Interim Management Report

Group trading performance

In the first half of 2010, Aggreko delivered a strong trading performance helped by revenues from the Vancouver Winter Olympics and the FIFA World Cup. Group return on capital employed, measured on a rolling 12-month basis, increased to 30.8% (2009: 29.6%) and Group trading margin increased to 22.2% (2009: 21.2%).

			Movement
	2010 £ million	2009 £ million	As reported	Constant currency
Revenue	583.6	499.8	16.7%	16.7%
Revenue excl. pass-through fuel	546.5	474.8	15.1%	14.9%
Trading profit1	129.8	105.8	22.7%	22.6%
Operating profit	130.7	113.6	15.1%	15.0%
Net interest expense	(5.0)	(7.9)	37.2%
Profit before tax	125.7	105.7	19.0%
Taxation	(38.3)	(33.8)	(13.4)%
Profit after tax	87.4	71.9	21.6%
Basic earnings per share (pence)	32.49	26.76	21.4%

Group revenue, as reported, increased 17% to £583.6 million (2009: £499.8 million), while Group trading profit of £129.8 million (2009: £105.8 million) increased by 23%. Excluding currency movements and pass-through fuel revenue, the impact of which is set out below, Group revenue grew by 15% and trading profit by 22%. On the same basis, trading margin in the first half was 23.6% which compares with 22.2% in 2009. Revenue excluding currency, the Vancouver Winter Olympics and the FIFA World Cup increased by 7% on the same period last year.

Group profit before tax grew by 19% to £125.7 million (2009: £105.7 million) and profit after tax increased by 22% to £87.4 million (2009: £71.9 million).

Currency had a minor impact on trading during the period with the various currency movements almost cancelling each other out. Pass-through fuel accounted for £37.1 million (2009: £25.0 million) of
reported revenue of £583.6 million and £0.9 million (2009: £0.5 million) of reported trading profit of £129.8 million.

Total capital expenditure for the period was £103.6 million, £6.2 million higher than the prior year. This spend was 134% of the depreciation charge in the period, reflecting the continued investment in fleet with the International business accounting for the majority of the spend. The ratio of revenue (excluding pass-through fuel) to gross rental assets, which is a key measure of capital productivity, decreased from 79% to 74%.

In the first six months, the business generated positive net cash flows and net debt decreased by £16.0 million to £159.5 million. Cash flow from operating activities totalled £208.3 million (2009: £199.3 million).

Regional trading performance as reported in £ million

	Revenue			Trading Profit
Management Group	2010 £ million	2009 £ million	Change %	2010 £ million	2009 £ million	Change %
Local business
North America	115.0	94.1	22.2%	14.7	10.8	36.1%
Europe	76.4	79.5	(3.9)%	2.4	4.4	(44.7)%
Middle East	48.7	42.6	14.2%	11.5	9.9	15.5%
Sub-total Europe & Middle East	125.1	122.1	2.4%	13.9	14.3	(2.6)%
International Local businesses	85.0	48.5	75.1%	23.5	10.3	127.3%
Sub-total Local business	325.1	264.7	22.8%	52.1	35.4	47.1%
International Power Projects (IPP)
IPP excluding pass-through fuel	221.4	210.1	5.4%	76.8	69.9	9.8%
IPP pass-through fuel	37.1	25.0	48.5%	0.9	0.5	89.3%
Sub-total International Power Projects	258.5	235.1	10.0%	77.7	70.4	10.4%
Group	583.6	499.8	16.7%	129.8	105.8	22.7%
Group excluding pass-through fuel	546.5	474.8	15.1%	128.9	105.3	22.4%

The performance of each of these regions in the first half is described below:

Local business: North America

	2010 $ million	2009 $ million	Constant currency change1 %
Revenue	175.3	140.4	23.5%
Trading profit	22.4	16.1	39.4%

 

Our North American business had a strong first half, largely as a result of the successful execution of the Vancouver Winter Olympics. Revenue in constant currency increased by 23% to $175.3 million and trading profit increased by 39% to $22.4 million; trading margin increased to 12.8% (2009: 11.5%). Revenue from the Winter Olympics recognised in the period amounted to $30 million bringing the total contract value to $45 million, including the revenue that was recognised in the second half of 2009. This was the largest project ever undertaken by our North American business, and our team performed extremely well, installing over 1,800 individual electrical panels, 750 transformers and 500 miles of cable servicing 52 venues and other sites.

Excluding the Olympics, total revenue increased 3% on the same period last year. Rental revenue was up 2% and services revenue was up 6%. Power rental revenue was down 5% while temperature control revenue was up 8% reflecting the dehumidification work performed in the aftermath of the Nashville floods as well as the higher temperatures in many areas in the late spring. Oil-free compressed air rental revenues grew 13%.

Performance was mixed on an area basis with strong trading in the Southeast and Canada but weaker in the other areas, most notably the West and Central. In terms of market sector performance we saw increases in petrochemical and refining, contracting and manufacturing but decreases in services and construction.

The summer season in North America started strongly, with volumes in both power and temperature control well ahead of 2009. In mid-August, temperature control and power volumes were up about 30% and 10% respectively. Some of this volume relates to work supporting the clean-up efforts in the Gulf of Mexico, but most regions are seeing encouraging growth. Rates have also begun to improve, although they are still below those achieved in 2008.

Local business: Europe & Middle East

	2010 £ million	2009 £ million	Constant currency change %
Revenue	125.1	122.1	3.9%
Trading profit	13.9	14.3	(1.3)%

Europe

	2010 £ million	2009 £ million	Constant currency change %
Revenue	76.4	79.5	(2.8)%
Trading profit	2.4	4.4	(45.2)%

Middle East

	2010 AED million	2009 AED million	Constant currency change %
Revenue	272.6	233.7	16.5%
Trading profit	64.4	53.9	18.2%

Our Europe & Middle East business saw revenue increase in constant currency by 4% but trading profit decreased by 1%. Trading margin decreased slightly to 11.1% (2009: 11.7%).

Revenue in Europe was £3.1 million lower than the prior period at £76.4 million; the revenue reduction matched the revenues generated in 2009 from the exceptional winter storms in France, so on an underlying basis, revenues were flat. Trading profit decreased by £2.0 million compared to the same period last year reflecting a 6% fall in rental revenue and a 1% increase in lower margin service revenue. Trading margin decreased to 3.1% (2009: 5.6%). Within rental revenue, power decreased 8% but temperature control increased 5%. Area performance was mixed with decreases in France and Benelux offset by growth in a number of territories, most notably Italy and Norway. On a sector basis, revenues from utilities, shipping and manufacturing fell while oil and gas and services increased. Our newest business in Russia is performing well with over 70MW on rent at the end of the first half (June 2009: 25MW on rent).

Our Middle East business had a strong first half with revenue increasing by 16% and trading profit increasing by 18%. Trading margin increased slightly to 23.6% (2009: 23.1%). Rental revenue was up 14% and services revenue was up 32%, with a marked increase in fuel revenue. Power rental revenue increased 17% but temperature control revenue decreased by 18% albeit off quite a small base. In geographic terms, the adverse economic conditions experienced in Dubai in 2009 have continued to have an impact in 2010 with revenue falling significantly again. However, this decrease has been more than offset by continued growth in other markets in the Middle East. On a sector basis we had good growth in utilities, oil and gas and construction but weaker demand in shipping and manufacturing.

The third quarter has continued in much the same pattern as the first half, with growth in the Middle East, and generally sluggish demand in Europe. In recent weeks, demand has improved in Continental Europe, particularly for temperature control, but it is too early to say whether this presages a more general recovery or not.

Local business: Aggreko International

	2010 £ million	2009 £ million	Constant currency change %
Revenue	85.0	48.5	50.8%
Trading profit	23.5	10.3	88.4%

Aggreko International’s Local businesses operate in Australia, New Zealand, Brazil, Mexico, Chile, Argentina, Singapore, China, India and South Africa. For this reporting period Aggreko International’s
Local businesses also include the revenues from the FIFA World Cup contract.

Revenue growth of this business in the first half was almost entirely generated by the FIFA World Cup contract, which was the largest events contract by value ever performed by Aggreko with 259 generators and chillers, 525 kilometres of cable and over 1,200 distribution panels on 11 sites. Revenue from the FIFA World Cup in the period amounted to £28.7 million, and this drove an increase of 51% in the total revenues of Aggreko International’s Local businesses. Trading margin increased to 27.6% from 21.3% in the prior year.

Excluding the World Cup, total revenue, in constant currency, was in line with last year with both rental and services revenue the same as last year. Power and temperature control revenue were also in line with the prior year. Revenue in the majority of Aggreko International’s Local businesses increased as compared to the same period last year but this was offset by revenue declining 15% in Australia, which is the largest business in this segment.

We would expect Aggreko International’s Local businesses to have a strong second half supported by revenue from the FIFA World Cup and the improving trading in Australia and South America.

International Power Projects: Aggreko International

	2010 $ million	2009 $ million	Constant currency change %
Revenue (excl. pass-through fuel)	337.4	313.4	7.7%
Trading profit (excl. pass-through fuel)	117.1	104.3	12.4%

Our International Power Projects business delivered another good performance with revenue in constant currency and excluding pass-through fuel, growing by 8%, to $337.4 million and trading profits increasing by 12% to $117.1 million. Trading margin remained strong at 34.7% (2009: 33.3%).

Demand has been strong during the first half and we secured 36 new contracts in 18 countries and a record 860MW of new work. Importantly, much of the new work has come from Asia and Central & South America, areas which have been a strategic focus for our International Power Projects business for the last couple of years. New contracts won in the first half include 450MW in Asia, and 200MW in Central & South America. At the end of the period, our order book was, over 26,800MW months, the equivalent of 14 months revenue at the current run-rate, and an increase of 49% over the prior year.

As a consequence of the high order intake, we put on-hire around 50% more than in any previous six-month period. However, we have only been able to deliver this rate of on-hires because the new contract wins have coincided with some large off-hires, which also reached record levels. The four-year drought finally ended in Kenya, and the country’s hydro generation is now running at almost full capacity; as a consequence, our customer, Kenya Electricity Generating Company, has off-hired some 150MW since the beginning of the year. The Yemeni power utility has also off-hired over 100MW. The record rate of on- and off-hires resulted in lower utilisation during the first half as equipment was serviced and moved from old projects to new. Revenue from our gas-powered units grew strongly and the number of MW on rent has increased by 40% year-on-year.

Outlook

We expect that conditions in the Local business will continue to improve. Volumes of equipment on rent are ahead of last year, and rates are beginning to strengthen in many areas; in particular there has been a sharp improvement in temperature control rentals. North America has had a strong start to the summer season, in part due to work supporting the clean-up efforts in the Gulf of Mexico and in responding to the floods in Nashville earlier in the year. Elsewhere, Europe & Middle East is a little ahead of last year, and Aggreko International’s Local businesses will have a strong second half, supported by revenue from the FIFA World Cup and improving trading in Australia and South America.

In International Power Projects, we expect continued growth in the second half as the record order intake seen in the first half feeds through to revenues in the second half, albeit partly mitigated by a high rate of off-hires, notably in the Middle East and Kenya, as contracts related to either hydro-shortfall or summer peak-shaving come to an end. The prospect pipeline remains strong for both gas and diesel projects.

Although the second half of 2009 included the benefit of both the 53rd week and the Vancouver Winter Olympics, we expect that the improving performance of the Local businesses, and the strong order-book and margins in International Power Projects, will enable us to make further good progress in the second half and that the outcome for the year as a whole will be slightly better than our previous expectations.

Financial review

Although currency movements had little impact on the trading result during the period, currency translation did have a larger impact on the balance sheet given the movement in period end rates, with
net assets increasing £33.3 million from December 2009 to June 2010 due to currency translation. Set out in the table below are the principal exchange rates affecting the Group’s overseas profits and net assets:

	Jun 2010		Jun 2009		Dec 2009
per £ sterling	Average	Period end	Average	Period end	Average	Period end
Principal Exchange Rates
United States dollar	1.52	1.52	1.49	1.65	1.57	1.62
Euro	1.15	1.21	1.12	1.17	1.12	1.12
Other Operational Exchange Rates
UAE Dirhams	5.60	5.58	5.48	6.06	5.76	5.95
Australian dollar	1.71	1.79	2.10	2.04	1.99	1.80

Source: Reuters

Interest

The net interest charge for the first half of 2010 was £5.0 million, a decrease of £2.9 million on 2009 reflecting the lower level of average net debt. Interest cover, measured against rolling 12-month EBITDA, remains very strong and increased to 28.5 times from 23.6 times in 2009.

Effective tax rate

The current forecast of the effective tax rate for the full year, which has been used in the interim accounts is 30.5% as compared with 32.0% in the same period last year. This decrease in the tax rate
largely reflects changes in the regional mix of profits.

Dividends

The interim dividend of 6.55 pence per ordinary share represents an increase of 50.0% compared with the same period in 2009; dividend cover is 5.0 times (30 June 2009: 6.1 times).

Cashflow

The net cash inflow from operating activities during the period totalled £208.3 million (2009: £199.3 million) which has funded capital expenditure of £103.6 million (2009: £97.4 million) as well as tax, interest and dividend payments. Net debt at £159.5 million decreased by £16.0 million during the period and was £127.7 million lower compared to June 2009. Gearing (net debt as a percentage of equity) at 30 June 2010 decreased to 23% from 58% at 30 June 2009 while on a rolling 12-month basis net debt to EBITDA was 0.4x compared to 0.8x for the same period in 2009.

Working capital at 30 June 2010 is £8 million higher than the previous half year with inventory, receivables and payables all increasing, driven in large part by higher levels of fleet build, greater levels of trading activity and foreign currency translation movements. Stripping out the impact of currency, the increase in receivables was mainly due to higher levels of trading activity in
our International Power Projects and North American businesses. The increase in payables, after allowing for currency, was driven by a general increase in the level of accruals reflecting higher levels of on- and off-hires at project sites and also includes a deferred revenue balance relating to the FIFA World Cup.

Financial resources

The Group’s banking facilities are primarily in the form of committed bank facilities totalling £467.7 million at 30 June 2010, arranged on a bilateral basis with a number of international banks. The financial covenants attached to these facilities are that Operating Profit should be no less than 3 times interest (30 June 2010: 18.4 times), EBITDA should be no less than 4 times interest (30 June 2010: 28.5 times) and net debt should be no more than 3 times EBITDA (30 June 2010: 0.4 times). The Group does not consider that these covenants are restrictive to its operations. The maturity profile of the borrowings is detailed in Note 11 to the Accounts with the next significant maturity not due until September 2011. The facilities in place are currently anticipated to be ample for meeting the Group’s operational requirements for the foreseeable future.

Net debt amounted to £159.5 million at 30 June 2010 and, at that date, undrawn committed facilities were £300.2 million.

Net operating assets

The net operating assets of the Group at 30 June 2010 totalled £960.0 million, up £87.7 million on the same period in 2009. The main components of net operating assets are:

			Movement
	2010 £ million	2009 £ million	Headline	Constant currency
Rental fleet	719.7	652.3	10.3%	2.2%
Property, plant	52.7	51.4	2.5%	(1.7)%
Inventory	106.4	82.9	28.4%	20.3%
Net trade debtors	187.6	144.3	30.0%	20.8%

A key measure of Aggreko’s performance is the return (expressed as operating profit) as a percentage of average net operating assets; we call this measure Return on Capital Employed (ROCE). 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, 1 January and the previous 30 June. For the full year, we state the period’s operating profit as a percentage of the average net operating assets as at 31 December, the previous 30 June and 1 January. The average net operating assets for the 12 months to 30 June 2010 were £905.4 million, up 10% on the same period in 2009; operating profit for the same period was £279.2 million. In the first half of 2010 the ROCE increased to 30.8% compared with 29.6% for the same period in 2009.

Shareholders’ equity

Shareholders’ equity increased by £86.5 million to £689.6 million in the six months ended 30 June 2010, represented by the net assets of the Group of £849.1 million before net debt of £159.5 million.
The movements in shareholders’ equity are analysed in the table below:

Movements in shareholders’ equity

	£ million	£ million
As at 1 January 2010		603.1
Profit for the financial period	87.4
Dividend1	(22.1)
Retained earnings		65.3
New share capital subscribed		1.0
Purchase of own shares held under trust		(27.2)
Credit in respect of employee share awards		10.3
Actuarial losses on retirement benefits		(1.7)
Currency translation difference		33.3
Movement in hedging reserve		(5.5)
Other2		11.0
As at 30 June 2010		689.6

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 the Board has developed a formal risk management process which is described on page 52 of the 2009 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;
• Failure to collect payments or to recover assets;
• Events;
• Failure to conduct business dealings with integrity and honesty;
• Acquisitions;
• Operational incidents;
• Competition;
• Product technology and emissions regulation;
• People;
• Information Technology;
• Investor Relations and Market Abuse;
• Accounting and Treasury/major fraud; and
• Liquidity

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.

25 August 2010