Weir Group has reported full year results for the period ended 31 December 2016.
Positioned for growth
• 10% order growth in Q4 as mining and oil and gas markets showed signs of recovery
• Minerals revenues and profits increased; consistently outperforming its markets
• Upstream North American oil and gas markets troughed in Q2; division returned to breakeven in Q4
• Flow Control margins relatively stable in challenging downstream markets
• Full year PBTA1 of £170m was impacted by severe oil and gas market downturn
o Reported PAT from continuing operations of £43m after £74m of exceptional items
• Continued strong cash generation: Group-wide free cash flow of £130m
• Strategic investment of £15m in people and technology planned for 2017
Jon Stanton, Chief Executive Officer, commented:
“Following a challenging and prolonged downturn, the Group returned to growth in the fourth quarter of 2016 as our main markets showed signs of improvement and we benefited from our on-going investment in new technology and long-term customer relationships.
“Minerals increased revenues from both original equipment and aftermarket. Oil & Gas extended its technology leadership amidst difficult end markets and Flow Control benefited from its recent restructuring which supported margins in challenging downstream energy markets. Our record of excellent cash generation continued.
“In recent months I have been encouraged by macro commodity trends and the signs in our mining and oil and gas markets that point to a cyclical upturn. Our new strategic priorities will strengthen our capabilities and enable us to fully capture opportunities presented by improving markets, although there is a range of views about the precise shape of the recovery in 2017. At a Group level, we expect to deliver strong cash generation and good growth in constant currency revenues. Profit growth will be further supported by foreign currency translation benefits, partly offset by incremental investments in people and technology.”
The Group provides highly engineered mission-critical solutions for global mining, oil and gas, power and other aftermarket-orientated process industries. The Group will execute its revised strategy, 'We are Weir' by focusing on four distinctive competencies: People; Customers; Technology and Performance to fully benefit from the expected market recovery.
In order to drive improvement towards achieving Weir's ambition of becoming a zero-harm workplace, a Chief Executive's Safety Committee was established. Comprising the CEO, Division Presidents and the Chief People Officer, its first action was to publish a new charter that clearly sets out the priorities and actions that will deeply embed a safety-first culture across the Group's global operations. 2016's graduate intake was the first to have an equal gender balance and the Group aims to ensure a third of the Board, Group Executive and their direct reports are female by 2020.
In 2017, Weir will improve safety through a programme of awareness aimed at changing the behaviours that lead to harm. The Group will invest an additional £8m in attracting, retaining and developing its people including leadership and training programmes and consolidating best practice across the Group to foster a greater coaching culture. Businesses will be given additional support to improve diversity further, and a global engagement programme will support the implementation of the new Group strategy.
One of the Group's core strengths is its close and long-term strategic relationships with a diverse range of customers. The Minerals division deployed a greater proportion of its engineers to mines in order to help customers meet their objectives of optimising plants to deliver increased productivity. Flow Control's safety valve technology was successfully deployed in the Arctic Circle – one of the most challenging operating environments in the world.
In 2017, the Group will pursue long-term strategic relationships with more customers, strengthening and leveraging existing relationships. Training and support will be targeted at promoting a 'solutions mind-set' in all operations to ensure customers fully benefit from the Group's deep engineering knowledge. New product development and sales processes will be updated to ensure they are consistently driven by customer insights.
The Group is the technology leader in its main markets and in 2016 continued to leverage its engineering expertise to design and produce efficient solutions including a new cone crusher for comminution markets and the commercialisation of the next generation frack pump, which was developed in response to customer demand for continuous duty service. The Group also increased its digital offering with the initial launch of a Flow Control e-commerce platform. In total, new products generated £110m (6%) of revenues in the year.
cognising the importance of technology to its strategy, the Group has appointed its first Chief Technology Officer. In 2017, Weir will also invest an additional £7m in its digital and innovation programmes including launching its first SynertrexTM solution, enabling Internet of Things connected products and assisting moves towards a more digital enabled field service. The Group will also prioritise expanding its skills-base to reflect the digitisation of industrial products, and will increase investment in research and development. The Group's new innovation framework will be embedded throughout the business supported by an extensive training programme.
The Group has a flexible business model that allows it to respond quickly to market cycles. In 2016 this approach delivered £60m in annualised run-rate savings, including an additional £10m actioned in December as North American Oil & Gas management and operations were fully integrated and the closure of a small Minerals manufacturing facility in Michigan was announced. Since Q4-2014, actions taken have reduced the Group's cost base by a total of £170m, which will support margins as revenues recover.
To improve strategic focus, Flow Control disposed of renewables businesses Ynfiniti Engineering Services and American Hydro, contributing to a Group-wide disposals programme that delivered proceeds of £78m. The Group also achieved procurement savings of £48m or c.5% of costs. The Group's investment in lean manufacturing capability continued with the opening of the Weir Gabbioneta facility in Milan, consolidating three previous sites into one. A strong focus on working capital management delivered a £32m inflow in the period.
In 2017, the Group will remain committed to continuously improving its operational performance with a specific focus on on-time delivery and inventory turns. Lean disciplines will be reinvigorated supported by a simplified value-chain excellence process that will be applied rigorously applied across all operations and underpinned by a comprehensive training programme, self-assessments and independent audits.
Group financial highlights
Order input at £1,860m decreased by 8% on a constant currency basis primarily due to the significant downturn in oil and gas markets.
Revenue of £1,845m was 11% down on a constant currency basis mainly reflecting the fall in orders in the Oil & Gas division. Reported revenues fell 2%, supported by a foreign exchange benefit of £183m.
Operating profit from continuing operations (before exceptional items and intangibles amortisation) decreased by £44m or 17% to £214m on a reported basis. Minerals showed great resilience to increase operating profits. The overall Group shortfall was largely due to significantly lower revenues and margins in the Oil & Gas division as a result of depressed market conditions, particularly in the first half of the year. The reported operating profit benefited from a £30m foreign exchange gain on the translation of overseas earnings due to the weakening of Sterling against the majority of currencies in the second half of the year. Unallocated costs were £24m (2015: £19m), £5m higher than the prior year predominantly due to the mark to market impact on derivatives used to hedge sale and purchase contracts denominated in foreign currencies. Operating profit (including exceptional items and intangibles amortisation) for the year of £90m was £223m higher than the prior year due to the £267m reduction in exceptional items and intangibles amortisation partly offset by the £44m reduction in underlying operating profit. EBITDA before exceptional items of £270m was 24% lower than 2015 on a constant currency basis.
Operating margin from continuing operations (before exceptional items and intangibles amortisation) was 11.6%, a decrease of 210bps on a reported basis and 240bps on a constant currency basis. On a constant currency basis Minerals resilience supported unchanged margins year on year at 19.5% while Oil & Gas reduced from 9.7% in the prior year to a loss of 2.2%, reflecting the market downturn. Flow Control margins at 9.1%, while slightly lower than the prior year's 9.8%, remained relatively resilient in challenging market conditions.
Total net finance costs, before exceptional items were £43.7m (2015: £38.8m), with the increase primarily due to a £3m negative foreign exchange translation effect on US$ denominated interest payments.
Profit before tax from continuing operations (before exceptional items and intangibles amortisation) decreased by 22% to £170m (2015: £219m). The reported profit before tax from continuing operations (including exceptional items and intangibles amortisation) of £43m compares to a loss before tax of £174m in 2015.
An operating exceptional charge of £74m (2015: £339m) and intangibles amortisation of £50m (2015: £52m) were incurred in the period. The largest component of the exceptional charge is £64m related to programmes to right size operations and realign certain activities in light of the prolonged downturn across the Group's major end markets. Actions include headcount reductions, rationalisation of product lines, and service centre closures, with the main impact on Minerals and Oil & Gas.
In addition, a number of legacy warranty, associated inventory and contract liabilities and other un-provided liabilities were identified within our China business during the period resulting in an exceptional charge of £17m. These liabilities have been finalised after a detailed review. They primarily relate to Trio, which was acquired for $220m in 2014, and relate to pre and post-acquisition liabilities.
Partly offsetting these charges was a £5m gain on the sale and leaseback of a number of properties, together with other net credits of £2m.
The tax charge for the year of £38m (2015: £52m) on profit before tax from continuing operations (before exceptional items and intangibles amortisation) of £170m (2015: £219m) represents an underlying effective tax rate (ETR) of 22.5% (2015: 23.9%).
Earnings per share (before exceptional items and intangibles amortisation) decreased by 21.5% to 61.2p (2015: 78.0p). Reported earnings per share including exceptional items, intangibles amortisation and profit from discontinued operations was 17.8p (2015: loss per share of 83.6p).
The Group delivered strong cash generation in the period with cash from operations of £293m (2015: £396m) representing 108% of EBITDA excluding exceptional items primarily due to a working capital inflow of £32m (2015: £87m). Net capex reduced from £88m to £62m, while cash dividends fell from £94m to £46m as a result of the introduction of the scrip dividend scheme in the period, which had a 49% average take-up. In addition, proceeds from the Group's asset disposal programme totalled £78m in the period, including the sale of non-core businesses (£39m) and properties (£39m).
The above movements resulted in a constant currency reduction in net debt of £123m, but including an adverse foreign exchange translation movement of £133m, mainly on US$ and Euro denominated debt, reported net debt increased by £10m to £835m (2015: £825m). On a lender covenant basis, the ratio of net debt to EBITDA excluding exceptional items was 2.8 times, compared to a covenant level of 3.5 times.
The Board is recommending a final dividend of 29.0p resulting in a total dividend of 44.0p for the year, unchanged from 2015. Dividend cover (being the ratio of earnings per share from continuing operations before exceptional items and intangibles amortisation, to dividend per share) is 1.4 times. If approved at the Annual General Meeting on 27 April, the final dividend will be paid on 5 June 2017 to shareholders on the register on 28 April 2017 with a scrip dividend alternative being offered as approved at the 2016 AGM.
Board and management changes
As previously announced, in October 2016 Jon Stanton was appointed Chief Executive Officer and was succeeded as Chief Financial Officer by John Heasley. These appointments were made after Keith Cochrane stepped down as Chief Executive following 10 years' service on the Board. In addition, Dean Jenkins, Chief Operating Officer, also stepped down from the Board at the end of September.
In January 2017, David Paradis joined the Group Executive as Division President of Weir Flow Control and today the Group announced the appointment of Geetha Dabir as Chief Technology Officer. Geetha will join Weir in March. She was most recently Vice President and General Manager of Intel Corporation's IoT Applications Ready Platform group. Her previous experience also includes thirteen years working for Cisco Systems Inc, latterly as Vice President of IoT applications.
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.
· Divisional input up 3% like-for-like compared to a mining capex decline of 15%
· Resilient margins and strong cash generation in challenging market conditions
· 2017 outlook: Moderate growth in constant currency revenues, broadly stable margins
2016 Market review
Commodity prices improved as the year progressed supported by supply constraints and improving demand. Copper prices increased 17%, iron ore doubled and gold increased 8%, but largely remained below incentive levels for greenfield projects.
Overall mining sector capital expenditure fell by an estimated 15%, marking a fourth consecutive year of double-digit declines. The year started with an extended shutdown in many regions, with low commodity prices impacting sentiment and leading to destocking and deferral of maintenance. As commodity prices improved through the second half of the year, customers continued to defer decisions on major expansion projects but were willing to invest in brownfield optimisations and started to address deferred maintenance. Global ore production grew slightly and on-going declines in ore grade led to increased processing of rock which supported aftermarket demand for spares and services.
Regionally, South America benefited from a number of large mines reaching full production. There was increased activity in South Africa, particularly in gold, while Central and West Africa were challenging. In Europe and Asia Pacific, production levels were relatively stable although capital expenditure remained subdued. In North America, coal markets continued to decline, although rising prices in the second half supported increased quotation levels in Australia.
Following the impact of wild fires in the second quarter, activity levels in the Canadian oil sands recovered in the second half, supported by oil price increases and the continued underlying trend of production growth.
2016 Divisional financial review
Order input increased by 3% to £1,125m (2015: £1,093m), and 3% up on a like-for-like basis. The division's book-to-bill at 1.01 was stable. Original equipment orders were up 5% year-on-year (3% higher like-for-like), reflecting increased brownfield and replacement capital expenditure by miners.
Aftermarket orders increased by 2% on constant currency and like-for-like basis and represented 71% of total input (2015: 71%). The impact of the extended shut-down in the first quarter reversed and mines returned to more normalised production levels, resulting in strong sequential and year-on-year aftermarket order growth in the second half.
In total, mining end markets accounted for 72% of input (2015: 75%) with orders broadly stable. There was strong growth in the industrial and oil sands sectors, while sand and aggregates markets declined.
Revenue was 2% higher on both a constant currency and like-for-like basis at £1,112m (2015: £1,091m). Original equipment sales were 6% higher (7% higher on a like-for-like basis) and accounted for 29% (2015: 28%) of divisional revenue. Production-driven aftermarket revenues were flat on a constant currency and like-for-like basis.
Strong growth in the Middle East and higher activity levels in Asia Pacific, Australia and South America offset reduced revenues in North America and Africa. At a product category level there was a strong increase in revenues from our GEHO product line. Slurry pumps also showed good growth reflecting their critical importance to support mine production as miners normalised maintenance schedules and the division secured brownfield orders.
Reported revenues increased by 11%, reflecting a 9% foreign exchange tailwind (2015: £1,001m).
Operating profit increased by 2% on a constant currency basis to £217m (2015: £213m), with higher bonus costs and inflationary pressures offset by efficiency measures and lower one-off costs. Reported operating profit increased by 13% after an 11% foreign exchange tailwind (2015: £192m).
Operating margin was unchanged on a constant currency basis, as anticipated, at 19.5% (2015: 19.5%), and was 19.6% (2015: 19.4%) on a like-for-like basis. Gross margins were broadly stable, as original equipment pricing and inflationary pressures were largely offset by procurement savings. The benefits of restructuring and efficiency measures were partially reinvested in expanding the service and engineering network supporting brownfield growth initiatives.
Capital expenditure of £32m (2015: £41m) included investment in further consolidation of the division's North American manufacturing footprint and facility upgrades in Chile and Malaysia. The division also continued the global roll-out of its standardised ERP system.
Research and development spend increased to £15m (2015: £13m) and was focused on maintaining and expanding the division's product portfolio. Developments included a new range of Trio crushers, materials technology and digital and additive manufacturing capabilities.
2017 Divisional outlook
Assuming commodity prices remain around current levels, we expect mining markets to be relatively stable with miners maintaining normal maintenance schedules and continuing modest ore production growth supporting demand for aftermarket products and services. We expect further modest reductions in overall mining capital expenditure in 2017, with the fifth year of declines in exploration and greenfield spending largely offset by increased investment in sustaining capital expenditure in plant optimisation and maintenance; which is the main focus of the division.
Overall, Minerals is expected to deliver moderately higher constant currency revenues as it maintains its focus on brownfield opportunities. Operating margins are expected to be broadly stable as a higher proportion of revenues from original equipment and further investment in operational capabilities is offset by volume leverage and the full year benefit of restructuring actions.
North American markets improving
· Sequential improvement in orders since Q3, returning to breakeven in Q4
· Strong working capital performance; cash generation of £47m
· 2017 outlook: Strong growth in constant currency revenues from low base, with return to modest profitability
2016 Market review
The average US land rig count fell by 48% year-on-year with the US land rig count falling 80% from the peak in October 2014 to the trough in May 2016. A rebound in US land rig count from the low in Q2 was supported by increased oil prices and the November OPEC agreement to cut production, with WTI increasing by 45%. US natural gas prices also saw a partial recovery, driven by a normalisation in storage levels. International markets also saw a significant reduction in activity with the average rig count in 2016 18% lower than the prior year and drilling levels continuing to decline in the second half.
Oil and gas companies continued to reduce capital spending with an estimated reduction in North America of c.40% in 2016 and c.20% internationally in 2016. The number of wells drilled in the US fell 45% with the number of horizontal wells drilled down by around 41%, substantially reducing demand for pressure control equipment and services.
US oil and gas frack fleet utilisation fell from an average of 59% in 2015 to 36% in 2016. In the second half, as activity levels began to increase, service companies commenced the refurbishment of previously idled frack fleet in anticipation of higher completion activity in 2017. Drilling activity also experienced sharp reductions in line with average rig count declines. Both North American markets experienced strong further downward pricing pressure through the first three-quarters of the year as both E&P's and Service companies sought to reduce costs further, although price points stabilised at these low levels in the fourth quarter.
International markets became increasingly challenged throughout the year, despite Middle East production increasing, with National Oil Companies seeking to reduce capital and operating expenditure. This resulted in increased pricing pressure across the region together with lower drilling related activity. Higher cost production regions such as the North Sea and the Caspian continued to face challenging market conditions.
2016 Divisional financial review
Order input at £417m (2015: £568m) was 27% lower reflecting the reduction in activity as oil prices remained subdued through most of the year. On a sequential basis, orders declined through the first half before seeing a progressive improvement in input throughout the second half. This contributed to a positive book-to-bill ratio for the division of 1.04 for the full year. Aftermarket orders were down 27% year-on year and continued to represent 82% (2015: 82%) of divisional orders. Original equipment input was 26% lower, driven primarily by reduced demand for wellheads as the number of wells drilled fell substantially compared to the prior year.
In North America, Pressure Pumping input benefitted as some customers refurbished equipment in the second half as activity levels rose. Similarly, Pressure Control's drilling related offering was supported by increases in the rig count later in the year. Customers remain focused on achieving efficiency improvements and are actively trialling the division's new products. As a result the division received the first order for its next generation frack pump and its EPIX joint venture is now trading.
Input from International markets also fell significantly, as competition increased. The division saw project delays in the higher-cost regions such as the North Sea and Caspian. However good progress was made in internationalising the Pressure Control product lines, with £18m of orders secured following the opening of the UAE's first wellhead manufacturing facility.
Revenue decreased by 34% to £401m on a constant currency basis (2015: £604m), reflecting order input trends. Original equipment and aftermarket revenues decreased by 39% and 32% respectively, with aftermarket accounting for 82% of total revenues (2015: 81%). Reported revenues fell by 26% after a 12% foreign exchange benefit (2015: £541m).
North American revenues increased sequentially through the second half, reflecting regional input trends. Conversely international revenues declined in the second half as customers delayed routine maintenance activities.
An operating loss including joint ventures of £9.0m (2015: £58.4m profit on a constant currency basis) was recognised in the year. EBITDA of £10m was 87% lower than 2015. The decline was driven by further significant activity reductions and pricing pressure in North America in particular. Pricing and volume declines also impacted international markets and more than offset incremental cost savings arising from the restructuring programmes carried out. The reported operating loss fell 117% on the prior year and included a 12% foreign exchange tailwind. Income of £7.2m (2015: £8.3m) from joint ventures was recognised in the period.
Operating margin was down 1190bps reflecting the impact of market conditions, particularly pricing and negative operating leverage. Divisional gross margins were also down significantly as pricing levels in North America fell through the first nine months of the year, before stabilising in the final quarter. Increased volumes in this region returned the division to breakeven in the fourth quarter, despite continued declines in international market conditions.
Capital expenditure of £8m (2015: £23m) included the facility consolidation programme as well as the upgrading of service centres and capabilities in our Dubai manufacturing facility.
Total R&D expenditure of £6m (2015: £8m) was focused on expanding the division's product offering and included the launch of the new SPM® QEM 3000 continuous duty frack pump.
2017 Divisional outlook
Assuming oil and gas prices remain at or above current levels, E&P and service companies have announced plans to increase capital spending in North America. However, the pricing environment is expected to remain challenging. International markets, which were later to enter the downturn, are expected to be slower to recover.
A strong increase in constant currency divisional revenues from a low base is expected, driven by continued North American rig count growth, with divisional margins expected to return to modest levels. Operating margins will benefit from the higher volumes and the full year benefit of restructuring and cost reduction measures, although pricing benefits are expected to be limited.
Resilient performance in challenging markets
· Input and revenues reflect declining end market conditions
· Margins supported by operational discipline and best-cost sourcing
· 2017 outlook: moderate constant currency revenue growth driven by OE , lower margins and profits
2016 Market review
Customers remained cautious in the face of continuing economic uncertainty and depressed energy prices. This resulted in increased pricing pressure and project delays in the power and downstream oil and gas markets, despite the recovery in energy prices over the second half.
In conventional power markets, demand was subdued in Europe and the United States with aftermarket demand impacted by reduced maintenance spend. However, the pipeline for nuclear opportunities in China, Korea and the UK was more promising.
Downstream oil and gas customers reduced spending, reducing the demand for both original equipment and aftermarket. Industrial markets continued to be subdued as customers delayed new investment decisions, although wastewater markets were more resilient.
2016 Divisional financial review
Order input decreased by 13% to £318m (2015: £364m) against a strong prior year comparator and was impacted by the significant decline in mid and downstream oil and gas markets. In addition, customer decisions to delay projects across the division's power and industrial markets impacted activity levels. Original equipment orders were down 12%, driven by the decline in pump demand from oil and gas markets in particular. Aftermarket input declined by 13%, with declines across both valves and pumps as customers delayed planned maintenance and power outages.
Power markets represented 41% of orders (2015: 38%). The proportion of orders from oil and gas markets decreased to 30% (2015: 33%). Emerging markets accounted for 37% of input (2015: 42%), with a fall in orders from the Middle East and South America. Orders were also down in North America, but input in Europe and Asia Pacific was more stable.
Revenue decreased by 10% on a constant currency basis to £332m (2015: £368m), with aftermarket revenues down 8% on the prior year. Original equipment revenues were down 11% as customers delayed receipt of project orders. Reported revenues fell by 2% reflecting a 9% foreign exchange tailwind (2015: £338m).
Operating profit was down 16% at £30m on a constant currency basis (2015: £36m), as the impact of lower volumes more than offset the benefits of cost reduction and operational improvement measures. Reported operating profits decreased 7% after a 12% foreign exchange tailwind (2015: £33m).
Operating margin was down 70bps to 9.1% (2015: 9.8%) against the prior year. Gross margins fell slightly as operational improvements, low cost sourcing and procurement savings partially offset pricing pressure across downstream markets.
Capital expenditure of £15m (2015: £17m) was primarily focused on relocating Gabbioneta, the downstream pump business, to a new state-of-the-art manufacturing facility in Milan. Investment in research and development increased to £5m (2015: £4m), with a new range of Screwflow and Roto-Jet® pumps launched and recording first sales in the period.
2017 Divisional outlook
Power, mid and downstream oil and gas markets are expected to remain subdued in 2017, while the outlook for industrial markets is mixed. The division entered the year with a lower order book but expects the benefits of the delayed project orders, combined valve and pump portfolio and sales initiatives to support moderate constant currency revenue growth. However, operating margins and profits are expected to fall as the higher mix of original equipment and continued pricing pressure more than offsets operational leverage effects.