Weir Group Regulatory News (WEIR)

The Weir Group PLC

31 July 2012

STRONG PROFIT GROWTH IN FIRST HALF OF 2012

The Weir Group PLC, a global engineering solutions provider to the mining, oil & gas and power markets, today reports its 2012 interim results

KEY POINTS

§ Strong trading in the Minerals and Power & Industrial divisions

§ Strengthening aftermarket performance; input up 17%, revenue up 29%

§ H1 upstream revenue and margin expectations met; H2 pressure pumping markets challenging

§ Acquisition integrations progressing well and trading in line with expectations

§ Profit before tax up 27% to £226m

§ 11% increase in interim dividend to 8.0p

Keith Cochrane, Chief Executive, commented:

"These results bear out the strength of our well-diversified Group. Effective execution of our growth strategy in Minerals and Power & Industrial and a good first contribution from acquisitions have offset the challenging pressure pumping market conditions faced by Oil & Gas.

In the second half we anticipate a strong performance from the Minerals and Power & Industrial Divisions and some improvement in Oil & Gas upstream pressure pumping aftermarket demand relative to the second quarter, although the timing of any improvement remains uncertain. Assuming no significant change in macro economic conditions, full year profit before tax, amortisation and exceptional items is expected to be between £440m-£460m with the low end of the range reflecting no improvement on Q2 in upstream Oil & Gas."

GENERAL OVERVIEW

The Group has continued to perform well, benefiting from a strong opening orderbook and delivering record first half profits. Generally positive conditions in mining equipment markets, alongside effective ongoing delivery of strategic growth initiatives in Power & Industrial, demonstrate the benefit of Weir's diverse presence in its three chosen end markets and ongoing focus on effective execution in changing market conditions. Despite challenging North American pressure pumping markets, investment in the capability and broadened product portfolio of the Oil & Gas division enabled it to meet its first half revenue expectations, supported by a strong first contribution from acquisitions.

In Minerals, good project activity continued across key mining equipment markets, in particular Africa, South America and Canadian oil sands. Increasing ore production and the growing installed base contributed to strengthening aftermarket activity across the period. In Oil & Gas, challenging conditions in the North American pressure pumping markets significantly impacted Weir SPM. Original equipment input fell, as flat end market demand combined with forward ordering in 2011 and resulted in excess frac pump capacity. This also affected aftermarket demand together with lower utilisation rates as equipment moved from dry gas to liquids-rich basins and frac pump service intensities fell. A positive first half performance from Power & Industrial was supported by strong organic growth across the business with good progress particularly in the emerging markets of Southeast Asia.

As Weir seeks to grow ahead of its end markets, it has delivered effectively against its strategic priorities. The integrations of Weir Seaboard and Weir Novatech are progressing well, leveraging the product range and geographic presence of the Oil & Gas division. Capacity has been added to target growth opportunities, expanding production of upstream flow equipment with foundry expansion underway in Minerals to serve the Canadian oil sands market and meet global demand for the broader product range. Innovation momentum resulted in the launch of five new products for upstream oil and gas markets and the development of a new screens range to support Minerals' focus on the adjacent comminution sector. A focus on supply chain activities has seen centres of excellence established in key Group-wide spend categories, with early improvements in cost, efficiency and supplier responsiveness. Finally, the establishment of a Weir Environment, Health and Safety (EHS) system has contributed to a significant reduction in accident rates. 

FINANCIAL HIGHLIGHTS

Order input in constant currency was 8% higher at £1,312m (2011: £1,220m) and, on a like for like basis, was 1% lower after excluding recent acquisitions (Weir International, Weir Seaboard and Weir Novatech). Original equipment orders were 2% lower (13% lower on a like for like basis), as growth in Minerals and Power & Industrial was offset by lower frac pump orders at Oil & Gas. Aftermarket orders were up 17% (11% higher like for like) with strong production trends across mining markets and good service activity in global power and oil and gas markets. Aftermarket represented 55% of total orders (2011: 51%) in the period. Orders from emerging markets were 17% higher at £494m, representing 38% of total input.

Revenue grew by 29% from £1,031m in 2011 to £1,325m with a negative net currency impact of £4m. In constant currency terms, this represents a 29% increase in revenues, reflecting the record Oil & Gas opening orderbook, strong Minerals order growth and the first contributions from recent acquisitions. Like for like revenues in constant currency were up 20%, with original equipment up 17% and aftermarket revenues up 22%. Including acquisitions, original equipment and aftermarket revenues both increased by 29%. Emerging market revenues grew by 25% driven by increasing sales in South America and Africa in particular.

Operating profit before exceptional items and intangibles amortisation increased by 33% to £248m (2011: £186m) after a net positive foreign exchange impact of £1m. On a constant currency basis, operating profit increased by 32% and on a like for like basis increased by 21%, principally driven by organic revenue growth in the Minerals and Oil & Gas divisions. Operating profit before exceptional items and intangibles amortisation includes one-off charges of £3m for acquisition integration. Total one-off charges in the first half of 2011 were £7m. EBITDA before exceptional items increased by 33% to £272m (2011: £204m).

Operating margin increased from 18.0% (18.2% on a constant currency basis) to 18.7%, primarily reflecting increased contributions from the higher margin Oil & Gas division, including recent acquisitions. Margins were 18.5% on a like for like basis, excluding the impact of these acquisitions. 

Net finance costs before exceptional items were £21.5m (2011: £7.8m) due to the increase in net debt following the Seaboard and Novatech acquisitions. In February, the Group raised attractively priced long term debt in the US private placement market. Notes to the value of US$1bn were issued with a weighted average term of 9.6 years at a weighted average coupon of 4.16%. The proceeds were used to fund the Novatech acquisition and repay certain borrowing facilities.

Profit before tax from continuing operations before exceptional items and intangibles amortisation increased by 27% to £226m (2011: £178m). Reported profit before tax from continuing operations increased by 22% to £203m (2011: £167m) reflecting intangibles amortisation of £18m (2011: £11m) and exceptional items of £5.2m. The increased intangibles amortisation was driven by the recent acquisitions. The exceptional items of £5.2m relate to two items. First, £4.5m representing the uplift of inventory to net realisable value on acquisition being charged against profits as the inventory is sold and secondly, the unwinding of the discount on the contingent consideration liability of £0.7m.

Tax charge for the period was £65m (2011: £51m) on profit before tax from continuing operations before exceptional items and intangibles amortisation and represents an underlying effective tax rate of 28.8% (2011: 28.7%).

Earnings per share from continuing operations before exceptional items and intangibles amortisation increased by 27% to 76.4p (2011: 60.1p). Reported earnings per share including exceptional items, intangibles amortisation and the impact of discontinued operations was 69.9p (2011: 56.3p).

Cash generated from operations was 10% higher at £141m (2011: £129m). Higher operating profits were largely offset by working capital outflows of £127m (2011: £76m) with total working capital on a constant currency basis representing 19.5% of revenues (2011: 13.2%). Net capital expenditure was £53m (2011: £33m) as investment plans to target growth continued although planned capex at Weir SPM was reduced. Net free cash outflow after all financing costs, tax and dividends was £40m (2011: inflow £2m). Cash outflows of £121m (2011: £12m) in respect of acquisitions of subsidiaries were principally incurred on the acquisition of Novatech. After non cash movements of £10m, net debt increased by £171m to £844m when compared to December 2011.

Dividend - an interim dividend of 8.0p (2011: 7.2p) is declared, an 11% increase. The dividend will be paid on 2 November 2012 to shareholders on the register on 5 October 2012.

DIVISIONAL HIGHLIGHTS

MINERALS

Weir Minerals is the global leader in slurry handling equipment and the associated aftermarket for abrasive high wear applications used in mining, oil sands and flue gas desulphurisation markets.

Market conditions in key global mining equipment markets were generally positive. South America continued to enjoy a buoyant environment and provided significant orders for greenfield and brownfield projects across the early cycle and core slurry pump product lines. High activity levels continue at North American oil sands projects with good input from the wider North American mining sector. Input trends in Australia were supported by large iron ore and coal projects although some customer caution around the timing of future projects was evident. African input rose by more than one third with strong activity outside of South Africa in particular. Project activity in Russia, Scandinavia and North Africa provided the focus for our European operations, with Eurozone markets generally subdued.

Good progress was made against the division's strategic priorities with ongoing success in driving sales of the full product portfolio. Weir Minerals Malaysia has developed best-cost manufacturing capability to support global growth in pumps and cyclones. The division took new products to market, including the Multiflo high-wall dewatering pump, a new range of large screen equipment and also developed the Gladiator frac slurry pump for the Oil & Gas division. Investment in foundry capacity is ongoing, with work underway on expansion of the UK facility and plans approved to expand North American production capability, adding 10% to divisional capacity when fully operational. In Europe, the acquisition of a small mining services business in Northern Sweden expanded our footprint in the growing Scandinavian market. In Chile our leading service presence helped the division to secure a 5-year copper mine service contract expected to be worth in excess of US$100m.

Order input increased by 11% to £726m (2011: £652m). Original equipment orders grew 9% with sequential second quarter input in line with the record first quarter. Aftermarket orders grew 13% and strengthened across the period with good progress in a number of categories including slurry pump spares, valves, cyclones and screen media. Original equipment orders represented 43% of total order input (2011: 44%).

Good growth was achieved across all key mining regions. In Brazil, the early cycle GEHO business won a £16m order for an iron ore pipeline project. In Chile, the division won slurry pump and process equipment orders at two copper projects worth £10m, with several other large orders received for copper projects in Peru and Mexico. Activity levels in Africa remained strong, with the pump rental business growing strongly and increased levels of recurring business. The Multiflo dewatering business secured a £4m order for pumps for a gold mine in Papua New Guinea whilst a £10m order for a package of ancillary products was received for a large iron ore project in Australia.

In North America, oil sands projects continue to present opportunities and the first order for KHD High Pressure Grinding Rolls for the Canadian market was received for a precious metals project. A £2m order for vertical pumps enabled the division to continue successfully targeting the Russian market whilst a £9m project was awarded for a phosphate pipeline in Morocco. Emerging markets input was 50% (2011: 50%) of total order input.

Revenue increased by 22% to £665m (2011: £544m) reflecting the strong opening orderbook and increasing momentum in shorter cycle aftermarket orders. Revenue increased across all key mining regions as high activity levels continued in copper, gold, oil sands and other mining projects. Original equipment represented 39% of revenues (2011: 38%).

Operating profit increased by 20% to £120m (2011: £100m), with underlying revenue growth across all regions contributing to the increase.

Operating margins of 18.0% were 40bps lower than the comparative period but 100bps higher than H2 2011 due to increasing spares in the revenue mix.

Capital expenditure totalled £21m (2011: £21m) and included investment in rubber manufacturing capacity in Chile and upgrades to the Johannesburg facility to integrate Linatex hose and screens manufacturing.

OIL & GAS

Weir Oil & Gas designs and manufactures well service pumps, flow control equipment and high-pressure wellhead solutions and provides aftermarket support principally for the upstream oil and gas markets.

In North American pressure pumping markets, the combination of lower North American natural gas prices and relatively high oil prices prompted an industry shift from gas to oil and liquids-rich shale formations. US horizontal gas-focused rig count declined by 31% and oil and liquids rig count increased by a similar percentage such that overall rig count was broadly flat over the period. Service company start-ups and high levels of forward ordering in late 2011, in expectation of growing activity levels, combined with these rig count movements to create substantial excess frac pump capacity in North America. Aftermarket activity was also impacted in the period, as utilisation fell as a result of this overcapacity combined with dislocation arising from the gas to liquids switch and increasing equipment wear life attributable to lower pressure oil rich basins and changes in customer operating procedures. This led to material overstocking of certain aftermarket components, reducing short term demand, which in recent months has resulted in a more competitive environment for these products. In addition, customers were also impacted by the extended weather related spring break-up in Canada. The wellhead market, served by Weir Seaboard, was supported by the higher numbers of wells drilled compared to the first half of 2011. 

Activity levels in Weir's Middle East Service markets grew strongly, with increased Saudi production and the ongoing rebuilding of Iraqi oilfield infrastructure. We also saw the first signs of an easing of original equipment pricing pressure in downstream markets.

Weir's pressure pumping focused operations (Weir SPM, Weir Mesa and Weir Novatech) have responded quickly to the rapidly changing trading conditions by in-sourcing machining, reducing headcount and identifying operating cost savings to ensure the business protects margins and profitability at lower activity levels. Good progress was made on a number of market share growth initiatives. North American flow equipment capacity was added to shorten customer lead times and Weir Novatech products are now fully integrated within the Oil & Gas sales structure, enabling the division to offer 'bundled' expendable packages. SPM also launched five new products featuring patent protected technology which will be introduced to the market during H2 2012. Outside North America, international opportunities continue to progress, with activity in China, Saudi Arabia, Australia and Argentina showing early promise and like for like upstream international input growing by 58% in the period.

The integration of Weir Seaboard has progressed well, validating confidence in growth opportunities with plans developed to deliver these over the next 12-18 months. Trading has been in line with acquisition expectations and the switch in activity from gas to liquids-rich basins was well managed.

Middle East Service operations delivered a strong first half performance. Downstream operations performed in line with expectations as we started to realise the benefits of low cost sourcing initiatives.

Order input at £373m (2011: £401m) was 7% lower, (29% lower like for like) due to changing conditions in North American pressure pumping markets and below our prior expectations as the anticipated recovery in aftermarket activity failed to fully materialise across the second quarter. Original equipment input fell 29% (53% like for like), while aftermarket input was up 20% but flat like for like with strong growth in Services and a more modest upstream performance offset by a reduction in downstream spares orders.

Like for like upstream businesses' (SPM and Mesa) order input fell by 37% to £211m (US$333m) on a like for like basis, with a total of US$84m of 2011 orders cancelled and reflected as an opening orderbook adjustment. Like for like upstream aftermarket input was 3% higher than the prior year period with growth in flow control products and service activities offset by lower fluid end demand as a result of excess customer inventory. Like for like upstream original equipment input was 61% lower than the prior year. Input from Seaboard and Novatech increased by 11% compared to the equivalent pre-acquisition period. Input across downstream and Service operations grew by 12%, including a US$20m service contract for Iraqi oilfield infrastructure.

Revenue increased by 49% (21% like for like) to £492m (2011: £329m). Upstream revenues increased to £317m (US$500m) like for like, up 18% on 2011 and in line with expectations, benefiting from a strong opening orderbook but down sequentially in the second quarter. Revenues of £93m ($146m) from Seaboard and Novatech were 20% higher than the equivalent pre-acquisition period. Service and downstream revenues grew 34%.

Operating profit including joint ventures increased by 46% (23% like for like) with a £22m contribution from Seaboard and Novatech (before integration costs) 31% higher than the equivalent pre-acquisition period. Good profit progression at service operations was supported by strong activity levels in Saudi Arabia and Iraq. In addition, one-off restructuring costs of £3.0m related to the Seaboard integration have been recognised in the period (2011: £3.6m).

Operating margins were 25.0% (2011: 25.5%) and 25.9% on a like for like basis, supported by increasing operating efficiencies in upstream and service operations. Like for like upstream margins improved by 50bps while underlying margins of recent acquisitions improved by 200bps on the comparable pre-acquisition period.

Capital expenditure was £23m (2011: £12m) with investment in expanded flow capacity at SPM and the newly acquired businesses of Seaboard and Novatech. In response to the lower demand environment in North America, the previously announced US$75m expansion of Weir SPM has been reduced by US$15m.

POWER & INDUSTRIAL

Weir Power & Industrial designs, manufactures and provides aftermarket support for specialist and critical-service rotating and flow control equipment, focused on the global power markets.

Global nuclear markets remained subdued, albeit we saw the first signs of a resumption in project activity as post-Fukushima stress testing and safety reviews were completed. Despite this period of uncertainty, the division secured substantial contract wins with South Korean EPC contractors for international new build nuclear activity. The acquisition in 2011 of HIM Tech, now Weir International, was an important factor in securing these contract wins.

Across other power markets, the low domestic natural gas price in the US has provided impetus to new gas-fired power projects. The North American hydro renewables market also continued to provide opportunities for refurbishment and optimisation contracts. European power and industrial markets remain challenging due to economic conditions within the Eurozone whilst North American general industrial activity showed signs of improvement, particularly in the first quarter.

The positive first half performance was largely due to successful delivery of the division's strategic priorities with good contributions from its recent acquisitions. Substantial growth in South East Asian oil and gas markets was achieved during the period, with further opportunities being pursued. The development of regional sales hubs supported growth across the broadened valves portfolio, with competitiveness enhanced by low cost sourcing initiatives. Investment in engineering resources has led to ten new product initiatives with market introductions planned over the next two years.

Order input increased by 22% (15% like for like) to £196m (2011: £161m) as a result of growth across all business lines including an £11m contribution from the South Korean acquisition. Nuclear input at £46m (2011: £43m) reflected the positive impact of Weir International in a difficult nuclear market. Input from the power sector was 59% (2011: 55%), while orders from Middle East and Asia Pacific emerging markets increased by 40% including good progress in oil and gas markets.

Revenue was up 11% to £154m (2011: £139m) with like for like revenues increasing by 9%. 

Operating profit increased by £3.3m against a comparative period impacted by costs associated with the cessation of Libyan activity and acquisition costs of £2.9m.

Operating margins were 7.6% (2011: 6.0%) as strategic initiatives took effect and cost competitiveness measures gained traction alongside a reduction in one-off costs. 

Capital expenditure was £11m (2011: £4m). Work is nearing completion on the new Montreal service centre facility with further investment underway to support growth initiatives in emerging markets.

RISKS & UNCERTAINTIES

The principal risks and uncertainties affecting the business activities of the Group remain those detailed on pages 32 to 36 of the Annual Report 2011, a copy of which is available on the Group website at www.weir.co.uk. The Board considers that these remain a current reflection of the risks and uncertainties facing the business for the remaining 26 weeks of the financial year. The Board has considered the risk to the business of the continuing uncertainty in the Eurozone and, based on the markets and geographies in our footprint, considers this should not have a significant impact on the Group.

MANAGEMENT CHANGES

Keith Ruddock was appointed as Group General Counsel and Company Secretary following the retirement of Alan Mitchelson, Company Secretary at the Group's AGM on 9 May. As announced on 29 February, Scot Smith, Divisional Managing Director, Minerals will shortly leave the Group. He is replaced from 1 August by Dean Jenkins, currently Divisional Managing Director, Power & Industrial. Kevin Spencer, currently Regional Managing Director, Europe, Weir Minerals, succeeds Dean Jenkins.

OUTLOOK

MINERALS

Conditions across the mining and oil sands markets are expected to remain generally positive in the second half with a good pipeline of new project opportunities supporting a broadly similar level of original equipment input to the first half. Despite signs of customer caution over project timings in the Australian market, macro-economic uncertainty and lower commodity prices have generally not impacted previously approved projects or production levels.

Supported by the opening orderbook, we expect further sequential growth in original equipment revenue as a number of major projects are delivered. Project commissioning during 2012 will contribute to continued growth in aftermarket revenues as we benefit from the growing installed base. Combined with a strong first half performance, we now expect full year revenues, profits and margins to be ahead of our previous expectations with full year operating margins in line with the first half.

OIL & GAS

The outlook for pressure pumping remains challenging with frac pump overcapacity expected to lead to minimal original equipment orders well into 2013. Excess equipment and lower service intensities have prolonged the impact of overstocking on aftermarket orders meaning second half revenues for SPM and Mesa will be lower than previous guidance. Recent customer commentary suggests the US onshore drilling market should remain stable at current commodity prices and we expect this to translate into improving aftermarket demand at some point in H2 2012. However, second half revenues for upstream operations will be impacted by the timing of the demand pick-up, the unwinding of excess inventory, and the success of our actions to gain market share in flow control and pump expendables. Full year expectations for Seaboard remain unchanged.

We expect to see a continuation of the positive trends in our downstream operations with the benefits of a new Polish facility and low cost sourcing supporting second half prospects. Service market conditions are expected to remain positive. Together, we expect full year revenues and profits to be lower than previous expectations with operating margins in line with last year.

POWER & INDUSTRIAL

Market conditions are expected to remain mixed, with good opportunities in emerging and oil and gas markets offsetting expected subdued conditions in developed markets. Nuclear activity is increasing with the conclusion of post-Fukushima safety reviews although this is not likely to impact orders substantially until 2013.

The strong first half performance, together with the first results from our strategic initiatives, leaves the division well placed to continue to deliver strong input, revenue and profit progression over the full year.

GROUP

While the global economic outlook remains uncertain, we expect the Group to continue to benefit from its global presence and diverse exposure across its chosen markets.

In the second half we anticipate a strong performance from the Minerals and Power & Industrial Divisions and some improvement in Oil & Gas upstream pressure pumping aftermarket demand relative to the second quarter, although the timing of any improvement remains uncertain. Assuming no significant change in macro economic conditions, full year profit before tax, amortisation and exceptional items is expected to be between £440m-£460m with the low end of the range reflecting no improvement on Q2 in upstream Oil & Gas.

The Group's leading positions in markets with positive fundamentals, together with a business model proven through the cycle, leaves Weir well placed to deliver sustainable long term growth.

This interim report includes 'forward-looking statements'. All statements other than statements of historical fact included in this presentation, including, without limitation, those regarding the Weir Group's financial position, business strategy, plans (including development plans and objectives relating to the Company'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 Company 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 Company's present and future business strategies and the environment in which the Company will operate in the future. These forward-looking statements speak only as at the date of this document. The Company 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 Company'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.