Chairman's Statement

INTRODUCTION

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 Military work in Afghanistan and post-Fukushima Japan reconstruction; and weakening exchange rates. Against these headwinds, Aggreko delivered a creditable performance, with reported revenue at similar levels to 2012 and the decline in reported trading profit was contained to 8%. Reported profit before tax decreased by 8% to £333 million (2012: £360 million) and diluted earnings per share also decreased by 8% to 92.03 pence (2012: 100.40 pence). On an underlying¹ basis (which excludes the impact of the London Olympics, the Poit Energia acquisition, pass-through fuel² and currency movements) revenue increased 4% and trading profit increased 1%.

Our Local business had a strong year; excluding the 2012 Olympics, average megawatts of power were up 9% driven largely by our strategy of expanding inemerging markets. We opened a further eight service centres and offices and successfully completed the integration of the Poit acquisition in Brazil. Our strategy of driving closer links between Power Projects and the Local business has brought many benefits: by the end of the year we had over 260MW of miniprojects on rent; fleet was also transferred from Power Projects to the Local business, saving us capex; and from a product perspective, the Local business is now renting material volumes of gas-fuelled generators developed for the Power Projects business, and has won its first contracts for our new Heavy Fuel Oil engines.

We knew at the beginning of the year that trading would be difficult in Power Projects; the run-down in our contracts for the US Military and in Japan was compounded by a weaker macro-economic environment in emerging markets. But there was good progress on many fronts: we launched our worldleading G3+ generators and the unique G3+ HFO; we ramped up our re-build and conversion capability to 10 units a week; and our power-plant in Mozambique, which is the largest of its type in the world, is delivering 229MW to Namibia, South Africa and Mozambique.

A feature of our business model and capital expenditure discipline is that in a period of weaker demand the business delivers very strong cash generation. Net cash inflow from operations increased by 26% to £603 million (2012: £479 million), which funded reduced total capital expenditure of £228 million 2012: £440 million). As a result, net debt of £363 million at 31 December 2013 was £230 million lower than the prior year.

Our financial position continues to be very strong with net debt to EBITDA (Earnings before Interest Tax Depreciation and Amortisation) of 0.6 times (2012: 0.9 times) at 31 December 2013, compared to our bank covenant of 3 times. Interest cover, measured on an EBITDA basis, is at 26 times (2012:25 times), far ahead of our covenant of 4 times.

DIVIDEND

The Board is recommending a 10% increase in the dividend for the year as a whole; this will comprise a final dividend of 17.19 pence per ordinary sharewhich, when added to the interim dividend of 9.11 pence, gives a total for the year of 26.30 pence. At this level, the dividend would be covered 3.5 times (2012: 4.2 times), which is in line with our declared policy of reducing cover towards 3 times over time. Subject to approval by shareholders, the final dividend will be paid on 27 May 2014 to ordinary shareholders on the register as at 25 April 2014, with an ex-dividend date of 23 April 2014.

ADDITIONAL RETURN TO SHAREHOLDERS

As set out in our Strategy Review, presented to investors in March 2013, we believe that under normal trading conditions an appropriate level of gearing for the business is around 1 times net debt to EBITDA. At this level the Company retains flexibility to react to opportunities for fleet investment and 'normal course' acquisitions, and also ensures that the business does not hold on to cash it does not need. This gearing level is a guide, but our policy is that, in the event that the gearing level materially falls below 1 times, we will consider supplementing the ordinary dividend with additional returns of value to shareholders.

With the strong cash generation seen during the year, our net debt at the end of 2013 has fallen to £363 million which is 0.6 times our 2013 EBITDA of £636 million; accordingly the Board believes that it is appropriate to supplement the ordinary dividend with an additional return to shareholders of approximately £200 million, which would result in adjusted net debt at the end of 2013 being £563 million or 0.9 times 2013 EBITDA. Subject to shareholder approval, each shareholder will receive a return of value of 75 pence in respect of each existing ordinary share they hold on 27 May 2014. 

As was the case in our previous return of value in 2011, when shareholders received £149 million (55 pence per share), the return will be made by way of a B share scheme, which will give shareholders a choice as to when, and in what form, they receive their proceeds from the return of value. Notably, it should allow most individual UK taxpayers to receive the return in the form of a capital receipt, if they so wish. The B share scheme will be accompanied by a share consolidation designed to maintain comparability of share price and return per share of the ordinary shares before and after the creation of the B shares.

A circular will be sent to shareholders setting out the details of these proposals later in March.

STRATEGY

We review our strategy on a regular basis. Every five years we do a fundamental review of all our business segments with the results of these quinquennial reviews having been presented to investors at our full year results in 2004, 2008 and 2013. The 2013 review confirmed that the targets set out in our 2008 review had all been exceeded; that looking ahead there were numerous opportunities for growth in both the Local and Power Projects business; and that our product and service offering was highly competitive. A detailed description of our strategy is set out in the Strategy section of the Annual Report, but, in summary, we said that over the five years to 2018 we should be able to achieve, on average and subject to year-on-year variation, double-digit rates of growth in revenues³, with margins and returns on capital in excess of 20%. On the basis used for the Strategy Review, 2013 Group revenues were 6% higher than the prior year, trading margin was 22% and return on capital employed was 21%.

BOARD

On 28 February we announced that, after 11 very successful years as Group Chief Executive, Rupert Soames has tendered his resignation from the Group to enable him to take up a new role as CEO of Serco Group plc. He will leave Aggreko after the Annual General Meeting on 24 April 2014.

The Board has commenced a process to identify a permanent successor and has appointed Angus Cockburn, currently Chief Financial Officer, as Interim CEO from 24 April and Carole Cran, currently Director of Group Finance, as Interim CFO.

Rupert has been an excellent CEO for Aggreko and the Group has achieved an enormous amount during his tenure. We are delighted that Angus has agreed to become interim CEO whilst we identify a permanent CEO from strong internal and external candidates.

Angus has the support of an extremely capable interim CFO in Carole and an excellent management team, who will continue to drive the business forward. The Board would like to thank Rupert for the last 11 years and wish him well as he seeks fresh challenges elsewhere.

On 1 November 2013 we were delighted that Ian Marchant joined the Board as a Non-executive Director. Ian was until recently Chief Executive of SSE plc having previously been Finance Director of SSE and Finance Director of Southern Electric plc. Ian's extensive knowledge of the domestic and international energy markets, combined with his substantial finance background will bring further strength to Aggreko's Board. Ian has also been appointed to the Audit Committee and the Ethics Committee.

David Hamill has decided to step down from the Board after this year's Annual General Meeting. David has served as a Non-executive Director for seven years, most recently as Senior Independent Director. David's experience and insight have proved invaluable to the Board during his tenure, and he has made a marked contribution to Aggreko's development. We all wish him well for the future. I am pleased to be able to say that Russell King has agreed to succeed him as Senior Independent Director.

EMPLOYEES

On behalf of the Board, I wish to express my sincere thanks to all our colleagues across the Group for their outstanding commitment and support in 2013.

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 currencies⁴ 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.

Ken Hanna
Chairman
6 March 2014