Weir's (WEIGF) CEO Keith Cochrane on Q2 2016 Results - Earnings Call Transcript

| About: Weir Group (WEIGF)

Weir Group PLC (OTC:WEIGF) Q2 2016 Earnings Conference Call July 28, 2016 3:30 AM ET


Charles Berry - Chairman

Keith Cochrane - Chief Executive Officer

Jon Stanton - Group Finance Director


Glen Liddy - JP Morgan

Alex Virgo - Bank of America Merrill Lynch

Jonathan Hurn - Deutsche Bank

Stephen Swanton - Redburn

Jonathan Hanks - Goldman Sachs

Robert Davies - Morgan Stanley

Charles Berry

Well, good morning, ladies and gentlemen. Shall we make a start? For those of you who don’t know me, I’m Charles Berry, and I’ve been Chairman of Weir since 2014. I want to say a few words about the management changes we announced this morning.

Keith will step down after 10 years with the company and will be succeeded by Jon Stanton. Keith has been a great leader of this business, first as CFO, and then for the last seven years as a Chief Executive. In this time, the business has outperformed and exciting, but occasionally volatile end markets. This required the vision to seize the rapid growth opportunities that arose in North American shale and to react decisively when faced with a historic market downturn.

And as an engineer, I'm pleased that throughout this he prioritized R&D, which trebled under his leadership. He has also created significant value for shareholders with a total return of over 150%, including dividends since his appointment as CEO. Whatever market circumstances prevail, the improvements he has made and the market positions that we have secured will endure.

As more evidence of this, in our first half results, where you can see how the business is positioned to fully benefit as markets recover. Keith built a strong management at Weir and we are therefore delighted that Jon will be the one to pursue those opportunities in the years to come. And having run an extensive process, the Board has confidence that Jon is the right person to continue the work that Keith has done and to take the business forward. A process is underway to recruit a new finance director and we’ll update you on that in due course.

Now you’ll also be aware that Dean Jenkins will also leave the Group at the end of 2016 after six years’ service. I’d like to thank him for the significant contribution he has made in that time and wish him and his family back in Australia the very best of luck for the future.

So with that, I’ll hand over first to Keith and then to Jon to run you through the results. Keith?

Keith Cochrane

Okay, thank you Charles for those kind words and I’ll share a few reflections in a few moments, but first let's concentrate on what is, I think, my 20th results presentation. And I can honestly say I’ve enjoyed the most and even those when over the years we’ve had a few challenging circumstances and indeed questions. But today I’m very pleased to be reporting that Weir has yet again demonstrated its fundamental strength and resilience.

These are a good set of results given the markets were operating in. The last six months have indeed been tough, but we’ve continued to be proactive, executing effectively and benefiting from a culture, which promotes innovation, financial discipline and close customer partnership.

I’ll now take a brief look at some of the headlines from the first half. And you can see the impact challenging end markets have had on the Group’s financial performance at the bottom of the slide. And Jon will take you through more of the detail in a few minutes but I’d like to highlight the continued improvement in safety, which is particularly pleasing as we move towards making Weir a zero-harm workplace.

More generally, while the Group can influence the global oil price or mining CapEx budgets, we aim to outperform whatever markets we face fully capturing all available opportunities and this underpins Weir’s first half performance. Minerals produced another robust set of results. The strong growth in original equipment sales and aftermarket revenues returned to quarter-on-quarter growth, reaching record levels in Q2, beating the previous high in June 2015.

The Group has also maintained its focus on cost and operational discipline. And you can see that’s demonstrated by the improved margins of both Minerals and Full Control and then the way Oil & Gas mitigated the effects of the downturn, which saw rig count fall by 80% from peak. In total, the Oil & Gas division has delivered £100 million in annualized cost savings and in the market context in which it was operating, its small loss, whilst still generating cash is very creditable.

And as we set out in February, the Group is targeting up to £100 million in asset disposals this year and we’ve made good progress. Last month, we announced the disposal of renewables businesses, American Hydro and YES for an initial consideration of £39 million, rising up to £41 million depending on certain conditions. In addition, we’ve also agreed the sale of property assets, which realized a further £7 million in July with further property disposals at an advanced stage.

We continued to expand our technology leadership. R&D spending has been protected and the benefits of this approach can be seen in the £38 million in first half revenues generated by new products, which we define as having been introduced in the past three years. So overall, markets were tough but we focused on strong execution and extending our competitive advantages. The results as a Group which has positioned to fully benefit as market recover.

I’ll say more shortly but first I’d like to ask Jon to take you through the numbers behind today’s headline results.

Jon Stanton

Thank you, Keith, and good morning, ladies and gentlemen. Before I begin, let me just say how honored I am to been chosen to lead Weir through the next phase of its development. We have a very talented team but I’m looking forward to working together to build on the success achieved over recent years under Keith’s leadership.

Turning to the numbers, as Keith said, we have continued to face challenging end markets, but despite this, our results for the first half of the year are ahead of market expectations. This reflects our strong execution in tough markets and our continuing focus on driving cash generation. I’d like to start by looking at a summary of the reported results.

Please bear in mind that all reference as to profit, margin and earnings per share referred to continuing operations and on before exceptional items and intangibles amortization. You should also note the disposal of our renewables businesses, American Hydro and YES, are being separated disclosed as discontinued in the current year with prior year comparatives restated. Please note the anticipated reduction in full-year operating profits of Flow Control as a result of these disposals to £2 million.

This slide shows our performance against last year on both a constant currency and reported basis. Although there has been a significant amount of volatility in FX markets during June as a result of the Brexit referendum, the net impact on the average exchange rate for the period, and therefore our results was relatively small with favorable translation effects at £17 million at the revenue level and zero impact on profits before tax. The headline results have been impacted principally by the continued downturns seen by Oil & Gas, while the revenue and profits are up in both Minerals and Flow Control.

In terms of headline numbers, order and book decreased 16% on a constant currency basis with aftermarket orders down 20% and the decline in original equipment orders of 5%. Revenue from continuing operations of £866 million was down 13% with operating profit of £103 million, down 22% on a constant currency basis. On a like-for-like basis excluding Delta, input and revenue were down 16% and 14% respectively.

Operating margins were down on 2015 at 11.9% and I’ll take you through the moving parts in the divisional discussions. Net finance cost of £24 million, up £1 million on last year due to the movement in the U.S. dollar to sterling exchange rates. Profit before tax of £82 million is down 25% year-on-year on a reported basis.

On a positive note, cash generation across the Group remains strong with cash from operations of £133 million, which represents an EBITDA of cash conversion ratio of 103%. The effective tax rate is 21.9%, is lower than last year principally due to the decreased proportion of the Group’s profits generated in the U.S. Headline earnings per share of 29.6 pence compared to 38.6 pence per share in 2015, while the interim dividend remains unchanged from last year at 15 pence per share.

Let me now turn on the summary of the performance of each division over the period starting with Minerals. Overall order input is flat on a constant currency basis and down 1% like-for-like reflecting the continued resilience of the business and a tough market. Original equipment orders were up 14%, 10% on a like-for-like basis, supported by a strong first half performance from GEHO product line and a number of good brownfield project wins.

Aftermarket orders decreased by 5% on a like-for-like basis, reflecting the extended shutdown by miners at the beginning of the year. Aftermarket trends showed a sequential improvement through the first quarter and held at these levels through the second quarter, despite lower oil sand input as a result of the wildfires in Alberta, meaning that second quarter aftermarket orders were flat year-on-year.

Emerging markets accounted for 51% of input, unchanged from the prior year. South America benefited from growing oil production volumes, while Africa was impacted by mine shutdowns in Central Africa, while the other markets remaining relatively stable. Revenue was 4% higher on a constant currency basis and 3% like-for-like. Original equipment sales of 24% higher, 19% on a like-for-like basis, reflecting conversion of shorter lead-time orders. This represents a 30% of divisional revenues compared to 25% in the prior year.

Aftermarket revenues were relatively stable, down 2% on 2015, as miners increased production following the extended shutdown in Q1, there was a sequential improvement such that Q2 aftermarket revenues exceeded previous peak levels and were ahead of the prior year. The division’s book-to-bill ratio remained broadly flat at 1.01. Operating profit increased 11% supposed by benefits from restructuring actions, procurement savings and the absence of Trio acquisition integration costs.

In terms of operating margin, this increased to 90.5%, reflecting the cost reduction programs and beneficial product mix. Operating cash flow of £105 million was down £10 million on last year due to higher working capital, resulting from the increase in activity levels seem towards the period end.

Moving onto Oil & Gas. Input was down 43% on the prior year as a result of reduced activity and pricing pressure across all end markets. Aftermarket orders were down 44% as North America remained weak in challenging conditions spread to the Middle East. Aftermarket reflected 81% of the total compared with 82% in the prior year. Original equipment orders were down 39% year-on-year, driven by lack of demand for the equipment as frac fleet utilization and wells drilled continued to decline.

Revenues decreased by 46% year-on-year, reflecting a significant reduction in oil input trends. Original equipment and aftermarket sales both reduced by 46% with the revenue mix broadly in line with orders.

And operating loss after joint ventures of £2 million was recognized in the period, down from a profit of £38 million last year, and within this, the Group’s share of profit from joint ventures was £3 million compared to £4 million last year. The division generated operating cash flow of £18 million, reflecting a further reduction in working capital year-on-year and a good results in light of profits falling below breakeven.

Turning to Flow Control. Input in the division was 15% down against the strong prior year and was affected by the timing of U.K. nuclear power outage schedules and declines in mid and downstream oil and gas markets. Oil and gas orders were 27% low in the period. Original equipment orders were down 14% year-on-year with pump demand impacted by the ongoing oil and gas downturn. Aftermarket orders declined 16%, principally across valves on the timing of power outages. The aftermarket represents 48% of input, in line with 2015.

Revenues were up slightly year-on-year with original equipment up 4%, offset by aftermarket down 4%. Pumps revenues were supported by a strong opening order book while valves revenues was stable year-on-year. Operating profit was up 17% to £14 million on a constant currency basis, with margins up 130 basis points to 8.8%, reflecting prior cost reduction actions and continuing operational improvement measures.

Operating cash flows also strong at £18 million, up £16 million year-on-year, due principally to an excellent working capital performance.

Now let's provide a brief overview of the exceptional items which we recognized in the year. And as the table shows, restructuring and rationalization charges in the period totaled £31 million. This represents the committed cost of ongoing programs to right-size operations and discontinued certain activities in light of the prolonged downturn seen across the Group’s major end markets.

In Oil & Gas, this represents continuing downturn actions with the ongoing consolation service centers and further headcount reductions. In Minerals, it’s in line with our previously communicated management de-layering and indirect overhead reduction plans. The total charge comprised a cash cost of £23 million and an impairments of tangible assets and working capital of £8 million.

In terms of discontinued operations, we recognized exceptional charges after-tax totaling £6 million in the period. The first of these is a loss on disposal of £3 million in relation to our two renewables-focused operations, American Hydro and YES, and these were part of the asset disposal program announced in February. The combined consideration is £39 million, including £4 million in escrow and a contingent element of £1 million.

The remaining exceptional item of £3 million relates to the reassessment of liabilities associated with the prior disposal. I’d now like to move onto the cash flow statement where total operating cash flows of £133 million were generated during the year, despite the decline in profitability. This represents a good EBITDA to cash conversion ratio of 103%.

Our working capital cash inflow of £6 million, reflects continued progress in Oil & Gas and Flow Control. However this was largely offset by the impact in Minerals of increased activity levels linked in the period. Tax was a cash inflow of £2 million compared to an outflow of £25 million in the prior year, primarily a result of a repayment in the U.S. where we were able to carry back losses against prior periods.

We have continued to invest in safety, research and developments and group-wide information systems, but given our continued focus on cash, net capital expenditure in the period decreased by £7 million to £34 million. Due to the introduction of a scrip dividend alternative in the period, the cash cost of the final 2015 dividend reduced by £30 million compared to the prior year.

In total, free cash inflow after dividends but before exceptionals was £46 million compared to a £59 million inflow last year. Looking at working capital, we saw a £41 million reduction in receivables, reflecting revenue declines and continued focus on cash collection across the roof with improvements noted in all divisions. Despite the downturn across our main end markets, we continued to avoid significant credit risk issues.

In terms of inventory, the reduction of £10 million in the period reflects further progress in our ongoing value chain excellence initiatives across the Group, with a decrease in Oil & Gas particularly encouraging.

Moving onto net debts and pensions. Net debt has increased from £825 million at the end of 2015 to £853 million at the period end. This is primarily driven by our free cash inflow of £46 million, offset by an adverse FX translation effect of £66 million. This foreign exchange impact is primarily linked to the currency volatility following the results of the Brexit referendum in June.

In addition to these movements, the disposal of renewables assets led to an initial cash inflow of £31 million. This is offset by a £7 million contingent consideration payments relating to the previous acquisition of Trio and the cash flows associated with both the current and prior year restructuring and rationalization programs. The net debt to EBITDA metric of 2.8x on a lender covenant basis remains well within the covenant level of 3.5x, despite the significant decline in EBITDA.

To be clear, this metric is calculated by applying the average FX rate in the periods to our closing net debt, in order for both EBITDA and net debt to be a consistent basis. As a result of this, the exchange rate volatility, which we witnessed at the end of June did not have any real impact on the covenant calculation and it is not expected to in the second half, which I’ll come back to shortly. Overall, looking at net debt to EBITDA, we are targeting a further reduction over the balance of the year.

Briefly on pensions. The net deficit on our defined benefits plans increased to £126 million over an opening position of £82 million, reflecting a 90 basis point decrease in corporate bond yields in the period.

I’d like to finish by just giving some guidance around cost savings on the financial items. In terms of cost savings, we’re on track to achieve £50 million of annualized cost reductions, taking our total since quarter four 2014 to £160 million, and Keith will give you some detail on this later.

As previously mentioned, the asset disposal program is currently on track and addition to the disposal of renewables assets in the periods we have in July completed £7 million property disposal and further excess property disposals are progressing well. As we complete the current restructure and reorganization programs, we expect exceptional charges to increase to approximately £45 million for the full-year.

We have capped capital expenditure focusing on health and safety-related items in strategic initiatives, but our full-year expectation remaining in the £60 million to £70 million range. In terms of tax, our effective rate is dependent on the proportion of profits generated in each of the countries in which we operate and principally in the U.S. Current estimates for this to be 22%, lower than last year reflecting a further decline in profits generated in the U.S.

And finally, just a few words on Brexit. At present, the full impact on the Group is unclear and we’ll continue to assess this as things develop. However only 2% of the Group’s revenues are generated by exports from the U.K. to the EU and clearly the effects of currency movements has been to make our U.K. businesses more competitive. Market volatility will continue to impact our pension valuation, but our exposure is reduced by the insurance policies we have in place.

In terms of FX, if current rates prevail through the second half of the year, the impact on the average rate for the year is expected to generate the benefit of circa £8 million to profit before tax. And if current rates continue across all currency pairs, the impact on net debt will be proportionate to the benefit on EBITDA, which means the net debt to EBITDA covenant metric remains unaffected supporting our guidance for the ratio to come down in the second half.

Thank you. Let me now hand over to Keith who will take you through the business overview and outlook.

Keith Cochrane

Okay. Thank you, Jon. So let me now say a few words about the Group’s strategic progress in the first half. Our global technology leadership and mission-critical solutions is based on Weir’s long history of innovation. Our customers want us to help them improve productivity and reduce total operating costs. And in the first six months of the year, we continued to deliver solutions which meet those objectives including new valve and seat technology for Weir’s stimulation pumps which doubles the life of the current product.

Our minerals engineers have developed a new range of crushers which offer substantial performance improvements with the first order recently shipped. And the Group’s digital agenda is well ahead of schedule with trials of our new Synertrex Internet of Things solution underway in the Americas, Australia and South Africa. You’ll know our equipment is often used in very remote and hostile conditions and we now indeed have a customer in the Arctic Circle where we are able to monitor essentially the performance on our equipment, a level of detail which was previously unavailable.

And we’re also working with Microsoft and other leading technology providers to optimize the performance data we’re receiving from Synertrex and help make our customers become more productive as a result. And beyond these initial trials, we’re seeing a lot of interest in this technology.

EPIX, the Oil & Gas division’s joint venture with Rolls Royce’s subsidiary MTU America received a good reception at this year’s OTC in Houston, industry’s largest conference. We expect to go to market with EPIX, which will be the first integrated frac system, very shortly. The Group’s efficiency initiatives in the period included facility consolidations and the overall workforce reduction in the first half of almost 500. And in total since the beginning of 2015, the Group’s workforce has fallen by more than 2,000 posts. These are always difficult decisions but they have been necessary to support competitiveness in the current environment.

And in total, the Group has delivered £160 million in annualized cost savings in the last 18 months. And alongside that, the Group has benefited from increasing its use of best cost sourcing. The integration of the process pump businesses into the new Flow Control division has been successful and there are no sharing routes to market. And we continue to invest for the long-term with a completion of a new downstream manufacturing facility in Milan, and this will consolidate operations which were previously spread across three separate locations into one state-of-the-art site with significantly enhance test facilities, expanding our addressable markets for centrifugal pumps and other solutions for downstream customers.

And as part of minerals intense pursuit of brownfield opportunities, we redeployed more applications engineers to service centers from central hubs in order to ensure their expertise as close to our customers as is possible. So as you can see, we’ve maintained momentum, and in doing so, we’re building a leaner, stronger Weir, which has positioned for the recovery in our end markets.

So let me now turn to those markets beginning with Minerals, where we’ve continued to see modest overproduction growth even though we’re low in the fourth year of overall CapEx declines. Our operations and indeed global oil growth are biased towards low cost regions. Latin America for instance has benefited from a ramp-up to full production of a number of large mine projects including Las Bambas in Peru reaching full commercial production.

The industry is seeing commodity prices recover from last year’s low with gold particularly positive. And there is also been an absence of mine closure announcements this year, and indeed we’ve seen one customer reverse a decision to close a mine in North America. The industry’s focus on productivity is also due to structural trends such as declining ore grades. And to give you an example, this month the owners of Escondida in Chile, the world’s largest copper mine reported a 28% decline in the ore grade in the last financial year. These trends mean miners are focusing their CapEx budgets on increasing productivity and saving energy costs.

And while substantial greenfield investment is unlikely before the end of this decade, brownfield and sustaining CapEx are expected to recover more quickly with copper and gold providing the most attractive prospects in the short-term. The division’s non-mining markets include oil sands in Canada, which suffered as a result of May’s wildfires. Any impact was temporary though and underlying oil sand production remains resilient.

Sand and Aggregates however was more challenging with subdued demand in North America and Europe. So that provides some of the challenging context our Minerals division has been operating in. But if you look at the division’s first half performance, there is one was which Ricardo Garib and the team can be extremely proud of and which yet again underlines the quality of the business.

Firstly, we benefit from our global leadership positions in terms of technology and customer proximity. That’s allowed us to maximize those greenfield opportunities which were available in the first half, including a large gold mine development in Turkey, where we’re providing a package of solutions from slurry and positive displacement pumps to screen cyclones and associated service work.

The division has also intensified its focus on brownfield, a process improvement opportunities by leveraging its service center network to spend more time helping customers. As miners concentrate on productivity gains, our engineers are there to assist them with plant optimization audits and bottleneck reductions. The process of globalizing our Trio acquisition is progressing well with a large comminution order secured in the Middle East, expanding the business beyond this traditional U.S. and China focus.

So as you can see with a broad range of leading technology, we’re able to offer integrated solutions and using aggressive system of trials putting out technology against competitors to gain market share. And as we’ve said before, our success rate in these trails is in excess of 90%.

The division’s non-mining revenues were impacted by a subdued oil price and effects of the wildfires earlier this year. As estimated, these are the formally impound impact on revenues over May and June and we would expect to recover half of this in H2. And while our engineers have been assisting customers, the division has also concentrated on self-help initiatives to improve competitiveness.

The closure of five plants over the course of 2015 has enabled us to increase our manufacturing efficiencies, helping to offset the impacts of a higher original equipment product mix. Our procurement efforts have also offset what pricing pressure we’re seeing. And we continued to look for ways to increase efficiency with actions underway to further optimize our foundry footprint.

In total, further actions announced in 2016 will deliver £24 million of incremental annualized cost savings. And these savings included a workforce reduction of 150, part of which involves reducing management layers and protecting customer-facing roles. And this has reduced overall SG&A for the division by 2% of sales.

Put this together and you can see why we’ve been able to increase operating margins by 110 basis points even in such challenging markets. And to emphasize how our partnership approach reaches from individual mine to worldwide operations, the division has signed its third global framework agreement with a top 10 customer. And to expand our close customer relationships further, we’re planning to increase our service center network in Peru, Mexico and Kazakhstan.

Overall, the first half is yet again demonstrated the strength of minerals strategy and business model. That means it’s well placed to prosper as markets recover.

So let me now turn to what is still the Group’s second largest end market, Oil & Gas. Market sentiments has been more positive recently as oil prices have shown signs of stability and the North American rig count, one of the main indicators of activity from our upstream businesses has started to recover from the record lows earlier this year. However as you can see from the graph on the top right, we are still a long way from where the market was at the start of the downturn and visibility remains low.

CapEx has fallen substantially this year, and North America, our largest market has been most affected. As rig count reduced, so did the frac fleet utilization, which fell to around 25%, down from more than 80% in 2014. But our estimates suggesting 4 million horsepower has been removed from the North American market, with those units which are currently deployed not operating to full capacity. The rest is not in operation and much of that is cold-stacked, meaning it is not field ready, has no clue and will need varying degrees of refurbishment.

A July tour of Texas frac yards by analysts from Simmons reported a large portion of the cold-stacked assets seemingly had one known major component failure while virtually every cold-stack unit lacked a fluid end.

Outside North America though, markets declined more in the first half than previously expected with increased project delays and intensified pricing pressure, while production in North America fell one million barrels a day from last year’s peak, Middle East production continued to increase as OPEC grew market share. Nevertheless, almost two years from the start of the whole downturn, the market is clearly stabilizing. While it feels as if we have reached the bottom, there is still uncertainty about the shape and pace of the recovery.

Customers will want to see improvements sustained before substantially increasing investment. And as the industry emerges, it is no clear shale will become a more significant part of the global energy mix. Consultants with Mackenzie estimate about 60% of the oil production that is economically viable with a crude price of $60 a barrel is in U.S. shale and only about 20% is in deep water. They also suggest 20 million barrels a day of additional supply will be needed by 2025 and most of that will come from shale.

And so the medium and long-term prospects for the division look positive. It’s biased towards the most attractive markets, North America and the Middle East, which together represent more than 80% of divisional revenues, with the Middle East growing its share since last year. As markets improve, the division will also benefit from its record of strong execution as it manages its way through the downturn.

In the first half, that included a further workforce reduction of 340 mainly in North America. The program of service center consolidation to eliminate the duplication is on track with 12 closed in the first half. The division’s working capital and inventory performance has been excellent. And throughout the downturn, R&D has been prioritized with a series of new products which lower customers’ total cost of ownership, while also increasing productivity.

The division has gained market share as a result, particularly in pressure pumping fluid ends and flow products. Internationally, the division is making good progress with its well-head offering generating £5 million of revenues in the first half, with an order of similar value secured in the last few days. The division’s overall strategic focus means it is ready for the upturn when it comes with a presence in all major shale plays and the people and capabilities they will need to prosper. But as I’ve said previously, the division has material under recoveries, which will ensure a positive flow-through from an upturn even without pricing increases as a result of the lower cost structure now in place.

Paul Coppinger and the team have done a great job in very challenging circumstances and the result of the division which is ready for a sustained upturn as it develops.

So moving to Flow Control, which following the sale of its renewables businesses and the integration of the process pump providers Gabbioneta and Floway, is focused on serving diverse valves and pump markets. However markets have reflected general global economic sentiment with customers cautious about increasing investment, particularly in developed countries. There was limited conventional new-build in Europe or the U.S.

Emerging economies were more positive, particularly nuclear activity in China and Korea. Mid and downstream oil and gas markets are later cycled than upstream but are impacted by the same broad trends with project delays a consistent feature. General investor markets have also been impacted by commodity price moves, while really you can see in the right, the global valves market is expected to improve in the medium term.

In that environment, I’m particularly pleased that John Heasley and the team have managed to increase margins and profitability as a result of ongoing cost reduction and efficiency measures and improved operational discipline. Management has been streamlined and given greater accountability and the division has leveraged the Group’s best cost sourcing to increase competitiveness and grow share in what have been challenging market conditions.

These challenges included revenues from power markets being impacted by the timing of power outages in the U.K. and fewer industrial and wastewater opportunities, albeit Oil & Gas benefited from a strong opening order book from Gabbioneta, which is in the process of delivering. The division continues to make strategic progress including expanding its product portfolio with a strong pipeline of opportunities. These include an ASME compliant safety valve for power markets; a Screw Centrifugal pump for industrial markets; and the Roto-Jet pump for use in downstream oil and gas applications.

It’s also commercialized its first alloy component manufactured using so called 3D Printing. This is a small but important initial step and its emerging technology has the potential to bring substantial efficiency benefits in the future.

In addition, the integration of the process pump businesses means that it can now pursue broader access to EPC customers with a more comprehensive product offering. A new regional sales and manufacturing approach has been developed and the division has seem good initial opportunities from the Middle East, particularly Iran as the country refurbishes its infrastructure following the end of sanctions.

So let me now turn to divisional outlooks starting with Minerals. We’re assuming stable commodity prices. We expect ongoing ore production growth to support good demand for aftermarket products and services. We see a tendency from customers to normalize their maintenance and service schedules following prior delays, and our strong field presence footprint and customer-focused teams are benefiting from this market change. Greenfield projects will be negligible, although a good pipeline of brownfield and debottlenecking opportunities in many markets are being pursued.

Given that outlook, full-year constant currency revenues are anticipated to be slightly up on the prior year, ahead of previous expectations and supported by the opening order book. Margins are expected to be broadly in line with the first half.

In Oil & Gas, the second quarter’s low activity levels are expected to persist into Q3. Assuming the North American rig count continues to recover from its historic lows, a modest pickup in activity is expected later in the year. International markets are normally slower to react and therefore its anticipated deal remains subdued throughout 2016.

The division therefore expects full-year constant currency revenues to be slightly lower than previous expectations with an improvement in profitability in the fourth quarter if activity increases. Oil & Gas still will be cash generative throughout.

And looking at Flow Control, we expect full-year constant currency revenues to be higher than 2015 and in line with prior guidance. Full-year operating margins are expected to be broadly in line with the first half.

And finally, at the Group level, full-year guidance for reduction in constant currency operating profits is unchanged with a better Minerals performance offset by the additional challenges we’ve seen in Oil & Gas markets this year.

Our reported numbers though will benefit from a positive FX effect if current rates prevail. In the next six months, we’ll maintain focus on our core strengths; innovative engineering, a partnership approach to our customers and strong cost control. We’re also continued to be cash generative, which together with further disposals will reduce net debt, and as a result, our covenant ratios. We’ll continue to invest in expanding our competitive advantages, which mean we fully recover as markets recover.

And before I move onto questions, please forgive me if I can take a few minutes to reflect on my time at Weir. It’s a business with a long heritage that immediately instills a sense of deep responsibility. When I first joined a decade ago, I was determined I would play my part in building a stronger and more resilient Group. I believe our team has done that and it is reflected in the Group’s financial performance over the last seven years.

Along the way, there have been challenges but we’ve also sought to turn those into opportunities. Fortunately we’ve had the tools and the people to respond, whether that was for a period of rapid growth or dealing with an unprecedented downturn in our end markets. We’re also been very careful to put the building blocks in place to ensure Weir remains a successful business in the next industrial revolution. That includes prioritizing R&D and expanding into attractive new markets.

The Group has embraced collaboration internally and externally including a series of partnership agreements which recognized in the modern world at least, the best ideas can come from anywhere. At the same time, our culture has been one of self-help and constant improvement. Our customer focus supported by lean operating model is a real source of competitive advantage, as is our ability to attract to retain the best people by providing them with opportunities to develop and embrace responsibility and accountability.

Many of you will have heard me talk about our job as writing the next chapter in the Weir story, and maybe the first line beyond that. So, well, Jon, it’s time for you to sharpen the pen.

And thank you. And now Jon and I will be happy to take any questions you may have. So please do wait for the microphone. State your name and company and we will respond. Thank you.

Question-and-Answer Session

A - Keith Cochrane

Hey Glen.

Glen Liddy

Good morning. It’s Glen Liddy from JP Morgan. In the Oil & Gas market, are you seeing any stabilization in the pricing climate, or is there any real prospect of prices improving in line with volumes in the second half of the year? And on the Minerals business, similar sort of question really. You've done an excellent job over the last couple of years mitigating any price pressure. Is it starting to get any easier if people that are working on things like copper are seeing rising demand for your products?

Keith Cochrane

Well, let me take those. In terms of Minerals, the answer is really quite simple. There has been ongoing pricing pressure. There is ongoing pricing pressure. It really isn't changing. It’s something we just need to deal with, and frankly from that perspective, it’s very much something we can manage in the current environment.

In terms of Oil & Gas, how we seen stabilization in pricing, listen, it’s really tough out there. Everybody is fighting for every order. So it’s probably stabilizing in the sense that you’re doing what you need to do to win the order, because there is a bit of a market share game and that you see we’re seeing all the success in terms of growing our market share. I think the reality is pricing power is going to take some time to come back. I think we will see volumes back meaningfully before we see pricing power just because of the capacity in the system that is out there. So I think it’s probably some way down the road before we start to get pricing relaxation in terms of Oil & Gas.

Albeit having said that, back to the point I made in the speech, the actions that we’ve taken in terms of making a cleaner and more efficient more competitive organization do mean that actually we don’t need to get back to prior pricing levels to be able to generate the same level of returns because there is no question, we, indeed the industry more generally is far more efficient than it ever have been and therefore that will flow-through as volumes should cover as well. Yes, Alex.

Alex Virgo

Thanks. Alex Virgo, Bank of America Merrill Lynch. Keith, congratulations on moving on. I hope you have some time downtime. Couple of questions on Oil & Gas. So could you update us on the business mix in terms of pressure pumping, pressure control service and just really around the weakness in the international business? What has surprised you there, because I think it has been a bit weak than expected. And then second question I think you’ve told before about maintaining service coverage in your service centers in the Oil & Gas business to position yourselves for recovery. Obviously now you’re taking some quite meaningful adjustments to that service center network. Just talk us through the thinking behind that and what that might mean as we look forward over the next couple of…

Keith Cochrane

Okay, I’ll let Jon just comment in terms of the mix of the Oil & Gas business in a minute but just touching on the Middle East and the service center questions. The issue in the Middle East, there hasn’t - it’s actually clearly the Middle East is producing record volumes of production so in the face of it you would think what’s the issue. The challenges is I guess just the backlog for general dynamic, the fact that everybody is looking for business is clearly creating a more competitive environment and our customers perhaps not surprisingly and you would probably do the same thing if you were there, are being quite oppressive in utilizing. That’s the advantage in terms of price downs. So therefore we have seen pricing pressure - meaningful pricing pressure in the Middle East. It does mean there is a lot of people bidding for every piece of work that comes off because everybody has got global capacity. But the actual underlying activity clearly is there.

And then it terms of the service centers in North America, we’ve been very careful, Alex, that to ensure we maintain the position in every major shale play, I think quite one and then I think I talked about it in February. There are several shale plays, particularly in the pressure control world where frankly we are last man standing. So we are well-positioned and essentially what we’ve done is consolidate our service center network together rather than necessarily shrink its coverage if you follow me. And that’s just reflected in the realities of the market, and indeed our expectations of where the market will be and where the new peaks will be in terms of volumes and activities, because it’s going to be a different world here even when the market comes back. Jon?

Jon Stanton

Yes, just to build on that point, Alex, with the follow through from that is that as the market recovers when it recovers, we’re not going to need to put those service centers back because we’ve consolidated and got the platform is going to enable us to serve those basins. So that will be a permanent reduction in the fixed overhead which will give us a point of positive leverage as we move forward among other things.

In terms of the split of the business, as we sit here today and we look at the first half, then we’ve made £3 million in terms of the share of the JV. The Middle East service business has also remained profitable, albeit down a little bit on last year existing pricing pressure plays through in that market as Keith talked about. The pressure pumping business is just got around breakeven and the pressure control business is all losing money at the moment given they have the more negative flow-through in pipe because of the rental element in those businesses.

Keith Cochrane

Okay. Jonathan?

Jonathan Hurn

Good morning. Hi, it’s Jonathan Hurn from Deutsche Bank. Just three questions please. Firstly, just on one on Flow Control. Can you just talk a little bit about some of the margin aspirations there? If they go back to what you kind of set for power and industrial, can we expect that to be a double-digit margin business in due course? That’s the first one. Second one was just on Oil & Gas. Can you just tell us about the overhead on recovering that business? Where it is right now, as we go into volume pick up or we need to get through to recover that? And then third quarter was just in terms of Minerals. Just looking the Sand and Aggregates, down 20% seems quite a big number. Is there something more sinister going on within Trio?

Keith Cochrane

I may touch on the final point of the question. I’ll let Jon answer the other two. I certainly have a view on flow margins but he gave me afterwards so I'll maybe tell you quietly, but better not create too many hostages to fortune for the two Jon’s going forward.

In terms of Trio, the big issue was if you call it that was China and the fact that we saw slowdown activity in China and that really just reflects what’s happening in the broader China markets. Our U.S. numbers are off. I talked about the good Middle East order. We’re getting traction across Africa, across Europe, but obviously this historically has been a business very focused on the U.S. and China, and therefore when China pulls back a bit, it does have an impact. Now hopefully we are seeing a bit more activity in some of the government stimulus funding start to ripple through into infrastructure projects, so we are more hopeful of a better H2, but again that is the principal driver.

But around Trio more generally I think there is some great opportunities and we’re really starting to build momentum outside China in a positive way.

Jon Stanton

So just in terms of the Oil & Gas question, Jonathan, the principal business is running manufacturing overhead run under recoveries at the moment pressure pumping, about £7 million or £8 million in the first half of the year, so £15 million on an annualized basis. And we reckon to get that back. We probably need about £35 million of revenue on an incremental basis for the current run rate, so relatively modest to where the business has been historically.

In terms of Flow Control, yes, I think we’ve done a really good job in terms of delivering the margins we have against a difficult end market, particularly in the midstream oil and gas - downstream oil and gas markets. The long-term aspiration for the margins in the business remains low-teens. We see 12%, 14% as being the aspiration for the business. That is going to require a recovery in those end markets and a recovery in nuclear alongside oil and gas is a right volume really getting that volume through the future. But I think the division is capable of delivering those sorts of margins into the medium term with that caveat.

Keith Cochrane

Okay. Stephen?

Stephen Swanton

Good morning. It’s Stephen Swanton at Redburn. Can I just ask on Oil & Gas about the service aspect of pressure pumping and there is also been lot of comments in some of your customers about the state of the equipment in the U.S. and what might be needed going forward in terms of overhauling and keeping equipment in good repair. Have you seen a pickup in inquiries orders in that part of the business? Second question is on Minerals and without meaning to launch into like a whole Capital Markets Day. Can you just say kind of why is Weir doing so much better than everyone else in Minerals? It does seem are you seeing a bit more of a pickup than things that lot brighter for you than any of your other mining equipment peers out there? That’s kind of my sense I guess from last couple of quarters.

Keith Cochrane

Well, I think in terms of Minerals, I think it’s difficult to pin it on to one individual thing. I do think we have very customer responsive teams. As you know, we have a service center network that I think is far beyond anyone else’s and therefore it does mean we are very close to customers. And with our particular focus there on getting out to the plants, helping customers, including plant audits and looking at opportunities to optimize the operation of their kit, our kit, alongside debottlenecking so they can get more throughput through the same production units. That is very much consistent with what our customers are wanting to see. So I think it’s a combination of those efforts clearly - and I think the trial success does demonstrate that we’ve got the best technology across our product portfolio for the products that we provide. So I think it’s a - and therefore as a result in some areas where we don’t have huge market shares, we are still growing market share. So I think it’s a combination of all the list factors.

Now in terms of service center inquiries, listen, I think it’s early days. I do have a view, I said to one or two analysts so I’m feeling I guess I admit slight hostage to fortune, but I do have a view that there will come a point when customers start to have confidence that the market is going to pick up that they will need to start spending money on their equipment in advance necessarily of rig count picking up because if you have kits that is unavailable when the market picks up, you’re not going to get the business. So it will become a bit of a market share gain and therefore those that can afford to, let's be honest not everybody can afford to, so we’ll be selective.

I would guess, I would if I was in their shoes, seek to invest in my fleet to make sure I had some readily available kit to go back into the market to be able to respond very quickly to the uptick when it comes, because if you don’t, you’re going to miss out because others will, some of the bigger boys we certainly do know are in that position already and therefore my sense is you will see it.

As to when that actually happens? That gets back to when you think the market will pick up and it gets back. Well, if they are getting closer for that point? I think it’s fair to say. Could you see at the back-end of this year if people think that ‘17 is going to be a better year? Yes, it possibly could but I don’t think we can quite yet bank on it because it would base even on a last couple of days with WTI coming back off again which just reinforces the fact that this is still a market in a bit of a state of flux, albeit our centers has said that it has sort of bottomed out and our guidance is very much that Q3 will look pretty much like Q2 at this point.

Jonathan Hanks

Hi. It’s Jon from Goldman. Just interested to get your thoughts on consolidation to space with obviously with Komatsu’s previous acquisition of Joy. Are you surprised you’ve not seen more consolidation in mining equipment than we’ve seen so far?

Keith Cochrane

Well, I think in terms of mining equipment, frankly there aren’t that many players of scale is point one. And I think point two is we have been in a fairly challenging market environment and therefore trying to do deals is not always that sheer forward in an environment. Yes, I think the more interesting dynamic is actually in oil and gas where you could argue more consolidation does have to happen as much to take capacity out of the system over time and the returns on that could really be quite positive and we’ve seen that with Cameron-Schlumberger. We’ve seen that with FMC-Technip. Who knows what the next combination might be because the industry once they will recover and I think it will come back strongly.

I doubt very much whether you’re going to ever see 2000 rigs again. Again we had an industry that was sort of build and supply chain that was built for 2000 rigs. So through a combination of people going out of business and individual companies rationalizing their capacity and potentially some consolidation, the rationale market would sought itself out. And I guess back to the pricing power because you saw it need that to happen before you get pricing power again otherwise there is too much capacity and people will always chase the volume rather than having the ability to push up prices.

Jonathan Hanks


Keith Cochrane

Okay, time for one final question. Over here I think.

Robert Davies

Thank you. So Robert from Morgan Stanley. Just couple of questions. One was just on Oil & Gas. Maybe you could just dig in a little more into the - you mentioned there is state of cold-stacked equipment, a lot of them not having the sort of fluid end. I guess if you kind of look across and talk to your customers, what are they sort of saying in terms of how much work they would need to put into that kit to bring it back? Is there any appetite to buy new kit instead of refurbing any of that kit? How would you sort of price that kit to kind of incentivize that? And then just around sort of drilled and completed well argument that people have talked but how much activity have you seen now in terms of customers going back to those before new wells? And then just the second one was around mining aftermarket and what are the risks there if you think metal prices were to come off again, obviously we’ve seen the mine flow decelerate as mine - as metal prices have gone up. All the underlying supply/demand balances kind of more in tune than they were maybe six, 12 months ago. Thanks.

Keith Cochrane

So I think in terms of Minerals, I think to your latter point is now sounds right. It does feel the market and that is a bit more balanced. It feels as if there is a bit more normality has come back to essentially from where it was at the beginning. But let's don’t forget, fundamentally what drives our aftermarket business is oil production and yield degradation and the combination of those two plus any market share gains and new products we’re able to introduce. And therefore it does get back - as long as the world is demanding more ore, then sort of irrespective of this supply demand balance, as long as that ore volumes going up, then there is going to be great demand for our products, so that we found depending for our product.

And then I think in terms of Oil & Gas and this sort of refurbishment on make versus buy decision, it’s a really interesting question. I think I talked about at the February results presentation that customers may need to spend up to $150,000, $200,000 to refurbish an entire pumping unit. Certainly they will look at that against the trade-off of new units which in our newest pump was something like 25%, 30% more efficient operating in parameters and come to views to whether it’s better to spend money on CapEx. I think part of the challenge to that will be even if there is a desire to spend money is financing and the ability to spend capital.

So one of the things that I’ve challenged our team with and I know the Rolls Royce’s team have a similar view and of course they’ve got quite a track record in this space, is how can we create a model that actually enables customers to access that new equipment and finance friendly environment, and I’ll let you think about that as to how that might be done.

And through that therefore our challenge is how do we essentially pull forward capital cycle, but the reality is with the amount of kit out there, you probably wouldn’t see a capital say for another year or two, a big time. So perhaps it’s through a combination of those efficiency improvements and the cost of upgrading this kit that’s sitting in the field in Texas, customers can be encouraged to bring these new units in - and I know one customer in Canada has been testing the QEM 3000 that is really, really - they think they can do fact of with a third fewer pumps than they previously needed. So that is huge saving when you think about it. It then gets back to about how do we finance this? Can we really afford it, et cetera, et cetera. And these are some of the things that the team went after work through.

So it’s sort of in our hands that if we can come up with a sensible solution, then we would hopefully be able to take advantage of that.

Keith Cochrane

Okay. Any - I think that was, as I said, final question. So with that, I think we will close off and indeed close off for the last time. So thank you for your support over the years. It’s been a fun ride. I’m sure would see each other again and good luck in the future. Thank you.

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