South32 results show early cost cutting with plans to accelerate

(ShareCast News) - Shares in South32, the metals mining group spun off from BHP Billiton in May, sank on Monday even though it reported maiden results showing improved underlying earnings benefiting from its early cost cutting plans.On revenues down 7% on a pro forma basis to US$7.74bn in the year to 30 June, underlying earnings before interest, tax, depreciation and amortisation (EBITDA) increased 26% to $1.85bn, with underlying EBITDA margins up to 14% from 8.6%.Pro forma profit after tax of $28m was less than half the $64m from 2014, mainly thanks to impairment charges against its manganese and coal operations.Underlying earnings per share rose 41% to $5.75.Chief executive Graham Kerr said the company had begun to accelerate the implementation of a regional operating model as it seeks to cut controllable costs by at least $350m over the next three years, having made productivity-led cost efficiencies of $282m in this financial year.As part of this process, the decision has been made to close four offices in Australia, with the next phase of the regional model expected to further reduce back office and operational management functions, with significant savings also eyed in procurement and logistics.These cuts amount to close to 5% of its $7.48bn total operating expenses last year, but were perhaps less than the market was hoping for, with South32 being created as a result of BHP hiving off its higher-cost assets.The company said sustaining capital expenditure would fall by 9% to $650m in 2016 and noted that a review of its South African manganese division may lead to further cuts in production.Management suggested South32's strong balance sheet represented "a key point of differentiation in the currently volatile operating environment", with net debt of$402m equal to only around 4% of equity and underpinned by an undrawn $1.5bn revolving credit facility.Broker Investec was impressed, highlighting that with low net debt, assisted by lower start-up costs and revaluation of finance leases, South32 could aford to be willing to be patient and opportunistic from an M&A point of view.