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.

The strategy was developed following an in-depth review of Aggreko's business in 2003, and has been consistently applied for the last eight years; it continues to be the basis of our business planning, and we believe that consistency of purpose has been a major contributor to our success. 19% compound growth in revenues and 30% compound growth in trading profit over this period indicate that the strategy is the right one, and we continue to work relentlessly to implement it.

Aggreko Group – excluding pass-through fuel
	2011	2003	CAGR
Revenue (£m)	1,288	324	19%
Trading profit (£m)	336	42	30%
Trading margin	26%	13%
Diluted earnings per share (pence)**	86.76	10.14	31%
Return on capital employed (ROCE)*	28%	13%
Enterprise value at year end (£m)1	5,744	514	35%
* Calculated by dividing operating profit for a period by the average net operating assets as at 1 January, 30 June and 31 December. ** Pre-exceptional items. 1 Enterprise value is defined as market value plus net debt.

The strong growth over recent years was only made possible because, over the preceding forty years, Aggreko's management and owners had patiently built a foundation of service centres in North America, Europe, the Middle East, Asia and Australia; had spotted that designing and building our own equipment had major advantages; had created a hardworking, entrepreneurial and customer-focused culture; and had built a brand. The lesson we see every day is that it takes decades to achieve the sort of global scale which Aggreko now has, and there are no short cuts.

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.

We regularly test our strategy which keeps it fresh and relevant, and enables us to spot and react to new opportunities. Having conducted a root-and-branch review in 2003 we re-examined our conclusions in 2005, 2007 and 2009. The conclusions from the 2009 review, which were communicated to investors in March 2010 and which we continue to believe, are summarised below:

• The strategy we developed in 2003, and re-affirmed in 2005 and 2007, is working well.

• Our Local business continues to offer attractive opportunities for growth, both from growing our density and footprint in existing markets, and expanding into new countries.

• The factors which have driven the growth of our International Power Projects business will continue to provide plenty of headroom for this business for the foreseeable future; the world faces serious structural shortages of power which will last for many years and which should sustain demand for our services.

• In our 2009 review we stepped up the work we are doing on emissions. To back this up, we have been running two major initiatives. The first is to build a fleet of gas-fuelled power generators, which have significantly lower emissions; by the end of 2011, we had invested a total of £239 million in new gas sets, and will have about 960MW of capacity in our fleet. The second initiative has been to embark on a wholesale upgrading of our North American fleet to be compliant with at least Tier 2 EPA levels.

• In all our businesses, there are always opportunities to improve the efficiency of operations, whilst maintaining our prized agility. There are plenty of things we can do better. In 2008 we launched a major Group-wide initiative called Orange Excellence, which aims to develop our capability to improve the way we do things in the business; under this programme, we have so far trained 330 people to Orange Belt standard, and 40 people to Black Belt standard, and, as a consequence of this, the company has hugely improved its capability to drive continuous improvement in the business.

With the 2007 Strategy Review reaching the end of its life in 2012, we have already started work on the 2012 Strategy Review. A significant amount of research has been commissioned, and many of the senior managers in the business are involved in developing our way forward. The outcome of this review will be presented to investors in March 2013.

Our current strategy for each of the business lines is set out 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;

• The International 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.

The Local business

The Local business serves customers from 165 service centres in 39 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 £10,000 and last a few weeks. The Local business represents 57% of Aggreko's revenues, excluding pass-through fuel, and 36% of trading profit. Since our first strategy review in 2003, revenues and trading profit have increased at a compound growth rate of 14% and 21% respectively:

Aggreko Local business
				% of Group
	2011	2003	CAGR	2011	2003
Revenue (£m)	734	258	14%	57%	80%
Trading profit (£m)	121	27	21%	36%	64%
Trading margin	17%	10%
ROCE*	18%	11%

There are three elements in 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.

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 3 years we have been asking approximately 17,000 customers what they think of the service they have received from us, and we measure our Net Promoter Scores. 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 6 years our score has improved by 10pp 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 2011 was amongst the top 5 highest of all their customers benchmarked world-wide 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 equipment is 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 2011, sales/gross rental assets in the Local business increased from 62% to 75%. Global fleet sourcing allows us to stock our fleet with premium-quality equipment at 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 21% over the last 8 years and a return on capital employed that has improved from 11% to 18% over the same period. Some people ask us why the return on capital in the Local business is lower than in International 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 International 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, including those acquired as part of an acquisition in:

North America:	Indianapolis, Long Island, Fort McMurray, Gillette, Shreveport, Minneapolis St Paul, Seattle, Fort St. John, Minot, Roosevelt
Europe:	Berlin, Bordeaux, Bristol, London, Padova, Warsaw, Istanbul
Australia/New Zealand:	Christchurch, Geraldton, Gladstone, Muswellbrook, Newman, New Plymouth, Tauranga, Wellington, Wollongong

However, we know that our businesses grow fastest where there is strong growth in GDP, and, specifically, in Aggreko GDP (GDP weighted to industries which typically use our services). 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, since then, we have opened or upgraded service centres in:

Africa:	Durban, Johannesburg
Middle East:	Doha, Jebel Ali, Abu Dhabi, Muscat, Jeddah, Al Khobar
Latin America:	Panama, Buenos Aires, Antofagasta, Recife, Parapuebas, Concepcion, Monterrey, Villahermosa, Belo Horizonte, Bogota, Camacari, Copiapo, Lima, Porto Alegre
Asia:	Pune, Shanghai, Dalian, Singapore, New Delhi, Guangzhou
Russia:	Moscow

International 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 International 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 hydro-electric power plants whose output is cyclical and dependent on rainfall.

International Power Projects now represents 43% of Group revenues and 64% of trading profit, excluding pass-through fuel. Since 2003, International Power Projects revenue excluding pass-through fuel and trading profit have grown at a compound annual growth rate of 31% and 40% respectively:

International Power Projects excl. pass-through fuel
				% of Group
	2011	2003	CAGR	2011	2003
Revenue (£m)	554	66	31%	43%	20%
Trading profit (£m)	215	15	40%	64%	36%
Trading margin	39%	23%
ROCE*	40%	25%
Note: pass-through fuel refers to revenues we generate from two 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 International 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 International 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 2011, 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 International Power Projects. There are numerous reasons for this:

• Being able to address demand on a world-wide 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 lead-times for large amounts of capacity is a significant competitive advantage. Small operators simply 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 International 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 International 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 recent 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. 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 International Power Projects, bigger is better – and Aggreko is now much larger than any other competitor in this market.