Our Strategy

Group strategy

The objective of our strategy is to deliver long-term value to shareholders, excellent service to customers and rewarding careers to our employees by being the leading global provider of temporary power and temperature control. Our strategy is founded on the belief that, in our market sector, it is possible to create competitive advantage by building a truly global business – i.e. one which operates in the same way around the world and can use the same fleet everywhere, the same processes, the same skills and the same infrastructure. This homogeneity means that significant operating advantages and efficiencies accrue to those who have global scale; the focus of our efforts, is therefore directed towards building global scale and securing these advantages and efficiencies for ourselves.

Our current strategy was developed following an in-depth review of Aggreko's business in 2003, and has been consistently applied (with the occasional tweak of the tiller) and which we have worked relentlessly to implement for the last nine years. We believe that this consistency of purpose has been a major contributor to our success and that the result – 19% compound growth in revenues and 28% compound growth in trading profit – is the proof of the strategy's success.

Aggreko Group – excluding pass-through fuel
	2012	2003	CAGR
Revenue (£m)	1,543	324	19%
Trading profit (£m)1	382	42	28%
Trading margin1	25%	13%
Diluted earnings per share (pence)1	100.40	10.14	29%
Return on capital employed (ROCE)1,2	24%	13%
Enterprise value at year end (£m)3	5,263	514	30%

1	Pre-exceptional items.
2	Calculated by dividing operating profit for a period by the average net operating assets as at 1 January, 30 June and 31 December.
3	Enterprise value is defined as market value plus net debt.

Whilst it is tempting (particularly to current management) to ascribe this success to our own brilliance, the fact is that we know we stand on the shoulders of giants. Aggreko's success over the last ten years has been made possible by the skilful and patient investment made over the previous forty years by our predecessors. It was they who built a network of service centres in North America, Europe and Australia; understood that designing and building our own equipment had major advantages; created a hardworking, entrepreneurial and customer-focused culture; and built a brand. The lesson we see every day is that it takes decades to achieve the sort of global scale which Aggreko now enjoys, and there are no short cuts.

We have a policy of thoroughly reviewing our strategy every five years, with interim updates every two years; since the first strategy review in 2003, we completed major reviews in 2007 and, most recently, in 2012. Aggreko's strategy is developed by the senior management team, led by the Chief Executive, and involves internal and external research, much of it proprietary. We seek to develop a deep understanding of the drivers of demand, changing customer requirements, and the competitive environment as well as developments in technology and regulation. We look at our own strengths and weaknesses, and at the opportunities and threats that are likely to face us. From this analysis, we develop a list of investment and operational options and analyse their relative risks and rewards, bearing in mind the capabilities and resources of the Group.

At the time of the 2007 review we set ourselves a target of growing the business at over 10% during the five years to 2012, subject to the vagaries of the world economy. We did not anticipate that there would be a financial crisis and global recession in that period, but it is a tribute to the structural drivers of growth in our business that we have bettered our targets by a significant margin, as shown in the table below.

Aggreko Group – excluding pass-through fuel
	2012	2007	CAGR
Revenue (£m)	1,543	634	20%
Trading profit (£m)1	382	131	24%
Trading margin1	25%	21%
Diluted earnings per share (pence)1	100.40	30.02	27%
Return on capital employed (ROCE)1,2	24%	27%
Enterprise value at year end (£m)3	5,263	1,647	26%

1	Pre-exceptional items.
2	Calculated by dividing operating profit for a period by the average net operating assets as at 1 January, 30 June and 31 December.
3	Enterprise value is defined as market value plus net debt.

Both our Power Projects and Local businesses have contributed to the growth we achieved; Power Projects grew trading profit at a 34% CAGR, whilst the Local business (which was hit harder by the recession) grew at a 16% CAGR.

We have now completed the 2012 Strategy Review which has incorporated a significant amount of proprietary research, as well as detailed input from many of the senior managers in the business. The process took around 14 months and included regular updates to the Board; the principal conclusions of the review are:

• The strategic initiatives of the last 5 years have generally worked well, and Aggreko is a much stronger business now than it was in 2007. Set out below is our assessment of our scorecard against our stated targets.

• There have been some disappointments. In 2007 we said we would grow our temperature control business, but revenues from this product line have barely moved over the period. We also said that we thought there would be an opportunity to use our technology to provide smoothing of power generation in developed countries as wind became a larger proportion of capacity. So far, we have singularly failed in this endeavour, although we have found a parallel market supporting wind farm construction and commissioning.

Looking ahead to the next 5 years, we believe that:

• Our Local business will continue to offer attractive opportunities for growth, particularly in emerging markets. We believe that the underlying market for power and temperature control rental grows at around 2 times GDP. The reason why emerging markets are so attractive is that their GDP is growing faster, and 2 x 6% is better than 2 x 1%. We have invested in opening or acquiring some 64 new locations in emerging markets since 2006; many of them have yet to achieve the $5 million annual revenues we would expect of a mature depot, so we expect to get the benefit as they grow to scale in the next five years. We will also take the opportunity through our new organisation structure to exploit the synergies that exist between the Local and Power Projects businesses; as we open Local businesses in new countries, contracts which previously might have been done by Power Projects can be executed at lower cost by depots. In terms of our expectation of the rates of growth the Local business will deliver over the next five years, we would expect revenue growth of between 8% and 12%; margins of between 17% and 20%; and a return on capital employed of between 18% and 21%. It should be emphasised that these are the averages we would expect over a five year period, and there will be years when we may be outside one of these ranges.
• Our Power Projects business is focused on emerging markets and the growth in its markets are driven by structural issues. Growth in demand for electricity in emerging markets is growing faster than GDP, and few countries have been able to finance the additional permanent generating and transmission capacity needed to keep up with demand. Our review has confirmed that these structural issues are likely to remain in place for the foreseeable future; we believe that the shortfall between supply and demand will grow at about 13% CAGR for the next five years. We think this will translate into an increase in market demand for temporary power in the range of 10-15% per annum. In terms of our expectation of the rates of growth the Power Projects business will deliver over the next five years, we would expect underlying revenue growth of between 10% and 15%; margins of between 27% and 32%; and a return on capital employed of between 25% and 30%. As with the Local business, it should be emphasised that these are the averages we would expect over a five year period, and there will be years when we may be outside one of these ranges. Our reference to 'underlying growth' above means the growth we would expect to achieve once we have adjusted for our contracts in Japan and with the US Military, which we expect to largely disappear over the course of 2013 and 2014.
  
• Product innovation will continue to be an important source of growth. Aggreko is unique amongst operators in the market in designing, developing and manufacturing its own equipment, and we use this to drive down the capital cost of our rental fleet and to develop new products. In 2006 we launched a range of gas-powered generators which, because of the lower price of gas, allows customers to generate power at much lower cost per kWh than they can with diesel. Over the last five years, revenues from this product have grown by 63% CAGR to over $250 million, and we expect gas to account for around 40% of Power Projects' revenues in 2013. Encouraged by the success of our gas development, in 2009 we launched a £6 million development programme with Ricardo plc to develop an engine which would both be able to run on Heavy Fuel Oil, a much cheaper fuel than diesel, and would also improve on the performance of our existing diesel engines. Our new engine was launched in early 2013 and we have high hopes for it.
  
• Longer term, we believe that the key to expanding the market for Power Projects is to be able to deliver a cost per kWh which makes temporary power competitive with permanent power. If we can marry the advantages of speed of deployment and flexibility of temporary power with the costs of permanent power, we should be able to greatly expand the market.
  
• In all our businesses, there are opportunities to improve the efficiency of operations, whilst maintaining our prized agility. There are plenty of things we can do better and we will continue to develop our capability to improve the way we do things in the business; following the launch of our 2008 Orange Excellence programme, we have now trained over 900 people in continuous improvement techniques.
  
• At a Group level, our expectation is that over the next five years we should achieve, on average and subject to year-on-year variation, double-digit rates of growth in revenues, with margins and returns on capital in excess of 20%.
  

Our strategy for each of the business lines is set out in more detail below.

Business line operational strategy

Supporting the Group strategy, Aggreko has developed operational strategies for our two different lines of business:

• The Local business rents power and temperature control systems, ranging from small generators up to large industrial cooling towers, to customers who are typically within a few hours' driving time of our service centres; and

• The Power Projects business builds and then operates temporary power plants, selling their capacity and electricity to utilities, the military and major mining and oil companies, mainly in emerging markets.

The Local business

The Local business serves customers from 194 service centres in 47 countries in North, Central & South America, Europe, the Middle East, Africa, Asia and Australasia. This is a business with high transaction volumes: average contracts (excluding major events) have a value of around £17,000 and last a handful of weeks. The Local business represents 59% of Aggreko's revenues, excluding pass-through fuel, and 45% of trading profit. Since our first strategy review in 2003, revenues and trading profit have increased at a compound growth rate of 15% and 23% respectively: 

Aggreko Local business
				% of Group
	2012	2003	CAGR	2012	2003
Revenue (£m)	905	258	15%	59%	80%
Trading profit (£m)1	170	27	23%	45%	64%
Trading margin1	19%	10%
ROCE1,2	20%	11%

1	Pre-exceptional items.
2	Calculated by dividing operating profit for a period by the average net operating assets as at 1 January, 30 June and 31 December.

The table below shows our progress since the last major strategy review five years ago:

Aggreko Local business
				% of Group
	2012	2007	CAGR	2012	2007
Revenue (£m)	905	453	15%	59%	71%
Trading profit (£m)1	170	81	16%	45%	62%
Trading margin1	19%	18%
ROCE1,2	20%	23%

1	Pre-exceptional items.
2	Calculated by dividing operating profit for a period by the average net operating assets as at 1 January, 30 June and 31 December.

There are three elements to our strategy for the Local business:

1. Maintain a clear differentiation between our offering and that of our competitors through superior service.
2. Use the benefits of global scale to be extremely efficient. This should enable us to make attractive returns whilst delivering a superior service at competitive prices.
   
3. Offering superior service at competitive prices will allow us to increase market share and extend our global reach, delivering growing revenues at attractive margins. In terms of markets we serve, we have been very focussed on expanding our presence in countries that have high rates of GDP growth, particularly emerging markets. This enables us to obtain higher levels of growth, and increase our scale and global reach. 
   

Against the first objective – to maintain a clear differentiation between our offering and that of our competitors – third-party research shows that Aggreko is one of the world's best-performing companies in terms of customer satisfaction. We are determined to maintain this reputation for premium service and we do this through the attitude and expertise of our staff, the geographic reach of our operations, the design, availability and reliability of our equipment, and the ability to respond to our customers 24 hours a day, 7 days a week.

The claim to be one of the world's best-performing companies in terms of customer satisfaction is a big one, but we think we have good reason to make it. For each of the last three years we have been asking about 20,000 customers what they think of the service they have received from us, and we measure our Net Promoter Score. This is an objective measure of customer satisfaction which reflects the balance between those who think we are wonderful and those who think we are dreadful. Happily, the former greatly outnumber the latter. Over the last seven years our score has improved by twelve percentage points and Satmetrix, a global leader in customer experience programmes who manage over 11 million customer responses annually (including Aggreko's), have confirmed that our Net Promoter Score in 2012 was amongst the top five highest of all their customers benchmarked worldwide in the business-to-business segment.

The second objective of our strategy for the Local business is to be extremely efficient in the way we run our operations. This is essential if we are to provide superior customer service at a competitive price and, at the same time, deliver to our shareholders an attractive return on capital. In a business in which lead-times are short, logistics are complex and we process a large number of low-value transactions, a pre-condition of efficiency is having high-quality systems and robust processes.

The operation of our Local businesses in most areas is based on a 'hub-and-spoke' model which has two types of service centre: hubs hold our larger items of equipment as well as providing service and repair facilities; spokes are smaller and act as logistics points from which equipment can be delivered quickly to a customer's site. The hubs and spokes have been organised into areas in which a manager has responsibility for the revenues, profitability and the return on capital employed within that area. In this model, most administrative and call handling functions are carried out in central rental centres.

Our Local business enjoys numerous advantages as a result of its global scale. Standardised operating processes and the investment in a single global IT platform bring visibility and homogeneity. Global utilisation statistics allow us to spot where equipmentis under-utilised, and where it can be moved to for the best return, and this is reflected in the increase in sales/gross rental assets which is a financial measure of utilisation; between 2004 and 2012, sales/gross rental assets in the Local business increased from 62% to 78%. Building our own equipment allows us to stock our fleet with premium-quality equipmentat competitive cost. Global reach allows us to deliver service to customers (such as major events customers) wherever they go. Global processes allow us to disseminate best practice quickly. The benefits of our global scale accrue to both customers and shareholders. Our Net Promoter Scores tell us that the model works well for customers and, for our shareholders, the benefit has been a compound growth in trading profit of 23% over the last 9 years and a return on capital employed that has improved from 11% to 20% over the same period. Some people ask us why the return on capital in the Local business is lower than in Power Projects; the main answer to this is that, inherently, the risks – political, economic and people-related – we run in the Local business are far lower than in Power Projects and, therefore, the rewards are consequently (and properly) lower.

The third objective of our strategy for the Local business is to deliver growth in revenues by increasing market share and global reach. In our more mature markets, such as North America and Europe, we know that the most profitable businesses are those where we have dense networks of service centres which can share equipment, staff and customers, and benefit from the low transport costs that come from being physically close to customers. So, in these markets, we focus on adding new service centres and upgrading existing centres to make them more capable. In the last 5 years, in our mature markets in Australia/New Zealand, North America and Europe, we have opened or upgraded service centres and offices, including those acquired as part of an acquisition in:

North America:	Edmonton, Fort McMurray, Fr St John, Gillette, Indianapolis, Long Island, Minneapolis St Paul, Minot, Odessa, Pittsburgh, Roosevelt, Seattle, Three Rivers
Europe:	Heinenoord, Padova
Australia/ New Zealand:	Christchurch, Geraldton, Gladstone, Muswellbrook, New Plymouth, Suart Basin, Tauranga, Wellington, Wollongong

However, we know that our businesses grow fastest where there is strong growth in GDP. So a core part of our strategy has been expanding our Local business in the faster-growing economies of South America, the Middle East, Africa and Asia. The acquisition of GE Energy Rentals in 2006 helped us to expand our footprint in Brazil, Chile and Mexico and, in the last 5 years, we have opened or upgraded service centres and offices in:

Africa:	Cape Town, Durban, Johannesburg, Walvis Bay, Nairobi, Port Elizabeth
Middle East:	Baku, Riyadh
Central & South America:	Ciudad del Carmen, Monterrey, Panama, Tampico, Villahermosa, Bahia, Belo Horizonte, Boa Vista, Bogota, Brasilia, Buenos Aires, Camacari, Campo Grande, Concepcion, Copiapo, Cordoba, Cuiaba, Florianopolis, Goiania, Lima, Neuquen, Parapuebas, Porto Alegre, Recife, Sao Bernardo, Sao Luiz, Sao Matteus, Tucuman
Asia:	Bangkok, Beijing, Bengaiuru, Dalian, Foshan, Guangzhou, Hyderabab, Kitanomaru, Kolkata, New Delhi, Pune, Seoul
Russia & Developing Europe:	Istanbul, Moscow, Warsaw

Power Projects

This business serves the requirements of power utilities, governments, armed forces and major industrial users for utility-quality, temporary power generation. Whereas in the Local business we rent equipment to customers who operate it for themselves, in the Power Projects business we contract to provide power generated by plants financed, built, commissioned and operated by our own staff. The power plants can range in size from 10MW to 200MW on a single site.

Most often, the business operates in areas where we do not have a large Local business. The majority of the customers are power utilities in Africa, Asia, Central and South America. As described in the 'What we do' section, the driver of demand in these markets is that our customers' economies are growing, with consequent increases in demand for additional power which cannot be met by the current generating capacity. As a result, many of our customers face chronic power shortages which damage their ability to support economic growth and increased prosperity. These shortages are often caused or exacerbated by the variability of supply arising from the use of hydroelectric power plants whose output is cyclical and dependent on rainfall.

Power Projects now represents 41% of Group revenues and 55% of trading profit, excluding pass-through fuel. Since 2003, Power Projects revenue excluding pass-through fuel and trading profit have grown at a compound annual growth rate of 29% and 34% respectively:

Power Projects excl pass-through fuel
				% of Group
	2012	2003	CAGR	2012	2003
Revenue (£m)	638	66	29%	41%	20%
Trading profit (£m)1	212	15	34%	55%	36%
Trading margin1	33%	23%
ROCE1,2	31%	25%

1	Pre-exceptional items.
2	Calculated by dividing operating profit for a period by the average net operating assets as at 1 January, 30 June and 31 December.

The table below shows our progress since the last major strategy review five years ago:

Power Projects excl pass-through fuel
				% of Group
	2012	2007	CAGR	2012	2007
Revenue (£m)	638	181	29%	41%	29%
Trading profit (£m)1	212	50	34%	55%	38%
Trading margin1	33%	27%
ROCE1,2	31%	34%

1	Pre-exceptional items.
2	Calculated by dividing operating profit for a period by the average net operating assets as at 1 January, 30 June and 31 December.

Note: Pass-through fuel refers to revenues we generate from three customers for whom we have agreed to manage the provision of fuel on a 'pass-through' basis. This revenue stream fluctuates with the cost of fuel and the volumes taken, while having an immaterial impact on our profitability. We therefore exclude pass-through fuel from most discussions of our business.

The strategy for this business is straightforward: grow as fast as we prudently can, to secure for ourselves the operating efficiencies and competitive advantages which come from being the largest global operator. So far, we have been successful in executing this strategy and our Power Projects business is now many times larger than its next largest competitor.

The reason why it is advantageous to be a global operator in Power Projects is because demand can shift rapidly between continents. In 2003, South America and Asia were probably the largest markets, and Africa was only a small proportion of global demand. In 2009, the market in Africa was larger than South America and Asia combined. In the last couple of years, the position (as measured by our fleet-on-rent) reversed with South America and Asia representing around 50% of our average fleet on rent. These shifts in demand were driven in part by rainfall patterns, in part by the relationship between economic growth and investment in permanent power generation and, in part, by geopolitical issues. To be successful in the long-term, therefore, requires the ability to serve demand globally, and that requires sales, marketing and operational infrastructure to be present in all major markets.

The reason we want to be big – and bigger than any of our competitors – is because we believe that, as in the Local business, scale brings significant competitive advantages in Power Projects. There are numerous reasons for this:

• Being able to address demand on a worldwide basis means higher utilisation. When fleet returns from a customer at the end of a contract, the speed with which it can be put back on contract again is a major determinant of profitability and returns on capital. Fleet will find new work far more quickly if it can address the total pool of world demand than if it is only able to operate in a single region.
  
  By the time customers have decided they really do have to spend money on temporary power, they generally want it as fast as possible. Being able to offer very fast delivery of large amounts of generating capacity is a significant competitive advantage. Small operators cannot afford to keep 250-300MW of capacity (say, £30-£40 million of capital) sitting idle waiting for the next job. Because the equipment used in Power Projects is also used in the Local business fleet, we manage our large generators as a common global pool. Between the Local business and Power Projects, we currently have a fleet of over 6,000 of these large generators, and can deploy hundreds of MW of capacity from our various businesses around the world on very short notice. A good example of our speed of delivery would be the power contract in Japan where, in response to the Fukushima disaster, we were able to deliver and commission 200MW across 2 sites within 70 days of the contract signature; most of our competitors would find it difficult to deploy that amount of fleet in that lead time.
• The management of risk is a critical part of our business; we place tens of millions of pounds worth of capital assets in countries where the operational, political and payment risks are high – sometimes very high. While we take great care to mitigate these risks, it is probable that sooner or later we will have a loss of either receivables or equipment, or both. However, because of our scale, such a loss would not imperil the Group as a whole. We treat our risks in the same way investors do: we minimise the risk of losses doing material damage to the business by having a broad portfolio of exposures, none of them correlated. For smaller companies, their portfolio of country risk is inevitably much more concentrated; the probability of loss in any one country for smaller companies is no less than it is for us, but their ability to withstand the consequences of a large loss is. Scale therefore allows us to deal in markets where others might, with good reason, fear to tread.
• Returns from rental businesses are heavily dependent upon the underlying capital cost of the rental fleet. Clearly, large buyers should get better terms than small buyers and, since we are by far the largest purchaser of power generation for rental applications in the world, we believe that we are advantaged in this area, and we estimate that our capital cost/MW is typically 20-40% lower than competitors'. The fact that we have the scale to justify having our own manufacturing and design facilities also means that we can source equipment which is better suited to our precise requirements, and more cheaply, than smaller operators.

In summary, a large operator will have lower volatility of demand, better lifetime utilisation of equipment, be better able to respond to customer requirements, and will have a lower capital cost per MW of fleet. In Power Projects, bigger is better – and Aggreko is now much larger than any other competitor in this market.