Weir Group PLC
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Weir Group PLC
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Good day, and thank you for standing by. Welcome to The Weir Group PLC Third Quarter Trading Update Call. [Operator Instructions] After the speaker's presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your speaker today, Jon Stanton, The Weir Group's CEO. Please go ahead.
Thank you, operator, and good morning, ladies and gentlemen, and thank you very much for joining us for this update at short notice.As you have seen, the group is currently managing the consequences of a sophisticated ransomware attack. My team acted early, decisively and robustly to protect the business from this attack, and I'm very proud of the way they responded. I will give you as much detail on the incident as I can this morning while being mindful that this is a criminal act and a comprehensive forensic investigation is underway in cooperation with intelligent services and relevant regulators. As a result of this update, we've brought forward publication of our third quarter IMS, and we've done this as soon as we could quantify the potential financial impacts of the consequences of the attack. While cyber instant had no impact on order demand, which was very strong in Q3, it has disrupted our operations around the world, and I'll come back to describe the impact shortly. Most importantly, this does not detract at all from our confidence in our strategy and ability to hit our 3-year growth and margin ambitions set out earlier this year. Let me start with a summary of the third quarter, where the group saw a very strong demand across our markets. Both mining and infrastructure markets are buoyant, with mining underpinned by commodity prices that remains significantly above incentive levels, particularly for the group's main exposures of copper, iron ore and gold. Our mining customers remain intensely focused on maximizing production across their assets and avoiding downtime, which is reflected in our strong order trends. Mine site access has improved overall, although issues persist in some markets and travel constraints do remain a hindrance to us. From an operational perspective, supply chain inflation, and freight and logistics complexities have not moderated since our last update, but we have continued to fully mitigate their effects. Overall, group orders in the third quarter increased 31% year-on-year, with original equipment up 71% and aftermarket up 21%. And -- so let me now give a little color on each division, starting with Minerals. Here, original equipment orders were GBP 129 million, up 71% year-on-year, reflecting strong conversion of our pipeline of firm quotes. Orders were reflective of the very active markets for smaller brownfield and integrated solutions, including sustainability-related projects. We saw good orders for HPGRs and GEHO pumps, our longer lead time products, while demand for the mill circuit product range was also strong. To give some further color, the largest 2 orders in the quarter were GBP 6 million or GBP 5 million with a long tail of smaller project wins. If you remember, Q1 included the Ferrexpo order for GBP 36 million, and Q2 included the APAC dewatering order for GBP 33 million. So the underlying sequential OE trend is very positive, and we expect to see OE orders remain strong in the coming quarters. Aftermarket orders were GBP 262 million, up 16% year-on-year, reflecting strong activity levels across all regions and fully in line with our expectations sequentially when the multi-period orders are excluded from the Q2 comparison. Minerals Division revenues was somewhat impacted by the cyber incident, which I'll talk about shortly. Turning to ESCO, where orders were GBP 137 million, up 36% over last year and hitting a fifth straight quarter of sequential growth from the low point in Q2 2020. ESCO is now above the previous record quarter hitting Q2 2019, when we were seeing significant pull forward from customers. In Q3 this year, we see growth rates for mining GET accelerates as machine utilization continued to increase as expected. Growth rates moderated in infrastructure, reflecting the OEM slowing down production of new construction machines, but remain at elevated levels. Mining attachments and other capital products, such as large mining buckets, also saw strong demand as we benefited from the expansion of ESCO's product offering into adjacent markets and geographies. Revenues also grew strongly sequentially as the H1 order book converted. Turning to the balance sheet. Net debt at the 30th of September was slightly higher than that reported at the 30th of June 2021, in line with expectations and reflecting normal seasonal patterns. In summary, I'm very pleased with the performance of the business in Q3. The order intake was very strong. And with an extensive pipeline of opportunities, I expect that to continue in Q4, which at this stage is very encouraging for the year-end order book and therefore, our expected performance in 2022. Let me now turn to the cyber attack. It started when our IT security monitoring systems detected suspicious activity on our network in the third week of September. Such intrusions happen from time to time. And as usual, we immediately engaged our external partners to provide further assessment of the risk and response required. It quickly became clear that this was a planned ransomware attack of scale and sophistication that required a very swift and strong response to protect our data, systems and networks. This involved asking every employee with a Windows computer to power down their device, the shutdown of most core applications such as our ERP and engineering systems, and the severance of all data links between our applications and from those applications to the Internet. We believe this quick but radical action was crucial in containing the incidents. At this stage, there is no evidence of any data being exfiltrated or encrypted. Clearly, this comprehensive response has had an impact on our business. Our people have had to adapt quickly, and the way they have done so has been magnificent. It's not easy for an engineering and manufacturing business to voluntarily disable its digital systems, to go to lights-out, but our teams immediately started problem-solving and found workarounds that mitigated any impact on our customers, including manual dispatch and invoicing of finished goods and going back to paper drawings, for example. Since the initial actions contained the threats, we've been focused on restoring systems, prioritizing those applications that are most business critical, such as our ERP and engineering software. And while we're not yet back to full capability across these systems, we are making excellent progress. Other back-office applications are being reinstated on a priority basis, and we have a clear plan to get most back online over the next few weeks. But we wanted to ensure that as we bring systems back online, we do so safely, securely and in a way that strengthens the resilience of our IT infrastructure even further. As a result of this disruption, we saw approximately GBP 50 million of planned September revenues slip into the fourth quarter, as we were not able to dispatch from several locations and we incurred overhead under-recoveries in manufacturing and engineering. While all of the mid-September revenue is expected to be billed in Q4, the knock-on effect of the disruption to our core business processes will cause some slippage of Q4 revenues into 2022, particularly in minerals due to the complexity of its engineering and supply chain functions. We're also likely to see some further overhead under-recovery through October. And by the end of the year, we will have incurred incident management costs as a direct result of the cyber attack of around GBP 5 million. As a result, the group now expects full year PBTA to be in the range of GBP 230 million to GBP 245 million. And while there's a degree of uncertainty over the exact impact, we consider that the low end of this range is a worst-case scenario and then the profit impact will be broadly split GBP 10 million to GBP 20 million from delayed revenues and GBP 10 million to GBP 15 million of overhead under-recoveries alongside the GBP 5 million of direct costs. Let me finish with what I think are the key takeaways from the third quarter. We have a clear strategic focus, we are winning in our markets and the resilience of the business has once more been proven. Our markets are highly active and provide a platform for us to grow the business strongly over the next few years, starting with what is now looking like a really encouraging 2022. In the medium term, the cyber event changes nothing about our confidence in the potential of where to execute strongly on its strategic aims and deliver on the performance goals set out earlier this year, growing faster than our markets, expanding our margins by 150 basis points, strengthening the balance sheet with more predictable cash conversion and, of course, delivering on our sustainability commitments. So thank you for listening. And John and I will now be delighted to take any questions you may have. Back to you, operator, please.
[Operator Instructions] And your first question comes from the line of Arsalan Obaidullah of Deutsche Bank.
Just 2 questions quickly. First, on the cyber attack. Just to understand, obviously, in terms of this happening again also, the preventive measures to ensure that this doesn't repeat itself. Is there -- what steps are being taken to sort of ensure this is a one-off? Is there sort of an upgrade to the systems and sort of things to suggest how it happened? I mean, to be honest, I'm not sort of familiar with these things. And these things happen quite regularly. And often they just don't get through the system. Nothing with sort of infrastructure, and also, defensive management will mitigate them.And then the second question is just to clarify on the orders for the year. I think sort of previously, you suggested sort of in terms of original equipment in minerals, sort of you only talked about if you strip out sort of 2 large orders, you're looking at sort of typically a flat H1 to H2 sort of order level. Is that what you're saying? Would you actually say now the base orders are probably a bit higher? And similarly, on the ESCO side of things for orders, I sort of had an idea for a similar growth in second half versus the first half as an organic growth. So I'm just wondering if that's sort of also still where you're sort of looking to and guiding to?
Yes, in terms of this network incident itself, we are working with world-class advisers, such as Microsoft, to deal with this issue. They are telling us we are doing everything right. Our strategy all along was to defend and contain the issue and then build back very, very carefully and cautiously so that we're clear that all of our systems are clean going forward. So as far as we know, it has been fully contained. We've not lost or had encrypted any data. And as I said, our advisers are telling us we are doing everything right in terms of the way that we are building back. So we're obviously being very cautious, but I'm very happy that we're in a good place. The business has responded very well, particularly the IS&T team, and the way they've managed this incident has been extraordinary. So we feel good that as we come back online, that we're doing all the right things. As regards to the orders for the full year, I think, yes, for Minerals, clearly, we feel very good about the pipeline of opportunities that we have. From an early point of view, it can be lumpy. So there are some -- there's a strong sort of pipeline of small opportunity, so we're consistent with what we've seen in the third quarter, but there are some larger opportunities that could come through as well. So I would expect that the fourth quarter will be probably broadly consistent with third quarter subject to any larger projects coming through, which we made further boost. So I would say the pipeline is very, very strong. And so, it's a run rate business. So I think you really have to look at what -- look at the trends that you've seen over in Q1, Q2, Q3. It might moderate slightly in the fourth quarter as we get into Christmas [ shopping ] and so on. But it is really driven by the activity that we're seeing in the field. And as we've seen over the last few quarters, mining machine utilization has consistently gone up from the sort of 80% utilization that we were as during the peak of COVID last year, we're now nearing max utilization. So that's really reflected in the orders. From here, ESCO is about what can we further do to accelerate the growth, which is about expanding the product line, expanding the geographies that we're operating in. We saw the benefit from that in the third quarter, and we expect to continue to be able to do that as we move through the end of the year.
And your next question comes from the line of Andrew Douglas at Jefferies.
Three quick questions for me, please. Can we just talk about any potential impact on 2022? I recognize that hopefully, all of your systems will be back online by the year-end. And I think the guidance is for no real impact next year. Can I just double check on the GBP 5 million of costs that you're incurring? Does that annualize and become GBP 15 million or GBP 20 million next year? Or is that a short-term one-off? That's the first one. Second one is with regards to bringing stuff back online. I understand that the ERP system and your engineering and manufacturing should brought on so you can kind of run as a proper business. Why are the noncore that's taking time? Are they on different systems? Do they need different approaches? Just wondering there, [indiscernible] And third question is on ESCO. You guided a lower margin at the half-year despite kind of the top-line growth due to the kind of cost structure. Is that still the case? Is that still seeing a lower margin in the second half?
Okay. Well, I'll point the ESCO margin question to John. In relation to 2022, our new building blocks, well, first of all, given the order terms that we've seen in Q2 and Q3, we feel very good about the way the order book is woven into the beginning of next year. And again, we expect to see strong orders through Q4. So we'll start next year with a really nice order book to the extent that any shipments do get deferred, any revenues do get deferred into 2022 then, clearly, that is an added for next year. The GBP 5 million is a one-off. So that is the specific cost of dealing with this event, the money that we have had to spend on our advisers, consultants the cost of doing the containment and restoration at GBP 5 million. That's the total cost that we expect to see through the end of the fourth quarter. And then next year, that should fall away.
Okay. So there's no big increase in your cyber security costs through the central line after the total?
No, no. I mean, stepping back, what we've done -- what we've been doing is we're sort of 2 years into a 3-year program of substantial upgrade within our networks and infrastructure. And frankly, if we hadn't made the improvements in investments that we made in the last 2 years, we'd be in a much worse situation than we are today. So we're definitely seeing the benefit of that investment. And what we're now doing is kind of accelerating the final year of the program into the fourth quarter of this year. So we'll -- by the end of the year, everything will be fully installed. We have essentially completed the upgrade program now and we can move forward with confidence. In terms of the way the systems are coming back on clearly, as I said in my speech, the links between all of our applications and systems were cut to prevent the spread of ransomware across the network. So as we bring them back on, we have to do that on a prioritized basis. And if you think about our new ERP system like SAP, where we are at the moment is we have brought core functionality back. But the SAP system has a multitude of integrations with things like time recording, payroll, purchasing systems, customer ETI. So we get the core system back and then over time add on those applications and rebuild the integrations. And then again, as a prioritized basis. So the core platforms will be fully operational by the end of this month, and then we will bring on the, currently, the lesser important ones over the balance of the year. But the core platforms will be fully operational by the end of this month. And that will allow us to operate broadly as normal. John, the ESCO margin point.
Yes. In terms of the ESCO margins, you're absolutely right. There's no change to what we said at the half-year in terms of the feeding of margins for the reasons that we discussed at that point in time. So we started lowering margins H2 relative to H1. Of course, the one-off costs that we're talking about here related to the cyber incident are part of those will fall within ESCO, which will clearly have a margin impact on a one-off basis. But I think the important point is that underlying absolutely no change to our medium-term margin targets across the group and across both divisions under these one-off costs this year reversed.
And your next question comes from the line of Mark Davies Jones at Stifel.
You obviously had some very specific challenges to deal with over recent weeks. But could you talk a little bit more about the more general ones because we are hearing from a number of people that supply chain logistics challenges are not only not getting easier, in some ways, they're getting tougher through the back end of this year, and there seems to be a general expectation that, that continues for longer, too, into 2022. So do you see that still being a headwind next year in terms of your ability to ship on time and in terms of any additional cost? Or are you confident you can pass all that on and handle those headwinds?
Mark, yes, look, I think thus far, we've done a fantastic job of dealing with those challenges. So if I think about inflation, we got ahead of the curve in terms of passing price increases through to our customers. That was part of the strong margin performance in the first half of the year. Clearly, inflation has continued to increase for certain of our inputs, but we've continued to respond to that through mitigation, through passing pricing towards customers where appropriate, adding surcharges for freight. So I think we have remained ahead of the curve, and I feel very good about our ability to mitigate that. Clearly, the general point about supply chain constraints and shortages and logistics is a headache, has been, but I think we put a huge amount of time into managing that, project managing supply chain, expediting from a project point of view. And again, I think the team has done an amazing job in terms of mitigating that. So I -- like you, I think it's not -- I agree, it's not getting any better. And it feels to us like we could be in a sort of situation through Q1. Hopefully, Q2 next year would be my best guess of where things start to alleviate. But we have fully mitigated the effects of these challenges, and I expect us to continue to be able to do that.
Great. And one follow-up. Have you seen any change in customer behavior given the more macro nervousness out there at the moment, particularly with regards to China? Is there any sign that the margin customers are thinking twice about projects? Or is that still full steam ahead?
I think it's full steam ahead as far as I'm concerned, Mark. Obviously, iron ore prices have come down a little bit. My view, China has responded because we were not prepared to stomach the place the prices have gotten to and needs a correction. That correction is happening, but I don't think it changes are fundamental demand outlook for the commodities that we're exposed to. I remain bullish about the level of CapEx that's coming down the line from our customers. And we certainly see no change in their intent in terms of pushing through some of the projects that need to happen to keep demand and supply balance. So no change.
And your next question comes from the line of Vlad Sergievskii at Bank of America.
Sir, can you comment on the scale of the revenue impact? Because, I mean, GBP 50 million is roughly an equivalent of 9 days of revenue. And you said the attacks happened in the second half of September. Does this mean that the business had the relatively small revenues in the last 2 weeks of September? Or is there another way to think about that? Then secondly, on cash flows. It looks like these attacks had minimal impact on cash flows in Q3. Do you then expect this cash flow impact to happen in Q4? And lastly, on the leverage. With these lower earnings in mind, is there a risk that at the end of the year, net debt-to-EBITDA target will go back above the targeted leverage for you guys? And if that's the case? Would it have any impact on how you think about the data?
Thanks, Vlad. I think 3 questions for the CFO there. Actually, John, if you're okay to handle those?
Sure. No problem, Vlad. So in terms of the scale of the impact, yes, you're right, I mean, GBP 50 million is, give or take, 2 weeks of revenue. So clearly, there's not a perfect way even phasing of our revenues, but that's the broad scale of things. And when we talked about the -- as we said, we expect that will catch up in Q4. But as we get towards the end of the year, then clearly, given the system disruption, the GBP 10 million to GBP 20 million profit impact from potential revenue slippage into 2022, that is broadly the equivalent, that's between 1 and 2 weeks. That just gives you a feel for the type of the scale of revenues, at least, that we're talking about. It's not significant in the context of the quarter to go. In terms of the cash flow, net debt, a little bit higher at the end of Q3 in line with our expectations. And as we move towards the end of the year then, clearly, to the extent the profit impact that we've highlighted comes through, that will clearly roll on to get an impact on leverage to some extent. But I think to follow on to your third question on leverage, our target of 0.5 to 1.5x net debt to EBITDA, we were 1.6 at the end of June. Clearly, we were targeting to get below the 1.5 by the end of the year. And with the additional costs that we're incurring and the potential revenue slippage there, that could have a 0.1, 0.2 sort of type of impact on leverage, which we were still going about that sort of mid-1s when we get to the end of the year. Clearly, difficult for us given the system complexities to be tremendously precise about that at this point in time, but that's the sort of order. And given the strength of our liquidity and comfort in our balance sheet and underlying cash generation at this point in time, while it's clearly a Board decision as we get to the end of the year, I wouldn't anticipate that having any negative impact on the dividend.
And the final question comes from the line of William Ashman at JPMorgan.
Actually, all my questions have been answered. So thanks very much for the time.
Okay. Thanks, William. All right. We'll wrap it up there, if you don't mind. I've got some things to attend to, obviously. But thank you very much for participating at short notice. An immensely frustrating situation, but just a bump in the road, which the business has dealt with very well, and we'll continue to do so. But nothing changes in terms of our view, positivity and confidence in the future of the business. And as I said, looking to 2022 order book building up really, really nicely. So feeling good about what we can achieve next year. So thanks again. And obviously, any follow-up questions, please get in touch with Stephen. Thank you, all.
That does conclude the conference for today. Thank you for participating. You may all disconnect, and speakers please stand by.