Interim Management Report

Group trading performance

Aggreko delivered a strong performance in the first half of 2011. On an underlying basis (in constant currency and excluding the one-off impact of the Vancouver Winter Olympics, the FIFA World Cup and the Asian Games as well as pass-through fuel), revenue grew by 21% and trading profit by 17%. Reported revenue increased by 9% and reported trading profit decreased by 3%.

			Movement
	2011 £ million	2010 £ million	As reported	Constant currency
Revenue	637.2	583.6	9.2%	12.8%
Revenue excl. pass-through fuel	583.8	546.5	6.8%	10.2%
Trading profit1	125.4	129.8	(3.4)%	0.3%
Operating profit	127.2	130.7	(2.7)%	1.1%
Net interest expense	(8.2)	(5.0)	(64.5)%
Profit before tax	119.0	125.7	(5.3)%
Taxation	(33.9)	(38.3)	11.5%
Profit after tax	85.1	87.4	(2.6)%
Basic earnings per share (pence)	31.69	32.49	(2.5)%

¹ Trading profit represents operating profit before gain on sale of property, plant and equipment.

Group revenue, as reported, increased 9% to £637.2 million (2010: £583.6 million), while Group trading profit of £125.4 million (2010: £129.8 million) decreased by 3%. Group trading margin was 20% (2010: 22%). Underlying revenue and trading profit (as defined above) increased by 21% and 17% respectively. On the same basis trading margin was 21% (2010: 22%). 

Group profit before tax decreased by 5% to £119.0 million (2010: £125.7 million) and profit after tax decreased by 3% to £85.1 million (2010: £87.4 million) reflecting the reduction in the tax rate from 30.5% to 28.5%. On an underlying basis both these measures of profit increased strongly. Group return on capital employed, measured on a rolling 12-month basis, decreased to 28.5% (2010: 30.8%) due to lower margins in International Power Projects, increased working capital, and the absence of the one-off sporting events of 2010, which were less capital intensive than the underlying business. The ratio of revenue (excluding pass-through fuel) to gross rental assets which decreased from 74% to 72%, also reflected the lower level of capital required for one-off sporting events.

The strengthening of sterling during the period, in particular against the US dollar, had the effect of reducing revenue by £18.7 million and trading profit by £4.8 million. Pass-through fuel accounted for £53.4 million (2010: £37.1 million) of reported revenue of £637.2 million and £1.2 million (2010: £0.9 million) of reported trading profit of £125.4 million. 

Fleet capital expenditure for the period was £169.4 million, £70.3 million higher than the prior year, and 208% of the depreciation charge in the period. The Aggreko International business accounted for the majority of the investment, and the largest investment in terms of product was in our gas fleet. In addition, we acquired £6.4 million of property, plant and equipment as part of the N. Z. Generator Hire Ltd (N. Z. Generator) acquisition in March 2011. The total consideration for this acquisition was £14.4 million. 

Net debt at 30 June 2011 was £97.7 million higher than the same period last year, chiefly as a consequence of the £77.4 million year-on-year increase in total capital expenditure, the N. Z. Generator acquisition and increased levels of working capital.

Regional trading performance as reported in £ million

	Revenue			Trading Profit
	2011 £ million	2010 £ million	Change %	2011 £ million	2010 £ million	Change %
Local business
North America	114.6	115.0	(0.3)%	15.8	14.7	7.8%
Europe	83.2	76.4	8.9%	2.1	2.4	(9.8)%
Middle East & South East Europe (SEE)	48.9	48.7	0.4%	7.5	11.5	(35.1)%
Sub-total Europe & Middle East	132.1	125.1	5.6%	9.6	13.9	(30.9)%
International Local businesses	78.2	85.0	(8.0)%	14.2	23.5	(39.6)%
Sub-total Local business	324.9	325.1	(0.1)%	39.6	52.1	(23.9)%
International Power Projects (IPP)
IPP excluding pass-through fuel	258.9	221.4	17.0%	84.6	76.8	10.1%
IPP pass-through fuel	53.4	37.1	43.8%	1.2	0.9	29.7%
Sub-total International Power Projects	312.3	258.5	20.8%	85.8	77.7	10.3%
Group	637.2	583.6	9.2%	125.4	129.8	(3.4)%
Group excluding pass-through fuel	583.8	546.5	6.8%	124.2	128.9	(3.6)%

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

Local business: North America

	2011 $ million	2010 $ million	Constant currency1 change %
Revenue	185.3	175.3	4.2%
Trading profit	25.6	22.4	13.7%
Trading margin	14%	13%

¹ Constant currency takes account of the impact of translational exchange movements in respect of our businesses which operate in currency other than sterling.

Our North American business delivered a very strong performance in the first half. Revenue in constant currency increased by 4% to $185.3 million, and by 27% on an underlying basis (i.e. excluding the impact of the Vancouver Winter Olympics). Despite the Vancouver Winter Olympics in 2010, trading profit grew by 14% to $25.6 million and trading margin improved from 13% to 14%.

On an underlying basis rental revenue was up 26% and services revenue was up 29%. Power rental revenue was up 29% 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 was up 26%, driven by some large emergency contracts in our Cooling Tower business and oil-free compressed air rental revenues grew by 21%.

All geographic areas of the North American business achieved strong base business growth on the same period last year, after adjusting for revenues generated from the BP Gulf oil spill response and the Nashville floods. This base business growth was also well spread across sectors with the strongest growth sectors being oil & gas, petrochemical & refining, and manufacturing; the growth came from both volume and rate improvements, with rates in North America generally back to pre-recession levels.

In the first half of 2011 we invested $12 million in new emissionised fleet and we expect to invest a further $25 million in the second half. This investment programme will continue into 2012, by which time substantially all our larger power fleet will be capable of operating at Tier 2 EPA standards or above. 

We are encouraged by the strong performance of the North American business in the first half and we expect to make further progress in the second half. While the business has not yet had the benefit of any material storm revenue during the summer season, the underlying business continues to trade ahead of last year.

Local business: Europe & Middle East 

	2011 £ million	2010 £ million	Constant currency change %
Revenue	132.1	125.1	7.9%
Trading profit	9.6	13.9	(27.0)%
Trading margin	7%	11%

Europe

	2011 £ million	2010 £ million	Constant currency change %
Revenue	83.2	76.4	8.9%
Trading profit	2.1	2.4	(10.3)%
Trading margin	2%	3%

Middle East & SEE

	2011 AED million	2010 AED million	Constant currency change %
Revenue	290.1	272.6	6.3%
Trading profit	44.5	64.4	(30.5)%
Trading margin	15%	24%

Our Europe & Middle East business had a difficult first half; while revenue across the region increased by 8% in constant currency, lower-margin services revenue increased faster than rental. Trading profit fell by 27% from £13.9 million to £9.6 million while trading margin declined from 11% to 7%. The decline in trading profit reflected a combination of disadvantageous revenue mix, higher fuel costs and the absence of a number of higher margin projects in our Middle East business, notably in Qatar.

Revenue in Europe was 9% higher than the prior period at £83.2 million. Rental revenue increased 11% and services revenue increased 6%. Within rental revenue, power increased 10% and temperature control increased 16%. Geographic area performance was mixed with a strong performance from our Russian business, which had around 120 MW on rent at the end of the first half (June 2010: 70 MW), and good progress in Germany, France, Italy and the UK. Our businesses in Spain and Ireland continued to perform poorly in the wake of difficult economic environments. Rates across Europe remained stubbornly weak, and conditions continue to be difficult in most sectors.

Revenue in our Middle East business increased by 6% with a decrease of 4% in rental revenue and a 55% increase in lower margin services revenue, which includes fuel. Within rental revenue power decreased 7% and temperature control revenue increased by 36%, albeit off a small base. In geographic terms, we continued to trade well in Abu Dhabi, Oman and Saudi Arabia but conditions remained difficult in Dubai and Qatar in the first half.

Although markets in Europe & Middle East remain challenging we expect to have a much better second half with profits noticeably ahead of the prior year, helped by recent contract wins in Cyprus, Iraq and Russia.

Local business: Aggreko International

	2011 £ million	2010 £ million	Constant currency change %
Revenue	78.2	85.0	(11.9)%
Trading profit	14.2	23.5	(43.1)%
Trading margin	18%	28%

Aggreko International's Local businesses operate in Australia, New Zealand, Brazil, Mexico, Chile, Argentina, Singapore, China, India, South Africa and, most recently, Peru, Panama and Colombia. Revenues in 2010 included over £28 million from the FIFA World Cup contract in South Africa and there was also a small amount of revenue in the first half of 2011 from the Asian Games in Guangzhou. As a result reported revenue in the first half decreased by 12%, trading profit decreased 43% and trading margin was 18% (2010: 28%). However, excluding the impact of these events, revenue increased by 29%, with rental revenue increasing by 31% and services by 24%.

Power rental revenue increased 35% and temperature control increased 8%. Revenue in nearly all Aggreko International's Local businesses increased as compared with the same period last year, most notably in Australia where revenue increased 37%, driven by a strong performance in the mining sector. We also opened new locations in the first half in Lima, New Delhi and Durban as well as completing the acquisition of N. Z. Generators in New Zealand, which has performed very well since acquisition.

Aggreko International's Local businesses have continued to show strong underlying growth in the first weeks of the second half, and we expect a strong underlying performance for the year as a whole.

International Power Projects: Aggreko International

	2011 $ million	2010 $ million	Constant currency change %
Revenue (excl. pass-through fuel)	418.5	337.4	24.0%
Trading profit (excl. pass-through fuel)	136.7	117.1	17.2%
Trading margin	33%	35%

Our International Power Projects business delivered a strong performance in the period with revenue, in constant currency and excluding pass-through fuel, growing by 24% to $418.5 million and trading profits increasing by 17% to $136.7 million. Trading margin remained strong at 33% (2010: 35%), despite an increase of $23 million (£14 million) in debtor provisions during the period; this increase was in respect of three customers where we are actively managing our exposure. None of the customers are disputing the payment liability and we are hopeful that we will see some improvement in this position during the second half.

Demand has been strong during the first half: we secured 25 new contracts and 730 MW of new work including 200 MW in Japan, 100 MW in Tanzania and 125 MW in Argentina. With low levels of off-hires and strong order intake, we increased our capacity on hire by 560 MW during the first half which means we have started the second half with 23% more MW on hire than the same time last year. At the end of the period, our order book was over 33,000 MW months, the equivalent of 14 months' revenue at the current run-rate, and an increase of 27% over the prior year. Revenue from our gas-powered units grew strongly and the average MW on rent has increased by around 55% year-on-year. 

On a geographic basis, Asia continued to show strong growth driven by major contracts wins in Bangladesh, Indonesia and Japan. Central America and South America also grew well with major contracts going live in Argentina. Our African and Middle East businesses declined reflecting the impact of the off hires in Kenya and Yemen which occurred in 2010. As anticipated, military revenues also declined as the US military presence in Iraq reduced.

The International Power Projects business has good momentum, and now has over 25% more MW on rent than a year ago. Recent contract awards in Kenya, Brazil, Indonesia and Mali have helped to sustain the order book, and overall trading in the first weeks of the second half has been a little stronger than we expected at the time of our Trading Update in June.

Financial review

The movement in exchange rates during the period reduced revenue and trading profit by £18.7 million and £4.8 million respectively, with the strengthening of sterling against the US dollar having the greatest impact. Currency translation also gave rise to a £14.4 million decrease in net assets from December 2010 to June 2011. Set out in the table below are the principal exchange rates affecting the Group's overseas profits and net assets:

	Jun 2011		Jun 2010		Dec 2010
per £ sterling	Average	Period end	Average	Period end	Average	Period end
Principal Exchange Rates
United States dollar	1.62	1.60	1.52	1.52	1.55	1.55
Euro	1.15	1.11	1.15	1.21	1.17	1.16
Other Operational Exchange Rates
UAE Dirhams	5.94	5.88	5.60	5.58	5.68	5.69
Australian dollar	1.57	1.50	1.71	1.79	1.68	1.52

Source: Reuters

Interest

The net interest charge for the first half of 2011 was £8.2 million, an increase of £3.2 million on 2010 reflecting the higher level of average net debt, driven by higher levels of capital expenditure in particular. Interest cover, measured against rolling 12-month EBITDA, remains very strong and increased to 36.2 times from 28.5 times in 2010.

Effective tax rate

The current forecast of the effective tax rate for the full year, which has been used in the interim accounts is 28.5% as compared with 30.5% in the same period last year.  

Dividends

The interim dividend of 7.20 pence per ordinary share represents an increase of 10.0% compared with the same period in 2010; dividend cover is 4.4 times (30 June 2010: 5.0 times). 

Cashflow

EBITDA (Earnings before Interest, Tax, Depreciation and Amortisation) for the period amounted to £215.4 million, up 3% on 2010. The net cash inflow from operations during the first six months of 2011 totalled £155.2 million (2010: £208.3 million). The reduction in cash inflow from operations was caused by working capital movements, in particular an increase in debtor days in our International Power Projects business and increasing inventory in our manufacturing operation needed to service the record levels of capital expenditure. 

Debtor ageing remained around historic levels across the majority of our International Power Projects customers. Three of our customers, however, had significant overdue balances, and these had a material impact on our working capital at the period end. None of the customers are disputing the payment liability and cash has been received from all three customers since the period end. We are hopeful that we will see some improvement in this position during the second half.

Capital expenditure of £181.0 million was up £77.4 million on the same period in 2010 reflecting the continued investment in fleet. The Aggreko International business accounted for the majority of the spend. 

This increase in total capital expenditure, the cash outflow related to the N. Z. Generator acquisition and the higher levels of working capital were the main drivers in net debt at 30 June 2011 being £97.7 million higher than the same period last year. On a rolling 12-month basis, net debt to EBITDA was 0.5 times compared with 0.4 times for the same period in 2010.

Financial resources

The Group's facilities are primarily in the form of committed bank facilities arranged on a bilateral basis with a number of international banks as well as our recently completed US private placement. Committed facilities totalled £762.8 million at 30 June 2011. The financial covenants attached to these facilities are that EBITDA should be no less than 4 times interest (30 June 2011: 36.2 times) and net debt should be no more than 3 times EBITDA (30 June 2011: 0.5 times). The Group does not consider that these covenants are restrictive to its operations. The maturity profile of the borrowings is detailed in Note 12 to the Accounts. 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 £257.2 million at 30 June 2011 and, at that date, undrawn committed facilities were £481.5 million. During the period we drew down funds of US$275 million (£171 million) under our US private placement. The draw down was applied to repayment of other debt and the balance held in cash at 30 June 2011 in anticipation of the return of capital to shareholders. 

Net operating assets

The net operating assets of the Group at 30 June 2011 totalled £1,251.5 million, up £291.5 million on the same period in 2010. The main components of net operating assets are:

			Movement
	2011 £ million	2010 £ million	Headline	Constant currency
Rental fleet	876.0	719.7	21.7%	24.5%
Property and plant	63.4	52.7	20.3%	19.3%
Inventory	145.0	106.4	36.3%	38.0%
Net trade debtors	267.2	187.6	42.4%	44.4%

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 2011 were £1,092.4 million, up 21% on the same period in 2010; operating profit for the same period was £311.0 million. In the first half of 2011 the ROCE decreased to 28.5% compared with 30.8% for the same period in 2010. The decrease in ROCE was due to lower margins in International Power Projects, increased working capital, and the absence of the one-off sporting events of 2010, which were less capital intensive than the underlying business.

Acquisitions

On 31 March 2011 the Group completed the acquisition of the business and assets of N. Z. Generator Hire Limited for a total cash consideration of £14.4 million. The fair value of net assets acquired was £9.7 million resulting in goodwill of £4.7 million. During the period the Group received £0.2 million relating to the Northland Power acquisition which completed in December 2010.

Shareholders' equity

Shareholders' equity increased by £60.1 million to £874.5 million in the six months ended 30 June 2011, represented by the net assets of the Group of £1,131.7 million before net debt of £257.2 million. The movements in shareholders' equity are analysed in the table below:

Movements in shareholders' equity

	£ million	£ million
As at 1 January 2011		814.4
Profit for the financial period	85.1
Dividend1	(33.2)
Retained earnings		51.9
New share capital subscribed		1.2
Credit in respect of employee share awards		10.7
Actuarial gains on retirement benefits		0.1
Currency translation difference		(14.4)
Movement in hedging reserve		1.3
Other2		9.3
As at 30 June 2011		874.5

¹ Reflects the dividend of 12.35 pence per share (2010: 8.23 pence) that was paid during the period.
² Other includes tax on items taken directly to reserves. 

Return to shareholders

The Board announced on 10 March 2011 that Aggreko would return approximately £150 million to shareholders, which equated to 55 pence per ordinary share in issue at the record date of 8 July 2011. At a General meeting on 5 July the return of capital was approved and then completed in mid July 2011. The return of capital was made using a B Share structure. The main terms of the return of capital and related consolidation of ordinary shares were:

• The issue of 1 B share of par value 6 ¹⁸/₂₅ pence for every 1 existing ordinary share held on the record date; and
• The issue of 31 new ordinary shares of par value 13 ⁵⁴⁹/₇₇₅ pence for every 32 existing ordinary shares held on the record date.

The holders of B shares had 3 options:

• Receive a single dividend of 55 pence per B share in respect of those B shares. Following the receipt of the single B share dividend the B shares automatically converted into Deferred shares with very limited economic and other rights; 
• Sell the B shares to the Company for 55 pence per B share. All B shares bought back were subsequently cancelled by the Company; or 
• Retain the B shares. Those who retain the B shares will be entitled to receive the B share continuing dividend at the rate of 75 per cent of 12 month LIBOR, payable annually in arrears on the notional amount of 55 pence per B share. The B shares are not listed. The Company intends to make a further offer to purchase the B shares around the time of the Annual General Meeting in 2012.

Since the period end:

• A special dividend of 55 pence per ordinary share was paid on 182,700,915 B shares, which then converted into deferred shares of negligible value resulting in a cash payment from the company of £100.5 million on 19 July 2011; 
• 85,896,058 B shares were bought back at 55 pence each resulting in a cash payment from the company of £47.2 million on 19 July 2011;and 
• The Company intends to offer to purchase the remaining 6,663,731 B shares in the future at 55 pence each.

Details of the rights that attach to the B shares and deferred shares are set out in the circular dated 10 May 2011.

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 pages 56 and 57 of the 2010 Annual Report and Accounts. Also set out on pages 31 to 35 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 integrity and honesty; 
• Acquisitions; 
• Safety; 
• Competition; 
• Product technology and emissions regulation; 
• People; 
• Information Technology; and 
• Accounting and Treasury/major fraud.

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
Finance Director

25 August 2011