Interim Management Report

Group Trading Performance

Aggreko delivered a good underlying¹ performance in the first half of 2014 with revenue and trading profit² increasing by 12% and 6% respectively. Underlying excludes the impact of currency translation and pass-through fuel³. On the same basis, revenue in our Local business increased 10% and trading profit increased 5% while revenue and trading profit in our Power Projects business increased 14% and 7% respectively. As anticipated, reported results were significantly impacted by adverse currency movements with reported revenue increasing 1% on the prior year, and reported trading profit decreasing 10%.

			Movement
	2014 £ million	2013 £ million	As reported	Underlying change
Revenue	768	760	1%	12%
Revenue excl. pass-through fuel	745	745	–%
Trading profit	140	155	(10)%	6%
Operating profit	140	157	(11)%
Net interest expense	(10)	(13)	30%
Profit before tax	130	144	(9)%
Taxation	(33)	(39)	14%
Profit after tax	97	105	(8)%
Diluted earnings per share (pence)	36.45	39.27	(7)%

 

Reported Group revenue increased by 1% to £768 million (2013: £760 million), while trading profit of £140 million (2013: £155 million) was down 10% on the prior year; reported trading margin was 18% (2013: 20%). Underlying revenue increased by 12% and trading profit increased by 6%; underlying trading margin was 19% (2013: 20%).

Group profit before tax decreased by 9% to £130 million (2013: £144 million) and profit after tax decreased by 8% to £97 million (2013: £105 million), reflecting a decrease in the tax rate from 27% to 26%. Group return on capital employed (ROCE⁴), measured on a rolling 12-month basis, was 21% (2013: 22%). The ratio of revenue (excluding pass-through fuel) to average gross rental assets decreased from 67% to 63% mainly due to a reduction in Military, Japan and Indonesia revenues in our Power Projects business.

The movement in exchange rates in the period had a significant impact on results, reducing revenue by £80 million and trading profit by £23 million. This was driven by the adverse movement in all our major currencies⁵, against sterling, compared to the average rates for the first half of 2013. Pass-through fuel, related to our contracts in Mozambique, accounted for £23 million (2013: £15 million) of reported revenue of £768 million.

We spent £107 million on new fleet in the period (2013: £111 million), equivalent to 87% of the depreciation charge (June 2013: 87% of the depreciation charge). Net debt at 30 June 2014 of £537 million was £15 million lower than the same period last year, despite having returned £200 million to shareholders during the second quarter. Cash flow from operating activities in the twelve months to 30 June 2014 was £546 million, which helped fund capital expenditure of £226 million, the £200 million return of value to shareholders, a final ordinary dividend of £70 million and interest and tax payments as well as currency movements over the same period.

Regional Trading Performance

The performance of our three regions is detailed below, along with an analysis of the global performance of our Power Projects and Local businesses.

Regional Trading Performance
as reported in £ million

	Revenue
	2014 £ million	2013 £ million	As reported change %	Underlying change %
By Region
Americas	340	317	7%	25%
Europe, Middle East & Africa	303	277	9%	14%
Asia, Pacific & Australia	125	166	(25)%	(16)%
Group	768	760	1%	12%
By Business Line
Local Business	431	433	–%	10%
Power Projects excl. pass-through fuel	314	312	1%	14%
Pass-through fuel	23	15	50%	62%
Group	768	760	1%	12%
Group excluding pass-through fuel	745	745	–%	12%
	Trading profit
	2014 £ million	2013 £ million	As reported change %	Underlying change %
By Region
Americas	66	67	(2)%	26%
Europe, Middle East & Africa	50	32	57%	69%
Asia, Pacific & Australia	24	56	(58)%	(53)%
Group	140	155	(10)%	6%
By Business Line
Local Business	57	62	(8)%	5%
Power Projects excl. pass-through fuel	86	95	(11)%	7%
Pass-through fuel	(3)	(2)	(25)%	(35)%
Group	140	155	(10)%	6%
Group excluding pass-through fuel	143	157	(10)%	6%

The performance of each of these regions is described below:

Americas

	As reported 2014 £ million	As reported 2013 £ million	As reported change %	Underlying1 change %
Revenues
Local	218	215	2%	14%
Power Projects	122	102	20%	51%
Total	340	317	7%	25%
Trading profit	66	67	(2)%	26%
Trading margin	19%	21%
1 Underlying excludes currency.

Our Americas business delivered a strong performance in the first half. Underlying revenue increased by 25% and trading profit by 26%. Reported trading margin decreased from 21% to 19%, with the decrease driven by the currency mix of our contracts.

Revenue in our Americas Local business increased 14% with rental revenue up 10% and services revenue up 25%. Rental revenue growth was driven by power rental revenue, which increased by 14%. Temperature control revenue grew by 3% but cooler ambient temperatures in North America resulted in a slower than usual start to the crucial summer season. Oil-free compressed air revenue declined 1%.

Growth was again strong in the oil and gas sector with continuing strength in shale in North America. This growth was supported by strong performances in petrochemical and refining as well as events, notably the FIFA World Cup contract in Brazil for which we provided all the broadcast power.

In North America growth was broadly based with the stand out performance coming from gas-fuelled generation which grew 80% over the prior year driven by both shale and encouragingly a number of industrial and construction applications. Our base business in Brazil was flat on the prior year in the face of very challenging economic conditions. Elsewhere in South America the local business continued to grow strongly, notably in Argentina, Peru and Colombia.

Power Projects revenue, on an underlying basis, was up 51% on last year, despite an £11 million ($18 million) decline in our Military revenues as the US withdrawal from Afghanistan continues. The growth in Power Projects was driven by a number of new projects which we secured during 2013, notably in Panama, Curacao and Peru, as well as incremental revenue from our contracts in Argentina. In Panama, we are operating as a licensed generator to the Panamanian wholesale electricity market, a first for Aggreko and the temporary power industry. The hydro shortage in the country during the second quarter meant that the plant operated continuously, which had a significant impact on revenue given the volume of fuel required.

Europe, Middle East & Africa (EMEA)

	As reported 2014 £ million	As reported 2013 £ million	As reported change %	Underlying1 change %
Revenues
Local	161	149	8%	14%
Power Projects excl. pass through fuel	119	113	6%	15%
Pass through fuel	23	15	50%	62%
Total	303	277	9%	14%
Trading profit
Excl. pass-through fuel	53	34	55%	69%
Pass-through fuel	(3)	(2)	(25)%	(35)%
Total	50	32	57%	69%
Trading margin excl. pass-through fuel	19%	13%
1 Underlying excludes currency and pass-through fuel.

Our EMEA business had a very strong first half with underlying revenue increasing by 14% and trading profit by 69%. Reported trading margin increased from 13% to 19% mainly driven by a better mix of higher margin rental revenue compared to lower margin services revenue as well as a lower level of mobilisation costs compared to the same period last year, with 220MW of gas projects being mobilised in Mozambique and Ivory Coast during the first half of 2013.

Revenue in our EMEA Local business, on an underlying basis, increased 14% on last year. Rental revenue increased by 20% with services revenue up 3%. Within rental revenue, power increased by 23% and temperature control increased by 4%.

Growth was broadly spread across the whole region. We experienced strong growth in the oil and gas sector, notably in Russia where we continue to grow our business in Siberia as well as in our newly established Romanian business and our Middle Eastern and Norwegian businesses. We are also seeing encouraging growth in gas-fuelled generation, notably, in Russia and Romania, building on our success in North America. Growth was also strong in the utilities sector with a key element being the provision of temporary power to support the continued commissioning of off-shore wind farms in Germany and the UK, as well as our first contract for wind farm commissioning in South Africa. We continue to expand our work in mining and we have been awarded a number of contracts in Africa. We are also encouraged by the early progress of our new local businesses in Turkey, Kenya, Namibia, Nigeria and Angola. Our fastest growing new business is Iraq, where we are supporting the development of the oil and gas sector in Southern Iraq and Kurdistan. We are clearly cognisant of the security situation not just in Iraq but also in other countries such as Libya, across both our Local and Power Projects businesses and continue to monitor developments closely.

At the time of writing this report the Glasgow 2014 Commonwealth Games has just ended. Aggreko provided 27MW of temporary power across the Games' 29 venues and the International Broadcast Centre.

Revenue in our Power Projects business, excluding fuel, was up 15% driven by the impact of the half two 2013 on hires of 122MW in Mozambique for the provision of power to Namibia and Mozambique, and an additional 100MW in Ivory Coast. Furthermore there were new contract wins in the second half of 2013 and the first half of 2014, such as 50MW of diesel in Guinea and 170MW of summer peak shaving work in Oman and Saudi. The impact of these new contracts was partly offset by off-hires in Angola and Kenya. In Southern Africa, we are supplying cross-border power into three countries as part of the Southern African Power Pool from our plant in Mozambique, where we have just extended the first 108MW until summer 2015.

Asia, Pacific AND Australia (APAC)

	As reported 2014 £ million	As reported 2013 £ million	As reported change %	Underlying1 change %
Revenues
Local	53	69	(24)%	(11)%
Power Projects	72	97	(26)%	(20)%
Total	125	166	(25)%	(16)%
Trading profit	24	56	(58)%	(53)%
Trading margin	19%	34%
1 Underlying excludes currency.

Our APAC business had a challenging first half with underlying revenue and trading profit declining by 16% and 53% respectively. The reported trading margin fell from 34% to 19% largely driven by the Power Projects business and the Australia Pacific Local business.

The Local business saw revenue decrease on an underlying basis by 11%. Rental revenue decreased by 14% and services revenue was in line with the same period last year. Within rental revenue power decreased by 14% and temperature control decreased by 6%.

Around 75% of APAC local revenue is generated by the Australia Pacific business which faced very challenging market conditions driven by the slowdown in the mining sector. The focus of our mining business in Australia has changed to support the operation of existing mines rather than the larger projects associated with the construction phase of new mines, which have significantly reduced. On a more positive note, our business in China grew strongly in the first half and we are encouraged by the early progress of our new Local business in South Korea, which was established earlier this year.

Power Projects in APAC had a difficult six months with revenue decreasing 20%, largely driven by Japan and Indonesia. Our largest contract in terms of value in Japan, for 100MW of post tsunami gas-fired generation, finished at the end of the first quarter of 2013. Encouragingly, we still have 148MW of diesel power on rent in Hokkaido providing stand-by power. In Indonesia, a combination of permanent power generation replacing temporary power on some of our sites in the second half of 2013, as well as intense price competition for both new contracts and extensions, resulted in a sharp year-on-year drop in revenues. Combined, the impact of reduced revenue and margins in Japan and Indonesia had a material impact on APAC's trading result in the first half of 2014. We are pleased, however, that new contracts were signed in the Philippines (42MW), Bangladesh (30MW) and Myanmar (21MW) in the first half of the year.

Power Projects Business

	As reported 2014 £ million	As reported 2013 £ million	As reported change %	Underlying1 change %
Revenues
Excl. pass through fuel	314	312	1%	14%
Pass through fuel	23	15	50%	62%
Total	337	327	3%	14%
Trading profit
Excl. pass-through fuel	86	95	(11)%	7%
Pass-through fuel	(3)	(2)	(25)%	(35)%
Total	83	93	(11)%	7%
Trading margin excl. pass-through fuel	27%	31%
1 Underlying excludes currency and pass-through fuel.

Our Power Projects business had an encouraging six months with underlying revenue increasing by 14% and trading profit increasing by 7%. Reported trading margin decreased to 27% (2013: 31%). The main reasons for the margin decline were the completion of contracts in Japan and Military and pricing pressure, in particular in Indonesia, as well as the currency mix of our contracts which had a two percentage point impact. These factors were in part offset by a lower charge to the income statement for the provision of bad debts in the six months to 30 June 2014 as compared to the prior year.

Order intake for the first half was 488MW, ahead of the 397MW secured in the same period last year. This includes the previously announced 120MW Libyan contract, 50MW in Senegal and 170MW of summer peak shaving work in Oman and Saudi. We are also pleased to have extended our gas powered contracts in Bangladesh and Mozambique. At the end of the period, our order book was over 26,000MW months, the equivalent of 9 months' revenue (2013: 11 months) at the current run-rate.

We go into the second half with 895MW of gas-fuelled generation on rent, and revenue from gas up 19% on the prior year in the first half. We are currently converting our existing diesel fleet into G3+ and HFO-capable sets at a rate of about 6 sets a week, and we currently have 538MW of HFO/G3+ sets in the fleet across both businesses. We continue to experience some early stage challenges with our HFO product, due to the difficulty in securing the appropriate grade of fuel for our engines. We are working to resolve these issues and the product continues to be very attractive to our customers.

Local Business

	As reported 2014 £ million	As reported 2013 £ million	As reported change %	Underlying1 change %
Revenue	431	433	–%	10%
Trading profit	57	62	(8)%	5%
Trading margin	13%	14%
1 Underlying excludes currency.

Our Local business delivered a strong first half with underlying revenue increasing by 10%. Rental revenue increased by 9% and services revenue by 13%. Within rental, power increased 11%, driven by EMEA and the Americas, whilst temperature control increased by 2% and oil-free air decreased 1%. Trading profit increased by 5% and trading margin reduced slightly from 14% to 13%. This increase in revenue was driven by good growth in emerging markets¹ as well as our more mature businesses and was helped by the £9 million of revenue in half one from the FIFA World Cup in Brazil and the Glasgow 2014 Commonwealth Games. It is also pleasing to note that the segment of 'mini-projects'² has continued to show growth over the period despite the decline in Australian mining projects with 290MW of mini projects on rent as at June 2014 (June 2013: 260MW).

Outlook

Overall, the Group performance in the first half of the year has been encouraging. The Local business has performed well in the first half but, as ever, the third quarter is important and, whilst we expect to deliver growth in the second half, comparators are more challenging. In Power Projects, whilst we take some encouragement from the order intake in the first half and a healthy enquiry pipeline, customers generally remain cautious.

We now plan to spend around £235 million on fleet capital expenditure for the full year, which is an increase of £20 million on our previous guidance reflecting some additional investment in our gas fleet in North America and our projects diesel fleet. As a result of our disciplined approach to capital expenditure, we also expect to deliver strong cash generation in the second half.

We continue to expect underlying trading profit for the full year to be similar to 2013.

Financial Review

The movement in exchange rates during the period reduced revenue by £80 million and trading profit by £23 million. The largest currency impact on revenue came from the US dollar followed by the Argentinean Peso and then the Australian dollar and Brazilian Reais. Currency translation also gave rise to a £24 million decrease in net assets from December 2013 to June 2014. Set out in the table below are the principal exchange rates affecting the Group's overseas profits and net assets:

	Jun 2014		Jun 2013		Dec 2013
per £ Sterling	Average	Period end	Average	Period end	Average	Period end
Principal Exchange Rates
United States Dollar	1.67	1.70	1.55	1.53	1.57	1.65
Euro	1.22	1.25	1.18	1.17	1.18	1.19
UAE Dirhams	6.13	6.25	5.67	5.60	5.75	6.08
Australian Dollar	1.83	1.81	1.52	1.65	1.62	1.86
Brazilian Reais	3.83	3.74	3.14	3.33	3.38	3.89
Argentinian Peso	13.05	13.84	7.92	8.20	8.57	10.70
Source: Bloomberg

Reconciliation of underlying growth to reported growth

The table below reconciles the reported and underlying revenue and trading profit growth rates:

	Revenue £ million	Trading profit £ million
2013	760	155
Currency	(80)	(23)
2013 pass-through fuel	(15)	2
2014 pass-through fuel	23	(3)
Underlying growth	80	9
2014	768	140
As reported growth	1%	(10)%
Underlying growth	12%	6%

Interest

The net interest charge for the first half of 2014 was £10 million, a decrease of £3 million on 2013, reflecting lower average net debt period on period, and arrangement fees included in the 2013 interest number for debt refinanced during the period. Interest cover, measured against rolling 12-month EBITDA, remains strong at 28 times (June 2013: 25 times) relative to the financial covenant attached to our borrowing facilities that EBITDA should be no less than 4 times interest.

Effective Tax Rate

The current forecast of the effective tax rate for the full year, which has been used in the interim accounts is 26% as compared with 27% in the same period last year.

Return to shareholders

In June 2014 we completed a £200 million return of value to shareholders, by way of a B share scheme, equivalent to 75 pence per ordinary share; a further £2 million will be paid in 2015 to those shareholders who elected to defer all or part of their return. Following the return, at 30 June 2014 our net debt stands at 0.9 times EBITDA on a rolling 12-month basis (June 2013: 0.8 times).

Dividends

The Board has decided to pay an interim dividend of 9.38 pence per ordinary share which represents an increase of 3% compared with the same period in 2013; dividend cover is 3.9 times (30 June 2013: 4.3 times) and is consistent with our strategy of reducing our full year dividend cover to around 3 times (31 December 2013: 3.5 times). This interim dividend will be paid on 3 October 2014 to shareholders on the register at 5 September 2014, with an ex-dividend date of 3 September 2014.

Cashflow

The net cash inflow from operations during the period totalled £213 million (2013: £270 million). This funded capital expenditure of £121 million which was down £2 million on the same period in 2013. Of the £121 million, £107 million was spent on fleet with about 60% going to the Local business and 40% to the Power Projects business. Within Power Projects, a substantial portion of the spend was for the conversion of 158 of our diesel sets to our new HFO and G3+ engines. Net debt of £537 million at 30 June 2014 was £15 million lower than the same period last year.

There was a £61 million working capital outflow in the six months to 30 June 2014 (6 months to 30 June 2013: £21 million outflow) driven by an increase in debtor balances. This increase is mainly driven by the current element of our gross debtors balance due to higher levels of activity, notably our contract in Panama which is running continuously and for which we have responsibility for fuel management. In addition debtor days in the Power Projects business have increased by 5 days to 100 days since December 2013 (30 June 2013: 111 days) which was the net impact of a better payment profile in the Americas and slower payments by a small number of customers.

Overall, the Power Projects bad debt provision at 30 June 2014 was similar to the provision at 31 December 2013 (£16 million lower than 30 June 2013).

Financial Resources

The Group maintains sufficient facilities to meet its normal funding requirements over the medium term. At 30 June 2014, these facilities totalled £798 million in the form of committed bank facilities arranged on a bilateral basis with a number of international banks and private placement notes. The financial covenants attached to these facilities are that EBITDA should be no less than 4 times interest and net debt should be no more than 3 times EBITDA; at 30 June 2014, these stood at 28 times and 0.9 times respectively. The Group does not consider that these covenants are restrictive to its operations. The maturity profile of the borrowings is detailed in Note 13 in the Accounts.

Net debt amounted to £537 million at 30 June 2014 and, at that date, un-drawn committed facilities were £259 million.

Net Operating Assets

The net operating assets of the Group at 30 June 2014 totalled £1,616 million, down £157 million on the same period in 2013. The main components of net operating assets are:

			Movement
	2014 £ million	2013 £ million	Headline	Constant currency1
Rental fleet	1,035	1,219	(15)%	(6)%
Property and plant	89	85	5%	20%
Inventory	157	163	(4)%	7%
Net trade debtors	308	293	5%	22%
1 Constant currency takes account of the impact of translational exchange movements in respect of our businesses which operate in currency other than sterling.

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 2014 were £1,662 million, down 3% on the same period in 2013; operating profit for the same period was £341 million.

In the first half of 2014 the ROCE decreased to 21% compared with 22% for the same period in 2013. This decrease was mainly driven by lower trading margins in our Power Projects business and our Local business in Australia Pacific.

Shareholders' Equity

Shareholders' equity decreased by £168 million to £972 million in the six months ended 30 June 2014, represented by the net assets of the Group of £1,509 million before net debt of £537 million. The movements in shareholders' equity are analysed in the table below:

Movements in shareholders' equity

	£ million	£ million
As at 1 January 2014		1,140
Profit for the financial period	97
Dividend1	(46)
Retained earnings		51
Employee share awards		2
Issue of shares to employees under share option schemes		2
Return of value to shareholders		(198)
Remeasurement of retirement benefits		1
Currency translation difference		(24)
Movement in hedging reserve		(4)
Other2		2
As at 30 June 2014		972
1 Reflects the dividend of 17.19 pence per share (2013: 15.63 pence) that was paid during the period. 2 Other includes tax on items taken directly to reserves.

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 to aid this the Board has developed a formal risk management process which is described on page 70 of the 2013 Annual Report and Accounts. Also set out on pages 34 to 39 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;
• Safety;
• Competition;
• Product technology and emissions regulation; and
• People.

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.

Angus Cockburn
Interim Chief Executive

Carole Cran
Chief Financial Officer

5 August 2014