Full Year 2018 John Menzies PLC Earnings Presentation
Edinburgh Oct 8, 2019 (Thomson StreetEvents) -- Edited Transcript of John Menzies PLC earnings conference call or presentation Tuesday, March 12, 2019 at 10:59:00am GMT
TEXT version of Transcript
* Giles Wilson
John Menzies plc - CEO, CFO & Executive Director
* John F. A. Geddes
John Menzies plc - Corporate Affairs Director, Group Company Secretary & Executive Director
John F. A. Geddes, John Menzies plc - Corporate Affairs Director, Group Company Secretary & Executive Director 
Good morning, ladies and gentlemen, and welcome to John Menzies plc Full Results Presentation. For those of you who don't know me, I'm John Geddes, Corporate Affairs Director.
As you have seen this morning, we made a senior level change with Forsyth Black stepping down after 3 years at the helm of the Aviation business. And Forsyth has a strong track record of building businesses and long-term planning, and we thank him for the contribution he has made to the business. The Board and I wish management to be more focused on growing the underlying business and prioritizing organic growth in what is a very attractive, growing market.
In the interim, Giles Wilson, who you all -- who many of you know very well, will assume the position of interim Chief Executive. Giles has in-depth knowledge having held a number of senior finance and operational roles over the last 8 years and will be very well known to the business and the senior team.
David Trollope, who's also here today, to my right, currently our Group Financial Controller. David will step into the role of interim CFO after 5 years as Group Financial Controller. So following this, a full internal and external structure -- sorry, will take place, and that will start tomorrow.
So moving on. 2018 has been a momentous year for John Menzies plc. We've completed our strategic alignment with the sale of the distribution business. And that's something since 1833, we no longer now have anything to do with newspapers, magazines or books. So quite a change.
We started on this journey in 2016. During which time, we have transformed the business through the acquisition and integration of ASIG, the restructure of our U.K. defined benefits pension scheme. And finally, the successful completion of the sale of Menzies Distribution. We are now extremely well placed to look forward as a pure-play aviation services business and to take advantage of the very attractive global market and growth dynamics of our industry.
So if I move on to the highlights of 2018, a pure-play Aviation business has been created. Revenue, profit and EPS have increased. We have had an excellent year renewing contracts and, importantly, increasing the overall margin. We have delivered our full year expectations, which we believe to be a resilient performance given a number of headwinds experienced during the year.
Before I review our investment case, I wanted to highlight what we believe to be a robust and diversified business model. Diversity provides us with stability, and as you can see, we do not have an overreliance on any particular geography, product or customer. The nature of our business also provides flexibility with a high proportion of our cost base being variable, which allows us to respond quickly to changing markets. Underpinning all of this is our internal governance, which I believe is vitally important. Strong capital and contracting discipline is vital as we look to match risk and reward in everything that we do.
So moving on to our investment case. We believe that we have very attractive dynamics, which will allow us to deliver strong underlying growth and therefore shareholder value. Looking in more detail, we have excellent market dynamics. We operate in a $60 billion market, with the portion that we can play in grows every year. We benefit from strong passenger growth, but more importantly, we're in the market where the aircraft fleet is growing rapidly. For us, each new aircraft is a fueling or ground handling opportunity. As the majority of these aircraft are narrow-bodied, this represents multiple turnarounds per day. So that is our market, but how are we going to take advantage of this?
Primarily, we will target organic growth. We'll look to put more customers at existing and new airports. We'll increase our product density throughout our network. We will participate in the continuing outsourcing trend as airlines continue to address our cost base and outsource to specialists, fully invested handlers, such as Menzies. We will also look to leverage our position in the into-plane fueling market as oil majors continue to retrench back to their refineries and significant outsourcing opportunities are starting to emerge.
Acquisitive growth will also be a feature, but we will be very selective. Highly synergistic opportunities will be prioritized. We will continue to look at smaller bolt-on acquisitions that typically increase density as existing stations as we've done very successfully over the last 2 to 3 years. But above all, every deal must be margin-accretive.
Now looking more closely at how we will create shareholder value. We have a strong track record for delivery. EPS at the end of 2018 has grown by a CAGR of over 50% since 2015. In light of this, we set ourselves some targets back in August that you may remember when we first became an aviation pure-play.
Going forward, our targets are that revenue will increase by 8% per annum, EPS by 10%. We will look to keep dividend cover somewhere between 2 and 3x. And most importantly, we'll look to keep net debt-to-EBITDA in a range of 1.5 to 2x. Overall, we really believe that it's a strong investment case and we look forward to the future with a degree of confidence.
I'll now hand you over to Giles who'll take you through the rest of the presentation.
Giles Wilson, John Menzies plc - CEO, CFO & Executive Director 
Thank you, John. Good morning, ladies and gentlemen. So before I take you through the financials, followed by the operational review and our outlook, I just want to say how extremely proud I am today to be taking on the interim position of CEO and will give this my absolute full commitment. As John has already said, I've been with Menzies for 8 years, both in finance and operational roles, and I'm really excited by the opportunity that this now presents me.
So starting with our financial highlights. Before I take you through the detail, to summarize, we are pleased with the 2018 performance, showing a resilient set of results, which were in line with our expectations. Throughout these slides, I will refer to growth rates on a constant currency basis and focus on our continuing operations to give a comparable underlying performance of the business year-on-year. Distribution and its related sell costs are now included in discontinued parts of our financial statements.
This chart sets out our overall financial performance, key metrics; and versus 2017, it's really pleasing to see that the key operating performance metrics have improved year-on-year. Revenue is up to GBP 1.3 billion, 4% on a constant currency basis. Underlying operating profit at GBP 55.1 million is up 8%. Underlying EPS of 37.6p is up 20%. And finally, our net debt decreased by 7% to just under GBP 200 million. So overall, 2018 full year results are delivered in line with expectations and, in light of the tough 2018 trading conditions, represents a very resilient performance.
So now turning to our 2018 full year results overview. The highlights are the underlying operating profit grows year-on-year by 8% and EPS by 20% on a constant currency basis. The performance is driven through strong results in our EMEA, Rest of World and AMI regions, offset by the challenging market conditions in Americas; more specifically, the U.S. and Canadian labor markets.
So if you now focus on the table on the left. Versus 2017, our group revenue grows by 4%, around GBP 45 million on a constant currency basis. Group underlying operating profit has increased from GBP 53.1 million to GBP 57.4 million on a constant currency basis, which has led to underlying profit before tax up 10%. Our net debt dropped by GBP 15 million year-on-year, with our net debt-to-EBITDA at 2.4x, broadly in line with expectations and staying within our covenant of 3x.
The largest change year-on-year outside our normal cash flows was the sale of Distribution, generating a cash inflow, which was used to pay down debt and make significant payments to our U.K. pension fund. We now do not benefit from having these distribution earnings in our net debt-to-EBITDA calculation. We also had quite a significant year-on-year FX hit of GBP 9 million on retranslating our U.S. term loan, which has then led to the net debt-over-EBITDA being slightly above where we hoped. Our target still remains to be between 1.5 to 2x over the medium to longer term.
Our exceptional charge in relation to our continuing operations has reduced significantly on 2017, representing the reduction in the ASIG integration costs now that integration is complete. Our effective tax rate of 28% for the continuing group is an improvement of -- by 7% on 2017 on a like-for-like basis, and going forward, we expect the effective tax rate to be between 28% and 30%.
And finally, as we communicated at the time of the announcement of the sale of Menzies Distribution, I'm also pleased to confirm that the full year dividend will remain unchanged from 2017 even after accounting for the reduced profits following the Menzies Distribution disposal. This reflects the Board's confidence in the results and our outlook for the group.
So turning to a bit more of a detail in our segmental performance. The key highlights show that we continue to grow in terms of top line and bottom line and with total margin as a pure-play aviation service but did -- continuing its upward trajectory to 4.4% on a constant currency basis. It is worth noting we are now comparing margin of the overall group as the corporate costs are only there to support the aviation pure-play. The underlying operating profit increase reflects the continued improvement in underlying business, the additional month of ASIG and the related synergies, offset by the previously advised challenges in the U.S. labor market and the loss of the larger cargo contracts at the end of 2017.
The revenue for all regions and businesses show a year-on-year growth. And in terms of underlying operating profit, all segments with the exception of the Americas has grown. As highlighted at the half year, the Americas has been impacted by the issues of U.S. labor turnover, driving increased overtime and training costs. And in addition, during the second half of the year, we lost 2 exclusive licenses in the Dominican Republic and Panama, further reducing profits. The team in America have worked really hard in 2018, specifically in the second half, to deliver price increases to cover off increases to labor rates, and these are now fully reflected in our 2018 exit rate and give us confidence as we go into 2019.
Following the strong first half performance of EMEA, the region has continued its growth -- return to growth, with operating profit up 27% on 2017, driven predominantly by strong European performance, especially in Scandinavia, the impact of ASIG synergies at Heathrow, offset by the continued challenges at some of our regional airports in the U.K.
It should be noted that neither EMEA nor the group operating profit include the financial results for airline services due to the fact the business was held at arm's length during the CMA process, and hence, the results have not been consolidated.
As highlighted at our interim results, we are particularly pleased with the Rest of World performance, again showing a year-on-year increase, and this is even after accounting for the loss of the large cargo contracts in the region at the back end of 2017. The regional team have worked really hard to win new business to fill that space.
Finally, our cargo forwarding business, AMI, has shown a really strong growth in profit, up GBP 2 million year-on-year, recognizing good market conditions and a reenergized business. Corporate, on a like-for-like basis, remains broadly flat. So overall, we see a positive movement in revenue, operating profit and margin.
Turning to some more detail on our underlying operating profit. You can see from this chart the underlying business has performed well, with good ground, fuel and cargo handling volumes, a strong focus on margin improvement and cost control and the realization of ASIG synergies, offset by the U.S. labor challenges, has delivered a GBP 1.3 million increase in our underlying business. This, added to our AMI business, which has delivered a record performance, delivers a total underlying business performance of GBP 3.4 million year-on-year. The GBP 1.6 million negative impact from lost licenses relate to the 2 licenses in the Dominican Republic and Panama in the second half as well as the sale of our Hyderabad cargo joint venture to our partners who exercised their 10-year call option. Those losses are built into our 2019 forecast.
On a more positive note, as we look into 2019, we see flights return to the exclusive license territory of St Maarten, following the devastation caused by Hurricane Irma in 2017. Our net contract gains have added some slight upside. And finally, the GBP 2.3 million new business and M&A primarily relates to the full year effect of ASIG and the other bolt-ons we did during 2017. FX is a negative GBP 2.3 million year-on-year with the majority of this in the first half as we saw sterling weaken in the second half of the year. So overall, a solid performance in tough trading conditions to deliver an operating profit of GBP 55.1 million.
So turning to the exceptionals and the Menzies Distribution discontinued business. The top chart relates to the continuing business, and therefore the exceptional items only related to the Aviation business. We have seen exceptional items year-on-year reduced significantly, reflecting the fact that 2017 included the majority of the ASIG integration costs.
M&A costs relate to the acquisition of airline services, the related CMA costs and other M&A projects that we've been working on. The warranty items are for the additional ASIG claims that relate to issues prior to our ownership. Our strong belief is, these will be recoverable through the mechanisms in the share purchase agreement. However, accounting standards requires us to recognize these liabilities and not the recoverable asset from the previous owner.
Included in others is the balance sheet write-downs of the Hyderabad cargo and ground handling investments, following the recent sale and loss of license, offset by some cash profit on the sale of U.K. properties as we closed out the legacy Menzies Distribution sites. The lower impact sets out the net impact to 2018 of Menzies Distribution, which delivered GBP 17.1 million of profit for the 8 months of ownership and it performed in line with our expectations for that period. The exceptional mainly relates to the cost of disposal and the loss on disposal mainly relates to the write-down of historical assets held on the -- sorry, historical intangible assets held on the group balance sheet.
Turning to our net debt. This slide shows more detail of cash flow since 2017. The group generated $94.9 million of operating cash flow in 2018. The next 3 bars reflect the ongoing cost for the group. CapEx is lower than previous years. We're following the successful deal with TCR, our leasing solutions provider in -- that we use in Europe now extended into Australia and New Zealand. This has bought in around GBP 10 million of proceeds from the sale and leaseback of assets and gives us the flexible asset management model that we enjoy in Europe now in Oceana.
The next 2, 3 bars relate to the cost of a more one-off nature. The net M&A includes net receipts from the sale of Menzies Distribution, the sale of Hyderabad cargo and the cost of the acquisition of Airline Services. The next column of the one-off GBP 12.5 million we inject into the pension scheme with the agreement of the trustees following the sale of Menzies Distribution and related U.K. properties. And included in the $16.7 million Other is predominantly the cash cost of the various exceptionals across the group, the Menzies Distribution-related separation costs and the GBP 4 million of share buybacks we did during the year.
Finally, the FX is negative year-on-year to the tune of GBP 9.2 million, reflecting mainly the retranslation of our $250 million term loan all in all leading to a net debt of just under 200 million and a net debt-to-EBITDA of 2.9 broadly in line with expectations and within our covenant of 3x.
Given the large amount of work and the changes that have occurred over the last couple of years in regards to our U.K. defined pension and the fact that we have recently gone through and agreed the 2018 triannual valuation, I felt it was worth a more detailed dive into the pension liability. The good news is a lot of progress has been made to derisk the pension over the last couple of years, and this chart shows the movement from the end of 2017 to 2018 on the accounting deficit.
The accounting deficit, you can see, has dropped from GBP 49.5 million at the end of 2017 to GBP 18 million at the end of 2018, a reduction of some GBP 31 million. In terms of the future cash funding requirement, this is based off the actuarial valuation, which has seen a drop of around GBP 70 million since the last triannual in 2015 of GBP 120 million to a funding deficit nearer -- today nearer GBP 50 million. This then converts into cash funding that we've agreed with the trustees of GBP 9 million a year, which is a reduction of GBP 2 million in 2018, and we can now see a clear path to fully funding the actuarial deficit.
This is a slide that I set out to the interim results and shows our underlying EPS performance of John Menzies plc as a standalone Aviation Services business without distribution. The chart begins in 2015, which is the last set of results before the strategic realignment process was started. The chart shows year-on-year improvement on a reported basis and with a CAGR of around 50% from 11.2p in 2015 to 37.6p in 2018, shows an excellent 3-year performance in our aviation business.
So now turning toward our business review. As I've already covered in the financial section, we are pleased with the underlying operating profit, up year-on-year by 8%. Our commercial teams have had a particularly busy year with 276 contract renewals at record levels, protecting over GBP 150 million of revenue, all at acceptable margins and in many cases enhancing our profitability. A continued focus on the people agenda has been led by the new HR Committee and our group HR function. While the U.S. labor market remain a challenge, we have seen real progress with some innovative approaches, and these are starting to show real returns.
And finally, we've continued the delivery of the Excellence Manifesto, started back in 2016. With the rollout of our industry-leading systems, I intend to focus these systems where we can get the best return on our investment and show our customers we are experts in what we do. Therefore, through our financials, our contract renewals, our investment in people, systems and processes, we continue our track record of delivering growth.
With over 500 customers, commercial activity must remain at the heart of everything we do. This slide sets out the 2018 performance, both on the underlying operations and the product categories and the commercial contracts' momentum during the year. As highlighted during the financial section, we have seen strong underlying performance on all 3 main product categories. In ground handling, the like-for-like increases have been particularly strong across a number of key stations, underlying cargo market has had another good year, and finally, fueling turns increased year-on-year, driven by market growth in the U.S.A. and our new expansion across France with WFS.
In terms of contract gains, though we've added 98 new contracts, the revenue impact is marginally reduced after accounting for the contract losses. We continue to win new fueling contracts, and our Rest of World division has performed particularly well, filling the space left following the 2017 large cargo contract loss. A particular feature of 2018, as I've already covered, has been the contract renewals. We're nearing 276 contracts, securing GBP 152 million of revenue, and this also includes 2 large multi-station deals with 2 significant U.S. customers.
As already explained, our commercial teams have had a really busy year with the renewals, which has taken its time -- toll on time available to focus on new contracts. That all said, the commercial teams have had some real great achievements in 2018, which helped underpin the 2019, as we look forward, and I'll pick out a few examples.
Our continued focus on the fast-growing Chinese carriers outside of China has had some really strong wins, but -- with Air China in Los Angeles and Heathrow. We've continued the successful targeted approach for major hubs, and we have secured a major hub win with Sunwing in Toronto. And our key account management approach has continued to pay dividends. Of particular success is the win with WFS across 4 stations in France to provide into-plane fueling and fuel farm management for them.
And finally, with a renewed and refreshed focus on cargo, we have delivered new customers, like Vietnam Cargo, across Australia. So though a challenging commercial year due to the strong focus on renewing many contracts in 2018, we still have some excellent successes across those key strategic priorities.
Turning to a bit more detail on our regional performance. The Americas, still our largest profit region, has had a particularly difficult year with challenges in key ports where high staff turnover is driven through near full or full employment. The Americas team have been really busy, especially in the second half, getting price increases across many customers to pay for increased wage rates. And though we've had a tough start to 2019, we are still -- we're starting to see a real traction through those labor rate increases, funded by pricing increase, giving us confidence in our 2019 outlook. On a much more positive note, as highlighted on the last slide, during the year, the Americas has been really successful with 2 large multi-site renewals in our into-plane fueling business.
In EMEA, our Europe business had seen real progress, but we continue with challenges in our U.K. regional business, which is a key focus of mine as I take up my interim role. In Prague, we were very pleased to be awarded the Czech Airlines hub, further cementing our position in this key airport.
Our Rest of World performance was particularly pleasing as we entered 2018 with cargo space to fill. The commercial teams managed to achieve this with volume coming from new customers, and that added to the particularly strong performance in New Zealand. We saw excellent financial results and strong performance for the region. Though still small, we have now started up in Indonesia, and this gives us a [foothole] in the region -- foothold, even, in the region and the ability to grow from there.
And finally, we have seen really strong performance in AMI, our cargo forwarding business. The new management team have been in place for around a year, and 2018 delivered a record profit. As we look into 2019, the team are now looking at a rollout of a global IT platform, which gives us 2 major benefits: the ability to cross-sell across our existing business as well as easily expand into new region. We are excited by the opportunity that AMI now represents under the new management team. So all in all, across our regions and our business segments, we see strong performance against the backdrop of some challenging market conditions.
So just turning to sort of summary and outlook. So why do our customers choose us? What sets us apart from our competitors and what encourages them to either move their business from others to us or even from business themselves to us? Safety and security is the most important element to our business and our industry. Without it, we don't have a business. We have market-leading position and we are significantly ahead of the industry average as reported by IATA. Our training programs and audit programs are world-class, and we are just starting on a journey with some customers about relying solely on our audit programs. With the advent of composite aircraft that John touched on earlier, which are far more expensive to repair due to the carbon fiber product and the customer sees real financial benefits from minimized damage and therefore costs of repair.
So through our market-leading safety and security systems, our drive to increase productivity and offering a great service at the right price, all underpinned by strong contract disciplines, we are in a great place to offer our customers the service they want. This is proved through our 83% contract retention rate.
As I've mentioned throughout the presentation, our commercial activity is key to the delivery of our future growth. Over the last few years, we've made some good strides in our commercial approach. Looking forward, this is where I'll be putting a significant amount of focus with key priorities set out on this chart to deliver sustainable earnings.
Starting at the top, through our key account management program, we have the ability to strategically target the right contract at the right time. And through global terms arrangements shown in the purple box, we'll make ourselves easier to deal with. Cross-selling is starting to become a real focus and the possibility -- and a possibility. We are now having conversation with customers about fueling and ground handling, specifically in the U.S.A.
The tendering process has changed. A few years back, it was driven around pricing models and high-level submissions. But today, we are happy to produce detailed tendering documents covering all the elements of service not just pricing. This further supports the statements earlier that customers are looking for more professional service and favor the larger handlers as we look forward.
So all in all, as we look into 2019 and refocus our commercial activities into a more targeted approach, we will deliver top line revenue growth and demonstrate to our airlines the ability to be their logistics partner of choice.
And finally, before I open the floor to questions, I will cover off the 2019 outlook. The overall trading in the first 2 months has been tempered by slightly softer cargo volumes and the continuing labor difficulties in the North American market. Despite this, and given the opportunities that remain ahead of us, we still remain positive about the remainder of 2019. Our market remains a very attractive place with many strong organic opportunities in the pipeline. We will continue to roll out our marketing-leading (sic) [market-leading] systems, differentiate ourselves through innovation, but on a much more targeted basis, where it will deliver the best value for money. And through this, we will build our position as the premium service provider in a market and the partner of choice for our airlines.
Thank you, and I shall open the floor to questions.