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

Good day, and thank you for standing by. Welcome to The Weir Group PLC Q1 IMS. [Operator Instructions] I must advise you that today's conference is being recorded. I'd now like to turn the conference over to your first speaker today, Mr. Jon Stanton. Thank you, and please go ahead.

Thank you, operator. Good morning, everyone, and thank you for joining us for our first quarter trading update. As usual, I'm joined by our CFO, John Heasley. And after a short overview from me, we'll be delighted to take your questions. Let me just start by updating on our colleagues in Ukraine, who I'm pleased to say are all safe and well. We're staying in regular contact with them and supporting them in whatever ways we can. They are showing tremendous spirits. And some of the team have actually chosen actively to return to work at our site, serving our customers and keeping business operations running as best they can. Our thoughts remain with everyone affected and I continue to hope for a very swift and feasible end to the hostilities. I'll say more on the impact of the current situation on our business shortly. But first, let me give you a summary of our progress in the first quarter. We have made an excellent start to the year and continue to grow our orders to reach an all-time high with total constant currency orders increasing by 15% year-on-year, while they were up 1% sequentially on Q4 of last year. Conditions in our main markets are still extremely favorable driven by continued strength in commodity prices. For our main exposures of copper, iron ore and gold, prices remain at near record levels, so our customers are highly incentivized to maximize production and machine utilization. This drove very strong demand for aftermarket with orders up 28% on the prior year and 3% sequentially against a very strong fourth quarter of 2021. Original equipment or OE orders were 17% lower than last year due to a strong prior year comparator. You will recall the GBP 34 million OE order from Ferrexpo that we booked in Q1 last year. Adjusting for that, our Q1 OE orders this year are well ahead by 8% on a more like-for-like basis. In the current environment, miners are doing all they can to run and avoid any downtime. OE order trends in the first quarter have reflected that with most demand coming from small and medium sized brownfield expansion and debottlenecking projects, whereas larger expansion projects remained slow to convert. The Group's book-to-bill was strong at 1.22, reflecting the record order intake, excellent aftermarket revenues and the good progress we're making in executing on our OE order book. As you know, input costs continue to rise, but once again, we have successfully managed these by further price increases and surcharges and through the operational efficiencies we're continuing to drive across the group. Alongside that, I'm pleased [ at the ] good job that the teams are doing in managing the disruption in global supply chains from COVID and labor shortages. I'll now move on to give you some more details on the performance of our divisions starting with Minerals. The division saw orders increased 9% year-on-year. The growth was driven by the aftermarket, which was up 23%, supported by a general trend towards lower ore grades and increased equipment utilization. This means more wear and tear on equipment, which has had a positive impact on aftermarket demand. That demand has been strong across all regions. And we've seen a good bounce in markets that were a little softer last year, such as Latin America or Australia and in the Canadian oil sands, where increased activity has been supported by buoyant oil prices. We've also seen some customers forward-purchasing given their strong cash generation and general concerns on supply chain. In such a high commodity price environment, miners seem quite happy to spend to derisk their production targets. As I mentioned before, last year's Q1 orders were distorted by the large Ferrexpo order. And so as expected, Minerals OE orders for this year's Q1 were lower, down 18%. But adjusting for Ferrexpo, they were up 11%, which reflects the higher volume of smaller orders for equipment to debottleneck existing assets and to expand capacity of brownfield sites. As COVID restrictions on mine site access have eased, our engineers have been able to spend more time on site to support our customers in identifying productivity improvements through our integrated solutions approach. The combination of customers focus on current production, together with environmental considerations means that larger expansion projects are remaining slow to convert, although the pipeline remains good. From an operational perspective, while our supply chains continue to be disrupted by the impact of COVID-19, our vertically-integrated regional model meant the division continued to execute well and made good progress on delivering the order book. A further spike in input costs after the Russian invasion of Ukraine is already being mitigated by a further round of price increases. Divisional revenues were strongly ahead year-on-year and the book-to-bill ratio for the quarter was 1.21. Let me now turn to ESCO, where the division benefited from a highly positive trends in mining and also from strong demand from infrastructure applications, consistent with the usual seasonality. This contributed to growth in orders of 32% on the prior year and 15% sequentially to record levels for the division. That includes a good early contribution from Motion Metrics. If it was excluded, ESCO's first quarter orders would be still increasing by 27% year-on-year and 11% sequentially. High mining machine utilization rates, coupled with some forward purchasing drove the division's aftermarket orders up 37% in the period. We continue to see good conversions to the next-generation Nemisys ground engaging tools, demonstrating our market-leading technology and total cost of ownership benefits to customers. Like Minerals, ore markets were strong, and ESCO is also implementing a second round of price increases to further offset input cost inflation. This strong performance has been delivered against a challenging operational backdrop caused by the ongoing pandemic. At the start of the year, staff absence due to COVID and quarantining was high. And through January, we had around 15% of our staff absent at any given time. Later in the period, mandatory COVID-related lockdowns in China forced the temporary closure of the division's foundry in Xuzhou. We're now up and running again. And while the situation with COVID continues to evolve, the division currently expects to manage the recent impact through the rest of the year. The integration of Motion Metrics is going well. And we've seen some pleasing early orders for its technology, including those where we have leveraged the ESCO and broader Weir brands to secure new business. ESCO's revenues were strongly ahead of last year, and its book-to-bill was 1.23, the highest since we acquired the business back in 2018. This reflects the record order intake and good execution against the complex backdrop I just described. Moving on to Russia. When I spoke to you back at the beginning of March, events were beginning to unfold on Russia's invasion of Ukraine. Just a few days after our full year results, the Group took the decision to fully suspend its business in Russia. Our business there comprises a sales and service organization with 267 employees. The majority of whom sit within the Minerals Division. We continue to put their welfare first, and I know this, too, has been a challenging time for them. I want to acknowledge the great work they have done over many years in growing that business. However, given the evolution of the situation in Ukraine and Russia, the Group has since taken the decision to wind down its Russian business during 2022. And while winding down the existing order book is complex, the Group is acting in line with its values, with consideration for all stakeholders and in a manner which considers its legal and contractual obligations and ensures continued compliance with all the relevant sanctions. The impact on our numbers of winding down the business remains fluid. But the loss of sales in 2022 is expected to have an impact on Group underlying operating profit of up to GBP 20 million in the year. From a balance sheet perspective, the Group's assets in Russia are mainly inventory and receivables, and represent around 2% of the group's net assets. We are driving to optimize recoverability of these balances as we wind down the order book, but this could result in an exceptional write-off later during 2022. Now a brief comment on net debt at the end of the quarter. Net debt was higher than that reported at 31st of December 2021, reflecting the impact of translational foreign exchange and normal seasonal patterns. Before I close, I'd like to say a few words on our strategy and on how we see the outlook for the remainder of the current year. We believe the long-term growth drivers for the group remain firmly in place, driven by decarbonization, and broader economic development. Recent developments will arguably see these drivers strengthen as the world looks to increase access to supplies of natural resources from other regions and push us forward with lower-carbon technologies that reduce dependence on fossil fuels. We are continuing to increase our investment in technologies that will enable our customers to meet their sustainability commitments while delivering the natural resources essential for net zero. We also continue to develop our vertically integrated regional supply chains on which our customers rely for consistent timely delivery throughout these complex times. As of now, we expect the current strong market conditions to continue, and we're well placed to continue to manage the ongoing COVID disruptions and inflation. As I look ahead to the rest of the year, subject to the ongoing geopolitical uncertainty, we expect to deliver strong growth in constant currency revenue and profit in 2022, in line with our previous expectations, but adjusted for the impact of loss of sales in Russia. For the full year, we expect margins to show good progress towards our medium-term target. And as we explained back in early March, our margins in the first half are expected to be lower than the prior year due to the mix and the one-off positive impacts we called out in the first half of 2021 before strengthening in the second half. Cash conversion targets remain on track too, and there will also be a slight weighting to the second half given the strength of the order book and working capital phasing. So let me close by summarizing the key takeaways. We've had a great start to the year with record order levels driven by a very strong aftermarket performance as miners remain highly incentivized to maximize production. Our teams are doing an excellent job in managing inflation and supply chain risks. Current market conditions continue to be highly favorable and the long-term fundamentals of our markets remain very positive, underpinned by structural trends. And we remain firmly on track towards our medium-term performance goals to grow faster than our markets, expand our margins and deliver strong cash conversion while driving towards zero harm and delivering on our sustainability commitments. Thank you for listening. And John and I will now be happy to take any questions you have. Back to you, operator, please.

[Operator Instructions] Our first question comes from the line of Klas Bergelind.

A couple of questions from me. The first one is on the cash flow guidance. I want to understand the progression here, the 90% conversion for the year. I mean most companies have struggled with working cap at the start of the year on the back of the renewed lockdowns over in China, the strong growth, of course, which is time working cap. Have you seen something similar? And therefore, do you think that you can still recover the lost ground from the cyber incident, et cetera, to still reach the 80% to 90% conversion over a weak first quarter?

I'll take that question. So in terms of the cash flow guidance, no change to our base expectation of 80% to 90% free operating cash conversion for the year. As Jon just said, we did see an increase in net debt in the first quarter. That's quite usual for us as nonseasonal working capital path at least. And as I said, we effectively -- you remember last year, we had -- we had about GBP 100 million outflow of working capital for a couple of specific reasons. One, the phasing of revenues towards the back end of the year due to the cyber incident; and secondly, the build of our order book meant that we were building inventory. So effectively, as we go through this year, we will grow into that higher level of working capital, which means that we don't expect any significant cash flow impact from working capital over the full year, notwithstanding the sort of logistical and supply chain challenges that you described. So in summary, no change to the 80% to 90% target.

All right. That is encouraging. My second one is on the order intake, effectively, a low to mid-single digit prebuy effect in ESCO around GBP 80 million, if you can just confirm that. And then on the equipment side, looking at the group, orders are down 4% quarter-on-quarter. And obviously, no drama at all. But when we compare it to the upstream guys and we connect it, this is undershooting the equipment momentum by a big margin. You said, Jon, that these smaller orders mainly coming through and that larger expansions are slower to convert. Similar message as at the full year stage, but we think they are converting even at a slower pace now versus the fourth quarter. Any change there?

This is John Heasley. I'll take those. First of all, I would just say to your first question that, we note the appreciation within the market of our commitment to those cash conversion targets. So we remain very confident and committed to delivering on them this year and beyond. So I just wanted to make that point. On the orders, yes, you're correct on the pull forward, if you like, in terms of preordering. We saw a little bit of that in Mineral -- both Minerals and ESCO. And yes, low to mid-single digit for both divisions. On the OE side, look, we're -- the fundamentals are -- to the pipeline is very, very strong, and it has a lot of smaller brands debottlenecking and some bigger expansion projects in there, too. There's terrific momentum on the former, i.e., the smaller projects. So if you exclude the Ferrexpo order from last year, within Minerals, we're up 11%, and that's on the smaller onesies and twosies of OE projects. I would say 2 other things. We are downstream relative to most of our peers. So to the extent, that's a big -- that's more larger project coming through, then we will see that later as is always the case. And obviously, you know the OEs can be lumpy from quarter-to-quarter just depending on how the profile plays through. There are actually a couple of projects that we were awarded orders for in the first quarter that we haven't booked yet because of how we're still outside of Russia, but we're working through whether the -- we can take those in line with sanctions. So we're really quite happy with just the underlying momentum and the backlog in the pipeline. So really no drama there on the OE side.

That's good. Just to clarify something you said. You said there was a low to mid-single-digit prebuy in both divisions. Did you say both ESCO and Minerals? Because the report says ESCO only. I just want to confirm that.

No, it says both. It's in both. So that's absolutely the case.

And the next question comes from the line of Will Turner.

My first question, I would just like a bit of a clarification on the Russia-Ukraine exposure. So you've outlined in this report that you're expecting it could be up to a GBP 20 million earnings hit from that. But at the full year results, you were indicating that would be -- that it was -- that Russia-Ukraine were less than 5% of operating profit. And I think around a similar amount of order intake as well. And given this new guidance seems to be it's closer to 7% on -- well, of 2021 numbers. Are you being a little -- like what's the difference? And what's changed? I know in 2021, and other full year results, it was only a week after the event, so the estimates might have been done a bit quickly. But why has that come out a bit higher? And even given it's come out a bit higher, are you not able to still generate some earnings from that region given that I can assume that January and February are probably unaffected and some of that capacity, which would have gone to Russia and Ukraine may be able to go elsewhere.

Thanks, Will. Well, I think the first thing to say is an incredibly complex and fast-moving situation. And what we're trying to do is balance, first of all, complying with the sanctions on our legal obligations, and that includes potentially delivering on some of the order book that we have there if we can. And we have to comply, not [Audio Gap] balance -- we must comply with sanctions, but where we have non-sanctioned orders or impacted orders, then we have to comply with the local obligations, contractual and legal obligations within Russia, trying to protect the directors and offices of the company in Russia so that they're not subject to criminal proceedings or other issues in terms of their overall welfare. So it's a very, very complex and fast-moving situation that we're trying to balance. In terms of the specifics we said today, it's up to GBP 20 million. And so the GBP 20 million is basically what was in our budget for this year, based on the opening order book and expected momentum orders, both within Russia and for other parts of the Group. So for the Russian business itself, but also for other parts of the Group where we might have been selling directly. So I said, it's up to GBP 20 million. We wanted to put a number out there, which is sort of the worst-case scenario if we can't deliver any of it. And then that will just continue to evolve over the course of the year. The less than 5% that we said, as you said, very swiftly after the crisis began. It was specifically relative to just what the Russian business did last year. So we wanted to sort of be as open as we can at this point in time with what the maximum potential exposure is. It's a complex situation, which we're continuing to manage with all the variables that I talked about. So we will firm that number over the course of the year.

That's clear. And then in terms of throughout the quarter, in particular in the aftermarket, how did the -- how did the quarter develop throughout? So was there any different particular differences at the end of the quarter in March versus the beginning. And is there any insight you can give us in terms of how April has progressed in terms of the aftermarket intake.

Yes. No, I think there's probably nothing really to call out in terms of the monthly progression in the first quarter, Will, it was consistently strong. And so we just saw -- you remember the momentum that we had in the fourth quarter, again, in the aftermarket, and that just continued. And so yes, really nothing is called out there. And as I said in the speech, and we say that the current market conditions remain very buoyant. So we're not expecting anything to slow down that momentum and April started very well.

And the next question comes from the line of Harry Philips.

Just hopefully, a straightforward one. Just in terms of the prebuy, I'm just curious as to how much the customers are sort of taking now and just building up inventory on their own book? Or how much they are ordering into the future's, if you like, on your own book. And then the sort of pricing mechanisms and put-throughs you might have around some raw materials on that additional visibility that, that might give you, please?

Yes, so it's not a common thing. It's a handful of customers, and it is actually concentrated in North America, where probably where there's just more -- maybe a bit more concern over supply chain. But it is literally some customers saying, actually, I'm just going to place all of my orders from my spares now, for the forthcoming year. So we're getting a one full year order rather than the sort of normal bleed through that you would get on a monthly or quarterly basis. So it's not specifically saying, I want all of that product necessarily today. There's probably a mix in there of some of us saying that some were happy to take the product through the year, but wanted to get their orders in. So they've got the production slots guaranteed. So it's a sort of slightly mixed picture in that regard in terms of the inventory implications.

And just to be sure on the price, when it is just booking those slots forward, there's a sort of -- clearly, with raw materials doing what they're doing and stuff like that. You're not sort of compromising on margin or profitability as you do that, you've got some mechanisms to sort of flex that accordingly.

We're very alive to customers trying to use that tactic to lock in existing price lists. So let me just say that. And stepping back, I'm very comfortable with the progress that we're making in terms of covering off input cost inflation with price increases. Once again, the division sort of acted really proactively to -- we put prices up at the beginning of the year. We're putting a second round of increases and surcharges during the second quarter. So I'm very happy that we remain well on top of it.

And the next question comes from the line of Aurelio Calderon.

It's Aurelio from Morgan Stanley. My question is mainly around the sustainability of the growth that you're seeing in mining aftermarket. I mean, the number, again, over GBP 300 million looks very, very solid. I wonder if you -- stripping out that effect from prebuying, what do you think is an underlying level that is sustainable over time?

Yes. So it's a good question. So I mean, I think, if you take the Group aftermarket orders up 28%, which obviously is a really strong performance probably low to mid-single-digit forward buying in that mid-single-digit pricing and the rest is volume. So probably close to 20% volume out of that 28%. We expect the sort of sequential momentum to continue, as I said, through the course of the year. But obviously, as we go through the year, then the comps get tougher. So I would expect the growth rates to revert closer to the long-term sort of average, which is what we say, is normally mid-single digit. So assuming we don't see a further huge step-up in activity, I think, towards the end of the year, we're probably getting back into that territory against what are really strong comps, as you recall from the end of last year.

Okay. That's great. And maybe just following up on that because you mentioned that pricing was around mid-single digit for aftermarket. What was the equivalent number for OE?

Yes. We don't really talk about price increasing in OE because these are negotiated prices. And it's -- they're contractual prices. So given the pricing opportunity for us and what we have to manage is really on the aftermarket, which is sort of 70% of our revenues, as you know. So OE is always about -- the pricing is always a negotiation, which is about winning the work. Suffice it to say, we're obviously not seeking to, in any way, impact our overall margins in OE, but we don't think about pricing in the same way as we do in the aftermarket.

There are no further questions at this time. Please continue.

Thank you, operator. Thanks, everybody, for joining the call this morning and for your questions, much appreciated. If you do have any follow-up questions through the course of the day, please call into head of IR, Ed. Otherwise, have a great day, and we'll catch up with you soon. Thank you.

That does conclude our conference for today. Thank you all for participating. You may all disconnect.