Review of Trading

Group trading performance

These results are for the 52 weeks ended 31 December 2010. In the last full financial year (2009) we reported a 53-week period.

Aggreko delivered another strong trading performance in 2010, with reported revenues growing by 20% and earnings per share growing by 27%. Our International Power Projects business won a record level of new orders and, in the Local business, trading profit grew by 53%, helped by an 'annus mirabilis' in our events business where we provided power to the Vancouver Winter Olympics (VANOC), the FIFA World Cup in South Africa and the Asian Games in Guangzhou.

As reported, Group revenue at £1,229.9 million (2009: £1,023.9 million) was 20% higher than 2009, while Group trading profit of £311.8 million (2009: £252.5 million) was 23% ahead of 2009. This delivered an increase in Group trading margin from 24.7% in 2009 to 25.4% in 2010. Return on capital employed, measured as operating profit divided by average net operating assets, improved by 3.4pp to 32.4% (2009: 29.0%). The weakening of Sterling during the year, particularly against the US Dollar and the Australian Dollar, had the effect of increasing reported revenue by £23.4 million and trading profit by £6.5 million.

Group profit before tax increased by 25% to £304.4 million (2009: £244.0 million), and profit after tax increased by 27% to £213.1 million (2009: £168.4 million). Earnings per share grew 27% to 79.37 pence (2009: 62.67 pence). The effective tax rate for the full year is 30.0% compared to 31.0% in the prior year.

As mentioned above, 2010 was an exceptional year for major sporting events; among them, the FIFA World Cup, the Vancouver Winter Olympics and the Asian Games accounted for £87 million of revenue in 2010. 2009, on the other hand, had the benefit of a 53rd week. To give investors a better understanding of the performance of the business without these one-off events, we also report movements in 'underlying' revenue and profit. This is defined as revenue and profit adjusted, where appropriate, for currency movements, pass-through fuel and the impact of both the 53rd week in 2009 and of the three major sporting events (VANOC, FIFA World Cup and Asian Games). On this basis, underlying revenue and trading profit both increased by 11% on the prior year. On the same basis trading margin was 25.4% (2009: 25.4%).

Fleet capital expenditure for the year was £254.4 million (2009: £149.7 million) which represented 95% of total capital expenditure. This fleet spend was 173% of the depreciation charge in the period, reflecting the continued expansion of our rental fleet; our International business accounted for 64% of this investment. In addition, we acquired £5.6 million of property, plant and equipment as part of the acquisition of Northland Power Services, a power rental business based in Wyoming, which was acquired in December 2010. Capital productivity – expressed as the ratio of revenue (excluding pass-through fuel) to average gross rental assets – increased from 71% to 76%, driven by improved utilisation and rates in the Local business and the exceptional level of major sporting events, which are generally less capital intensive than the rest of the business.

The Group delivered another strong performance on cash. EBITDA (earnings before interest, taxes, depreciation and amortisation) increased 15% to £475.6 million. This was a material factor in the decrease in net debt of £43.3 million to £132.2 million despite a 67% increase in total capital expenditure.

Corporate activity

On 3 December 2010 we completed the acquisition of Northland Power Services, a leading provider of temporary power solutions for the oil and gas exploration and production market in the Rocky Mountains region of North America, for a maximum consideration of $25.7 million (£16.7 million). The oil and gas market is a key focus for Aggreko, both in North America and worldwide, and the Northland acquisition strengthens Aggreko's position in the market as a whole and in the particular segment of supporting the extraction of coal-bed methane and shale oil and gas resources. On 7 March 2011 we also entered into an agreement to acquire N.Z. Generator Hire Limited, a leading provider of temporary power solutions in New Zealand and the Pacific Islands. The total consideration is NZ$27.5 million (£12.7 million).

Regional trading performance

The performance of each of our regional businesses is described below. 2010 was a year in which the usual order of things in Aggreko was reversed. In recent years, it has been the International Power Projects business which has been the main driver of growth but, in 2010, it was the Local business which grew trading profit by 53%, while International Power Projects delivered an uncharacteristically modest 7% growth in reported trading profit, mainly due to an unusually high level of on- and off-hires in the contract base.

After a difficult year in 2009, our North American business recovered strongly in 2010, in part due to revenues from the Vancouver Winter Olympics in the first half. More importantly, the business saw an improvement in underlying trading (i.e. adjusting for currency, Vancouver, and the 53rd week in 2009) in the second half, with underlying revenues and trading profit up 35% and 51% respectively. For the year as a whole, revenue in constant currency increased by 21% to $380.1 million and trading profit increased by 29% to $69.7 million; trading margin increased to 18.3% (2009: 17.2%). On an underlying basis, revenues for the year as a whole increased 19%.

Revenue recognised in the year from VANOC 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 electrical distribution panels, 750 transformers and 500 miles of cable servicing 52 venues and other sites.

Excluding VANOC, rental revenue grew by 16% and services revenue was up 23%. Power rental revenue was up 11% whilst temperature control revenue increased by 22%. Oil-free compressed air rental revenues grew by 15%.

It should be noted that the sharp recovery in the North American business – and particularly in temperature control – was helped by the comparison between a particularly cool summer season in 2009 and a particularly hot one in 2010. Revenue in nearly all the business units increased on prior year; Canada saw a sharp recovery as work in the Alberta Oil Sands resumed, and the acquisition of Power Plus in 2008 really proved its worth in 2010. The Southern Business Unit had a particularly strong year, aided by the clean-up work associated with the Nashville floods and the BP oil spill in the Gulf of Mexico. Underlying volumes and rates improved on prior year helped by growth in the petrochemical & refining, contracting and manufacturing sectors.

In the first few months following the acquisition of Northland, the new business has performed satisfactorily. This acquisition, along with the opening of new service centres in Shreveport, Minneapolis St Paul, Seattle, Ft St John, Minot and Roosevelt has significantly extended the footprint of our North American business.

We expect that the recovery in trading we have seen in the second half of 2010 will continue into 2011, aided by our recent acquisition and continued geographic and sector infill in other parts of North America. 2011 is also an important year for North America as we are in the process of investing in excess of $120 million in new fleet which will deliver significantly better emissions performance.

The Europe and Middle East business made progress in the year, with revenue increasing on a constant currency basis by 5% to £261.8 million; trading margin increased to 15.9% (2009: 14.1%) and trading profit increased on a constant currency basis by 17% to £41.6 million. Revenue excluding the 53rd week in 2009 increased by 7%.

Revenue in Europe of £164.2 million was 5% ahead of the prior year on a constant currency basis with most areas growing compared to the prior year. Rental revenue increased by 2%, with power decreasing by 1% but temperature control increasing by 12% aided by a warm summer in Continental Europe. Services revenue, which mainly comprises fuel and transport, increased by 9%. Our business in Russia, which was only fully established in 2008, is performing very well, and by the end of the year we had over 70MW on rent (Dec 2009: 24MW on rent). Trading profit in Europe increased by 47% helped by the release of two accruals, established in 2009, following the favourable resolution of the issues.

Revenue in the Middle East of AED554.1 million (£97.6 million) was 6% ahead of the prior year on a constant currency basis. Rental revenue increased by 2% in the Middle East, with power increasing by 4%, but temperature control decreasing by 16%. Services revenue, which mainly comprises fuel and transport and generates much lower margins than rental, increased by 25%. Within the region, the adverse economic conditions experienced in Dubai in 2009 have continued to have an impact in 2010 with revenue falling significantly again. This decrease has been offset, however, 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. Margins decreased slightly to 23.5% (2009: 24.7%), reflecting the higher proportion of services revenues.

The recovery in Europe and Middle East has been less pronounced than in North America, reflecting the generally slower rate of economic recovery. The 11% underlying growth (i.e. excluding the 53rd week in 2009) in the second half was an improvement on the 4% seen in the first half, and the business starts 2011 with some large contracts secured in the Middle East and Russia. We are cautiously optimistic that we will see further improvement in the region in 2011.

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

The FIFA World Cup contract was the largest events contract by value ever performed by Aggreko with 259 generators and chillers, 525 kilometres of cable and over 1,200 electrical distribution panels on 11 sites. Revenue from the FIFA World Cup in the year amounted to £48 million. The Asian Games was attended by over 9,700 athletes from 45 nations competing in 42 events, and Aggreko provided 100MW of power generation and over 150 kilometres of cable; revenue from the event in the year amounted to £20 million. Both of these contracts helped to drive an increase of 71% in the total revenues of Aggreko International's Local business. Trading margin increased to 29.4% from 24.4% in the prior year. Excluding both of these contracts, as well as the impact of the 53rd week in 2009, revenue increased 11% over prior year.

Excluding the major events, rental revenue was up 9%, with power up 9% and temperature control up 10%. Services revenue increased by 10%. Revenue in the majority of Aggreko International's Local businesses increased as compared to last year.

We expect Aggreko International's Local businesses to grow on an underlying basis in 2011; we are continuing our rapid expansion of our service centre network. In the last two years, we have opened new service centres in Adelaide, Geraldton, Gladstone, Buenos Aires, Concepcion, Monterrey, Villahermosa, Recife and Parauapebas and we expect several new sites to be commissioned in 2011.

Our International Power Projects business had a difficult year, but one in which it made important progress in achieving its strategic objectives. It was difficult, because the business saw unprecedented levels of on- and off-hires as the geographic balance of the business shifted. As a result of this change in the contract base, the business now has a record order-book and has achieved one of our strategic objectives, which is to improve the regional balance, which had been heavily weighted towards Africa, and establish operations of real scale in Asia and South America. At the beginning of 2010, the business had 1,586MW on hire in Africa and the Middle East, 191MW in Asia, and 387MW in Central and South America; by the end of the year, the numbers were 1,025MW in Africa and the Middle East, 833MW in Asia and 657MW in Central and South America.

Demand was very strong during 2010. We secured 49 new contracts in 25 countries and a record 1,300MW of new work; the previous highest number was 630MW in 2009. 730MW of the new work was in Asia, and 270MW in Central and South America. At the start of 2011, our order book stood at almost 30,000MW-months, an increase of 60% over the prior year, and the equivalent of 14 months' revenue at the current run-rate. This order intake coincided with record levels of off-hires, which totalled about 1,000MW during the year. The timing of these off-hires was fortuitous, as we would certainly not have been able to cater for the record level of new orders had we not had large amounts of fleet coming off-hire elsewhere. But the effect of large amounts of fleet being de-commissioned on one continent and then re-commissioned on another, via several thousand miles of ocean and at least two sets of customs authorities, meant that an abnormal proportion of the fleet was costing, rather than earning, money during 2010, and utilisation over the year averaged 80% – well below the levels we have achieved in previous years in International Power Projects.

In terms of trading performance, revenue and profits (excluding pass-through fuel) increased by 8% and 5% respectively. Excluding the 53rd week in 2009, revenue increased by 10%. Trading margin was slightly down on prior year at 36.5% (2009: 37.4%) reflecting the very high levels of off-hires during the year. Revenue from our gas-powered units grew strongly with the number of MW of gas on rent increasing on average by 30% year-on-year.

On an area basis, revenue increased in Asia, Central America and South America but decreased in South and East Africa, North & West Africa and Military. Around 75% of International Power Projects' revenue in 2010 came from utilities; military projects represented about 16%, and oil & gas, mining and manufacturing together contributed about 9%. At the start of the new year, the International Power Projects fleet, at over 3,600MW, is 19% larger than 12 months earlier, including a gas fleet which is 30% larger.

International Power Projects started the year with nearly 14% more capacity on rent than a year ago and a very strong order book. We also expect the level of off-hires to be lower in 2011, and as a consequence we expect this business to grow at a faster rate in 2011 than in 2010.