The Weir Group PLC (LON: WEIR) Interim Management Statement for the third quarter ending 30th September 2019.(1)
· Orders2 from Continuing Operations +4% and were flat on a like-for-like3 basis
· Minerals orders +17% including the record £100m Iron Bridge Magnetite Project award
o Original equipment (OE) +72%; excluding Iron Bridge orders were down c.£20m (22%)
o Aftermarket (AM) down 5%; underlying +3% excluding one-offs in Q3 2018
o Year-to-date4 OE and AM orders are +22% and +4% respectively, in line with our expectations
· ESCO pro forma5 orders +9%
o Year-to-date pro forma orders +3%, in line with our expectations
o Cost synergy delivery continues to run ahead of the integration plan
· Oil & Gas orders -32% as capital constraints intensified in North American markets
o c.£30m cost reduction programme underway; c.£20m exceptional restructuring charge
o Oil & Gas division moderately profitable in Q3; Q4 expected to be sequentially lower
· No change to full year guidance for Minerals or ESCO divisions
Jon Stanton, The Weir Group Chief Executive, commented:
“The highlight of the third quarter was the record £100m order for an industry-leading crushing solution for the Iron Bridge Magnetite Project in Australia. The innovative process design, which will reduce energy and water consumption by more than 30% compared with traditional mills, reflects our growing technology offering and focus on making mining smarter, more efficient and sustainable. It will be a major reference for the industry in accelerating the adoption of advanced high pressure grinding rolls (HPGR) technology.
The growth delivered in Minerals and ESCO reflects our integrated solutions strategy and the continued strength of our aftermarket business model. Our project pipeline in mining remains encouraging but in the third quarter we saw some project approvals deferred due to negative macro sentiment. In North American oil and gas markets, demand was impacted by an intensified focus on cash preservation in the quarter. In response we have undertaken a c.£30m cost reduction programme in this division to support competitiveness in the short-term.
Looking forward, we now expect 2019 full year operating profits in the Oil & Gas division to be below our previous range with guidance for both Minerals and ESCO divisions unchanged.”
Third quarter review
Third quarter orders for the Group were 4% higher than the prior year period and flat on a like-for-like basis. Original equipment orders increased 41% (up 40% on like-for-like basis) driven by the £100m Iron Bridge order in Minerals. Aftermarket orders fell 7% (down 15% on a like-for-like basis) principally as a result of the accelerated downturn in North American oil and gas markets. Oil & Gas revenues were impacted by these market conditions while Minerals and ESCO were in line with expectations. The Group generated a positive book-to-bill ratio of 1.08 over the three-month period.
Mining market fundamentals remained positive despite a mixed short-term commodity price outlook. The pipeline of expansion projects was strong with the long-term outlook for copper, gold and iron ore remaining supportive. Nickel projects were accelerated while further lithium projects are expected to be deferred until demand catches up with recently added supply. Overall, miners continued their focus on increasing the productivity of their existing assets supporting demand for integrated solutions with short payback periods although there were some project approval delays due to customer caution over the impact of trade tensions on the outlook for global growth.
Aftermarket demand continued to be supported by structural trends including ore grade declines that increase the intensity of processing and drive demand for spares and services. The exception to this was Central Africa where proposed tax reforms in Zambia and a number of customer operational issues significantly impacted demand for spares.
Divisional orders for the third quarter were up 17% compared to the prior year. Original equipment orders were 72% higher driven by the £100m Iron Bridge Project order in Australia. Excluding this landmark order, underlying OE orders were down c.£20m (22%) reflecting delays in project approvals. The division’s pipeline remained strong due to longer-term demand drivers and the strength and breadth of its technology leadership. Aftermarket orders were 5% lower against a tough prior year period that included c.£20m of one-off multi-period and commissioning spares orders. Excluding the one-offs underlying aftermarket growth was 3%, while year-to-date aftermarket growth of 4% is in line with our mid-single-digit expectations. The division’s order book increased in the quarter with a book-to-bill ratio of 1.17.
Full year divisional expectations are unchanged, with Minerals anticipated to deliver good growth in constant currency revenues and profits, with broadly stable operating margins.
ESCO’s mining markets, which represent around two-thirds of orders, were positive, underpinned by miners’ focus on increasing productivity. The impact of challenges in Central African markets were modest for ESCO. Infrastructure markets, which represent around a third of divisional orders, were weaker due to softer demand in North American and European construction as a result of macro-economic concerns.
Divisional orders were up 9% on a reported pro forma basis and stable sequentially. This strong performance reflected the division’s technology leadership which included market share gains for its latest N70 ground engaging technology and increased demand for dredging consumables. Revenue growth was consistent with order trends notwithstanding a temporary reduction in manufacturing capacity as the division’s foundries are upgraded to reach Weir operational and safety standards.
Full year expectations for the division are unchanged with good growth in constant currency revenues and further margin progression expected supported by the ongoing of cost and revenue synergies and operational improvements.
Oil & Gas
The cash-flow discipline and tight financing conditions for operators in North American oil and gas markets intensified in the period leading to early budget exhaustion and an accelerated slowdown in demand for pressure pumping equipment. US land rig count fell 11% and Oilfield Service Companies stacked fleets, with the number of active frack fleets estimated to have fallen 20% in the quarter. Oversupply in the industry reduced demand for original equipment, while destocking and renewed cannibalisation of idle frack fleets impacted aftermarket demand. For the first time we saw meaningful levels of permanent retirals of NAM frack fleets with estimates of around 2m of HHP scrapped so far this year with more expected to follow over the next few months. International markets continued to recover with strong activity in Saudi Arabia and an increasing number of Eastern Hemisphere projects.
Overall, divisional orders for the third quarter were 32% lower than the prior year period reflecting the challenging market conditions in North America. Original equipment orders were down 26% and aftermarket orders were 34% lower, reflecting market trends. On a sequential basis orders were lower than Q2 2019 and the division’s book to bill was 0.94. As expected, pricing was mixed, with softness in certain product lines partially offset by gains in technology-driven solutions. As a result of reduced activity levels and a lack of visibility as to when market conditions will improve, the division undertook an annualised c.£30m cost reduction programme that included reducing its North American workforce by around 20% (450 posts), reducing non-direct overheads and the introduction of mandatory furloughs. This will result in an exceptional restructure charge of c.£20m including the impairment of certain under-utilised assets.
As a result of lower volumes in North America, the division was only moderately profitable in the third quarter and is anticipated to be sequentially lower in the fourth quarter.
Net debt at 30 September 2019 was broadly in-line with that reported at 30 June 2019. The Weir Group continues to expect strong second half cash generation supported by a working capital inflow relative to the position at 30 June 2019.
- Financial information is given for the three months ended 30 September 2019 and relates to continuing operations.
- Orders are reported on a constant currency basis.
- Like-for-like excludes the impact of acquisitions. ESCO was acquired on 12 July 2018 and excluded for 2018 and 2019.
- Year-to-date refers to the nine months to 30 September 2019.
- Based on ESCO’s adjusted, unaudited US GAAP management accounts.