Operator: Good morning, and welcome to the Weir Group plc Q1 IMS. My name is Charlie and I'll be coordinating the call today. [Operator Instructions] I will now hand over to our host, John Stanton, CEO, to begin. John, please go ahead.

Jon Stanton: 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 start with current trading, where we had a very good start to the year. Market conditions were as expected, with mining markets remaining very active. We continue to make good progress with our strategic growth initiatives and in particular, grew our pipeline of sustainable technology solutions. -- on the strong operational momentum seen in the second half of last year was carried into the first quarter, all of which are underpinned by confidence in delivering our 2023 goals and the longer-term value creation opportunity that we now present.

Specifically, in the first quarter, we grew our order book, revenue and operating margins. We captured market share with differentiated solutions that help our customers with their biggest sustainability challenges, and we continue to benefit from the long-term structural tailwinds that underpin our mining markets. :

Looking at our markets in more detail, conditions in mining markets are positive. Commodity prices are well above minus cost to reduce and physical inventory levels remain tight, so our customers are focused on maximizing ore production. And we launched projects remaining slowing to convert, there growing and accelerating production from existing assets while also increasingly engaging on new sustainability-driven technologies such as our redefined mill circuit and the nation Metrics digital offering. In infrastructure, as we expected, activity levels have improved since the fourth quarter, but remained well below the peak we saw in Q1 last year. Overall, these market trends are reflected in our group orders, which were up 4% year-on-year. In original equipment, orders were up 22%, driven by small brownfield projects. And in the aftermarket, as expected, total orders were flat against the prior year comparator, which included a peak quarter for infrastructure, some prebuy in ESCO and the last orders from Russia. :

Underlying performance in our mining focused aftermarket was strong with Minerals aftermarket up 5% year-on-year, and the mining-focused part of us goes stable. This is a reflection of the high-quality nature of our mining aftermarket, which is largely driven by nondiscretionary spend on the spare parts that are essential to keep mines running, which, of course, is what makes our aftermarket business highly resilient. The group's book-to-bill was 1.04 reflecting order bit growth and strong execution. In fact, both divisions delivered year-on-year revenue growth and continue to use pricing to offset the impact of cost inflation and so maintain gross margins. We also kicked off several projects within Performance Excellence. Our transformation program, which will support future margin expansion and cash conversion. Projects included the reorganization of our North American footprint in Minerals to improve customer proximity and the leaning ags and simplification of global value streams, both of which will support improvements in margin and inventory [volumes]. We also stood up, the transformation team, for we've business services, which will drive our move to a global business services model, delivering high-quality and efficient enabling functions to the business. :

Overall, we're moving at pace with performance excellence and expect to see the early financial benefits this year. Other highlights in the quarter include receiving approval from SBTI of more than ambitious emission reduction targets, which we announced in the second half of last year. I'll now give a little bit more detail on the performance of our 2 divisions, starting with Minerals. And orders in the Minerals division grew 9% year-on-year. In aftermarket, year-on-year orders were up 5% against the comparator, which included the contribution from Russia. So excluding Russian orders from the prior year, aftermarket orders were up 7%, reflecting both price and volume growth. Demand for aftermarket was strong across most hard rock mining territories, reflecting wider ore production trends. Asia Pacific and South America were particularly strong as we benefited from recent expansion in the power installed base in these regions. :

As expected and previously outlined, we saw a slight moderation of demand from customers in the Canadian oil sands as activity levels moved in line with broader energy markets. In original equipment, orders were up 20%, with customers ordering Weir solutions to debottleneck, expand and improve the sustainability of existing mines. And this reflects a broader regrowing trend with the supply deficit for forward-facing metals such as cast copper becoming more visible, and large projects remaining slow to convert our customers are turning to bear to help them accelerate and grow production from their current assets. Notable orders in the quarter included a GBP 12 million order for our GEHO pumps for a high-grade nickel expansion project in Indonesia. This builds on the GBP 33 million of orders we booked in the second half of 2022 for similar applications and further underlines our growth, our leadership position in this attractive high-growth niche. Operationally, Minerals has momentum and is executing well with team delivering year-on-year revenue growth and a book all for the quarter of 1.05. :

Now on to ESCO. And here, as expected, heavy orders were lower than last year, with the comparative being a peak quarter for infrastructure orders and also including some prebuying. However, orders grew sequentially from Q4, with a modest uptick in infrastructure markets and continued strong underlying demand in mining. So let's look into those 2 end markets in more detail, starting with mining, which accounts for around 70% of ESCO's revenue. Trends in this part of the business are positive. On a year-on-year basis, orders were in line, while sequentially orders were up mid-single digits. This reflects ported market trends and incremental demand for our industry-leading brand engaging tools, driven by market share gains and the positive net conversions we achieved in 2022. Demand for our mining attachment was also strong as we continue to expand our market share with our tech-enabled mining buckets. This proposition is underpinned by our differentiated marking metrics, AI and logic 3D camera technology, which continues to generate growing customer interest. Other Q1 highlights include the transition of ESCO's scandinavian business from a distributor to a direct-to-customer model, representing another important step on our direct in mining strategy. :

Turning next to infrastructure. As you may recall a few weeks ago, at our full year results, I outlined that we seen a sequential decline in that part of ESCO's business during 2022, largely driven by Europe and to a lesser extent North America in Q4. As expected, demand is there fall down on where we were this time last year, albeit we've seen modest sequential recovery from Q4 levels, and we expect the U.S. infrastructure build and inflation Reduction Act will provide a long-term underpin to activity levels in North America. Operationally, ESCO is also performing well, and in the first quarter, delivered year-on-year revenue growth and had a book-to-bill of 1.04.:

Turning to the balance sheet, where, as expected, net debt was higher than that reported at the 31st of December 2022, reflecting typical seasonal trends. And we continue to strengthen the balance sheet. Earlier this month, we were pleased to see S&P upgrade our credit rating from BB+ to BBB-, which coupled with the Baa3 rating we already have with Moody's means we now have a full investment-grade credit rating, which delivered on the target we set out in our capital allocation policy last year. :

Turning now to the outlook. Conditions in our mining markets are positive, and our strong start underpins our confidence in the year ahead. We are reiterating our guidance for 2023. We expect to deliver growth in constant currency revenue, operating profit and margin, and we're on track to deliver our 2023 operating margin target of 17% with a free operating cash conversion of between 80% and 90%. The building lots of revenue growth and margin expansion are consistent with those we outlined in our full year results a few weeks ago. On revenue, we expect mid-single-digit growth in aftermarket, driven by production trends and share gains in hard rock mining, partially offset by the loss of revenue from Russia and moderation of demand from oil stands, and we expect demand in infrastructure to be flat. In original equipment in line with the fees in our open order book, we expect year-on-year revenues to be stable. :

On operating margin, our increase to 17% in 2023 will be delivered through further pricing benefits, operating leverage, earnings accretion and motion metrics and the initial benefits from the Performance Excellence Program. We expect operating profit phasing to follow typical seasonal patterns with a 4555 H1-H2 split upper margins to improve sequentially through the year as mix tilts towards aftermarket, and we realized the only financial benefits of Performance Excellence. :

Before I open up to Q&A, I'd just like to say a few words on our strategy and equity case. We has a comparing value creation opportunity as a sustainable technology leader in mining, and we are committed to delivering excellent outcomes to all our stakeholders. We operate in highly attractive mining markets, which benefit from long-term structural tailwinds, offering a multi-decade growth opportunity, underpinned by growing demand for critical metals to deliver at 0 and the transition to more sustainable mining. :

Unique capabilities, customer intimacy, focused portfolio and technology strategy means we continue to enjoy high barriers to entry and are well placed to capitalize on this opportunity. At the same time, our focus on operations and the benefits from performance excellence give us confidence that we can expand our margin above 17% beyond 2023 while continuing to cleanly convert our earnings to cash. :

We've achieved this while remaining resilient, protecting and building our large installed base of equipment, which creates the aftermarket demand that is largely inelastic to CapEx cycles and day-to-day commodity price fluctuations. And we will deliver for our people on the planet, driving 0 harm in our operations and reducing our emissions in line with our recently approved SBTI reduction targets. So we're confident in meeting the commitments we set out in our refreshed equity case last year to ipi markets, expand our margins and convert our earnings to cash while remaining resilient and doing the right thing for our people and the planet. So to close, just let me summarize the key takeaways. We've had a strong start to the year, delivering year-on-year growth in orders and making good strategic progress. We've got excellent operating momentum, and we executed well through the first quarter, growing our revenue and expanding our margins. Conditions in our mining markets are positive, and we are reiterating our guidance for 2023. :

And finally, we have a compelling value creation opportunity. We're operating in attractive markets. And with our focused platform and clear strategy, we have confidence in delivering excellent outcomes for all our stakeholders. So thank you for listening. And John and I will now be happy to take any questions you may have. Back to you, the operator. :

Operator: [Operator Instructions] Our first question comes from Christian Hinderaker of Goldman Sachs.

Christian Hinderaker: I wanted to start maybe on the mining side. A number of the miners have actually missed the production guidance in recent quarters. Appreciate that activity levels are high and the backdrop remains robust as you mentioned. But just interested for any comment on why you think those guidance production rates have been missed and whether that's having any impact at all in your own order activity.

Jon Stanton: Yes, obviously, the performance of our mining customers is entirely reflected in our aftermarket, given that's what their production is ultimately what drives the revenue on the aftermarket side of the business. So I would say we've obviously seen that to some of our customers. Others have done better. But fundamentally, the aftermarket is driven by the amount of rock moved. It's driven obviously by the activity across all of the mines around the world. And those trends are positive. And even though the production guidance might have been missed by a few customers, we haven't seen it really obviously impacting the overall volumes that we've seen in the aftermarket.

And of course, alongside the volume growth that we have seen, we're seeing continued pricing benefits coming through as well. So both of those things have contributed to the aftermarket. But ultimately, it is the reflection of what our customer is doing is in those numbers. :

Christian Hinderaker: And then on the infrastructure side, if we in back to 4Q, I believe you were talking about a 5% 50% year-on-year decline in demand in Europe. Obviously, you've entered at minus 6% for ESCO as a whole. And I said that the mining side is stable. So the infrastructure side is obviously somewhat worse. Just interested in some regional color on the infrastructure demand. And also, thinking back to the last quarter, I think you touched on it earlier, you're shifting from a distributor led to the customer model in some of these areas. I just wonder what impact you think that's having in the first quarter.

Jon Stanton: Yes. So just to clarify on the second part of your question about our channel to market. Our strategy is to be direct in hard rock mining, which has been a continuing journey for ESCO and also I talked about Scandinavian markets where we've just now performance distributor to direct.

So in hard rock mining, that's been very much the strategy, and we made good progress with that. In infrastructure markets, we will still continue to use third-party dealers and distributors because frankly, it's a very, very fragmented market, and it doesn't make sense to have a sort of direct sales force in that space. So we are clear that we're direct in hard rock Mining, very much embedded within customers' operations based on the ground. It's very important to our business model and a key differentiator. But in infrastructure, we'll continue to use third-party channels. :

In terms of the regional color, obviously, we said Q1 last year was a peak quarter for infrastructure. Europe declined through the second half of last year and North America a little bit in Q4. In the first quarter of this year, Europe continues to be at quite a low level, reflecting the economic activity in Europe, but we've seen a modest uptick in North America. :

So as we expected, I think we said a few weeks ago at the 2020 week results that ultimately, the slight decline that we saw in Q4 in North America was probably a return to normal seasonal patterns where you see a little bit of caution in ordering from dealers into the end of the year and then a pickup in the first quarter, and that's what we've seen. It's still down on last year, but sequentially a modest improvement in North America, Europe continuing to remain soft. :

Christian Hinderaker: And finally, maybe just an update, if I may, on lead times and so some inbound supply and your own deliveries. I just wonder if those back or completely normal levels now and whether that's having an impact on inventories.

Jon Stanton: I know our lead times at -- you largely normalize through 2022 as the operational cadence of the business picked up and supply chain challenges eased. So I would say, by and large, there's plenty of free capacity around the world now. So from a supply chain point of view, we're -- I would say we're largely normalized, that with precoded sort of lead times and on the front end of the business. Our lead times are sort of a standard level.

So the only time where it sort of stretched out a little bit it was span at the beginning of 2022 and '21 after the cyber attack. So that was a weird specific point but that has been dealt with clearly, and now we're back to normal levels. And I don't think there's any impact on that in the ordering trends that we've seen. And we certainly don't think in mining that there's been any sort of stocking strategy changes in our customers. We think the inventories are at sort of normal type levels through cycle levels. So we feel it's pretty balanced at the moment. :

Operator: [Operator Instructions] Our next question comes from Jonathan Hurn of Barclays.

Jonathan Hurn: Just 2 questions from me then. Firstly, just on the cash pension, obviously, you're guiding to 18% to 19%. Can you just talk us through the phasing of that cash conversion through 2023? Is it still going to be quite Q4 weighted in terms of getting to that target, please? That was the first one.

Jon Stanton: Thanks, Jonathan. I'll take that. So yes, I mean, obviously, reiterated our 80% to 90% guidance for this year. And last year, obviously, we had a significant working capital flow in the first half of the year and then not coming back in Q4. Matthew remember was driven in part by the supply chain challenges and extended and lead times on bottom components for our project activity within the Minerals division principally. So we won't see that same extent this year.

We will have still see an outflow of working capital through the first half of the year. We're building inventory to support the shipping of revenue through the second part of the year. That will be marginally reverse through the second half of the year till we've got modest outflow of working capital, keeping working capital to sales in a similar position to last year. So rolling all that together specific to your equation, I think that you will certainly see cash conversion progress from H1 to H2. But H1, we will see it strong than we did in H1 last year, but not to the full 80% to 90% level on each one that will be a 3-year number, Jonathan. :

Jonathan Hurn: Great. That's very clear. And the second question is just on the margins. Obviously, you've reiterated 17% target. Can you just talk us through how we kind of think the H1, H2 split in terms of those margins, just in terms of maybe the momentum in terms of the growth in H1 and the potential momentum coming through in H2? I know obviously, H2 is going to be a little bit more loaded on some of the comments you made earlier. So can you just give us a little bit of color on that, but that would really be helpful.

Jon Stanton: So are no problem. So again, start with the 17%. The Q1 has given us good confidence in delivering that. So no change to our overall 17% target for the year. That's were underpinned by the areas that we outlined at the end results in terms of continued pricing benefits ongoing efficiencies, performance excellence, moving metrics, all of these are in a lockup to deliver that 17% margin. Some of those are slightly more second half weekly. So thinking about the benefits from Performance Excellence, Motion Matrix margins coming through. So what that means is that to deliver the 17%, which is 100 basis points up on last year, then in the first half, margins will improve on the first half last year, fall by a bit less than 100 basis points.

And then for the reasons I've just described the second half, we'll see those margins progressively accelerate in terms of the difference of the last 2 years such that the H2 '22 to '23 will be a bit more than 100 basis points. So that is sort of how we see the largest phasing. But it's been a good start drawing put margins up in the first quarter and really confident in the matting the normal. :

Jonathan Hurn: And maybe I can just sort of squeeze just one last one just very quickly. Just in terms of those in terms of the Minerals aftermarket orders, obviously plus 5%. Obviously, you said for demand price. Can you just give us a rough split of how much of that was priced in terms of that growth is?

Jon Stanton: Yes, I'll take that one, Jonathan. I mean, it's absolutely in line with what we said at the beginning of March. So inherent in the numbers in Q1, we've seen underlying mid-single-digit volume growth. We've seen underlying mid-single-digit pricing growth, but that's been offset by the headwinds from [indiscernible] Russian orders and a little bit from the oil sands, which brings us back to sort of mid-single-digit net. So that's the way to think about it. So -- but exactly what we expected to happen and expect to see for the balance of the year.

Operator: [Operator Instructions] We currently have no further questions registered by the telephone lines, so I hand back over to John Stanton for any closing remarks.

Jon Stanton: Thank you, operator. Thanks, everybody, for attending the call. And we appreciate the questions. Obviously, if there are any follow-ups, then please get in touch with the Investor Relations team over the course of today. But thanks again for your participation.

Operator: Ladies and gentlemen, this concludes today's call. Thank you for joining. You now disconnect your lines.

Earnings Transcript for WEIR.L - Q1 Fiscal Year 2023

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