. And I do not see this changing in the decade ahead. To outperform, companies must be resilient. Enhancing resilience is what we, at Rio, have been focusing for a number of years to create optionality. You can expect the same discipline from us in the future. Let me give you some example of what I mean. We have strengthened our balance sheet. Our net debt has moved from $13.8 billion to $3.7 billion over the last 4 years. And we have improved our capital allocation process. We have also simplified the portfolio, divesting $12 billion in noncore assets. This move mean we are, therefore, well positioned to withstand shocks and move on opportunities. Resilience also comes from having a clear strategy and a deep knowledge of our customers and markets. At Rio, we remain committed to our value-over-volume strategy to drive performance, productivity and free cash flow per share. We will also continue to strengthen our understanding of the market and develop our relationship with customers. To create further resilience, we are also enhancing our understanding and management of hazards and critical risk. Safety is nonnegotiable for us, one of our core values and we are doubling down on our efforts to keep our people safe. And of course, health has now taken an even greater emphasis for obvious reasons and will shape the way we operate for some time, potentially forever. Finally, resilience for our industry increasingly means managing sustainability issues very well. And at Rio, all of our operations have climate considerations and resilience built into their operational and strategic plans. We are also focused on enhancing our relationships with our host governments, communities and employees. These relationships have been critical in recent times and as you have heard me say before, license to operate is a make or break for business. In the world where digital technology and new skills will be needed, all employees remain key to our success. We have invested in enhancing their technical and commercial capabilities. As we look ahead, employee and leadership diversity will also underpin our performance, in addition to partnership, which will be key to how we transform ourselves. Now let's move to Slide #8. Let me say a few words on partnership. Traditionally, the mining industry has been hyper competitive. We compete for access to the best resources, the best talents, the best markets. Although there has been greater recent collaboration, for sure, which we started doing on tailings management, [ some essential ] and others, supported by industry associations. Collaboration in the future, also needs to extend to partners across the value chain to unlock new sources of value creation. Like partnership for growth and access to resources, and [ power shipping ] new frontiers for the industry, like digital and technology, blockchain, automation and so on and so forth. Partnerships are also key to derisking. This means partnership with customers, suppliers, governments and communities on emerging issues such as environmental performance, wealth sharing and complex project development [ through number three ]. At Rio, we are developing a stronger partnership approach, as you can see on the slide. We have developed new partnership in China with our customers; in Australia in education initiative with universities; and in the U.S. and Canada in new technologies. These are key to enabling us to solve problems, create newer solutions, contribute to both shareholders value and society and most importantly, to our ability to adapt quickly. The third and last point I want to cover today. So moving to Slide 9. Of course, the image in this case, our ability to adapt with pace is COVID-19 related. And as I mentioned earlier, we think this rapid response to changing conditions may become the norm. And what COVID has shown us is that we can do it. Let me give you some example. We moved all of our idle employees to different rosters in a week where previously it may have taken a year. We screened 9,000 of our employees in a few weeks through testing facilities at Perth Airport, which we set up from scratch with the full support of the government, both at the federal and state levels in Australia and we have maintained business as usual across 36 countries despite a significant portion of our workforce working from home. We also reshaped our products at some operation in the week to fit with changing customer requirements. I'm absolutely loving the [ joy ] in Rio Tinto and there are some recent gains that we want to lock in to enable future performance such as increased collaboration across the business with partners, across the partnership between commercial and the operations and greater regional and locally empowered decision-making. These changes have enabled us to adapt quickly. And in the world where capital may be scarce and tolerance for risk is lower, we want to maintain these characteristics to unlock new sources of growth, financing and market opportunities. You heard me say before that mining development of the future may start smaller and be embedded with optionality for growth [ over stretches ], yielding quick cash flows to shareholders, communities and development, such as our Winu project in Western Australia. In this post-COVID world, this type of development approach may become more viable. Rio Tinto has a diverse portfolio. We have 72% EBITDA margin in our business, generating $9.6 billion of free cash flow, a business many would like to have right now. We also have a range of growth options in iron ore, in copper, in bauxite and minerals. So we are patient and we will make investment decisions based on market fundamentals, which are clearly shifting. We know that adaptation is also thinking about our future portfolio. And we are keeping a watching brief on M&A. Right now, the finding is finding it difficult to value companies and the COVID-19 recovery pathway is not clear. Let me be clear, Rio Tinto will only transact if an opportunity to create value, we remain patient but not complacent. Moving to the final slide, Slide #10. Let me close with a reminder of why we are in business to create value. The last 4 years are not just about strong financial and portfolio performance. It is also a consistent story of disciplined capital allocation. Our businesses generated over $62 billion over a 4-year period. More than 2/3 or $50 billion of this came from operating cash flow. On the back of this, we paid $36 billion to our shareholders at Rio Tinto. That is equivalent to over 2/3 of our market cap at the beginning of 2016. We have strengthened the portfolio, divesting $12 billion of assets. We have reduced our net debt by $12 billion, and we have invested $18 billion in growth and in sustaining our world-class assets. Our track record is strong and we have a solid base for future investments and returns. So Rio is well placed. There will be uncertainty ahead, but we have a clear strategy to perform and transform. It is all about creating sustainable and superior value day in and day out. And we will do this through enhancing resilience, strengthening partnerships and adapting quickly. And then on this note, over to you, Jason, for a fantastic Q&A.

Thanks, J-S. So at this point, we'd normally invite you over to a sofa, but maybe you sit down for this part. As ever, we do really enjoy your thoughts about the big picture on today's situation. Let's talk a little bit about China. So I think you have around $25 billion in sales to China. You actually buy a lot of stuff from China. You should have a pretty decent insight into what's going on there. What are you seeing from your order books today? How should we think about the second half?

Yes, absolutely. So I mean you're right. We have a high exposure to China. We sell around $25 billion if I look at the metrics last year, and we buy around $1.5 billion of goods and services from China, and we have a pretty strong team on the ground with more than 200 people either based in Shanghai or in Beijing. And by the way, both offices in Shanghai and Beijing are up and running as we speak. Let me maybe start with the macro. Overall, we feel pretty confident about China. I mean, yes, full year GDP growth may be impacted from the shock in the first quarter. But what we see is the industrial part of the economy is clearly -- is running nearly in a normal way. I mean, full speed, I mean. And by the way, this part of the economy is -- or the recovery, if you want to talk about recovery, is proving to be pretty commodity intensive, which is a great piece of news for clearly, Rio Tinto. Now it's fair to say that on the other side, the service economy, the leisure part of the economy is under pressure and will take time to return to full activity, all right? So, so far, so good, and the demand for our product is strong. And maybe I'd say a few words after on this one. Now there are maybe 3 key fields of uncertainties that we are working very, very carefully. One is the extent that the current demand is restocking driven, okay? The second one is how much of this demand is pull forward in anticipation of higher future activity levels. I think machinery is a good example of it. You could argue that it could be linked to the Communist Party Congress in a few weeks and maybe some expectation that a stimulus package will be put in place. And at the same time is, what could drive in the other way around is a potential drag on China's economy from weak exports because the rest of the world is -- if people believe and maybe I am one of those that you could have a V-shaped recovery in China. In the other part of the world is, I don't know which letter of the alphabet you want to use, WW or L or whatever letter, it's not the same. And then clearly, maybe we have said, but that's pretty obvious is the ability for China to handle any new wave of COVID-19. Now what it means for the -- our key product is -- and maybe I'll focus, conscious of time, on the iron ore. So I will start with the steel demand. And I have to say the steel demand has been pretty resilient, okay? Driven by resilience in the property market, for example. Clearly, we've seen an increase of infrastructure spending and then we see some, I don't want to say, boost the [ frequency ] in terms of machinery CapEx and some recovery, but from a very low base, specifically on the automotive. The important piece is to look at the metrics and we have seen now 8 consecutive weeks of drawdown in steel industry across China, okay? Interesting enough is we've seen an increase in [ years ] restart over the same period as well. But for our iron ore market, which is one of our key markets is, if I look at the China angle is, all the books were in full, all right? And interesting enough is because the steel demand has not been as strong outside China, I mean, Europe is a good example of it is, we have managed to reallocate, for example, some of the products from IOC in Canada to China. So to answer your question is, are we overly concerned by China, the answer is no. Are we watching it carefully, the answer is absolutely yes, and we have regular conf call with all troops in Shanghai and Beijing to really understand what's happening with our customers and sometimes the customer of our customers and our suppliers as well because we're on both sides of the ledgers, so that gives us lots of insight. But as I said from our iron ore business, at this point in time, we are working full speed ahead, but we are ready that if the market conditions were to change, that we will take actions, value over volume. Jason, I think that's what I can say today.

I think James is going to ask the next one.

Yes. J-S, a quick one for me. Just wondering if you can already envision ways in which the COVID-19 crisis will structurally change how we operate in the medium to long term and also how does it tie into your ESG efforts.

Okay. Fair enough. That's something where we are already working on. I mean, maybe a few thoughts is -- at a macro level and I think I've touched on it is, resilience will be absolutely key, okay? And the ability to adapt as well. Let me step back. All the companies and Rio no exception, if you look at them and across many industries as well, all their business resilience model were based on one principle, which is the ability to move people around, including, by the way, 80% of the case in terms of cybersecurity, all right? And what we have learned in the last few days, weeks and months is, you can't make this assumption anymore. So we're going to have to develop from an operational standpoint and we have been pretty good at it, to be honest, so far, a different type of resilience. But it's clear, financial and commercial resilience will be key. That's one aspect. The second aspect is we have been talking about different scenario, different forces at play that will have an impact on the industry and the economy in general, we talk about geopolitics, technology, society. There is no doubt as we're having this conversation that geopolitics is going to be the dominant forces in the foreseeable future. So that may lead to trade friction, maybe increased focus on near-term economic outcomes and less global coordination. That will have, I have to say, a negative impact on the economy and trade growth. Now I think the -- from our perspective is, clearly, in order to deal with a lower growth environment and other potential hurdles, we will need to be more agile to move faster, okay? We will have to be more agile in our approach to investments and also how we maintain access to markets and resources. And the last element in order to be agile and to be more resilient is going to be about partnership. Partnership will be the name of the game. And it's about partnership with customers, suppliers and peers in order to make sure that we -- what I've said is our ambition has not changed, which is the superior -- to build superior and sustainable value in the short, medium and long term. Now James, back to your second part of the question on ESG. I got no doubt that how we create value and how we share value with different stakeholders will be absolutely essential. The performance in terms of environment, the fact that we are protecting our communities today is going to be a key feature going forward. The other piece is, if you take a long-term perspective is, issues like climate change, and interesting enough, the resilience of the assets under a different climate change scenario has not disappeared. And as far as we're concerned is -- and I've said it in the past and I think I said today as well is, all our assets now have climate change actions fully embedded. So climate change is business as usual, the way we look at it. But partnership will go beyond that. We need to strengthen the relationship with our customers and the customer of our customers. And I think a good example of what we're doing is the policy we put in place some time ago with Baowu, which is now I understand the largest steelmaker in China and globally, and Tsinghua University in order to fundamentally improve the industrial footprint, including CO2 emissions across the supply chain. I think the partnership we have put in place now with Alcoa, one of our peer on aluminum, and the government of Canada and of Québec, to develop a new technology for aluminum will be essential, more in the pipeline, but that's going to be the name of the game. So lots of uncertainty. Uncertainty creates volatility, volatility creates optionalities that we need to be able to adapt to and capture, that is very important. And as I said, resilience, partnerships and keep on moving fast, adapting fast, having the right decision at the right level, but never focus -- never lose focus on we need to keep our business healthy, we need to continue to ensure that we understand and manage our critical risk or critical hazards. I think that's what I would say, James, today.

Very good. Thanks, J-S, very comprehensive. Jason?

I think we're just about out of time, J-S, but I'm going to be cheeky and ask one of the questions from the clients. Someone said to me, did he just say we have growth opportunities in iron ore? Did you say that?

I said -- sorry, I couldn't hear you, James. The line is bad.

Yes. So the question was the client said, "Did you say, did J-S just say we have growth opportunities in iron ore?"

Well, I think we have growth opportunities across many of our communities and so on and so forth. And we shouldn't forget that as and when -- as we are doing today, moving 1 million tonnes of iron ore every day is depletion is a reality and at some stage, we will have to offset this depletion.

Okay. Well, thanks, J-S. On that, I think we're out of time. So I've got to wrap up. Thank you so much for dialing in 1 in the morning, you get a real hero medal for that. And again, I really, really appreciate it. And hopefully -- yes. Go ahead. J-S, go ahead.

Yes. Jason, I was going to say Rio Tinto is working 24 hours a day, 7 days a week. We never stop. So time is not an issue here.

Okay. Touché. Thanks again, J-S, and that concludes the call, folks. So you can log off now. Thank you.

Thank you. Thanks, guys.