Review of Trading

Group trading performance

I am pleased to report that Aggreko has delivered another strong performance in 2011, with underlying¹ growth in revenues of 22% and in trading profit² of 26%. The Group also achieved solid headline growth despite the fact that 2010 was an extraordinary year for our revenue from major sporting events, with the FIFA World Cup, the Vancouver Winter Olympics and the Asian Games together accounting for about £87 million of revenue in 2010. Such a happy coincidence of three world-class events running in the same year happens only once every four years. We therefore feel justified in focusing on the underlying results, which we define as being revenue and trading profit excluding these events, pass-through fuel³, and currency movements, as well as a small amount of revenue from the London Olympics which arose in 2011. To give added perspective, the table below shows the reported versus underlying numbers for both 2010 and 2011.

Year-on-year growth %
	2011	2010
As reported
Revenues	14%	20%
Trading profit	8%	24%
Underlying
Revenues	22%	11%
Trading profit	26%	11%

A summarised Income Statement for 2011 is set out below. All references to taxation, profit after tax and earnings per share in this section are pre-exceptional items unless otherwise stated.

			Movement
	2011 £ million	2010 £ million	As reported	Underlying change
Revenue	1,396	1,230	14%	22%
Revenue excl. pass-through fuel	1,288	1,156	11%
Trading profit	338	312	8%	26%
Operating profit	342	315	9%
Net interest expense	(18)	(11)	(85)%
Profit before tax	324	304	6%
Taxation	(92)	(91)	(1)%
Profit after tax	232	213	9%
Diluted earnings per share (pence)	86.76	78.98	10%

As reported, Group revenue at £1,396 million (2010: £1,230 million) was 14% higher than 2010, while Group trading profit of £338 million (2010: £312 million) was 8% ahead of 2010. This delivered a Group trading margin of 24.2% (2010: 25.4%), with the reduction due to not having the benefit of the major sporting events revenue of 2010. Underlying revenue and trading profit increased by 22% and 26% respectively. On the same basis trading margin increased to 25.9% (2010: 25.1%).

As reported, group profit before tax increased by 6% to £324 million (2010: £304 million), and profit after tax increased by 9% to £232 million (2010: £213 million) reflecting the reduction in the effective tax rate from 30.0% to 28.5%. Diluted earnings per share grew 10% to 86.76 pence (2010: 78.98 pence). Return on capital employed, measured as operating profit divided by average net operating assets, decreased by 4pp to 28.0% (2010: 32.4%) due to increased working capital and the absence of the major sporting events revenue of 2010 which were less capital intensive than the base business. The ratio of revenue (excluding pass-through fuel) to average gross rental assets decreased from 76% to 71% also reflecting the higher capital productivity of major sporting events as well as the high level of fleet investment in 2011, particularly during the second half.

The strengthening of Sterling, during the year, in particular against the US Dollar, had the effect of reducing revenue by £26 million and trading profit by £9 million. Pass-through fuel, which we manage as a service to two customers at little or no margin, increased sharply, primarily driven by the unit cost of fuel rather than volumes, and accounted for £108 million (2010: £74 million) of reported revenue of £1,396 million and £2 million (2010: £2 million) of reported trading profit of £338 million.

Fleet capital expenditure for the year was £392 million (2010: £254 million) which represented 94% of total capital expenditure. This fleet spend was 2.2 times the depreciation charge in the period, reflecting the continued expansion of our rental fleet; our International business accounted for around 71% of this investment. The largest investment in terms of product was in our gas fleet. In addition, we acquired £5 million of property, plant and equipment as part of the acquisition of N.Z. Generator Hire Ltd, in March 2011. The total consideration for this acquisition was £14 million.

Net debt of £365 million at 31 December 2011 was £232 million higher than the same period last year. We regard this as a creditable performance given the £149 million year-on-year increase in total capital expenditure and the £160 million increase in cash returns to shareholders; this latter item comprised the £148 million return of capital to shareholders, completed in July 2011, and a £12 million increase in the ordinary dividend.

Regional trading performance

The performance of each of our regional businesses is described below. Our International Power Projects grew revenue in constant currency and excluding passthrough fuel by 25%, and secured over 1,200MW of new work in 20 countries; on the same basis, trading profit increased by 33%. Our Local business delivered an underlying 21% growth in revenue, and on the same basis 15% growth in trading profit.

Regional trading performance as reported in £ million
	Revenue			Trading profit
Management Group	2011 £ million	2010 £ million	Change % As reported	2011 £ million	2010 £ million	Change % As reported
Local business
North America	259	246	5%	49	45	9%
Europe	189	164	15%	22	19	17%
Middle East & South East Europe (SEE)	113	98	16%	20	23	(14)%
Sub-total Europe & Middle East	302	262	16%	42	42	–
Aggreko International's Local businesses	173	188	(8)%	30	55	(46)%
Sub-total Local business	734	696	6%	121	142	(15)%
International Power Projects (IPP)
IPP excl. pass-through fuel	554	460	20%	215	168	28%
IPP pass-through fuel	108	74	46%	2	2	19%
Sub-total International Power Projects	662	534	24%	217	170	28%
Group	1,396	1,230	14%	338	312	8%
Group excluding pass-through fuel	1,288	1,156	11%	336	310	8%

Local Business: North America

	2011 $ million	2010 $ million	Underlying change %
Revenue	415	380	18%
Trading profit	79	70	27%
Trading margin	19.1%	18.3%

In generally difficult market conditions, our North American business performed extremely well in 2011 with underlying revenues (i.e. excluding the impact of the Vancouver Winter Olympics in 2010) increasing by 18%, and trading profit by 27%; on the same basis trading margin improved from 17.9% to 19.1%.

On an underlying basis, rental revenue grew by 15% and services revenue was up 27%. Power rental revenue was up 21% with good base business growth as well as the added benefit of the acquisition of the Northland Power Services business in late 2010. Temperature control revenue increased by 9% and oil-free compressed air rental revenues grew by 13%. A significant part of the growth came from an improvement in rental rates across all three product lines, most notably in power, where rates are back to pre-recession levels.

Nearly all geographic areas of the North American business achieved strong base business growth on the same period last year. Our strategy to develop our presence in both upstream and downstream oil & gas both through acquisitions and organic growth has paid off handsomely, and it now represents the largest customer segment of our North American business.

During 2011 we continued our investment in new emissionised fleet and by the end of 2012 we will have invested $135 million in our North American fleet renewal programme with the vast majority of our power fleet capable of operating at Tier 2 EPA standards or above.

The North American business has made a strong start to 2012, maintaining the momentum we saw in the second half of 2011, and we expect that the business will continue to deliver growth in the first half. The second half, in which the business generally delivers the majority of its profits, is hard to discern at this distance in time. Our current view is that we should deliver continued growth in the second half, but perhaps at a slightly slower rate than in the first half.

Local Business: Europe & Middle East

	2011 £ million	2010 £ million	Underlying change %
Revenue	302	262	15%
Trading profit	42	42	(3)%
Trading margin	13.7%	15.9%
Europe
	2011 £ million	2010 £ million	Underlying change %
Revenue	189	164	12%
Trading profit	22	19	7%
Trading margin	11.5%	11.3%
Middle East & SEE
	2011 AED million	2010 AED million	Underlying change %
Revenue	666	554	20%
Trading profit	117	130	(10)%
Trading margin	17.5%	23.5%

Our Europe & Middle East business experienced something of a role reversal in 2011, in that the Middle East – which has historically been one of Aggreko's fastest-growing businesses (and is now our largest Local business world-wide in terms of MW on rent), went backwards in 2011 in trading profit terms. In contrast the European business, which has historically grown more slowly than other parts of our Local business, delivered a very creditable 7% underlying growth in profits.

The main driver of the movements in the Middle East was that some highly profitable power projects came to an end, and were replaced by some temperature-control contracts which brought with them very high volumes of fuel which went through our books at tiny margins; so revenues went up, and margins went down. In Europe, our oil and gas business, notably in Russia, grew strongly as a result of several years investing in our Local business there.

Revenue of £189 million in Europe was 12% ahead of the prior year on an underlying basis (i.e. in constant currency and excluding a small amount of early revenue from London 2012). In terms of performance in individual countries, it was the usual mixed picture.

We made progress in Russia, France, Germany, Italy and in the UK while our businesses in Spain and Ireland continued to suffer from the weak economy. Given the state of their economies this is hardly a surprise. Rental revenue increased by 14%, with power increasing by 18% and temperature control increasing by 4%. Services revenue, which mainly comprises fuel and transport, increased by 9%. The underlying trading margin of 10.8% was slightly down on prior year (11.3%).

Revenue in the Middle East of AED666 million (£113 million) was 20% ahead of the prior year on an underlying basis, and much of this growth was driven by high volumes of low-margin fuel. Rental revenue increased by 7%, with power increasing by 6%, and temperature control increasing by 25%. Services revenue, where the fuel is booked, increased by 73%. Margins fell to 17.5% (2010: 23.5%), reflecting the higher proportion of services revenues. Our businesses in the Southern Gulf and Saudi Arabia grew strongly; trading was weak in the Northern Gulf and Bahrain.

Across Europe & the Middle East rental rates showed a small improvement on the prior year, but are still below pre-recession levels, reflecting the challenging economic conditions in most of the countries in which we operate.

We are continuing to expand the footprint of our Europe & Middle East business; in the second half of 2011, we established a new local business in Turkey, and we also signed our first civilian contracts in Iraq, serving the rapidly-developing oil and gas sector. These developments, combined with a 45MW emergency contract providing power in Cyprus and continued growth in Russia, will help our business in the face of a tough economic environment in many parts of this region. Our Europe & Middle East business also has to deliver a faultless service to the London 2012 Olympic Games, which is one of the largest events contracts ever delivered by Aggreko. We now expect to install well over 500 generators and 1,200 kilometres of cable across 44 sites; we will have over £25 million of fleet assets serving the event, much of it delivered new from our factory in Dumbarton, and the timing of the contract means that we are having to pull forward fleet capital expenditure into the first half in order to ensure all the equipment is available on time. We now expect that the total contract will be worth over £40 million. On an underlying basis, excluding the Olympics, we expect the business to deliver modest growth.

Aggreko International's Local Business

	2011 £ million	2010 £ million	Underlying change %
Revenue	173	188	37%
Trading profit	30	55	29%
Trading margin	17.3%	29.4%

Aggreko International's Local businesses operate in Australia, New Zealand, Brazil, Mexico, Argentina, Chile, Singapore, China, India, South Africa, Peru, Panama and Colombia. It is in this business that the difference between reported and underlying growth is most stark, as revenues in 2010 included over £68 million from the FIFA World Cup contract in South Africa and the Asian Games in Guangzhou; to confuse matters further, there was also a small amount of revenue in 2011 from the Asian Games. As a result reported revenue in 2011 decreased by 8%, trading profit decreased 46% and trading margin was 17.3% (2010: 29.4%). However, excluding the impact of these events, revenue increased by 37%, with rental revenue increasing by 41% and services by 25% while trading profit increased by 29%. Between them, these businesses now account for nearly 25% of Aggreko's Local business, and they are growing at an impressive rate. They are not diluting margins, but they are diluting returns on capital as every time we open a new depot we have to stock it with fleet and it generally takes 5 years to get a depot to the point where it has the utilisation to deliver respectable returns on capital. In 2011 we opened 12 new centres, namely, in South America, Lima, Belo Horizonte, Bogota, Camacari, Copiapo, and Porto Alegre; in Asia, in New Delhi and Guangzhou; in Africa, we opened in Durban. In Australia-Pacific, we opened depots in Muswellbrook, Newman, and Wollongong, and also, through the acquisition of N.Z. Generators in New Zealand, gained depots in Christchurch, New Plymouth, Tauranga and Wellington. We have sown a lot of seed-corn in these territories; not all of them will work out, but we are confident that enough of them will provide strong growth in the years ahead.

In terms of the trading performance, excluding the major sporting events, revenue from power was up 47% and temperature control was up 5%. Revenue in all of Aggreko International's Local businesses increased as compared with last year most notably in our largest market Australia where revenue increased 27% driven by a strong performance in the mining sector.

It is extremely encouraging to see that our strategy of expanding our footprint in fast-growing markets is bearing fruit. At the end of February 2012, this business had over 30% more power on rent than the previous year, and we intend to continue to build our service centre network with about 20 new facilities planned to be opened in 2012. As a consequence, we believe that this business will continue to deliver good growth in 2012.

Aggreko International: International Power Projects

	2011 $ million	2010 $ million	Underlying change %
Revenue (excl. pass-through fuel)	888	712	25%
Trading profit (excl. pass-through fuel)	344	260	33%
Trading margin	38.8%	36.5%

Our International Power Projects business delivered another strong performance in 2011 with revenue, in constant currency and excluding pass-through fuel, growing by 25% to $888 million and trading profits increasing by 33% to $344 million. Trading margin increased to 38.8% (2010: 36.5%).

Demand was very strong during 2011. We secured 36 new contracts in 20 countries and 1,242MW of new work comprising 513MW in Asia, 316MW in Africa & Middle East, 330MW in Latin America and 83MW for the others. At the start of 2012, our order book stood at almost 36,000MW-months, an increase of 21% over the prior year and the equivalent of 14 months' revenue at the current run-rate. In terms of rates, the mix impact of the rapid growth in our higher rate gas business meant that overall rates were slightly higher than the previous year, despite diesel rates being flat on 2010.

On a geographic basis, Asia continued to deliver strong growth, and is now our largest area. Latin America also grew strongly; our African and Middle East businesses had a tough year reflecting the fullyear impact of the off-hires in 2010 in Kenya and Yemen. As anticipated, military revenues also declined as the US military presence in Iraq ended and we anticipate that military revenues will be materially lower in 2012. Around 80% of International Power Projects' revenue in 2011 came from utilities; military projects represented about 11%, and oil & gas, mining and manufacturing together contributed the remaining 9%. At the start of 2012, the International Power Projects fleet, at over 4,400MW, is 22% larger than 12 months earlier and includes around 840MW of gas-powered fleet.

A key challenge in our International Power Projects business is cash collection and the potential volatility what this can have on the trading results. This was illustrated during 2011 when the bad debt provision increased by $23 million in the first half due to delays in payment by three major customers. During the second half, significant payments were received from these customers and we were able to release $18 million of the provision, leaving a net increase for the year as a whole of $5 million. Unpredictable payment behaviour is a feature of the International Power Projects business, and it is likely that this pattern of bad debt provisions moving up and down between reporting periods will continue in the future. It is for this reason that we continue to take a prudent view when it comes to taking provisions against overdue debt. At 31 December 2011 bad debt provisions amounted to around 17% of our 2011 International Power Projects gross debtors.

International Power Projects has started the year strongly with nearly 21% more capacity on rent than a year ago and a 14-month forward order book. Order intake so far in the first quarter has been strong, with almost 300MW of new business secured. Although we expect the first half to be strong, comparators in the second half are going to be tough, as we have to replace revenues from Japanese and US Military contracts off-hiring, and we will not have the benefit of the 2011 second half bad debt provision release described above. We hope to be able to partially offset these factors with the continued growth in our gas business. Overall we expect to deliver continued strong growth for the year as a whole.