Weir Group PLC
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Weir Group PLC
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Ladies and gentlemen, thank you for standing by, and welcome to The Weir Group PLC Q1 2020 Interim Management Statement. [Operator Instructions] I must advise you that this conference is being recorded today. And I would now like to hand over the conference to your speaker, Jon Stanton. Please go ahead.
Thank you, operator, and good morning, ladies and gentlemen, and thank you for joining us for our first quarter interim management statement. As usual, I'm joined by our CFO, John Heasley, and we'll be delighted to take any questions you have shortly after some opening remarks. You may not know it, but today is World Safety Day. At Weir, today, we always take to reflect on our safety progress but also challenge ourselves as to how we can improve. This year, it's going to be different given COVID-19 and that will certainly be the focus. But I'm also delighted to say that we will be celebrating as, for the first time ever, the group achieved a TIR of 0 in March, a major milestone on our journey to zero harm. Turning to COVID-19. And as for all enterprises, the global pandemic is a unique challenge, but Weir has benefited from its robust contingency planning and highly decentralized operating model. We're all having to adapt and learn as we go along. But faced with uncertainty, we've chosen to be guided by our values and that starts with thinking safety first. That means fully enabling home working for those that can do so. And where that's not possible in our manufacturing and service centers, changing our working practices to ensure we do everything we can to protect our people, including reconfiguring operations to support social distancing and rigorous hygiene. And it also means supporting people's mental welfare. These are understandably anxious times with many colleagues dealing with additional responsibilities from home schooling to caring for vulnerable relatives. Our job is to support our people to stay safe, protect their families and support their communities. Across the world, our businesses are stepping up and playing their parts, whether that's donating PPE and oxygen to hospitals, 3D printing face mask components or providing financing to support the local groups in countries where the absence of government assistance programs mean economic hardship is extreme. At the same time, we haven't lost sight of our need to continue to delight our customers, with the vast majority of the world's miners continuing to operate. In Kazakhstan, 3 of our service engineers volunteered to stay on a remote mine site for additional fortnight because travel restrictions would otherwise have left the customer unsupported. In Canada, our teams work through the night to help our customer complete their planned maintenance early, so they could send their workforce home ahead of an impending lockdown. And in many locations, our engineers are using virtual or augmented reality to enable training and support for customers where we cannot travel to site. I've often spoken of how strong the Weir culture is and what an advantage it gives our business, but it's truly inspiring to see our people go the extra mile, particularly in these challenging times. Let me now turn to a brief summary of the group's first quarter performance, where the impact of COVID-19 on demand was relatively limited given the resilience of our aftermarket-focused business model. Both Minerals and ESCO had a relatively solid start to the year, with the majority of the 13% decline in group-wide orders due to the downturn in North American oil and gas markets, which, as you all know, were tough even before this month's record declines. More broadly, our overall pipeline remains strong, with a positive book-to-bill ratio of 1.08 over the 3-month period. I'll now turn to each division, starting with Minerals. As I said earlier, the vast majority of the world's mines remain open for business, and we are there to support them. While there have been some inevitable disruptions as a result of travel restrictions and staffing, oil production has continued, supported by commodity prices that remain above incentive levels for our key exposures. As a reminder, these include gold, where demand is strong; and copper and iron ore, which are also robust overall. Mining is benefiting from the tailwind of lower oil prices, which is the industry's biggest input cost. Indeed, in the former Soviet Union, the oil price and strengthening of the dollar has suddenly transformed the number of mines from breakeven to profitability. Thermal coal markets are more challenging given reduced global power consumption. However, oil sands demand has remained robust. So far, we've seen a limited impact from recent oil price declines due to a combination of forward hedging, the integrated nature of many of the producers and the fact that oil sands development simply cannot be switched on and off without significant additional investment. However, the outlook is more uncertain given the current oil market dynamics. Where there have been disruptions, their severity has varied by country. In South Africa, a comprehensive nationwide shutdown has seen both mines and our facilities largely closed, although we were able to support the limited activity taking place. In Peru and Panama, some mines have reduced production levels but remained operational. And again, we've been able to supply spares from our distribution centers. In Malaysia and India, our manufacturing facilities are at 50% of capacity due to the extended lockdowns. In all other locations, our operations, including our larger sites in Chile, the U.S. and Australia, are largely unaffected. And in China, we are back to full capacity. This is testament to the hard work of our teams and also the benefits of our regional manufacturing model, which is a real competitive advantage and has meant we've been able to fully service customer demand. This can be seen in the division's first quarter performance, where aftermarket orders were stable, down only 1% against a strong prior year comparator, but up 2% sequentially and with March the strongest month of the quarter. 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 Australia and a little pricing pressure in the oil sands. Original equipment orders were 13% lower as a result of deferrals in project procurement as miners understandably turn their attention to immediate challenges as a result of COVID-19. Some ongoing projects where mines under construction have been slowed down to deal with COVID-related constraints. But this is viewed as temporary. Our large ongoing project, the Iron Bridge development in Western Australia is on schedule to produce its first store in 2022, and manufacture of the long-lead items at our Venlo plant is running to plan and readiness to ship later in the year. The divisional book-to-bill ratio in the first quarter was 1.14, and overall bid activity remains healthy. The division's project pipeline is strong, supported by the long-term fundamentals underpinning minerals markets, although we expect order conversion to remain slow until greater clarity on the future emerges.Looking forward, there is clearly some uncertainty. So far, the impacts of COVID-19 on miners' production has been limited, but this may change. As a result, we're acting now to ensure profitability is supported, including freezing recruitment, restricting discretionary spending and undertaking some modest restructuring activities, including a workforce reduction of 350 people or 4% of divisional headcount, total savings of approximately GBP 30 million to be realized this year. We'll continue to monitor the situation closely and have well-developed plans in place should further action be necessary, which I'll come on to later.At the same time, we're also protecting our investments in technology and differentiated customer service. We're making good progress on a number of innovations that we've previously spoken about, including developing hydro hoisting solutions and the first plants to use our Terraflowing tailings technology. The theme of smarter, more efficient and more sustainable mining is not going away. Let me now turn to ESCO, where, again, we saw a relatively robust performance from its core GET in both mining and infrastructure markets. As you know, ESCO is predominantly an aftermarket business. The biggest driver of the 7% reduction in overall orders was weaker demand for more discretionary products such as buckets and blades in construction markets in North America and Europe. You'll also recall the division is the global leader in dredge GET and recently secured orders for a Suez Canal project, including a number of cutterheads and GET totaling over $13 million. Overall, the division generated a positive book-to-bill ratio of 1.02 in the first quarter. And just like Minerals, the division benefits from its global manufacturing footprint and service facilities, which includes foundries in North America, Chile and China. While there were some interruptions in the quarter, including the extended New Year break in China and a 5-day shutdown of the Newton, Mississippi foundry, all the division's facilities are currently fully operational. We're also pleased that previous supply chain interruptions in Europe due to COVID-19 restrictions have now been largely resolved. Looking forward, while mining markets have been fairly robust so far, that may change, and we expect a significant impact of demand in infrastructure markets as a result of lower economic activity. Given ongoing uncertainty, the division is also taking a number of mitigating actions to reduce costs, which will save approximately GBP 9 million this year. Let me now turn to the Oil & Gas division, where market conditions are extremely tough. To give you an indication of the speed of decline just a month ago, the industry expected North American E&P CapEx to fall by around 30%. Today, that figure is 50%. U.S. land rig count is already halved compared to last year, and active frack fleets have fallen around 60%. International markets have been more robust, but they too are experiencing a rise in project deferrals at current oil prices. In the first quarter, orders fell 34%, with original equipment down 41% and aftermarket down 31%. So far, 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, which is now reopened. In response to the deterioration in market conditions since the beginning of April, the division has taken further steps to rightsize its operations and protect cash generation, which will save an additional GBP 12 million this year on top of the GBP 24 million announced in March. This has included a workforce reduction of another 150 people, meaning the division has reduced its workforce by around 1,000 people since the beginning of 2019. In addition, the division has increased furloughs and secured concessions from vendors and landlords. These actions have been taken while protecting the business technology leadership and broader service capability, which supported some share gain in the period, particularly dividends. Looking forward and given market conditions, the division is now likely to be loss-making. But as in prior downturns, it will remain cash-positive. Looking at the group as a whole, we've taken first half cash preservation actions of GBP 140 million, including withdrawal of the final 2019 dividend, minimizing noncommitted and nonsafety-related CapEx and rephasing of tax repayments. In addition, cost mitigation actions of GBP 75 million are targeted to be realized in the year, including those outlined in the divisional reviews, cutbacks in corporate costs and the suspension of 2020 management bonuses. And we've also canceled inflationary salary of fee increases for the group executive and Board. History suggests our mining aftermarket will be resilient if ore production volumes continue. But as I said earlier, the environment remains uncertain. Given that context, we've stress tested a number of downside scenarios of varying severity. These include widespread disruption to our operations and supply chain, deferments of original equipment orders and revenues and a significant reduction in aftermarket demand. Comprehensive plans are in place to mitigate each of these scenarios. And as always, we will be proactive if we feel further action is necessary. Our downside scenario assumes the larger and faster reduction in mining revenues than we've ever seen before. For example, the last mining downturn lasted 3 years, and our aftermarket was resilient throughout. Our stress test assumes a larger contraction over just 9 months and includes a significant and unprecedented reduction in aftermarket revenues.So let's turn to the balance sheet then where, as expected, net debt levels at the end of March were higher than the 31st of December 2019, reflecting the normal seasonal patterns that we have budgeted for. Clearly, the year is now going to be somewhat different to our original budget. But as in prior downturns, we do not see liquidity as an issue given the inherently resilient and cash-generative nature of the business. From a covenant perspective and based on the downside scenario I described before, we would expect the group to remain within our lender covenants supported by the range of mitigating actions that have been identified and are ready to be executed as necessary. Specifically on liquidity and based on the March net debt number, the group has around GBP 500 million of immediately available undrawn committed facilities and cash balances. In addition, we've arranged a GBP 300 million facility under the U.K. government's Covid Corporate Finance Facility and have a further circa GBP 100 million of uncommitted facilities. As part of the normal schedule, we've been undertaking a like-for-like refinancing of our revolving credit facility and term loan, and we expect these discussions to conclude in the second quarter. So in summary, we have plenty of liquidity, and our leverage is expected to be manageable even in a downside scenario. Turning to our outlook. And after a relatively resilient first quarter, we do expect COVID-19 to have a greater impact in the second quarter. And as I said, we've undertaken the first round of actions that will help underpin first half profitability. Given the uncertain environment, though, no specific guidance is provided for the remainder of the year, although we will update as and when visibility improves. So finally, let me conclude with the key takeaways. Our priorities during the COVID-19 crisis are to keep our people and communities safe while fully supporting our customers. Our mining-focused businesses continue to show their relative resilience, reflecting the mission-critical nature of our technology and the benefits of our aftermarket business model. We're protecting the group with a number of prudent actions to cost and cash preservation and have a number of further mitigation actions available should they be required in a downside scenario. And finally, our recent portfolio changes mean we are well positioned to benefit from the positive long-term fundamentals of our mining markets. We are ideally placed to help our customers become more efficient today while also enabling the transition to more sustainable operations in the future. Thank you again for listening. John and I will now be delighted to take any questions you may have. Back to you, operator, please.
[Operator Instructions] Our first question comes from the line of Lars Brorson from Barclays.
I have 3 quick ones, if I can, Jon. Just firstly, on the Minerals aftermarket comment of strength in March. I'm just trying to reconcile that with sort of mines shutdown. Do you interpret that as safety stocking ahead of expected supply chain disruption? Or is there anything else sort of unusually going on as far as just the very recent numbers in your Minerals aftermarket is concerned? That will be my question number one.
Lars, yes. Look, I mean, there was a little bit of stocking up here and there where customers had concerns about continuity of supply. But I wouldn't say that was a massive factor in the scheme of things. Don't forget that most mines were running through the month of March, and most markets were actually going pretty well. So it was a good month and a good first quarter in terms of the aftermarket that we saw. So I think we are -- stocking out is probably relatively modest in the scheme of things. Clearly, the effect of the shutdowns in mines in Peru and Panama and South Africa are going to have more of an effect as we go through the second quarter and in April. But as I said, with the comments that we've seen so far coming through in April is that the aftermarket remains fairly resilient.
That's helpful. Secondly, if I can ask, Jon, just to -- a slightly higher-level question, maybe around drop-through in ESCO. We don't have a lot of history here. We obviously have the presentation you provided around the time of the acquisition, where I think we saw was a 700, 800 basis point margin contraction over 4 years on a 20%, 25% revenue drop. And with all the caveats you gave at the time around ESCO being late in terms of taking costs out, can you help us a little bit with how to think about drop-through or incremental margins in ESCO in the short to medium term? Obviously, you've had some operational changes under your ownership, but it is still the most operationally geared of your divisions.
Yes. I think the fundamental point to note is that the ESCO operating platform, fixed overhead base, that we have at the moment is fundamentally different to what it was at the time of the last mining downturn, a number of its older and more efficient foundries that are sustained through most of that period were closed at the back end of the last mining downturn. The business is running at not far off 100% capacity utilization at the moment. We've been struggling for full capacity, to be honest, as we talked a little bit about last year. And so we expect that the decrementals would be broadly similar to that which we see in Minerals, for example, whereby we expect that we'll see the gross margin flow through, but we'll be able to offset that to a fairly substantial degree by SG&A savings. So the fairly sort of modest declines that we're expecting at the moment shouldn't lead to a particularly damaging drop-through, and that's a current scenario thinking.
Helpful. Thirdly and finally, if I just can, I was curious about your stress testing and what the downside case says around particularly operating free cash flow in the short term, say in Q2 and Q3, and what levels you have around particularly CapEx and working capital, how are you phasing CapEx for the year, what should we pencil in, by the way, for the full year in terms of CapEx and also working capital. But maybe you can help us understand a little bit better what you see in your downside case as far as operating free cash flow is concerned in the short term.
Yes. Well, I think the first point, I'll let John sort of deal on the specifics in terms of the CapEx guidance and how we're thinking of working capital. But the overarching point is that we expect business continues to be highly cash-generative. We've seen that through previous downturns. I'd say the operating model works. And to the extent that we do see revenue or volume decline, then that will drive reduction in receivables and inventories and so on, which will flow through in terms of working capital reductions. But John, in terms of the specifics on CapEx, in particular?
Sure. Lars, in terms of CapEx, the previous guidance was, as you know, around GBP 100 million. And with the restrictions that we're putting on that, to limit that to sort of safety CapEx and CapEx already committed, then I would think, over the course of the year, we should be looking to save around 1/3 of that original estimate, and that would be broadly phased evenly over first half, second half. And in terms of working capital, as you know, we always see an outflow during the first half of the year given normal seasonal patterns, which I think we will still see a modest outflow in the first half of this year but certainly looking to limit that relative to what we've seen in recent years. And then over the full year, it will really obviously depend how the year turns out in terms of volumes and activity but looking to minimize any outflow on a full year basis. And just worth remembering that we got a little bit of a benefit last year with the advanced payments and so on, on the Iron Bridge Project. But I think certainly very -- a key focus of ours and certainly looking to minimize any outflow on a full year basis.
Our following question comes from the line of Andrew Wilson.
I've just got 3 questions as well. I think if I can just start with a sort of high-level one, maybe on the aftermarket. And can you just remind us a little bit on the differences, if any, but the differences between the sort of Minerals and ESCO offering within the aftermarket and just how the differences might impact what we see through the Q2? Just trying to sort of think -- I guess my thinking is that the Minerals business would be more resilient than ESCO potentially. Just trying to get a sense of how you're thinking about that. And also, I guess, any indication within April or that you could help us, it would be great.
Yes. I think, Andy, the fundamental difference, well, there's 2 things I would say. I mean, first of all, the ESCO aftermarket is really the GET and other sort of LIP system consumables which is a sort of relatively narrow product range, whereas Minerals clearly have a much broader aftermarket operation across all of the mill circuit and degree in dry processing. So there's a bit -- the Minerals aftermarket is going to be a little bit more diversified than you see on ESCO. But a fundamental difference, and which we've been clear on from the timing of the acquisition, is that regardless of commodity prices, miners tend to keep producing. So the minerals market will see that the mill circuit is continuing to run, therefore, there's a constant sort of drawdown in terms of spares requirements for the mill circuit. Whereas for ESCO, again, if the miner keeps digging, then there is going to be demand for ground engaging tools. But in extreme circumstances, they can stop blasting and moving earth and just run down stockpiles to feed the mill circuit. So you can occasionally see that. So that's what I would call out in terms of the difference in practice that you potentially might see. But in terms of current experience, certainly, no sense of any of that happening at the moment. But clearly, that might be a feature depending on how the balance of the year plays out.
And just to follow up to that, it doesn't sound like you've had too many difficulties in terms of actually getting product to those mines which are still open but obviously potentially with some restrictions. It doesn't sound like there's been much disruption from that.
No, not at all. We've been able to fully satisfy the demand from our customers. As I said in my comments, the vast majority of our operations are open. And even in those countries where we've been shut for a period of time, we've still been able to -- because our customers and ourselves are designated as essential businesses in most jurisdictions, we've been able to keep warehouses or distribution centers open and supplying to our customers. So the only impact we've really seen here in mine is actually shutdown and it doesn't need anything, then obviously, we're not supplying. But in terms of our internal manufacturing and supply chain, we've been able to keep going, and that's a testament to the decentralized and regional manufacturing footprint, where even if we've had issues, we can supply from elsewhere.
That's helpful. Just on the cash side, I mean, there's quite a lot of detail in the statement, so apologies if I could kind of work this out, but I guess it's easier to ask. The GBP 75 million is sort of cash conservation or mitigation actions which you talked about, just to be clear, does that include working capital and CapEx within that? Or is that a comment around the central costs and obviously the various programs within more divisions?
No. So there's 2 numbers in the statement. The GBP 75 million is not a cash number as such. The GBP 140 million that we highlight is a cash conservation number for the first half, which is principally the dividend, cuts in CapEx and rephasing of some tax payments. The GBP 75 million is what -- so this is the cost savings programs that we've implemented that we would expect to deliver on. So that's a realized number over the remainder of the year. And of course, that will also have a cash benefit, but the phasing of that might be slightly different.
Yes. No, understood. Okay. That's very clear. And then maybe just a final one, just on those cost savings, and again, obviously, I appreciate this in detail in the statement. But just to clarify, how much of that GBP 75 million is going to be structural costs coming on to the businesses?
If you think -- well, what we've done, I suppose, across the business is to say that we've gone region-by-region because, clearly, the different regions of each business are in a different place. And some regions have seen more of an effect of COVID-19 than others, and, therefore, the cost savings that we have taken out have been really focused on the areas that we need to. So for example, in Chile, where actually demand is very strong, all the mines are running, then the actions we've taken are very, very modest. Whereas in South Africa, where the mines have been shut down for a long period of time, we've got ongoing structural issues in Central Africa, then we've taken a more fundamental view. So I can't give you an exact split. Some of it is structural takeout. So in Central Africa, we reconfigured our service center footprint, we've fundamentally changed our sales and distribution model in terms of how we go to market to take cost out. But some of it is pure variable cost that is just reflective of a slightly lower level of volumes in those markets where trading is a little bit softer at the moment. So I'd say the majority of it is variable, and there is an element of structural in there, but not a huge number.
Our following question comes from the line of Will Turner from Goldman Sachs.
Many of the questions I have, have already been asked, so that's quite good. Just a couple of ones. So obviously, you announced a couple of months ago your potential strategic action with the Oil & Gas business. I was just wondering what is your latest thoughts with, obviously, the recent developments and how you plan on kind of managing the business if you were to be a holder of it for the medium term.
Yes. So clearly, the current market environment, as it was over the last couple of weeks, is not hugely conducive to us being able to do anything in the short term in terms of progressing with our desire to maximize value from that business. But that absolutely remains the intent to do so. And I would say that since we made the announcement in February, we've learned a lot. We've got a lot of intelligence in terms about who the potential buyers might be. And therefore, alongside the preparation that we've clearly been doing for a separation, we feel that when a window opens, we're in a good place to hopefully transact. But clearly, it's very, very difficult to put a frame on that from a time perspective at the moment. Fundamentally, whether we sell this year or next year or whatever, it doesn't change my view on how we run the business. It operates -- it has been operating in a highly cyclical environment, and we've got to manage the business for that. So that means being aggressive in terms of taking costs out in the short term to protect the bottom line as best we can and to deliver cash generation. But at the same time, in the high-quality business, the long-term outlook, I think, is positive, and we need to make sure that we don't do anything that damages the capability of the business, so that whether it's in our hands for a little bit longer or in somebody else's hands, it's able to take advantage of the opportunities that are out there. So nothing fundamental in terms of the way that we're managing the business.
Great. And then just kind of on the free cash flow. Are you -- so clearly, you're expecting for the full year to be positive. Could you just give a bit more about how you're expecting the first half and the second half to develop? Obviously, with the working capital drag in the first half, would that mean that the first half has a potential to be not positive or low number? I will be just interested to get a bit of color on those weightings.
Okay. John, can I ask you to pick that one up?
Well, of course. No problem, Will. So I mean, I think it follows similar lines to my response to the working capital question earlier, but clearly, we normally do have that seasonal pattern that we'll look to minimize, clearly, the major component of the dividend, which is the 2019 final dividend, which is withdrawn, would have been GBP 80 million or thereabouts of cash in the first half, which now wouldn't happen. Jon referred to the phasing of tax payments, where with various authorities around the world have provided opportunity in the COVID environment to delay payments into the second half. So I think there is -- there are some positive boost to the first half. That means it will be more positive than in prior years, but still the sort of largest element of operating cash flow typically does flow in the second half, and I would expect that to be the case in this year as well. But clearly, we need to -- we're not guiding, we need to wait and see how things pan out. But there still will be a second half weighting, but the first half certainly has got some positive drivers in it relative to prior years.
Our following question comes from the line of Max Yates from Credit Suisse.
Just -- my first question is on the mining aftermarket. And could you give us any sort of up-to-date commentary around those individual countries where we've seen these restrictions, so Peru, South Africa, Panama? And we've obviously heard it's kind of increasingly in certain regions, mining is being considered a more important industry that's being put on sort of the special industries' list. So could you just tell us actually sort of today where we are with those restrictions, whether we're likely to -- or whether we've come out the other side of any of those, or if you've seen any positive developments in the countries in terms of them being put on a sort of list of special industries? That would be helpful.
Yes. So yes, Max, it's a mixed picture. So I would say that actually, most of the countries that you mentioned there, the broader country-wide restrictions are being extended. But what we've seen -- and if you take Peru, for example, it started out as a total shutdown on everything, all manufacturing, including mining. And then there was some lobbying from certain of the miners saying, in a minute, if we shut down, that's going to have a horrendous cost because you know what the restart, recommissioning costs can be for a mine site if we stop. So they lobbied, some other miners lobbied and were able to keep going. And therefore, we -- where we have been shut down, we're able to lobby to say, if our customer is going, then we need to keep open as well. So in Peru, our manufacturing is actually closed down, but some of the service centers are open and we've got sufficient inventory in the warehouses and through distribution to be able to support some of those customers. And it's actually a fairly similar patent in South Africa, where, although the lockdown is being extended, then there is a little relief in terms of some of the mines being allowed to operate. And broadly speaking, I expect from here that, that trend will continue. But we're probably going to see moments where there's either a spike in the virus in a particular country or in a particular region, which causes an action to be taken. So I think we -- through the second quarter, we saw this gets a bit stopped here and on specific additions.But so far, in the really big regions for us, if I take Australia, Chile, Brazil, copper and iron ore production, the big low-cost producers are still very much keeping going. So it's a mixed picture. I think it's going to be stocked out for a little while. But as we think about this in quarter or actually we think that the second quarter that will abate. There's a decent amount of coverage for it than what we expect. And as we said, April has not been too bad so far in terms of the order intake. So there are -- it's really about what does the second half look like, where there's much less clarity because, frankly, it's going to be all about what happens to demand for commodities and whether that starts to drive production shutdowns because at the moment, it's really all been about supply side. And the big question is whether it shifts to a demand-side issue, which is the one that we're obviously watching really, really closely in terms of what are the leading indicators for that.
Okay. That's helpful. And just my second question is around, could you help us think through any COVID-related additional costs that you might expect to face as a result of whether it's kind of freight costs or any sort of additional supply chain measures you've had to take because of restrictions? Just anything we should be thinking about that may drive sort of unusual seasonality in the Minerals' margin this year, or have you been largely unaffected on the additional cost front?
No. Let me try and answer that, and I'll ask John to pitch in if you can think of anything else. But I think the generic answer is no. The only really sort of significant incremental costs that we are carrying or will incur is really around some of the restructuring that we've done, where we're going to be carrying the cost of some of the redundancy programs and other one-offs associated with that. But by and large, I mean it comes back down to the decentralized localized nature of our operations that we don't necessarily expect that there's going to be any sort of significant things that are unusual in terms of supply chain distribution costs. John, can you think of anything?
No. I think that's consistent, Jon. I think the main ones, the restructuring costs that we flagged in the statement, nothing beyond that.
Okay. And just my final question is just thinking a little bit longer term about the Oil & Gas business. Obviously, we kind of went into this year thinking, so the EBIT would be down year-over-year at kind of $30 oil. We've now gone kind of lower than that. I mean, what kind of oil price do we need to see for this business to earn a double-digit margin? Because I've kind of always linked to return to double-digit margin as the kind of level when you might sort of look to dispose of this business. So I'm just trying to sort of think through, it was probably unlikely to see a disposal this year at $30 oil. We're now lower than that. So what kind of level does this business make a sort of adequate return that would allow you to think more proactively about disposing of it?
Well, I think there's a number of ways you can look at that, but I would start by saying that in the round, we'll be very clear on this. We see the move to exit Oil & Gas at some point in the future as being viewed through a lens of maximizing value, and that's partly about the price, but it's partly about what that does to the overall rating of the group when it is a mining -- when it becomes a mining technology, pure play. It's about what it does to our leverage and balance sheet metrics and capital allocation, it's about what it does in terms of freeing up management time to allow us to really focus on what we believe are the very, very exciting opportunities from around sustainability and technology agenda that we have created across Minerals and ESCO. So that's the frame, if you like, the lens that we will consider where we go with Oil & Gas.To the specific question in terms of where you get to double-digit margins, then you're probably going to need to -- you're going to need to see global supply and demand for oil come back into balance, however that happens, through production cuts elsewhere or demand recovery and the current inventories being worked down. And that probably implies you need that balance to be reattained and the oil price probably somewhere north of $50 to get you back to that situation. But I would say to you in the context of the broader comments I made, I don't have to have double-digit margins as a trigger to achieve the maximizing value, which is our overall objective in doing this.
The following question comes from the line of Mark Davies Jones from Stifel.
Can I come back to the demand side and the production trends in driving the outcome in Minerals? Looking across the range of commodities you're exposed to, where are you concerned on the outlook through the second half? We've heard some slightly more negative noises perhaps around iron ore. Obviously, there's some oil sand issues. But at the other end, I guess, gold is looking robust. Where do you see the risk in that as we go through the balance of the year?
Mark, yes, that's a very good question. I think in terms of the immediate concerns, or I'd say, while we said the oil sands has been relatively robust, and there are reasons why that has been the case in a situation where we see a sustained surplus of oil, and I think that does start to get a little bit more difficult. Iron ore in the U.S., where it is vertically integrated with steel and auto manufacturing, is of concern. And as to a more broader comment around copper and iron ore globally, then it is really going to depend on what happens with global GDP and what that means for demand for those materials. And at the moment, the commodity price has been recovering, telling us that -- for both those metals telling us that the -- at the moment, the constraints that we've seen on the supply side are kind of in balance with demand concerns. And so it's really how that plays out. We don't have a crystal ball. We don't know. But if global GDP takes a sustained hit, and we start to see inventories build in China, for example, which they're not at the moment. In fact, they've been going down since Chinese manufacturing restarted. Those are the triggers that we're looking at, but it's very, very difficult to tell exactly how that's going to play out other than in those specific areas that I just mentioned.
Okay. And in that context, do you see any risk of timings around Iron Bridge deliveries? Any chance that gets pushed out a bit beyond the current year?
Well, there's always a chance, but so far, they have been absolutely focused on delivering in accordance with the time line. Construction of the mine site is going according to plan. As I said, the manufacturing of the long lead items in our plant is going according to plan. We're currently negotiating with them on the ongoing aftermarket contract, which is going to be a multiyear contract which will hopefully have some lease on soon, which is good. And the key thing, I think, for Iron Bridge, going back to the fact that it's a magnetite deposit, means that it is a very high-quality ore, and they've already got customers for the production. So in a sense, they are saying to us that we don't see any real risk in this because, as soon as we start producing, we can sell this stuff. So I can never say with 100% certainty that there won't be a delay. But so far, so good.
Our following question comes from the line of Robert Davies from Morgan Stanley.
First one was just getting in a little bit more on your remote aftermarket offering. Just maybe give us a little bit more color exactly what you're doing there and what's the uptake. Is it sort of varied by region or the profitability of your sort of basic service against spare parts where parts stack up? I'd be interested to find out a little bit more about your remote aftermarket offering, if possible.
Sorry, when you say remote, what do you mean?
So in doing sort of service and sort of upgrade work, I guess, sort of via Skype or sort of over the telephone, are you doing much of that activity in terms of aftermarket at the moment? Or are you managing to get all your people on the site as needed or keeping people on site? I'd just be interested to know if you're doing any of that work remotely or getting the customer to do it with your help virtually.
Yes. So we've got some great -- sorry, I just -- sorry to ask on the clarification, I just want to be clear where you were going with the question. But -- so as you know, I mean, the vast majority of our aftermarket is spares. So it's hard product sales. And so -- and as I said earlier, that's been largely unaffected because of our ability to leverage the global manufacturing footprint, supply chain that we have. And service is a relatively small component. But we've got some great examples of where we're using technology. So for example, we just had a number of pumps landed from Europe into a new mine site in Chile, and the engineers who would normally travel with those pumps to complete the build of the pumps and the installation and commissioning have not been able to travel. So we've been able to use local engineers working with augmented reality so that we guide the engineers, the normal commissioning engineers who are in Europe -- can sit in Europe, and they can help the locals to put the pumps together and make sure they're installed correctly. And I see that this whole situation, that technology, we've already been trialing it and got quite excited by it. But I think this whole situation actually is going to catalyze more and more of that type of working because it's highly effective and, fundamentally, much cheaper to do that if you can work in that way. So I would view that as something that we will do more of. And this crisis, if you like, has provided an opportunity to really test that out and demonstrate the value that it can deliver.
Is that sort of tied in any way to your digital offering? Have you seen any change in uptake or interest in that state that people are just sort of hunkering down and not focused on that because they're trying to save cash? Or are people more willing to look at some of those digital remote offering products to maybe take out some costs? I am interested to know what the dynamics are there too, please.
Yes. No, I mean, we don't -- I mean, the digital program that we set up is now -- in some way, it's not a separate thing. It's the integration that we have on our normal mechanical products, if you like. So everything that goes out is enabled -- every piece of equipment that goes out is enabled to be operated remotely and have digital capability to it. So I would say that's now integrated within our offering. We're continuing with the rollout on the existing installed base. We're continuing with all of the things that we're doing around predictive maintenance, around developing closed-loop control systems where we think that can add value. And that is the future of it. That is one of the big drivers that is going to make mining more sustainable and more efficient in the future as a large part of our technology portion and product road maps, and that is continuing unabated.
Okay. And then my final one was just around your outlook and thought by the different regions for the infrastructure and construction segment. You mentioned obviously seeing some disruption, and I think you mentioned North America. But I guess, you're starting to see some signs in certain regions of maybe construction sites opening up into U.S. If you just kind of -- I'd be quite interested to hear what your guys on the ground are hearing in terms of the regional trends for that infrastructure and construction segment, please.
Yes. So I mean it is really -- it's much more of an ESCO question than for Minerals because Minerals has a relatively small exposure in that base. And as far as -- I mean, the lead indicators both for the U.S. and Europe have been quite negative for a while in terms of construction trends. But what we have seen happening is that actually demand is held up okay, and that's we think because actually, we use third-party dealers, distributors in those markets by and large, and I think they have been concerned about supply constraints to a degree and, therefore, has been probably nudging up their safety stocks a little bit. But we expect that to lift the effect of probably that upstocking and overall lower levels of economic activity to play through in the second quarter. And then again, it comes back to the big question of what does the second half look like. And you could see and you could look at it through different lenders, right? I mean, we could have a sustained economic deterioration, which means that construction and infrastructure spend remains slow, or we could have, as you alluded to, that there's going to be quite a lot of funding coming into infrastructure to try and reinvigorate economies. And we might see that benefit in the second half. So it's just -- it's a big unknown at the moment, and that's clearly why we're not in a position to give any guidance overall because we've just got these unknowns in terms of what the demand is going to look like. But that's a flavor of what we've seen so far.
Our following question comes from the line of Mark Fielding from RBC.
In terms of Oil & Gas, could you maybe just talk in a bit more detail about when you're talking about those losses how you're seeing the picture in SPM versus maybe the other U.S. fracking businesses versus the international business? And then maybe beyond that, in that context of the medium-term thought process of exiting that business, is it an exit as one block? Or could it actually be that there are pieces here that go different directions as well because of their different performance?
Yes. So I think, just to break that down -- thanks, Mark. Just to break that down, the international piece of the business is clearly seeing -- had been on a sort of steady upward trajectory over the last 18 months or so, clearly seeing a little bit of pressure at the moment. But regardless, it's going to be -- it has been for the last 12 months and probably is not going to be much different than sort of low single-digit millions profitability. So I mean the top line will be a bit weaker, but I think it will remain profitable. And it's really that the North American businesses, both pressure pumping and pressure control, where we're getting to a point at the moment where volumes are expected to be so low over the next few months as we virtually -- there's not much chance you can do in terms of cutting costs, so we've just followed the market down, have been as aggressive as we can. But you get to a point where we are probably going to incur operating losses. Now we're doing everything we can to try and remain EBITDA-breakeven and then with the working capital unwind to be cash-generative. But that's where we are.On the second question in terms of potential exit routes, our strong preference would clearly be to sell the division as a whole whenever a window to do so opens up. And we think that is a broad balance as far as there is likely to be interested for the division as a whole. In theory, could we sell it in different parts, then that is also possible but, as I say, not the preferred route.
Thank you. We have no further questions at this time. [Operator Instructions] There are no further questions coming through. Please go ahead.
Yes. Okay. I think that's the hour up anyway. So can I just finish by saying thank you very much, everybody, for your participation and the questions. Much appreciated. And of course, if there's any follow-on questions, please give Stephen a chat through the day, and we will be glad to help as best we can. But in the meantime, thanks again, and I hope you all stay safe and well. Take care.
That does conclude our conference for today. Thank you for participating. You may all disconnect. Speakers, please stand by.