Weir Group Regulatory News (WEIR)

The Weir Group PLC

2 August 2011

STRONG EXECUTION IN POSITIVE END MARKETS

The Weir Group PLC, a global engineering solutions provider to the mining, oil & gas and power markets, today reports its 2011 interim results

HIGHLIGHTS

§ Original equipment input up 67%, aftermarket input up 25%

§ Strong growth across the minerals and upstream oil and gas markets

§ Record upstream Oil & Gas input of US$531m and revenues of US$422m

§ Pre-tax profits up 24% to £178m after one-off costs of £7m

§ 20% increase in dividend to 7.2p

§ US$75m investment plan to further expand upstream oil and gas capacity

§ Sale of Cathcart, Glasgow site with net proceeds of £25m in the second half

Keith Cochrane, Chief Executive, commented:

"The Weir Group has delivered another positive set of results, with revenue and profit growth and record orders. Strong order trends in our Minerals division, as well as an excellent performance from our upstream oil and gas operations demonstrate our ability to serve market needs by executing effectively on our strategic growth agenda.

The Group will continue to invest to grow ahead of our end markets and we now expect profits for the full year to be somewhat ahead of our previous expectations."

GENERAL OVERVIEW

The Group has continued to perform strongly. Positive market conditions across the minerals and upstream oil and gas markets, together with delivery of our strategic growth plans, translated into record orders, revenues and profits, ahead of our expectations. A significant increase in original equipment orders strengthens confidence in the full year outlook and further expands the installed base of products that drives future aftermarket opportunities. 

The strength of our business model and exposure to markets with rising global demand, underpinned by emerging market needs, was again evident in the period. The Oil & Gas division benefited from further growth in North American horizontal rig count, greater operating intensities and an acceleration of our capacity expansion plans. In Minerals, we saw strong project activity in a number of key markets and positive aftermarket trends as we extend our market presence. Power & Industrial was impacted by the cessation of project work in Libya and some delays in new project awards.

Weir has made good progress against its key strategic priorities, positioning the Group to continue to grow ahead of our end markets. Capability in all markets has been extended through the introduction of new products, greater service coverage and success in building out the full product portfolio. The establishment of a cross-divisional Oil & Gas Forum will enable us to better leverage our global product portfolio in the oil and gas markets and the Weir Advanced Research Centre, a partnership with Strathclyde University, increases our focus on engineering capabilities, product development and innovation. Group-wide capability has been reinforced with key senior management appointments focused on operational support and talent development. Our emerging market presence was extended with the acquisition of a South Korean valves business announced in June.

FINANCIAL HIGHLIGHTS

Order input in constant currency was 43% higher at £1,225m (2010: £859m) and, on a like for like basis, was 32% higher after excluding the 2010 acquisitions. Original equipment orders were up 67% (57% on a like for like basis), driven by increasing capital expenditure across our key end markets. Aftermarket orders were up 25% (15% on a like for like basis) with positive production trends continuing across our mining and upstream oil and gas markets. As expected, this drove a shift in mix towards original equipment, which represented 49% of total orders (2010: 42%) in the period. Orders from emerging markets were 30% higher at £438m and orders at Group Companies were £6m (2010: £17m).

Revenue grew by 33% from £775m in 2010 to £1,031m with a negative net currency impact of £4m as the strengthening of sterling relative to the US dollar was largely offset by weakness against the Australian dollar. In constant currency terms, this represents a 34% increase in revenue, reflecting growth in order input during the period, a stronger opening order book and positive contributions from acquisitions. Like for like revenues in constant currency were up 23%, excluding the contribution of the 2010 acquisitions. Aftermarket sales, including acquisitions represented 54% (2010: 59%) of total revenues. Emerging markets revenues grew by 20% and at 36% contributed proportionately less to total revenues (2010: 40%) due to the increase in revenues from North American upstream operations. Revenues at other Group Companies were £15m (2010: £14m).

Operating profit before intangibles amortisation increased by 23% to £186m (2010: £151m) after a net negative foreign exchange impact of £2m. On a constant currency basis, operating profit increased by 25% and on a like for like basis increased by 19%, principally driven by organic revenue growth in the Oil & Gas and Minerals divisions. Operating profit before intangibles amortisation includes one-off charges of £5m in respect of restructuring and acquisition costs and £2m in respect of Libyan working capital provisions. The profit contribution from Group Companies was £0.6m (2010: £1.7m). EBITDA increased by 23% to £204m (2010: £166m).

Operating margin decreased from 19.5% (19.3% on a constant currency basis) to 18.1%, reflecting the impact of the 2010 acquisitions, a shift in revenue mix towards original equipment and ancillary products and services, lower activity levels in downstream oil and gas and one-off charges of £7m taken in the period (2010: £nil). Excluding one-off charges, operating margins were 18.7%.

Net finance costs were £7.8m (2010: £7.0m) due to higher average net debt than the comparable period driven by the timing of acquisitions in the second half of 2010.

Profit before tax from continuing operations before intangibles amortisation increased by 24% to £178.4m (2010: £144.0m). Reported profit before tax from continuing operations increased by 24% to £167.6m (2010: £135.6m) reflecting intangibles amortisation of £10.8m (2010: £8.4m).

Tax charge for the period was £51.2m (2010: £41.6m) on profit before tax from continuing operations before intangibles amortisation and represents an underlying effective tax rate of 28.7% (2010: 28.9%).

Earnings per share from continuing operations before intangibles amortisation increased by 24% to 60.2p (2010: 48.5p). Reported earnings per share including intangibles amortisation was 56.6p (2010: 45.7p).

Cash generated from operations was 7% higher at £129m (2010: £121m). Higher operating profits were largely offset by working capital outflows of £76m (2010: £45m) driven by receivables increases in line with revenue growth, the impact on inventory of the shift in orders towards longer cycle original equipment projects and the impact of 2010 acquisitions. Overall working capital on a constant currency basis was 14.8% of revenues (2010: 11.6%). Net capital expenditure was significantly higher at £33m (2010: £18m) as investment plans were implemented at Weir SPM and across the Minerals division. Net free cash inflow after all financing costs, tax and dividends was £2m (2010: £31m). Cash outflows of £12m (2010: £4m) in respect of acquisitions and disposals were principally incurred on the acquisition of HIM Tech in South Korea. After non cash movements of £5m, net debt increased by £5m to £289m when compared to December 2010 (£284m).

Dividend - an interim dividend of 7.2p (2010: 6.0p) is declared, a 20% increase. The dividend will be paid on 4 November 2011 to shareholders on the register on 7 October 2011.

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.

Project enquiries and activity levels across the mining and oil sands markets continue to be strong with commodity prices supportive of further investment and increased production. Increased industry capital expenditure has translated into growing original equipment orders, while higher commodity production volumes supported aftermarket growth.

Buoyant market conditions in South America resulted in a number of significant orders placed for major greenfield projects and created a good pipeline of future opportunities across the entire product portfolio with the early cycle GEHO business enjoying strong input. We are also seeing increased brownfield and plant optimisation opportunities across the region. Activity levels in Africa and across Asia Pacific remained strong, while in North America, oil sands projects continue to progress with continuing interest in barges and related products and solid activity across the mining markets. Encouraging trends were evident in Europe, supported by our extended service network.

Good progress was made against the division's strategic priorities. The integration of Linatex is complete, with positive input trends benefiting from an enhanced global footprint and route to market. A substantial pick up in ancillary products and services was seen as we prioritised the sale of our full portfolio across a number of key markets. The new Warman WBH centrifugal slurry pump, with more than 20 design enhancements compared to existing technology, was launched across our global network.

Order input increased by 34% to £662m (2010: £493m) with strengthening growth evident across the second quarter. On a like for like basis, excluding the impact of the Linatex acquisition which contributed £57m, order input increased 23%. Original equipment orders grew 38% (34% on a like for like basis) while aftermarket orders grew 32% and 14% on a like for like basis, despite strong prior year comparatives. Aftermarket activity benefited from an increased focus on the sale of ancillary products and services with organic growth of 31% and spare part orders up 11%. Original equipment orders represented 44% of total order input (2010: 43%) and 47% of input adjusting for the Linatex acquisition.

All regions showed good growth across the full product portfolio. Notable original equipment contract wins included a number of pipeline transportation pump projects in emerging markets, major pump contracts for Chilean and Peruvian copper projects, additional barge and spools contracts in Canada and South America and a significant molten salt pump order for a North American solar project. Against the prior year, emerging markets input increased to 51% (2010: 49%) of total order input.

Revenue increased by 28% to £551m (2010: £431m) including £52m from Linatex. Like for like revenues were up 16%, reflecting the strong opening order book, positive original equipment input trends and continuing momentum in shorter cycle aftermarket orders. Underlying revenue increased across all regions as activity in oil sands, copper and other mining projects ramped up.

Operating profit increased by 19% to £101m (2010: £85m), including a £7m contribution from Linatex. Underlying revenue growth across all regions contributed to the increase.

Operating margins were 18.4% compared to 19.7% in the prior period, reflecting our strategic focus on growing market presence in ancillary products and services organically and through acquisition, lower margin original equipment deliveries and investment to support growth. Compared to the second half of 2010, operating margins were down 0.5%.

Capital expenditure totalled £20.9m (2010: £9.0m) and included investment in additional foundry capacity in Australia and South Africa and machining capacity in the Netherlands, Chile and Brazil.

OIL & GAS

Weir Oil & Gas designs and manufactures high pressure well service pumps and flow control equipment focused on unconventional oil and gas markets and highly engineered centrifugal pumps for use in the refining industry. Weir Oil & Gas Services provide comprehensive engineering services, focused on the upstream oil and gas sector.

Oil prices continued to provide a strong incentive for growth in onshore unconventional drilling targeting oil and liquids rich shale formations. As a result, market conditions for our North American focused upstream businesses (Weir SPM and Mesa) remained buoyant. With a 13% increase in US horizontal rig count since 1 January 2011, more than half the active North American rig count is now focused on oil, a level unseen since the mid-1990s. This trend, coupled with more aggressive hydraulic fracturing techniques, continues to drive increased aftermarket requirements and a need for additional original equipment. Capitalising on this positive environment, we introduced new products and extended our service centre footprint, enabling our upstream businesses to achieve a record performance in the period with total input of over US$1billion in the 12 months to 1 July 2011. As a result, our previously announced US$40m capacity expansion plan has been accelerated and will be completed in the second half, with upstream operations already achieving an annualised revenue capacity run rate of around US$850m. We have now developed plans to further increase North American manufacturing and support capacity with an additional investment of US$75m over 18 months, alongside greater use of the Group's North American infrastructure. 

Improving upstream market conditions in the Middle East, particularly in Iraq, supported a strong performance from our services operations. Downstream market conditions continue to be very challenging and our restructuring actions are progressing to plan.

Good progress has been made delivering the division's strategic growth plan, with the successful launch of the Destiny™ TWS 2500 pump, further new product initiatives and the expansion of our service centre footprint enabling Weir SPM to increase market share. Our Shengli Highland joint venture, to extend SPM's product offering into the Chinese market, was launched in the period.

Order input increased by 82% to £394m (2010: £217m). Upstream businesses order input grew by 128% to £329m (US$531m) benefiting from continuing strong demand for original equipment, market share gains and new product introductions. Input across downstream and service operations fell by 10%, reflecting a strong aftermarket performance offset by lower original equipment orders in a highly competitive downstream market. Original equipment input grew 180% to £218m as our upstream customers significantly increased frack fleet expansion and their replacement capex programmes and our Shengli Highland joint venture received its first orders in the period. This resulted in strong levels of forward ordering of pumps with some orders already placed for 2012 production. Aftermarket input was up 27%, reflecting continuing strength in upstream demand and improvement in the UK and Middle East service operations, including a successful entry into the Iraq market.

Revenue increased by 49% to £324m (2010: £218m). Upstream revenues increased to £261m (US$422m), up 103% on 2010, benefiting from the strong opening original equipment order book, positive original equipment, aftermarket trends and market share increases in the period. This was achieved by acceleration of our capacity expansion plans, additional third party outsourcing and greater use of the Group's North American existing capacity. Growth in our service operations increased revenues by 14% while a strong prior year period comparison and weaker opening order book pushed downstream revenues lower by 51%.

Operating profit including joint ventures increased by 41%, driven by the substantial increase in upstream activity levels offset by a reduced contribution from the downstream operations where profits were broadly in line with the second half of 2010. In addition, one-off restructuring and transaction costs of £3.6m have been recognised in the period.

Operating margins were 25.4% (2010: 26.7%) with a positive margin impact from the upstream business from greater operating leverage as capacity expanded, offset by reduced downstream margins reflecting lower activity, a more competitive pricing environment and restructuring charges. Excluding one-off charges operating margins were 26.5%.

Capital expenditure was £12.0m (2010: £6.2m). Substantial investment is ongoing to expand capacity in upstream operations at Fort Worth and Odessa with the initial phase of $40m to be invested by the year end and an additional $75m investment in the upstream businesses by the end of 2012.

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.

The global nuclear market continued to be active in the early part of the year, but following the tragic earthquake in Japan and the incident at Fukushima in March, has been impacted by a number of new project delays and cancellations, although this has not affected our existing nuclear workload.

The division won its first contract in South Korea with an order for control valves for a new nuclear plant. This landmark order, together with the acquisition of a majority stake in HIM Tech positions the division well for future opportunities in this important market.

Across the rest of the power market, conditions in the North American hydro market were positive with a number of significant new project awards at American Hydro. However, demand for original equipment products for coal fired plant has been weak, particularly in China and North America with few new build opportunities underway. European power and industrial markets remained challenging while unrest in Libya led to the cessation of all project activity, impacting our UK Services business. Towards the end of the period the first signs of a pickup in North American general industrial activity were evident.

Investment in new product development and geographic expansion to drive organic growth across the power and industrial and oil and gas markets continued and is reflected in significantly increased quotation levels, although conversion into firm orders is slower than anticipated. A positive contribution was also made by the 2010 acquisitions of American Hydro, BDK and YES, with integration activities progressing.

Order input increased by 23% to £163m (2010: £133m) as a result of a £31m contribution from the 2010 acquisitions and was flat on a like for like basis. Nuclear input at £44m (2010: £37m) reflected the South Korean contract success and positive input trends in the early part of the period ahead of the slowdown in new project opportunities and outage delays due to safety reassessments following the Fukushima incident. Good progress was made in driving control and safety valve product growth following strategic investments made in 2010. In addition, input at both American Hydro and BDK was ahead of expectations, benefiting from generally buoyant markets. A focus on the renewable power generation market and leverage from American Hydro has also benefited service operations in Canada. Overall, the proportion of orders from the power sector was 54% (2010: 57%).

Revenue was up 29% to £141m (2010: £109m) with a good contribution from the 2010 acquisitions. On a like for like basis, excluding the acquisition effects, revenues were flat. While a strong opening order book led to increased nuclear original equipment deliveries, this was offset by reduced revenues following the cessation of work in Libya in February.

Operating profit fell by £1m. A £3m contribution from acquisitions and a positive impact from the Canadian restructuring completed last year was more than offset by one-off charges of £3.4m comprising a provision for Libya working capital of £2.0m and acquisition related costs of £1.4m.

Operating margins fell to 6.1%. While margins benefited from a positive contribution from the 2010 acquisitions they were impacted by one-off costs, the Libya trading impact and further investment in our growth plans. Excluding acquisitions and one-off costs, margins were 8.0% (2010: 9.1%).

Capital expenditure was £3.6m (2010: £2.9m). Work has begun on a new French facility to provide support for the nuclear businesses.

RISKS & UNCERTAINTIES

The principal risks and uncertainties affecting the business activities of the Group remain those detailed on pages 34 to 36 of the Annual Report 2010, 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.

POST BALANCE SHEET EVENTS

Agreement has been reached for the sale of the former Weir Pumps facility at Cathcart in Glasgow to Clyde Union, prior to 31 December 2011. Net proceeds from the sale are £25m, giving rise to a gain on sale of approximately £20m which will be treated as an exceptional item. Clyde Union acquired the Weir Pumps, Glasgow business in 2007 and since then has leased the Cathcart site from the Group.

In July 2011, the Trustees of The Weir Group Pension and Retirement Saving Scheme announced to scheme members that, following the recent change in legislation, it has been decided to increase certain elements of pension in line with the Consumer Prices Index, which will affect their pension entitlements under the scheme. This change is expected to give rise to a reduction in the pension deficit of approximately £10m in the second half of the year with the resulting gain being treated as an exceptional item in the Consolidated Income Statement.

OUTLOOK

MINERALS

Market conditions across the mining and oil sands markets are expected to remain positive. Our pipeline of new project opportunities remains strong, although the timing of new project awards means that we expect original equipment input growth to moderate over the balance of the year. Aftermarket orders in the second half will continue to benefit from a positive market environment and our strategic growth initiatives and we expect broadly similar absolute input levels to the first half.

Recognising these positive market conditions and the strong opening order book, we expect that second half original equipment and aftermarket revenues will be higher compared to the first half with a larger proportion of original equipment orders as a number of major projects are delivered. As a result, operating margins will be lower than those achieved in the first half although we expect full year operating profits for this division to be in line with our previous expectations.

OIL & GAS

The immediate outlook for our upstream business remains positive. US horizontal rig count is currently forecast to grow by around 5% over the balance of the year with a further shift to oil and liquids rich shale formations expected. Encouraging early discussions on 2012 original equipment requirements are now underway, and we would expect these to convert into firm orders over the second half. However it is too early to say whether the exceptional input achieved in the second half of 2010 will be realised. Aftermarket input trends are expected to remain positive, given our growing installed product base. Downstream market conditions are expected to remain challenging, whilst the positive trends seen in the services market are expected to continue.

Recognising the encouraging upstream market outlook and the timing of additional capacity benefits, we expect second half upstream revenues to be modestly higher compared to the first half. As a result, we expect full year revenues, operating profits and margins for this division will be ahead of our previous expectations.

POWER & INDUSTRIAL

Overall market conditions remain mixed with uncertainty on the timing of new power projects offset by good opportunities to drive growth through our strategic initiatives and new acquisitions.

Despite the division's withdrawal from Libya we continue to expect a stronger second half trading performance relative to the first half reflecting the traditional phasing of work and the one-off costs incurred in the first half. As a result, we expect full year profits for this division to be higher than 2010.

GROUP

The Group will continue to invest to grow ahead of our end markets and we now expect profit before tax and intangibles amortisation for the full year to be somewhat ahead of our previous expectations.

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'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.