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Edited Transcript of BBA.L earnings conference call or presentation 5-Aug-19 7:30am GMT

Half Year 2019 BBA Aviation PLC Earnings Presentation

London Aug 12, 2019 (Thomson StreetEvents) -- Edited Transcript of BBA Aviation PLC earnings conference call or presentation Monday, August 5, 2019 at 7:30:00am 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 CEO & Director

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Conference Call Participants

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* Andrew Douglas

Jefferies LLC, Research Division - Equity 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 CEO & Director [1]

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So good morning, and welcome to BBA Aviation's 2019 Half Year Results. The usual health and safety, no fire alarms planned for this morning. The sign above the door shows the exit, I think straight out to the street if we need to, but no plans for that today.

As usual, I'm here with David Crook, the Finance Director. So before I move on to the results, let me first comment on our news of last week, which occurred after the half year. That was our proposed disposal of Ontic to CVC for $1.365 billion. We've always said Ontic is a great business with a strong brand and attractive returns. That said, the $1.365 billion consideration represents a compelling transaction multiple for Ontic. And so the proposed sale was unanimously approved by the Board of BBA Aviation. We expect to complete in early Q4, and that will allow for capital return to shareholders expected to be in the range of $750 million to $850 million. Clearly, we've also got an ongoing disposal process around ERO and further disposal proceeds here will provide an opportunity for further returns of capital in due course. This portfolio simplification will enhance our focus on our market-leading, high-quality Signature business.

And just a segue, I mean, due to the timing of the Ontic announcement, i.e., after the 30th of June, the results we're presenting today will still cover Ontic and indeed ERO as they were both part of the group in half 1. So the Ontic transaction aside, we've continued to deliver strong strategic progress for BBA Aviation. In the first 6 months of the year, we executed our growth strategy at Signature and indeed Ontic. Our investment thesis at Signature, which it will be going forward, is robust. Signature has a clear market leadership position in end markets with long-term structural growth drivers. Signature enjoys significant barriers to entry, which underpin our sustainable competitive advantage. And we have a low fixed cost base with flexible cash investment requirements. Further, we see multiple organic and inorganic acquisition opportunities at Signature. And overall, Signature has an attractive financial model, which delivers strong free cash flow and returns to shareholders.

I'll review some of the highlights of our strategic progress in the first half before I pass to David shortly to cover our financial performance. When David is done, I'll conclude with some further updates on the B&GA market, our operational excellence initiatives and a reminder of the key value drivers we spoke about at the Capital Markets Day, which will deliver sustainable growth.

So let's just take a look at our progress in the first half. The results for the first half were broadly in line with our expectations. We delivered a solid performance at Signature despite a flat B&GA market. We still outperformed that market by 70 basis points. Although the FAA movements were flat in half 1, as we anticipated, the volatility of this market, i.e., the month-on-month basis has presented some operational challenges. More on this later and the actions we've taken to deal with that.

Last year's acquisitions of EPIC and Firstmark are both delivering to plan. Ontic has delivered a strong half 1. We've seen both organic and inorganic growth, including the first full 6-month contribution from Firstmark as well as the license investments made in 2018. And overall, we've continued to deliver attractive free cash flow, $107 million in the first 6 months from Signature and Ontic. In fact, the vast majority of this is generated by Signature, as you will see in David's slide shortly.

As I've already mentioned, we're delighted with the compelling multiple achieved on our proposed sale of Ontic for $1.365 billion. But looking forward, we've continued to invest for the future in Signature. Part of the strategic rationale for the EPIC transaction was the ability to go to the market with a combined Signature and EPIC gallon, some 500 million gallons annually. And we've executed a highly successful fuel RFP, and we're very pleased with the outcome, which will save us on a full year basis $7 million year-over-year. We launched an operational excellence program, LEEP, Labor and Equipment Efficiency Project, in Q2, and I'll talk more about that in a little while. And I'm really pleased that we've increased the penetration of our EPIC fuel card within our Signature-owned network. This is one of the key reasons we acquired the business. Here, we've doubled penetration to almost 6%. And as you know, around 50% of our transactions are on credit cards, and we believe there is a big opportunity to save credit card fees year-over-year.

I spoke previously of an increased focus on people and culture. This is really important to me. Increased engagement drives safety, retention, but also customer service. All our bases have action plans they develop locally based on their local survey results. These are the bottom-up action plans we will put in place to deliver service across the board.

And finally, some of you may have seen the announcement about our strategic partnership with Uber Elevate. We're very excited by this. We will be the operational infrastructure partner as they progressively launch flying services ahead of the eVTOL service rollout from 2023. So you can see, we continue to build a strong platform for sustainable growth.

I'll now hand you over to David to walk you through the financial performance for the half year. David?

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

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Thanks, Mark, and good morning. Although BBA Aviation adopted the new lease accounting standard, IFRS 16, during the first half, my presentation will focus on comparable operating performance during the period. I will return to IFRS 16 later to set out the impact of the new accounting rules on financial performance, financial position and leverage.

Turning to Slide 4. As Mark said, the first half U.S. B&GA market was broadly flat as expected, and Signature FBO outperformed that market by some 70 basis points. Ontic had a strong first half with key contributions from new licenses acquired and the first full half from the Firstmark acquisition. Ontic continues to have a significant pipeline of license opportunities. And we saw further improvement in ERO as it remains classified as a discontinued operation. Overall, this has delivered operating profit growth of 5%, taking the group's total underlying operating profit to $190 million.

Now let's look at the segmental performances in more detail. Turning first to Slide 5, on Signature, which represents Signature FBO, TECHNICAir line maintenance and our EPIC businesses.

Turning to the charts. On the revenue chart on the top right of the slide, firstly you can see last year's revenue at $926 million, decreased from the effect of FX and fuel prices to a like-for-like number of $909 million. With EPIC contributing $230 million of revenue growth following its acquisition in the second half of last year, the organic revenue growth is modest. With Signature FBO growing $8 million, delivering 1% organic growth, which reflects the 70 basis points outperformance. Our line maintenance business, TECHNICAir, continues to face a challenging market with organic revenue decline of $5 million, impacted by the continued challenges in repair activity on key contracts and our rationalization of the TECHNICAir footprint.

The operating profit chart shows the development from a like-for-like $163 million to $160 million, with the EPIC acquisition adding $3 million of operating profit, in line with expectations. We've increased fuel card penetration across the Signature network. We saw modest organic decline in operating profit at Signature FBO and TECHNICAir. Signature FBO declined $3 million, reflecting higher operating costs in tighter and more volatile B&GA markets, which is making flexing of the cost base on a month-to-month basis challenging along with a reduction in heavy jet traffic across our network.

At TECHNICAir, operating profits were down $2 million on prior year. After absorbing footprint rationalization costs, this was broadly flat against the second half of last year. We have successfully completed our fuel RFP, which is set to achieve $7 million annualized cost savings from July this year. This overall performance has delivered Signature ROIC of 11.7%.

Now let's turn to Ontic on Slide 6. A strong first half for Ontic with an across-the-board contribution to growth from the 2018 licenses, Firstmark and organic business. Turning to the chart. On the top right-hand side chart, you can see the $21 million contribution from license acquisitions and Firstmark, which is delivering as expected. The organic revenue growth of $7 million reflects the demand across our GE license portfolios. Underlying operating profit improved by $8 million, with a $5 million contribution from Firstmark, supported by additional profit growth from the new licenses acquired and the organic business.

Overall, the development of Ontic's portfolio has seen operating margins grow to 26%, up some 20 basis points on the same period last year. And this has delivered Ontic ROIC of 15.4%. This performance is slightly ahead of expectations following a strong start for the year. So that's the business overview for Signature and Ontic.

Turning to discontinued operations on Slide 7. Yet again, we saw further improvement in ERO during the first half, with an increase in operating profit to $19 million on a discontinued operations basis. The table on the left side bridges the performance of ERO as it would have been without the reporting required for a discontinued operation. This results in underlying business performance of $7.5 million, reflecting moderate growth.

Completing the group's operating profit outcome on Slide 8 is central costs. These contain 2 elements: Underlying central costs and support costs associated with ERO. I'll return to the ERO support costs shortly as part of guidance for the full year. Underlying central costs were broadly flat in the first half at $15 million.

Now let's complete the income statement on Slide 9. Net interest has increased by $13 million to $40 million, due primarily to increasing interest rates and the refinancing of debt during 2018. The net interest costs reported in 2018 included a $5 million gain on a swap closeout required for that refinancing. The additional financing costs have impacted adjusted EPS, with it down 3% to $0.113. And the 5% 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 10. On Signature and Ontic operations, mostly noncash here with amortization of $48 million, plus some restructuring cost of $1 million. On the discontinued operations, the exceptional charges represent the costs associated with the ERO disposal process. In addition, we have taken a $32 million impairment against our ERO assets to reflect our best estimate of the fair value less cost to sell at circa $240 million. And completing the exceptional items, we have established provisions of $10 million, primarily related to the disposal of our ASIG business.

Now let's complete the overall picture with cash flow on Slide 11. The group delivered free cash flow of $129 million for the first half, that's up 15% on the prior year. Looking at the table, we've distinguished between Signature as a retained group, Ontic and ERO discontinued operations. This highlights that Signature as a retained group delivered substantial proportion of the group's distributable cash flows during the first half, and it is structured to support flexible deployments of CapEx and the longer-term debt structure that better reflects the long-term leases that Signature holds. Along with a favorable cash tax position, this all goes to support ongoing bolt-on acquisitions and a progressive shareholder distributions policy. Ontic continues to generate cash flows to support ongoing license investment and ERO cash flows reflect the partial recovery of the working capital outflows we saw in 2018 as a result of OEM supply chain issues.

Let's look at the impact of IFRS 16 leases on Slide 12. First of all, it is worth commenting that the new standard has no impact on our free cash flow generation. It has no impact on our business prospects. Our right to operate leases in Signature are the cornerstone of value creation for Signature FBO. There's no impact on our ability to deliver strategy nor will it impact our liquidity as our debt covenants will continue to be measured and tested on historical accounting basis. These factors all support the group's maintenance of a progressive dividend policy. The results of lease rental charges being replaced by asset depreciation and interest expense on the capitalized leases is a $27 million increase in underlying operating profits, whilst interest charges increased by $36 million. This $9 million impact to PBT has a [0.6 cents] impact on reported EPS. That impact on reported EPS will neutralize over the term of the individual leases.

So turning to net debt and leverage on Slide 13. The leases are now recognized on balance sheet at the discounted value of the future lease payments. This results in reported net debt increasing by $1.2 billion. But as I mentioned earlier, nothing changes with regard to our bank commitments, our covenants, which will continue to be monitored and tested on historical accounting rules.

On leverage, the group finished the half at 2.8x levered on a covenant basis, flat with the year-end position after funding of progressive dividend payment and further Ontic license investments. We have reported adjusted performance measures to reconcile post IFRS 16 financial performance and position with pre IFRS 16 as we have not restated our comparative periods.

Looking at the full year 2019 for a few technical guidance items on Slide 14. We expect underlying central cost to be broadly flat at $28 million for the year. In addition, the cost of supporting ERO, we expect to be $11 million for the year. The developments of these costs will clearly be dependent on the timing of the disposal and the requirement for a transitionary service period from the buyer. The support costs associated with Ontic amount to $4 million, and these services will be paid for by the buyer subject to negotiation of the TSA, and we will then work to remove those costs once the completion of the TSA period has occurred. Therefore, we do not expect these costs to impact the group going forward. These costs have been charged against Ontic's operating profit in the first half of 2019. Group CapEx for Signature and Ontic in 2019 is now expected to be in the region of $105 million to $115 million. This continues to reflect our significant investment in Atlanta, which is planned for 2019, whilst across other FBO projects we continue to monitor this carefully in what is a volatile B&GA market. The CapEx for Ontic was minimal at $1 million in the first half. This CapEx guidance excludes the investment in Ontic licenses for which we invested $24 million during the first half.

On working capital, we expect a onetime outflow of $60 million in Signature from the successful implementation of our fuel RFP, which is set to deliver $7 million of fuel cost savings annually from July this year. The working capital impact arises due to the agreed credit terms with refiners being much shorter than those previously negotiated with the middle market fuel suppliers. The underlying effective tax rate for 2019 is expected to be stable at 21% and the cash tax rate remains guided at 14%.

Interest expense, excluding IFRS 16, is still expected to be $75 million and cash interest, excluding IFRS 16, is also expected to continue to be $75 million.

So in summary, this group, and more specifically Signature, 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 ongoing returns to shareholders as we target the maintenance of our agreed leverage range at a minimum of 2.5x.

And that's a great note on which to hand back to Mark.

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

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So thank you, David. Let me just start again with Ontic before I sort of move into a deeper look at what's going on in Signature. So as I said, it's a great business, it's a strong brand and attractive returns. The price of $1.365 billion represents a compelling transaction multiple. On a pro forma basis, if you adjust for a full year of Firstmark and the licenses in 2018, the trailing EBITDA multiple is around 17x, very compelling relative to where we trade at. As I said earlier, plans to complete in Q4 and we'll then look to return capital to shareholders between $750 million and $850 million. We will start now consulting with our shareholders as to the best way to structure this as there are many different views and different options. And as I said earlier, we clearly have the ERO process that can provide further capital for returns in due course.

So after all of these events, we will focus on Signature. It's a market leading brand, very cash generative with significant opportunities for growth. So I want to spend a bit of time looking at Signature and discussing our strong platform for sustainable growth. I want to cover the B&GA market as we usually do, I want to pick up on some operational excellence initiatives and I want to talk about our growth strategy and a refresh back to the Capital Markets Day, which seems years ago, but it was actually only 8 months ago, last November. Lots going on since. And then lastly, I'd like to close on the outlook.

So taking a look at the market. When we spoke in March, we said we expected the B&GA market, as measured by FAA movements, to be flat in 2019. That's pretty much in line with what we've seen with growth of only 0.3% in the 6 months year-to-date. I think global market uncertainties continue, and the segmental trends we identified in March have also continued. And I'll show you that chart on the next slide. An additional factor we're seeing at the moment has contributed to our shortfall on the historic levels of outperformance, we've delivered 70 versus 200 in the past, is the reduced activity in heavy aircraft flying. And this is across 2 notable segments. The ultra-high net worth individuals/heads of state that are traveling less to the U.S., and therefore less within the U.S., and we're also actually seeing less U.S. government flying across our bases within the U.S. These customer groups purchase large uplifts and a typical transaction is over 5,000 gallons, which is much, much larger than we would see on an ordinary business jet. So when they're flying less in the U.S. and to and from the U.S., we see that impact dropping through. That's affected us disproportionately because we've got a great -- we have a greater weighting of locations where the heavy jets travel to, i.e., the major cities. And don't -- recall, we're in 32 of the top 50 city [players] within the U.S.

Our last market observation is that the long tail, and this is a customer grouping we called out at the Capital Markets Day as a target for growth, we've seen in the tighter markets a shift to more value buying behaviors. So that really means that we are winning share. We're just not winning it as quick as we had hoped at this point in time.

Let's take a deeper look at the segmental data. So the color chart. We showed you this before. So let me just talk you through the key highlights. So I think FAA and Signature market gallons are the purple and blue lines, the sort of slightly thicker ones in the middle. Red, GDP is an interesting one. If you look, it has been climbing for a long time. Back end of '18, it started to fall. We just saw the latest Q2 GDP first estimate [adding] 2.1% in the U.S. So that is coming down gradually. The yellow line, which is Part 91 corporates is broadly tracking the FAA patterns. And then the green one, which is the Part 135 charter, this is the discretionary travel we've spoken about previously, again markedly down year-over-year. I always like to finish on a positive. So picking up on the black line, the fractionals. These would be the NetJets [of] the like and they are growing strongly, which is great to see.

Additionally, I think another observation that you don't necessarily see in this data is we've seen greater month-on-month volatility of flying in 2019 as reported by the FAA. We've seen swings of plus or minus 4%. April was up 2x, June was down 2x, some big swings. And this makes our continued focus on cost management all the more important in our business.

This month-on-month volatility makes managing the operational cost [of the side] less than straightforward. But we've got some great examples of actively managing the cost base over the last 9 months. The fuel RFP, David and I have both spoken about, the plus $7 million annualized. Now some of that will go to offset headwinds in labor costs. In the U.S., hourly labor costs are increasing by 3.1% a year at the moment. It's quite, quite high. We've also looked at technology. Not only does our Signet 2.0 new FBO management system allows to improve the customer experience, it will help us remove paper from the back-office. A simple example of this today is, if you got a fueling event, the line tech gets a piece of paper, writes down the fuel reading of the truck at the end of the event, takes that piece of paper back to the FBO, writes it on the daily log sheet. Then somebody takes the daily log sheet and manually updates it into the systems. I mean, this is sort of far from the modern technology and the modern age. As and when -- in the second half of this year, we introduced a new handheld POS system, this will all be automated. So it is a good example of how we can improve labor efficiency and doing the right things to serve the customer safely rather than just pushing paper around.

In Q2, we launched a new operational excellence program called LEEP, Labor and Equipment Efficiency Program, to better manage our 5,000 employees and indeed our 6,000 pieces of ground service equipment. We are good, but there is always room to improve.

So taking labor first. I mentioned a moment ago that flying activity versus the prior year was up 2.2% in April and then down 2.4% in June. In July, based on our gallon reports internally, we see it bouncing back the other way again, sort of being up 2% in July. So this volatility on a 4% swing, it's quite hard to manage your labor against that. And it's particularly hard to manage labor in the short-term when record -- when employment levels are record high. That means we have to think very hard before adjusting labor. If we adjust labor, we take it out, it takes us between 4 to 8 weeks to hire that labor back on for the simple reason that you have to go through drug screening and criminal records checks. You're getting a secure pass at an airport. These things aren't given away easily. So we have to think very, very hard about adjusting our labor.

And looking at equipment, yes, we've got over 6,000 pieces of equipment, but it's not always in the right locations. On my regular base tours, I always find that some bases with surplus, they are hoarders. They've got lines of these things that you'd like to reallocate. And you go to other locations and they just tell you, we haven't got enough stuff, we haven't got enough stuff. I think the point here is, it's not about spending a huge amount of more money, it's about allocating the resources better across the network such that they are appropriately dispersed. So look, overall, lots of really good work going on, on the cost side, which we continue to be absolutely focused on.

Alongside that, we are maintaining our disciplined approach to capital investment as we continue to invest in and fortify our market-leading Signature network. We've commenced preparatory work at our new Atlanta FBO and are planning to break ground in late Q3, that's the artist's impression on the top right corner. Yes, it's a key sole source location where we'll also be launching the ELITE program.

In the second half of the year, we will -- plan to invest in the second half of the equity balance in the St. Thomas Jet Center to take full ownership as planned. And we're also making good progress to launch ELITE in the U.S. You may recall at the Capital Markets Day in November, we gave you a 2- to 5-year time line to do this.

So having spoken about both the Caribbean and ELITE in my last 2 points, I'm delighted to announce this morning that late Friday we signed contracts to acquire IAM Holdings Limited, adding 5 sole source locations to our Caribbean network. They are in Barbados, Jamaica, Grenada and Tortola in the BVI. The fifth, in St. Lucia, will be opening in Q4 this year when construction completes. So as well as adding 5 high-quality FBOs, the company offers flight planning services across the Caribbean and VVIP services in Barbados and Grenada. So these 2 will be great additions to our LEEP program. Think of British Airways flying out the U.K. being met in Barbados by a LEEP. It's the other end of our Gatwick connection, for example. It's a great opportunity.

Now it's one thing investing in infrastructure, but it's equally critical that we continue to invest in our people. Thus, our continued actions for employee and customer engagement are equally fundamental to building a sustainable long-term future in our business. And finally, as we look to future technologies and travel solutions in the aviation space through our partnership with Uber Elevate, we are very excited to be at the forefront of this industry development. This continued investment in our future is enabled by the strong free cash flow generation from our businesses. In half 1, that was nearly $107 million from Signature and Ontic, but the vast majority of that coming from Signature. We will continue to invest in the growth and fortification of our network within the parameters of our capital allocation policy.

So we genuinely are, we are Signature. And it's worth a reminder of the initiatives we set out at the Capital Markets Day that will leverage our market-leading FBO network to deliver an increased market outperformance of 250 basis points over the medium term. You'll see here our familiar 4-pillar flight path. There is no change to guidance here. This 250-basis point outperformance remains our medium-term target.

This slide reminds you of some of the initiatives we'll deliver to achieve that target. In the second column, you'll see pricing optimization. This is bringing data and technology to making smarter decisions. We also made significant investments in 2018 with the acquisition of EPIC. And as we said previously, 2019 is the year to focus on delivering the business cases. And I can tell you, we are. So in the third column, you'll see the EPIC fuel card. I'm pleased to report that we almost doubled penetration to 6% of the card transactions. And we believe that deeper penetration of the branded fuel card within our Signature network represents a $4 million to $8 million underlying [OP] opportunity over time. And in the fourth column, you can see the introduction of new services. I've spoken just about Uber ELITE and the growth of -- sorry, Uber Elevate and the growth of Signature ELITE, now given a boost by the acquisitions in Barbados and Grenada I've just announced this morning. So taken all together, these will contribute to our increased outperformance target over the medium term.

And so I'll move to the outlook. For 2019, Signature is expected to deliver full year outperformance, in line with half 1. The proposed Ontic disposal is expected to complete in Q4 after which we'll start returns to shareholders. And as I mentioned, the ERO's disposal process is ongoing. It's the right deal at the right time, but we're hoping to complete that one shortly. The retained Signature business will remain focused on high value, return on invested capital investments and continues to be and will continue to be strongly cash generative. And in Signature, our continued investments, some of which I've talked about today will underpin growth and market outperformance in our market-leading FBO network.

So we've got lots to do, but it's a very exciting time as we transition from an aviation portfolio to a Signature-focused business going forward. So thank you for your time. I'll happily open this up to questions.

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Questions and Answers

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

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Rishika?

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Rishika Dipak Savjani, Barclays Bank PLC, Research Division - Assistant VP [2]

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It is Rishika Savjani from Barclays. And I will start with 3 questions, if I can. The first one on the fuel RFP. Can you just maybe talk about the reasons why you've decided to keep the cost savings to offset against other items rather than reinvest it back into the customer? I think you said that the long tail are becoming more value focused. So did you think about the idea of maybe investing more in price to stimulate volumes within that long tail as a result those fuel savings?

And then second question, just on the CapEx guidance, the lowering that you've guided to there, can you just maybe confirm if that's a step down in CapEx or just a timing shift into next year, specifically with the Atlanta FBO? And then maybe just some comments around the flexibility that you think you have around CapEx in this lower volume environment?

And then finally, just on non-U. S. acquisitions and growth. I think, obviously, you mentioned the Caribbean FBOs, I think I saw also some additions in Italy recently. So maybe you can just talk about your international strategy? That would be very interesting.

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

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Sure. Well, let me just take the RFP one at the beginning. I think, as with any business, you're constantly striving to drive cost efficiency through your business. But equally, with a business that employs 5,000 people, you've always got employee headwind. So whether we allocate the fuel RFP savings to one particular area or other, it's really a pool -- [I've described] the savings against which we deliver that. You talked about, shouldn't we [have] invested it back into price initiatives? We're doing that anyway. There's nothing we're not doing on the commercial initiatives. And actually, the underlying commercial initiatives are performing very strongly year-over-year. Where we're seeing a shortfall on the outperformance is really on some of the market shortfall and also some of the areas around the heavy jets and others that pick up there.

Let me just take the one on growth and then I'll hand to David on the CapEx point. I mean, look, we continue to look for growth [adds] to our network and makes rational decisions from a customer perspective. The announcement in Italy was more about handling agents. So we weren't really setting up an FBO per se. We were just adding locations where we could handle traffic. It's a very asset-light way of doing it within Italy, it's the [politest] way to do it. And outside of Italy, we continue to review opportunities on a case-by-case basis. It just so happens that the Caribbean one was the one that actually we've been tracking for, gosh, nearly 3 years, and we finally got the confidence of the sellers that we would be a good custodian. And actually, it came on the back of St. Thomas Jet Center. Once those owners had been through that and realized that Signature is a good custodian for these businesses going forward, it looks after the employees, for example, they were happier to sell to us at that point in time.

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David Crook, BBA Aviation plc - Group Finance Director & Director [4]

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Yes. On the CapEx, Rishika, that's flexing. So you'll expect to some balancing of that to 2020. Again, it reminds us that we have that capacity to work on where we do invest and when we invest. We clearly will not cut out any core CapEx that's safety driven, et cetera, in terms of [code] conditions, but we can work to look at market positions and where we should deploy capital and [hedge] cash within any given period. So it's flexing its full effect and something Mark and I will continue to monitor and make appropriate capital decisions relative to market.

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Mark R. Johnstone, BBA Aviation plc - Group CEO & Director [5]

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Okay. Sam?

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Samuel James Bland, JP Morgan Chase & Co, Research Division - Research Analyst [6]

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Sam Bland, JPMorgan. Could you just talk about where the ERO process is and the disposal process there, bearing in mind the impairment announced this morning. And the second one is, I remember, last year, there was some -- obviously, the IT costs. Can you just talk about: A, I guess, why you aren't getting the benefits from them coming through. And B, also how the -- maybe the costs are winding down following the initial investment against your plan?

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Mark R. Johnstone, BBA Aviation plc - Group CEO & Director [7]

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I'll take the ERO one and then I'll ask David to pick up on IT. In terms of ERO, I've been very consistent -- consistently boring in a way, saying it's the right deal at the right price. And let's not lose sight of the fact the business is performing very strongly, which is always a great position to be. We've always said that we have to get through a number of approvals to get this transaction through. That is still very much the case. We are much closer than we were before, but we'll continue to work diligently through that. I think I would compare and contrast with the Ontic transaction we announced -- didn't require such a high level of approvals, hence it got done very quickly, whereas this one is taking just a little bit longer as we work our way through that. It doesn't unduly worry me. It's really just a process to go through. The frustration is this is a process we don't control. The counterparties will act and so move forward at their own pace on this one.

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David Crook, BBA Aviation plc - Group Finance Director & Director [8]

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Yes. On the IT side, I think, as you heard last year too, 2 elements to that. There was the pricing model and then the electronic point-of-sale, and pricing model is active and in full effect and is bringing the benefits we expected from that. Clearly, that's sitting against a broader market, which has some aspects of headwinds as we talked about the heavy jet traffic, et cetera. So there's a [voluming] play against those initiatives. But if you look underneath that, the initiatives are really coming through and (inaudible) of doing what we expected it to do.

On the electronic point-of-sale side, that's taking longer than we anticipated. So we are still rolling out electronic point-of-sale. Remember, this is going to every base right across the U.S. network and then to a good proportion of Europe as well. We will likely be continuing to run that during the course of this calendar year. We have got an element of savings. We guided to 9 net-net over the course of the year. You're probably looking at a couple of million coming through as we've got that slower trajectory on the electronic point-of-sale. So it's going to take '19 into '20 before we can really work ourselves through a full electronic point-of-sale implementation.

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Mark R. Johnstone, BBA Aviation plc - Group CEO & Director [9]

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And just on the EPOS here, we're looking at 139 locations in the U.S. We're around about 110 at the half year. We're about 15 to 19 short as we stand here today, but due to be closed out in the next 2 weeks, then we'll have everything on the system at that point in time. So it's a little bit late -- not dramatically, but it takes time rolling it out, learning the nuances of every base and how they operate. Andy?

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Andrew Douglas, Jefferies LLC, Research Division - Equity Analyst [10]

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It's Andrew Douglas from Jefferies. Three short questions, hopefully. The EPIC card usage, I think you're running at 5% or 6%. I think at the Capital Markets Day you alluded to the fact that could be kind of in the 20s. Is that still a kind of achievable number? And are you kind of happy with how that's progressed? Looks like it's a decent progress in the first half.

With respect to rolling out labor efficiency benchmarking in the statement, can you just give us an idea of kind of how long that will take and whether that involves any capital ahead of any benefits coming through?

And clearly, Uber Elevate is kind of massively exciting. It's going to be huge. Can you give us an idea, roughly, kind of any thoughts of how that could impact your group over the medium term. I'm assuming it's kind of again limited capital requirement, but if you can just confirm that, that would be perfect.

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Mark R. Johnstone, BBA Aviation plc - Group CEO & Director [11]

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Yes. So on EPIC, yes, we did describe 25% target. I think we've moved from roughly 2% to about 6% in pretty short order. We -- and that 25% was based on the penetration with EPIC's own FBOs rather than ours. We would like to get to that 25%. It's going to take a couple of years to get, I think, to be fair. So still pushing on with that. In terms of labor, let me just describe a typical scenario. If you're running an FBO, you tend to get planes turning up in the morning and then leaving in the afternoon. Yet you're providing labor coverage throughout the day. So it's how do you manage through the peaks and troughs? And you go beyond that -- many of our leases require us to work 24/7. Traditionally, we've always done that with actually people in situ, 24/7. Actually, it doesn't need that, just needs somebody on call. So it's really trying to match supply and demand in a smarter way. Instead of starting all the shifts at sort of 6:00 am in the morning, why don't you stagger the shifts every hour to provide your coverage through the day. So it's simple labor planning, which both myself and Tony Lefebvre having run some commercial ground handling businesses is some kind of second nature to us, hasn't necessarily been deployed. In terms of timing, we are reasonably well advanced. I expect to sort of really see the first major savings coming through beginning of '19 -- sorry, '20 I would get at this stage, should be some this year, but we've got some work to get through. In terms of CapEx on that, nothing. So it's really about using data, manipulating it, making sure we got us a [rostering] department working.

And then lastly, on Uber. I mean, just to be clear on Uber, we're described as the infrastructure partner. That means they're coming to us because we know how to run an FBO. How do you get in the old days fuel, but in the new days, electricity. I mean, help designing the aircraft in terms of access points, so you're taking trays of batteries out and replacing them where you're just plugging the things in. So really, what we're providing is labor and ground support. We are not investing in new facilities or building them on tops of buildings, et cetera. It's really a way to expand, I guess, a network in a way on an asset-light basis, again using our skills and expertise. For example, in New York, we're operating -- or Uber are operating Uber Copter today, which flies from Lower Manhattan down to JFK and LaGuardia. We provide the labor. So we're on the ground, advising labor safety, everything that goes with that. Operating out of the Manhattan Heliport and actually landing in one of our competitor's FBOs bizarrely. But it just so happens as our employees put in their Uber T-shirts at that point in time. So they came to us because we're the biggest brand, we're the experts in the industry. And actually, Tony Lefebvre, my COO, sits on the GAMA, which is the General Aviation Manufacturers Association. He head -- he's the Chair of the Infrastructure Committee in the U.S. So we're positioning our employees in the right places to make sure these conversations are held with us. Gerald?

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Gerald Nicholas Khoo, Liberum Capital Limited, Research Division - Transport Analyst [12]

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Gerald Khoo from Liberum. A few from me. Starting with ERO, you talked about needing approvals, are those from OEMs or someone else?

On CapEx, can you give a rough indication as to I know -- I suspect it will vary year-to-year, but can you give a rough indication of the split between, should we say, mandatory and discretionary CapEx? How much can you shift according -- into another year or abandon altogether according to need?

Thirdly, on the Caribbean acquisitions, you talked about being viewed as a good custodian. Who are the vendors in this case if they're interested in your values as future employers?

And finally, can you talk through the ASIG provision? How has that come about? On what time line should we expect that to turn into cash? And what is the risk of further such provisions, please?

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Mark R. Johnstone, BBA Aviation plc - Group CEO & Director [13]

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Thanks, Gerald. Let me take the ERO and the Caribbean, and then I'll pass to David on the CapEx and the ASIG. So on the ERO, the approvals are primarily twofold. One is the OEMs because the contracts state that they have some -- depending on which contract and which OEM they have different criteria around approving a change of control. And the second one is the regulatory and competition authorities. We will have to make an HSR filing due to the size of the transaction and go through sort of normal due process on that. Short term on that, it can be cleared in 30 days and if it goes to a second request, it could be 4 to 6 or 8 months. We expect it to go through quicker.

On the Caribbean, who are the vendors? Private owners. A couple of entrepreneurs, I think, is the best way to describe it that set it up over time and have built the base -- built the network from starting in Barbados to now 4 islands, plus St. Lucia coming on, on 5. So it's really getting to that next stage. They are pretty -- they'll kick me for saying this, been like me, maturing in age and looking to move on and look after the future of their business and make sure the employees, et cetera, are in safe hands and we continue to grow. David?

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David Crook, BBA Aviation plc - Group Finance Director & Director [14]

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Yes, I mean, CapEx, we typically look at up to half of our CapEx being flexible. That's sitting within the lease frameworks in which we operate and our capacity to look at where we deploy that over a period. We'll typically agree to deploy it, but over a number of years and build that flexibility into the original arrangement. And so it allows us to manage positions from year-to-year and obviously react should we see anything different in the market in a given year.

In terms of the ASIG provisions, this essentially is related to usual reps and warranties you would get around a disposal of a business and some additional provisions in respect of some labor matters that have only come to light subsequent to disposal. So it was not known at the time of disposal and those relate to matters in California that we need to address and naturally to do the right thing and pick those up and work those through. Whether they'll actually cash out the provisions made will be an outcome of due process, but we've looked to make an appropriate provision for the matters we see in front of us. Clearly, that reflects against the business that we sold in ASIG a couple of years ago at $202 million.

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Mark R. Johnstone, BBA Aviation plc - Group CEO & Director [15]

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Which I would add was an extremely attractive price at that time. Any more? Seems not. Well, thank you for your questions. Thanks for attending. Have another coffee afterward. But see you again in 6 months. Thank you all.

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David Crook, BBA Aviation plc - Group Finance Director & Director [16]

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Thank you.