Earnings call: Weir Group reports growth and sustainability progress

Weir Group (OTC:WEGRY) (WEIR.L), a leader in mining technology, has announced in its Full Year Results Presentation a year of progress, with a 9% revenue increase and operating margins expanding to 17.4%. The company has also made strides in sustainability, achieving a 6% reduction in emissions and maintaining its CDP A List status for climate change performance.

With a focus on mining technology innovation and business optimization, Weir Group is targeting 20% operating margins by 2026 and expects further improvements in cash generation and return on capital employed.

Key Takeaways

• Weir Group's revenue grew by 9%, and operating margins expanded by 140 basis points to 17.4% in 2023.
• The company achieved a 6% reduction in Scope 1 and 2 emissions and remained on the CDP A List for climate change.
• ESCO's free operating cash flow in China increased by £50 million, reaching £392 million for the year.
• Weir Group's net debt decreased to £690 million, with a net debt-to-EBITDA ratio of 1.1x.
• The company is well-positioned for long-term growth, with a focus on aftermarket services, technology initiatives, and operational excellence.
• Global ore production is expected to increase by about 1.5%, with Weir delivering close to £1 billion of incremental original equipment recently.
• Weir Group is looking for assets to accelerate its organic growth strategy, including technology and regional product infills.
• The company expects low-single-digit pricing growth in 2024, with two-thirds of revenue growth coming from volume.

Company Outlook

• Weir Group aims to outpace market growth and targets 20% operating margins by 2026.
• The company anticipates continued growth and margin expansion in 2024.
• Weir's strong balance sheet provides flexibility for potential M&A activities to accelerate growth.

Bearish Highlights

• The company has seen some moderation in projects related to battery metals like nickel and lithium.
• Pricing contribution is expected to be smaller in the less inflationary environment of 2024.

Bullish Highlights

• The company's aftermarket bias business model and technology-focused initiatives position it for compounding growth.
• The mining industry's positive long-term outlook, driven by the energy transition and sustainable mining trends, supports growth.
• Weir's solutions contribute to sustainable mining by reducing energy consumption and carbon emissions.

Misses

• Despite overall growth, the company has observed a slowdown in customer activity for battery metals due to pricing and supply/demand mismatches.

Q&A Highlights

• The transition to an external provider for business services is on track, with savings expected to be realized in 2025.
• Weir is making operational improvements, including process improvement and manufacturing consolidation, to drive efficiency.
• The new foundry in China is highlighted as a driver for cost reduction and increased capacity.
• The company's small exposure to battery metals is factored into their overall guidance for 2024.

Full transcript - None (WEIGF) Q1 2023:

Jon Stanton: Good morning, everyone, and welcome to Weir’s Full Year Results Presentation. Please note the usual cautionary notice on forward-looking statements. Today, I’m joined by our Head of Investor Relations, Ed Pears. Ed is standing in, as our new CFO, Brian Puffer, doesn’t start until tomorrow. This will also be Ed’s last set of results in IR as he is moving into a senior finance role within minerals. I’d like to thank Ed for his excellent contribution to our IR efforts over the last two years and to welcome his replacement, Phil Carlisle, who will be transitioning into the role over the next couple of months. So after some opening remarks from me, Ed will take you through the financial review, and I’ll then return with the strategic and markets review and the outlook for the Group. We’ll then open up for questions with Andrew Neilson, President of Minerals, also here, with Ed and I for the Q&A session. Weir has a compelling long-term value creation opportunity, which is underpinned by three key factors. Firstly, we are a focused mining technology leader with unique capabilities. Our world-class engineering solutions, combined with intensive global aftermarket support, keep our customers’ mines running and solve their big challenges. We are deeply embedded in their operations and have a large installed base of mission-critical equipment with high barriers to entry. Secondly, the long-term trends in our markets are highly attractive to deliver the energy transition and support global demographic trends, production of critical metals needs to increase significantly. In parallel, our customers must also adopt new technologies to extract and process those metals in a more sustainable way. And thirdly, through Performance Excellence, we’re optimizing our business, creating an ever leaner and more efficient Weir, reducing cost and complexity in our operations and driving margin expansion. Reflecting our confidence in the long-term outlook, at our Capital Markets event in December, we significantly upgraded our commitments to our stakeholders. We reaffirmed our commitment to grow faster than our markets and to deliver compounding growth in mid to high single digits through the cycle. We upgraded our margin targets, committing to further operating margin expansion beyond our 2023 target of 17% with a full year operating margin target of 20% in 2026. We committed to further improving our cash generation with free operating cash conversion of between 90% and 100% from 2024 onwards and maintaining our keen focus on increasing return on capital employed. And finally, to nurture our highly resilient business model while continuing to do the right thing for our people and the planet, delivering sustainable Weir and accelerating sustainable mining. In 2023, we made great progress. We met or exceeded our commitments, continuing to build our track record of delivery as a focused mining technology company. We grew revenue by 9%. We expanded operating margins by 140 basis points to 17.4%. We delivered a 280 basis points increase on return on capital employed. We demonstrated resilience and consistency delivering cash conversion within our target range, and we further significantly reduced absolute CO2 emissions from our operations. Our progress in 2023 is a testament to the hard work of Weir colleagues across the globe. And I’d like to thank them for their dedication and contribution through the year. We have a superb team that’s delivering strongly and there’s still much more to come. With that, I’ll now hand you over to Ed to take you through the 2023 financials in more detail. Ed?

Ed Pears: Thank you, Jon, and good morning, everyone. As Jon outlined, we’re delighted with our financial results for 2023, which reflect continued positive trends in our mining markets and a strong focus on execution. Orders at £2.6 billion were stable year-on-year, reflecting positive conditions in mining offset, as expected, by lower demand from infrastructure and oil sands customers and the non-repeat of prior year orders from Russia. Revenue grew by 9% to £2.6 billion as we executed strongly on our opening order book and benefited from price realization. Operating profit of £459 million was 18% higher than last year, and operating margins exceeded our 2023 target, increasing by 140 basis points to 17.4%. Margin expansion was driven by operational efficiencies as we realized strong flow-through and the initial benefits from Performance Excellence offset in part by a shift in Minerals revenue mix towards OE. Profit before tax of £411 million was £63 million ahead of last year, including an FX translation headwind of £6 million and EPS was up 18% at 115.9p per share. Free operating cash conversion was within our target range at 85% and was achieved despite an increase in capital expenditure of £25 million. As a result, net debt to EBITDA decreased to 1.1x. All of the above delivered a significant increase in return on capital employed, which was up 280 basis points to 18%. I’ll now provide some detailed commentary on each of the divisions. Starting with Minerals where conditions in our mining markets are positive. 2023 saw us benefit from further expansion of our installed base and our customers’ continued focus on maximizing ore production. Across our key commodities, market prices were well above miners cost to produce, and we saw particularly strong demand from corporate customers. Ore production trends, coupled with installed base expansion, drove increased demand for our spare parts with aftermarket orders up 3%. This reflects volume growth in hard rock mining and a contribution from price, partially offset, as expected, by lower demand from Canadian oil sands customers following a period of overstocking in 2022 and also the non-repeat of prior year orders from Russia. In OE, orders decreased 6% year-on-year against a strong prior year comparator, which included £33 million of large orders in the second half for our Indonesian nickel projects. 2023 demand was driven predominantly by solutions for debottlenecking and small brownfield projects as we won market share and converted over 85% of our competitive field trials for large mill circuit pumps. Positive production trends in mining continued throughout 2023, with Q4 aftermarket orders up 2% both year-on-year and sequentially. During the year, we executed strongly, delivering our record in order book and capitalizing on momentum in our markets. Revenue increased 12% to £1.9 billion with aftermarket up 8% and OE up 23%. Strong mining markets, coupled with price realization and higher revenues in Canada, following record oil sands orders in 2022, more than offset lower revenue from Russia, which year-on-year decreased by £38 million as we wound down operations. Product mix moved towards OE which represented 28%, up from 26% last year. Operating profit increased by 18% on a constant currency basis to £376 million, and margins increased by 110 basis points to 19.4%. This was underpinned by operational efficiencies, a reduced impact from adverse transactional FX and initial savings from Performance Excellence, all of which more than offset a 2% shift in revenue mix towards OE. Moving on to ESCO, where similar to Minerals, we benefited from positive mining markets and also made excellent progress with our strategic growth initiatives as orders for mining attachments increased by 40%. In infrastructure, demand remained stable through 2023, but below the peak of the prior year, reflecting dealer destocking and lower end market demand. Combined, these market dynamics left orders down 2%, with robust mining demand and a contribution from price, offset by infrastructure. Looking at quarterly trends, Q4 orders were up 2% both year-on-year and sequentially as strength in mining continued and infrastructure comparatives eased. Turning to revenue, which on a full year basis, increased by 2% to £699 million. This reflects strong execution of our opening order book, price realization and momentum in mining, partially offset by a decrease in infrastructure, which year-on-year was down 14%. Operating profit at £122 million was 11% higher than last year on a constant currency basis as significant gains in operational efficiency drove 150 basis points of operating margin expansion, with margins reaching record levels at 17.4%. Now, bringing things together to look at Group operating margins, where both on a reported and constant currency basis, year-on-year margins were increased by 140 basis points to 17.4%. The main drivers of underlying margin growth in the year were as follows: firstly, as I mentioned earlier, Minerals revenue mix shifted two percentage points from aftermarket to OE resulting in a 70 basis points impact on margins. This was offset by a 20 basis point reduction in the impact of transactional FX and favorable underlying efficiencies of 170 basis points, reflecting strong operating leverage, a contribution from price and improvements in operational efficiency, as we demonstrated close management of our costs and the benefits of our focused platform. Furthermore, as Jon will describe in more detail, we realized £6 million in absolute savings from Performance Excellence, which contributed to a further 20 basis points of margin expansion. Together, this all left margins at 17.4%, exceeding our 17% target for the year and giving us a great head start as we pursue our 2026 target of 20%. Now a brief comment on exceptional items, which in the period were £22 million, year-on-year, these reduced by £27 million, reflecting the non-repeat of the prior year charge from the wind-down of our Russian operations, offset by an £8 million net credit from higher-than-anticipated recoveries from Russian working capital and an initial charge of £29 million relating to the mobilization and initial delivery of Performance Excellence. Other adjusting items increased by £30 million in the year, driven primarily by a £43 million charge to increase our asbestos provisions relating to our U.S. subsidiary. This follows the recent completion of the triennial actuarial review and reflects a period of higher claims volumes than previously modeled. And following the exhaustion of insurance assets estimated to occur in mid-2025, we expect will result in an annual cash outflow of around £7 million. Finally, on this slide, additional pension contributions in the year were £9 million. And pleasingly, with our UK main scheme now fully funded on a technical provisions basis, these will reduce by £6 million on a go-forward basis. Turning to cash flow and returns where we delivered another strong performance, meeting our cash conversion target and significantly increasing returns. Cash generated from operations was up 17% to £526 million, driven by increased profitability and improvements in working capital efficiency, with working capital as a percentage of sales decreasing to 21%, down from 24% in the prior year and working capital cash outflow reducing by £21 million to £28 million, including a reduction in inventory from initial Performance Excellence initiatives, and also phasing-driven reductions in payables and receivables. CapEx was higher than last year at 1.4 times depreciation, with the majority of the investment for our new ESCO foundry in China incurred in the year. This left free operating cash flow up £50 million at £392 million, resulting in free operating cash conversion within our target range at 85%. Going into 2024, our strong focus on cash generation and working capital efficiency continues. And with CapEx to depreciation reducing to 1.2x, we’re well placed to deliver a step up in cash conversion to 90% to 100%. Finally, on this slide, our strong performance in 2023 drove a significant increase in return on capital employed to 18%, up 280 basis points in the prior year and 600 basis points since completing our portfolio transformation in 2021. Turning to the next slide, free cash inflow of £238 million compares to £193 million last year with the increase of £45 million, mainly driven by the favorable free operating cash flow just described, and a modest reduction in interest driven by phasing, partly offset by higher tax payments as profits increased. This funded dividends exceptional cash flows primarily relating to performance excellence and the small acquisition of SentianAI, which we announced in November. This left a net cash inflow of £116 million, decreasing net debt to £690 million with a resultant net debt-to-EBITDA at 1.1x on a lender covenant basis. This sits well within our target range of 0.5x to 1.5x and gives us optionality on future capital allocation. Looking at our debt profile as a result of strong execution and recent refinancing actions including reducing the size of our RCF facility in February this year, the group has more than £700 million of long dated liquidity and over 90% of our debt is fixed at a weighted average rate of 3.7%. Later on the presentation, Jon will provide some color on our outlook for 2024, with us expecting another year of growth and margin expansion, this slide supplements that setting out some financial modeling guidance for the year with some specific points to highlight. Firstly, based on current FX rates, we would see a £19 million full year operating profit translation headwind, mainly driven by the strengthening of the pound relative to the U.S. dollar and the Chilean peso. Secondly, we expect CapEx in leaked spend of around £120 million and free operating cash conversion of between 90% and 100%. Thirdly, we anticipate an exceptional cash outflow of around £40 million in a year, primarily relating to performance excellence. And finally, as I touched on earlier, additional pension contributions will reduce by £6 million. I’ll now summarize the key messages from this section of the presentation. Conditions in our mining markets are positive, high levels of activity, our strategic growth initiatives and installed base expansion are driving aftermarket demand and we’re seeing continued momentum and demand for our OE solutions. In 2023, we executed strongly, delivering revenue and profit growth and a significant step up in operating margins with continued strong cash conversion reflecting the efficiency of our mining focused platform. Our returns continue to grow with return on capital employed up 280 basis points in the prior year and our proposed full year dividend up 18% and with net debt-to-EBITDA at 1.1x, we have optionality on future capital allocation. Overall, we delivered a strong financial performance in the year and as we move through 2024, have good momentum and are confident in delivering a year of further progress. Thank you. And I’ll now hand you back to Jon.

Jon Stanton: Thank you, Ed. In this next section, I’ll share more details on our strategic progress in 2023, revisit our long-term value creation opportunity and also set out our outlook for 2024. So, starting with our strategic progress in 2023, as a reminder, this slide sets out our key strategic priorities that are enshrined in the We are Weir framework across our four pillars of people, customer, technology and performance. In 2023, we made significant progress across all four pillars, which I’ll highlight over the next few slides. Looking first at our people initiatives on safety, our year-on-year total incident rate was stable and while that keeps us amongst the safest companies in our sector, I’m disappointed that we didn’t make more progress. So in 2024, we’ll be redoubling our efforts, putting learnings from our recently launched Zero Harm Behaviours framework into action, and continuing our drive towards our ambition of Zero Harm. And our focus on safety extends beyond physical safety. And I was really pleased that our commitment to workplace mental health was recognized during the year, with Weir being commended as the biggest improver on performance and disclosure in the CCLA Corporate Mental Health Benchmark. We made strong progress in inclusion, diversity and equity with a sizable uptick in the proportion of our employees who are female. We established five new chapters of our Weir Women’s Network global affinity group and also maintained our leading employee engagement score. Finally, our voluntary attrition rate remained at industry-leading low levels and we launched a number of new training and leadership programs aimed at driving our talent development to create the leaders of the future. Turning next to our customer and technology growth initiatives, starting with minerals, in combination, we delivered strong year-on-year growth in aftermarket orders, reflecting our growing installed base and customer penetration. Highlights included production starting up at Ironbridge, where our energy and water saving high pressure grinding rolls are installed and operating well, and also orders for Enduron tyres for a copper mine in South America on a competitor machine. In digital, we made great progress with Synertrex, expanding our Intelli solutions offering, which is now active across six product platforms. Our latest solutions captured critical machine health data and enable remote conditioning, monitoring and predictive maintenance. In the year, we saw strong customer demand for these solutions, with the technology now active on around 400 pieces of equipment at over 60 mines. The acquisition of SentianAI, which we announced in November, also further enhances our digital capability and bridges to our Synertrex technology. The acquisition is accelerating the rollout of our process optimization solutions using non-linear modeling, which will enable us to explore new revenue generating models and work in new ways with our customers. We also saw further share gains in our core mill circuit as we converted over 85% of our competitive field trials and good progress on geographical expansion, opening six new service centers, including at Port Hedland in the Pilbara, Australia. Turning to technology, we won our first commercial orders for Coarse Particle Flotation, which we accessed through our partnership with Eriez and we generated over £100 million of revenue from new products, reflecting a strong return on recent R&D investments. One of the highlights of the year, which I’m most pleased with is the progress we’ve made with Synertrex. Our latest version of this proprietary system is enabling customers to optimize equipment performance in real time, delivering tangible and measurable benefits in their operations. A recent case study was at a large copper mine in the U.S. where our customer was seeking to optimize mineral separation and increase ore throughput. After successful field trials, the customer is replacing their legacy cyclones, which had been provided by a Weir competitor and deploying our Synertrex enabled Cavex technology across all 13 processing lines at the mine. This Weir hardware and software combination together with the expertise of our on the ground team, increased first pass recovery by 30%, reducing re-circulating load and increasing fresh ore throughput. And through its continuous monitoring capability, Synertrex is providing ongoing visibility into machine performance and ensuring the process is maintained in the optimal operating envelope. Turning now to ESCO, where we also made pleasing strategic progress. On digital, we successfully completed Phase 1 field trials of our proprietary or characterization solution, which is focused on enabling the mineral content of rocks to be determined in the pit, so that waste material is not transported and processed. Our development program has good momentum and Phase 2 field trials are due to commence in the coming weeks. We also made good progress with our Motion Metrics, digital technology, delivering year-on-year revenue growth and a growing pipeline of new opportunities. In mining attachments, we delivered a standout performance, year-on-year orders were up 40% and since focusing on the mining buckets category back in 2019, our revenue has increased almost fourfold with more to come as we globalize this business area. We also grew market share in our core mining GET with positive net conversions and continue to expand geographically, including the transition to a direct to customer model in Scandinavia. In terms of technology, the main highlight was the successful field trials of our next generation mining GET solution, where results have validated our enhanced customer proposition of best-in-class wear life and lowest total cost of ownership. This proprietary technology will keep us ahead of the competition in the years to come and will drive further share gains on full market launch later in 2024. As I touched on earlier, we continue to make good progress with Motion Metrics and one of the highlights of the year was the adoption of the technology at a large iron ore mine in Western Australia. The customer’s objectives were to reduce downtime in the processing plant and to further enhance their safety performance. In response, we provided a package of our latest generation LoaderMetrics and ShovelMetrics solutions, which are being rolled out on all large machines at the mine and include tooth and shroud loss detection, oversized material detection, fragmentation analysis and blind spot monitoring. Blind spot reduction is ensuring mine employees remain safe and the customer is using outputs from fragmentation analysis to optimize their drill and blast operations. This is a great example of how we work in partnership with our customers to make mining smart, efficient and sustainable. Turning now to performance and you’ll recall in December, we doubled our performance excellence target to £60 million in absolute savings in 2026, with £20 million of savings coming from each of capacity optimization, lean processes and Weir Business Services reflecting the momentum, which performance excellence has across Weir. In 2023, we made great progress across all three elements of the program. On capacity optimization, we consolidated a number of our minerals facilities in the U.S. and we poured the first casting earlier this month at our new ESCO foundry in China. We also commenced a number of other projects, including the consolidation of our elastomer manufacturing in Asia Pacific, which we announced in December. On lean processes, our recent investments in enhanced operational capability and foundational systems are enabling us to optimize how we operate across our manufacturing and supply chain footprint. Projects underway include the launch of our new lean operating system to eliminate waste in our end-to-end value streams and upgraded product lifecycle management, enabling us to transition customers from legacy SKUs and improve inventory turns. We’re also rolling out new configure to order tools across both divisions, enabling us to reduce engineering lead times and product variation, thereby improving manufacturing efficiency. Finally, the transition of our enabling functions to WBS is now in full swing in conjunction with our external delivery partner. Once complete, this will deliver £15 million of fixed labor savings, providing a strong underpin to the total WBS target of £20 million with the remainder to come from efficiency, standardization, and automation. Turning to sustainability, where we’ve continued to make excellent progress. Early in the year, we had our ambitious Scope 1, 2 and 3 emissions reduction targets approved by SBTi, and we’ve made good progress towards these targets in 2023, delivering a further 6% reduction in our Scope 1 and 2 emissions, meaning our cumulative absolute reduction relative to our 2019 benchmark is now 23%. Our progress continues to be recognized externally as we maintained our place on the prestigious CDP A List for leadership in corporate transparency and performance on climate change. And we’ve also refreshed our overall sustainability strategy focused on two key principles, delivering sustainable Weir and accelerating sustainable mining. This strategy carries forward our existing priorities, adjusting our emphasis in some areas, while also setting new priorities based on the findings of a double materiality assessment. Going forward, it will be the North Star for our approach and actions on sustainability. Now shifting gear and recapping on our long-term opportunity, where Weir is positioned to continue to deliver compounding growth and margin expansion. This is underpinned by the four components of the framework you see on the slide. First, we play in highly attractive markets driven by structural tailwinds. Second, our aftermarket bias business model enables us to grow throughout the cycle. Third, we have a portfolio of technology focused growth initiatives enabling us to win, share and outgrow our markets. And fourth, through our transformation program performance excellence, we’re optimizing how we operate and driving margin expansion. I’ll now touch on these elements in more detail before turning to the outlook for the year ahead. So the long-term outlook for the mining industry is highly attractive, underpinned by the structural growth drivers of the energy transition and global demographic trends, together with the shift to more sustainable mining. To deliver the energy transition, the world needs to produce significantly more metals. Forecast indicate production of copper needs to more than double by 2050, while the demand for nickel and lithium is also forecast to grow significantly. In parallel, to have the social license to operate and to compete, miners must transition to smart, efficient and sustainable technologies and that’s where Weir is delivering new thinking to the industry. With our unique business model and capabilities, we are well place to capitalize. That business model is heavily biased towards the aftermarket, which accounts for around 80% of our revenue. On average, each sale of original equipment generates around 30% of its 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 revenue. As all production expands at existing mines, our equipment is run harder and longer, meaning demand for our spares and expendables increases incrementally. The drive for increased production also creates demand for our debottlenecking solutions, which increase mine capacity and in turn further accelerate aftermarket demand. And of course, new large expansion projects create sizable opportunities for further installed base expansion. So regardless of how growth in ore production is delivered by our customers, we will continue to expand our installed base, which drives the aftermarket growth algorithm. In parallel, our end-to-end technology strategy is focused on both protecting our core business and also developing new solutions to make mining more sustainable. It’s underpinned by organic R&D investment, strategic technology partnerships, and bolt-on M&A. With M&A likely to feature more prominently going forward as we continue to grow our acquisition pipeline. The result of our approach is a portfolio of digitally enabled sustainable solutions offering compelling value propositions across the extraction and processing phase of the mine. In 2023, to validate the sustainability credentials of our solutions, we carried out an avoided emissions study. This work focused on our redefined mill circuit, which comprises HPGRs and stirred mills as alternatives to traditional tumbling mills, coupled with a Coarse Particle Flotation system for improved separation. While we already knew the solution delivered significant energy savings, the objective of the study was to quantify and independently verify them, enabling us to incorporate the data into our customer value proposition in the market. The results were significant, per ton of ore moved our redefined mill circuit reduces energy consumption by 40% and avoids carbon emissions by as much as 50%. So its a solution which is already enabling sustainable mining. The study is the first of its type for a mining use case. And following a year where global warming exceeded 1.5 degrees is capturing interest from a broad range of stakeholders, including customers, governmental bodies, investors and NGOs, and is likely to be a catalyst for accelerating demand for sustainable solutions. Bringing the story together, it’s clear that we are strongly positioned to deliver compounding growth and margin expansion going forward. As you heard from Ed earlier, through strong execution, we’ve already exceeded our 2023 operating margin target of 17%. So we’re delivering ahead of plan and we have a clear pathway to our 2026 operating margin target of 20%. The growth assumptions which underpin margin expansion from operating leverage are conservative given the business model I just described and the long-term outlook for the mining industry. And the actions we’re taking to deliver the £60 million of absolute savings from performance excellence, which will drive around 200 basis points of margin expansion, are underpinned by the specific projects I mentioned earlier, so actionable, deliverable and within our control. In short, we have a clear plan, excellent operating momentum, and our established track record gives us confidence in the future. Now, bringing that back to the outlook for 2024, I wanted to start with our top line growth assumptions. As I said earlier, aftermarket accounts for around 80% of our revenue and is predominantly driven by the spare parts and expendables, which are essential to keep mines running. The key drivers are ore production growth, the impact of declining grades and installed base expansion. The aftermarket is also largely inelastic to the CapEx and commodity price cycles, so is both predictable and sustainable. In 2023, the group’s aftermarket orders were stable year-on-year, but there were some significant moving parts in that, with underlying volume growth in hard rock mining and a contribution from pricing being offset by a number of factors. These included the non-repeat of prior year orders from Russia, a slowdown in the Canadian oil sands following a period of overstocking in 2022, and lower demand from ESCO’s infrastructure customers. As we go into 2024, these factors will not repeat and we will see volume growth from all production increases and installed base expansion, including production ramp up at Iron Bridge. While the contribution to growth from pricing is expected to moderate compared to the last couple of years. The through cycle track record of our aftermarket, which remember has grown at 7% CAGR over the last 12 years, means we are highly confident in our aftermarket growth predictions for 2024. Alongside, aftermarket growth, we expect current mining production trends to support original equipment demand around current levels, with momentum in demand for debottlenecking and small brownfield projects continuing and large project expansion activity remaining slow. So with these market dynamics and the strong order book we carried into the year, we’re expecting another year of growth and margin expansion in 2024. Specifically, we expect to deliver growth in constant currency revenue, profit and operating margin with operating margin expansion underpinned by incremental benefits from performance excellence. On cash, we expect to deliver free operating cash conversion of between 90% and 100% as CapEx falls back closer to depreciation and working capital improvements continue. So, summarizing the key messages from our presentation. In 2023, we delivered on our commitments, delivering strong growth in revenue and operating profit, expanding our margins, exceeding our 2023 operating margin target of 70% and taking steps towards our new target of 20% in 2026. Cleanly converting profits to cash and growing return on capital employed and making excellent strategic progress. As we turn to 2024, all production trends in our mining markets are positive and with our track record of delivery, we expect to deliver another year of growth and margin expansion. And finally, looking further ahead, our long-term outlook is tremendously exciting. We have a world class mining focused platform. Our future growth is underpinned by decarbonisation trends and the transition to sustainable mining. And through performance excellence, we’re optimizing our business and driving margin expansion. So our future is bright and the best is still yet to come from Weir. Thank you for listening. The team and I will be pleased to now take any questions you have.

Operator: [Operator Instructions] The first question is from Jonathan Hurn of Barclays. Please go ahead.

Jonathan Hurn: Hey, guys. Good morning. Just a few questions for me, please. Just firstly, just in terms of, obviously the profit bridge, you explained obviously that transition in 2023, but how do we think of that sort of profit bridge in 2024? Can you talk about a little bit about what we can expect from areas such as mix operating on leverage? That was the first question, please.

Jon Stanton: Yes, sure. Good morning, Jonathan, and thank you for the question. So, yes, as we look forward, we’re expecting to see a benefit from mix of about 30 basis points as we move through 2024. Another 30 basis point improvement in operating margin coming from the next phase of performance excellence savings, and we’re going to sort of increase our investment in R&D through 2024, which will be a 30 basis points headwind, and then 20 basis points from operating leverage, so net-net that comes back to about 50 basis points of margin expansion as we go through 2024. And of course, we expect to see revenue growth, as we’ve outlined, around mid-single digit, which will drive the overall absolute profit improvement.

Jonathan Hurn: No that’s very clear. Thank you. The second question is just a little bit on sort of visibility between the divisions and also between sort of OE and aftermarket. Can you – as you go into 2024, obviously you’re quite confident in terms of delivering this growth. Can you just maybe talk about a little bit about the visibility and obviously why you have such confidence in this growth coming through?

Jon Stanton: Yes. Well, I think as we sit here today and we saw it through 2023 and conditions are continuing, activity levels remain really strong in hard rock mining. We’re seeing that in the momentum that we have in the aftermarket and also in original equipment orders, which, as you know, are very focused on debottlenecking small brownfield expansion projects. So activity levels are high. We think as we go through 2024 that original equipment orders and revenue will be broadly flat relative to 2023. Just sort of recognizing a continuation of the theme that we’re seeing at the moment with the growth really coming from the aftermarket and what’s driving that. I think you can look at it from a top down and we look at it from a bottom up point of view as well. But global ore production is expected to increase by around 1.5%. We will see incremental volume from an expansion of our install base. If you think about it, we’ve delivered over the last couple of years close to £1 billion of incremental original equipment to the market that’s in the process of being commissioned. The aftermarket doesn’t kick in immediately, but that will phase in over the course of 2024 and beyond. So we’ll really see a year of volume growth in 2024. Some contribution from pricing, but much smaller than we’ve seen over the course of the last couple of years as we’re now into a sort of less of an inflationary environment moving forward. So that’s the way to think of it sort of top down. And then, of course, from a budgeting and forecasting point of view as a business, we sort of do a bottom-up mine by mine. So we know for every customer, what are their individual production plans? What are they expecting? How are they expect going to drive the production of that mine over the course of the year? So we have very detailed visibility that sort of from a bottom-up point of view aligns exactly with what we see from a top-down perspective as well.

Jonathan Hurn: Perfect. That’s very clear. And maybe just squeeze one last one just in terms of obviously the balance sheet that net debt to EBITDA down at sort of 1.1 times. Obviously, it does give you a lot of optionality. You’ve spoken about that in the presentation. But I think as you go through 2024, I mean, the scope for M&A sort of bolt-on M&A has that increased? Do you think there’s more chance of deals in 2024?

Jon Stanton: Well, first of all, I’m really, really pleased with the very consistent cash generation that the business is now delivering. And you can see that in the reduction in leverage that we’ve delivered over the last couple of years. So as you say, we’re now down to 1.1 times net debt to EBITDA, which is sort of bang in the middle of our target range. I think as we look forward, that gives us optionality now in terms of how we think about enhancing in the best way total shareholder returns from here. Alongside all of the operational improvements that we’ve been making over the last couple of years, we have been refreshing our sort of M&A playbook and things that we would like to have within the portfolio that will accelerate our organic growth strategy. So, we are now more focused on that and in line with our sort of strict criteria in terms of returns, strategic fit, not to dilute our business model, I would hope that we can deploy capital in some bolt-on acquisitions over the next couple of years.

Jonathan Hurn: Great. Thank you guys.

Operator: The next question is from Christian Hinderaker with Goldman Sachs. Please go ahead.

Christian Hinderaker: Yes, good morning, everyone. Thanks for the question. Just want to think about the shape of the infrastructure demand outlook. There’s obviously been comments from peers that we may not see the usual seasonal pickup in the first half. Others do see that seasonal improvement. And then sort of linked to this, Ed, I think you mentioned destocking trend in infrastructure markets. Is that region specific? And do you think that is just a year-end dynamic? Or is something more midterm?

Jon Stanton: Hi, Christian, yes, I think from everybody’s infrastructure exposure is slightly different depending on the geographical mix and product portfolio and so on. But for us, it’s in ESCO. Remember, it’s North America and Europe principally. And there’s a third of ESCO. So less than 10% of the group revenues, just to put it in context. So we’ve clearly through 2022 and 2023 being through a stocking and then destocking cycle with relatively weak end market demand as well. As we went through the second half of 2023, we saw demand sort of flattening off. So not getting any worse. And our sort of base assumption for 2024 at this point in time is that the market sort of continues at the current level. So, we’ve seen destocking. The market has sort of normalized, and we expect – we’re not expecting any real growth through 2024 from here. And that’s our base assumption at this point in time. It may be better than that, but we’re not calling it at this point in time.

Christian Hinderaker: Thanks, Jon. Maybe can I turn to that slide you had on accelerating sustainable mining. You’ve talked about a 40% energy improvement and significant for the carbon reduction from that redefined flow sheet, but only a 20% lower cost. So just trying to link this through to the HPGR part of the portfolio. Obviously, one of your competitors has won as we understand the only two tenders that have come through in the market in the past 12 months to 14 months. Just curious as to what you see as the sort of competitive landscape in HPGRs, do you think that offering stacks up favorably versus the peers? How should we think about pricing versus competition? Just interested in an update.

Jon Stanton: Yes. Well, let me sort of tackle that Christian from an overall market point of view, and then Andrew may pick up on the progress that we actually made through 2023 and indeed early this year. So, I think what is really, really exciting is that the market is now sort of shifting focus to HPGRs from traditional tumbling mills. We’re seeing that in our customer conversations. We’re seeing that in the conversations with the engineering houses. And when you go to conferences, when you have the discussions from a technical point of view, the market is really, really focusing now on HPGRs as being part of the future flow sheet. So we’ve invested a lot in that over the last few years. So that’s really, really good to see. Technically and competitively, I’m extremely happy with our product line and what it offers. And it’s – we have one competitor in the marketplace essentially, and we’re both pushing very hard on driving HPGRs. I would say that with respect to the couple of orders that have been announced by our competitor, one of them was actually a project that was first won in 2018. CapEx was then canceled and reapproved this year. So that was actually quite a long time ago. And the other one we actually for commercially sensitive reasons declined to bid for. But I’m very happy with the momentum in the market in terms of the discussion around HPGR, and we’re getting real traction with the broader redefined mill circuit and the win-win that can deliver for our customers, both in energy and cost savings. So presents a tremendous commercial opportunity, but also great from an ESG point of view from our customers. But Andrew, specifically on what went well for us in 2023 and early this year.

Andrew Neilson: I think in 2023, what we saw was a number of projects slipped fundamentally. So as you pointed out there, it’s quite a low year in terms of absolute number of contract awards. We won one an HPGR Award last year. Indeed, we received notice of another award for an HPGR contract earlier this year. So for me, the market remains strong, our pipeline remains very strong, still very confident. We’ve got a good, strong market position. As Jon said, the technology and the product is great. Yes, fundamentally just confident that will start to come through this year and beyond as we go forward. And indeed, we have a very strong market share position in that product line. Now, if you rule out all the previous awards that we’ve won in recent years, and those are starting to come through into commissioning progressively this year into next year. And again last year in 2023, we did see big pickup in our comminution aftermarket orders, and we expect further pickup this year as those HPGRs and broader comminution products go into commissioning phase.

Christian Hinderaker: Thank you. Maybe just a final one on M&A, and you’ve set out ambitions for maybe a more active approach in 2024, given the strong balance sheet. Are there sort of specific product categories in focus here, or is this across the whole portfolio?

Jon Stanton: Yes. I think it’s across the whole portfolio, Christian. As we’ve talked about before, the way that we’re sort of thinking about acquisitions is can we identify assets that will accelerate the organic strategy that we have across the business. And that could be in technology, digital AI, as we did with Motion Metrics. It could be a regional infill, as it was with Carriere that required for ESCO and could be also product infills as well. So I wouldn’t say there’s one of those that is more likely than others, but I think we’re trying to push forward on all of those three fronts. And as I said, we’ve done quite a lot of work on refreshing the playbook and thinking about the assets that would be a really good fit with us strategically and we think we could add value to. So, as I said, we’re hopeful we can make some progress this year.

Christian Hinderaker: Thank you.

Operator: The next question is from Bruno Gjani with BNP. Please go ahead.

Bruno Gjani: Thank you for taking the question. I was wondering if you could just perhaps add some color in regards to how order intake has fared in the start on the aftermarket side in particular for both minerals and the ESCO business in general?

Jon Stanton: Yes. Morning, Bruno. Yes, Q1 has started very well. So we are seeing growth in order input in line with our broader guidance for 2024. So a solid start to the year in aftermarket. And from an OE point of view as well, Andrew said, we had a really nice HPGR order already this year. We did see a couple of projects slip from Q4 as customers sort of slowed down decision making into the year end, but all of those came through very early in the year as to no hour in the order book. So from both an OE and an aftermarket point of view, and in terms of both divisions, we’re seeing momentum as we start the year.

Bruno Gjani: Okay, understood. And just on the, I guess, conservatism around some of your customers and pulling the trigger on some of those orders, could you talk just a little bit how the order pipeline has progressed? And if you’re seeing that progress positively or is it more stable at this point?

Jon Stanton: No, I mean the order pipeline has been consistently strong over the last couple of years, and there’s been absolutely no real change in that. As you know, our OE orders have been dominated by small brownfield debottlenecking, sustainability related projects for our customers. So we don’t have a number of new large greenfield projects in the pipeline in the short term, hopefully longer down the track. Yes, but we’ve just got a lot of this momentum, CapEx coming through, which is converting into orders. That pipeline has been maintained at sort of strong levels over the course of the last couple of years. No change in that. So I think – and I would come back to why are we benefiting from that? Why are we seeing the momentum? It does come back to our business model. The Weir [ph] boots on the grounds, we’re on more mines than anybody else. So we have the eyes and ears to sort of see the opportunities, discuss and develop those opportunities with customers, and hopefully quite rapidly convert those into orders. So that’s the real sort of thing that characterizes our order book at the moment and gives us confidence that we’ll see OE coming through and that pipeline converting at a similar sort of quarterly run rate as we’ve seen over the last couple of years.

Bruno Gjani: Understood. And just finally, just on pricing, when you comment on pricing normalizing to three cycle rates, should we interpret that as being 2% to 3% on the aftermarket side? Just some color there would be helpful.

Jon Stanton: Yes, low-single digit. I think the way I would think about it, we’re saying that in 2024, both aftermarket orders and revenue are expected to grow mid-single digit. I would say two-thirds of that is going to come from volume, a third of it is going to come from pricing. So the pricing is really low-single digit in terms of our assumption for the year. Quite a lot of that is baked in because it’s the full year effect of 2023 price increases. So we’re only expecting incremental pricing in 2024 to be really quite modest.

Bruno Gjani: Okay. Thank you very much.

Jon Stanton: Thnaks.

Operator: The next question is from Max Yates with Morgan Stanley. Please go ahead.

Max Yates: Thank you. Could I just start with the 17.4% margin that you did this year? Because obviously, it’s quite a bit better than what you had originally sort of set out. And I think when you look at the kind of the £60 million cost savings plan; it looks like you’re sort of broadly on track with what you were thinking. So I guess what I’d really like to understand is, within the kind of, I guess, I think you called it kind of performance improvement, which has kind of operational leverage, pricing, some kind of back-office improvements. Just to really simplify, what are the kind of – what did you really do better this year in terms of those kind of cost buckets or pricing buckets than where you originally thought when you started the year and guided to that sort of 17% margin?

Jon Stanton: Yes. So well first of all, delighted with the progress that we’ve made on margin. Delighted to be ahead of our 17% target in 2023 and therefore, already moving towards the 20% target in 2026. That 170 basis points of improvement that sort of comes from operational improvements, pricing and so on, has come through really, really strongly. What surprised me in that? Well, pricing is as we expected. We realized mid-single-digit pricing in our revenue through the course of 2023. So we saw a modest improvement in our gross margins as a result of that and obviously, the top line growth drove strong operating leverage and flow-through in terms of incremental margins. I think the thing that is perhaps most pleasing and where we’re running ahead, though, is in the operational efficiencies, the manufacturing efficiencies and all the streamlining that is coming from the efforts that have gone into Performance Excellence. And in minerals, that’s sort of leveraging the investment that we’ve made in operations, the investments that we’ve made in systems over the years where we’re now moving into a sort of more globally managed sales inventory, operational planning process. So as we bring the Minerals regional manufacturing into a sort of global system, we’re really starting to drive the efficiencies out of that at the moment. And then on the ESCO side, it’s really improvements in the foundries that we’ve talked a little bit about over the years where, particularly in North America, we still have work to do, and that is really now – again, we’ve invested, we’ve upgraded capability, and we’re now really starting to see that coming through in the manufacturing recoveries and eliminating waste and variances from a manufacturing point of view in the foundries. And of course, as ever, we managed costs tightly. But, yes, in the Performance Excellence piece in terms of the absolute cost savings, that’s bang in line with where we expected it to be at this stage. And I think maybe Andrew could give a little bit more color on minerals and the things that are coming, but we’ve got a very, very clear action plan in terms of the projects that are going to drive the incremental savings from here. It’s all planned out over the next three years. So it’s really about execution. We know where it’s coming from. So I feel very good about that. But Andrew, just to give a bit of color about what’s coming in minerals, perhaps.

Andrew Neilson: Yes, sure. I mean I think building things Jon highlighted there in terms of systems, for example, we rolled out 42Q [ph] across our manufacturing plant is giving us good insights into routings and balancing bottlenecks and areas for improvement. We’ve launched our new lean program called WINS, which again, we’re seeing some early wins from that, and that will continue for the next two, three years, for sure, as we see benefits from that. As we’re looking at our capacity more globally, we’re optimizing where we make particular products, what we make, what we buy. And so it’s a multiyear journey, which we laid out in the Capital Markets Day back in December that we see plenty of opportunity to continue to get far more efficient in our manufacturing supply chain operations and that underpins a lot of the £60 million program that we talked about in December.

Max Yates: Okay. Maybe just a quick follow-up. So the sort of – I mean, two-part quick follow-up. Just on the working capital, kind of that’s come down nicely to around 21% of sales. Do you think that’s around kind of the right kind of level for the business? Or can that come down further as a percentage of sales? And then I guess an extension of that return on capital employed, you’ve not kind of target – you don’t have an explicit target. We’re now at kind of high teens. Is that something you would expect to continue to push higher with margins? Or is that the right kind of level for this business?

Jon Stanton: Yes. So I think starting with working capital, once again, really delighted with the progress that we’ve made there and the benefits of the things Andrew and I are just talking around, not only giving benefits from an operational efficiency point of view, but also helping us to move working capital down. So 21% of sales is really, really good progress. But I think when you break that down, the thing that’s really moved the dial is that the inventory turns are now starting to shift. They’ve been pretty stubbornly down in the low 2s over the last few years. We’re moving up to 2.7 at the end of 2023. But that – there’s still more to come there. Our inventory turns; we’re targeting further improvements there over the course of the next couple of years. So that’s really what’s going to drive further improvement in working capital as a percentage of sales. And again, the plans that we’ve got in place through Performance Excellence, which are driving the efficiencies will also drive that improvement in working capital. So we feel really good about that. In terms of return on capital employed, yes, I mean, again, really pleased with the progress that we’ve made there. And I think there is more to come. We’re not setting out a definitive target, but we are focused on continuing to improve returns. How are we going to do that? Well, we’re going to continue to see top line and bottom line profit growth. So returns will continue to grow over the next few years. But what we’re now really focused on is making sure that we’re well invested in the asset base. We’re going to – we will be moving more towards CapEx at one times depreciation. So the fixed overhead, the fixed cost base is not going to be increasing. Those improvements in working capital will also help. So our intent is that we continue to shift return on capital employed up from here. And of course, if we do acquisitions, they might be modestly dilutive, but that’s very much the plan.

Max Yates: Okay. That’s perfect. Thank you.

Operator: Next question is from Jones David with Stifel. Please go ahead.

Mark Davies Jones: I guess that’s me, it’s Mark Davies Jones. Hi, Jon, if I can turn back to performance excellence because obviously, what’s driving most of the margin bridge up to that 20% goal. Lots of moving parts in that. But as you’ve got into the work, have there been any shifts in the anticipated phasing either of cost or benefit. And in terms of implementing those plans, where do you see the biggest sort of operational risk? Is it around the move to Global Services? I know that some companies have struggled making that work in practice? And what are your thoughts on that?

Jon Stanton: Hi Mark. Yes, I mean, we announced obviously the upgraded targets in the Capital Markets event in December. So frankly, not much has moved since then in terms of the way that we’re thinking about the projects or indeed the phasing of those projects, except that we’re moving forward very rapidly and particularly with the shift to global business services, we are now well into the transition to our external provider. We’re going through the process there. There have been no surprises in that. Again, we have very, very clear plans in terms of the waves the transition as we move through that program. And that will be done in terms of the lift and shift in Q3 this year. So we’ve got a lot of work to do over the next six months to deliver that, but we will then be rapidly getting into the benefit realization phase. So those savings will start to come through strongly in 2025. The divisions are executing well against the operational improvement areas. Andrew gave you a little bit of color there about some of the things that we’re working on, both in improving process but also reducing roofline and consolidating manufacturing. That’s all in train, really good progress with the lean initiatives. And the thing that’s going to be a big driver from an ESCO point of view, is the new foundry in China, which is going to be – is our lowest cost per ton producer of ground engaging tools. We’ve got a significant uplift in capacity there as the new foundry comes online, and that’s going to reduce our overall cost per ton of product for ESCO and therefore, enhance the gross margin and we’ll keep level loaded the other foundries that are in the higher cost locations. So I think all the building blocks are there Mark, no surprises. Everything going according to plan as we sit here today.

Mark Davies Jones: Thanks, that’s very helpful.

Operator: Next question is from Edward Maravanyika with Liberum. Please go ahead.

Edward Maravanyika: Thank you very much. Good morning, Jon. My question related to your growth coming out of the – coming out of the energy transition metals, just given what’s happened to prices in that space of lithium of nickel, et cetera. What are you currently seeing in terms of customer response? Are projects slowing down? Is your activity in that area being affected?

Jon Stanton: Well, I think if I look at those battery metals, specifically nickel, lithium, cobalt, it’s about 3% of our total revenue. So it’s still quite a small number. We obviously hope that number will be larger in the future as production ramps up. But as you highlight, those have been going through a little bit of a correction at the moment in terms of pricing and supply/demand mismatch. So if you look at nickel, we’re starting to see that in some of the developed mines in Australia and the U.S. that customers are slowing down. Equally, as you know, we delivered a large amount of installed base into Indonesia over the course of last year, and that’s growing rapidly. So there’s sort of an offset for us on the nickel side at the moment. Lithium is also moderating a little bit in terms of the growth. But as I say, it’s still quite a small exposure. And those moving parts are absolutely factored into our overall guidance in terms of the aftermarket revenue growth and order growth that we expect to see in 2024.

Edward Maravanyika: Okay. Thank you very much.

Operator: That was the last question. I turn the conference back to the management for any closing remarks.

Jon Stanton: Okay. Thank you very much. Thanks, everybody, for joining us this morning. We appreciate the questions. And of course, if there are any further follow-ups, then we’ll be available over the course of the day to help. But thanks again for joining.

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