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Edited Transcript of AGK.L earnings conference call or presentation 3-Mar-20 9:30am GMT

Full Year 2019 Aggreko PLC Earnings Call

London Mar 24, 2020 (Thomson StreetEvents) -- Edited Transcript of Aggreko PLC earnings conference call or presentation Tuesday, March 3, 2020 at 9:30:00am GMT

TEXT version of Transcript


Corporate Participants


* Chris Weston

Aggreko Plc - CEO & Director

* Heath Drewett

Aggreko Plc - CFO & Director


Conference Call Participants


* Andrew Nussey

Peel Hunt LLP, Research Division - Analyst

* Daniel James Hobden

Crédit Suisse AG, Research Division - Research 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

* William Kirkness

Jefferies LLC, Research Division - Equity Analyst




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



Good morning, everyone. We were very original in our project name for that: Project Megawatt, a large and impressive project that we did in Belgium at the beginning of the year 2019. You saw some of the stats there, 180 megawatts. It's quite complicated when you have both gas and diesel across 5 sites and you're 150 kV, so high voltage; that's not straightforward. It had some customer-made kit in it that was specifically done for that project: fault reactors. I can give you a lesson about those later if you want. But it was on for about 10 weeks, solved the customer's problem. I'm very happy with the returns that we got from it. And fleet came from all of Europe and the Middle East to satisfy the project needs. So that was Project Megawatt, an example of what we do. This is one of our Y.Cube's batteries, on its way to Pampa Energia in Patagonia, Argentina.

So no further ado, very pleased with the results that we have delivered in 2019. Good profit growth, up 13%, so I think slightly ahead of where consensus settles. Particularly pleased with working capital and cash flow generation. So working capital inflow, the first since 2009. Consequently, balance sheet strengthened and net debt-to-EBITDA coming down to 1. So very pleased with that.

Returns increasing, up 1.1% to 11.2%. And in fact, when you look at returns at the year-end at the end of December, they were just over 12%, so on the right trajectory to get to where we need them to be this year. And given that good result and what we can see for the next few years, really happy about being able to increase the final dividend up 3%. So a good solid set of results.

We've had quite a lot of questions this morning from media and analysts around Tokyo, and I'm sure that will happen again later, but preparations are going as planned. We have the vast majority of the equipment we need for the games in Tokyo already in our warehouse and in a laydown yard, and we are beginning to deploy some of the medium-voltage equipment to site, and it is very much business as usual with the local organizing committee.

Some questions have been about what may or may not happen. I'm not going to speculate on what the local organizing committee does. We obviously have a contract in place around the games. It is commercially confidential, but it does cover all the types of eventualities that you can think of, and I'm not going to be drawn on that later this morning.

We are seeing some impact from coronavirus, travel restrictions. We are restricting travel to some countries, very little in terms of the supply chain, a few delays here and there. So we are beginning to see some impact. We are watching it very carefully, but nothing of any materiality at the moment. So that just gives you some headlines as to how we went in 2019 and some of the things that we're seeing at the moment.

So I'm now going to run through each of the business units before I hand over to Heath. So firstly, talking about Rental Solutions. So on the picture here, I've often talked about Granny Smith. This is the Granny Smith hybrid project, which is now operational. So we have 22 megawatts of thermal power. I was hoping that was going to work, but up here, that's our thermal power generating station, which is 20 -- sorry, 24 megawatts. This is our solar farm, 21 hectares, 8 megawatts. So you really see the scale and the power density of a project like this. So this is up and operational now. I'm very pleased about that. That solar farm covers about 15 football pitches. So good to see that up and working.

Rental Solutions had a very good year. Just quickly, Northern Europe, they struggled a bit, I think, with market uncertainty around Brexit and also us taking quite a tough view on pricing discipline. The revenue went backwards there 15%. Continental Europe across the channel was up 3%, helped by that project Megawatt that you just saw there. AusPac had a tough comparator in the AEMO project from a year ago, and they were down 13%. But if you strip that out, they were down 3%. And we saw good activity levels in mining, which were up 10% year-on-year.

I suppose everyone is interested, understandably, in North America. So they performed well. Revenue was up 5% in North America. If you take out the impact of the storms, then their revenue was up 12%, so strong growth. We saw growth across 5 of their 7 key sectors, so the 2 sectors that went backwards were events that were backed 2% and manufacturing that was backed 6%. And I talked at the half year about a bit of softness in manufacturing. But essentially, in all the other sectors, there we saw good growth. So oil and gas was up strongest, but we also saw very good growth in utilities and in building services and construction, both up 16%.

Margin expanded. And I think we're seeing the benefits of the new systems that we have put in place. They have allowed us to have better visibility and governance around rates. So when you look across all of those sectors, rates were stable or improved other than in building services and construction. So that was encouraging. And in particular, product sets like gas and also oil-free air going into petchem and refining. Also continued work on cost. So all that reinforced an improvement in margin in Rental Solutions. And I think that absent coronavirus this year, you might see that strengthen a little bit more.

And just to touch on utilization, there, coming off a few points. So I think to understand that you have to split it down into diesel and gas. Diesel went backwards 5 points, and that was for understandable reasons, for the storms-related work coming off and also AEMO coming off in AusPac. So that was diesel.

Gas actually is a little different story. We have seen growing demand for gas. And so gas megawatts on hire were up 13%. And so we've been moving gas fleet from Power Solutions Utility into Rental Solutions and indeed into Power Solutions Industrial, ahead of that demand. So the fleet size grew about 17%, and that saw utilization come off a little bit. And just while I'm on that, we have moved gas, about 250 megawatts out of Power Solutions Utility into both Rental Solutions and into PSI. So that's Rental Solutions.

Touch on Power Solutions Industrial. So revenue grew 2% here. If you strip out the various Olympics, the Winter Olympics and also the early design work and project management work that we did for the Summer Olympics, then revenue grew by 6%, but profits went down 7%. So although we saw good growth in some parts of the world, Africa, Middle East and Latin America, I mean Africa was up impressively 29%, Middle East, good to see 10% growth there, we did see a slower performance in Eurasia, where revenue was down 8%. And this is our most profitable region in Power Solutions Industrial, and so it pulled down the profit across Power Solutions Industrial overall.

So what's going on there? A couple of things to talk about. One in the market. So market activity in oil and gas, its most important sector was a little bit subdued. There were less projects out there for 2 reasons: One, I think the OPEC plus type agreement that was in place for much of the time had an impact on activity, and also, there is less of a flare gas activity -- flare gas opportunity at the moment in Eurasia. So those were some elements of the market. The other bit in the market was undoubtedly increased competition. So a year ago, I think I talked about increased competition in diesel that persists with associated pricing pressure. But we also saw competition in gas. And that then was reflected in the rates and also the order intake. The order intake was down at 282, playing 333 the year before. So that's what drove the performance in PSI and why the margin came down.

What would I expect for this year? So I'm quite optimistic for this year for Eurasia. Their newer contract wins are doing what they should at this stage of the year. So about where we would expect them to be. Their extensions have been very strong and that I find encouraging. And they are also looking at their cost base and improving their efficiencies. So when I take all that together, it does make me cautiously optimistic, and I would expect to see an improvement in Eurasia this year.

And then again, to touch on utilization, again splitting it, diesel and gas. Diesel is much of a muchness, 1% or 2% here or there. So it's pretty much the same as it was a year ago. So the story is more about gas. And in gas, exactly the same thing is happening here as we see happening in Rental Solutions. So gas fleet that is on hire. So demand is up 25%. We've moved fleet across from utility and the fleet of gas in PSI has gone up 35%. Hence, you've seen a reduction in utilization. So we're moving fleet to where the demand is. So that's Power Solutions Industrial.

To move to Power Solutions Utility. So revenue was down 5%. Volume was down a bit more. Pricing for new work looks pretty stable at the moment. We saw a number of off-hires driving that revenue. So particularly in gas, where Myanmar and a couple of projects, Ghorashal and B-Baria came off-hire in Bangladesh. So that all had an impact there. But despite that, we saw very good profit growth, and that really is a result of better operational performance and how we move stuff around the world and set up sites and associated reduced costs. So we are on track with our cost reduction program that we said would have a full year impact in 2021.

I'm really pleased with what the team have done here in receivables, very strong cash collection in all parts of the world, Latin America, particularly in Africa, but also in Asia, in Bangladesh. So pleased with the progress, and we saw cash collected ahead of invoice by about $100 million. So good progress with receivables. Not only did they do well with the cash, I think we've made some significant progress on contracts and contract wins. I mean, firstly, on the Ivory Coast. So that picture there is half of our site in the Ivory Coast. So we have extended that 1 year so far to the end of 2021. The deal that we have made with the Ivory Coast starts at the beginning of this year and does, as you might expect, offer a discount.

We are swapping out 100 QSK60s or 100 megawatts worth of QSK60s and we are putting next-gen gas in there to improve the efficiency of the site. We are an important part of the generation mix there, merit order. We offer them huge flexibility, and we have a very good relationship with them. And we are discussing what we might do with them beyond 2021. So I was pleased with the progress that we have made there.

But in addition to that, there are also a number of other important contract wins that we've had in this business that will have a full year impact in 2021. So at the beginning of this year, we signed 165-megawatt flare-to-gas contract in Kurdistan, and that's a 4-year contract, and that we'll mobilize throughout this year and come into operation in Q4.

We signed a second contract in the Philippines with a partner we're working with, Marubeni. The first one is commissioning, as I speak, is 70 megawatts. And the second one will commission towards the end of this year, is 150 megawatts of diesel for 5 years. We have the Amazonas project PIE, well advanced in its commissioning. So that will all finish commissioning in the first half of this year. That's 135 megawatts for 15 years, so full -- first full year of operation will be next year, but it will contribute towards this year.

And in Power Solutions Industrial, but I do want to mention it, we have the large hybrid that we signed with the Resolute Mining Company for their Syama Mine, which is 40 megawatts, plus 10 megawatts of storage and we are planning to add 20 to 24 megawatts of solar in a couple of years' time there. But that will be commissioned later this year, and will be operational next year. So all of those support Aggreko and PSU in 2021, and we are comfortable with the margins and returns from those various projects.

Underlying, because of the cost efficiencies, we did see an improvement in margin in this business. But I do want to say that in 2020, we will expect the margin and the returns to reduce for Power Solutions Utility. Reasons behind that: one, FX, where there's a disproportionate impact on Power Solutions Utility; two, many of these contracts that I have talked about are yet to commission; and three, you've got the Ivory Coast discount as well impacting this division. So despite the continued, planned and on-track cost reductions, I would expect margin returns to come down in PSU in 2020 and be -- that to reverse strongly in 2021 as these projects come on stream.

So maybe the last thing to touch on is utilization. Diesel was flat at around 70%. Gas, due to off-hires, has come down to 58%, and that is down to the off-hires I mentioned earlier, Bangladesh and Myanmar. We have moved, as I said, 250 megawatts of gas out of this business unit into PSI and Rental Solutions. I do expect, because of those contracted volumes that we have, that by the end of this year, gas will largely be utilized, up at 90-odd percent. So we are already talking about buying more gas fleet to fulfill what we are seeing in the pipeline because we need the existing fleet for the contracts that we already have signed. So I hope that's clear on Power Solutions Utility.

Just quickly on hybrids, very encouraged about the progress that we are making there. So you saw a truck with a Y.Cube on it at the beginning of the presentation. This is where it went to Pampa Energia, where we have 6 megawatts of next-gen gas and 1 Y.Cube. So this is used for something called spinning reserve displacement and power quality, reduces fuel burn, so much more environmentally friendly. So that's what it's being used for. As you can see, we secured 185 megawatts of hybrid work in 2019 and 30 Y.Cubes are now under contract. I have to say that is a little bit ahead of what I expected. So pleased with that.

It's made up of 9 contracts, the shortest of which is the Olympic Games, which is 6 months where it'll be providing power to a part of the canoeing setup. And the longest is the Syama Mine site with Resolute, which is 16 years, 10 Y.Cubes going in there. And it's spread across 4 sectors, oil and gas, mining, utilities and data centers. The pipeline is growing. It has 88 opportunities. It's about 1.5 gigawatts. When you break that down, about 670 megawatts is thermal, 300 megawatts is solar and 490 megawatts is storage. So a lot of interest, mainly in the sectors of mining and utilities. And we're continuing to develop this product.

So at the moment, we have a 1 megawatt for 30-minute variant and 1 megawatt for 60-minute variant. So we're developing that to do a number of things: one, to improve thermal management so it can cope more effectively with the extremes of temperature that we operate in. So one, about thermal management; two, about mobility, at the moment, we have to take the batteries out of the container to move it, so we're fixing that; and lastly, cost out, always a never-ending focus for us. And we're adding in new functionality around black-start and UPS.

In addition to the Y.Cube, we're also now investing in smaller canopy storage that we can deploy alongside our canopy fleet. So the smaller units that we can use to start making that fleet lower carbon in its operation. So very encouraged by the momentum that's beginning to build around the hybrid product set.

And then lastly, just to touch on August. So when we come back to you, we're going to talk a little about the evolution of our priorities within the business, our strategy, if you like. These are our 4 priorities at the moment. You've seen them all, customer focus, technology investment, capital efficiency and our expert people. So when we come back in August, we will talk more about this. I suspect it is going to be an even evolution of this, nothing radical. There will be an evolution of what we're doing here. It will talk about growth and returns beyond 2020 and the opportunity that we see ahead of us in the energy transition that we're already beginning to realize in what we have in our hybrids based on the Younicos platform that we acquired and going hand in glove with that, we will see -- we'll talk a little bit about capital allocation. But I'd stress, it is going to be evolution. I wouldn't expect any dramatic changes.

So that's all I wanted to say. I will now hand you over to Heath, who will talk about the rest of it. Thank you.


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


Thanks, Chris. Good morning, everybody. So hopefully, the format of my slides this morning will be pretty familiar to you. And as Chris has spoken largely about the individual business unit performance, my slides will focus on the overall group perspective.

As previously, I'll go a little deeper into working capital, whereas Chris said, I'm pleased to see significant improvement during 2019, was accepting that there is more to do in that area. I've also included a little bit of detail on the fulfillment asset, which I know is of interest to some of you. And don't forget, we do put some appendices slides in there, not to bulk out the presentation, but actually, there's some detail and it will answer some of your questions, I suspect, if you just have a flick through and just see what's in the appendices. And I'll refer to a couple of those through the presentation this morning.

And then just before I get going, as usual, any comparative year-on-year movements, I will refer to on an underlying basis, so excluding effects of currency and pass-through fuel, consistent with the statement.

So let's start with the group's overall performance. Good news is always worth telling people twice, so apologies for repetition here on some of the points that Chris raised. But pretty pleased with our profit growth and strong cash performance this year, and I'll cover in a bit more detail the cash and working capital movement that we've seen. So revenue was down 1%, actually in line with the prior year, if you take out both the 2018 Winter Olympics from prior year and the revenue that we took this year or in 2019 on the project management and design aspects, early aspects on Tokyo 2020; so flat, if you take both of those out. We saw good ex Olympics growth in Power Solutions Industrial of 6%, largely driven, as Chris mentioned, by a strong performance in Africa and in the Middle East. This was offset by Rental Solutions down 1%, and Power Solutions Utility down 5%, which Chris has covered.

Operating profit up 13%, driven by a 22% increase in operating profit in the Rental Solutions business, where good growth seen across a number of the sectors, 5 out of 7 sectors growing in North America in particular, enabling us to leverage better our cost base in that business. Effective tax rate of 35%, in line with the guidance that we gave right at the outset of the year, with the group's tax rate continuing to be impacted and determined most by the geographic mix of our profits.

Return on capital, 11.2% improved 1.1 points on an underlying basis, despite a 0.4 percentage point impact of the adoption of IFRS 16 at the start of the year. Good momentum, therefore, into 2020, on track to deliver mid-teens ROCE target this year. And on this point, it's just worth remembering the ROCE we quote uses a 3-point average net operating assets for the business; so it takes January, June and December net operating assets. And if you were to look at the what we kind of referred to internally as the exit ROCE, just based on the closing balance sheet NOA, actually 12.1%. So you can see the direction that the balance sheet performance is heading in as we moved through 2019. And you can see the numbers that support the ROCE calculations actually in Appendix 5 in the presentation, it gives you those 3 data points. You can cut them anyway you want, look at ROCE on an average or closing basis.

And just finally, for this slide, as Chris noted, we've announced this morning growth in our final dividend of 3%, which if you couple with the interim dividend, which was unchanged, previously announced, results in a 2% increase in the full year dividend, really reflecting the Board's confidence in the sustainability of this performance this year and also recognizing the importance of dividends to shareholder returns.

So let's move on to the cash flow where, as we've said this morning, pleasing progress. Operating cash inflow of GBP 628 million, some GBP 205 million above the prior year. And the improvement really driven by significant working capital inflow of GBP 107 million, slightly offset by higher project mobilization spend, and we'll cover that shortly. So the working capital inflow of GBP 107 million, which we've broken out in the box on the right, represents a significant improvement over last year's outflow of GBP 56 million. Constituent parts of GBP 78 million inflow from receivables, which includes around GBP 90 million reduction in our Power Solutions Utility receivables, and I'll come back to that in a moment. And as said to you before, our ability to manage and deliver the growth in return on capital does require us to improve our working capital efficiency across the business. So that's an important component for us as we move forward.

Fleet CapEx was GBP 189 million in the period. And if you just look at that split across the different businesses, GBP 71 million invested in Rental Solutions, primarily on temperature control equipment and the renewal of our North American oil-free air fleet. In Power Solutions Industrial, we spent GBP 69 million, which included GBP 26 million for the Tokyo Olympics. And finally, the balance of GBP 49 million spent in Power Solutions Utility, major areas of spend, about GBP 13 million on diesel G3 to G3+ refurbishments to the more efficient variant of the G3+. About GBP 16 million spent on next-generation gas sets in support of the new work and some of the specific contracts that Chris has referred to already, and GBP 12 million spent on project-specific fleet on our PIE-A contract, the 15-year contract in Brazil.

And finally, for this slide, net debt closed at GBP 584 million, a reduction of GBP 102 million versus this time last year, with the net debt-to-EBITDA ratio closing at 1x. It's worth noting that this improvement of GBP 102 million comes despite the inclusion this year of about GBP 100 million of lease liabilities relating to IFRS 16 that we took on the balance sheet prospectively on Jan 1, 2019. I've spoken previously about the effects of IFRS 16, and they might be more material in some of the other businesses you follow, but Appendix 6 sets out the balance sheet and P&L impacts of IFRS 16, if you want to understand that a little bit better.

So let's move to the familiar traffic light slide for working capital, where I'm very pleased that we've got all 3 lights green at the year-end. As I mentioned a moment ago, significant working capital improvement in the year. And as Chris mentioned, the first working capital inflow for this group since 2009. We achieved an GBP 8 million decrease in inventory during the period, reflecting a number of initiatives in place across the group and which we've touched on at our interim results in the summer. A significant reduction in trade and other receivables, driven by good progress on cash collections in Power Solutions Utility, and we'll just come back to that performance in a moment. And then in terms of trade payables, we saw a GBP 21 million increase in trade payables. This is really the result of about GBP 52 million of deferred revenue on the Tokyo Olympics following receipts of milestone payments on the contract, partially offset by a reduction in fuel creditors following the off-hire of some of our large utility contracts in Brazil where fuel was in scope.

And in summary, while there's more to do in this space going forward. I'm pretty pleased with our focus on working capital finally delivering some tangible results in this year's full year outturn.

So if we just look specifically at the trade receivables, we've delivered strong growth in this -- strong improvement in this area, a reduction of GBP 58 million on the balance sheet trade receivables balance year-on-year. And this follows an increase in the trade receivables of the group in the last 5 years. Within this, as we've already mentioned, pleased with the results taken in Power Solutions Utility, specifically, with a GBP 91 million reduction. And as you can see from the graph, the orange bar here at the bottom, Power Solutions Utility trade receivables now represent less than half of the group's trade receivables.

So having talked about a part of the business where we've seen real success, we have to recognize there's more to achieve in the receivables in the other 2 businesses. Specifically, the Power Solutions Industrial balance was up GBP 6 million, largely associated with increased activity, and we've seen a GBP 27 million increase in Rental Solutions as we focused on tackling the level of accrued income or unbilled revenue in this business over the last year. As you may recall, this was primarily an issue in North America, where we saw higher activities in the second half of 2018 relating to the hurricanes. And then quite frankly, we failed to keep pace with the invoicing after losing some folk in our U.S. billing team. However

We have been successful in reducing that balance through the course of 2019. As a consequence, we now have a higher trade receivables balance that we need to focus on to make sure that we can get those invoices paid in a timely manner.

So drill 1 level down further into the utility position. Just a reminder, this graph -- chart is in dollars. We just report internally in dollars, it's easier for us to understand what's going on in these projects, so a dollar-denominated slide. The slide shows the progress we've made over the last 8 quarters to reduce the overdue receivables here, showing invoicing per quarter and collections by quarter. And what you can see is that since the first quarter of 2019, where we received less cash than we invoiced in the period, we've achieved a net inflow in the 3 following quarters. It's also worth noting, as you can see, that we don't expect this process to be linear. Timing of receipts from our customers in this business can be quite volatile, as I'm sure you've learned over the years.

And you'll see actually the absolute level of invoicing is also lower than 2018, reflecting the reduced scale of the utility business over time. And actually, specifically, the off-hiring of the contracts in Brazil that included fuel. And we rarely talk about including fuel numbers. But if you look at the stats of the Power Solutions Utility, you look at the fuel revenue year-on-year, you'll see a significant reduction in that fuel revenue really relating to the contract which off-hired in Brazil and that clearly had knock-on effects in terms of the absolute levels of invoicing during 2019 as we were no longer invoicing the fuel on that contract. And while our focus on this debt will continue, I have to continue to caution you that fully winding ourselves out of some of these debt exposures will take some time.

So the moment you've all been waiting for, IFRS 15, here we go, fulfillment asset. We've had a lot of questions about this, not just this year, but on the introduction of IFRS 15, and specifically on our capitalization of mobilization costs. So I just wanted to spend a few moments, both reminding you about the accounting methodology and also providing a little more detail on the makeup of both the balance and the in-year spend, and that's what this slide seeks to do.

So just as a reminder, IFRS 15 requires to -- that all the costs to fulfill a contract are essentially matched with the revenue recognized, and how novel that is. And therefore, all our upfront mobilization costs taken to the balance sheet until the revenue starts to be recognized, at which point those costs are amortized on a straight-line basis through the life of the project as the revenue is recognized. Typically, although not exclusively, these contracts tend to be in Power Solutions, where we generally see our larger, longer-term contracts.

And this chart shows the movement in the fulfillment asset on the balance sheet over 2018 and 2019 from when we first adopted the standard at the beginning of 2018. We've showed you what we spent in the period and therefore capitalized what's been amortized through the income statement as we've begun to recognize that revenue on those projects, you see the amortization and then the lesser movements, which are essentially provisions for demobilization and some exchange rate movements, making up the balance.

And in addition, on the table on the right, we've just listed out some of the larger projects where we've incurred spend in each of the 2 years, and I suspect all of those that we pulled out there will be familiar names. So as you can see, the 2018 spend of GBP 44 million included significant amounts in respect of PIE-A in Brazil, which, as you know, runs for 15 years. And the 295 megawatts of gas and diesel projects that we mobilized in Bangladesh in 2018, those run for 4 and 5 years, respectively.

The GBP 66 million spend in 2019 is in the range that I spoke about at the interims of between GBP 60 million and GBP 70 million, with the year-on-year increase, primarily driven by the GBP 18 million of spend for project for the Tokyo 2020 Olympics. Other notable projects this year include GBP 10 million on the 50-megawatt HFO contract in Burkina Faso that's now on hire and about GBP 3 million on the Granny Smith gold mine project that Chris showed you earlier on the Rental Solutions slide. And a further GBP 5 million on PIE this year as we've been completing the work to bring the last of those 26 project sites online.

The mobilization spend is entirely project-specific and reflects a combination of size and complexity with project duration also sometimes a factor in the spend level. Accepting the uncertainty that this creates in terms of predicting likely mobilization spend on new work that we have yet to secure, we know that our spend on Tokyo will continue around GBP 25 million to GBP 30 million this year incurred on Tokyo. And excluding this, we don't expect spend to be materially different from the 2019 ex Tokyo level of GBP 48 million. Clearly, as we move into 2020, the amortization will step up because all of that Tokyo mobilization asset, both what we carry of the December balance sheet of '19, plus any additional mobilization spend that gets capitalized prior to the games kicking off will flow through the income statement as the revenue is recognized.

Enough of that. So just to close with the outlook. So for the full year, we expect profit before tax in line with market expectations, subject to any future FX movements. At the moment, we're facing a year-on-year currency headwind on the group profits of around 8% as detailed in Appendix 4. And as Chris noted, more sharply felt in Power Solutions Utility in terms of the different business units simply because of the currency mix in that business relative to the others. But 8% headwind overall 2020 on 2019. Look, you're obviously better placed than me to know, but I don't believe that full level of that headwind has yet been reflected in everyone's forecast. It's clearly been moving around through the back half of this year. So for those analysts that haven't updated their forecasts for some time, I might suspect that, that will result in a little bit more headwind coming through forecasts as people update.

Our effective tax rate guidance remains at 35% for this year, subject, as I mentioned earlier, to any material changes in the geographic mix of the profits across the group. And this morning, we've reiterated our confidence in our ability to achieve mid-teens ROCE in 2020 and beyond. And in that context, I just wanted to highlight a couple of points regarding our expected balance sheet progression this year. Firstly, as you can see, the outlook for fleet CapEx is GBP 200 million to GBP 250 million, which will include around GBP 20 million for the Olympics. This remains below -- slightly below depreciation for another year. And secondly, we expect further progress on working capital. Just, however, on the second point, we need to recognize, we're going to see increased inventory as a result of significant cable purchases for Tokyo, which, as you know, we take into inventory. And I expect to see a high level of fuel on the PIE-A contract as all the sites will be up and running at that point. And given the distances to fuel supply, we will be carrying fuel reserves on those sites, which will sit on our balance sheet for the period until used.

Additionally, the deferred revenue in Tokyo will obviously unwind as the games progress. So overall, this profit outlook, coupled with continued capital discipline should support another good year of cash generation for the group. Notwithstanding all of this, as the outlook in our statement this morning confirms, we're closely monitoring the development and potential impact of the coronavirus outbreak, which with the current levels of uncertainty has not been factored into our outlook.

And with that, Chris and I will happily take any questions.


Questions and Answers


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


Thank you, Heath. So we go to questions now. If you could say your name, where you are from and then ask the question, that would be great. So Will?


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


Will Kirkness from Jefferies. Three, please, if that's okay. Firstly, just on the shape of the fleet. You talked a bit about diesel versus gas. I just wonder whether you need to accelerate and move to gas more, and if there's anything you can do to help that.

Secondly, just on the outlook for Y.Cubes to be built in FY '20.

And then lastly, perhaps for Heath, just around cost savings, specific areas you need to look at this year to hit that 2021 run rate.


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


So yes, shape of fleet, gas and diesel, difficult one to answer. We do see increased demand for gas. We are ordering more gas sets -- next-gen gas and likely QSK60 to meet that demand. I'm not sure how much we can do to accelerate the shift to gas. I think an area that we are increasingly looking at is diesel. We are not buying any more diesel, and we haven't for a number of years for our container fleet, we do for our canopy fleet. And utilization at 70% is a little bit below where we would like it for the container fleet. So we are looking carefully at that at the moment. And I would expect that over the next 5 or so years, as a result of what we're doing and these early indicators we're seeing in the market, coupled with the hybrids and the evolution of hybrids, you will see a greater proportion of fleet becoming gas, a higher proportion than we probably thought 2 or 3 years ago. There seems to be a lot more activity around gas and hybrids. So that's one element of the answer.

Now on the diesel side, and we are going to talk more about it in August, I suspect what you'll see happening in diesel is, over time, you will see the average node size reduce and storage deployed alongside those nodes to take up any variance or large variance in the load that we have to meet. And I think you will also see more synthetic fuel, and we already offer synthetic fuel to customers. We are promoting that at the moment in the U.K., and we're beginning to look at the supply chain in Europe and in North America. And through a mixture of smaller nodes, storage, fuel and the newer emissionized technology, so Stage V in the U.K. -- in Europe and Tier 4 Final in North America, you get to a diesel fleet over time that has almost no environmental footprint, hugely reduced from where we are at the moment. So I mean there's a little bit about it. We're also beginning to think about what other alternative fuels we could start to introduce the fleet. So I know I've wondered on a bit from your initial question, but it gives you a bit more background to how we're thinking.

On Y.Cubes, we've got 30 under contract, and I think by the end of this year, at the moment, we're planning to build about 70. It wouldn't surprise me if we had to build more, but it will depend on how that pipeline begins to materialize. Heath?


Heath Drewett, Aggreko Plc - CFO & Director [4]


And then on cost savings. So I think it's continuation, probably, on the 3 big areas this year, which is service materials, which is all around leveraging the data that we're getting off the machines, adopting consistent service patterns, condition-based maintenance, which is maintaining the equipment when it needs it based on its condition rather than purely on a time basis. So service materials is a big bucket of improvement. Some of the support functions and location, sort of office location savings will start to come through back end of this year. That was probably one of the longer lead time items. It doesn't always pay to make those decisions immediately till you've got office commitments, cost of moving people to different locations. So some of those will come through more significantly this year.

And lastly, utilization and the benefits of improved utilization, as Chris referred to, we expect to see. Certainly on the gas fleet, utilization stepped up this year. Diesel is more difficult and more stubborn, but we need to see some utilization benefits coming through. So those are probably the 3 service materials, the support functions, office location costs and utilization.


Robert John Plant, Panmure Gordon (UK) Limited, Research Division - Analyst [5]


It's Rob Plant from Panmure Gordon. You mentioned that North American oil and gas was up, how did it progress across the year? And what's the outlook?


Chris Weston, Aggreko Plc - CEO & Director [6]


Yes, up quite strongly on the year before, so up about 40%. We did see a slowdown as the year progressed. We come into this year, and activity levels still look good. So when I look at the pipeline, but please bear in mind that pipeline only goes out to a couple of months; so the prospects in the pipeline are still building. It is a competitive market. There is the uncertainty around oil price and coronavirus. But at the moment, activity levels look good in the -- certainly in the Permian, which is 70% of the oil and gas revenue in North America.


Daniel James Hobden, Crédit Suisse AG, Research Division - Research Analyst [7]


It's Dan Hobden from Crédit Suisse. Just 2, if I may. One, if you could speak just a little bit around the margin impact of Y.Cube and maybe how that changes the scope of the overall projects and how we expect that to trend over the next sort of year, 2 years as they increase?

And then the second one, so consciously, you don't want to speak about Tokyo 2020 too much, so maybe if we think about some of the other events that you have in that region, I know one of the Gulf events was canceled. I think the Japanese Marathon or the Tokyo Marathon was reduced from mass participation to elite event or elite athletes. How have you seen, over the last, what, do we call it 2 months, 2 and a bit months, have you seen the events market and maybe what protections do you have in place for that? Sorry.


Chris Weston, Aggreko Plc - CEO & Director [8]


That's okay. So margin impact of Y.Cube, I'm not sure there is particularly a margin impact. It's pricing in well, and we're earning the kind of margins and returns that we would expect typically for a renewable project. I mean we can put a Y.Cube in for 6 months or a year, maintain it as part of the fleet, and I'm happy with how that prices through. If in a hybrid you have things like solar, then you need a longer duration contract. So really, 5 -- 5-plus years. But we are very happy in deploying capital into that area at the moment, and the returns and margins we get are very much in line with expectations.

So events, so coronavirus, it is -- we are absolutely beginning to see some impact, but it is not a material impact. So some events are being canceled or postponed. Formula One, Formula E, that kind of thing, some of the running events that you've talked about. We are beginning to see some travel restrictions, but again, nothing that threatens our operation. We are doing what you would expect us to do in watching it carefully and planning as best we can for what this outbreak may or may not look like. But I mean you have to forgive us, this is a very, very fluid situation and difficult to predict what may or may not happen. Some of the precautions we take are the normal ones you would expect about restricting travel to some countries and self-quarantine and that type of thing, nothing particularly out of the ordinary at the moment.



Rajesh Kumar, HSBC, Research Division - Analyst [9]


Rajesh Kumar from HSBC. Two, if I may. First is, if we look at your 9.5 or so capacity in terms of total generators you have, it might be a bit more, you have not been -- you've been spending CapEx lower than depreciation and the diesel fleet was bought before the gas fleet. So say, end of 2020, beginning 2021, we should be seeing a lot more depreciated diesel fleet. And just by the mix effect, you should have more gas. So how does the shape of the fleet with the planned disposals look at the end of 2020 in your view? I think we can start building on that.

And the second part of the question, obviously, is after the benefit of Tokyo Olympics, coronavirus providing, how do you see your capital allocation shape through after 2020? Which areas, gas you have indicated, but in terms of geographies, end markets you would be focusing on?


Chris Weston, Aggreko Plc - CEO & Director [10]


Okay. I'm not sure I can give you too much clarity on what the shape of the fleet other than -- maybe other than directionally, you will see, I think, the diesel fleet shrink beyond 2020 and gas grow -- and gas very much being the transition fuel to a low-carbon future. Heath might want to comment on depreciation and what that looks like. But that is directionally what you see -- you will see. You will continue to see gas taken up in Rental Solutions and Power Solutions Industrial, less so in a canopy fleet. And that's why, as I said earlier in answer to Will's question, you will start to see small-scale storage and synthetic fuels going through that fleet.

I do believe that for many, many, many years to come, there will be a need for thermal power generation in the type of work that we do. You just can't do it any other way. You look at that Granny Smith photograph, where you've got 21 hectares for 8 megawatts and less than 1 football pitch for 22. That kind of power density and reliability is going to be needed for a long time.

And then capital allocation beyond 2020. As I said, we are coming back in August, and we intend to talk in more detail then about what you might expect to see, but it isn't going to be massively different from what we do at the moment.

Heath, do you want to add anything to any of that?


Heath Drewett, Aggreko Plc - CFO & Director [11]


No, not really. I mean, as I said, 2020 CapEx will be slightly less than depreciation. 2021, they could, well, be more in line. So clearly, we've got kit coming on, which will replace the depreciation of the fully depreciated equipment. I mean in terms of the overall 9.5 gigawatts that we've got, it's down about 4% in diesel. And it's down a couple of percent in gas. And if you split that gas, actually it's all the QSK60s retiring and end of life, but actually, next-gen gas sets significantly up and double-digit growth in next-gen gas, which I think reflects what we expect to see going forward. So I'd probably just look at the delta between depreciation and CapEx in terms of the main indicator. And that's closing -- that gap is closing this year and may have closed completely into 2021.


Chris Weston, Aggreko Plc - CEO & Director [12]




Andrew Nussey, Peel Hunt LLP, Research Division - Analyst [13]


Andrew Nussey from Peel Hunt. Just following on from the oil -- U.S. oil and gas question. Can you give us some insight in terms of how the volume and price dynamic has played out through the course of the year, given it's obviously been quite an important influence on profitability.


Chris Weston, Aggreko Plc - CEO & Director [14]


In oil and gas?


Andrew Nussey, Peel Hunt LLP, Research Division - Analyst [15]


U.S. oil and gas.


Chris Weston, Aggreko Plc - CEO & Director [16]


Yes, so I suppose, a bit more detail about that. We have seen -- I mean it's definitely a competitive market. There are elements of supply that are quite tight, particularly around technicians and skilled resource to where we need it. But pricing has been pretty good, actually. And when you compare to the peak of prices in 2014, diesel is about back to those levels, gas is still 20%, 25% of those levels. And I don't really envisage it increasing any further.

And just while I'm on that, and when you look at volumes, volumes out of the Permian at the end of last year were about, I think, 260 megawatts, playing against a peak of about 320. So they still have -- would still have a little way to go. Now I'm not saying -- suggesting they will get there. But there is activity that we're seeing, continued activity in the Permian. And the Permian is 70% of North American oil and gas. We are seeing activity pick up elsewhere, but it's less pronounced. And we're happy with having more assets in the Permian, which is the lowest cost and most productive basin in North America. Did that help? Thank you very much.

All right, Paul. You nearly lost your moment.


Paul Daniel Alasdair Checketts, Barclays Bank PLC, Research Division - Director [17]


It's Paul Checketts from Barclays Capital. I've got 3 questions and there might be a couple of subparts. Can I ask about the -- just touch on the Ivory Coast contract. Were there any other bidders on that new work?

The second is around hybrid. What -- you've got that pipeline, do you think those bids will go -- that work will go through an RFP? Or will it be a bilateral discussion?

And on hybrids, from the thermal perspective, are you able to use all the kit, please? And then the last one is around the trade receivables. Could you give us -- just elaborate a bit on it, Heath, please, in terms of the movement? I'm interested in things like, to what extent the reduction was due to, one, concentrated data that you managed to get paid, how the concentration looks now and why the bad debt hasn't reduced at the same time, bad debt provision?


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


So if I take the first 3, then Heath, you can take the last one. Ivory Coast, I mean, we discussed within the whole time their power requirements. They didn't have an RFP. Whether they talked to anyone else, I don't know. But I obviously was pleased with how those went. And I'm pleased with the ongoing discussions about what may happen beyond 2021. We have a good relationship with them.

On hybrids, it's a bit of a mixture. Some of them might be existing contracts where we might suggest to the customer that they add a hybrid element, and that may not be an RFP, but we are absolutely seeing RFPs in this market. Generally in an RFP, it is a consortium that you're up against. So you'll have a lead on that, who will then subcontract much of the work. But we're happy, as I said, with what we're seeing in contract conversion and prices, and I think we did a little better than I expected to last year in the contracts we landed. And absolutely, you can use any kit in it.

So the modularity that we bring as Aggreko is a very important part of the attractiveness of that. The fleet mix that we can put together and then integrate using the Y.Q application that we bought through Younicos is impressive. And it's an important part of our proposition. I mean flexibility in kit, our ability to integrate these various elements of power generation, the different levels of customer service and the terms and conditions we put about it. There's much more to our customer proposition now. And I think we are more disciplined about that than we ever have been in the past. And I think that plays to our strengths. Heath?


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


So trade receivables, no one sort of single big mover in the year. I mean the 3 regions: Africa, Latin America and Bangladesh. Bangladesh, I would put down to actually, we saw some buildup of debt in Bangladesh when we went on these new contracts in 2018, got behind with their processes and have recovered that, now understand how to get invoices through that project and through the team. So that was the sort of Bangladesh position. Not particularly a legacy buildup of debt, but a more recent issue in terms of just understanding how to get those invoices paid.

Latin America, again, not legacy contracts, but we'd seen a buildup of debt on those contracts, which recovered through 2019. And in fact, the slippage in the first quarter of 2019 was actually largely Latin America issue related actually to the contract where we had to fuel on that contract. That's now off-hired, fully paid. So that recovered its position through 2019.

And then on the legacy debt, it's more an Africa issue across a raft of different debtors in Africa. So no one particularly big movement but a raft of different debtors across the African region. Some off-hired, some still ongoing. So not necessarily all off-hired contracts, some current contracts where we've got behind and have now recovered that to some degree. And so quite a mixture in Africa.

In terms of the bad debt provision, I mean we provide where the customer disputes the debt or where our level of confidence about their ability to pay is diminished. And that, on the dispute issue, rarely reverses. If they've disputed the debt, then they continue to dispute elements of the debt and we continue to be provided.

Where it does shift a little bit is our confidence around their ability to pay. And in some cases, during the course of this last year, we've seen that position improve. On customers where we had provisions, we've lifted the provisions off those customers where we've seen cash flow, and we've moved it to where we have less visibility of cash in the hands of our customers that could then come to us. So specifically, Yemen and Venezuela. We've increased the provisions on both of those or -- contracts in both of those countries over the last 12 months, and we've effectively funded that by cash flow that's come through on customers where we were provided in Africa, we've seen the cash come through. We don't think the provision is necessary now and moved that. So that's the broad shape of what's been going on, on the provision levels. And as you say, that leaves the provision pretty much flat year-on-year.


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


Okay. Any more questions? We will call that a wrap then. Thank you very much.


Operator [21]


Ladies and gentlemen, this concludes today's call. Thank you so much for joining us. You may disconnect your lines now.