Review of Trading

Group Trading Performance

I am pleased to report that Aggreko has delivered a good performance in 2012, with reported revenues and trading profit¹ increasing by 13%: excluding pass-through fuel, reported revenues increased by 20%. On an underlying² basis revenues increased 14% while trading profit increased 6%. Underlying results exclude revenues and trading profit from major events (Asian Games in 2011 and London Olympics in 2012), the Poit Energia acquisition, pass-through fuel³ and currency movements. 

To give added perspective, the table below shows the reported versus underlying growth rates for both 2011 and 2012.

Year-on-year growth %
	2012	2011
As reported, excl. pass-through fuel
Revenues	20%	11%
Trading profit	14%	8%
Underlying
Revenues	14%	22%
Trading profit	6%	26%

A summarised Income Statement for 2012 is set out below. All numbers in this section are pre-exceptional items unless otherwise stated.

			Movement
	2012 £ million	2011 £ million	As reported	Underlying change
Revenues	1,583	1,396	13%	14%
Revenues excl. pass-through fuel	1,543	1,288	20%
Trading profit	381	338	13%	6%
Operating profit	385	342	13%
Net interest expense	(25)	(18)	(32)%
Profit before tax	360	324	11%
Taxation	(94)	(92)	(2)%
Profit after tax	266	232	15%
Diluted earnings per share (pence)	100.40	86.76	16%

As reported, Group revenues at £1,583 million (2011: £1,396 million) were 13% higher than 2011, while Group trading profit of £381 million (2011: £338 million) was also 13% ahead of 2011. This delivered a Group trading margin of 24% (2011: 24%). Underlying revenues and trading profit increased by 14% and 6% respectively. On the same basis trading margin decreased to 24% (2011: 26%). 

Group profit before tax increased by 11% to £360 million (2011: £324 million), and profit after tax increased by 15% to £266 million (2011: £232 million) reflecting the reduction in the effective tax rate from 28.5% to 26.0%. Diluted earnings per share grew 16% to 100.40 pence (2011: 86.76 pence). Return on capital employed, measured as operating profit divided by average net operating assets, decreased by four percentage points to 24% (2011: 28%) due to lower trading margins and increased working capital in our Power Projects business and the impact of the Poit Energia acquisition. The ratio of revenue (excluding pass-through fuel) to average gross rental assets was in line with last year at 71%. 

The movement in exchange rates in the year had the effect of decreasing revenue by £6 million and trading profit by £1 million. Pass-through fuel accounted for £40 million (2011: £108 million) of reported revenue of £1,583 million.

Fleet capital expenditure for the year was £415 million (2011: £392 million) which represented 94% of total capital expenditure. This fleet spend was 1.9 times the depreciation charge in the period, with part of the year-on-year increase accounted for by equipment purchased to service the London Olympics contract, which, following the Games, has been put to use in the wider business. The fleet spend was evenly split between the Local and Power Projects businesses. In addition, we acquired £47 million of property, plant and equipment as part of the Poit Energia acquisition. The total cash paid in the year for this acquisition was £136 million.

Net debt of £593 million at 31 December 2012 was £228 million higher than the same period last year driven by: the acquisition of Poit Energia (£136 million); higher capital expenditure and increased levels of working capital in Power Projects. These increased outflows were in part offset by higher EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortisation). 

Acquisition of Poit Energia

On 16 April 2012 we completed the acquisition of the entire share capital of Companhia Brasileira de Locacoes ('Poit Energia'), a leading provider of temporary power solutions in South America. The initial transaction price of £138 million (R$404 million) was made up of £105 million consideration payable to the owners of Poit Energia, plus £33 million of debt to be paid off by Aggreko on behalf of Poit Energia. In addition to the initial transaction price of £138 million, there was a further amount of up to £20 million conditional on the business achieving stretching performance targets for the year to 31 December 2012. We completed the acquisition and legal merger of the two businesses earlier than we anticipated and, accordingly, we agreed with the vendors that we would terminate the earn out period early in return for a payment of £3 million. This has allowed us to move ahead faster with the operational integration of the businesses; we have made good progress on the integration and anticipate its completion by the end of the first quarter of 2013. 

The acquisition of Poit Energia supports Aggreko's strategy of expanding its Local businesses in fast growing economies; it strengthens Aggreko's business in South America, both in terms of geographic footprint and in accessing sectors to which Aggreko previously had limited exposure. 

Regional Trading Performance

The performance of each of our regional businesses is described below. Our Power Projects business grew underlying revenues in constant currency and excluding pass-through fuel by 15%, and secured 1,029MW of new work in 13 countries. Our Local business delivered headline growth in revenues of 23%, and an underlying growth rate of 13%.

Regional trading performance as reported in     £ million
	Revenues			Trading profit
	2012 £ million	2011 £ million	Change %	2012 £ million	2011 £ million	Change %
Local business
North America	304	259	18%	66	49	34%
Europe	222	168	32%	40	12	249%
Middle East & Developing Europe	145	134	8%	28	30	(6)%
Sub-total Europe & Middle East	367	302	21%	68	42	65%
Aggreko International's Local businesses	234	173	35%	36	30	19%
Sub-total Local business	905	734	23%	170	121	41%
Power Projects
Power Projects excluding pass-through fuel	638	554	15%	212	215	(2)%
Power Projects pass-through fuel	40	108	(63)%	(1)	2	(134)%
Sub-total Power Projects	678	662	2%	211	217	(3)%
Group	1,583	1,396	13%	381	338	13%
Group excluding pass-through fuel	1,543	1,288	20%	382	336	14%
1 As a result of a change in how management monitor the business, the Russian business, which was previously reported as part of Europe, is now reported as part of the Middle East segment which has been renamed as Middle East & Developing Europe.

The performance of each of these regions is described below:

Local business: North America

		2011 $ million	Underlying change %
	2012 $ million
Revenues	482	415	16%
Trading profit	105	79	32%
Trading margin	22%	19%

Our North American business delivered a strong performance in 2012. Underlying revenues, which in the case of our North American business adjusts only for the impact of currency translation, increased by 16% to $482 million and trading profit by 32% to $105 million. Trading margin improved from 19% to 22%.

Rental revenues grew by 15% and services revenues were up 19%. Power rental revenues were up 31% with strong performances in construction, events and oil & gas. Temperature control revenues decreased by 1%, largely due to lower volumes in our Cooling Towers business, with the prior year containing some large projects which did not recur in 2012. Oil-free compressed air rental revenues grew by 2%. 

Most geographic areas of the North American business achieved strong base business growth over the same period last year, with performances in our Canada and North business units being particularly strong. 

The North American business has taken significant steps in upgrading its diesel generator fleet with the latest emissions technology. The next stage of this has begun and we started taking delivery of the first Tier 4 interim engines during 2012. By the end of 2013, almost 50% of the fleet will be Tier 3 or Tier 4 compliant.

Local business: Europe & Middle East

		2011 £ million	Underlying change %
	2012 £ million
Revenues	367	302	5%
Trading profit	68	42	4%
Trading margin	19%	14%
Europe
		2011 £ million	Underlying change %
	2012 £ million
Revenues	222	168	3%
Trading profit	40	12	36%
Trading margin	18%	7%
Middle East & Developing Europe
		2011 AED million	Underlying change %
	2012 AED million
Revenues	843	787	8%
Trading profit	163	176	(6)%
Trading margin	19%	22%

Our Europe & Middle East business had a very strong year with the successful execution of the London Olympics contract delivering revenues of £60 million (2011: £4 million) and contributing to a 65% increase in reported trading profit. On an underlying basis (i.e. excluding London Olympics and the impact of currency) revenues increased by 5% and trading profit increased 4%. On the same basis trading margin was in line with the prior year at 13%.

Revenues in Europe, on an underlying basis, were 3% up on the prior year. Rental revenues increased by 1% and services revenues increased by 6%. Within rental revenues, power increased by 3% but temperature control decreased by 4%. Area performance continued to be mixed with increases in the UK, Spain and Italy partially offset by decreases in Germany and France. From a sector perspective we saw increases in oil & gas and petrochemical & refining but decreases in contracting and construction. On an underlying basis trading profits increased by 36% and trading margin increased from 6% to 8% mainly driven by the UK business which benefited from London Olympics related work.

Revenues in the Middle East & Developing Europe of AED843 million (£145 million) were 8% ahead of the prior year on an underlying basis. Rental revenues increased by 10%, with power increasing by 12% but temperature control decreasing by 13%, albeit off a small base, reflecting the off hire of some large cooling projects in the UAE. Services revenues increased by 4%. Trading margins fell by 3pp to 19% due to the absence in 2012 of some large projects which typically attract better margins than our day-to-day business. We saw good growth in Oman and Saudi Arabia and benefited from an emergency contract in Cyprus. In terms of our newer geographies our business in Russia continued to grow with over 160MW on rent at the end of the year; we are also continuing to build our businesses in Iraq and Eastern Europe.

Aggreko International's Local business

		2011 £ million	Underlying change %
	2012 £ million
Revenues	234	173	20%
Trading profit	36	30	18%
Trading margin	15%	17%

Aggreko International's Local business operates in 23 countries across Africa, Asia, Australasia and Latin America. This business had a strong year with underlying revenues (excluding currency translation, Asian Games in 2011 and the Poit Energia acquisition in 2012) increasing by 20% and trading profit by 18%. On the same underlying basis trading margin was in line with last year at 16%.

On an underlying basis rental revenues increased 20% and services revenues increased 18%. Within rental revenue, power increased 20% and temperature control increased 19%. Revenues in nearly all geographies increased as compared with the prior year, most notably in our more mature business in Australia Pacific where revenue increased 27%, driven by a strong performance in the mining sector, and in Brazil where revenue (excluding the Poit Energia acquisition) increased 34% driven by the mining, utilities and events sectors. In 2012 we continued our expansion into faster growing economies and opened 18 new locations: 5 in South America; 2 in Central America; 6 in Asia; 4 in Africa; and one in Australia.

In addition, through the acquisition of Poit Energia, the international Local Business gained 8 new locations.

Aggreko International: Power Projects ¹

		2011 $ million	Underlying change %
	2012 $ million
Revenue (excl. pass-through fuel)	1,012	888	15%
Trading profit (excl. pass-through fuel)	335	344	(1)%
Trading margin	33%	39%

1	The International Power Projects business has been renamed  as the Power Projects business.

Our Power Projects business grew underlying revenues, in constant currency and excluding pass-through fuel, by 15% to $1,012 million. Trading margin, however, decreased from 39% to 33%, for three reasons. First, we increased bad debt provisions by $39 million; second, mobilisation costs on our large Mozambique contract were unusually high; and third, we have seen a continued reduction in revenues from our Military and Japanese contracts, which typically attract higher margins. As a consequence of these three factors, trading profit decreased by 1%; excluding the impact of the increased bad debt provision, trading profit increased by 10%. 

As we have said before, cash collection is a key challenge in our Power Projects business. Unpredictable and inconsistent customer payment behaviour is a feature of the Power Projects business and is a key factor that we consider in determining our bad debt provision. Although we take measures to reduce our exposures, we continue to take a conservative view when it comes to providing for overdue debt. The increase in the bad debt provision in 2012 year was principally in respect of two customers; they are not disputing the payment liability, and we are receiving cash, but more slowly than we would like. At 31 December 2012 bad debt provisions amounted to around 26% of our 2012 Power Projects gross debtors (2011: 17%).

In 2012, we secured 23 new contracts in 13 countries and 1,029MW of new work, comprising 280MW in Asia, 606MW in Africa & Middle East and 143MW in Latin America. Revenues from our gas-powered fleet continued to grow strongly with the number of MW of gas on rent increasing on average by nearly 80% year-on-year. At the start of 2013, our order book stood at almost 37,000MW-months, an increase of 3% over the prior year and the equivalent of 12 months' revenue at the current run-rate.

On a geographic basis, Asia continued to deliver strong growth along with South & East Africa and North & West Africa. As anticipated, Military revenues continued to decline in line with US troops withdrawal from Afghanistan. In 2012, 84% of Power Projects' revenues came from utilities; military projects represented about 8%, and oil & gas, mining and manufacturing together contributed the remaining 8%. At the start of 2013, the Power Projects fleet, at over 5,000MW, is 13% larger than 12 months earlier and includes around 1,100MW of gas-powered fleet.

Outlook for 2013

The Local business has had a very strong start to the year, with almost 20% more power on rent than a year ago, helped in part by our acquisition of Poit Energia in April 2012. Encouragingly, growth in the Local business has been broadly spread, with most areas other than Europe showing healthy year-on-year increases in MW on hire.

In Power Projects, we have signed new contracts totalling 140MW in the year to date, and importantly, we have secured our first large order for our new Heavy Fuel Oil engine, with a 56MW contract in the Caribbean. We have also secured a contract for 57MW of diesel-powered generation in Djibouti. Trading continues to be subdued and is likely to remain so in the first half; however, in recent weeks there has been some improvement in the prospect pipeline. 

Our expectations for the year as a whole remain unchanged from previous guidance.