Review of Trading

GROUP TRADING PERFORMANCE

After nine consecutive years of growth, during which Aggreko's trading profits increased at a compound rate of 28%, 2013 proved to be a challenging year. A number of factors contributed to this: weaker market conditions in our Power Projects business; comparatives with an exceptionally strong 2012 which included the London Olympics as well as peak revenues from Japan and Military contracts in Afghanistan; and weakening exchange rates. Against these headwinds, Aggreko delivered a creditable performance.

In aggregate, Group revenue was flat on a reported basis, while trading profit¹ was down 8%. On an underlying² basis Group revenue increased by 4% while trading profit was up 1%. Our Local business, representing around 60% of revenue, delivered good underlying revenue growth of 7% and margins strengthened; trading in our Power Projects business was, however, more difficult, with underlying revenue at similar levels to the prior year and margins a little lower than the prior year.

To give added perspective, the table below shows the reported versus underlying growth rates for both 2012 and 2013.

Year-on-year growth %
	2013	2012
As reported, excl. pass-through fuel3
Revenues	–%	20%
Trading profit	(8)%	14%
Underlying
Revenues	4%	14%
Trading profit	1%	6%

A summarised Income Statement for 2013 is set out below.

			Movement
	2013 £ million	2012 £ million	As reported	Underlying change
Revenues	1,573	1,583	–%	4%
Revenues excl. pass-through fuel	1,531	1,543	–%
Trading profit	352	381	(8)%	1%
Operating profit	358	385	(7)%
Net interest expense	(25)	(25)	–%
Profit before tax	333	360	(8)%
Taxation	(87)	(94)	8%
Profit after tax	246	266	(8)%
Diluted earnings per share (pence)	92.03	100.40	(8)%

As reported, Group revenues at £1,573 million (2012: £1,583 million) were at similar levels to last year, while Group trading profit of £352 million (2012: £381 million) was 8% lower than 2012. This delivered a Group trading margin of 22% (2012: 24%). Underlying revenues and trading profit increased by 4% and 1% respectively. On the same basis trading margin decreased to 23% (2012: 24%).

Group profit before tax decreased by 8% to £333 million (2012: £360 million), and profit after tax decreased by 8% to £246 million (2012: £266 million). Diluted earnings per share decreased by 8% to 92.03 pence (2012: 100.40 pence). Return on capital employed (ROCE⁴) was 21% (2012: 24%) and the ratio of revenue (excluding pass-through fuel) to average gross rental assets* was 64% (2012: 71%). The reduction in trading margins, ROCE and the ratio of revenue to average gross rental assets was driven by the Power Projects business, mainly due to a lower level of diesel fleet utilisation and a reduction in Japan and Military revenues, partly offset by a movement in the provision for bad debts.

The movement in exchange rates in the year had the effect of decreasing reported revenue by £10 million and trading profit by £6 million. Pass-through fuel accounted for £42 million (2012: £40 million) of reported revenue of £1,573 million.

In response to the subdued trading conditions in our Power Projects business we reacted promptly to reduce the rate of capital expenditure in our rental fleet; we spent £205 million on new fleet in the period (2012: £415 million), equivalent to 80% of the depreciation charge (2012: 187% of the depreciation charge). As a consequence, net debt fell to £363 million at 31 December 2013, £230 million lower than the prior year.

REGIONAL TRADING PERFORMANCE

The performance of each of our regional businesses is described below.

REGIONAL TRADING PERFORMANCE AS REPORTED IN
£ MILLION

	Revenue
	2013 £ million	2012 £ million	As reported change %	Underlying change %
By region
Americas	645	607	7%	8%
Europe, Middle East & Africa	625	626	–%	9%
Asia, Pacific & Australia	303	350	(13)%	(13)%
Group	1,573	1,583	–%	4%
By business line
Local business	904	905	–%	7%
Power Projects excluding pass-through fuel	627	638	(2)%	(1)%
Pass-through fuel	42	40	5%	4%
Group	1,573	1,583	–%	4%
Group excluding pass-through fuel	1,531	1,543	–%	4%
	Trading profit
	2013 £ million	2012 £ million	As reported change %	Underlying change %
By region
Americas	147	129	14%	20%
Europe, Middle East & Africa	114	128	(11)%	14%
Asia, Pacific & Australia	91	124	(27)%	(27)%
Group	352	381	(8)%	1%
By business line
Local business	158	170	(7)%	11%
Power Projects excluding pass-through fuel	196	212	(7)%	(5)%
Pass-through fuel	(2)	(1)	–%	–%
Group	352	381	(8)%	1%
Group excluding pass-through fuel	354	382	(7)%	1%

The performance of each of these regions is described below:

AMERICAS

	As reported 2013 £ million	As reported 2012 £ million	As reported change %	Underlying1 change %
Revenues
Local	445	400	11%	10%
Power Projects	200	207	(3)%	4%
Total	645	607	7%	8%
Trading profit	147	129	14%	20%
Trading margin	23%	22%
1 Underlying excludes currency and the Poit Energia acquisition in April 2012.

Our Americas business delivered a strong performance with underlying revenue increasing by 8% and trading profit by 20%. Reported and underlying trading margin improved from 22% to 23%.

The Local business in the Americas performed well, and had the benefit of the full-year impact of the Poit acquisition in Brazil. Reported revenue increased by 11%, and underlying revenue, which excludes the Poit impact and currency, increased by 10%. Within the underlying number, rental revenue increased by 8% and services revenue increased by 14%; margins improved which was particularly pleasing given the faster growth of services revenues (which typically have significantly lower margins than rental revenues). Rental revenue increased across all our products: power increased by 9%, temperature control increased by 8% and oil-free compressed air increased by 7%. On a sector basis, demand has been strong in the upstream oil & gas as well as in petrochemical & refining in both North and Latin America; contracting and construction, although a small part of our revenues, also grew strongly. On a geographical basis we saw good growth in the majority of areas, although towards the end of the year we saw growth rates taper off in Brazil as a weaker economic environment led to some projects being delayed.

The integration of the Poit Energia business was completed in the first quarter and the combined business in Latin America has performed well, growing its revenues at around 20% on a pro forma basis. We are delighted to have been chosen as the supplier of temporary power for broadcast and critical services for the 2014 FIFA World Cup in Brazil.

Power Projects revenue, on an underlying basis, was up 4% on last year, despite a £10 million decline in our Military revenues; the rate of off-hires in Military revenues picked up pace in the second half as troops withdrew from Afghanistan and camps were closed; at the end of December MW on hire to the Military was down about one third year-on-year, in line with our expectations. On a more positive note, we were awarded our first large order for our new HFO engine for 56MW in the Caribbean and towards the end of 2013 we were awarded an 80MW diesel contract in Panama.

EUROPE, MIDDLE EAST AND AFRICA (EMEA)

	As reported 2013 £ million	As reported 2012 £ million	As reported change %	Underlying1 change %
Revenues
Local	331	374	(12)%	4%
Power Projects excl. pass-through fuel	252	212	19%	17%
Pass-through fuel	42	40	5%	4%
Total	625	626	–%	9%
Trading profit
Excl. pass-through fuel	116	129	(10)%	14%
Pass-through fuel	(2)	(1)	–	–
Total	114	128	(11)%	14%
Trading margin excl. pass-through fuel	20%	22%
1 Underlying excludes currency, pass-through fuel and London 2012 Olympics.

Our EMEA business also had a good year with underlying revenue increasing by 9% and trading profit by 14%. Reported trading margins dropped from 22% to 20%; on an underlying basis trading margin increased from 19% to 20%. The major factor in the difference between reported and underlying growth rates is the London Olympics, which generated around £60 million of revenue in 2012 in the EMEA Local business.

Revenue in our EMEA Local business was up 4% on last year on an underlying basis, and, pleasingly, rental revenue increased by 7% while services revenue was down 2%. Within rental revenue, power increased by 8% and temperature control increased by 2%. We also secured two small HFO contracts in the Middle East. We are delighted to have been chosen as the supplier of temporary power for the Glasgow 2014 Commonwealth Games. On a sector basis there was good growth in oil & gas and services, but a decline in construction and utilities. In geographic terms we saw rental revenue growth in the UK, Germany, Norway, Russia and in the Middle East particularly in Iraq, Qatar and Saudi Arabia. Our new African local businesses all recorded revenue growth but we experienced continuing weak demand in a number of other countries in Continental Europe.

EMEA Power Projects had a strong year, notably in Africa, and particularly with our gas-fired technology, which is delivering electricity to customers at a cost which is comparable to many permanent power plants and far below that which is achievable with dieselfuelled generation. Underlying revenues were up 17% on last year as we benefited from our 229MW gas-fired power plant in Mozambique, which is now delivering power to three countries (Namibia, South Africa and Mozambique) across the Southern African power grid; the first 107MW of this plant went online in July 2012, so in 2013 we had the benefit of revenues for the full year. And in 2013 we installed an additional 122MW in Mozambique, which went online in June 2013, as did an additional 100MW in Cote d'Ivoire, which takes our capacity there to 200MW. We also signed diesel contracts for 120MW in Tunisia and 50MW in Guinea. These gains were partly offset by off-hires in Angola and Kenya.

ASIA, PACIFIC AND AUSTRALIA (APAC)

	As reported 2013 £ million	As reported 2012 £ million	As reported change %	Underlying1 change %
Revenues
Local	128	130	(2)%	2%
Power Projects	175	220	(20)%	(21)%
Total	303	350	(13)%	(13)%
Trading profit	91	124	(27)%	(27)%
Trading margin	30%	35%
1 Underlying excludes currency.

Our APAC business had a challenging year with underlying revenue declining by 13% and trading profit declining by 27%. Reported and underlying trading margin declined from 35% to 30%.

APAC operates Local businesses in Australia, New Zealand, Singapore, China and India; the Australian business also executes 'mini projects' in the Pacific Islands and Papua New Guinea. Around 70% of APAC Local revenue is generated by the Australian business, which delivered strong growth in the first half, and then went backwards in the second half as reduced levels of investment in the mining sector impacted demand. Across the year, Local business revenue increased on an underlying basis by 2%, within which rental revenue increased by 3% and services revenue was up 1%. Power revenue was flat while temperature control increased by 34% driven by emergency cooling jobs in Australia.

Elsewhere in the APAC Local business, India delivered good growth in its day-to-day transaction business, but was impacted in the second half by a deteriorating economic backdrop. We continue to struggle to build a business of scale in China and have decided to consolidate our operations into Shanghai and Dalian whilst we work out the best way to build a solid rental business in the country.

Power Projects in APAC had a very difficult year. As tends to be the case when sophisticated economies suffer power shortages, utilities in Japan were quick to re-build capacity after the Fukushima disaster, and most of the temporary power which came into the country in 2011 was gone by the end of 2012. Our largest contract in terms of value in Japan, for 100MW of gas-fired generation, finished at the end of the first quarter of 2013. Our other two contracted sites totalling 148MW of diesel were extended through the whole of 2013, and have recently been extended through to December 2014; however, in 2013, there was a significant year-on-year revenue drop in Japan. At the same time, in Indonesia, a combination of permanent power generation replacing temporary power on some of our sites, as well as intense competition for new and extension contracts, resulted in a sharp year-on-year drop in revenues. Combined, the impact of reduced revenues and margins in Japan and Indonesia had a material impact on APAC's trading result in 2013.

POWER PROJECTS BUSINESS LINE

	As reported 2013 £ million	As reported 2012 £ million	As reported change %	Underlying1 change %
Revenues
Excl. pass-through fuel	627	638	(2)%	(1)%
Pass-through fuel	42	40	5%	4%
Total	669	678	(1)%	(1)%
Trading profit
Excl. pass-through fuel	196	212	(7)%	(5)%
Pass-through fuel	(2)	(1)	–	–
Total	194	211	(8)%	(5)%
Trading margin excl. pass-through fuel	31%	33%
1 Underlying excludes currency and pass-through fuel.

The performance of our Power Projects business as a whole was mixed. In terms of trading, it was a challenging year, but in terms of the strategic development of the business, we made a lot of progress. It was also mixed by geography; Africa was very strong and South and Central America made encouraging progress, but our Military and Asian businesses were both well down.

The decline in Military and Japanese revenues was inevitable, and, because of their above-average margins, this has had a disproportionate impact on profits. On top of this a number of competitors who were suffering from low rates of utilisation, focused on one of our key markets, Indonesia, to get excess capacity on rent, and rates on new work and extensions in that market dropped markedly.

In this environment we were pleased to hold Power Projects revenues at similar levels to last year and trading profits to a decline of 5%. Trading margin decreased to 31% (2012: 33%). There are a number of moving parts behind this margin movement; the completion of contracts in Japan and Military and a number of cost-lines that went against us, notably a £18 million increase in fleet depreciation due to the high levels of fleet investment in 2012, but we were able to release around £4 million of bad debt provision as we received payments against some of our overdue debt; this compares with 2012 when we charged £25 million.

Order intake for the year was 725MW (2012: 1,029MW) which includes the 122MW cross-border power project supplying power to Namibia and Mozambique, a summer peak-shaving contract in Tunisia of over 100MW, 56MW in the Caribbean (our first major HFO contract) and a 50MW contract in Guinea. In the second half we signed a six-month 80MW diesel contract in Panama, under which we will provide power as a licenced generator to the Panamanian wholesale electricity market; this is, we believe, the first time that a temporary power supplier has entered a country's wholesale electricity market competing with permanent power generators. At the end of the year, our order book was over 25,000MW months, the equivalent of 10 months' (2012: 12 months) revenue at the current run-rate.

We have made excellent progress on the development of our product range. Our product strategy has a single objective: reducing the cost to our customers of each kilowatt-hour we generate. We do this by focusing on the three main costs of generating temporary power: fuel, capital cost, and operating costs. During the year we launched our new super-efficient G3+ generator, which offers world-leading fuel efficiency; our new G3+ HFO, allows customers to run HFO, a fuel which is typically 30% cheaper than diesel. We now have 35% of our Power Projects revenue being generated by gas-fuelled plant at costs per kilowatt hour that are competitive with many of our customers' permanent power plants.

LOCAL BUSINESS LINE

	As reported 2013 £ million	As reported 2012 £ million	As reported change %	Underlying1 change %
Revenue	904	905	–%	7%
Trading profit	158	170	(7)%	11%
Trading margin	18%	19%
1 Underlying excludes currency, Poit Energia acquisition and London 2012 Olympics.

Our Local business delivered a strong performance with underlying revenue increasing by 7%. Rental revenue increased by 7% and services revenue increased by 6%. Within rental, power increased 7%, temperature control increased 8% and oil-free air increased 7% with trading profit increased 11%. Reported trading margin dropped from 19% to 18%, with underlying trading margin having increased from 17% to 18%. The most significant difference between the reported and the underlying growth rates relates to the London Olympics, which generated around £60 million of revenue in 2012.

The strong underlying growth in both revenues and margins was driven by a number of factors. First, our strategy of expanding our Local business in emerging markets has delivered increased volumes; excluding the Olympics, average megawatts of power on rent were 9% up year-on-year, and within these emerging markets grew well above the average. Secondly, our strategy of sharing technology between our power projects and local businesses has enabled us to introduce gas-fuelled power to Local markets, and this is driving growth in both volumes and margins; average gas megawatts on hire in the Local business increased by 40% year-on-year. We have also won several contracts for our new HFO solution from industrial customers. The other driver of underlying volume and trading profit growth has been our strategy of using the Local business to execute 'miniprojects'; these we define as power contracts of 12MW or over, and of a duration of 3 months or longer, and which, were they in a territory where we did not have a Local business, would be accounted for within the Power Projects business. As our Local business grows in scale and capability in emerging markets, these mini-projects are a fertile source of growth; and at the end of the year, we had over 260MW on rent in mini-projects.

OUTLOOK FOR 2014

The Group has made an encouraging start to 2014. The Local business has continued to show good growth with volumes on rent currently up 7% on the prior year. In Power Projects, year to date order intake is 64MW; in addition, we have recently signed a contract in Libya for 120MW which we would normally have taken into the order book. However, given the volatile situation in the country, we will not include it in order intake until we are certain we will be able to execute it. Assuming that we are able to proceed in Libya, we expect that order intake for the first quarter will be at a similar level to the final quarter of 2013. Off-hires in the first quarter are expected to run at a lower rate than has been the case for the last few years and our 150MW of diesel contracts in Japan have now been extended until December 2014. Whilst this is all welcome, customers in the Power Projects market continue to be cautious, and at this early stage in the year, so do we.

Overall, since we last reported in December, the business has performed in line with our expectations. For the full year we expect trading profit to be similar to 2013 on a constant currency basis, as growth in the Local business is offset by weaker trading in Power Projects. However, the latest spot rates for some of our major trading currencies¹ have moved against the average exchange rates of 2013; if these rates pertain for the rest of the year, we would see a marked translational impact on our 2014 reported results.