BHP Group (BBL) Q4 2021 Earnings Call Transcript

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BHP Group (BBL)
Q4 2021 Earnings Call
Aug 17, 2021, 3:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Mike Henry -- Chief Executive Officer

Hello. Thank you for joining David Lamont and me for this briefing.

Today, David and I are pleased to be able to speak with you about the great operational and financial results we've delivered during the 2021 financial year, which enable us to declare a record dividend. We'll also talk about a number of transformative changes to our portfolio and structure to strengthen our ability to continue to protect and grow long-term value. These include: investing in the Jansen Stage 1 potash project in Canada, a Tier 1 asset with growth potential;

Creating a global top 10 independent energy company through our agreement to pursue a merger of our Petroleum business with Woodside; and finally, making BHP simpler and more agile through our intent to unify our corporate structure under Limited.

Our current performance and our plans for the future are built upon our portfolio of world-class assets, our commitment to sustainability and social value creation, and most importantly, the capabilities and culture of BHP and its people.

I'd like to thank our employees. You've delivered some great outcomes this year. We've shown what we can achieve together and we're carrying momentum into the year ahead. I'd also like to acknowledge all those who support us, including our communities, customers, suppliers and the traditional owners of the lands on which BHP operates. Thank you.

We're proud of the results we achieved in financial year 2021. We've maintained our focus on becoming safer, lower cost, more reliable and more productive. We're striving to be a leaner and more consistently higher performing company, the industry's best operator. And this is because we believe that operational and financial excellence drive higher and more consistent returns for shareholders, and enable us to outcompete in the long run for opportunities and growth. Our results from the past 12 months reflect this belief and commitment.

While ensuring we're maximizing near-term returns, we're also focused on ensuring that we have a portfolio that is future fit. As demonstrated in our climate change presentation last September, we expect our current portfolio to perform even better in a world of strong climate action. But we need to further increase our positive leverage to the mega trends playing out around us and this includes through an intent to add more growth options in future-facing commodities.

We've made strong progress in delivering against our aims. We're generating excellent returns for shareholders and not just through high commodity prices, but through our reliable delivery of operational results and our financial decisions. These are the foundations upon which we are building an even brighter future.

Before I talk about our future plans, let me outline our results for the 2021 financial year. Nothing at BHP is more important than keeping our people and our communities safe. We've now had over 2.5 years without a fatality in BHP and we've seen a sustained improvement in our key leading and lagging safety performance indicators, including events with potential to cause a fatality and our Total Recordable Injury Frequency. Our commitment to safety is unwavering and we continue to seek improvement every day.

Our operations are running well. We continue to unlock incrementally better performance and capacity from our equipment and infrastructure. Two of our largest assets, Western Australia Iron Ore and the Escondida copper mine have continued to set production and throughput records. Our Petroleum business beat full year guidance for both production and unit costs. And benefiting from a multi-year program of asset integrity remediation and capability building, Olympic Dam has recorded its highest copper production since BHP acquired it 16 years ago and its highest ever gold production. Combined with disciplined cost control, this strong operational performance has helped us derive maximum benefit from high iron ore and copper prices.

We delivered four major projects during the year, on budget, and on or ahead of time. These were the Spence Growth project in copper, South Flank in iron ore, and Ruby and Atlantis Phase 3 in petroleum. And we've established additional exploration partnerships, acquired new tenements and progressed greenfield exploration adding to our early stage options in future facing commodities.

This trifecta of strong operational performance, high commodity prices and capital discipline, underpinned excellent financial results for the year. We generated record free cash flow, return on capital employed strengthened to over 32% and our balance sheet remain strong, with net debt finishing the year at $4 billion.

With these results, having taken into account our Capital Allocation Framework, we announced today a record final dividend of $2 per share. This brings BHP's returns to shareholders to more than $15 billion for the full year and to more than $38 billion over the past three years. Our shareholders are capturing the benefit of our performance. And not just shareholders, we're also creating significant value for the communities, governments, partners and employees who support BHP.

We're continuing to build a more diverse workforce, an important driver of the uplift in performance I've just spoken about. Since 2016, we've increased female representation in our workforce by more than two thirds, to almost 30%. We're supporting communities and investing in social programs around the world, whether through conservation projects, funding education and training courses or working with councils to fund infrastructure that builds community resilience.

And we continue our track record of taking action to reduce operational emissions and working with others to reduce emissions in our value chain. We've signed new renewable power agreements at a number of our operations. We've established research and development partnerships with some of the world's largest steelmakers. And we're working with the maritime industry to support greener freight.

We continue to deliver strong operational and financial performance and ever more sustainable outcomes. We're unlocking growth and taking a number of steps to further ensure we have a portfolio that is fit for the future. BHP has never been better positioned.

I'd like to now hand over to David to take you through our results in more detail. David, over to you.

David Lamont -- Chief Financial Officer

Thanks, Mike. It's great to be back at BHP and to be able to deliver such a strong set of financial results. They really do represent the capability and commitment of the people across the BHP business. As Mike said, our continued focus on operational excellence underpinned our financial performance and enabled us to fully capitalize on the higher realized prices in iron ore and copper.

Underlying EBITDA was up 69% to over $37 billion at a record margin of 64%, while our underlying EBIT was up 91% to $30 billion. Our adjusted effective tax rate, including royalties and PRRT payments, was 41%. And net exceptional items were $5.8 billion after tax. This primarily relates to a $1.2 billion current year impact of the Samarco dam failure, a $2.2 billion impairment of our energy coal assets and a $2.1 billion impairment relating to Potash.

In relation to this, we've previously acknowledged the capital invested to date has been significant and that our approach would be different if considering the project again today. The impairment follows an analysis of what we'd expect a market participant to attribute to our investments to date. We remain very positive on the growth potential of the commodity and the Jansen project. Reflecting our strong performance, our dividend for the year was a record $3.01 per share, an 89% payout ratio.

Across the business, we've delivered on our production and cost guidance. Some key highlights are: record EBITDA margin of 77% in Western Australia Iron Ore; a 3 percentage point increase in our Petroleum EBITDA margin to 58%, despite significant weather events in the Gulf of Mexico, partly due to also around $250 million of cost savings and value creation initiatives which has helped enhance its business resilience and cost competitiveness; an almost doubling in EBITDA in Copper to $8.5 billion, driven by higher prices and strong underlying cost management across all operations, despite the continuing impacts of COVID; and finally, our Met Coal business had a strong second half, although full year volumes were impacted by significant weather events in Queensland.

Turning to FY22, we expect inflation and exchange rates to remain volatile. We are experiencing increases in a number of commodity-linked uncontrollable costs, and constraints on the free movement of our workforce due to COVID. Despite this, our businesses are performing well and capitalizing on the strong demand for the commodities we produce. We continue to control our costs well. As an example of this, our expected unit costs in iron ore to be between $17.50 and $18.50 per tonne. This reflects an increase in our expected U.S. to Australian dollar exchange rate from $0.70 to $0.78, and the inclusion of COVID costs, which were treated as exceptional in this year's results.

Reflecting our strong performance, we generated record operating cash flow of more than $27 billion for the year. Our balance sheet is robust, with net debt at $4.1 billion, well below our current target range. We invested $2.3 billion in maintenance in line with our plans and we are seeing rewards in the reliability of our operations. And we invested more than $5 billion in development, growth and exploration across our business, including the counter-cyclical acquisition of a 28% stake in Shenzi when oil prices were below $50 a barrel.

Off the back of our strong results, we announced a record final dividend of more than $10 billion, which takes our full year dividend to more than $15 billion. We continue to deliver outstanding returns to shareholders and maintain our ongoing capital discipline. The business today is performing better than ever. Through outstanding operational performance, we have capitalized on some historically strong commodity prices, invested in growth and returned significant cash to shareholders. Some near term uncertainties remain. In Australia, we have seen COVID outbreaks resulting in border closures and ongoing pandemic creating uncertainty for our business. Despite this, we remain positive in the outlook for the long-term global economic growth and commodity demand.

Thank you. Back to you, Mike.

Mike Henry -- Chief Executive Officer

Thanks, David.

We have a simple strategy at BHP, which is designed to deliver exceptional value and returns through the cycle. We do this through owning a winning portfolio of world-class assets with exposure to highly attractive commodities which benefit from the trends unfolding around us, and by operating them exceedingly well, safer, more productive and lower cost. We do it through being exceptional allocators of capital and through being leaders in sustainability and the creation of social value. Today's announcements both fit with and accelerate this strategy.

Our progress against the objectives we've set out for BHP have laid strong foundations for these changes. Through our systematic focus on improving reliability and debottlenecking our operations, our Western Australia Iron Ore business is the lowest cost major iron ore producer in the world. We're continuing to enable our people and invest in capability through our FutureFit Academy and our centers of excellence. We've made an offer to acquire Canada's Noront Resources, which their Board has recommended to their shareholders to gain access to a highly prospective nickel basin in an attractive region. And we've made progress on focusing our coal portfolio on higher quality metallurgical coals, with our recent agreement to sell our interest in the Cerrejon thermal coal mine in Colombia.

We're delivering improved performance and a better portfolio. We're focused on continuing to deliver sustainable long-term value growth for shareholders and our other stakeholders. Doing so requires that we operate ever more sustainably. This means advancing the technologies and practices that enable us to reduce the emissions produced in our operations and to minimize our overall environmental footprint, be it through water stewardship or through mitigating biodiversity impacts. It means working with others to reduce the emissions generated in the transport and use of our products by our customers, while at the same time recognizing that many of the products we produce are critical enablers of the energy transition. And it means working in the spirit of true partnership to create value for all those who depend on and who support BHP, including business partners, communities and first peoples. This intent shapes our approach and we're embedding it into all of our decisions.

We're supporting employment in the communities in which we operate. As well as our target for Indigenous employment in Australia, we've now set a target in Chile of 10% by mid-2026 and in Potash of 20% a year later. And we've long recognized and have responded to the risks of climate change. We've set and delivered on targets to reduce operational emissions since the 1990s. And in September last year, we announced a medium-term climate-related target and Scope 3 goals, which have been followed by a number of new partnerships and commercial agreements.

Building on this momentum and to give our shareholders greater direct voice on this topic, we plan to put forward a Say on Climate advisory resolution at our 2021 Annual General Meetings in relation to a soon-to-be-announced Climate Transition Action Plan. The plan will cover the focus areas of the Climate Action 100+ Net Zero Company Benchmark and provide further information on our approach to addressing emissions in our value chain.

BHP continues to improve and evolve. The world is also changing in ways that play to BHP's strengths. The past year has seen growing global commitment and action toward tackling the challenge of climate change. There is growing recognition of the critical role that copper, nickel, iron ore, and even metallurgical coal for steel making, as well as potash for improved farming practices, have to play in the energy transition and in ensuring a sustainable world for future generations. The increased focus and awareness reinforce our conviction that the mega-trends of decarbonization, electrification, population growth and higher living standards will drive strong demand for many of the commodities we produce and that there will be an increasing call for these commodities to be supplied by companies with a track record of sustainable operations and strong social value creation. That's BHP. I would also note that while BHP's diversified portfolio is expected to remain resilient under a number of different long-term scenarios, our 1.5 degree scenario is the most positive for us.

We are actively positioning BHP to benefit from the trends unfolding around us. We will deliver the products the world needs today and in the future. Our focus on ensuring we can meet the world's long-term demand for certain commodities will enable us to create significant new value, over generations, for all our stakeholders. We continue to evolve the portfolio through our decision on Jansen and through our intention to merge our Petroleum business with Woodside. These are transformational decisions.

After implementing these changes, BHP will have a far greater relative exposure to future-facing commodities through some of the world's largest and most sustainable resources: copper to support unprecedented demand for electrification and renewable energy; nickel for batteries; and potash to support sustainable farming. And we'll retain our world-class iron ore and metallurgical coal assets. These will remain essential for the steel used in the infrastructure needed to decarbonize and to drive economies forward. BHP will be even stronger.

The approval of Jansen Stage 1 is aligned with our strategy of growing our exposure to future-facing commodities. While we haven't always gotten everything right with Jansen in the past, we are confident in the decision we're taking today. Demand for potash is underpinned by the need for more productive agriculture with a lower environmental footprint to provide affordable nutrition for a growing global population. It will benefit from increased demand for the biofuel required for decarbonization and from the need to increase global food production from constrained arable land. And it provides positive differentiation from the rest of our portfolio in terms of commodity, country and customer.

The $5.7 billion investment will deliver 4.35 million tonnes of potash per year. First ore is targeted in 2027 and it will ramp up to full production over two years. Jansen plays to BHP's strengths in mining, processing and bulk logistics. It will enter the market toward the bottom end of the global operating cost curve. It incorporates the latest equipment and technology. It will be one of the world's most sustainable potash mines with a low carbon footprint and low water intensity embedded into its design. Located in the world's largest potash basin, it will support up to a century of future production and growth.

Jansen Stage 1 has an attractive risk return profile. It is expected to have strong returns through the cycle, a short pay back period and high operating margins. Jansen will generate strong cash flows and value for decades to come. I hope you can tell that we're excited by this new chapter in BHP's history as we are by the next chapter for our oil and gas assets.

We regularly review our portfolio to ensure our assets are owned in a way that maximizes value and today we announce our intention to separate our Petroleum and Minerals businesses. This decision will give shareholders greater choice about how to weight their exposure to the different investments and sector propositions. It will accelerate BHP's relative exposure to future-facing commodities and it will allow a greater proportion of capital in BHP's remaining portfolio to be allocated toward these future-facing commodities and enhanced shareholder returns.

Having made the decision to separate these parts of our business, we believe a merger of BHP Petroleum with Woodside delivers the most value for shareholders. Oil and gas provide more than half of the world's primary energy today. They remain essential to the processes and products that support everyday life. And high-quality assets and projects are expected to continue to generate attractive returns for the next decade and likely beyond. The question is not whether these resources have a role, but rather how to position them to deliver the best shareholder and societal outcomes during the energy transition and today's announcement will achieve that.

The merged entity will be a global top 10 independent energy company. It will unlock synergies and bring together complementary skills, including exceptional operational and technical capability in deep-water oil and in LNG. And it will have significant scale with current production of around 200 million barrels of oil equivalent per year, a portfolio of assets with greater diversity by product, geography and end market and a continued focus on sustainable operations, carbon management and ESG leadership.

The combined company will have expanded growth optionality, with a suite of high-return brownfield and greenfield projects, along with attractive exploration prospects in some of the world's best oil and gas basins. And with low cash break-evens and greater financial resilience than on a stand-alone basis, it will have the capacity to support phasing and delivery of these.

Even as the world's economy decarbonizes, it will still need oil and gas for decades to come. Significant new investment will be required to meet this demand as operating assets inevitably decline. And we believe that responsible producers with high-quality projects and competitive emissions intensity, like the combined business, will be well placed to deliver this. The merger, which is subject to Board and other approvals, is expected to be completed during the second quarter of the 2022 calendar year.

Strong delivery against our objectives and the changes announced today, position BHP well to continue to pursue long-term value growth. Simplification of the BHP corporate structure through unification is a natural flow on from the portfolio changes we've effected over recent years, which have left no material profit generation on the Plc side of BHP. And it will improve strategic flexibility by allowing transactions to be undertaken more simply, including the planned merger of our Petroleum business with Woodside announced today.

We've also seen a material reduction in the costs associated with unification. And hence, now is the time to unify. Unification will not change BHP's strong underlying business, the underlying operation of our assets, our cash flow generation, our dividend policy and ability to pay fully franked dividends and shareholders' proportionate interests will remain the same. There will be one BHP share price globally. The same BHP share will be traded around the world from Australia to South Africa to the United Kingdom and the U.S. BHP will retain listings on all key stock exchanges.

Subject to final Board approval, it's expected that shareholder meetings and votes will occur early in 2022. Following unification, BHP will be simpler with even greater ability to continue to shape our portfolio for the future, while retaining our same strong foundations. Over recent years, we have been successful in delivering our purpose and creating value for our shareholders, customers, suppliers and communities. We have excellent assets and they're being run exceptionally well. We're consistently disciplined with our capital allocation and we're committed to sustainability and creating value for those around us.

The decisions we've announced today will further strengthen BHP's positioning for the future. Through the portfolio changes, we're increasing our leverage toward the world's changing needs. And through unification, we'll be more streamlined, efficient and agile. We'll be even better placed to deliver long-term value.

Thank you.

Questions and Answers:

Duration: 10 minutes

Call participants:

Mike Henry -- Chief Executive Officer

David Lamont -- Chief Financial Officer

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