Aggreko's (ARGKF) CEO Chris Weston on Q3 2016 Trading Update Conference Call (Transcript)

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Aggreko PLC (OTCPK:ARGKF) Q3 2016 Trading Update Conference Call November 15, 2016 3:30 AM ET

Executives

Chris Weston - CEO

Carole Cran - CFO

Analysts

Robert Plant - JPMorgan

Will Kirkness - Jefferies

Toby Reeks - Morgan Stanley

Emily Roberts - Deutsche Bank

Karl Green - Credit Suisse

George Gregory - Exane

David Phillips - Redburn

Rajesh Kumar - HSBC

Rory McKenzie - UBS

Paul Checketts - Barclays

Michael Donnelly - Panmure

Nicholas De La Grense - Bank of America of Merrill Lynch

Chris Weston

Good morning, everyone, today I will briefly cover our third quarter trading update, our contracts in Argentina and our business priorities. Carole and I will then take your questions, all numbers I quote will be on an underlying basis i.e. adjusted for currency movements and pass through fuel.

At a Group level, underlying revenues were down 7%, and reported revenues were up 8% staring with rental solutions revenues were down 7% on the same period last year due to continuing weakness in North America which comprises over 50% of the rental solutions business.

In North America, our two biggest sectors are upstream oil and gas and petrochem and refining. On the former revenue was 50% lower than last year in the third quarter and although we have seen a small increase in activity in some shales we do not expect an improvement for the rest of the year.

In petrochem and refining, seasonally adjusted volumes were much stronger in Q3 compared to Q2 due to differed maintenance turnarounds starting to come through. More generally coming out of Q3 volumes remain promising although I do not expect this to have a material impact this year. Unfortunately this has been more than offset by a continued decline in gas volume and pricing pressure specifically in the oil and gas sector. Given the continued decline in gas volumes we are reviewing the carrying value of our small gas generators which are almost exclusively deployed into the oil and gas sector. The net book value of these assets is about £40 million or 3% of the group fleet.

As a result revenue in North America was down 17% on Q3 2015 and profit by a greater extent given the mix effects of higher volume at a lower rate. Outside of North America rental solutions grew year-on-year in both Europe and Australia Pacific, of particular note with our temperature control business, an area of focused in our business priorities which grew 5% across the rental solutions business. Including the acquisitions of ICS and DRYCO.

In the power solutions industrial business revenue was 3% higher if you exclude the impact of the Baku European Games in 2015. We continue to see growth in Russia and Africa with steady trading in the Middle-East. Trading conditions were challenging across Latin America and Asia and in particular in Singapore and South Korea, where the global over capacity in shipping is effecting our business.

Finally, power solutions utility revenues was 6% lower than last year. As outlined at the half year the biggest impact was the off-hire of 173 megawatts of gas contracts in Mozambique at the start of the year. Pleasingly, we have recently signed a contract for 45 megawatts of this to come back on hire.

Our order intake continues to be good and since we last reported we have won new work in Brazil, Senegal and Mozambique. Order intake currently stands at overall 1 gigawatt and is considerably higher than the 561 megawatts we had secured at the same point last year. It includes the 143 megawatts 15 year contract in Brazil which does not on hire until the second half of next year.

Margins and returns on the new work are in line with our medium-term targets. As the statement notes, our off-hire rate in Q3 was 4% and we continue expect a full year off hire rate of around 30%. In summary we expect to exit this year with about 3.9 gigawatts on hire and utilization at 80% the strongest level for some time.

Turning to Venezuela, I'm sure you’re well aware of the situation in the country and the despite the uptick in the oil price, the conditions have not improved over the last quarter. We’ve two customers both of whom we supply a critical service to, either in maintaining grid stability or in providing power to oil wells. Our relationship with both remains constructive, we’ve regular dialog at all levels and we’re making progress. We have been able to convert the outstanding balances with one customer into a debt instrument, the payments against which are scheduled from the start of next year. Overall we expect the power solutions utility debtor provision to be at a similar level for the full year as it was at the half year. We’ve also seen a small improvement in debtor days.

At the half year we updated you on our contracts in Argentina, a portion of which had extended at lower rates and for a shorter term than we had previously expected. The Argentina contracts are the last significant legacy contracts remaining on Aggreko's books. That is contracts initially signed in 2008 when the market dynamics and country risk profile were both very different. As a result the margins on the contracts are materially higher than today’s portfolio of contracts.

There are two types of contract in our market in Argentina, standby and fixed. Standby covers volume that is deployed from a depot as required by the customer and fixed covers volume that is permanently deployed in the field. We have 270 megawatts of standby contracts and estimate there is around 540 megawatts of this contract type in the market, and we have 180 megawatts of fixed contracts out of a total around 900 megawatts in the market. The majority of these contracts are due to expire between now and June 2017 and 56 megawatts of our standby volume has now off hired.

Recently, the customer issued a new tender with 200 megawatts of standby power to commence on the December 1, this year and run through until the end of 2017. We understand that this will replace all standby power in the market. The tender process is ongoing, but early indications are that we’re eligible for the majority of this volume, although it is still subject to award from ENARSA and to contract. As you would expect given that the standby volume required by the customer is substantially reducing, the pricing was very competitive. While we do not normally pricing due to commercial sensitivity, given that the tender documents will be publically available, we can confirm that our bid price was significantly lower than our historic pricing and slightly lower than the 120 megawatt three month extension we secured in the summer.

I should add it is still acceptable in the context of our medium-term targets. We are in discussion with Cammesa our other major customer in Argentina on the future of the fixed sites and we expect any extension that we do achieve to be at a discount to the original pricing.

To help you understand the potential impact of this we have provided a breakdown of the expiry dates of our contracts in the statement and noted that the 2015 revenue from Argentina was a £124 million.

Briefly on our financial position, at the end of the third quarter net debts stood at £695 million, we expect our net debt to EBITDA ratio of the full year to be similar to the 1.2 we reported at the half year, albeit could be an impact from foreign exchange translation. We expect fleet capital expenditure for this year to be around £260 million and our initial view for H1 next year is £150 million. But please note that we are still going through our budgeting process and so this may change.

This is higher than last year due to the build of our new HFO and next generation gas engines, the continued refurbishment of the G3 to G3+ diesel sets, as well as movements in FX. As we have discussed previously our short lead times mean that we don’t yet have to commit to this level of capital expenditure, and we retain the flexibility to adjust this as the half progresses. Taking account of the items we have spoken about we now expect the 2016 pre-exceptional profit before tax to come in at around £225 million broadly in line with current market expectations. As usual we will provide guidance for 2017 with our full year results in March.

I'm very conscious but a number of the issues we are dealing with are macro issues and largely outside our control. Notwithstanding this the business is working extremely hard to mitigate the impact and in particular timely execution of the business priorities will help us to navigate difficult markets more effectively.

I'm pleased with the implementation to date with good progress made since we last reported. We have signed off a new CRM system and deployment into the business begins this month. Our next generation gas and HFO products are now both on customer sites in field trial. And our new site performance management tool is being introduced this quarter and starting in H2 next year we will begin to reduce unplanned outrage costs.

We also expect to generate procurement savings beyond the £40 million identified and continue to look for other opportunities to improve our operational efficiency. It is too early to update you on these today and I will provide a more comprehensive view on our plans at the full year results in March.

Before we turn the call over to questions I would like to reflect on where we were 18 months ago and where we are today. The business has undergone substantial change and we have achieved a great deal. There was a huge amount of work to be going on to make us stronger and more resilient. We have seen a record order intake now standing at over 1 gigawatt.

Utilization in the third quarter is back over 80% in power solutions utility, a level not seen before years. We have reduced our headcount, we have launched two new and several enhanced products and now have a clear technology road map. We are significantly improving our customer management with a new website and CRM system. We have acquired two bolt-on acquisition which improve and extend our product offering and offers significant potential for growth. And we finally have a clear view on who our customers are and their motivations.

There is still much to do and it has not been easy, but I would like to thank all our employees for their hard work and dedication. They continue to do a great job in particularly difficult market conditions.

Thank you very much for your attention, Carole and I will now take your questions, so over to your Chris.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question this morning comes from Robert Plant of JPMorgan. Robert your line is open. Please go ahead.

Robert Plant

Two questions, please. You mentioned, Chris, that you're going to update for 2017 consensus in March but, given you're talking about 224 million, and I can see Bloomberg consensus is 256 million for next year and the news on Argentina, do you think that 256 million is too much of a stretch? And then, secondly, you've mentioned quite a lot about Argentina. The other two rebids are Yemen and Venezuela. Can you tell us how they're going? Thanks.

Chris Weston

Good morning Robert, I mean as I said, we will update the market on 2017 in March, and we’re right in the middle of our budgeting process. There are lots of moving parts, without a doubt Argentina is a significant earnings headwind for the next year, but there are other moving parts, the order intake, the cost work that we’re doing, et cetera and it is too earlier for us to be definitive on that at the moment and we'll update further in March.

On the other extensions, Yemen I’m happy where that is, it is due to extend this year, it’s a difficult situation as you can imagine in country with a war going on, but I think we’re bit more comfortable now than we were six months ago. We’re getting regular payments out of Yemen, we’re being able to resupply sites, they need the power. And I’m sure as the situation settle we will get a full more extension in place.

In Venezuela, again a difficult situation, very construction positive relationships with the customers, the team down there are doing a very good job, encouraging the conversion of some of our receivables into a debt instrument with PDVSA. So, I'm comfortable with where we are. Both customers are keen for our power to continue, we fulfill a critical need for them, as I said one in producing -- helping produce oil, which they need for cash and the other in terms of grid stabilization. So, I think in due course that will extend. So I’m comfortable about both of those.

I think the other one that is out there just to add is Bangladesh where we have 95 megawatts at Asharganj that were extended until the end of November. We’re in discussions with the customers around auctions for that. Nothing to conclude at the moment, still early days but I’m hopeful that we will land something.

Operator

Our next question this morning comes from Will Kirkness of Jefferies. Will your line is open. Please go ahead. Q - Will Kirkness

I just had one question on the Venezuela debt instruments. Can you talk a little bit about how much you've got there or outstanding, how much has been provided, how the instruments exactly work and when you would expect to get cash from those? Thanks very much.

Carole Cran

Hi, Will. How are you doing? And as I said, it's PDVSA, in particular. Given that the amount will be accessible in the public domain, it's around $20 million that covers by the instruments and it’s ourselves and 12 others that have been invited to participate. So, PDVSA designated what they're referring to as strategic suppliers and we’re one of them. And so in the original forum they are promissory notes that are issued by PDVSA they are seeing a second step where they’re been converted into exchange notes and packaged into an overall instrument that will be traded on Euronet. That second phase isn't concluded yet.

So, we will continue or we are continuing to hold a provision against it. And we'll take our judgment as to, I guess, how much -- how many cents from the dollars are collectible. I think the encouraging thing is as first of all, that we've been invited into the scheme. And, secondly, as you may well have read, we have been able to reset the maturities of their bonds owed by a couple of years and in the last couple of weeks they paid down just over $1 billion on the bonds as well. So, progress there, and we'll know by the end of this month if that final step to the exchange note has been completed.

Will Kirkness

Okay, thanks. Just with regard to that contract extending, would you like to see more recoverability before you commit?

Chris Weston

Well that is an internal part of the discussions that we are having yes.

Will Kirkness

Okay, thank you.

Operator

Our next question comes from the line of Toby Reeks from Morgan Stanley. Toby, your line is open. Please go ahead.

Toby Reeks

Can I ask, could you quantify for us what the full loss of an Argentina off-hire would be if theoretically it happened? And then I've got a couple of others.

Chris Weston

Well, it depends if we replace it on hire elsewhere, so we would told you what the revenue was last year.

Toby Reeks

Assume you didn't.

Chris Weston

Well, then you wouldn’t replace all of that revenue would you.

Toby Reeks

No, I mean at the profit level rather than a revenue level, that's the question.

Carole Cran

Hey, Toby I think it’s only the base recounts, so I mean we can't talk about specifics in terms of Argentina margins because that wouldn’t be appropriate in the middle of a tender. So I think the best way to answer it is to refer you back to what's already publicly available. So if you go back to 2007 to 2012 in the era that is contract were signed than the utility business was generating margins on average of about 35%. And those are fully lucrative margins i.e. we’ve recovered overheads and again if you look back in that period than our overheads we would run as around 10% to 15% of revenue and the other thing that's recovered within that margin is effectively utilized depreciation.

So as you know we typically run around 80%, so there is portion of depreciation that needs to recover as well and that would be another 5%. So if you are looking at it purely at a project level or what we would refer to as project contribution as opposed to a fully loaded margin, than that would back you into a number -- so let’s say you assume the 16% for the overheads and another 5% for the depreciation, so that --.

Toby Reeks

On top of the 35%.

Carole Cran

That being said 35% to 55%, and we’ve noticed that when we first went into Argentina, obviously different risk profile in terms of the regime, what that implied in terms of cash extraction and indeed when we signed those contracts, we weren't -- unlike other contracts, we weren't able to secure payment guarantees and so that also played into the pricing that was negotiated last time. So you can think all of Argentina being relatively higher.

So that would be the implication, if, as Chris said, you didn't redeploy any of the 450. Clearly, that's quite an extreme view given that our order intake for diesel has been healthy this year and the pipeline continues to be healthy. But hopefully that gives you an idea of overall impact and then you can relate that to the margins that we’ve been achieving more recently for the utility business to give you a sense of the impact.

Toby Reeks

Great, that's very clear. And would there be demobilization costs in addition to that?

Carole Cran

Yes it would, so that would be -- again if it were to be as dramatic as the full 450 then you would have the demob associated with that. But, as you know the more impactful cost is actually the mobilization. So demob costs are relatively small costs compared to mobilization, so it’s that churn impact in terms of cost mob cost, and what it would do for a period of time to our utilization that would be more impactful then the demob.

Toby Reeks

Okay, great. Then the next question I've got is just trying to think about moving parts for next year. If you've got PBT of 225 million for this year, add-on interest is 30 million, you're sort of around that trading profit level of 225 million, which is where consensus is, so there's no real change this year. The positives you've got are 40 million of cost savings, and I've got a quick question on that afterwards perhaps. And then, FX, which was closer to 20 million, I guess 25 million at one stage, but is now probably 19 million, 20 million. So, you're starting point going into the year is probably, for the end of the year is 314 million.

North America oil and gas we can debate what happens there, but let's say flat. It feels like there's some improvement coming through, but let's not worry about that. IPP will be a positive, because of the win rate versus the order book, so arguably you get say 20 million from that, so the starting point for trading profit should be 330 million roughly, which gives us about 50 million compared to consensus prior to Q3. Some of the numbers this morning are 65 million to 100 million difference, compared to that number we've just got to.

That's the bit I don't really understand. I don't understand the massive differential we're now getting between what I see as being a reasonable number, which is, you could take Argentina out of that comfortably, or could you give me some comments around whether those are the moving parts, and whether that math is, broadly speaking, the way to think about it?

Carole Cran

As Chris said, Toby, we're not guiding, and we are in mid-budget review, so it's pretty difficult. I mean, we try to be clear in the big moving parts and obviously Argentina and North America, and the cost saving. You can’t see an awful lot more than the fact that we're continuing to work through it, and obviously it pains to highlight the big moving part.

Toby Reeks

Okay, that's fair. And then just sorry two more, I know I've taken up a bit of your time. On the costs that you, the comment Chris that you made of the incremental procurement savings, is that incremental in 2017 to the 40 million, or is it stuff that comes in 2018?

Chris Weston

It will be on 2017.

Toby Reeks

So, in 2018, yes?

Chris Weston

We got the full year effect from procurement and from the headcount reduction which is largely in place to this year but in 2017 and then 2018 we think we can do a bit more.

Toby Reeks

Do a bit more, fine okay. And then the final one is, has that IPP pipeline changed at all? I think you're off-hire assumption means Q4 is going to be a bit more busy, in terms of the off-hire assumption, is that right?

Chris Weston

Yes, I mean there are still some moving parts in all of that, in fact Bangladesh being one of them. The pipeline looks healthy still, so we are pleased with that and no change really from what we said about the pipeline of the half year.

Carole Cran

Sorry, Toby. Just to close that off, the around 30% implies 8% for Q4 and the biggest piece of that 8% is more happens with Bangladesh.

Toby Reeks

Okay, so if you kept it, it would be lower than that, yes?

Carole Cran

Correct, yes.

Toby Reeks

Okay, great. Thanks a lot, guys.

Operator

Our next question this morning comes from Emily Roberts of Deutsche Bank. Emily, your line is open. Please go ahead.

Emily Roberts

Three questions from me please. Firstly, I wondered if you could give a bit more detail regarding volume expectations in Argentina. You highlighted that standby volumes are substantially reducing in the market. Do you expect the 900 megawatts of fixed sites to reduce as well? And then I appreciate it will only impact one month of this year, but could you give us some color on what volume assumptions you've made in your Argentina expectations?

Secondly, on North American oil and gas, are you losing market share there? And then, finally, on your 1 gigawatt of order intake, how much of that is peak shaving? Thank you.

Chris Weston

Okay, I will try and remember all of those. So firstly in Argentina we've said what we can say about the stand-by the volume, so 200 megawatt tender, it is still being assessed by us and also the customer initial indications are that we could have won the majority, but that won’t to be confirmed or hasn’t yet to be in confirmed, but we could hear any day now.

On the 900 megawatts and again it's too early to tell, I mean they need the power we are having constructive discussions with them and as soon as we have anything substantial to say we will come back to you. And I hesitate to say any more than that at the moment. We assumed that in for the one month for the rest of the year that the 180 megawatts of fixed stay on, but at a discount and we have assumed that we have won the majority at a significant discount of the stand by contracts. So that's what we have assume for the rest of the year.

In North America in terms of market share I think if you look at the sectors that we are operating in you can see that those sectors have been quite volatile over the last 18 months, and petrochem and refining particularly in the first half of this year. So and you can easily see market commentators that would validate that point.

So I don’t think we are losing market share we have looked at it extremely carefully. If there is any erosion of market share it might be at the lower end sub 253,000 kVa, so the smaller end. But as soon as it gets into larger power oil-free air or TC requirements where it starts to get more complicated than we are the market leader and there is no indications that we're losing market share. Then, in the order intake, peak shaving, there's no peak shaving in it.

Operator

Our next question today comes from Karl Green of Credit Suisse. Karl your line is open. Please go ahead.

Karl Green

Just a couple of questions from me. In terms of the order intake since the half-year stage of 159 megawatts, I think you mentioned three contracts, Brazil, Senegal and Mozambique. Can you just indicate the respective sizes of those bids, please? Also, just in terms of bids where you've, perhaps, been unsuccessful in the tender process, can you maybe highlight some of the tenders where it's not gone your way and perhaps the reasons why? And then I've got a follow-up questions which I'll ask afterwards, if that's all right.

Carole Cran

Hey Karl, so on the order intake, the biggest bits -- it’s a bit more in Brazil, so there is another 45 megawatts in Brazil. In Chris' script he mentioned that that we've got 45 megawatts in Mozambique back on hire, so we would have the 170 megawatts [ph] that came off at the start of the year, but 45 megawatts now back on. Then there is a couple of contracts in Senegal, which is about 25 megawatts and there is some volume in Ecuador, Indonesia and the Philippines and Iraq as well, so it’s fairly well spread. But the biggest pieces are the three that Chris mentioned which is Mozambique, Brazil and Senegal.

Then in terms of unsuccessful tenders, I think there is been some commentary out in the market about Myanmar. Our understanding is that that gone to a consortium including APR. I think its bigger kits, to bigger sized engines that would be more akin to a permanent installation. So, I think it's a five-year contract, but our understanding is that it would be a bigger HFO engines that are being deployed into that opportunity. I think also APR more recently mentioned a win in Benin for 50 megawatts. So at the same time that we won our 100 megawatts in Benin that was within our August numbers, they were awarded 50 megawatts at the same time.

So I think those are the ones that are being spoken about in the market. Obviously, we've previously discussed Argentina, that the 2.5 gigawatts that was awarded some months ago, and I think those are the ones of note and like if there are any other ones you had and you’re particularly in --.

Karl Green

No, that's very helpful. I know you don't actually quantify the size of the tender pipeline, but can you give a sort of rough sense of the proportions of the smaller scale former IPP projects, and maybe sub-50 megawatts versus some of the larger scale stuff? Can you just give us some sense as to how much of it is at the bigger end versus the smaller end?

Carole Cran

Yes of course, are you talking about the pipeline order or intake?

Karl Green

The pipeline rather than the order intake.

Carole Cran

Well, probably the pipeline, probably the pipeline has pretty similar [technical difficulty] composition to our order intake, because if you think of the gigawatts in this year, then the two, the two -- well it’s with the three biggest were Zimbabwe, obviously, 200 megawatts, and the 143 megawatts in Brazil, and albeit that is across 30 odd sites and then the 100 megawatts in Benin. Then everything else is more in the 10 megawatts to 50 megawatts range. So I would say that’s pretty, that would be pretty much profile of the pipeline.

Karl Green

Okay, brilliant, thank you. And then just one follow-up on a different subject. So, in terms of the potential pressures coming through in North America rental solutions from the pricing pressure in oil and gas. I mean it’s easy to get very focused on the negative there. Are there any positives across the wider rental solutions business beyond the cost saving benefits, which might be coming through in terms of better utilization or other mixed differentials which we should be thinking about for 2017, please?

Carole Cran

I suppose from a sector perspective, PCR is looking at a bit better, I think, as we touched on with the work that we’re doing around our business priorities there is lot going on behind the scene in the rental solutions business. Chris touched on the new CRM starting to come online this month. There is lots of others that associated initiatives that will help improve not only front end of the North American business, but also that we process and what that means in terms of fleet optimization and then obviously the utilization. So, yeah lot is going on, it takes a bit of time obviously Karl to work its way through, but we expect it to start to reap benefits as we move through 2017.

Karl Green

Great. Thank you.

Operator

Our next question today comes from George Gregory of Exane. George, your line is open. Please go ahead.

George Gregory

Three from me, please. Firstly, you mentioned, Chris, you’ve seen a slight improvement in the debtor days. Perhaps, Carole, could you just give us an update of where you’d expect to see the net working capital position finish the year in the context of the H1 outflow? I think you said at the H1 that you would expect about half, in very broad terms, of that outflow to reverse in the second half. Does that still hold?

Secondly, on the return in the utility business. Clearly, if we take out Argentina, the implied returns on that utility business going into next year, even would be a fair way below your sort of target range. Just wondering what -- and utilization on that basis would be back around the 80% range. If you’re winning work in line with your medium term target, does that imply that pricing on the remainder of your business is far below where you would like it to be? And, therefore, how do you get that up? What are the dynamics that are keeping that where it is?

Final question just on Brazil. I think Brazil was one of the drivers of the debtor provision, unless I’m mistaken. If that is the case, just trying to understand how you justify gearing up your exposure in that market? Thanks.

Carole Cran

Yes, if I take one and three, because they're related. Yes, day-to-day is a little bit better George and not a huge change, but is a bit better. Working capital at the end of the year, I'd hoped to make some inroads into that 100 [ph], I’m not sure it’ll be as much, just half of it. I think we will still have a little bit more missing in inventory if we touch on the fact that the fleet CapEx guidance now for this year is 260, previously it was 270 and that 10 or so will most likely be an inventory in the form of engine HFO or gas engines. In terms of Brazil and the debtor provision, we did referenced one particular customer and quite unrelated to the customers that we have won the new work from. So we wouldn’t read across and in fact the customers that we've won the new work from this year, we have worked with them a number of times before in the past.

They had a good credit record, the volume in Brazil in particular, is supported by -- well, basically there's a Government fund where those monies have been set aside to bring power to that part of the country. So I wouldn’t make the connection between what we said before on that one particular customer and the order intake itself.

And then on the overall returns and the rest of the book, ex-Argentina, wouldn't have a drag effect and I mean there is obviously lots of moving parts in that return picture including for investments in new fleet like the next gen gas and the HFO, does to return for a short period of time, as even based into that opportunity. So I wouldn’t actually conclude that on the rest of the book.

George Gregory

But the rest of the book would implicitly be generating a return below your target? You think that's wrong, you think it's actually generating return in line with your medium-term target?

Carole Cran

That would be -- I mean obviously you could take Argentina into that picture to get some underlying view, but yes that would be my conclusion. But there is obviously lot of to be moving parts and we can pick it up.

George Gregory

Okay, thanks.

Operator

Our next question today comes from David Phillips of Redburn. David, your line is open. Please go ahead.

David Phillips

I've got two. I'll just ask them one by one, though, please. On the CapEx for the first half of next year, of 150 million. I think from memory that's up about 50 million or 60 million year on year of you do that, and I take your point, because of that flexibility. But given all the moving parts for next year, and it feels like next year's profits could be looking round about flat year on year, if things don't go brilliantly for you. What's driving that incremental increase in CapEx? And how much is specific to maybe the Brazil contract, or contracts you've already won?

Chris Weston

There is a chunk that is related to the Brazil contract that will go in higher and then be utilized at a 100% for the life of that contract. But the bulk of the CapEx is in the two areas that I mentioned a little bit earlier one is the refurbishments G3 to G3+. I think the G3+ has been hugely important in our order intake and just making us more competitive and so we will probably end up refurbing more G3 to G3+ next year.

So that's one aspect and then you've got next gen gas and HFO and HFO obviously it's early days and it is quite difficult for us to forecast precisely how we are going to build that fleet we have the balance that against the pipeline that is building as we bring this into market and so we are making assumptions around HFO and we’re going to do with that fleet and we will flex it as we need to. I mean that’s probably the best detail I can give you at the moment David on that one.

Carole Cran

I think, probably the only other things to note, David, which is not something that we’ve spend much time talking about, but the temperature control business does continue to grow, so there is been basement, going into that part of the business as well.

David Phillips

Great, thank you. And just to clarify something on the Venezuela instrument. The $20 million that's been rolled into this promissory note. Does that imply that $20 million has come out of the debtor provision and moved into a different part of the balance sheet? Or is it still, on an apples-to-apples basis, you’re going to be slightly down on the number you reported in debt provision from August?

Carole Cran

No, that’s a like-for-like comment, David, so we've not moved out. It doesn't get designated any differently. So it will still sit in the receivables and we will still take a judgment as to what percentage of provision to hold against it, so that’s a like-for-like comment.

David Phillips

So there's no, so the Venezuela number hasn't gone down, because this has moved from being one instrument into another, from being a debtor to being an instrument, there's no change?

Carole Cran

That’s right.

Operator

Our next question this morning comes from Rajesh Kumar from HSBC. Your line is open. Please go ahead.

Rajesh Kumar

Just in terms of looking at the contracts you are just in discussion of renewal. Could you remind us, how do you account for the revenues in the mean time? Do you still assume the old billing rate and accrue the revenues on that basis? Or, are you making an assumption about the new prices, which you might be able to achieve and accrue on that basis?

Also, given your experience with Bangladesh and some of the pricing environment changes in the last couple of years, are you going to re-visit that approach at all? The second one is on changes on staff incentive, you have highlighted earlier about some changes to how you're going to pay your sales people going forward. At the interims, you said you are still trying to finalize what is the right structure. Where are we in that process? What is the kind of focus that's likely to prevail in those discussions?

Chris Weston

You want to take the first one Carole?

Carole Cran

Sure, so what we will do Rajesh is, I guess it depends on how much we know and the level of certainty as to those new prices. The customers will, typically, honor the existing pricing whilst you're working through the negotiations, so we'll take a judgment as to what to recognize and, also, what to forecast for the balance of [technical difficulty], I mean with Bangladesh and we are at the time that we announced discounts there and said it was retrospective to be beginning of Q2 and last year. We were always working on that basis, and in terms of own internal assumptions, but we were just clear to clarify, when we announced it, so that you understood it wasn’t an impact as at the point of us announcing, but it was an impact from the beginning of Q2. So we’ve been accounting for it at the lower rate already.

Chris Weston

And on the sales incentive, the sales teams now have an element revenue generation in their target. It’s a fairly significant proportion. I am very comfortable with how that is progressing need to see what a full year looks like, but I think our sales performance and conversion has been good this year. So, pleased with what I’m seeing at the moment.

Rajesh Kumar

Thank you very much. Just more follow-up for a question on Venezuela. The promissory notes, I didn’t fully understand what currency were they denominated in, were they in --?

Carole Cran

Yeah. They are US dollar, Rajesh.

Rajesh Kumar

Thank you very much.

Operator

Our next question this morning comes from Rory McKenzie with UBS. Rory, your line is open. Please go ahead.

Rory McKenzie

Just one follow-up on Karl’s question actually on that slightly higher mix of maybe smaller contracts, is that kind of because those tenders have less price competition so you’re going for them more or just recently have no customers popped up with needs for chunky amounts of power? Some commentary there, please. And then secondly just talk about the Mozambique on hire again, what was the pricing like there and any more background to that contract?

Chris Weston

On the mix. So on the smaller contracts, so I mean I think the mix of contracts that we’re winning has changed slightly over the last three years or four years not dramatically. And those tenders are pretty much as competitive as they have been for the last while. So, no dramatic change. As to why we saw a pickup in the pipeline, which I think is what you’re getting, it’s very difficult to be clear on that. Part of it might be the actions that we’ve taken internally that give us more discipline around pipeline and pipeline management part of it, might be a lower oil price.

So, having said that, I suppose your follow up question might be around pricing on new contracts and the pricing on new contracts looks relatively stable at the moment and has been so for the last 18 months or so. I mean you have to think about pricing in three buckets, one is on renewals of the legacy contract which I suppose Argentina falls into renewals from first contract where you might see a leg down or a discount given to reflect mobilization cost falling out. And then ongoing pricing for new business, and that’s been relatively stable.

And then on Mozambique, I mean we don’t go into the pricing or margins on specific contract but we’re comfortable with where that landed and I’m very pleased that it’s back on supply.

Rory McKenzie

No comment on if it’s I guess down on the renewal or how the relationship has changed?

Carole Cran

It's a slightly different contract anyway, Rory, so you know there is a total plant that the things that you’re so it's on a slightly different arrangement with EDM and utility in Mozambique. So, it’s not like-for-like compounds in terms of higher prices, but when you then translate into margins and retiring and they’re fine to where they’ve been historically, compared to where they’ve been historically.

Rory McKenzie

Okay. Great.

Operator

Our next question is from Paul Checketts of Barclays. Paul, your line is open. Please go ahead.

Paul Checketts

I've got two questions please. The first returning to areas you’ve already talked about. The first you mentioned the Myanmar contract and I can see that you didn’t make the shortlist, but you did bid for it could you -- do you know why you didn't make that shortlist please? And one company that did was Karpowership, although they weren't successful, are you seeing them increasingly? And Chris, maybe you could elaborate a bit on your thoughts on that company as a competitor? Thanks.

Chris Weston

Okay, the Myanmar situation five year contract, we did look at it. You are right we did put a bid in, but the final solution is going to larger engines. I think they’re 10 megawatt engines and those are permanently installed and the winning continuum I think has done it on the back of being certain around 5 years prices, what happens after that I don’t know. But those engines, I think we have always said will be more fuel efficient than our engines, they are a longer term solution and that makes it difficult for us to compete with it when you get a 5 or 10 year contract.

Karpowership interestingly bid but weren’t rewarded a contract. I mean that's probably the only instance where we've come across them this year. We don’t really see them in most of our market, they are on the periphery. They tend to go for longer term contract 5 to 10 years, we tend to focus on immediate requirements and satisfying those and we might start with the six months to a three year contract and then extend as necessary.

So we don’t see a huge amount of Karpower in our rocket space. So hopefully that gives you a bit more background, Paul.

Paul Checketts

It does and can I just return to another topic, which is the oil and gas in North America. Sequentially, what sort of deterioration are you seeing?

Chris Weston

It depends on when you’re referencing it to. So I think we've said that oil and gas revenues were down about 50% on Q3 last year and we have seen a bit of stability recently, but we have seen a continued drift of this year, and the stability has been in the last month or two where we have seen an uptick in both diesel and gas volume and prices have been a little bit more stable, but I would really hesitate before I suggested anything certain about that and it will continue into next year, but it is encouraging.

Paul Checketts

Thanks.

Operator

Our next question is from Michael Donnelly of Panmure. Michael, Your line is open. Please go ahead.

Michael Donnelly

My question's been answered, thank you.

Operator

Our next question today is from Nicholas De La Grense of Bank of America of Merrill Lynch. Nicholas, your line is open. Please go ahead.

Nicholas De La Grense

Two questions please. So, all of the recent contract wins have been in diesel, but the next gen gas, I guess, is kind of starting to come into the fleet, as will HFO from next year. Can you talk about how the build-up of opportunities in the pipeline, with regard to those technologies is looking? And are you finding that, as they get closer to reality, your sales guys are more able to get in front of clients with that proposition? And is it being well received?

And then the second question is just with regard to some of your larger competitors have won some sizeable business recently, and we've obviously talked about APR on the call. What's your view on the current level of underutilization in the industry? Which direction is it headed and what do you think or what is the impact on pricing dynamics at the moment? Thanks.

Chris Weston

Next gen gas is certainly being well received by both the customers that we put it in front of, and by the sales force understandably. So the pipeline is building, we have as we said, got it on trial, happy with how it's going. And it looks quite promising, but again its early days.

So we’re very focused on maintaining utilization in the QSK60 fleet, that is a product that performs extremely well in the more advertise climates you see in Russia which is quite helpful for utilization and as we bring next gen gas in, next gen gas is typically what we will bid into new contract work and all our indications are that is going to do as we would hope it would. So we will have to see how that develops over the next year or so.

Utilization in the industry, I mean I think there has been an uptake in contracts been awarded, so it is beginning to soak up some of that underutilization, you mentioned APR. It looks like between their actions in selling fleet and some of that wins, there utilizations, that levels will start to come up to the kind of utilization levels that we manage our fleet to. I think others are still struggling a bit there is still access kit in some of our competitor yards, that we see around the world in the Middle East, Latin America I think it’s a bit tighter.

So energy there has reach the high utilization levels as best we can tell. Interestingly, Karpower, they have just been off hired in Iraq, so that a -- I don’t know how much it is, may be 200 megawatt, 300 megawatts on a couple of ships that have been off hired, so that will go back into the market. But those are not easy volumes to place around the world. Interesting, the problems they had in Myanmar there. So I think on balance it is slightly better, when we look at pricing, we’re not seeing a particular deterioration in the market. It seems that’s a bit early fairly stable, on where it has been for the last 6 to 18 months.

So I mean it’s fickle market, things can change quickly, but pricing seems to be to be doing okay, at moment on diesel.

Nicholas De La Grense

Thanks very much. And just a couple of quick follow-ups to the first question. Do you now feel that you've got a market leading proposition in gas with the new technology, because I know that the old QSK60s, you felt were not necessarily at the cutting edge? And then you mentioned that the next gen units are being used on all of your new bids currently. Is there enough demand in the industrial business to soak up the existing gas units as they come off higher, if you weren't able to redeploy them in utility?

Chris Weston

I’m comfortable at the moment with the activity we see around the world that we can manage utilization of the QSK60 fleet. Either in industrial or in Russia where, as I said, there is quite a lot of demand for it. So yes, I’m comfortable with that. In the next gen gas, it's up there with -- as a market leading product.

We’re developing further enhancements to it, in another version of it that can be retrofitted, and so would typically happen at refurbishment. When that comes into being, which is a year or so time, it would be the market leading product. And that is just part of our ongoing technology roadmap we’re been much more proactive by now I think in looking at the technology roadmap for each of the fuels, and what we do to enhance the fuel efficiency. And that looks like promising over the next few years. Does that answer the question Nick?

Nicholas De La Grense

That does. Thank you very much.

Operator

Our next question is a follow up question from George Gregory. George, your line is open. Please go ahead.

George Gregory

Yeah. Hi. Just following-up on, I guess both Paul and Nick’s question on mid-term solutions and your existing fleet mix. Chris, what is stopping you from moving more quickly into larger, yet still modular solutions? I mean there’s clearly demand in that market, why are you sort of still focusing on high-speed gas generators and not moving into the mid-speed generators now? Thanks

Chris Weston

Well, we are I mean HFO product is a medium speed engine. So, that is being introduced as we speak. The technology roadmaps that we are working on, we are moving as quickly as we can. I mean if you think about it, we’ve had to bring in new capability, new people, new technical people and then look at the product that is out there in the market and then adapt to our mobile and modular format, so package it. And people might take that as being fairly straight forward and take it for granted. But it is a little bit more technically complex. So some of the HFO solution, we have been able to protect through down the patent route, because it is not an easy thing to do. And it was an expertise that we have developed.

So, I think George, we’re going as quickly as we can. Of course, as the CEO, you got to patience and want it all to happen more quickly, but it is -- it’s just the time it takes to package and then productionize some of this new technology. I suppose the bits of it, when you start to look at heat recovery which we’ve talked a bit about in our Technology Day, some of that technology is a bit more cutting edge, and so we need to be comfortable that it is robust and will operate across all the conditions that we find in our market. And that just takes a little bit longer.

And we are being more robust I think with our new product introduction making sure that it’s fully tested and it works as we expect and it would give us the fuel consumption figures that we would expect. So, all of that when you lump it together doesn’t mean it takes a little bit longer than maybe some of us would like.

George Gregory

Understood. Sorry, go ahead.

Carole Cran

Yeah, just going to add to that George and see some of the examples of bigger engines being deployed to say five years contract. Our view is that those aren’t mobile.

Chris Weston

No they’re not, they’re permanent.

Carole Cran

They are permanent, so our statement of those is that you then taking a judgment on the likelihood of extending well beyond that five year period on an asset that has a life perhaps of 20 years. So, our view is that you need to retain the mobility and modularity of our solutions. And if you’re looking out five year contract and --.

Chris Weston

I mean a 10 megawatt engine is 200 tons to 250 tons, once it's in, it's in. It won't get moved.

George Gregory

Sure, sure. But, clearly, there's a spectrum and there are mid-speed engines, which are not 10 megawatts, but they're also not 1 megawatt and they would help bridge the gap in terms of efficiency. [Multiple speakers] I take your point on sort of recalibrating the solutions which makes entire sense. Just one follow-up on the gas points. The impairment of the gas sets in North America. Is it -- how much of that is being driven by -- is it entirely market driven or are there new solutions coming on stream which lead you to impair those sets?

Chris Weston

It's market driven.

Carole Cran

Yes, all market George.

George Gregory

Thanks.

Operator

Our next question is a follow-up from Karl Green. Karl, your line is open. Please go ahead.

Karl Green

Just a follow up. Just in terms of power solutions utility. I think you've said earlier this year that Southern Africa, the Southern African region was potentially an interesting area for you in terms of opportunities. Is that still the case in terms of the shape of your pipeline, please?

Chris Weston

I think Africa as a whole is an interesting opportunity. I think South Africa is still a recently large part of that. Overall the pipeline continues to look healthy.

Karl Green

Okay. Thank you.

Operator

Chris and Carole we have no further questions on the phone lines.

Chris Weston

Alright, thank you very much everyone. Appreciated you dialing in today and thank you Chris for hosting the call.

Operator

[Operator Instructions].

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