Aggreko expects difficult markets into 2016

Leading temporary power and temperature control equipment provider Aggreko is to reduce capital expenditure in its fleet by 10% after telling investors it expects difficult market conditions to continue into next year.

As well as the half-year results, Aggreko has also announced the findings of the business review that started in March and were implemented into a new organisational structure that took effect on 1 August.

The company, which issued a profits warning last month, announced its half-year interim results today. It said capital expenditure would be “flexed from £300 million (€430 million) to £270 million (€387 million) reflecting current trading conditions”.

The results themselves show power project revenues down by 9% due to pricing issues in Bangladesh and lower utilisation on a contract in Panama, and Aggreko said: “2016 will be a year of change in the business with markets remaining difficult. Margins and returns are likely to be lower in the short term.”

Though group revenue, which also includes Aggreko’s temperature control business, was up 2% year-on-year to £781 million (€1.12 billion), the financial results described underlying revenue as “broadly flat” and profit before tax fell by 21% to £102 million (€146 million).

Aggreko, which has identified £80 million (€115 million) of savings to be made by 2017, reorganised its business structure into Power Solutions and Rental Solutions units as a result of its business review.

“While we initially expected our financial performance this year to be broadly in line with last year, these challenges mean that, as announced on 24 July, we now expect profit before tax to be between £250 million (€358 million) and £270 million (€387 million) for the full year,” said chief executive Chris Weston.

Initial profit forecasts had been around £289 million (€414 million).

“Our new organisational structure, which incorporates Rental Solutions, comprising our local business in developed markets, and Power Solutions, comprising our power projects business and local business in developing markets, better focuses the business on our markets and our customers, providing a more effective platform for growth,” Mr Weston added.

Europe, Middle East and Africa was the best performing business segment for Aggreko, with revenue for the six months to 30 June up 12% year-on-year to £344 million (€493 million). This was helped by the group’s temporary power supply contract for the European Games sporting event in Azerbaijan.

Revenues in both the Americas and Asia, Pacific and Australia fell, by 3% and 14% respectively, due mainly to the loss of the World Cup in Brazil and the downturn in the Australian mining sector.

Following its business review, Aggreko has announced a number of priorities for both the Rental Solutions and Power Solutions businesses.

For Rental Solutions, the company said it will improve its account management service to customers; enhance its coverage of the oil and gas, petrochemical and refining, and mining and events sectors; develop the temperature control business including loadbanks; and develop its digital offering.

Aggreko believes Rental Solutions can grow at around 2% per year.

Power Solutions will look to optimise the depot infrastructure deployed in recent years and move to a hub and spoke model, as well as mobilising and demobilising projects to address inefficiencies and variability in site operations.

“At the group level, our reorganisation will remove duplication, which combined with an improvement in procurement practices and improved project site efficiency, we expect will generate savings of £80 million (€115 million) by 2017,” the interim management report said.

“These savings provide an option to balance reinvestment in the business for growth and with support to margins and returns. There will be a one-off cost of around £30 million (€43 million), which will largely be incurred in the current year, to enable the delivery of these savings.

“The majority of this work will be completed over the next two years. To minimise the risk associated with delivery a programme management office will oversee the whole programme, providing assurance and risk management, thereby allowing the rest of the business to focus on our customers and day to day operational requirements.

“The market environment has changed, but Aggreko has a unique business model. There are good opportunities for growth in each of our markets. To capture these, management is focusing on three business priorities: customer; technology and efficiency.

“As a result, we expect to grow faster than our markets whilst delivering margins and returns of around 20% in the medium term. There will be significant change in the business in 2016 and the market environment remains difficult, so we anticipate that margins and returns will be lower in the short term.”