Local Business and Power Projects Business
Aggreko is organised around two different business models. Whilst they may look different, with very different contract sizes and durations, they share fleet, people and infrastructure, and by sharing, each is a better business than it would be standalone.
LOCAL BUSINESS
Our Local business runs with high volumes of generally quite low value transactions, providing power or temperature control equipment to customers when they either need it in a hurry or for a short period of time. Aside from major events such as the Olympics (where contracts can be worth tens of millions of pounds), the average contract value is around £17,000, but the range is from £200 to over £1,000,000. Although most of this business is planned in advance, about 25% of its revenues come from responding to emergencies. It is therefore essential to have the capability to deploy equipment and people to the customer's site within a matter of hours. This business operates from 202 service centres and offices in North and Latin America, Europe, the Middle East, Africa, Asia and Australasia. These service centres look after customers who are normally within a radius of 200 miles, and they offer the complete range of our products and services.
Our Local business serves any customer who uses power and temperature control: butchers, bakers and candlestick makers; banks, TV manufacturers and film studios; farmers, wineries, utilities and oil companies; miners, armies, navies, air forces and telecoms companies; hairdressers, party planners and major sporting events. Anyone who uses power or temperature control in their business is a potential customer. This makes our customer-base diverse both in terms of geography and market segment, which is a great advantage as it gives us some protection against the vagaries of any one particular market. And we can quickly move resources to sectors and countries which are growing.
In 2013, the Local business had revenues of £904 millionwhich is 59% of Aggreko's total revenue excluding pass-through fuel1.
POWER PROJECTS
The Power Projects business sells power which we deliver using power plants built, owned and operated by ourselves. Whereas in the Local business a contract with a customer is described in terms of renting specified items of equipment for a period of time, most of the contracts that Power Projects performs are for providing a defined amount of generating capacity, for which a customer pays a fixed monthly capacity charge; they then pay, in addition, a variable charge for each MW-hour they take. Under the terms of these contracts, Aggreko is responsible for installing and operating the equipment and the invoice to the customer is for power generation capacity and MW-hours delivered, not equipment rented. Most projects in this business are worth over £1 million a year and some can be worth very much more than that; in 2013, we invoiced our largest utility customer around £83 million. A typical contract in this business would be for the rental of 20-50MW for an initial period of 6-12 months, which will often be extended. Our power-plants are highly modular, and their capacity can be flexed in 1MW increments using standard containerised units of our own proprietary design, built in our factory in Scotland; importantly, these generators are also in widespread use in the Local business, so fleet can be shared between the two businesses. They use diesel, gas or heavy fuel oil and are designed to be easily transportable, reliable and robust; power projects can arise anywhere in the world and the required response time is generally weeks rather than the hours or days needed in the Local business. To support these projects, we concentrate our fleet in a number of hubs – in Central America, Europe, the Middle East and Asia. From each hub, large amounts of equipment can be shipped or flown rapidly to wherever it is needed.
Power Projects customers are almost all in emerging markets; 85% of our revenues come from utilities but we also serve governments, armed forces, as well as oil & gas and mining companies.
In 2013, our Power Projects business generated revenues of £627 million, or 41% of Aggreko's total revenue excluding pass-through fuel1.
COMPETITIVE ENVIRONMENT
When customers need power or temperature control equipment, they have the choice to buy, lease or rent, and therefore the biggest competitors for our customers' money are not rental companies but equipment manufacturers. The vast majority of chillers and generators are permanent installations that customers buy or lease; the rental market is therefore only a relatively small part of the overall supply. So, in terms of pricing and service, we always have to be focused on the fact that customers have a choice, not only of using other rental companies, but also to buy from manufacturers. The questions in the choice between buying and renting tend to be speed – how quickly do you need it? – and duration – how long do you need it for? Urgency, and/or limited duration, is the need that we, as a rental business, serve.
Within the Local business, barriers to entry are relatively low; many companies, small and large, drift in and out of rental, and competition in each market is fierce. Typically, competitors in the Local business are either privately-owned specialist rental businesses, or divisions of large plant-hire companies. Their common characteristic is that they are local: most of them operate in a single country and, often, in just a particular part of a country. In their own territory they are very effective, but they find it difficult to operate outside their home market. So in most areas in which we operate, competition in the Local business is fierce; but the names with whom we do battle will tend to be different country by country, or even county by county.
For Power Projects, in some regions – notably South America and Asia – there are a number of companies that compete with us in their home territory, but they find it hard to operate outside their regional base. There are about 10 Caterpillar dealers who compete vigorously for power projects but, again, they tend to stick to neighbourhoods they know. These companies find it hard to organise themselves globally, however, and it is difficult to operate efficiently in the Power Projects business without a large homogenous fleet and the infrastructure to market, sell and operate it in a consistent manner around the world. There is only one other company that has the proven ability to operate globally, which is APR Energy, based in Jacksonville, Florida, and we have been competing with them, on and off, for about nine years. Analysts' consensus is that their 2013 revenues will be around $310 million, or 1/8th of Aggreko's revenues.
In both the Local business and Power Projects, valuable economies of scale accrue to those who can operate on a global basis. However, to gain these benefits of global scale requires a very long-term commitment to building distribution, deep technical expertise across a number of disciplines, and a well developed supply-chain; it also requires hundreds of millions of pounds of capital to fund fleet investment. Some people have the misconception that Aggreko has grown from nothing over a short period of time; to the contrary, Aggreko was founded some fifty years ago, and it has taken us five decades, several billion pounds of cumulative investment in fleet and a global network of service centres to get to the point where we are big enough to enjoy the benefits of global scale. Over the last ten years, some very large and powerful companies who have global scale in other markets have tried to emulate Aggreko but none has yet succeeded in building a global integrated power and temperature control business of the same scale. Aggreko is currently the only business in the market which has grown large enough to capture the economies of global scale and, in turn, these efficiencies have enabled us to fund rates of investment, and deliver returns to shareholders, far ahead of any competitor. As a consequence of this rate of investment, we have grown to be significantly larger than any other company operating in our market.