Weir Group PLC
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Good morning, ladies and gentlemen. Thank you for standing by, and welcome to your Weir Group plc Q3 2018 Interim Management Statement. [Operator Instructions] I must advise you, your conference is also being recorded today, on Tuesday, the 6th of November 2018. I'd now like to hand the call over to your host, Jon Stanton. Please go ahead.
Thank you, operator, and good morning, ladies and gentlemen, and welcome to today's call. I'm joined by our CFO, John Heasley, and we'll be delighted to take any questions you have in a few moments. But first let me take you through the highlights of the group's third quarter performance.From a group perspective, we delivered another quarter of good growth, underpinned by positive fundamentals in our main markets. Our people have again proven the strength of our business model and executed against our strategic objectives around the world. Including ESCO, which became part of Weir on July 12, orders increased 40% year-on-year, while on a like-for-like basis, they were up 16%. Within this, orders for our original equipment increased by 20%, while aftermarket grew 15%. I'll now turn to each division, starting with Minerals. Money markets continued to be positive, despite the softening in commodity prices as customers remained focused on increasing production volumes and improving the productivity of their existing assets.The focus of our customers on these themes demonstrates the relevance of our integrated solution strategy, where the sales and engineering investments we made last year continue to deliver excellent outcomes for our customers and have translated into continuing order momentum, with incremental orders of GBP 67 million year-to-date from this initiative.Overall, in the third quarter, orders increased 20% with similar growth levels seen in both original equipment and aftermarket solutions.OE orders grew by 19%, benefiting from our focus on brownfield opportunities and some initial orders from the growing pipeline of expansion projects. I was in Chile last month, meeting with some of our largest customers and spending time with our service center engineers as in the field.It's very encouraging to see the way our people are intensely focused on the integrated solutions approach. It involves working closely with our customers directly within the mine, understanding their operational challenges and then delivering solutions that offer quick paybacks in terms of productivity and efficiency.The level of trust that our customers have in us and the way that we are deeply embedded in their operations remains a huge competitive advantage. And this is now being further underpinned by our IoT solutions with the Synertrex commercial rollout taking place in the third quarter and the platform now up and running across a number of customer sites.Brownfield opportunities continue to be a sweet spot for us and are particularly attractive for miners in the current climate because of the speed with which they can be executed and the returns they can offer. And the broader mine process engineering capability we brought into the business means we're having far more wide-reaching conversations with our customers across the entire mine site.And this was evident in the diverse range of larger orders won in the quarter across underground crushing, HPGR, high-pressure pipelines, dewatering and tailings, alongside the core slurry pump and mill circuit product lines. On the greenfield and expansion site, projects quotation activity also continue to increase. Although at a broad level, miners remained cautious about making final investment decisions. To us, the long-term case for expansion project continues to improve, particularly for commodities such as copper, our biggest exposure.This is being driven on the demand side by electrification, electric vehicles, generation grid and charging infrastructure, while on the supply side, depletion of old mines is an increasingly urgent topic of debate, as was evident from my discussions with some of our customers in Chile. Our tracking pipeline of individual $1 billion plus projects would, if fully developed by our customers, involve total investment of more than $200 billion over the next few years, and we are intensely focused on capturing our share of that spend.Turning to the aftermarket. We also saw continuing momentum with orders growing by an exceptional 20% year-on-year, but that included some great one-off wins with a number of commissioning and multi-period spares orders, but there was also good momentum in underlying slurry pump spares and mill circuit solutions, reflecting the ongoing drivers of our business, increasing ore production volumes and ore grade declines.Each region also continues to target further aftermarket share gains, both from the very small proportion of our own installed base where we aren't the current spares provider and in some cases where others installed the original equipment. And this program has delivered GBP 27 million of incremental orders so far this year.So overall, a good quarter, underpinning our unchanged outlook for strong revenue growth and broadly stable margins. Let me now turn to ESCO, our newest division. It has been great to welcome the team to the Weir family. We continue to be impressed with everything we see, which has validated our view of the value-creation opportunities we set out in April. ESCO benefits from the same structural trends of production growth and ore grade declines that are benefiting minerals, with miners looking for technology that improves productivity.Its leading ground engaging tools last longer, and have quicker change-outs, allowing customers to extract and move more material with less downtime. During the third quarter, the division saw increased market share, securing new conversions for our Nemisys Lip System that includes a proprietary locking technology that means once it is installed, the aftermarket capture rate is 100%.Around 1/3 of ESCO's orders are from infrastructure markets, and these also experienced good growth in demand. Overall, the division is trading in line with previous expectations from an order, revenue and margin perspective and delivered 8% order growth on a reported pro forma basis.The integration into the group is progressing well, and we're seeing the benefits of having a broader offering to our customers through collaboration between Minerals and ESCO.We're on track to deliver our target of $30 million in cost synergies over a 3-year period, and this includes sales teams sharing sales offices in Europe and Australia. And this month, we'll see consolidation of our first service center, with plans for further facility sharing in 2019.We also saw our first revenue synergy shortly after completion, with Minerals' Linatex rubber technology being applied to materials handling machines. Plans are now in place to leverage Minerals' presence in Russia, Kazakhstan and West Africa to help ESCO grow in areas where it's currently underrepresented.The pace of the integration is being helped by the close cultural fit between the businesses. These are teams that think and act alike and to me, that's a great advantage. What has really pleased us is that the division hasn't missed a beat in the first 100 days, and indeed, all the evidence we have from employees suggests engagement has gone up since the acquisition was announced. Overall, our 2018 outlook for revenue and operating profits is unchanged. Let me now turn to Oil & Gas, which represents around 1/3 of group orders, but where I'll spend a little more time given the moving parts and market focus.While the division delivered good year-on-year growth of 10%, the story of the quarter was the sequential decline in demand in North America, prompted by Permian capacity constraints and the materialization of excess pressure pumping capacity. In the last few weeks, we've also been dealing with the impact of a specific legacy product performance issue that I'll give more color on in a moment.Since our September update, conditions have continued to soften and indeed, has accelerated towards the end of the third quarter and over the course of October. So what are the market conditions we're specifically seeing? First, some E&P 2018 budgets are becoming exhausted ahead of expectations and residual budgets are being prioritized towards drilling over completion activity. This is being driven by the Permian takeaway constraints, attractive drill rig contracts and production hedged at lower than current spots.This is evident in the way the U.S. rig count is holding up, with DUC wells now hitting almost 8,500. Second, frac fleet utilization has fallen below 60%, with some overbuild in the first half leading to oversupply and meaningful spot pricing pressure developing for some of our pressure pumping customers.Third, service companies have laid down crews or not activated new crews in anticipation of E&P operators taking extended seasonal breaks. In some cases, this has driven cannibalization of idle equipment.This all contributed to double-digit sequential declines in orders for both original equipment and aftermarket products from Q2 to Q3, albeit service and refurb orders continue to run at record levels.Pressure control demand was more robust but was impacted by lower activity in Canada where rig count fell 13% in the period, including a decision by a major customer to suspend its entire drilling program until the New Year.Internationally, markets remained challenging. Early signs of recovery continued with increased project activity. The performance issue I mentioned earlier relates to a specific legacy fluid end design that's been reliably deployed in the fields since its original introduction almost 30 years ago with a consistent record of durability.In the third quarter, for a couple of customers and for a number of specific reasons, it emerged that recent performance fell short of customer expectations and required us to respond quickly to execute an abnormal warranty program to support those specific customers.In terms of ongoing sales, we immediately retrofitted newer technology features into the legacy product to fully resolve the issue, and this is now in the process of being signed off by affected customers. The transition period to the newer technology contributed to the recent decline in aftermarket orders, but in addition, we are recognizing warranty compensation costs and inventory provisions, which will result in an exceptional charge of GBP 25 million being taken in 2018.While this is frustrating, we've responded quickly and decisively to deal with the issue, with the full support of our customers to retain our strategic supplier relationships and draw a line under the issue.So turning to the underlying performance of Oil & Gas for 2018, we now expect operating margins to be slightly lower than last year and for the division to deliver operating profits of between GBP 90 million and GBP 100 million. This reflects the anticipated demand softness in Q4 and the effect of manufacturing under-recoveries from the reduced volumes.Despite the more challenging market conditions, we've broadly maintained earlier pricing gains, offsetting the impact of U.S.-China tariffs. Our performance underpins the division's market position and the benefits of its lower total cost of ownership proposition.Given market conditions, we're taking action to reduce discretionary expenses such as overtime and have frozen hiring. While we will continue to monitor market conditions closely, the current outlook for 2019 is positive, and we have no plans to undertake more substantial cost cutting through this temporary dislocation.We and our customers both regard the current slowdown as a temporary pause in growth. You've heard in this reporting season that service companies expect extended seasonal breaks and budget exhaustion to lead to weaker completions activity and pressure pumping demand in the fourth quarter before progressively improving throughout next year.So assuming oil prices remain supportive, 2019 will see E&P budgets replenished, a record DUC well inventory ready to be completed, more favorable hedging positions relative to Q3 and progressive Permian pipeline capacity additions.By the end of 2019, the Permian will be able to transport an additional 1.5 million barrels of oil per day, a 40% increase from 2018. And for context, total U.K. North Sea output is currently 1.6 million barrels a day. More generally, long-term confidence is based on the positive fundamentals in the wider Oil & Gas market, up in North America and onshore specifically.Production intensity continues to rise, with further staged kind growth expected in 2019, while the EIA predicts U.S. crude production will increase by another 1 million barrels a day next year to almost 12 million. These all auger well for Weir and we continue to target a return to 20% divisional margins over the medium term.Let me now move to Flow Control, which delivered another good quarter, with orders up 13%, with original equipment up 21% and aftermarket orders up 3%, the 6th consecutive order of growth -- quarter of growth. The outlook for broadly stable full year constant currency revenues and mid-single digit operating margins remains unchanged.And as you have seen from the media, we've launched the formal sales process for the division, and we had a good level of interest. As I said before, our focus is on maximizing shareholder value. And we'll update you on further developments when we can.Finally, to summarize, our 2018 constant currency guidance is unchanged for Minerals, for ESCO and for Flow Control, whereas in Oil & Gas, we now expect profits in the range of GBP 90 million to GBP 100 million.Let me finish by highlighting what I think are the key takeaways from this quarter. One, the fundamentals of our main markets remained positive. Two, the slowdown in North American shale is expected to be a temporary phase and the legacy product issue is fully contained. And three, in mining, our largest market, we have a unique and growing offering that positions us strongly for the future. With that, thank you for your time. And John and I would be delighted to take any questions you have. Back to you, operator.
[Operator Instructions] And your first question comes from the line of Lars Brorson from Barclays.
Three, if I could. First of all, on margins, and margin outlook, Jon, into the year-end and start of 2019. I mean, the guide implies high single-digit margins for the second half in Oil & Gas. I wonder whether you could give a bit of color as to the progression through the half. Would it be fair to assume Q3 probably still in the low teens, maybe slightly lower with volumes and pricing still pretty good, and Q4 perhaps something more like breakeven? And also maybe just to the margin outlook and some early thought if you would in 2019. You're making a clear point about maintaining your preparedness for late '19 recovery. Can you help me understand what you might be able to do to cost in a slightly more prolonged downturn through '19?
Yes, Lars, so yes, in relation to Oil & Gas margins, there will be a sequential decline through Q3 and Q4. So progressively slightly worse, but certainly, it'll be into the single digits in Q4, but certainly, not going anywhere close to breakeven. And then as we think about 2019, it's clearly very early to call, but based on what our customers are saying and based on the factors that we look at around the Permian, constraints being removed, the DUC wells, the refreshed E&P budgets, the hedging position and ongoing intensity, I think all the signs are there for a sequential recovery through 2019. I suppose the way that we are thinking about it at the moment is probably 2018 in reverse. But clearly, it's a very dynamic situation, and we'll be giving full guidance in February.
Can you give a little bit of color, Jon, if you could around the segments within Oil & Gas? You've told about North America pressure pumping in first half running in the high-teens, very high-teens, pressure control, obviously lower international, very low single digits. Give me some sense of how you see that pan out over the next couple of quarters? It is exclusively a North American pressure pumping issue and how do you see margins there settle as we get into the early parts of '19?
Yes, so again, we've got our budget reviews next week, so we'll be going through that detail over the course of the next few days, but I would expect for pressure pumping margins which I said earlier going to be sort of single digits in the fourth quarter, which we'll see progressively improve next year as a result of volume improvements and the elimination of the under-recoveries as volume progresses. If we look at our international business, and it's only very modestly profit-making at the moment, and the pressure pumping -- sorry, the pressure control business in North America is close to breakeven as well. So I think it's going to be a combination of margin improvement as the factors play through in 2019 for pressure pumping and sequential improvement in the international and pressure control businesses as the markets pick up through the course of next year.
Helpful. Secondly, if I could just ask to Minerals. Can you give us some sense of the sequential order trends in Minerals? You're doing a bit better, it looks like, than some of your peers this earnings season, very encouraged to see the growth come through. Maybe you could just help us understand normal seasonality in that business and if you look to the lumpiness around some of the larger OE orders, can you give us some sense of how things are moving sequentially Q3 versus Q2 on an underlying basis?
Yes, so I think, if we look at the normal seasonal trends, then we do see aftermarket tend to slow down a little bit in terms of after -- overall order input levels over the second half of the year. So we're seeing a little bit of that. OE is incredibly lumpy, Lars, as you know. So it can swing around from quarter to quarter. But I would say, in terms of the underlying things that we're doing to capture brownfield and to convert the pipeline, that's going very well from my perspective. And I think we're broadly in a positive market environment. So OE orders can jump around depending on when the big ones come through. But I think I see the trend continuing to be positive for us in relation to that market in the past. But if the market, from an aftermarket perspective, clearly 20% growth in the third quarter is incredibly strong relative to expected norms. I would say probably half of that is due to the larger one-off commissioning spares, the multi-period spares orders that we saw. So if you think about the underlying growth rates, then we're into double digits through the first half of the year. And that's probably the underlying growth that we're seeing year-on-year, albeit sort of moderating from a sequential perspective in line with normal, seasonal patterns.
That's helpful color. Can I finally just ask quickly to net debt-to-EBITDA guidance, slightly above 2 from 2 earlier. I mean, I appreciate the lower earnings in Oil & Gas. Could you just help us understand the moving parts in that leverage guidance? Presumably you're getting an offset on working capital on Oil & Gas that is offsetting lower earnings and, therefore, we'll be only moving slightly above 2x. But could you help us just understand what is reflected in that updated guidance, please?
Yes, I'll ask John to do that.
Yes, Lars. So you're right. The main driver of that is the reduced profitability in Oil & Gas from an absolute debt perspective then, not really any significant change as we look at working capital. There were the GBP 60 million outflow in the first half of the year. We'd look to at least hold that position with no further outflow in the second half, maybe slightly positive. So the main driver is the dropoff in Oil & Gas profitability, which as you see will just get leveraged slightly above the 2x.
We will now take our next question from Robert Davies of Morgan Stanley.
Couple of questions. First one, could you just flesh out your expectations of 2019 around the timing? I know there's quite a big debate at the moment that you're seeing some of the U.S. oil service names call the bottom in the fourth quarter. Some people are only expecting quite late in 2019 before things get better. Just if you could perhaps give us an update in terms of what your expectations are in terms of recovery and what customers are seeing? And then, just on -- another one, can you just flesh out a little bit more around that legacy product? Is that product sitting with other customers at the moment or is that sort of a specific product that's just for that -- with that 1 customer? And then did you say that, that was a mix of inventory write-down? And what was the cash cost for that charge this year?
Yes. Robert, so in terms of the sequential development in 2019, it's obviously very early to say. I think we can look at our customers saying, as you say, that Q4 is the bottom. We can look at the positive themes that should support growth as we work through 2019. And as I say, from our perspective, that should see us delivering sequential growth. And the best I can say at this point in time as a sensible way to think about it is 2018 in reverse. We'll just need to see how it plays out, how bullish the market is as the year develops. So that's our best view at this point in time. And let's say, we'll let you know if that will develop over the course of the next couple of months, and we'll -- you'll have a clearer picture in February. In relation to the performance issue, yes, specific legacy product, it's a couple of customers where the life in the field did not expect -- did not hit expected performance parameters. I recall Zinarsis said, that's a number of specific contributory factors that we've identified. We've retrofitted new technology to the legacy design, which is tried and tested technology so we're highly confident that the solution and that product is already being delivered to the affected customers, of which there are only 2 testing at the moment. And we recently just concluded the financial settlement with those customers over the course of the last couple of days. And frankly, we're in a position in the current market where we needed to front up and support those customers. They're strategic customers. I would say the conversations with those customers has been incredibly good. They're very supportive when we're talking about 2019 and go-forward plans. So from our perspective, we've contained the issue and had been prudent in putting forth an exceptional charge to deal with it. Of that, around 2/3 is in relation to expected cash costs, which would be incurred through the balance of this year and some into 2019, reflecting the historic performance issue. And the third is related to inventory provisions that we will take to cover expenditures that we have for the old -- the legacy product that's in the supply chain coming through.
That's great. And then just maybe if I could as a final one, just on Minerals. So I've seen there's been a bit of a mixed bag through the quarter on some of the commentary from the larger greenfield projects, in particular. I know you're obviously sort of more brownfield than productivity focused. But have you noticed any change in customer behavior around larger mining projects? And if so, why are they blaming it on emerging market currencies or just more uncertainty? What are mining customers saying specifically about large projects at the moment?
The way I look at it is the commentary has not really changed in that there is caution around approving larger projects, whether they're greenfield or brownfield. And that dynamic really hasn't changed very much. But the pipeline is there. We've got a terrific pipeline of expansion projects across both greenfield and brownfield. And the conversations with our customers are evolving positively in terms of their intent to let those orders. We look through that and I think they are the fundamentals, as I said in my speech. [ Resigate ] for copper are very strong and with emerging constraints from the supply side. So I think it's a slow-moving process. And as I said to Lars' question earlier, it's going to be a bit lumpy. But for us the direction of travel is good in terms of the number of projects that are out there. And I think our Minerals business is executing incredibly well in that market because of the strategy around integrated solutions, the proximity that we have with our customers and the breadth of our offering there relative to what it used to be. So I think it's a combination of a market which is evolving quite nicely from our perspective, from a project perspective and excellent execution from within our business.
And we'll now take our next question from Amy Wong of UBS.
My question -- I have 2 questions related to the Oil & Gas business, please. The first one relates to some of the pricing pressures you flagged in the September update. But can you just give us an update on kind of where that pricing is going in the aftermarket sequentially in the fourth quarter? And when do you expect that to dissipate? Or are clients now finding some kind of a -- a kind of flattening out there? The second question relates to your comments on excess pressure pumping equipment in the field right now. What's your best view, kind of what's your best guess on how that excess pressure pumping equipment will get deployed into the market over the course of the next 12 months or so?
Amy, so on the pricing pressure that we flagged in September and as I said in my speech, we were worried about it at that point in time based on the initial conversations we have with our customers. And I would say that it's clearly a tough market, and we're having some tough conversations on price. But -- and there are ups and downs, but in the round, we have actually managed to hold on to the pricing gains we've achieved so far over the course of the last 18 months or so. And our expectation is that broadly we'd be able to do that now through this fourth quarter, which is offsetting the inflationary impacts that we're seeing coming through from the China-U.S. tariffs. So again, as I said earlier, it's a dynamic market. Everybody is finding it hard to work through the temporary period, but very pleased with what we've achieved in terms of holding on to pricing in the round. In terms of where the pressure pumping horsepower sits today on the equipment side. If you look at it, we think there's probably about gross absolute horsepower of somewhere close to 24 million in the U.S. with demand today probably around 14 million. So that's -- that gets you to the sort of sub-60% utilization that I mentioned in my speech. If you take it by the theoretical maximum that can be utilized, it's probably only ever 80% of the growth. So that would put you down at about 19 million available compared to the '14. So there's about 5 million as we sit here today that will need to be progressively soaked up through the course of 2019. But for all the reasons we talked about earlier in terms of sequential improvement, my view is that actually a large proportion of that will get soaked up as we work through the course of 2019. And I mean, what that means is there's unlikely to be any further additions or replacement as we work through next year. But I think most of that has the ability to come back to work as those constraints that we've been dealing with latterly get removed.
[Operator Instructions] We'll now take our next question from the line of Mark Davies Jones from Stifel.
Can I just press a little bit more on the competitive dynamics in the pressure pumping business? Obviously, you have a rather noisy U.S. peer who's been claiming large market share gains, particularly in the aftermarket side on pressure pumping. I'm assuming that from your perspective, you think that the retention of your aftermarket is as strong as it has ever been. You're confident that the slowdown is entirely markets and not partly market share, are you?
Yes. So I think, first of all, I think you have to look at the different product mix that we have compared to our peers, which is clearly a factor in relative performance. Generally speaking, I'm very happy with where we sit from a market share perspective. I think we knocked the ball out of the park in the first half and very broadly we're fine with market share across the product line as we go through the second half, with the exception of the product line where we have had the warranty issue because we've not been able to ship and our customers have gone elsewhere for that product in the intervening period. But those customers are strategic customers, and the conversation with them is that, in terms of 2019, how do we get back to previous levels with the new technology. So I think it's just in that very one -- that one specific area, where we've probably seen a little bit of loss of share in the -- over the last couple of months. But I would expect we'll get that back next year. But as to everything else, very happy with market shares.
Okay, great. And as the market continues to weaken overall through Q4 and presumably at least the first quarter of next year is still going to be very difficult. I'm kind of surprised how much of that price you seem to be holding on to at the moment. Is that again just a factor of how high the retention rates are and who's really competing for what slug of business? Or is it also reflecting the customer view that this is a temporary issue? I don't want to beat you up too hard.
Everybody's trying very hard at the moment. I can assure you, but you have to look at the dynamics across the individual product lines, and some are up and some are down. From an OE perspective, if you think about it from a pump point of view, then sales have dropped off quite significantly given the capacity that is in the market at the moment. So in some ways, that pricing is really a nonevent there because volumes are low. In product lines where the market is quite concentrated, if I take flow line, for example, then we are in a much stronger position in terms of price. Fluid end, when there are a few more competitors, it's a little bit harder. But then that's why I say in the round, we've held on to it. And given where we are now and the expectation that Q4 is the bottom, I think we should sort of work through it pretty quickly.
And we will now take our next question from the line of Alexander Virgo of Bank of America Merrill Lynch.
I had a couple questions, actually. One just following up on your -- the point you raised there on fluid ends. I think when we saw you back in Houston, fluid end suppliers had ramped back up to sort of 15 to 20 or, depending on who you spoke to, more than that as the machine shops come in and pick up some of the slack. How much of a shift in dynamics of the competition -- competitive landscape is that now versus 12 to 18 months ago or 2 years ago, or the last cycle given this problem that you've seen on product? Or are they unrelated?
I think they're unrelated. I think as I said earlier, there are a few more competitors around fluid end at the moment. Our focus is absolutely on new technology in our proposition of lowest total cost of ownership. That's why we continue to hold the shares that we have held apart from this latest issue that, as I said, that we will work through. Our large customers fully understand the importance of total cost of ownership. And that's where we play, to be honest. So I don't think that's something much more than that.
Okay, all right. And last question just on, I guess, still on the Oil & Gas side. I think you had a -- you've appointed a new Pressure Pumping divisional president underneath Paul which looks like it's a good appointment. I'm just wondering, when you look at the pressure control business and internationally, I suppose, is a function more of volume than anything else. Is it time to think about pressure control more long-term? Should we actually -- is it a part of the market we should be in?
So yes, good spot on the Pressure Pumping president, and that reflects the evolution of the business and where we are today in terms of actually kind of rebuilding the team post the downturn. And that's the -- sort of the final piece in the jigsaw. Paul Coppinger had been running the business directly. And given where we sit today, Paul was right to bring a specific president of that business back in. As for the pressure control international businesses, look, we have been going through a tough period from a market perspective. But international markets are coming back. The progress that we've actually made in pressure control in North America is very encouraging. The profitability is not yet where I would want it to be. And that's the focus for the next 12 months to 24 months. But we think we can get international margins significantly ahead of where they are, and that's also the case of pressure control North America. So that's all parts of the jigsaw puzzle of getting divisional margins back up to the 20% that we've been plugging for a little while now. So we need to do that.
And our next question today comes from the line of Jonathan Hurn from Deutsche Bank.
Just a couple of questions for me. Firstly, John, just coming back to your point about international margins. So obviously, you're at breakeven or around about breakeven in that business. Where do you think that margin can get to in 2019? Because like you say, it's a big -- it's a reasonably important part of the margin bridge up to around about 20%?
Yes, I think, and it's -- the guys are putting the budget together as we speak. So I haven't seen the numbers yet, but we would hope -- as you said, we're at breakeven. We would hopefully see some progression from there. And over time, we'd like to see those parts of the business delivering double-digit margins. We're not going to get there next year, I expect. But that would be the medium-term intent and, of course, as I said earlier, we'll update in February once we got a clearer view on how that would specifically look in 2019.
Great. And the second one was just on mining. Obviously, brownfield is a really important part of the OE story for you. But I think if you look back, obviously, OE peaked for you in 2012, and if you kind of look at the slurry pump, you probably lost on average maybe sort of 5 to 7 years. I mean, are we due a sort of replacement cycle to kick in on the slurry pump side over the next sort of 12, 24 months?
I mean, slurry pump replacement cycle is just an ongoing theme. It's a fundamental part of the business. If you think about it -- or the way I think about it is a slurry pump should sit at the mill circuit for 20, 30 years, whatever the life of the mine is. And your high-wear parts get changed every 3 or 4 times a year. The casing of the pump may get -- might get changed every couple of years. The motor gets changed after 5 years. After 5 or 7 years, there's not a single component left of the original slurry pump, but there's still a slurry pump sitting there working away. So it doesn't sort of -- most of the peaks or troughs in that actually in underlying aspects of the business, to be honest. So we continue to take you through the brownfield integrated solutions piece. Upgrade pumps give solutions to our customers where we can help them improve productivity and production. That's just an ongoing part of the business.
Okay, very clear. And maybe just one last one, just follow up. Just on ESCO, you put out the cost synergies number out there, which obviously you're sticking to. Now you said you're starting to realize some sales synergies. I mean, can you just give us a little bit more color on maybe what sort of can be gained from the sales synergies side for ESCO, please?
Yes, I mean, it comes from a range of areas, to be honest, Jonathan. So we're not ready to put a number on that yet. But clearly, as we said at the time when we announced the acquisition, there was no revenue synergy baked into the underlying model. So to the extent we can deliver revenue synergies that's upside to what we set forth. So it's a combination of in markets or countries where ESCO doesn't have a presence today or a limited presence, we're able to leverage the Minerals network because, as you know, we have a comprehensive global service center footprint. And we're using that to take ESCO into markets that they're not in already. There are markets where we're both in but actually, we've got a certain market share, they've got a certain market share. So there's a sort of cross-sell into -- they are on some mines that we're not and vice versa, so there's a cross-sell between mines in particular markets. We're looking at channels, so ESCO do use third-party distributors more than we do, and we're looking market-by-market what makes sense in terms of direct versus the distributor. But they do have some great strength in their reach to market and some fantastic networks that we'll take advantage of as well. So all of those things are going to drive incremental revenue synergies. And I guess, on the flip side, we talked about North America. And to a degree, in Europe, ESCO have a terrific dealer network into infrastructure and construction, which is much stronger than the existing Weir one. You need to use third-party in those markets. And we are planning to leverage on the strength that ESCO have on some of our products that go into those markets, such as crushers and web parts. So lots and lots of different aspects to it and a huge amount of work going on at the moment to pull that all together, but it remains an exciting, essential opportunity for us.
And we will now take our next question from the line of Jonathan Hanks of Goldman Sachs.
Jon, it's Jon. I suppose you got a number of good quarters on Minerals order grades, and 3Q stands out, I suppose, particularly, versus most of your peers. And when I hear about you've invested in your mine engineering capability and hence bringing productivity to your customers, I traditionally think about that benefiting your equipment orders. But I just wanted to check kind of to what extent is that also driving higher aftermarket growth? Because obviously, aftermarket growth in Minerals has been running, I suppose -- even kind of ex these larger orders this quarter, been running way ahead for what we might expect of underlying production growth for your customers is.
It's a good question. And of course, it is a factor but the whole point of that is the approach where we're deeply embedded with our customers. We're having run of mine conversations with our customers about a universe of opportunities. Those opportunities could be for a week for a modest expansion or a debottleneck or it could drive aftermarket opportunities just in terms of improving the metallurgy or powder using different linings for pumps, circuits or whatever. So I think, we're seeing the benefit in our end. We're probably seeing some benefit in aftermarket as well. But I think the point is and where we're differentiating ourselves, is that -- those deeply embedded customer relationships where we're having terrific conversations about how we can help them, that frankly we -- is a stronger proposition than what we had before.
[Operator Instructions] We will now take our next question from the line of Sandeep Gandhi from Exane.
Just one question from me. So just on tariffs. So I think you previously talked about GBP 7 million impact from tariffs in H2 for the group which is to be offset by pricing gains, and it seems like you've been able to do that. Just wondering if you could give some guidance on the impact of these tariffs in 2019 across both the Oil & Gas and Minerals divisions.
Sandeep, so yes I think, that's the number you quoted is the sort of H2 impact. So if you annualize that, it's probably double, at least double that as we move into next year. And of course, some of the tariffs step up a little bit. Again, as I said earlier, we're still working through how we -- the budgets for 2019. But by and large, we have managed to absorb those tariffs so far in Oil & Gas. By and large, we've absorbed tariffs where we've got them in the Minerals division and, likewise in ESCO, give or take. So my expectation would be in the round, as we go through next year, we'll be able to -- we won't see an adverse effect on those tariffs and that we'd be able to either absorb them or cover them off through price increases.
I'll now hand the conference back to Jon.
Okay, well, look, thanks very much, everybody. Appreciate the time. And I know that some of these are sell-side guys on the call. We'll see you on -- tomorrow, so I look forward to that. And thank you very much for the questions and for listening. Bye.
Thank you. Ladies and gentlemen, that does conclude the presentation for today. Thank you all for participating. You may now disconnect.