The Australian
February 18, 2020
Mining services companies will be hit again with new BHP boss Mike Henry wanting to double the proportion of his 72,000 staff permanently employed as part of a cultural shift in the company.
Now only 35 per cent of BHP staff are permanent and Henry wants to double the percentage and invest more in his own workers as part of a greater focus on operational excellence.
It’s hard to imagine BHP doing more in the field but that is what Henry was doing when Andrew Mackenzie was running the shop, and we can expect him to lift the intensity now he has the top job.
With BHP bringing more in-house that means less work for the outsiders and embattled services group Downer took another hit on Tuesday with its stock price down 2.5 per cent at $6.57.
BHP’s profit of $US4.9bn ($7.3bn) was a little under expectations, as was the US65c-a-share dividend but, as finance boss Peter Beaven noted, it’s hard to attack $US3.3bn in dividend payments and a 63 per cent dividend payout ratio.
Henry is yet to adjust his top bench, which will be the first operational change. The impression yesterday was finance chief Peter Beaven would be staying and, from his perspective, barring a better offer, with annual pay of $US4.5m and 204,262 BHP shares in his back pocket, life is OK.
Executive positions are there until they are gone, so time will tell.
On Tuesday, Beaven and Henry could not have gone further in praising each other and in stressing their 20-year working relationship.
Henry impressed in his first outing with the market and ticked all the big strategic boxes: BHP would keep petroleum, would sell thermal coal if someone put the right offer on the table, would decide on potash next February as indicated, and would keep the DLC until the tax benefit in the structure dwindles.
He said potash had to pay its way, which means competing with other projects for capital with an investment case to sell.
The hurdle here is high when you consider 75 per cent of the increase in the company’s earnings before interest, tax, depreciation and amortisation came from mainly iron ore price increases adding $1.5bn.
The company’s iron ore division operates on an earnings margin of 69 per cent and 49 per cent return on capital.
Copper earns 47 per cent margins on a 9 per cent return and petroleum 65 per cent margin on a 15 per cent return. These are earnings performances most chief executives dream about.
Return on capital at 19 per cent was compared to 14.8 per cent a year ago.
Little wonder Henry didn’t come to the table screaming the need for a revolution. This is more one of refining to empower workers and lift performance even higher. He said his to-do list centred on culture, capability, an asset-centric focus, technology and capital allocation. All well within the BHP playbook.
The coronavirus is obviously a wildcard and Henry says BHP is watching hoping it is under control by the end of the first quarter but if it lasts any longer then there will be an impact on its trade with China.
Long-term decisions are pending on increasing exposure to copper and nickel, which is seen as future-facing commodities fitting in with the de-carbonisation theme BHP is following.
Henry stressed the company was concentrating on those commodities which “would move the dial” and means no interest in some of the other trendy alternatives, like Wesfarmers’ favourite-lithium and cobalt.
It would help if the products had a steep cost curve to give BHP room to bring them down.
Henry backed the emphasis on creating social value that his predecessor Andrew Mackenzie underlined with priority on reducing the company’s carbon footprint.
Technology will be a renewed focus including with help from outside the company.
Henry will run BHP with monthly direct reports meetings combined with more frequent one-on-one meeting with the yet to be finalised senior leadership group.
Given his emphasis on the operational folk, one might expect a more simplified structure with individual commodity chiefs reporting through a chief operating officer.
Right now, coronavirus willing, Henry has inherited a well run company, as always in need of modifications starting with more decisions and less reviews.
Right fit
BHP’s Mike Henry is 53 which, according to executive search firm Blenheim Partners, puts him right in the box for ASX 300 appointments.
As of November, the average age of chief executives was 47.3 with 90 per cent appointed to the top job by the time they were 55 years old.
Some 63 per cent of top 50 appointments were internal, according to the headhunters.
Coles sell-down
Coles boss Stephen Cain satisfied the market with Tuesday’s flat profit of $489m, which was creditable given the year ago half came amid the Wesfarmers divestment.
This left the door open for Wesfarmers to sell a 4.9 per cent stake in the company, which poses two questions: what is Wesfarmers going to do with the money and what does it know that we don’t about Coles.
Wesfarmers earnings might provide some news on the first question, but finding answers to the second question will take some investigation, and of course Wesfarmers still owns 10 per cent of the retailer.
At $16.08 a share, Wesfarmers is selling out towards the top of the market range given the stock has increased from $12.48 to $16.75 over the last year.
Cain is in the middle of a campaign to take out $1bn in costs up to 2023 and knows well you don’t cut costs to grow unless sales increase and last quarter’s 3.6 per cent increase provided hope on this score.
He is also increasing prices, as shown by the gross margin expansion.
Coles is increasing capital expenditure by around $800m this year compared to Woolworths at $1.8bn. On this score, either Woolies is spending too much or Coles not enough.
Mall retail blues
Department stores are continuing to lose ground in shopping malls, with Scentre Group noting sales down 0.9 per cent last quarter and up 0.7 per cent for the year.
This compares with speciality stores, which were up 2.8 per cent in the quarter and 2.2 per cent for the year.
Shopping centre is of course the wrong term to use. Peter Allen at Scentre calls them “living centres” and Mark Steinert at Stockland calls them “town centres” – but you get the idea.
Some 43 per cent of a typical Westfield living centre is taken up by services, ranging from gyms to beauty centres to child-care facilities, which in part explains the name change.
Stockland’s Steinert is trying to connect the centres more with the community through ventures like an AI-based hydroponic vegetable farm to be based in his Maitland town centre.
Scentre’s Allen is continuing to convert more retail space into service centre space, so the decline in department stores simply means more space becomes available.
Last year department stores, accounted for 25 per cent of space and just 8 per cent of sales.
Article by John Durie