BHP Billiton (NYSE:BHP) is working through a downturn in the commodities markets. During the company's fiscal 2014 conference call (years end June), CEO Andrew Mackenzie wanted to make sure investors understood that his company is not only set to survive through the trough, but is becoming a better company at the same time.
According to Mackenzie, "In the 2014 financial year, we continued to deliver on our commitments." That's an important statement for a company that earned roughly $4.30 a share in fiscal 2011, but only $2.60 in fiscal 2014. That said, the 2014 performance was an improvement of around 20% year over year.
And while BHP isn't earning as much as it once did, the year-over-year improvement came in a still difficult business environment that was, "characterized by weaker prices for the majority of our key commodities." That's been particularly true of iron ore, which accounts for roughly 30% of revenues and about half of earnings before interest and taxes (EBIT). This is, clearly, a point in time where management needs credibility, and that has to come from follow-through on goals such as exceeding production guidance and increasing productivity.
Goodbye non-core assets
Another issue that's been dogging BHP Billiton has been non-core assets. The company has stated that it's focusing on iron ore, copper, metallurgical coal, oil and gas, and potash. But what about everything else? The "other" category represents about 13% of the company's sales, but a paltry 1% of EBIT. No wonder investors have been down on this segment, which produces aluminium, manganese, and nickel, among other commodities.
Well, the time is nigh: "We have decided to reshape our company and stay true to our strategy. We plan to simplify BHP Billiton's portfolio with a demerger." In other words, the plan of attack is to spin off its laggard businesses and solve the overhang in one step instead of a long string of one-off asset sales.
We are getting better
Although part and parcel with following through on its promises, the CEO made sure to highlight some of the improvements being made on the operating level. At the end of the day, that's what will drive long-term performance.
On that front, "Annual production records were achieved at 12 of our operations." That included "a 14th consecutive year of record production at Western Australian Iron Ore," which was "significantly ahead of our initial full-year guidance." In addition, met coal production was up 20%, copper was in line with guidance despite declining ore grades, and petroleum liquids volume increased 18%. Clearly, the core businesses are doing well.
But production increases were only half the story. According to Mackenzie, BHP "surpassed [its] annual productivity target with another $2.9 billion of sustainable gains." That's come from projects like automating its truck fleet. That increased utilization by 10%, or "the equivalent of 75 additional trucks at no extra cost." Overall, BHP "delivered a unit-cost reduction of 12%" in the second half of fiscal 2014. And it expects to do even better in the years to come.
We can wait
While BHP's CEO admits the current market for its products is weak, he also points out there's a good reason for investors to stick around: "We have many of the best ore bodies in the world [...] We hold more than 100 years of inventory across multiple commodities in our major minerals basins."
Strong assets coupled with an investment-grade credit rating and an improving and streamlined business mean BHP is not just going to survive this downturn, but it will probably be in better shape than it entered when commodities rebound. Sometime in the next century, that rebound is probably going to happen.
You matter to us!
Perhaps most important, however, is the company's plan to "return excess cash flow to our shareholders in a consistent and predictable manner." In fact, BHP "will seek to increase steadily or at least maintain our dividend per share after the demerger." There's no better way to say I love you to shareholders than paying them for owning your shares. And that's exactly what BHP has indicated it wants to do, via dividends now and potential share buybacks once it has its balance sheet in better shape.
There are a lot of moving parts at BHP Billiton right now. However, management wants to make sure you hear about the positives through the cacophony of change. With the end goal being a better company for investors, it looks like BHP is hitting the right targets.
Reuben Brewer has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.