Interim Management Statement

The Weir Group PLC
Interim Management Statement for the period to 2 November 2015¹

Highlights:

• Full year earnings expectations broadly in line with current market consensus²
• £25m incremental cost savings, bringing annualised impact of actions taken in last year to over £110m³
• Q3 Group order input⁴ down 29% year-on-year and 8% compared to Q2 2015
  • Minerals orders resilient in increasingly challenging markets
  • Further declines in Oil & Gas activity - US oil rig count down 14% in the past two months
• Operational progress in Power & Industrial; margins increased
• Weir Technology Advisory Board established; High-horsepower crusher launched

Keith Cochrane, Chief Executive, commented:
"The challenges in our end markets intensified during September and October. Mining customers took measures to preserve cash by delaying investments, reducing purchases of consumables and mothballing or curtailing production volumes at higher cost mines. Trading conditions in oil and gas markets were impacted by a double-digit decline in North American rig count as WTI oil prices fell below $50. In response to these market-issues, the Group has taken further action to support profitability.  These measures will generate an additional £25m in annualised cost savings and include additional workforce reductions and service centre consolidations. We continue to invest in technology to further extend our global leadership positions, ensuring the Group is positioned to fully benefit from the good long-term structural growth prospects of our end markets.

Looking ahead, we expect trading conditions to remain challenging through the fourth quarter with further declines in upstream oil and gas activity.  We will focus on delivering further cost and procurement savings, alongside strong cash generation.  We continue to expect a sequential improvement in our second half performance with our full year earnings expectations broadly in line with market consensus²."

Third quarter review
Third quarter⁵ input was 29% lower than the prior year period and 8% lower than the second quarter of 2015, primarily driven by a significant drop in activity levels across oil, gas, power and industrial markets.  Original equipment orders were down 20% and aftermarket orders 33% lower than the prior year period.  On a like for like basis⁶ (excluding the acquisitions of Trio and Delta Valves), order input fell 31%, with original equipment down 25% and aftermarket down 33%. Order input for the 39 weeks was 22% lower (H1: 18% lower) with aftermarket orders down 20% (H1: 13% lower) and original equipment orders down 26% (H1: 29% lower).

Revenues, on a constant currency basis, were down compared to the third quarter of 2014 chiefly due to reduced North American oil and gas activity levels, but in line with the second quarter. The Group maintained a positive book to bill ratio of 1.01 over the 39 week period.   Group operating margins were lower than the prior year, primarily due to the decline in margins of the Oil & Gas division. As a result of cost reduction measures taken in the third quarter the Group's workforce will reduce by a further 400 posts.

Recognising the long-term potential of its markets and business model, the Group continued to prioritise investment in products and technology.  A new range of high-horsepower crushers was launched by Minerals and positive test results gathered from new frack-pump valve designs in Oil & Gas.  The Group-wide IoT (Internet of Things) programme, which aims to use big data analytics to monitor, improve and control performance, progressed well with the Group close to finalising strategic partnerships with global technology leaders.  The Weir Technology Advisory Board was launched in the period and will ensure the Group has access to leading technologists from a range of industries.

Divisional review

Minerals
Order input for the third quarter was down 1% against a strong prior year, reflecting a resilient performance in more challenging market conditions.  On a like for like basis, orders were up 5% on a sequential basis and down 5% year-on-year.  Original equipment input was 18% higher than the prior year period, supported by a good contribution from Trio and Delta Valves (the latter acquired on 8 July 2015), and up 7% on a like for like basis reflecting the realisation of the anticipated strong performance from the Geho product line, which captured a large share of available projects.  

Aftermarket input was down 9%, and 10% lower on a like for like basis, compared to a strong prior year figure as customers responded to weak commodity prices by closing mines, cutting safety stock levels and postponing scheduled maintenance in the latter part of the period.  

Pressure on commodity prices continued with copper down 11% since the end of the second quarter, contributing to further mine closures and customers intensifying their efforts to reduce operational expenditure.  Orders in Africa were in line with the prior year as higher original equipment orders offset a decline in aftermarket, largely as a result of mine closures in Zambia, the Democratic Republic of Congo and South Africa, and customers' aggressive cost control. In North America orders declined as a result of mine closures in the first half across iron ore and coal industries with copper production volumes also falling.  Orders also declined in Asia Pacific, although net production volumes in Australia remained resilent.  Activity levels in South America remained robust, although customers sought to reduce stock levels and stepped up efforts to reduce consumables expenditure.

Despite these market conditions, constant currency revenues in the third quarter were slightly ahead of the prior year, supported by resilient aftermarket sales and a good contribution from recent acquisitions.  The order book increased in the period with a book to bill ratio of 1.03. The division's efficiency programme continues on schedule, with the closure of a small manufacturing site in France completed in the quarter, while further workforce reductions took place in Africa, Australia and China.  These measures effectively offset the impacts of pricing pressure, which continued through the period, with third quarter margins ahead of the first half.

Assuming third quarter trading conditions continue through the balance of 2015, the division expects broadly flat full year constant currency revenues, with the contribution from acquisitions offsetting the reduction in original equipment revenues.  Operating margins will improve sequentially with full year operating margins expected to be slightly down on the prior year, consistent with the trends seen in the first half.

Oil & Gas
Order input for the third quarter was down 58% on the prior year period, which was the highest quarterly input in 2014, with original equipment down 60% and aftermarket 57% lower.  On a sequential basis, input was 12% lower than the second quarter of 2015, slightly below prior expectations, reflecting declining activity levels in North American markets including a weaker than expected seasonal recovery in Canada.

Oil and gas markets became increasingly challenging through the period with oil prices falling nearly 25% since  the end of the second quarter.  After stabilising in July and August, the US rig count fell a further 12% in the past two months with the oil-directed rig count now down 64% from its peak in October 2014.  Gas-directed rigs have reduced by 40% since the start of 2015, as E&P companies reacted to falling energy prices by making further cuts to capital spending. In response to these evolving market conditions, further cost reduction measures are being implemented across the division's upstream businesses, including additional workforce reductions and service centre consolidations, which will deliver annualised savings of £20m.

Both Upstream operations (Pressure Pumping and Pressure Control) saw low double-digit sequential order declines as customers reversed prior plans to increase activity levels.  In Pressure Pumping, order levels fell below the 2009 lows and continued to be impacted by destocking and cannibilisation as the further decline in activity levels increased the proportion of excess equipment.  Pressure Control was also impacted by a weak recovery in Canadian markets from the spring break-up, although it continues to hold market share in both Canada and the US.  Conditions continue to be challenging in international and downstream markets with evidence of a slowdown in construction related activity in the Middle East.

Divisional revenues were materially lower than the prior year on a constant currency basis.  Third quarter revenues increased sequentially, supported by delivery on the order backlog in Gabbioneta and flat Upstream revenues compared to the second quarter, such that book to bill reduced to 0.89.  Operating margins fell to single-digit levels and slightly below the second quarter reflecting on-going pricing pressure, lower volumes and a higher mix of lower-margin original equipment in Gabbioneta, partially offset by cost saving measures and a slight decrease in manufacturing overhead under-recoveries.

Industry expectations are that activity levels in North America will continue to decline through the fourth quarter, reflecting depressed energy prices, such that full year constant currency revenues will be slightly lower than previous expectations.  Reflecting these lower volumes, second half margins are expected to be slightly lower than prior guidance as a result of continued manufacturing overhead under-recoveries.    

Power & Industrial
Order input for the third quarter was down 15% on the prior year period, as on-going economic uncertainty led to continued customer caution and project delays across the division's power and industrial markets, with further oil price reductions impacting downstream oil and gas activity levels. Original equipment orders were down 18% and aftermarket orders reduced by 11% against the prior year period. Valve original equipment orders were down on the prior year, reflecting end market conditions, although aftermarket input was more resilient.  Order input was also lower in the division's Hydro operations as a result of the phasing of orders from its strong pipeline of work, while the announcement of power plant closures in the UK impacted Services input.   

Divisional revenues, on a constant currency basis, were slightly lower than the prior year period but operating margins increased as a result of cost reductions and operational improvements.  Further restructuring actions have been taken across the division's services operations which will support performance in 2016 and beyond.

Full year divisional revenues, on a constant currency basis, are expected to be slightly lower than the prior year.  Operating margins are expected to improve sequentially in the second half and compared to the prior year.   

Net debt
Net debt at 2 October 2015 was higher than that reported at 3 July 2015 as a result of foreign exchange movements, the consideration in respect of the acquisition of Delta Valves and cash restructuring costs.  Full year restructuring costs will be higher than previously indicated as a result of the additional measures taken in the third quarter.  The Group remains confident of delivering strong cash generation in 2015, with inventory reduced by over £30m in the third quarter.

Notes:

1. Financial information is given for the 39 weeks ended 2 October 2015.
2. Earnings based on PBTA (before amortisation and exceptionals).  Market consensus gathered between 29 August and 28 October 2015 and disclosed at http://www.weir.co.uk/investors/key-financials/company-gathered-consensus.
3. £110m total consists of £85m of annualised run rate cost savings previously announced at our interim results on July 30 2015 combined with the £25m of measures taken in Q3 2015.
4. Order input is reported on a constant currency basis.Third quarter refers to the financial period 13 weeks ended 2 October 2015.
5. Where growth is provided on a like for like basis, like for like is defined as the comparison of the current year results to the equivalent prior year period for those businesses that have been part of the Group throughout the current and prior year reporting period, on a constant currency basis.

Analyst and investor conference call
A conference call for analysts and investors will be held at 0800 (GMT) on Tuesday 3 November to discuss this statement.  Participants can join the call by registering in advance by visiting weir.co.uk and following the link on the homepage.

A recording of this conference call will be available until Monday 16 November on [phone] using the conference ID 63238104.

Enquiries:
Investors: Stephen Christie	[phone] / (0) 7795 110456
Media: Raymond Buchanan / Ross Easton	[phone] / (0) 7713 261447 / (0) 7920 190994
Brunswick: Patrick Handley / Nina Coad	[phone]

Appendix - quarterly input trends (constant currency)

	Reported growth							Like for like growth
Division	2014 Q4	2015 Q1	2015 Q2	2015 Q3	2015 Q1-Q3			2014 Q4	2015 Q1	2015 Q2	2015 Q3	2015 Q1-Q3
OE	-7%	4%	-14%	18%	2%			-7%	-13%	-26%	7%	-12%
Aftermarket	5%	6%	-2%	-9%	-2%			5%	3%	-4%	-10%	-4%
Minerals	1%	5%	-5%	-1%	0%			1%	-2%	-11%	-5%	-6%
OE	37%	-41%	-63%	-60%	-56%			37%	-41%	-63%	-60%	-56%
Aftermarket	13%	-15%	-47%	-57%	-41%			13%	-15%	-47%	-57%	-41%
Oil & Gas	19%	-23%	-52%	-58%	-46%			19%	-23%	-52%	-58%	-46%
OE	-11%	-34%	-16%	-18%	-24%			-11%	-34%	-16%	-18%	-24%
Aftermarket	-31%	12%	-2%	-11%	0%			-31%	12%	-2%	-11%	0%
Power & Industrial	-21%	-14%	-8%	-15%	-12%			-21%	-14%	-8%	-15%	-12%
OE	4%	-22%	-35%	-20%	-26%			4%	-28%	-40%	-25%	-32%
Aftermarket	4%	-2%	-22%	-33%	-20%			4%	-4%	-23%	-33%	-21%
Continuing Ops	4%	-9%	-26%	-29%	-22%			4%	-12%	-28%	-31%	-24%
Book to bill	0.89	1.05	1.03	0.95	1.01			0.89	1.03	1.02	0.95	1.00

Notes:
1. Input for Q3 and Q4 2014 restated to remove the impact of a large Minerals order placed in Q3 2014 and subsequently cancelled in Q4 2014.

This information includes 'forward-looking statements'.  All statements other than statements of historical fact included in this presentation, including, without limitation, those regarding The Weir Group PLC's ("the Company") financial position, business strategy, plans (including development plans and objectives relating to the Company's products and services) and objectives of management for future operations, are forward-looking statements.  These statements contain the words "anticipate", "believe", "intend", "estimate", "expect" and words of similar meaning.  Such forward-looking statements involve known and unknown risks, uncertainties and other important factors that could cause the actual results, performance or achievements of the Company to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements.  Such forward-looking statements are based on numerous assumptions regarding the Company's present and future business strategies and the environment in which the Company will operate in the future.  These forward-looking statements speak only as at the date of this document.  The Company expressly disclaims any obligation or undertaking to disseminate any updates or revisions to any forward-looking statements contained herein to reflect any change in the Company's expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based.  Past business and financial performance cannot be relied on as an indication of future performance. 

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Source: The Weir Group PLC via Globenewswire

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