Aggreko's CEO Hosts Interim Management Statement Conference (Transcript)

Oct.28.13 | About: Aggreko PLC (ARGKF)

Aggreko Plc (OTCPK:ARGKF) Interim Management Statement Call October 28, 2013 4:30 AM ET

Executives

Rupert Soames – Group CEO

Angus Cockburn – Finance Director

Analysts

Robert Plant – JP Morgan

Will Kirkness – Jefferies & Company

Toby Reeks – Morgan Stanley

Paul Checketts – Barclays Capital

Peter Testa – One Investments

Andrew Chu – Deutsche Bank

George Gregory – UBS

Nicholas de la Grense – Bank of America Merrill Lynch

John Lawson – Investec

Michael Murphy – Numis Securities

Operator

Hello and welcome to today’s Aggreko Third Quarter IMS Analysts and Investors Call. Throughout this call, all participants will be in a listen-only mode, and afterwards there’ll be a question-and-answer session. And just to remind you, this call is being recorded.

Today, I’m very pleased to present Rupert Soames, Chief Executive Officer; and Angus Cockburn, Chief Financial Officer. Gentlemen, over to you.

Rupert Soames

Good morning, everybody, this is Rupert. I’m pleased to say that trading in the third quarter has been in line with our expectations with underlying revenues and trading margins slightly ahead of the same period last year.

The local business is continuing to perform well; the Americas grew by almost 10% in the quarter with the Oil and Gas segment particularly strong. And I am pleased to say that we are now getting real traction in our gas fuel sets in the local business.

Both Asia Pacific and EMEA were flat in the third quarter, and I want to give some color to this. Our APAC local business is heavily weighted to Australia, where we saw a very strong performance in the first half in defiance of the prevailing economic environment there. In Q3, we saw softer conditions in Australia, but I am very pleased with the way that that business is performing as a whole.

In EMEA, the local business is actually doing very well, but in Q3 last year, we had 45 megawatts running in the Cyprus and 160 megawatts of summer peak shaving work in Oman, of which 80 megawatts was accounted for in the local business.

So the comparatives there are tough, and the day-to-day transactional business is actually very strong at the moment, and we are even seeing some better trading in Europe which has been stubbornly flat for several years.

In power projects, the picture is largely as we expected. Revenues in the third quarter were 2% down on an underlying basis with trading margins slightly behind last year. Third quarter order intake was at similar levels to the prior year at 105 megawatts, and full production from our gas plants in Mozambique and Cote d'Ivoire is largely offsetting in revenue if not in margin, reduced volumes in Japan and military.

Now, it’s a year since we told the markets that we thought that conditions in power projects were softening and that we believe that reduced expectations of growth in emerging markets would lead to reduced demand. We also said that we believed that there was growing overcapacity in the diesel-centric power markets.

Events over the last 12 months have, I believe, proved us largely right. With the exception of North Africa, every region in the power project markets has seen lower orders in 2013 than in 2012, and we have seen intense competition in Asia in particular, as people have fought over orders in order to reduce their overcapacity.

I also note that power systems OEMs have been reporting weak conditions in emerging markets this year. Significant currency devaluations and a persistently high oil price have made temporary power more expensive for many of our customers and they remain cautious.

However, a year on from sounding our first cautionary note, I would say that we are possibly slightly less pessimistic than we have been in recent months. There are some reasons to be hopeful, our quotation rate is very high and customers are enthusiastic about our new HFO product.

Overcapacity amongst competitors has, we believe, been somewhat reduced, but until we see tangible evidence of the changing market conditions, we will remain cautious in thought and word and deal.

Finally, whilst on power projects, I want to give you an update on the two company-specific headwinds we faced being the decline in military and in Japan. Now military revenues in 2013 have been a little more robust than we originally thought.

But we are not yet seeing a pickup in the rates of camp closures, and megawatts on hire in this segment are now about 25% down year-on-year, and we expect this trend to continue as troops withdraw from Afghanistan in 2014.

There is somewhat better news from Japan where our customers have extended their 150 megawatts to the end of the year. This has actually had no impact on our expectations for the year, as what we have gained in an additional quarter on rents, we have lost in terms of transit charges which only rises when the plant off-hires, which will be in 2014 at the earliest.

On now to cash flow and CapEx; in the third quarter, cash flow was very strong with net debt reducing by y £83 million, to £469 million at the end of the quarter. You will remember that when we first sounded the alarm about market conditions in October 2012, we immediately responded as we always do by adjusting CapEx to reflect demand.

We sharply reduced the rate of our investment, and as a consequence, we’ve enjoyed the one benefit of slower growth which is strong cash inflow. Over the last year, net debt has fallen by £216 million. We expect to spend about £230 on CapEx in the current year, and much of this is being spent on conversion of our diesel sets into HFO and high efficiency G3+ sets.

And by the end of the year, we expect to have completed over 350 conversions. Our colleagues in Dubai have done a stellar job ramping up the rate of these conversions, and we are currently achieving a run rate of about nine sets a week.

Now as you are aware, we now give CapEx guidance on a six-month forward basis, and we are currently planning to spend around £140 million in the first half of 2014, slightly more than last year, and this reflects an increase in local business CapEx as the business continues to perform well.

We think that local will be about 60% of CapEx in H1 -- in the first half of 2014, but this probably understates the level of capacity growth as we are of course feeding the local business needs for large gensets, from the power projects business as well.

We are going to maintain a firm grip on power projects’ CapEx, and I would just remind everybody that with spare diesel capacity in our fleet, CapEx is likely to be a lagging rather than a leading indicator in terms of power projects.

For the outlook, the position has unchanged since we last reported in August and is as set out in the IMS statement, with profit before tax expected to be in line with market expectations; and on that basis, thank you very much for your attention, and Angus and I will now take your questions.

Question-and-Answer Session

Operator

Thank you very much. (Operator Instructions) Our first question is from the line of Rob Plant of JP Morgan. Please go ahead with your question. Your line is open.

Robert Plant – JP Morgan

Thanks. Good morning, Rupert.

Rupert Soames

Good morning, Rob.

Robert Plant – JP Morgan

Last week, the deal with APR was GE was a turbine deal, but I wondered if you thought there was any implications for Aggreko, generally what you thought about it please?

Rupert Soames

Yes, I mean we obviously read it with interest and you will be aware that we looked at this business back in 2006. To the extent that this was any impacts on us, I would see it actually as being broadly positive I think for three reasons. First, I made comments from APR which make it very clear that the margin and focus on their turbine business and they don’t plan to further expand the reciprocating engine fleet.

I think that that has to be a positive for us and good news for the supply demand balance in the market. Second, it now appears that having sold their energy rental business to us in 2006 and now the turbine business to APR in 2013, GE has definitively exited the power rental business as operators.

Thirdly, there has been sort of this mutter around the market, which we would find it very difficult to source turbines if we decided that we wanted to have a fleet on the basis that suppliers rather wouldn’t supply us or (inaudible) tied up in exclusive long-term deals.

With the change of exclusive long-term deals, I think we can safely say that, if we ever did want to get into turbines, I don’t think we’d have a problem finding a supplier absolutely delighted to partner with us. So, I think that for those three reasons, the deal is probably net hopeful to us.

Robert Plant – JP Morgan

Thank you, Rupert and on that last point, it doesn’t sound as though you’ve changed your strategy on turbines, but have you had any thoughts about maybe tying up with Pratt & Whitney given they must now be looking for someone?

Rupert Soames

Well, the thing about turbines, this is not something of religion. It’s a matter of practicality, and we are going to get led to what the right solution is first by our customers and second by our financial analysis of whether we can make a return from turbines.

I don’t think it would be a problem us entering the market if we wanted to. Our analysis at the moment is actually it’s a relatively small number of customers who want them. There are those who do, but we think it’s a relatively small part of the market; and ten years of history of operating in the power turbine market for all that we know and all that we see is nobody has yet succeeded in making a return on capital out of these beasts.

And it’s not only that they are very expensive in terms of dollars per megawatt, they are not particularly fuel efficient. There also is the track record is over ten years but it’s incredibly difficult. You can’t get much higher rates of utilization out of the turbine fleet, but you can out of a normal [reset] fleet.

So, when you see calculation is done off the returns on capital of turbines, you’ve got to take into account; a, is going to be on the management in the fleet but not utilized, and you already have to look at the GE fleet to see how painful that could be, but you’ve also got to take into account what depreciation you are going to look at, what life you think the product is going to really have.

So, if we see customers really wanting it, what really wanted and if we believe that we can make a good return on capital, then surely we will get into the market. But at the moment, we don’t think that either of those two factors from our point of view are satisfied. I would also make one further point on this is that, our equation on this may be slightly different from those of others, for the very simple reason that we’ve got massive cost advantage in our existing technology in gas and in diesel resets.

So, the cost per megawatt makes much greater difference to us than it does for other people, because our starting point is much lower than anybody else. Anyway, we’ll keep it under review, and we’ve reviewed it every couple of years, we’re not I hope been done about this or – if our customers want it, if we think we can make a decent return on capital, then we would be in that, but until those two conditions are satisfied, we’re going to sit out and see what happens, Does that answer your question?

Robert Plant – JP Morgan

Very clear. Thank you, Rupert

Operator

We now go to Will Kirkness of Jefferies. Please go ahead. Your line is open.

Will Kirkness – Jefferies & Company

Thanks, I just have a couple of questions and if that’s alright? The first one was on HFO, and I wonder if you could talk about the contracts that you are winning there and whether the terms in terms of pricing and everything, are similar, to what you had expected?

And then secondly, just around the customer hesitations, obviously quotations seem to be going well, but the conversion is not quite there at the moment, do you get a sense that if the pricing was lower or if they saw their currency getting stronger or perhaps diesel subsidies picking up again, then they would convert or is there issues do think in there sort of with underlying demand at the moment?

Angus Cockburn

Can I take the second one? As there is no doubt in my mind that the basic dynamic, the demand is growing faster than supply still rules supreme in the emerging markets. The underlying drivers of growth are still there.

There might be growth of demand for electricity, it might be slightly mutedgiven the GDP growth, it is lower now in emerging markets than it was, but equally if you be able to look at what’s happening to the older books of the major OEMs and large power equipment suppliers, that supply order books have also been pretty muted as well.

So I am not -- I am actually not worried about the underlying drivers of growth, but people do have a choice, and our number one competitor is Mr. Do Nothing, Mr. (inaudible), and it’s an expensive proposition getting in temporary power, and people do have the choice, and I think that, at the moment, a lot of – we are seeing a lot of caution in our customers.

I don’t think it’s caution. I don’t think it’s one, but if we drop the prices a bit, all of a sudden the caution would disappear, and I would remind you that our element of charge, which is for supplying and operating the plant is actually a relatively new part of the overall cost.

Maybe, it would make the difference if the oil prices were lower, but that then comes onto our story about HFO. I mean, our strategy is to offer our customers the lowest possible cost per kilowatt hour that they can get, and that is all around being able to offer them the capability to run the cheapest fuel that is available to them, and that to a few of them that means gas, and to everyone that means diesel – everyone is on diesel by the more at an increasing number

They have had the fuel available to them which is a great deal cheaper. So, you’ve asked us about progress on that, we’re very pleased with that. A couple things stand out for me, one is it is actually the order intake is growing faster than it did so when we launched our gas product.

Checking this with the customer set is much more diverse than it was gas. We’ve got one large order and quite a lot of small orders typically by this most recent one for 20 megawatts in Africa, and the people who are ordering is not just utilities, it’s mining, it’s industrial companies, it’s not just in one region, it’s all the way around the world and also we are supplying this out of our local business as well as our power projects business.

And that’s ideally what we’d like to have if these products can play in both. But it’s early days yet, we’ve got– this is not yet an established product, it’s got to get more mileage on the road, but so far so good, and yet we are able to convince customers that the fuel saving is also great that we can – we will be putting HFO at a noticeable premium to standard diesel.

Will Kirkness – Jefferies & Company

Okay, guys. Thank you.

Operator

Our next question is from the line of Toby Reeks at Morgan Stanley. Please go ahead. Your line is open.

Toby Reeks – Morgan Stanley

Good morning, guys. And can I ask a few? On the expectations of military and Japanese revenues, could you give us some sort of steer of what you think you are going to do in terms of dollars next year, I am assuming Japan drops out at the end of the year in your expectations, but could you give us the military number? And secondly, on the CapEx, could you give us what you are expecting in terms of fleet at the end of the first half on achieving that 140 megawatts gives you quite a firm indication of where it will be in the first half by local and IPP?

And then, finally if I can, could you give – and you talked about the enquiry rates picking up, you are obviously feeling slightly more positive, and could you give us an indication of where the enquiry rates are picking up, which types offleets and your confidence that some of that’s going to turn into business in due course?

Rupert Soames

Toby, in terms of Japan and military, first of all, in terms of 2013, we will be expecting somewhere about $120 million, not quite split, slightly heavy on military across the two of them.

As we go forward into 2014, we are doing our budgets during Q4. So we are not aware of the definitive numbers, but our Japanese HEPCO contract has been extended to the end of the year, and if we were to get – if we weren’t to get an extension, we still have a bit of transit revenue in the first quarter of next year, but we will wait and see what happens on that.

In terms of the military, we would expect military to come significantly down next year. We would expect that probably to be sub-$30 million.

Toby Reeks – Morgan Stanley

Okay, thank you.

Rupert Soames

In terms of the fleet, we came into this year with about 5,030 odd megawatts on power projects. We will close the year at somewhere around 5,090 megawatts. In terms of local business, we came in at about 4,463; we would expect it to come out at about 4675, so up 1% in power projects, which has a number of gas sets and up about 5% in local.

In terms of where we will be at the half year, our project spend is going to be on HFO G3+ refurbishment, so we would expect to come out with a similar amount of fleet in terms of where we would be at 30th of June. On the local business again, just a few percentage points ahead.

Toby Reeks – Morgan Stanley

On the – just (inaudible) up on that a little bit, just when you said that you are serving some of the G3+ and HFO at the local business, how should we think about that? Are you…?

Rupert Soames

No, I didn’t say -- G3+ and HFO refurb is all in the power projects.

Toby Reeks – Morgan Stanley

Okay, so there aren’t going to be any HFO contracts in local business?

Rupert Soames

There are HFO contracts in the local business, but they are very small in terms of fleet size. It’s a de minimis number, but we are encouraged by the fact that in some local markets in the Middle East, there is a bit of HFO, but in terms of looking at the overall movement to the fleet, compared to sort of 5000 megawatts, you are talking 20, 30, 40.

Toby Reeks – Morgan Stanley

Okay. Thanks, very much, and just on the HFO, you’ve given us the numbers where you expect to be at the end of the year, could you give us the number where you would expect to be in the first half?

Rupert Soames

We would expect to, we are going to have 350 by the end of the year, we would expect that to be around about 500 for the first half of next year.

Toby Reeks – Morgan Stanley

Okay. Thanks, very much.

Operator

Our next question is from the line of Paul Checketts at Barclays Capital. Please go ahead.

Rupert Soames

Paul, before you ask your question, there was one other question that Toby asked which was about a pickup in the order or the quotation rates and where it was coming from. It’s not so much a pickup. Our quotation rate has been running very strongly since about March, April, that has got stronger through about June, and it’s been strong ever since.

So it’s not as if there has been a pickup in the last two or three months. It has been strong over the last six months. I just wanted to make that clear; and secondly, it has been pretty much all around the world, it’s not a particular area that is stronger one to the other.

Operator

Okay, Paul, please go ahead with your question.

Paul Checketts – Barclays Capital

Thanks, I’ve got, I think two. Firstly around Japan please. When we last spoke, you were feeling a little more passionate that HEPCO wouldn’t extend that contract, and I think usage levels were fairly low. What’s changed there? Why they extended it, and is there a potential that we’ll have some more work there?

Angus Cockburn

I don’t think it’s likely that we are going to get more capacity. The question is, is that when do they decide if they want to keep existing capacity or not. The usage on that plant is very heavily biased towards the winter where not only do the –the Japanese utility have strong demand, but it’s when they also do a lot of their refurbishment of their thermal equipment, their thermal plant as well. So, it is quite a seasonal business, point one.

Secondly, I think that the Japanese are very wisely using us as we are built to be used, i.e. they’ve got the luxury of taking the decision at the last possible minute whether they want to extend or not, a large part of that decision is going to be around what’s happening on the nuclear power plants.

And whatever decisions they take on this, we’re likely to get some poor visibility on that, because it takes about six months to get them followed up, but we will see about taking it as it were three or four months at a time, we are taking it at the same way.

It’s good news that they wanted to extendit, I think that reflects on both on the quality of service that we’ve been giving them. We have a very good relationship with them. But at the end of the day, they want to exercise their right to make up their mind at the last moment whether they wish to keep the equipment or not.

Paul Checketts – Barclays Capital

Right, and can I ask another contract-specific one which is to do with Brazil, 2014, have you – when is the bid process for that expected?

Rupert Soames

It is current at the moment.

Paul Checketts – Barclays Capital

Okay, and the last question is actually on the cash flow. I think it was a little better than probably I expected at least – can you explain what happened there, is there anything you can do about that, and then following on from that, can you give us an update on your thoughts on the potential for a special dividend, if that continues to trend like that?

Angus Cockburn

Well, working capital is a little bit better. In terms of the challenge that we’ve got, around the bad debt provision, that’s still there. I would say that one of our countries, it’s probably a little bit easier than it was and the other one is a little bit more challenging. But overall, we are reasonably encouraged in the third quarter. As we head towards the year end, we would expect net debt somewhere about 430 million. You translate that into sort of using consensus, you are about at 0.7 x net debt-to-EBITDA. Obviously, we’ve said over the longer term that, one-time is what we’ve been comfortable with sort of the past decade. In 2011, we gave cash back [inaudible] through a special dividend [inaudible].

And it’s something we are cognizant of or think about over the next six months and in the run-off, we’ll talk about it in the preliminary results in March. Our preference still always remains to invest in the organic growth or acquisition growth of the business, but it doesn’t makes sense to run net debt down to zero. So something we are [inaudible] we’ll get [inaudible].

Paul Checketts – Barclays Capital

Thanks, very much.

Operator

Our next question is from the line of Peter Testa with One Investments. Please go ahead. Your line is open.

Peter Testa – One Investments

Hi, thanks, very much. Just going back to the question on the conversion rate. Can you give a sense as to where you see evolution in the discussion, as you said the interest has been high since the spring and the conversion rate has been slow since the spring?

Can you give some sort of understanding as to how conversations are evolving and what you have managed to zero in on that’s being your customers or potential customers’ main requirements before making decisions?

And the second question was just you mentioned on diesel [inaudible] CapEx have now become sort of [inaudible] leading indicator, maybe if you could help us understand the utilization rate changes that you are experiencing in diesel now? Are they heading trending up, trending down there or how are they trending? Thank you.

Rupert Soames

If Angus takes utilization question first, I will take the customer question.

Angus Cockburn

Diesel utilization for the second half, we would expect to be in the low 70’s? First half it was about 76%; compare that to year ago we’re in the low 80s. So, diesel utilization is lower than it was hence the comment on the capital.

Rupert Soames

So in terms of the – so what are we doing about that diesel utilization, we are doing a couple, first we are taking diesel sets and converting those into HFO fleet and into G3+s and we are also shipping some of that fleet where it’s needed from power projects into the local business, which gives us some extra relief on that.

In terms of the low conversion rate, remember that for the majority of our customers, whether to take temporary power or not, is a government decision, but most of our utilities are power stations of one sort or another. They are funded by the states and there has to be a coming together of various government departments and consensus. So it is to get the funding.

Now you get certain situations of which Guinea which is where we got a 50 megawatt contract in the summer, where everything comes together incredibly fast, the President says we need to do something but was [laughing] [ph] on the street, they wanted to move and the whole political process goes incredibly quicker.

Another example would be Tunisia, where we have 120 megawatts over the – again, that was a very rapid consensus, I think particularly in what was going on next door. They wanted to secure their power supply at Ramadan, so that all went smoothly. But then you have other countries where the whole political process gets glued up where there is a sense that we can sit [inaudible] we have to do it this month or next year.

And, what we are saying is, there is a great deal of interest, there is a great deal of latent demand. But what has been happening is it been hard to get people to actually cross the line and put pen to the paper on contracts.

And we’d love to be able to force some pace on it, but you can’t, because as I say these are government decisions, they may have to build consensus in the country, by which whether they are going to spend money on buying aircrafts, hospitals or temporary power.

So I think that, what I would characterize it another way I would characterize is that, when the market is busy and the people are confident, you get a phone call from the energy minister saying, can we come and see them next Monday, as opposed to now, we have to call them and we are put on to the secretary - the PA and you are lucky if you get a meeting within two months and it’s a whole thing about the page and urgency on it.

Now, it varies enormously country-to-country. But our general view is, is that, the interest is high, the quotes are high, but getting the conversion has been very difficult. And as I say, with the exception of Northern Africa, we think that order intake across the industry has been [well done] [ph] in 2013 as it was - against what it was in 2012.

Peter Testa – One Investments

Do you think that you need permanent power in a continent which is arriving to be slowdown before you’ll see it and then a real urgency as it requires some temporary power or do you think they’re more driven by this economic confidence?

Rupert Soames

No, I don’t think it’s been driven by the arrival of permanent power, I think there is a dribble of new permanent power going into these countries. If you look at the last figures from flat, 80%, between 70% and 80% of the total new power plant investment in developing markets went into just two countries which was India and China.

And, a theory is that, there is a whole lot of new permanent plants coming online, are just not correct. Now there are countries where that is happening and I can give you two very specific examples where that is happening. But they are not the generality. One of them would be Angola, where after nine years and that’s operating across about eight cities, about two years ago – three years ago, the government decided to go and put in and distributed permanent power stations there.

That’s led to [all powering] [ph] of some of our temporary power. Likewise, in Uganda, they’ve built a hydro power plant a couple of years ago and commissioned that which led to some of our temporary power been [inaudible]. This is absolutely normal. This is why people take temporary power, they take into the bridge that’s very often between temporary and permanent.

But we are not seeing any pick up in the pace of building a permanent power across our customer base. There is a dribble of it, not a rush.

Peter Testa – One Investments

Okay, that's great. Thanks very much.

Operator

Our next question is from the line of Andrew Chu with Deutsche Bank. Please go ahead. Your line is now open.

Andrew Chu – Deutsche Bank

Good morning everyone. I have few questions for me please. Firstly on the CapEx, I was just interested in your views, given that you seem to be a little bit more comfortable, cautiously optimistic about the future and that 140 CapEx number for the first half. I guess that the sort of CapEx number over the last 12 months has been sort of chunking down and given that you are talking about been conservative at this stage I am just wondering in terms that the 140 million CapEx forecast, is that a number that’s sort of cast iron as a sort of conservative number linked to your outlook on things essentially getting a little bit better.

I guess last year you were talking about 150 million for the first half of 2013 I think you came in at 111 and secondly, I wonder if you could give some numbers or some harder numbers around Australia and the growth rates there and also maybe some dollar numbers as to what’s happening on the many projects side and how much has fallen out from Oman and Cyprus? Thank you.

Rupert Soames

Andrew, can I just give you, cuff you gently around the ear, for taking my carefully crafted formulation of saying that we’re marginally less pessimistic, and turning it into we’re cautiously optimistic, and we are not – I would not use the word optimistic in our stance at the moment.

It is as we said it is we are marginally less pessimistic – it is the difference. We are not calling a turn in the market or anything like that and there is no evidence that – the tangible evidence that there has been a turn. But I just sense, and it is as much a personal thing as anything else that things may be fractionally, fractionally better than they were but it doesn’t verge towards optimism.

And I want that to be on the record less people turn around and say, oh, you told us you were optimistic, well I’m not optimistic, but that’s one thing. Secondly, in terms of the CapEx next year, as you know, our CapEx number floats around and that’s partly due to the way that we organize our manufacturing and our shipments.

So the 140 that we’re talking about next year is a – at this stage it’s our best estimate, we’ll build our MRP on that. But we – the great thing is, and particularly with the conversions, we at the moment, we are running at about nine a week. That almost a moment’s notice, it can drop.

So we are not going to go and build vast amounts of HFO, if we are not getting the orders, we’ll probably be still be converting them in to G3+ and we can alter that. So, the 140 is, two things, first of all, it’s a guide, not a precise number. And I would also say that the significant thing about it is the growth in it is really coming from the local business where utilization rates are strong, the business is growing. And we are generally more confident about that and like any growing business is the beast has to be fed and the thing just to say the [inaudible] is actually we are feeding that beast a bit faster than the CapEx number would indicate, because we are of course transpiring big [arm] [ph] fleet, which is a fair part of the local business investment from the power project fleet. I am going to ask Angus to answer the question on Australia.

Angus Cockburn

In terms of Australia, if you look to the first half, Andy, we were off low double-digits, but third quarter, we were 2% below prior and that’s something we’ve talked about a lot given the fact that more than half of our business has got a [binding] [ph] exposure. In many projects, Oman and Cyprus accounted for about a 125 megawatt between them.

Operator

Our next question is from the line of George Gregory at UBS. Please go ahead, George. Your line is now open.

George Gregory – UBS

Good morning everyone. Couple from me. Firstly, just on, HFO, I wondered whether there were any thoughts you might be able to share on your HFO genset performance given the contracts you have up and running, particularly the big one in the Caribbean; are the sets degrading or anything like that? Clearly, you are ramping up production from which I would imagine things are going pretty well.

Secondly, a more general question, there seems to be a bit of a bifurcation in the industry between small projects and large-scale plants. Do you have any comments on APR Energy’s claims that in larger scale interim power utility clients want turbines not resets, very interested to hear your thoughts on that Rupert. Thanks.

Rupert Soames

Right, as far as the HFO is concerned and in terms of the technical development of the engines, we are making good progress and learning more about the performance of the engines in practice every day. We’ve had a fair amount of experience introducing new products.

We introduced the G3, QSK-50-G3 diesel package about 12 years ago, we’ve introduced the QSK-50 package about four years ago, six and a half years ago, we introduced the gas package and now we’re introducing the HFO. And there is – rather like launching a new aircraft, it was never a case where there aren’t issues with them [that used not all one] [ph] at a time as you go and you find them in practice.

What I will say is that we are very happy with the way that the engines are performing. That the only significant change that we are making as a result of the experience so far to-date is that we are re-specifying the turbo charger and we think that that’s going to give us a longer life.

This is certainly going to be a product that’s going to require more intervention than other – than the normal diesel product, but we can price that into it and by intervention, what I mean is, is that we are going to have to do a valve change. At the moment, we think it’s going to be at about 3000 hours to a valve change, that takes about a day to do per set.

And I think with the new turbo charger where we are going to get that up to maybe 5000 hours or 6000 hours a set which is fine. We’ve [coasted] [ph] the extra cost of these interventions into the model and as I would say, actually, sort of been nothing particularly unexpected.

I think one of the things we are learning is that fuel specification is a very important part of this business and we’ve got to keep a pretty tight grip on the quality of fuel that’s being supplied, because it’s not just like so diesel, where there is a set specification and sometimes customers have issues with the stability of the fuel quality.

But we are not unhappy but to the contrary we are happy with the way that the engines are performing and we are not seeing anything that would give us a concern that this is not a well-engineered product that will do just fine in practice.

So going on to the issue on turbines, look, we will see – let’s just say, let’s just sort of cut through this and say that there are number of facts about turbines, but we have to weigh up and that our customers have to weigh up.

Fact one is that turbines have better power density than reciprocating engines, so they take up less space per megawatt. Fact two, is that their emissions performance is better than reciprocating engines when running diesel.

But actually, it is much less of a difference when running gas, but when running diesel the emissions performance is better. Set against these two facts are three others. The first is, is that they are massively more expensive in terms of capital cost than reciprocating engines and that is particularly the case in us, because our cost is so much lower than anybody else’s.

The other fact is that they are less fuel-efficient than reciprocating engines and we think that that gap is going to get wider not narrower. The third one which is important to us is that because that very same power density argument means that they come in big blocks, typically 25 megawatts a piece, is that it’s difficult to get both redundancy and to right-size the amount of capital committed to a customer site using very large blocks of power.

And the average site size [inaudible] power project is 33 megawatts and if you are going to take these turbines at about 25, that means, you got to provide two turbines, one of which is going to be working way under [expected capacity to get that capacity] [ph] [inaudible].

In the argument of saying that on the very large sites customers are going to prefer them, well, maybe, but I would point out that currently, in Mozambique, we’ve got 230 megawatts of gas power plant powering away up on the South African border. We got 200 megawatts running out of Cote d'Ivoire on resets. Clearly, a turbine is easier, because of power density and the [inaudible] big installations and we’ll see how the market [sits] [ph] away on that.

But, the evidence so far is that, I should say, call it 9,000 to 10,000 megawatts of temporary power capacity, now we can see how much GE have got on. It’s about 10% of the market. Even if that grows considerably, it’s still a relatively small part of the market, because actually, we think with all the evidence talking to our customers are, is that they are more interested in cost per kilowatt hour.

They are more interested in the fuel efficiency than they are in – and the careful costs of the operating charge than they are in (inaudible) or emissions. If that changes and if we get customers saying, look we really like you to supply turbines, we will, but it’s going to have to be rates that are reflective of making the same sort of returns on capital but we can get out of our normal business.

George Gregory – UBS

Okay, thanks.

Operator

Our next question is from the line of Nicholas de la Grense of Bank of America Merrill Lynch. Please go ahead. Your line is now open.

Nicholas de la Grense – Bank of America Merrill Lynch

Good morning guys. Just two quick questions please. Paul asked about Brazil 2014, I was wondering if you can just give us an update on the Sochi Winter Olympics and with where you stand in the bidding process there and then the second question is on the Ressano Garcia plant which you mentioned.

Do you see scope to expand that plant further? I know there has been some speculation in the Namibian press about additional power being provided to Namibia?

Rupert Soames

In terms of [sports], it has already been gone and it’s been the power is being provided by a local Russian company who, I have to say we have not heard of prior to meeting them in the Sochi bidding process. We will be doing a small amount of work, I mean, probably a couple of million dollars’ worth of work of crucial work around some of the broadcasting. And one of the broadcasters has asked us to come and secure that supply. So it’s – we are broadly speaking absent on any scale from Sochi, but we have a little bit going on that.

And in terms of Ressano Garcia, we have already expanded our capacity there from 100 megawatts to a 123 megawatts. The power is being provided to Eskom, to NAMPA and to EDM. The ability to expand further the capacity there is really down to gas allocation whether we can get some more gas on the one hand and on the other hand there are constraints in terms of the transmission.

And none of this is [insuperable]. We will clearly have, since we’ve got a large operation there, we’d like to supply more power. The South African power pool, as a whole remains very [shorter] than power, but let’s say it’s the amount of getting hold of the gas and it’s a matter of being with the transmission constraints. But clearly that whole region is going to be short of power for quite some time, so whether it is in Mozambique or elsewhere, we think that if we can provide extra power we will have willing buyers for it.

Nicholas de la Grense – Bank of America Merrill Lynch

Thank you.

Operator

Our next question is from the line of Toby Reeks at Morgan Stanley. Toby, please go ahead. Your line is reopened.

Toby Reeks – Morgan Stanley

Hi there, I have a couple of follow-ups. The first is, I know you are not going to be willing to give too much information about what the World Cup contract could look like, but has it changed in your expectations in anyway, i.e., nothing like the 2010 African World Cup in terms of scope of what you are bidding on?

And then the second one was, I was interested on what you said about the gas market, the large gas market in reference to turbines, i.e., maybe they work well in large for the gas environment. I think the conversion charges are broadly similar and could you say whether you see turbines competing against you yet in large gas contracts? Or is the gestation period so long that that wouldn’t have occurred yet?

Rupert Soames

Yes, we have seen turbines competing against this in large projects. I mean, Cote d'Ivoire being an example, where turbines were being pitched by two suppliers there. But the resets won the day for 200 megawatts, probably won the day twice, once 100 megawatts in terms of second 200 megawatts expansion.

And actually interesting enough Cote d'Ivoire does have some space constraints. They are not all that (inaudible) but the cost and the fuel efficiency came to the fore. And I accept that the fuel efficiency difference is less, I’d say at the moment, the fuel efficiency difference is less on gas than it is on diesel where, I mean, the first thing is, we can’t quite get our heads on-time is that nearly – the vast majority of turbines that are running in the temporary power markets are running on diesel.

And they are significantly less fuel efficient than the resets are and then we believe that that they experience that. So we have seen them, we have competed against them and we have won, but there hasn’t been an awful lot of heads and I think one of the reasons being is that, the issue by getting gas allocations, the lead time is long.

I think that if people have a gas – a long-term gas allocation, very often what they are looking is building a permanent plant and then we are pitching to go and build a temporary plant alongside it to be a bridge and in that case, actually, resets are often fine.

And the other thing is we don’t quite know yet how this is going to work out. We are retaining on an open mind, I think it’s fair to say that actually, it’s not a lot of countries are using turbines compared to resips. If more do we’ll just to have to play or going to be led by our customers on this.

That was your first question, what was the other question? The World Cup, yes, the expectations about the World Cup is that it would be no where near the size if we are successful in that, it would be no where near the size of the South Africa only for two reasons. The first is, is that, I think that the decision will be taken much earlier that it was relative to the event, you’ll remember that we didn’t actually sign, the South African contract for about six weeks before the event.

That was a huge amount of air freight and a huge amount of very complicated logistics. That secondly is that, perversely although there was a lot of (inaudible), actually because we didn’t have much of a local business, the rental periods were longer in South Africa.

And then they are going to be in Brazil, we got a very big Brazilian business that we will be able to service a lot of the requirements out of our local business and as I said, I think we’ll have a longer lead time on this one than we did on the other. So, it will be a no when we have the size that South Africa was.

Toby Reeks – Morgan Stanley

Okay, fine and just if I can jump back to the last question, when you did come up here in competition, can I assume that would be an – the back of when they are competing with you in Cote d'Ivoire?

Rupert Soames

I wouldn’t speculate on that, but it’s a very limited number of people who have temporary power available in the market and it was for the 100 megawatts was won a year ago and the original 100 megawatts was won two years ago.

Toby Reeks – Morgan Stanley

Okay, thank you very much.

Operator

Our next question is from the line of Peter Testa with One Investments. Please go ahead, Peter. Your line is open again.

Peter Testa – One Investments

Hi, thank you. Two questions please. Just back on the diesel utilization, with the HFO conversions and the swap of some capacity to local and presumably a lower level for replacement CapEx and diesel looking through the guidance in CapEx, can you give a sense please as to what you think you can do in terms of the size of your diesel fleet on the ITP side to change its high demand?

And the second question is just on competition, I was wondering and you said there was some change in the competition and I was wondering if you could give us an update in terms of what you feel are some of our capacity is in the market and the extent that which competitive terms I think and so on are being still used in the markets?

Rupert Soames

In terms of the government, we don’t have -- we clearly have – we know what the APR fleet is and they know what ours is. And between us we account for a very large chunk of the market, but they are then caterpillar dealers it would be the other group of competitors and it’s quite hard to actually get, to see, to get to see what their fleet is.

But my sense is that actually, probably quite a lot of fleet has gone into Indonesia, whether they will have an appetite for continuing to reinvest in fleets of that rate than we – that’s to be seen. But my sense is that probably they would actually use a little bit a smaller.

In terms of what we are doing with our fleet, as you know we are converting about 350, what we done 300 this year, we are doing about – and the thing to remember is, that the conversions that we are doing are into an engine that can run either diesel or HFO.

So, that could either becomes a super-efficient diesel engine or it becomes an HFO set and the conversion once we rebuilt, it’s the conversion from one to the other is literally about two or three hours’ work.

Peter Testa – One Investments

Yes, I guess, that I know is the change to local and the shift (Multiple Speakers)

Rupert Soames

That’s 50 to 100 megawatts a year that the local business would have clearly, we are telling the local business, thou shalt not buy any more large on diesel fleets, because we’ll give it to them probably, it’s about 50 to 100 megawatts a year depending at the moment.

Peter Testa – One Investments

And the lower replacement rates?

Rupert Soames

And what?

Peter Testa – One Investments

Lower replacement rates, I presume you are not seeking to replace as much expiring diesel capacity as well.

Rupert Soames

Well, I mean, when you say, replacement rate, in Aggreko, actually, by the time the diesel get to the end of that, remember we depreciate straight line over eight years, about the time we get around that the week, we then go and do this conversion from an old set, we get a new sets. So, we don’t really get – we don’t get naturally the things coming to the end of their lives and then ceasing to exist.

Peter Testa – One Investments

Sure, okay. Thank you.

Rupert Soames

Because, we are able to –and it is an absolute, it’s such a slam dunk of an economic idea that half the price of a new set, we get a new set and 75% of the price of a new diesel set we get a new set that’s got 15% more I put and 4% more fuel efficiency at the same price of the new set we get an HFO set. So, the economics of rebuilding them when they get eight years are absolutely compelling.

Peter Testa – One Investments

Right, but you are also lowering your CapEx on the front end, and you are spending more on HFO gas...

Rupert Soames

Yes, the reality is that they don’t end up disappearing of, or they may disappear of our books from a depreciation point of view until we go and rebuild, in which case they come back. They don’t disappear off into a scrap heap. So, but what is absolutely true is the number of sets that we are putting in at the front end –the fleet is not expanding.

Peter Testa – One Investments

Yes, okay all right. Thank you.

Operator

(Operator Instructions) The next question is from the line of John Lawson of Investec. Please go ahead. Your line is open again.

John Lawson – Investec

Hi, guys, conscious of time moving on, but just a couple of quick ones from me. You talked about in the local business in North America performing well, particularly oil and gas, so I want to you to elaborate a little bit more on that how you see that moving forward. I know we’ve talked about sort of fracking and issues like that in the past. And secondly, you highlighted better trading in Europe, can you identify which countries and perhaps elaborate a bit more on that?

Angus Cockburn

Trading – John, what was the first question, I got the trading – what was the first question was?

John Lawson – Investec

North America, North America local.

Angus Cockburn

Yes, it was the number in front page then Rupert can talk about the oil and gas. North America was 6% up in the third quarter. Obviously, oil and gas price being the key driver within that shale, as we go through the third and fourth quarters what we say it was the comparatives have become tougher, but we are still seeing strong growth in that marketplace.

In Europe, actually, a lot of the countries are doing better. Germany is having a better year, Italy is pretty strong, France is doing a little bit better and the UK is doing very well. And now we have the Oman the profile of the numbers in the Middle East on the comparisons.

So year-on-year, the Middle East is doing pretty well as well. And when I said the numbers, I am talking about the megawatts on rents are numbers. So, I think that we are – that’s a pleasant change to be getting some growth out of Europe.

How long it will last? It tends to be it’s a quite seasonal business, the European and they tend to sort of peak up in the summer and then down in the winter– and it may be just be that the shoulders are lasting a bit longer.

But at the moment,we’ve got good growth as of – in most of those countries and who knows maybe get something out of this storm coming through today it may be helpful. But, it’s all pretty marginal in terms of Aggreko as a whole, but in terms of these businesses it’s quite important.

John Lawson – Investec

And does that mean margins,– for instance I know overall you talk a little better, but are we going to get any meaningful numbers out of the Europe eventually from a margin point of view?

Rupert Soames

Example of margins and returns on capital, it’s all about, clearly, we recall – and I think, shareholders should be prepared to accept a lower rate of return, if we are renting a 350KVA genset to Nestle in Munich. Then if we are putting $100 million of our assets into Argentina, for instance.

So, you should not expect to get the same returns on cash flow out of mature European business as you would out of an emerging market’s business. I mean, what is absolutely true is that, Europe has been a drag on our performance over the past few years, but it’s – of it’s a (inaudible) drag and it’s important part of our marketplace and just because it’s got slower growth. The returns are not dilutive of – they are not below our cost of capital. They contribute to the general -- but they are lower than they would be in other parts of the world. They still got some inside, we don’t want to be that.

John Lawson – Investec

But I am reading all this, it is getting, the return is getting a little bit better from what we are seeing today.

Rupert Soames

Well, we don’t know yet, because, I don’t know the result is going to be for full year and as always there is a –when you are talking about returns, you’ve got two very large numbers being revenue and margins can move around quite a lot. But I think I am right in saying that the returns in the local business on an underlying basis are somewhat stronger this year than they have been last year.

John Lawson – Investec

Okay, thank you very much guys.

Rupert Soames

We would expect them just a touch short of [20,000].

John Lawson – Investec

Okay, thank you.

Operator

We will now go to the line of Mike Murphy with Numis Securities. Michael, please go ahead.

Michael Murphy – Numis Securities

Good morning guys. Can you comment on the performance on the temperature control business in the United States in Q3, please?

Rupert Soames

Temperature control?

Michael Murphy – Numis Securities

Yes.

Rupert Soames

Well, no hope – no help, I have to say, by the total absence with any form of meaningful guts of wins anywhere up the North Atlantic seaboard so far. So, it’s been the cooling towers business has actually been a little bit better, but also very low base. And if I said, that was – I am thinking that the volumes in temperature control were 3% or 4%?

Angus Cockburn

Yes, exactly, 3% or 4% or 5% up in terms of revenues.

Rupert Soames

In revenue in the third quarter. But the more granular you get into business, the more local events matter and there was one large storm last year which was Sandy which came through in November, in Q4, but what has been absolute, astonishing, as a dedicated tropical weather watcher wake up every morning, turn on radio, look to see if there is any tropical depression in the Mid Atlantic. It’s been the most boring occupation. But you can possibly mention with the exception possibly Mike, of horse racing.

Michael Murphy – Numis Securities

Thank you, Rupert.

Rupert Soames

And the nary a puff of winds, whereas the Pacific has been whipped up in an absolute frenzy, that’s what it will be in the chateau. We’ll have to see what happens to the rest of the year. But it’s certainly been a poor year so far in terms of sorts.

Michael Murphy – Numis Securities

I’ve been also thinking in terms of the core temperature controls, but in the United States outside of there has been…

Rupert Soames

And the answer is grown by about 4 or 5% in the third quarter.

Michael Murphy – Numis Securities

That's great. Thank you, Rupert.

Rupert Soames

Thank you.

Operator

To this stage, there are no further questions in the queue. So may I please pass the call back to you to close?

Rupert Soames

Well, thank you very much everybody and we will go forth and get on with trying to sell some temporary power. Thank you.

Operator

This now concludes the call. Thank you all very much for attending. You may now disconnect your lines.

Angus Cockburn

Thank you, very much.

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