Weir Group PLC

LSE:WEIR

Good morning, everyone, and welcome to Weir Half-Year Results Presentation. Please note the usual cautionary notice on forward-looking statements.

I'm joined today by our CFO, John Heasley, and will follow our usual format. So after some opening remarks from me, I'll hand over to John to take you through the financial review and then I'll return with the strategic and markets review, and the outlook for the group, will then open up for questions.

Before starting, many of you will have seen last week's announcement regarding John's move, and while he will be with us for a few months yet, I wanted to state today's opportunity to recognize and thank him for his significant contribution to Weir and to wish him well in his new role.

I believe Weir has a compelling long-term value creation opportunity that will benefit all of its stakeholders. As a focused mining technology leader with unique capabilities, we are deeply embedded in our customers' operations and supply chains, delivering engineering expertise, and innovative solutions for sustainable mining. We have leading positions, and we are well placed for the multi-decade growth opportunity ahead, driven by the need for critical metals in decarbonization and the adoption of new technologies to enable the transition to sustainable mining. With a leading platform and focused strategy, we're investing for the long-term and continuously delivering on the commitments we made.

And here's a reminder of those commitments, and the outcomes we're targeting, growing faster than our markets, delivering compounding growth in mid to high-single-digits through the cycle. Delivering operating margin expansion through operating leverage and our performance excellence program, which will take us beyond our 2023 target of 17%. Clearly converting our earnings growth into cash and returns and deploying it in line with our capital allocation policy. Remaining highly resilient, as demonstrated by the greater than 7% CAGR in our minerals aftermarket since 2011. And delivering all of the above in the right way, eliminating harm in our operations and communities, and with clear targets to reduce emissions in our end-to-end value chain.

With the equity case reset, following our portfolio shift, we're on a journey. Moving on from the complexity of the past to showcase the quality of the business we are today, building a track record as a focused mining technology leader. Quarter-after-quarter, we're meeting our commitments, delivering multiple periods of growth, margin expansion, and increased cash generation, and the first-half of 2023 was no exception. We grew our aftermarket revenues by 12%, expanded operating margins by 80 basis points, significantly improved our cash conversion and return on capital employed, demonstrated our resilience, as we executed strongly, and made progress in sustainability with our emissions reduction targets approved by SBTi.

Our performance in the first-half marks another key proof point on our journey and we're now upgrading our full-year revenue and profit guidance. I'm really pleased with the focus and alignment across the organization and what we achieved wouldn't be possible without the contribution of Weir colleagues around the globe, and I'd like to thank them for their hard work and dedication.

With that, I'll hand you over to John to take you through the financial review. John?

Thank you, Jon, and good morning, everyone. I'm delighted with our first-half results, which showed 2% growth in orders, 16% growth in revenues, and a 22% increase in operating profit. 2% order growth was supported by a 5% increase in original equipment, reflecting successful market share gains and new sustainable solutions, while aftermarket demand continued to show its usual resilience, up 1% despite some headwinds from infrastructure, Russia, and the Canadian oil sands.

Revenue is, up 16% at GBP1.3 billion, reflecting strong execution of our opening order book, and good price realization. Notwithstanding the growth in revenues, we still added to our order book in the period, with book-to-bill at 1.03, providing a great foundation for further growth through the second-half of the year.

Operating profit of GBP212million was 22% higher than last year, and operating margins increased by 80 basis points or 100 basis points as reported to 16.3%. This was largely driven by operating efficiencies more than offsetting an OE mix headwind and puts us on a good trajectory to delivering our full-year target of 17%. Profit before tax of a GBP188 million was GBP45 million ahead of last year, including an FX translation tailwind of GBP5 million with EPA is up 32% at GBP53.4 per share.

Finally, on this slide, free operating cash conversion increased to 51%, an improvement of 22 percentage points. This was supported by a normalization of working capital levels following supply chain disruption last year and we remain on track to deliver full-year cash conversion of 80% to 90%. The resultant net debt to EBITDA is down 0.5 times at 1.5, and we continue to have over GBP800 million of long dated low cost liquidity. The result of all of the above is that return on capital employed also increased significantly, up 390 basis points at 16.3%.

I will now turn to provide some detailed commentary on each of the divisions. Starting with minerals, conditions, and mining markets remained highly active. Across most key commodities, market prices were well above minus cost to produce, and end market demand was high, particularly in Australia, and South America. Ore production trends coupled with the incremental aftermarket demand from recent OE installations drove demand for our aftermarket spares with aftermarket orders being up 5%. This reflected volume growth in hard rock mining and a contribution from pricing, partially offset as expected by lower volumes from customers in the Canadian oil sands and the loss of orders from Russia.

OE your orders increased 1% year-on-year as large projects remain slow to convert with OE orders being driven by debottlenecking and brownfield expansion projects. We made good progress in our ambition to grow ahead of our markets, with significant share gains, evidenced by converting 100% of head-to-head competitor trials for large mill circuit pumps while also running share in cyclones. We executed strongly in the period, delivering on our record opening order book with revenues being 20% higher than the prior year with aftermarket, up 16% and OE up 32%. Ahead of our expectations, as supply chain challenges eased, therefore allowing flawless execution.

Revenue growth in North America was particularly high following a period of strong order growth in the Canadian oil sands last year. Product mix moved towards OE, which represented 28% of revenue, up from 25% last year. With book-to-bill of 1.03, we enter the second-half of the year with a strong order book to support further growth. Operating profit increased by 25% on a constant currency basis to GBP173 million, while margins increased by 70 basis points to 18.2%, despite mix moving 3 percentage points to OE. This was underpinned by pricing action and good operating leverage.

Gross margins, of course, remained rock solid as we continue to benefit from prior year price increases with average aftermarket price realization of mid-single-digit percent. Operating leverage reflects good cost control and process efficiency following our investment in IT Systems over recent years. This was all as expected, and we look forward to further margin progress in the second-half as performance excellence benefits start to augment our already good operating leverage.

Moving on to ESCO, where we experienced similar positive mining market conditions as the Minerals division. I've seen and heard firsthand in recent weeks when visiting customers in Western Australia and Nevada just how highly valued ESCO product is as miners continue to focus on maximizing production, while operating safely, efficiently and reliably. And infrastructure demand in our largest market of North America was stable throughout the period, but well below the peak in the first-half of last year, mainly reflecting stocking and destocking trends, but also a degree of lower underlying demand.

And European infrastructure markets demand continued to be subdued. We made good progress with our strategic growth initiatives where we grew market share in mining attachments, expanded our geographical reach in Scandinavia, and increased the number of mines using motion metrics, AI enabled vision technology. This led to overall orders reducing by 3% with robust demand in mining and strategic initiatives progress offset by the infrastructure trends.

Revenues increased by 6% to GBP350 million, reflecting strong execution of the opening order book, progress in strategic initiatives, and the contribution from prior year price increases. The divisions book-to-bill remain positive at 1.02, supporting further growth through the second-half of the year.

Operating profit at GBP59 million was 10% higher than last year as the division benefited from good operating leverage plus the non-repeat of the modest under recoveries, which arose in the prior year. Margins were up 60 basis points at 16.7%, in line with expectations, reflecting pricing gains, reduced freight costs, and operating efficiencies.

Now bringing things together to look at the Group operating margins. Overall, on a reported basis, group margins have increased 100 basis points in the period to 16.3%, which equates to 80 basis points on an underlying constant currency basis. The main drivers of underlying margin movement in the period are as follows: Firstly, the strong execution of the opening order book and associated increase in OE revenues meant that minerals mix shifted 3 percentage points from aftermarket to OE. As is normal, this increased absolute profits and of course, lays the foundation for a future aftermarket revenue annuity, but resulted in a 90 basis point reduction in margin.

I'm pleased that this headwind was offset by underlying operating leverage of 150 basis points, driven by volume growth coupled with cost and process efficiency. Process efficiency has been supported by the deep rooted benefits of the Weir production system and incremental returns from our investment in systems like SAP and Workday over recent years. Cost efficiency is reflective of general close management of indirect costs, as well as real clarity over our operating model with the focus group structure avoiding any unnecessary duplication of effort.

We've also seen a reduction in the impact of transactional FX, with a reversal of some of the mark-to-market phasing highlighted in the prior year having a favorable impact of 20 basis points. This all left margins where we expected at 16.3%, and we remain on track towards our 17% target for the full-year. Our margin increase over the balance of 2023 will be supported by ongoing operating efficiencies, further price realization, and the early financial benefits of performance excellence, which Jon will update you on shortly.

Turning to cash flow, our continued focus on operational excellence and reliance on our Weir production system has supported a strong performance. Cash generated from operations increased by GBP73 million or 73% to a GBP173 million and reflects an increase in profitability together with a normalization of working capital following last year's first-half supply chain disruption.

Working capital cash outflow reduced by GBP24 million to GBP88 million in the period, reflecting the usual buildup of inventory in the first-half of the year to support the second-half order book. Meanwhile, payables decreased following the elevated prior year position, which resulted from the phasing of purchases and temporary disruption in global supply chains. As a result, working capital as a percentage of sales improved to 24% from 32% in the prior year. I'm pleased with this level of working capital efficiency at the half-year point, which compares very favorably with our industry peers.

CapEx was higher than last year and at 1.2 times depreciation reflects the ongoing construction of our new foundry in China, which remains on track. This all left, free operating cash flow up GBP59 million at a GBP108 million, resulting in free operating cash conversion of 51%, up 22 percentage points in the prior year, even including the 8 percentage point adverse impact of the higher CapEx, compared to last year.

Turning to the next slide, free cash inflow of GBP24 million, compares to a free cash outflow of GBP24 million last year, representing an increase of GBP48 million year-on-year, mainly due to the favorable free operating cash flow just described partly offset by an increase in tax payments. This funded dividends and exceptional cash flows, leaving a net cash outflow of GBP32 million increasing net debt slightly to GBP842 million and keeping net debt to EBITDA at 1.5 times on a lender covenant basis in line with December 2022 and within our target range.

In April of this year, S&P upgraded our credit rating to investment grade at BBB minus to add to Moody's investment grade Baa3. This allowed us to make our debut in the sterling bond market in June, placing GBP300 million of five-year sustainability linked notes at 6.875%. This leaves the Group with more than GBP800 million of long dated liquidity with 80% of our debt fixed at a weighted average rate of 3.7% and an RCF carrying a very favorable margin relative to current market rates.

Briefly, this next slide sets out some financial guidance for this year with a few points to highlight as follows: Firstly, based on current FX rates, we would see no full-year operating profit translation impact with a reversal in the second-half of the first-half tailwind. Secondly, we continue to expect free operating cash conversion of 80% to 90%, which includes CapEx above depreciation as we progress our new foundry in China. Thirdly, as previously discussed, we anticipate an exceptional cash outflow of around GBP15 million in the year primarily relating to a performance excellence program. Finally, I'm pleased to say that our defined benefit pension schemes continue to be in very good health with an overall accounting surplus of GBP9 million. We completed a GBP136 million buy in during the period, which means that more than 60% of the U.K., main scheme liabilities are now insured. The remaining liabilities are well funded, meaning that from 2024, our annual cash contributions will reduce from GBP12 million a year to GBP6.

In summary, our markets are strong with high levels of activity in mining, and our strategic initiatives are delivering market share gains. Very strong execution has delivered revenue and profit growth, and a positive book-to-bill provides a platform for future growth. We've delivered a significant step up in absolute profits and margins with strong operating leverage. Cash conversion at 51% was much improved on the first-half last year, reflecting excellent working capital efficiency.

Returns are good, with return on capital employed increasing by 390 basis points from 12.4% to 16.3%, and our interim dividend of 17.8 pence is 32% higher than last year. So with an excellent first-half performance and strong mining markets, we remain on track to deliver our 2023 margin target of 17% and full-year cash conversion of 80% to 90%.

Looking beyond this year, our balance sheet is strong, with an abundance of long dated liquidity giving us the necessary capital strength to continue executing on our clear and exciting strategy.

Thank you, and I will now hand back to Jon.

Thank you, John. So I'll now share more details on Weir's long-term potential and our strategic progress in the first-half and then comment on the outlook for the year. Weir has a compelling value creation opportunity. Our markets have long-term structural tailwinds, driven by demand for critical metals and the near-term outlook is positive. Our sustainability and technology focused growth initiatives together with our strategic competencies give us conviction we can outgrow our markets. And we're taking action through our performance excellence transformation program to compound this growth and drive our margins above our 2023 target of 17%.

Today, I'm going to talk about each of the elements of this framework in more detail, starting with our markets. We have strong structural dynamics in our mining markets. The current production of critical energy transition metals is insufficient to meet future demand, so our customers are pursuing growth. There is growing intent to increase capacity and develop new expansion projects, but the approval and permitting process is time consuming and complex.

In response, our customers are accelerating production from existing assets, running equipment harder, developing harder, and lower grade parts of the mine and driving efficiency in existing processes. These production trends play to the strength of Weir driving demand for our aftermarket and debottlenecking solutions, putting us in a win-win position.

In parallel, customers are striving to meet ever more stringent social and regulatory obligations, so they're adopting new technologies to reduce their environmental impact. Both of these factors will drive growth for Weir, as we provide the essential spares and solutions to increase production of critical metals and new technologies that enable the transition to more sustainable extraction and processing techniques.

Near-term, the outlook for our end markets is positive and mining activity levels are high. And as the graph on the left shows, the current spot price for copper remains well above marginal cost heavily incentivizing production. Indeed, production is largely inelastic to spot prices. As you can see on the graph, since 2021, copper has fluctuated between $3 and $5 per pound, yet activity has remained consistently high. And this is the case across our basket of commodities, underpinning our conviction in the strength of the demand environment.

And our conviction is further supplemented by the structure and composition of our aftermarket, with over 90% coming from spares and expendables we are heavily leveraged to ore production rather than discretionary service and maintenance cycles, which can fluctuate over time.

In infrastructure markets, which is a small part of our portfolio, our main exposure is in the U.S., and the near-term outlook is stable, while dealer stocking cycles have driven fluctuation in recent orders over the medium term, legislation such as the Inflation Reduction Act will support incremental investment in new large scale projects and therefore growth in our business. The inelasticity of commodity prices to ore production underpins our highly resilient business model, and this is evidenced in our long-term financial performance.

The graph shows our minerals aftermarket revenues for the last 12-years, which have grown at an annual compound rate of more than 7%. And we've supplemented this now by adding data for ESCO, which since acquisition has grown at a similar rate. So that we now have a GBP2 billion aftermarket powerhouse. And this brings to life what I described the moment ago, our strong bias towards spare parts makes us an essential production partner for our customers, which together with our barriers to entry, reinforces our through cycle resilience.

I'll now turn to progress on our strategic growth initiatives, starting with Minerals. In comminution, commercial production commenced at the Iron Bridge magnetite mine in Western Australia where our energy saving HPGRs are installed. Production is ramping up, and the multiyear GBP15 million per annum spares and service contract will start later in the year, along with regular spares orders for our Warman and GEHO pumps and other equipment. The mine is now an important reference site for HPGR and associated dry processing technology, and we're already talking to other customers about what it can deliver.

Across our comminution portfolio, year-on-year, orders were up, including orders for HPGRs for mines in Southeast Asia, a pebble crushing plant for a large copper mine in South America and a crushing solution for a Tier 1 potash plant in Canada. In digital, we launched our proprietary Synertrex Intelli solutions for pumps, cyclones and HPGRs, which offer customers critical machine health data, enabling remote condition monitoring and predictive maintenance. Other highlights included wins in our core mill circuit as we converted 100% of our competitive trials for large mill circuit pumps and also rolled out our latest Cavex 2.0 cyclone technology.

On geographical expansion, we won further orders for nickel expansion projects in Indonesia with a GBP12 million order for our GEHO heat barrier pumps. And we expect Indonesia and the broader Asian region to be an ongoing growth area with a strong pipeline of future opportunities developing as we leverage our new service center. In R&D and technology, we invested to expand our range of Warman pumps and notably secured our first orders for coarse particle flotation technology, which I'll talk more about shortly.

Turning now to a short case study. Our cyclone technology plays a critical role in mineral recovery in post grinding separation and through sustained organic development we've built a market-leading position. Our latest Cavex 2.0 technology delivers significant gains in efficiency and recoveries for our customers. And a recent example of this is at Vale's Vargem Grande iron ore mine in Brazil. Our team identified an opportunity to increase mineral recovery by reducing the amount of fines lost and center tailings. Our on-mine presence meant we understood the operation in the issue and our trusted relationship with the customer gave them confidence to trial our innovative new cyclones.

We developed a customized solution enabled with Synertrex digital monitoring and provided technical support across all aspects of the trial, and the results were impressive with an increase in mineral recovery of over 400,000 tonnes per annum from material that would otherwise have been lost to tailings. The success of this trial has led to a sizable order from Vale to upgrade to our new technology across the entire mine, and they're interested in extending use to their other sites. ESCO also made good strategic progress.

On digital, the initial field trials of our ore characterization technology was successful with the technology performance validated in the real world and critical data captured, we're progressing to the next phase of development, which includes exploring novel illumination technologies that will further enhance real-time visualization of mineral characterization.

Other digital highlights included further rollout of our Motion Metrics technology. And one of the most notable orders was a package of 10 systems comprising our latest generation ShovelMetrics and LoaderMetrics, which will be deployed across all large mining machines at an iron ore mine in Western Australia. We also grew share in our core mining GET market and also in mining attachments.

On geographical expansion, we transitioned to our direct-to-customer model in Scandinavia, leveraging minerals footprint in the region and also completed the integration of CIS. Technology highlights included the launch of new Motion Metrics capabilities, including our latest proprietary lens cleaning solution, which uses pressurized water and air to clean dust from the camera lens, further enhancing our leading system reliability compared with competing technologies.

Now a short case study for ESCO on mining attachments, which has been a key strategic priority. Since acquisition, when revenue from attachments was around $10 million, we've grown at 30% compound and our market share has multiplied many times over. Underpinning this success is our tried and tested formula, mission-critical, differentiated technology, coupled with leading support and service.

In short, our bucket technology lasts longer and improves productivity. Progress in the first-half was particularly strong with orders up almost 40%, including four unique cable shovel buckets for a large copper miner in North America, replacing OEM buckets.

Our engineering team worked directly with the end users to design bespoke customized markets, incorporating our structural components, which are tougher and stronger than competitor offerings. And I saw firsthand the superb engineering that goes into these products when I was at Elko, Nevada a couple of weeks ago. Combined with ESCO lip systems and leading GET, the buckets will deliver less downtime and longer campaign reliability than the OEM solutions they replace. The first bucket was delivered to the customer last week and at over five meters wide, the photo on this slide really doesn't do it justice.

Turning to the group's end-to-end technology strategy and R&D framework, which has two objectives: investing in capabilities to protect our core and addressing our customers' biggest sustainability challenges, which is driving our future growth. Our investment target of 2% of revenue, together with our recent growth has actually doubled our absolute R&D spend in the last four years, enabling the accelerated development of new technologies, spanning the verticals in the mine where we operate.

Individually, the technologies have significant sustainability and efficiency benefits, but combine the benefits compound. By using all characterization to select, which rocks are moved and new processing and tailings management technologies, such as our redefined mill circuit and Terraflowing solutions, energy and water consumption are optimized at all stages and waste is minimized. And our Synertrex and Motion Metrics digital solutions deliver further benefits by optimizing processing and machine performance.

One of the innovations I'm most excited about is our redefined mill circuit, which we introduced at the September Capital Markets event last year. It packages technologies to reduce re-circulating load within the processing loop, increasing throughput of virgin ore and decreasing energy and water consumption. Key components include our leading crushing, pump and cyclone technology and also our HPGRs, which are used as alternatives to tumbling mills.

As a dry process, HPGRs eliminate loss of water due to evaporation, and they also use 40% less energy than mills and avoid the use of steel grinding media, which has high levels of embodied carbon. Other critical parts of the package include stirred mills and coarse particle flotation, which we access through our partnerships with STM and Eriez. Stirred mills use ceramic grinding media and significantly reduce energy consumption, while providing a more system feed than tumbling mills. Coarse particle flotation reduces the amount of grinding required and enables easier separation and flotation of minerals. And in recent field trials at one of our customers' copper mines in South America, the technology has delivered a 10% increase in throughput and reduced freshwater consumption by 15%.

The combined benefits of the redefined mill circuit are therefore significant, and we're really encouraged by the early interest and engagement from our customers. Progress in the first half was pleasing with our first orders for coarse particle flotation. The technology will be packaged with our latest generation of Warman mill circuit pumps and Cavex cyclones to create a pilot circuit, which will improve mineral recoveries and process efficiency. Once operational later this year, these plants will become important technology reference sites for the mining industry.

So we've covered growth in our markets, great progress on our strategic initiatives, and we'll now turn to Performance Excellence, our business transformation program. The program is on track, and we're executing at pace. Across the three main program areas of capacity optimization, lean processes and global business services, we made good progress. Key projects were initiated and the early financial benefits will be realized this year.

Looking at each in turn, in capacity optimization, our Minerals U.S. distribution and assembly footprint was consolidated into a new purpose-built facility in Salt Lake City. I had the pleasure of opening the facility last month, and its strategic location near the hard rock mines in the West positions us close to our customers and enables us to exit older and less efficient sites. The construction of our new ESCO foundry in China is also progressing well and will soon transition to the equipment installation phase of the project with the first test castings expected in early 2024.

On lean processes, our new Minerals Chief Operating Officer is working on product management and global fulfillment processes, which will reduce inventory levels and simplify value streams. Initial progress is encouraging with a number of legacy product variants already identified and retired. And the transition to Weir business services is also progressing well. The detailed design phase of the project has commenced. We've mobilized the project management office and have made key appointments to the team, including a highly experienced VP of Transformation.

Since becoming a mining focused group back in 2021, Weir has been on a journey of continuous margin expansion. And this year, we're well on track to deliver our operating margin target of 17%. However, the journey doesn't stop here. As we go forward, the GBP30 million of savings from Performance Excellence along with operating leverage from growth will drive further expansion and take us well beyond 17%. And I look forward to sharing more details of the next phase of our margin journey with you later this year at a Capital Markets Spotlight event with date and details to follow.

Turning back to the first-half, our great strategic progress is testament to our employees around the world. And so now let me update you on our people initiatives. Safety is our number one priority. And in the first-half, we made good progress towards eliminating harm from our operations. We improved our total incident rate by 12% to 0.29%, and we're seeing strong engagement from colleagues in our recently launched Zero Harm Behaviors program. And our Zero Harm ambition extends beyond physical safety. And so it was pleasing to see our commitment to workplace mental health and well-being recognized in CCLA's latest benchmarking report, which ranked Weir as most improved for our performance and disclosure.

We continue to have an active involvement in our local communities across the globe, maintaining our strong emphasis on encouraging access to STEM careers for women and girls. While on inclusion and diversity in our first-half, we improved our percentage of female employees and expanded our global-led affinity groups.

Finally, before I turn to the outlook, I'll touch briefly on progress in sustainability. Our Scope 1, 2 and 3 absolute emissions reductions targets were approved by SBTi, and we continued our transition to renewable power generation. We also launched our first climate transition plan and are refreshing our materiality assessment to review the sustainability areas where our actions can have the largest impact.

Our work on Scope 4 or avoided emissions also progressed. We expanded its focus to quantify the benefits of our full redefined mill circuit rather than just the individual components, and we will release the data later in the year. This will just demonstrate how core our sustainable solutions are to our commercial strategy.

So now on to the outlook where we are upgrading our guidance for the full-year. We now expect strong growth in revenue and operating profit and for operating profit to be towards the upper end of the current range of analyst expectations. On margins, we are on track to meet our operating margin target of 17%, with expansion in the second-half, underpinned by operating leverage, the early benefits from Performance Excellence and further price realization. On cash, our guidance is unchanged, and we expect to deliver between 80% and 90% free operating cash conversion.

On the second half order outlook, as you've already heard, activity levels in our mining markets are high. We, therefore, expect group aftermarket orders to be stable relative to a strong prior year comparator with growth in orders from hard rock mining customers, offset by continued normalization in the Canadian oil sands. While in infrastructure, we expect year-on-year orders will be stable. In original equipment, as you know, order patterns can be skewed by phasing. However, we expect momentum and demand for our brownfield and sustainable solutions to continue and for year-on-year orders to also be stable.

So to summarize what we've delivered in the first-half. We executed strongly while continuing to grow our order book. We hit or exceeded all of our committed targets. We made excellent strategic progress with our sustainability and technology-led growth initiatives, and we continue to do the right thing by our people, our communities and the planet. And we've upgraded our full-year revenue and profit guidance to strong growth. In short, we are continuing to build our track record as a focused mining technology leader and delivering on the potential of the business.

So to end, I'll come back to where we started. Our long-term value creation opportunity is compelling. We have a world-class mining focused platform. Our future growth is underpinned by decarbonization trends and the adoption of new sustainable technology in mining, but we will deliver more than that, and we're investing to drive compounding growth and margin expansion. I'm excited about the future and have deep conviction that we will continue to deliver excellent outcomes for all our stakeholders.

So thank you for listening. And John and I will now be pleased to take any questions you have.

Thank you. [Operator Instructions] We have our first question from Andrew Wilson, JPMorgan. Please proceed. Your line is now open.

Hi, good morning. Thanks for taking my question. I've got two, if I can. I just wanted to, I guess, maybe start big picture on the mining market where it seems that the commentary on second half is more of the same, which I think would be again consistent with your peers in terms of sort of stable at a high level. But I just wondered if you could talk -- if you're seeing any kind of changes with regard to, I guess, customer behaviors, particularly thinking around maybe some of the junior mines when I think about potential financing concerns and can you just kind of remind us of, I guess, the different exposures to the sort of the mix in the junior's outcome as well. Maybe I take one at a time.

Yes. Good morning, Andy, thanks for the question. Yes, I think we do have a positive view that for the second-half of the year, we'll continue to see high levels of activity. And I think I'd probably draw out a couple of things, actually. First of all, commodity prices over the last few weeks, you'll have noticed will have nudged up. So I think that just sort of sets a nice tone as we go into the second-half of the year with gold now at $2,000 an ounce, copper back at $4 a pound, significantly above our customers' cost to produce, iron ore is in a good place. And even oil has picked up over the last few weeks as well. So I think the backdrop in terms of where commodity prices are, is looking better than maybe it did three months ago. So that's the first thing I'd say.

And then when you look around the world where we operate, then pretty much all of our regions have seen a strong first half of the year across all the commodities that we're exposed to, and we really do expect that to continue. But then the other thing I would say, particularly as it relates to investment, to your point, I think clearly, it's a different environment for the juniors just now in terms of financing. Clearly, commodity prices are important than that.

But if you just look the last few weeks, Rio announced $1 billion expansion of their Kennecott copper mine, Antofagasta have announced $1.2 billion expansion of the Zaldivar copper mine. KCGM in gold Northern Star announced a $1 billion expansion of their concentrator in Kalgoorlie, Vale, another $2.5 billion, I think, in terms of iron ore expansion. So there's a really nice trend in terms of these brownfield expansions, which, as you know, is really the sweet spot for Weir. We want to see the large greenfield projects coming through, but that remains slow. But at the same time, we are seeing a pickup, I think, in brownfield expansion activity, which to me is really encouraging and underpins our view of the outlook from here.

Thank you. And then if I can ask the second one, and it's quite broad, but it's a bit sort of longer term. If I -- it's been quite helpful with regard to second-half in terms of the margin drivers to kind of bridge obviously, the 17% that we've talked about for a while. Kind of looking beyond the 17%, I'm not expecting you to give those numbers or guidance or anything like that. But can you just help us a little bit in terms of some of the drivers from here with regards to expanding the margin? Is it just the same drivers we're expecting to see in the second-half?

I'm just thinking a little bit with regards to the price/cost situation might be changing relative to this year. But just to try and give us some of the building blocks, I guess, to give us the confidence in terms of that bridge to the 17% plus that have been called out.

Yes. It's really a continuation of everything that we've been doing, the building blocks we put in place, the momentum that we have in the business at the moment. Of course, Performance Excellence is a key underpin with GBP30 million of run rate savings by the end of '25 and full realization of those benefits in 2026. That program, as I said in my speech, is now in place. It's about delivery and execution. We expect to see continued growth as we move forward. And as you've seen in the first-half of this year, that's delivering very nice operational leverage, and we continue to be in a good place from a pricing realization point of view.

I expect the price/cost environment will moderate next year. So we're more likely to be in a position of low-single-digit pricing increases next year, does depend on the inflationary environment. But as you've seen over the last few years, we've done a great job across the business in terms of maintaining our gross margins, which is how we sort of drive performance. So those are the sort of key building blocks. And as you've seen from the execution in the first half of the year, the operational cadence in the business, the confidence about delivering those building blocks is very high.

Thank you very much, Jon.

Thanks, Andy.

Thank you. We now have Christian Hinderaker from Goldman Sachs. You may proceed your question.

Yes. Good morning, everyone. Christian Hinderaker from Goldman. Thanks for the presentation and John, congratulations on the new role. Obviously we feel sorry to see you depart. And maybe we can talk about the competitive dynamics in the market at the minute within Minerals. We've seen some peers raise pricing and obviously, attempt to make some pushing on some of your core product categories with new offerings. You mentioned you're a little bit less exposed, John, to discretionary maintenance cycles. And we've seen perhaps that some of the refurbishment work is now normalizing following some strong growth in the aftermath of the pandemic. I just wonder what you're seeing in the competitive landscape and also how much exposure you have, if any, to that refurbishment dynamic. And then I'll come on to the other too.

Yes. So I feel really good about how we performed relative to the competition in the first-half of the year, and we've gained market share across many of our product categories. We sold a lot of pumps over the last 18-months, and I know the competition talk about moving into slurry pumps, but I think we've continued to be very successful there. As I said in my speech, 100% success rate in mill circuit trials. So I think that demonstrates the quality, capability of our products and solutions, and we continue to be able to offer our customers the lowest total cost of ownership, less downtime, better wear rates, which is ultimately what they're interested in.

So I'm very happy that we're gaining share in the core product lines, and that applies to ESCO as well, frankly, in terms of the net conversions that we've seen across the market. But I think where I'm particularly pleased, though, is what we're doing in terms of broadening out our products and solutions with the redefined mill circuit. We're growing. The comminution business grew in the first-half of the year, which is very pleasing to see.

We're getting more traction with the high-pressure grinding rolls, but there's a lot of excitement about what we're now bringing to market through our partnerships with Eriez and Swiss Tower Mills in terms, of course, particle flotation and stirred mills, which together with our underlying pumps, cyclones, HPGRs, offers the potential to provide our customers with significant reduction in energy and water intensity across their circuits.

We sold our first pilot plants in the first half of the year, incorporating some of that technology. And I think those pilot plants as they deliver will be very important reference sites for the market and should underpin us to be able to really accelerate our growth in that area. So I feel we're not complacent, but I feel really good about how we are performing in terms of the competitive dynamics.

Thanks, Jon. And then maybe coming back to Andrew's question on the mining market, I guess, demand structure, but asking with a different lens, I wonder how you think about different metals markets. I think you mentioned demand in iron ore being robust. That seems a little off with some comments that peers have flagged softness there. Maybe you can just talk about how the different metals end markets are currently performing relative to one another.

Well, I think everything everywhere feels pretty strong at the moment. Copper is obviously a metal which we need a significant amount more supply over the next few years. And that has sort of been evident really in some of the M&A that's going on among our customers, some of the projects that I mentioned earlier being announced, customers trying to expand production of copper, but running very hard to keep up with demand in terms of their own supply. So we're kind of seeing benefits on the original equipment side in terms of expansion.

We're seeing benefits on the aftermarket side in terms of how hard our customers are running their mines at the moment. Iron ore, again, it's pretty solid from a commodity price point of view. And I would remind you that we are mostly exposed to the large low-cost mining regions. So in Australia, and Brazil where activity is very strong, and again, I talked about the Iron Bridge project in my speech. That's a major new iron ore, very high-grade magnetite mine that is going to play into the green steel theme over the years ahead. As that mine ramps up, that's going to be a significant increase in our aftermarket revenues as we go through the years ahead as production increases in that mine.

So -- and gold, which is in our top three exposures as well, as I said earlier, $2,000 an ounce, the incentive to increase production, work harder across the mining complex is also there. So consistent with what we said earlier in the year, the only thing that's a bit softer this year is the Canadian oil sands where for the reasons we discussed last time out, we saw a very -- almost an excess demand year last year as it bounced back following the disruption and the very low oil prices of the year before. So we're seeing that. But across the rest of the mining complex, very high activity levels.

Thanks, Jon. Maybe just on infrastructure, if I recall correctly, it's about three quarters North America, 25% Europe. How does that mix -- or sorry, how does that sort of distribution channel layering look? You touched on destocking dynamics. I think that was in specific reference to the American market, but please frame if that's wrong. Just interested to hear a little bit more color on that.

Yes. I think the first thing to say, and remember, it's only 30% of ESCO. And as you rightly say, 75% North America, 25% Europe. Both of those markets have destocked. If you remember, Q1 last year was again an exceptional quarter driven by the demand post-COVID, post supply chain disruption. So in the first-half of this year, we were up against a very, very tough comp. We've seen some destocking in both markets. But that has now sort of normalized, I would say. So as we look forward, I think it's going to remain stable where it is now for the short-term. But clearly, particularly in the U.S., medium to long-term, the underpins look really, really good given the Inflation Reduction Act, the infrastructure bill. We're expecting to see significant capital deployed across U.S. infrastructure over the years ahead, and that will be a really good underpin for the business.

So I think it's -- if you think specifically about ESCO likely to be stable through the second-half of the year, but actually activity in the mining part of the business has been really strong, and we expect that to continue obviously very similar trends to those as I've discussed in relation to minerals. And so I think that as we get into weaker comps for ESCO, I think its orders will start to turn to growth as we move forward through the next two or three quarters.

Understood. Thank you.

Thanks, Christian.

Thank you. We now have Max Yates from Morgan Stanley. Please go ahead when you are ready.

Thank you. Could I just ask, first of all, on what has really changed in the guidance? Because when I think about kind of where we were when we went into this year, I think you were guiding on flat OE revenue growth and mid-single digit aftermarket growth. Am I just correct if we go back to where we were, what has really changed is the OE growth? Is that correct? The aftermarket assumptions on revenue are still very similar.

Yes, that is correct, Max. So I think if you think about OE, when we guided at the beginning of the year, we guided based on the mix that we had in the order book, and that was a balanced view of how that would play out and how we would deliver on that reflecting some of the challenges we had last year. But on that, we saw absolutely flawless execution across the business. It was ahead of our expectations just because of that. We also actually saw some short-cycle OE orders, as well in the first-half. So kind of in and out orders and revenues, which helped as well. So it's just a really, really pleasing performance, but I hope that explains why we have outperformed what we previously guided to.

Okay. And just if I kind of think about that kind of into the second-half, your book-to-bills in mineral equipment are about 1 times in the first-half, slightly above 1 times. You're talking about orders flat and revenues growing further year-over-year. So they'll -- those book-to-bills will turn negative in the second-half, i.e., falling below 1 times. I guess I just want to understand how much is that sort of dictator for what next year's revenue growth will look like versus how much of your equipment business is affected by kind of in-for-out orders?

I guess what I'm trying to understand is if we're sitting here in six months' time, as implied by your guidance, book-to-bills are below 1 times for the full-year in equipment, how much of a guide on what will happen to next year's equipment revenues? Or can we still get in-for-out orders that will keep that equipment business growing?

Yes. I mean we haven't guided for next year. We haven't done the budget yet. So it's quite difficult to look into the crystal ball on that one. But based on the guidance, you're right, the book-to-bills may turn mildly negative in the second-half of the year. But I think that's quite a conservative assumption. We may do better on that. It really depends on how the aftermarket plays out. As I say, ESCO should return to modest growth. Minerals, we're calling flat year-on-year at the moment for aftermarket, but it may surprise the upside. We'll see.

But I think as I started with the original equipment environment is looking positive. We -- as a group, we're running GBP140 million, GBP160 million original equipment per quarter. Actually, in the second quarter, we saw some chunky orders slip into Q3, which are now in the bag. So I think we see -- we'll see that sustaining. And looking forward to next year, again, we've got some strong building blocks in place in terms of new installed base. And if activity levels remain high, I don't sort of at this point in time see any particular worries in relation to next year.

Okay. And very quick final one. Just again, if I go back to, kind of, how we laid out this year, it was aftermarket growing faster than OE, which implies the mix should have been positive. We've now got a 90 basis point mix headwind. And it sounds like the rate of OE growth versus aftermarket growth in the second-half will again be skewed towards OE. So it should be mix negative. So we're going to be offsetting a very big mix headwind that we weren't anticipating at the start of the year.

I guess just in really simple terms, when I look at your cost savings charts, it isn't obvious that cost savings are being pulled forward. So I guess, just in really simple terms, I'd really like to understand if you're going to have a 90 bps mix headwind that you didn't think you were going to have. What is being done elsewhere that is really offsetting that because that's quite a big difference to where we were at the start of the year?

Thanks, Max. I'll take that one. I think the first half has demonstrated that with the additional volume coming through on the original equipment, then the operating leverage that we've seen in that has more than offset the mix headwind. So if I just sort of broke down the first-half margin, first of all, and then use that to think what's going to sort of play out in the second-half of the year, then first of all, pricing was favorable for us in the first-half. So when you look at our gross margins, we remain -- we retained our gross margins at consistent levels, compared to last year notwithstanding that mix. That's due to a combination of positive pricing dynamics, which represents, once again, the market-leading positions that we have, the fact that we don't sell on price. We sell on value. So we really do have strong pricing power. We are the price setter.

Then on top of that, we've been talking for a number of years now about SAP, our ERP system that we've rolled out across minerals. That's largely complete. We've been rolling out Workday, our global HR system, and the operational process efficiency benefits of that, Max, are really coming to the fore now. So what that's doing is giving us an extra boost to the operating leverage that's managing to offset those mix headwinds. So in the first half, that was the story that the mix was offset with operating efficiency, operating leverage and a little bit of transactional FX reversal.

As we move to the second-half of the year, it's really going to be more of the same story. So we're going to see volume growth sequentially H1 to H2. We're going to continue to get the benefits from those systems and processes that we continue to roll out. On top of that, the benefits from our performance excellence through the second-half of the year. We've said mid-single-digit millions benefit. We've taken the action in the first half, so we consolidated some facilities in North America, moving from Madison, Wisconsin to Salt Lake City. We've done consolidation of service centers through Australia.

So just a whole lot of things that are happening in the business, structurally, operationally, from a process perspective that are meaning that, that operating leverage is coming through. So that's the dynamic. That's what's happened in the first half, and that's what gives us the confidence that we'll continue to do that through the second half and deliver on the 17%, Max.

Okay, thank you very much.

Thanks, Max.

We now have Klas Bergelind from Citigroup. Your line is now open.

Yes. [Indiscernible] good morning. Klas from Citi. So my first one is on the aftermarket. It still seems to be driven by good demand at a high level in hard rock. But then on pricing here, I guess, pricing -- I'm talking about new orders, it's up against tougher compares in the second half. And so within that guidance of sort of stable year-over-year growth, what kind of production effect, i.e., volumes relative to pricing, do you bake into that comment, Jon? Thanks.

Yes. I think as you look at that, we expect that the pricing realization will moderate relative to what we saw in the first-half of the year. So it's probably low-single-digit sort of pricing benefit, a little bit of volume on top of that, but we still have the negative effect of the very strong Canadian oil sands orders that we saw continue right the way through last year. So those moving parts bring us back to the sort of stable outlook as we sit here today.

Okay. No, that's clear. And then I want to come back to Max's question on the execution. So can you just clarify, when I look at slide 11, it looks like the volume leverage and pricing was the main step-up? Or do you think that you're also ahead of sort of the self-help, which was contributing to what you say is good execution or was it more deleverage out of the backlog and that we should sort of expect to have a bigger tailwind from the self-help bucket in the second-half?

Yes. I mean the self-help was always scheduled to be second-half loaded. So when we talk about self-help, we're talking about Performance Excellence, which is the GBP30 million program through 2025. We said that this year, which is the first year of the program, we would be getting, as I said, that mid-single-digit pounds millions benefit. That is second-half loaded. We've taken the action in the first-half. The benefits will come through second half. So the -- so that element of self-help is second half loaded.

I would say that the other self-help, which is more longstanding around, as I mentioned before, the systems investment, the process benefits that we're getting, moving to one system and allows us to manage inventory levels on a global basis. It allows us to look at order fulfillment on a global basis. There's all of these things now that we're able to get to that a bit of that is supporting the operating leverage coming through, Klas. So I would say that the operating leverage, the volume, the pricing has been the big driver, but that has been, as I said, boosted by the increasing efficiency that we have from our -- from these systems and IT technology supporting us.

And the other thing I would say is I didn't mention this in response to Max is as we've focused the group into this mining technology-focused business, that's allowed us to have real organizational simplicity between our corporate office, our operating companies, who's doing what. And I can honestly say there's really -- that eliminates any duplication of cost. And so real tight management of our overhead costs in addition to everything I've described is helping that operating leverage as well.

Okay. No, that's good to hear. My final one is on the cash flow. Obviously, a further second-half improvement here, quite meaningful as expected. To what extent is this going to easing of supply chains globally versus your own efforts, talking about self-help on cash flow here, SAP and so forth. Is it largely the external factors? Or do you think that you're sort of ahead on your own efforts in improving net working capital?

I think it's a little bit of both. So if we look at the first-half then, our 51% free operating cash conversion is exactly where we wanted to be. Relative to last year, that was up 22 percentage points. Given the fact we spent more CapEx in the first-half on our ESCO foundry, that was -- that would have been another 8 percentage points higher had CapEx been like-for-like with last year. The key driver of that, I would say, is really the working capital efficiency in the first-half of the year where we were at 24% of sales. That compares to 32% last year. Last year was a bit of an outlier, and that was due to the supply chain constraints. We were carrying more inventory at the first-half of the year last year, as you remember, we've been explaining and then we unwound that through the second-half.

So I think the majority of the step-up through the first-half of this year relative to last has been the cleaning up of the supply chain as well as our execution. And I think there's the fact that we are at 24% of sales at the half-year point, I said it in my speech, it really compares very favorably indeed to the industry peers. And I think that's reflective of our focus on operational excellence, our Weir production system. I've always said that in the medium term, I think this business should be somewhere between 20% and 25%.

I think all of the things we're talking about in Performance Excellence, SAP and so on through time will take us towards the 20%. But that's a longer journey and takes a bit of time to execute on. But the majority, so far, elimination of the supply chain challenges, a little bit of self-help, more self-help to come.

Thank you.

Thank you. Your next question comes from Rory Smith of UBS.

Hi, it’s Rory of UBS. Thanks for taking my question. Two quick ones, hopefully, from me, please. First, on Minerals aftermarket revenue at 16% in constant currency. Could you please break that down into moving pieces, increasing volume price, but also any Russian non-repeat and oil sands in the revenue number in the first-half? And then how we should think about that playing into the second-half revenue in aftermarket and Minerals, please?

Yes. The -- I mean, the Minerals aftermarket revenue in the first-half of the year, 16% then it's the -- it really reflects the strength in the underlying mining markets predominantly. So I would say there's probably mid-single-digit price in there. There's probably getting on for between Russia and the Canadian oil sands, probably another mid-single-digit and then underlying volumes sort of one-third of that. So underlying volumes as we expected, mid-single digit. And as we move into the second-half, clearly, the second-half last year, given the supply chain challenges in the first-half, there really was a very strong second half last year in terms of aftermarket revenue.

So I expect that we will see the year-on-year growth moderate through the second-half in terms of Minerals aftermarket revenues, probably low-single-digit revenue growth for the second half of the year. To come back to the first question that we had in terms of the earlier guidance, exactly what we expected for the full-year, which is mid-single digit aftermarket revenues through Minerals. So those are sort of the moving parts in that, Rory.

Sorry. Sorry, John. Forgive me if I misheard that or misunderstood. But I was under the impression that Russia non-repeat last year would be a headwind to revenue this year. Apologies there.

Yes, that's right. Sorry if I wasn't clear. So between the sort of the Canadian oil sands probably gave us sort of on for a mid-single-digit tailwind this year and in Russia, I netted within that. And that’s probably only about a couple of percentage points or so of Russia in there, which, as you say, is a headwind.

Okay, thank you. I think, I understand. A second question back to that point on mix. Both the question is if -- is 30 basis points of margin dilution per 1 percentage point of revenue mix towards OE sensible thing to model if we're modeling stronger OE growth beyond this year? And then obviously, the -- you talked about the Performance Excellence programs and the benefits thereof. How do you think you can offset that mix headwind, if that is the right way to think about mix headwinds and to keep that margin expansion going within your sort of scenarios that you've looked at internally.

I mean the first thing I would say is that more OE is great news for us. We're delighted with that. So that creates this future aftermarket annuity, which is the backbone of our business. So OE is good as the starting point. Secondly, your rule of thumb there in terms of 30 basis points for a 1 percentage move is broadly right. You've seen that over the last couple of years, that's roughly the dynamic to play through.

I come back to the first-half of the year, we've demonstrated that even with that mix headwind in the first-half, we've got enough in our locker to be able to deal with that, which reflects strong operating leverage for the reasons I described. It reflects our pricing power and the fact that we always maintain our gross margins.

And then on top of that, we've got the self-help that's going to come over the next two or three years. And just on that, we've said GBP30 million. I think I said when we announced this at our Capital Markets Spotlight event last year that I think once we get into this and work our way through, I'll be disappointed if we don't do a little bit better than that. So really, I wouldn't get too focused on the margin downside from OE. OE is great news for us and we're increasingly demonstrating that we've got the tools within our box to be able to manage the margin against that backdrop.

Yes. I'd just reiterate that, Rory. As John said, we have plenty in the tank to easily cover off the mix headwind that we saw in the first-half of the year. From here, I don't really expect the mix is going to move massively around barring a big CapEx cycle at some point in the future. But if that happens, that's fantastic. I'll take that every day of the week. But with all of the self-help, all of the momentum, all of the initiatives that we've got across the business that John talked about, we feel very, very comfortable about going beyond 17% next year.

Okay, that’s very clear. Thank you. And just to confirm, it's about 3 times the gross margin on where we -- sorry, on aftermarket versus the rewrite if we're trying to model that operating leverage drop on value growth.

Correct. Yes. Yes.

Okay, great. Thanks so much. Thanks for clarifying the questions.

Thanks.

Thank you. As we have no further questions on the line, I'd like to hand it back to Jon Stanton for any final remarks.

Okay. Thank you very much, everybody, for joining the call today. We appreciate your attendance and the questions. And of course, if you have any follow-up questions through the course of the day, please do get in touch through Ed on the IR side. But thanks again for joining today.