BHP boss Andrew MacKenzie: Free trade good, protectionism bad

BHP boss Andrew MacKenzie has issued a stern warning to US President Donald Trump on the dangers of protection.

Wesfarmers’ Richard Goyder and Michael Chaney. Illustration: Eric Lobbecke.

BHP boss Andrew Mackenzie has maintained the bullish run for resources companies with a strong first-half profit that came with an equally stern warning to US President Donald Trump on the dangers of protectionism.

When asked about his meeting with the President, Mackenzie said he talked about climate change and the resources market but didn’t say he broached the protectionism issue.

Yesterday’s result, following the earlier strong returns from Rio Tinto, came on the back of commodity price rises and continued productivity improvements.

The increase in earnings before interest tax, depreciation and amortisation, from $US6 billion to $US9.9bn ($12.9bn), came on the back of $US3.5bn in price rises and $US1.1bn in costs out.

There were costs applied against that, primarily due to foreign exchange moves and volumes, but the company noted its earnings margin of 54 per cent would have been less than 30 per cent if not for the cost-cutting.

The big surprise in the results was an extra $US532 million, or US10c a share, dividend to bring the total payout to 40c, or $US2.1bn. Mackenzie said the payout was more than the US30c a share promised, but warned that shareholders may not get the same rewards next time.

“With several of our commodity exposures currently trading above our long-term forecasts and with considerable economic and political uncertainty ahead, our bias for lowering debt remains,” he said in a statement.

Free cash flow stood at an impressive $US5.8bn, more than covering the dividend payout, and net debt was cut from $US26.1bn to $US20.1bn.

BHP said its tax rate stood at 34.7 per cent, or 44.5 per cent if you include royalties, which suggests the company cannot be charged with dodging Australian taxes.

Mackenzie was optimistic about China, but said it was too early to say what changes Trump may bring to the US. He was more certain about the negative impacts of protectionism, saying it “blows an ill wind for most of us. Free trade is good for earnings and a driver for growth in the short and long term and most of us will be losers if there was an increase.”

BHP said growth rates in China would moderate.

Mackenzie did note that most of the company’s sales were to Asia, where the threat of protection had yet to rear its ugly head as it had under Trump in the US.

Iron ore, which accounts for 42 per cent of earnings and delivers margins of 60 per cent, was again the star performer, but petroleum, which accounts for 20 per cent of earnings and margins of 61 per cent, was not far behind.

Coal margins were 54 per cent and copper at 56 per cent is cited as being a big improver with the world predicted to be in deficit for copper in the 2020s.

After asset sales totalling some $US7bn including the divestment of South32, Mackenzie now has a portfolio from which he can deliver strong cash flows throughout the cycles. This was in display with yesterday’s impressive numbers.

Caltex gets serious

Caltex chief Julian Segal and CFO Simon Hepworth yesterday both made clear undertakings that shareholders would not lose from the present allegations surrounding some franchisees not paying staff. It’s a big issue for the company as it attempts to expand the empire into “The Foodary” — a convenience store model now being tested in the Sydney suburb of Concord.

Segal has put one of his direct reports, Andrew Brewer, on the case full time to show how seriously he is taking the issue.

Two big accounting firms have done audits and an advisory firm has studied the franchise model just to check there is nothing systemically wrong.

Segal says so far both studies have come out in the company’s favour suggesting a couple of rogue franchisees may have taken it into their hands to rob staff.

Segal and the company appear to be making all the right moves to ensure the system’s integrity.

Yesterday’s profit of $610m was up 17 per cent on year-ago figures, based on a 9.3 per cent gain in marketing earnings and another strong performance from the Lytton refinery. Petrol volumes were down 4 per cent, but a 2 per cent boost to Caltex premium fuels, Vortex, helped minimise the impact of lower volumes.

The good news is Caltex 98 sells at about 17c a litre more than unleaded petrol, and premium about 13c more, and a slab of the difference goes straight to the bottom line. Segal won’t say what his premium margin is after accounting for infrastructure costs, but it’s safe to assume Caltex is doing OK.

Musical chairs

Woodside chair Michael Chaney did a global search encompassing Mosman Park and Peppermint Grove in Perth to find club member Richard Goyder, at the former, available to be his replacement.

Under Ralph Norris, CBA used to do global searches taking in both the north and south islands of New Zealand, but Chaney isn’t even bothering to leave home for this one. The prize is chair of the biggest companies in the country, an oil and gas producer and explorer, and it’s going to someone with zero experience in the sector and zero public board experience, outside the Wesfarmers club.

Woodside boss Peter Coleman was partying hard at the Wesfarmers function at the Leeuwin Estate concert last weekend for good reason.

The club is alive and well and within days of unveiling Rob “the dog catcher” Scott as his replacement, Goyder has found himself a quality board position to launch his non-executive career. Goyder, of course, has already accepted the role as AFL chairman and, to be fair, Chaney no doubt wanted to tie up his man before he got flooded with too many other offers.

Chaney, of course, moved up six flights of stairs in his Perth digs in the old Wesfarmers House to take the chair at Wesfarmers in late 2015 after handing the keys to Goyder as chief executive in 2005.

Before joining the AFL, Goyder was on the board of Fremantle Football Club and, as luck would have it, Woodside is a major sponsor of the AFL club.

Goyder is also a director at Gresham, which is 50 per cent-controlled by Wesfarmers and provides extensive investment banking services to the group.

Chaney sees no reason to apologise for appointing from within, saying it’s better to have a chair from the same home town (something that didn’t happen when he was NAB chair) and the shareholders and few others would quibble at Goyder’s qualifications

Goyder will join the board in August and assume the top job next year when Chaney goes.

This is a very similar handover period between the two as took place when they swapped over as Wesfarmers chief executive. Chaney rightly says Goyder, on paper, is eminently well suited for the job.

Scott was appointed to take Goyder’s place at Wesfarmers in part because he was considered the best internal candidate to carry on the clubby tradition.

But there is also a need to watch closely when chairs don’t benchmark appointments against external candidates who may just happen to have new ideas about how to boost value. Clubs are not always a recipe for shareholder wealth but, for the moment, don’t tell that to Chaney.

Goyder at last count has 961,350 Wesfarmers shares worth $40.6m and paying annual dividends of $1.9m.