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Edited Transcript of MNZS.L earnings conference call or presentation 4-Mar-14 10:30am GMT

Preliminary 2013 John Menzies PLC Earnings Presentation

London Oct 4, 2019 (Thomson StreetEvents) -- Edited Transcript of John Menzies PLC earnings conference call or presentation Tuesday, March 4, 2014 at 10:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Paula Bell

John Menzies plc - CFO

* David McIntosh

John Menzies plc - Managing Director, Menzies Distribution

* Craig Smyth

John Menzies plc - Managing Director, Menzies Aviation

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Conference Call Participants

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* Martin Brown

Shore Capital - Analyst

* Chris Bamberry

Peel Hunt - Analyst

* Will Shirley

Liberum - Analyst

* Mike Murphy

Numis Securities - Analyst

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Presentation

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Paula Bell, John Menzies plc - CFO [1]

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So welcome to our full-year results presentation for 2013. In the usual way I will give an overview and the financial results for the year and then pass it over to David and Craig who will give a bit more color on the divisions. I am only small so I hope you can see me.

Okay, so first having a look at our highlights, 11% earnings improvement from Aviation, another year of profit growth and cargo margins are at their highest ever following management decision and action in 2012. With three new Aviation acquisitions in the year we continue to build on our global platform. And as previously explained, our results were indeed impacted by a sharp decline in magazine sales.

The business challenge within Distribution was to respond to an GBP11 million adverse profit impact due to overall print decline. We managed to deliver over GBP5 million of cost savings in the year and, with GBP3 million of new income from Orbital and other marketing activities, this fell just short to cover the impact.

Despite this, 2013 has actually been a year of much progress. Both our divisions have been busy renewing key customer contracts. We now have in place over 80% of publisher contracts out to 2019 and have added new contract and customer wins in Aviation, underpinning future years' revenue streams.

We have in place a strong balance sheet, which I will take you through in a moment, and continue to enjoy strong operating cash flow generation from both our divisions. So reflecting our future confidence, we propose a full-year dividend increase of 5%.

So, if we turn to the financial overview here, just to mention, our results are prepared on the basis of IAS 19 revised, which is the accounting requirements for employee benefits or the pension changes that we need to process have gone through all of the results.

So, here are our overall Group figures set out here. Turnover just [peeked] over the 2 billion mark, so upon prior year. As I mentioned, magazine sales directly affected our group profitability. Underlying profit before tax at GBP53.1 million included a GBP0.7 million adverse foreign exchange impact which we experienced right at the end of the year. So, overall we are pleased with the end result.

You may recall our policy is not to hedge the translation of overseas earnings like many, so right now all our key currencies have exchange headwinds. And if you did roll forward, look at 2014's earnings and use the current exchange rates, that will be as much as a GBP4 million impact to operating profit. That's a big number.

Operating cash flow was GBP69.7 million in the year, better than last year and both divisions continue to produce strong cash streams, as I mentioned. Underlying effective tax rate in the year was 25%, slightly up on the previous year. And looking forward we do expect the average tax rate to increase, nearer to 27% actually, as our growth tends to come from these higher tax rate regions. Therefore underlying EPS was 65.6 P for the year and, as I mentioned, the full-year dividend of 5%, as you can see there.

So let's take a look at the performance by each division. Revenue grew by 5% in Aviation overall. Operating profit up 11% in constant currency. You can see here a very busy year in ground handling. We did experience revenue growth, but some yield pressure experienced along the way during the contract renewal phase, and some of our more lucrative margin business was rebased.

However, this was more than offset with the profit improvement you can see here and cargo handling and we continue to focus on our premium sheds. Operating margins are now at their highest level of about -- just under 8% there. And our smaller cargo forwarding business also continues to make good progress.

Aviation and represents more than 60% of our earnings and this will continue to grow as a proportion over time. Within distribution operating profit fell by GBP3.2 million in the year. We've experienced roughly 6% profit impact from the print decline. Corporate costs, as you will recall, at GBP2 million were up on prior year due to loss of internal rent from properties that our Distribution business has since vacated and they'll continue to look at getting out of properties going forward.

If we just take a little further look into the moving parts of Distribution here, you can see here the red boxes represent the overall decline on the business with newspapers, magazines and collectibles there. The uptick in collectibles that we did think would come through in the second half didn't materialize as these products tend to be I guess less used by children. But we are expecting levels to be fairly flat going into 2014 because we do have the upside hopefully from the World Cup in Brazil offsetting the general decline levels, so a level outlook there.

But in print generally, looking at 2014, our plans are based on no material change to the decline experienced in 2013. As I mentioned, another busy year with over GBP5 million of cost savings delivered, and David will take you through shortly, and indeed new plans we've designed for 2014 and onwards to respond to this ongoing structural decline. We estimate and exceptional cost of around GBP6 million to implement these plans which will be incurred over the next -- this year and next year.

Here you can see the new business -- additional contribution coming from our new business activities. Orbital in particular is delivering very well and good contribution towards the division figure. So the outturn there was GBP24.3 for the full-year result.

Just turning to cash flow and net debt, we closed the year with a net debt figure of GBP103.5 million compared to GBP93 million a year ago, but we've been very busy investing in the business. We have good improved operating cash flow compared to last year and here you can see in the green boxes acquisition expenditure about GBP13 million in the year.

CapEx was actually GBP5 million up on the previous year. So, we continue to follow a very careful investment program to help build our business. And we do expect replacement CapEx levels to be slightly up in 2014.

So, net debt to EBITDA ratio, I know the banks are here today as well, so you'll be pleased to hear we have a net debt to EBITDA ratio of 1.7 and interest cover of 13 times. So we have ample covenant headroom.

So just turning to the balance sheet for completeness here. Overall net assets increased in the period mainly as a result of the pension liability which you can see here which has been good news -- strong asset returns coupled with further Company cash contributions, deficit fell from 48.1% to 36.6% at the end of the year. And the next triannual valuation is March 2015.

We can see here in working capital the benefit of owning a distribution business. It brings with it negative working capital and the year-on-year movement is really just due to timing of key supplier payments there. So, I've already made reference to the net debt balance, but it's important to note that GBP95 million of facilities which were due for renewal at the beginning of 2014 have been replaced with GBP150 million of new facilities.

It does increase our finance costs marginally going into the new year. However, now having over GBP240 million of committed facilities puts us in a very strong position to manage the growing pipeline of opportunities that we have. So, with that I shall hand over to David who can give you some more color on progress and momentum in Distribution.

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David McIntosh, John Menzies plc - Managing Director, Menzies Distribution [2]

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Good morning, everyone. Thank you, Paula. So, on to Distribution. 2013 saw our division face the most challenging market conditions so far with a step change in the volume declines which affected the magazine market. Nonetheless we took great steps towards securing our long-term income stream, [agreeing] new contract running through 2019 which account for more than 80% of our revenue.

Our efforts to improve the efficiency of our operations and diversify into adjacent sectors continued apace. Over GBP5 million of savings were delivered while integrating our biggest acquisition, Orbital Marketing Services Group, into our business. Orbital has lived up to our expectations and promises to deliver further opportunities.

In 2014 we will further optimize our network with a new round of rationalization and continue to explore opportunities for further business development.

On to the sales chart, these charts show the performance of our magazine and newspaper product sectors respectively. The line describes the sales volumes and the bar describes the sales values. As you can see in the magazine chart, a downward curve in sales of weekly products compounded by several high-profile title closures led to a very poor performance in that sector.

Turning to newspapers though, although the volume line continues to show decline, sales values performed in line with recent trends. Welcome price increases across the board from titles such as The Daily Mail and the publisher portfolios of the Express and Trinity Mirror were all helpful to us. Looking forward we are planning for similar trends in 2014 to those seen in 2013.

On to contracts, given our focus on restructuring and optimizing the network to maximize profitability, securing continuity of our revenues was a key priority through 2013. We are pleased to have delivered that crucial stability, striking agreements within the year which take the level of our revenue secured to 2019 to 80%. We fully expect to close the final deals in due course. This success gives a substantial platform from which to drive further rationalization and business development.

In terms of the network rationalization, our experience of conducting large-scale rationalizations in recent years allied to the greater economies of scale made possible by our modern packing and returns processing technology has given us confidence that even greater value can be derived through a new phase of network restructuring.

We plan to accelerate our centralization of magazine packing and to close a slight [range] of newspaper packing spokes entirely, reducing what has previously been a very fixed cost to our network. The project has already begun with the first changes taking effect this month and will run through to end 2015. This will be the year where we take the actions and the benefits will clearly come through next year.

In terms of business development, the Orbital business is delivering strongly against its targets and we believe that the new clients and specialties that it's brought into our business will be a critical part of our future success.

We are comfortably leveraging the existing capabilities of the group, such as transport and logistics or pick and pack order assembly, alongside the complementary capabilities of Orbital and the spheres of fulfillment, promotion and communication. Orbital's capabilities will allow us to provide a wider range of services to clients both within our existing markets and the new areas such as e-commerce and fulfillment.

And finally from me in summary, despite a rough year for magazines, the vision for the future is broadly unchanged. We will continue to manage our traditional decline in market in the most effective way possible and we will capture every possible cost synergy and cross-selling opportunity from our Orbital business. We will leverage our expanding network to skew new revenue streams and become a more national logistics provider. Over to Craig for Aviation.

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Craig Smyth, John Menzies plc - Managing Director, Menzies Aviation [3]

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Okay, thank you, David. I am delighted to report another year of double-digit growth in Aviation with profit up GBP3.8 million. That is 11% as shown in the slide in that both in line with our recent track record as well as our future growth aspirations. The division is clearly benefiting from customer and geographical diversity with all three products we do well. Ground handling is benefiting from volume, cargo handling from margin and EMI from good organic grace.

Ground handling volume increased on strong volume growth. Margins did drop slightly due to yield pressure, but we still enjoyed excellent growth momentum in the period from what is our strongest product.

I'm also delighted with the turnaround we've now delivered in cargo handling with profits up just about GBP2 million on overall lower volumes. As well as closing a number of underperforming sheds which have been well reported to this audience, we won some nice new cargo contracts and, as Paula said, we are now enjoying margins of close to 8%, the best ever.

I know Paula said it earlier but it's worth noting again that our overall profit margin for the business was up in the period to 5.2% from 5% last year. And again, that is the best we've ever achieved. Now having delivered our long-held target, this shows the direction we are looking for as we grow organically and make selective acquisitions in this market.

Looking forward we do see room for underlying volumes to increase as GDP both recovers and new aircraft orders are fulfilled. And again, as many of you have seen before, we have a targeted plan to grow channeling our people and cash resources into the best business development opportunities in what's a strong pipeline today.

So, turning to ground handling in a bit more detail. Ground handling now represents 63% of our business. And as you've just seen, it grew as a result of aircraft turnarounds being up 9% overall.

If you look at the chart on the bottom left, you'll see that the volumes, and to a [lesser] extent labor efficiency, were not helped in the first quarter by unexpected volatility in some airline schedules with two examples being FlyBE struggling with its route planning focus and British Airways rightsizing following the merger of BMI.

Again, the first quarter tends to be the lighter quarter in the year. But you'll also note in that chart the like-for-like volumes did start to pick up steadily later in the year with plenty of new aircraft deliveries on their way in 2015 and 2016.

Yield pressure is never constant in our business with airlines getting better at buying, continually trying to reduce the cost on the ground where there is often strong competition. This period was no different with us addressing the impacts through the usual ways of improving [profit] productivity continually as well as adding economies of scale through growing market share organically and by our selective acquisition strategy. And I should confirm that contract wins are still meeting [cargo] rates of return.

In the year in ground handling we delivered profits of GBP21.9 million from ground handling with margin steady at just under 5%. And the chart shown on the bottom right shows the past compound volume growth rate and supports why we are we are always excited about this particular product going forward.

So, looking now at cargo handling and cargo forwarding, underlying profit in handling was up 28% and margin improved by over 2% to 8% and all of this on underlying volumes down 2%. You'll see again the chart on the bottom left, underlying volumes have been slowly recovering over the last two years and were actually positive to slightly in 2013 in quarter four, which is a good sign at last. Absolute volumes were down 13% and that is shown in the bar chart reflecting the shed closures and rationalization programs across the UK and US which are now complete.

Although cargo handling is just 20% of what we now do and, notwithstanding its operational gearing effects, it does continue to be an important product where we can make highly attractive margins in the right markets -- those where we can hold a strong competitive position and where capacity and demand closely match.

We also continued growing cargo forwarding, that is our EMI business, with operating profit increasing consistently, as you will see in the chart on the bottom right. Again, this is an organic growth business with fairly decent prospects going forward.

So, as far as business development is concerned, we do have a formidable track record of growing our business. This is testament to both our strong operating model as well as how we focus our efforts towards the attractive financially strong and growing airlines.

The first chart here shows the strength we have renewing existing contracts with 114 contracts renewed with a value of GBP70 million in ground handling and GBP36 million in cargo handling. Again, 2013 was a pretty normal here for contract renewals.

The second chart shows we've opened 18 new airport operations with particular excitement about some of the rifle shot targets in Nice, Bogota and Perth.

And the bottom charts show the number and value of wins to 66 net contract wins with 92 wins and 26 losses. The wins, again, are all at 10% margin in sales and losses lost mainly on price. Noteworthy wins were Cathay Pacific Cargo across Australia and New Zealand, Etihad Cargo in Amsterdam and more recently a 300 [turn a day] ground handling contract with Delta at one of its hubs in Detroit.

On the acquisition front we invested GBP13 million in three projects all completed in the second half and now well down their integration paths. The first was Desacol in the fast-growing Colombian market. We bought cargo and ground handler at five stations. Customers include a range of high volume anchor customers like Copa and the very strong [Laing] Group. And since acquisition we've already added a new contract with KLM Air France Martinair, which is our biggest customer globally.

We do see strong growth opportunities growing market share in what's a growing marketplace in Colombia and once bedded down there will be further opportunities to expand in the rest of South America.

The second acquisition was Skystar bringing eight ground handling stations across Australia and New Zealand serving mostly narrow bodied and regional aircraft with a high level of turnarounds. The principal customers were the Qantas Group including the fast growing Jetstar.

This is a great example of a consolidation play with good synergies in one of our most successful markets, which is both still fragmented and still largely an untapped self-handling market because Qantas in New Zealand and Virgin have yet to outsource. And since acquisition we've won contracts with Thai Airways and Scoot, Scoot being the low-cost long-haul carrier operating out of Singapore.

And finally, in this slide we acquired Moose Aviation to expand their capability for profitable deicing services across Scandinavia. This is a good example of adding incremental ancillary revenues around our core ground handling scale which will certainly help drive margins going forward.

So, finally from me, how do we see 2014 and really beyond that? We do see potential for better underlying growth as aircraft orders are fulfilled and flown by our portfolio of attractive growing customers. We see potential for better underlying cargo tonnages as GDP recovers further.

We do believe our market dynamics are strong and highly attractive. There aren't too many markets in this world that are inherently growing at overall size as well as available market opening up due to growth in low-cost carriers as well as outsourcing opportunities.

We also see some consolidation picking up, which will be an overall positive for the industry. As I said to you before, with the airlines getting lower costs from more capable handlers and handlers getting benefits of economy of scale initially and perhaps in time helping margin progression.

We've established a strong platform with an excellent track record delivering results year in/year out, often against challenging economic and competitive market conditions. We have a particular strength in ground handling where we've enjoyed continued success building the business organically because our airline customers value our consistent levels of safety and service.

And the distraction of reshaping cargo is now behind us, so we can focus on the good ones where market dynamics are better. Finally, in closing, we have a confident clear plan with experienced as well as analytical foundations to continue to roll out and grow. And I must say again that our business development pipeline looks pretty good at the moment. I hand you back over to Paula.

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Paula Bell, John Menzies plc - CFO [4]

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Thanks, Craig. Okay just to summarize -- so as I said at the beginning, really it has been a year of much progress with over 80% of publisher contracts renewed. We have still got more to do in Aviation particularly in the first half of 2014, but great progress made on that very, very important point.

We are responding to disappointing print decline with a refresh program of network rationalization which David's been speaking to. And another year of solid growth from Aviation. The results really speak for themselves there. And operating in a growth market means, as Craig mentioned, indeed a very, very busy pipeline of opportunity.

Cargo handling delivered a strong result in the year, so we've got a good recipe there with prime shared locations. And three acquisitions in the year means our global reach has definitely been extended to give us further opportunity.

So, with that being said, we'd like to hand over now to questions. And if you could just state your name and company that would be really helpful. Thank you.

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Questions and Answers

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Martin Brown, Shore Capital - Analyst [1]

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Martin Brown from Shore Capital. Just a couple of questions if I could. Craig, you talked very confidently about the outlook for the industry. And very confident on how Aviation's positioned. Apart from obviously taking your word on that, have you got -- sort of what data are you basing that assumption on?

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Craig Smyth, John Menzies plc - Managing Director, Menzies Aviation [2]

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This is aircraft orders, so again, this is -- the source of this Boeing and Airbus. So, if we look at our underlying, like-for-like turns have probably never been better than 2% or 3% historically. And you've seen passenger growth numbers of 4% and 5% with load factors going up. And this really is the first time I've ever seen consistent charts like this which is actually showing aircraft orders up between 4% and 5%. So passenger numbers will probably be at that, maybe even slightly higher.

So again, I'm not promising for 2014 and 2015. It depends on whether or not this is net new capacity that comes onto the market or whether or not airlines then replace old fuel inefficient jets. But this is pretty good.

I've not seen this in my 20 years as strong as this. So, (inaudible) the cycle breaks or aircraft are replaced, I don't know. But there's consistent data with IATA as well. We tend to be more bullish than the (inaudible) manufacturers, but that's why I think we can look forward to stronger like-for-likes in two or three years' time.

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Martin Brown, Shore Capital - Analyst [3]

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Okay, thank you. And just on the competitive pressures in Europe in particular mentioned, do you see that easing anytime soon or is that kind of the new normal?

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Craig Smyth, John Menzies plc - Managing Director, Menzies Aviation [4]

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It is the new normal I'm afraid. So, we are renewing about GBP150 million of our revenue base every year, it tends to be three- and five-year contracts. Five or six years ago you used to be able to do non-tender renewals where you gave up a bit of margin or a sign on. If everything goes to tender and there's fairly strong competition, but we are used to that; we've had that throughout the whole of the economic cycle.

We tend to give up maybe a couple percent on average if you are looking for a rule of thumb, but we then get that usually back within three months, six months through productivity and then adding scale through organic contract wins, growing the market share and the odd acquisition which brings synergies.

So, we're now the number two in size. Swissport has been number one with Servisair as number three. So, there's a big number one, there's a medium-size number two, and then the rest after that is a bit lumpy. It's a bit regional from some smaller players. I don't see signs of any new entrants into the market, so I do think consolidation is going to help us get efficiencies which we can pass back in contract renewals plus maybe keep some for the shareholder.

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Martin Brown, Shore Capital - Analyst [5]

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That would be nice. And you mentioned once things are bedded down in terms of Latin America being a possible growth opportunity. Would that be further acquisitions or would that be organic focused?

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Craig Smyth, John Menzies plc - Managing Director, Menzies Aviation [6]

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I think Latin America, probably acquisitions that we'd make. So, as you've seen before, there's about 150 airport targets. Having profiled 2,500 airports, there's probably 20 of the 150 that are in South America with the rest being across the rest of our region of business. And we've got teams on each continent running the business as well as business developing. So, that's why it's a smaller market but it's pretty fast growing.

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Martin Brown, Shore Capital - Analyst [7]

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I'm not trying to hog the microphone here, but two final questions just on distribution in terms of the rationalization of the pay per spokes. Could you put some numbers around that as to how many there are now and how many you'd be looking to come down to?

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David McIntosh, John Menzies plc - Managing Director, Menzies Distribution [8]

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I can't give you the exact numbers, not because I don't want to, simply because I've got to be careful because we've obviously not told the unions and the staff yet. But you can clearly get from the website our existing numbers. And we're talking about taking 40% out of our hub network. Some of those become spokes. And overall we are going to take our network down by 20% over the next two years.

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Martin Brown, Shore Capital - Analyst [9]

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And Paula, just on CapEx, obviously you referenced it in your presentation there. Could you give us guidance as to where you see CapEx going over the next couple of years?

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Paula Bell, John Menzies plc - CFO [10]

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Yes, in 2013 the CapEx is around GBP20 million and I think for 2014 we've got a figure of about GBP25 million in mind. So, that would be the content we've got at the moment. But obviously we've got a pipeline of ideas where we could do more.

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Chris Bamberry, Peel Hunt - Analyst [11]

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Hi, Chris Bamberry, Peel Hunt. With regard to distribution I was wondering what the cover price inflation benefit you'd expect at this point in the year for the full year? What was kind of in the bag from last year?

And similarly, in the terms of the cost savings you're making this year, could you break it down into some categories perhaps? How much comes from actually closing of depots and how much perhaps from improved packing or other measures just to get a flavor for what the mix is?

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David McIntosh, John Menzies plc - Managing Director, Menzies Distribution [12]

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In terms of our -- the cover price growth is probably running for us somewhere in the region of net across our overall business something like 4% or 5%. The issue for us is that we haven't really had cover price growth in the titles we benefit a lot from like the Sun for example. But the volume declines are still pretty heavy, so it brings our net sales down still about minus 2% for newspapers.

In terms of the costs, I normally split the cost categories into four categories. The first one is just simply to try and match a target, what we call a [pip] target which is to get cost out of the depots, and that normally is around GBP1 million to GBP1.5 million.

We then run a program called CI, which is continuous improvement for us, and it's based on a team of specialists at Lean 6 Sigma and they are all about standardization of process. And that normally runs in the region of GBP1 million to GBP1.5 million as well.

And then we are starting to get some of the benefits of the depot rationalization this year. And then the last bit is just normal centralization of costs and starting to -- and procurement benefits, etc., etc. So, the balance of those last two gets us somewhere between GBP4 million and GBP5 million.

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Will Shirley, Liberum - Analyst [13]

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Hi there. Will Shirley from Liberum. First of all, could you give us an idea what the organic profit growth was for the two divisions -- or profit decline was in respect to the distribution business if you strip out the acquisitions that you made?

And secondly, in terms of contracts you lost in the aviation business, you said I think nine were due to price and the remainder due to the routes being terminated. Of the contracts you won were any one where you weren't the cheapest price and, if so, how many?

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Craig Smyth, John Menzies plc - Managing Director, Menzies Aviation [14]

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I guess I don't know the answer to were we the cheapest price because it's sealed envelope. So, I think we don't always have to be cheapest price, especially when it comes to managing the global key accounts with the [BAs] and the KLA and Air Frances, etc. We all say we're never going to be the cheapest price, but there is value in the overall relationship and what that brings.

So, I think there were something like 16 route cessations, we can't do anything about that. There were a few contracts with the EasyJet particular that we did want to go down to a breakeven level. And so, we understood we couldn't make the more than normal margins on those with that then goal. We've got fairly good commercial strategy where we'll give up some margin but we won't give it all up. That hasn't changed in the last five years.

So we continue to renew, continually grow by adding new contracts. And yes, every so often we lose out. But we'll never be the cheapest. And I think Swissport as number one, they'd probably say the same. So, we do see consolidation as a good thing overall in the future for margins, again talking beyond three years.

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Paula Bell, John Menzies plc - CFO [15]

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And just to continue with your question on distribution, I think slide 6 in the pack there is quite helpful in as much that we started the year with a GBP27.5 million profit contribution in 2012, which is essentially the core business.

We've had the impact of an GBP11 million reduction in that area from print decline and we mitigated against that GBP5 million of cost savings. So, net-debt there's about a GBP6 million reduction overall on that base. The new revenue from Orbital, etc., wasn't there in 2012, so we wouldn't discount that.

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Will Shirley, Liberum - Analyst [16]

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Is the GBP3.1 million all Orbital?

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Paula Bell, John Menzies plc - CFO [17]

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90%, yes. We only have outside of Orbital some smaller marketing activities, so they are quite small in the round to exclude that. So, in essence you can see the building blocks there of the print decline versus the cost savings was a net-net GBP6 million deducted.

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Will Shirley, Liberum - Analyst [18]

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And then Aviation organic (inaudible)?

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Paula Bell, John Menzies plc - CFO [19]

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Organic growth in Aviation -- well, there's been an element of profit contribution from our acquisitions in the year. But after deal costs and start-up costs it is quite negligible in the round. So, in effect most of the profit -- a good chunk of that 11% is going to be from organic means in 2013.

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Craig Smyth, John Menzies plc - Managing Director, Menzies Aviation [20]

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So, there was the cargo shed, the closures which is about GBP1.8 million of the overall GBP3.8 million with the rest being organic and the acquisitions neutral in the year.

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Paula Bell, John Menzies plc - CFO [21]

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Yes.

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Mike Murphy, Numis Securities - Analyst [22]

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Mike Murphy at Numis Securities. A number of questions, please. First of all, on the Swissport/Swiss Air merger of last year, what impact have you seen on your business; i.e. have they lost any stations, airports, etc., because of the merger?

Secondly, just coming back to the organic growth. In your presentation, Craig, you said 11% compound per annum and that was your expectation going forward. Is that 11% including acquisitions rather than organic? You just alluded to organic. If you can just --.

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Craig Smyth, John Menzies plc - Managing Director, Menzies Aviation [23]

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Yes, that's how it's been achieved for the last five years that we've shown on the slide the last 10 years if we showed you that chart. So, you're looking at about 2% being the underlying like-for-like, you're looking for another 3% to 5% being from the organic business development.

That is contract wins or new licenses and opening new stations organically with the top up coming through acquisitions. So, there might be some years of 7% or 8%, there might be some years of 12% or 13%, depending on what we win and what we choose to spend our money on.

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Mike Murphy, Numis Securities - Analyst [24]

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Okay, and how would you describe your pipeline at the moment? Full?

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Craig Smyth, John Menzies plc - Managing Director, Menzies Aviation [25]

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It's never as full as I would like it to be. But it is pretty healthy. I have to -- just linking that with your first question, because of change of control causes and some of the service air contracts, then that's helped the pipeline particularly in the UK. So, we've been all over the customer base.

And there's a few small wins, but you're very close to some bigger wins. But actually it does show some of the stickiness because we tried very hard to get a couple big trophies, but those airlines renewed, offsets a lesser price with Swissport. So, it's not all about price, price, price. There's a little bit of loyalty in this market which, again, we've demonstrated over a consistent 10-year period.

So yes, there's still some contracts to win from the Servisair/Swissport merger. There an integration has been complete now for two months. They went through the integration. I imagine that will be a bit of a roller coaster for them. They'll come out the other end, they say one year, 18 months. They seem to have doubled the value of their synergies. So, I think that's against a background of (inaudible) trading.

It wasn't so good in Servisair at the end and current trading at Swissport in the last quarter and for the year hasn't been particularly brilliant. I think some of you can get access to Swissport now because of their bond issue, so they released some stats last week which you should go and have a look at their presentation.

And so, they're going to have to take out the costs of Servisair pretty rapidly to be able to afford the cost of the funding that they've got. But they'll come out the other end and I want them to be successful because I do believe in consolidation.

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Mike Murphy, Numis Securities - Analyst [26]

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Okay, thank you. And then thirdly, just some questions on the -- a financial question for you, Paula. On the cash cost rationalization, can you just say what those are expected to be this year and next year?

And then secondly, can you say whether the -- in the central cost the pensions, that was a full amount last year; i.e., is there any incremental to come on pensions for this year?

And then thirdly, just some guidance on working capital for this year. It was a good performance on net debt last year and I'm just wondering if there's any spring back at all.

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Paula Bell, John Menzies plc - CFO [27]

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Okay, so taking you through those. Exceptional costs, our flag has been around GBP6 million. I would estimate [the spec] to be about GBP4 million in 2014 and GBP2 million in the following year as the changes are implemented.

Pension costs in terms of -- in our finance cost in the income statement there, we are running with our best guidance from actuaries which is a flat line. So, we're running that in our model going forwards. And on working capital --.

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Mike Murphy, Numis Securities - Analyst [28]

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And that is GBP1 million. I'm talking about all the sign up --.

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Paula Bell, John Menzies plc - CFO [29]

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Auto enrollment? Sorry, auto enrollment has been a new cost to the business which we've had to absorb, was around GBP1 million.

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Mike Murphy, Numis Securities - Analyst [30]

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And it was GBP1 million in 2013. So it was a full-year almost (multiple speakers)?

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Paula Bell, John Menzies plc - CFO [31]

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No, GBP1 million in 2014. It just came into effect the latter quarter of 2012. So, it's a new additional cost that we are bearing in our cost base into 2014 that we'll have to manage.

In terms of working capital, obviously you've seen the figures there. We've carried the negative working capital from distribution. I think if we look at the trend of working capital, our job is to constantly drive down our debtors, etc., particularly around our Aviation business.

Our headwinds in working capital are around the smaller distribution gets the less negative working capital we'll therefore have. Those headwinds are always around about the GBP5 million mark per annum. But I think that's probably a good number to model going forward in that regard.

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Mike Murphy, Numis Securities - Analyst [32]

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Can I ask a further question? Just on the distribution activities, you acquired Orbital. Is there anything else that you are looking outside of the core business with a view to acquisition post Orbital?

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David McIntosh, John Menzies plc - Managing Director, Menzies Distribution [33]

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Not at this stage.

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Paula Bell, John Menzies plc - CFO [34]

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Good, any other questions? I think we're done. Okay, thanks, everybody.

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Craig Smyth, John Menzies plc - Managing Director, Menzies Aviation [35]

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Thank you.

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David McIntosh, John Menzies plc - Managing Director, Menzies Distribution [36]

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Thank you.