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Edited Transcript of BBA.L earnings conference call or presentation 5-Mar-19 8:30am GMT

Full Year 2018 BBA Aviation PLC Earnings Presentation

London Mar 13, 2019 (Thomson StreetEvents) -- Edited Transcript of BBA Aviation PLC earnings conference call or presentation Tuesday, March 5, 2019 at 8:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* David Crook

BBA Aviation plc - Group Finance Director & Director

* Mark R. Johnstone

BBA Aviation plc - Group Chief Executive & Director

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Conference Call Participants

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* Andrew Douglas

Jefferies LLC, Research Division - Equity Analyst

* Eoghan Reid

Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst

* Gerald Nicholas Khoo

Liberum Capital Limited, Research Division - Transport Analyst

* Rishika Dipak Savjani

Barclays Bank PLC, Research Division - Assistant VP

* Samuel James Bland

JP Morgan Chase & Co, Research Division - Research Analyst

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Presentation

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Mark R. Johnstone, BBA Aviation plc - Group Chief Executive & Director [1]

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Good morning, everyone. We'll just let everybody grab a seat. If you're on the webcast, apology for the slightly late start, we were just dealing with security downstairs in the building.

I think we are good to go. Okay. So good morning, and welcome to BBA Aviation's 2018 Full Year Results. Along beside me today, on far side of the room is David Crook, our Finance Director. 2018 has been a year of strong strategic progress for BBA Aviation. We've executed our growth strategy at both Signature and Ontic, our 2 continuing businesses. We've achieved all this within the parameters of our capital allocation framework and a new capital structure including a highly successful inaugural bond issue. Our investment case is robust. We have clear market leadership positions in end markets with long-term structural growth. We have significant barriers to entry, which underpin our sustainable competitive advantage. We have a low fixed cost base with flexible cash investment requirements, and we see multiple organic and inorganic investment opportunities in both Signature and Ontic. And above all, we deliver a very strong attractive free cash flow model. I'll review some of the highlights on the next slide in a moment, before I pass to David. But when David is done, I'll spend a little bit -- a bit more time with some further analysis on 3 areas: one, the U.S. business general aviation market; second, our confidence in this long term structural growth; and lastly, a reminder of the key value drives for our group, which we described at the Capital Markets Day back in November.

So 2018 has been a year of strategic progress. Firstly, we are outperforming today. I'm very pleased that we've continued to outperform the principal market in the U.S. by 210 basis points in our Signature FBO business. This is over and above the market growth of 0.9% in the year in U.S. B&GA movements. We have also continued to gain market share through our pricing initiatives and through the scale and quality of our network. Second, we continue to demonstrate strong free cash flow delivery. In 2018, our free cash flow was $259 million from our continuing business. And third, notwithstanding the markets, we've continued to invest for tomorrow's growth. So in commercial technology, we've invested in IT, for new pricing and FBO management systems a sum of $14 million. David will talk to that later. We've also -- we will also, in 2019, begin to see value being delivered through the pricing optimization strategies described by Shawn Hall at the Capital Markets Day in November. We've also invested in our people and culture. I personally believe that engaged employees drive, not only improved customer experience, but improved safety and staff loyalty. We undertook our first survey in 2018, our first in 4 years. And it's clear from the results that we've got a lot of work to do on engagement, inclusion and diversity, all of which drive business performance.

And lastly, in terms of our strategic progress in the year, on acquisition and licensed growth, in Signature, we started the year with 200 FBOs. We've ended the year with just over 400. That's after our EPIC and St. Thomas Jet Center acquisitions. And in Ontic, we added 6 new high-quality licenses through the year and in November, completed the acquisition of Firstmark Corp. All of these investments are performing to plan. All-in-all, these are key steps we've taken to further strengthen our market-leading businesses and lay the foundations of a strong platform for sustainable growth.

I'd now like to hand over to David, who will talk you through the financial results for the year.

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David Crook, BBA Aviation plc - Group Finance Director & Director [2]

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Thanks, Mark, and good morning. As Mark said, it's been a year of implementing our strategy and investing for growth, whilst at the same time delivering growth in operating profit and free cash flow. Turning to Slide 3.

We continue to significantly outperform our principal market with U.S. B&GA flight movements during 2018. Signature FBO outperforming that market by some 210 basis points. We're already realizing value from our 2018 acquisitions in Ontic, with a strong order book and a pipeline of license opportunities. And we've also delivered further strong improvement in ERO, which is now classified as a discontinued operation. Overall this has delivered operating profit growth of 4%. We've reported earnings per share down 2.9% to $0.233 due to interest costs and taxation. And we've increased the full year dividend by 5% to $0.1407 per share, reflecting the continued strong free cash flow and our confidence in future growth. Now let's look at the segmental performances in more detail.

We've renamed our 2 continuing operating segments, Signature and Ontic. First, Signature on Slide 4, which represents our Signature FBO, TECHNICAir line maintenance and EPIC businesses.

Turning to the charts. On the top-right revenue chart, firstly, you can see last year's revenue at $1,643 million, increased for the effects of fuel price increases and FX, taking it to a like-for-like number of $1,787 million. The Signature FBO growth of $50 million, reflects the 210 basis points outperformance referred to earlier, delivering 3% organic revenue growth. Our line maintenance business, TECHNICAir, had a challenging second half, impacted by lower repair activity on key contract maintenance [cats]. Here, full year revenues fell $2 million on total of revenues of $74 million. We also saw a first time contribution from EPIC, with second half revenues for the period of our ownership at $292 million.

The operating profit chart shows the development from a like-for-like $330 million to $321 million. The $321 million, reflects the $14 million in year IT cost, as we developed our commercial technology solutions ahead of their deployments in 2019 as previously guided. At TECHNICAir, full year organic operating profits were down $4 million. Stripping out these factors, organic underlying operating profits at Signature FBO increased by $7 million. This reflects a drop through of 14%, which should be impacted by customer mix and bad debt provision or 1 of our network contract customers. We continue to expect underlying drop through to be in the order of 25% for Signature FBO.

EPIC delivered operating profits in line with expectations, with underlying operating profits of $3 million for the 6 months, offset by $2 million of acquisition and integration costs. In this year of investing for growth, Signature delivered return on invested capital of 11.8%.

Now let's turn to Ontic on Slide 5. In Ontic, we saw revenue growth of 3% and operating profit growth of 7%, with our 2018 license acquisitions driving performance. Looking at the charts, on the top right-hand side, revenue chart. You can see the $12 million contribution from license acquisitions, which are delivering as expected. We also saw a 1-month contribution from Firstmark, following completion of its acquisition in late November. The organic revenue decline reflects the nonrepeats of cyclical military orders delivered in 2017 as previously guided. And you can also see this drop through to the organic operating profit. Underlying operating profit for the license acquisitions, alongside the 1-month contribution from Firstmark, has delivered $6 million in line with expectations, and more than offsetting the expected organic decline.

Overall, the development of the Ontic product portfolio has seen operating margins grow to 27%, up 110 basis points. This has delivered Ontic ROIC of 15.6%, during the year of significant portfolio growth. This performance is as expected, but is nevertheless very pleasing. So let's now look at the -- so that's the business continuing overview, let's now look at the discontinued business on Slide 6.

This represents substantially all of our ERO operations, excluding the Middle East activity, which ceased during 2018. You can -- yet again, we can -- we saw further improvements in ERO during 2018 with an increasing operating profit of $11 million on a discontinued operations basis. The table on the left of the slide, bridges the performance of ERO, as it would have been, as a continuing business, to the reporting required for its status as a discontinued operation. There is -- this results in a $35 million operating profit for ERO discontinued operations, compared to an ERO performance of $18.4 million, had it been presented as a continuing business. Completing the group's operating profit outcome on Slide 7 is central costs.

There are now 2 elements to central costs, the central corporate costs and the support costs associated with ERO. I'll return to the ERO support costs shortly, when I reflect on guidance for the year ahead. Central corporate costs were $28 million, a decrease of $6 million over last year. The decrease resulted from the removal of the final cost associated with supporting ASIG, and reduced impact of hurricane claims at our captive insurance company. Now let’s complete the income statement with a review of financing costs and taxation on Slide 8.

Net interest has increased to $67 million. And prime -- this is primarily to -- due to increased interest rates and the refinancing of debt during 2018. The net interest costs for 2018 are reported net of a $4.6 million gain arising on the close out of interest rate swaps associated with the refinancing during the first half. And the continued group underlying tax rate stands at 21%, as guided previously.

The additional financing costs and underlying tax have impacted total adjusted earnings per share, which was down 2.9% at $0.233 per share. And the $0.05 increase in the dividend reflects our continued strong free cash flow and our confidence in future growth.

Turning to exceptional and other items on Slide 9. Mostly noncash here, with amortization of $89 million plus restructuring cost of $9 million, relating to the restructuring takeout costs previously supporting ASIG and the closure cost associated with our ERO, Abu Dhabi facility, which ceased operations during 2018. Impairments of Sloulin Field FBO, as highlighted at the half year, which is set to close in 2019, as the airport relocates to the Williston Basin International Airport. A recent judgment in the U.K. has resulted in all U.K. pension plans being required to equalize guaranteed minimum pensions. The Impact of this has been to recognize a past service cost of $11 million. On discontinued operations, the exceptional charges represent the completion of the Dallas footprint consolidation. Our program to our new Dallas Fort Worth facility and the costs associated with the disposal process for ERO. Now let’s complete the overall picture with cash flow and leverage.

There's a bit of detail on this slide, but the key point is that we continued our strong free cash flow generation from our continuing business at $259 million. Looking at the table, we distinguish between continuing operations and discontinued operations. Turning to continuing group first.

We see the EBITDA for the continuing group of $428 million, offset by $11 million of support costs related to ERO. On the working capital, we have an inflow of $22 million, while CapEx stands at $76 million, and it's favorable compared to expectations for the year due to timing of payments. Net interest payments were $57 million, and CapEx -- apologies. And cash tax payments amount to $27 million and are in line with expectations at an underlying cash tax rate of 10%. Exceptional and other cash items include cash spent on restructuring costs relating to takeout of costs previously associated with supporting ASIG and the closure of the Middle East. And as I said, all this delivered a strong free cash flow from continuing operations of $259 million for the year, in line with our medium-term guided range of $250 million to $300 million. This free cash flow continues to provide a solid platform from which we can fund progressive dividend payments, along with the continued acquisition of Ontic licenses and bolt-on acquisitions such as EPIC, St. Thomas Jet Center and Firstmark.

On ERO discontinued operations, we have a $48 million working capital outflow, which largely reflects the delays in engine completions, a result -- as a result as of parts availability from the OEMs, as I highlighted at the half year. This is a timing matter, and we expect to unwind during 2019 as availability of parts improves.

Overall, this cash flow performance results in net debt of some $1,332 million and leverage on a covenant basis at 2.8x. And once again, it's worth emphasizing the cash performance during through 2018, clearly demonstrates the inherently strong free cash flow characteristics of the continuing group, to support future growth and value creation within our overall capital allocation framework. And you remember that the debt refinancing we completed during the year is structured to support our growth plans and the long-term nature of our assets.

Looking to 2019 and a few items of technical guidance on Slide 11. We expect central cost to be broadly flat at $27 million for 2019. In addition, we are now reporting the costs associated with supporting ASIG -- supporting ERO, sorry, as part of our central costs, and these are expected to be $12 million for 2019. The developments of these costs will clearly be dependent on the timing of the disposal of ERO and the requirements of a buyer for a transitionary service period. So that's $39 million in total for central costs, flat year-on-year. Continuing group CapEx in 2019 is expected to be in the region of $115 million to $125 million. This largely reflects FBO projects, in part, carry forward for 2018 and significant new projects in 2019. We're expecting to spend around $20 million to develop additional ramp space at a strategic airport for a 25-year lease term. And we've agreed significant investments at Atlanta, having secured of a 20-year lease with a possible extension. This CapEx guidance excludes the ongoing investment in Ontic licensing, which we expect to continue to be around $30 million to $35 million. The underlying continuing effective tax rate for 2019 is expected to be stable at around 21%. The cash tax rate for 2019 is expected to increase to around 14%, reflecting the timing of payments for the 2018-'19 tax year and an increase in our tax basis.

Interest expense excluding the impacts of IFRS 16 for 2019, is now expected to be around $75 million. This reflects the nonrepeat of the swap gain in 2018 and a full year under the current capital structure, as previously communicated with leverage in the 2.5 to 3x range. Cash interest for 2019 is also expected to be $75 million. Finally, let's look at IFRS 16 leases on Slide 12, which we are adopting from January the 1st, this year.

First of all, it's worth emphasizing that the new standard has no impact on our strong free cash flow generation. It has no impact on our business prospects. The right to operate long-term leases within our Signature FBOs business are the cornerstone of value creation. It has no impact on our ability to deliver our strategy nor will it impact our liquidity, as debt covenants will continue to be measured and tested on a historical-accounting basis. And these factors all support the maintenance of the group's progressive dividend policy. So then let's look at what IFRS 16 does to the financials on Slide 13.

These indicative impacts are based on 2018 financials, and do not reflect the expected performance in 2019. Again, it's worth emphasizing that free cash flow and revenue will not be affected. The results of lease rental charges being replaced by asset depreciation and interest expense on the capitalized leases is that we expect 2019 to see underlying operating profit and EBITDA increase by around 12% and 30%, respectively, whilst interest charges would double. This is expected to impact reported EPS by around 10%. This net impact to reported EPS will neutralize over the term of the lease. The leases are recognized on balance sheet for the discounted value of the future lease payments. This results in reported net debt increasing by around 85%. But as I mentioned earlier, nothing changes with regard to our bank facilities and their associated covenants. They will continue to be reported and tested on previous lease accounting rules.

During 2019, we will report adjusted performance measures to reconcile the post-IFRS 16 performance and position with pre-IFRS 16, as we will not be restating the comparative period.

So in summary, it's been a year of significant growth and investments in line with our strategy. The group is well positioned for 2019 and beyond with a firm foundation of strong free cash flow to fund further growth and value creation, with the prospect of returns to shareholders, as we maintain a leverage range at the minimum of 2.5x. That's a great note on which to hand back to Mark.

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Mark R. Johnstone, BBA Aviation plc - Group Chief Executive & Director [3]

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Thank you, David. So in this next section, I just want to spend a bit of time focusing on 3 topics; firstly, the U.S. business general aviation market; second, implementation of our growth strategy; and thirdly, an outlook for 2019 and beyond. So first, let's take a look at the U.S. B&GA market.

We showed you this slide at the Capital Markets Day in November, and at that time, we identified 3 market drivers, the business in general aviation flying. They were: The macroeconomic drivers, the size of the operation installed fleet and then, fleet utilization. At the Capital Markets Day, we described -- sorry, discussed the drivers and noted the strong correlation between flying activity and both profits -- sorry, GDP growth and corporate profits based on data going back nearly 40 years. These are the same charts. Industry forecast predicts global B&GA fleets will grow by 14% in the next 10 years. Independent of that, the FAA predicts the growth in U.S. jet hours will be at an average of 2.7% per annum through 2038. It's a positive trend indeed.

Over the long run, GDP and B&GA flying movements tracked closely as demonstrated in this chart. Through cycle, we operate in a structural growth market with GDP of 2% plus CAGR. We believe this remains valid looking ahead. But there are shorter periods when they do not track as closely. Let's just take a quick look at the detailed performance in 2018. You've heard us say already that the market grew 0.9%., and we witnessed a strong first half followed by a weaker second half. So why did flying slow in the second half?

Well, from the end of Q1 2018, increasing global economic uncertainty started to impact flying, particularly in the U.S. We saw increased geopolitical trade tensions, not only the U.S. and China, but to an extent, Europe too. You'll recall the first trade tariffs on steel and aluminium were put in place in March, and there were further escalations each month after that. At the same time, for March, we saw the Fed raise rates 4 times through 2018. And then also, we've seen foreign direct investment and capital spend slow. Business confidence was clearly reducing, with the real impact being felt on flying from half 2 2018. We know through our own data and customer surveys, the business confidence is a key driver, especially to the more discretionary charter, or part 135 as it's called in the trade, flying segment. Data shows that this charter segment has slowed more than any other market segment. And we see this decline in the charter activity as the key reason for the current gap between positive GDP growth and growth in B&GA flying in U.S. So let's take a slightly more detailed look at that assertion.

This chart shows U.S. market using the FAA market segments we described in Capital Market Day. As you see along the bottom, Charter is 135, GA part 91, fractional, 91K, et cetera. It plots year-over-year changes in flight movements. This is a really important chart, and there are 4 key points to bring out: Number one, short-term flying activity fluctuates both above and below GDP. So GDP is the red line on this chart. So if we look at the chart you'll see, take the Green Line charter, it was significant -- the growth was significantly above GDP. But in recent months, that growth rate has fallen off. If you look back further over time, you will see similar patterns of trends, both above and below GDP. The second point I want to make is that the charter growth peaked in mid-2017, so it's the top of the green line, right here in the middle. Whereafter the growth rate, still growth, but the growth rate slowed until such time as it crossed across the red line in Q1, end of Q1 2018, just here. So that's when GDP was growing faster than, for example, the charter market.

We stated that the weakening business confidence effects charter more than other segments. This charter activity is more of a discretionary spending decision and thus, might easily be deferred.

Point 3 on the chart, fractional, which is the black line, is more resilient and a less volatile segment in the market than charter. And then finally, if you come to the right-hand side of the chart over here, you'll see that it shows a modest recovery in Q4, but it is fair to say that the Q3 comparator in '18 was a harder comparator because we had the hurricane activity in Q3 2017, back in the prior year.

Now looking at Q1 2019, we've seen record levels of U.S. winter storm activity. However, we believe that underlying flying has continued in line with Q4 2018. So whilst charter movements have declined in 2018, Signature has been able to outperform and increase our charter market share in 2018 through both the strength of our network and through the pricing optimization initiatives Shawn Hall described at the Capital Markets Days in November. This share growth is a really great example of our continued strategy execution. So through 2018, we have also continue to invest in improving our customer experience, while at the same time fortifying our network. We invested in new sports charter terminal at Miami International, that's the photograph on the top right. And we invested in the new executive and sports charter terminal at Nashville, which facilitated a new 30-year lease. That's the picture of the lounge on the bottom right. We've talked previously about Atlanta, the world's busiest hub, where we secured a 20-year lease extension with a 5-year option, and again, we will be launching our Elite service.

And then lastly, we spent time renovating many of our existing facilities. For example, we've renovated our FBO at Las Vegas, a location where we compete directly with Atlantic Aviation. We described at the Capital Markets Day in November, initiatives that will leverage our market-leading FBO network and will deliver increased performance in the medium-term rising to 200 -- I'm sorry, outperformance in the medium-term, rising to 250 basis points from the 200 basis-point guidance today. This slide, again, summarizes some of those initiatives. So we've seen the pricing optimization on the second column from the left. This will add $10 million OP in the next 1 to 2 years, and comes on the back of the investment we made in '19 -- sorry, in 2018.

We'll see some credit card and advertising initiatives, which will grow our nonfuel revenues. Again, nonfuel revenue against an already invested real estate. This can supplement OP by another $10 million. And then, we'll introduce new services, which is about offering new services on the already invested real estate. For example, Elite, which we spoke about at the Capital Markets Day. You can see here that we anticipate $25 million to $35 million of operating benefit across these initiatives over the next few years. We are making really, really good progress on these initiatives, particularly the ones we described at the Capital Markets day in November. That covers Signature, so let's just take a quick look at Ontic, where it's also been a great -- a year of great progress in delivering against our strategic initiatives.

At Ontic, we added 6 new licenses in 2018. We had cockpit displays -- cockpit LCD displays with Honeywell. We had fuel control products with UTAS. We added some follow-on license with Ultra and one other OEM at the end of the year, and we added some aviation products -- sorry, avionics products with Esterline. We continue to see strong license pipeline for our guided $30 million to $35 million of license investment per annum. Also, at Ontic, the Firstmark acquisition completed at the end of November, delivers an exciting opportunity to create further value at Ontic. This has been an example of a targeted acquisition, which brings both its own management team, proprietary product IP and new locations in North Carolina and New York, from which to grow Ontic further.

Gareth Hall, President of Ontic, first showed you this slide at the Capital Markets Day describing the Ontic growth platform. 4 key points: Number one, Ontic has a leading market position with significant competitive advantages in terms of owned intellectual property; secondly, Ontic holds extremely strong OEM relationships, reinforced by our execution track record across many sole-sourced product lines; we've demonstrated a strong track record of strong growth and sustainable margins in Ontic; and lastly, we have a highly effective business development and product transition team that will continue to deliver future growth.

At Ontic, we set ourselves a growth target of $100 million EBITDA by the end of 2021, which will be delivered through both license and M&A additions. We have a clear line of sight to deliver this $100 million EBITDA. All of these initiatives in both, Signature and Ontic, are centered around our strategy. We presented this strategy at the Capital Markets Day in November and the center was built on 5 key value drivers: firstly, a fortified network, service enhancements and an expanded portfolio; #2, operation efficiency and process improvements, front of house and back of house; #3, technology solutions for our customers; #4, improved customer experience. And #5, data-empowered decision making. These 5 initiatives are all delivering growth -- or both growth and long-term value creation.

So BBA Aviation is a strong platform for sustainable growth. We have a simplified portfolio. The continuing group generates between $250 million and $300 million of free cash flow per annum. Our 2018 investments are all delivering to plan. We'll expand our network and platform positions through connections to our customers. We have clear opportunities of value creation from our infrastructure, our real estate and our intellectual property. So we believe the Signature flight path will deliver 250 basis points mid-term through cycle performance, and we've laid out our focus on growing Ontic to a $100 million EBITDA business by 2021. So let me just move on to our outlook.

At Signature, our investments in both our network and technology will underpin the future growth and longer term market outperformance of the business. Ontic continues to have a strong pipeline of growth opportunities and excellent forward order book cover in 2019. The continuing group is focused on high ROIC and strong cash generative businesses. The ERO process is continuing. And lastly, the board is confident of growth in 2019 through continued out performance against a flat U.S. B&GA market.

That concludes our presentation today, so I'm very happy to move on to Q&A.

Who is first? Rishika.

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Questions and Answers

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Rishika Dipak Savjani, Barclays Bank PLC, Research Division - Assistant VP [1]

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Rishika Savjani from Barclays. I wanted to ask a couple of questions about the profit drop through. I think in your commentary, David, you said that there was an impact from customer mix. Could you just explain to us what exactly that means? And if that's a sustained change in the business, or do you still think the 25% drop through that you've talked about in the past on incremental revenue still stands? And then, I guess to put the question the other way. If you look at the equity market and what it thinking or asking about, well then, clearly there's been a concern about the slow down in the rate of market growth, and as you go a point to, if there is a point at which, volumes track below GDP and potentially could go negative. So how should we think about the deleverage in the business on negative volumes, and how -- what does that mean for kind of [charter] profitability?

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Mark R. Johnstone, BBA Aviation plc - Group Chief Executive & Director [2]

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David?

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David Crook, BBA Aviation plc - Group Finance Director & Director [3]

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Yes. In terms of margin, no change in the 25% drop through guidance and that still holds. And In terms of the customer mix, what we saw taking place was the conversion of what we would call retail business or spot business, to contracted business. So business that would have been more transient, and the risk of that business obviously coming and going, we've converted that to a contract business. And we've taken a bit of a margin squeeze on that business, but created that surety of bringing that into the fold, as contracted business to work with us and grow with us as we move forward. So that's the piece around customer mix. And In terms of wider market question. I think, as Mark has spoken to today, in terms of the market we see and that market hasn't shown any signs of any significant change and it's still developing the way we saw in the fourth quarter and this sort of marginal, just sort of flattish marginal growth to flattish position in that fourth quarter. And we are planning to work off a flat market position is how we're working at the moment, and clearly, focused on that outperformance targets against a flat market or whatever market will brings for us, we will remain focused on outperformance.

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Mark R. Johnstone, BBA Aviation plc - Group Chief Executive & Director [4]

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I think, in terms of the, Rishika, the resilience question, and we've spoken about this sort of regularly. Certainly, when we set our gearing range earlier in the year, we clearly stress test the organization to make sure that that's going to be absolutely set. We have, if you look at our cost base, it's 75% variable 25% fixed. So I mean, fuel flexes itself, labor is the other key piece on variable that we pulled down. So we're confident we can manage that if necessary, where it's been necessary. We don't see that in 2019, but yes, we have to be ready. And then equally on the cash side, on the capital side, we've got $100 million or a little bit over in 2019 year. Worse comes to worse, we believe we can turn off half of that in any given year. So take it down by $50 million, if we absolutely have to without any material impact on the business. And that would really be some sort of capital deferrals across the portfolio where we could just spend it a year later. We've demonstrated that in the past. So again, same answer I'm afraid that we've given before, but yes, we obviously have to think about that resilience. But we don't see that in 2019. We just sort of see this continued 0 growth, really. I mean, yes. There could be triggers that change that, trade settlements, et cetera, but who knows what will happen. Okay? Andy?

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Andrew Douglas, Jefferies LLC, Research Division - Equity Analyst [5]

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It's Andrew Douglas from Jefferies. A couple of questions please. On Slide 24, you talked about the strategy. Can -- I mean, early days yet in your tenure, but can you just give an overview of kind of where you feel you've made progress versus your expectations and maybe where there's a bit of catch up. And on Ontic, I'm assuming that the hopper we talked about at Capital Markets Day remains full, and there's plenty to go for in the current year. And then just a question on the one you've bought in December, which I believe is $10 million. Is that, broadly to some of the 5x EBITDA you talked about previously? And then if you can just give us any overview really, on the competitive landscape within Signature, how you feel that's evolving? And that's kind of in the last 12 months. It would be helpful.

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Mark R. Johnstone, BBA Aviation plc - Group Chief Executive & Director [6]

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Okay. So I mean, on the strategic progress, those sort of the pentagon, as I call it, the 5 things. We described that really in November. I think you'll see, for example, some of the pricing optimization on these sort of the Signature flight chart. I talked about $10 million OP uplift coming through the next 1 to 2 years. That's a good example of some of the actions we've taken and put in place. In terms of network growth, we obviously added EPIC and a slightly different business model, which not only gives us customer reach, but also gives us increased purchasing power. Nearly 600 million gallons a year, and we go through a fuel RFP bid process every year. We're in the middle of it now. So yes, the ability to get behind some of these middle men and back to the refinery gate should help us there. So I think generally, around '24, everything is heading in the right direction. And part of that is about getting the right team in place. And you've met many of the team back in November. High-quality individuals. They are the ones that drive this business day-to-day. In terms of Ontic, in terms of the hopper, which you quite rightly say, it sort of feeds through. I mean, we signed 6 licenses in the year. The one at the end of the year was with an OEM, who doesn't want us to disclose who they are. It's a $10 million transaction. But we're within the $30 million to $35 million that we set out. We certainly see that the same track in 2019 coming forward. What else do we have? We had, so that's December, that's 3 of them, and competition. So the main competitor in the U.S. is obviously, Atlantic. Macquarie published their results, and I think you've seen that. They're always very coy about actually how they're doing. They tend to talk about what has happened in terms of the mix of their airports, and what was in and what's out year-over-year. It is down to them to manage their business. We are very pleased with the way we're managing our business and our outperformance. You don't see them commenting on that. So I think it's a transparency piece. Something we're proud of and something which is core to our strategy going forward.

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David Crook, BBA Aviation plc - Group Finance Director & Director [7]

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You asked, Andy, as well about the sort of EBITDA multiple within that deal. So yes, that $10 million deal in December, which again shows the strength of the pipeline coming through. That's straight down the middle again, 5x EBITDA deal on licensing.

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Mark R. Johnstone, BBA Aviation plc - Group Chief Executive & Director [8]

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Yes?

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Eoghan Reid, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [9]

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Eoghan Reid from Berenberg. Just 3 questions for me. Firstly, what's the average lease length in Signature now? I think they had a few extensions over the year. Secondly, on the ROIC in Ontic. That came down a bit this year. What is the sort of sustainable ROIC that to you see in that division, given you are doing 5x EBITDA multiples? Do you think that's going to stay around the [15] level? Do you see sort of upside as you get to a 30% EBITDA margins? And just on that license acquisition, that's obviously, 5x EBITDA and $10 million. It's 20% margins. How do you get to a 30% EBITDA margins from there?

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Mark R. Johnstone, BBA Aviation plc - Group Chief Executive & Director [10]

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David, do you want to take it?

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David Crook, BBA Aviation plc - Group Finance Director & Director [11]

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Yes, certainly. In terms of the lease portfolio, that stills remains around 17 years. There's obviously a constant churn. We're having a portfolio of 200 such leases, and we've got, leases renewing, extending leases maturing over time as well. So remains at 17 years and provides that long-term clarity in terms of forward cash flow look from Signature. In terms of Ontic, you've seen Ontic in a year, where it's developed the portfolio strongly through 6 license deals, and it's sort of the first time, stepping to the M&A world with the acquisition of Firstmark. So it's put on a block of invested capital. Therefore, you've seen that slight adjustment down on this year's ROIC. But from Ontic's point of view, you expect that to be able to continue to deliver mid-teens ROICs as a business framework. And in terms of the 5x EBITDA deal at the end of the year, I mean the deals do vary in terms of profiling within each deal and the product mix in each deal, but ultimately, we continue to expect the Ontic portfolio to deliver 30-plus EBITDA margins as an overall portfolio. And we'll look at individual licenses on a license-by-license basis.

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Eoghan Reid, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [12]

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Did you ever think of that, or change...

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David Crook, BBA Aviation plc - Group Finance Director & Director [13]

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There's no change in strategy. We take every license on its own merits, both individually and its additive value into the portfolio and the technologies and the skill sets that we have. And no change to what we previously disclosed in terms of 30% plus EBITDA margins for Ontic.

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Mark R. Johnstone, BBA Aviation plc - Group Chief Executive & Director [14]

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And I would add to that. We talked about value optimization, which is a combination of cost and price across Signature, that's equally valid and Gareth spoke to that in November as well. Sam?

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Samuel James Bland, JP Morgan Chase & Co, Research Division - Research Analyst [15]

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Sam Bland from JPMorgan. I've got 2 please. First, one was again on that customer mix. Is there sort of more to do there, if you wanted to? Or what kind of proportion of your customers are now on a contracted model? Could it be higher? And if it could be, would you like it? It would -- is that something you're interested in? And then on IFRS 16, obviously, I appreciate no change to covenants. The previous leverage target was 2.5 to 3, which we kind of assume that basically moves up with the impact of IFRS 16. So you're still basically in the middle of whatever the new reported range is basically.

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Mark R. Johnstone, BBA Aviation plc - Group Chief Executive & Director [16]

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So let me start on the customer mix and I'll let David close on that then move on to our IFRS 16. I think, at the Capital Markets Day, we talked about having 50% of our business roughly contracted, but they happen to be on the aircraft operators that fly much higher hours, and I think we talked to around 600-plus hours utilization versus an average somewhere 300 to 500. What that means is that, well we're actually was selling an awful lot of gallons on a small proportion of the market. I mean in November, I cited around 15% of the market, which left 85% of the market. This thing we called the long tail. So there is very much an opportunity to go after that long tail, which is really about market share, which you're seeing some of and we've touched on as we've been through today. So yes. Now clearly, people don't ordinarily move across as they get exactly the same deal, unless they've had a bad experience somewhere else with customer service or safety. So you need to incentivize people. The skill and value of our network is how we look at that. And Shawn showed you those slides in November in the Capital Markets Day about pricing optimization. And he gave a couple of examples, where you'll -- your trading, should we say, margin initially for volume. We didn't publish those on the website for obvious reasons. But this is exactly what we're doing. And yet we're asked earlier about what we're doing about executing that sort of the pentagon, sort of strategy. This is a great example of what we're up to. That takes time. You can't just deploy it across the networks. So we work our way through it and demonstrate our value to those customers, so that will continue. We see that as great opportunity. David?

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David Crook, BBA Aviation plc - Group Finance Director & Director [17]

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Yes, IFRS 16, and quite rightly, you say no change to the banking position and measurements at our bank facilities against the traditional covenants, which is covenants up to 3.5x leverage compared to the 2.8 we're reporting today. So plenty of headroom, as we sit in middle of that -- middle of target leverage range. In terms of the adoption of IFRS 16, you're looking at the order of $1.2 billion of liability coming on to balance sheet. And that puts you in IFRS 16 terms of upper 3s, and so around about 3.7x levered under an IFRS 16 basis. It's worth just putting that in the context of what we did during 2018. We, as Mark said, we went out and ran our first inaugural bond issue. That took on a public credit rating, and the credit rating agencies already evaluate BBA as part of that process. And in many ways, have always done a proxy of IFRS 16 in the way they look at liquidity. And if you look across their analysis, they typically have us around the sort of 4, 4-plus times levered the way they analyzed that. Clearly, they'll be adopting -- well, they'll be looking to understand the adoption of IFRS 16 by businesses like ourselves. And clearly, we are coming out on the lower side of where they traditionally been modeling. So again, I expect that to land in a positive way in terms of that reference back to the credit agencies pre-IFRS 16 view of our lease portfolio.

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Samuel James Bland, JP Morgan Chase & Co, Research Division - Research Analyst [18]

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Okay. If I can ask one follow-up? You put the historic FAA movements on Slide 17 against U.S. GDP. It shows obviously the decline of 2008-'09. Is your view that, that recession was -- had a particularly large decline in business jet flights versus, let’s say, previous ones? A, just because it was a larger recession, and B, maybe there's a bit of stigma attached to the business jet flight. And, i.e., basically, if you go through another recession, probably the downturn in flying activity is not as sharp as we saw in '08-'09, do you think that's fair?

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Mark R. Johnstone, BBA Aviation plc - Group Chief Executive & Director [19]

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I'm not sure I can sort of agree that, that is entirely fair. But I mean firstly, it was a long time ago, and it has a very different role and capacity to the organization. In fact, I just joined 6 months before. So I don't think anybody knew what was going on. Does it set a precedent for the future? I genuinely don't know. I think the trend is there, absent the correction, do I see another sort of 2008 scenario, famous last words, in '19? No. But there's certainly that long time trend. Actually, if you look at the right-hand side of that chart, you see a slight separation of the 2 lines, very subtle. Sort of last -- and that's really what I was talking about in terms of the segmental analysis, trying to explain what we're seeing today. And to put it in context, if you own an aircraft, you're in for the fixed costs, already, right? So variable cost of flying per hour might be, say $3,000 an hour. If you're looking to fly an aircraft, so you're not into the variable costs, your decision point is going to be 2x of that, so maybe $6,000 an hour. So it gives you a slightly different decision on a discretionary buying: Are you going to spend $6,000? Or am I going to use something that's parked up in hanger anyway, and it doesn't cost me that much more? So there is that aspect that comes through. That's not purest illustrative math, Sam. Don't quote me on it as being perfect, but direction of travel. I mean, that's a good example of why you see, should we say different behaviors in purchasing in that part 135 market. Gerald?

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Gerald Nicholas Khoo, Liberum Capital Limited, Research Division - Transport Analyst [20]

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Gerald Khoo from Liberum. 3 from me, if I can. Firstly, on the ERO sale. What's the hold up in that process? Is that about getting the right price? Or it's -- are there competing assets sort of in the market? What's going on? TECHNICAir, obviously a small part of the business, but a big percentage movement in profit. Is that line of business always that volatile? What are the prospects for turning that around and what role does that play within the group? And finally, a bit -- question on the bad debts provision. Can you elaborate a bit on how that arose? How important the customer was it? Maybe you could help us to understand this, the size of the exposure. What percent of customers pay in arrears? And what's the risk that you are exposure to this sort of risk increases as you chase, as you try to convert more of that transient business to contracted business?

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Mark R. Johnstone, BBA Aviation plc - Group Chief Executive & Director [21]

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David, do you want to talk to the last one first and then, I'll come back to ERO and the TECHNICAir piece?

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David Crook, BBA Aviation plc - Group Finance Director & Director [22]

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Yes, certainly. Yes. On the bad debt side, that's the order of about $2.5 million in value terms. And tell you what, I won't name the customer, that the customer is contracted network customer, who we have seen sort of fleet size contract across 2018 and to the point at which they're operating in a much smaller capacity than at the time which we entered into our network contract agreement. We remain supportive of that customer, but we recognized they clearly had some significant challenges. In terms of your question about whether that's more widespread. No. This is unique to this particular customer. This is not an industry that has any historical pattern of such exposures and the nature of the customers we operate. This is not commercial airline territory, in that regard. So I don't see that as a wider exposure issue.

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Mark R. Johnstone, BBA Aviation plc - Group Chief Executive & Director [23]

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So on TECHNICAir, I mean, it's the first time we've disclosed it, we chose, as you see, on Page 5, I think, in the RNS, to sort of unpick it to help people understand drop through. Obviously adding EPIC, lots of revenues, a small margin. It's important we show the TECHNICAir piece. Two things there, one is sort of market activity led. We weren't getting as much business as we want to. I mean, it is a small business, and it's $74 million. The other one is actually labor shortages, skilled technicians. Now I think if you look at the U.K. and U.S., in fact around the world, unemployment is an all-time low. And we also have, I guess it's fairly true in the U.S. as well as anywhere else, an aging population of trained mechanics. Trying to get the right people in place and right time to do this work is not easy. And our biggest -- one of our biggest locations is in the New York area. Teterboro. I think some of you may have seen it on the Capital Markets Day, but others not. But there's a competitive market around the New York area. So it's tough. But hopefully we're on top of that, I mean, we're guiding to sort of a flat performance in '19 for that business. And on ERO, what's the hold up. I mean, I'll be very clear about getting the right deal at the right price. I think you've seen today in the results have come through a very strong continued recovery in the ERO business. It's much easier having a conversation with somebody having delivered a financial result rather than promising to deliver a financial result. So that's one part. The other part I spoke about, well we spoke about before, is the working capital issue, due to supply chain parts. There's a risk of leaving money on the table there. And lastly, it's complex transaction, not only in negotiating with bidders, it's negotiating with the engine OEMs on the transfer and stuff. Yes there have been market activity. You probably saw that StandardAero was acquired by Carlyle just before Christmas in a $5 billion deal. So there seems to be a lot of interest in these assets out there. The process is ongoing and we'll keep you posted as to how we get on with it. Yes, again, patience, right deal, right price. And again, the business is no longer hemorrhaging cash. It's performing really well, which makes it even more attractive.

Anymore? Yes, Alex?

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Unidentified Analyst, [24]

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Two quick questions, please. Firstly, just to follow-on on the ERO. You, in the central costs, you say $12 million ERO annual support costs, but they are to be eliminated post disposal or the TSA period. I'm just wondering if you could say to us, what those kind of timeframes might be. And also, so for example, if you disposed it, do the costs dropout straight away, if there's no TSA period? Or if you got notice periods to give and so on. If there is some sort of working with the buyer, where you have to keep those for longer, what kind of length are we talking about? And therefore, at what point in the year do you get to it if a transaction hasn't closed and they start to appear in 2020? And then, it -- would there be redundancy cost associated with that as well? And then, the second question was just on your leveraging the network. You -- in the sort of new product scenario, and so on you have a lead. I know this is something like 2- to 4-year plan. I just wondered, if there had been any early indications of adoption or success in selling that.

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Mark R. Johnstone, BBA Aviation plc - Group Chief Executive & Director [25]

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Let me start with the second one. I think the just at a very high level, it is early days. I mean we sort of showed you more of this strategy in November. I think the continued market outperformance of 210 basis points is testament to what we're seeing there. And having guided that to increase to 250 in the medium term, that's where we're going to see this. You can't naturally outperform in perpetuity. That's a fact. So you're going to be doing something about it. We talked about the long tail, we talked about the pricing, we talked about nonfuel, we talked about leveraging the yield of real estate. All these things add up on that side. On ERO, I'll hand it over to David, if I may.

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David Crook, BBA Aviation plc - Group Finance Director & Director [26]

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Yes, Alex, in terms of ERO, those support costs will be a function of timing of disposal and the nature of any transition we service period [today]. Typically, that quite often ends up being a 3-, 6-months type period. It will be a function of who buys it, as well quite often. And you've got a strategic buyer, then they probably got a lot of background infrastructure ready to bolt a business like that into. If it's a financial buyer they're probably starting with a blank sheet of paper, unless they have a similar asset type in the portfolio already. And they typically want a little bit longer on the transitionary service period. So we do see, as I guided on flat costs, that continuing to be a support cost we have during 2019. And you really can then only what to take the cost out, when the buyer says, "Thank you very much. We're now stable. We can stand on our own 2 feet, and we're ready to go forward alone." At which point, all the support network start to get switched off. Clearly, we'll be planning on working ahead of time to be clear on our strategy of switch off and be ready to act quickly and effectively. But those actions could well see us taking those at the beginning of 2020 for example to your point. And when we do take those actions, it will depend exactly where the actions fall in terms of the cost takeout and clearly, we will guide as soon as that becomes clear as to any restructuring costs that we would incur as a result of actioning that $10 million of support costs.

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Mark R. Johnstone, BBA Aviation plc - Group Chief Executive & Director [27]

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I'm just conscious of time. So one more question. If you need to go, please feel free. But we'll wrap up after this one.

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Unidentified Analyst, [28]

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It's [Jack from Insurance Capital]. I just wanted to clarify the IFRS 16 impacts because your leverage will sort of be impacted by 1 point. In terms of the capital returns, does it now mean that sort of we'll move from 2.5 to 3.5x?

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Mark R. Johnstone, BBA Aviation plc - Group Chief Executive & Director [29]

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Sorry, in terms of capital?

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Unidentified Analyst, [30]

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Well, previously you've said that you'd return capital below 2.5x net of EBITDA, will that now mechanically move up to below 3.5x in your IFRS 16?

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David Crook, BBA Aviation plc - Group Finance Director & Director [31]

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Yes. Yes. Any change as we come to frame IFRS 16 will be mechanical, but we will be working in the same origins of cash flow out of that 2.5x lever. Those leases are there today, we fund them today, we have the free cash flows that make those lease rental payments. So I don't expect the IFRS 16 introduction to change anything in terms of the business model and the point at which, we would return value back to shareholders. And that would remain at 2.5x in pre-IFRS 16 money, and we'll be bridging for everybody post-IFRS 16, which is quite complex, as a standard, and showing you exactly how that sits in today's, well, 2018's lease accounting framework, and we would return to keep ourselves at 2.5x levered under that basis.

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Unidentified Analyst, [32]

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Okay. That is very helpful. And then, perhaps, one follow-up. If you were to dispose ERO, how do you think about making new acquisitions, versus develop your own that stock today?

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David Crook, BBA Aviation plc - Group Finance Director & Director [33]

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In terms of disposing of ERO, I don't think it changes anything in terms of the way we would look at our acquisition pipeline. Our acquisition pipeline is very focused on Signature and Ontic, as you've seen here in 2018. And I think, as I'd mentioned before in terms of disposing of the ERO and any proceeds coming into the group, we'll look at those as part of the pipeline we see, but clearly, if that pipeline is such that it would take us below 2.5x levered, then we would actually be within our capital allocation framework and return value to shareholders.

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Mark R. Johnstone, BBA Aviation plc - Group Chief Executive & Director [34]

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So happy to hang around and take any other questions, but I'm conscious you've got days ahead of you. So thank you for attending today, and thank you for your time. All the best for '19.