Weir Group PLC

LSE:WEIR

Earnings Call Transcript 2021-Q1

[Operator]

Good day, and thank you for standing by, and welcome to The Weir Group plc First Quarter Trading Update conference call. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your speaker today, Jon Stanton, The Weir Group CEO. Thank you. Please go ahead.

[Jonathan Stanton, CEO & Director]

Thank you, operator, and good morning, ladies and gentlemen, and thank you for joining us for our first quarter trading update. As usual, I'm joined by our CFO John Heasley, and we'll be delighted to take any questions you have shortly after some brief opening remarks. Let me start with safety and COVID-19, where we continue to focus on the health and well-being of our employees, customers and communities. Our overall safety performance was good, with further progress at ESCO, of note, as we continue on our journey to zero harm. On COVID, it is encouraging to see progress on vaccination programs in the U.K., U.S. and Europe, but there are still many parts of the world where this is not the case, and our thoughts are with all of those, who are currently experiencing further waves of infections. At Weir, we continue to see pockets of disruption, but our facilities remain open, and our operating model means that throughout the pandemic, we've been able to fully meet customer demand. I remain incredibly proud of our global team and their hard work and commitment. In the first quarter, they not only had to deal with the ongoing challenges of COVID-19 but also the severe weather events in Australia and North America as well as disruption to international freight markets. As ever, they have stepped up and been inspirational. Let me now turn to a summary of the first quarter where the group made good progress in growing orders, driving continuous improvement in our operations and executing against our sustainability strategy. In our main market, we believe that the structural trends underpinning mining demand remain very robust. And this is reflected in the near record commodity prices we continue to see, particularly for Weir's main exposures of copper, iron ore and gold. While COVID has added complexity and delay, we are seeing conditions improve and momentum build. This is reflected in our first quarter results, where orders increased by 11%, both year-on-year and sequentially against Q4 2020. Traditionally, these were the first signs of an upturn as seen in our longer lead time products like GEHO positive displacement pumps and Enduron, high-pressure grinding roles. And one of the features of the first quarter was not only the strength of the project pipeline for these products but the fact that conversions accelerated principally focused on brownfield expansions. This included a large order for HPGRs and screens for exposed iron ore operation in the Ukraine, which is increasing its capacity from 32 million to 80 million tonnes per year. This is part of their green steel initiative, where they're developing high-grade iron ore pellets that are expected to be crucial to reducing emissions in the steel industry. Higher grades, meaning more processing, which requires a step change in comminution efficiency. Ferrexpo chose Weir because our Enduron HPGR technology delivers 2 of their key priorities, improve productivity and significant energy savings of up to 40%, which means Ferrexpo will be able to produce more high-grade iron ore, while generating fewer emissions per tonne. It's an excellent example of the key role Weir has to play in making mining more efficient and sustainable. A theme that continued into April with a GBP 32 million order for dewatering pumps in Asia Pacific, where one of our customers is converting from diesel to a largely electric solution. The group's aftermarket orders, while down slightly year-on-year because of residual COVID impacts in ore production, were still very resilient. And perhaps more importantly, we continue to see sequential improvement in aftermarket demand with a 7% increase on Q4 of last year. And I hope this audience will appreciate that we started to disclose absolute orders by quarter to help demonstrate the profile more clearly and where we sit in the cycle. The group's revenues were stable, reflecting aftermarket resilience and OE project timing. In common with everyone else, we continue to see input costs rise, particularly in North America, but we aim to mitigate them with further price increases and operational efficiencies. You'll recall, we set out new medium-term performance targets in March, which included outgrowing our markets through the cycle, expanding operating margins and delivering a 30% reduction in relative emissions by 2024. As our first quarter results show, we've made good progress in order growth, and we're supporting our on-site engineers with new tools to help them do their job more efficiently. This includes digital field service technology that will also improve our installed base data. We're also enhancing operating efficiency, including the upgrade of Minerals Australia foundry to focus on larger castings and finalized development plans for ESCO's China foundry relocation and expansion, where we expect to break ground in Q3. Execution of our sustainability strategy continues to gather pace and, across the group, there are now around 150 separate initiatives underway to reduce energy, water and waste in our operations. We're also developing a tool to quantify the embedded CO2 in our products, which alongside our in-use energy consumption data, will help us even more clearly demonstrate the sustainability benefits of our technologies. And we're on track to complete our scope 3 emission study together with our evaluation of science-based targets and net zero pathways in 2021. Behavioral change will be important in helping us achieve our targets, and sustainability, safety and lean training are key features of our new global learning platform, which gives all employees access to first-class materials to support their professional development. So overall, a good start to the year. Let me now give you a little bit more detail on the performance of the divisions, starting with Minerals. The division saw orders increase 15%, driven by original equipment, which was up 66%. As I said, this included strong demand for Enduron HPGRs and GEHO pumps. And as mine site access improved, it supported the division's integrated solutions strategy. This is where engineers provide plant audits to help identify productivity improvements, often focused on debottlenecking to increase throughput. While mine access has improved, particularly in North America, Australia and Russia, compliance with COVID restrictions is understandably adding complexity and difficulty. One colleague recently visiting customers had to take 8 PCR tests in 3 days which they were happy to do, but it shows the level of commitment that's required. And while the vast majority of mines are open, ore production does continue to be impacted by workforce restrictions and weather as some of the big mining houses have reported in their recent earnings call. These residual COVID disruptions are one of the reasons that the division saw a decline of 1% in aftermarket demand. It's also worth remembering that last year, we saw a number of customers, particularly in South America, increased their safety stocks in Q1 as the pandemic developed. This hasn't been repeated this year, although normal demand has been very resilient. And for us, the key indicator is the sequential improvement in divisional aftermarket orders, while Q1 was up 3% on Q4 of last year. Divisional revenues were up modestly year-on-year due to project phasing, and Minerals' book-to-bill was 1.27, reflecting increased conversion of the project pipeline. Let me now turn to ESCO, where the division also saw positive trends in mining and particularly strong demand in infrastructure. This contributed to orders up 2% on the prior year, but up 19% sequentially. Mining machine utilization remained below pre-COVID levels, although gradually increased as customers started to rebuild stockpiles that have been depleted in the last year as they focused on the process side of the mine. The division continued to see good conversions to its Nemisys technology and its increased focused on bucket opportunities saw a number of good wins, including a significant order of 3 large cable shovel buckets in Africa. Customers particularly like the productivity improvements we can offer, which include longer maintenance cycles that reduce downtime and increase bucket capacity that enables more efficient truck loading. Geographic expansion of the division's offering also continued leveraging mineral service network to secure orders in North Africa and Western Europe. There was a strong sequential recovery in infrastructure markets, particularly in North America and Europe. This was driven by residential construction, which then led to increased demand from sand and aggregates producers. There was also increased restocking from dealers with wider confidence further supported by increased government stimulus commitments. Dredge markets were stable, but I have to mention that ESCO has been a trusted supplier to the Suez Canal authority for 25 years, and the dredge barges recently used to release the stranded Evergreen ship were equipped with our GeoVor cutterhead technology. So we played a small part in unblocking one of the world's great trade routes. ESCO's revenues lagged orders slightly as expected, but, again, we saw a good sequential improvement, and its book-to-bill was a solid 1.11. Turning to net debt, which has reduced significantly since the year-end due to the receipt of GBP 256 million of net proceeds and a reduction in lease liabilities of GBP 66 million from closing the sale of the oil and gas division. The completion of the sale of the Saudi JV for approximately $30 million is still expected in the first half. Excluding the effects of oil and gas, net debt at the end of the March would have been higher than December, but reflecting normal seasonal working capital patterns. Let me finish with what I think are the key takeaways from the first quarter. We've had a good start to the year with an 11% increase in both year-on-year and sequential orders, driven by a very strong OE performance. As expected, conversion of our project pipeline is increasing, particularly for those longer lead time products that we would normally see pick up early in the cycle, and this is a theme that has continued into April. Aftermarket activity remains highly resilient and is improving as market conditions steadily normalize, and the fundamentals of our markets remain positive, underpinned by long-term structural trends. In the medium term, we feel good about the performance goals set out earlier this year, growing faster than our markets, expanding our margins, strengthening the balance sheet with more predictable cash conversion and, of course, delivering on our sustainability commitments. In terms of the specific 2021 outlook, we're seeing strong progress with vaccination programs in some parts of the world, but in many others, we do continue to see ongoing COVID disruptions. We will remain vigilant, but at this stage, as we look to the full year, we expect to deliver growth in constant currency profits in line with current market expectations. Thank you again for listening, and John and I would be delighted to take any questions you have. So back to you, operator, please.

[Operator]

[Operator Instructions] The first question comes from the line of Max Yates from Crédit Suisse.

[Max Yates, Research Analyst]

I just had 2 questions. Just the first one was, if you could talk a little bit about the pipeline of large orders? And I'd just like to understand kind of how perhaps exceptional or not these 2 larger orders that you have announced today? Are there kind of ongoing discussions for orders sort of similar to this size that could be booked through some of the remaining quarters this year?

[Jonathan Stanton, CEO & Director]

Yes. So the pipeline is strong, but I would say that the 2 orders we received in Q1 and then early in April are quite exceptional in terms of their size. So we don't have any other projects in the pipeline that we would expect to win this year or of that sort of magnitude. So it's sort of characterized now by the more typical brownfield pipeline opportunities. So we've got quite a few in the sort of $10 million to $20 million range, but nothing really above that. But there is a lot of smaller projects in the pipeline, if you like. And I would say, while it's been a really great start in terms of conversion of the pipeline and some of that will convert into revenue in the current year. Where we go in terms of where we revenues really will depend on how we see April and May develop. And because when we get beyond that, projects are likely to be revenue in 2022 and beyond rather than later this year.

[Max Yates, Research Analyst]

Okay. And just the second question would be around the HPGR market. I mean we've now seen another kind of very large and good order win here. I just wanted to understand kind of to what extent these orders are reflecting the market for HPGRs kind of really growing and really taking kind of a much larger share of new orders against traditional SAG mills or whether this is just new winning kind of almost 100% share of the orders on offer? And I guess I'm just trying to understand, if we look out sort of 5 years, I mean, could this be the case where kind of the HPGR market has doubled in size because of all of these kind of efficiency savings versus traditional SAG mills? I'm just trying to understand what the sort of penetration looks like of that market to maybe gauge better how your business could evolve?

[Jonathan Stanton, CEO & Director]

Yes. It's a great question. So first of all, I mean, I think overall, I mean, the market, I think, is going to expand quite significantly over the next few years, but people are still going to buy SAG mills. There's lots of greenfield and large brownfield expansions out there with concentrators, which have SAG and bore mills in them. So I think the HPGR opportunity, it's not that everything that once was a SAG mill is going to be HPGR going forward. I think HPGRs are going to be focused in certain areas. It's number one, where in a brownfield, customers are looking for to expand capacity, but without completely replicating the scale of a whole concentrator with a SAG mill. You can add modular capacity by adding HPGRs. There's a specific opportunity in relation to rod mills because there are ball mills and rod mills and rod mills are the ones that are most sort of old technology and inefficient, if you like. So I think there will be a trend to replace rod mills with HPGRs. And I think the opportunity is also significant in iron ore, which I talked a little bit about in the speech where as over the next few years, we try to move towards greener steel because that's a really huge emitter of CO2 steel production. Then that's going to require higher grades of iron ore, and that's where HPGR should really come in. And you've now seen that in iron bridge and now with this Ferrexpo job. I think, beneficiation of iron ore to create higher grades, which play into green steel is going to be a major theme for us as well. So all of those things, I think, the market is going to develop positively for HPGRs over the next few years. That's reflected in the pipeline. But I would also add that it's not only the market, we're also winning big on share because, I think, our technology in HPGRs is quite differentiated from what our competitors have in the space.

[Max Yates, Research Analyst]

Interesting. And sorry, just one very final one for John, perhaps. I just want to check on the margin phasing in the Minerals division. I mean, I think, we're used to this division seeing sort of 100, 150 basis points of sort of sequential margin improvement in H2 versus H1. And I think you mentioned sort of price rises being put through to mitigate input costs. But I'm just wondering whether there would be any kind of delays, any sort of abnormal phasing that we should be aware of as we move through the year in the Minerals division because of any effects like that or cost savings, et cetera?

[John Heasley, CFO & Director]

Max, no, there's nothing unusual in terms of the phasing of margins that we're expecting this year. As you know, we're traditionally extremely successful in passing through price rises on the minerals aftermarket and nothing's changed in that regard. So margin profile, nothing unusual this year.

[Operator]

The next question comes from the line of Arsalan Obaidullah from Deutsche Bank.

[Arsalan Obaidullah, Research Analyst]

My first question. I was wondering if you could just give a bit more sort of color on the aftermarket side and some of the challenges that you've faced and sort of how you see those potentially, I guess, unwinding through the year, given, obviously, the high activity that you'll be seeing through the mine. I was just wondering sort of how that plays out with sort of some of the changes and issues that you're finding.

[Jonathan Stanton, CEO & Director]

Yes. I think in a nutshell, it's simply that our aftermarket, specifically at Weir is very, very highly correlated with global ore production for the commodities that we're exposed to. As I referred to in my speech, you can see that there is still some ongoing disruption across a number of our customers. And oil production levels are not quite back up to pre-COVID levels at the moment. So that's what's going on. We're doing great in terms of market share and continuing to deliver from our -- to our customers. So very, very happy with the resilience of the aftermarket overall. Then in terms of how it will develop, I think you have -- if you go back and look over the last few quarters, you can see the trajectory that we're on in terms of the sequential improvement in orders. So that's telling you the shape going forward. And then if you look at last year in the comps, they clearly get quite a lot weaker as we go through Q2, Q3, Q4. So I think from Q2 onwards, we should -- Q2 is always a big quarter in terms of order. But as we get into Q3 and Q4, then the growth numbers should be coming through really, really strongly.

[Arsalan Obaidullah, Research Analyst]

Okay. And in terms of sort of the -- you've sort of touched upon this one and the sort of supply chain issues and constraints and rising sort of costs, do you -- are you sort of confident that -- is that sort of something that potentially could be an issue coming maybe later half in the year? Are there any sort of issues that you're finding in terms of delivering projects and challenges you're having there? Or is that sort of being managed and mitigated?

[Jonathan Stanton, CEO & Director]

Yes. I mean it's been an interesting first quarter. Alongside COVID, there's been quite a few other sort of disrupting events. But what I would say at Weir is that we do really benefit actually from our regional operating model, decentralized and being vertically integrated as well. So compared to many, actually, much more is within our control. That said, we did see quite a bit of friction on the international freight, with kind of both Brexit and some of the other international freight considerations. So we saw a bit of that. But in the scheme of things, it was a nuisance more than anything else. And then on the input cost side, our biggest sort of raw material input is essentially metal that goes into the foundries. And that's sort of -- we're seeing generic price increases in those commodities, which we're sort of dealing with. The area that's been most challenging is North America, where a lot of ESCO's production capacity is based, where scrap steel, bar and plate is going through the roof. So specifically, in minerals, generally, we're kind of dealing with it in the normal price increases. In ESCO, we're actually putting through a second price increase, which has already gone out to cover off where raw material prices have gone to for that business in the last couple of months.

[Operator]

The next question comes from the line of Andrew Wilson from JPMorgan.

[Andrew J. Wilson, Analyst]

The first one, I wanted to ask on pricing. I guess interested on any comment you'd make around the larger orders that we've seen, but I'm actually more interested in the kind of general backdrop. Clearly, market is a lot healthier today, always increasing -- getting healthiest there than it has been probably over the last 12 months or so. Just interested to see, even if you're gaining any benefit in that in terms of being able to sort of price-up for some of these solutions, particularly, I guess, the new products that you bring into market.

[Jonathan Stanton, CEO & Director]

Yes. I think, Andy, I always say this, don't. The market for OE doesn't really change very much through the cycle and that we all have to compete very hard to get the installed base. It's a complex buying decision based on technical capability, evaluation by an EPCM, valuation of end-user considerations in terms of total cost of ownership and so on and so forth. But specifically also where you've got an EPCM, it's also about them delivering the lowest cost solution for their customers. So price is always quite tight on OE. But that's because, as you know, it delivers such a long-term revenue stream in terms of aftermarket going forward. So I think we will continue as we always do, among our peers to sort of fight hard to get the installed base and pricing is what it is for original equipment. We very rarely lose money on original equipment. But sometimes, we have to sort of take the margins down to get that installed base because we know what it's going to deliver over the next few years. One thing that is interesting on that which I talked a little bit about before is the fact that with these HPGR orders, we are pushing much harder to get longer-term service agreements which we haven't traditionally done on the pump and wet side of the business and that's because some of the dynamics in the combination market are a little bit more different. So alongside the GBP 95 million Iron Bridge aftermarket order that we got last year, which wasn't booked, that's going to get booked in subsequent years as we see the revenue come through. We're also going to get a similar service agreement with Ferrexpo in the Ukraine, which will be a 5-year service agreement, plus potentially another 5 on the back of that. So that's going to be a theme that we certainly -- and that also ensures that we make sure we're getting the pricing that we want to have on the aftermarket going forward. And that payback from an annuity point of view, which is so positive in terms of our go-forward revenues.

[Andrew J. Wilson, Analyst]

And maybe just as a follow-up to that, can you touch on it in terms of -- on the aftermarket side. This is sort of the backdrop of where you have this, you obviously have some cost inflation, whether it would be materials or logistics, I guess, broadly. Does that help in terms of the conversation around how you price the aftermarket? Or is it not as consequential in terms of the conversation?

[Jonathan Stanton, CEO & Director]

Well, I think the good thing about the conversation with our customers is they know very well more than anybody, what's going on with commodity prices and therefore, understand where we're coming from when we're talking about input costs. So not that it's always a straightforward conversation, nobody likes a price increase. But we kind of do it differently in different parts of the world, some areas, it's just the annual price increases; other areas, we have an indexation agreements that we've talked about a bit in the past. But generally speaking, we get the price increase that we seek to deliver year-on-year. And I don't think this year will be any different.

[Andrew J. Wilson, Analyst]

Perfect. And second question, I guess, totally different. But on the M&A side, and there's been several sort of, I guess, comments around potentially what that looks like going forward now that the group's appeal plan and clearly that sort of narrows the field a little bit with regards to focusing on mining assets. I'm just interested as to sort of the appetite internally at this stage, obviously, not long after the sale of Oil & Gas gas for M&A., but also sort of how to do that in a market which I presume sort of vendor expectations are starting to increase given that the backdrop for mining looks so positive. So there's probably 2 quite general questions I was interested in any comments.

[Jonathan Stanton, CEO & Director]

Yes. I mean, I think my overall comment would be that my approach to M&A, just in the mining space has just not changed at all since 2016. We know the assets we'd like to have to accelerate our strategy, fit with our business model that we think we can add value to. And then it's all about availability and striking a price, which allows us to deliver the returns that fit with our financial criteria. So that's what we do. We continue to build relationships with those owners of the assets that we would like to have in the portfolio at some point, and we play the long game. And we're not going to overpay to your point about where valuations are at the moment. I think the other point I would say is that we are clearly very focused on organic delivery at the moment. There is a lot going on in our markets. We set out our targets to outperform our markets over the medium term, and we're absolutely committed to delivering on that as well as all of the margin improvement and underlying foundational improvements and continuous improvements that we want to deliver in the group. That means we continue to scale. So I'm not interested in M&A if that in any way takes away from our focus on that. But it's really sort of the same old story in terms of how we're thinking about it.

[Operator]

The next question comes from the line of Mark Davis Jones from Stifel.

[Mark Davies Jones, Associate]

One quick one, please. How long are the long lead time contracts you're signing up at the moment? Would you expect all the revenue related to the OE delivery to come this year? And if not, as we see more OE in the mix, is that going to put something of a strain on working capital as we go through the current year? Obviously, things are ramping up quite fast there, so there's some quite big for you to carry through to the revenue point of view. So any comments on phasing there.

[Jonathan Stanton, CEO & Director]

I'll let John take those both up.

[John Heasley, CFO & Director]

On the 2 specific contracts that we called out, then the GBP 36 million Enduron HPGR and screens contract, that's a sort of multiyear upgrade Ferrexpo undertaking. So about 1/3 of that, we would expect to convert to revenue this year, about 1/3 next year and then the balance spreads over the following few years. On the pumps contract in Indonesia, the majority of that will ship this year. And in terms then of the other OE, typically, we've got to really book that in the first half of the year on the sort of projects side to see revenue in the year. So we've got another month or so of opportunity to get any significant orders through as we get into the more sort of ones and twos and a little bit of efficiency upgrades then. We've got a bit more than that. We could probably ship within 3, 4 months on some of that. But on the project side, another month or so of opportunity.

[Mark Davies Jones, Associate]

Great. And the impacts on working capital?

[John Heasley, CFO & Director]

I mean working capital, clearly, at the first half as we're building up, so the activity on the projects that we've booked in the last couple of months, and we'll continue to book those. We'll be turning into work in progress through the first half. So you'll see a little bit of build in working capital at the first half, as we typically see before some of that unwinding through the second half. And then other than that, we can see, as we saw with Iron Bridge, a little bit of plus or minus around advanced payments and so on that really are determined project by project. So the general phasing a little bit of build in first half, unwind in second half and then the sort of anything on top of that is advanced payment driven which we don't really know until we get there.

[Mark Davies Jones, Associate]

Okay. Just one other follow-on. For ESCO, infrastructure was obviously a weak area when you first took ownership of that business and that looks rather promising given what's going on in the U.S. So is the Q1 number a little distorted by restocking? Or do you think that infrastructure side of the ESCO exposure could actually grow very strongly over the next couple of years?

[Jonathan Stanton, CEO & Director]

No, I think it will grow Mark. I think we're seeing -- at the moment, we're seeing some pickup because of the restructuring -- so the restocking, some pick up, which is generally activity related in construction and infrastructure markets. Clearly, not really much coming through yet in terms of the stimulus spend. So I think that money that is going to come through over the next few years. There will be a nice tailwind for that part of the business. And part of what we're trying to do to grow the revenues more broadly in ESCO is, that market, we're very much focused in North America and Europe at the moment. We think there are opportunities in other parts of the world to get into that infrastructure market as well. So it's a good growth opportunity, I think, going ahead, moving forward. And to be clear, we're focused on the higher end. So the bigger quarries, the sort of bigger infrastructure-type projects, the machines that are involved in that sort of space of the market. So while it's -- the margins are slightly lower than on the mining side, they're still pretty good, and we're less interested in the smaller machines, the more commoditized part of the market. We don't want to participate in that. We'll focus on those parts of the market where our customers really understand the total cost of ownership [indiscernible].

[Operator]

The next question comes from the line of Lars Brorson from Barclays.

[Lars Wauvert Brorson, Director]

Jon and John, it's Lars here. 2 things, if I can, Jon. One on order intake in the quarter and one on your full year guidance. Well done, obviously, on equipment orders. If I can nitpick a little bit on your aftermarket and ESCO quarters. Maybe starting with ESCO, appreciate your point, Jon, that it's a strong sequential growth, but frankly, Q4 was a fairly easy comparison. And I'm not quite clear on the seasonality in ESCO, but 2% growth year-over-year still looks a bit soft to me, certainly versus peers, and presume that was down if we [indiscernible] the restocking. So can you help me a little bit with the dynamics here and particularly around your noninfrastructure business, where are these declines coming? And is it still very much around some of the, should we say, more structurally impaired end markets like cold and oil sands? I'll start there.

[Jonathan Stanton, CEO & Director]

Yes. No. No. I think it's a fair question, Lars. And -- but what I would say is that I'm very happy with the sequential improvement that we are seeing in ESCO. You have to remember that the large mining machines are still running at utilization levels. This is below COVID -- the pre-COVID levels. You have to remember that the Q1 comp last year was strong because of stocking up by our customers as they were beginning to evaluate the potential effects of COVID. And you have to remember that Q1 this year for ESCO was disrupted by weather events, flooding -- high levels of rain and flooding in Western Australia, where we do a lot of work in the iron ore mines. Our foundry in Mississippi was shut down for a week because of the extreme cold that we saw in North America in the quarter. The oil sands production was disrupted because of the extreme cold weather events as well. So I think in the context of all of that, I am perfectly happy with ESCO. And as you'll see, to my earlier point, when you look at the comps going forward, we will start to post really strong growth as we get into Q2 and beyond.

[Lars Wauvert Brorson, Director]

Understood, Jon. And maybe similarly -- and fair enough. And similarly, on your Minerals aftermarket, I mean, I appreciate your point around site access friction on field services, but I would have thought, again, your core spare parts business might have done a little bit better. I mean it feels like there was a bit of pent-up demand from 2020. We've heard at least one of your peers talk about meaningful pent-up demand, particularly around stationary crushers, which is not dissimilar to your core minerals aftermarket business. I wonder what you see there, just on the core spare parts business and how do you see that track through 2021 as well, please?

[Jonathan Stanton, CEO & Director]

Yes. No. Again, I'm very comfortable with where we are. As I said, production levels are still below pre-COVID levels. Minerals also saw some of the disruptions that ESCO saw. So -- and what you'll see -- you're seeing our customers work through the cycle at the moment. The process side of the mine, notwithstanding overall production levels, has been run pretty hard right from the beginning of last year as customers try to maximize production, take advantage of high commodity prices as best they could. And so where they're focused at the moment is in some of our more upstream peers, where they need to get drilling and blasting. They the need to get digging again. Anecdotally, a lot of the mines that we have got people back onto stockpiles that were there a year ago are gone, i.e., all that rock has been used in the process circuit, in the concentrators, and customers are very focused on rebuilding those stockpiles at the moment. Why is ESCO not being that quite strongly? Maybe as some of our upstream here as well. They've got machines on the sidelines that are not utilized. So we're not quite yet seeing it come through there. So I think it's just working its way down through the cycle, down through the value chain in mining. And as I said earlier, I think I'm just looking at the trajectory, and it's all about run rates. It's all about run rates for us, both for ESCO and for the core mineral spare parts, which there we're seeing the sequential improvement that's really encouraging. And as we get it -- as I said, as we get against those weaker comps as we get into Q2 and beyond, then we'll be posting strong growth figures. So I'm perfectly happy with where we are on that sort. We do need to see that return to growth to deliver on our outlook, by the way, because aftermarket from an order perspective has been running negative for several quarters now. We expect to grow that business from a revenue point of view this year. So we have to see that come through, but I'm very confident that it will.

[Lars Wauvert Brorson, Director]

Good color. And finally, if I can just confirm on your 2021 guidance. It's a bit of a convoluted guide growth in constant currency profits. I'm looking at a boom of consensus in absolute numbers, adjusted EBITDA of GBP 320 million for the year. I just want to clarify that that's the number that you're firming up as market expectations?

[Jonathan Stanton, CEO & Director]

I think, to me, the same mistake, seems very clear, Lars, so absolutely.

[Operator]

And the next question comes from the line of Robert Davies from Morgan Stanley.

[Robert John Davies, Equity Analyst]

First one was just really around the magnitude of the inflection in the OE orders. Just wondered if that had any implications for additional sort of cost add backs or need for additional employees. Just wondered how your cost footprint was looking into the second half of the year, if there's any additional ads required?

[Jonathan Stanton, CEO & Director]

No. Not at all. I mean there we've got plenty of capacity as we go into delivery mode on those orders. So beyond the sort of normal just increases in sort of variable costs to support incremental revenue, there will be absolutely no sort of step change or further incremental costs going in. And we're very mindful, we need to continue to see the growth come through, and we're not going to get ahead of ourselves in terms of putting costs back into the business. We can sort of remain sort of balanced on our outlook on that. So as we see it coming through, then we'll put in the incremental variable costs, but no, nothing that is any sort of step-up from the normal run rate.

[Robert John Davies, Equity Analyst]

And then 2 sort of quick follow-ups. One was just on the ESCO margins over the medium term. You see you had a very strong inflection in the ESCO OE orders of any sort of 80% or so in the quarter. I know it's only a small piece of the overall pie. But does that sort of mix issue have any impact on your thinking around margins for that division either this year or next?

[Jonathan Stanton, CEO & Director]

John?

[John Heasley, CFO & Director]

Robert, no, I mean the OE in ESCO, as you say, doesn't have a big -- it's not a big element of the overall revenues and therefore, won't have a big impact on the margin overall. We are and remain committed to getting to the 17% target. We're within touching distance of that in our reported numbers last year. And we'll get there and then see if there's an opportunity to go beyond. So no change to the medium-term outlook. I would just remind you that last year, we did have a little bit of a benefit in the ESCO margins from the COVID savings that we realize without having any significant incremental COVID costs. That was about 60 basis points. So we're probably looking at slightly flatter profile on ESCO this year, but that's nothing to do with the OE aftermarket mix and certainly doesn't take away from our commitment to the 17% margin that we've laid out.

[Robert John Davies, Equity Analyst]

And then just my final one. It was just on, I guess, the sort of ESG side of the business. It has obviously been a focus for lots of cap bids coming in the last year. I know yourselves have made more of a kind of push on that front. Just in terms of the interaction and the discussions with customers, are they -- given the activity is sort of picking up across the board, are you seeing sort of increased demand for these kind of new products and the ESG-related sort of kit that you're getting into the market? Or are customers still buying the usual sort of blocking and tackling pieces of kit and the sort of more ESG-focused part of that spending profile is still more sort of talk than real orders? I'd just be kind of interested if things have changed at all now that the market is sort of firming up a bit.

[Jonathan Stanton, CEO & Director]

Yes, it's a great question. And I would say, yes, the dynamic is changing. And a couple of points I'd make on that. Actually, the Ferrexpo, Ukraine order was -- that was a project that was in the pipeline in 2014 actually, and then canceled with the CapEx downturn that we went through in that period. Actually came back online only a few months ago for obvious reasons. But I would say the conversation with that customer 6, 7 years ago was really about technical capability and total cost of ownership. But this time, they were very, very focused on the emissions, energy consumption, the sustainability benefits alongside those other things. So I think that dynamic has really shifted. And then the other thing I mentioned in my speech, Robert, was that we are developing this year our tool to measure the embedded CO2 in our products, which is data we want to give to our customers alongside the energy consumption that our products will deliver. And they are demanding that. They are demanding that because they need to -- they're doing all the work on their scope 3 at the moment. So they need all of their suppliers to tell them about embedded CO2. So we're seeing a real pull for that data, which is why it's on the sort of critical road map for us to deliver that this year. And I would say that we're seeing it come through in a much more sort of localized level among our customers. It's sort of been a boardroom and sort of senior executive conversation for a while, but our engineering, salespeople on the ground are getting pulled from customers. The conversation is including, I need to understand what your product can deliver from a CO2 footprint perspective as well. So I think that's a really interesting and positive trend for us.

[Operator]

[Operator Instructions] And the next question comes from the line of Edward Maravanyika from Citigroup.

[Edward Maravanyika, Director]

I just had a question on ESCO as well actually. You talked around the kind of market share gains you've been making in the Africa space. Could you just please maybe talk through what the market share growth opportunity is in ESCO outside the U.S.? And then just on sort of the cash coming in from the Oil & Gas sale proceeds, where is your thinking with regards to the balance sheet in terms of sort of use of cash? We've seen one of your peers announced a buyback this week. Is that something that you might be thinking of as well?

[Jonathan Stanton, CEO & Director]

Okay. Well, John can come back on the cash question. As far as ESCO is concerned, the go-forward strategy for that business from here is all about top line growth. We've delivered on the cost synergies. We've delivered on the integration. By and large, the margins are where we said they would be, and John made the comment that more like to be flat this year. But beyond that, we would hope to sort of squeeze on a little bit more. But it's all about growth from here, and that is on multiple levels. It's about geographic expansion in mining for using the Minerals footprint where ESCO doesn't have a presence. On the infrastructure side, it's about going into markets outside North America and Europe and also moving from a sort of distributor model to a dealer model in some part -- to a direct model in some parts of the world, so that we're retaining more of the value add. And we're seeking to broaden out the product line. So the progress that the team has made on selling buckets is a good example of that. We're really pushing harder into that space. So we're not just a GET, an attachment company. We're offering buckets and indeed other consumables, which sits in and around the mining machine. And over time, it's also about bringing technology and data and intelligence to the systems and buckets that can play into our customers' overall ambitions to optimize what's going on in their minds. So that's about loss detection of ground engaging tools, trying to figure out what's going into the bucket. So you can help customers with all sorting and things such as our tool tech product, which is an automated change-out, GET change-out technology, which means you get people out of harm's way in the GET change-out process. So it's really about growth, and it's on multiple levels. So that gives you a flavor of what we're focused on that. On the cash, John?

[John Heasley, CFO & Director]

Ed, on the cash, we've been clear since we announced the disposal of Oil & Gas. The proceeds were to be used to continue deleveraging. We also, as you will recall, in March, we're very clear about our capital allocation policy that sets out our leverage targets, which is between 0.5 and 1.5x net debt to EBITDA. In March, again, we announced on a pro forma basis, including the proceeds of Oil & Gas, net debt-to-EBITDA was 1.7x. So we're well on the path to getting to within that range. So that includes the proceeds. So there's no plans for special distribution as a result of the proceeds of Oil & Gas. So again, we are committed to retaining our full investment-grade credit rating. And of course, we laid out our dividend strategy and policy in that capital allocation, which is through the cycle to return [ 1/12th ] of earnings per share to shareholders. So no change is the summary here.

[Operator]

Thank you. There are no further questions. Please continue. Thank you.

[Jonathan Stanton, CEO & Director]

Thanks, operator, and thanks, everybody, for your participation this morning. Good to get your questions. And obviously, if there are any follow-ups during the course of the day, then don't hesitate to be in touch. But thanks again, and stay safe.

[Operator]

Thank you, speakers. This concludes today's conference call. Thank you for participating. You may now disconnect. Speakers, please stand by.