Earnings Transcript for WEIR.L - Q4 Fiscal Year 2020

Jon Stanton: Good morning, everyone, and welcome to Weir's full year results presentation, which is taking place in what is the group's 150th year. Weir was started in 1871 by 2 brothers, James and George, both engineers, who are passionate about using innovative engineering to solve the big challenges of the day. A century and a half later, the challenges are very different, but the same focus is right at the heart of our strategy as you'll hear throughout this presentation. This morning, we'll look at how the business continues to protect its people, customers and communities. We'll reflect on the resilience of the group's financial performance and the benefits of our transformation into a mining technology pure play. And we'll set out our new medium-term performance goals, including how we'll grow ahead of our markets, expand our margins further and deliver on our sustainability ambitions, all within the disciplined framework of our refreshed capital allocation policy. As usual, I'm joined by our CFO, John Heasley. And after my opening remarks, John will take you through the financial review in detail. I'll then return with the business review and more on our new performance goals before we open up for questions. But first, let me start with safety and the COVID-19 pandemic. As you know, at Weir, we believe safety is the first priority and the primary indicator of organizational effectiveness, and we're on a mission to become a zero-harm workplace. COVID presented a new set of challenges but, as our teams always do, they responded magnificently. We rapidly adapted to ensure everyone who could work from home was able to do so effectively. Colleagues in our manufacturing and service facilities reconfigured our operations to make them as COVID-safe as possible. And across the group, there was a 23% reduction in our underlying total incident rate, including 2 full months, March and November, where there were no recordable incidents. This is the first time this has happened in our history. The biggest change recently has been the rapid improvement in ESCO since the acquisition. The division has embraced Weir standards, and achieved a 34% reduction in TIR in the last year through a combination of investment in facilities but, most importantly, behavioral change. And by having safe and agile operations, we've been able to fully serve our customers throughout the pandemic with some excellent examples of why, at Weir, people are our most precious resource. In Peru, an ESCO engineer who suddenly couldn't get access to a mine site, developed a GET Weir measurement app for the customer to put on their smartphone. Augmented and virtual reality was adopted in a variety of ways from completing product test inspections to safety gamble walks. Maintenance crews and engineers volunteered to be quarantined on remote mine sites for weeks on end and, of course, all those working from home who have delivered, including the completion of the Oil & Gas sale by a cross disciplinary team, which was an extraordinary feat in the circumstances. These are just some examples of the brilliant culture we're nurturing at Weir. And in all our communities, colleagues have been playing their parts in the pandemic response from manufacturing PPE here in the U.K. to providing food parcels in Brazil and financial support to organizations in South Africa. This blend of a caring culture, global capability and local empowerment is an enormous asset to Weir and is extremely hard to replicate. I'd like to personally thank all my colleagues for their hard work and commitment in the past year. Let me now turn to the group's financial performance, which was highly resilient. After the lows of Q2, when oil production fell by approximately 15%, there's been a gradual recovery in demand, which is continuing to develop positively. Our full year results reflect the fundamental strength of the business with broadly stable revenues, supported by delivery of the majority of the Iron Bridge order and operating profits that benefited from our GBP 40 million cost-saving program. We also delivered the full ESCO cost synergies early, supporting another step-up in margins, which has now increased by more than 500 basis points since acquisition. The successful sale of the Oil & Gas division and strong cash generation also strengthened the balance sheet with pro forma net debt-to-EBITDA falling to 1.7x. So a solid financial performance, but we also continue to make significant strategic progress. So let me give you some highlights. Of course, the biggest change has been our transformation into a premium mining technology business. We're around 80% of revenues from mining applications, putting us in an excellent position to deliver long-term profitable growth in the decades ahead. Among the other highlights in the year were

John Heasley: Thank you, Jon, and good morning, everyone. Once again, the quality and resilience of our mining businesses has shown through. In the most challenging of years, the essential nature of our industry and the importance of our products to our customers supported our top line performance. Our early and proactive action on cost and liquidity protected our financial position, and this, together, with the sale of Oil & Gas, means that our balance sheet is strong. On a constant currency basis, orders at GBP 1.9 billion were down 9%, excluding the Iron Bridge OE order received in 2019 while revenues were down only 1%, reflecting the benefit of most of the Iron Bridge OE order being delivered in the year. Operating profit on a constant currency basis was flat year-on-year, with negative mix and COVID-related costs being fully offset by our planned GBP 39 million cost savings in response to COVID, which included reduced headcount, travel and bonus costs. Profit before tax reached GBP 14 million to GBP 255 million due to foreign exchange translation headwind of GBP 10 million and increased interest costs associated with our refinancing completed in June. The total group loss after tax of GBP 149 million reflects the GBP 209 million noncash impairment of our Oil & Gas division to align the carrying value to disposal proceeds. Operating cash flow was again strong at GBP 372 million, and this, together with the pro forma impact of the sale of Oil & Gas, means net debt-to-EBITDA was 1.7x. I'll now get more detail on each of the divisions starting with Minerals. Prices for our key commodities of copper, gold and iron ore remain resilient through the first wave of COVID before reaching multiyear highs, supported by stimulus spending in China and COVID-related supply constraints. A number of our customers' mines were closed or disrupted for varying durations, especially in Africa, Peru and North America. This led to our production to fall significantly in the second quarter before recovering through the second half with an estimated full year decline of between 2% and 4%. While oil production returned closer to normal in the latter part of the year, our ability to offer our full package of support to our customers was curtailed by very restricted mine site access. We continue to see an ongoing improvement in this situation, but are still below pre-COVID levels. Decision-making and project activity was also impacted by a combination of caution and logistics through the second and third quarters before easing slightly towards the end of the year. While a number of our factories and service centers based ongoing COVID-related closure and disruption through the year, our regional operating model meant we were always able to fulfill customer orders. Against this challenging market backdrop, Minerals had a strong year. Aftermarket orders down 4%, broadly in line with our production despite our restricted site access. Strong performances in Chile, Brazil and Russia offset weakness in North America, Australia and Africa. Australia and Africa were impacted by more severe COVID restrictions while North America was impacted by lower Canadian oil sands demand, as oil price is at record lows, and activity reduced in the Iron Bridge as the auto industry shut down for much of Q2. Aftermarket momentum gathered towards the end of the year with a 7% sequential increase in orders from Q3 to Q4. Original equipment orders were 11% lower, excluding the prior year Iron Bridge contract as decision-making slowed. Notwithstanding this, we saw good conversion on integrated solutions, especially later in the year with 2 orders worth a combined GBP 20 million received in December, a GBP 12 million copper project in Russia for slow pumps, cyclones and flotation pumps and an GBP 8 million gold project in Canada for HPGR's slow pumps and cyclones. Regionally, North American demand was weakest, driven by a higher proportion of non-mining activity while demand was strong in Russia, driven by mine upgrade and expansion activity. We saw a 45% sequential improvement in Q4 OE orders. Although as ever, these can be lumpy. Constant currency revenues increased 4%, with OE increasing 19% due to Iron Bridge, more than offsetting a 2% reduction in aftermarket. This meant that we represented 31% of revenues compared to 27% in the prior year. Operating profit was flat at GBP 260 million as the absolute profit increase from higher OE revenues matched the loss profit from the much smaller drop-off in aftermarket revenues. The COVID-related disruption to our operations described above resulted in incremental costs and overhead under recoveries that were fully mitigated by the GBP 30 million of cost savings realized in the year. Those cost savings were mainly related to reduced headcount, bonus and travel costs. We expect 2/3 of these to be temporary in nature. And while the timing of full reinstatement of costs will depend on the path out of COVID, the net result of savings and associated COVID-related costs should continue to be broadly neutral. The 70 basis points reduction in margin reflects the higher proportion of OE revenue in the year, consistent with our countercyclical margin model. Moving on to ESCO. Market conditions in mining were similar to Minerals, with infrastructure markets in Europe and North America more significantly impacted as many construction projects suffer COVID disruption, especially through Q2 and Q3. Overall, orders and revenues were down 15% and 13%, respectively, broadly aligned as you would expect for a shorter cycle business. After a strong first quarter, we saw a sharp drop-off in Q2 and Q3. This was driven by 2 main factors

Jon Stanton: Thank you, John. In this section, I want to share why we're so excited about the future and how we'll build on our recent transformation to deliver long-term profitable growth that provides value from all our stakeholders. Let's start with a reminder of what Weir looks like as a focused mining technology provider. At the heart of how we operate is our We Are Weir strategic framework. In one page, it sets out our purpose. It makes clear our distinctive competencies in people, customers, technology and performance. And it articulates our values, culture and business model. You'll see this visual in every Weir location, and it informs our decision-making from daily tasks through to strategic portfolio management. It's designed to give all our stakeholders a clear idea of what Weir stands for and why we will continue to stand out in the future. The bedrock of Weir is our business model that's designed to maximize growth while providing significant resilience through the cycle. As we saw in 2020, our focus on mission critical, highly engineered technology means that we are crucial partners to our customers in avoiding downtime. The highly abrasive applications our equipment is used in drives demand for aftermarket spares and services that are captured through our direct service network, delivering best-in-class recurring revenues that represent 3/4 of sales. Regardless of commodity price or CapEx cycles, our customers tend to maintain production levels, which is what makes the aftermarket so resilient, while the nature of our technologies combined with low local service and vertically integrated capacity means we're able to develop and maintain long-standing customer relationships. Our resilience is supported by our focus on what we see as the best parts of the mine with #1 market positions in each of the 4 segments where we have a presence. Over time, we've broadened our products offering, but also now offer integrated solutions in critical areas of the value stream, sometimes working in partnership with other suppliers to complete the package. We're religious about our business model, however, as we don't want to own the more commoditized parts of the process, and also remain mindful that the large EPCMs are among some of our most important customers. This was perfectly illustrated in the case of Iron Bridge, where our ability to provide an innovative and comprehensive grinding and crushing solutions of the project unlocked further opportunities in slurry pumps, cyclones and valves, which all come with significant aftermarket potential. The comprehensiveness of our offering, the strength of our brands and the responsiveness of our service network builds long-term relationships that are based on trust. Over time, we'll leverage those relationships, continuing to expand our offering of solutions, but remaining true to our razor blade business model. And these foundations have delivered a doubling of our Minerals aftermarket revenues and highly resilient margins over the last decade, despite challenges that have included the end of the super cycle, a major downturn and now a global pandemic. This resilience, coupled with the long-term prospects for mining, particularly for the future-facing commodities we have the most exposure to, is why we decided to focus on our core strengths, acquire ESCO and sell both the flow control and Oil & Gas businesses. And it means we're now ideally positioned for the future, aligned to structural trends that can deliver multi-decade growth. Mining's essential status is clear given its crucial role in providing the resources to support population growth, urbanization and rising living standards. It's also a critical enabler of decarbonization, which will require significantly higher production of metals, such as copper and nickel. But the way these essential resources are produced needs to change, and that requires a technology transformation in the industry. In short, mining needs to become smarter, more efficient and sustainable, and that means Weir has a tremendous opportunity to rise to the innovation challenge, just as James and George did with steam ships at the end of the 19th century. Helping the mining industry get to net zero and fulfill its other ESG promises is not only the right thing to do, but it's a tremendous commercial opportunity, and that's why we put sustainability and efficiency at the heart of our purpose, 2 themes that will dominate the industry in the years ahead. As a reminder, last year, we launched our comprehensive and integrated sustainability road map that sets out our 4 priority areas, including reducing our footprint, nurturing our unique culture and championing zero harm. But from the comprehensive stakeholder engagement we undertook to divert this road map, it was very clear that by far, the largest impact we can have is by helping our customers meet their objectives from safety to climate and productivity, and that means driving the creation of more sustainable solutions. So what are our customers telling us? In essence, they want our help to safely produce more ore from lower grades using less energy and water and with a lower environmental impact. We're just at the start of what is likely to be the most innovative period in mining since the industrial revolution. Enabling this change will require close partnerships throughout the supply chain, and those businesses that can help make mining more sustainable and cost-effective will be the real winners. At Weir, we're already seeing this play out in the rapid market share gains we've seen from our Enduron HPGRs and Nemisys LIP system, and the interest in our tariff line concept that has the potential to deliver a solid tailings product more cost effectively than alternative technologies. We're also field trialing our latest mill circuit pump, which will provide customers with unrivaled Weir life and digital insights that lets them optimize their operations even further. I am really excited about our technology agenda and the opportunities we have before us. In mining, the question is not if the industry will change, but how rapidly change will happen. And at Weir, we intend to stay in the vanguard. So how will that translate into performance? Well, as you've seen, we start with a very strong platform and with an excellent set of structural tailwinds that will support growth in the decades ahead, also about our more immediate priorities. As ever, we start with our We Are Weir framework. And what makes us distinctive? This begins with people where we want to turn 2 months of no recordable incidents into 12 months and make zero harm the norm. We also know the benefits of a highly engaged workforce, and that's never been more evident than during the COVID pandemic. We benchmark our employee Net Promoter Score. And while we're already a top performer, we still have more to do, particularly in making the business more inclusive and diverse, which is one of the main areas for improvement identified by our employees. Looking at customers, our goal is to grow ahead of our markets through the cycle. We'll do that by gaining share in our current segments, but also leveraging our technology and service presence into attractive adjacencies and geographies and expanding digital beyond our equipment and into an enterprise-wide approach with the customer experience at its heart. Our technology agenda will see us invest more in R&D win-wins, where the customer benefits from the lowest total cost of ownership and reduce environmental impact. And as we grow, we'll do so profitably, progressing margins, improving returns on capital and making our own operations more energy efficient. It's an ambitious agenda to deliver long-term profitable growth that provides excellent outcomes for all stakeholders. Let me go into a little bit more detail on how we'll achieve those goals, starting with outperforming our markets. First, we expect our markets, principally ore production, to grow at around 3% per annum in line with long-term averages. In contrast, we expect Weir to deliver mid- to high single-digit growth through the cycle. This will be achieved through a number of organic initiatives, including integrated solutions. This includes brownfield productivity upgrades, where we can reduce bottlenecks and increase throughput, providing swift paybacks. In new greenfield projects, we'll leverage our fuller offering, just as we did with Iron Bridge, to cover a broader range of subsystem applications from crushing through to mill circuit and tailings. And where it makes sense, we'll support these relationships with selective longer-term service level agreements. Geographic expansion will focus on those high-growth areas, where the total cost of ownership argument is gaining traction [indiscernible], particularly in Russia, Central Asia, China and Asia Pacific. We'll accelerate progress of our Minerals and ESCO revenue synergies as part of a wider expansion of ESCO's products into underweight markets. For example, in Ghana, the division has gone from no present to nearly $5 million in orders in just over a year. We also expand its infrastructure offering beyond the U.S. and Europe, focused on large new machines where the TCO proposition is compelling. We also continue to broaden our product range, both in terms of our traditional strengths in mechanical and hydraulic technology, but also digital solutions where we can help customers leverage machine learning and big data to improve productivity. And of course, we'll help our customers meet their net zero ambitions, both in terms of the products we have in the field and those we're developing. This includes Scope 4 offerings, where, for example, emissions are avoided due to increased Weir line for energy efficiency, which is clearly our sweet spot. And as we grow, our operating margins will benefit from the strategic clarity and focus we now have. This includes supporting gross margins through manufacturing consolidation and optimization, including best cost sourcing. Following our multiyear investment in SAP and other foundational platforms, we're now able to drive towards a more lean and efficient back office in functional areas such as finance, HR and IT, including more shared services. And we'll continue our journey towards operational excellence through reduced waste, so we can then spend more on research and development. We aim to deliver 150 basis point improvement in group operating margins in the next 3 years, assuming a broadly stable mix between original equipment and aftermarket revenues. However, as we've always done, we will take a long-term view on margins, accepting that when CapEx is high, margins are lower but the payoff is a long-term stream of higher-margin aftermarket revenues, which ultimately increase profitability. We're also on a path to net zero with a clear sustainability road map that will first deliver a 30% reduction in emissions relative to revenue by 2024 and 50% by 2030. This will be achieved through behavioral change where people throughout the organization take personal responsibility for reducing emissions, building on the lessons from our safety journey. We'll significantly increase the proportion of power we receive from renewable resources and focus on improved efficiency at our most energy-intensive foundries. As you can see, we made good progress in 2020 with a 13% reduction in CO2 emissions, which did include a COVID benefit but also action to improve manufacturing efficiencies, process and technology upgrades and increased use of renewables. We were also pleased to be upgraded to A- by CDP in recognition of our commitment to best practice, particularly in governance, disclosure and emissions reduction initiatives. Our next steps in 2021 are to fully evaluate our Scope 3 potential, science-based targets and net zero pathways. We're also further integrating ESG metrics into our remuneration policy to support execution further. But of course, our biggest contribution will be in making our customers more efficient. To put that in some context, the energy savings from the HPGRs we have sold so far are equivalent to 3x the group's total emissions, which reinforces our view that this is a major commercial opportunity for Weir. Our growth agenda will be supported by a disciplined capital allocation policy that starts with investing in the many opportunities we have before us. We'll also maintain a strong balance sheet, with a normal leverage ratio of between 0.5 and 1.5x net debt to EBITDA. We will continue to pursue M&A opportunities that accelerate our strategy, but they must also fit our business model and exceed our financial hurdles. I've talked before about how we see Weir continuing to be a consolidator in our markets as we expand our product portfolio and increase our digital capability. To ensure we remain agile, we will be willing to stretch leverage to 2x for the right acquisition at the right point in the cycle. In terms of shareholder returns, our new dividend policy post Oil & Gas will be to distribute 1/3 of EPS through the cycle, with the timing of resumption depending on how 2021 develops. We'll also satisfy all equity-based compensation through our market share purchases, which last year was GBP 11 million. And finally, where excess cash is generated, we'll return this to shareholders as appropriate. Let me end with a few words on outlook. We're not giving detailed guidance for 2021 due to ongoing uncertainty as a result of COVID-19, but I do think it's worth reflecting on what we see as underlying market conditions. Firstly, the structural trends I spoke about earlier are accelerating, particularly the move towards cleaner, more metals intensive energy and transport and as the world builds back better, it will do so using more copper, nickel and iron ore. Secondly, mining needs to invest. The industry has been through a prolonged period of constrained CapEx, equipment ages at record levels, and the pandemic has exacerbated this further as maintenance schedules have been pushed out. Added to this is the continued decline in ore grades that means production is even more intensive with now around 200 kilos of material being processed to extract just 1 kilo of copper. And thirdly, we've seen some commodities reach record highs in the last year. If supportive prices are maintained, they will ultimately speed up decision-making on the current pipeline and encourage new investments. So the medium-term outlook looks bright. But of course, the road map out of the pandemic is uncertain and understandably leading everyone to tread cautiously. As I said earlier, we've seen a good start to the year. We're still seeing disruptions in some countries, not helped more recently by extreme weather, but the vast majority of mines are open. And given commodity prices, they're keen to maximize production within current constraints, which is supporting aftermarket demand. As mine access issues continue to ease, we expect to see CapEx spending increase, and that's reflected in our project pipeline where bid activity remains very active, stepping up further in January and February. It's a similar outlook for infrastructure markets, which are gradually recovering from their lows in Q2 of last year, and are expected to be beneficiaries from government stimulus programs as the global economy ramps back up. Overall, we expect to see growth in constant currency profits in 2021, but the last year has taught us we need to remain vigilant, and the path may be bumpy over the next few months. Before we move to questions, let me quickly summarize what I think are the key messages from this presentation. Today, Weir is a premium mining technology business. We have a major opportunity to make mining more sustainable and efficient. We have a clear strategy to deliver profitable growth ahead of our markets supported by structural trends and accelerated by our own organic initiatives. And we'll achieve that growth in a disciplined way that delivers long-term value for all our stakeholders, underpinned by our strong culture and our 150-year record of seeing things differently. Thank you, all. And John and I would be delighted to take any questions you now have. So back to you, operator. Thank you.

Operator: [Operator Instructions] Our first question comes from Max Yates of Credit Suisse.

Max Yates: My first question is on the Minerals margins into next year, and obviously, there's quite a few moving parts with mix, cost savings coming back and some inefficiencies that you shouldn't have in next year. So how should we think about the Minerals margins evolution into next year in your view? Is stable a reasonable expectation? Or do you think you can show improvement here from the base where we are now?

Jon Stanton: Yes. Thanks for that, Max. I'll let John talk about the moving parts. But just before I do, I think the big thing to say is, clearly, we've built a really big pipeline from an OE perspective. There's got a lot of uncertainty about how that will convert, but it is starting to look quite positive. So I think a lot will depend on the OE aftermarket mix, and we'll have to see how that develops over the next few months in terms of the OE orders coming through, if they come through quickly, which means we'll be able to ship some of them by the end of this year. So I think with that, that's the sort of caveat out there in terms of the sort of slight unknown. But in terms of the moving parts on the cost base, John, do you want to just take Max through those?

John Heasley: Yes. Thanks. So I got a couple of things. One, of course, remember that we've got Iron Bridge in this year's numbers, which is a fairly significant portion of OE. So that -- as that comes out then, notwithstanding the great pipeline that we've got then, there's probably a little bit of room there on the mix. In terms of the cost savings then, obviously, this year, we had the GBP 30 million of COVID savings, which went to offset the incremental costs of site shutdowns and so on as we went through the year in various parts of the world. So clearly, some of the cost savings this year were temporary, things like bonus and travel that will come back as we move through 2021. So the assumption just now on the cost side is that, essentially, we'll continue to see a neutral impact between COVID costs and COVID savings into next year. Clearly, the shape of that, none of us really know yet, but our base case is that those broadly offset. So all things being equal, if we see a bit of -- and really, as Jon says, has been driven by the mix with the cost base, broadly having a neutral margin impact as we move into next year. And then on the longer term, the 150 basis points, I think, will sort of being broadly spread over the 3-year period.

Max Yates: Could I just check what the Iron Bridge contribution was to revenues? Did you recognize all of the revenues this year? Or is there still some to come in 2021?

John Heasley: There's still a little bit to come next year, Max. So there's just north of GBP 80 million in this year's numbers, which means there's still another GBP 10 million or so to come in 2021. So the delta year-on-year is going to be about minus GBP 70 million or thereabouts.

Max Yates: Okay. Helpful. And maybe if I can just ask a question on M&A. You talked about sort of Weir continuing to be a consolidator. When you look at the sort of pipeline of potential acquisitions and potential areas that you can move into, you made it quite clear that there's areas that you don't want to move into. But could you help us a little bit with the sort of size of acquisitions that you're considering? And what we should think the most likely areas for you to move into. Would it be digital? Or actually, are there product areas where you still think you have white spots within the group?

Jon Stanton: Yes. Yes, thanks very much. It's a good question. So I would say, when you look at the footprint that we have in the mine, we're very happy with the bookends of that. As you know, we have a very, very strong offering on the wet process. We have a strong offering in dry process around HPGRs, but some product gaps around that. Frankly, we can fill either organically or potentially accelerate through M&A. And of course, ESCO is -- it's really a very narrow product line in terms of the consumables. So I think there are opportunities from the equipment perspective. And as I said, when you picked up, we're going to be very, very focused on razor blade. So we don't want the commodity bits of equipment that sit around the mission-critical pieces. So we'll continue with that strategy. We're absolutely crystal clear on that. But again, to your other point, if there are things that we can buy from a technology perspective that help us to accelerate our quest on Big Data, AI, machine learning, then that's potentially interesting for us as well. And as regards to size, we've got a playbook, which currently includes a lot of small things, 1 or 2 big things. So what we're really focused on is where we can take the portfolio and accelerate the execution of the strategy, absolutely sticking to our financial discipline in terms of what we expect to see from returns. But the size will really depend on what does or doesn't become available on that playing field.

Operator: Our next question comes from Mark Davies Jones of Stifel.

Mark Jones: Can I just pick up on the ESCO point now and the narrowness of the range there? You said during your prepared comments that you'd be looking at broadening that out. Firstly, where might that go in terms of product range? And secondly, around the financial targets on ESCO. You've clearly got pretty close to your margin targets despite a very depressed volume environment, particularly on the infrastructure side. So as those markets turn up, why can't that ESCO margin target be revised up from here?

Jon Stanton: Yes. So taking the first point first, Mark. Yes, I mean, the ESCO product range that sits today is principally the GET and other Weir parts that sit around that and some other ancillary bits of equipment. Our strategy really is to extend what we do in and around the excavator machine itself. So expanding into buckets, expanding into other Weir plates and other consumer boards that sit around the machine. And from a technology perspective, sort of driving the transition from a dumb bucket, if you like, that just moves us to a smart bucket that actually has sensing data capture, which provides information downstream in terms of what's coming, both from a sort of a safety perspective, if there are big boulders in the bucket or sort of sensing whether there's been GET losses and so on. So I think just kind of broadening out what we do around the theme of making the machine more efficient is really where we can go with ESCO, and we think there's a lot of opportunity to do that. And as I said earlier, there's also plenty of opportunities to broaden out the geographical footprint with ESCO as well, which is going to provide another further angle for -- to growth. In terms of the margins, look, I think -- in contrast with Minerals where John said, basically, we've got cost going back in, but the level of cost that will eliminate will be flat. There is more of a headwind in ESCO because going into 2021, some of the discretionary costs in terms of bonus and travel and so on is going to go back, but we didn't actually have any significant incremental COVID costs or under recoveries in ESCO, which is just the nature of where the manufacturing operations are located. They were less disruptive to Minerals. So we have actually got a headwind going back in terms of costs in ESCO for this year. That said, we're not expecting our margins to go backwards. Will we get to 17% in 2021? We've got a bit of headwinds to deal with there. But beyond that, Mark, look, I think we're very confident we will get to the 17%. And as part of our overall performance goals, targets that we set out today, we will be pushing the business beyond that. But we are not going to put a number on that yet. It's still too early. But we will be seeking over the next 3 years to try and push ESCO margins through that 17% initial target.

Mark Jones: Great. Can I ask one follow-up just on the group level targets? You've given, obviously, an outlook on revenue and profitability. Is there something you can say in terms of targeted cash conversion because it sounds like CapEx is going up again. There's going to be some working capital requirements as the OE side picks up. So what do you think normal through cycle cash conversion should be on business that's not comprised?

Jon Stanton: John, do you want to take that one up?

John Heasley: Yes, that's fine. I mean, as I said in my remarks, working capital now without Oil & Gas is running pretty clean at 22.9% of sales. So I think that feels appropriate for the business. So I think as you see growth coming through, then we'll clearly get a bit of absorption of working capital of that order, just north of 20% of revenues. In terms of cash conversion outside of operating cash, then the slide that I presented on guidance makes clear that we will be investing at around that GBP 100 million of CapEx. That clearly is running above depreciation, not expecting any significant exceptional cash costs. And then, there's a couple of things in there, just the normal pension contributions and, as John mentioned in his remarks, the share-based compensation. So I think from all that, you can see we're still expecting strong free cash flow. And depending on where the growth goes, you can work out the working capital from there. So hopefully, that gives you the moving parts, Mark.

Operator: [Operator Instructions] Our next question comes from Andrew Wilson of JPMorgan.

Andrew Wilson: A couple of questions. Maybe to start, just on the portfolio. I guess it's a bit of a follow-up to some of the earlier questions. Is there a sort of temptation as you think about where the balance sheet sits? As you think about some of the opportunities you have from an acquisition perspective that there are potentially parts of your portfolio, however, small, that you might divest and sort of recycle some of that cash into perhaps more attractive areas or kind of, I guess, we're probably talking about Minerals. Do you sort of look at that whole portfolio today and think nicely, this is what we wanted to look like and it's the case of building to that and not subtracting?

Jon Stanton: Yes. I think we've done enough disposing for the time being with the sale of Flow Control and Oil & Gas. I'm very happy with what we've got today. I mean, I think there's a little bit to do in terms of tidying up around our manufacturing footprint and making sure that we've got our production capacity optimized and might we just sort of walk away from tiny bits of business or sorts of tiny bits of business as we do that, possibly, but nothing of any significance that I would say, is non-core or diluted to, frankly, to where we are today.

Andrew Wilson: And then just kind of going back to the earlier question, just on cash and free cash flow. Sort of when you think about, I guess, maybe the CapEx over the longer term, I mean, is that GBP 100 million a good number for us to think about on a 3-year view, for example? Or is it particularly high at the moment because obviously, there's a lot of investment and that can normalize? Just trying to think about the sort of the free cash flow and how that plays into your thinking around the new dividend sort of power structure that you've talked about.

Jon Stanton: Yes, it is. I think as John mentioned, we've just approved the construction of a new foundry for ESCO in China, which is part of our ongoing manufacturing optimization that's going to increase our capacity, which we'll meet over time. So that's going to be running through over the next couple of years. I think, to your point, where are we today? I mean, now that we sort of emerge ex-Oil & Gas with absolute laser focus and very, very clear strategy of how we're going to grow the business going forward, really, really strong positions that we can build on, we want to invest to deliver that growth and bring margins up with us as we see that growth coming through. So I think it's reasonable to assume that we'll continue over the next 2 or 3 years as we position ourselves to take advantage of that growth that we'll see CapEx running slightly above depreciation. GBP 100 million is not an unreasonable assumption to make. And the decision on where we want to go with the dividend in terms of the payout ratio is based on the fact that now that we see this as a growth story, we want to invest as much free cash as we can into that growth whilst having the discipline of resuming dividends depending on how this year progresses. So that's really how we're thinking about it.

Operator: We have no further questions on the phone line, so I'll hand back.

Jon Stanton: Okay. Thank you, operator. Thanks, everybody, for listening in this morning, and I appreciate that. And of course, if you do have any follow-up questions, then please come through to Stephen, and we'll do as best we can to help as we go through the course of the day. But thanks again for your participation, and we'll catch you up soon. Bye-bye.