Weir Group Regulatory News (WEIR)

The Weir Group PLC today reports its interim results for the six months to 30 June 2018

For a printer friendly copy of this announcement, please click on the link below to open a PDF version:-

http://www.rns-pdf.londonstockexchange.com/rns/2323W_1-2018-7-30.pdf 

Delivering strong profit growth in line with expectations

· 20% increase in orders from Continuing Operations

o Minerals +12% with record aftermarket orders in Q2

o Oil & Gas +35%

· Operating profit from Continuing Operations +38% (Total Group +62%)

o Margins +170bps to 15.1%

· Discontinued Operations: Flow Control orders +34%; margin improvement on track

· Strong cash generation driving further deleveraging; 5% increase in interim dividend

· Transforming the portfolio

o Acquisition of ESCO Corporation completed in July

o Flow Control sale process planned to launch in late Q3

· Outlook: Full Year expectations for strong constant currency revenue and profit growth unchanged

Jon Stanton, Chief Executive Officer, commented: 

"This is a strong set of results with total Group operating profits up by more than 60% and all our divisions showing good momentum. It reflects the hard work of our people and the benefits of investing early to take full advantage of positive long term fundamentals in our main markets. With the acquisition of ESCO and decision to sell Flow Control, we began the transformation of Weir into a stronger Group focused on leading positions in highly abrasive, aftermarket intensive mining and upstream oil and gas markets.

Looking to the full year we continue to anticipate strong constant currency revenue and profit growth in addition to further strong cash generation and balance sheet deleveraging. Reflecting confidence in our long term growth outlook the Board has approved a 5% increase in the interim dividend."

A live webcast of the management presentation will begin at 0800 (BST) on 31 July 2018 at www.investors.weir. A recording of the webcast will also be available at www.investors.weir.

Notes:

Strategic priorities

Weir provides highly engineered mission-critical solutions for mining, energy and infrastructure customers. We focus on high abrasion applications that drive significant aftermarket demand and require comprehensive global support. The Group's strategic framework, 'We are Weir', is focused on outperforming in four distinctive competencies: People, Customers, Technology and Performance.

People

Medium term KPI

· Improve sustainable engagement and organisational effectiveness.

Progress in the first half:

· Safety: Maintained Total Incident Rate at 0.53; significant reduction in the severity of incidents

· Progressed strategic workforce planning strategy with initial pilots scheduled to begin this year

· Developed criteria for employee engagement measures to drive future organisational effectiveness

Customers

Medium term KPI

· Increase market share.

Progress in the first half:

· Delivered c.£50m (+29%) in additional sales from Minerals integrated solutions strategy

· Increased customer trials programme to drive further Minerals aftermarket gains

· Oil & Gas 'Weir Edge' service launched reducing downtime with faster on site root cause analysis and repair

Technology

Medium term KPI

· Increase revenues from new solutions1.

Progress in year:

· Revenues from new solutions increased 16% to £67m including new Simplified Frac System

· Synertrex® IoT deployed to initial customer sites with seven product lines to be fully commercialised in Q3

· Additive manufacturing cell established supported by dedicated taskforce to prototype initial product lines

Performance

Medium term KPI

· Sustainably higher margins through the cycle.

Progress in year:

· 80 value chain excellence initiatives focused on optimising on time delivery and inventory efficiency

· 12 IT infrastructure projects underway aimed at leveraging global scale and further enhancing cyber security

· Sustainability pilots launched at major manufacturing locations - target ~10% reduction in energy use

Notes:

Group financial highlights 

The financial highlights below primarily reflect the Continuing Operations of the Group except as noted.

Orders at £1,166m (2017: £976m) increased 20% on a constant currency basis reflecting an increase in activity levels in North American oil and gas markets, coupled with strong growth in Minerals.

Revenue of £1,062m (2016: £922m) increased 15% on a reported basis reflecting excellent growth in both original equipment and aftermarket across both Minerals and Oil & Gas. This was after a foreign exchange headwind of £57m, with revenue on a constant currency basis 23% ahead of prior year. The Group's order book increased in the period with a positive book to bill ratio of 1.10 (H2 2017: 0.98).

Operating profit before exceptional items and intangibles amortisation of £160m, increased by £36m or 29% on a reported basis. This was impacted by an £8m adverse foreign exchange movement on the translation of overseas earnings due to the strengthening of Sterling against the majority of currencies. Operating profit was £44m or 38% higher than the prior year on a constant currency basis. Oil & Gas was higher driven by positive North American markets, with Minerals benefiting from strong underlying revenue growth. EBITDA before exceptional items was £187m (2017: £148m).

Operating margin before exceptional items and intangibles amortisation was 15.1%, an increase of 160bps on a reported basis and 170bps on a constant currency basis. On a constant currency basis Minerals remained flat while Oil & Gas increased by 520bps moving from 10.1% in the prior year to 15.3%. This improvement reflects the strong market upturn and excellent operating leverage notwithstanding the loss of profit contribution from the EPI joint venture sold in November 2017, which last year had a 140bps favourable impact on margins on a constant currency basis.

Net finance costs before exceptional items were £17m in total (2017: £21m) reflecting a reduction in average levels of net debt, due to net proceeds of £357m received from the placement of shares in April 2018 to part fund the acquisition of ESCO, refinancing of £95m USD private placement to Euro commercial paper and favourable foreign exchange translation due to the strengthening of Sterling relative to USD.

Profit before tax before exceptional items and intangibles amortisation increased by 38% to £143m (2017: £104m). The reported profit before tax from continuing operations (including exceptional items and intangibles amortisation) of £90m compares to £75m in 2017.

A net exceptional charge of £25m (2017: £2m) was recorded in the period, primarily related to costs associated with acquisition of ESCO, with the remainder reflecting the continuation of specific restructuring and rationalisation programmes which commenced in prior periods to right size operations and discontinue certain activities.

The tax charge for the period of £36m (2017: £23m) on profit before tax before exceptional items and intangibles amortisation of £143m (2017: £104m) represents an underlying effective tax rate of 25.3% (2017: 21.8%).

Earnings per share before exceptional items and intangibles amortisation increased by 9.2p or 25% to 46.3p (2017: 37.1p). This reflects underlying profit growth offset by the impact of the increased number of shares is issue following the placement of shares in April 2018 to part fund the ESCO acquisition. Reported earnings per share including exceptional items, intangibles amortisation and the results of discontinued operations was 29.1p (2017: 21.4p), an increase of 7.7p. 

Cash generated from total operations increased by £61m or 78% from £78m to £139m driven by the increase in total operating profit (pre-exceptional items and intangibles amortisation) of £56m.

Working capital efficiency continued to improve with inventory turns of 2.5 and working capital as a % of sales of 26.9% compared to 2.3 and 27.6% in the prior year respectively on a constant currency basis.

Free cash flow from total operations was an outflow of £7m (2017: £50m). The £43m improvement reflects higher operating cashflows and reduced cash dividends, due to the higher uptake for the scrip dividend compared to prior year, partially offset by higher cash tax and the settlement of derivative financial instruments.

Net debt decreased to £529m in the period (December 2017: £843m). This includes a net cash inflow of £357m from the placement of shares in April 2018, issued to part fund the acquisition of ESCO. Excluding this cash which was held at 30 June before being used to part fund the ESCO consideration on 12 July, net debt increased by £43m to £886m. This was primarily driven by adverse FX of £25m together with the free cash outflow, plus exceptional cash items of £7m. On a lender covenant basis, the ratio of net debt to EBITDA was 1.2 times (2.1 times excluding the impact of the placement), compared to a covenant level of 3.5 times and the prior year of 3.1x.

Acquisition of ESCO Corporation

The acquisition of ESCO Corporation, the world's leading provider of ground engaging tools for surface mining and infrastructure, for an estimated Enterprise Value of US$1,285m, was completed on 12 July 2018. ESCO will operate as a new division of the Weir Group and will be reported as a separate segment alongside Minerals and Oil & Gas with effect from that date.

ESCO delivered 12% constant currency revenue growth in the first half, benefiting from the same positive mining market conditions seen in the Minerals division. The division remains on track to achieve revenue of US$675m and operating profit of US$80m, for the 12 months to December 2018. Its revenue and profits are expected to be delivered broadly evenly between pre and post completion. We continue to target US$30m of cost synergies over the next 3 years.

Discontinued operations

Following the announcement that the Group intends to sell the Flow Control division, the division is now classified as held for sale. Previously reported as an individual reporting segment, the division is now reported as a discontinued operation and the prior period comparatives have been restated accordingly. We expect to begin a sale process for the division in the third quarter.

Dividend

The Board has approved an interim dividend of 15.75p (2017: 15.0p). The interim dividend will be paid on 2 November 2018 to shareholders on the register on 12 October 2018. No scrip alternative will be offered.

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.

Strong performance supported by strategic growth initiatives

· Double-digit order growth and increasing pipeline of opportunities

· Operating profits +13%; 90% EBITDA cash conversion

· 2018 outlook: Profit expectations unchanged; now with strong revenue growth and broadly stable margins

Market review

Activity in mining markets continued to grow strongly as customers ramped up production to maximise the benefits of supportive commodity prices. Demand was particularly good for brownfield solutions that help debottleneck, increase throughput and reduce downtime of existing mines. The pipeline of new projects continued to increase driven by good long term fundamentals for commodities such as copper, gold and lithium. Customers remained disciplined about committing to new greenfield developments, although a small number of projects received final approval.

There was also good growth in the division's non-mining markets with oil sands production continuing to support aftermarket demand. Infrastructure and construction markets also remained positive.

Operational review

The division's early investment in deploying more engineers to customer sites to help miners improve productivity continued to support strong order growth. Sales from integrated solutions, which leverage the division's broad portfolio of premium products, delivered c.£50m in additional orders with engineers completing 374 site audits in the period. The division also continued to grow market share through its successful trials programme that sees it go head to head with competitor products to demonstrate the superior performance of Weir equipment.

The first half also saw the opening of additional service centres in Zambia, Chile and Peru to further extend our unrivalled service network. Technology programmes focused on continuous improvement in the division's core products while also developing the Group's Synertrex® IoT solution, with full commercialisation in mining markets planned for the second half of 2018.

Financial review

Orders increased by 12% to £728m (2017: £650m), and supported a strong book-to-bill of 1.12. Original equipment orders were up 9% year-on-year and grew by more than 20% from the second half of 2017. Aftermarket orders increased by 14%, including a record second quarter. In total, aftermarket represented 69% of orders (2017: 68%).

Mining end markets accounted for 75% of orders (2017: 72%). Non-mining markets including industrial, oil sands and power sectors grew while sand and aggregates were impacted by specific project delays.

Revenue was 13% higher on a constant currency basis at £651m (2017: £576m). Original equipment sales accounted for 28% (2017: 27%) of divisional revenues and were 17% higher than the prior year driven by the strong opening order book and the early investment in growth initiatives in 2017. Production-driven aftermarket revenues were up 12% on a constant currency basis.

Regionally, revenues from Africa, South America, Australasia, Middle East and Asia Pacific grew strongly, while in Europe and North America growth was more subdued. Aftermarket revenues grew strongly for pump and mill circuit spares particularly in our core slurry pumps and mill circuit hoses and spools. Reported revenues increased by 7% (2017: £608m), after a £32m foreign exchange headwind.

Operating profit increased by 13% on a constant currency basis to £112m (2017: £99m), driven by strong underlying growth. Reported operating profit increased by 7% after a £5m foreign exchange headwind (2017: £104m).

Operating margin on a constant currency basis was unchanged at 17.2% (2017: 17.2%) with strong revenue growth at consistent gross margins offset by product mix and the full run rate impact of costs added to support growth in 2017.

Operating cash flow increased by 38% to £114m (2017: £82m) reflecting the increase in operating profit and working capital efficiency.

2018 Divisional outlook

The division's profit expectations are unchanged and will now be delivered through strong constant currency revenue growth and broadly stable margins.

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. Equipment repairs, upgrades, certification and asset management, and field services are delivered globally by Weir Oil & Gas Services.

Excellent execution in attractive North American markets

· Delivered significant order, revenue and margin growth reflecting leadership in Pressure Pumping

· International markets remained challenging but quotation activity increased

· 2018 outlook: Strong increase in constant currency revenues and profits; FY margins consistent with H1

Market review

North American upstream oil and gas markets grew strongly year on year with the rig count increasing 24% in the period and US production reaching record levels. This was underpinned by WTI oil prices averaging US$65 for the period - comfortably above E&P investment incentive levels. Oilfield service companies continued to rebuild and reactivate their frack fleets supporting demand for both original equipment and aftermarket consumables, which also benefited from increased intensity of production. Overall, US frack fleet utilisation was approximately 70%. Pricing improved in certain product lines although remained competitive overall, reflecting continued spare capacity among equipment providers.

International markets, which are later cycle, continued to be relatively challenging with continued pricing pressure. While these markets bottomed and there was encouraging quotation activity, they remained highly competitive.

Operational review

The division continued to successfully ramp up production with Pressure Pumping reaching previous peak volumes and delivering excellent operating leverage to support further meaningful improvement in its margins. More broadly, the division continued to leverage its differentiated technology and service proposition supported by a comprehensive key account management programme. This enabled it to gain NAM market share in both Pressure Pumping and Pressure Control, with the latter also returning to profitability.

The division's new Simplified Frac Iron System and RFID technologies have been well received by customers as they enable further increases in operational safety and productivity. The 'Weir Edge' offering was launched enabling customers to benefit from root cause analysis by engineers on site - reducing costly downtime and building on the division's market-leading service network.

Performance in the International businesses was weaker reflecting market conditions and the exit from recently won contracts in Iran following the recent re-imposition of US sanctions.

Financial review

Orders of £438m (2017: £326m) were 35% higher and 31% higher on a like for like basis, and 21% higher than the second half of 2017. Aftermarket orders were up 28% year-on-year and represented 75% (2017: 79%) of divisional orders. Original equipment orders were 58% higher, driven by increased demand for pumps, power ends and flow equipment, and strong initial demand for our new Simplified Frac Iron System. Orders from international markets were slightly higher.

Revenue increased by 42% to £411m on a constant currency basis (2017: £289m) and was up 39% on a like for like basis, reflecting order trends. Original equipment and aftermarket revenues increased by 67% and 36% respectively, with aftermarket accounting for 77% of total revenues (2017: 80%). Reported revenues were up 31% after the impact of a £25m foreign exchange headwind (2017: £314m). 

North American revenues increased sequentially through the first half while international revenues were lower reflecting the challenging market conditions.

Operating profit including joint ventures was up 117% to £63m (2017: £29m) on a constant currency basis driven by volumes and operating leverage, which also offset the £4m impact of the 2017 disposal of the EPI minority interest. Reported operating profit increased by 98% after a £3m foreign exchange headwind (2017: £32m).

Operating margin was up 520bps on both a constant currency and reported basis including the negative 140bps impact on a constant currency basis from the disposal of EPI.

Operating cash flow increased by £40m to £39m (2017: outflow of £1m) primarily driven by the significantly improved profitability of the division.

2018 Divisional outlook

The division continues to anticipate a strong increase in constant currency revenues and profits, with any potential impacts from moderated growth in the Permian offset by both increased activity in other basins and the effect of higher equipment attrition. Operating margins are expected to continue in the mid-teens seen in H1.

Discontinued operations - 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.

Delivering significant order and profit growth

· Very strong OE order growth driven by increased nuclear demand

· Significant profit increase driven by strong AM performance, operational efficiency and absence of one-offs

· 2018 outlook: Broadly stable constant currency revenues; mid-single digit operating margins 

Market review

New nuclear developments in the UK and Asia supported improved demand for original equipment while, with the exception of coal, power markets also supported continuing aftermarket momentum. Project activity in downstream oil and gas also continued to improve and there was a strong recovery in refinery maintenance.

Operational review

The division expanded its installed base in attractive long-term nuclear markets by winning a £23m contract to install pumps on the new Hinkley Point C nuclear power station in the UK. This was in addition to £10m of nuclear contract wins in Korea. Its strategy of globalising its sales and marketing capability to fully leverage its valve and pump product portfolio is showing encouraging results with a growing pipeline of opportunities. The division also continued to leverage its installed base including in downstream oil and gas markets and delivered a fifth consecutive quarter of year on year aftermarket growth.

Financial review

Orders increased by 34% to £206m (2017: £153m). Original equipment orders were up 53% while aftermarket orders grew 19%. Power markets represented 45% of orders (2017: 42%) and oil and gas markets represented 19% (2017: 20%).

Revenue was stable on a constant currency basis at £161m (2017: £161m), with aftermarket revenues up 10% on the prior year. Original equipment revenues were down 8%, reflecting the lower opening order book. Reported revenues were down 3% (2016: £166m) reflecting a 3% foreign exchange headwind.

An operating profit of £9m (2017: (£11m) loss) on a constant currency basis reflected the success of the division's growth initiatives and the upturn in market conditions and the absence of a £13m one-off charge recorded in 2017. The reported operating profit included a £1m foreign exchange headwind.

Operating margin was up 1260bps against the prior year at 5.4% (2017: loss of 7.2%) on a constant currency basis.

Operating cash flow increased by 5% to £8m (2017: £7m) reflecting the improved profitability of the division.

2018 Divisional outlook

The division continues to expect 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 full year mid-single digit operating margins.

Board and management changes

As previously announced, Alan Ferguson and John Mogford retired from the Board following the 2018 Annual General Meeting. Stephen Young succeeded Alan Ferguson as Audit Committee Chairman, with effect from 26 April 2018. In addition Cal Collins, formerly Chairman and CEO of ESCO Corporation, joined the Board as a Non-Executive Director on 12 July 2018.

Jon Owens, formerly President and COO of ESCO Corporation, joined the Group Executive on 12 July 2018 as President of the ESCO division.

Principal risks and uncertainties

The Board considers the principal risks and uncertainties affecting the business activities of the Group are:

· Technology and innovation

· Political and social risk

· Safety, health and environment

· IT systems and cyber security

· Ethics, governance and control

· Value chain management

· Staff recruitment, retention and development

· Market volatility

· Contract risk

Further details of the Group's policies on principal risks and uncertainties are contained within the Group's 2017 Annual Report, a copy of which is available at www.annualreport.weir.

Appendix 1 - 2017 / 2018 quarterly order trends

1 Continuing operations (excludes the Flow Control division which has been classified as being held for sale).

2 Like-for-like excludes the impact of acquisitions. KOP was acquired on 27 July 2017 and excluded for 2017 and 2018.

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.