The Weir Group PLC

Ladies and gentlemen, welcome to the Weir Group PLC Q3 IMS Conference Call. I am George, the College Call Operator. I would like to remind you that all participants will be listened on remote and the conference has been recorded. The presentation will be followed by Q&A sessions. You can register for questions at any time by pressing star N1 on your telephone. For operator assistance, please press star N0. The conference must not be recorded for publication or broadcast. A fifth time, it's my pleasure to hand over to John Stanton, Chief Executive Officer. Please go ahead, John.

Thank you, operator. Good morning, everyone. Thank you for joining us for our third quarter trading update. I'm joined this morning as usual by our CFO, John Heasley, and after a short overview from me, we'll be delighted to take your questions. This will be the last update call for John at WEA, and he'll be leading us to join Anglo American at the beginning of December. So I'd like to take the opportunity to thank him for his 15 years of outstanding contributions to WEIR, and in particular his support for me as we have transformed the group. And I wish him all the best as he joins the board of one of the world's major mining companies. And you will have seen that we also announced this morning the appointment of Brian Puffer as our new CFO. Brian joins us from BP, where he's currently the Chief Financial and Risk Officer of their Trading and Supply Division. having previously served as SVP of Global Business Services and Group Financial Controller. I'm delighted that we'll have a new CFO of Brian's caliber with tremendously relevant experience as we execute on our performance excellence ambitions. Brian will join us in March next year. Turning to Q3, let me start with a few words on what we're seeing in our markets and current trading. In mining markets, activity levels are high, Commodity prices are well above marginal cost and our customers continue to be focused on maximizing oil production and improving the efficiency of existing mines. As a result, we're seeing strong demand for our spares and expendables and also our brownfield OE solutions. In parallel, our business has good operating momentum and we are executing well. With the additional underpin of a strong order book, we have high levels of confidence in reiterating our 2023 guidance. Turning specifically to Q3, where orders reflect the positive mining production trends I just described, though this is somewhat masked, as expected, by lower demand from our oil sands and infrastructure customers. Specifically, we saw growth in demand for our mining spares and expendables. Orders were up year on year, driven by a contribution from both price and volumes. and we saw continued good momentum in demand for our OE brownfield solutions with orders stable sequentially versus the second quarter. Operationally, the business also performed well. Our Q3 revenues were ahead both year on year and sequentially, and we saw strong flow through with operating leverage and process efficiency driving operating margin expansion. We also took significant strides in our performance excellence transformation program and I'm delighted with how the business is engaging. We're building really good momentum. The actions we've taken so far are already driving hard cost savings, with £6 million of benefit expected this year, and of course, much more to come in future years. Encouragingly, as we get into the programme, we're also seeing a snowball effect, with our teams increasingly identifying new opportunities. So we've got growing enthusiasm about its potential and the margin expansion it can deliver, and I'm looking forward to telling you more about our progress and expectations in December at our capital markets event. Turning back to Q3, now let me give you a little bit more detail on the performance of our two divisions, starting with minerals. In the aftermarket, year-on-year orders were up 1%. This reflects growth in volumes in hard rock mining and a contribution from pricing action taken in previous periods. This was partially offset, as we expected, by lower demand from customers in the Canadian oil sands, where orders were elevated in the prior year as customers built safety stocks to capitalize on strong energy prices and mitigate supply chain challenges. Demand for our mining spares was particularly strong in South America, given our strong installed base in copper mines in the region, and also in Australia, as production ramped up at a number of recently commissioned lithium mines. Turning to original equipment, we're in the quarter we continue to see good momentum with customers ordering wear solutions to de-bottleneck and improve the efficiency of existing mines. This trend is reflected in the Q3 orders, which were stable sequentially and within the range which we've consistently seen over each of the last six quarters. And as those orders convert to revenue and the equipment is commissioned, these orders will expand our install base and support future aftermarket growth. Operationally, Minerals is performing well. Strong execution, price realisation and underlying operational efficiencies drove revenue growth and margin expansion in the quarter. And we expect this strong operating momentum to continue for the balance of the year and into 2024. So why do we expect to see that continued momentum? Well, let me just briefly highlight Iron Bridge, the new magnetite mine in Western Australia. At the mine, we have pretty much the full suite of Weir integrated solutions, including our energy-saving high-pressure grinding rolls, currently ramping up after being commissioned in the second quarter. The HPGRs are the largest in the world, and the £15 million per annum multi-year service contract is scheduled to start later this year. We'll also start receiving orders for spares for the Warman's, Guiho's, ESCO and Motion Metrics equipment, which is installed at the mine, all of which will be incremental to our aftermarket. And when added to the spares demand from all of the OEM we've shipped this year, it provides a strong underpin for 2024. Now back to the Q3 performance and onto ESCO, where we saw good momentum in the mining-focused part of the business, though as expected, this was masked by trends in infrastructure. And looking at the trends in each market in more detail, in mining, which accounts for around 70% of ESCO's revenue, year-on-year orders were stable. High levels of ore production meant we saw good demand for our mining expendables across most regions. In mining attachments, differentiated technology meant we continued to gain market share. And as I talked about in our half-year results presentation, attachments have been an area of strategic focus. So it's pleasing to see progress come through in the financials, with year-to-date orders already exceeding our total order intake for 2022. This is encouraging as the market share in the segment is still small, so there's plenty of room for growth. Turning to infrastructure, where we continue to see dealer destocking in North America and a lower demand environment in both North America and Europe. This mirrors trends we've seen in our orders for much of the year, which year to date are down almost 20%. That said, with the visibility we have, we believe we're getting close to the end of the destocking cycle. Therefore, with an easier Q4 comp, and end-market activity stabilizing, we expect infrastructure headwinds to lessen for the remainder of the year and into 2024, and for the underlying strength of the mining franchise to become more visible. Turning to operations, where ESCO also performed well, operational efficiencies and price realization drove year-on-year margin expansion, and similar to minerals, we expect our strong operating momentum to continue for the balance of the year and beyond. Stepping back up to the group level and looking at cash flow and balance sheets, free operating cash flow for the quarter was positive. That debt was marginally higher than that reported at the 30th of June, predominantly reflecting the impact of translational foreign exchange on our US dollar denominated debt. Our leverage ratio was in line, and we expect this to reduce the balance of the year as we achieve our full year target of 80% to 90% free operating cash conversion. I'll shortly comment on the outlook. But before I do, I'd like to take a moment to remind you of our strategy and strong positioning. Earlier in the call, I mentioned IronBridge. And of course, the upside from the incremental spares is a nice underpin as we go into next year. However, more fundamentally, it's a reference site for the whole mining industry, proving that new energy and water-efficient technologies deliver both operational and sustainability benefits. Indeed, even in the few months the mine has been running, we've had a number of other customers visit to see the technology in action, and it's driving increased interest, not just in our HPGRs, but across our whole technology portfolio. Today, WEIR is challenging the industry to undertake a technology shift from our motion metrics vision technology in the mine, through to our energy and water efficient crushing and grinding solutions, including HPGRs and STM stirred mill technology, but also our terra-flowing solutions, which enable more sustainable and cost-effective tailings management. And as we look at the combined benefit across the whole flow sheet, we estimate our package of sustainable solutions can reduce carbon emissions by 50% relative to traditional technologies. So if all the world's minds converted, this would be equivalent to eliminating the global CO2 emissions of Argentina. This won't happen overnight, but the evidence of performance at IronBridge and the growing number of conversations we're having with customers are proof points of traction. So we're increasingly excited about the future. And this feeds into my excitement about our overall long-term positioning, which I believe is compelling. driven by three key factors. Firstly, we have structural tailwinds in our markets underpinned by growth in demand for critical metals, which are essential to enable the transition to net zero. Secondly, to unlock the supply needed, the mining industry must adopt more sustainable extraction and processing techniques. And our technology strategy will help customers achieve this. And thirdly, we're taking action through performance excellence to optimize our business which will deliver margin expansion and further improve our cash conversion. The benefits from these levers, together with the embedded resilience of our aftermarket focused business, positions us to outperform our markets and deliver compounding financial benefits over time. Now, focusing back on the near term and the outlook for the rest of the year. We go into the fourth quarter with a strong order book, which together with the operating momentum we have in the business, means our 2023 guidance is well underpinned. We therefore have high levels of confidence in reiterating that we expect to deliver strong growth in constant currency revenue and operating profit, an operating margin of 17%, and between 80% and 90% free operating cash conversion. And as I touched on earlier, with performance excellence progressing well, we remain on track to expand our margins above 17% in 2024 and beyond. Sticking with 2024, we recognize that everyone is looking to get an early read on our expectations. And the current macroeconomic and geopolitical environment does bring complexity. However, based on what we see today, all production trends in our mining markets continue to be strong. And as you know, our aftermarket focused business means we have embedded resilience, evidenced by the 7% CAGR we've seen in the minerals aftermarket over the last 11 years. Therefore, in our base case scenario for our mining-focused businesses, we're assuming that production trends, together with the effects of declining grades and installed base expansion, will support aftermarket growth rates that are consistent with our through-cycle targets, and will also support continued momentum in small and medium-sized OE projects. In infrastructure, which is a much smaller part of the portfolio, with the comparatives easing, our base case assumes demand is broadly stable. So to close, let me summarize the key takeaways. Our third quarter performance was in line with our expectations. We capitalized on high levels of activity in mining markets and executed strongly. Carrying a strong order book and good operating momentum into the fourth quarter and our 2023 guidance is underpinned. All production activities continue to be strong. And therefore, in our base case scenario for beyond 2023, we're assuming mining markets continue to be supportive. And finally, we continue to have a compelling long-term value creation opportunity supported by structural tailwinds in our markets and our technology-focused growth strategy and performance excellence. Thank you for listening. And John and I will now be happy to take any questions you have. So back to you, Operator.

We will now begin the question and answer session. Anyone who wishes to ask a question may press star and one on their touchscreen telephone. You will hear a tone to confirm that you have entered the queue. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use only headsets while asking a question. Anyone who has a question may press star and one at this time. Our first question comes from Christian Inderacker from Goldman Sachs. Please go ahead.