AGK.L Regulatory News (AGK)

AGGREKO PLC INTERIM RESULTS FOR THE SIX MONTHS

ENDED 30 JUNE 2018

1 AUGUST 2018

"These are encouraging results that keep us well on track to deliver our full year guidance. As we continue to execute on our strategy, we have also completed a comprehensive review of the Group's expected performance over the medium term. Based on this review, and the detailed action plans we have developed, we are confident that the Group can deliver a return on capital employed in the mid-teens in 2020 with potential for further improvement beyond this."

1Underlying excludes pass-through fuel, currency and 2017 exceptional items. A reconciliation between reported and underlying performance is detailed on page 10.

· Good underlying1 Group revenue growth of 14%

o Rental Solutions underlying1 revenue up 32% (26% excluding hurricanes in North America)

o Power Solutions Industrial underlying1 revenue up 15% (up 3% excluding the Winter Olympics)

o Power Solutions Utility underlying1 revenue down 15%

· Profit before tax of £59 million, up 8% on an underlying1 basis

· Group average megawatts on hire during the six months of 6,560 MW (2017: 6,520 MW)

· Successful execution of the Commonwealth Games and South Korea Winter Olympics

· Interim dividend maintained at 9.38p per share

· Our strategy, as set out in 2015, focusing on customer, technology and capital efficiency, has evolved to reflect the changing markets

· Execution of our strategy has strengthened the Group's foundations and is beginning to drive growth

· Our detailed execution plans, particularly focused on operating margin and capital efficiency, supported by a £50 million cost reduction programme, are expected to improve the financial returns of the Group over the medium term

· With higher returns in Rental Solutions and Power Solutions Industrial and significant improvement in Power Solutions Utility, we expect the Group to deliver a return on capital employed in the mid-teens in 2020, with potential for further improvement beyond this

November 2018 Q3 2018 trading update

A presentation will be held for analysts and investors today at 9.30am (BST) at the London Stock Exchange, 10 Paternoster Square, EC4M 7LS.

A live web-cast and a copy of the slides will be available on our website at www.plc.aggreko.com/investors.

RESULTS FOR THE SIX MONTHS TO 30 JUNE 2018

Reporting changes

As previously announced, as a result of the Group's increased sector focus, we have refined our segmental reporting and reassigned all non-utility sector customer contracts from within our Power Solutions Utility business into Power Solutions Industrial. The details of the impact of this change are contained in Note 4(a) to the Accounts.

The Group has also adopted IFRS 15 'Revenue from Contracts with Customers' with effect from 1 January 2018. Note 3 to the Accounts explains these changes in detail.

Comparative figures for 2017 have been restated to reflect both the above changes.

Group trading performance

2 Underlying excludes pass-through fuel and currency.

Underlying1 Group revenue rose 14%, driven by a strong performance in Rental Solutions which offset the decline in Power Solutions Utility. Underlying1 profit before tax was up 8% at £59 million. The operating margin was 9% (2017: 10%) as good growth in Rental Solutions was offset by Power Solutions Utility off-hires and lower operating profit in our Power Solutions Industrial business. The lower margin resulted in a reduction in the Group's return on capital employed (ROCE) to 11% (2017: 12%). Diluted earnings per share (DEPS) were 15.85 pence (2017: 17.88 pence, excluding exceptional items).

Divisional headlines

Rental Solutions underlying1 revenue was up 32%. North America had a strong first half with revenue up 34%, supported by £17 million from hurricane-related work (up 23% excluding hurricanes) and a strong performance across several key sectors including building services & construction, petrochemical & refining and oil & gas. We also achieved good growth in both Europe and Australia Pacific. The operating margin rose six percentage points to 11%, driven by improved volumes, rates, fleet utilisation and operating leverage.

Power Solutions Industrial underlying1 revenue increased 15%, supported by the South Korea Winter Olympics (up 3% excluding the Olympics). The operating margin was 11%, down three percentage points due to competitive pressure and market conditions driving down rates across the Middle East and in parts of our business in Africa, as well as the timing of on and off-hires in our industrial project portfolio.

Power Solutions Utility underlying1 revenue was down 15% primarily due to planned off-hires in Zimbabwe and Japan, and lower volumes and pricing in Argentina. As a result, the Power Solutions Utility margin (excluding pass-through fuel) was down 9 percentage points to 8%.

Reported financial measures

Reported revenue and operating profit include the translational impact of currency as Aggreko's revenue and profit are earned in a number of different currencies (most notably the US Dollar), which are then translated and reported in Sterling. The movement in exchange rates in the period had the translational impact of decreasing revenue by £67 million and operating profit by £10 million.

In addition, the Group separately reports fuel revenue from contracts in the Power Solutions Utility business in Brazil, where we manage fuel on a pass-through basis on behalf of our customers. The reason for the separate reporting is that fuel revenue on these contracts is entirely dependent on fuel prices and the volumes of fuel consumed, which can be volatile and may distort the view of the performance of the underlying business. In 2018, fuel revenue from these contracts was £89 million (2017: £42 million).

Reported Group revenue was up 10% on prior year, with Rental Solutions up 26%, Power Solutions Industrial up 3% and Utility down 3%.

During the first half of 2017 the Group incurred exceptional costs of £10 million relating to the implementation of our Business Priorities programme, split as follows: Rental Solutions £3 million, Power Solutions Utility £2 million and Power Solutions Industrial £5 million. There were no exceptional items reported in the first six months of 2018.

Dividends

The Group is proposing to maintain the interim dividend at 9.38 pence per share (2017: 9.38 per share), which equates to dividend cover of 1.7 times (2017: 1.9 times). Dividend cover is calculated as basic earnings per share for the period divided by dividend per share.

Cash flow and balance sheet

During the first six months, we generated an operating cash inflow of £160 million (2017: £184 million). The decrease in operating cash flow is mainly driven by higher working capital outflows year on year, with an outflow of £68 million in 2018 compared to £51 million outflow in 2017. This year's outflow consists of a £7 million inflow from trade and other receivables, a £50 million outflow from trade and other payables, a £4 million outflow from inventory and a net £21 million outflow from the movement in fulfilment assets and demobilisation provisions.

The decrease in trade and other receivables is analysed by business unit as a £8 million decrease in Power Solutions Utility, a £7 million decrease in Rental Solutions and a £8 million increase in Power Solutions Industrial. The increase in Power Solutions Industrial is driven by the revenue growth and improved activity levels in Eurasia. The reduction in Rental Solutions is driven by an increased focus on collections as well as delayed receipts on some of the hurricane-related work through the end of 2017. In Power Solutions Utility the decrease is driven by lower activity, coupled with solid cash collections. We see signs of stability in the overall Power Solutions Utility debtor position, however we still have some customers who are taking longer to pay due to issues of liquidity and access to foreign currency (primarily US dollars and Euros). The Group's bad debt provision is £81 million in line with December 2017.

The movement in fulfilment asset and demobilisation provisions mainly relates to mobilisation costs for new contracts in Bangladesh, Madagascar and Malawi.

The decrease in trade and other payables balances since the year end is driven by a decrease in accruals reflecting lower capital expenditure, release of deferred revenue within our global events business and the payment of prior year bonuses. The increase in inventory reflects the timing of fleet production in our facility in Dumbarton.

Fleet capital expenditure was £87 million (2017: £115 million). Within this, £26 million was invested in our Rental Solutions business, primarily on new temperature control fleet and the renewal of our Oil Free Air (OFA) fleet, which serves the North American market. In Power Solutions, £10 million was invested in upgrading our G3 diesel engine to the market leading G3+.

Net debt was £741 million at 30 June 2018, £58 million higher than the prior year. This resulted in net debt to EBITDA on a rolling 12-month basis of 1.4 times compared to 1.3 times at June 2017.

Outlook

Our good first half performance, combined with the expected improvement in Power Solutions Industrial and continued growth in Rental Solutions, give us confidence we are on track to deliver our guidance for the full year of profit before tax in line with 2017, excluding the effects of currency.

Fleet capital expenditure, previously guided to be in line with 2017 (£246 million), is now expected to be approximately 10% lower, as the Group has continued to focus on capital efficiency and fleet utilisation. We continue to expect the Group tax rate to be around 31% for the full year and, based on our current projections, this will increase to around 35% going forward, as a result of changes in the geographic mix of our profits. We also expect a small inflow in second half working capital and year end net debt/EBITDA of between 1.2 and 1.3 times.

Over the last three years we have strengthened the foundations of the business through the execution of our strategy, which has provided the Group with a solid platform and is beginning to drive growth. We will build on this with our detailed plans focused on operating margins and capital efficiency, supported by a £50 million cost reduction programme, to deliver an improvement in the returns of each of our businesses. With overall higher returns in Rental Solutions and Power Solutions Industrial, together with a significant improvement in Power Solutions Utility, we expect the Group to deliver a return on capital employed in the mid-teens in 2020, with potential for further improvement beyond this.

BUSINESS UNIT PERFORMANCE REVIEW

RENTAL SOLUTIONS

· Underlying1 revenue and operating profit, up 32% and 192% respectively

· Increase in operating margin of six percentage points driven by strong performance in North America

· Continued good growth in temperature control, up 15% excluding currency effects

· Successful execution of the Commonwealth Games, earning revenue of £7 million

Our Rental Solutions business had a strong first half. The increase in operating margin was driven by our North American business, where we delivered improved volumes, rates, fleet utilisation and operating leverage.

North American underlying1 revenue, was up 34% on the prior year (up 23% excluding hurricane-related work). Our sector focus continued to drive growth, and we saw good performance in most of our key sectors, in particular building services & construction, petrochemical & refining and oil & gas. This growth enabled us to leverage our fixed cost base more effectively, leading to improved operating profit and margin.

In our Australia Pacific business, underlying1 revenue increased 18%, supported by good growth in the mining sector and a 100 MW contract delivering emergency power to Melbourne over the summer months.

Our Continental European business grew underlying1 revenue by 20%, aided by good growth in most countries, most notably the Netherlands and Belgium. Key sectors included petrochemical & refining, where we have leveraged our experience and expertise in North America to expand our market footprint, and in the utilities sector, where we have supported renewable energy build out.

The Northern European business also delivered good growth with underlying1 revenue increasing 8%, driven by our Next Generation Gas contracts in Ireland and an increase in activity in the oil & gas sector.

POWER SOLUTIONS

· Power Solutions Industrial underlying1 revenue increased 15%, supported by the South Korea Winter Olympics. Revenue excluding the Olympics was up 3% on the prior year

· Power Solutions Industrial underlying1 profit decreased 15% due to competitive pressures in the Middle East and Africa as well as the timing of on and off-hires in our industrial project portfolio

· Power Solutions Utility underlying1 revenue and operating profit reflect the impact of known off-hires

Power Solutions Industrial underlying1 revenue excluding the impact of currency increased 15%. Revenue excluding the Winter Olympics was up 3% on the prior year. In Eurasia revenue grew 18%, with good growth in its key sector of oil & gas. Eurasia order intake for the year to date was 185 MW (2017: 179 MW). Revenue in Latin America increased 16%, supported by an emergency contract in Argentina for a local utility distribution company. In the Middle East revenue decreased 20% with weakness in most areas, notably in Qatar and UAE. Revenue in Africa decreased 17%, driven by East Africa, while revenue in Asia increased 14% with a good performance from South Korea. Operating margin decreased to 11% (2017: 14%) largely due to pricing pressure in the Middle East and Africa as well as the timing of on and off-hires in our industrial project portfolio.

Power Solutions Utility saw underlying1 revenue decrease 15% due primarily to lower rates and volume in Argentina and off-hires in Zimbabwe, Bangladesh and Japan. As a result, the operating margin decreased to 8% (2017: 17%). Average megawatts on hire in this business was 2,680 (2017: 3,132), with the year on year reduction reflecting an increased off-hire rate in the first half of 27% (2017: 16%), due to notable off-hires in Japan, Zimbabwe and Bangladesh. We now to expect the full year off-hire rate to be 35 to 40%. Order intake year to date for Utility sector projects is 162 MW (2017: 369 MW), including 60 MW in Senegal.

Receivables in the Power Solutions Utility business continue to be a focus area, as a number of customers in Africa take longer to make payments, and the ongoing crisis in Venezuela continues to impact the ability of our customers there to pay down overdue debts. We continue to believe that the primary reason for delay in payments is liquidity and access to foreign currency, rather than customer disputes. Resolving these situations remains a key part of our strategy to improve returns in this business and we have seen a slight reduction in the level of Power Solutions trade receivables during the period. Power Solution Utility's bad debt provision has remained at $87 million, in line with December 2017.

FINANCIAL REVIEW

A summarised Income Statement for 2018 is set out below providing the results excluding and including the effect of the 2017 exceptional items, as previously reported.

Currency translation

The movement in exchange rates in the period had the translational impact of decreasing revenue by £67 million and operating profit by £10 million. This was driven by the strength against Sterling in the majority of the principal currencies impacting the Group, most notably the US Dollar. Currency translation also gave rise to a £28 million decrease in the value of the Group's net assets from December 2017 to June 2018. Set out in the table below are the principal exchange rates which affected the Group's profit and net assets.

Reconciliation of reported to underlying results

The tables below reconcile the reported and underlying revenue and operating profit movements:

Revenue

Operating profit

Note : the currency impact is calculated by taking 2017 numbers in local currency and retranslating them at 2018 average rates.

Interest

The net interest charge of £17 million was £1 million higher than last year, reflecting higher average net debt year on year and an increase in the effective interest rate. Interest cover, measured against rolling 12-month EBITDA (Earnings before Interest, Taxes, Depreciation and Amortisation) remained strong at 15 times (2017: 17 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 31% (30 June 2017: 28%). The increase in the effective rate is driven primarily by a change in the expected geographic profit mix for the year.

Dividends

The Board has decided to pay an interim dividend of 9.38 pence per ordinary share, in line with last year; dividend cover is 1.7 times (30 June 2017: 1.9 times). This interim dividend will be paid on 2 October 2018 to shareholders on the register at 7 September 2018, with an ex-dividend date of 6 September 2018. Dividend cover is calculated as basic earnings per share for the period divided by dividend per share.

Cash flow

The net cash inflow from operations during the period totalled £160 million (2017: £184 million). The decrease in cash inflow from operations was mainly driven by an increase in the working capital outflow of £17 million. Capital expenditure in the period was £95 million (2017: £128 million), of which £87 million (2017: £115 million) was spent on fleet assets. The working capital movements in the period are explained on page 5.

Financial resources

The Group maintains sufficient facilities to meet its normal funding requirements over the medium term. At 30 June 2018 these facilities totalled £1,155 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 2018, these stood at a comfortable 15 times and 1.4 times respectively. The maturity profile of the Group's borrowings is detailed in Note 11 in the Accounts.

Net debt amounted to £741 million at 30 June 2018 and, at that date, un-drawn committed facilities were £396 million.

Net operating assets

The net operating assets of the Group (including goodwill) at 30 June 2018 totalled £2,123 million, £52 million higher than 30 June 2017. The main components of net operating assets are detailed in the table below.

A key measure of Aggreko's performance is the return (expressed as underlying operating profit) generated from average net operating assets (ROCE). For each half year reporting period, we calculate ROCE by taking the underlying 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. In the first half of 2018 the ROCE decreased to 11% compared with 12% for the same period in 2017, driven by the decrease in the Group's operating profit.

Acquisitions

The Group completed two acquisitions in the six months to 30 June 2018, details of which are contained in Note 16 to the Accounts.

On 15 February 2018 the Group acquired the business and assets of A Contact Electric Rentals (A Contact) in North America. A Contact specialises in the rental of medium and high voltage electrical distribution equipment across North America, and furthers Aggreko's leadership position in the speciality rental market in the region. The cost of the acquisition was £21 million.

On 31 May 2018 the Group acquired the business and assets of Generator Hire Service in Australia, for a total consideration of £3 million.

Shareholders' equity

Shareholders' equity decreased by £16 million to £1,298 million in the six months ended 30 June 2018, represented by the net assets of the Group of £2,039 million before net debt of £741 million. The movements in shareholders' equity are analysed in the table below:

3 Reflects the final dividend for 2017 of 17.74 pence per share (2016 17.74 pence) that was paid during the period.

Principal risks and uncertainties

In the day to day operations of the Group, we face risks and uncertainties and the job of management is to prevent these risks from crystallising and to mitigate their impact if they do. To facilitate this the Board has developed a risk management framework which is described on pages 48 and 49 of the 2017 Annual Report and Accounts. Also set out on pages 48 to 54 of that report are the principal risks and uncertainties which we believe could potentially impact the Group. These are listed below:

· Market dynamics;

· Disruptive technology;

· Talent management;

· New technology market introduction;

· Cyber security;

· Equipment obsolescence;

· Health and safety;

· Security;

· Failure to conduct business dealings with integrity and honesty;

· Failure to collect payments or to recover assets; and

· Working capital management

We do not believe that the principal risks and uncertainties facing the business have changed materially since the publication of the 2017 Annual Report and Accounts.

Shareholder information

Our website can be accessed at www.plc.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.

GROUP INCOME STATEMENT

FOR THE SIX MONTHS ENDED 30 JUNE 2018 (UNAUDITED)

GROUP STATEMENT OF COMPREHENSIVE INCOME

FOR THE SIX MONTHS ENDED 30 JUNE 2018 (UNAUDITED) 

GROUP BALANCE SHEET 

AS AT 30 JUNE 2018 (UNAUDITED)

GROUP CASH FLOW STATEMENT

FOR THE SIX MONTHS ENDED 30 JUNE 2018 (UNAUDITED)

RECONCILIATION OF NET CASH FLOW TO MOVEMENT IN NET DEBT

AS AT 30 JUNE 2018

AS AT 30 JUNE 2017

GROUP STATEMENT OF CHANGES IN EQUITY

FOR THE SIX MONTHS ENDED 30 JUNE 2018 (UNAUDITED)

(i) The currency translation difference is explained in the Financial Review on page 9.

(ii) During the period 41,543 Ordinary shares have been transferred from the Employee Benefit Trust to satisfy the Restricted Stock Schemes. 

(iii) During the period 940,000 Ordinary shares were purchased at an average price of £7.39 and transferred to the Employee Benefit Trust. 

GROUP STATEMENT OF CHANGES IN EQUITY

FOR THE SIX MONTHS ENDED 30 JUNE 2018 (UNAUDITED)