The Weir Group PLC (WEIR) Earnings Call Transcript & Summary

Well, good morning, ladies and gentlemen, and welcome to Weir's 2019 full year results presentation. As usual, I'm joined by our CFO, John Heasley. And I'll start with a summary of 2019's results, before John takes you through the financials in detail. I'll then return with a business review, including our markets, strategic progress and outlook before we end with the question-and-answer session. And to help with that, we have our division presidents in the room, Ricardo Garib for Minerals; Paul Coppinger from oil and gas; and Jon Owens from ESCO. But I'll begin with a couple of notices. Firstly, it's important to start meetings with a safety moment. And so let me tell you that we aren't expecting any fire drills in the next hour. That means that if you hear an alarm, please make your way to the exits at the rear of the room, where you'll be escorted to an assembly point. As usual, we are recording this meeting, and so if you could switch any mobile phones to silent, it'd be much appreciated. Continuing on the safety theme, I'd like to update you on the group's progress on safety in 2019. Our absolute goal is to become a 0 harm workplace, and we continue to move towards that ambition. Our underlying total incident rate improved by 40% in 2019 to 0.27, making Weir one of the safest industrial businesses in the world. The oil and gas division was the standout going through 2019 without a single lost time incident. We're also improving performance in ESCO supported by ongoing investment in its facilities to bring them up to Weir's safety standards. As I've said before, safety is a fundamental indicator of organizational health and effectiveness. It makes us an attractive employer, is a core tenet of our culture and is increasingly vital when winning new work. I'd like to thank all our colleagues around the world for their commitment in 2019, but particularly for all they do to take care of each other. So let me now move on to a summary of our 2019 results, which benefited from our recent portfolio shift and saw a strong performance from our high-quality mining technology businesses, which represented around 90% of operating profits. Both minerals and ESCO saw revenue growth of 4% and delivered strongly on margins with minerals up 50 basis points year-on-year; and ESCO margins reaching 14.5%, up 340 basis points since the acquisition, well on our way to our 17% target. One of the real highlights of the year was the acceleration of demand for our sustainable solutions, including our high-pressure grinding rolls technology that delivered minerals record GBP 100 million order for the Iron Bridge development in Western Australia. We are now the clear market leader in this technology, with demand for HPGRs increasing sevenfold in 2019, reflecting 2 themes, which Weir is perfectly placed to benefit from. The first is the drive for continuous productivity improvements in mining with our customers focusing their investments on their current assets to maximize returns as they continue to exercise caution over larger greenfield capital investments. The second is the environmental and sustainability challenges of mining operations. Our customers are under enormous pressure from their stakeholders, including governments, local communities and investors, to reduce emissions, energy and water consumption and waste, while at the same time, improving the safety of their operations. This can only be done through technology transformation, utilizing the kind of innovative engineering that defines Weir. Our role, therefore, is to make mining more sustainable and efficient, and it's why our primary focus is on extending our premium positions in the industry. Oil and gas had a tough 2019 with a significant deterioration in its markets through the second half, but we responded quickly with a GBP 35 million cost-saving exercise to support performance. While oil and gas remains a great business with strong market positions and a good record of returns over the cycle, the combination of changed market dynamics and uncertain outlook in North America means we've taken a noncash impairment charge of more than GBP 500 million. And given the changed market dynamics in North American shale, we are now focused on becoming a mining technology pure play, and we're taking actions to maximize value for shareholders whenever the right opportunity to move is identified, and I'll say more on that later. Finally, we delivered strong cash generation with GBP 126 million working capital inflow in the second half ahead of our previous expectations, with progress across all 3 divisions as we largely reversed the outflows seen in the first half. And as trailed at our Capital Markets Day in December, I'm delighted today to be formally introducing our new integrated sustainability strategy, which builds on our work over the past 3 years. It starts with our refreshed purpose, which is to enable the sustainable and efficient delivery of the natural resources essential to create a better future for the world. It gives clear direction to all our stakeholders and provides a compelling common cause to our people around the world. The strategy has its foundations and a commitment to best-in-class governance, ensuring we're a well-run business that conducts itself with integrity at all times. And a strong ethos of social responsibility within our communities. But over and above that base, we are now clearly setting out our future priority areas, which are the result of extensive internal and external consultation and have been robustly tested to ensure they are actionable. Not only is it the right thing to do, but it also presents a huge commercial opportunity for Weir, which is why we are so excited that we'll get real traction. I'll give you some more color on this later. But first, let me hand over to John for the financial review.

Thank you, Jon, and good morning, everyone. Starting with a summary of the results for the year, we've seen contrasting conditions across our 2 main markets. Our mining businesses continue to trade strongly, including our first full year for ESCO, while after a steady first half conditions in our North American oil and gas markets deteriorated through the second half of the year. Orders increased 8% to GBP 2.8 billion, including the full year impact of ESCO and reduced 4% on a like-for-like basis with revenues following a similar trend. Operating profit on a constant currency basis was broadly flat year-on-year, with the full year impact of ESCO and minerals growth offsetting the reduction in oil and gas, and profit before tax reduced by GBP 7 million or 2% to GBP 303 million. Reported loss before tax of GBP 372 million reflects the GBP 546 million noncash impairment of our oil and gas assets in North America, which I'll discuss in more detail later. EPS was down 7% as the weighted number of shares increased due to the full year impact of the equity raised in 2018 to finance the ESCO acquisition. We delivered another year of good cash conversion with operating cash flows of GBP 408 million, and the final dividend is proposed at 30.45p per share, in line with last year, to leave the full year dividend 2% higher at 46.95p. I'll now give more detail on each of the divisions, starting with minerals. Commodity prices for our main exposures of copper, gold and iron ore remains supportive through the year, albeit macro concerns around trade, cost and CapEx caution amongst our customers. This meant that our customers focused on increasing production and efficiency from existing assets, which play to our strengths with our leading on the ground service and engineering capabilities. CapEx caution means projects need to be clearly differentiated to proceed. And this is exactly what we aim to do with our integrated solutions, which offer sustainable, smart and efficient solutions to our customers' challenges. Against this backdrop, aftermarket orders increased 5% on a constant currency basis, significantly ahead of our production with strong growth across most regions, but most notably in the Canadian oil sands, Australia and Asia Pacific. After a 5% reduction in Q3 due to a number of multi-period commissioning orders received in the prior year, aftermarket orders in Q4 showed 8% year-on-year growth, leaving the second half up 1%. Original equipment orders increased 22%, largely due to the GBP 100 million Iron Bridge contract award that you'll be familiar with. However, we also saw good demand for our integrated solutions offerings, especially in South America for corporate expansion projects and in Europe and Russia with efficiency upgrades at a real area of focus across a number of commodities. Like aftermarket, OE orders were strong in the fourth quarter, up 20%, including the pumps contract for the Iron Bridge project on top of the original GBP 100 million combination order. As demonstrated with Iron Bridge, we're getting good traction in our focused comminution offering. We've learned a lot over the last few years and have found our sweet spot. As our focus becomes clear, we've decided to exit sand and aggregates combination markets in North America. This was a market which did not value differentiation. It was, therefore, slightly loss-making and at a high working capital requirement, characteristics which are not in line with our premium mining franchise. We incurred an exceptional charge of GBP 22 million related to this market withdrawal of which GBP 2 million is cash. With around GBP 3 million in annual benefits, the cash payback is less than 12 months. Constant currency revenues increased 4%, in line with underlying orders, excluding Iron Bridge, about 2/3 of which will ship in 2020. Aftermarket represented 73% of revenue, up from 72% in the prior year. Operating profit increased by 7% on a constant currency basis or by GBP 17 million to GBP 270 million. This represented strong growth in our earlier cycle GEHO business, South America and Australia, partly offset by previously highlighted headwinds in Central Africa due to tax changes and customers' operational challenges. Operating margins at 18.3% were 50 basis points higher than last year, with second half margins of 19.3% reflecting normal seasonality. And specific product mix with a number of lower-margin OE project shipments moving into 2020. Moving on to ESCO. We continue to be really pleased with both the performance and integration of the business. From a mining market perspective, we've seen ESCO experience the same conditions as minerals with customers focus on maximizing production from existing assets, driving strong demand for GET consumables across all regions with the exception of Central Africa. Construction markets in North America started the year well, but slowed as the year went on. Orders were down 1% on a full year basis, which is more reflective of order phasing than underlying demand. For example, Q3 orders were 25% higher than the prior year, while Q4 was 16% lower. This is due to timing of capital and stocking orders. Revenues are generally more reflective of underlying demand and they were 4% higher for the full year, in line with our minerals aftermarket. From a market perspective, we saw good growth across mining, oil sands, dredge and construction, albeit, as I said, North American construction demand weakened as the year progressed. Geographically, growth was strong in North and South America, with the only real weakness in Central Africa. Integration continues to go very well and realized $25 million of cost synergies in the year, an increase of $18 million in the prior year. With an exit run rate of $27 million, we're well ahead of schedule to achieve our target announced at the time of the acquisition of $30 million. Operating profit of GBP 83 million is a GBP 17 million increase on the 2018 pro forma, benefiting from cost synergies and underlying growth and pricing gains. This resulted in operating margins of 14.5%, continuing on track towards our target of 17%, which over time will be driven by procurement synergies, operating leverage and manufacturing efficiencies off the back of the investment we continue to make in the ESCO foundries. We should see these benefits coming through in margins in the second half of 2020. Turning to oil and gas. 2019 was again a year in 2 parts. The first half of the year supported reasonable aftermarket demand before E&P budgets were exhausted and their focus on cash and returns intensified. This drove down drilling and completion activity and lowered frac fleet utilization to less than 60%. This in turn led to cannibalization of existing fleets, resulting in a significant slowdown in demand for frac equipment. International markets continued to show positive signs of recovery, albeit with pricing remaining competitive. Even with reasonable growth in orders in the smaller international business, order trends are dominated by the North American results. This meant that orders were 30% lower year-on-year, with H2, down 26% sequentially. Even within H2, the market deteriorated with a 20% sequential decline from Q3 to Q4. Revenues followed a similar trend, down 25% in the year. As we noted in November, we took positive action in Q3 to mitigate as far as possible the impact of these challenging market conditions. This resulted in an approximately 20% reduction in our workforce and impairment of certain underutilized assets with targeted annual savings of GBP 30 million. You will recall, we realized about 50% of these savings in Q3 and achieved a full run rate in Q4, such that we realized around GBP 11 million of savings in 2019. In addition, as market conditions deteriorated in Q4, we impair some further tangible assets that will result in an additional GBP 5 million of annualized savings. I'll talk about the overall impairment of oil and gas North American assets shortly. Operating profit at GBP 37 million was GBP 64 million lower than last year, representing a 31% decremental flow through on lower volumes. The business remained modestly profitable through the second half with Q4 just about breakeven, including the GBP 7.5 million of fully realized cost savings. This reflected lower volumes and increased pricing pressure. Looking briefly at discontinued operations. As we discussed in July, the disposal of Flow Control completed on the 28th of June with GBP 263 million proceeds received at that time, subject to our normal completion accounts process. That has now been completed with a true-up to normal working capital, resulting in a GBP 4 million payment to First Reserve in January 2020. This results in a final proceeds of GBP 259 million and a post-tax loss on sale of GBP 22 million. Turning now to exceptional items. Given current North American oil and gas market conditions and uncertainty over the timing of a market recovery, we've impaired the carrying value of our North American assets. This resulted in a noncash impairment charge of GBP 546 million and reduces the carrying value of the division as a whole to GBP 591 million on a value and use basis. The costs associated with oil and gas restructuring actions and minerals exit from the sand and aggregates comminution markets, which I referred to earlier, were GBP 15 million and GBP 22 million, respectively, with the majority of these costs being noncash. Cost of the ESCO integration at GBP 11 million means total spend remains in line with our initial estimates. Of the GBP 596 million total exceptional charge, GBP 24 million is cash, with GBP 17 million of that already incurred in 2019. I would now like to turn to our cash performance, which is shown for the total group and once again demonstrates the strong underlying cash generative nature of our operations. Operating cash flows of GBP 408 million were $3 million lower than last year with a number of moving parts. The disposal of Flow Control resulted in a GBP 75 million reduction, while oil and gas operating cash flows were GBP 51 million lower, reflecting profitability. These headwinds were offset by a strong cash performance in minerals and ESCO as well as the benefit of certain lease costs transferred out of operating cash flows as a result of IFRS 16. After a significant outflow of working capital in the first half, the seasonal nature of that was confirmed with a GBP 126 million inflow during H2. While overall, on a full year basis, there still left a modest increase in continuing working capital, this was primarily to support growth in minerals with a number of relatively advanced project orders spanning the year-end. While there was some benefit from the asset impairments, our key metrics of inventory tons and debt of days showed good improvement reflecting a strong cash focus across all functions. It's pleasing to see this progress in activities we've been talking about for some time. However, there is still room for improvement, and we continue to focus on value chain initiatives from detailed sales and operations planning through supply chain, engineering, operations and finance. This, together with the rollout of Minerals SAP platform will drive further medium-term working capital efficiency. Looking at free cash flow, we saw an outflow of GBP 79 million in the year. With operating cash flows in line, this reflected a number of factors. CapEx was GBP 19 million higher, mainly to support operational and safety enhancements in the ESCO foundries, which was identified as necessary at the time of the acquisition. Settlement of derivatives increased by GBP 40 million, reflecting the impact of FX volatility seen on group borrowings and ordinary corresponding of overseas subsidiaries, while the increase in the dividend cash cost reflects the cessation of the scrip dividend and increased number of shares in issue following the ESCO acquisition. Net debt on a reported basis increased by GBP 30 million to GBP 1.16 billion, but excluding the impact of IFRS 16, reduced by GBP 155 million to GBP 972 million, benefiting from the proceeds from the sale of Flow Control. This left leverage at 2.4x compared to 2.3x last year, with the benefits of the debt reduction and improved minerals and ESCO profits being offset by the lower profitability in oil and gas. Finally, let me leave you with some guidance on financial matters for this year. Based on January exchange rates, as included in the appendix to this presentation, we would see a GBP 14 million FX headwind at operating profit level, with the main drivers being Sterling's improved position against the U.S. dollar and Chilean peso. This impact is approximately GBP 10 million in minerals, GBP 3 million in ESCO and GBP 1 million in oil and gas. We expect working capital phasing to reflect normal seasonality with an outflow in H1 being partly recovered through the second half as we continue to invest to support growth in minerals. CapEx spend will be around GBP 100 million as we continue our work to upgrade the ESCO facilities and roll out SAP in minerals. Based on charges taken this year, we expect exceptional cash flows to be around GBP 10 million. With the oil and gas outlook for 2020 for modest profitability, we expect net debt and leverage and, therefore, interest to remain at around current levels, while the effective tax rate is expected to be around 25%. In summary, 2019 was challenging from an oil and gas perspective and the uncertainty around the timing of a North American market recovery has been reflected in our decision to impair the carrying value of the division. Our mining businesses delivered a strong financial year, with the profitability and cash-generative nature of both minerals and ESCO once again confirmed. Thank you. And I'll now hand back to Jon.

Thank you, John. In this session, I'll start with some of the other highlights from across the business in 2019 before coming back to oil and gas and our decision to focus on becoming a mining technology pure play. Then we'll revisit some of the megatrends and long term drivers, which, in our view, make mining such an attractive space to play in and talk about what we plan for 2020 to further build on our already strong platforms across minerals and ESCO. That will lead into current market conditions and 2020 guidance, and I'll conclude with the group's long-term sustainability strategy, which builds on what you already heard. So let me start with 2019, which was a year of significant progress towards our long-term ambition of creating a more focused premium quality Weir. From a people perspective, there was great momentum on safety, as I've said already, but we also continued to invest in and engage our people, with more than 3,000 employees given additional product training to support our integrated solution strategy in minerals and ESCO engagement scores increasing during a significant period of change for the business. All 3 divisions grew market share, with minerals becoming a market leader in HPGRs, ESCO extending its leading technology into smaller machine classes, supporting a 30% increase in cumulative conversions to its Nemisys brand. And working with minerals, the 2 businesses have also delivered almost $10 million of our $50 million revenue synergy target. And oil and gas gained great traction with its large-bore simplified frac system. We also continue to deepen our customer relationships by expanding our leading service network to give our customers the support they need and continue to capture aftermarket opportunities. This included oil and gas, opening a new supercenter in the Permian Basin, plus minerals and ESCO, building integrated sales infrastructure in target markets for revenue synergies. We focused our technology agenda on providing smart, efficient and sustainable solutions for our customers. This included receiving the first order for a pilot plant using our new tariff flowing technology that dewaters tailings in a low cost way, enabling them to be cost effectively stored or repurposed. ESCO developed an automated tool head solution that removes people from harm's way during GET change-outs and which is getting great reviews from our customers. And oil and gas launched their first electric compatible frac pump, the QEM 5000 capable of significantly reducing the operating footprint on a frac site. Performance was supported with operational improvements to both ESCO and minerals' larger facilities. In ESCO, this delivered a 30% increase in production at its biggest foundry. ESCO also continued to lower cost synergies ahead of our original plan, including removing duplicative corporate costs, merging functions, leveraging our increased scale to secure procurement savings and consolidating overlapping facilities. Oil and gas meanwhile was proactive in managing its cost base in challenging markets, including reducing its workforce by 600 people. And of course, that's all on top of delivering the successful sale of Flow Control and the launch of Weir Sharebuilder which has now received external recognition for its comprehensive approach to global oil employee share ownership. So let's now turn to oil and gas markets where we've recently seen moderated expectations for growth in global demand for oil and macro and excess supply concerns restraining the oil price. International markets continue making a steady recovery after years of underinvestment, but in North America, the market has deteriorated in the past 12 months. E&P's focus on capital discipline means CapEx budgets continue to fall, with an estimated further 10% reduction expected in 2020, which is likely to be mirrored in frac demand. Last year, we saw a pickup in both rig count and completions activity in January as a result of budgets being reset. However, so far this year, we've seen both rig count and completions activity decline further. On the positive side, the cannibalization and destocking seen through the second half of 2019 is likely to unwind to a degree and the retiral of around 5 million of hydraulic horsepower will help tighten the market, leading to a future replacement cycle. But for now, challenging near-term conditions are leading to further pricing pressure throughout the supply chain, which is now at previous trough levels overall. Given the situation, conviction on the timing of a recovery is difficult, and that's led us to take the impairment charge that John described and to update our external position on the future of the portfolio and our long-term strategic intent. As you know, under my leadership, our clearly stated priority for capital allocation has been on mining technology, and we've achieved a lot: The acquisition and successful integration of ESCO, sale of Flow Control and continued strengthening of minerals. I'm really pleased with the progress we've made, continuing to build on the strengths of our platform with high barriers to entry, resilient aftermarket, leading margins through the cycle and a clear path to long-term sustainable growth. And given our strong market positions and the transformational technology opportunities that we are unlocking, I am more convinced than ever about the exciting future potential for a high-quality Weir mining technology franchise. And I want to have the capacity and resources to continue to build out that offering both organically and inorganically. The oil and gas division is also a great Weir business and shares many of the same underlying characteristics. It is a leading player in its field, relying on innovative technology and customer proximity to deliver a strong aftermarket and good through-cycle margins. However, the market dynamics have changed in North America, which for now is operating on increasingly short cycles and with higher levels of volatility than before. While I do continue to believe in the long-term opportunity in shale, the current uncertainty and market behaviors mean it now has a very different investment case to that offered by our mining businesses. As a result, our strategic direction is to focus on becoming a mining technology pure play, and we are looking for opportunities to maximize value from the oil and gas division at the right time. Today, the market backdrop is a challenge. So we will continue to manage the business with a long-term perspective, including taking continued action to optimize our footprint for current market conditions, while still investing in people and technology to drive market share gains and profitable growth. At the same time, we are taking actions such that whenever we identify the best solution to drive value for our shareholders, we will be ready and able to capitalize. So now let's turn to mining markets and look at the fundamental trends underpinning demand for the commodities we help to produce. As the world's population continues to grow, urbanize and decarbonize, it will require significant infrastructure investment and more metals, not less. For copper, in particular, the outlook is very strong, with demand forecast to materially outstrip supply in the medium term. Customers who today are focused on maximizing their current assets will need to start to develop new sources of supply very soon. And at the same time, accessing commodities such as copper is getting more difficult with continuing all grade declines, meaning more and harder rock needs to be processed to access the same amount of ore. And all this raises the question: how can we wait -- make the world more sustainable when low carbon critical metals like copper are essential to continued economic development. And the answer is through innovative engineering and that means Weir has never been more relevant to our customers. And to understand their concerns, we need to be with customers from the mine sites to the boardroom, and we absolutely are. So what do they care about most? And in short, it's smart, efficient and sustainable solutions. Smart means driving productivity gains through automation and utilizing the power of big data to accurately predict and optimize equipment performance. Efficient means better wear life with longer-lasting components, more capable of withstanding the increasing intensity of production and reducing costly unplanned downtime. And sustainable means taking people out of harm's way and using less energy, water and waste. With our unique portfolio of premium brands from the pit to processing plants, we are ideally placed to help our customers become more sustainable and efficient, lowering both costs and emissions. And this is now defining our technology road map. Let me give you a great example. Our HPGR technology continues to gain great traction in the market with more than GBP 70 million in orders last year. You may recall at our Capital Markets Day in Venlo in December, we also had a customer in the factory, assessing the technology. And I'm delighted to say they placed an order for the first of 3 enduring HPGRs for a gold mine in the Middle East, impressed by its ability to significantly reduce energy and water consumption. And just to give you an indication of the difference this technology can make to the global sustainability challenge, the energy savings from choosing around just 16 HPGRs versus SAG mills would offset Weir's entire annual emissions of CO2. In the year ahead, we will focus on a continuing basis on leveraging our core capabilities. We'll make more progress towards becoming a 0 harm workplace and targeted improved engagements in learning and development. We'll extend our service advantage further with new facility openings and pursue more customer technology partnerships. Those will focus on smart, efficient and sustainable solutions from incremental innovation through to breakthrough technologies. We see big opportunities in regions such as Russia and Central Asia, where they are upgrading Soviet-era mines and where the total cost of ownership argument is gaining momentum. And we'll reach our $30 million cost synergy target for ESCO, while continuing to optimize our manufacturing footprint and back-office operations. As you know, there are a number of global macro uncertainties at the moment, including the impact of the new coronavirus on economic growth. And while that remains unknown, other risks such as trade tensions do seem to be abating. But given the swings in sentiment we've seen in recent months, miners remain cautious about sanctioning large greenfield expansion projects. So today, their primary focus is on maximizing productivity of their current assets to take advantage of supported commodity prices. That means most CapEx is aimed at sustaining expenditure as they increasingly optimize their assets or invest in brownfield expansions of existing mines. For Weir this is right in our sweet spot, leveraging our on-site presence to help miners make the most of what they have and when they're ready to expand, supporting them with technologies that are responsive to their challenges. Even though miners currently remain cautious on large scale investments, they are continuing to work on expansion projects, both greenfield and large brownfield, and we exited 2019 sitting on a record pipeline. Just like Iron Bridge, we need to be patient and work with our customers to bring these projects to fruition, but given current depletion rates and growing demand for metals critical to carbon transition, we believe that original equipment opportunities will be plentiful over the next few years. Day-to-day aftermarket conditions remain positive, with the fundamental drivers of our production growth and declining grades set to continue to support growth opportunities. So I'll now turn to the outlook for 2020, where we expect the group to deliver further good progress in our mining focused businesses before the impact of foreign exchange headwinds. This will be offset by the continued challenges in North American oil and gas markets. At a divisional level, we expect minerals to deliver good constant currency revenue growth with margins slightly lower than 2019, reflecting product mix which includes delivery of the first stage of the record Iron Bridge order. ESCO will see good constant currency revenue growth, with margin progression driven by further cost synergies and operational efficiencies continuing the journey -- the division's journey towards 17% operating margins over the medium term. And finally, oil and gas. As I said, industry expectations are for a further cut in North American E&P expenditure in 2020 as operators continue to focus on capital discipline over growth. International markets are expected to continue their steady recovery. While visibility is limited, we currently expect the modest levels of profitability seen in the second half of 2019 to continue in 2020 with lower demand and pricing pressure being offset by the benefits of our restructuring actions. Let me also say a few words on coronavirus, which is clearly a developing issue. At the moment, our plants and the broader supply chain in China are ramping up, after the enforced extension of the Chinese New Year public holidays. If this continues, we do not expect to have any major unmitigated disruption over the full year, although Q1 order trends could probably be subdued given customer caution. However, a deterioration in the situation in China as the year progresses could affect component supplies to varying degrees across all 3 divisions. So we continue to watch the situation very closely. And finally, we are excited to be formally launching our integrated sustainability strategy today. As I said earlier, we have carefully assessed where we can make the biggest difference in the global sustainability challenge building on our already strong foundations. This has resulted in 4 priority areas for our sustainability strategy. Firstly, creating sustainable solutions for our customers. Secondly, significantly reducing our own environmental footprint. Third, nurturing our unique culture to support sustained high performance. And finally, championing 0 harm. Creating sustainable solutions means applying sustainability as a lens through which to view every aspect of the product life cycle from design to end-use and round again. And as you heard earlier, this is where we believe we can make the biggest difference as the world tackles climate change and carbon transition. But we know we must also set the example in our own operations, and that's why today, we are announcing our target of reducing our relative CO2 emissions by 50% by 2030. That's an ambitious target for an industrial company that runs 11 foundries, but solving big challenges is what good engineers do. And we've tested our assumptions over the past 18 months using pilot projects in our most energy-intensive facilities to ensure our plans are rigorous and actionable, providing clear evidence that we can deliver on our targets. To us, sustainability means much more than environmental action, though. It's also about building a business that people are proud to be associated with and that's why we're also prioritizing, nurturing our unique culture. We want a high-performing group where people share a common sense of purpose and responsibility, no matter what their background, location or financial position. It's something I'm very passionate about, and it's a real differentiator for Weir, and, of course, is now underpinned by making all of our employees, shareholders. Similarly, as you know, the safety of our people is our top priority. I've already spoken about the progress we're making towards 0 harm, but we must ensure we are also good neighbors leading by example in protecting the environment in the communities in which we operate. So as you can see, we have 4 clear priority areas built on solid foundations and fully aligned to our business strategy and purpose. I believe it's a powerful combination, and it will help define this business in the years ahead. So in summary, we continue to benefit from our core strength as a high-quality mining technology business. We are ideally aligned to benefit from the strong structural drivers in our markets where our Weir strategy is driving organic growth, supporting our drive to make our customers' operations smarter, more efficient and sustainable, and we have a consistent track record of sector-leading performance through the cycle. Our future is as a mining technology pure play, and we're taking the actions necessary to ensure we maximize value from oil and gas at the appropriate time. Let me finish with a few words on Jon Owens here in the front row. As you know, Jon has announced his intent to retire from ESCO in the summer after more than 30 years with the business. He has been a superb leader and a driving force behind the successful integration of the business into Weir, not to mention a great guy to work with. We wish on a happy retirement when it comes. He will be replaced by Andrew Neilson, who many of you know, who will shadow Jon through the second quarter before taking the reins in July. Thank you again, and let's now open it up to any questions you may have. If you could wait for the microphone, give your name and organization before asking your question, it will be much appreciated. Thank you very much.

This is Bruno Gjani from Exane BNP Paribas. Just a quick one on the exit strategy of oil and gas. Given the political climate in the U.S. where the Democratic Party is talking about a ban on fracking, how likely is it that you could find a possible buyer for your U.S. oil and gas assets?

I suspect there are going to be quite a few questions on oil and gas. So I'll try and provide a bit of overall color to it, if I may. I think the context is that it's a great business with leading market shares, technologies and so on. But these markets have changed, and it is now a different investment case to our mining technology businesses. And while I love the business and have great affection for the people, we have to be quite hardnosed about that and the board to do the right thing. We've announced the process today because we want to sort of create the maximum space and air cover, if you like, to explore all opportunities over time. And I don't think we'd be able to do that if we were doing that behind closed door because we need externally and internally to flag what we're doing. But to be clear, we're not setting a timetable or defining a process today. And whether we exit sooner or later is probably too early to tell. We want to maximize value through that process. And that's again why it's somewhat open-ended and maximizing value is going to be a judgment the board makes. As you know, that's based on multiple factors that we consider. And if we do sell the business, then there are clearly questions about what that means in terms of the group looks like going forward, operating model and capital structure and so on. So that's why we're doing what we're doing today, and we need to have the internal air cover so that we can get our people focused on exploring opportunities and at the same time, sort of seeing what the market has to say about that. As regards the political situation in North America, clearly, statements have been made. They have been made in the past by those on that wing of the Democratic Party and whether they are actionable or not, I think, is a very, very big question. So we're not overly concerned about that today. Mark?

Mark Jones at Stifel. Given all that, is there anything further you can do to the oil and gas business while you're waiting this process? I'm assuming that from a cost perspective, you can't strip much more out of that without damaging the position on the ground, particularly close to the customers. Is that fair?

Yes. As I said in my speech, how this plays out. It depends on what's the variable. So we have to continue to run the business for the long term. And that means doing all the things that we do week in, week out to optimize the business and make sure it's rightsized for the current market conditions and continue to invest in the technology and the people in the organization. So that's the mindset. So no real change in how we think about the business. We've always taken decisive actions, however the market moves. So that's what we're doing. Now clearly, the actions we will take is around how we prepare the business for a potential exit in the future in terms of the things that we need to do around entanglements and so on and so forth. So we'll be getting all of that work done in the background, but everything else is very much business as usual.

On the other side of the strategic equation and your ambitions to grow further on the mining side, obviously, you've broadened the range of products that you play in over the last couple of years. Is the intention to continue that process, i.e. enter new segments? Or is it more about consolidating positions you've got?

The focus is absolutely on consolidating the positions we've got, because if you think about -- we're sort of in 3 sort of sectors of the mining value change in wet chain. In wet processing, we have a market-leading position, fantastic brands, products. We have pretty much everything that we want to have within the portfolio. Could you see some little geographic infills in that space? Possibly. When you go one step upstream into dry processing, where we have -- we've got a great position now with the high-pressure grinding roles, which I talked about and some crushing capability around that, but we certainly don't have the full solution suite that we might have. And when you go one step further upstream, then ESCO is really a single product line in the pit, and there are clearly other consumables that may be of interest in and around that, that we could explore over time. So I certainly don't see us going downstream of where we are today. Could we possibly go a little bit further upstream? Maybe, but we will be focused on the positions that we have.

Just one little detailed one. The aggregates business you're exiting in the U.S., can you tell us what the revenue run rate on that was?

It's pretty small. I think the cost benefit from that is about GBP 3 million.

Yes, GBP 3 million cost benefit, the revenues are negligible, GBP 10 million to GBP 15 million, something like that.

Andrew?

Just a quick one on working capital. Clearly, you've flagged a good second half expectation and you delivered one, so good stuff there. Can we just kind of have to think about the next kind of 2, 3 years and given where you are net debt-to-EBITDA, 23% working capital to sales probably still can come down. What are the levers now aside from oil and gas, you got GBP 590 million. If you ex out intangibles, it's about GBP 300 million. So that's not going to massively move the dial. What's the kind of, I guess, the bridge really to getting net debt-to-EBITDA down to, I don't know, 1, 1.5 over the next couple of years? That would be helpful.

Let me just -- I think John will give you the detail there, but let me just say that it is absolutely a focus to reduce net debt-to-EBITDA from where it is today and driving cash generation and working capital is a priority, but John, in terms of the detail.

Yes. I mean I think from where we are, clearly, I have guided for next year, Andy, on net debt and leverage to remain broadly in line, and that really reflects the lower profitability in the oil and gas division. And as we go forward from there, it's really about leveraging that strong mining position and building that out, which hopefully, increases profitability through time, but fundamentally, through the operations, really an absolute focus on cash generation and working capital. So while, as I said, I'm pleased, and collectively, we're pleased with the second half of the year with the progress that we've seen on inventory turns and receivables days at 60, we're not satisfied with that, and we're going to keep pushing. And especially through minerals, there's a real opportunity with the SAP platform to start to take a more global view on supply chain and inventories and so on that will drive that medium-term benefit. So it's not going to -- there's no silver bullet, as I think I've said before, it's not an easy exercise. It's in the detail. But each of the gentlemen running the divisions are well on with that, and that's deep rooted right through the organization.

I guess, one quick follow-up. Just thinking about oil and gas in the current year and it might be slightly unfair, but I'll ask anyway. Will we see oil and gas in profit in the first half at the division level?

I think we said, we expect the run rate to be broadly in line with the second half of 2019. And it's -- so splitting hairs a little bit to say exactly where it will be. We'll see how the next few months unfold, but we can't see a catalyst to it for it to be meaningfully different from that. Andy up there.

It's Andy Wilson from JPMorgan. Just a follow-up actually on that question on gas in terms of the run rate, but thinking about the top line and kind of market conditions, I think you mentioned on one of the slides, I can't remember exactly, which indicated you talked to kind of 10% down. I think it was maybe customer budget. I mean is that a sort of a base case for the top line? We aren't wishing to kind of pin you to a number, but in terms of how you're thinking about the top line development to run through kind of compared to the second half or compared to '19 as a whole, I guess.

Yes, by and large, I mean you see -- you've got other factors in there, and let me ask Paul to just sort of give a little bit of color on what he is seeing on the ground at the moment. But we do expect activity levels to be lower. So in January, we've seen a pickup on what is the run rate in November and December, but it's still way lower than January last year. So there's a little bit of budget reset, but we don't think it's going to be hugely sustaining from there. So it will be down. And that 10% decline in E&P CapEx is a broad indicator will be down on volumes; pricing's very tough, as I said. But clearly, we'll be offsetting that with the full run rate of the cost-cutting that we've done. Paul, anything to add in terms of what you're seeing on the day-to-day?