Interim Management Report

Group trading performance

First half performance was in line with expectations. Our Local business, representing some 60% of revenue, delivered strong underlying¹ revenue growth and margins strengthened; trading in our Power Projects business was, however, subdued relative to its historic performance, with revenue flat on the prior year and margins weaker. In aggregate, Group revenue increased by 5% on an underlying basis and 4% on a reported basis, while trading profit² was at similar levels to the prior year.

			Movement
	2013 £ million	2012 £ million	As reported	Underlying change
Revenue	760	734	4%	5%
Revenue excl. pass-through fuel	745	714	5%
Trading profit	155	157	(1)%	–%
Operating profit	157	158	–%
Net interest expense	(13)	(12)	(16)%
Profit before tax	144	146	(2)%
Taxation	(39)	(38)	(2)%
Profit after tax	105	108	(3)%
Diluted earnings per share (pence)	39.27	40.91	(4)%

Group revenue, as reported, increased by 4% to £760 million (2012: £734 million), while trading profit of £155 million (2012: £157 million) was down 1% on the prior year; reported trading margin was 20% (2012: 21%). Underlying revenue increased by 5% and trading profit was at similar levels to the prior year; underlying trading margin was 21% (2012: 23%).

Group profit before tax decreased by 2% to £144 million (2012: £146 million) and profit after tax decreased by 3% to £105 million (2012: £108 million), reflecting an increase in the tax rate from 26% to 27% which was driven by profit mix. Group return on capital employed (ROCE³), measured on a rolling 12-month basis, was 22% (2012: 26%). The ratio of revenue (excluding pass-through fuel⁴) to average gross rental assets decreased from 71% to 67%. The reduction in trading margins, ROCE and the ratio of revenue to average gross rental assets was driven by the Power Projects business, mainly due to a lower level of diesel fleet utilisation and higher than normal mobilisation costs from the 222MW of gas plants we have recently commissioned in Mozambique and Cote d'Ivoire.

The movement in exchange rates in the period had the effect of increasing revenue by £5 million, with a minimal impact on trading profit. Pass-through fuel accounted for £15 million (2012: £20 million) of reported revenue of £760 million.

In response to the subdued trading conditions in our Power Projects business we reacted promptly to reduce the rate of capital expenditure in our rental fleet; we spent £111 million on new fleet in the period (2012: £220 million), equivalent to 87% of the depreciation charge (June 2012: 213% of the depreciation charge).

As a consequence, net debt fell to £552 million at 30 June 2013, £126 million lower than the same period last year.

Regional Trading Performance 

In September 2012 we announced a new organisation structure comprising three regions: Americas; Europe, the Middle East and Africa (EMEA) and Asia, Pacific and Australia (APAC). This new structure took effect from 1 January 2013. The performance of these regions is detailed below, along with an analysis of the global performance of both our business lines – Power Projects and the Local business.

Regional trading performance as reported in
£ million

	Revenue			Trading profit
	2013 £ million	2012 £ million	Change %	2013 £ million	2012 £ million	Change %
By Region
Americas	317	280	14%	67	55	22%
Europe, Middle East   and Africa	277	280	(1)%	32	42	(24)%
Asia, Pacific and Australia	166	174	(4)%	56	60	(6)%
Group	760	734	4%	155	157	(1)%
By Business Line
Local Business	433	404	8%	62	52	18%
Power Projects excl.   pass-through fuel	312	310	1%	95	105	(9)%
Pass-through fuel	15	20	(20)%	(2)	–	(225)%
Group	760	734	4%	155	157	(1)%
Group excluding   pass-through fuel	745	714	5%	157	157	–%

The table below further splits the regional revenue into the Local and Power Projects elements:

	Revenue
	2013 £ million	2012 £ million	Change %
Americas
Local	215	175	25%
Power Projects	102	105	(4)%
Total	317	280	14%
Europe, Middle East and Africa
Local	149	167	(11)%
Power Projects excl. pass-through fuel	113	93	21%
Pass-through fuel	15	20	(20)%
Total	277	280	(1)%
Asia, Pacific and Australia
Local	69	62	12%
Power Projects	97	112	(13)%
Total	166	174	(4)%

Americas

	As reported 2013 $ million	As reported 2012 $ million	Underlying change %
Revenue
Local	331	274	17%
Power Projects	158	167	1%
Total	489	441	11%
Trading profit	103	86	26%
Trading margin	21%	20%

Our Americas business delivered a very strong performance in the first half. Underlying revenue (which for Americas was adjusted for the impact of the Poit acquisition in April 2012 as well as for currency), increased by 11% and trading profit by 26%. Underlying trading margin improved from 20% to 21%.

The Americas Local business operates from 98 service centres in Canada, the United States, Brazil, Chile, Argentina, Peru, Colombia, Mexico and Panama. Revenue, on an underlying basis, increased by 17%. Rental revenue increased by 14% and services revenue increased by 23%. Within rental revenue all products (power, temperature control and oil-free compressed air) increased by 14%, albeit our temperature control business had a slow start to the summer season as ambient temperatures in North America were unusually cool in May and June. On a sector basis, demand has been strong in the oil & gas and petrochemical & refining sectors in both North and Latin America; contracting & construction, although a small part of our revenues, also grew strongly.

The integration of the Poit Energia business has been completed and the combined business in Latin America has performed very well, growing its revenues at around 20% on a half year pro forma basis.

Power Projects revenue was slightly up on last year, within which revenue from the Military contracts was slightly down on the prior year. We expect to see a further decline in Military revenue in the second half as troops continue to exit from Afghanistan and a number of these contracts finish.

Europe, Middle East and Africa (EMEA) 

	As reported 2013 $ million	As reported 2012 $ million	Underlying change %
Revenue excl. pass-through fuel
Local	230	265	–%
Power Projects	174	146	19%
Total	404	411	7%
Trading profit excl. pass-through fuel	52	67	(19)%
Trading margin excl. pass-through fuel	13%	16%

Our EMEA business grew underlying revenue (adjusted for the London Olympics in 2012 and currency) by 7%. 

Revenue in our Power Projects business, excluding fuel, was up 19% on last year as we benefited from the first phase of our power plant in Mozambique, which is now delivering power to three countries (Namibia, South Africa and Mozambique) partially offset by off-hires in Angola. However, in the first quarter we signed contracts for an expansion of the Mozambique plant and the mobilisation costs of this additional 122MW, as well as those related to a 100MW expansion of our plant in Cote d'Ivoire, meant that trading margin in our EMEA business fell by three percentage points. Having taken the mobilisation costs in the first half, these plants will both contribute to profits in the second half.

Revenue in our EMEA Local business, on an underlying basis, was at similar levels to last year. Rental revenue increased by 5% and services revenue was down 8%. The decrease in services revenue is driven by some large cooling contracts in our Middle East business in the prior year which didn't repeat this year. Within rental revenue, power increased by 5% and temperature control increased by 3%.

On a sector basis there was good growth in oil & gas and construction, but a decline in utilities. In geographic terms we saw rental revenue growth in the UK and the Middle East but we experienced weak demand in a number of countries in Continental Europe. We also had the benefit in 2012 of an emergency contract in Cyprus, which finished in the second half of 2012.

Asia, Pacific and Australia (APAC)  

	As reported 2013 $ million	As reported 2012 $ million	Underlying change %
Revenue
Local	107	97	11%
Power Projects	150	177	(15)%
Total	257	274	(6)%
Trading profit	87	95	(8)%
Trading margin	34%	35%

Our APAC business has had a challenging first half with underlying (after adjusting for currency) revenue declining by 6% and trading profit declining by 8%. The underlying trading margin moved from 35% to 34%.

The Local business, consisting of Australia Pacific, Singapore, China and India, saw revenue increasing on an underlying basis by 11%. Rental revenue increased by 11% and services revenue was up 9%. Within rental revenue power increased by 9% and temperature control increased by 23% driven by emergency cooling jobs in Australia. Strong revenues from Liquid Natural Gas (LNG) construction projects in Queensland offset reduced revenues from mining projects in West Australia.

In geographic terms, we saw good growth in Australia Pacific which contributed over 80% of the revenue in the Local business. India delivered good growth allowing for a mini power project in the comparatives. China continues to be our most challenging market in Local APAC and we are in the process of reviewing how best to target the Chinese market going forward.

In the first half of 2013, Power Projects revenue was 15% lower than last year largely driven by lower volumes in both Japan and Indonesia. In Japan, some 100MW of gas-fired generation which had been supporting TEPCO following the Fukushima disaster off-hired at the end of the first quarter; we continue to provide around 140MW of diesel capacity to HEPCO. In Indonesia, a number of sites off-hired in the second half of 2012 and early in 2013; most of these off-hires were due to permanent power plants coming on-line, but the competitive environment in this market is also tough.

Power Projects Business Line 

	As reported 2013 $ million	As reported 2012 $ million	Underlying change %
Excl. pass-through fuel
Revenue	482	490	–%
Trading profit	147	166	(8)%
Trading margin	31%	34%

Our Power Projects business experienced subdued trading in the period with revenue, in constant currency and excluding pass-through fuel, at similar levels to last year and trading profits decreasing by 8%. Trading margin decreased to 31% (2012: 34%). A number of factors contributed to the margin movement: high levels of mobilisation costs from the 222MW of gas plants which we commissioned in Mozambique and Cote d'Ivoire; the completion of contracts in Japan and Military; lower diesel fleet utilisation; and some pricing pressure on diesel fleet. These factors were in part offset by a lower charge to the income statement for the provision of bad debts in the six month to 30 June 2013 as compared to the prior year.

Order intake for the first half was 397MW (H1 2012: 669MW) which includes a summer peak-shaving contract in Tunisia of over 100MW as well as the 122MW cross-border power project supplying power to Namibia and Mozambique. At the end of the period, our order book was over 30,000MW months, the equivalent of 11 months' revenue at the current runrate. Our investment in technologies using fuel other than diesel is paying dividends: we go into the second half with nearly 900MW of gas-fuelled generation on rent, and revenues from gas were over 40% up on the prior year in the first half. Encouragingly, there has been strong interest from customers in our new Heavy Fuel Oil (HFO) product, and between Power Projects and the Local business we now have four contracts for this product. We are currently converting our existing diesel fleet into HFO-capable sets at a rate of about 7 sets a week, and expect to have around 300MW of HFO capacity by the end of the year.

Local Business Line 

	As reported 2013 £ million	As reported 2012 £ million	Underlying change %
Revenue	433	404	9%
Trading profit	62	52	18%
Trading margin	14%	13%

Our Local business delivered a strong first half with underlying revenue increasing by 9% and trading profit increasing by 18%. On the same basis trading margin increased from 13% to 14%. Within this, our recent investments in building our presence in emerging markets⁵ continues to drive good levels of growth. Rates across the Local business are slightly up on the prior year.

As we set out in our strategy review in March, a key part of our strategy is to use our Local business network to execute smaller power projects, which, absent a Local business, would have been executed by our Power Projects business; it is pleasing to note that this segment of 'mini-projects'⁶ has shown very strong growth over the period and over the last 12 months we have executed some 500MW worth of contracts of this type.

Outlook

Our expectations for the full year remain unchanged.

We expect revenues in Power Projects to be higher in the second half than in the first, as increased revenues from our gas projects offset reduced revenues from Military and Japan. We also expect to make further progress with our new HFO product, for which we have signed another contract since our June Trading update. We now have a total of four customers for this product in the Americas, Africa and in Asia, underlining the broad appeal that this product will have. However, although the prospect pipeline remains healthy, we do not expect a pick-up in the rate of order intake for the Power Projects business in the immediate future.

On an underlying basis we expect that the Local business will continue to perform well in the second half with margins anticipated to improve year on year, in part reflecting the growth in mini power projects.

We now expect to spend around £240 million on fleet capital expenditure for the full year. As a result of our disciplined approach to capital expenditure, we also expect to deliver strong cash generation in the second half.

 

Financial review

The movement in exchange rates during the period increased revenue by £5 million and had a minimal impact on trading profit. Currency translation also gave rise to a £23 million increase in net assets from December 2012 to June 2013. Set out in the table below are the principal exchange rates affecting the Group's overseas profits and net assets:

	Jun 2013		Jun 2012		Dec 2012
per £ Sterling	Average	Period end	Average	Period end	Average	Period end
Principal Exchange Rates
United States Dollar	1.55	1.53	1.58	1.56	1.59	1.61
Euro	1.18	1.17	1.22	1.24	1.23	1.22
Other Operational Exchange Rates
UAE Dirhams	5.67	5.60	5.79	5.73	5.82	5.92
Australian Dollar	1.52	1.65	1.53	1.53	1.53	1.55

Source: Bloomberg

Reconciliation of underlying growth to reported growth

The table below reconciles the reported and underlying revenue and trading profit growth rates:

	Revenue £ million	Trading profit £ million
2012	734	157
Currency	5	–
2012 pass-through fuel	(20)	–
2013 pass-through fuel	15	(2)
Poit Energia acquisition	12	2
Underlying growth including events	14	(2)
2013	760	155
2012 revenue from London Olympics	(21)
As reported growth	4%	(1)%
Underlying growth	5%	–%

Interest

The net interest charge for the first half of 2013 was £13 million, an increase of £1 million on 2012, reflecting arrangement fees for debt refinanced during the period. Interest cover, measured against rolling 12-month EBITDA, remains strong at 25 times (June 2012: 26 times) relative to the financial covenant attached to our borrowing facilities that EBITDA should be no less than 4 times interest.

Effective tax rate

The current forecast of the effective tax rate for the full year, which has been used in the interim accounts is 27.0% as compared with 26.0% in the same period last year. The increase is principally driven by the regional mix of profits.

Dividends

The Board has decided to pay an interim dividend of 9.11 pence per ordinary share which represents an increase of 10% compared with the same period in 2012; dividend cover is 4.3 times (30 June 2012: 5.0 times) and is consistent with our strategy of reducing our full year dividend cover to nearer 3 times (December 2012: 4.2 times) in the next 2-3 years. This interim dividend will be paid on 4 October 2013 to shareholders on the register at 6 September  2013, with an ex-dividend date of 4 September 2013.

Cashflow

The net cash inflow from operations during the period totalled £270 million (2012: £134 million). This funded capital expenditure of £123 million which was down £110 million on the same period in 2012. Of the £123 million, £111 million was spent on fleet which was split evenly between the Power Projects and Local businesses. Within Power Projects, a substantial portion of the half and full year spend will be on converting over 250 of our diesel sets to our new HFO engine which we launched at the time of our March 2013 strategy review. Net debt of £552 million at 30 June 2013 was £126 million lower than the same period last year mainly driven by the lower capital expenditure. On a rolling 12-month basis, net debt to EBITDA was 0.8 times compared with 1.2 times for the same period in 2012.

There was a £21 million working capital outflow in the six months to 30 June 2013 (6 months to 30 June 2012: £143 million outflow) mainly driven by an increase in debtor balances in our Power Projects business. Debtor days in the Power Projects business increased by 21 days to 111 days (30 June 2012: 119 days). There continues to be two customers where payments are slow, albeit in one of the cases the cash received in the first six months of this year has exceeded the value invoiced. In both cases discussions are ongoing to progress the overdue balance.

Overall, the Power Projects bad debt provision at 30 June 2013 was £11 million higher than at 31 December 2012 (£19 million higher than 30 June 2012). For the full year our expectation remains that the bad debt provision will be at a similar level to the prior year.

Financial resources

The Group maintains sufficient facilities to meet its normal funding requirements over the medium term. At 30 June 2013, these facilities totalled £922 million in the form of committed bank facilities arranged on a bilateral basis with a number of international banks and private placement notes. Since the start of 2013, we refinanced £350 million of facilities. The financial covenants attached to these facilities are that EBITDA should be no less than 4 times interest and net debt should be no more than 3 times EBITDA; at 30 June 2013, these stood at 25 times and 0.8 times respectively. The Group does not consider that these covenants are restrictive to its operations. The maturity profile of the borrowings is detailed in Note 13 in the Accounts.

Net debt amounted to £552 million at 30 June 2013 and, at that date, un-drawn committed facilities were £376 million.

Net operating assets

The net operating assets of the Group at 30 June 2013 totalled £1,773 million, up £106 million on the same period in 2012. The main components of net operating assets are:

			Movement
	2013 £ million	2012 £ million	Headline	Constant currency1
Rental fleet	1,219	1,152	6%	4%
Property and plant	85	80	5%	4%
Inventory	163	175	(6)%	(7)%
Net trade debtors	293	344	(15)%	(15)%

A key measure of Aggreko's performance is Return on Capital Employed (ROCE) (expressed as operating profit as a percentage of average net operating assets). For each first half, we calculate ROCE by taking the operating profit on a rolling 12-month basis and expressing it as a percentage of the average net operating assets at 30 June, 31 December and the previous 30 June. For the full year, we state the year's operating profit as a percentage of the average net operating assets as at 31 December, the previous 30 June and 31 December. The average net operating assets for the 12 months to 30 June 2013 were £1,716 million, up 21% on the same period in 2012; operating profit for the same period was £384 million.

In the first half of 2013 the ROCE decreased to 22% compared with 26% for the same period in 2012. This decrease was mainly driven by lower trading margins in our Power Projects business which was driven by: high levels of mobilisation costs from the 222MW of gas plants which we commissioned in Mozambique and Cote d'Ivoire; the completion of contracts in Japan and Military; lower diesel fleet utilisation; and some pricing pressure on diesel fleet.

Shareholders' equity

Shareholders' equity increased by £92 million to £1,137 million in the six months ended 30 June 2013, represented by the net assets of the Group of £1,689 million before net debt of £552 million. The movements in shareholders' equity are analysed in the table below:

Movements in shareholders' equity

	£ million	£ million
As at 1 January 2013		1,045
Profit for the financial period	105
Dividend1	(42)
Retained earnings		63
New share capital subscribed		1
Employee share awards		(3)
Actuarial losses on retirement benefits		(1)
Currency translation difference		23
Movement in hedging reserve		12
Other2		(3)
As at 30 June 2013		1,137

Principal risks and uncertainties

In the day to day operations of the Group, we face risks and uncertainties. Our job is to mitigate and manage these risks and to aid this the Board has developed a formal risk management process which is described on page 61 of the 2012 Annual Report and Accounts. Also set out on pages 29 to 33 of that report are the principal risks and uncertainties which we believe could potentially impact the Group, and these are summarised below:

• Economic conditions;
• Political risk;
• Failure to collect payments or to recover assets;
• Events;
• Failure to conduct business dealings with integrityand honesty;
• Safety;
• Competition;
• Product technology and emissions regulation; and
• People.

We do not believe that the principal risks and uncertainties facing the business have changed materially since the publication of the Annual Report and we believe these will continue to be the same in the second half of the year.

Shareholder information

Our website can be accessed at www.aggreko.com. This contains a large amount of information about our business, including a range of charts and data, which can be downloaded for easy analysis. The website also carries copies of recent investor presentations, as well as Stock Exchange announcements.

Rupert Soames
Chief Executive

Angus Cockburn
Chief Financial Officer 

1 August 2013