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BHP BILLITON STRATEGIC FRAMEWORK BRIEFING PAPER
BHP Billiton CEO and Managing Director Paul Anderson and Deputy CEO Brian
Gilbertson will today present an overview of the Group's Strategic Framework
at an Australian Securities Institute luncheon in Sydney, Australia.
Attached is a copy of the Briefing Paper that will be distributed at the
luncheon. Additionally, a copy of the PowerPoint slide presentation from the
briefing will be available on the BHP Billiton website
(www.bhpbilliton.com/investor) at about 1.00pm today (Australian Eastern
Standard Time).
The BHP Billiton Strategic Framework briefing will be repeated in London on
Wednesday 10 April 2002.
Australia
Dr. Robert Porter, Investor United Kingdom/South Africa
Relations Michael Campbell, Investor &
Tel: + 61 3 9609 3540 Media Relations
Mobile: +61 419 587 456 Tel: +27 11 376 3360
email: Mobile: +27 82 458 2587
Robert.Porter@bhpbilliton.com email:
Michael.J.Campbell@bhpbilliton
Michael Buzzard, Media .com
Relations
Tel: +61 3 9609 3709 Ariane Gentil, Manager
Mobile: +61 417 914 103 Communications
email: Tel: +44 20 7747 3977
Michael.Buzzard@bhpbilliton.c Mobile: + 44 7881 518 715
om email:
Ariane.Gentil@bhpbilliton.com
United States
Francis McAllister, Investor
Relations
Tel: +1 713 961 8625
Mobile: +1 713 480 3699
email:
Francis.R.McAllister@bhpbilli
ton.com
Briefing Paper
BHP Billiton Strategic Framework
CONTENTS Page Number
I Strategic Framework
Vision 3
Value Objectives 3
II Strategic Framework and Performance
Measures 4
III Business Model to Support Strategy 9
Customer Sector Groups (CSGs) 9
Portfolio Model 9
Marketing Structure 10
Common Business Processes (BHP Billiton Way) 11
IV Capital Management Disciplines 12
I STRATEGIC FRAMEWORK
Vision:
BHP Billiton aspires to be one of the world's premier companies.
This will be accomplished by delivering upon our vision to earn superior
returns for our shareholders as the world's premier supplier of natural
resources and related products and services.
Value Objectives:
Shareholders:
The delivery of superior total shareholder returns through a focus on Net
Present Value (NPV) enhancement, sustainable returns above the cost of
capital and free cash flow generation. This is associated with a
recognition that the Group's ultimate goal must be to be a core holding for
global equity investors.
Customers, Employees, Communities and the Environment:
BHP Billiton's success as a global corporation depends, in large part, on
how effectively we work with our customers, our employees and the
communities in which we operate. Our objective is to be the employer and
partner of choice in the resources sector, and to serve our customers better
with a broader and more flexible product offering.
We are committed to continued improvement in our Health, Safety, Environment
and Community (HSEC) performance towards the aspirational goal of zero harm
to people and the environment. Our standards and guidelines reflect leading
industry practice and community expectations both local and global.
II Strategic Framework and Performance Measures
BHP Billiton Strategic Imperatives Performance Measures
Value Drivers (How the market can judge
(Organisationa progress)
l capabilities
&
distinguishing
factors)
I. Outstanding 1. Zero Harm Improving HSEC Performance
Assets Policy goal of zero harm
BHP Billiton is (zero fatalities, zero
committed to continued significant
improvement in its environmental incidents,
HSEC performance no transgressions of UN
towards our Declaration of Human
aspirational goal of Rights)
zero harm to people Expenditure
and the environment. of 1% of pre-tax profits
(three year rolling
average)
2. Operating on community development
Excellence programmes
60% of the Group's
assets are in the 2. Cut Operating Costs
first quartile of Reduce operating costs for
costs and 80% are in existing businesses by 2%
the lowest half of the in
cost curve. real terms per annum on
Improved unit cost average
performance. over the next three years
Improved capital (US$500m in FY 2003-05)
efficiency. Achieve US$270m merger
Systematic process to benefits
establish, benchmark by the end of FY 2003
and transfer best Improved EBIT & Free Cash
practices across the Flow
Group (The BHP (FCF) (normalised)
Billiton Way). 3. Return on Capital
Return on capital - greater
than
15% by 2006
II. Growth 3. Project Evaluation 4. Evaluate/Implement
From Deep & Execution Projects
Inventory of BHP Billiton has US$10
Projects The Group has a deep billion
inventory of high of mature identified growth
quality growth potential in the current
projects spread across portfolio
its main Customer (approximately US$2.5
Sector Groups (CSGs). billion has
Investment evaluation been committed since the
and project execution merger
skills will be central to April 2002)
to the efficient The indicative split of
delivery of this expenditure
growth potential. by CSGs to 2006 is as
High value growth will follows
be pursued through a - Aluminium 15%
combination of - Base Metals 15% - 20%
brownfield and - Carbon Steel Materials
greenfield projects, 10%
as well as appropriate - Energy Coal 10%
M&A activities. - Petroleum 35% - 40%
- Stainless Steel Mat. &
Others 10%
III. Customer- 4. Serving Customers 5. Preferred supplier
Centric Best status &
Marketing global marketing and
BHP Billiton's trading
marketing approach
seeks to combine
physical product
handling skills with
the flexibility and
trading skills of a
merchant, and the risk
management skills of a
financial institution.
The combination of
these skills will
allow additional value
creation and growth
opportunities through
the transformation of
products from a purely
physical, to an
augmented offer.
IV. The 5. Portfolio
Portfolio Management 6. Maintain a credit rating
Effect of A
Key capital or better
management, risk Generate positive cash flow
management and after
portfolio management tax & investment every
decisions are taken at year.
a Group level. The Maintain EBITDA to interest
major focus is on coverage ratio such that
enhancing the the
performance of the ratio exceeds eight times
existing portfolio of over
assets, and the the cycle (gearing band of
management of 35%-
portfolio risk 40%)Cash Flow at Risk to
Cash Flow
6. Funding & Capital ratio not greater than 25%
Management
BHP Billiton will
maintain an approach
to funding and capital
management to support
delivery of its
strategic imperatives.
This includes
maintaining a credit
rating that will
enable the Group to
minimise its cost of
debt within the
constraints of
optimising its gearing
ratio and debt
maturity profile to
reduce its overall
cost of capital.
V. The Value Adding Growth 7. Low discovery costs &
Petroleum growth
Customer Petroleum provides the in reserves and production
Sector Group ability for BHP
Billiton to pursue
high quality growth
opportunities in the
E&P sector, without
some of the regulatory
and market constraints
that may impact upon
growth in some metals
and mining sectors.
Petroleum, in
combination with the
Group's other energy
positions allows the
pursuit of energy
marketing and trading
opportunities.
VI Innovation Creative Thinking Dependent on opportunities
Commercial Judgement
Transaction Execution
Pursuit of selective
growth opportunities
based on accessing
external and internal
networks related to
existing BHP Billiton
activities (business
development
initiatives, BCAP)
III. Business Model to Support Strategy
BHP Billiton's business model is designed to support the achievement of
superior shareholder returns through the:
Maximization of returns and the management of risk at the portfolio level
Effective deployment of capital to new growth projects and merger and
acquisition (M&A) opportunities
Efficient extraction of value from existing assets
Facilitation of knowledge sharing and best practices procedures throughout
the Group
Achievement of value through the marketing structure, as well as the
identification of new business initiatives through BCAP.
The main features of the BHP Billiton business model are as follows:
1. Customer Sector Group Structure
The Customer Sector Groups or CSGs have been established based on natural
customer-oriented groupings of commodities. This is consistent with our
approach of orienting our business from the customer to the mines rather
than simply on the extraction and delivery of product.
Each of the CSGs is a substantial business in its own right, a number are
leaders in their field. The CSGs have significant autonomy to optimise
their businesses with clear accountabilities, based on their own strategic
plan, around EBIT performance and shareholder value add.
The CSGs operate with their own Board comprising the CSG President and two
Executive Committee members drawn from other CSG or functional areas. The
marketing personnel from within the CSGs are located in one of the twin
marketing hubs - in The Hague and Singapore - and have a direct reporting
line to their CSG President as well as the Chief Marketing Officer.
2. Portfolio Model
The purpose of the portfolio model is two-fold:
To define the risk/reward frontier to support investment and capital
allocation decisions, and
To enable the organization to manage both the portfolio of assets and the
portfolio of risks
The portfolio model rests fundamentally on a robust capital management
system applying techniques, such as Cash Flow at Risk, and Value at Risk, as
well as the centralization of key capital management, risk management,
business and economic evaluation methodologies.
The ability to utilise the portfolio's characteristics provides the
capability to deliver value beyond that provided by the aggregation of
business strategies at the CSG level. These include:
- The inherent increased stability of cash flows of the portfolio
- The ability for investments to be made through business cycles
- The ability to provide more customer focused solutions
- Critical mass in capital markets
Marketing Structure
The marketing approach entails the adoption of a coordinated marketing
function based around twin hubs in The Hague and Singapore, designed to
augment and extend the product offering to customers and enhance value from
a customer-orientated approach to the delivery of product, as well as sell
more goods than the Group produces.
This customer-centric marketing approach is underpinned by a number of
pillars, including:
- Operations standardisation (common SAP centred marketing execution and
risk management systems)
- Integrated supply chain planning (providing the ability to offer a fully
integrated capability to customers for their raw material needs)
- Trading, merchanting and aggregation (enhancing product offering to
customers, enabling geographical arbitrage)
- Market consolidation (moving from a mine by mine marketing basis to the
centralised offering of full commodity output)
- Market transformation (energy market offering; substitution of one form of
energy exposure for another within the portfolio)
4. Common Business Processes (The BHP Billiton Way)
The adoption of common business processes and practices (termed the BHP
Billiton Way) to deliver operational improvements through the rigorous
application of the same proven improvement process across the Group.
Benefits to derive from:
- Knowledge sharing and alignment
- The evolution to a global corporate culture within BHP Billiton
- Cost reduction
- Production/yield increases
- Capital elimination/deferral
- Enhanced health, safety, environmental and community performance
- Faster and more efficient project implementation
IV CAPITAL MANAGEMENT DISCIPLINES
Capital Management Disciplines (including Financial Risk Management Model)
Authorisation levels
Asset Leaders, Up to US$5 million
Selected VP
Business US$5 million to
CEO/President CSG US$50 million
Executive Committee US$50 - US$100
million
BHP Billiton Board Above US$100 million
* The Investment Review Committee (IRC) is responsible for the risk analysis
and evaluation and advice to the Executive Committee and the Board on all
investment decisions above US$100 million, including capital (growth and
sustaining), mergers, acquisition, divestments, non-capital (exploration,
technology, expense investing), venture capital and BCAP investments etc.
* The IRC will endorse projects to the Executive Committee.
* CSGs are responsible for identifying growth opportunities and taking
investment proposals through the tollgating process.
* Investment evaluation is based on:
- Base high and low case returns
- Probability distribution of project returns
- Impact on Group financial statements
- Impact on the Group portfolio
* The investment process has five phases:
- concept
- pre-feasibility
- feasibility and approval
- execution, and
- operation
* Independent Peer Reviews (IPR) - for each investment an IPR Leader is
appointed. The IPR Leader is selected by a sub-committee of the IRC.
* IPR Team investigates the investment proposal to determine if it is robust
based on:
- appropriate quality control processes
- generally accepted best practices
- sound assumptions
- solid criteria and
- high integrity in information output
* During the feasibility phase the IPR focuses on:
- the strategic fit of the proposal
- portfolio risk/group impact
- value drivers
- detailed economics
- project team capabilities
- key risks, including HSEC risks and opportunities
- technology and
- execution plans
* Project Development Services assists the IRC in relation to:
- endorsement of the selection of the project manager and key reports
- management of an independent review process during execution phase
- management of the project's close-out review process
Financial Risk Management
* BHP Billiton has undertaken a comprehensive review of its strategy in
relation to market price risks (including commodity prices, foreign
exchange, interest rates and freight). This has quantitatively demonstrated
the benefits of the diversified portfolio in terms of cash flow at risk
(CFAR).
* The diversification effects within the combined portfolio materially
reduce market risks (cash flow at risk to cash flow pre merger was: BHP -
25%, Billiton 26%. Post merger, the CFAR to cash flow ratio was assessed at
19%.).
* The diversification benefit is complemented by the strength and
flexibility provided by the Group's world class, low cost assets and the
options inherent within its project pipeline.
* This provides a natural hedge against adverse market price movements and
reinforces the self insurance approach.
* Oil, aluminium, copper, coal and currency exposures dominate in the
portfolio.
* BHP Billiton's portfolio is also diversified in terms of country risk -
over 90% of EBITDA generation is in investment grade sovereign risk
jurisdictions.
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