Aggreko : 2020 Half Year Results Presentation transcript

Aggreko 2020 Half Year

Results

Thursday, 6th August 2020

Transcript produced by Global Lingo

London - 020 7870 7100

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Aggreko 2020 Half Year Results

Thursday, 6th August 2020

Introduction

Chris Weston

CEO, Aggreko PLC

Welcome

Thank you very much, Leona. Good morning, everyone, and thank you for joining us this morning. I am going to talk upfront, it might be a little longer than normal. In addition to covering each business unit, I am also going to talk about how the virus has impacted Aggreko and a little bit about the future as well. I will then hand over to Heath, who will do a financial update. And there should be time for Q&A at the end. And I am very conscious that some of you probably need to get on to another call after this.

Our response to COVID-19

So the business came into 2020 in a very strong position. We had good momentum, and we were confident about meeting consensus, delivering improved margins and a return on capital employed above 14%. But then the virus came along. So the first thing I want to do is play a video to you that shows some of the things that have been going on in Aggreko over the last few months. So Leona, if we could play that now, that would be great.

[VIDEO]

So that video was made from Yammer feed. And that, along with teams, have become two of the most used tools in Aggreko over the last few months. And I hope it gives you a good sense of some of the areas of focus and what we have been up to in Aggreko.

As soon as the pandemic was declared, we settled on four near-term priorities:

• Reassuring our people;
• Maintaining our financial strength;
• Supporting our customers; and
• Emerging Strong.

So just touching on these. First of all, our financial strength and our costs, we acted immediately. And in addition to the normal cost discipline within the Group and the Power Solutions cost out programme, we also froze any recruitment activity, and we looked very hard at our temporary headcount, and we have reduced that over the last few months by 24%.

We also reduced all the more discretionary areas of spend very quickly, and that was down 29% in the first half. Typical example might be travel, which as you would imagine, was down materially more. We also cancelled the 2020 bonus and the 2020 salary review. And that has definitely been of extreme importance as we have managed to the first half and the impact of the virus.

We have also been more proactive with our contact with our customers, more proactive with credit management, and we have had increased focus on billing and collections. And that, I am pleased to say, has led to very good working capital performance, £104 million inflow from receivables.

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Touching on our people, like many companies, many started to work from home. So overnight, 3,500 people started to work from home. And we have 4,000 people logging into Teams every single day, and the infrastructure has held up well. Health and safety has continued to be of prime importance, and I am very pleased to say that the leading indicators around risk reports and virtual management safety walks have continued at the high levels that we expected.

We have had 166 cases in the business, of which 41 are still active. Of those 166 positive tests for coronavirus, 60% were in Latin America and 70% were technicians. Almost all of them were asymptomatic. We have continued to support our customers. All depots and project sites have remained open and operational. Techs continue to support customers. And we currently have about 270 of them stuck on project sites all over the world, some of them up to four months longer than they expected to be.

And as I said, we have upped our contact with our customers. We have provided field hospitals, temporary morgues, support to industrial processes that have had to step up volume to be able to deal with demand. And that, again, has been all over the world. And I am pleased to say, in coping with all that, our customer satisfaction, our net promoter score in June was 75. It was 66 a year ago.

We have also worked on our fleet, making it rental ready. We have continued to assess and act on our depot and portfolio of projects with a view to either close or improve returns, and we have also continued to invest in our hybrid capability. To-date, we have not made anyone redundant. We have not furloughed anyone, nor have we taken any government support.

We currently expect general business activity to revert to pre-COVID levels in 2022. In the meanwhile, as we continue to work on our priorities, we expect over this time to drive meaningful improvements in operating margins and capital efficiency.

Headlines

So turning to the results. All the numbers I mentioned are underlying, so they exclude the exceptional items. They exclude pass-through fuel and currency.

Group revenue was down 12%, driven by the virus, the impact on the oil price, the impact on the events market and reduced economic activity. Most significantly impacted was Rental Solutions, where revenue was down 18%. Group operating profit was down 15%. The margins were supported by the cost actions that I have talked about earlier. The biggest impact was driven by the 45% decrease in our Power Solutions Industrial business, primarily due to the challenging environment in our business in Eurasia.

Balance sheet has been really strong, which has been pleasing. And our net debt at £499 million is down £285 million over the last year. Following the withdrawal of the 2019 final dividend, we are resuming the dividend with an interim payment of 5p. I would like to be clear, this is not a rebasing of the dividend nor is it a change in policy. It simply reflects the lower earnings in the period, as well as our financial strength and our confidence in the future.

As you are all aware, we have been through a very thorough exercise looking at all of our assets on the balance sheet and the impact on those assets in the light of the virus, and we

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have taken a non-cash exceptional impairment charge of £181 million, and I am going to leave the detail of that to Heath.

Rental Solutions

Turning to Rental Solutions. I have to mention the photograph there, which is us providing power at an event in Spain. And as you can see, our generators running on biofuel, HVO, hydrogenated vegetable oil, and that is something that we are increasingly doing in Europe and beginning to see a little bit of in America.

Rental Solutions' revenue, as I said, was down 18%. North America was a little bit more, down 19%. Continental Europe and Northern Europe were a bit more than that. AusPac was much less affected, down about 5%. I am going to focus mainly on North America, where revenue was impacted by the oil and gas, petchem and refining and events sectors. Oil and gas and petchem were both down 30%. Events, which was smaller, was down 47%.

But we saw good growth elsewhere actually. So growth in utilities was up 30%, some really good work in California. And building services and construction was up 24%. And we now have a well established and very effective team there in a sector that is fairly new to us.

The business outside oil and gas has been growing strongly over the last few years as we have implemented our focus on sectors. Volumes in North America were only down about 3%. And if you take out oil and gas, they were actually up 21%. So there has been some price pressure, primarily in oil and gas, where prices were down about 10%. Outside that sector, they were down about 5%.

Utilisation, as you can see, is relatively flat. So although volumes across Rental Solutions have been down, we have reduced the fleet. We have disposed of diesel fleet as part of the Group disposal programme, which ceases sell or scrap about 400 megawatts of diesel fleet. And we have moved gas fleet into Power Solutions Industrial, where we see good demand for gas.

Rental Solutions - Signs of improvements

Just turning to some of the recent trends. The chart on the right there, you can see the difference in revenue between this year by month and last year. And you can see oil and gas in dark blue and the business outside oil and gas in orange. So you can see the low point in April, and we have seen an improvement since April. We saw a slight step-down in July, largely due to North America and the resurgent virus in North America.

Underlying some of that or all of that, in fact, the business wins were at their lowest in April. And we have seen a steady improvement since then, but they are still about 15% below 2019. And they have plateaued over the last few weeks due to North America. Megawatts on hire, the low point was a bit after that in May, and we have seen a steady improvement since then, but they are still about 8% below last year.

Power Solutions Industrial

Power Solutions Industrial had a tough first half, revenue down 4%. If you take out the Olympics, revenue was down 8%. Most regions were impacted by the virus, with two of our larger ones, Eurasia and Middle East, which are most exposed to oil and gas, down 16% and 8%, respectively.

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On the other hand, Africa was up 14%. Good growth in local businesses in Nigeria and Angola. And particularly in mining, which was up 44%, and it is now about 50% of regional revenue. And that is projects like Syama, the big hybrid that we are mobilizing in Mali. And also this picture here, which is the Kinross Gold mine in Mauritania, which is an HFO deployment.

Operating profit was down 45%, driven by Eurasia. There are a few things going on here. Diesel volume was down 10%, but rates were good. Diesel volume was down because of the OPEC+ arrangement, and diesel is primarily used for drilling and there was less drilling requirement. So that was down.

Gas volume was strong, up 18%. But due to competition, rates were down 27%. And we also had a fairly material contract that had a lower off-take arrangement. That contractually reverses at the beginning of 2021. And we also had delays due to the virus in commissioning projects that we had expected to commission by now, but now because of the virus would not commission until later on this year.

We are confident about the future and the margins in this business and what 2021 holds for it. Utilisation, you can see was off a little bit. Megawatts on hire were largely flat, down 1%. If we unpick that a bit, diesel was down 8% and gas was up 24%, and was up across all regions except Asia. When you look at the fleet that goes into this, the diesel fleet was flat, but the gas fleet was up 15% as we moved equipment in from elsewhere. And that combination results in the slight drop in utilisation that you see there.

New work was much the same as it was in the first half of 2019 at 223 megawatts, playing 245, of which in Eurasia was 148, playing 127 a year ago.

Just to touch on the Olympics. Preparations continue for the postponed games pretty much as normal. We have removed any equipment we had deployed back to our warehouse so venues can be used by the public. We do have a skeleton team in country, 40 or 50 people. At its height, it will be 500 or 600 people. And we are in discussion with TOCOG regarding the postponement and the cost of it. The contract is a little larger than the $250 million that I mentioned at the prelims, and we have invoiced and collected 60% of that contract.

Power Solutions Utility

So turning to Power Solutions Utility. The photograph there is a 48-megawatt site in Mexico that we mobilised during the virus and the team that did it that came from North America and Latin America had to quarantine together to be able to commission that site.

Revenue here was down 7%. A couple of things going on, some off-hires that we knew about in Angola, Benin and Brazil, which amounted to about 250 megawatts of diesel, partially offset by on hires in our PIE project in the Amazonas, which is not quite fully mobilised yet, and the 50-megawatt HFO project in Burkina Faso. So amounting to about 184 megawatts. So a bit behind the off-hires.

The bigger impact was the repricing of our Ivory Coast contract, which now runs until the end of 2021. We gave a material discount there of 25% but are happy with the profitability of that contract. The swap out, we are swapping out 100 megawatts of QSK60s and replacing them with next-gen gas, completes in September this year, which is probably about a month late.

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Prices, excluding Ivory Coast, were pretty stable. Profit was up 9%, reflecting the cost out actions that I have been talking about earlier. Utilisation, average megawatts on hire were down 10%, and we reduced the fleet across both gas and diesel at similar amount. Diesel was disposed of or strapped and gas moved into PSI. So utilisation remained roughly flat. And the team has done some outstanding work in the management of receivables and their continued cash collection.

And as Heath will show later, with receipts ahead of invoices by about £18 million. So that is the third half in a row that they have achieved that. New work was 237 megawatts, playing 213 in a year ago. Pipeline is still pretty healthy. We have not seen any dramatic change in that, at around 10 gigawatts, much as it was pre-virus. It is getting harder to convert contracts because of the restrictions around the virus.

Having said that, extensions are running better. So we are extending about 85% of the opportunities that are presented to us. We do have, as you would expect, operational challenges on mobilisation. I have mentioned the Ivory Coast. Big project in the Philippines, I mentioned at the full year, called INGRID, it is 150 megawatts of diesel. We will complete the install by year-end. We then have to go through regulatory approvals, and we expect commissioning in the second half of next year.

Syama, we have 10 Y.Cubes already on site. They will be commissioned later this year, as will the first 10-megawatt power block, with the next two following in Q1 next year. And the Kurdistan gas job, 165 megawatts has been delayed and will see over the next year. And I mentioned all of those because of the full year I talked about the positive impact that they would have on margins and returns in 2021. And obviously, that will be delayed slightly because of the delayed commissioning.

Positioning Aggreko for the energy transition

So that takes us through the business units. I just wanted to touch on some areas that look to the future. One was around our hybrids and the progress that we are making there. We have seen strong revenue growth, but it is off a very small base. So revenue has doubled to £8 million. And the returns that we are seeing in this product are good.

So we have a total of 220 megawatts of hybrid, either on hire and operating or contracts secured, and that is up from 185 megawatts at the prelims. That splits 159 megawatts of thermal, 36 of solar and 25 of storage. It is mainly for spinning reserve displacement and power quality. And contract lengths vary, but generally they are five years or longer. The longest is 16 years. The shortest is 6 months, which is for the Olympic Games.

The pipeline is much the same size, nearly 1.2 gigawatts, 80-odd opportunities, mainly made up of mining and utility companies. That is about 80% of it. And I have to say a good chunk of it, half of it, is in Africa, and they can be anything from full hybrids to storage only. We are doing a lot elsewhere. We are bringing tier four final and stage V regulated assets into our fleet. We are offering synthetic fuel, hydrogenated vegetable oil to our customers. And that, in combination, will reduce carbon footprint by about 90% and remove pretty much all local emissions, and we are offering that to our customers now.

We continue to evolve our Y.Cubes storage product, our controls platform and our digital capability, which is getting a few awards and I think is pretty market-leading. And we have

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also introduced a small-scale storage to our fleet in two depots, one in Swindon and one in Linden in North America and that we are beginning to put into the market as well.

We are trialling hydrogen as a fuel, both as a fuel for our engines and also as a fuel for fuel cell, and we have a fuel cell that we will deploy to a customer site later this year. But I do not think hydrogen is going to be a material part of our business in the near-term.

And then just to touch on the work that we are doing on strategy, and we will present to you at our full year results in March next year, some of the things that we are seeing. First of all that we are operating in an enduring market. So there will be an enduring need for temporary power and temperature control services. It is fair to say the pace of change of the energy transition varies by sector, and I have will put a few examples on the right of the slide here, and it absolutely presents new opportunities for Aggreko. And a prime example is what we are seeing in hybrids and we are doing in sectors like mining.

It is clear that we have a pretty unique capability, which becomes more relevant over the energy transition when renewables introduce more volatility and uncertainty to power networks of any dimension, be they grid connected or off-grid, particularly when infrastructure is aging and environmental pressure is building.

We provide the ultimate degree of flexibility to our customers, flexibility in terms of location, in terms of the length of the contract, in terms of technology, in terms of volume and in terms of fuel, all of which we can change quickly over time within a contract lifetime. We are evolving, as you heard me talk a little bit about on the previous slide.

Governments and many large customers are working to net zero in anywhere between 2030 and 2050. We are assessing how our fleet will evolve over this time. Diesel will undoubtedly be a much smaller proportion of our fleet in 10 years' time. We are assessing how gas, storage, efficiency, fuel and data, all of which we have a good foundation in, we are assessing how all will evolve and play an increased role across our business.

We are also looking at the financial implications, and we will return with more about this in March. It is clear that Aggreko is well positioned as the market leader in an enduring market, that we are evolving and that this is an opportunity.

So thank you very much for that. And I will now hand over to Heath.

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1H20 Results Review

Heath Drewett

CFO, Aggreko PLC

introduction

Thanks, Chris, and good morning, everyone. I have kept my slides this morning in a familiar format for you, and with Chris having already covered the individual business unit performance, I will largely talk about the overall Group position.

Before diving into the details, I would like to say that I am particularly pleased with our strong cash generation over the last six months, further demonstrating the working capital improvements that we continue to make, notwithstanding the need to address, in particular, a number of the Group's legacy receivables as part of the impairment review.

Following on from our other popular year-end disclosure, we will also cover this morning the progression of the Group's fulfilment asset, which, as you will see in the period has been driven by our work on the Tokyo Olympic Games. And please do not forget the appendix slides provided for your reference, which may well help answer some of your more detailed questions.

And lastly, before I get going, as usual and similar to Chris, unless stated otherwise, I will quote year-on-year movements on an underlying basis, i.e., at constant currency and excluding pass-through fuel and pre-exceptional items.

Exceptional items

So I would like to begin by providing some context around the non-cash impairment of £181 million that we have reported today. Having taken time to consider the impact on our business of the COVID-19 pandemic, the lower oil price and the energy transition acceleration to lower carbon technologies, it has been became clear that the combined impact presented an impairment indicator for a number of the Group's assets.

As a consequence, we have conducted a comprehensive review of all the asset classes on the Group's balance sheet. The review, which has been carried out over a number of weeks and involved many people across the business, from operations to engineering, sales and finance, has been undertaken at a very detailed asset-by-asset level.

On our fleet, for example, we have looked at each individual piece of equipment. On the debtors, we have considered the context of each debtor, including their payment record, all of our recent engagements with them, the economic environment in which they are operating and any commercial leverage or legal options available to us.

And on the inventory, we have considered our global stock part number by part number to determine the likely future consumption across the business. While we consider various independent external and internal data sources regarding the future economic outlook for the Group, the exercise also included significant commercial judgment with an inevitably wide range of potential outcomes.

However, given the level of detail at which the review has been undertaken, we believe that the overall risk of a further impairment within these asset classes, or indeed the Group's other asset classes where no impairment has been made, is not material.

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Trade and other receivables

So looking now at the main categories, and starting with the £69 million of trade and other receivables. I will cover the working capital more generally later in my slides, and we will show the continued progress we are making on cash collections. However, £57 million of the impairment charge largely relates to legacy PSU debtors in Venezuela, Yemen, parts of Africa and Brazil, where our judgement to fully impair our residual balance sheet exposure is based on the more challenging financial outlook for these customers in their respective markets.

As noted previously, these customers do not dispute the balances owed and the decision we have taken to impair is based solely on our assessment of their ability to pay. In addition to this PSU provision, across the rest of the business, we have identified £12 million of debt, mainly relating to oil and gas and events sector customers, where our judgement suggests recovery is also unlikely, including indeed one or two where the customer has already gone into liquidation.

It is also worth noting that in addition to the £69 million exceptional impairment, we have increased our debtor provisions a further £14 million in the half, which has been recognised above the line in pre-exceptional operating profit. And of that £14 million taken above the line, some £9 million relates to Power Solutions Utility.

Property, plant & equipment

The £59 million impairment on PPE reflects the Group's revised more modest growth expectations over the next few years given the material impact of a sustained low oil price environment and generally reduced economic activity. While all the assets impaired are considered unlikely to go on rent in future, the specific circumstances for the impairment do vary, including those that require work to be made rental ready and for which the investment case no longer stands, although stranded in countries where the local market offers no prospect for them.

In addition, for our HFO fleet in particular, we have also considered the impact of an acceleration in the energy transition to greener, cleaner technologies. And this, together with the lower oil price, which reduces the HFO fuel cost advantage over diesel, has led to an impairment of around one-third of this fleet's net book value.

Inventory

The inventory impairment of £36 million includes parts, cable, duct and hose. Here, we applied a consistent criteria with the fleet analysis, impairing those items that have been slow or non-moving and for which we consider there to be no likelihood of consumption, given the lower demand and outlook. We have also reviewed all of our capitalised technology development projects and impaired those where, due to the impact of the faster energy transition, the future market demand no longer supports the level of capitalised spend.

It is worth noting that the majority of this impairment on the intangibles relates to development spend on future production of HFO equipment, which we now consider unlikely.

Other intangible assets

Finally, in addition to the impairment charge here, we have taken an exceptional write-down of £5 million in relation to the Group's deferred tax assets, and this is recorded as an exceptional item within the Group's tax charge.

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Group summary

So having spoken some length there about the impairment review, let us now consider the group's overall performance on a pre-exceptional underlying basis. So starting at the top, as Chris said, Group revenue down 12%, driven primarily by the downturn in the oil and gas and events sectors.

Rental Solutions have seen the most significant decline, down 18%, driven by North America, which was down 19% and which has been particularly hard hit across its oil and gas events and petchem and refining business.

Power Solutions Industrial revenue, as Chris said, down 4%, where most regions and sectors have been impacted with our two larger regions of the Middle East and Eurasia, which are most exposed to the impact of the lower oil price, being down 8% and 16%, respectively.

Our Africa business, by contrast, has continued its recent good growth into 2020, with revenue up 14%. Power Solutions Utility revenue down 7%, largely reflecting off-hires in Africa and Latin America, together with the planned rate reduction in the Ivory Coast, as Chris mentioned.

Group operating profit was down 15%, driven by the 45% decrease in Power Solutions Industrial, primarily due to a challenging environment for our business in Eurasia. Our effective tax rate is 45% based on our current forecast for the full year, and this is considerably higher than our previous guidance of 35% and is due to two factors that are impacted by the reduction on the Group's overall profit for the year.

Firstly, we are seeing a relatively greater reduction in profit in jurisdictions where the tax rate is lower than the Group's effective rate, in North America and the Middle East, for example. And secondly, an increase in the proportion of our tax charge which relates to irrecoverable withholding tax.

Return on capital at 11.2% improved 1.2 percentage points on an underlying basis. At the half year, this is calculated on a rolling 12-month profit basis, and therefore, includes our strong performance in the second half of 2019. The improved underlying ROCE is due primarily to the reduction in operating assets therefore, through a combination of our working capital improvements and continued capital expenditure discipline, together with the impact of the impairment. Although it is worth noting that the impact of the impairment only actually contributed 0.3 percentage points to the ROCE improvement.

And finally, as Chris has already mentioned, following the decision to withdraw the 2019 final dividend earlier in the year, in the response to the uncertainty presented by the then emerging COVID-19 crisis, we have this morning announced that we will resume dividend payments with an interim dividend of 5p per share for 2020.

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Cash flow

Turning now to the Group's cash flow, where pleasingly we have delivered an operating cash inflow of £250 million, supported by a working capital cash inflow of £100 million, which obviously excludes the impact of the impairment which is all non-cash. This inflow which we have broken out in the box on the right, represents significant improvement over last year's £16 million outflow, and as you can, is driven by £104 million inflow from receivables.

This comprises of £60 million decrease in Rental Solutions, a $27 million decrease Power Solutions Utility and a £17 million decrease in Power Solutions Industrial. While obviously reflecting lower revenue, we have also continued to make good progress in improving our invoicing and cash collections processes within Rental Solutions this year, which has contributed to much improved working capital efficiency in that business.

I will touch on the fulfilment asset and CapEx spend in a few moments. But just to close on the brief cash position, net debt due was £499 million, a reduction of £285 million versus this time last year and £85 million down on at December close.

Net working capital change

Moving on then to our familiar capitalised slide on working capital, starting with the amber light, which reflects the £28 million increase in inventories during the period. This increase was primarily driven by a significant volume of cable purchase for the Tokyo Olympics, together with increased inventory held within our manufacturing facility at Lomondgate to support the build programme of Y.Cubes and next generation gas sets in the second half.

In terms of trade and other payables, we saw a £24 million increase. This is as a result of increased deferred revenue for the Tokyo Olympics following a receipt of a further milestone payment receipt on this contract in the half. This partially offset by lower accruals, specifically following the cancellation of the Group's 2020 annual bonus programme as Chris referred to.

Overall, despite this challenging environment, I am very pleased that we continue to demonstrate good progress in managing down the Group's working capital.

Trade receivables

This next slide shows the Group's gross trade receivables, where we delivered a reduction of £54 million in the period. While we normally present this graph purely on a gross basis, as you will see this time, we have also shown both for December 2019 and June 2020 positions on a net basis post provisions on the right hand end. This is simply to demonstrate the impact of the Group's existing debt provisions and the H1 impairment on the Group's overall balance sheet exposure.

The overall reduction includes a £39 million decrease in rental solution, with as I say, the business driving sustained improvement in its invoicing and cash collection processes. Specifically this business has managed to reduce its invoicing days comfortably below 10 days on most of the period compared to around 15 days a year ago, thereby significantly improving the working capital cycle.

Power Solutions Utility have maintained its focus on improving cash collections, which together with the impact of the impairment brings a new position for this business down to

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less than a third of the Group's total net trade receivables balance. And that is down from around a half over the last 18 months.

Utility - Invoicing/receipts performance

So let us take a specific look at Power Solutions Utility. And just as a reminder, this slide is presented in US dollars. And the slide charts the progress on the business on its cash collections since the first half of 2018.

As you can see, despite the more challenging environment, we have still managed to collect more than we filled in the first half. And it is worth noting that the $118 excess receipts over invoicing over the last three halves, so the last 18 months, represents nearly half of the net trade receivables balance in this business at the beginning of that period at the end of December '18.

In terms of where we now stand, the net trade receivable balance in Power Solutions Utility represents just under four months sales down from our six months some 18 months ago. Notwithstanding stays impairment announced on the Group's trade receivables, I continue to believe that our focus in tackling this outstanding that will lead to further reductions in our exposure over time. However, on PSU in particular, just under four months sales outstanding, given the territories in which we operate, we need to be realistic about the likely quantum of such further improvements as we move forward.

IFRS 15 - Fulfilment asset progression

Turning then to our fulfilment asset. This chart shows the movement in the fulfilment asset over 2019 and into the first six months of 2020. It shows what has been spent and capitalised in the period and what has been amortised through the income statement as we have begun to recognise revenue on these projects.

In the table on the right, we have listed the larger projects incurring spend in the first six months of 2020 and through 2019. As you can see, of the £58 million capitalised so far this year, £36 million relates to the Tokyo Olympics. While some of the Tokyo spend this year and last has been amortised, just a couple of million in the period to June this year, the bulk of it will remain on the balance sheet until the games takes place in 2021 and we begin to recognise the games revenue.

Excluding the Tokyo spend, the table lists other notable jobs on which we have incurred mobilisation spend this year. And in terms of the likely full year position, I am comfortable with the guidance that we gave in March, that we do not expect our 2020 level of mobilisation spend ex-Tokyo to be materially different to last year.

Capital expenditure

Given our focus on cash during the period, I wanted to give you some additional detail on our capital expenditure for the first half, which for some of you, may appear rather higher than you might have expected. As you can see, the spend is slightly up year-on-year at £86 million. Of this, £28 million relates to secured projects, including the Wartsila power blocks for the Syama mine contract in Mali, together with a number of Y.Cube and next-generation gas sets.

The temperature control and OFA, oil-free air fleet replacement programme, has been ongoing in North America and Continental Europe for some time as we refresh this fully

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depreciated fleet with more modern efficient equipment. Our strong balance sheet and cash position has enabled us to continue uninterrupted with this investment programme despite the COVID crisis. The Tokyo CapEx is self-explanatory and was all incurred prior to the postponement of the game.

Finally, we have spent around £11 million on refurbishments to bring sets back into fleet as rental ready as part of our effort to emerge stronger from the current crisis.

Outlook

So just on outlook, I wanted to close with a few words on the outlook for the year. While the outlook obviously remains uncertain, given the usual increase we see in the events and PCR sectors specifically in the second half, we do not expect to experience our traditional second half-weighted seasonality and are therefore guiding to a full year profit before tax pre- exceptionals in the range £80 million to £100 million.

I recognise that this is a wide range for what is just a six-month period, but it is very much a consequence of the continued market uncertainty, and specifically at the bottom end does reflect a further tightening across some of our markets in response to a second potential wave of the virus.

That said, in terms of the guidance range, we have assumed that Rental Solutions will see reduced seasonality as a result of the continued slowdown in events and lack of PCR activity, particularly related to plant turnaround that we usually see in the second half. There will be ongoing oil and gas pressure in our Power Solutions business as trading conditions remain difficult, and our second half events revenue in the Middle East, in particular, is expected to be significantly down.

And project mobilisations, particularly in Power Solutions Utility, will continue to see some delays given potential for ongoing travel restrictions.

Additionally, the outlook remains subject to any further FX movements, where as you can see from the appendices, we are already facing a currency headwind on Group profit of around 6%. The effective tax rate, as discussed earlier, is expected to be around 45%. And on this as our profit recovers into next year and starts to reverse the adverse tax effects that I noted earlier, we expect the rate to move back towards the level of our previous guidance for this year of 35%.

In terms of fleet CapEx, we expect to be lower than our previous guidance and to now come in at less than £200 million. And within this, around 20% to be spent on next-generation gas and storage assets.

And finally, it probably goes without saying, but we will obviously continue to maintain our focus on cash and cost control as we move through H2 and beyond.

And with that, having finished with the formal presentation, Chris and I will move on to take your questions.

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Q&A

Will Kirkness (Jefferies): Firstly, just on the cost side. There has been some pretty strong cost reduction, especially in Rental Solutions. I just wondered if you could talk about how permanent that is, whether any of it needs to come back as demand picks up, and then indeed actually whether there has any more to go for? And then secondly, just post the write-downs, I wondered if you could talk a bit about the shape of the fleet now. So perhaps book value, original cost versus net book value and how that compares sort of diesel and gas, just to get a sense of perhaps the useful life of the fleet simply over the next few years?

Chris Weston: Maybe I will take the first one and Heath can talk a little to the second one. You broke up a bit. So I think I got the gist of your question around costs. And I think you were asking how they might come back as the business started to return to more normal levels of activity.

So obviously, some of the things like bonus and salary review will get implemented or reintroduced next year as activity levels return to normal. So you will see that come back into the cost base. I think some of the shaping around the more discretionary elements, there might be a slight improvement on them.

And I would say that on top of that, particularly in Rental Solutions, we have a couple of ongoing programmes. One is around optimisation of the business and the processes within them. So we have put in the new applications around Salesforce, etc, over the last few years. And we have a programme underway that is looking at optimising those processes and making them more efficient. So that will absolutely help the cost base over the next year or so.

And then in addition to that, part of really an ongoing programme, looking at the depot network and looking at the costs, the revenue and the returns in the depots and whether they are performing well enough and what we need to do to make them perform better. It is an ongoing programme. We have actually closed about 10 depots over the last 12 months or so. And that will continue.

So those are the types of things that you might expect to see have an impact on the effectiveness or the efficiency of the business going forward. But a lot of the costs that we immediately grabbed as we went into this around things like bonus and an annual salary review will come back into the business. So fleet?

Heath Drewett: Yeah. Just on fleet, Will. I mean, as you have seen by the CapEx in the first half and the guidance we are giving for the full year, we have continued to invest through this period on the fleet rather unabated, given the financial strength of the balance sheet. As we look forward, I think CapEx and depreciation will be largely in line. I do not see a significant dislocation between CapEx and depreciation over the next couple of years.

Increasingly, you will see us spending money on gas and storage and a disproportionately less on diesel fleet. Around 20%, as I said, of this year's CapEx will be on gas, debt and Y.Cubes. And if you look at the impairment, the vast majority of the impairment was levered on the diesel fleet plus HFO. So less than 10% actually related to gas fleet, just individual items located in geographies where we do not expect to use them.

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So you are seeing a shift away from diesel, but it is an evolution, I think, rather than a revolution and continues the trends that we have seen over recent years, disposals and retirement of the diesel, particularly the larger diesel fleet and replacing that with gas as the demand for gas starts to pick up.

Rory McKenzie (UBS): Brilliant. Yes, I wanted to follow-up on that fleet question from a product perspective. Obviously, as you said, your write-downs and disposals were focused in diesel and HFO. So could you possibly give us a breakdown of either now or where you expect to be in terms of kind of diesel fleet or the old QSK60s versus G3 and all that kind of product mix, please?

Chris Weston: I am not sure we are going to do that now, but I can give you some directional comments that probably reinforce what Heath has just said. So increasingly over time, we would expect to see a greater proportion of gas than diesel in the fleet, and we will talk to that in more detail in March. Between the Group disposal programme and the impairment that we have taken this year, it addresses about nearly one gigawatt of the diesel fleet.

And we are unlikely to be buying any large diesel going forward. Although we might buy some of the canopy fleet around tier four final and stage V. So you will increasingly see that come into the fleet over time.

On next-gen gas, you will continue to see us buy that largely against orders, so we keep utilisation high, but I would expect to see that continue to grow. QSK60s, we are bringing a few more into the fleet. It is a very robust bit of equipment. It has particular capabilities that are helpful in certain applications. So that, again, it is an aging fleet. You may see it maintain its current level of megawatts.

And then storage, I mean, I talked to the hybrids and how we are introducing those. You will continue to see storage assets grow over time. I mean, we can probably give you more granularity on that certainly in March, when we talk about the fleet. We are assessing different technology pathways for our fleet. And we can give you a detailed breakdown of the percentage of megawatts in gas, QSK60s, next-gen gas, diesel, etc., after the call, Rory, if that is okay.

Rory McKenzie: Yes, that would be great. And just one follow-up on the fleet write-downs. I see you mentioned a couple of fleet that has not been used for 12 months and fleet that has been stranded in some specific geographies. Given the kind of fungibility of your fleet and your global platform, can you just talk about how fleet ends up stranded and what it actually means in reality and what the issues are?

Chris Weston: I mean an obvious example is something like Yemen or Venezuela, and I think both of those countries are fairly self-explanatory. So they get stuck in that kind of situation, and there are a few examples of that around the world. So that is the type of thing that would lead to a stranded asset, Rory.

Heath Drewett: Of the £59 million on fleet, Rory, there is a couple of million, £2 million to £3 million, which relates to stranded assets. And as Chris said, it is Venezuela and Yemen where we are identifying those, which lines up with the debt provisions in those territories as well.

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Robert Plant (Panmure Gordon): In Rental Solutions, the margin went up 1.7%. When I take out the £6 million of gain on asset disposal, it went down 0.2%. You have got the exceptional column of £26 million. I just wondered if there was any debate as to whether you should put that asset disposal one-off into the exceptionals?

Heath Drewett: I think the exceptional criteria for us was both the nature and materiality of those. We do ordinarily have asset disposals. That was a pre-agreed arrangement with one of our customers in the US, nothing to do with the low oil price or COVID or energy transition. So that was well in-flight before all of that. And as I say, we do have profits on disposals of that level of individual item does not categorise as exceptional in our book.

Chirag Vadhia (HSBC): You mentioned that you have reduced the trade receivables across all the business units. Could you just give a bit more colour on how those remaining receivables are progressing? And then secondly, I think you might have answered this. But as a consequence of the energy transition, do you see any impact on rental rates coming through in [inaudible]?

Chris Weston: I am sorry. I really could not hear those.

Heath Drewett: I just picked up the first question around the kind of shape and progression of the receivables going forward, which I can pick up. But then you started to talk about something on the energy transition, and we lost you. So if you just repeat the second half of the question, please, sorry.

Chirag Vadhia: Yeah, sure. Just as a consequence of the energy transition, do you see any impact on rental rates?

Chris Weston: On rates.

Heath Drewett: Let me pick up the first question on the receivables and how we see that. So look, we have talked about Rental Solutions for some time in terms of the opportunity that existed there. I think the guys have done a great job over the last six months, both in getting their invoicing cycle faster and the collections process better. I think there is a little more to do in Rental Solutions, but I think we have broken the back of what has been somewhat frustrating to get those processes a bit clicker. So I think we have done a good job. A little bit more to do, but not too much beyond that.

Power Solutions Utility, as I said, we are sitting now with just under four months of sales outstanding. Again, I think we can take a little bit more out, but they are in territories where you are not going to run a clean working capital cycle of invoicing and collections. And Power Solutions Industrial, I think both Chris and I feel that that is the one in the middle, and there is more opportunity there, both in terms of the rental business, the more transactional side, learning from some of the lessons within Rental Solutions, but also the industrial projects where we think we can take more out of that.

But look, over the last 18 months, there has been a significant reduction, both through cash collections and obviously the impairment on some of the legacy debtors. So I think whilst we would expect some improvement, they are clearly going to be more modest than we have seen over the last 18 months.

Chris Weston: So on rates and the energy transition, you will appreciate we are quite early in this. So firstly, just touching on the hybrids, as I mentioned earlier, we see projects there

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where we are deploying solar and batteries alongside thermal. And the returns that we are getting from those projects are where we would expect them to be. So very comfortable with those.

If you look at rates in the more transactional business, the rental business, I suppose the best indicator is around our oil-free air, the new product that we have been bringing in over the last 12 to 18 months, which is a tier four final product. And the rates there have been quite well above the rates for the less-emissionised equipment. So there are many instances where we have achieved that, and customers are prepared to pay that.

It is less clear on power, on power tier four final stage V. I think the jury is out on that one. But the equipment is obviously more expensive. The engine itself is about 20% more expensive. We have good governance now around our rates. But I think we are too early to tell one way or another on that type of product.

George Gregory (Exane): I had two questions, please. Firstly, to your comments about getting back to pre-COVID levels of activity by 2022. I would presume that you would within that be assuming some level of reduction in some areas of your business. Is the assumption that you will see growth offsetting that? And if you could just clarify whether you mean in revenue and/or profit terms on that comment. And secondly, just on the numbers you have provided on Tokyo. Just trying to reconcile the point, I think, Heath made on collections or maybe it was Chris, apologies, that you had collected about 60% of the revenues. If the revenues are at around $250 million, and you have collected $150 million of those and you have also capitalised, I think, probably over $70 million on a run rate basis, that does not leave much. So what am I missing there in terms of the reconciliation of those three numbers?

Heath Drewett: I will take the last question, but I will put it back to you. I am not really sure what you are trying to reconcile. You have absolutely got it right. So what are you trying to spring out of that reconciliation?

George Gregory: Well, if those numbers are right, that only leaves kind of $30 million or so of what would be profit, assuming you collect the rest of the revenues. Or am I -

Heath Drewett: No, assuming we collect the revenues, we have got another - overall, we will collect $250 million plus of revenue, and you can see what we are capitalising so far on the mobilization asset, plus we have got other costs on the projects to come. You are trying to create a broad event profit on only 60% of the revenue that we have collected.

George Gregory: I will take another look at that one, Heath. I might come back to you on it.

Heath Drewett: Okay. That is all right.

Chris Weston: So when we look forward over the next few years, George, specifically talked about activity levels, and some sectors are going to recover at different rates than other sectors. So when we look out a few years, we are not assuming that we are going to see the same level of activity in oil and gas as we have seen over the last few years. But equally against that, we have focused more on other sectors. And I mentioned two utilities and building services and construction, another one that is quite small for us in North America is mining that is growing and growing strongly as it is in Africa.

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So there might be a slightly different mix in the sectors over the next couple of years. But we expect each of them to recover at different rates and activity levels across the business in terms of volumes on hire, etc., to be up to where they were in 2019 and 2022. And in the meantime, all the work that we are doing around cost out or looking at the depot network or the project network and becoming more efficient. All the work we are doing around the balance sheet, looking at receivables, working capital, all of that will continue. So I was quite specific in the wording around that bit of the presentation.

Daniel Hobden (Credit Suisse): Just one from me. I think when we are talking about the PSI division, you mentioned that rates would go down. I think you said 27%, but I think that was for one specific area, which I did not quite catch. I was just wondering, as we look at PSI and specifically within Eurasia, how do we think about the rates environment not just sort of now and through these challenges, but structurally as we go out to the next couple of years as well, please?

Chris Weston: So the number that you picked up rates down 27% was in gas in Eurasia, which is one of the larger divisions or one of the larger regions in PSI. Gas volumes were up 18%. Rates were down 27%. And the business in gas was hit by competition. We have had quite aggressive competition over the last couple of years.

And there is also a large gas contract, which has quite a lot of exemption associated with it over the next few years that has had lower off-take as a result of the OPEC+ agreements. There is a contractual obligation to increase that at the beginning of next year. So looking at the business, as I said, even with the competition around gas, we would expect margins to improve in 2021, and the business has, we believe, got good growth prospects. A lot of it is focused on oil and gas. There are big expansion opportunities in Northern Siberia that we are working with Rosneft on, and we will continue to do so.

But we are also trying to diversify away from oil and gas, which is if I remember rightly, 70%, 75% of the business in Eurasia. And we are diversifying away into manufacturing and also into other regions, like the Far East of Russia. And in those two areas, we have projects that are going live towards the end of this year. They are quite large projects, and they are typically CHP, so combined heat and power projects, and they run for multiple years.

I can not remember off the top of my head. They are long contracts, five to 10 years. And we are also seeing opportunities outside oil and gas in remote communities. So distributed energy. One of Russia's President Putin's main thrust is how he provides power to these remote communities, and that is an area we are also working. So we do see good prospects going forward in Eurasia, and we do expect the profitability to improve materially next year.

So Leona, it looks like there are no more questions there. So I think we are happy to call that a wrap, and thank everyone very much for coming along to the presentation. Thank you very much.

[END OF TRANSCRIPT]

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