Aggreko's (ARGKF) CEO Chris Weston on Full Year 2018 Results - Earnings Call Transcript

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About: Aggreko Plc (ARGKF)
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Earning Call Audio

Aggreko PLC (OTCPK:ARGKF) Full Year 2018 Earnings Conference Call March 6, 2019 4:30 AM ET

Company Participants

Chris Weston – Chief Executive Officer

Heath Drewett – Chief Financial Officer

Conference Call Participants

Andrew Nussey – Peel Hunt

Rob Plant – Panmure

Will Kirkness – Jefferies

Rory McKenzie – UBS

Paul Checketts – Barclays Capital

Karl Green – Crédit Suisse

Rajesh Kumar – HSBC

Chris Weston

All right, good morning, everyone. Thank you very much for coming along to our Prelim Results. Before I hand over to Heath, who is going to give you the detail of the results, I just wanted to say a few words giving you my take on the business. So the first thing I would say, I’ll get the right slide. The first thing I would say is I am extremely pleased with the results that we delivered in 2018. A lot of hard work went into the business. We came in, in line with expectations, some would say slightly ahead and certainly ahead of the guidance that we set out at the beginning of the year. So I think that is encouraging.

And also, we have seen return on capital employed go backwards for a number of years, and I’m pleased at least on an underlying basis, that the work that we are doing is beginning to show fruit. And we saw a slight improvement in underlying return on capital employed. Looking at each of the businesses, in terms of Rental Solutions, I think, everyone would recognize that Rental Solutions had an extremely strong year. Very good growth, particularly in North America, but that growth was more widespread, and we saw a good growth in Aus-Pac and also in Europe. So I was pleased about that.

And when we look forward, a couple of points, we’re not seeing any reduction in the level of activity in North America. So that looks encouraging, and I think, that is consistent with other operators in that market. And I would also say that as we go forward, a lot of the work that we’ve done around systems, processes, service materials, et cetera, will bear fruit in 2019, and I would expect to see an improved margin in Rental Solutions in 2019.

PSI, Power Solutions Industrial, also had a good year, strong contribution from the Korean Winter Olympics, where I think the team delivered exceptionally in very difficult conditions. But even if you take that out, there was good underlying growth. And that business, PSI, now makes up a larger proportion of the underlying order intake in Power Solutions. And indeed, if you look at the fleet on hire, it’s nearly 50% of the fleet on hire now. And that is a deliberate shift over the last few years.

A couple of comments about a couple of areas. Firstly, in terms of the Middle East, we said end of the first half, we would expect to see that recover in the second half, and indeed, we did begin to see beginnings of recovery. Volumes are up slightly in the second half, prices are still depressed, but they are stable, and I think that is encouraging coming into 2019. And the other area, just to touch on is Eurasia.

There was a good order intake last year, 333 megawatts, exactly flat on the year before, but that was good. But we are going to see or we do expect to see a softening in growth in Eurasia in 2019. And that really is down to a couple of things. One, the flare gas opportunity in Russia is largely saturated. And secondly, diesel, there is more local competition, and you saw that a bit in some of the prices in diesel in Russia this year. But we would expect megawatts on hire to grow this year and that business to grow this year.

In terms of Power Solutions Utility, without doubt, a tough year for them, team did a very good job there. And although, the Power Solutions order intake overall was pretty similar to last year, and to the year before, the Utility business won a reduced proportion of that order intake. And that is due to a slight change in the market. So the shorter term end of the market, let’s say sub-3 years, where we are extremely competitive and we are maintaining our market share, market growth is much lower than it was. At the longer end, where we are less competitive, so 3 to 8 to 10 years, then we see more growth in that market but our technology is less competitive, and so it’s harder for us to win business in that segment of the market.

Now that being said, I was very pleased to be awarded a contract in West Africa, in Burkina Faso, for 50 megawatts of HFO and that is mobilizing now and will COD in the middle of the year. This business has got a tremendous concentration, as you can imagine, on receivables. And I think they had a good year on the receivables, stemming the tide and keeping it flat year-on-year. And I like what I’m seeing in the work that they are doing and I think it is a question of time before we see an improvement in the receivables there. We didn’t quite set – achieved what we set out to achieve, but I think they have made good progress.

And then when you look at this business, as Heath said at the half year, the focus is really on the cost base, and we talked about a GBP 50 million cost out program in the asset base, so asset efficiency. And there’s a lot of work in that area, not only in the PSU but more broadly across Aggreko that we have reinforced for 2019 through an incentive scheme, which is designed to encourage more efficient use of assets. And I’m sure that’s something that we will touch on later.

And then, lastly, I can’t open without recognizing winning the Rugby World Cup, provision of power, not the game itself, I hope England does and also the Olympics contract. So a $200 million contract, the largest Olympics contract for temporary power that has been awarded, thrilled that the team won that. It has been a long time in the making and was helped tremendously by our performance in the Korean Winter Olympics. We will do prime power for opening and closing ceremony and the international broadcast center as well as the 43 venues that the event is being held in. And unusually, we will also provide medium voltage, not just low voltage. And that is part of the $200 million. So the contract is $200 million as it is currently designed. So very pleased to be able to announce that towards the end of last year.

So with that as a few opening comments, I will hand over to Heath, who will take you through the results in a bit more detail.

Heath Drewett

So good morning, everybody. And so look, I’ll start this morning with a reasonably familiar format on the results slides, and then I’ve got a couple of more detailed slides around working capital, which, as you know, since my joining a year or so ago, has been one of my top priorities in the business over the last year. So as usual, every percentage year-on-year data point that I quote will be excluding currency and pass-through fuel, which in our presentation and our statement, we refer to their underlying performance. So that’s the basis on which I’ll quote those.

So let’s just start with the group’s overall performance, as Chris already said, results in line with expectations this morning, despite currency headwinds. PBT up 10% on an underlying basis, and even after recognizing that 2017 PBT has subsequently been restated downwards by about 3%, as a result of the IFRS restatement, we’re clearly ahead of our guidance a year ago, this time a year ago that PBT would be flat, excluding the impact of currency.

Another way, perhaps, to look at the outperformance is to note that while currency headwinds have increased during the year from about 8% last March when we were standing here last March, we talked about an 8% headwind in the year to around 13% by the year-end as we’ve confirmed today.

So market gets profit expectations during the whole of that period have remained pretty much unchanged at GBP 182 million, which, obviously, we’ve reported in line with today. And in my view, that’s a pretty good result in a year and that has not been without its challenges across the world.

So briefly on the headlines on the income statement then, we saw good growth in underlying revenue of 8%, 10% growth in operating profit, and as I mentioned, PBT, as Chris said, driven really by a very strong performance in our Rental Solutions business, which now represents 52% of the group.

As you know, it is our intention to avoid taking exceptionals, where we can and where we deem the items actually to be more underlying trading than exceptional, and you’ll see there are no exceptional items reported this year.

Our effective tax rate for the year was 31%, in line with the guidance we gave back in March, 2018, slightly up on the prior year, due largely to a one-off tax credit in 2017 as a result of the changes in the U.S. tax reforms that we spoke about at the time.

Return on capital, 10.3%, was just ahead of last year on an underlying basis, however, with the impact of currency on a reported basis, as you see here, down slightly below last year’s level of 10.7%.

We’ll look at the individual businesses in a little more detail, and we will start with Rental Solutions.

So you see revenue in Rental Solutions rose 22%, a strong performance and actually pretty significant in the context of the group as a whole. Just referencing our Q3 trading update, those that pulled out of the draw to see what we said at Q3, this is down slightly on the Q3 nine month run rate growth, really driven as a result of stronger comps in Q4 in 2017 as a result of the hurricanes. And so actually, Q4 if you do the calculations, 12% up, including the hurricanes, 18% out up, if you take hurricanes out of both periods.

We’re showing here the breakdown of results by sector, the revenue by sector. Chris will develop that later when he talks about our sales strategy, diversification, sector focuses, et cetera, and how that’s producing the results we’re seeing for this business.

As you know, North America represents just over half of Rental Solutions, and we grew revenue in North America by 25%. As we delivered approximately the same increase in hurricane-related revenue in 2018, as the rest of the business on the full year, while in Q4, there’s an impact, on the full year, there isn’t.

So the North American revenue growth rate of 25% is the same, including and excluding hurricanes. Margins in North America up from around 11% to 15% in the year, really the operational leverage and some of the efficiencies in operation coming through into that margin.

But as Chris said, it wasn’t just the U.S. that grew, our Continental Europe business grew 24%, successfully reflecting the expansion of our sector footprint support from the Ryder Cup in September. And then the Benelux countries benefiting, in particular, from the buildout of the renewable energy market in the utility sector.

In Northern Europe too, revenue rose 8%, number of contracts for next-generation gas technology, in particular, supporting data centers, as you know, require reliable, completely uninterrupted power, together with some increased oil and gas activity in Northern Europe.

And finally, on Australia Pacific, revenue grew 16% supported by good growth in the mining sector, in Aus-Pac and an emergency contract to support Melbourne’s power supply over the summer months there.

So returning back to the Rental Solutions business, overall the operating margin rose 1.2 percentage points to 12.9%, reflecting disciplined approach to costs, which enable us to leverage the strong top line growth that we’ve seen.

Our focus on utilization increased from 56% to 62%, supported good growth in the ROCE for our Rental Solutions business, which grew from 12.2%, as you can see here, to 14.7%.

So moving to the industrial sector of Power Solutions. As a reminder, a point of housekeeping, the figures for both 2018 and 2017 are after the move into this business of the non-utility projects, which previously used to be reported in Power Solutions Utility, we’ve now stripped those back so Power Solutions Utility is only utility projects, and we’ve moved those industrial projects into this sector for both years.

So, Power Solutions Industrial now represents about 27% of total group revenue and grew 7% or 4% if you take the Olympics out of it. So the Winter Olympics in South Korea reported in the Power Solutions Industrial sector. And again, if you take a look back at our Q3 statement, you can compare that 4% ex-Olympics growth on the full year with a 2% growth at the nine months point, reflecting a better performance in the Middle East.

As we closed out the year, as we’d expected and spoke about indeed at our results at the half year, we’re expecting a stronger relative performance in the Middle East, offset slightly by some softening in Eurasia, which Chris has spoken about the competitive landscape that we see in Eurasia and that started to show through the back end of 2018.

Order intake for the year, including Eurasia, rose 29% to 604 megawatts in this business, reflecting a shift in the overall project portfolio towards more industrial than utility contracts. And I’m sure we’ll pick that theme up later as well.

So, within Power Solutions Industrial, our Eurasian business grew 7% over the course of the year, good growth from its main sector, which remains oil and gas, although diversification is key for that business as we move forward.

Pricing in the region, as Chris said, remaining pretty tight and if you take it at the highest level, revenue was up 7%, volumes on hire across the whole fleet were up 9%. So, you can see the pricing pressure coming through with more competition in Eurasia. And this coupled with the flat order intake in the Eurasia region year-on-year of 333 megawatts, expected to result in slowing growth in 2019 compared to what we’ve seen in this region over recent years as we’ve built that business up. So it’s still expected to grow, but the rate of growth in Eurasia will slow into 2019.

Latin America delivered strong revenue growth of 31%, our business there, much more competitive following the restructuring done in 2016 and 2017 that we’ve spoken about previously. And an increased prioritization of profitability of contract opportunities over top line growth in the Latin America region, consequently, year-on-year margin increased from around 7% in 2017 to 12% in 2018.

As I said earlier and then we discussed at the interims, our Middle East business had a tough first half owing to the macroeconomic issues in the region, and particularly ongoing Qatar blockade, and while that continues, against softer comparatives, we did regain some ground, as I said, in the second half, as we had expected and indeed spoken about previously.

However, a combination of the slowdown in Qatar, plus some of the spillover into the construction sector in the UAE, meant our overall revenue in the Middle East for the year was down 8%, just as a comp, it was down 20% at the half year, 8% for the full year. Revenue in Africa declined 4%, reflecting just some off-hiring of projects in the mining sector. And finally, Asia, not including the Winter Olympics, so everything else within the Asia business, rose 11%, good performances in Japan and Singapore, in particular.

So coming back to the overall Power Solutions Industrial sector, operating profit improved 10% to GBP 71 million, margin of 16.6%, slightly up on the prior year on an underlying basis. And that margin improvement really reflecting the strong growth and margin increase in Latin America, offset by the pricing and impacts of the Qatar blockade in the Middle East.

We’ve done well to improve utilization, which, as you can see here, is 71%, it’s a couple of percentage points up on last year and above the target level that we’ve spoken about for this business of around 70%. And that said, we believe we can improve this further with some of the activities we’ve now put in place and starting to see that utility – that utilization increase a little bit.

So lastly, onto Power Solutions Utility, which represents about 21% of group turnover for 2018. Revenue was down 14%, primarily due to lower rates and volume in Argentina, and some pretty significant, but known off-hires at the beginning of the year Zimbabwe, Bangladesh and Japan, which we’ve spoken about many times. So full year off-hire rate of 42% included some GBP 400 million – 400-megawatt plus across just those four contracts. So a much higher off-rate than we would normally expect, which is in the 30% to 35% range, really reflecting a broadly three-year on average contract length, which says you’ll be turning your book, about a third of it every year, it was hire of 42%. And this last year, as I said, we saw those contract off-hires coming, we’ve known about those for some time.

Operating profit was down 23% at a reduced operating margin of 6.2%. And combination of the repricing in Argentina, together with that reduced volume, which has driven significant reduction in utilization, 73% down to 66%. You see the opposite effect of the operational leverage in this business compared to the Rental Solutions business, where you start to grow the business, utilization goes up, you see the margin and profit kicker, you see the converse in this business.

Overall, average megawatts on hire across the business declined around 13%, so revenue down 14%, average megawatts on hire, 13%, so again, at the top level, it gives you a sense of where pricing is at in this market, which is pretty stable, we’ve said that for a while, other than the off-hiring of those unique individual contracts like Argentina, which is really the last one to go.

We secured new orders just under 400 megawatts, 398 megawatts down 40% on the prior year, although we did agree some key contract extensions this year, 117-megawatt contract in Yemen and 100-megawatt contract in Benin among those contracts extensions. The receivables in Power Solutions Utility continues to be a focus and we’ll talk about those in one moment.

So just on that, let’s turn to the cash flow. Operating cash inflow down from GBP 450 million to GBP 423 million, you can see there fourth or fifth line down. This was impacted by outflows relating to the mobilization of new contracts in Brazil, specifically so the big Amazonas contracts that we’ve spoken about. Bangladesh, which, obviously, on hired during the course of 2018 and St Croix, which will on hire in 2019. And those three contracts represent about 200 megawatts of new work, so the cost associated with some fairly sizable projects there.

The working capital outflow, which we call out here on the box on the right, GBP 56 million, up slightly compared with last year, driven by a GBP 60 million outflow or reduction in payables. And I’ll come back to this in a bit more detail in a moment. As I said earlier, working capital is pretty key in my priority set but also for the group to improve its returns.

Fleet CapEx came in at GBP 196 million, down some GBP 50 million from the GBP 246 million last year. As we’ve sought to increase utilization across the business and only invest new capital where utilization levels support it. Last time we spoke, we thought CapEx fleet would be around GBP 200 million, it’s come in to shy of that at GBP 196 million. Of that GBP 196 million, we invest about GBP 79 million in Rental Solutions, continue our investment in temperature control assets, as well as the renewal of our North American oil-free air fleet.

Industrial CapEx was about GBP 47 million, which included some solar for our diesel, solar hybrid project in Eritrea and some of the CapEx for the Winter Olympics in Korea, which we’re now redeploying across the business more widely.

Utility CapEx was GBP 70 million, down significantly from GBP 141 million, and utility in 2017, included GBP 22 million on G3 diesel refurbs, G3+ diesel refurbs and around GBP 14 million on some specific CapEx for the Amazons contract in Brazil. Non-fleet CapEx of GBP 20 million, related primarily to our ongoing investment in new systems.

Net debt, as you can see at the bottom of this cash flow, GBP 686 million, GBP 34 million higher than the prior year, but as you can see here, an adverse currency movement on our borrowings of GBP 39 million, which I think when I look across the analysts’ expectations for net debt, I don’t think people were able to factor that in just knowing what our debt profile was so that’s a GBP 39 million FX increase on our net borrowings.

This resulted in net debt to EBITDA rolling 12 months of 1.3 times, up from the 1.2 times at December. And we do expect on a go-forward, the continued discipline on capital expenditure and our focus on working capital to see this gearing reduce over time.

So then, specifically on working capital, as I said earlier, during my first year, the focus on improving working capital has been one of my personal priorities. And while we’ve seen a cash outflow on payables during the year, as part – in part, just reduced activities in CapEx, drives lower CapEx payables. And from December 2017 to December 2018, we had some deferred revenue sitting in payables at the end of 2017 in relation to the Winter Olympics, which then got released during 2018. So aside from the payables outflow, we’re seeing receivables stabilizing and our improved management of inventory across the group starting to show through.

Just specifically on the receivables amount here of GBP 10 million, so GBP 9 million of that outflow is in our Rental Solutions business, really driven by growth, primarily in North America. GBP 2 million of it’s in Power Solutions Industrial, which says that GBP 1 million reduction actually in trade receivables in Power Solutions Utility. So that GBP 1 million reduction compares to an GBP 86 million increase in 2017. So when we refer here to the debtors’ position stabilizing, we’ve clearly got more to do on Power Solutions, but we are moving from a period where we’ve seen significant outflows in that business as recently as 2017 of GBP 86 million, coming to GBP 1 million reduction in 2018. So we’ll talk a little bit more about that later. But we definitely feel that that is stabilizing, and now we need to drive it to be a positive capital inflow for us.

So just looking in a little bit more detail, inventory, this chart takes you back over a couple of years, but shows the progress we’ve made over the last two years in reducing both the absolute level of inventory. But equally important, the sort of inventory efficiency metric here, we do it here as a percentage of revenue, internally we look at it as a percentage of cost of sale. But you don’t have cost of sales, so easy to identify so we’ve done it here against revenue so that you can track that yourselves.

And I think the business has responded well to the initiatives we put in place in 2017, the increased impetus we’ve had on that in 2018. And you can see on the right-hand side, here we spoke about some of those things at the half year. Those continue to be the levers that we’re pulling on the inventory.

More to do I think on inventory, but starting to see that coming down. And in particular, I think around the sort of centralization of inventory management, it was very desperate and very disaggregated previously, we’re now trying to manage that much more holistically. Systemization of our stock management and getting kind of the automation to drive activity and buying levels rather than sort of individual human intervention.

And the closer relationships with suppliers, just exploring, how we can manage our supply chain better, either on a consignment stock basis or just-in-time delivery. So our procurement team working closely with suppliers to run a more efficient inventory book.

So trade receivables, so as I said, while we’re yet to turn the ship on this, I think we’re beginning to see stabilization over the last few years as we continue to take the various actions that we set out here. Obviously, you can see just over half of that 54% of the group’s trade receivables balances within our Power Solutions Utility business. So we’ll just touch on that.

So this chart’s familiar to those of you that were at the interims or saw our interim presentation, we’ve shown here the quarterly receipts and invoicing for Power Solutions Utility only, it’s in dollars. So more difficult to tie to all the trade balances, which only have FX effects in them, but by and large, the invoicing and receipts in this business are in dollars or dollars denominated currency so we’ve left it in the currency that we look at it in.

And you can see the nature of this business is such that its larger projects, it’s more lumpy cash flows and sort of inherently more unpredictable than I think in Power Solutions Industrial and Rental Solutions. But as we explained at the half year, you can see the Q1 lower cash collections in Q1 partly as a hangover from a pretty strong performance in Q4 of 2017, where we had receipts exceeding invoices by some margin.

So we felt the hangover of that a little bit in Q1 this year. But for the year as a whole, we are well ahead of our 2017 performance. You can see that in the top right box and while we still had an invoicing to cash deficit of GBP 19 million, compared to the GBP 113 million in 2017. Ultimately, we need to turn that deficit into a surplus, if we’re going to reduce the level of nonperforming capital that’s sitting in this business, but I do believe that the steps that we are taking, in particular, the increased engagement that I’ve seen over the last 12, 18 months or so with these utility customers on a case-by-case basis, we should achieve receipts ahead of invoicing in 2019.

As I’ve said many times over the year, there’s no doubt that winding ourselves out of this position will take some time, with the situation in parts of Africa, Venezuela and Yemen being the most challenging. As issues essentially one of customers limited liquidity and access to foreign currency, as Chris I think mentioned in his opening remarks, for me, it’s more of a question of when rather than whether we will receive payment. That said, whether route to payment is less clear, we’ve taken appropriate provision, and in this contest, as you can see here, whilst there’s been some movements within the level of provision within Power Solutions customer-by-customer, the overall provision has remained broadly unchanged, GBP 83 million this year, just slightly up, I think GBP 1 million or so up on the previous year.

So looking to how you bring all of that together in terms of the cash flow performance, the capital base and the returns, this is a chart that we showed at the interims in terms of our journey to the mid-teens target in 2020. We remain, as we’ve said this morning in our statement, confident of our delivery of that mid-teens target in 2020.

And just by a way of reminder of how we calculate ROCE and its operating profit pre-exceptionals, which for this year, is the same as operation profit and we used the three-point average on the net operating assets, we always have done, so we take 1 Jan, 30 June, 31 December and we average that across the year. And we’ve set out the calculation for you in the appendices actually so you can see with increased focus on ROCE, how that is actually calculated on those balance sheet dates so there is an appendix slide that sets that out.

We’re committed to improving our returns by driving volume and pricing and overall operational efficiency in the P&L, while adopting a more disciplined approach to key components of our capital employed, namely fleet and working capital, which obviously, the second two bars here.

On the left-hand side of that chart, you can see the format we used at the interims, showing that progress starting at 10.3%, rising to mid-teens in 2020. And on the right-hand side, the list of some of the actions we’re taking to improve each of operating profit, working capital and fixed assets. So just starting with the operating profit, Chris, as I said, we’ll discuss shortly, how we’re driving increased revenue and higher margin work in Rental Solutions and Power Solutions Industrial, added to which, we obviously have the benefit of the Tokyo Olympics in 2020 with additional revenue of around $200 million.

We’ve built this contract into our own forward projections in setting out 2020 ROCE target at the time. And – but just from looking at some of the analyst forecast projections, it’s clear that not everyone’s gotten that yet in their numbers and wait to see the refresh of that. And we’ll add consensus for 2020. At the moment, we’re only showing 2019 on our website.

We’ll add 2020 on to the Investor Relations website once we’ve got a little bit more consistency of approach. And I expect that to happen over the coming days as people update their models, but there’s no point in putting your consensus out with apples and pears on Olympics in and Olympics out because it clearly makes a material difference.

Given its commercial sensitivity and before – and if you ask or after a number of you already have asked and irrespective how many times you can ask that question in all the different ways that you can think of, we are not going to tell you or give you any guidance on the profitably of that contract. And I’m sure you’ll understand the commercial sensitivity of it.

However, it’s not just all about revenue and the growth rates and we’re also heavily focused on costs, and we’ll drive cost improvements, margin improvements, through cost efficiency in the business, particularly landing in Power Solutions Utility, where we expect to really realize the majority of our cost reduction program. It’s not just the Power Solutions Utility cost reduction program, Power Solutions Utility in and of itself isn’t a business, its a set of customers and contracts.

So we’re running a cost reduction program across the business, but inevitably, a lot of activity sits in Power Solutions Utility and that will benefit – and those contracts will benefit from that GBP 50 million by the end of 2021. So we’ve now got the program team to support that in place and fully mobilized and they’re working through each of the work streams.

And there’s a small amount of that built into 2019, but that increases in terms of the lead times on some of those elements and the bits that are falling into 2019 are really around fleet logistics, freight costs being smarter about when we move fleet and only moving it when we need to move it. And the continued efforts that we’re making on servicing costs and some of the savings are feeding through into 2019.

Spoken already about working capital in some detail, and – but let’s just emphasize again how key that is to achieving this ROCE target. I feel we’ve made good strides on inventory, and I’m encouraged by the progress on receivables, although, we do have more to do, for sure. Significantly improved our procurement processes and whole supply management activities over the last two to three years, and since the procurement team have been in place, and whilst we saw a decrease in payables through 2018, I don’t considered those to have been driven by structural issues and they particular need solving.

So a look on working capital, in summary, I think we’re making good progress on some of the harder things there are to fix, but we’ve got more to do over the next couple of years. And finally, on fixed assets, we continued disciplined approach on capital expenditure. And now augmenting this with a rigorous review of our underutilized fleet to see what opportunities there are to make some selected disposals and where we’ve got fleet that we don’t expect to go on hire and we can sell into the market.

Capital efficiency is a key focus across the group, and as Chris said, we’re actually introducing changes this year to our annual incentive programs for our senior management to reward improvements in the level of assets deployed within the business and as well as just focusing the teams on increased profitability.

Wouldn’t be complete, I suspect, without a slide on IFRS 16. And while it’s not a significant in this business as I’m sure as in a number of companies you follow. And we’re adopting it prospectively with no prior year restatement, which is probably what most people are suspect – doing as well. It does thread its way through, as you know, through pretty much all of the statement.

So firstly, on the income statement, we’re seeing improved operating profit of around GBP 3 million, within which, as you know, there will be increased depreciation of about GBP 30 million in lieu of the operating lease rental costs, that’s only really important when you’re doing your net debt to EBITDA. So remember that you’ve got an EBITDA kicking up by the additional depreciation, offset in our business by increased interest cost of around GBP 5 million. So we’ve got a net reduction in PBT, and albeit, relatively small of GBP 2 million as a consequence of IFRS 16.

On the balance sheet, about GBP 100 million of assets will go on the balance sheet with a corresponding financing liability on the other side. And with the result of all of that being the gearing, we’ll increase by about 10 basis points and our ROCE will reduce by about 30 basis points, once you flow all of those through the top and bottoms of those ratios.

So just to close on a few words on our 2019 outlook. For the full year, we expect to be in line with the market guidance on profit before tax with a couple of points worthy of note. Just firstly, on currency, we expect based on the February closing rates, a full year FX headwind on profits of around GBP 9 million against 2018, which we will have to absorb it if we’re going to deliver the market’s expectations for this year. We’ve set that currency impact out in the appendix to the slide so you can see that.

And secondly, the impact of IFRS 16 of GBP 2 million, again, we will – if we’re going to deliver to the market expectations, which we are guiding to today, we’ll have to mitigate that through underlying performance improvement. So – and whilst we are not expecting people to move off their numbers as we are comfortable with where the markets are actually in achieving that, there is an GBP 11 million implicit improvement in underlying performance to hold to those numbers.

As we’ve guided to and discussed previously, the tax rate for 2019, 35%, really a function of our geographic mix of profits, together with some irrecoverable holding – withholding taxes and non-tax deductible costs, really relating to our operations in Dubai, where clearly the tax rate’s zero. For your reference, we’ve just put in the appendices and it’s a 2018 look, but it gives you a sense of the size of those items on the tax rate and how they play through our tax rate in 2018, but the same applies in 2019.

And in terms of the profit weighting for 2019, we expect to see a greater weighting to H2 than in 2018, we were just around 34 – 35 to 65, that could be closer to 30-70. We have a natural seasonal weighting to the second half in the business, it’s just slightly more weighted to the second half this year, given the known timing of on hires and off-hires that we can see, a couple of contracts, the Amazonas contract coming on hire in 2019 later on in the year, the HFO contract, which Chris referred to coming on hire in the second half of the year. So and we say that just to make people aware when you see us reporting at the interims, our expectation of that weighting for the full year.

And finally, just in conclusion then, reiterate our confidence this morning in achieving the group’s mid-teens ROCE target and on that journey, we’re expecting to manage our fleet CapEx again below GBP 200 million this year. And in addition to that, continued focus on working capital should drive an improvement in the gearing at the year-end, despite the slight negative that we referred to on IFRS 16, we still expect to see our gearing come down through 2019.

And with that, I’m going to hand back to Chris to take you through what we’d be doing on the customer side.

Chris Weston

Thank you very much, Heath. So I’m just going to spend a little bit of time giving you an update on our strategy, one particular area around customer focus. So I think you’re all aware of the four priorities that we laid out or reiterated at the half year last year that have been in place for a number of years, customer focus, technology investment, capital efficiency and our expert people. We have added to those this year, just the measures of access – success that we use internally.

So we can see the progress that we are making. Some of those very obviously, you would expect to see around ROCE, cost base utilization, others may be less obvious around what we spend on our people and what we do to improve their competence and capabilities. But as I said, I’m going to spend a little bit of time talking about customer focus. So really, focusing more on the top line, where Heath has been talking more about capital efficiency and cost base.

So in this area, the three things that we are setting out to do are on the left-hand side of the page there, being particular about the sectors we focus on, offering specialist solutions and then being simple to do business with. And we are doing this because it creates a more sustainable business that is less cyclical and has a more diverse revenue base, so revenue base spread across sectors and geographies.

It does play to our strengths, it differentiates us and it makes it difficult for our competitors to copy what we do here. So we have a reputation really, second to none in the market, A technical competence, a market leadership position in many of these sectors that we are reinforcing through the investments that we are making in the business, the changes that we are making around connecting our fleet, backhauling that data and using data analytics to make ourselves more efficient, and I think, that is ahead of what others are doing in the market.

And we are doing that because at the end of the day, it creates a more loyal customer base with a longer-term customer relationship and repeatable revenue. So when you look at the top 100 customers in Rental Solutions, in 2018, 19 of them also used us in 2017. And indeed, when I look at all the contracts in 2018, only 17% came from new customers.

So that repeat business, that repeat revenue, that rests on our reputation and our technical competence, is extremely important. And when you look at the focus on these sectors, within Rental Solutions, about 84% of their revenue comes from the top seven sectors there. And when you look at it on a group basis, that concentration has increased over the last few years from 55% to 67%, all playing to our strength.

So a little bit more about what we have done. And first of all, focusing on what we are doing in the areas of sales, so the changing – changes we are making in our sales channels are to make them more efficient and to make them more effective through improved conversion. So the – one of the first things that we have done is focus our very valuable and technically competent field sales engineers on particular sectors. And you can see the change in the top bullet there that we have brought about over the last couple of years, and indeed, in 2019, over 90% of the sales team will be dedicated to only one or two sectors. And at the same time as doing that, we have introduced for the first time, last year, what we call, inside sales or telesales, so this is inbound calls that we get requesting service or sales. And so we have put that in place, well, across the whole of Rental Solutions now.

Last year, the inbound telesales, which is focused on more transactional business, generated just over $80 million of revenue, and its run rate is increasing and in the end the year, it was about doing $8 million a month and growing. So that’s focused on more transactional revenue that we can then execute on more cost effectively. And it frees up our technical sales resource to focus on the more complex opportunities that are out there.

And so when you look at the average contract value, the average contract value that the field sales force is writing is about 40% above that the telesales is writing at the moment. And we have seen that contract value increase over 2018 by about 20%. So that’s the refocusing of the sales teams that we have put in place over the last couple of years. And we are beginning to do that, as the last bullet suggests, in the area of Power Solutions Industrial that is behind where Rental Solutions is at the moment. So there’s more to come in Industrial in both the systems that we are going to be rolling out there and the focus on the particular sectors. We have though switched the sales force to focus more on the industrial sectors and less so on the utility sectors over the last year and coming therefore into 2019.

So what does that – all of that mean? Well, just firstly, as you would expect, as you get that greater sector focus, you start to get better penetration of those sectors and understanding of the sectors. And as you do it and you unpack them, you find that there are subsectors within them. And in those subsectors, for instance, in utilities, where you might be dealing with transmission and distribution or generation or renewables, they could be different customers in each, they will speak a different language and they will have different requirements and different technical solutions required to settle those requirements. And so that goes to increased specialization.

What are we seeing in terms of results? So this here in the middle shows on the right-hand side, the number is the year-on-year growth we’re seeing in each of those sectors. And the bars are showing the 2017 and 2018 proportion of revenue in – from each of those sectors. So you can see, in Rental Solutions, that we have seen strong growth across all of those sectors, other than manufacturing. So good growth. It’s not just oil and gas, it is good growth across all of those sectors. And sector concentration in Rental Solutions across these seven sectors is high at about 84%.

If you look at North America, you can see a similar good growth across all of those sectors within North America, other than manufacturing. So – and then if you looked again at Continental Europe, Northern Europe and Australia Pacific, all of them are showing good growth against the sectors that we are now focusing more on.

Now just to touch on oil and gas in North America. So in North America, you can see that we saw tremendous growth in oil and gas over the year, largely driven by shale operations in the Permian Basin and that now makes up 20% of that North American revenue. At its peak in 2014, the revenue from oil and gas, as you can see there at the bottom left, was 33%. So it’s somewhere below its peak. And if the revenue grew by another 25% in oil and gas, which it might well do, then it would reach the same level of revenues we saw in 2014, but it would only be 23%, 24% of revenues. So there’s much less revenue concentration in oil and gas in North America.

And I would add to that, that 70% of that shale-driven revenue is in the Permian Basin, which is in the most prolific and lowest-cost producing shale basin in North America. And where only yesterday, two of our customers, Chevron and Exxon, both announced plans to triple production in the Permian Basin over the next five to six years. So that gives you an idea of about the results of greater focus on the sectors.

I have to say, in Power Solutions as a whole, just moving on to that, I’m just going to start with these charts in the middle. So the charts in the middle show revenue in Power Solutions in 2014 and 2018 reduction as you can see. It also shows the Power Solutions Utility order intake, GBP 697 million in 2014 going to GBP 398 million in 2018. So when you look at Power Solutions as a whole, as I said earlier, the order intake this year, just over a gigawatt, is pretty similar to the order intake last year and in 2016, and in fact, is materially ahead of the order intake in 2014 and 2015. But we are seeing a shift, quite strongly towards the Power Solutions Industrial business, which is then reflected in the proportion of revenue that comes from Power Solutions Industrial, unsurprisingly.

And we are now in a situation, where 48% of the average megawatts hire – on hire in 2018 is on hire with Power Solutions Industrial and that is a deliberate swing over the last few years. You have seen order intake in Power Solutions utility go from 68% in 2016 to 58% in 2017 and 40% last year. So quite a big swing that I think is resulting in a better-focused business on the growing segment of the market, based on those various sectors that we are focusing on there.

And you can see the growth across the various sectors, there are two that were held back slightly, building services and construction and manufacturing, and that was largely down to what we have talked about in the Middle East and a little bit in Africa.

And so a lot of what we are doing in Power Solutions Industrial is now very much copying what we have done in Rental Solutions over the last couple of years, putting in place those systems, there’s a lot of work that has already been done on sales discipline, but focusing the sales force more on these sectors. So I would expect to see further improvement over the next few years. So that’s continuing the sector focus, being particular about the sectors we target.

Not just moving on to the specialist solutions. So last time I stood in front of you, I talked about the oil and gas sector, where we have about 45 odd applications that we offer into that sector, I talked about the mining sector, where are – there are another 20-or-so applications that we offer into that sector, and I gave some examples around shovel walk and around turbine inlet cooling, some applications that we deliver to these customers.

And what we have done this year is we have created more global focus on the sectors, we have appointed global sector leads, all of whom are backed up by a technical lead, who work across the business, talking to customers, but also, helping support our sales teams in the applications that are being developed elsewhere in the world that are relevant to their sector, all designed to create incremental growth. And here are a few examples of some of the areas that we have applications in. And it might be from the different types of gases that we have to operate with, biogas, landfill gas, liquid propane gas, all those kind of things, through to safe operations on oil rigs, all of which require specialist capability.

And I just wanted to touch on a couple of application examples. One we developed in Australia, which is looking at, as it says there, bulk air cooling in the deep mine sector. So in many mines, particularly in hot countries and where there is a seasonality, we – mines do struggle with productivity with the temperature in the mines. And the particular concern is around the wet-bulb temperature, which looks at heat and humidity. And if that is too high, then people can’t work there anymore. And ultimately, you might have to shut down production in the mine, which is obviously not what our customers to do – want to do. And it’s typically where there is seasonality and where the activity in the mine has gone beyond or is too great for the existing ventilation and cooling systems in that mine.

So we put in a surface-based solution, which we can do quickly. It is there temporarily for these hotter seasons, and so we can do it quickly and it is better for the environment, rather than putting the equipment down in the mine. And that then puts the cooling into the mine, which ensures the mine stays productive. And we developed this in Australia – or in Western Australia. We now have deployed it in South Africa, in Europe, and we are beginning to look at it in Latin America and North America. So that’s one example of an application.

Another is based on the Younicos acquisition. So last time, I talked about Granny Smith. This is a solution that we have put into a data center in Northern Europe. The customer – the end customer is a very well-known end user, who is particularly demanding about power quality and reliability as they should be and, particularly, frequency reliability. And at the same time, they want us to reduce cost and reduce emission. So any of you that have worked in the energy industry know that’s quite a tough ask. And this is being done before utility power is provided to that data center, as it is ramp-up – in ramp-up mode, which makes it even more difficult to provide power.

So we have put in place 14 megawatts of Next Gen Gas, so low on emissions, and a Y.Q, which is a storage product that we have now gotten into in the market. And that has resulted in frequency stability, as you can see on the right, a reduction in emissions and also a reduction in costs. So you’re able to run the gensets at more efficient levels, which reduces fuel burn and wear and tear on the engines, which reduces the cost to the customer and it reduces the cost to us in servicing and maintaining those units. Very interesting application. We are seeing a total cost of energy that is competitive with grid in many parts of the world.

We have also recently just been awarded a contract for this from an energy company in a – in the shales in Argentina in the Vaca Muerta for very similar reasons. And we are seeing a lot of interest in this type of product around the world based on the capability that we bought into through Younicos. So that’s all I’m going to say on the specialist solutions that we offer.

Just about – a bit about being simple to do business with. I told you a couple of years ago that we talked to a number of our customers. So we surveyed about 1,000. We talked to about 50 in-depth surveys to understand better how they used us and the journey that they went through, I mean, very briefly. They have to find us initially. They then have to decide what they want in terms of the product and service, which we can help them with. We then have to dispatch it and transport it. We have to operate it and remove it. And then we have to invoice them. And so we looked at each of the steps in the process. We looked at who was best not only in our industry, but more broadly and worked out what we had to do with our systems and processes to get them to be market-leading.

That then led to what I’m going to talk about on the right-hand side here, so you got the customer in the middle there and then the customer journey around the outside. And we invested in a number of systems, one being customer relationship management and cost price quote systems, CRM, CPQ, which is now largely used by our field sales and inside sales to fill in contract and order forms, which we used to have to do through a rental center.

We have also put in place order fulfillment, so how do we optimally fulfill that order from the kit that we have around the business to reduce the cost of being able to do that and then the logistics of moving it. And then lastly, for now, looking at how we manage it in the field, how we dispatch engineers, how we do the servicing around it and being able to monitor it remotely. And all of those are where we have invested in, and this last one, in particular, around remote monitoring, all of our fleet in Rental Solutions is now monitored remotely. And 54% of our fleet in Power Solutions Industrial is monitored remotely. And that will be complete by the end of the year.

So Rental Solutions, this whole suite of systems will be installed and embedded. And there’ll be a good way through changing their operating model by the end of the first half of this year. And Power Solutions Industrial will have that first element, CRM/CPQ, by the end of this year. There’s a bit more to do around invoicing to make it easier for the customer to understand and quicker that will also help us in working capital. We are reworking processes first before we do any systems work. I mean, at the end of the day, you might ask, so what? It does make us more simple to do business with. It does help our customer relationship. But it does have hard benefits associated with it, as well. And I’ve listed – lifted – sorry, listed a few on the left there.

Cost of rework is reduced. We can centralize operations and reduce costs. We are better at planning and dispatching, which makes us more efficient. And it will improve utilization. And the benefits from this program across Rental Solutions, and Power Solutions Industrial over the next few years are of the same order of magnitude as the cost out program that we are running in Power Solutions Utility. Although I have to add there are some of it, an element of it that is revenue rather than just cost. So the benefits are tangible and hard and will support the bottom line. And this is one of the reasons, why I’d expect the margin in Rental Solutions to improve in 2019.

There’s also a benefit for customer satisfaction. We have always been known for good customer satisfaction. We have overhauled the way we look at customer satisfaction, the way we use the Net Promoter Score across the business over the last couple of years and we changed the way we did it at the beginning of 2018. There are more surveys throughout the journey of the – life of the customer with us. We only used to measure it at the end of that journey. And you can see that we have an improved customer service over the year. And it is – at the end of the year, it was just under 60%, 59%, which put us in the top 5% of B2B operations around the world. And that is important. That is our customers’ faith in us and recommending to others that they would use us. And that is why we have such high repeat revenue, as I was talking about earlier in the presentation.

So that’s what I wanted to talk about in this area, a focus on the sectors, the applications and solutions that we put into those sectors, and then making it easier for customers to do business with us. And we’re doing it because it creates a more sustainable, more – a less cyclical revenue business with more diverse revenue. It plays to our strength. It differentiates. It’s more difficult to copy. You get longer-term relationships with customers. And it drives, at the end of the day, higher-margin revenue growth.

So maybe just in closing, just to reiterate some of the points that have already been made. Firstly, I am very pleased with the results for 2018. I think the team have done a great job. It was good to be ahead of the guidance we gave at the beginning of the year. You’ve heard about the strategy, and I’ve unpacked that a little bit for you. It is fundamentally unchanged. I think, as a result of that and the changes that we have made over the last few years, we have a stronger portfolio. Power Solutions Utility is 20% of our business. The other 80% is quite clearly growth opportunity for the business where we are making progress.

And I just want to reiterate what Heath said earlier. The business is extremely focused on return on capital employed, on working capital, on receivables, on the capital that we are putting into the business. And there is a very robust program within Aggreko that gives Heath and myself and the board confidence in meeting that midteens return on capital employed target that we have for 2020.

So thank you very much for listening. And with that, we are happy to take questions.

Question-and-Answer Session

A - Chris Weston

Andrew? There should be a microphone over here Richard – Richard, over here for Andrew.

Andrew Nussey

Hi, good morning. Andrew Nussey from Peel Hunt. A couple of questions, if I may. First of all, looking at Rental Solutions and the pricing trend through the course of 2018, in particular what was happening in sort of Q4 and maybe an insight you can give us going into 2019. And secondly, I see CapEx are running below depreciation. Give us a feel for the aging of the fleet and if we might bump into sort of some increased maintenance cost moving forward, please.

Chris Weston

Okay. Well, maybe I’ll start on both of those and Heath can add as you see fit. So firstly, in Rental Solutions, in 2018, prices were pretty good. Generally, across all four regions, prices were stronger than the year before. When you looked at Rental Solutions overall, it was more broadly, though, driven by the storm – storms in North America and the pressure that put on fleet and the corresponding pressure on prices, but also driven by oil and gas and the uptick we saw in North America, which did allow us to recover prices in the oil and gas sector. But there was a general stability and slight increase in prices across the whole of Rental Solutions. Difficult to say what it’s going to do in 2019.

But I think, our governance and control around prices is enhanced. As we put in place that newer CRM, CPQ system, it does give us realtime visibility of prices before contracts are struck. That governance process is in place. It has to embed. It has to mature. But I hope that will help in terms of support for prices in Rental Solutions. In terms of CapEx, I would expect to see CapEx run below depreciation for a little while yet. I think, in terms of the fleet and its aging, you will obviously see an aging in fleet – in the fleet. But I don’t think we are storing up a problem. I think we have been quite – we will continue to be careful in how we look after the fleet, but we might have been a little bit zealous in how we maintained it in the past.

And I also believe the work that we have done around data analytics and connecting the fleet will see us move much more towards condition-based green carding and condition-based servicing. And both of those, I think, will allow us to be more sophisticated in how we manage the fleet and the replacement of CapEx in the fleet. And you’ve – we saw that this year in the way that service and maintenance cost came down. And I would expect them to come down and us to be more efficient with those in 2019. Do you want to add anything?

Heath Drewett

Right now, anecdotally, people will always say the older piece of cake gets the more than it costs. But at the moment, we’re in a downward trajectory on our service cost per unit of measure on hire. And we expect, as part of the GBP 50 million cost saving, is our ongoing operations and servicing costs. And to Chris’ point, I think we can actually be smart about the way we maintain our fleet with the extra knowledge and the data that comes back, which means that we can extend the life and also see servicing cost come down at the same time.

Chris Weston

Okay. Front here.

Rob Plant

It’s Rob Plant from Panmure. The Yemeni’s contract, how is that performing? Is there any risk?

Chris Weston

Do I want to if you want to?

Heath Drewett

I can take it. Yes. so the – we’ve got current contracts live in Yemen. And at the same time, we talked about renewing that. We also talked about the debt risk in Yemen, it’s really in 2 parts. We have a residual debt balance that has sat there since before the conflict arose when actually our client was the public utility in Yemen, that debt balance is just under $10 million in terms of our overall exposure. We’ve reasonably highly provided against that, but we have a just under $10 million exposure to that legacy debt.

When the civil war came, our customer changed, and it’s now on a dry-high basis through an agent, we have different people paying us to the national utility, which currently doesn’t operate. And therefore, we have a contract, which is washing its face. So the challenge for us on our debt exposure is a legacy one, not on the current contract, which is why we’re happy to renew the current contract as we are being paid on it and while, at the same time, keeping an eye on that pre-civil war exposure and making sure that we’re adequately provided on that as time passes.

Chris Weston

Operationally, it goes well. We’re probably spread across, I don’t know, 25 odd sights in Yemen. And those are run by locals. They pay as they use it. And we continue to provide all the consumables. So that works quite well. And then there’s a larger deployment into Aden, 60 megawatts, which is under a separate arrangement directly into the government. And again, that operates quite efficiently. Will?

Will Kirkness

Will Kirkness, Jefferies. Just thinking about Power Solutions Industrial. Can you just walk through some of the puts and takes in fiscal 2019? So it sounds like Middle East recovering, softer in Eurasia, just your visibility and comfort around some of those. And then secondly, could you just talk of some of the retender risk in Utility in 2019 in some of the main contracts?

Chris Weston

Okay. I mean, I think you’ve heard of the larger moving parts that we’re seeing in PSI in 2019. I mean, Eurasia and the Middle East, I think we would expect to see absolutely nothing happening in the economy, and Latin America to continue to perform well. We do have a new management team in Africa. And I think John Lewis has got his arms around that business. And I would like us to think we would see better performance there. But the two material bits – or the major bits that you need to understand, I think, are around the Middle East and around the Eurasia.

Maybe just to open up a little bit more on Eurasia. About, I won’t say, 80% to 85% of that business is oil and gas focused. When we look at the forward pipeline, about 50% of the forward pipeline is in oil and gas. The rest in – is in other sectors that we are diversifying away from manufacturing utilities. So we’re seeing a bit more opportunity in distributed generation in utilities and in manufacturing, providing power at a cheaper rate than the grid, which we can use – do using some of our technology, but also combining it with combined heat and power, where there is a need for heat or cooling in the plant that we’re providing service to. And we’ve had some good recent wins in those areas.

And oil and gas itself, when we started in Eurasia, the flare gas opportunity was about 12% of the gas produced was flared. That’s down to about 6% now. And it really is an area where you’ve either got hydrogen sulfide in the gas, which is a problem, or where there is no need on the grid for the power. And so I think we’re going to see less of a flare gas opportunity. And on the diesel side, you’re seeing, there will absolutely be a continued need for diesel power generation for drilling. And we will absolutely see the Russians continue to drill to keep their production up, but there is more local competition in the diesel side of things. And we did see a little bit of price pressure coming through in the Eurasian business. But those are the major parts that you need to think about for industrial. I would expect it to continue to grow at roughly similar margins.

In PSU, the order intake – sorry, the pipeline, which is always a question that comes up, again, is much the same. At the end of – I think, in 2017, at the end, it was about 7.7 gigawatts. Now it’s about 8.3 gigawatts. About a third of that is with our new products, HFO, Next Gen Gas and hybrids, where there is quite a substantial pipeline. And about 58% of that pipeline, though, is now slanted towards PSI, so less than an opportunity in the Utility business. So I’m not expecting at the moment any great uptick. I think we’ll continue to maintain market share at the lower end of the market, so three years and down. And at the higher end, we will still compete, but we are less competitive. So I would see – expect to see less traction in the market there.

In terms of contract of hires, I know everyone asked about the Ivory Coast. That contract is due to run until the end of 2020. They can give us 12 months notice now. They could give us six months notice on half of it on 100 megawatts. They have not done so. We are in discussion around extensions, and those look quite encouraging at the moment.

Other larger megawatt contracts we have out there include Argentina, where we still have 174 megawatts on with CAMMESA. I think that will run for a while. I think if it were to start off hire, we would likely on hire with local distribution companies in Argentina, so I’m not particularly worried about that. We have 142 megawatts. I’m not going to pronounce the name because it’s Russian, the company called YMG [ph]. That is due to run through the end of this year. I would expect that one to continue into next year. We have B Baria in Bangladesh, 85 megawatts of gas that is likely, I think, to off hire end of Q1 this year. We have Flores 80 megawatts in Brazil that, I think, will run until the Amazonas contract starts in the second half of the year replacing that. So those are some of the bigger extension – extensions that we have in the business this year. I think the off-hire rate will be considerably lower than it was last year and will be much more normal. Good. Rory?

Rory McKenzie

Good morning. It’s Rory McKenzie from UBS. Within the strong year in Rental Solutions, I think H2 profits lift in flattish and so most of the drop through came in H1. Can you help us understand the moving parts there? And what kind of drop through rates you’d hope for, particularly as you roll out these new systems you’ve talked about? And secondly within Power Solutions, can you talk about the ability to reshape the cost base and about the asset base from utility into industrial? And does the commentary around disposals suggest that some of that historic work and contracts just can’t be continued and how you’re going to deal with that part of the business? Thank you.

Chris Weston

So maybe I’ll touch on the second and you can think about the first, Heath. So in terms of cost base, we have mobilized a program in Power Solutions – I mean, broadly, Power Solutions, but more focused on Power Solutions Utility. That has dedicated people. It is designed to deliver over the next three years. We will see some benefit this year. But the full run-rate benefit will be in 2021. It kind – it covers the kind of areas that you would expect it to. So it goes from the service and maintenance of the fleet, how we do that and where we do it. It goes to the logistics, how many unnecessary journeys do we move the gensets at the moment. I think we’re getting a better handle on that. And procurement of those logistics. It goes to our depots and their location and our offices and our locations. It goes to the manning on the sites and how we can change those and make more use of remote monitoring. And all of that is in train now, it’s in play now, and we’ll deliver over the next three years.

And that is largely removed from the Power Solutions Industrial side of the business. That projects business is largely runout of Jebel Ali. The overlap is where there is a projects business and industrial. So you’ve got an industrial rental business that looks very like Rental Solutions and industrial projects business that plays into the industrial sectors that I talked about a little bit earlier. And where you see the benefits in cost reduction in the Utility business, you will also see the benefit going into the Power Solutions Industrial project business. And at the same time, as we do that, we implement the rental systems – the Rental Solutions systems to improve the cost base and efficiency there.

So I think that, overall, you’ve got improvements in efficiency and effectiveness coming into the industrial business, both from utility and from Rental Solutions. And that’s a well-established program that is underway. As we do this and we implement this incentive around looking at asset efficiency, it is making people look at the fleet more closely. For instance, bits of kit that are not used or have not been used over the last 12 months and we will then start to look to dispose these into the market. At the moment, I think it is too early to say what the impact of that will be, but it is absolutely an important part of supporting our plans for return on capital employed. And that is new this year. It has gained a lot of traction and enthusiasm in the business. And I would be very surprised if we didn’t see some good result from it.

Heath Drewett

Yes. So just on the margin, so H1 margins in Rental Solutions, 10.6%. H2 margins 14.8%. So actually, the margin is up in the second half, giving an average margin for the year of 12.9%, which is up on the prior year of 11.8%. So we’re seeing a margin improvement as we move through the year in Rental, which is in part the operational leverage as more revenue is coming through some of the systems changes. And as Chris said, that 12.9% this year in 2018 into 2019, actually, we expect to see that margin improve again. The growth rates will soften. And you can’t continue to grow bigger businesses as the absolute size of the business grows the percentage by which it grows will reduce a little bit into next year. But we do see margin expansion in Rental Solution. So stronger margins in the second half at 14.8%, so coming out at the sort of margins that we’d aspire to within that business as we put the operational systems in.

Chris Weston

On the front here, Paul?

Paul Checketts

Good morning. It’s Paul Checketts from Barclays Capital. I think I’ve got three. The first one is just sort of a general theme on utilization, because if you look at the three segments, you’ve got Rental and Industrial and now sort of big step-up and they’re in above levels that we would normally see as optimum. Can you give us a feel for how you think that progresses from here? And the same for the Utility business, which, obviously, has the reverse situation. And I suppose, it’s linked to that topic, but the point you made about possibly selling off assets, what might that include as things are trending at the moment? And then the second one is perhaps, just for us analysts on doing our models. Can you give us the megawatts for the different segments at the end of the year, if possible? And then the last thing is the comments on receivables that you made during the presentation were, I thought relatively, beaten. You effectively said you thought that would improve in 2019, the position. Can you elaborate, please, on what it is that gives you the confidence to say that?

Chris Weston

Okay. In terms of utilization, in 2019, given what we’re seeing at the moment, I would expect Rental Solutions, Power Solutions Industrial, either stay as they are or improve a bit. I know they’re higher than really they ever have been. But we have tremendous focus on using what is out there and not buying more, so keeping the CapEx bill down. And I think there will be bits in the fleet that if you don’t use them for 12 months that we sell off, that will also improve utilization.

So, I would like to think they will be where there are or slightly better in both of those, but we are very early in the year. In Power Solutions Utility, we have seen a slight pickup in utilization at the beginning of the year. Pipeline looks reasonably promising at the moment. And I would like to think that either through the activity of selling assets that are underutilized or what we’re seeing in the market, I would like to think we’ll see a pickup in utilization in Power Solutions Utility.

It’s too early to say what the shape of those assets and what those assets might look like that we’re going to sell. QSK60 could feature in that, but we would be new in doing that. And there has been quite good demand for QSK60s within the fleet. Their utilization is just under 70% at the moment. But we are looking at everything there. And I think as the teams get their arms around it, over the coming months, we’ll probably have a better idea around it at the interims of the half year. I’m sure Heath will add to receivables.

So what gives me confidence around receivables is that is an area that we have been focused on improving for quite a while now. We did expect to make more progress towards the end of last year. And when we look at – I mean as you would expect, we have specific actions underpinning the top 20 receivables in Power Solutions Utility, and that focus is in addition to all the work that we have done around process and management of receivables elsewhere within the utility business and indeed, within the group. But when I look at those specific actions, I have a lot in – a lot of faith in what the team are doing.

The outside agencies that we see doing work – corroborate what we’re hearing from those customers. And when you go to talk to one of these customers, hearing the consistency in the story across the various elements that you talked to around the customer, be it the utility, be it the Ministry of Finance, be it the regulator, all of that gives me more confidence that we will see progress in 2019 with these major receivables. And I have sat down with some of these customers. And even though I wasn’t particularly looking for it, I’ve been encouraged by that consistency of story that I hear, and that is usually an indicator as to what is going to happen. And I’m encouraged by what we are seeing there. And I think customers now understand the service we provide has to be paid for. And we are going to up the ante if they don’t. So that’s why I’m encouraged about it. I don’t know if you want to add to that, Heath or...

Heath Drewett

No. I think I’ll – the two data points, which I pulled out in my presentation, Paul, to show that we’re getting on top of it, the GBP 113 million invoicing to receipt deficit in 2017 down to GBP 19 million deficit in 2018. The increase in 2017 switch currencies sterling of GBP 86 million down GBP 1 million in 2018. So I think we are getting on top of it. Now we’ve got to turn those numbers around the other way to reduce it. But I think we’ve made significant progress. And for me, it’s all about what I’ve seen the team doing and with John Lewis, who Chris mentioned earlier, came into the business just after me in the spring, because it’s about liquidity and it’s about access to currency and funding of our clients and customers. It’s around how good is our line of sight to the money essentially and how good is our line of sight into their cash flow. And as Chris mentioned here, we’re trying to get other data points to validate that, whether it’s the banks’ relationship we’ve got, whether it’s the government relationships, whether it’s other ministerial people that we can validate the line of sight to getting that funding. And where we can’t see that so clearly, that’s where we’ve taken the greater provisions in our debt book.

So in Yemen and Venezuela, the line of sight to seeing where that funding is coming from on that legacy Yemen debt. And indeed, the debt that needs to be cleared in Venezuela, it’s less clear and, therefore, it’s less clear. Therefore, we’ve taken a higher level of provision. But where we have a clear line of sight and it’s a case of keeping an eye on that, waiting and watching and seeing that funding coming through, we’ve got much better visibility of that now, I think, than we had a year or so ago.

Chris Weston

Karl?

Karl Green

It’s Karl Green from Crédit Suisse. I’ve got three unrelated questions. But the first one, probably the easiest, just in terms of the geographic mix shift away from Eurasia within PSI, is that likely to have a discernible impact on the margin in fiscal 2019? So, I think you’ve said in the past, certainly, the Russian flare gas to energy work has been good margin. The second question, again relatively straightforward. Just any update you can provide around client interest or demand for power storage solutions and whether you’re any closer to potentially putting storage assets on your own balance sheet. And then the final question on IFRS 15, Heath, and I’m going to probably try and press you on this. I was just looking at the movements in the cash flow statement. They were nearly as big as the working capital movements themselves. Now working capital, clearly, you’re slightly beholding to what happens at the year-end given you’ve got revenue budgets, profit budgets. Can I pressure on what you’d expect to see in terms of those mobilization, demobilization movements coming through in fiscal 2019 please?

Chris Weston

Well, I’m definitely going to leave IFRS to Heath. So looking at the first one, looking at the geographic mix in PSI, we’re not going to see a major shift in the geographic mix of where revenues come from. And I would expect to see Eurasia grow this year. And so I think margin impact, I’ve already said, we expect it to be similar in 2019 to what it was in 2018. And I’m not expecting to see any change in the margin due to any geographic mix change, and I think it’ll be minimal any way.

Demand for storage, considerable number of opportunities in the pipeline, adding up to many hundreds of megawatts of solar and thermal power and tens of megawatts of storage, I’m encouraged by what I am seeing there. At the moment, where we are deploying it, we’re deploying it on our own balance sheet. As we see momentum building, we would look to talk to a third-party about interest in and then providing or using their balance sheet. And we are – we have spoken to a number of those in the past, but there is nothing eminent. I want to see how it develops this year. But I am encouraged by the early views we’re getting and the discussions that we are having, so that data center one and then the one in South America and there are few more that are in the closing stages of contract. So – and then – so that’s one element.

The other element is then how we’re going to start using storage ourselves, and I think that looks like some quite interesting opportunities, where you’ll be able to run gensets more efficiently and therefore reduce the wear and tear and the service maintenance, et cetera. But that, I think, is slightly longer term and you’ll probably hear more about it as 2019 goes on. And with that, I will hand over to Heath to talk about IFRS 15.

Heath Drewett

So just in terms of that GBP 44 million, there are three biggest contributors to it. Brazil, so this big contract that Chris has spoken about previously down in the Amazon 30-odd sites quite a big – it’s a 15-year contract, so quite a large mobilization cost effectively being amortized, ultimately over 15 years of the contract. So that’s quite a big contributor to it. That’s still in progress, but it goes COD this year. So we’ve seen a full 12 months of mobilization cost on Amazonas, which won’t repeat itself in full in 2019.

Bangladesh, which went on hire, as you know, late spring this year, May, June, also contributed quite significantly. It’s a big site. Quite a lot of the civil’s work done and raising up the level of the ground, given water around the site, so quite a lot of civil’s work in that mobilization. Cost as a consequence of the Bangladesh, that’s obviously all now COD. So there’s no repeat of the Bangladesh.

And then the third one is St. Croix, which is a contract which will go on hire this year. So in part, it was in 2018, and there’ll be a further small buildup in 2019. So in aggregate, when I look at what’s mobilizing this year, you’ve got continuation of Amazonas, you haven’t got Bangladesh, you’ve got a little bit more on St. Croix to finish that off. My sense is it will be much more in line with 2017, GBP 22 million outflow. I think, in 2017 on that line as opposed to GBP 44 million in 2018. So that’s pretty where I see it heading towards in 2019.

Chris Weston

Rajesh, did you have a question? Yes.

Rajesh Kumar

Just following up on that mobilization and demobilization cost. Can you clarify how much was capitalized in aggregate? And what is the aggregate duration? I thought – I appreciate Brazil is a long-duration amortization. But overall, for the entire company in 2018, what was the proportion capitalized? And the second one is on the pricing tool. You presented some very interesting ideas there in terms of how you can improve price discipline on the ground as sales people can generate dynamic pricing. Is that more of a Rental Solution application or you can see that being used in longer-duration utilities or PSI contracts as well?

Chris Weston

So on the pricing, the governance that we’re putting in place in Rental Solutions will also go into Power Solutions Industrial. And so we will have more real-time pricing governance. In Power Solutions Utility, the governance is all very – already very good. There is a well-worked process there that culminates in opportunities coming up to Heath and myself as necessary. So there is absolutely an opportunity in PSI, and I’m going to be very interested to see how that new framework, that new visibility beds into Rental Solutions and the benefit that we might get from that.

I will let Heath talk to those – the IFRS 15 point, but those contracts, I mean, Brazil is 15 years, St. Croix is a long-term contract. I want to say, five. It might be longer than that in terms of years, as is Bangladesh, a five-year contract coming up in 2023. So they’re quite long-term contracts. But Heath, I don’t know if you want to add to it.

Heath Drewett

Chris knows this stuff on IFRS 15. So yes, look, about one-third of that GBP 44 million was on Brazil, which is over 15 years, Bangladesh is five and St. Croix is five. The others are kind of one, two, three. So that GBP 44 million will unwind over those sorts of time frames. So that’s probably all I can say, really. It’s a portfolio mix of projects, but that’s heavily weighted in terms of absolute dollars. That’s why it’s so high and to those longer contracts where you’d expect that bigger, they can afford greater level of infrastructure being prepared for them. So...

Rajesh Kumar

And how does the pricing tool deal with this mobilization and demobilization in the costing exercise? Does it treat it as a P&L? Does it expense it and/or capitalize it?

Heath Drewett

The pricing tool is the, as Chris has referred, is more in Rental Solutions, so not on the Power Solutions. On the projects business, which is all of this mob, demob stuff, where the pricing and the decisions we make on pricing are all around the returns that we see. And there’s an individual project, P&L and cash flow that works through the working capital, the mob, demob costs, the timing of the cash flows, et cetera.

So the pricing of the projects for sure builds in those mob and demob, but that’s done kind of offline through modeling each individual project. The pricing tool is really around more the Rental Solutions business, where we have automated pricing levels, discounting levels above and beyond, which there is management intervention, et cetera, on pricing.

Rajesh Kumar

Thank you.

Chris Weston

Okay. All right. Well, I’m going to call it a wrap there. So thank you very much, everyone, for coming along. Appreciate that. Thank you.