Weir Group Regulatory News (WEIR)

The Weir Group PLC today reports its full year results for the year ended 31 December 2017

Delivering strong growth and strategic progress

· Group orders1 up 20% as demand for our leading technology and services increased in our main markets

o Minerals orders up 11%; consistently strong aftermarket growth and increased quotation activity

o Oil & Gas orders increased 67%; North American upstream increased 82%

o Flow Control orders 6% lower; aftermarket growth offset by tough original equipment conditions

· PBT2 up 47% driven by excellent growth and operational leverage from Oil & Gas

o Operating margins in all three divisions increased sequentially in H2

o Second half Oil & Gas margins of 15.3%

o Full year Minerals margins reflect previously announced growth investments and one-off costs

o ROCE increased 290 basis points

· 'We are Weir' strategic framework delivering early results:

o Safety improvement: 20% reduction in Total Incident Rate;

o R&D investment up 47%; revenues generated from new solutions, up 53% to £168m;

o New Technology and People roadmaps developed

· 2018 expected to deliver strong revenue and profit growth

Jon Stanton, Chief Executive Officer, commented: 

"The Group's performance in 2017 reflects the strength of Weir's leadership positions in our core markets. We worked closely with customers to identify opportunities to increase their productivity and invested early to take full advantage of improving conditions.

That proactive approach saw Minerals deliver great order momentum, underlined by the consistent growth in its high margin, cash generative aftermarket and positioned it decisively for the anticipated upturn in the mining capital cycle. Oil & Gas took full advantage of improving markets in North America to deliver an outstanding operating performance, while Flow Control turned the corner after a challenging first half. We have also made significant progress in developing the strategic framework that will drive sustainable medium term performance.

Looking to 2018, assuming market conditions remain supportive and despite anticipated foreign exchange headwinds, we expect to deliver strong revenue and profit growth and further balance sheet deleveraging."

A live webcast of the management presentation will begin at 0900 (GMT) on 28 February 2018 at www.investors.weir. A recording of the webcast will also be available at www.investors.weir.

Notes:

Strategic progress

Weir provides highly engineered mission-critical solutions for global mining, oil and gas, power and other aftermarket-orientated process industries. The Group's strategic framework, 'We are Weir', is focused on outperforming in four distinctive competencies: People, Customers, Technology and Performance. Key achievements within each competency are summarised below.

People

Medium term KPI

· Improve sustainable engagement and organisational effectiveness.

Progress in year:

· 20% reduction in total incident rate to 0.53 - implemented a new Safety Charter and rolled out a Group-wide behavioural safety programme.

· Increased female representation at both Board and Senior Management levels with every business developing diversity and inclusion improvement plans to widen the Group's talent pool.

· Refreshed leadership training and undertook a global programme of increased employee engagement to embed 'We are Weir'.

Customers

Medium term KPI

· Increase market share.

Progress in year:

· Minerals grew orders ahead of sustaining capital spending and increased its order book by spending more time on customers' sites and investing in additional sales, project and product management experts in addition to opening eight new service centres.

· Oil & Gas leveraged its key account system to further embed Weir among Tier-1 oilfield service customers in North America and fully capture its share of the North American market upturn.

· Flow Control restructured its sales and marketing capability to better leverage its divisional product portfolio across a greater number of international markets and EPC customers delivering good aftermarket order growth.

Technology

Medium term KPI

· Increase revenues from new solutions1.

Progress in year:

· Completed a new technology roadmap to be implemented from 2018 with a focus on digital solutions, advanced manufacturing, materials science and water and energy efficiency.

· Deployed Synertrex®, the Group's Internet of Things (IoT) platform, to initial customer sites within the Minerals division to enable better monitoring and maintenance of assets.

· Oil & Gas introduced the Simplified Frac Iron System that increases safety and reduced downtime on frack sites.

Performance

Medium term KPI

· Sustainably higher margins through the cycle.

Progress in year:

· Minerals reconfigured its manufacturing facilities and supply chain to increase efficiency ahead of the anticipated upturn in the mining capital cycle.

· Oil & Gas delivered an excellent operational performance, ramping up its supply chain and workforce to enable its main manufacturing facility to double manufacturing volumes while also delivering significant operating leverage.

· Baseline Value Chain Excellence scores were established for each business with improvement plans and training in place to further improve inventory turns and shorten lead times.

Notes:

Group financial highlights 

Orders of £2,395m (2016: £1,989m) increased 20% on a constant currency basis primarily due to the strong upturn in North American oil and gas markets, coupled with good growth in Minerals.

Revenue of £2,356m (2016: £1,845m) increased 28% on a reported basis reflecting both the recovery in North American Oil & Gas and a foreign exchange translation benefit of £127m. On a constant currency basis revenue was 19% ahead of prior year. The Group's order book increased in the year with a positive book to bill ratio of 1.02 (2016: 1.01).

Operating profit from continuing operations (before exceptional items and intangibles amortisation) of £292m increased by £78m or 36% on a reported basis.

The reported operating profit benefited from an £18m foreign exchange gain on the translation of overseas earnings due to the weakening of Sterling against the majority of currencies. Excluding foreign exchange gains, constant currency operating profit was £60m higher. Oil & Gas was £101m higher driven by positive North American markets, offset by Flow Control and Minerals which were £35m and £7m lower respectively. Flow Control was negatively impacted by continued depressed market conditions and resulting under-recoveries as well as a £13m one-off charge recorded in the first half in respect of legacy contract challenges. The lower Minerals profit reflects good underlying growth offset by investment in growth initiatives and costs of plant and supply chain reconfigurations. EBITDA before exceptional items was £350m (2016: £270m).

Operating margin from continuing operations (before exceptional items and intangibles amortisation) was 12.4%, an increase of 80bps on a reported basis and 60bps on a constant currency basis. On a constant currency basis Minerals decreased 180bps to 17.7%, with the second half showing a sequential increase to 18.1% as the business started to see payback on its investment in growth initiatives. Oil & Gas increased from a loss of 2.3% in the prior year on a constant currency basis to 13.0% following a strong market upturn and excellent operating leverage. Flow Control margins decreased on a constant currency basis to -0.8% from 9.2% in 2016 with the division improving in the second half to deliver mid-single digit margins.

Net finance costs before exceptional items were £42m in total (2016: £44m).

Profit before tax from continuing operations (before exceptional items and intangibles amortisation) increased by 47% to £250m (2016: £170m). The reported profit before tax from continuing operations of £181m compares to £43m in 2016.

An exceptional charge of £13m (2016: £74m) was recorded in the year, which primarily related to the finalisation of restructuring and rationalisation charges for programmes which commenced in prior periods to right size operations and discontinue certain activities. The cash outflow in respect of restructuring programmes in the year totals £29m. An exceptional gain of £10m was recognised on the sale of our 49% stake in Energy Products LLC (EPI), offset by a fair value charge of £9m on finalisation of the contingent consideration relating to the acquisition of the remaining 40% of Weir International, Flow Control's South Korea based valves business. EPI contributed £7m to Group operating profits in 2017, including a £2m one-off operational credit.

Intangibles amortisation totalled £55m in the year (2016: £50m), including an increase of £3m due to adverse foreign exchange translation.

The tax charge, before exceptional items and amortisation, for the year of £60m (2016: £38m) on profit before tax from continuing operations (before exceptional items and intangibles amortisation) of £250m (2016: £170m) represents an underlying effective tax rate of 23.9% (2016: 22.5%).

The exceptional tax credit of £41m includes a £24m credit resulting from the revaluation of the US deferred tax assets and liabilities following the reduction in the US federal tax rate from 35% to 21% and the release of previously held US tax provisions on unremitted overseas earnings, as a result of the signing into law of the United States Tax Cuts and Jobs Act on 22 December 2017.

Earnings per share from continuing operations (before exceptional items and intangibles amortisation) increased by 42% to 86.7p (2016: 61.2p). Reported earnings per share was 73.5p (2016: 17.8p).

Cash generated from operations decreased by 25% from £293m to £221m, with the increase in operating profit offset by the activity level driven growth in working capital of £119m (2016: inflow of £32m). Our working capital efficiency was demonstrated by working capital as a percentage of sales reducing from 27.1% to 25.7% and inventory turns improving from 2.2 to 2.7.

Free cash flow1 from continuing operations was an outflow of £24m (2016: inflow of £130m). The £154m reduction reflects lower operating cash flows, higher cash tax, increased capital investment and increased cash dividend with lower uptake for the scrip dividend compared to the prior year.

The free cash outflow, plus outflows for exceptional items of £29m and other movements of £4m were partially offset by a favourable foreign exchange movement of £49m, mainly on US$ and Euro denominated debt. Cash proceeds of £32m for EPI and £3m from other investment activities were broadly offset by our purchase of the remaining 40% of Weir International for £37m. This resulted in a marginal increase in reported net debt at year-end to £843m (2016: £835m). On a lender covenant basis, the ratio of net debt to EBITDA excluding exceptional items was 2.5 times, compared to a covenant level of 3.5 times.

Dividend

The Board is recommending a final dividend of 29.0p, resulting in a total dividend of 44.0p for the year, unchanged from 2016. Dividend cover (being the ratio of earnings per share from continuing operations before exceptional items and intangibles amortisation, to dividend per share) is 2 times. If approved at the Annual General Meeting, on 26 April 2018, the final dividend will be paid on 4 June 2018 to shareholders on the register on 27 April 2018 with a scrip dividend alternative continuing to be offered, as approved at the 2016 AGM. 

Board changes

As previously announced, Stephen Young joined the Board as a Non-Executive Director on 1 January 2018 and Alan Ferguson and John Mogford will both retire from the Board following the 2018 Annual General Meeting. Stephen Young will succeed Alan Ferguson as Audit Committee Chairman, with effect from 26 April 2018.

Minerals

Weir Minerals is a global leader in the provision of mill circuit technology and services as well as the market leader in slurry handling equipment and associated aftermarket support for abrasive high wear applications. Its differentiated technology is used in mining, oil and gas and general industrial markets around the world.

Delivering strong order growth and building long-term value 

· Strong order growth, up 11%, benefiting from its integrated solutions strategy and early investment

· Margins reflect additional investment to support growth and plant and supply chain reconfiguration costs

· 2018 outlook: Moderate growth in constant currency revenues with slightly higher operating margins 

2017 Market review

In mining, ore production increased slightly by 1% while average ore yields continued to fall, requiring greater levels of processing to maintain the same volume of refined commodity, supporting aftermarket demand growth. While overall mining capital spending was stable, sustaining expenditure increased by 5% as miners sought to optimise production from existing assets.

Regionally, Australasia saw increased activity driven by gold and lithium markets while coal remained challenging. Similarly, Africa benefited from increased activity in gold and copper, although there was some disruption from government actions in East Africa in the second half of the year. North America and Europe benefited from improved sentiment and activity in hard rock mining markets, although North American general industrial and coal markets were relatively subdued. In Latin America, mining activity remained robust despite the impact of industrial relations issues in the first half for some of our customers.

In non-mining markets, aggregates demand remained supportive in most regions, with the US in particular increasing its investment in infrastructure. While there was no significant new investment in oil sands projects, production increased overall supporting demand for aftermarket spares and services.

2017 Operational review

As part of its continued focus on developing a broader solutions mindset, more time was spent by employees from all levels of the organisation on customer sites. This close customer intimacy gave the division improved insight, allowing it to anticipate additional demand, particularly for integrated solutions that optimise production of existing assets.

To take full advantage of these positive trends the division was proactive, investing in additional sales, engineering and project management capability. It also extended its global service centre network with new facilities in Canada, France, Poland, Sweden, the Dominican Republic and Russia, taking our total number of service centres to approximately 100. The division encountered some short-term operational challenges in North America and Europe as result of plant and supply chain reconfigurations to meet demand growth, but these had been substantially remediated by the end of the year. Good progress was made globalising newer product lines such as the comminution offering and Delta Valves while new technology introductions included advanced spools for oil sands applications.

2017 Financial review

Orders increased by 11% to £1,347m (2016: £1,215m), and supported a good book-to-bill of 1.05. Original equipment orders were up 14% year-on-year, reflecting higher sustaining expenditure by miners.

Aftermarket orders increased by 9% on a constant currency basis reflecting improved market conditions and continuing investment in the division's service network and engineering sales force. Aftermarket orders represented 70% of total input (2016: 71%).

In total, mining end markets accounted for 74% of input (2016: 73%) with orders growing strongly. Non-mining markets, including sand and aggregates and industrial markets, also performed well, while the oil sands and power sectors were stable.

Revenue was 7% higher on a constant currency basis at £1,287m (2016: £1,201m) reflecting order trends. Original equipment sales accounted for 29% (2016: 29%) of divisional revenues and were 7% higher than the prior year driven by the success of the division's integrated solutions strategy.

Regionally, revenues from Africa, South America, Australia, Europe and Asia Pacific grew, while North America was more subdued and the Middle East remained challenging. Aftermarket revenues grew strongly for pump and mill circuit spares, particularly in Latin America, China and Africa and were also supported by increased production in Canadian oil sands markets. Reported revenues increased by 16% (2016: £1,112m), after a foreign exchange translation benefit of £89m.

Operating profit reduced by 3% on a constant currency basis to £227m (2016: £234m). Good underlying growth was more than offset by £25m investment in growth initiatives and plant and supply chain reconfiguration costs of which approximately £10m is one-off in nature. This effect was mostly first half-weighted with second half operating profit 7% higher than the prior year. Reported operating profit increased by 5% after an 8% foreign exchange tailwind (2016: £217m).

Operating margin on a constant currency basis reduced by 180 bps to 17.7% (2016: 19.5%) reflecting incremental investment in supporting growth and plant and supply chain reconfigurations. These impacts were reduced in the second half as the division started to see returns on its investments with margins showing a 100bps progression compared to the first half. Product line gross margins were broadly stable.

Operating cash flow decreased by 32% to £160m (2016: £236m) reflecting investment in working capital to support current and future growth.

Capital expenditure of £41m (2016: £32m) included investment in plant reconfiguration within the division's North American manufacturing footprint and facility upgrades in Chile and the UK. The division also continued the global roll-out of its standardised ERP system.

Research and development spend increased to £16m (2016: £15m) and continued to be focused on maintaining and expanding the division's product portfolio. Developments included the initial rollout of the Group's Synertrex© technology platform to customer sites.

2018 Outlook

Miners are expected to increase sustaining capital expenditure in 2018, supporting global ore production growth. Assuming supportive market conditions continue, it is anticipated the division will deliver moderately higher constant currency revenues and slightly higher full year operating margins, with performance supported by both the strong order book and investment in growth initiatives in 2017.  

Oil & Gas

Weir Oil & Gas provides highly engineered and mission-critical solutions to upstream markets. Products include pressure pumping and pressure control equipment and aftermarket spares and services. Internationally we provide equipment repairs, upgrades, certification and asset management, and field services.

Rapidly responding to increased demand

· Strong order, revenue and margin growth with excellent operating leverage

· Later-cycle international markets remained challenging

· 2018 outlook: Strong increase in constant currency revenues and profits 

2017 Market review

Activity in North American upstream markets was supported by increasing oil prices through the year. This led to increased industry investment, with the US land rig count averaging 852, a 74% increase on 2016. Oilfield service companies responded by refurbishing frack fleets with effective utilisation of the active US fleet now running at approximately 80%. Production methods continued to intensify with the number of frack stages and volume of proppant used increasing and driving increased demand for aftermarket spares and services. As the market tightened during 2017 there was a modest improvement in pricing.

Later cycle international markets entered the downturn after North America and conditions remained challenging. While the international rig count increased 2%, new investment was subdued, with continued pricing pressure and project delays.

2017 Operational review

The division delivered an excellent operating performance as demand for its solutions increased rapidly in North America. The divisional workforce grew by approximately 1,000 with its main manufacturing facility in Fort Worth, Texas, moving from one shift to three. Operating leverage benefited from previous cost reductions and good supply chain management. The division continued to innovate including introducing the Simplified Frac System which reduces the amount of iron required on a frack site, improving safety and uptime.

Internationally, the division continued to develop its pressure control offering in challenging market conditions with the acquisition of KOP Surface Products extending its geographical reach into South East Asia and accelerating its Middle East wellhead strategy.

2017 Financial review

Orders of £732m (2016: £438m) were up 67% and 64% higher on a like for like basis, reflecting the significantly increased activity levels in North America, where orders were up 82%. Aftermarket orders were up 59% year-on-year and represented 78% (2016: 82%) of divisional orders. Original equipment was 104% higher, against a weak comparator, driven primarily by increased demand for frack pumps, flow equipment and wellheads.

Orders from international markets fell moderately year-on-year but increased sequentially through the second half as activity levels improved slightly, particularly for inspection and service work.

Revenue increased by 67% to £704m on a constant currency basis (2016: £421m) and was up 64% on a like-for-like basis, reflecting order input trends. Original equipment and aftermarket revenues increased by 87% and 63% respectively, with aftermarket accounting for 80% of total revenues (2016: 82%). Reported revenues were up 75% after a 5% foreign exchange translation benefit (2016: £401m).

North American revenues increased by 78% compared to the prior year and in the second half increased sequentially by 28%, reflecting strong order trends. International revenues were also higher year-on year although against a weak comparator with a sequential improvement in line with order trends.

Operating profit including joint ventures was £92m (2016: operating loss of £9m on a constant currency and reported basis). The recovery was driven by higher activity levels and volumes in upstream North American markets and strong manufacturing overhead recoveries supported by previous cost base reductions. In North America we saw modest pricing improvements.

Operating margin at 13% was up 1530bps reflecting positive market conditions, modest pricing increases and excellent operating leverage. Margins improved sequentially through the year, with second half margins of 15.3%.

Operating cash flow declined by 9% to £43m (2016: £47m) with the significant increase in operating profit more than offset by a working capital outflow to support strong revenue growth.

Capital expenditure of £25m (2016: £8m) included the upgrading of North American service centres and ongoing replacement of the rental asset fleet.

Total Research and Development expenditure of £7m (2016: £6m) included developing the Simplified Frac System that significantly reduces the amount of iron needed on a frack site, improving safety and reducing downtime.

2018 Outlook

Assuming market conditions remain supportive at or around current levels, E&P and service companies are expected to increase capital spending in North American upstream markets. It is anticipated that international markets will continue their modest recovery. In this context, the division is expecting a strong increase in constant currency revenues and profits with mid-teens operating margins, driven by higher North American completions activity levels.

The range of external expectations for growth in 2018 is wide, reflecting very different assumptions on how the market develops through the year. Assuming current market conditions continue our base case operating plan is in line with consensus for Oil & Gas operating profit, subject to adjustment for the £7m profit contribution from the EPI business which was sold in November 2017 and current foreign exchange rates. This would represent constant currency revenue growth in our North American businesses of around 25% together with some further modest pricing gains. Further growth beyond this base case would require stronger rig count growth, higher completions activity and incremental capital investment by customers in new build capacity beyond current expectations.

Flow Control

Weir Flow Control designs and manufactures valves and pumps as well as providing specialist support services to the global power generation, industrial, oil and gas and other aftermarket-orientated process industries.

Aftermarket growth in challenging conditions

· Orders reflect challenging downstream oil and gas markets; AM growth in power and industrial markets

· Full year margins impacted by market conditions and one-off charges; H2 margins improved sequentially

· 2018 outlook: Increased constant currency profits and margins

2017 Market review

Customers continued to be cautious in both power and downstream oil and gas markets. There was limited project activity with competitive market conditions and pricing pressure a common feature. Nuclear projects in China and South Korea continued to make progress but sentiment in the United States and Europe was more subdued. Aftermarket demand was supported by ongoing maintenance schedules.

Downstream oil and gas markets, which were later to enter the downturn, remained challenging for original equipment and aftermarket demand, although there were signs of improvement towards the end of the year. Industrial markets were more positive, in line with global economic growth.

2017 Operational review

In challenging market conditions the division successfully maximised aftermarket opportunities and expanded the geographic reach of its wider product portfolio. Sales and marketing operations were reconfigured to support new global and application based initiatives while competitiveness was enhanced by value chain excellence initiatives and best cost sourcing. While one-off charges in the first half of £13m relating to legacy contract challenges at Gabbioneta impacted overall performance, the division delivered a better second half supported by higher volumes and good operating leverage. The division also made good strategic progress in the development of new technologies and expansion of its e-commerce offering.

2017 Divisional financial review

Order input decreased by 6% to £316m (2016: £336m) and was principally impacted by the significant decline in mid and downstream oil and gas markets. In addition, there was limited project activity in power markets, although there was good growth in industrial markets. Original equipment orders were down 16% led by reduced pump orders in downstream markets with valve orders relatively stable. Aftermarket orders grew 6% driven by demand for valves with pump demand stable year-on-year.

Power markets represented 44% of orders (2016: 41%). The proportion of orders from oil and gas markets decreased to 24% (2016: 30%). Emerging markets accounted for 39% of input (2016: 37%). Overall, good growth in Asia Pacific was more than offset by reductions in Africa, Middle East, North America and Europe.

Revenue increased by 4% on a constant currency basis to £365m (2016: £350m), with aftermarket revenues flat on the prior year. Original equipment revenues were up 7%, as the legacy order book unwound. Reported revenues were up 10% (2016: £332m) reflecting a 5% foreign exchange translation benefit.

An operating loss of £3m (2016: £32m profit on a constant currency basis) was recorded as a result of tough trading conditions impacting gross margins and overhead recoveries, together with the impact of £13m of one-off costs.

Operating margin for the full year was down 1000bps to -0.8% (2016: 9.2%) principally as a result of the tough trading conditions and one-off charges outlined above.

Operating cash flow of £23m (2016: £42m) reflected a good working capital performance and the reduced profitability of the division.

Capital expenditure of £5m was significantly lower than last year (2016: £15m) which included the completion of the relocation of Gabbioneta to a new manufacturing facility in Milan. Investment in research and development was unchanged at £5m (2016: £5m).

2018 Outlook

The division's main power and downstream oil and gas markets have stabilised with some early signs of improvement. The division entered the year with a lower order book but is expected to deliver broadly stable constant currency revenues for the full year as it benefits from its new sales and marketing structure. Operating profits and margins are expected to increase, with a return to mid-single digit operating margins for the full year.

Appendix 1 - 2017 quarterly input trends

1 Continuing operations (excludes American Hydro Corporation and Ynfiniti Engineering Services which were disposed of in Q2 2016).

2 Like for like excludes the impact of acquisitions, KOP was acquired on 27 July 2017 and excluded for 2017.

Appendix 2 - 2017 Foreign Exchange (FX) rates and profit exposure

This information includes 'forward-looking statements'.  All statements other than statements of historical fact included in this presentation, including, without limitation, those regarding The Weir Group PLC's ("the Group") financial position, business strategy, plans (including development plans and objectives relating to the Group's products and services) and objectives of management for future operations, are forward-looking statements. These statements contain the words "anticipate", "believe", "intend", "estimate", "expect" and words of similar meaning. Such forward-looking statements involve known and unknown risks, uncertainties and other important factors that could cause the actual results, performance or achievements of the Group to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements. Such forward-looking statements are based on numerous assumptions regarding the Group's present and future business strategies and the environment in which the Group will operate in the future. These forward-looking statements speak only as at the date of this document. The Group expressly disclaims any obligation or undertaking to disseminate any updates or revisions to any forward-looking statements contained herein to reflect any change in the Group's expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based. Past business and financial performance cannot be relied on as an indication of future performance. 

Notes to the Audited Results

1. Accounting policies

Basis of preparation

The audited results for the year ended 31 December 2017 ('2017') have been prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union and applied in accordance with the provisions of the Companies Act 2006.

The financial information set out in the audited results does not constitute the Group's statutory financial statements for the year ended 31 December 2017 within the meaning of section 434 of the Companies Act 2006 and has been extracted from the full financial statements for the year ended 31 December 2017.

Statutory financial statements for the period ended 31 December 2016 ('2016'), which received an unqualified audit report, have been delivered to the Registrar of Companies. The reports of the auditors on the financial statements for the period ended 31 December 2016 and for the year ended 31 December 2017 were unqualified and did not contain a statement under either section 498(2) or section 498(3) of the Companies Act 2006. The financial statements for the year ended 31 December 2017 will be delivered to the Registrar of Companies and made available to all shareholders in due course.

These financial statements are presented in Sterling. All values are rounded to the nearest 0.1 million pounds (£m) except where otherwise indicated.

The accounting policies which follow are consistent with those of the previous period. There are no new standards or interpretations which are considered to have a material impact on the annual Consolidated Financial Statements of the Group.

Exceptional items & intangibles amortisation

In order to provide the users of the financial statements with a more relevant presentation of the Group's underlying performance, on a like for like basis, profit for each period has been analysed between:

i) profit before exceptional items & intangibles amortisation; and

ii) the effect of exceptional items & intangibles amortisation.

Exceptional items are items of income and expense which, because of the nature, size and/or infrequency of the events giving rise to them, merit separate presentation. These specific items are presented on the face of the Consolidated Income Statement to provide greater clarity and a better understanding of the impact of these items on the Group's financial performance. In doing so, it also facilitates greater comparison of the Group's underlying results with prior periods and assessment of trends in financial performance. This split is consistent with how underlying business performance is measured internally.

Exceptional items may include but are not restricted to: profits or losses arising on disposal or closure of businesses; the cost of significant business restructuring; significant impairments of intangible or tangible assets; adjustments to the fair value of acquisition related items such as contingent consideration and inventory; other items deemed exceptional due to their significance, size or nature; and the related exceptional taxation.

Intangibles amortisation has been shown separately to provide visibility over the ongoing impact on the Group's Income Statement of prior and current period investment activities.

Further analysis of the items included in the column 'Exceptional items & intangibles amortisation' is provided in note 3 to the financial statements.

2. Segment information

For management purposes, the Group is organised into three operating divisions: Minerals, Oil & Gas and Flow Control. These three divisions are organised and managed separately based on the key markets served and each is treated as an operating segment and a reportable segment under IFRS 8. The operating and reportable segments were determined based on the reports reviewed by the Chief Executive Officer which are used to make operational decisions.

The Minerals segment is the global leader in the provision of slurry handling equipment and associated aftermarket support for abrasive high wear applications used in the mining and oil sands markets. The Oil & Gas segment provides products and service solutions to upstream, production, transportation and related industries. The Flow Control segment designs and manufactures valves and pumps as well as providing specialist support services to the global power generation, industrial and oil and gas sectors.

The Chief Executive Officer assesses the performance of the operating segments based on operating profit from continuing operations before exceptional items (including impairments) and intangibles amortisation ('segment result'). Finance income and expenditure and associated interest-bearing liabilities and derivative financial instruments are not allocated to segments as all treasury activity is managed centrally by the Group treasury function. The amounts provided to the Chief Executive Officer with respect to assets and liabilities are measured in a manner consistent with that of the financial statements. The assets are allocated based on the operations of the segment and the physical location of the asset. The liabilities are allocated based on the operations of the segment.

Transfer prices between business segments are set on an arm's length basis, in a manner similar to transactions with third parties.

The segment information for the reportable segments for 2017 and 2016 is disclosed below.

2. Segment information (continued)