The Weir Group PLC

Good morning, everyone, and welcome to WEIR's half-year results presentation. Please note the usual cautionary notice on forward-looking statements. I'm joined today by our CFO, John Heasley, and will follow our usual format. So after some opening remarks from me, I'll hand over to John to take you through the financial review, and then I'll return with the strategic and markets review and the outlook for the group, and we'll then open up for questions. Before starting, many of you will have seen last week's announcement regarding John's move. And while he will be with us for a few months yet, I wanted to take today's opportunity to recognise and thank him for his significant contribution to Weir and to wish him well in his new role. I believe Weir has a compelling long-term value creation opportunity that will benefit all of its stakeholders. As a focused mining technology leader with unique capabilities, we are deeply embedded in our customers' operations and supply chains, delivering engineering expertise and innovative solutions for sustainable mining. We have leading positions and we are well placed for the multi-decade growth opportunity ahead, driven by the need for critical metals in decarbonisation and the adoption of new technologies to enable the transition to sustainable mining. With a leading platform and focused strategy, we're investing for the long term and continuously delivering on the commitments we made. And here's a reminder of those commitments and the outcomes we're targeting. Growing faster than our markets, delivering compounding growth in mid to high single digits through the cycle. Delivering operating margin expansion through operating leverage and our performance excellence programme, which will take us beyond our 2023 target of 17%. Cleanly converting our earnings growth into cash and returns and deploying it in line with our capital allocation policy. remaining highly resilient, as demonstrated by the greater than 7% CAGR in our minerals aftermarket since 2011, and delivering all of the above in the right way, eliminating harm in our operations and communities, and with clear targets to reduce emissions in our end-to-end value chain. With the equity case reset following our portfolio shift, we're on a journey. moving on from the complexity of the past to showcase the quality of the business we are today, building a track record as a focused mining technology leader. Quarter after quarter, we're meeting our commitments, delivering multiple periods of growth, margin expansion, and increased cash generation. And the first half of 2023 was no exception. We grew our aftermarket revenues by 12%, expanded operating margins by 80 basis points, significantly improved our cash conversion and return on capital employed, demonstrated our resilience as we executed strongly, and made progress in sustainability with our emissions reduction targets. ...approved by SBTI. Our performance in the first half marks another key proof point on our journey, and we're now upgrading our full-year revenue and profit guidance. I'm really pleased with the focus and alignment across the organisation, and what we achieved wouldn't be possible without the contribution of WEAR colleagues around the globe, and I'd like to thank them for their hard work and dedication. With that, I'll hand you over to John to take you through the financial review. John.

Thank you John and good morning everyone. I'm delighted with our first half results which show 2% growth in orders, 16% growth in revenues and a 22% increase in operating profit. 2% order growth was supported by a 5% increase in original equipment, reflecting successful market share gains and new sustainable solutions, while aftermarket demand continued to show its usual resilience up 1% despite some headwinds from infrastructure, Russia and the Canadian oil sands. Revenue is up 16% at £1.3 billion, reflecting strong execution of our opening order book and good price realisation. Notwithstanding the growth in revenues, we still added to our order book in the period, with book-to-bill at 1.03, providing a great foundation for further growth through the second half of the year. Operating profit of £212 million was 22% higher than last year and operating margins increased by 80 basis points or 100 basis points as reported to 16.3%. This was largely driven by operating efficiencies more than offsetting an OEMix headwind and puts us on a good trajectory to delivering our full year target of 17%. Profit before tax of £180 million. £88 million was £45 million ahead of last year, including an FX translation tailwind of £5 million, with EPS up 32% at 53.4 pence per share. Finally on this slide, free operating cash conversion increased to 51%, an improvement of 22 percentage points. This was supported by a normalisation of working capital levels following supply chain disruption last year, and we remain on track to deliver full-year cash conversion of 80-90%. The resultant net debt to EBITDA is down 0.5 times at 1.5, and we continue to have over £800 million of long-dated, low-cost liquidity. The result of all of the above is that return on capital employed also increased significantly, up 390 basis points at 16.3%. I'll now turn to provide some detailed commentary on each of the divisions. Starting with minerals, conditions in mining markets remained highly active. Across most key commodities, market prices were well above miners' cost to produce, and then market demand was high, particularly in Australia and South America. Our production trends coupled with the incremental aftermarket demand from recent OE installations drove demand for our aftermarket spares with aftermarket orders being up 5%. This reflected volume growth in hard rock mining and a contribution from pricing partially offset as expected by lower volumes from customers in the Canadian oil sands and the loss of orders from Russia. OE orders increased 1% year-on-year as large projects remained slow to convert, with OE orders being driven by de-bottlenecking and brownfield expansion projects. We made good progress in our ambition to grow ahead of our markets with significant share gains, evidenced by converting 100% of head-to-head competitor trials for large mill circuit pumps, while also winning share in cyclones. We executed strongly in the period, delivering on our record opening order book, with revenues being 20% higher than the prior year, with aftermarket up 16% and OE up 32%, ahead of our expectations as supply chain challenges eased, therefore allowing flawless execution. Revenue growth in North America was particularly high following a period of strong order growth in the Canadian oil sands last year. Product mix moved towards OE, which represented 28% of revenue, up from 25% last year. With book-to-bill of 1.03, we enter the second half of the year with a strong order book to support further growth. Operating profit increased by 25% on a constant currency basis to £173 million, while margins increased by 70 basis points to 18.2%, despite mix moving 3 percentage points to OE. This was underpinned by pricing action and good operating leverage. Gross margins of course remained rock solid as we continued to benefit from prior year price increases with average aftermarket price realisation of mid single digit percent. Operating leverage reflects good cost control and process efficiency following our investment in IT systems over recent years. This was all as expected and we look forward to further margin progress in the second half as performance excellence benefits start to augment our already good operating leverage. Moving on to ESCO, where we experience similar positive mining market conditions as the minerals division. I've seen and heard firsthand in recent weeks when visiting customers in Western Australia and Nevada just how highly valued ESCO product is as miners continue to focus on maximising production while operating safely, efficiently and reliably. In infrastructure, demand in our largest... market of North America was stable throughout the period, but well below the peak in the first half of last year, mainly reflecting stocking and destocking trends, but also a degree of lower underlying demand. In European infrastructure markets, demand continued to be subdued. We made good progress with our strategic growth initiatives where we grew market share in mining attachments, expanded our geographical reach in Scandinavia and increased the number of mines using Motion Metrics AI-enabled vision technology. This led to overall orders reducing by 3% with robust demand in mining and strategic initiative progress offset by the infrastructure trends. Revenues increased by 6% to £350 million, reflecting strong execution of the opening order book, progress in strategic initiatives and a contribution from prior year price increases. The division's book to bill remained positive at 1.02, supporting further growth through the second half of the year. Operating profit at £59 million was 10% higher than last year as the division benefited from good operating leverage plus the non-repeat of the modest under-recoveries which arose in the prior year. Margins were up 60 basis points at 16.7% in line with expectations reflecting pricing gains, reduced freight costs and operating efficiencies. Now bringing things together to look at the group operating margins. Overall, on a reported basis, group margins have increased 100 basis points in the period to 16.3%, which equates to 80 basis points on an underlying constant currency basis. The main drivers of underlying margin movement in the period are as follows. Firstly, the strong execution of the opening order book and associated increase in OE revenues meant that minerals mix shifted 3 percentage points from aftermarket to OE. As is normal, this increased absolutely. profits and of course lays the foundation for a future aftermarket revenue annuity but resulted in a 90 basis point reduction in margin. I'm pleased that this headwind was offset by underlying operating leverage of 150 basis points driven by volume growth coupled with cost and process efficiency. Process efficiency has been supported by the deep-rooted benefits of the WEIR production system and incremental returns from our investment in systems like SAP and Workday over recent years. Cost efficiency is reflective of general close management of indirect costs, as well as real clarity over our operating model with the focus group structure avoiding any unnecessary duplication of effort. We've also seen a reduction in the impact of transactional FX with a reversal of some of the mark-to-market phasing highlighted in the prior year, having a favourable impact of 20 basis points. This all left margins where we expected at 16.3% and we remain on track towards our 17% target for the full year. Our margin increase over the balance of 2023 will be supported by ongoing operating efficiencies, further price realisation, and the early financial benefits of performance excellence, which John will update you on shortly. Turning to cash flow, our continued focus on operational excellence and reliance on our WEIR production system has supported a strong performance. Cash generated from operations increased by £73 million or 73% to £173 million and reflects an increase in profitability together with a normalisation of working capital following last year's first half supply chain disruption. Working capital cash outflow reduced by £24 million to £88 million in the period reflecting the usual build-up of inventory in the first half of the year to support the second half order book. Cables decreased following the elevated prior year position, which resulted from the phasing of purchases and temporary disruption in global supply chains. As a result, working capital as a percentage of sales improved to 24% from 32% in the prior year. I'm pleased with this level of working capital efficiency at the half-year point, which compares very favourably with our industry peers. CapEx was higher than last year, and at 1.2 times depreciation reflects the ongoing construction of our new foundry in China, which remains on track. This all left free operating cash flow up 59 million pounds at 108 million, resulting in free operating cash conversion of 51%, up 22 percentage points in the prior year, even including the eight percentage point adverse impact of the higher CapEx compared to last year. Turning to the next slide, free cash inflow of £24 million compares to a free cash outflow of £24 million last year, representing an increase of £48 million year on year, mainly due to the favourable free operating cash flow just described, partly offset by an increase in tax payments. This funded dividends and exceptional cash flows, leaving a net cash outflow of £32 million, increasing net debt slightly to £842 million and keeping net debt to EBITDA at 1.5 times on a lender covenant basis in line with December 2022 and within our target range. In April this year, S&P upgraded our credit rating to investment grade at BBB-, to add to Moody's investment grade, BAA3. This allowed us to make our debut in the sterling bond market in June, placing £300 million of five-year sustainability-linked notes at 6.875%. This leaves the group with more than £800 million of long-dated liquidity, with 80% of our debt fixed at a weighted average rate of 3.7%, and our RCF carrying a very favourable margin relative to current market rates. Briefly, this next slide sets out some financial guidance for this year, with a few points to highlight as follows. Firstly, based on current FX rates, we would see no full year operating profit translation impact with a reversal in the second half of the first half tailwind. Secondly, we continue to expect free operating cash conversion of 80% to 90%, which includes capex above depreciation as we progress our new foundry in China. Thirdly, as previously discussed, we anticipate an exceptional cash outflow of around £15 million in the year, primarily relating to our performance excellence programme. Finally, I'm pleased to say that our defined benefit pension schemes continue to be in very good health, with an overall accounting surplus of £9 million. We completed a £136 million buy-in during the period, which means that more than 60% of the UK main scheme liabilities are now insured. The remaining liabilities are well funded, meaning that from 2024, our annual cash contributions will reduce from £12 million a year to £6 million. In summary, our markets are strong with high levels of activity in mining and our strategic initiatives are delivering market share gains. Very strong execution has delivered revenue and profit growth and a positive book to bill provides a platform for future growth. We've delivered a significant step up in absolute profits and margins with strong operating leverage. Cash conversion at 51% was much improved on the first half last year, reflecting excellent working capital efficiency. Returns are good, with return on capital employed increasing by 390 basis points from 12.4% to 16.3%, and our interim dividend of 17.8 pence is 32% higher than last year. First-half performance and strong mining markets will remain on track to deliver our 2023 margin target of 17% and full-year cash conversion of 80-90%. Looking beyond this year, our balance sheet is strong, with an abundance of long-dated liquidity giving us the necessary capital strength to continue executing on our clear and exciting strategy. Thank you and I will now hand back to John.

Thank you, John. So I'll now share more details on WEA's long-term potential and our strategic progress in the first half, and then comment on the outlook for the year. WEA has a compelling value creation opportunity. Our markets have long-term structural tailwinds driven by demand for critical metals, and the near-term outlook is positive. Our sustainability and technology-focused growth initiatives, together with our strategic competencies, give us conviction we can outgrow our markets. And we're taking action through our performance excellence transformation program to compound this growth and drive our margins above our 2023 target of 17%. Today, I'm going to talk about each of the elements of this framework in more detail, starting with our markets. We have strong structural dynamics in our mining markets. The current production of critical energy transition metals is insufficient to meet future demand, so our customers are pursuing growth. There is growing intent to increase capacity and develop new expansion projects, but the approval and permitting process is time consuming and complex. In response, our customers are accelerating production from existing assets, running equipment harder, developing harder and lower grade parts of the mine, and driving efficiency in existing processes. These production trends play to the strength of WEIR, driving demand for our aftermarket and de-bottlenecking solutions, putting us in a win-win position. In parallel, customers are striving to meet ever more stringent social and regulatory obligations, so they are adopting new technologies to reduce their environmental impact. Both of these factors will drive growth for WEA as we provide the essential spares and solutions to increase production of critical metals and new technologies that enable the transition to more sustainable extraction and processing techniques. Near term, the outlook for our end markets is positive. In mining, activity levels are high. And as the graph on the left shows, the current spot price for copper remains well above marginal cost, heavily incentivizing production. Indeed, production is largely inelastic to spot prices. As you can see on the graph, since 2021, copper has fluctuated between $3 and $5 per pound, yet activity has remained consistently high. And this is the case across our basket of commodities, underpinning our conviction in the strength of the demand environment. And our conviction is further supplemented by the structure and composition of our aftermarket. With over 90% coming from spares and expendables, we are heavily leveraged to all production, rather than discretionary service and maintenance cycles, which can fluctuate over time. In infrastructure markets, which is a small part of our portfolio, our main exposure is in the US and the near-term outlook is stable. While dealer stocking cycles have driven fluctuation in recent orders, over the medium term, legislation such as the Inflation Reduction Act will support incremental investment in new large-scale projects and therefore growth in our business. The inelasticity of commodity prices to ore production underpins our highly resilient business model, and this is evidenced in our long-term financial performance. The graph shows our minerals aftermarket revenues for the last 12 years, which have grown at an annual compound rate of more than 7%. And we've supplemented this now by adding data for ESCO, which since acquisition has grown at a similar rate. so that we now have a £2 billion aftermarket powerhouse. And this brings to life what I described a moment ago. Our strong bias towards spare parts makes us an essential production partner for our customers, which, together with our barriers to entry, reinforces our through-cycle resilience. I'll now turn to progress on our strategic growth initiative, starting with minerals. In comminution, commercial production commenced at the Iron Bridge magnetite mine in Western Australia, where our energy-saving HPGRs are installed. Production is ramping up, and the multi-year £15 million per annum spares and service contract will start later in the year, along with regular spares orders for our Warman and Giho pumps and other equipment. The mine is now an important reference site for HPGR and associated dry processing technology, and we're already talking to other customers about what it can deliver. New orders were up, including orders for HPGRs for mines in Southeast Asia, a pebble crushing plant for a large copper mine in South America, and a crushing solution for a Tier 1 potash plant in Canada. In digital, we launched our proprietary Synatrex Intelli solutions for pumps, cyclones and HPGRs, which offer customers critical machine health data, enabling remote condition monitoring and predictive maintenance. Other highlights included wins in our core mill circuit, as we converted 100% of our competitive trials for large mill circuit pumps and also rolled out our latest Cavex2 cyclone technology. On geographical expansion, we won further orders for nickel expansion projects in Indonesia, with a £12 million order for our Giho heat barrier pumps. And we expect Indonesia and the broader ASEAN region to be an ongoing growth area, with a strong pipeline of future opportunities developing as we leverage our new service centre. In R&D and technology, we invested to expand our range of Warman pumps and notably secured our first orders for coarse particle flotation technology, which I'll talk more about shortly. Turning now to a short case study, our cyclone technology plays a critical role in mineral recovery in post-grinding separation, and through sustained organic development, we've built a market-leading position. Our latest KVIX2 technology delivers significant gains in efficiency and recoveries for our customers, and a recent example of this is at Vale's Vargem Grande iron ore mine in Brazil. Our team identified an opportunity to increase mineral recovery by reducing the amount of fines lost and sent to tailings. Our on-mine presence meant we understood the operation and the issue, and our trusted relationship with the customer gave them confidence to trial our innovative new cyclones. We developed a customized solution, enabled with Synetrex digital monitoring, and provided technical support across all aspects of the trial. And the results were impressive, with an increase in mineral recovery of over 400,000 tons per annum from material that would otherwise have been lost to tailings. The success of this trial has led to a sizable order from Vale to upgrade to our new technology across the entire mine and they're interested in extending use to their other sites. ESCO also made good strategic progress. On digital, the initial field trials of our ore characterization technology were successful, with the technology performance validated in the real world and critical data captured with progressing to the next phase of development, which includes exploring novel illumination technologies that will further enhance real-time visualization of mineral characterization. Other digital highlights included further rollout of our motion metrics technology and one of the most notable orders was a package of 10 systems comprising our latest generation shovel metrics and loader metrics which will be deployed across all large mining machines at an iron ore mine in Western Australia. We also grew share in our core mining GET market and also in mining attachments. On geographical expansion, we transitioned to our direct-to-customer model in Scandinavia, leveraging minerals footprint in the region, and also completed the integration of CIS. Technology highlights included the launch of new motion metrics capabilities, including our latest proprietary lens cleaning solution, which uses pressurized water and air to clean dust from the camera lens, further enhancing our leading system reliability compared with competing technologies. Now, a short case study for ESCO on mining attachments, which has been a key strategic priority. Since acquisition, when revenue from attachments was around $10 million, we've grown at 30% compound, and our market share has multiplied many times over. Underpinning this success is our tried and tested formula, mission-critical, differentiated technology, coupled with... leading support and service. In short, our bucket technology lasts longer and improves productivity. Progress in the first half was particularly strong, with orders up almost 40%, including four unique cable shovel buckets for a large copper miner in North America, replacing OEM buckets. Our engineering team worked directly with the end users to design bespoke, customized buckets, incorporating our structural components, which are tougher and stronger than competitor offerings. And I saw firsthand the superb engineering that goes into these products when I was at Elko Nevada a couple of weeks ago. Combined with ESCO lip systems and leading G.E.T., the buckets will deliver less downtime and longer campaign reliability than the OEM solutions they replace. The first bucket was delivered to the customer last week, and at over five meters wide, the photo on this slide really doesn't do it justice. Turning to the group's end-to-end technology strategy and R&D framework, which has two objectives, investing in capabilities to protect our core and addressing our customer's biggest sustainability challenges, which is driving our future growth. Our investment target of 2% of revenue, together with our recent growth, has actually doubled our absolute R&D spend in the last four years, enabling the accelerated development of new technologies spanning the verticals in the mine where we operate. Individually, the technologies have significant sustainability and efficiency benefits, but combined, the benefits compound. By using all characterisation to select which rocks are moved, And new processing and tailings management technologies, such as our redefined mill circuit and teraflowing solutions, energy and water consumption are optimized at all stages and waste is minimized. And our Synetrex and MotionMetrix digital solutions deliver further benefits by optimizing processing and machine performance. One of the innovations I'm most excited about is our redefined mill circuit, which we introduced at the September Capital Markets event last year. It packages technologies to reduce recirculating load within the processing loop, increasing throughput of virgin oil, and decreasing energy and water consumption. Key components include our leading crushing, pump, and cyclone technology, and also our HBGRs, which are used as alternatives to tumbling mills. As a dry process, HPGRs eliminate loss of water due to evaporation, and they also use 40% less energy than mills and avoid the use of steel grinding media, which has high levels of embodied carbon. Other critical parts of the package include stirred mills and coarse particle flotation, which we access through our partnerships with STM and IRIES. Stirred mills use ceramic grinding media and significantly reduce energy consumption while providing a more consistent feed than tumbling mills. Caused particle flotation reduces the amount of grinding required and enables easier separation and flotation of minerals. And in recent field trials at one of our customers' copper mines in South America, the technology has delivered a 10% increase in throughput and reduced fresh water consumption by 15%. The combined benefits of the redefined mill circuit are therefore significant and we're really encouraged by the early interest and engagement from our customers. Progress in the first half with pleasing, with our first orders for coarse particle flotation. The technology will be packaged with our latest generation of Warman mill circuit pumps and Cavex cyclones to create a pilot circuit which will improve mineral recoveries and process efficiency. Once operational later this year, these plants will become important technology reference sites for the mining industry. So we've covered growth in our markets, great progress on our strategic initiatives, and we'll now turn to Performance Excellence, our business transformation program. The program's on track and we're executing at pace. Across the three main program areas of capacity optimization, lean processes, and global business services, we made good progress. Key projects were initiated and the early financial benefits will be realized this year. Looking at each in turn, in capacity optimisation, our minerals US distribution and assembly footprint was consolidated into a new purpose-built facility in Salt Lake City. I had the pleasure of opening the facility last month and its strategic location near the hard rock mines in the west positions us close to our customers and enables us to exit older and less efficient sites. The construction of our new ESCO foundry in China is also progressing well and will soon transition to the equipment installation phase of the project with the first test castings expected in early 2024. On lean processes our new minerals chief operating officer is working on product management and global fulfillment processes which will reduce inventory levels and simplify value streams. Initial progress is encouraging with a number of legacy product variants already identified and retired. And the transition to WIR Business Services is also progressing well. The detailed design phase of the project has commenced. We've mobilized the project management office and have made key appointments to the team, including a highly experienced VP of transformation. Since becoming a mining focus group back in 2021, WIR has been on a journey of continuous margin expansion. And this year, we're well on track to deliver our operating margin target of 17%. However, the journey doesn't stop here. As we go forward, the £30 million of savings from performance excellence, along with operating leverage from growth, will drive further expansion and take us well beyond 17%. And I look forward to sharing more details of the next phase of our margin journey with you later this year at a capital market spotlight event with date and details to follow. Turning back to the first half, Our great strategic progress is testament to our employees around the world. And so now let me update you on our people initiatives. Safety is our number one priority. And in the first half, we made good progress towards eliminating harm from our operations. We improved our total incident rate by 12% to 0.29. And we're seeing strong engagement from colleagues in our recently launched Zero Harm Behaviors program. And our zero harm ambition extends beyond physical safety. And so it was pleasing to see our commitment to workplace mental health and well-being recognized in CCLA's latest benchmarking report, which ranked Weir as most improved for our performance and disclosure. We continue to have an active involvement in our local communities across the globe, maintaining our strong emphasis on encouraging access to STEM careers for women and girls. While on inclusion and diversity in our first half, we improved our percentage of female employees and expanded our global-led affinity groups. Finally, before I turn to the outlook, I'll touch briefly on the ...on progress in sustainability. Our Scope 1, 2 and 3 absolute emissions reductions targets were approved by SPTI and we continued our transition to renewable power generation. We also launched our first climate transition plan and are refreshing our materiality assessment to review the sustainability areas where our actions can have the largest impact. Our work on scope 4, or avoided emissions, also progressed. We expanded its focus to quantify the benefits of our full redefined mill circuit, rather than just the individual components, and we will release the data later in the year. This will just demonstrate how core our sustainable solutions are to our commercial strategy. So now onto the outlook, where we're upgrading our guidance for the full year. We now expect strong growth in revenue and operating profit, and for operating profit to be towards the upper end of the current range of analysts' expectations. On margins, we're on track to meet our operating margin target of 17%, with expansion in the second half underpinned by operating leverage, the early benefits from performance excellence, and further price realisation. On cash, our guidance is unchanged and we expect to deliver between 80% and 90% free operating cash conversion. On the second half order outlook, as you've already heard, activity levels in our mining markets are high. We therefore expect group aftermarket orders to be stable relative to a strong prior year comparator, with growth in orders from hard rock mining customers offset by continued normalization in the Canadian oil sands. While in infrastructure, we expect year on year orders will be stable. In original equipment, as you know, order patterns can be skewed by phasing. However, we expect momentum and demand for our brine-filled and sustainable solutions to continue and for year-on-year orders to also be stable. So, to summarise what we've delivered in the first half, we executed strongly while continuing to grow our order book. We hit or exceeded all of our committed targets. We made excellent strategic progress with our sustainability and technology-led growth network. And we continue to do the right thing by our people, our communities and the planet. And we've upgraded our full year revenue and profit guidance to strong growth. In short, we are continuing to build our track record as a focused mining technology leader and delivering on the potential of the business. So to end, I'll come back to where we started. Our long-term value creation opportunity is compelling. We have a world-class mining-focused platform. Our future growth is underpinned by decarbonisation trends and the adoption of new sustainable technologies in mining. But we will deliver more than that, and we're investing to drive compounding growth and margin expansion. I'm excited about the future and have deep conviction that we will continue to deliver excellent outcomes for all our stakeholders. So thank you for listening. And John and I will now be pleased to take any questions you have.