3rd Mar 2005 07:02
Aggreko PLC03 March 2005 EMBARGOED UNTIL 0700HOURS 3 MARCH 2005 AGGREKO plcPRELIMINARY RESULTS FOR THE TWELVE MONTHS TO 31 DECEMBER 2004 Aggreko plc, the world leader in the supply of temporary power, temperaturecontrol and oil-free compressed air services announces its preliminary resultsfor the twelve months to 31 December 2004. The Group's underlying trading performance in 2004 was strong, driven by a sharpturnaround in North America and robust growth in Aggreko International. Thisperformance was diluted by movements in exchange rates and, in particular, theweakening in the US dollar. As reported, Group revenue at £323.6 million showeda decline of 2.5% compared with 2003; however, in constant currency(1) revenueincreased by 5.0%. Group trading profit, pre-exceptional items, was similarlyaffected, increasing by 7.5% on a reported basis, but by 19.2% in constantcurrency. 12 Months to 31 12 Months to 31 Movement December 2004 December 2003 As reported Constant CurrencyGroup turnover £323.6m £331.8m (2.5%) 5.0%Of which:- £107.4m £110.8m (3.1%) 8.4%North AmericaEurope £106.2m £113.1m (6.1%) (4.9%)International £110.0m £107.9m 1.9% 13.0%Trading profitpre-exceptional £45.2m £42.1m 7.5% 19.2%Profit beforetaxpre-exceptional £42.6m £40.1m 6.3%Profit beforetaxpost-exceptional £27.6m £40.1m (31.1%)Earnings persharepre-exceptional 10.86p 10.17p 6.8%Earnings persharepost-exceptional 7.04p 10.17p (30.8%)Dividend pershare 5.82p 5.65p 3.0% Key points include: •Profit before tax of £42.6m ahead of expectations; trading profit up 19.2% on constant currency basis.•Sharp turnaround in North America: trading profit in constant currency more than doubled, and trading margin increased from 8.2% to 15.4%.•Strong performance in Aggreko International: revenues in constant currency up 13.0% and trading profit up 19.4%.•In Europe, revenues fell 4.9% in constant currency and trading profit fell 41.9%, due to sluggish demand in core markets and the temporary disruption, previously reported, caused as we implement our new operating model.•Net debt reduced by £17.8m to £82.1m.•Good progress against strategy announced in March 2004: - New Local business operating model implemented in North America and Europe - Good results from first implementations of new ERP system - Excellent progress in geographic expansion of International Power Projects business: revenues in key target market of South America up fourfold on 2003 - Launch of new gas-fuelled temporary power solution - £5.1m savings against fleet capex from value-engineering and improved procurement Chairman Philip Rogerson commented: "I am pleased to report that good progress has been made in line with ourstrategy which we announced last year. In the Local business, the new managementstructure is now well established and rental centres are operational in bothEurope and North America. In the International Power Projects business, goodprogress has been made in growing our revenues in new countries, and inparticular in South America. As is always the case at this time of year, we have limited visibility withrespect to the outcome for 2005. We anticipate that, for the year as a whole, wewill continue to make progress compared with 2004." Chief Executive Rupert Soames commented: "We are now halfway through our two-year restructuring programme, and have madegood progress thus far. When we announced our new strategy we said that therewould be some disruption as we re-organised large parts of the business, but itis very pleasing to see that, despite this, trading performance has improvedsignificantly over the prior year. The sharp turnaround in North America hasbeen a key driver of this improvement. I am also pleased to announce that we have developed a new gas-fuelled temporarypower solution, which will broaden the portfolio of services we can offer to ourcustomers, and which will allow us to address new markets where gas would be apreferred source of energy." (1)Constant currency takes account of the impact of translational exchange movements in respect of our overseas businesses. - ENDS - Enquiries to: Rupert Soames / Angus CockburnAggreko plcTel: 0141 225 5900 Fiona PiperThe Maitland ConsultancyTel: 020 7379 5151 CHAIRMAN'S STATEMENT Overview and Strategy Update In March 2004 we announced the results of the Strategy Review which was carriedout following the appointment of Rupert Soames as the Group Chief Executive. Thestrategy has two strands: to restructure our Local business and implement a newoperating model within it; and to grow our International Power Projects businessby extending our capability into new countries. I am pleased to report that goodprogress has been made in both respects. In the Local business, the newmanagement structure is well established, and rental centres are now operationalin both Europe and North America, enabling us to improve the way in which werespond to customers. In the International Power Projects business, goodprogress has been made in growing our revenues in new countries: I can reportthat over the last twelve months we have succeeded in establishing ourselves asa significant competitor in the South American market. We have also developed anew gas-fuelled temporary power solution which will broaden the portfolio ofservices we can offer to our customers, and allow us to address new marketswhere gas would be a preferred source of energy. Concurrent with the business restructuring, we are implementing an EnterpriseResource Planning (ERP) system. This is now fully operational in Central Europe,underpinning our operations in Netherlands, Belgium and Germany. The roll-out tothe rest of Europe and North America is scheduled over the next twelve months. Overall, we have made a good start to both the implementation of our strategyand to the roll-out of the new ERP system. Despite the disruption anddistraction caused by the implementation of such major structural changes, ourtrading performance has been encouraging. Trading The Group's trading performance during 2004 was significantly impacted bymovements in exchange rates and, in particular, the weakening in the US dollarfrom an average rate of £1 : $1.64 in 2003 to £1 : $1.83 in 2004. As reported,Group revenue at £323.6 million showed a decline of 2.5% compared with 2003; inconstant currency(2), however, revenue increased by 5.0%. Group trading profits,pre-exceptional items, were similarly affected, increasing by 7.5% on a reportedbasis, but by 19.2% in constant currency. Group profits before tax and exceptional items increased by 6.3% to £42.6million, whilst earnings per share pre-exceptional items increased by 6.8% to10.86 pence. As previously indicated, exceptional costs of £15 million weretaken during the year relating to the reorganisation associated with theimplementation of our new strategy. Group pre-tax profits and earnings per sharepost-exceptional items were £27.6 million and 7.04 pence respectively. An early benefit from our Strategy Review has been in the area of capitalexpenditure. As a result of re-examining equipment specifications,value-engineering and improved procurement, we have significantly improved thecost per megawatt of our power fleet purchases. As a consequence, during 2004,we added approximately the same amount of capacity into the fleet, but at a cost£5.1m lower than in 2003. Accordingly, Aggreko's total capital expenditure in2004, the great majority of which was spent on fleet renewal, amounted to £56.3million, a decrease of £5.6 million compared with 2003. This expenditure equatesto 96% of our depreciation charge. The return on average net operating assets improved from 13.7% in 2003 to 15.0%in 2004. Notwithstanding a cash outflow of £6.9 million relating to theexceptional items, net debt reduced during the year by £17.8m to £82.1m (2003:£99.9 million), reflecting strong cash generation during the year. Aggreko's financial position remains strong, as measured by net assets of £178.3million and interest cover on a pre and post exceptional basis of 11.8 times and8.0 times respectively. With this in mind, the Board is recommending a finaldividend of 3.57 pence per ordinary share which, when added to the interimdividend of 2.25 pence, gives a total for the year of 5.82 pence per ordinaryshare, representing a 3.0% increase on 2003. At this level, the dividend wouldbe covered 1.9 times on a pre-exceptional basis. Subject to approval byshareholders, the final dividend will be paid on 20 May 2005 to ordinaryshareholders on the register as at 22 April 2005, with an ex-dividend date of 20April 2005. Employees The credit for the encouraging progress in implementing both the strategy andour new ERP system lies with our employees. There have been very significantchanges to the structure and operating processes of the business and this hasbeen achieved with no reduction in our high standards of service. The progressboth in terms of trading and against our strategic objectives is a tribute tothe focus, hard work and dedication of the entire Aggreko team, and I would liketo thank them all for their efforts. Outlook 2005 is the second year, and in many ways the more challenging, of Aggreko'stwo-year restructuring programme. It will see the implementation of the new ERPsystem in some of our largest businesses, and it will also be the year when webed down all the operational processes involved in the new Local businessoperating model. We anticipate therefore that some business units will continueto experience disruption in the year ahead. In the International Power Projectsbusiness our focus is threefold: continuing to drive the growth of our businessin new territories; establishing our new gas-fuelled solution in the market fortemporary power; and ensuring that we continue to maximise our potential in ourexisting customer base. We have had an encouraging start in North America, but Europe continues to bechallenging. Although the UK has had a poor start to the year, our Beneluxbusiness, which is the first unit to have implemented our operating model in itsentirety and has now had stable systems and processes for the last six months,has seen sharply increased revenues and profitability. In Aggreko International,the Local businesses in the Middle East, Singapore and Australia have all had agood start to the year, as has our International Power Projects business, whichhas recently signed contracts in a number of new countries in Africa, Asia andSouth America. The prospect pipeline for new power projects is strong, andmilitary revenues in Aggreko International continue to run at similar levels to2004 with no indication of a reduction in the short term. As is always the case at this time of year, we have limited visibility withrespect to the outcome for 2005. We anticipate that, for the year as a whole, wewill continue to make progress compared with 2004. Philip G RogersonChairman3 March 2005 (2)Constant currency takes account of the impact of translational exchange movements in respect of our overseas businesses. OPERATING AND FINACIAL REVIEW Our Strategy In March 2004 we announced the outcome of an in-depth review of Aggreko'sstrategy. This review had started some nine months earlier, and covered everyaspect of our business. It concluded that Aggreko needed to have two differentbusiness models: a Local business, which markets the complete range of ourservices to customers within easy reach of our service centres; and anInternational Power Projects business which hires large power plants on a globalbasis to power utilities, the military and major industrial users. Local business There are two key objectives that underpin our strategy for the Local business. The first relates to customer service. Our customer surveys show that Aggreko isregarded by our customers as providing industry-leading levels of service.Customers' expectations of what constitutes good service are constantlyevolving, however, and we know that Aggreko is most successful when customersperceive clear differentiation between our offering and that of our competitors.The first objective of our strategy therefore is to maintain as wide adifferentiation as possible. The biggest opportunity for differentiation lies inthe area of customer service where the attitude and expertise of our staff, thegeographic reach of our operations, the availability of a broad range ofequipment, and the ability to respond 24 hours a day 7 days a week all give usreasons to argue that our offering is superior. Our first objective, therefore,is to find ways continuously to improve the service we offer to customers. The second objective of our strategy is to be the most efficient specialistrental company. This will not only improve customer service but will also enableus to generate good returns on capital, whilst enabling us to provideoutstanding service at a price the customer is willing to pay. In a business inwhich there are large numbers of relatively low-value transactions, shortlead-times and complex logistics, an essential pre-condition of efficiency ishaving high quality systems and processes. Our second objective, therefore, iscontinuously to improve our systems and processes. Both of these objectives are being addressed by a two-year restructuringprogramme, which commenced in March 2004, for our Local business which for someyears had been suffering declining profitability and returns. An underlying reason for the fall in profits related to the way we hadhistorically organised our Local business. As the business had grown, each localservice centre was established as an almost completely self-contained unit withits own administration, management and infrastructure; each depot collected itsown debts, made its own local purchase agreements and consequently carried aheavy overhead burden. Accordingly, we are implementing a new operating model for our Local businessesin Europe and North America. This "hub-and-spoke" model has two types of servicecentre: hubs hold our larger items of equipment and provide service and repairfacilities. Spokes are smaller and act as logistics points from which equipmentcan be delivered quickly to a customer's site. The hubs and spokes have beenorganised into areas in which a manager has responsibility for the revenues,profitability and use of capital within that area. In North America, we have re-organised the business into seven areas operatingwith twenty four hubs and twenty one spokes. In Europe, we have twelve areasoperating with fourteen hubs and twenty two spokes. The difference in structuresis a function of market density. In this new model, most administrative functions are carried out in centrallocations. In Europe we have three rental centres supporting the business whichare located in Cannock in the UK, Paris, and Aachen in Germany. The model inNorth America is to have four rental centres, of which two are currentlyoperational, as well as a national call-handling centre; the remaining tworental centres will open in 2005. This new model will deliver a range of benefits. For our customers, it will meanhigher and more consistent levels of service and response. For Aggreko's Localbusiness, it will mean an operating model which will allow us to increaserevenues more cost-effectively. In other words to develop a more scalablebusiness model and, as revenues increase, to improve our margins. A further benefit of the new model will be that profit and capital employed canbe measured at the same point in the organisation. Historically, because of thesize of our service centres and the frequency with which rental equipment had tomove between them, capital employed was not measured at the same level asprofitability. In our view, return on capital employed is the key metric ofefficiency in any business as capital-intensive as ours. A guiding principle ofour organisation is to devolve responsibility and authority to the lowest pointat which we can measure return on capital employed. An integral part of the strategy for the Local business is the implementation ofour new ERP system which will provide a single, global, IT system for managingour business. Many of our service centres are currently using inefficient andold software packages, some of which are no longer supported by the originalvendors. Once our new system has been implemented, we will have greatly improvedvisibility of the business, which will enable us to drive improvements inoperating efficiency. During the next twelve months we will roll out the newsystem throughout our North American and European businesses. International Power Projects Business This business has grown rapidly over the last five years, building an enviablereputation in delivering large power packages, often into remote locationsaround the world. Historically the bulk of our business has been concentrated inAfrica and the Middle East. Our research has shown that these two regionsaccount for less than 30% of the world market and, by rapidly expanding ourgeographic coverage, we can address a greater proportion of the global market.Of particular interest to us are power utilities which in many regions arehighly reliant on hydro power. Whilst this can be a cost-effective form ofenergy, it is very dependent on rainfall which can vary widely from year toyear, leading to potential short-term shortages in power supply. Our strategy in the International Power Projects business therefore is to driveexpansion into new regions and, in particular, into Asia and South America. Thiswill increase the revenues of the business whilst reducing its volatility, since- in a market in which events can move demand rapidly between different parts ofthe world - we will be able to address a greater proportion of the opportunitieswhich arise each year. Summary In summary, the overall objective of our strategy is to develop Aggreko into abusiness which is growing revenues and earnings, and is producing healthyreturns on capital; is positioned in growing markets; and has a number ofstrategic options for further development. We will achieve this by: • Re-structuring our Local business into a new hub-and-spoke model, delivering best-in-class customer service and efficiency. • Driving the expansion of our International Power Projects business into new territories and markets, and, thereby, making it a larger and less volatile business. PROGRESS AGAINST THE STRATEGY IN 2004 Progress has been generally good against the objectives set out in the StrategyReview, and is described in the Trading Review. A summary is shown below: Local business progress in North America and Europe Reorganisation into Areas Complete. Seven areas created in North America, and twelve in Europe.Implementation of new management structure Complete. Eighteen out of nineteen Area General Manager roles filled.Creation of National Rental Centres Complete in Europe, with NRCs in Cannock, Aachen and Paris. In North America, National Call Centre and two out of four rental centres operational. Remaining two rental centres will go live in 2005.Implementation of Hubs and Spokes Complete in North America; partial implementation in Europe. Lack of suitable properties is slowing progress in the UK. Major new hub at Moerdijk in Holland purchased to cover operations in Benelux, to be commissioned in 2006. Barcelona hub opened in 2004.Planned headcount reductions Complete.ERP implementation Progressing well. Final production version developed and taken live in Benelux and Germany. Implementation started in North America, with roll-out on a region-by-region basis in 2005. French implementation to start in H1 2005, and UK late 2005. International Power Projects business Geographic expansion in South America Excellent progress. Over 100 MW on hire in South America at year end. Four fold increase in revenue from region in 2004. Major projects running in Brazil and Venezuela. Good progress in local business operation in Macae, serving off-shore oil and gas operators.Geographic expansion in Asia Early progress. Senior management installed in region to develop business. New contracts won in Indonesia, Philippines, South Korea and Malaysia.Development of gas-fuelled temporary power solution Good progress. Solution developed and prototyped. First customer order won. Review of Trading (3) All references to profit in this section are pre-exceptional unless otherwise stated. Aggreko's trading performance improved significantly over the prior year,notwithstanding the disruption that we knew would be caused by the far-reachingrestructuring of our businesses in North America and Europe. On a constantcurrency basis revenues grew by 5.0%; trading profit(3) by 19.2%; trading marginincreased from 12.7% to 14.0%; and return on capital increased by 1.3 percentagepoints. This improvement has been driven by a sharp turnaround in North America,and a strong performance in Aggreko International. Profits in Europe fell. The underlying trading performance was diluted by adverse currency movement, andmost particularly, by the weakness of the US dollar (in which 58% of the Group'srevenues and 72% of the Group's trading profit are denominated) relative tosterling, which reduced reported revenues by £23.7m and trading profit by £4.1m.This is shown in the table below, which also highlights the impact of fuel whichwe managed on behalf of a Sri Lankan customer but pass through our books at nilmargin. Group revenue 2004 2003 Change % £m £mAs reported 323.6 331.8 (2.5%)Translational currency impact (23.7)Constant currency 323.6 308.1 5.0%Sri Lankan fuel (3.4) (7.5)Constant currencyexcluding Sri Lankan fuel 320.2 300.6 6.3% Group trading profit As reported 45.2 42.1 7.5%Translational currency impact (4.1)Constant currency 45.2 38.0 19.2% The performance of each of our businesses is reported below. North America 2004 2003 Change % £m £mAs reportedRevenue 107.4 110.8 (3.1%)Trading profit 16.5 8.9 84.7% $m $m Change %In local currencyRevenue 196.8 181.3 8.6%Trading profit 30.3 14.6 107.0% The business' performance in 2004 represented a welcome turnaround, with marginsand return on capital both improving sharply. Revenue for the year to 31 December 2004 of $196.8 million was 8.6% ahead of theprevious year; trading profit more than doubled; and trading margin increasedfrom 8.2% to 15.4%. The revenue growth was achieved despite a reduction of 15%in the average headcount and the closure of eight of our fifty-nine locations inNorth America. On a like-for-like basis, excluding service centre closures,revenue grew by $26.1 million or 15.4%. Business performance was enhanced byseveral large military contracts won in the early part of the year, a number ofwhich continued into the second half, and the busiest hurricane season in manyyears. Our employees in North America responded superbly to the considerablechallenge of four major hurricanes over a six week period, working long hoursto ensure our customers received the highest level of service. Importantly,whilst the business was certainly helped by these exceptional events, revenuesexcluding exceptional events and the impact of service centre closures increasedby 5% on the previous year thus reflecting a higher level of underlying businessactivity and a more stable pricing environment. In terms of business mix, rental revenue grew 6% and services revenue grew 15%,with military contracts pulling through a high level of value-addedservices. Power rental revenue for 2004 was 8% ahead of prior year - againmainly attributable to the military contracts. Temperature control and oil-freeair rental revenue grew during 2004 by 4% and 5% respectively, reflecting astrong performance in both products during the year. The service centre closures and headcount reductions were implemented early inthe year, and formed part of a concerted programme of cost reduction. Theservice centre closures also allowed re-deployment of substantial amounts offleet to areas where it could achieve higher levels of utilisation, therebycontributing to improvements in fleet productivity. The management team was also reorganised, with general managers each havingresponsibility for an area of North America. The new teams have got to gripsquickly with the new operating model and, together with the work that has beendone to improve our selling capability, this will stand the North Americanbusiness in good stead for the future. Overall, we have had an extremely good year in North America. Progress is beingmade in many areas, notably with the opening of two rental centres which areproviding centralised administration functions to several areas; theimplementation of a national call centre; and the development of thehub-and-spoke network. Preparations are also underway for a phased roll-out ofthe new ERP system commencing during the first half of 2005. Europe 2004 2003 Change % £m £mAs reportedRevenue 106.2 113.1 (6.1%)Trading profit 7.1 12.3 (42.5%) •m •m Change %In local currencyRevenue 156.6 163.3 (4.1%)Trading profit 10.4 17.7 (41.3%) The European business had a difficult year, and profits fell sharply. Revenuesfell by 4.1%, while trading profit pre-exceptional items declined by €7.3million, or 41%, to €10.4 million and trading margin decreased from 10.8% to6.6%. This was partly due to sluggish demand in our core markets and partlybecause, as was anticipated at the time we announced the outcome of our StrategyReview, the roll-out of our new business model caused some disruption to theoperations of the business. The scale of change which the European business has undergone as a consequenceof the restructuring programme is underlined by the fact that, against aheadcount of 744 employees at 1st January 2004, 299 people left the business and213 were recruited. This inevitably caused a considerable degree of distractionas managers focused on establishing a completely new set of processes andoperating procedures, as well as recruiting and training large numbers of newemployees. The weakness in European trading was most pronounced in the Northern Europebusiness, and particularly in the UK. As the first, and largest, of ourbusinesses worldwide to implement a National Rental Centre, this unit has seenthe most disruption. It has also had to implement the new model without thebenefit of our ERP system, which facilitates operating in a centralisedenvironment. In addition, volumes declined in the telecommunications sector (inwhich Aggreko historically has had a strong position), as operators reached thefinal phases of their infrastructure roll-out programmes and, at the same time,the competitive environment became more intense. Revenues in Northern Europewere also impacted in the second half as we closed our locations in Gothenbergand Helsinki which, in future, will be served out of our Norwegian hub. In Central Europe, subdued market conditions and a cool summer led to a declinein revenues and profits. Considerable progress was made, however, inimplementing our new business model. A multi-lingual rental centre was opened inAachen in September, providing call-handling and contract administrationservices across four countries. Following the successful implementation of ourERP system in Benelux, the system was rolled out in Germany and is now fullyoperational across our entire Central European business where it is beginning todeliver real operational benefits. Encouragingly, once the business in Benelux(which is the first territory to have implemented both the new structure and ERPsystem) had settled down following the implementation of the new business modeland people were able to focus solely on the day-to-day running of the business,we have seen a steady improvement in sales and operational performance. Aftertwo years of declining revenues, the fourth quarter saw solid growth both on theprior quarter and year-on-year in Benelux. Our Southern Europe business continued to grow both revenues and profits, withgood performances in France, Italy and Spain. There were several major contractwins, including a project to provide cooling in several French nuclear powerplants, and the provision of power for the construction of the Viaduc de Millau.The Southern European rental centre became operational in Paris in the lastquarter, and is preparing to implement our new ERP system in 2005. In terms of business mix, rental revenue in Europe declined by 2%. Within this,power reduced by 2%, temperature control revenue was flat on the prior year, andour smaller product line - oil-free air - fell by 8%. Service revenue declinedby 9%. The European business is now about half-way through the two-year restructuringprogramme. Much has been achieved over the last twelve months, and we now havefirmly established a new management structure based around 12 areas as opposedto 39 depots. Our National Rental Centres are all operational, and growing dailyin effectiveness; our new ERP system has been proved to work in practice as wellas in theory. The next twelve months will remain challenging: the ERP system will beimplemented in our largest business in Europe - the UK - as well as in France.Against all this, the business is now stronger and the people within it lookforward to a year in which their attention can be focused on winning andexecuting business rather than on re-organising and re-structuring. Overall, weexpect to make progress in Europe this year and to be ready to enter 2006 a muchstronger business. International 2004 2003 Change % £m £mAs reportedRevenue 110.0 107.9 1.9%Trading profit 21.6 20.9 3.8% $m $m Change %In local currencyRevenue 201.5 174.8 15.2%Sri Lankan fuel (6.3) (12.3)Local currency excludingSri Lankan fuel 195.2 162.5 20.1% Trading profit 39.7 33.3 19.2% Aggreko's International business performed very strongly in 2004, although thiswas masked on a headline basis by the weakness of the US dollar anddollar-linked currencies relative to sterling. In local currency, revenuesincreased by 20.1% (excluding Sri Lankan fuel) and trading profit by 19.2%. Onthe same basis, trading margin was at a similar level to the prior year at20.5%. The strategy of our International Power Projects business, which comprises about64% of Aggreko International's revenues, has been to expand its geographicalreach beyond its heartland of the Middle East, Sri Lanka and West Africa; and togrow the proportion of revenues generated by power utilities as opposed tomilitary support work which, in the long term, is subject to greater volatilitythan the utility and industrial projects market. The business has madeconsiderable progress in the last twelve months in implementing this strategy,although continuing high demand from military customers has meant that a greaterproportion of equipment remained on military work than was initiallyanticipated. We have moved aggressively to consolidate our foothold in SouthAmerica, which is a key target market. On top of the 30 MW won in December 2003in Venezuela, we won our first large project in Brazil with 20 MW in Macapacommissioned in November 2004. We have also continued to win business in the Oil& Gas sector through the recently-opened service centre in Macae, north of Riode Janiero. Revenues from South America increased fourfold in 2004 compared with2003. Progress was slower in Asia, where we have reinforced our major projectscapability by installing new management in Singapore; new projects were won inthe Philippines, Malaysia, Korea and Indonesia. Poor rainfall in Sri Lanka in 2002 and 2003 led to low levels in the country'shydro dams in 2004, resulting in strong demand for Aggreko's services, with apeak of 130 MW running from February through to September. In the last quarter,as the hydro dams filled during the monsoon, demand for additional power reducedsharply, and we enter 2005 with 15 MW on rent in Jaffna. Following the Tsunami,Aggreko was one of the first companies to make a donation in support of theemergency relief efforts in Sri Lanka, and we have told the authorities that westand ready to assist in any way we can. Given the substantial amount of rain inthe recent monsoon, however, and the commissioning of two new permanent powerstations in the country, it is likely that supplementary power requirements inSri Lanka in 2005 will be substantially lower than in 2004. The Local business performed well in all of Aggreko International's territories.In the Middle East, a decline in military work was offset by rapid deployment ofour equipment into new infrastructure projects across the Middle East, and thebusiness continues to grow well. In Australia, a strong summer was followed by agood winter season as the business benefited from the desire of clients tomaximise production at a time of high commodity prices. Our development ofseveral new specialised applications for power and temperature control equipmentis now paying dividends. The Local business in Singapore also had a good year. Overall, we had a good year in International, making progress with theimplementation of our strategy and continuing to build a broader base on whichto grow the business in the future. The investment we have made in establishingour business in South and Central America is beginning to reap rewards: inDecember we signed a new 25 MW contract in Suriname, which took our power onrent in the region to over 100 MW. Looking to the future, an opportunity to develop the market for gas-fuelledtemporary power solutions was identified as part of our Strategy Review. During2004, we invested development effort into identifying the right technicalsolution and, recently, we secured our first customer for this technology.Whilst we are at an early stage in the development of this market, it has thepotential to be an important contributor to Aggreko International's futuregrowth. FINANCIAL REVIEWOverview The profit and loss account for the year ended 31 December 2004 is summarisedbelow: 2004 2004 Post- Pre- exceptional exceptional items items 2003 £ million £ million £ millionRevenue 323.6 323.6 331.8Operating profit 31.5 46.5 44.7Profit before tax 27.6 42.6 40.1Taxation (8.8) (13.6) (12.8)Profit for the financial year 18.8 29.0 27.3 Earnings per ShareBasic earnings per share for the year of 10.86 pence represent an increase of6.8% over the 2003 figure of 10.17 pence. Basic earnings per share for the yearpost-exceptional items were 7.04 pence compared to 10.17 pence last year. Exceptional itemsAn exceptional charge of £15.0 million in respect of our restructuring programmehas been recognised in the year ended 31 December 2004. Shareholders' FundsShareholders' funds decreased by £7.6 million to £178.3 million, represented bythe net assets of the Group of £260.4 million before net debt of £82.1 million.The movements in shareholders' funds are analysed in Table 1 below: Table 1: Movements in Shareholders' Funds £ million £ millionAs at 1 January 2004 185.9Profit for the financial year 18.8Dividend (1) (15.5)Retained earnings 3.3New share capital subscribed 0.3Purchase of own shares held under trust (3.3)Credit in respect of employee share awards 0.8Exchange (8.7) -----As at 31 December 2004 178.3 ----- (1) The proposed final dividend for 2004 is 3.57 pence per ordinary share which,when added to the interim dividend of 2.25 pence, gives a total for the year of5.82 pence (2003: 5.65 pence). Cashflow and Net DebtEBITDA (earnings before interest, taxes, depreciation and amortisation)pre-exceptional items, for the year amounted to £105.1 million, up 1.5% on 2003.EBITDA post-exceptional items amounted to £90.1 million. The net cash inflowfrom operating activities during the year totalled £98.9 million (2003 - £96.6million). This funded capital expenditure of £56.3 million, which was down £5.6million on 2003. Net debt decreased by £17.8 million during the year. Financial PositionAs a result of the decrease in net debt, gearing (net debt as a percentage ofequity) at 31 December 2004 reduced to 46% from 54% at 31 December 2003. The net interest charge for the year was £3.9 million, a decrease of £0.7million on 2003, reflecting the lower level of net debt during the year.Interest cover pre-exceptional items increased to 11.8 times from 9.7 times in2003. Based on the proposed final dividend of 3.57 pence, which would result ina full-year dividend of 5.82 pence per ordinary share, dividend coverpre-exceptional items is 1.9 times (1.2 times post-exceptional items). The net operating assets of the Group at 31 December 2004 totalled £295.7million, down £28.0 million on 2003. The return on average net operating assets,pre-exceptional items, has increased to 15.0% compared with 13.7% in 2003. Currency TranslationThe Group has sought consistently to hedge its net investment in overseassubsidiaries but not its major currency translation exposures arising fromtrading activities. The net overall impact of exchange rates on currencytranslation in 2004 was to reduce revenue and operating profit by £23.7 millionand £4.1 million respectively. Set out in Table 2 are the principal exchangerates affecting the Group's overseas profits and net assets. Table 2 2004 2003(per £ sterling) Average Year End Average Year EndPrincipal Exchange RatesUnited States dollar 1.83 1.93 1.64 1.79Euro 1.47 1.42 1.44 1.42Other Operational ExchangeRatesUAE Dirhams 6.73 7.10 6.01 6.58Australian dollar 2.49 2.48 2.51 2.38(Source: Reuters) Increasingly, Aggreko International Projects is entering into contracts wherethe majority of its revenues and costs are US dollar denominated or linked tothe US dollar. Therefore, for reporting purposes, the functional currency ofthis business has been changed from sterling to US dollars in 2004. TreasuryRole of group treasuryThe Group's treasury function is managed centrally to support the operatingactivities of the Group. Its primary role is to ensure that adequate liquidityis available to meet the Group's funding requirements as they arise, and thatfinancial risk arising from the Group's underlying operations is effectivelyidentified and managed.The Group does not undertake any trading activity in financial instruments nordoes it enter into any leveraged derivative transactions. Management of foreign exchange riskThe Group manages its currency flows to minimise foreign exchange risk arisingon transactions denominated in foreign currencies and uses forward contractswhere appropriate in order to hedge net currency flows. In order to reduce the currency risk arising on its net investments, the Groupuses direct borrowings in the same currency as those investments. Groupborrowings are currently drawn down in the principal currencies affecting theGroup, namely US dollar, sterling and euro. Management of interest rate riskThe Group's borrowings of £90.0 million at 31 December 2004 were principallydrawn under bank facilities at floating rates. In order to manage interest raterisk, the Group uses interest rate swaps where appropriate to vary the mix offixed and floating rates. At 31 December 2004 debt of £63.1 million, afterinterest rate hedging activity, was at fixed rates of interest. This resulted ina fixed to floating rate net debt ratio of 77:23 (2003 - 66:34). Management of funding and liquidity riskThe Group maintains sufficient facilities to meet its normal fundingrequirements over the medium term. These facilities are primarily in the form ofbank borrowings arranged on a bilateral basis with a number of internationalbanks. The Group does not consider that the financial covenants contained in thefacilities are restrictive to its operations. During the year, Aggreko concluded the refinancing of £200 million of debt facilities. The new bi-lateral multi-currency facilities have a range of maturities up to 7 years with key financial covenantsbeing unchanged from the previous arrangements. Management of counterparty credit riskCash deposits and other financial instruments give rise to credit risk onamounts due from counterparties. The Group manages this risk by limiting theaggregate amounts and their duration based on the credit rating of the relevantcounterparty. Financial IndicatorsThe key financial indicators, which, when taken together, are a measure ofperformance and the efficiency of the finance and risk management structures inplace, are shown in Table 3. Table 3 - Financial Indicators 2004 2003 Interest Cover * 11.8 times 9.7 timesNet Debt / Equity 46% 54%Net Debt / EBITDA * 0.78 times 0.96 timesAverage Cost of Debt 3.9% 3.7%Effective Tax Rate 32.0% 32.0%* pre exceptional items TaxationTaxation payable on the Group's profit on ordinary activities post exceptionalitems for 2004 was £8.8 million (2003 - £12.8 million). The Group's effectivetaxation rate for 2004 was 32.0% (2003 - 32.0%). International Financial Reporting Standards Under European Union legislation, all listed companies will be required toreport under International Financial Reporting Standards (IFRS) for accountingperiods commencing on or after 1 January 2005. The first annual report andaccounts for Aggreko prepared under IFRS will be for the year ended 31 December2005, with comparative information for 2004 stated in accordance with IFRSguidance. Interim results for the period to 30 June 2005 will also be preparedon an IFRS basis. An IFRS implementation project team was established at the end of 2003 to ensurethat appropriate processes and procedures were put in place to achieve thetransition to IFRS. The project is overseen by a steering committee comprisingthe Group Finance Director and senior finance management, with the externalauditor in attendance. The steering committee meets on a monthly basis andreports to the Audit Committee. The project team ensures that the other changeaspects of this project are managed - for example, business system changerequirements, training programmes for the personnel concerned, and othercommunication issues. The Group's auditors have been kept informed of, andconsulted on, the development of the IFRS project and the preparation of the newGroup accounting policies. The restatement of the opening balance sheet for IFRS purposes has now beencompleted and the new IFRS compliant accounting policies implemented from 1January 2005. There is no material impact on profit before tax, earnings pershare and net assets for the year ended 31 December 2004. It is likely, however,that IFRS will introduce increased volatility in the reported financial resultsgoing forward, notably with respect to the implementation of IAS 39. A summary of the key areas of accounting policy and disclosure change for theGroup is as follows: IAS 14 Segmental Reporting IAS 19 Employee Benefits IFRS 2 Share Based Payments IAS 38 Intangible Assets IAS 39 Financial Instruments (derivatives) Segmental ReportingThe new IFRS requirements for segmental reporting involves an increase in theamount of detail disclosed. Consistent with the Group's published businessstrategy, the segmental reporting disclosures will reflect the way in whichmanagement monitors the business, and will be based on geography and businesstype. The segments will be Europe North; Europe Other; North America; Other,which together comprise the Local business and AIP which comprises the projectsbusiness. Segmental disclosure will include revenue, operating profit, assets,liabilities, capital expenditure and depreciation. Employee BenefitsUnder IAS 19 the net financial position of the Group's defined benefit pensionscheme, based on the market values for the scheme's assets and schemeliabilities, will be included on the balance sheet. The initial adjustment ontransition will be made directly against retained earnings. This treatment andthe related disclosures have many similarities with the requirements of FRS 17,which are reflected in note 24 to the Group's Annual Report and Accounts. Share Based PaymentsUnder IFRS 2 "share-based payments", the Group will be required to recognise acharge in the profit and loss account for all share options and awards based onthe fair value of the awards as calculated at the grant date using anoption-pricing model. An expense is recognised in the profit and loss account,as the fair value of the award is charged over the vesting period. For Aggreko,the financial impact is not considered to be material. Goodwill and Intangible AssetsUnder UK GAAP, the Group capitalises and amortises goodwill from businessacquisitions. With respect to IFRS, we do not intend to take the IFRS 1exemption on business combinations. Previous business acquisitions have beenreviewed and individual intangible assets identified and separated fromgoodwill. There will be an IFRS opening balance sheet adjustment to reduce thebalance of goodwill. Under IFRS, any residual goodwill will no longer beamortised and will instead be subject to annual impairment testing. Capitalised software costs will also be reclassified in the balance sheet fromtangible fixed assets to intangible assets. Financial Instruments and Hedge AccountingThe Group manages its currency flows to minimise foreign exchange risk arisingon transactions denominated in foreign currencies, and uses forward contractswhere appropriate to hedge net currency flows. The Group's borrowings areprincipally drawn under bank facilities at floating rates. In order to manageinterest rate risk, the Group uses interest rate swaps where appropriate to varythe mix of fixed and floating rates. Under IFRS the Group's hedging strategy hasnot changed and we anticipate that the majority of its financial instrumentswill qualify for hedge accounting under IAS 39, thereby minimising the level ofearnings volatility arising as a result of changes in the fair value offinancial instruments. Future IFRS ConsiderationsFurther International Financial Reporting Standards and interpretations may beissued in the future that will be applicable for financial years beginning on orafter 1 January 2005. Therefore, the Group's first audited IFRS financialstatements may be prepared in accordance with different accounting policies fromthose discussed here. We will monitor closely future IFRS developments and theirimpact on our financial statements. Rupert Soames Angus CockburnChief Executive Finance Director3 March 2005 Consolidated Profit and Loss Accountfor the year ended 31 December 2004 Notes Total before Exceptional exceptional items items (Note b) 2004 2004 2004 2003 £ million £ million £ million £ millionTurnover fromcontinuingoperations a 323.6 - 323.6 331.8Operatingexpenses (277.1) (15.0) (292.1) (287.1) ------- ------ ------- ------- Operatingprofit fromcontinuingoperations a 46.5 (15.0) 31.5 44.7Net interestpayable c (3.9) - (3.9) (4.6) ----- ------ ------ ----- Profit onordinaryactivitiesbeforetaxation 42.6 (15.0) 27.6 40.1Tax on profiton ordinaryactivities d (13.6) 4.8 (8.8) (12.8) ------- --- ----- ----- Profit for thefinancial year 29.0 (10.2) 18.8 27.3 ====== ======Dividends (15.5) (15.1) ===== ------- Retainedprofit for thefinancial year n 3.3 12.2 === ==== Dividends pershare (pence) 5.82 5.65 ===== ==== Basic earningsper share(pence) e 7.04 10.17 ==== =====Basic earningsper sharebeforeexceptionalitems (pence) e 10.86 10.17 ===== ===== Dilutedearnings pershare (pence) e 7.01 10.14 ==== ===== Dilutedearnings pershare beforeexceptionalitems (pence) e 10.82 10.14 ===== ===== A reconciliation to historical cost profits and losses is not shown as allgains and losses are recognised in the profit and loss account under thehistorical cost convention. Group Statement of Total Recognised Gains and Lossesfor the year ended 31 December 2004 2004 2003 Note £ million £ million Profit for the financial year 18.8 27.3Exchange translation (losses)/gains n (8.7) 0.1 ----- ---- Total recognised gains and losses for thefinancial year 10.1 27.4 ==== ==== Balance Sheetsas at 31 December 2004 Group Company 2004 2003 2004 2003 Notes £ million £ million £ million £ millionFixed assetsIntangible assets f 2.5 3.0 - -Tangible assets g 263.5 282.4 12.9 9.2Investments - - 53.0 53.0 ----- ----- ----- ----- 266.0 285.4 65.9 62.2 ----- ----- ----- ----Current assets Stocks h 24.6 23.1 - -Debtors i 70.8 62.2 244.7 241.7Cash at bank and inhand 7.9 6.6 - - ----- ----- ------ ----- 103.3 91.9 244.7 241.7Creditors - amounts falling due within one year - borrowings i (6.8) (1.2) (6.1) (7.4)- other creditors j (73.0) (57.8) (100.6) (68.9) ------ ------ ------- ------ Net current assets 23.5 32.9 138.0 165.4 ----- ----- ----- ----- Total assets lesscurrent liabilities 289.5 318.3 203.9 227.6 Creditors - amounts falling due after more than one year - borrowings j (83.2) (105.3) (83.2) (105.3)Provisions forliabilities andcharges l (28.0) (27.1) (1.2) (0.7) ------ ------ ------ ------ Net assets 178.3 185.9 119.5 121.6 ===== ====== ===== ===== Capital and reserves Called up sharecapital m 53.6 53.6 53.6 53.6Share premium account n 6.0 5.7 6.0 5.7Capital redemptionreserve n 0.1 0.1 0.1 0.1Profit and lossaccount n 138.1 137.3 59.8 62.2Other reserves(exchange) n (19.5) (10.8) - - ------ ------ ----- ----- Equity Shareholders'funds o 178.3 185.9 119.5 121.6 ===== ===== ===== ===== Approved by the Board on 3 March 2005 and signed on its behalf by: P G Rogerson A G CockburnChairman Finance Director Consolidated Cash Flow Statementfor the year ended 31 December 2004 Notes 2004 2003 £ million £ million Net cash inflow from continuing operating (i) 98.9 96.6activities Returns on investments and servicing offinanceInterest received 0.3 0.6Interest paid on bank loans and overdrafts (4.2) (5.2) ----- ----- Net cash outflow for returns on investments andservicing of finance (3.9) (4.6) TaxationUK Corporation tax paid (0.8) (2.6)Overseas tax paid (9.6) (7.8) ------ ----- Tax paid (10.4) (10.4) Capital expenditure and financial investmentPurchase of tangible fixed assets (56.3) (61.9)Proceeds from disposal of tangible fixed assets 3.7 6.7 ---- ----- Net cash outflow for capital expenditure andfinancial investment (52.6) (55.2) Equity dividends paid (15.2) (14.9) ------ ------ Cash inflow before use of liquid resources andfinancing 16.8 11.5 Management of liquid resources - 0.8 FinancingIssue of shares 0.3 -Net purchase of own shares held under trust (3.3) -Increase/(decrease) in debt due within one year 2.6 (0.3)Related Shares:
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