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

Good morning, everyone, and welcome to The Weir Group PLC Half Year Results 2021. My name is Seb, and I'll be your operator for the call today. [Operator Instructions] I will now hand the floor over to Jon Stanton, CEO, to begin. Please go ahead, Jon.

Thank you very much, Seb, and good morning, everyone, and welcome to Weir's interim results presentation, which is taking place in what is the group's 150th year. It's also our first year as a mining technology pure play. And as you'll see throughout this presentation, we're already seeing the benefits of our new focus in driving growth, expanding margins and positioning Weir as a key enabler of more sustainable mining. As usual, I'm joined by our CFO, John Heasley. And after my opening remarks, John will take you through the first half financial review in detail. I'll then return with the business review, including an update on strategic progress against the performance goals we set out in March and the outlook for the group and our markets. We'll then open up for questions. But first, let me start with safety and the ongoing COVID-19 pandemic. As you know, at Weir, we believe safety is the first priority. And our mission is to become a zero harm workplace. We've made great progress in recent years. And while we saw an ongoing reduction in severity in the first half of 2021, our total incident rate increased slightly year-on-year. I think this reflects the unique circumstances of 2020 as the world responded to the initial threat of COVID-19. And our standards remain world class, and we are engaging strongly with our people on achieving the next level of safety performance. We're also continuing to do everything we can to support colleagues, customers and communities as we navigate the ongoing pandemic, but especially providing support to the families of those colleagues who have unfortunately lost their lives in this pandemic. To keep more people safe, we're encouraging employees to get vaccinated where this is available and to share that information with the business so that we can normalize operations as quickly as possible. Where local authorities allow such as in India, we've provided special clinics so that employees and their family members can be inoculated. And across the group, we continue to focus on mental health and well-being, with our recent global employee survey providing very positive feedback, with Weir scores significantly better than third-party benchmarks. Despite ongoing disruptions to our operations caused by COVID, we have been able to fully serve our customers as a result of our integrated regional operating model. We've done this while also navigating a number of other challenges, including the now familiar global supply chain issues as well as adverse weather events and political unrest in South Africa and Peru. I'd like to personally thank all my colleagues for their passion and commitment in making this happen. Before I summarize the group's first half performance, it is worth having a brief reminder of the new Weir. We're now a premium mining technology business, and the only provider of solutions in the mine, from extraction through to tailings management. We have very strong market positions in a traditionally conservative industry, with a range of leading brands that have been trusted by generations of miners to improve safety, productivity and deliver the lowest total cost of ownership. We focus on mission-critical technology that is essential to ongoing production. So as long as the mines are running, they're using our equipment. And as we've seen in the COVID-19 pandemic, the world regards mining as an essential industry. Our technology is used in highly abrasive applications that generate significant aftermarket demand for spares, providing best-in-class resilience through the cycle. So let me show you what I mean by looking at the past decade. Here, we see a clear trend: strong aftermarket growth through multiple cycles. In the last 10 years, we've seen the end of the super cycle; a shift from volume to value as miners cut CapEx; the return to growth as the global economy strengthened and new supply was commissioned; and of course, the recent impact from the COVID-19 pandemic. Throughout, Minerals aftermarket revenues have been remarkably resilient. And through each cycle, the total opportunity has grown, while since its acquisition, ESCO has demonstrated very similar margin resilience. So now as a group, we're moving back into a new growth phase, as you can see in our first half performance. And this strength in our order growth is one of the highlights of the first half results. As expected, with our timing in the mining cycle, we saw order momentum accelerate through the period, while infrastructure benefited from the strength of residential completions in North America and Europe. Original equipment orders were up 57%, as we leveraged our differentiated technology, particularly in solutions that reduced energy, water and waste. Aftermarket demand also accelerated in Q2 back to pre-COVID levels, despite ongoing disruptions in some regions, as miners focused on maximizing production to take advantage of near record commodity prices. Revenues and operating profits were strong. Our margin increased by 120 basis points, supported by operating efficiencies and ongoing temporary savings, while we were able to fully offset inflationary pressures. Our balance sheet has been significantly strengthened in the period, supported by the sale of the Oil & Gas division, which fully completed at the end of June with the closing of the sale of our Saudi Arabian JV. And our recent sustainability linked notes issue significantly enhances our liquidity. So we're fully on track to deliver on our 3-year performance targets set out in March. Finally, the Board is pleased to resume the dividend, which is in line with our refreshed capital allocation policy and represents 1/3 of our first half EPS. The decision reflects the progress we've made and our confidence in the go-forward strategy and future prospects of the business. By a way of illustration, our recent order win in the Ukraine is an excellent example of why we are bullish about the opportunity ahead. The initial GBP 36 million order for our Enduron high-pressure grinding rolls and screens will support the expansion of Ferrexpo's Poltava iron ore pellet production from around 30 million to 80 million tonnes a year. They chose Weir because our differentiated technology is proven to increase efficiency, while significantly reducing energy and water consumption. It's a win-win solution and a great example of the difference we can make to help the industry produce more essential resources while reducing their environmental impact. So we're in good shape. And I'll now hand over to John Heasley to give more details on the group's financial performance. John?

Thank you, Jon, and good morning, everyone. We've continued to see the benefits of our transition to a mining technology pure play in the period with strong trading and a much improved balance sheet position. Group orders of GBP 1.1 billion were 17% up on last year and continued to gather momentum, with the quarter to June being the third straight quarter of sequential growth, with H1 orders 6% higher than the equivalent pre-COVID period in 2019. Given lead times on some of our larger OE orders, revenues of GBP 0.9 billion were only 3% up on last year, but that resulted in a book-to-bill ratio of 1.21. Operating profit of GBP 143 million was 12% higher than last year, with operating margins improving by 120 basis points to 15.9%. While there are a number of moving parts that I will want to explain, we remain on track to deliver our performance goal of 150 basis points improvement over the next 3 years. Profit before tax of GBP 121 million was GBP 7 million higher than last year, including an FX translation headwind of GBP 7 million, with EPS at 35p per share. There were no exceptional items in the period. Operating cash flow from continuing operations at GBP 157 million was slightly lower than last year, reflecting specific working capital movements, which I will discuss shortly, while we were pleased to receive the proceeds from the sale of Oil & Gas, resulting in net debt-to-EBITDA of 1.6x, slightly ahead of the pro forma 1.7 at the end of December. I'll now turn to provide some detailed commentary on each of the division. Starting with Minerals. Market conditions continued to develop positively, supported by strong commodity prices and demand for energy and water efficient solutions for expansion and upgrade projects. On the ground, while we did see gradual easing of COVID restrictions in some regions, site access remains mixed, given travel and testing requirements. When we do get to site, customers are keen to explore solutions to improve productivity to drive further production, while commodity prices are supportive. On the projects side, focus remains on upgrade and expansion projects, with strong activity in iron ore. And regionally, we've seen Australia and Africa bounced back strongly from a COVID impacted 2020, while Russia and Central Asia have continued strongly. Latin America was stable after very strong growth in 2020, in part due to stocking in the early part of the pandemic, while demand in the oil sands was weaker for the same reason. Sequentially, Q2 orders were 17% higher than Q1, with both OE and aftermarket ahead. Q2 is generally the highest aftermarket quarter given phasing of multi-period orders. But even excluding that effect, there was still good sequential growth. As expected, we saw the aftermarket return to growth in the quarter, 9% ahead of last year, while OE continued the strong trends seen in Q1, up 50% supported by the GBP 33 million Indonesia electric pump order in April which follows on from the GBP 36 million Ferrexpo HPGR order in March. This resulted in H1 order growth of 18% plus 4% for the aftermarket and 57% for OE. This all left the aftermarket orders back at pre-COVID levels and OE running at levels not seen since 2012, excluding the GBP 100 million Iron Bridge order received in 2019. Revenues were 4% higher than the prior year across both OE and aftermarket, with the non-repeat of GBP 20 million of Iron Bridge revenue from last year being offset by underlying OE momentum. Book-to-bill at 1.26 reflects a buildup of order [ book ] in both the OE and aftermarket. The majority of the Indonesia pump order is expected to ship in H2 with the Ferrexpo order spread over the next 3 years. This means we will see revenue mix move towards OE through the second half of the year. Operating profit increased by GBP 12 million or 11% on a constant currency basis to GBP 120 million, with margins up 120 basis points to 18.1%. As we expected, while some of the temporary cost savings realized last year, such as bonus and T&E return, these were largely offset by lower levels of under-recoveries as we faced fewer COVID related plant disruptions. The underlying profit and margin improvement was supported by higher volumes and underlying efficiency savings as we drive the operating performance of the newly focused group. This included refreshing the Weir production system that assesses every production and service facility against a standard set of lean criteria as well as further progressing our back-office shared services and realizing benefits from our IT transformation program. We also benefited from around GBP 2 million of one-off gains in the period, mainly relating to the sale of a property in China as part of our efficiency program. As [ shared in ] our strategic framework, some of the benefits from these activities have been and will continue to be reinvested in R&D as we look to achieve our medium-term spending target of 2% of revenues. The underlying profit improvement was especially pleasing given the operating environment is not straightforward. We have successfully mitigated disruption to our freight lines and supply chain and expect to continue to do so through the second half of the year. Moving on to ESCO. ESCO experienced similar mining market conditions at the Minerals division, with mining orders running at significantly higher levels than H2 last year as machine utilization returned to almost pre-COVID levels. Infrastructure and construction markets in Europe and North America recovered strongly, with the impact of last year's destocking and this year's sharp bounce back and restocking taking orders to record highs. While we have confidence in the long-term infrastructure fundamentals and ongoing demand, we may see some phasing of restocking orders over the balance of the year as inventory levels normalize. While total Q2 orders were only slightly higher sequentially, they were 30% higher than last year, supported by the infrastructure demand just described, leaving the half year 14% ahead. OE filed smaller in absolute terms grew by 48%, supported by our focus on differentiated bucket technology to bring efficiency gains to our customers with greater payer loads, reducing the number of passes required for a given tonnage to be moved. Revenues were up 1%, lagging orders due to phasing and lead times, with book-to-bill at 1.08, one of the highest since we acquired the business in 2018. Operating profit of GBP 40 million was GBP 3 million or 6% higher than last year. This was driven by the small volume increase and further efficiency gains from our ongoing investment in the foundries since acquisition, together with a slight phasing benefit on price increases for the following reasons. Like Minerals, ESCO is facing increasing logistics and freight disruption, and to a greater extent than Minerals, raw material cost increases, especially for steel plate in North America. To mitigate this, we have passed additional price increases to customers. Our phasing of purchase contract renewals and associated cost accounting. Some of those raw material and cost increases will only fully hit in H2, meaning there's a phasing benefit to the first half profit and margins, which we expect to reverse through the second half. You will also remember last year that ESCO profits benefited from COVID-related temporary cost savings, such as bonus and T&E, with no significant offsetting recovery impact. While some of that benefit has reversed in the first half and been offset by the benefits described above, there remains a degree of spend which has not yet returned, which continues to benefit margins. These factors resulted in an operating margin of 16.7%, up 70 basis points from last year. And we remain on track to achieve our medium-term target of 17% set out at the time of acquisition. Turning briefly to discontinued operations relating to our former Oil & Gas division. I'm delighted to confirm that the agreed net cash consideration totaling GBP 299 million was received in the first half, while the profit of GBP 107 million mainly relates to a technical accounting requirement to recycle historic cumulative exchange translation gains and losses from the FX reserve to the income statement at the point of disposal. The operating cash flow reflected normal seasonality up to the point of completion, but given the terms of the sale agreement, will have no net impact on the group. Moving on to cash flow. We were again pleased with the underlying cash generation, with continuing operations delivering GBP 157 million of operating cash flow. The working capital outflow of GBP 29 million is GBP 32 million [ adverse ] to last year, which benefited from GBP 31 million of invoice discounting relative to this year following our decision last December to minimize this activity. Excluding that impact, working capital movements are in line with last year, notwithstanding the buildup of inventories in both Minerals and ESCO to support an increasing order book. This has been achieved with a relentless focus on receivables collections and underlying inventory efficiency, which is underpinned by our Weir production system processes and supported by our investment in SAP and other systems. Working capital to sales has increased slightly, primarily reflecting the inventory buildup to support the order book in advance of revenue being recognized. Turning to the next slide. Free cash flow of GBP 45 million is GBP 20 million lower than last year, of which GBP 19 million relates to the discontinued operations year-on-year movement. Excluding this, free cash flow is in line with last year, with the impact of reduced invoice discounting being offset in the main by favorable CapEx, mainly due to GBP 12 million of proceeds from the sale of one of our Chinese properties as part of our efficiency program. We were delighted to see absolute levels of debt reduced by GBP 372 million since December, following the completion of the sale of Oil & Gas, leaving net debt-to-EBITDA at 1.6x on a lender covenant basis. As previously announced, we also completed our debut public bond in May with the successful issuance of $800 million of 5-year sustainability-linked notes with an all-in coupon of 2.2%. This opens up a new market and source of liquidity for us. It extends our debt maturity profile. And on maturity of our 4.3% coupon private placement debt in February 2022 and '23 will provide a significant interest saving. Very briefly, this next slide details a few financial matters for the balance of the year, with no significant change to my previous comments in March, other than the reduction in net CapEx from GBP 100 million to GBP 80 million, mainly reflecting the property disposals I mentioned earlier, with gross investment spend largely unchanged. In summary, we've been really pleased with the first half financial performance. We've delivered excellent order growth, margins have increased and the balance sheet is strong. These factors have given the board confidence to propose an interim dividend of 33% of H1 adjusted EPS, in line with our capital allocation policy. Thank you. And I will now hand back to Jon.

Thank you very much, John. In this section, I'll update you on the strategic progress we're making as a pure-play mining technology business, discuss the long-term trends that will underpin our future growth, and end with current market conditions and our full year outlook. One of the advantages of being a truly focused business is the ability to devote more management attention to those areas that will accelerate profitable growth in the future. These are enshrined in the way our Weir framework focused on people, customers, technology and performance. So let me remind you of the priorities we set out in March. As I've always said, first, we want to be a zero harm workplace. And we're determined to get there, building on the significant progress we've made in recent years. We also know the benefits of a highly engaged workforce, and that's never been more evident than during the COVID pandemic. I was delighted to see participation reach 90% in our recent employee survey, and our employee Net Promoter Score increased to a new high, reinforcing the vitality of the Weir culture. And we continue to invest in talent capability across the business from leadership development programs through the digital skills, leveraging new technology to give all our people the tools they need to do the best work of their lives. Looking to customers. Our goal is to grow ahead of our markets by getting even close to them through expansion of our service footprint. In the first half, we opened 3 new service centers in Canada, Kazakhstan and here in the U.K. Our Minerals Integrated Solutions strategy delivered GBP 134 million in orders in the first half, while the pipeline remains strong. And we're extending the integrated solutions approach to ESCO, with our smart bucket strategy that will provide a step change in customers' productivity. And will play a leading role in helping miners reduce their environmental impact with sustainable technologies that improve efficiency, while reducing energy, water and waste. In technology, we'll continue to invest in extending our existing product leadership, while working closely with customers through our tech connect program to ensure our R&D and innovation pipeline is targeted on delivering the solutions that our customers need. So far this year, we've opened 4 new regional control centers that allow our engineers to monitor equipment remotely. And one of which is the photo on the front cover of the slide. And we're accelerating our overall digital journey, embedding smart capability across the organization. And as we grow, we'll do it profitably, expanding margins by leveraging our platform capability and optimizing our operating footprint, which will increase capacity utilization while reducing our CO2 footprint. So let me give you some highlights on the next 3 slides. Starting with sustainability, which is a thread that is weaved through our Weir way strategic framework. And I'm really pleased with our progress this year. We're on our journey to net zero, with a clear road map that will first deliver a 30% reduction in emissions relative to revenue by 2024 and a 50% cut by 2030. I've been really impressed with the way the business has embraced this challenge. We currently have around 150 projects underway across the group to reduce our footprint, covering every business unit. One of the biggest changes we can make internally is to increase the proportion of power we consume from renewable sources. And we're currently evaluating a number of major power purchase agreements that could significantly reduce our Scope 2 emissions. We've also completed our first cut assessment of Scope 3 emissions, which confirms, that by far the biggest overall impact we can have as a business is by reducing the in-use energy consumption of our product portfolio. To help our customers, we've rolled out specific sustainability training for more than 500 engineers, are increasing R&D investment, and have partnered with data scientists to create a tool that demonstrates the energy and water benefits of our key product lines. And the pull for these benefits from our customers around the world is increasing. The large dewatering project mentioned by John in Indonesia was driven by sustainability concerns and will involve the replacement of a whole fleet of diesels with electric pumps. As promised in the second half, we will assess the adoption of science-based targets and net zero pathways. And we'll report our progress and evolved road map with our 2021 results next year. As ever, we're taking a comprehensive approach to ensure when we make a commitment, we have a clear plan to deliver it. Turning to technology. We are fully aligned with our customers' top priorities. So we are evolving our existing products to help them to produce more, while reducing energy, water and waste. ESCO's smart bucket strategy aims to transform what used to be unintelligent steel into an intelligent productivity tool. Using real-time data analysis, it will monitor wear-life and support preventative maintenance, thereby reducing cost and bucket downtime. It will improve the performance of both the excavator and the haul truck by optimizing payloads. And it will automate previously manual processes, driving improved operator safety. In Minerals, initial trials of the new Warman mill circuit pumps have been very successful, delivering improved total cost of ownership and reduced water consumption. And our new Cavex hydrocyclones significantly improved first pass yield, delivering up to 30% more capacity, while also reducing energy consumption. All of our major product groups are now digitally enabled. And across the group, we've had our digital and data road maps independently assessed, and are accelerating adoption, ensuring we not only defend, but extend our strong market positions. Our aim is to ensure digital becomes a stronger differentiator as our market -- material science capabilities. Digitalization will also support our margin expansion objectives as we combine enterprise-level tools with the Weir production system to drive efficiencies across our operations. ESCO is seeing early benefits from its digital supply chain initiative, which will provide improved end-to-end visibility to both Weir and our customers. Minerals delivered a 2% increase in on-time delivery in the first half despite global supply disruptions, supported by the globalization of its enterprise resource planning system, which is part of a program of consolidation of our software platforms across the group to improve visibility, consistency and support synergy and waste reduction. We're also optimizing our manufacturing footprint, upgrading our larger facilities to support future growth, while rationalizing excess capacity where we have it. The recent investment in our Australia Heavy Bay Foundry would increase its capacity by 40%, while the sale of an oversized facility in China will help reduce under-recoveries. Our refreshed lean initiatives are delivering improved machine utilization across our global operations, while we're also continuing to diversify our best cost sourcing capability, including expanding capacity in Mexico and Brazil. These operational improvements are being achieved while, at the same time, we enhanced organizational capability through new leadership programs and extensive digital learning and development opportunities that are available to all employees. So as we continue to focus and sharpen our capabilities, our margin expansion targets will be underpinned. Let me now turn to the market conditions, where I think it's useful to spend time on both for long-term fundamentals and also what we're seeing on the ground in our markets today. But let's start with why we are so excited about the future. As the world develops, it will require more resources to support population growth, urbanization and rising living standards, while at the same time, ore grade declines mean more ore needs to be processed to extract the same minerals. As the economy decarbonizes, it will need more clean energy, metals like copper, nickel and lithium. Renewables are rapidly increasing their proportion of world energy supply, fueled by demand for electric vehicles, solar and wind, which all require much more metal than their fossil fuel alternatives. At the same time, the mining industry's recent commitment to capital constraint means that current and planned copper production will be insufficient to meet the demands of this decade, never mind net zero by 2050. And as demand increases, so too does stakeholder pressure on miners who have set ambition to become net zero by 2050, requiring that technology transformation to electrify operations and transitions to renewable energy significantly reduced in used energy consumption while also minimizing water consumption. Take comminution, which is one of the most intensive processes in mining. Significantly reducing its energy and water consumption has to be tackled head on, and is one of the reasons we're getting industry-wide traction in our Enduron HPGRs. We believe these trends present multi-decade opportunities for Weir, and it's why our innovation pipeline continues to be so focused on them. Moving to current market conditions, which are very good in both mining and infrastructure. If we look at mining OpEx, where we generate the majority of our revenues through the aftermarket, we see miners focused on maximizing production to benefit from near record commodity prices, supporting underlying spares demand. However, ore production is still not yet fully recovered to pre-COVID levels in every region, so we certainly see the current trends continuing. Also, the focus on maximizing production and ongoing site access issues in some areas means we're still seeing maintenance deferrals. And there will be a catch-up when equipment can no longer be just catched up. Looking at mining CapEx. We've seen good activity in smaller brownfield opportunities, especially where they debottleneck operations and provide quick paybacks without disrupting ongoing operations. On the flip side, larger brownfield opportunities, which are plentiful in the pipeline, are still proving quite slow to convert, given that typically they are disruptive to the existing operations. We're also seeing greenfield activity increasing as miners extend exploration activity, especially for clean energy metals, and the dusting off on-hold projects in line with the supply shortage concerns I mentioned earlier. And we've seen 1 or 2 cases of very rapid surprise reactivations. So overall, mining markets are positive. Our momentum is increasing. We are traditionally slightly late in the cycle than some peers, but we are now seeing an acceleration in demand for both our longer lead time products and our shorter-cycle technology, in line with previous expansionary periods. Finally, on infrastructure markets, which continue to recover strongly, underpinned by residential completements in North America and Europe and stimulus plans from governments around the world. So we're in good markets, with great prospects. But there are short-term challenges we need to continue to manage. So turning to the full year outlook. And most importantly, we continue to expect to see strong order growth as markets recover further. But the world today is not straightforward, and we're still managing ongoing disruptions from COVID and supply chain constraints. However, as we have done in the first half, we believe these issues can be fully mitigated. Alongside that, we'll continue to execute strongly on the efficiency program to deliver good underlying margin progression year-on-year, with second half margins broadly similar to the first half. Overall, we continue to expect to deliver growth in constant currency profits and margins in line with our and current market expectations. So beyond the very encouraging short-term trends we're seeing, let me just finish with what I think are the key messages that now underpin our investment case. Weir is a premium mining technology business that is clearly benefiting from its increased focus. We have a critical role in making mining more sustainable and efficient, and are ideally positioned to benefit from the multi-decade opportunities ahead of us, underpinned by global carbon transition and demographic trends. We have a clear strategy to grow ahead of our markets, supported by our own organic initiatives. And we'll achieve that growth in a disciplined way that delivers long-term value for all our stakeholders, underpinned by our strong culture and a 150-year record of seeing things differently. Thank you, all. And John and I would now be delighted to take any questions you have. So back to you, operator, please, for those questions.

[Operator Instructions] And our first question is from the line of Arsalan Obaidullah from Deutsche Bank.

Just one. First one is on just a comment on margins, and you talked about it sort of being flat H2 versus H1, which does -- I guess, at the group level, that sort of suggests a bit of downside to where sort of the consensus is sitting. So just wanted to understand a bit more about that. And also, just generally sort of looking at margins, how we should think about it for both Minerals and ESCO H2 versus H1. It's the first question. Second one is just looking at ESCO and the performance for the half, again, versus sort of the expectations. The sales sort of seemed a little bit disappointing and the sort of profitability as a result as well. Just wondering, was this more driven by, as you highlighted, maybe more one-offs and disruptions? Or are there sort of broader challenges in terms of delivery that you're seeing for projects there.

Okay. So I'll give an overall comment about margin and then the ESCO sales point and then I'll let John give some detail on the margins. But I think, first of all, on margins, our guidance is exactly the same as it was and where consensus is. So we're expecting to deliver what we said we would deliver on margins. There's clearly a lot of moving parts. And the first half benefits from some of the temporary savings. But I think we're expecting to be bang in line for the year, so just to be clear on that. The ESCO sales point, I think, obviously, we're very pleased with the order progress. And then -- but what we've seen is that we have seen some disruption. Clearly, from a supply chain point of view, ESCO does have a major facility in China, and freight from China has been a problem in the first half of the year. Plus we see, initially, the bounce back in infrastructure has been stronger than the bounce back in mining. So we have to change the mix of production, which will also create a lag effect in what we can ship. So there's just a couple of features there, which mean the revenues probably just lag the orders a little bit. But as I said, the good thing is the orders have come back really, really strongly and see it bounce back to sort of 30%-plus year-on-year in the quarter is just exactly where we wanted it to be. So I'm pleased with that. And the order book means the revenue will come as we sort of work our way past those slight disruptions. John, on the detail of the margins.

Yes. Thanks, Jon. In terms of the -- your point between sort of first half and consensus, I mean, I think it's negligible there. So in sort of positioning for the year-end, I think that's all in the round. There's no intended difference from our guidance, so that's consistent with what we've said before. In terms of just thinking from the first half to the second half, margin has been broadly stable in Minerals. Clearly, as I said in my prepared remarks, the mix is going to move more towards OE in the second half. So that will be a bit of a headwind. Clearly, volumes will be higher, which will -- should broadly offset that mix headwind with the flow-through benefits. Then you go to unwind the small one-offs that we had in the first half of the year and a little bit of extra R&D. So I think in the round, those are the moving parts as we see moving from first half to second half. In ESCO, again, as I mentioned, we did have a bit of a benefit in the first half from the phasing of price increases to customers versus raw material price increases. Given the way our purchase contracts work, that will reverse through the second half. And again, we would expect continued returning of those prior year cost savings in respect of bonus and travel, et cetera, as we move through the second half. While there is still COVID disruption around, we look at North America, for example where traveling pretty much is normal there, so that those costs are all starting to come back that we said last year and for the first half was sort of temporary benefit to ESCO's margins. But in round, no change to what we thought and in line with first half and market expectation.

Our next question is from the line of Will Turner at Goldman Sachs.

Given that you just answered some questions on margins, which I want to focus on the order intake outlook. And in Minerals, you've highlighted how you see some potential kind of pent-up demand from delayed maintenance. And so I think it's pretty reasonable for us to assume that the aftermarket for Minerals could see an acceleration in order intake. But how do you see the outlook for the OE business, especially given you've had a good first half? And do you see any potential for any further large orders in the OE business? And I don't know if it's -- I know you said it's a bit early, but have you got any indication to -- from customers of any 2022 expectations for their OE?

Yes. Thanks for that. Yes. You're exactly right on aftermarket. As we move -- obviously, the second quarter is always the highest quarter with the multi-period order that we get in Q2. But if you think about Q3 and Q4, we're going to be moving into a period where we've got quite weak comps. Ore production is still moving back up to pre-COVID levels. In some regions, I think copper is down 2% so far this year. There's more to come there. Plus, the deferred maintenance piece you talked about. So we expect the aftermarket growth in the next 2 quarters to continue to move positively. And we'll deliver strong prints, I expect, in terms of the growth. That's going to be in double-digit growth probably in the third and fourth quarters. OE, I mean, I think the pipeline is very vibrant. So we expect it to continue to be so. Some of the -- as I mentioned in my commentary, we expect some the larger brownfields will convert and continue to get good progress with the smaller brownfields as well. So there aren't any sort of GBP 30 million-plus projects out there, but there are quite a few in the sort of GBP 20 million to GBP 30 million range alongside the normal smaller ones as well. So my expectation is that the original equipment orders will continue over the next few quarters to be very strong. Whether it -- exactly how they phase through the quarters and whether it's '22 or -- '21 or '22, there is always a question of that. Things do move around a little bit. But my overall expectation over the next few quarters is that we will continue to see OE running at pretty similar levels actually in terms of the order intake.

Okay. Great. And ESCO, on ESCO, you touched about how there was a bit of an issue with the shipping of sales. So I think, in the second half, should we expect that the sales growth will be faster than the order intake growth? That's my first question. And then the second one, you mentioned earlier in the call about maybe a potential destock in ESCO. Is it possible you can quantify the magnitude of that because similarly, like ESCO has a lease for order intake, a relatively easy comp for the second half. So again, I think should we be expecting, again, good strong growth from ESCO? Is that destocking of big quantifiable amount that is right for us?

Yes. So I think the ESCO book-to-bill will moderate somewhat in the second half of the year as we catch up with the orders. That said, as we said, I mean, it's a challenging world out there at the moment with the supply chain and freight issues that we're still managing. I think we've done a great job of mitigating that in the first half. We continue to expect to do that. But yes. So I do expect that the revenues will catch up with the orders, and we'll see a much stronger second half in terms of revenue delivery. The destock, I mean it's not quantifiable, well, it's -- we flagged the infrastructure orders in the first half of the year were surprisingly, incredibly strong. And we think some of that is the restocking. So it's not a destocking. It's just that restocking effect will fade a little bit as we go in through the year. But it remains to be seen. I mean, so far in July, it's continued to be very strong. So it's just a slight note of caution that tailwind that we've seen in the first half in ESCO will -- may fade. But equally, the mining part of the GET is still on an upward trajectory. But yes, difficult to quantify.

Yes. Great. That's very clear. And then just my final question, and a bit of a broad one. You've mentioned some of the supply chain disruptions. And obviously, you do have like presence in South Africa and North America, where you mentioned that simplification. Have you found that these supply chain disruptions, some product shortages or maybe labor shortages in India, have you found that the operation are getting worse? Or is it generally getting better in terms of those disruptions?

I think it's got worse through the first half of the year. And I'm hoping it doesn't get any worse through the second half of the year, but it's still quite challenging. If you think about it, all of the freight dislocation, I'm sure you've talked to many companies about it. But you've got the impacts of the sewer situation. You've got containers in the wrong ships in the wrong places in the world following last year. So actually getting space in the container out of China is hard work at the moment. And when you do, a container out of China to the West Coast, the 40-foot container is now $20,000 and it was $2,000 a year ago. So the costs have gone up remarkably. But look, I think as I said, we've done a great job managing it. We're very sophisticated in terms of our supply chain capability. We've mitigated all of that inflation in terms of being able to pass it through the customers. And we'll continue to do that. But yes, it's not a straightforward world by any stretch.

Our next question is from Lars Brorson at Barclays.

If I can maybe just start by following up on the earlier question around margin trajectory for the second half, but specifically on price cost. I wonder whether, John, you're able to quantify the price cost tailwind in the first half to ESCO, and conversely, also the reversal of that or headwind in the second half. And just clarifying that, that is just for ESCO, not for group. I would have thought there would be some price cost impact, particularly Minerals aftermarket such as midlines. But if you could help us quantify that and talk a little bit about the price/cost cadence from here. When do you expect full mitigation on some of these raw material and logistic cost headwinds you're facing in the second half?

Lars, thanks. Yes, in terms of the scale of that sort of benefit in the first half, I mean, it's modest in absolute terms, been very low single-digit millions. But in terms of ESCO margins really, given the scale in that can move it by small tens of basis points. So it's not significant. But in the context of ESCO margins, it was just worth mentioning. So it's not big in absolute terms. And in terms of the recovery, as we said, we're confident that we have and will over the course of the year really recover those inflationary costs in ESCO. We put through additional price increases to customers. So we were ahead of the curve. We were early with the price increases. And some of the more OE related product, like blades and buckets which are much more intensive in terms of steel plate which I mentioned are -- is where we've seen the greatest inflation, actually, what we're doing is then surcharging as well. So where we've seen super inflation in North America, we search our customers. So it's all visible. It's all clear. And as and when prices start to moderate, that straight off again customer invoices. So in the round, Lars, small in terms of the H1, H2 flip, but what made interesting just because it's got an impact on margins, and we remain confident that we're truly recovering everything, and expect to continue to do so through the second half.

Helpful. Secondly, can I ask -- Jon, to ESCO. I think when we talked after Q1, I think you reflected on the first quarter being somewhat adversely impacted by weather in North America. I think the message then was we were expecting a sort of sustained sequential recovery through 2021. Now it appears to me, I think the language is restocking effects set to moderate or book-to-bill set to moderate in the second half. I wonder how you sort of see the outlook for ESCO at this point? I guess mining is on an upward trajectory. But is there anything in how you're managing the business in terms of selectivity, or otherwise, that might explain that sort of perhaps, at least from my standpoint, slightly underwhelming growth trajectory. I also note some of the big OEMs like Caterpillar, I think, are pushing a bit harder on consumables. So anything from a competitive standpoint you might reflect on, that would be helpful.

No, I think I'm delighted where our store is and I would say [ 30% ] growth in the second quarter is exceptional. The mix is going to change. Our point is the mix is going to sort of shift back a little bit more towards mining, i.e. infrastructure was probably stronger than we thought it would be in the first half. Mining probably offsetting that slightly because the machine utilization was slow to come back. But we'll see that mining piece of the business develop more positively through the second half of the year. A question over infrastructure, as I've talked about, as to whether that moderates, but clearly, we're -- just as I said, for Minerals, we're moving into a period of quite weak comps. So we're going to continue to be delivering. Growth level is probably at sort of similar level in the second quarter. And then overall, probably an improvement in the second half over the first half. So I'm happy with where we are. And the focus sort of take that down in terms of market share. So we're the price leader. So we led on the price increases, and others have now followed. So I don't worry that we're out on a NIM from that perspective, we are winning in the marketplace in terms of net conversions on machines and growing market share. We monitor very, very closely. So I'm very happy with where ESCO has gotten to and where it will go. And as I said in my speech, what we've been talking about is the sort of smart bucket concept because it's going to be a new leg approach as we think in a much more sophisticated way about how we can help improve the overall performance of the machines that our fees and budgets are connected to, and we're pushing really hard into that space. We do expect real growth of that in buckets rather than GET as well. So if you took any caution from the earlier comments, probably should understand.

Understood. And third and finally, if I can, just maybe a word on tailings. It seems to me, we've had a couple of interesting announcements of late. Rio yesterday on their agenda product in Serbia on dry stack tailings. I think Metso had a big order a couple of weeks back. You talk about water solutions in the report, but can you update us specifically on tailings? And specifically, I guess, with Andritz, are you still working with Andritz around Isodry? And how is that rolling out, if at all? And how are you targeting that tailings opportunity more broadly? And am I right, sorry, just to be a little long winded. Am I right in saying we are starting to see more momentum in terms of actual order intake around tailings solution?

Yes. It's a great question. So yes, we are continuing to work with Andritz. We've sort of took the agreement based on how it went thus far. So -- but we're very happy with the way that we're going to market with Andritz now. We do have big tailings and dewatering opportunities in the pipeline. So yes, we do see that as a focus area at the moment. And I won't mention projects from a commercial point of view, but a cost of big opportunities that you will be aware of, and then we expect that to be a theme that we're playing into, with both our technologies from a tariff line point of view, but working with Andritz on the more sort of traditional dewatering type process as well. So to my earlier comments, the timing at which those orders and projects might come through, being sort of in the lumpy OE nature is variable, but we're definitely expecting to see progress in that space.

Your next question comes from Robert Davies at Morgan Stanley.

The first one was just following up. Maybe I just got confused with your comment on the sort of similar level of growth. I think you mentioned on the OE and double-digit on aftermarket. Just the thing I wanted to pick up was 3Q versus 2Q last year, so particularly in Minerals sort of sequential decline. I think it was more than 25% on the original equipment side and mid-teens in aftermarket. So just wanted to make sure I wasn't missing something that in terms of -- is that sort of typical sort of seasonality that you're expecting to come off 3Q versus 2Q? Or just if you could go into that, that would be my first question.

Yes. So obviously, from an OE perspective, it's just lumpy. And obviously, the second half of last year was quite weak as everybody was sort of focused on preserving cash and not many projects are coming through. So as I said, I expect that we'll see a similar level as we've seen in -- so far this year through the second half. Q2 aftermarket is always [ up ] in the year because, as we mentioned, we do get quite a big multi-period order each year that sort of comes through in that order that we book in that quarter. So aftermarket, Q2, Q3 will drop sequentially, but Q3 over Q3 last year will show very strong growth because of that weak comp, plus the other factors that I mentioned in terms of [ momentum ]. Is that clear?

Yes. No. That's clear. And then just, I guess, on a medium-term outlook, given the movements in sort of raw material prices and freight costs and everything you sort of -- you've already obviously done quite well on the ESCO margins amid probably faster than -- certainly than I expected sort of progress there. Just sort of looking forward and thinking about the OE, aftermarket mix, which could become quite material in the next couple of years, the progress you made on ESCO. How are you thinking about the evolution of margins at the group level? Is it sort of a relatively flattish or modest trajectory from here given the OE mix? I guess a little more color on the medium-term margin outlook would be helpful.

Yes. I think we're -- in March, we set out our 3-year goal for the group margins to improve them by 150 basis points. Obviously, we made good progress on that in the first 6 months, albeit helped by some one-offs and sort of phasing thus far. But we're very much on track to deliver sort of 50 basis points of that 150 this year and the remainder over the following 2 years. We did say in March that is dependent on the OE aftermarket mix staying where it has been. So I think the only thing that would moderate that is if OE does come through very, very strongly and sort of radically alters the mix. But clearly, as you know, it's a real high-quality problem because that's going to generate the installed base and future aftermarket revenues. So for now, we feel we're on track to deliver the 150. And I'm very, very pleased with the progress that we've made so far.

Okay. Great. And then my final question was just you've obviously put quite a lot in your slide deck in the last year or so around sort of sustainability and energy efficiency. I'd just be interested, in terms of the engagement you're having with customers around some of those products, and I guess the way you can kind of price through it, are you still able to get reasonable sort of pricing on those products? Is it sort of an incremental cost to you to put those products into the market to begin with? Or can you price them at the same sort of cost as your existing products or even more if you're sort of saving them money over time? How do you price them as new products that are specifically targeting energy efficiency metrics?

Yes. I think, overall, we continue to sell, as we always have done. And yes, total cost of ownership is still very important to our customers. So what we're seeing, that still forms an important part of the conversation. But then if you can back that up with sustainability prudentials, i.e., CO2 footprint, reduced energy consumption, reduced water consumption, then that is a question that is now being asked locally on mines, i.e., sort of filtered down through the mining organizations, and it is an important question that they want answered. So it is becoming part of the buying decision. And of course, that's very much playing into the capability of our products. Fundamentally, if you are able to offer the lowest total cost of ownership, it's also likely that you are offering the lowest CO2 footprint compared to the competition as well. So that's something that we're very cognizant of, and pushing very hard in terms of our marketing. In terms of pricing it, does that help. I think in certain cases, it will. But the OE dynamic does remain, everybody fights very hard for the installed base and to win the original equipment orders because of what that delivers over time. So we're using it to try and improve pricing where we can, but I wouldn't say it's a huge factor in the decision at the moment in terms of us being able to generate more it is becoming an increasingly important part of the buying decision among our customers.

And then just a final one, if I could squeeze in. Just around mid -- Jon, around sort of working capital movements and cash. Just post the sale of Oil & Gas, what do you think the potential sort of working capital benefit sort of cash uplift that you could see for the overall group from moving from the sort of 3 divisions to 2 division structure? Just we get quite a lot of investor questions obviously around return and cash profile as a pure-play mining business.

Yes. Thanks, Robert. I think as I said back in March, we're -- with the sale of Oil & Gas, I think we see a much more straightforward working capital profile, but roughly 22%, 23% of sales at the end of December for the reasons I described. In terms of inventory, we're about 24% at the half year. And I think that's a pretty good place to be. So as being in that sort of low 20s is appropriate for us as a mining pure play. And you'll see the absolute levels of working capital move up and down with volumes. And on that note, we've seen the GBP 40 million outflow in the first half of the year. And I would expect that on a full year basis, it probably stays at or around that level. As we ship a lot of these big orders later in the year, the inventory will still be there on our balance sheet as receivable. And given the order of trajectories that we've been talking about, of course, we'll be building order book for next year as well. So I think there will be [indiscernible] as the business grows, but staying much more consistently at that low 20% is where we stand now as opposed to the much more significant volatility that we used to see with the Oil & Gas division.

Our next question comes from Max Yates at Credit Suisse.

Just my first question was around the -- you mentioned some benefits or you were working on sort of productivity, new IT system, benchmarking some of your plants and then also back office costs. Would you be able to give any quantification around kind of how much this may have yielded in H1 or how much it might yield for the first half? I just don't think I've sort of previously been aware of -- I know you're doing it, but what the sort of specific benefit might be?

Yes. I mean, look, I think I would say the headline, Max, is that it underpins the margin targets that we've set for ourselves is one of the moving parts in there. And it will deliver benefits that will enable us to meet those margin targets. We are -- we've got a degree of elevated costs this year as we go through our sort of IT rationalization and transformation. Some of that will fall away next year. But then once we've got that in place, we're then going to start to really drive even harder on shared services. We've now got SAP in most of the regions. In Minerals, we're just about to launch Phase 2 of our global HR system, both businesses are now on salesforce.com. So we put in place all of these foundational platforms and invested in that. And that is going to -- and now we're moving into a period of benefit realization and really driving the capability in terms of visibility, automation for that -- and improved quality and risk management that those systems are going to allow us to have. So probably outside in, you don't appreciate the amount of work that we've done over the last few years to get those systems in place. And as I say, we're now moving into a phase where we're going to deliver the benefit of those. But there are many moving parts in the margins. So I'll just leave that it will underpin what we will deliver over the next few years.

Okay. But I guess it would be fair to say that we sort of haven't seen much of a benefit, and the benefit from that is largely to come. Is that a fair conclusion?

We're already delivering on shared services in IT and some finance shared services, but it's probably fair that there's more to come.

Okay. Just my second question was around the electric pump order or the conversion order for the electric pumps to diesel. I just wanted to understand kind of how big that opportunity could be. Because it sounds like, given everything miners are talking about kind of trying to be more efficient now have sort of a lot of emissions targets. Is that sort of the first one of these orders in the market? These electric pumps are kind of very new technology? Or is it more that you've just developed this sort of technology so this is your sort of first order in converting these pumps? I'd just love to know kind of any detail around kind of what proportion of pumps out -- dewatering pumps out there are electric and whether kind of going conversions could be a big theme in the next 5 years.

I think that the order in Q2 was fairly unique given the scale of it. You see mines which have very large fleets of these dewatering pumps, where in very wet parts of the world, obviously. So it's -- most mines will not have that many dewatering pumps, certainly, the surface mines that we mostly operate in. So I think it's pretty -- we'll see probably a continued trend, but I wouldn't expect there will be more sort of GBP 30 million-plus orders for that kind of conversion. That was a fairly one-off in nature just given the size of the fleet of pumps in that particular mine.

Okay. And maybe just sort of 2 very brief kind of housekeeping points. You mentioned kind of the -- obviously, GBP 80 million CapEx, but GBP 100 million still kind of underlying. I just wanted to understand whether that was a kind of -- that was viewed as now a normal amount going into sort of 2022 and 2023. Or you see that amount this year as sort of more elevated related to some investments you're making.

Yes. Thanks, Max. I think that is elevated for the next year or 2. You'll remember that we talked about starting this year our new foundry in China for ESCO. So that -- that's keeping the CapEx a little higher this year and into next year. The final tranche of that systems investment that Jon just described across ACP, we're into sort of final 20% or so of that now. So that continues for the next year or so. And then we'd expect to drop back in closer to more towards maintenance depreciation. So for this year next, I think those more elevated levels and then refer to more maintenance thereafter.

Okay. And just a very final housekeeping. I mean, sorry to sort of labor this margin point. But I just wanted to understand. In your prepared remarks, when you talked about Minerals margin mix and some of the moving parts becoming more challenging for H2, were you indicating that sort of H2 kind of versus H1 margin seasonality might not be as positive as previous years? Or were you actually sort of mentioning that margins would be broadly flat in Minerals H2 versus H1? I was just a bit unclear whether you're flagging some headwinds or actually flagging some close to flat margins H2 versus H1 in Minerals.

No. Sorry, if there was any confusion. Hopefully, it was clear that margins, we expect to be flat H1 to H2. Minerals, obviously, the biggest part of the group, that absolutely holds true for. I think if there was anything in my remarks that we're seeing, that we'll continue to see those logistics and supply chain and freight options. But as we did in the first half, we're highly confident of mitigating those. So the clear message is that Minerals margins we expect to be flat in H1 to H2.

Our last question comes from Edward Maravanyika from Citigroup.

Most of my questions have been answered, but I just had one on the comment in ESCO for infrastructure markets recovery in North America and Europe. Could you just provide a little bit more color in terms of the expected duration of that infrastructure markets recovery in both regions?

Yes. Look, I mean, as I said earlier, it's been a very positive first half of the year in those markets, driven by the rebound in activity plus the distribution that we talked about. Led by the U.S., that's been the strongest one. Europe also catching up. When you then think about the stimulus spending that is coming, then that is just a positive for that -- for those markets. So we expect that it will continue to be a very positive environment. And if that stimulus spend sort of comes through multiple years, then it will remain that way. So that's certainly what we're hoping for at this point in time. So yes, I mean, the only moderation point I talked about is that the restocking that we've seen in the dealer distributors will slow down. Obviously, these things come and go. But I expect those markets to remain positive from an activity point of view for some time to come, supported by that stimulus spending.

We have no further questions on the call, so I will hand the floor back to Jon and John.

Thank you. Thanks very much, everybody, for participating. I appreciate you joining the call on what is a very busy day from a reporting point of view. I understand that. But I do appreciate your participation. Obviously, do get in touch with Stephen if any follow-up questions. And enjoy the rest of your day. Thank you, all.