Investors

• Board of Directors
• Financial Reports
• Business Review
  • Strategy and Performance
• Share Information
• Financial Releases
• Investor Information
• Results and Presentations
• Interactive Analyst
• Regulatory News
• Financial Calendar
• Shareholder Services
• Corporate Responsibility
• Corporate Governance

IR Services

 

• Alert Service

Print Bookmark

IR Disclaimer |  IR Privacy

Strategy and Performance

Group Strategy
Our strategy is to deliver long-term value to shareholders, excellent service to customers and rewarding careers to our employees by being the leading global provider of temporary power and temperature control. This strategy was developed following an in-depth review of Aggreko’s business in 2003, and has been consistently applied for the last six years; it continues to be the basis of our business planning. The strong growth in revenues, margins and returns on capital achieved by the Group over the last six years indicate that the strategy is the right one, and we continue to work relentlessly to implement it.

Aggreko Group – excluding pass-through fuel

	2009	2003	CAGR
Revenue (£m)	966	324	20%
Trading profit (£m)	251	42	35%
Trading margin	26%	13%
Return on capital employed (ROCE)*	29%	13%
Enterprise value (£m)	2,719	514	32%
*calculated using average net operating assets

Aggreko’s strategy is developed by the senior management team, led by the Chief Executive, and involves internal and external research, much of it proprietary. We seek to develop a deep understanding of the drivers of demand, changing customer requirements, the competitive environment, as well as developments in technology and regulation. We look at our own strengths and weaknesses, and at the opportunities and threats that are likely to face us. From this analysis, we develop a list of investment and operational options, and analyse their relative risks and rewards, bearing in mind the capabilities and resources of the Group.

We test our strategy on a two-year cycle; this keeps the strategy fresh and relevant, and enables us to spot and react to new opportunities. Having conducted a root-and-branch review in 2003 we re-examined our conclusions in 2005 and 2007 and have done so again in 2009. The conclusions from this most recent review are summarised below:

• The strategy we developed in 2003 and re-confirmed in 2005 and 2007 is working well.
• Our Local business continues to offer attractive opportunities for growth, both from growing our density and footprint in existing markets, and expanding into new countries.
• The factors which have driven the growth of our International Power Projects business will continue to provide plenty of headroom for this business for the foreseeable future; the world faces serious structural shortages of power which will last for many years and which should sustain demand for our services.
• In our 2009 review we stepped up the work we are doing on emissions and planning the transition of our fleet to use equipment with improved emissions performance.
• In all our businesses, there are opportunities to improve the efficiency of operations, whilst maintaining our prized agility. There are plenty of things we can do better.

Below we set out our strategy for each of our business lines, and at the end of this section we reflect on some of the future trends that we believe may come to be important to our business in the years ahead.

Business line operational strategy
Supporting the Group strategy, Aggreko has developed operational strategies for our two different lines of business:

• The Local business rents power and temperature control systems, from small generators to large cooling plants, to customers who are typically within a few hours driving time of our service centres.
• The International Power Projects business installs and operates temporary power plants and sells their power on to utilities, the military and major industrial users.

The Local business
The Local business serves customers from 144 service centres in 34 countries in North, Central & South America, Europe, the Middle East, Africa, Asia and Australasia. This is a business with high transaction volumes: average contracts have a value of around £3,000 and last for 2-3 weeks. The Local business represents 56% of Aggreko’s revenues and 37% of trading profit, excluding pass-through fuel. Since 2003, the performance of the Local business has improved sharply, despite the difficult trading conditions experienced in 2009:

Aggreko Local business

	2009	2003	CAGR	% of Group (09)
Revenue (£m)	544	258	13%	56%
Trading profit (£m)	93	27	23%	37%
Trading margin	17%	10%
ROCE*	20%	11%

There are three elements in our strategy for the Local business:

• Maintain a clear differentiation between our offering and that of our competitors through superior service.
• To be extremely efficient in the way we run the Local business.
• To deliver growth in revenues.

Against the first objective – to maintain a clear differentiation between our offering and our competitors’ – our research shows that Aggreko is regarded by our customers as providing extremely good service, and that we deliver high levels of customer satisfaction. We are determined to maintain this reputation for premium service and we do this through the attitude and expertise of our staff, the geographic reach of our operations, the design, availability and reliability of our equipment, and the ability to respond to our customers 24 hours a day, 7 days a week.

There is tangible evidence that we are succeeding in building service differentiation in the form of our Net Promoter Scores. This is an objective measure of customer satisfaction which we derive from questioning over 25,000 customers a year; when customers off-hire equipment in our Local business, we ask them to rate our performance, and distil their responses into a single number which reflects the relationship between those who think we are wonderful, and those who think we are dreadful. Happily, the former greatly outnumber the latter. Over the last four years our score has improved by 10pp and, in many of our Local businesses, is now at levels that match or exceed those achieved by companies in other sectors renowned for delivering high levels of service.

The second objective of our strategy is to be extremely efficient in the way we run our operations. This is essential if we are to provide superior customer service at a competitive price, and at the same time deliver to our shareholders an attractive return on capital. In a business in which lead-times are short, logistics are complex, and we process a large number of low-value transactions, an essential pre-condition of efficiency is having high quality systems and processes.

The operation of our Local businesses in Europe and North America is based on a ‘hub-and-spoke’ model which has two types of service centre: hubs hold our larger items of equipment as well as providing service and repair facilities; spokes are smaller and act as logistics points from which equipment can be delivered quickly to a customer’s site. The hubs and spokes have been organised into areas in which a manager has responsibility for the revenues, profitability and use of capital within that area. In this model, most administrative and call handling functions are carried out in central rental centres.

An integral part of the strategy for the Local business is the implementation of our ERP system which provides a single, global, IT system for managing our business. The system gives us greatly improved visibility of the business, which enables us to drive improvements in operating efficiency. The system is fully operational in Europe and North America, and is well progressed in the Middle East and Aggreko International.

This operating model, and the investment in a standard global IT platform, is delivering benefits to both our customers and shareholders. As described above, our Net Promoter Scores tell us that the model is benefitting customers, and for our shareholders the benefit has been a compound growth in trading profit of 23% over the last six years and a return on capital employed that has improved from 11% to 20% over the same period.

The third objective of our strategy for the Local business is to deliver growth in revenues by increasing market share and global reach. In our more mature markets, such as North America and Europe, we know that the most profitable businesses are those where we have dense networks of service centres, which can share equipment, staff and customers, and benefit from the low transport costs that come from being physically close to customers. So, in these markets, we focus on adding new service centres and upgrading existing centres to make them more capable. In the last three years, in our mature markets in North America and Europe, we have opened or upgraded service centres in:

North America: Indianapolis, Long Island, Fort McMurray, Gillette
Europe: Bordeaux, Bristol, Metz, Padova, Berlin
Australia: Geraldton, Gladstone

However, we know that our businesses grow fastest where there is strong growth in GDP, and, specifically, in Aggreko GDP (GDP weighted to industries which typically use our services). So a core part of our strategy has been expanding our Local business in the faster-growing economies of South America, the Middle East, Africa and Asia. The acquisition of GE Energy Rentals in 2006 helped us to expand our footprint in Brazil, Chile and Mexico, and since then we have opened or upgraded service centres in:

Africa: Johannesburg
Middle East: Doha, Jebel Ali, Abu Dhabi, Muscat, Jeddah, Al Khobar
Central & South America: Panama, Buenos Aires, Antofagasta
Asia: Pune, Shanghai, Dalian, Singapore
Russia: Moscow

International Power Projects
This business serves the requirements of power utilities, governments, armed forces and major industrial users for utility-quality, temporary power generation. Whereas in the Local business we rent equipment to customers who operate it for themselves, in International Power Projects we contract to provide power generated by plants financed, installed and operated by our own staff. The power plants range in size from 10MW to 100MW on a single site, and the initial contract value will typically be around £1 million, with a duration of 6-9 months, although many contracts are subsequently extended beyond this in both time and value.

The business operates in areas where we do not have a large Local business. Most of the customers are power utilities in Africa, Asia, Central and South America. The driver of demand in these markets is that our customers’ economies are growing, with consequent increases in demand for additional power which cannot be met by the current generating capacity. As a result, many of them face chronic power shortages which damage their ability to support economic growth and increased prosperity. These shortages are often caused or exacerbated by the variability of supply arising from the use of hydro-electric power plants whose output is dependent on rainfall.

International Power Projects now represents 44% of Group revenues and 63% of trading profit excluding pass-through fuel. Since 2003, the International Power Projects business has grown very rapidly:

International Power Projects excl pass-through fuel

	2009	2003	CACR	% of Group (09)
Revenue (£m)	422	66	36%	44%
Trading profit (£m)	158	15	48%	63%
Trading margin	37%	23%
ROCE*	42%	25%
Note: Pass-through fuel refers to revenues we generate from two customers for whom we have agreed to manage the provision of fuel on a ‘pass-through’ basis. This revenue stream fluctuates with the cost of fuel and the volumes taken, while having little impact on our profitability. We therefore exclude pass-through fuel from most discussions of our business.

The strategy for this business is straightforward: grow as fast as we prudently can, to secure for ourselves the operating efficiencies and competitive advantages which come from being the largest global operator. So far, we have been very successful in executing this strategy, and Aggreko’s International Power Projects business is now many times bigger than its next largest competitor.

The reason why it is advantageous to be a global operator in temporary power is because demand can shift rapidly between continents. Six years ago, South America and Sri Lanka were the largest markets, and Africa was only a small proportion of global demand. In 2009, the market in Africa was larger than South America and Sri Lanka combined. It would not surprise us if this situation were to change again in the next three years. These shifts in demand were driven in part by rainfall patterns, in part by the relationship between economic growth and investment in permanent power generation and in part by geo-political issues. To be successful in the long-term, therefore, requires the ability to serve demand globally, and that requires sales, marketing and operational infrastructure to be present in all major markets.

The reason we want to be big – and bigger than any of our competitors – is because we believe that this is a business in which scale brings significant competitive advantages. There are numerous reasons for this:

• Being able to address demand on a world-wide basis means higher utilisation. When fleet returns from a customer at the end of a contract, the speed with which it can be put back on contract again is a major determinant of profitability and returns on capital. Fleet will find new work far more quickly if it can address the total pool of world demand than if it is only able to operate in a single region.
• By the time customers have decided they really do have to spend money on temporary power, they generally want it as fast as possible. Being able to offer very fast lead-times for large amounts of capacity is a significant competitive advantage. Small operators simply cannot afford to keep 250-300MW of capacity (say, £30-£40 million of capital) hanging around waiting for the next job; they will tend to wait until they get a job, and then try to finance and build the equipment to serve it, which inevitably means longer lead-times. Because the equipment used in International Power Projects is also used in the Local business fleet, we manage our large generators as a common global pool. Between the Local business and International Power Projects, we currently have a fleet of around 4,400 of these large generators, and can therefore assemble hundreds of MW of capacity from our various businesses around the world on very short notice. A good example would be a recent contract award in Kenya, where we were able to deliver and commission 140MW within 8 weeks of contract. No competitor could meet this delivery.
• The management of risk is a critical part of our business; we place tens of millions of pounds worth of capital assets in countries where the operational, political and payment risks are significant. While we take great care to mitigate these risks, it is probable that sooner or later we will have a loss of either a debtor, or equipment, or both. However, because of our scale, such a loss would not imperil the Company as a whole. The risk of loss for smaller companies is no less, but their ability to withstand the consequences of a large loss is. Scale therefore allows us to deal in markets where others might sensibly fear to tread.
• Returns from rental businesses are heavily dependent upon the underlying capital cost of the rental fleet. Clearly, large buyers should get better terms than small buyers, and since we are by far the largest purchaser of power generation and temperature control equipment for rental applications in the world, we believe that we are advantaged in this area. The fact that we have the scale to justify having our own manufacturing and design facilities means that we can source equipment better suited to our precise requirements, and more cheaply, than smaller operators.

In summary, a large operator will have lower volatility of demand, better lifetime utilisation of equipment, be better able to respond to customer requirements, and will have a lower fleet cost per MW. In International Power Projects, bigger is better – and Aggreko is now much larger than any other competitor in this market, as well as being the only company to have distribution in all the major markets.

Further ahead
In the 2009 strategy update, we also tried to look ahead and outside the boundaries of our existing business model to see if there might be other opportunities for us to deliver value to our shareholders. We were encouraged by what we found, and we set out below some of our thoughts about the way the energy market might develop. We do this with trepidation, because there is a danger that some people will take our musings on the opportunities that might lie in front of us, and the ideas that we want to explore, as commitments that we will move into a particular market space. They most definitely are not. But on balance, we think it right that we should share with investors and other stakeholders what we are thinking about; how we see the world and our markets evolving; and where we are investing time and money in research. So it is with this caveat that we show below how we see the future.

As we have set out in the section describing our markets, we estimate that world demand for electricity will increase at a compound rate of around 4% between now and 2015; this compares to a growth in net capacity of around 3% per annum, resulting in a world-wide projected shortfall in supply growing at around 50,000MW per annum. This supply : demand gap is likely to be focussed on emerging markets, who have burgeoning demand, and inadequate supply.

These emerging markets have driven the strong demand seen by our International Power Projects business over the last five years. However, in our 2009 study, we have identified that some of the stresses which create demand for us in emerging markets may also start to appear in more developed economies.

The market for the supply of electricity, like most utility businesses, thrives on stability and hates uncertainty. This is particularly so in countries that rely on the private sector to fund investment in power generation, which is the case in most developed markets. The long life and enormous capital costs of the infrastructure required to generate and deliver cheap electricity require an environment in which investors can build power plants and be reasonably sure of the amount of money they will earn over the next thirty or forty years. We believe that the market for the supply of electricity in developed markets is going through a phase where that stability and certainty is lacking. There is going to be a lot of change, uncertainty and market stress, and the next ten years are going to be hugely challenging for governments, regulators, investors and operators.

The main source of that stress and uncertainty arises from the struggle to devise ways to manage the electricity supply market to deliver de-carbonisation of power generation, and to accommodate changing public attitudes to nuclear power. On the one hand, the great power-plant manufacturers of the world have developed over the last fifty years extremely effective technology for generating vast amounts of cheap electricity using hydro-carbon and nuclear fuels. These technologies have been perfected in time for public opinion to decide that they must have less of that, and far more renewable technology, much of which is decades away from competing in terms of either cost or efficiency with thermal plants.

The amount of subsidy, or the increase in the price of carbon, required to level the playing field between a modern Combined-Cycle Gas Turbine and an offshore wind-farm is enormous. Regulators, economists and politicians have struggled to devise ‘market signals’ with which they can square this circle, proposing revisions to policy, subsidy regimes and planning regulations at bewildering rates, and this rapidly changing outlook has encouraged investors to wait-and-see rather than build new plant.

Levels of investment have been inadequate to replace power plants which, either because of age or because they fail to meet emissions standards, will have to be closed in the next ten years. Between 2000 and 2007 the amount of generating capacity outside China over 40 years old (a reasonable proxy for the average life of power plants) more than doubled, and yet in the same period the amount of new capacity commissioned per year outside China fell sharply (see graph); by 2015 over a quarter of the world’s current generating capacity outside China will be over 40 years old.

We believe that the developed world is building up a bow-wave of delayed investment that sometime in the next ten years will have to break. The most immediate effect of the wave breaking will likely be rapid inflation in the building costs of new plant as plant operators rush to order the plants that should already be in construction.

But what plants will they build? The majority of plants will inevitably have to be thermal, but the electricity networks of the future are all going to have to deal with large amounts of wind-power, and that is going to require substantial investment in transmission and distribution networks to cope with intermittent output and, in the case of wind, the fact that large wind-farms have to be positioned far from centres of consumption. For those unfamiliar with the variability of wind generation, the graph below shows the output from Ireland’s 900MW of installed wind capacity during the period 1st January – 31st March 2009.

During this 3-month period, there were 12 occasions where power output varied by more than 100MW within 15 minutes, 76 when that variation occurred within 30 minutes; that variation is equivalent to around 37% of the average output. The peak output was 940MW, the lowest was 9MW. These variations in output bore no relationship to demand, which was at its peak during a cold period in mid-February, characterised (as cold winter periods often are) by very little wind.

Presenting these facts is neither a polemic against wind-power, nor one in favour of thermal plants. It is simply stating that the generation mix in ten years time will be different, and will have to cater for part of the mix being far more variable than system operators are used to having to deal with.

Our whole strategy in developing our International Power Projects business has been based on our analysis that the energy gap between supply and demand was getting worse, and particularly so in emerging markets. So that is not new. What is new is our analysis that similar stresses may begin to emerge in developed economies over the next ten years, driven partially by the policy of de-carbonising power generation and lack of investment.

These stresses should present opportunities for Aggreko. The technology we have developed over recent years has some unique features which may make it attractive to system operators who will have to manage large amounts of renewable generation, low reserve margins and ageing plant. To be more specific:

• We have developed a highly-efficient, multi-fuel, utility power generating capability which has a capital cost per megawatt about one third that of conventional utility power plants. We think conventional power-plant technologies such as Combined-Cycle Gas Turbines, Hydro and Nuclear, while ideally suited for base-load operation, will struggle with the economics of operating on an intermittent basis and the unpredictable start-stop cycle required to respond to the variable output of renewable power generation.
• Our technology is ideally suited to intermittent, fast-start operation. We can bring enough power on-line to keep the lights on for whole cities within 30 seconds. We think system operators will come to find this sort of sustainable, distributed, fast response capability essential if they are to operate with meaningful amounts of wind generation.
• Our technology is ideally suited to distributed operation. Because it comes in 1MW blocks, and is mobile, we can put 25MW here, 150MW there, and 5MW over there. And then can shift 50MW of the 150MW site to the 25MW site within a couple of days. We think that distributed generation will become increasingly popular with system operators and they will value the mobility and flexibility we have the capability to provide. And for our part, we should be able to generate premium returns by being able to move our plant globally to where the need, and therefore prices, are greatest.
• To match what we believe will become an increasingly attractive technical proposition, we also have, for a power generation company, an enormous customer base and global reach. We already are established suppliers to power utilities and governments in around 50 countries. This means that we have the ability to roll out good ideas on a global scale.

In summary: to date the main focus of our International Power Projects business has been emerging markets. Over the next ten years, however, as wind penetration rises, and as old plants retire, reserve margins will fall in developed economies as well. And at this point opportunities might arise for Aggreko to support system operators and utilities in developed markets as well as in emerging markets.

We would like to stress that this is not a short-term opportunity. Quite the opposite: in the short term many developed countries have high reserve margins as the economic crisis has caused power consumption to reduce. But these reserve margins are forecast to fall quite sharply between now and 2015. So we will spend some time over the next few years exploring these ideas.

MW installed by year 1980-2007 vs Plant >40 years old

Ireland output in MW from wind Jan-Mar 2009