Ladies and gentlemen, welcome to the Weir Group PLC Q1 IMS conference call. I'm Vicky, the conference call operator. I would like to remind you that all participants are in listen-only mode, and the conference is being recorded. The presentation will be followed by a Q&A session. You can register for questions at any time by pressing star and one on your telephone. For operator assistance, please press star, then zero. 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 non-discretionary 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 ore 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 and grow production from their current assets. Notable orders in the quarter included the HPGR, I mentioned earlier, and three 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 achieve 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 return 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, 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 benefit 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. 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, t he 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 by incremental performance excellence savings, mixed 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 I 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 cleanly 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.
Thank you. We will now begin the question-and-answer session. Anyone who wishes to ask a question may press star and one on the touchtone telephone. You will hear a tone to confirm that you have entered the queue. If you wish to remove yourself from the question queue, you may press star then two. Participants are requested to use only handsets while asking a question. Anyone who has a question may press star and one at this time. The first question is from Jonathan Hurn, Barclays. Please go ahead.
Yes. Firstly, just if we look at that 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?
Yeah. Hi, Jonathan. Yeah, you back solved the revenue from the book-to-bill, which is correct. And it's simply the phasing of the order book. You know, 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 do we have a slightly different phasing this year? But given our order intake is completely as we expected, and you know, we came into the year with a, you know, 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 2024. Is it still fair to assume that in terms of the organic expansion for margins, it's still gonna be around about 50 basis points? And then if you take into account the FX, the margin expansion is gonna be closer to 30. Is that still the thinking as we go through 2024?
Yeah, that's where we're sitting today, Jonathan. So exactly as we'd set out at the end of February with our 2023 results, you know, we're gonna see tailwinds from a little bit of mix, production volume growth, and an operational leverage. We are gonna put a bit more into R&D this year, and even, we're still expecting a headwind on FX. So net, net, that's exactly in the right place.
Great. Thank you. And maybe just, just squeeze one last one in. Just in terms of obviously that, that growth, how do we think about sort of pricing in 2024? Obviously, you're gonna have some benefits coming through from prices in 2023, and also, I'm sure you're gonna put some pricing through for, for this year as well. So just can you just sort of give us how much of that, of that growth is gonna come through from price please?
Hey, Jonathan, it's Brian. Yeah, the 4% growth in the aftermarket we spoke about in the IMS is about 50/50. You could assume price first 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.
Brilliant. Thank you, guys.
Thanks, Jonathan.
The next question is from Sinha Chitrita, JP Morgan. Please go ahead.
Hi, it's actually, Andy at JP Morgan. Apologies. Obviously, can't use the phones over here. I just have one quick one, I think. Just on the, 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, of broad end market. Just kind of interested in sort of confidence around sort of where we are post, presumably destocking, finishing it. It felt like a bit more of a positive message there.
Yeah, I think you have to remember, Andy, that, you know, we all, you know, we and our peers, you know, we all talk about construction Infrastructure markets, but I think our exposures are all probably slightly different. So, you know, as we look at North America and Europe, you know, we have a very clear insight into, you know, 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 we're 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. You know, frankly, there may be a bit of upside from here, but, you know, as you know, it's not a significant part of our exposure either.
Very clear. Thank you, Jon.
The next question is from Christian Hinderaker, Goldman Sachs. Please go ahead.
Hi, 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? Or you know, I think peers generally struggle to get a feel for inventory levels across the channel. That's question one.
Yeah, 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 two particular markets, we have a relatively limited number of dealers. You know, 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, you know, we see, you know, to your question about regions, we see kind of exactly the same in North America as we're seeing in Europe. But, you know, our dealers are now moving into normal ordering patterns.
Understood. Thanks, Jon. And maybe secondly, just on the mining side, as we've heard a lot about slowness in customer decision, appreciate three-quarters of the business for you is aftermarket and obviously less exposed. But just, have you got any sense from customers around, you know, how long larger scale project sign-offs are taking and whether that might be slower today versus a year, 18 months ago?
Yeah, I think what we're trying to call out in the press release, Christian, is that, you know, yes, you know, 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 there, you know, we're detecting over the last couple of months, you know, 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 don't know when they're gonna convert, but we see a definite sort of increase in intent to try and move things forward. So, you know, a slight positive and encouragement.
Thank you.
Thank you.
The next question from Rory Smith, UBS, please go ahead.
Good morning, it's Rory from UBS. Thanks for taking my questions. 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, you know, 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?
Yeah, 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, you know, could be several years before they come through. So we have got visibility of, you know, 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, you know, really good about the guidance that we, you know, will see, you know, a run rate sort of consistent with the sort of GBP 500 million or so, you know, ambition for this year in terms of revenues. So, you know, and those projects are relatively small in size. They're mostly brownfield, so, you know, they don't need, you know, to particularly go up the line or have big, external approval requirements.
So that pipeline, you know, 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 gonna happen, but, you know, we just see a sense there's a bit of momentum at the moment.
Momentum b rilliant. That's very clear. Thank you. 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?
Yeah, it's just what we're trying to, you know, obviously highlight, is that we have a really important strategic asset in terms of our installed base, which we continue to grow. You know, every dollar of OE is largely incremental in terms of that installed base and aftermarket opportunity. So as we grow our installed base, global ore production increases, we continue to win market share, we get a little bit of pricing every year.
That's what drives that kind of, you know, 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 know, you can see that relative to some of our peers, I think.
Brilliant. Thank you very much.
The next question from Bruno Gjani, BNP Paribas. Please go ahead.
Thank you for taking my questions. 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 was 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.
Yeah, well, I'm not gonna go into the sort of breakdown of individual orders. [crosstalk]Sure. To your first question, yes, all of the orders that slipped from Q4 to Q1 were received in the quarter. Yeah, at the same time, you know, some things will have slipped out of Q1 into Q2. So I think, you know, taking a read on underlying thematic trends by just one 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, you know, as you try to make clear, the underlying run rate, in terms of what the pipeline is going to deliver, I mean, it's 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, 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, or temporary?
Well, we hope they're all temporary. I mean, the specific mine closures that we've seen in the quarter were obviously Cobre Panamá, given the political challenges there, where, you know, we had just completed commissioning quite a significant amount of installed base, which is now, as long as that mine is mothballed, that really won't be delivering any aftermarket. And we saw some, you know, mothballing and slow down a little bit in nickel and lithium in Australia.
So, and the flip side of that is that, you know, we've seen real strength in nickel in Indonesia, whereas, you know, we got significant installed base over the last couple of years, frankly, which is still coming. So, you know, it, it's... You know, 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 gonna get a, you know, some closures, some openings, a bit of warp and weft, but, you know, it's lost in the roundings of that growth algorithm I talked about in response to Rory's question.
Got it. And just, 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?
Well, 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.
Understood. Thank you very much.
Thanks, Bruno.
The next question from Max Yates, Morgan Stanley. Please go ahead.
Hi, good morning, Jon. 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 gonna happen again this year? And could you just remind us what those kind of positive seasonal dynamics are?
Yeah. 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, 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. You know, you know, that 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 gonna be split between Q2 and Q4. So, you're probably not gonna see quite the step up in Q2, but you're gonna 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.
Yeah. Okay. Second question was just around. We've obviously seen a quite big announcement today across your customers of two. Well, 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 amount 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 hot off the press, and obviously highly conditional and no, you know, 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, you know, 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, you know, if a deal like that is about, you know, copper in particular, you know, and driving the, you know, accelerated production of copper, given the demand that's coming, then that's gonna be a positive for us. And with any of these deals, of course, you're always gonna get synergies, but, you know, over the years, you know, you've seen what our aftermarket does. So, yeah, net-net, I wouldn't worry about it in terms of any negatives.
And, Max-
Okay, and just-
The other thing you wanna focus in, we always talk about our total cost of operation, and you would have seen, you know, the successes we have in terms of our trials and stuff. So that 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, just third and 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.
Yeah. We're focused on bolt-on, and that's in three buckets: technology and technology product infill, geographic infill, and tech, potentially along the lines of Motion Metrics. So those are the three 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 you know, I'm hopeful, but cannot guarantee, but hopeful that you know, we'll start to see some of that pipeline convert as we go through this year. You know, 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, are 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, how are you thinking about that?
There are the three buckets I described. I can't tell you today which bucket, you know, will deliver more or less, but those are the areas, three areas, that we're focusing on. We are very focused also on, you know, where we're taking this business in terms of, you know, margins sustainably at 20%+. That's what we're trying to do. You know, that is driven by the quality of the aftermarket and business model that we have. We're not gonna do anything that fundamentally dilutes that in any way.
Okay. Thanks for the time, Jon. Thank you.
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. Please go ahead.
Hi, Jon. Just squeezed in. Can you just update us on the, the self-help end of things, particularly business services? Sometimes those moves 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.
Hi, Mark. Yeah, no, coming in and, the first thing I've done is taken a thorough look at the whole WBS and what we're in the transitions. Seen 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 in what we promised in December, but what muscle 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 muscle. But, so far, we're very pleased with where we are in the progress.
If I could just add to that, Brian, at BP, delivered-
Yeah.
- the GBP 2 billion of savings, Brian, so I think-
So, well, that's-
Thinking about what we're trying to do.
Long time ago, but yeah, set up GBS and, BP, and we delivered over $2 billion of savings in six and a half years. So, I don't think we'll deliver that, John, but, yeah.
No, I'm being sure.
Yeah.
Cool. Thank you very much.
Thanks, Mark.
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 rather a lot of questions for the Q&A 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 call through in the IR team later today, but thank you for participating.
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