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Ladies and gentlemen, thank you for standing by, and welcome to the Weir Group PLC Quarter 3 2020 Interim Management Statement. [Operator Instructions] I must advise you that this call is being recorded today on Tuesday, the 3rd of November 2020. Now I'd like to hand the call over to your host today, Jon Stanton. Please go ahead.
Thank you, operator, and good morning, ladies and gentlemen, and thank you for joining us for our third 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. As you know, we achieved a major milestone in the quarter by agreeing more cash sale of the Oil & Gas division to Caterpillar for an enterprise value of $405 million, transforming the group into a premium mining technology pure play. I was particularly pleased to agree the sale in what are very tough market conditions. The sale maximize the value for our stakeholders and puts Weir in great shape for the future. As a mining technology pure play, we stand to benefit from the demographic trends such as population growth, urbanization and the continued rise of GDP per capita in emerging markets, now further helped by governments across the world, indicating that infrastructure investment will be core to their economic response to the COVID-19 pandemic. And as they build back better, many want to accelerate the transition to a new lower-carbon economy, which, of course, depends on essential metals like copper, our largest exposure. At the same time, we continue to see miners set ambitious environmental targets, which require a technology transformation in the industry, which Weir is an in ideal place to support.But of course, in the near term, we continue to navigate through the COVID-19 pandemic. I'm very proud of the way our teams around the world continue to respond, prioritizing the health and well-being of colleagues and their communities while continuing to go the extra mile for our customers. So looking specifically at the third quarter, where our orders continue to show the relative resilience of mining but also reflect the ongoing COVID-19 effects across our markets. Overall, underlying orders, which exclude the impact of last year's record Iron Bridge contract, were 11% lower for continuing operations. Oil & Gas is now classified as a discontinued operation, and I'll come back to that later. So mining now represents around 80% of our continuing business, and as we know, this is an essential industry with the vast majority of the world's mines remaining in operation through the pandemic, which is providing us with resilient demand for equipment. However, many mines are operating with reduced staffing, particularly at management levels. As a result, all production volumes have been lower and decision making, particularly for near-term upgrade projects, has slowed down. Restrictions also mean mine access to suppliers is still limited. And while Zoom and Teams are great tools, they can't fully replace the benefit of face-to-face collaboration that are crucial to do sales and contract decision-making. But the industry is adapting to these challenges, and we saw a strengthening in demand towards the end of the quarter. Let me now turn to our divisions, starting with Minerals, where demand was relatively robust with underlying orders down 5% year-on-year, excluding last year's GBP 100 million Iron Bridge order. This performance benefited from the broad geographic diversity of the business. And as you'd expect in an evolving global pandemic, the situation varies by country and region. For example, in South America, Russia and Central Asia, where there are many of the world's biggest mines, demand has been strong. In Africa, we've seen a number of mine closures. And in Australia, which has a greater number of medium and smaller mines, demand has been impacted by workforce constraints and strict travel restrictions between states. Overall, Minerals underlying original equipment orders were down 6%, which, for context, represents only about GBP 5 million. And as we've often said before, OE tends to be lumpy quarter-to-quarter. We saw good orders for our crushers, pumps and tailing solutions, but delayed decision-making and site access issues impacted our integrated solutions offering overall, which does rely on engineers being on-site with customers. That said, site access is now starting to improve. From a longer-term perspective, we're not seeing any slowdown in larger expansion project activity with firm bids increasing strongly in the quarter, underpinned by the positive fundamentals for mining markets. Aftermarket orders were 5% lower, mainly reflecting more production volumes and also some short-term measures, including destocking and the deferral of nonessential maintenance. Aftermarket revenues are continuing to improve sequentially, as they have throughout the year, and we maintained a positive year-to-date book-to-bill. In the context of annual copper production forecasts down high single digit, some high grading and all of the COVID challenges, I was particularly pleased with this performance. The division also continued to deliver its GBP 30 million cost-saving program, which, together with operational efficiencies, supported margins in the normal range. Looking forward, it's clear that miners are working their assets as hard as they can, but they're also focusing on higher-grade ores, destocking their spare parts and deferring maintenance CapEx. While these responses are understandable given the personnel challenges, they are also inevitably temporary. Alongside that, what with site access improving and commodity prices for copper, gold and iron ore reaching multiyear highs recently, supported by stimulus spending and supply concern, there are a number of positive data points. Against this, we continue to face the unpredictable evolution of COVID-19 and localized government responses. So it is difficult to be completely confident in how demand will develop from here. But overall, looking to the remainder of the year for Minerals, we expect mining markets will remain robust, assuming there is no significant increase in disruption to either Weir or our customers' operations. Let me now turn to ESCO, which saw orders reduce by 24%. But as we've said before, revenues are a much better indicator of activity for this short-cycle business, and sales were much more robust than 14% with a modest improvement from Q2 to Q3. That's in line with average mining machine utilization in the quarter, which was around 12% below pre-COVID levels. North America was impacted by some specific customer operational issues in the oil sands and the gradual ramp-up in operations in iron ore, which, as you know, is vertically integrated with the auto industry in the U.S. Infrastructure demand, whilst still subdued, shows sequential improvement Q2 to Q3, particularly for core GET consumables. Year-on-year order comparisons also reflect the impact of temporarily extended lead times in 2019 as we upgrade with foundry operations. This led some customers to build additional safety stocks last year, which they have been burning down over the past 6 months or so. However, we're now seeing the results of those foundry upgrades with good operating leverage, alongside the GBP 9 million 2020 cost-saving program underpinning the division's margins. Looking ahead, the outlook for ESCO's mining end markets for the rest of 2020 is consistent with Minerals, while the pace of recovery in infrastructure is expected to be modest and dependent to future COVID-19 restrictions, which remain uncertain. Moving on to net debt, which at 30% tender, was higher than reported at the end of June, reflecting normal seasonal patterns and in line with our expectations. Turning to Oil & Gas, which is now reported under discontinued operations. As expected, we saw some improvement in demand in Q3 following the historic lows of the second quarter, but completions activity was still down around 70% year-on-year with divisional orders down 56%. As I said earlier, we continue to expect the sale of the division to complete by the end of this year, and the circular on the sale will be published later today. To summarize then, the third quarter saw a robust performance by the group despite COVID-19 challenges with demand strengthening as the period ended, and our 2020 cost action is fully on track. Our longer-term project pipeline improved further, reflecting the positive fundamentals in our mining markets. And with the sale of Oil & Gas, we're able to fully focus on unlocking the many opportunities we have to make mining operations smarter, more efficient and sustainable, positioning Weir at the heart of the industry's technology transformation. So with that, John and I will be delighted to take any questions you have. Thank you, and back to you, operator.
[Operator Instructions] And the first question comes from the line of Andrew Wilson at JPMorgan.
I just wanted to try and get a sense of kind of, I guess, how the quarter has developed versus expectations. So I think, obviously, with the Iron Bridge order in the basket, it makes some of the comparison quite difficult in trying to work through some of that. But just in terms of sort of -- I get the sense that the commentary is maybe a little bit more supportive than some of the headline numbers. I'm just trying to get a sense of if that's a fair comment. And also, if that's just a kind of quarterly phasing of orders dynamic?
Yes. We saw -- Andy, we saw, as I said in the few comments there, a strengthening towards the end of the quarter. September was the best month in the quarter as we saw the benefits of ore production picking up a little bit, mine site access opening up a little bit, which was supportive of the development of aftermarket. And that's the same for, really, the Minerals aftermarket and for ESCO as well. So we did see that strengthening towards the end of the quarter. And October is looking similar for Minerals aftermarket and ESCO as well in terms of order input. So that's fairly encouraging. OE is, as you know, it's lumpy. The challenge at the moment is -- the pipeline is as strong as it's been for a long time, frankly. Our firm quotes are probably higher than they've been at any time over the last 2 years. But getting orders over the line -- just simple things like getting a signature on a PO is really challenging because pre-COVID, when you get to the end of a contract negotiation process, everybody gets in a room and you hash out the final issues and then you put a signature on something. Well, that is proving extraordinarily difficult to do at the moment. So OE is quite difficult to predict. But a great pipeline, looking strong into Q4. But getting things over the line, it's quite painful at the moment just for those restrictions that we're all still working under.
That makes sense. I guess as well, just on the revenue side. I mean, I appreciate you don't give sort of full disclose on this, and there's some comments in that. But it seems that the sort of revenue run rate is -- again, is kind of similar to what you're expecting. And probably, if I kind of look at consensus numbers, it wasn't too far from the kind of run rate which has been assumed. Is that a fair comment? I appreciate that's obviously a little bit less lumpy than the orders.
Yes. No, it is. It is a fair comment. If you think about Minerals, Andy, then the normal seasonal pattern would be that we see stronger input in the -- sorry, stronger orders in the first half of the year, and that translating into stronger revenues, sequential increase in revenues as we go into the second half of the year. So it's sort of orders, stronger H1 and weaker H2 and a reverse on revenue. And so far, that's exactly what we're seeing. So we've seen sequential increases in revenue from Minerals on the aftermarket side through the first 3 quarters. That's expected to continue. And for ESCO, less so. But it's -- as I said, it's pretty stable at the moment. And if you think about last year for Q4 for ESCO, then that was actually where we started to see the orders come down quite significantly as a result of the reversal of the increased safety stocks and so on that our customers have been building. So as we get into Q4, I think you'll see more sensible comps, to be honest, as well.
Perfect. And maybe if I can just squeeze one. Just on the kind of book-to-bill. Again, because of what's in the basket, because of Iron Bridge, it kind of makes it a little bit difficult maybe to get some of the underlying numbers. But I guess -- and I think you made a comment in your statement around the book-to-bill looking better through the year or looking positive through the year. Can you just sort of clarify or maybe even, I guess, help me -- maybe even help everyone, hopefully, just in terms of what's the best way to think about the kind of book-to-bill as we've gone through this year as obviously we're trying to think ahead into 2021?
Yes. So if you think about it, take Minerals, original equipment is obviously less than 1, given the fact that we have GBP 100 million of Iron Bridge order last year and that revenue is basically going out as we speak through the second half of this year. So below 1 for OE. Book-to-bill for Minerals on the aftermarket side has been above 1 throughout the year. So that has trended positively. We've been building order book in Minerals. And again, for ESCO, it's below 1 at the moment. But that's really reflecting the destocking and the specific issues that relate to ESCO. So there, we're seeing revenues are more stable. And as I said, as we go into Q4, we'd expect the book-to-bill to normalize as well.
Your next question comes from the line of Will Turner at Goldman Sachs.
I've just got a couple of questions. The first one is on ESCO. Could you just go into a little bit more detail as to why the [indiscernible] demand, and then discrepancy with the revenue order intake, just so that we can fully understand the difference between the 2? And then the second question...
Sorry, Will. You've broken up so I didn't catch the first part of that question.
Sure. So could you just go into a little bit more detail in explaining the mechanics on to why the order intake is so different in ESCO versus a revenue decline?
Yes. It comes down to the bookings that we get from our dealers are -- can be pretty lumpy in terms of the order input we get. So we get blank -- if you like, blank IPOs, which are multi-periods. So that then -- you get that effect. You get the effect of the upstocking we saw last year and the destocking that we're seeing this year in terms of the dealers. And also, to a degree, for our direct customers as well because they were also impacted by the -- obviously, by the increase in the lead times that we had to put in place last year as we went through the foundry upgrade. So I think through -- back in the middle part of 2019, then, we have very positive book-to-bill, reflecting the fact that our customers, both direct and indirect, were building inventories. And we're just seeing that reverse at the moment. But the underlying revenue bookings coming through don't reflect those patterns because they're much more representative of actually what's going on in the mines and the utilization of the machines. So that explains the disconnect. So I think we've had -- it's sort of an unusual 12 months that we've been through where that disconnect has been sort of exacerbated by a number of things. But going forward, as I said in my response to Andy, I would expect that to come back into line.
Okay. Sure. And in terms of the margins during the last 4 months, has that progressed kind of as expected? So in Minerals, we've obviously got the dilution from the Iron Bridge order. But similarly, this is going to be offset by some of the cost savings initiatives and also those temporary savings that you have from using Zoom and the lower travel expenditure. Are there any comments you can make on those?
Yes. No, I'm just -- I obviously don't talk about actual margins for the Q3 update. But as I said in my speech, Minerals margins are exactly where we expect them to be, within the normal 17% to 20% range. We've explained -- as you've said out there, the dynamics of the moving parts of that in terms of the higher OE, offset by some of the cost savings. But we're also still carrying some incremental costs and under recoveries because of utilization levels in some of the plants. So quite a few moving parts, but very comfortable with where Minerals margins are. And clearly, the really pleasing thing about ESCO, as we said at the end of July, is the progress that we've made on margins there and notwithstanding the fact that it's top line. It's slightly softer than Minerals for the reasons that we've explained. Then the bottom line performance has been absolutely terrific, and that's continuing.
Your next question comes from the line of Mark Davies Jones at Stifel.
Can I try 2 questions, please? Firstly, obviously, encouraging to see things opening up and run rates picking up through the back end of the quarter. But the obvious question is, does that go into reverse as we see second waves and further lockdowns and so on? Are you hearing any indications yet of any sort of retrenchment around that? That's my first question.
Nothing so far. And we're obviously watching it very closely. But our feeling as we go into -- I mean, I feel quite good about the business and the activity levels that we're seeing. As I said, the pipeline, and particularly for OEs, is very, very strong at the moment with with a lot of activity around that. So I feel, both for the period we've been through where mines have been limited in what they've been doing, or maintenance limited and what we're doing in terms of smaller CapEx projects because of the lack of personnel on-site and so on, it does feel like there's a lot of pent-up demand there. The difficult thing is calling whether that will come through depending on what happens with COVID over the next quarter. And obviously, that's why we felt it was not appropriate to reinstate guidance because we can't predict if the Chilean mining industry is going to get shut down because of the COVID side. We just really don't know the answer to that question. But as I said, we feel good about the momentum that we carry into the fourth quarter. There are no signs so far anywhere that, that will be disruptive. But of course, it remains a possibility.
Okay. No, that's fair enough. And on ESCO, the suggestion is the outlook on the mining side of that is similar to that of Minerals. But obviously, it's been weaker today and it's a slightly different mix of end market commodities. So can you just talk a little bit more about -- I mean, I think you called out coal, oil sands, iron ore. Are there good reasons to see that picking up in Q4? Or should those stay weaker for longer? Because, I guess, the latter would be my expectation.
Yes. I mean, I think, taking those specific commodity exposures as it relates to ESCO, it is different to Minerals in story. Minerals has a truly diverse global geographic footprint, a truly diverse commodity exposure. ESCO is a little bit more focused in certain parts of the world, and that's behind where it sits today. Some of the specifics, coal -- thermal coal is clearly in decline, and that has been the case and will continue to be the case. And it is what it is. So it's a relatively small part of the business today and will just get smaller. Iron ore in the U.S., which is a big exposure for ESCO, of course, was very severely impacted through Q2 and the beginning of Q3 because it's vertically integrated with the automotive and consumer durables industry in the U.S. That's where that steel goes. And that's starting to pick up in Q3. And if you look at what is happening in the end markets, the auto and consumer durables in the U.S., then that's quite a positive lead indicator, I would say. So I'd be hopeful there. On the flip side, infrastructure in North America and Europe is clearly going to remain challenging, in Europe, particularly with further COVID shutdowns. And of course, a big day in the U.S. today, which will potentially be quite telling in terms of how sentiment develops in that market. So hopefully, that gives you a bit of hallmark.
Your next question comes from the line of Robert Davies at Morgan Stanley.
The first one was just around the issues you mentioned on mining side around maintenance pushouts. Just I wondered if you could give us any sense of how long you think that can go on for. Is that a one quarter event? Is that something that theoretically could continue sort of through the entire COVID pandemic and pushed out to sort of the latter half of 2021? Or is that just impossible? Will they sort of be forced to do something sooner than that? Just if you could give us any sort of color on the kind of multi deferments that you -- that the customers can do on the aftermarket side. That's my first question.
Yes. So well, I could just talk about what we're seeing in Q3. And there, the momentum that we sort of alluded to in OE for that maintenance CapEx is probably highlighted by the fact that of the original equipment orders that we got in Q3, over half of them were in September. So July and August were pretty soft, but September came through much stronger. And we hope that, that momentum continues into the fourth quarter. So if site access continues to improve, if we see more of the management, if you like, back on the mine sites, able to progress some of the more strategic operational actions and all those positive things -- and as I say, based on those trends and what we've been working on in terms of sales pipeline, our firm bid activity, our firm quotes is as high as it's been for a long time. So there's the potential there. But I have to urge a degree of caution, given the pandemic environment that we remain in. And as I said in the answer to Andy's question, just getting things over the line at the moment is quite challenging, but we're pushing hard. And we do -- we exit Q3 with some good momentum. And hopefully, that will continue into Q4.
And then my other question is, I guess, just more big picture. You've obviously changed the portfolio within the mining division quite a bit, I guess, over the last 10 years. You've added lots of new products and services within the portfolio. Just stepping back, I guess, if you're looking at where over the next sort of 4 to 5 years, is there sort of certain elements, products or regions you'd like to sort of develop? Is that going to be mainly organic, inorganic? Or how do you think about sort of moving hereon from where you are right now?
Well, I think the first thing to say is, as I said in the speech, I'm very excited about where we now sit with our product portfolio, the focus on mining and the opportunities that lay before us, because I think we're in a pretty unique situation where we've got a convergence of events around the demographics, around carbon transition, around minor sustainability challenges, which means we should be in a real sweet spot over the next few years. And obviously, post Oil & Gas, you've got a management team that is absolutely focused on that and excited about delivering on that. And I think as you've seen with the ESCO integration and the progress that we've made with Minerals, we've got a great track record. So we think, subject to what happens with the pandemic, the future is very exciting. In terms of our strategic approach to those markets then, nothing really changes in that we've got a very strong organic plan for the business in terms of how we want to develop it, continuing to broaden out the Minerals footprint and technologies and solutions that we're taking into that market, playing to those big customer theme. And ESCO is similar. And actually, having had a really good integration and got the margins according to where we want them to be, I think for ESCO, it's now about how we really get the top line moving, which is the focus for the new division President, Andrew Neilson, who now is coming in. So -- and we've got a lot of our strategic planning at the moment is on how we get some real growth through ESCO and leverage the Minerals footprint more. So very excited about the organic story. And then inorganically, you know that M&A is part of what we do. We do believe that there will be opportunities in the future to continue to acquire businesses that will add to that core footprint that we now have from extraction through to concentration and tailings. And we're very clear on where gaps are and what are the attractive assets. M&A, as you know, is opportunistic. So whether we'd be able to do those things -- but the bottom line is, I think the organic story is very powerful. And if we can add to the portfolio through M&A on top of that as well, it should supercharge it.
That's great. And my final one is just on -- you mentioned some of the seasonality in the mining business. You normally get stronger orders through the first half and stronger sales in the second half. I guess kind of looking into 2021, is there a possibility you're going to see a slightly different shape to growth given some of the issues around COVID? Do you think that might sort of disrupt the seasonality compared to what you normally see? Is there a chance that you could see orders pushed more to the second half? And I guess, if you missed the window and they don't land in 1H, is there any reason why customers then typically wouldn't come through in the second half? Or is that just sort of normal behavior that might be a bit different next year?
No. I think, look, I mean, all I'll say -- I mean, obviously, we don't guide on -- we won't guide on 2021 until we get to the 2020 results at the end of every -- aligned with our normal practice. And clearly, there are challenges around visibility at the moment. But that said, I think we ended Q4, and hopefully, 2021, with momentum in the business. We'll have to see how the winter proceeds in the Northern Hemisphere and what that says in terms of the development of the market, but it's clearly not something that we can talk about at the moment.
Your next question comes from the line of Edward Maravanyika at Citi.
Actually, most of my questions have been answered. But perhaps I could just ask your sort of 2 Board member announcements with Venkat and Ben Magara, so both with strong precious metal background. Is that sort of an intentional prop towards precious metals or just a coincidence?
No. I think, first of all, I'm really delighted that Ben and Venkat have been in the Weir Board. The primary reason for that was that we -- earlier this year, we said farewell to Rick Menell and then Cal Collins in September. So probably, the 2 Board members on the non-exec side with the most mining experience left the Board. So we needed to replace that experience to make sure that we have the right balance across the Board. And in doing that, we wanted to make sure that our Board, over time, becomes more representative of the countries and places around the world that we work. And so we're really delighted to welcome them to the Board. And I think they're going to add a huge amount to where we're taking the business strategically, clearly with their experience. But no hint in there in relation to our direction of travel on commodities. Copper, gold and iron ore are our big 3, but we'll obviously play in anything else where we are relevant.
That was the final question. I'll hand the call back to you, Jon.
Okay. Thank you, operator. Appreciate everybody's attendance this morning. Good to have the opportunity to talk to you. Thank you very much for the questions. Obviously, please do get in touch with Stephen through the course of the day if you have any follow-ups. Thanks all very much. Bye-bye.
That does conclude the conference for today. Thank you for participating. You may all disconnect.