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

Ladies and gentlemen, welcome to the Weir Group PLC Q1 IMS Conference Call. I'm Vicki, the Chorus Call operator. [Operator Instructions] The conference is being recorded. [Operator Instructions] The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Jon Stanton, Chief Executive Officer. Please go ahead, sir.

Thank you, operator. Good morning, everyone, and thank you for joining us for our first quarter trading update. I'm joined today by our new CFO, Brian Puffer. And after a brief overview from me, we'll be delighted to take your questions. Let me start with current trading, where we've had a good start to the year. Market conditions in mining are strong with production growth and brownfield project activity driving demand for Weir products. Highlights of the quarter included progress with our best-in-class HPGR offering with a GBP 7 million order received in a gold application. Minerals were also unbeaten in competitive large pump trials for the quarter, a testament to our customer proximity and world-class technology. Within ESCO, Motion Metrics received a large order for 12 ShovelMetrics packages, including our latest Gen 3 systems. Overall, our aftermarket growth algorithm delivered as expected with our significant installed base and well-diversified mix of commodities and geographies, resilient against mixed commodity prices and increasing geopolitical tensions. Customer focus on maximizing minerals production and growth in our installed base from new OE commissioning supported overall aftermarket growth. Our Performance Excellence program is on track with several underpinning projects completed or in progress that will ensure delivery of our medium-term financial targets. Turning to orders where, as expected, we saw mid-single-digit growth in aftermarket orders, up 4% year-on-year, reflecting the high-quality nature of our mining aftermarket, which is largely driven by nondiscretionary spend on spare parts that are essential to keep mines running. Growth was driven by underlying ore production, the commissioning of new installed base and a modest benefit from pricing, all of which more than offset moderate headwinds from mine closures in specific regions and commodities. Original equipment orders were flat sequentially, and although down on a very strong Q1 last year, when orders were up 22%, we continue to receive high levels of interest for our technology, which enables our customers to address both the demand for critical metals and the transition to more sustainable mining. There is a clear push in certain commodities to try and accelerate new project approvals, and we expect to benefit as project activity inevitably increases. As opportunities materialize, we expect to receive larger packages than in the last cycle given our future flow sheet and brownfield optimization offerings have significantly extended our addressable market. Our business model means that most of our original equipment orders are incremental and generate around 30% of the original value in aftermarket spares every year. So our installed base of equipment is a strategic asset, which underpins the growth and resilience of our aftermarket business. Overall, group orders were up 1% year-on-year. Let me now give a little bit more detail on the performance of the divisions, starting with Minerals. Here in aftermarket, year-on-year orders were up 4%, reflecting both price and volume growth. Demand for aftermarket was strong across most hard rock mining territories, reflecting all production growth year-on-year and the effect of growth in our installed base. In OE, orders were stable sequentially with continued momentum in our debottlenecking solutions, which expand and improve the sustainability of existing mines. With the supply deficit for forward-facing metals, such as copper, becoming more visible and large projects remaining slow to convert, our customers continue to look to Weir to help them accelerate OE production from their current assets. Notable orders in the quarter included the HPGR, I mentioned earlier, and 3 large mill circuit pump wins in the Central African copper belt, which were the result of our strategic geographic expansion initiatives, combined with our market-leading products. Additionally, our trial team converted 11 more large pump installations, the vast majority being market share accretive. Now on to ESCO, where aftermarket orders in the quarter grew 5%, reflecting strong mining markets, and in infrastructure, a return to normal order levels as expected. In mining, which accounts for around 70% of ESCO's revenue, orders were positive on a year-on-year and sequential basis. Incremental demand for our industry-leading ground engaging tools is being supported by production growth and growing installed base. We continue to grow market share and achieved 17 net digger conversions to ESCO Lip Systems in the quarter, slightly ahead of the prior year run rate. Turning next to infrastructure, where we returned to normal order levels as expected with our dealers having completed their destocking cycle. Moving forward, we expect the U.S. Infrastructure Bill and Inflation Reduction Act will provide a long-term underpin to activity levels in North America. OE orders in ESCO were down slightly year-on-year, reflecting phasing of capital orders with our pipeline of opportunities for the full year looking strong. Now a brief comment on our Performance Excellence program where we had several key milestones in the quarter, which underpin our future margin expansion and cash conversion targets. Projects included the official opening of our new ESCO foundry in Suzhou and rollout of the Weir Integrating Network System at several of our manufacturing sites across Minerals. We also launched Weir Business Services transitions across our North American business with all regions expected to be transitioned by the end of 2024. Overall, we're on track with our capacity optimization, lean process and global business service programs, and we'll see incremental financial benefits throughout the year. Turning to net debt, where we expect to further delever the balance sheet over the full year given anticipated strong cash generation. And in the quarter, S&P upgraded their outlook from stable to positive, emphasizing the strength of our balance sheet as well as the strong trading performance we expect to deliver in this and future years. Now on to the outlook. The business is executing well and conditions in our mining markets are positive, underpinning our confidence in the year ahead. We are on track to deliver our guidance for 2024, expecting to deliver growth in constant currency revenue, operating profit and margin, together with a free operating cash conversion of between 90% and 100%. The building blocks of revenue growth and margin expansion are consistent with those we outlined in our full year results a few weeks ago. So on revenue, we expect mid-single-digit growth in aftermarket with volume growth from installed base expansion or production growth and a modest contribution from price. In OE, we expect to see continued momentum in demand with year-on-year revenues being stable. On margin, we expect to deliver expansion in the years of our incremental performance excellence savings, mix benefit as we benefit from installed base growth and further operating leverage. Partially offsetting these tailwinds, we are increasing our investment in R&D and still expect translational FX headwinds at current rates. We expect operating profit phasing to follow typical seasonal patterns and for margins to improve year-on-year and sequentially through the year as minerals revenue mix moves towards aftermarket, and we realize the incremental benefits of Performance Excellence. Before we open to Q&A, I'd just like to say a few words on our performance in the context of our equity case. Weir has a compelling value creation opportunity as a sustainable technology leader in mining, and we are committed to delivering excellent outcomes for all our stakeholders. We continue to see strength in the mining markets across our divisions and strong demand for our products. Weir's unique capabilities, customer intimacy, focused portfolio and technology-led strategy means we continue to enjoy high barriers to entry and are well placed to capitalize as miners respond to the growing demand for critical metals to deliver net zero. While we protect and grow our large installed base of equipment, we create aftermarket demand that is largely inelastic to CapEx cycles and day-to-day commodity price fluctuations as demonstrated through our growth this quarter. Taken together, we are confident in meeting our longer-term guidance to outgrow our markets, expand our margins and convert our earnings clearly to cash while remaining resilient and doing the right thing for our people and the planet. So to close, let me summarize the key takeaways. We're winning in our markets. Our project pipeline is strong and continues to run at historically high levels. Our aftermarket growth algorithm is delivering, built on our significant installed base and diversification across commodities and geographies. We're on track to deliver our 2024 guidance of growth in revenues, profits and operating margins. And finally, over the long term, we have a compelling value creation opportunity. We're operating in highly attractive markets with a clear strategy to grow ahead at sustainably higher margins. So thank you for listening. And Brian and I will now be pleased to take any questions you may have, and I'll return the call back to you, operator.

[Operator Instructions] The first question is from Jonathan Hurn, Barclays.

Firstly, just if we look at the Q1 performance and look at revenue, it looks to be down 5% in the first quarter year-on-year. Can you just give us a little bit of information sort of explaining why that was the case? And also why you've got confidence of performance improving through the full year and obviously meeting expectations, please?

Yes. Jonathan, yes, you've back-solved the revenue from the book-to-bill, which is correct. And it's simply the phasing of the order book. If you compare this year to last year, we came into 2023 with some significant projects for shipment in the first quarter. We had the tail end of the strong oil sands orders and the tail end of Russian orders being delivered at the beginning of last year. So true, we had a slightly different phasing this year. But given our order intake is completely as we expected, and we came into the year with a strong order book, albeit with a different phasing, we're highly confident in delivering on our growth expectations of mid-single-digit revenue growth for the full year.

Great. That's very clear. And the second one was just coming back to that sort of margin expansion and obviously, the bridge for the '24. Is it still fair to assume that in terms of the organic expansion for margins, it's still going to be around about 50 basis points? And then if you take into account the FX, the margin expansion is going to be closer to 30%. Is that still the thinking as you go through '24?

Yes, that's where we're sitting today, Jonathan. So exactly as we set out at the end of February with our '23 results, we're going to see tailwinds from a little bit of mix, production volume growth and operational leverage. We are going to put a bit more into R&D this year, and even, we're still expecting a headwind on FX for net-net, that's exactly in the right place.

Great. And maybe just squeeze one last one. Just in terms of obviously that growth, how do we think about sort of pricing in '24? Obviously, you're going to have some benefits coming through from prices in '23. And also, I'm sure you're going to put some pricing through for this year as well. So just -- can you just focus how much of that growth is going to come through from price, please?

Jonathan, it's Brian. Yes, the 4% growth in the aftermarket, where we spoke about in the IMS, is about 50-50, you could assume price versus volume. And so that's what we're expecting for the remainder of the year, and that's what we saw in the first quarter.

The next question is from Sinha, Chitrita, JPMorgan.

It's actually Andy at JPMorgan. Apologies. Obviously, we can't use the phones over here. I just have one quick one, I think. Just on the commentary on infrastructure on the ESCO side, it's a little bit more supportive, I think, than some of the commentary from your European peers who, I guess, have at least overlap in terms of broad end market. Just kind of interested in sort of confidence around sort of where we are post, and presumably destocking finishing, it felt like a bit more of a positive message there.

Yes. I think you have to remember, Andy, that Weir and our peers, we all talk about construction and infrastructure markets, but I think our exposure is all probably slightly different. So as we look at North America and Europe, we have a very clear insight into what our dealers are doing in terms of stocking and ordering. And we can very clearly see that they've come to the end of the destocking cycle and was just starting to see orders revert to the sort of more normal patterns now. So definitely a leveling off relative to the declines we had last year. We're calling it flat at the moment. Yes, frankly, there may be a bit of upside from here. But, as you know, it's not a significant part of our exposure either.

The next question is from Christian Hinderaker, Goldman Sachs.

Jon, and welcome, Brian, I guess maybe just wanted to follow up on infrastructure, if you have any comments around the European backdrop. I don't think that was cited in the RNS. And then maybe just on that point around the visibility that you have in terms of customer order levels and stocking. Just want to understand what underpins that. I mean is that because the breadth of SKUs or number of products sold is relatively low? I think peers generally struggle to get a feel for inventory levels across the channel. That's question one.

Yes. Well, I think it's -- again, it's 6% or 7% of our group revenues, so I think it's relatively small compared to our peer group. And because it's tight and focused in 2 particular markets, we have a relatively limited number of dealers. We have direct visibility to their inventory levels. So that's what we're seeing. And as I said, structurally, it's a little bit different to our peer group. So we see -- to your question about regions, we see kind of exactly the same in North America as we're seeing in Europe, but our dealers are now moving into normal ordering patterns.

Understood. And maybe secondly, just on the mining side, we've heard a lot about slowness in customer decision. Appreciate 3/4 of the business for you is aftermarket and obviously less exposed. But just have you got any sense from customers around how long larger scale project sign-offs are taking and whether that might be slower today versus a year or 18 months ago?

Yes. I think what we're trying to call out in the press release, Christian, is that, yes, there's no overall change, I would say, today in terms of how long projects are taking through approval processes and obtaining permits and licenses and so on. But then -- we're detecting over the last couple of months, a real push, certain commodities, and they're the obvious ones, as you would expect, like copper, to try and accelerate some of these projects and to move forward. And that's just sort of our sense based on what our customers are telling us, the engagement that we're sort of seeing at the moment. So we still -- we don't know when they're going to convert, but we see a definite sort of increase in intent to try and move things forward, so a slight positive and encouragement.

The next question is from Rory Smith, UBS.

It's Rory from UBS. Just picking up on that last point on project approvals, if I may, what does that mean in terms of visibility in minerals OE? So what visibility does your order book give you on future OE revenues? Presumably that's quite strong. Or are there orders in the book that require project approvals to be approved before they're able to convert into deliveries?

Yes. I mean our pipeline includes everything, Rory, from projects that are improved and sort of going through final sort of sign-off processes right through to budgetary bids, which could be several years before they come through. So we have got visibility of everything that is happening and potentially coming and some of it will go and some of it won't. The thing that I would call out is that we have a really strong pipeline in terms of the momentum, brownfield, debottlenecking projects, which are driving our OE order levels at the moment. So just in terms of this year, we feel really good about the guidance that we'll see a run rate sort of consistent with the sort of GBP 500 million or so ambition for this year in terms of revenues. So -- and so -- and those projects are relatively small in size, they're mostly brownfield. So they don't need to quickly go up the line or have big external approval requirements. So that pipeline, you can see is very, very active. And then the bigger greenfield projects, which are sort of further out in the pipeline, as I say, there is a bit more activity on particular commodities to try and move those forward. So I'm not saying that's definitely going to happen, but we just see a sense there's a bit of momentum at the moment.

Momentum, brilliant. That's very clear. And if I could just ask one more question. You mentioned the sort of aftermarket growth algorithm, sorry, I missed your sort of preamble on that. Could you just remind us what that algorithm actually is or what that looks like?

Yes. It's just -- what we're trying to obviously highlight is that we have a really important strategic asset in terms of our installed base, which we continue to grow. Every dollar of OE is largely incremental in terms of that installed base and aftermarket opportunity. So as we grow our installed base, global oil production increases, we continue to win market share, we get a little bit of pricing every year. That's what drives that kind of mid-single-digit growth in aftermarket through the cycle, which is largely inelastic to the CapEx cycle, the commodity price cycle. So that's what we're talking about. The way that our aftermarket growth comes through is driven by those fundamental factors, which happen regardless of the cycle. So that's why we're saying it's such a strong algorithm. And that's why our growth is really positive in the first quarter of this year. And I think you can see that relative to some of our peers, I think.

The next question is from Bruno Gjani, BNP Paribas.

The first one is just on the Minerals OE business. I think on the last call, we talked about some OE orders slipping from Q4 and they were expected to land in Q1. Did all of those orders land this quarter as anticipated? Or is there some further slippage? And also what did those larger mill circuit orders that you landed this quarter sum to if you're able to provide that color?

Yes. I'm not going to go into the sort of breakdown of individual orders. To your first question, yes, all of the orders that slipped from Q4 to Q1 were received in the quarter. At the same time, some things would have slipped out of Q1 into Q2. So I think taking a read on underlying thematic trends by just 1 quarter of OE is quite difficult. It's, as you know, quite lumpy. It can shift around from quarter to quarter, and that's what we're seeing at the moment. But as you tried to make clear, the underlying run rate in terms of what the pipeline is going to deliver is looking good and completely supports our guidance for the year.

Very clear. And on the aftermarket side, for Minerals, you talked about some mine closures that acted as a headwind in the quarter. Are you able to isolate or quantify that impact? And on that Australia mine closures, specifically, are those permanent closures or temporary?

Well, we hope they're all temporary. I mean the specific mine closures that we see in the quarter were obviously Cobre Panama, given the political challenges there, where we had just completed commissioning quite a significant amount of installed base, which is now as long as that mine is mothballed, it won't be delivering any aftermarket. And we saw some mothballing and slow down a little bit in nickel and lithium in Australia. So -- and the flip side of that is that we've seen real strength in nickel in Indonesia, where as you know, we got a significant installed base over the last couple of years, frankly, which is still coming. So it's -- the way I would characterize it overall is that our aftermarket is massively diversified across commodities, massively diversified across geographies. And every year, you're going to get some closures, some openings, a bit of warp and weft, but it's lost in the roundings of that profile where the values I have talked about in response to Rory's question.

Got it. And just finally on ESCO, just to, I guess, clarify something. So there was a strong sequential recovery in the orders in Q1. Is this current run rate sustainable? Or is there some seasonal factors that we should bear in mind?

The current run rate is consistent with what we said for the full year of mid-single-digit growth, so bang in line. And pipeline for ESCO is strong as it is for minerals.

The next question is from Max Yates from Morgan Stanley.

My question is just on the Minerals aftermarket. And could you just remind us of the seasonality that you have in this business? And I guess my reason for asking is that your kind of Q1 orders were GBP 328 million. That's obviously quite far below where they were in Q2 of last year, GBP 357 million. So what I'm trying to understand is, obviously, you showed good year-over-year growth in Q1, but at the current run rate, your orders would be down quite a lot for Q2. So I appreciate when I look back at numbers, there is some normal seasonality where Q2 seems to pick up. Are we confident that that's going to happen again this year? And could you just remind us what those kind of positive seasonal dynamics are?

Yes. So the overall general seasonal piece is that the aftermarket tends to be a bit stronger in the first half than the second half in terms of orders and vice versa in terms of revenue. In Q2, specifically, and we've called this out consistently over prior years, we have a multi-period order that comes in every year of between GBP 25 million and GBP 30 million in Q2. So that's why you saw the step-up last year. So that's what has happened historically. I would call out this year that, that multi-period order, that contract has just been renewed. And so actually, this year, the order is going to be split between Q2 and Q4. So you would probably not going to see quite the step-up in Q2, but you're going to see a bigger step up in Q4 as the other half of that order comes through.

Okay. And then you're still comfortable that orders in aggregate should be around mid-single digit for the aftermarket orders this year as well?

Absolutely comfortable.

Yes. Okay. Second question was just around, we've obviously seen a quite big announcement today across your customers of -- one potentially looking to acquire another. Could you just talk through kind of how you think internally that would affect your business? How large? I mean we obviously haven't seen a huge amounts of large consolidation for a while in the industry. How do you think about it for your business? Is that an opportunity potentially because of the acquirer? Is it a risk because it gives them more purchasing power? And obviously, they would target, I would assume, some procurement synergies. How do you think about that internally given that news?

It's all off of press, and obviously, highly conditional, and no certainty as to whether anything will go ahead, so -- and we've got about 15 minutes to think about it. But it's all -- whether consolidation happens or not, it's all about the assets and the commodities. And so we just think about it from that point of view. And if a deal like that is about copper, in particular, and driving the accelerated production of copper given the demand that's coming, then that's going to be a positive for us. And with any of these deals, of course, you're always going to get synergies. But over the years, you've seen what our aftermarket does. So, yes, net now, I wouldn't worry about it in terms of any negatives. And that -- another thing you want to focus is we always talk about our total cost of operation, and you would have seen the successes we have in terms of our trials and stuff. So it hopefully answers your question on purchasing price and stuff like that, purchasing power. So that's our main focus for our customers.

Okay. And just a final one, Jon. On your own acquisition strategy, we've seen a few instances now where companies in the sector have seemingly got a bit more aggressive on M&A. Can you just remind us of kind of what your acquisition priorities are? And are you seeing kind of larger M&A opportunities out there that you're considering? Or would you focus more on bolt-on at the moment? So just a reminder of how you're thinking about that in the current environment?

Yes. We're focused on bolt-on and that's in 3 buckets: technology and technology product infill, geographic infill and tech potentially along the lines of Motion Metrics. So those are the 3 areas. We've done a lot of work on building our pipeline of those kind of opportunities over the last couple of years as we've been going through the process of delevering the balance sheet to create the capacity. And I'm hopeful, but cannot guarantee, but hopeful that we'll start to see some of that pipeline convert as we go through this year. As we said earlier, we've got a fantastic organic growth algorithm, which is delivering. If we can deploy capital on top of that to compound that growth and accelerate our way to our targets, then that is something that we are definitely going to do.

And sorry, just to finish off that thought. When you talk about Motion Metrics, will more of these bolt-ons likely to be in that kind of software area? Or will you also look at sort of potentially lower multiple kind of equipment style deals as well? Just how you're thinking about that.

There are the 3 buckets I described. I can't tell you today which bucket will deliver more or less, but those are the areas -- 3 areas that we're focusing on. We are very focused also on where we're taking this business in terms of margin sustainably at 20% plus. That's what we're trying to do. That is driven by the quality of the aftermarket and business model that we have. We're not going to do anything that fundamentally dilutes that in any way. Operator, I think we've got time for one more question if that's okay.

Yes. So the next question is from Mark Davies Jones, Stifel.

Jon, just squeezed in. Can you just update us on the self-help end of things, particularly Business Services, sometimes as move to shared services get quite complicated, quite slow. It looks like you're very much on track or better. So what are you finding as you roll that out? And what are the benefits looking like?

I'll let Brian answer that one, Mark, if you don't mind.

Yes, no coming in, and the first thing I've done is taken a thorough look at the whole WBS and the transitions, seeing a lot of positives there, and we're on track to deliver exactly as we said in terms of the release in the Capital Markets Day. I think the more important thing is -- coming in fresh is I see us building a muscle, and it's not just about what we can deliver and what we promised in December, but what muscles do we build for ongoing improvements. We're not looking to change anything at this point in time, but we will continue to look at how we can further develop this WBS muscles. But so far, we're very pleased with where we are in the progress.

And if I could just add to that, Brian at BP delivered on the $2 billion of savings. So thinking about what we are trying to do.

A long time ago, but yes, set up GBS and BP, and we delivered over $2 billion of savings in 6.5 years. So -- I don't think we'll deliver that, Jon, but...

Gentlemen, there are more -- a couple of questions more. Would you like to take them?

No, we need to move on now. Unfortunately, we have our Board meeting and AGM, so -- it's rather a lot of questions for Q1 update, but great questions. I'll just say thank you very much, everybody, for participating. Obviously, if there are any further follow-ups, then we'll go through them in the IR team later today. But thank you for participating.

Ladies and gentlemen, the conference call is now over. Thank you for choosing Chorus Call and thank you for participating in the conference. You may now disconnect your lines. Goodbye.