REG-Final Results <Origin Href="QuoteRef">WEIR.L</Origin>
24/02/2016 07:10
Press Release
24 February 2016
The Weir Group PLC today reports its results for the 52 week period ended 1
January 2016.
Strategic progress in challenging markets
* Consistent delivery across end markets:
* Continued resilience in Minerals: aftermarket revenues stable;
* Sequential input decline in Oil & Gas: in line with market conditions;
* Power & Industrial: improved profitability despite challenging markets.
* Aggressively responding to market conditions:
* 2015 cost reductions delivered £110m in annualised savings supporting
resilient gross margins;
* Additional £40m cost reduction programme in 2016 to support ongoing
performance.
* Strong cash generation: free cash flow increased to £132m, up 67%; 123%
EBITDA cash conversion.
* Net debt reduced by £36m, despite a £48m foreign exchange headwind;
* Up to £100m to be realised from the disposal of non-core assets in 2016.
* Investing for the long term: R&D investment up 17% and delivering new
products.
* Power & Industrial division restructured as Weir Flow Control, focused on
global process industries.
* £365m of operating exceptional costs in 2015, including £225m Oil & Gas
impairment.
Continuing Operations 2015 2014 Reported Constant
Growth Currency 1
Order input 1 £1,877m £2,478m n/a -24%
Revenue £1,918m £2,438m -21% -22%
Operating profit 2 £259m £450m -42% -43%
Operating margin 2 13.5% 18.4% -490bps -510bps
Profit before tax 2 £220m £409m -46% -47%
Cash from operations £396m £421m -6% n/a
Earnings per share 2 78.4p 141.3p -45% n/a
Dividend per share 44.0p 44.0p 0% n/a
Return on Capital Employed 3 10.0% 18.2% n/a -820bps
Net debt £825m £861m £36m n/a
Keith Cochrane, Chief Executive, commented:
"Despite market challenges which are unprecedented in recent years, Weir has
delivered a resilient performance in Minerals, maintained leadership and
market share in Oil & Gas, and created an additional platform for growth with
the new Flow Control division. As Weir has always done, we adapted quickly
to market conditions. Costs were aggressively reduced while the cash
generative nature of the business supported continued investment in our
strategic priorities.
Given ongoing market conditions, 2016 will be another challenging year. As a
result, we are planning for a further reduction in constant currency Group
operating profits, driven primarily by lower activity levels in upstream oil
and gas markets. We will continue to invest for the medium term supported by
our aftermarket-focused business model, further cost reduction initiatives,
non-core asset disposals and a clear focus on cash generation, to ensure we
benefit fully and quickly when markets improve."
A live webcast of the management presentation to the investment community
will begin at 0900 (GMT) on 24 February 2016 at www.investors.weir
Enquiries:
Investors: Stephen Christie +44 (0) 7795 110456
Media: Raymond Buchanan +44 (0) 7713 261447
Brunswick: Patrick Handley / Nina Coad +44 (0) 20 7404 5959
Notes:
2 2014 restated at 2015 average exchange rates. 4 Adjusted to exclude
exceptional items and intangibles amortisation. Reported operating loss and
loss before tax were £158m (2014: operating profit of £193m) and £200m
(2014: profit before tax of £149m) respectively. Reported loss per share
was 83.6p (2014: earnings per share 33.8p). 6 Continuing operations EBIT
before exceptional items on a constant currency basis (excluding Trio and
Delta EBIT and exceptional items) divided by average net assets (excluding
Trio and Delta net assets) excluding net debt and pension deficit (net of
deferred tax asset).
Strategic overview
The Group's strategy is to strengthen and extend its position as a leading
provider of highly engineered solutions for use in global mining, oil and gas,
power and other aftermarket-orientated processing industries. Weir aims to
achieve sustainable growth ahead of its markets, while responding to short
term market conditions. The Group executes its strategy by focusing on four
strategic pillars: innovation; collaboration; value chain excellence; and
global capability.
Improving competitiveness
The Group reacted quickly to market conditions, delivering £110m in
annualised savings. Actions included the closure of smaller manufacturing
operations in the USA, Australia and Europe and consolidating twelve Oil & Gas
service centre facilities. The workforce was reduced by approximately 1,600
in 2015 with the largest impact on the North American oil and gas workforce,
which fell by more than 40%. In this process, the Group has been careful to
ensure it retains the capability to respond quickly when markets recover.
2015 cost reductions enabled it to maintain broadly stable gross margins
(before manufacturing overhead under-recoveries) and reduce underlying
Selling, General and Administration (SG&A) costs by £27m (9%).
In 2016, the Group will continue to reduce costs with the additional
consolidation of manufacturing and service facilities. These measures will
deliver an anticipated £40m in further annualised savings. In addition, it
plans to realise up to £100m from the disposal of non-core assets.
Innovation:
R&D investment increased 17% and drove the successful introduction of new
products which are closely aligned to customer demands for increased
efficiency and performance. These include Oil & Gas' new SPM® QEM 3000
frack pump which will substantially reduce customers' total cost of
ownership. Similarly, the Minerals division's new Cavex® 700 CVX
Hydrocyclone range can increase throughput by up to 50% and reduce processing
costs. Power & Industrial launched a new safety valve for Liquefied Natural
Gas (LNG) customers and a light-weight industrial pump for hydrocarbon
applications. In addition, the Group established the Weir Technology
Advisory Board, with representatives from different engineering disciplines to
advise on future R&D priorities.
With Microsoft Corporation the Group is developing 'Internet of Things' (IoT)
solutions for mining, oil and gas and power customers. The Group's work with
Microsoft recognises the importance of accessing the best skills to complement
Weir's engineering expertise, by working with one of the world's leading
technology companies.
Collaboration:
The success of the Group's Downstream Forum, which brought together
businesses from different divisions to share best practice and market
opportunities, has been recognised with the strategic restructuring of the
Power & Industrial division. Power & Industrial will be renamed Weir Flow
Control and will incorporate the downstream-orientated pump businesses Floway
and Gabbioneta, which were previously in the Minerals and Oil & Gas divisions
respectively. This will create a division clearly focused on flow control
opportunities in power, oil and gas and other process industries. The Oil &
Gas division has agreed the terms of a joint venture with Rolls-Royce PLC
subsidiary MTU America to develop an integrated frack power system, which will
combine the new Weir SPM ® QEM 3000 frack pump, a transmission and MTU
engine. The new power system will be offered with comprehensive aftermarket
support which will be provided by Weir's Oil & Gas service network.
Value Chain Excellence (VCE):
The Group's commitment to operational excellence has helped support
performance through a series of value chain excellence initiatives which have
delivered significant productivity and procurement gains. These have
included a reduction in lead times and working capital, where there was
substantial progress, particularly in the Oil & Gas and Power & Industrial
divisions. The Minerals division is continuing to implement a common
Enterprise Resource Planning (ERP) tool across its global operations which
will consolidate fifteen ERP systems into one. Rollout is complete in
Malaysia and Europe, and is underway in Latin America. These initiatives
helped sustain gross margins and deliver an £87m working capital inflow, in
addition to the Group's ongoing procurement efforts, which in 2015 delivered
£37m in savings.
Global Capability:
The integration of Trio Engineered Products was successfully completed with
early success in new comminution (crushing, grinding and screening) and sand
and aggregates markets. A worldwide sales team was established to bring
Trio's products to a wider range of customers. The Group also acquired
US-based Delta Industrial Valves, which is a leading supplier of knife-gate
valves principally for mining and oil sands applications. In addition, work
is continuing to develop the Group's global facilities with Oil & Gas'
manufacturing centre in Dubai moving to full operation, serving upstream and
downstream customers, and a new factory and distribution centre in Milan to
serve downstream customers.
Financial performance overview
Summary
Overall, in a challenging year, order input and revenue (on a constant
currency basis) decreased by 24% and 22% respectively, with Oil & Gas input
declining sequentially each quarter in line with market conditions.
Aftermarket input declined 22% and original equipment orders fell by 29%.
On a like-for-like basis, input was down 27% and revenue was down 24%. On
a reported basis, revenues were 21% lower, supported by a £6m foreign
exchange tailwind. In constant currency terms, gross margins (before
manufacturing overhead under-recoveries) fell 20bps on a like-for-like basis,
while operating margins declined 520bps, reflecting negative operating
leverage and manufacturing overhead under-recoveries partially offset by
restructuring cost savings of £65m. Reported profit before tax,
amortisation and exceptional items of £220m was down 46%, primarily as a
result of declines in North American oil and gas. Operating exceptional
charges of £365m were incurred, reflecting impairments and restructuring
actions taken across the Group.
In the Minerals division, as expected, orders fell as a result of reduced
customer capital expenditure. Falling commodity prices led to some mine
closures, reduced safety stock levels and postponement of scheduled
maintenance, although the division took advantage of ore production growth and
available brownfield opportunities. The division's order book was unchanged
with a book-to-bill ratio of 1.00. As expected, operating margins declined
slightly, primarily as a result of lower volumes, acquisition integration
costs and investment in product development.
In Oil & Gas , further falls in oil prices resulted in significant reductions
in activity levels, particularly within upstream North American unconventional
markets, with investment falling substantially. Operating margins fell and
were impacted by significant pricing pressure and negative operating leverage
resulting from lower North American upstream volumes, despite the proactive
and aggressive cost reduction and facility consolidation.
Power & Industrial's overall orders were down 11% in constant currency.
Original equipment orders were down 20% against a prior-year period which
included large hydro and steam turbine orders. Valve and hydro orders were
affected by project order and delivery delays across oil and gas and power
markets. Aftermarket was more resilient, falling 2%. Operating margin
increased 130bps, reflecting an improved operational performance, as the
benefits from restructuring more than offset the impact of the negative
operating leverage from the revenue decline.
Segmental analysis
Continuing Minerals Oil & Gas Power & Unallocated Total Total Total
operations £m Industrial expenses OE AM
Input (constant currency)
2015 1,033 567 277 n/a 1,877 579 1,298
2014 1,076 1,088 314 n/a 2,478 816 1,662
Variance:
- Constant currency -4% -48% -11% -24% -29% -22%
- Like for Like 1 -9% -48% -11% -27% -34% -23%
Revenue
2015 1,034 582 302 n/a 1,918 598 1,320
2014 (as reported) 1,128 992 318 n/a 2,438 822 1,616
Variance:
- As reported -8% -41% -5% -21% -27% -18%
- Constant currency -4% -45% -5% -22% -27% -19%
- Like for Like 1 -9% -45% -5% -24% -32% -20%
Operating profit 2
2015 198 58 22 (19) 259
2014 (as reported) 226 225 19 (20) 450
Variance:
- As reported -13% -74% 16% -7% -42%
- Constant currency -9% -76% 15% -7% -43%
- Like for Like 1 -13% -76% 15% -7% -45%
Operating margin
2015 19.2% 10.0% 7.2% n/a 13.5%
2014 (as reported) 20.1% 22.7% 5.8% n/a 18.4%
Variance:
- As reported -90bps -1270bps 140bps -490bps
- Constant currency -100bps -1280bps 130bps -510bps
- Like for Like 1 -80bps -1280bps 130bps -520bps
1 Like-for-like excludes the impact of acquisitions and related transaction integration costs. 2 Adjusted to exclude exceptional items and intangibles amortisation.
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.
Constant currency £m H1 1 H2 2015 2014 1 Growth LFL 3 Growth
Input OE 154 156 310 332 -6% -19%
Input aftermarket 384 339 723 744 -3% -5%
Input Total 538 495 1,033 1,076 -4% -9%
Revenue OE 135 169 304 354 -14% -25%
Revenue aftermarket 370 360 730 723 +1% -1%
Revenue Total 505 529 1,034 1,077 -4% -9%
Operating profit 2 91 107 198 218 -9% -13%
Operating margin 2 17.9% 20.3% 19.2% 20.2% -100bps -80bps
Operating cash flow 117 118 235 225 +4% n/a
Book-to-bill 1.06 0.94 1.00 1.00
1 2014 and H1 restated at 2015 average exchange rates.
2 Adjusted to exclude exceptional items and intangibles amortisation.
3 Like-for-like (LFL) excludes the impact of acquisitions and related
transaction integration costs. Trio Engineered Products was acquired on 22
October 2014 and Delta Industrial Valves was acquired on 8 July 2015.
Continued resilience:
* Aftermarket revenues stable: slight increase in mining sales offset by oil
and gas declines.
* Gross margins up: modest pricing impacts offset by cost initiatives;
operating margins in line with guidance.
* Broadly stable margins expected in 2016 with revenues slightly down.
2015 Market review
Price declines continued across a number of key commodities as markets
adjusted to slowing demand in China and new lower-cost capacity coming on
line. Iron ore spot prices fell by 40%, copper prices fell by 26% and gold
prices fell 12%. Supply outstripped demand in iron ore and coal, while some
operators reduced production in higher-cost areas with iron ore mine closures
in North America and China. In Africa and the United States, higher cost
copper mines were closed.
Overall, in 2015, aftermarket demand was supported by the growth of global
ore production which benefited from the start-up of several new low-cost mines
in South America and the positive full year effect of mines commissioned in
2014, offset by maintenance delays and closures of higher-cost mines. Oil
prices were down by around a third, significantly impacting oil sands capital
expenditure although production volumes increased.
Mining sector capital expenditure fell by an estimated 25% in 2015 with both
greenfield and brownfield spend experiencing further significant reductions
from 2014 as customers deferred decisions on major projects. As ore
production increased and ore grade declined, miners focused on optimising
existing sites, resulting in brownfield opportunities for engineering
solutions which clearly demonstrate efficiency improvements and short pay back
timescales.
The recovery in African markets following industrial action in 2014 was
affected by some reduction in production and concerns over further industrial
action. In Asia Pacific, markets were relatively stable although weak iron
ore and coal prices led to some production cuts in Australia, South East Asia
and China. Similarly, lower commodity prices led to production reductions in
North America. Political and economic instability in Europe contributed to
subdued conditions.
In the second half of the year, some of the world's largest mining companies
reacted to falling commodity prices by announcing substantial restructuring
plans which included the mothballing or closure of mines that fail to offer
sufficient returns.
Order input decreased by 4% to £1,033m (2014: £1,076m), with a 9%
like-for-like decline partially offset by a full year contribution from Trio
and a first contribution from Delta Industrial Valves. The division's
book-to-bill at 1.00 was stable year-on-year. Original equipment orders were
down 6% year-on-year (19% lower like-for-like), reflecting declines in capital
expenditure by miners and oil and gas customers. Contrary to overall trends,
the division had a strong performance from the Geho product line, which
captured a large share of available mining projects.
Aftermarket orders decreased by 3% and represented 70% of total input (2014:
69%). On a like-for-like basis aftermarket input was down 5% against a
strong prior-year figure, primarily due to declines in power, oil and gas and
industrial markets. Mining aftermarket orders were broadly stable as the
impacts of mine closures and customers reducing safety stock levels and
postponing scheduled maintenance was offset by the move to full production in
a number of greenfield sites in South America, together with underlying ore
production trends.
In total, mining end markets accounted for 74% of input (2014: 74%) with
orders down 6% on a like-for-like basis due to original equipment declines.
Sand and aggregates markets were stable while oil and gas sector orders fell
34%.
Revenue was 4% lower at £1,034m on a constant currency basis (2014:
£1,077m) and 9% lower like-for-like. Original equipment sales were 14%
lower (25% lower on a like-for-like basis) and accounted for 29% (2014: 33%)
of divisional revenue. Production-driven aftermarket revenues were
relatively flat, up 1% over the prior year, but down 1% on a like-for-like
basis.
Strong aftermarket growth in South America and higher activity levels in the
Middle East only partially offset reduced revenues in Australia, North
America, Europe and Asia Pacific. At a product category level there was a
reduction in revenues from larger, more discretionary products such as HPGRs,
hoses and other wear resistant liners, as well as a significant reduction in
demand for swellable packers used in North American oil and gas completions.
There was a 4% increase in slurry pump spares' revenues reflecting their
critical importance to support increasing processing and their lower
susceptibility to maintenance delays.
Reported revenues declined by 8%, reflecting a 5% foreign exchange headwind
(2014: £1,128m).
Operating profit decreased by 9% on a constant currency basis to £198m
(2014: £218m), reflecting lower volumes, £5m (2014: £1m) of one-off
acquisition integration costs and increased investment in product development.
Reported operating profit fell by 13% after a 4% foreign exchange headwind
(2014: £226m).
Operating margin declined, as anticipated, by 100bps to 19.2% (2014: 20.2%),
and was 19.5% (2014: 20.3%) on a like-for-like basis. Gross margins (before
manufacturing overhead under-recoveries) increased by 120bps on a
like-for-like basis, as a result of a more favourable aftermarket mix and the
benefits of procurement and restructuring initiatives, which more than
outweighed pricing pressure. This was offset at an operating level by the
effect of negative operating leverage and increased investment.
Capital expenditure of £41m (2014: £45m) included investment in completing
the restructuring and consolidation of the division's regional manufacturing
footprint announced in November 2014. The division also continued the
roll-out of its standardised ERP system in Europe.
Research and development spend increased to £13m (2014: £11m) and was
focused on continuing to develop the division's product portfolio, materials
technology and IoT and additive manufacturing capabilities which are being
developed on behalf of the whole Group.
2016 Divisional outlook
We expect further reductions in mining capital expenditure in 2016, marking
the fourth successive year of reduced spend. Greenfield and brownfield capex
is expected to fall, partly offset by a modest rise in sustaining capex. We
anticipate slight growth in global ore production as increased capacity from
low cost mines is largely offset by the full year impact of previously
announced mine closures. Sand and aggregates end market prospects remain
attractive, particularly in North America and South East Asia, helping to
mitigate the impact of reduced mining original equipment revenues.
Oil and gas markets will remain challenging, impacting capital expenditure in
oil sands and upstream North American markets, although production levels in
the oil sands are expected to remain resilient.
Overall, the division is expected to deliver slightly lower constant currency
revenues with operating margins broadly stable as additional cost saving
measures offset pricing pressure.
Oil & Gas
Weir Oil & Gas provides superior products and service solutions to upstream,
production, transportation, refining and related industries. Upstream
products include pressure pumping equipment and services and pressure control
products and rental services. Equipment repairs, upgrades, certification and
asset management and field services are delivered globally by Weir Oil & Gas
Services. Downstream products include API 610 pumps and spare parts.
Constant currency £m H1 1 H2 2015 2014 1 Growth
Input OE 77 61 138 320 -57%
Input aftermarket 249 180 429 768 -44%
Input Total 326 241 567 1,088 -48%
Revenue OE 66 69 135 292 -54%
Revenue aftermarket 260 187 447 757 -41%
Revenue Total 326 256 582 1,049 -45%
Operating profit 2 37 21 58 239 -76%
Operating margin 2 11.3% 8.3% 10.0% 22.8% -1280bps
Operating cash flow 95 51 146 209 -30%
Book-to-bill 1.00 0.94 0.97 1.04
1 2014 and H1 restated at 2015 average exchange rates.
2 Adjusted to exclude exceptional items and intangibles amortisation.
Sequential decline in line with end markets:
* Lower revenue and margins in H2 as activity levels continued to slow;
* Strong working capital performance; cash generation of £146m;
* Expecting significant decline in full year revenues and lower margins in
2016;
* North American upstream businesses currently operating around breakeven.
2015 Market review
International oil benchmarks Brent crude and West Texas Intermediate crude
(WTI) fell by around two thirds between their 2014 peak and the end of 2015
while natural gas prices fell by more than 60%, with a subsequent reduction in
capital spending and activity by oil companies. Operators sought significant
pricing discounts from suppliers as part of their focus on reducing
expenditure.
In North America, the division's biggest market, rig count fell by 61%.
Oil-directed rigs fell 64% and gas-directed rigs reduced by 52%, both greater
than market expectations at the start of the year. The number of wells
drilled in North America fell 53% with the number of horizontal wells drilled
down by around 40%, substantially reducing demand for pressure control
equipment and services.
In pressure pumping markets, North American frack fleet utilisation fell from
87% in 2014 to below 50% in 2015. Pressure control markets also experienced
sharp reductions in activity in line with rig count declines. With
substantial additional equipment lying idle, there was an increase in
destocking and component cannibalisation which reduced demand for both
original equipment and aftermarket spares and maintenance services. In
China, which has the largest frack fleet outside of North America, demand was
subdued after strong growth in previous years.
In order to cut costs, many operators in North America negotiated pricing
concessions which impacted the whole industry. USA oil production peaked in
April and had fallen 6% by January 2016. As a result of ongoing efficiency
gains in the industry and higher production levels, the breakeven cost per
well fell by around a quarter in 2015.
In the Middle East, production increased, particularly in Saudi Arabia and
Iraq, with the average rig count increasing 2%, although projects were subject
to delay and customers targeted cost reductions from suppliers in line with
the global industry. In higher cost production regions such as the North Sea
and the Caspian, market conditions were more challenging.
Order input at £567m (2014: £1,088m) was 48% lower reflecting the reduction
in activity as oil prices fell substantially over the year. Aftermarket
input was down 44% year-on-year, primarily as a result of significant declines
in the upstream North American markets, with Services also down, and a slight
decline in Downstream. On a sequential basis, aftermarket orders were
relatively stable from the third to the fourth quarter, despite further
declines in activity as a result of continued falling oil prices
Aftermarket orders increased to 76% (2014: 71%) of divisional orders.
Original equipment input was 57% lower, driven primarily by reduced demand
for pressure pumping equipment and wellheads as frack fleet utilisation and
the number of wells drilled fell substantially.
Pressure Pumping input was down 59%, with order rates declining sequentially
quarter-on-quarter and original equipment orders falling below lows
experienced in the downturn of 2009. As expected, cannibalisation of idle
frack fleet continued throughout the year in response to rig count reductions,
which together with destocking, significantly reduced aftermarket demand for
flow control and fluid end products. Service and maintenance input was more
resilient. Customers remain focused on achieving efficiency improvements and
are actively trialling the business' broader technologically-differentiated
product portfolio.
Pressure Control input also fell significantly, although both Seaboard and
Mathena maintained market share in a very challenging environment. Seaboard
continued to see good interest in its zipper manifold product line as
customers targeted further efficiency improvements. Mathena input was
impacted by customers downgrading the range and specification of the equipment
used during drilling.
Input from Services operations decreased year-on-year, primarily due to
reduced activity levels in the North Sea and Caspian although the core Middle
East business was relatively resilient. Downstream order input was also down
on a strong prior year, as customers continued to delay project activity in
subdued markets.
Revenue decreased by 45% to £582m on a constant currency basis (2014:
£1,049m), reflecting order input trends, particularly in North America.
Original equipment and aftermarket revenues decreased by 54% and 41%
respectively, with aftermarket accounting for 77% of total revenues (2014:
72%). Reported revenues fell by 41%, after a 6% foreign exchange benefit
(2014: £992m).
Pressure Pumping benefited from a positive opening order book in the first
quarter before the reduction in North American upstream activity impacted
revenue. Pressure Control revenues decreased in line with order trends.
Services revenues were more resilient with growth in Iraq, partially
offsetting declines in the North Sea and the Caspian. Downstream revenues
fell slightly, with performance impacted by project delivery delays.
Operating profit, including joint ventures, was 76% lower on a constant
currency basis at £58m (2014: £239m). The decline was entirely
attributable to North American upstream operations, despite c. £40m of cost
savings and strong profit growth from Services and Downstream. Reported
operating profit decreased by 74% after a 6% foreign exchange tailwind (2014:
£225m).
Operating margin was down 1280bps reflecting the impact of pricing pressure,
lower volumes and negative operating leverage. Divisional gross margins
(before manufacturing overhead under-recoveries) were down 370bps
year-on-year, with double-digit North American upstream pricing pressure
partially offset by cost and operational efficiency measures. Pressure
Pumping manufacturing overhead under-recoveries totalled £20m in the year.
Capital expenditure of £36m (2014: £50m) included a new manufacturing
facility for Downstream in Milan and further expansion of Services facilities
in the Middle East, including the acquisition of a service facility in
southern Iraq.
Total R&D expenditure of £10m (2014: £8m) was focused on expanding the
division's product offering and included the launch of the new SPM ® QEM 3000
continuous duty frack pump.
2016 Divisional outlook
Having fallen materially at the start of the year, the market expects oil
prices to remain low throughout much of 2016. Many E&P and service companies
have announced plans to further reduce their capital spending plans. As a
result, market conditions are expected to remain challenging.
So far in 2016, North American rig count and activity levels have continued
to fall with a consequent impact on upstream revenues. Continued declines in
activity will extend the period of destocking and cannibalisation in pressure
pumping markets through the first half of the year with market rationalisation
expected to continue. Conditions are also expected to be more challenging in
international and downstream markets.
The division continues to reduce costs and increase efficiency and will take
proactive action to support operational performance as appropriate. However,
these measures will not fully offset market impacts, and consequently a
further significant reduction in constant currency divisional revenues is
expected. Operating margins will be impacted by additional negative
operating leverage, with North American upstream businesses currently
operating around breakeven, albeit still cash generative.
Power & Industrial
Weir Power & Industrial designs and manufactures valves, pumps and turbines
as well as providing specialist support services to the global power
generation, industrial and oil and gas sectors.
Constant currency £m H1 1 H2 2015 2014 1 Growth
Input OE 66 65 131 164 -20%
Input aftermarket 88 58 146 150 -2%
Input Total 154 123 277 314 -11%
Revenue OE 76 83 159 175 -9%
Revenue aftermarket 73 70 143 143 -1%
Revenue Total 149 153 302 318 -5%
Operating profit 2 10 12 22 19 +15%
Operating margin 2 6.4% 7.9% 7.2% 5.9% +130bps
Operating cash flow 15 22 37 14 +159%
Book-to-bill 1.04 0.80 0.92 0.98
1 2014 and H1 restated at 2015 average exchange rates.
2 Adjusted to exclude exceptional items and intangibles amortisation.
Improved profitability despite challenging markets:
* Benefits from restructuring and cost reductions more than offsetting
revenue declines;
* Integrating with process pump operations to create c.£375m revenue Weir
Flow Control Division;
* Broadly stable revenues and margins expected in 2016.
2015 Market review
Uncertainty over the pace of global economic growth led to project delays in
power and industrial markets, while activity in oil and gas was affected by
the substantial reduction in prices that led to reduced capital and
operational spending.
In conventional power markets, demand was subdued in Europe and the United
States and there was a significant reduction in South Korean project
activity. New build nuclear opportunities were concentrated in China with
delays to planned investment in the United Kingdom. In the United States,
hydro markets were stable. Reduced spending on new projects supported
aftermarket demand as customers used their existing equipment more intensely.
Order input decreased by 11% to £277m (2014: £314m) primarily due to large
hydro and steam turbine orders in 2014 which were not repeated in 2015. In
addition, customer decisions to delay projects across the division's power and
industrial markets and oil price reductions impacted mid and downstream oil
and gas activity levels. Excluding the impact of large one-off orders, input
was down 8%. Original equipment orders were down 20%, driven by the timing
of hydro orders, reduced Korean power orders and oil and gas project delays in
Valves. Aftermarket input declined by 2%, with good Valves growth offset by
lower Services input. Total Valves input was down 12% year-on-year.
Power markets represented 58% of orders (2014: 58%) and the proportion of
orders from oil and gas markets decreased to 13% (2014: 14%). Emerging
markets accounted for 26% of input (2014: 35%), with a fall in orders from
Asia Pacific and the Middle East as a result of lower project activity and a
subdued Korean domestic market.
Revenue decreased by 5% on a constant currency basis to £302m (2014:
£318m), with aftermarket revenues broadly flat on the prior year and original
equipment revenues down 9% supported by the opening order book. Valves
revenues were 5% lower year-on-year, with strong double-digit aftermarket
growth offset by project delays for original equipment. Reported revenues
fell by 5% and were not impacted by foreign exchange movements (2014: £318m).
Operating profit was up 15% at £22m on a constant currency basis (2014:
£19m), as the benefits of the cost reduction and operational improvement
measures more than offset the impact of lower volumes. Reported operating
profits increased 16% after a 1% foreign exchange tailwind (2014: £19m) and
the benefits of an £8m year-on-year reduction in SG&A.
Operating margin was up 130bps to 7.2% (2014: 5.9%) against the prior year,
which was impacted by strike action. Gross margins (before manufacturing
overhead under-recoveries) increased by 140bps, reflecting the benefits of
restructuring and low-cost sourcing. Cost reduction and efficiency measures
broadly offset the impact of the negative operational leverage from the
revenue decline.
Capital expenditure of £5m (2014: £9m) was primarily focused on expanding
the capacity of the division's Valves facility in South Korea. Investment in
research and development was stable at £2m (2014: £2m), with a new range of
municipal pumps progressing to field trials.
2016 Divisional outlook
Power, oil and gas, and industrial markets are expected to remain subdued in
2016, with uncertainty across most process industries leading to customers
delaying new investment decisions. Mid and downstream oil and gas markets
will be affected the most, with existing projects subject to delays.
The division, which enters 2016 with a lower order book but supported by the
benefits of restructuring and strategic growth initiatives, expects broadly
flat constant currency revenues. Operating margins are also expected to be
broadly flat as the full year benefit of previous restructuring actions is
offset by modest pricing impacts.
Group financial highlights
Order input at £1,877m decreased 24% on a constant currency basis. Original
equipment orders were down across all markets driven by weak commodity prices
and the resultant impact on customer activity levels. Aftermarket orders
were down 22%, reflecting a significant decrease in Oil & Gas and representing
69% of total input (2014: 67%).
Revenue of £1,918m was 22% down on a constant currency basis. The
aftermarket accounted for 69% of revenues, a 3 percentage point increase over
the prior year. The 2015 full year impact of the Trio and Delta acquisitions
was £63m in revenue.
Operating profit from continuing operations (before exceptional items and
intangibles amortisation) decreased by 42% to £259m on a reported basis.
Restructuring related cost savings of £65m and procurement savings of £37m
were realised during the year, an element of the latter passed on to customers
to secure available volumes. One-off costs incurred in the period, excluding
exceptional items, were £5m (2014: £2m) and related solely to acquisition
and integration costs. The contribution from current and prior year
acquisitions in 2015 was £8m, after charging integration costs. Unallocated
costs were £19m (2014: £20m), reflecting continued investment in innovation
and strategic initiatives, offset by cost reduction measures implemented
centrally.
Operating margin from continuing operations (before exceptional items and
intangibles amortisation) was 13.5%, a decrease of 490bps on a reported basis
on the prior year (2014: 18.4%; 18.6% on a constant currency basis).
Minerals reported an operating margin, on a constant currency basis, of 19.2%
(2014: 20.2%) for the full year demonstrating the division's resilience to the
downturn in commodity prices and the benefits of a significant installed
base. The like-for-like Minerals operating margin was 19.5% (2014: 20.3%).
The Oil & Gas full year operating margin at 10.0% (2014: 22.8% constant
currency) reflects the substantial volume decline, negative operating leverage
and pricing pressure seen across the division's North American upstream
businesses. The operating margin in Power & Industrial was 7.2% (2014: 5.9%
constant currency) and reflects the benefits from cost reduction and
operational improvement measures taken at the end of 2014, which more than
offset the impact of lower volumes.
An exceptional charge of £365m (2014: £212m) was recorded in the year,
primarily in relation to the oil and gas downturn actions of £92m implemented
to mitigate current market conditions and the impairment charge against
intangible assets of £251m. In addition, the final charges in respect of
the Group-wide efficiency review announced in November 2014 were recorded in
the first half of the year (charge of £8m (2014: £49m)) and other
restructuring actions taken by the Minerals and Power & Industrial divisions,
by way of continued response to market conditions, resulted in further charges
of £16m (2014: £nil).
The total charge in relation to the Oil & Gas downturn actions comprised an
anticipated cash cost of £31m, of which £7m was reflected in the current
year cash flow statement, and an impairment of assets of £61m.
The prolonged downturn facing oil and gas markets, and the resultant impact
on the North American rig count and related activity levels, resulted in an
impairment charge of £225m being recognised at the end of the year in
relation to the intangible assets held in the Pressure Control cash generating
unit (CGU). This has been allocated £193m against goodwill and £32m
against other intangible assets and is further to the goodwill impairment of
£160m that was recognised in 2014. The cash flow forecasts underpinning the
impairment testing reflect current oil price projections with depressed
activity levels expected to endure for the next two years, followed by a
gradual pick up in year three and measured return to more normal levels
thereafter.
An impairment of £26m has also been recognised in relation to the goodwill
of two other CGUs in Power & Industrial reflecting the planned disposal of
non-core assets following the creation of the Weir Flow Control division. No
impairment has been identified in relation to any of the other CGUs.
Other exceptional items in the period include the £2m unwind of inventory
fair value adjustments in respect of Trio, offset by a gain of £2m (2014:
charge of £1m) in relation to the fair value adjustment of contingent
consideration liabilities and the release of a warranty indemnity provision of
£4m which lapsed during the period.
Total net finance costs , including exceptional items, were £41m (2014:
£43m). There were four components of this net charge, the most significant
being the interest cost of £41m (2014: £44m) on the Group's borrowings
(including amounts in relation to derivative financial instruments). The
other elements were finance income of £5m (2014: £6m), a charge of £3m
(2014: £3m) in relation to the Group's defined benefit pension plans and an
exceptional cost of £2m (2014: £2m) being the unwind of the discount on
contingent consideration liabilities.
Profit before tax from continuing operations (before exceptional items and
intangibles amortisation) decreased by 46% to £220m (2014: £409m). The
reported loss before tax from continuing operations of £200m compares to a
profit before tax of £149m in 2014.
The tax charge for the year of £53m (2014: £106m) on profit before tax from
continuing operations (before exceptional items and intangibles amortisation)
of £220m (2014: £409m) represents an underlying effective tax rate (ETR) of
23.9% (2014: 25.8%).
Earnings per share from continuing operations (before exceptional items and
intangibles amortisation) decreased by 45% to 78.4p (2014: 141.3p). Reported
loss per share including exceptional items, intangibles amortisation and
profit from discontinued operations was 83.6p (2014: earnings per share of
34.3p).
Cash generated from operations before working capital movements was £309m
(2014: £503m). Cash generated from operations decreased by 6% from £421m
to £396m but represents an improved EBITDA to cash conversion ratio of 123%
(2014: 82%). Working capital cash inflows of £87m (2014: outflow of £82m)
were driven by excellent cash collections of receivables, particularly in Oil
& Gas. Exceptional items in the period resulted in total cash outflows of
£33m across all restructuring activities (2014: £11m). Net capital
expenditure decreased from £101m in 2014 to £88m in the current year,
reflecting the Group's focus on cash management while maintaining investment
in key strategic arenas including operational efficiency, R&D and Group-wide
Information Systems. The settlement of financing derivatives resulted in a
net cash outflow of £2m (2014: £3m) and additional pension contributions of
£3m (2014: £11m) were paid in the year in respect of agreed deficit recovery
contributions. Free cash flow from continuing operations, before cash
exceptional items and after dividends of £94m (2014: £103m), was £132m
(2014: £79m). Dividend cash outflows reduced as a result of the rephasing
of dividend payments in 2014. Outflows in respect of the acquisition of
subsidiaries of £15m resulted in a closing net debt of £825m (2014: £861m),
which includes an adverse foreign exchange movement of £48m. On a lender
covenant basis, the ratio of net debt to EBITDA was 2.5 times.
The Group's Return on Capital Employed (ROCE) of 10.0% for 2015 (on a like
for like basis, excluding Trio and Delta) was lower than the prior year (2014:
18.2%), reflecting current market conditions.
Dividend The Board is recommending a final dividend of 29.0p resulting in a
total dividend of 44.0p for the year, aligned with 2014. Dividend cover
(being the ratio of earnings per share from continuing operations before
exceptional items and intangibles amortisation, to dividend per share) is 1.8
times. If approved at the Annual General Meeting, the final dividend will be
paid on 6 June 2016 to shareholders on the register on 29 April 2016. The
Board is also recommending a scrip dividend scheme to replace the current
Dividend Reinvestment Plan. The proposed scrip dividend scheme will give
shareholders the option to receive new fully paid Ordinary Shares in the
Company in place of their cash dividend payments. The Board intends that the
necessary resolution to introduce the scrip dividend scheme will be put to
shareholders at the Annual General Meeting on the 28 April 2016. Further
details will be provided with the Annual General Meeting documentation when it
is sent to shareholders. If the scheme is approved by shareholders, the last
date for receipt of scrip elections will be 25 May 2016.
Board and management changes
As previously announced, Dean Jenkins joined the Board as Chief Operating
Officer on 1 January 2016. He was succeeded as Minerals Divisional Managing
Director by Ricardo Garib, previously the division's Regional Managing
Director for Latin America.
Appendix 1 - 2015 quarterly input trends
Reported growth Like for like 1 growth
Division Q1 Q2 Q3 Q4 FY Q1 Q2 Q3 Q4 FY
Original Equipment 4% -14% 18% -31% -6% -13% -26% 7% -41% -19%
Aftermarket 6% -2% -9% -7% -3% 3% -4% -10% -8% -5%
Minerals 5% -5% -1% -15% -4% -2% -11% -5% -19% -9%
Original Equipment -41% -63% -60% -62% -57% -41% -63% -60% -62% -57%
Aftermarket -15% -47% -57% -53% -44% -15% -47% -57% -53% -44%
Oil & Gas -23% -52% -58% -55% -48% -23% -52% -58% -55% -48%
Original Equipment -34% -16% -18% -9% -20% -34% -16% -18% -9% -20%
Aftermarket 12% -2% -11% -8% -2% 12% -2% -11% -8% -2%
Power & Industrial -14% -8% -15% -9% -11% -14% -8% -15% -9% -11%
Original Equipment -22% -35% -20% -38% -29% -28% -40% -25% -42% -34%
Aftermarket -2% -22% -33% -29% -22% -4% -23% -33% -29% -23%
Continuing Ops -9% -26% -29% -32% -24% -12% -28% -31% -34% -27%
Book to Bill 1.05 1.03 0.95 0.88 0.98 1.03 1.02 0.95 0.89 0.98
1 Like-for-like excludes the impact of acquisitions and related transaction
integration costs. Trio Engineered Products was acquired on 22 October 2014
and Delta Valves was acquired on 8 July 2015.
Appendix 2 - 2015 Foreign Exchange (FX) rates and profit exposure
2014 FY 2015 FY Percentage
average average of 2015 operating
FX rates FX rates profits
US $ 1.65 1.53 44%
Australian $ 1.83 2.04 12%
Canadian $ 1.82 1.96 12%
Euro € 1.24 1.38 8%
Chilean Peso 940 1,001 12%
United Arab Emirates Dirham 6.01 5.61 8%
Russian Rouble 63.32 93.65 1%
Brazilian Real 3.87 5.10 2%
South African Rand 17.87 19.53 1%
A one-cent move in the average US$:£ exchange rate has an impact of circa
£1m on operating profit over the year.
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 ("the
Company") 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.
AUDITED RESULTS
Consolidated Income Statement
for the 52 weeks ended 1 January 2016
52 weeks ended 1 January 2016 52 weeks ended 2 January 2015
Before Exceptional Total Before exceptional items & intangible amortisation Exceptional items & intangible amortisation (note 3) Total
exceptional items &
items & intangible
intangible amortisation
amortisation (note 3)
Notes £m £m £m £m £m £m
Continuing operations
Revenue 2 1,917.7 - 1,917.7 2,438.2 - 2,438.2
Continuing operations
Operating profit (loss) before share of results of joint ventures 250.6 (417.2) (166.6) 439.8 (257.3) 182.5
Share of results of joint ventures 8.3 - 8.3 10.0 - 10.0
Operating profit (loss) 258.9 (417.2) (158.3) 449.8 (257.3) 192.5
Finance costs (40.5) (2.4) (42.9) (44.5) (2.1) (46.6)
Finance income 4.7 - 4.7 6.0 - 6.0
Other finance costs - retirement benefits (3.3) - (3.3) (2.8) - (2.8)
Profit (loss) before tax from 219.8 (419.6) (199Recent news on Weir
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