Company Announcements

The Weir Group PLC Interim Management Statement for the first quarter ending 31 March 2020¹

^{Relatively resilient Q1; Future impact of Covid-19 still uncertain}

·      Safety of our people, families and wider communities is the Group's number 1 priority

o  Adapting working practices to continue to safely serve customers

o  Designated as an essential business in most jurisdictions

·      Benefiting from resilience of aftermarket-focused mining businesses (80% of total Group orders)

o  Commodity prices above incentive levels; customer production volumes robust

o  Stable Q1 Minerals AM orders² (-1%) against a strong comparator (+9% Q1'19)

o  Robust ESCO Core GET orders² (-3%) although construction demand weaker

o  Minerals OE orders² 13% lower reflecting project procurement deferrals; pipeline remains strong

·      Oil & Gas slightly above breakeven in Q1; expected to be cash positive for the year

o  Q1 orders² down 34%; with North American capex now expected to be down 50% in 2020

o  Additional £12m cost savings programme announced

·      Protecting the business with prudent cost and cash mitigation actions

o  £140m of cash preservation actions in H1 including withdrawal of 2019 final dividend

o  c.£75m full year cost mitigations include workforce, travel and discretionary spending actions

o  2020 bonus schemes suspended; inflationary Board and Group Executive increases withdrawn

·      Ensuring sufficient Group liquidity to manage through a range of downside scenarios

o  c.£500m immediately available through committed facilities and cash balances

o  In addition, the Group is approved for £300m under the UK Government's CCFF

·      Trading in April

o  No impact on our ability to meet customer demand

o  Mining AM demand remains robust; OE conversion remains slow

o  As expected O&G weaker due to record oil price declines

o  Still too early to assess full impact of Covid-19 on the balance of the year

Jon Stanton, Chief Executive, commented:

"I am very proud of the way the global Weir family has responded to the Covid-19 pandemic.  This is a unique time and a unique challenge, and we have been led by our values, with our incredibly strong culture shining through.  Our priorities remain safeguarding the health and well-being of our people and communities.  This has included adapting our working practices to promote social distancing in our facilities, donating PPE and oxygen supplies to local health authorities, utilising our 3D printing capability to manufacture face mask components, and providing financial support to local organisations in countries where there is limited social support.

At the same time, we have continued to fully and safely support our customers.  This was demonstrated in the first quarter where our mining-focused businesses delivered a very resilient performance, underpinned by the critical nature of our technology to miners' ongoing operations.  In Oil & Gas, we have once again acted quickly to protect the business as it navigates the steep downturn in market conditions.

While there remains a high degree of uncertainty over the full impact of Covid-19, we are taking a prudent approach to managing costs and conserving cash and are ready with a range of further actions should market conditions require them.  More broadly, our recent portfolio changes have positioned Weir to benefit from long-term structural trends, including carbon transition, as a key technology provider making mining smarter, more efficient and sustainable."  
 

First quarter trading review

First quarter orders for the Group were 13% lower than the prior year principally reflecting significantly weaker oil and gas market conditions.  Original equipment (OE) orders fell 22% with aftermarket (AM) down 10%.  The Group generated a positive book-to-bill ratio of 1.08 over the three-month period.

Divisional review

Minerals

The long-term effect of Covid-19 remains uncertain but its impact on mining markets has been relatively limited so far, reflecting the designation of miners, and providers of mission-critical technology such as Weir, as essential businesses in most countries.  While there have been some inevitable disruptions as a result of travel restrictions and staffing, ore production has continued, supported by commodity prices, which remain above incentive levels for our key exposures. Gold markets are strong with copper and iron ore remaining robust overall.  Thermal coal markets are more challenging given reduced global power consumption, while oil sands demand has remained relatively robust so far, despite a significant reduction in Canadian oil prices.

The vast majority of global mines have continued to operate, and the division has continued to fully meet customer demand despite some disruptions to operations. In South Africa, a comprehensive nationwide shutdown has seen both mines and our facilities largely closed.  In Peru and Panama, some mines have reduced production levels but remained operational and we have been able to supply spares from our distribution centres.  In Malaysia, we have seen ongoing disruption to our manufacturing capability from extended government shutdowns, although we have been able to ship some already completed products.  In India, we have secured permits to enable around 50% of our employees to continue working in our manufacturing operations.  In the UK, we temporarily closed our foundry for five days to reconfigure operations to support social distancing and hygiene, but we are now operational. In China, operations have fully recovered after Covid-19 restrictions interrupted production in February.  In all other locations operations are largely unaffected despite a significant level of mandated home working for managerial and administrative staff.

Overall, the division has benefited from its regional manufacturing footprint and localised supply chains, enabling it to shift production to support customers around the world, as demonstrated by its resilient first quarter performance.  Aftermarket orders, which represented 76% of the total, were stable, down 1% against a strong prior year comparator but up 2% sequentially with March remaining strong. This was supported by good demand for spares in Latin America reflecting production trends and some customers increasing safety stocks.  This was offset by weakness in Russia Central Africa and Australasia.  Original equipment orders were 13% lower as a result of deferrals in project procurement, particularly for longer lead time products.  However, the division's project pipeline and quotation levels remained strong, reflecting its technology leadership and the positive long-term fundamentals underpinning its markets.  The book-to-bill ratio in the first quarter was 1.14.

Looking forward visibility remains limited.  Currently, there has been a modest reduction in miners' production forecasts, but this may change given the uncertain impact of Covid-19 on demand and supply in mining markets.  As a result, the division is under-taking a number of pre-emptive mitigating actions to reduce costs and preserve cash including freezing recruitment, restricting discretionary spending and undertaking some restructuring activities, including a workforce reduction of 350 (4%), in total saving c.£30m to be realised this year.

ESCO

Demand for the division's core GET products has remained robust in both mining and infrastructure markets.  In the first quarter the division saw a 7% reduction, although core GET remained robust with softer demand for more discretionary products such as buckets and blades in construction markets, particularly in North America and Europe, reflecting lower economic activity levels.  The division did however see a 15% sequential increase in orders from Q4'19 and its book-to-bill ratio was 1.02.

Performance was supported by the division's global manufacturing footprint and service facilities which include foundries in North America, Chile and China.  These are all currently fully operational although there have been some interruptions to production due to temporary closures in the US, including a five-day closure of its Newton, Mississippi foundry.  The division's foundry in China is now fully operational following the extended shutdown at the beginning of February and previous supply chain interruptions in Europe due to Covid-19 restrictions have now been resolved.

Looking forward visibility remains limited.  Currently, there has been a modest reduction in miners' production forecasts, but this may change given the uncertain impact of Covid-19 on demand and supply in mining markets.  Infrastructure markets, and particularly construction in North America and Europe, have been significantly impacted by nationwide shutdowns with the duration and extent of these still uncertain.  Given ongoing uncertainty, the division is taking a number of mitigating actions to reduce costs including freezing recruitment, restricting discretionary spending and undertaking some restructuring activities, including a workforce reduction of 130 (5%), in total saving £9m this year.

Oil & Gas

There has been a deep downturn in oil and gas markets since the beginning of the year with E&P capex now expected to fall c.50% in North America compared to March estimates of 30%, reflecting recent oil price declines which have seen WTI fall to multi-decade lows.   These conditions had an immediate impact on the US land rig count which is 54% lower than last year.  At the same time, the number of active frack fleets has reduced by c.60%, with a subsequent reduction in demand for both pressure pumping and pressure control products.  International markets have been more robust, although there has been an increase in project deferrals. 

These conditions are reflected in the division's first quarter performance where orders fell 34% in the period with OE down 41% and AM 31% lower although the division did make market share gains in fluid ends and services.  Following previously announced 2020 cost savings of $30m (c.£24m), the division has taken further steps to right size its operations and protect cash generation which is expected to deliver an incremental £12m saving this year.  This included a workforce reduction of 150 meaning the division has reduced its workforce by 350 in 2020, and by a total of c.1,000 (c.30%) since the start of 2019.  In addition, the division has increased furloughs and secured concessions from vendors and landlords.  These actions have been taken while protecting the division's technology leadership, broader service capability and core manufacturing capacity so that it is well positioned to benefit from a future recovery.

The impact of Covid-19 on the division's operations has been restricted to the temporary closure of a facility in the United Arab Emirates. Looking forward, while the recent OPEC+ agreement will eventually contribute to a reduction in oversupply, there remains significant uncertainty over the extent and duration of Covid-19's impact, including on global energy demand.  Based on current market conditions the division is now expected to be loss making but remain cash positive through 2020.  

Prudent cost control and cash management

The longer-term impact of Covid-19 on macro-economic conditions and our markets is as yet uncertain and therefore the Group is taking a prudent approach to reduce costs and conserve cash.  In addition to the operational actions detailed in the Divisional Reviews, the Group has also undertaken a number of corporate measures. These include: withdrawing the recommendation to pay the 2019 final dividend; curtailing capital expenditure; managing working capital to minimise normal seasonal outflow in the first half; rightsizing Group functions; and, restricting all discretionary spending.  In addition, all 2020 executive and management annual bonus schemes have been suspended and inflationary increases in Board and Group Executive fees and salaries withdrawn. 

The Group expects to realise c.£75m of cost mitigation savings in 2020 which include workforce reductions, reduced travel and discretionary spending.  We expect to incur exceptional cash costs of c.£25m in the year. 

Through the first half of the year, cash preservation actions of £140m include withdrawal of the final 2019 dividend, minimising non-committed and non-safety related capex and rephasing of tax payments. 

While our mining aftermarket will be resilient if ore production volumes continue to be robust, we have stress tested a number of potential downside scenarios of varying severity. These include widespread disruption to our operations and supply chain, deferment of original equipment orders and revenues, and significant reduction in aftermarket demand.  While there is a high degree of uncertainty, in each of these scenarios we expect to have adequate liquidity and manageable levels of net debt supported by a range of well-developed mitigating actions that are ready to be executed if necessary. 

At the same time the Group will continue to invest in strengthening its key competitive advantages in technology leadership and differentiated customer service.  This will enable Weir to take full advantage of the attractive long-term prospects in its markets, including the Group's critical role in making mining more sustainable and efficient.

Outlook

After a resilient first quarter, we expect Covid-19 to have a greater impact in the second quarter, and as outlined above, a first round of mitigations has already been actioned which will help underpin first half profitability. Given the uncertain environment no specific guidance is provided for the remainder of the year, although we will update as and when visibility improves.

Net Debt and Liquidity

As in prior downturns, we expect the business to continue to be highly cash generative and are taking actions to mitigate the normal first half working capital seasonal outflow.  Based on Net Debt levels at the end of March, which were higher than 31 December 2019 reflecting normal seasonal patterns, the Group has liquidity of c.£500m of immediately available committed facilities and cash balances.  It also has the ability to access up to £300m under the UK Government's Covid Corporate Finance Facility (CCFF) programme and has a further c.£100m of uncommitted facilities. 

As part of a normal schedule, the Group is currently undertaking a refinancing of its $950m Revolving Credit Facility ($152m matures in September 2020 and $798m matures in September 2021) and its £300m Term Loan which matures in December 2020.  These discussions are ongoing and are expected to conclude during the second quarter. 

Chairman and AGM

Charles Berry has resumed his duties as Chairman after his recent medical leave.  The Board would like to thank Barbara Jeremiah, the Senior Independent Director, for deputising in Charles' absence.  The Group will hold its Annual General Meeting later today but has asked that shareholders do not attend in person due to Covid-19 restrictions and instead vote and submit questions electronically.    

Completion of Black Economic Empowerment Transaction in South Africa

The Group is also pleased to announce its subsidiary, Weir Minerals South Africa (Pty) Ltd (WMSA), has completed a Broad-based Black Economic Empowerment ("B-BBEE") ownership transaction with Medu Capital (Pty) Ltd ("Medu Capital").  The transaction will result in WMSA being '25%+1' Black-owned (as defined in the Broad-Based Black Economic Empowerment Act 53 of 2003). As part of the transaction, Medu Capital has made a cash investment into WMSA.  The business will continue to be fully consolidated in the Group's financial statements.

This ownership structure better reflects the demographics of South Africa and reiterates Weir's long-term commitment to the country and to the communities in which we operate.  It will also differentiate WMSA from many of its competitors as one of the few '25%+1' empowered mining technology companies in South Africa. 

Notes:

1.             Financial information is given for the three months ended 31 March 2020 and relates to continuing operations.

2.             Orders are reported on a constant currency basis.

Analyst and investor conference call

A conference call for analysts and investors will be held at 0800 BST on Tuesday 28 April 2020 to discuss this statement.  Participants can join the call by registering in advance by visiting www.global.weir/investors and following the link on the page.

A recording of this conference call will be available until Tuesday 12 May 2020.

About The Weir Group PLC

We are one of the world's leading engineering businesses working in partnership with customers to solve their toughest operating challenges safely, efficiently and sustainably.  Our market-leading solutions are used in high abrasion mining, infrastructure and upstream oil and gas applications, supporting the essential resources needed by a growing world.

Weir's ordinary shares trade on the London Stock Exchange (ticker: WEIR LN) and its American Depositary Receipts trade over-the-counter in the USA (ticker: WEGRY).
 

Appendix 1 - Continuing Operations¹ quarterly order trends (constant currency)

1 Continuing operations (excludes the Flow Control division which has been sold).

² Like for like excludes the impact of acquisitions, ESCO was acquired on 12 July 2018 and excluded from 2018 and 2019.

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.