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Edited Transcript of AGK.L earnings conference call or presentation 30-Jul-19 8:00am GMT

Half Year 2019 Aggreko PLC Earnings Call

London Aug 1, 2019 (Thomson StreetEvents) -- Edited Transcript of Aggreko PLC earnings conference call or presentation Tuesday, July 30, 2019 at 8:00:00am GMT

TEXT version of Transcript


Corporate Participants


* Chris Weston

Aggreko Plc - CEO & Director

* Heath Drewett

Aggreko Plc - CFO & Director


Conference Call Participants


* George Nicholas Gregory

Exane BNP Paribas, Research Division - Research Analyst

* Marc Antony Elliott

Investec Bank plc, Research Division - Mining Analyst

* Paul Daniel Alasdair Checketts

Barclays Bank PLC, Research Division - Director

* Rajesh Kumar

HSBC, Research Division - Analyst

* Robert John Plant

Panmure Gordon (UK) Limited, Research Division - Analyst

* Rory Edward McKenzie

UBS Investment Bank, Research Division - European Support Services Analyst

* William Kirkness

Jefferies LLC, Research Division - Equity Analyst




Chris Weston, Aggreko Plc - CEO & Director [1]


Right. Should we get on the way then? So morning, everyone. Thank you very much for coming along to our interim results. Slightly different format. I'm going to talk upfront and talk a little bit about business performance. And then I'll hand over to Heath, who will take you through a bit more detail. Might be a little bit shorter than normal, the formal bit, and then plenty of time for question-and-answers.

I'm going to talk about some of the pictures as we go through. You won't recognize what that is, but that's one of our new Tier 4 final OFA Oil-Free Air Compressors somewhere in West Texas, and you'll hear me make reference to that a little bit later. And that's, again, in West Texas. That is a frac sand mining operation. And in the front here, you can see some QSK60s providing power to that operation before the utility gets there.

So just to talk a bit about headline. I have to say, I am pleased with our performance in the first half. As many of you have noticed, slightly ahead of consensus. Confirming our guidance for the full year and confident about meeting our target for the mid-teens ROCE next year, good plans in place, and they are delivering. So pleased about that.

Group revenue down slightly 4%, that has Winter Olympics in the comparator, a one-off event or once every 4 years or so. So if you take that out, we were flat half-on-half.

And also very pleasing to see the fruits of the work that we're doing around cost base, working capital and balance sheet. So profitability, up 9%; improved margins, and that is very pleasing to see. We'll unpack that in a little more detail in a minute. And then the work around the balance sheet, working capital. So we've seen an improved cash flow.

Maintaining capital discipline. I think that muscle is well exercised now within the organization and particularly in Power Solutions Utility, in the receivables area, where we've seen a good improvement and cash collection well ahead of invoice.

Seeing return on capital employed tick up. On an underlying basis, up 0.6 percentage points and maintaining the dividend.

A couple of other things to point to. Very pleased that in the half, we were able to launch our Y.Cube storage product, which I'll talk in a bit more detail about later. And also continuing strengthening in the pipeline for hybrids and renewables. Again, I'll talk about that a little bit later.

And the other activity of note in the first half was around preparation for Japan, both for the Rugby World Cup and for the Olympics. We are now 360 days as of today until the Olympic opening ceremony.

So for the Rugby World Cup starts in September, we are prime power for all venues for the TV coverage. The team is well positioned, well established. All the fleet is in country, very good relationship with the Rugby World Cup team. So pleased with how that is going. And also for the Olympics. There will be 43, 44 venues that we provide service to, and pleased with how the preparations are going for that. And I was out there a couple of months ago to see it, and I'm out just to coincide with the Rugby World Cup in September.

Right. So to look at each of the business units in a little bit more detail. I think many of you have seen this photograph before. That is our power station at the Granny Smith Gold Mine, where we have 24 megawatts of gas, Next Gen Gas. We also are installing 2 megawatts of storage and 8 megawatts of solar. That goes live at the end of this year, under a 14-year contract. An example of what we're doing around hybrids.

In Rental Solutions, they were -- their revenue was up 1% to GBP 400 million. Good performance in North America, and in Continental Europe. Continental Europe revenue, up 12%, helped by the emergency work around concerns of blackouts in the Benelux earlier in this year.

North America, particularly pleased with -- they had a very tough comparator with the storms in the number in the first half of last year. So they were up 7%. And if you take out the storms, they were up 16%. So I think good performance from the North American team.

And when you look at the various different sectors. All the sectors grew apart from utilities and manufacturing. Utilities, 8% of revenue, manufacturing, 6% of revenue.

In utilities, we have seen a good pickup in prospects. It looks like it will be an active second half. In manufacturing, the pipeline is without doubt, weaker, but it is a smaller part of our portfolio. Petchem and refining was up 10%, half-on-half, which -- first half-on-first half. Pleased to see that. Events, up 22%, and oil and gas, up 51%. And the majority of that oil and gas revenue is in the Permian Basin. The most prolific and the lowest cost of production, shale basin in North America. So 67% of revenue in oil and gas was out of the Permian.

And just to compare, in 2014, the percent of revenue that came from the Permian was only 9%. So I think we're in a very different position now.

Pleased to see the margin strengthened, up 1.1 percentage points to 11.8%, expanded across all regions. So good to see the focus on rates that we've had for the last 18 months or so beginning to come through. That is helped by our new systems, which give us more visibility and more discipline around rates. So pleased to see that.

It was also helped, as you can imagine, in Continental Europe, by the work in Belgium, the emergency nature of that work.

When you just look, in particular at North America at rates, I'm sorry, that I'm going to strip out storms again. But if you look across all sectors, rates were up, which is encouraging.

And then return on capital employed was down 1.2 percentage points to 14.3%. A couple of things going on there. One, which you may or may not get to in questions, is my favorite subject of IFRS 16. And the other is around investment in some new fleets. So that Tier 4 Final OFA bit of kit, I showed on the first slide, is new to us, and we are beginning to introduce that into the fleet, and we'll do so over the next few years.

Looking at that, you can also see that utilization was down slightly. So some of that is due to diesel utilization coming off, and that is all down to storm volume coming off compared to last year. And the other bit is in gas. We have seen good growth in average megawatts on hire for gas, but we have also, as a group, moved gas fleet out of PSU, Power Solutions Utility, and into PSI and into Rental Solutions, and that has brought utilization down a little bit. So that is what's going on behind the utilization.

And then lastly, just to mention on the systems. So that is complete for all the customer-facing systems. So that is our quoting systems, our relationship management systems and also our operation -- our fleet management and field systems have all been now completed and deployed. We are doing a little bit more work around improving our invoice process, which I'm sure Heath will touch on. That deployment has -- the deployment of the rest of the systems has been successful and is now going into PSI.

That has allowed us to go after cost. It has allowed more discipline about rates that you can see in the results. It will mean in the second half, we will have a better presence online with a customer portal and also improved e-commerce, and we are seeing benefits to customer satisfaction.

So our NPS score has always been high, but was 51 this time a year ago, it is now 66. So very pleased to see that improvement.

So turning to Power Solutions Industrial. That is a Petro Amazonas site somewhere in the Ecuadorian jungle, pretty remote, as you can see. The type of place that we provide service.

In Power Solutions Industrial, revenue was down 9%. That had the full brunt of the Winter Olympics in it as a comparator. If you strip that out, it was up 4%. The average megawatts on hire went up 6%, and we saw some good growth in gas on hire, up 21% and good growth in some regions like Africa, which I'll touch on in a minute.

Order intake was less than last year at 213 megawatts, down from 264. And when you look at that, it's pretty much the same number of contracts were won. It's just last year, we had one particularly large one in the DRC in Africa.

Margin was up 0.6 percentage points to 10.5%. Good to see margin expansion in Africa, Latin America, and particularly, the Middle East. And return on capital employed, up 1.6 percentage points to 10.6%.

Just looking at that revenue in a bit more detail. In Africa, we saw good revenue growth, 29% driven in particular by 2 countries, Nigeria and Angola. Nigeria, interesting situation, where you have a pretty unreliable utility. And you have a plentiful supply of gas. So we've seen a lot of pent-up demand for our gas product, which we have now moved fleet into that country, and it's across a fairly broad swath of industrial sectors, cement data centers and oil and gas to name three. So pleased to see the activity there.

And in Angola, they have a slightly more reliable utility, but still seeing demand in retail and oil and gas and telecommunications, but most of that is diesel demand.

Middle East, that has been -- that was a problem for us last year. So we saw revenue up 6% driven by Oman, Saudi and the U.A.E. So better levels of activity, better base business activity, fairly broadly spread, particularly in Saudi, I think we're encouraged by that. And there's a lot of interest in new events in Saudi Arabia, and that is proving to be a growth sector for us there.

Qatar has always, well, for the last 18 months or so, has been a problem. The political situation has not changed there. The business has stabilized. So we're seeing pretty similar rates over the last year. Volume is much the same as it was in half 1 2018. It is a seasonal business, so we would expect it to pick up in the second half. Profitability is improved because we've moved fleet out and also taken cost out of the cost base.

Just to touch on Eurasia. Revenue was down 10% in Eurasia. A couple of things going on there. One is timing of commissioning dates for project work we won in the second half of 2018. They haven't slipped, they were just always a bit later than we would have liked. And that is due to agreements with the customer. And the other, there is a bit of rate pressure in there, both for diesel and gas.

The new order intake was pretty similar to last year at 127 megawatts, playing 131 megawatts last year. Mix in that was different. So less oil and gas, which was typically about 85% is now down in mid-40%. And it is good to see manufacturing coming through particularly the length of the contracts, 10-year contracts, and we've won one of few of those in Russia, which is encouraging.

You can see utilization is off slightly, so diesel utilization is actually flat half-on-half. The utilization in gas has come down. So megawatts on supply has gone up, but we've moved fleet, as I said, out of PSU into PSI, and that's what's brought the utilization down, and that is predominantly in Russia. So that's all I want to say on Power Solutions Industrial.

Touching on Power Solutions Utility. So this is us mobilizing our PIE A contract in the Amazon, which is 138 megawatts across 26 different sites. The closest site, which I have visited is 280 kilometers from Manaus, the port of Manaus, which is just there. So a long way upriver. The one furthest is 1,100 kilometers from Manaus and the supply chain is all up the Amazon. And that's a 15-year contract.

So revenue in this business unit was down 7% to GBP 150 million really off hiring last year in the first half of a couple of contracts that you know about Japan and Mozambique. Average volumes on hire were down 8%. Prices were stable, maybe a little bit favorable. Order intake, 245 megawatts, up from 102 a year ago.

I'm particularly pleased with 60 megawatts win in Gabon for Next Gen Gas for 5 years. I was pleased to see that one come in.

Off-hire rate in this area, 15% in the first half comparing to 27% in the first half of last year. We do expect the full year to be around 35%.

Good work on costs and receivable, but starting with costs by Stephen and team, and you can see that in the margin improvement, up 3.5 percentage points. And also the profitability. I know they're small comparators, but up 52% on the first half of last year.

So a lot of work around fleet, moving it, disposing it, getting some of it on hire. Also in how we maintain that fleet, so may taking advantage of the remote operating center and being able to see the assets more clearly. And so being able to spend money on assets more effectively. So that saves us a bit of money.

On the resourcing around sites. So local optimization, less expats, more locals and also just generally, cost control around overheads. So pleased to see what the team are doing there.

Return on capital employed, up 0.9 percentage points to 6%. Good progress on the receivables. It has been a long hard slog. But very pleased to see what the team are doing. They invoiced in the half, $244 million and collected $295 million, which was encouraging and some pretty difficult areas, parts of Africa, in particular, that we have made good progress in.

Maybe just to touch on utilization, upper point. So diesel utilization is up slightly. So we moved -- there's less fleet deployed in PSU. There's more megawatts on hire, which improved diesel utilization, and that is what is really driving that improvement. We have moved quite a lot of gas fleet out of PSU into the other 2 business units. And we saw utilization in gas even though we moved fleet out, our utilization came down. So that is what is going on in Power Solutions there.

And then a couple of slides before I hand over to Heath on some of the work that we're doing around renewables. So very pleased that we were able to launch this product. This is what we call the Y.Cube. So essentially, storage that we put together in Lomondgate, using Samsung and LG as our battery suppliers, lithium-ion batteries.

You can get it in 2 variants. They're really, well, cool Variant 0 and Variant 1. Both are 1 megawatt. One is for 30 minutes storage and the other is for 1 hour storage. As you would expect from Aggreko Mobile and Modular, so we can put them together. They can work together to increase the amount of storage if the customer requires that. They are very easy and quick to set up on site.

Importantly, because of the work we've done around the Younicos Y.Q. software, it's easy to integrate with our thermal assets on-site in a hybrid situation. And it's very quick to deploy from contract signature, about 3 months.

We are building this year 46 of these, 12 of them are going to what we would call legacy Younicos contracts. And the other 34 are going into a fleet to be used against the pipeline that is developing.

So a little bit more about how it's being used in the pipeline. So these are typical applications, spinning reserve displacement. So that means if you put one of these on site, you can deploy -- you don't have to deploy as many gensets, and those gensets that you have deployed, you run at their most fuel-efficient level. So it saves the customer a lot of fuel costs, a very beneficial to them.

Ramp rate control, that really is allowing the integrate -- or integration of a renewable power source like wind or solar with thermal and it controls how power is generated from the gensets in response to power fluctuations from the renewable source. So the battery enables that. I think, peak shaving, most of you are aware of that. And then the more normal one, UPS uninterrupted power supply.

So those are the types of applications that we see customers being showing interest in.

We've deployed a first set in Ireland at a data center. We are deploying sets to Argentina now to a customer contract; to Granny Smith Gold Mine, 2 of them, as I said, commissioning at the end of this year; and then three, into the Amazonas contract.

And the pipeline itself, it's at the moment, nearly 80 opportunities in the pipeline, mainly across Australia and Africa. Predominantly in mining, just over 50% of those in mining. So a lot of interest from mine sites, remote mine sites. But also in utilities, particularly in distributed power generation.

And increasingly, in events, actually. They are very conscious of -- event managers are conscious of their reputation. And actually, we deployed some of this onto Glastonbury a few weeks ago: solar batteries and on a smaller scale, batteries and a hybrid solution.

In that -- in those 77 opportunities that we are after. They're taking a little bit longer to convert. I think the customer has to get comfortable with this new concept, but there are about 480 megawatts of storage and renewable power generation within that pipeline, all up. And then if you add the thermal in that will be deployed alongside it, it takes it to about 1 gigawatt. So an interesting and exciting part of the business.

So that's all I wanted to cover this morning. I'm pleased with how we have gone in the first half, how it sets us up for the future. And I will now hand over to Heath, who will take you through the numbers.


Heath Drewett, Aggreko Plc - CFO & Director [2]


Thanks, Chris. Very good. And this is a truck with a couple of boxes on top.

So hopefully, the format of my slides today will be pretty familiar to most of you. We're going to take a little bit into working capital, which, as you know, has been a key priority for me since joining the group last January.

And as Chris has already given you a bit of color on the individual business units, actually, most of my slides are on a group -- larger group perspective only. There are in the appendices, some of the divisional slides, which you would have seen before, but Chris has spoken to.

And just finally, as usual, any comparatives are on a constant currency and ex-fuel. So any percentage changes are on that basis.

So let's start with the group's overall performance. As Chris already said, our first half results announced this morning, in line with expectations despite continued currency headwinds through the half. PBT, up 9% on an underlying basis, slightly ahead of consensus, albeit relatively few analysts put our half year numbers. But those that do slightly ahead of those numbers.

Group revenue was down 4%, largely reflecting the Winter Olympics and the comparator as Chris referred to, with growth in industrial, ex-Olympics and in rental solutions, offset by a reduction in utility revenues in the period.

Operating profit was up 12%. And our cost reduction program in Power Solutions has started to take effect and gather some momentum. As you know, that peaks in 2020 with 2021 with a full year effect but starting to get some of the early wins on that cost reduction program and also leveraging our cost base in Rental Solutions off the back of the growth seen in the regions there.

Our effective tax rate for the half at 35%, in line with our full year guidance provided back in March. And as you know, the group's tax rate really continues to be fundamentally determined by the geographic mix of profits across the business.

Return on capital at 10.2%, 0.6 percentage points ahead of last year on an underlying basis. Despite the adoption of IFRS 16 this year, which puts, obviously, assets on the balance sheet. However, if you take the currency effects out of that number, leave IFRS 16 in, it was slightly down on last year. As you can see here, 10.5%, down to 10.2% on a reported basis.

So let's just move on to the cash flow. Delivered about 30% increase in our operating cash flows in the half, up to GBP 210 million. You can see there in the fifth line down, really driven by improved operating performance, margin performance across the business and lower working capital outflow than last year, somewhat offset, as you can see here, by higher project mobilization spend in the period.

The mobilization spend relates to 2 or 3 contracts, in particular, the PIE A contract in Brazil, the 15-year Amazonas contract that Chris referred to. We've got a new contract, HFO contract in Burkina Faso, 50 megawatts, and spending money in the first half, mobilizing that. Together with some early mob costs on the Tokyo Olympics in the half as well.

So the working capital outflow on the right-hand side GBP 16 million, down significantly compared to last year's outflow of 47%, really driven from GBP 34 million inflow in receivables as I continue to focus on cash collection delivered well, and I'll come back to that in a little bit more detail in a second. And as you've noted previously, reducing our working capital is key to the ROCE journey to 2020 and beyond. So important that we make some progress there as we've done.

Fleet CapEx for the period, GBP 83 million, slightly down on last year. Continue to exercise discipline on capital spend. Within that GBP 83 million, about GBP 29 million was in Rental Solutions, predominantly on Temperature Controls, or TC equipment, and the North American Oil Free Air product, which was shown on the opening slide, that blue piece of kit. So TC and OFA investment in Rental Solutions. In Power Solutions Industrial, GBP 24 million out of the GBP 83, of which GBP 15 million was the Tokyo Olympic spend.

And finally, GBP 30 million in Power Solutions utility, includes some ancillaries and fleet equipment for the PIE A contract that's gone into CapEx, about GBP 11 million. And there's about GBP 6 million of diesel refurbs, G3s to G3+ and then various other items within that GBP 30 million passage in utility. So you can see pretty targeted CapEx on specific things, either fleet renewal or upgrade, refurbishment of old diesel sets and/or project-specific spend, whether it's PIE A or Tokyo.

Non-fleet CapEx spend of GBP 16 million includes our systems investment, continued investment there, together with some non-fleet assets for the PIE A contract, including the land we purchased for some of the sites, et cetera, will fall into that non-fleet CapEx.

Net debt closed at GBP 784 million, GBP 43 million higher than this time last year. But as you can see, in the cash flow right at the bottom, we've obviously taken on board the leases in terms of our balance sheet debt for IFRS 16, GBP 102 million movement in lease liability there just before the bottom line here. We adopted that standard effective 1 January this year.

We've discussed with you previously, many of you are aware from all your other companies, that rather the lease costs running through the operating cost, the balance sheet takes the asset, it's then depreciated over the life of the lease as a financing charge through the interest line.

We've previously given you some numbers around the impact of IFRS 16. We've done it again in the statement this morning, there's an appendix in the back of this presentation that gives you both the balance sheet cash flow and P&L impacts of the IFRS 15 -- IFRS 16 standard. However, just taking a look at some of the models, I think it's clear that many of the analysts' forecasts don't yet have the IFRS 16 number. And certainly talking to some of you guys this morning, I think you're waiting to kind of put all of your customers -- all of your clients through the IFRS 16 change at the same time. So we've got a bit of a mixed economy in terms of who's put it through and who hasn't in people's net debt forecast at the moment.

So the group's gearing on a 12-month rolling basis, 1.5x. That includes, obviously, the leases within that net debt definition. Just worth noting on our banking covenants, not dissimilar to most companies, they are on a frozen GAAP basis. So pre-IFRS 16 in terms of the ratios. And if you were to do our net debt-to-EBITDA on a pre-IFRS 16 basis, comes in about 1.3x. So it's worth a couple of percentage or sort of point difference on the gearing.

So let's just look at this working capital change in terms of the constituent parts. So whilst we overall have seen a working capital outflow in the half, albeit much reduced on last year, pretty pleased with the progress that we've made on receivables, GBP 34 million reduction, cash inflow effectively on receivables in the period, primarily driven by Power Solutions Utility.

Small increase in inventory, a couple of million in the period, really reflecting actually the parts that we're holding ahead of our in-house build program in H2. So just the timing of making sure we've got the parts ready to build some of the equipment up in Dumbarton in the second half. So I'm expecting that to reverse in the second half as we effectively burn through that parts inventory with the build program and expecting our overall level of inventory to actually be down on the full year.

The large movement in payables includes about GBP 36 million reduction resulting from reduced running and fuel costs in our Brazil contract. And you can see in the appendices, we've given you just a brief summary of reported to underlying revenue. And as you know, a big piece of that is stripping the fuel out and then we have the FX out as well. And you can see that just looking at the fuel revenue period-on-period, you can see a big step down from H1 this year on those Brazil contracts versus H1 last year. And there was an associated creditor at December and given that we had ramping up of that activity through the second half and, therefore, greater fuel creditor at December than we have in June '19. So GBP 36 million of that GBP 48 million relates to Brazil fuel costs. And then there's some other ups and downs within that number.

Our focus on working capital will clearly continue through the second half and beyond. And just in terms of the traffic lights here, I'm personally hoping to have 2 greens out of 3 by the end of the year. The beauty being I'm the arbiter of whether it's green or amber. There will be 2 greens at the end of the year.

So just on trade receivables. So these trade receivables numbers don't include the accrued revenue. So this is what has been billed. You can pull these numbers out of the notes to the account. So this is the straight trade receivables number. It's also pre-provisions albeit that the provisions didn't really move in the period other than through FX and a bit of movement within the balance. But -- So this is a gross receivables number, all 3 businesses. Together, we've highlighted the PSU receivables here. And as you can see, the overall receivables balance pretty stable since the year-end, circa 5 90 million at December, circa 5 90 at the half year. And within this number, you've seen a GBP 33 million reduction in Power Solutions Utility, which is demonstrated by the orange bar, offset by an increase in Power Solutions Industrial, largely associated with increased activity, albeit I think we have to acknowledge that our efficiency of collections in PSI could have been better in the half and an increase in Rental Solutions. As we sought to bill some of the unbilled work at the back end of last year, and we've got a slide on that, just coming up, in terms of the mix of what we've billed versus unbilled in Rental Solutions. So PSU down and the other 2 business units up.

And you can see here now, the mix of what's sitting in trade receivables for PSU is just under half of the overall group balance, it was about 54% at December in terms of PSU receivables out of the group receivables book.

So just then specifically on the utility receivables position. You've seen this chart a few times before, and you'll get to realize that I will repeat slides to provide you some consistency. This is in dollars. So we switch currency here because, obviously, we look at cash receipts and invoices in the currency that they're largely billed and received in. And so we're in dollars on this chart through the quarters of '18 and '19. And you can see it quarter-by-quarter.

As you can see, Q1, we actually received less than we invoiced. We had a pretty strong December in that Q4 result. We only ever show the quarter, so you didn't see the months within the quarter, but we had a pretty strong December. But you can see that, that shortfall in Q1 reversed pretty strongly in Q2.

Interestingly, we received about the same amount of cash in Q2 last year. But clearly, against a much higher level of billing this time last year in PSU, reflecting both the reduced scale of the utility business over that period and, indeed, our efforts to start to collect some of the longer-term overdue debt and eat into the historic balances.

People have asked this morning kind of what's changed? What's the trick on that? And in summary, I think it's just increased engagement by the customers. We had very good performance in our Africa business over the period. We had a new MD came into the Africa business about May -- April, May last year. And I think he's supported our efforts to increase customer engagement. And actually, just a much more proactive approach with each of our customers. It's different customer by customer, project by project, the fact pattern is different, the leverage points are different, but actually, approaching that in a kind of a rigorous customer by customer, what's the plan, what's the next step that we expect to do. So clearly, yielding fruit. And we've had a pretty strong July, we're ahead across the PSU book, collections versus receipts in the month of July as well. So it's good to see that continuing.

I have said a number of times and will continue to repeat, winding ourselves out of this situation will take some time. And we've clearly got more to do, but I do think we are now seeing tangible progress, and you're seeing that starting to come through the numbers, so it's encouraging. And as Chris said earlier, it's across a number of customers across a number of geographies. So it's good to see that coming through.

So then just on Rental Solutions, I wanted to show this as well. This, again, we showed this slide at the half year last year in exactly the same format that you see here now. So I've got the trade receivables, including the unbilled because you need to see the dynamic of billed and unbilled here. And at the year-end, we discussed the increase in accrued income, which basically is, obviously, the revenue not yet been built in Rental Solutions, which drove an increase through the H2 position. You can see that the first 2 bars, that step up from H1 to the full year was largely unbilled work, which was really driven by record activity levels in North America through the second half, which, candidly, we failed to keep up with in terms of our customer invoicing.

So in the first half of this year, we've really focused on getting that unbilled revenue billed, getting invoices out and through recruitment of additional staff. We've put some simple system solutions in. As Chris said, we haven't gotten the full invoicing module in place yet. We're just looking at the process rather than automating the process that we've got. We're trying to go through some process improvement before we then implement the system solution for it, but we've done some sort of offline systems works, some best practice operating process improvements across the Rental Solutions regions, which is helping to reduce it. So you can see we've reduced that backlog significantly and represented about 36% of our receivables balance unbilled at December, now down at 27%.

[Pro tem] that's turned into an increased receivables number, the next task is clearly to chase down that debt and get those collections through the system. So step one, get it billed; step two, get the cash in.

So that's it in terms of details on the financials of the half. Just looking ahead, before I pass back to Chris for Q&A. In terms of the guidance for the full year, we expect profit before tax in line with market consensus, basically unchanged from when we issued our guidance last back in March at the full year results. Within this, we're still facing a slight currency headwind of about 2% on profits. And we have got the IFRS 16 impact, which at a PBT level, is a 2 million hit, it's favorable operating profit, adverse interest and ends up being adverse at PBT of a couple of million.

Effective tax rate, as I said earlier, remains at 35%, consistent with the rate, obviously, that we booked in our half year results today.

As Chris said, we remain confident in our ability to deliver the mid-teens ROCE in 2020. And in that context, capital discipline is important. The CapEx guidance also remains unchanged at below GBP 200 million. Despite the fact that by the time we get to the year-end actually will have incurred about GBP 30 million on Tokyo CapEx by then. We've got [15.5], that doubles up to around GBP 30 million by the time we get to the end of December, making sure we've got all of our equipment purchased and ready for the games.

And that CapEx discipline, coupled with progress on the working capital, should deliver reduced level of gearing over the full year as we said back in March, despite the impact of IFRS '16. So we should see, even though it won't be on the same basis, want to be pre and want to be post IFRS 16, should see a reduced level of gearing if we deliver on what we're hoping to through H2.

And with that, I'll pass back to Chris.


Chris Weston, Aggreko Plc - CEO & Director [3]


Thank you, Heath. So now, as is customary, we have time for some questions.


Questions and Answers


Chris Weston, Aggreko Plc - CEO & Director [1]


So if you could just follow the normal, wait for the microphone, say who you are and where you come from and then pose your question. Will?


William Kirkness, Jefferies LLC, Research Division - Equity Analyst [2]


It's Will Kirkness from Jefferies. Just a couple please. One on the amount of kits that shifted out of PSU, I wonder if you could give the megawatts that you've moved into Industrial and Rental Solutions. Secondly, on that, you've talked quite a lot about rates by different regions. I just wonder if you can give a sort of overview for each of the divisions of what you think rates has done. And then perhaps lastly, just on Y.Cube. What will you do that if that ramps more than expected? Is there -- are you quite happy to allocate more CapEx to that?


Chris Weston, Aggreko Plc - CEO & Director [3]


Yes. So on fleet, predominantly moved gas out of PSU. So that fleet has come down by about 320 megawatts of gas that we've moved into the other 2 business units. The other 2 business units saw average megawatts on hire and gas go up, both of them actually 21%, but it hasn't soaked up all of that gas fleet that was moved across. So that's that one.

On rates, I mean, it's been different in each of the different sectors, probably we've seen the strongest rate increases in North America in gas -- sorry, in oil and gas, which is up quite strongly, but nowhere near the peak that we saw in 2014. So more than 10 percentage points. There are a lot of restrictions in the Permian, including for fleet and people. I have to say, going hand in glove with that, we have seen an increase in cost in servicing customers in that area where technicians are quite scarce. But pleased with the operations there.

The other benefit we've had from rates and really from the systems is more around when you price a contract often in the past, many of the ancillaries that would go with the power generation just didn't get charged for properly. So we have seen that begin to be rectified, where we have put the new systems in place, and it's probably had a benefit of 1% or 2%, that type of thing.

I'm sorry, the last one what was on Y.Cube and if it ramps? Yes.

I mean, the lead times for that are really down to the lithium-ion batteries. And this is a judgment as we try and balance supply and demand. So we'll have 34 in the fleet, which is quite a lot short of what is in the pipeline. But I think we just need to see more confidence about how that pipeline converts. We have good relationships with all of the suppliers.

And in many instances, you don't have to deploy. If you have 8 megawatts of solar, like in Granny Smith, you don't have to have 8 megawatts of storage, you only have to have 1 or 2. So there's a disproportionate support from the battery into the renewables side of power generation.

So we are -- we could not meet. If all of that pipeline were to convert, we could not meet it -- the pipeline is anywhere for battery supply between 3 and 6 months, and there would be a hiatus. But we would -- I'm very confident that we could manage that with the customer and the commissioning dates that we would agree with them.


Robert John Plant, Panmure Gordon (UK) Limited, Research Division - Analyst [4]


It's Rob Plant from Panmure. At a very general level, emerging market customers, do they feel better or worse positioned compared to last year?


Chris Weston, Aggreko Plc - CEO & Director [5]


I would say that it was much the same. You do see a lot of these -- I mean, the -- obviously, we interface with them to sell them contracts. And that's often and always has been a fairly lengthy process. So we haven't seen much change there. In fact, the demand across the projects, business or the pipeline before you start to convert it is probably a bit stronger. We have, as you can imagine, a huge amount of interaction around receivables at all levels from the utility up to government, Ministry of Finance, et cetera. And it really does differ. And I mean, it's probably much the same. Some of these countries are trying to refinance and struggle to do so, but it was ever us. I don't see any huge difference now to compare to a year ago. I think we have much better connection into these customers, into the governments that support them. Much better engagement, and that is what has led to the improvement in receivables in utility. So that's I hope a bit of color around it, and probably about as best I can do at the moment. Rajesh?


Rajesh Kumar, HSBC, Research Division - Analyst [6]


Rajesh Kumar from HSBC. Two, if I may. The depreciation figure in the first half looks higher than what we have for the second half run rate. How much of that is IFRS 16? And how much of that is underlying? Second one is on the opportunity on Y.Cube. You said you see about 1 gigawatt of potential opportunity with current pipeline around [EUR 485 million], if I got that right. So could you give us some color on what types of customers are looking to go for Y.Cube type solutions? How many of these solutions or they want to bring their own batteries and have you provide just the software? So basically, system agnostic solution. And how many of these require you to bring in the kit as well?


Chris Weston, Aggreko Plc - CEO & Director [7]


So maybe just starting with the Y.Cube, yes, so there are 77 opportunities in there. Just over half of those are in mining, remote mine sites, and they are like Granny Smith. Granny Smith is unusual in that it's a gas thermal with 3 megawatts of storage and 8 of solar. We are seeing other hybrids that either involve diesel or HFO. And some of them quite large megawatts of thermal, up to 40 or 50 megawatts.

Typically, all of the contracts you see in this area are lengthy, 5 years plus out to 15, 16 years. In all of them, we will supply the kit. So we will supply the thermal power generation, the storage, the renewable, whatever it may be, and often, the renewable is sequenced in later after the storage and thermal has been put in place.

So we provide the kit to them and including all of the integration and software that makes the whole thing work together.

I think -- so that's in mining. And utilities, it's -- because the mine site is typically one site. In utilities we're getting a lot of interest from, well, countries that are looking for ways to solve remote power provision. So they look for distributed generation to local communities that aren't connected to the main grid. And they are reluctant to put straight diesel in. I think it's more difficult to get financing for straight diesel. And if you add solar and battery into the mix, it becomes easier to finance for these remote distributed power generation. And that's typically what we are talking about, and we will provide all of the assets for that as well. And again, they're for fairly lengthy contracts.

So that's what we are seeing. The pipeline takes longer to convert. And I would say that is largely down to the nature of the products, the new product, people are worried about the reliability of a straight renewable: it's volatile, clouds go across, it rains, if you don't get sun for a long time, all of that kind of thing. And so you have to integrate it with the thermal.

And so when you've done that, managing that volatility of renewable resource and matching it against the customers' load, which is also bearing is I mean, it's not straightforward. We have the capability to do it, others don't and the customer because you're putting it into a critical operation, like a mine site, where you've got key safety considerations, wants to be absolutely certain that it's going to be okay.

Interestingly, Granny Smith, gas is probably the most tricky of the hybrids that you could do, and it will be a very fine example for us when we go live with that, and there's some other very interesting ones that are coming to fruition in the pipeline. Hopefully, that gives you a bit of color, and I'll let Heath talk to depreciation.


Heath Drewett, Aggreko Plc - CFO & Director [8]


Yes. So just on IFRS 16, there's about GBP 14 million in the half on IFRS 16 assets, which will pretty much double to GBP 30 million on the full year. So there's not a big variation in the IFRS 16 impact. So if you strip that out, you've got the depreciation on all the other assets for the half and whatever you have for the full year, and that just reflects the aging of the assets and/or new CapEx coming through. But it's GBP 14 million, doubling to around GBP 30 million on the IFRS 16 asset depreciation.


Chris Weston, Aggreko Plc - CEO & Director [9]


Gentleman at the third row back.


Marc Antony Elliott, Investec Bank plc, Research Division - Mining Analyst [10]


Marc Elliott, Investec. Just a little bit curious on the Younicos and the battery and the adoption, what is the thought process that you have there? Because batteries will inherently last not as long as diesel gensets or HFO. And what is sort of the capital intensity we need to think about if that picks up? Because -- in addition to that, what happens on sort of end-of-life process when these things get a bit exhausted after 6, 7 years? So you've got some 15-year projects, do you have to change them out? Those sorts of issues.


Chris Weston, Aggreko Plc - CEO & Director [11]


Well, as you can imagine, we work very closely with the suppliers on the life of these batteries. And the contracts that we're putting them into, I mean, are capable of being supported by the batteries. For the duration of the project. So I mean, they are not called upon the whole time. So they are -- it depends on how quickly they cycle and how often they cycle. So some of them may cycle once a day, and they are okay doing that for 10 or 14 years. You always then have to look at the individual cells in the battery. And I'm absolutely sure that a percentage of sales will have to be replaced over the lifetime of the whole storage setup. But you get -- I mean in one of those is Y.Cubes. I don't know how many there are. There are probably in the half hour variant, they're probably 50 or 60 cells. So quite a lot of cells in there but some of them are bound to fail over the life. But they are typically having worked with the manufacturers set up for the duration of the project. To capital intensity, they are more expensive than thermal. And I think one of the things that will drive adoption more fully, both by customers and by us for our own use will be the continued reduction in the cost of batteries. So we only deploy them where it makes economic sense for us to do so at the moment and for the customer, and that is typically justified on lower fuel burn. So the economics stack up, you will get much wider spread adoption if battery prices continue to fall, as they have done over the last few years. Okay? Rory?


Rory Edward McKenzie, UBS Investment Bank, Research Division - European Support Services Analyst [12]


It's Rory McKenzie from UBS. In Rent Solutions, the megawatts on rent were down about 5%. So crudely, average pricing was up kind of 7%, and that's despite loss of the hurricane work from last year. So firstly, how much was mix of, say, gas against diesel or the regional mix maybe? And then secondly, how should we think about the pure rate improvement that you're going for? And you talk about having better visibility on things like pricing, ancillaries, or just pricing against market maybe. So how much further do you think you can gain on the rate side?


Chris Weston, Aggreko Plc - CEO & Director [13]


I'll have a go and maybe you can help me on that one, Heath. But -- so when you look at the average megawatts on hire, they were down in diesel by about 10% and up on gas by about 20% in Rental Solutions. So that's what the mix looked like. And overall, the power on rent was down by 5%. Utilization came off, as you saw on the graph that I talked to earlier. So those are the movements, and we moved a reasonable amount of fleet into Rental Solutions, just over 120-odd megawatts of gas fleet was moved in. We haven't got a particular target around rate increases, and it very much -- I mean each case has to be priced on its own merits. I mean, you can see that the emergency type work that you do into the country -- the Benelux, for instance, attracts a higher rate. You're there for a shorter period of time. You have to mobilize and demobilize. You can see the supply and demand pressures in the Permian, and that allows you to put rates up. But there is just a continued focus on rates that may improve at 1% to 2%, but it will all come down to supply and demand and what is the kit being used for. And the more specialist nature that has a bigger economic benefit for the customer, I am now more confident that we will be able to capture a slightly higher rate, but it is going to be 1% or 2% a year at best. And I caveat that by economic conditions and all the rest of it. Do you want to add anything?


Heath Drewett, Aggreko Plc - CFO & Director [14]


Yes, I mean, it is complicated by sector, by geography, by need and [where have] emergency as/or otherwise. I'd probably roll it all up in to say, well, what's the margin going to do in Rental Solutions and is there a headroom in the margin. The margin is up as you saw in the first half. We expect to see the margin up year-on-year on the full year, and I think there's a little bit further to go on the Rental Solutions margin as we move out from 2019 into 2020. So that's a combination of cost and rate and leveraging increased volume. So -- but I'd probably distill it right down to what's happening on the margin, where I think we do feel there's more to go. And when we do that ROCE step through last -- this time last year, the first bar of that chart for rental was all around the P&L benefit, and that was a combination of growth in the market, plus cost improvements as we roll out systems, plus some opportunities as we got as Chris said, kind of more specialized, that does give you a rate opportunity. So all of those 3 together should deliver margin expansion, which is sort of probably where you need to get to at the end.


Chris Weston, Aggreko Plc - CEO & Director [15]




George Nicholas Gregory, Exane BNP Paribas, Research Division - Research Analyst [16]


It's George Gregory from Exane BNP Paribas. A couple, please. Firstly, just on the mob, demob costs capitalization. Heath, I wondered whether you could give us a view for the full year. And secondly, I wondered if there was any update on the Ivory Coast contract, please?


Heath Drewett, Aggreko Plc - CFO & Director [17]


Can I come back to you on the full year mob, demob number in a second because I have got a full year number here.


Chris Weston, Aggreko Plc - CEO & Director [18]


Yes, so on Ivory Coast, very pleased with how the relationship has developed with them. I think we have a good team in place, focused on supporting our existing project that we have there 200 megawatts QSK60s. They are clearly very happy with the product that we provide and how it fits into their merit order. It's extremely flexible. So when they need power we can produce it very quickly, and that enables them to have a more stable and secure power supply into their grid. So that's very helpful.

We are talking to them. I mean, they have the ability now to off-hire with 12 months’ notice, the whole thing. They can off-hire half of it with 6 months’ notice. The whole thing is 200 megawatts at the moment. The contract reaches its natural term at the end of next year, the end of 2020, and we are talking to them as I speak about what life might look like beyond that, and I am encouraged with the discussions that we are having. It's probably the best way to say it. We will probably look at a different technology though for any extension, something more efficient.


Heath Drewett, Aggreko Plc - CFO & Director [19]


Yes. Just on the mob cost. I mean, clearly, a part of that is us trying to preempt what jobs we might win and the associated mob cost, which is difficult because you don't know which ones you're going to win and then what the mob cost is. But I would say, there's 28.5 in the half. It could be 60 to 70 by the full year. The Olympics piece stepped up quite a lot. So within that 60 to 70, there could be 20-odd million on the Olympics by the time we get to the year-end. There's a little bit more on PIE A. Those sites are starting to go online now, so there's a bit on PIE A. And Burkina Faso, which was a large part of the first half is done, that's all on hire now. So PIE A continues, Olympic stepped up a bit and you can end up in the 60 to 70 for the year.


Chris Weston, Aggreko Plc - CEO & Director [20]


Paul at the front?


Paul Daniel Alasdair Checketts, Barclays Bank PLC, Research Division - Director [21]


It's Paul Checketts from Barclays Capital. I got a few, if I could whizz through them. The first is on the Permian. If we look at the rig count, it's actually -- most recently, it was down. So your growth is really separated from that, and as well, we've seen some other rental companies -- sorry, other industrial companies, talk about it being a bit harder. Can you just remind us what's driving your growth? And perhaps give us a sense for how much further that might have to go. And then the second is on utility business. In that order intake, you mentioned Gabon, but can you just remind us what -- can tell us what else is in the order intake. And to the extent you talked about off-hire of being 35% the full year, what do you have visibility on coming off? And then the last one, I just wanted to ask you, Heath, about the receivables. Why did you -- if I look at that chart you've given, and you can look at what you invoiced, why in the first half was invoicing 33% less than the prior year? And then separately, on the North American balances, have you had any issues with recovering those, given that you're sending them an invoice quite long after you did the work?


Chris Weston, Aggreko Plc - CEO & Director [22]


Okay. So maybe just to start on Permian. So the driver of our work in the Permian is the oil companies exploiting resource that is beyond the utility and moving more quickly than the utility can keep up with them. That is the prime driver for our business in the Permian. And you've got a couple of very large players. I think I mentioned actually at the full year results in both Exxon and Chevron, who are big customers of ours, who have announced quite aggressive investment plans, drilling programs over the next 5 or 6 years, and that is largely -- that kind of thing is largely ahead of where the utility is, and that is what is driving our growth in the Permian. I think the utilities struggles to keep up with the development and the drilling that is going on in the Permian, and I suspect it will be like that for the next 1 or 2 years. Our biggest problem is getting fleet in there and getting technicians to service all of that fleet. So we're still seeing relatively strong growth there.

Going to utility, looking at the order intake, so pleased with Gabon. There was also Senegal in there, which was another 60 megawatts. And I would have to come back to you on what the other ones in there but those are the 2 larger ones. It's a relatively short one. It's not -- I mean, it's the typical kind of thing that we do. It's not like the 5 year one in Gabon.


Heath Drewett, Aggreko Plc - CFO & Director [23]


It's 6 months. Those 2 Senegal ones are 6 months, 30 each.


Chris Weston, Aggreko Plc - CEO & Director [24]


And what was the next one, receivables?


Heath Drewett, Aggreko Plc - CFO & Director [25]


Yes, just on the receivables, I mean, if you look at the -- if you look at the revenue in past [seasons] utility on a [ink] fuel basis, it's down 33%. It's down 31% ink fuel on a sort of constant currency. That's basically the difference coming through there.


Chris Weston, Aggreko Plc - CEO & Director [26]


Okay. Anymore? Perfect. Thank you very much, indeed.