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Edited Transcript of MNZS.L earnings conference call or presentation 13-Aug-19 10:59am GMT

Half Year 2019 John Menzies PLC Earnings Presentation

Edinburgh Oct 8, 2019 (Thomson StreetEvents) -- Edited Transcript of John Menzies PLC earnings conference call or presentation Tuesday, August 13, 2019 at 10:59:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Giles Wilson

John Menzies plc - CEO, CFO & Executive Director

* John F. A. Geddes

John Menzies plc - Corporate Affairs Director, Group Company Secretary & Executive Director

* Philipp Joeinig

John Menzies plc - Independent Chairman

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Conference Call Participants

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* Christopher Bamberry

Peel Hunt LLP, Research Division - Analyst

* Eoghan Reid

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

* James Beard

Numis Securities Limited, Research Division - Analyst

* Robin Alexander Speakman

Shore Capital Group Ltd., Research Division - Research Analyst

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Presentation

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Philipp Joeinig, John Menzies plc - Independent Chairman [1]

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Very good morning, dear ladies and gentlemen. I would like to welcome you to the half year results presentation of John Menzies plc. My name is Philipp Joeinig, and I am the Chairman of this company.

As you will hear later on from Giles and John, we had a tough start into 2019. But you will also hear that we have been developing a series of actions to address the shortfalls and to show you and to show to the market that we will have not only a very much stronger second half in 2019, but also going forward into 2020, rebuilding and focusing on profitable growth.

I, in my capacity as Chairman, will guide and support this business and make sure that, together with Giles and John, we are supporting the management teams and becoming a very fit and focused organization. Fit means we are having a very effective but lean overhead structure -- a cost structure in general. And focus means that we are focused for our profitable growth and execution in the stations.

Having said that, I would like now to hand over to Giles, who is going to lead us through the details of what I've just summarized. And I'm very much looking forward to any questions or discussions we may have after the presentation. Thank you very much.

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Giles Wilson, John Menzies plc - CEO, CFO & Executive Director [2]

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Sorry. I thought I was going to fall off the edge there. All right. Thank you, Philipp. Good morning, ladies and gentlemen. So the order of the day is, I'll sort of start with an overview. I'll then put on my old hat as CFO and go through the numbers. And then I shall hand over to John, who will run us through a business review and I'll wrap up at the end.

However, I'd like to start by saying how extremely proud I am to have taken up the position of CEO of John Menzies plc at this really exciting time in the company's evolution.

As you'll hear over the next hour, we -- in the last few months since taking up the position of CEO, we've put in place a number of initiatives, including a number of changes to our senior management team to set ourselves up to be the strongest position to take advantage of the future growth opportunities.

We recognize the current challenging times in the global economy that our customers face in difficult trading and operating conditions, driven by outside influencing factors, like the Boeing 737 MAX grounding, air traffic control restrictions, poor cargo market and bad weather in Europe. We, therefore, must be fit for purpose, stay close and build our relationship with our customers, deliver their needs and provide a safe, secure and efficient service to make sure we're their supplier of choice. I am genuinely excited by the opportunities that are in front of us. And I now believe we have the strongest team to deliver that.

So now looking at our key headlines of the first half. Our revenue grew by around 4% to GBP 650 million, reflecting the impact of the Airline Services acquisition, our commercial activity, mainly in the Americas due to the price increases we passed through to staff, offset by the closure of loss-making stations, underlying weak cargo market and the 3 license losses in sales during 2018.

However, even with this revenue growth, our operating profit has dropped year-on-year by about GBP 5 million, driven by some key first half factors that will reduce as we head into the second half. During the second half of 2018, we lost the high-margin Dominican Republic and Panama licenses as well as sold our high-margin Hyderabad cargo operations following the call option by our JV partners. All in all, this will impact around GBP 4 million in the first half.

Also during the second half of 2018, we sold Menzies Distribution, which left us with previously advised stranded corporate costs, which the business used to support of about GBP 1.2 million in the first half.

And finally, weak cargo markets and the number of scheduled changes and reductions by our customers, which has then led us to issue the statement we did on the 5th of July.

We have a number of mitigating factors but not enough to cover off this year-on-year shortfall. It should be noted that the start of 2018 was a particularly strong cargo [market]. And as we entered the second half of 2018, the cargo market started to weaken. So the first half differential in the second half should not be repeated.

Since taking up the interim position and then the appointment to CEO, I've made a number of changes to my senior management team to strengthen the team, flatten the structure and put sharper focus on our commercial opportunities. I'll cover this in more detail later. We've kicked off the cost rationalization program, which will deliver in excess of GBP 10 million of cost savings as we head into 2020. And we have an aggressive fix/close/sell review of underperforming region sales and stations going on.

As part of the cost rationalization program and the management changes, we've reinvested some of the savings into strengthening our commercial teams and our customer interaction. We're starting to see some early benefits of this. And I'm particularly pleased in the way that we have changed our commercial relationships. An excellent example of this is this -- the easyJet win at their home hub of Luton, a contract we've had for over a decade but one until senior level engagement, we were clearly going to lose.

I've set out some key priorities, which will see the themes as we run through the presentation today. I will cover these in more detail later. But there are 5 key short-term priorities, which will then lead into the longer-term strategy, of which 2 will deal with the past and 3 will deal with the future.

Looking back, we need to reduce our overhead costs and make us fit for 2020 and beyond; aggressively fix, close and sell our underperforming stations, particularly in the U.K. And looking forward, targeting our commercial activity and building our customer relationships so that we can get that organic growth engine going again; focus on our people, both the operational level and how to be the employer of choice as well as structure our management team to deliver that future growth; and finally, target sensible business development, business development doesn't just mean large-scale M&A but licenses, large hub wins, new markets, complementary products and highly synergistic bolt-on acquisitions.

This slide sets out the 3 key reasons of what is so exciting about the John Menzies investment case. We work in a market with strong market dynamics. We see excellent growth opportunities. And Menzies has a unique set of strengths to capitalize on those markets and grow those -- and those growth dynamics. Our market is huge, estimated at $60 billion and with long-term growth dynamics across passenger, cargo and fleet. Within that $60 billion, around 50% is still insourced, further adding to the upside potential. Through focusing on our customer needs, developing the right organic growth and targeting the right business development opportunities, we can exploit those excellent growth opportunities.

And finally, our unique proposition comes through our strong leadership team. This starts at the very top with our new Chairman, Philipp, bringing a wealth of aviation experience; and my new management team, including the recent appointment of Mervyn Walker, as EVP, Global Operations. Mervyn brings over 30 years of ground handling and aviation experience. And his impact in the first few months has already been seen. Adding that to our very strong management team across our 5 regions and our newly formed senior commercial team, we are now getting set for the future.

So I shall now turn to our financial overview and take us through the numbers. Before I run through the detail, this set of results is going to be complicated by a number of factors compared to 2018. We, as usual, present our results on a constant currency basis. However, in this set of results, our reported numbers now contain the new IFRS 16 leasing standard, please no questions, which has a material impact to both our EBITDA and our net debt figure. In addition, during 2018, we had to adjust our figures for the discontinued Menzies Distribution business. So bear with me as I navigate ourselves through these numbers.

The chart sets out overall financial key metrics versus 2018. Revenue is up 650 -- to GBP 650 million, which is 3% up on a constant currency basis. Underlying operating profit at GBP 17.9 million is down GBP 3 million on a reported basis and GBP 5.3 million on a like-for-like basis. The reduction predominantly driven by drivers in the first half that won't repeat in the second half. So let me just take you through a bit more detail on that.

The first 3 bars reflect the headwinds we faced in the first half. Starting with cargo, given the high-margin nature of cargoes, small losses in revenue have a significant impact to profit. And as we already explained, 2018 was -- started with strong cargo operations. Though the cargo market remains weak, the full year impact was slow as we entered the second half, with the second half of 2018 also being weak.

The GBP 1 million of schedules and trading reductions reflect a number of factors, both positive and negative. The key items in here are the schedule changes in Europe impacting the efficiency of our operations, partially driven by the 737 MAX grounding; challenging labor markets in Eastern Europe, particularly in Prague and Budapest; general labor inflation inefficiency in some key Australian ports, driven by the tactical cancellation and scheduled changes by our customers. However, these down trades have been offset by a better performance by the Americas region, the closure of loss-making stations and Sint Maarten returning to growth.

As we head into the second half, actions are being put in place to mitigate these with cost actions and aggressive fix, close and sell review of underperforming operations. The impact of the license losses of Panama, Dominican Republic and Hyderabad put us back about GBP 4 million. This impact that will be much less in the second half as these losses will cease to operate during the latter parts of 2018.

The impact of the contract gains and losses add GBP 0.5 million of profit, mainly driven by our Americas region but offset by our Thai Airways cargo loss at London Heathrow. The M&A activity is Airline Services delivering GBP 1.4 million of profit in the first half, predominantly driven by its de-icing season at the beginning of the year. As we enter the second half in 2020, we will see the full year impact of the acquisition and more importantly the synergies.

Our net cost savings for the first half were about GBP 1.7 million, but this is offset by the GBP 1.2 million of stranded costs. The stranded costs come as the result of the Menzies Distribution sale during the first half of 2018, where we benefited from the contribution. As we enter the second half, the year-on-year impact will reduce. The GBP 1.7 million savings are made up of planned savings and the new savings as part of the cost actions we've recently put in place. This will build as we enter the second half and meet our GBP 10 million exit rate basis as we enter 2020.

Finally, the impact of IFRS 16 leasing adds GBP 2.3 million of our operating profit.

So flicking back, by the way, in your packs, I'm afraid. So all in all, this means underlying EPS of 6.8p or 8.1p on a like-for-like basis is 4.9p less than 2018, recognizing a reduction in operating profit. Our net debt-to-EBITDA at 2.8x is in line with where we expected this to be post the sale of Menzies Distribution with the June month end being higher working capital than the year-end as you build up for the busy summer months. We expect this to drop as we unwind that higher working capital towards the end of the year.

Our exceptionals charge has reduced significantly year-on-year. As 2018 included the write-down of Menzies Distribution investment in advance of its sale, our effective tax rate at 29% is again in line with expectations and an improvement year-on-year as we structure the group post the sale of Menzies Distribution.

And finally, I'm also pleased to confirm the interim dividend will remain unchanged from 2018. This is to recognize the actions being put in place to underpin 2020. And therefore, the profit shortfall we see in this set of interim results are temporary for '19, driven by short-term market factors. And with those actions in place, the Board are confident of the 2020 outlook.

So turning in more detail to our segmental performance. This year, we have seen the decrease in operating profit driven by those market factors and other factors prominent in the first half. However, within the results, we see a number of positive factors, which we will see as we head into the second half of '19 and into full year of '20. With the exceptions of the Americas, all regions and businesses showing year-on-year revenue growth, the underlying operating profit in all segments going backwards.

Americas have seen -- has been significantly impacted by the Dominican Republic and Panama losses. And if we were to add those back on a year-for-year basis, we would actually see the underlying business increase its profit by GBP 2 million.

EMEA is particularly impacted by the soft cargo market with our largest cargo facility in Amsterdam included and the schedule reductions across Europe. With EMEA, we see the benefit of Airline Services. But that offsets the loss of the Hyderabad cargo JV.

The emerging trend of high staff turnover due to full employment in Northern and Eastern Europe is affecting operations. So our focus for our operational or HR teams will be that in the second half of 2019. The Rest of World again is impacted by the effect of both cargo volume and mix and tactical cancellations across the region. We do, however, see a very strong performance in our Macau JV, which has helped mitigate that. And finally, AMI, our cargo forwarding business, has been impacted directly by the weak cargo market, particularly in May and June.

In terms of our exceptionals, year-on-year, we see a reduction of around GBP 20 million, mainly related to the inclusion of the Menzies Distribution asset write-down ahead of its sale last year. M&A cost relates to the review of acquisitions during the first half and the start-up of our new JV in Iraq. The integration costs relate to airline services integrations and the GBP 1.9 million warranties and claims relate to the past acquisition of ASIG which, as I explained at the full year results, we expect to fully recover from a vendor through the mechanisms in the share purchase arrangement. However, accounting standards require us to recognize these liabilities and not the recoverable asset.

The restructuring is predominantly the cost related to securing the GBP 10 million of cost savings for 2020. And finally, we have a GBP 2.1 million positive benefit following the final windup of the pension scheme transfer to Menzies Distribution, a benefit that is contractually due to us.

In terms of cash flow, this shows the cash flow since 2018 year-end. The group generated around GBP 59 million of operating cash flow. And the next 3 bars reflect the ongoing cost to the group with good operating cash flow following the challenges at the end of 2018 with some customers paying late. The next 2 bars relate to the costs of more of a one-off nature with GBP 5.8 million mainly related to the current year and prior year exceptional costs. And finally, the FX is negative since the year-end by a further GBP 6 million, reflecting the retranslation of our $250 million term loan.

The impact of IFRS 16 adds GBP 236 million to our net debt. However, for the purposes of bank covenants, this is excluded. So all in all, stripping out the impact of IFRS 16, our net debt is around GBP 215 million for covenant purposes, a net debt-to-EBITDA of 2.8x, in line with our expectations and within our covenant of 3x.

So with that, I shall hand over to John.

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John F. A. Geddes, John Menzies plc - Corporate Affairs Director, Group Company Secretary & Executive Director [3]

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Thank you, Giles. Good morning, everyone. I'd now like to look at the operational detail -- operational performance in the first half in a little bit more detail. Since March, we've conducted a thorough review of head office costs and taking swift action by reducing head count, closing our EMEA regional office and making sure we get real benefits from our system deployment.

We are focused on operating a lean cost base that supports the business to be as efficient as possible as we seek to grow organically. We have placed a far greater emphasis on operational discipline, with the appointment of Mervyn Walker, we aim on continual improvement to ensure we can lead the industry and continue to deliver safe and secure operations each and every day. We are raising standards within our commercial teams and accordingly have made a number of changes designed to ensure we are best placed to deliver growth.

We are also engaging at an executive level to ensure that the appropriate messages are communicated and relationships are built. And Giles has done an enormous amount of work on this in the last 6 months. We operate in a growing marketplace with lots of opportunities. So it's very, very important that we are structured appropriately and that the commercial teams are incentivized to secure new business.

To support this move, 2 new EV positions -- EVP positions have been created, one looking at -- solely at cargo, where we believe we are subscale, and the other looking at the remaining product lines. These changes cannot deliver benefits overnight, but we are already seeing progress emerging, the pipeline is building and I hope to see tangible evidence of our organic growth trajectory being back to where we want it to be in 2020. More on this later.

That said, we have a number of commercial successes in the first half, most notably the award of a 5-year contract with easyJet at London Luton. In Oceania, the region's 2 largest cargo contracts with Thai and Cathay were up for renewal. And I'm delighted that we were able to secure both contracts without going to a competitive tender. And that is testimony to the service that we deliver in that region.

In the Americas, we're delighted to see operations return in Sint Maarten, following the devastating hurricane in late 2017. And we have consolidated our position in this market by signing a 5-year extension to our existing exclusive license.

Finally, we are a people business and continue to deliver a number of initiatives to ensure we recruit and retain the best people, train our staff to the highest possible standard, as without this, we cannot deliver the service excellence that we desire.

We have flattened the senior management structure to drive greater accountability and to achieve a more lean and nimble cost base as we rightsize the business for the future.

We have previously highlighted to you the tight labor market in North America. Overall, during the period, the market in North America has improved but remains a challenge. We're also seeing labor issues emerging in Eastern Europe, where economies are strengthening. That said, our teams are on top of this and strategies are being deployed to mitigate the impact.

It has been pleasing to see some of these initiatives have made a difference. These initiatives, some of them are really not rocket science. The initiatives includes more engagement through social media. We have a relatively young workforce on the ramp, so they need to be communicated in a way that they understand and they know. So what we're doing there is we're sending out rosters by text messages. You can change your holidays by text. You can interact in that way [or form]. We've got recognition now for staff for continued periods of good performance, but it also comes down to leadership and career path. And what we need to do -- our employees, whilst pay is always very important, these other factors really all add up to staff retention, and we're working very hard on that across the network.

Moving on to review our operations by region. I'd now like to highlight a few key events from each. In the Americas, as part of a review, we have taken decisive action to close operations where there's really just no pathway to profitability. We do not close operations lightly and must always be cognizant of our customers. And it's vital to communicate with them openly and transparently.

During the first half, operations in a number of locations ceased with the largest being fueling operations in Fort Lauderdale and Vancouver. Commercial activity is not just about winning and retaining contracts, it can also involve repricing of contracts where markets have changed or the dynamics of the relationship have changed. In the U.S.A., we have been very successful in repricing a number of contracts. This allows us to pay more to our staff, gaining retention, driving consistency and ensuring risk and reward are matched.

Operations in Mexico and Colombia progressed very well and we will look to apply some additional business development resource in this region, where we have a strong management team, sound operations and opportunities do exist.

The EMEA region has seen much change in the first half. The regional office based in Heathrow has been closed as we look to increase accountability and operate from a much leaner cost base. The region was too large and we have effectively split it into 3 operating regions -- operating areas, which has allowed us to take out a significant amount of cost, reduce head count in areas where duplication of roles and responsibilities had been allowed to build up.

Within the region, we have integrated the Airline Services business, which we are finally able to get control of following a long and drawn-out process with the CMA. I am really pleased though to be able to expand that business and use the new product categories it had brought. So this was achieved by winning more cabin cleaning contracts, primarily from easyJet in Luton and Edinburgh, and from British Airways doing their overnight ultra-clean business at London Heathrow.

In the U.K., which has been underperforming for a number of years, we have replaced the entire management team with a new, experienced and highly energized team who are focusing on the turnaround. We have strong businesses in the London area, but much work to do in the regions. Each airport now has a specific plan operationally and commercially and costs have been reduced. We have slimmed down the U.K. back office and deployed resource back into the stations where these individuals can make a real difference.

Within our fuels business, we have embedded a new business won in H2 of 2018 and have been developing our relationship with World Fuels. And I look forward to expanding our partnership with them as we move forward.

As highlighted by Giles, cargo handling operations have experienced a tough first half. And EMEA, in particular, our operations in Amsterdam and Heathrow have been behind forecast. In both locations, we need to keep costs lean, and we need to win more contracts.

In the Rest of World, I've already mentioned the excellent work done in securing key contract renewals. But we have also gained some excellent new business, notably with Qatar and Korea and New Zealand.

In this region, profits are dominated by higher margin cargo operations. And we have experienced a difficult period, not necessarily through reduced volumes but more with a mix of cargo and a greater proportion of exports, which typically attracts a lower yield.

Our stellar operations in Macau continued to prosper and are delivering great results. And in March, we were very pleased to renew our anchor customer there, Air Macau, for a further 5 years.

Finally, on this slide, AMI, our cargo forwarding business, started the year very strongly with the management team that we put in place in 2018 making a real difference. They're overhauling the IT system and have identified a number of bolt-on opportunities. However, as Giles mentioned in the last few months, markets have been tougher and this has impacted trading.

So moving on to our commercial performance. I'd like to look in more detail at the progress we've made in the first half. We are absolutely committed to driving our business forward through organic growth. I've already discussed some of the changes we are making to deliver this. Going forward, we will report our commercial performance by reviewing commercial activity as a whole rather than discussing the number of contracts won or lost, which really give no proportionality. So what we'll do is commercial activity will include revenue won and lost and increased revenue secured from price negotiations.

In this period, net revenue increased by GBP 1 million with notable wins from British Airways, easyJet and Qatar, offset by contract losses with Delta in Australia and Royal Jordanian in London Heathrow, both of which were lost in price. Renewing existing business is vital, and we've had a very strong first half. And most pleasingly overall, we've increased the margin from these renewals. In the first half, we renewed GBP 68 million of new revenue -- annualized revenue, sorry.

We've also been successful in extending a number of contracts -- of our key contracts. Following a much closer commercial relationship, we have extended our contracts with Norwegian at 4 U.S. locations. And we are confident of opening up at least one more operation with them in the very near future. And with WestJet, our anchor customer in Toronto, we've extended our relationship for another 4 years.

So finally from me, I'd just like to give you a little bit more detail on the new commercial focus that we've been talking about. This is an area we are very passionate on and have been very frustrated at our lack of progress over the last 18 months. Our approach has been changed. We will strategically target where and with who we want to grow. To do this, we have overhauled our commercial structures with clear rounds of responsibility, new EVP positions have been created and they will drive the regional teams to a set of common goals.

Our commercial teams have been restructured to ensure direct accountability, no pollution of roles, salespeople selling with incentives targeted solely on sales, key account managers living and breathing their airlines' performance, dealing with issues and sourcing opportunities. Quite importantly, we've also been successful in implanting some of our key commercial staff into the head offices of some of our key customers. This will allow us to be fully proactive and really have our finger on the pulse as to what's happening in their head offices rather than somebody sitting in our head office.

To support the sales offering, we now have a dedicated sales support team, with contract managers pulling together the legal documents and ensuring salespeople are not bogged down in admin in what is a vital area for us and a very different skill set from selling. We must make ourselves easy to do business with. Contracting is complex, limits of liability, payment terms, consequential loss, GDPR, et cetera, et cetera, is not getting more -- is not getting any easier. What we're striving to do though is with major customers, and they also have a real desire to do this, is to have global terms agreements in place so that the big ticket items that I've just mentioned are all covered off. Then when we have a discussion with them, an airline, it's about the local annex, the local terms. What we've been criticized in the past from major airlines is, "Oh, we've just done business with you in Bogotá but if we may do it in Prague, we have to start all over again." That's nuts. So what we want to do is take all that out, global terms agreement in place and we can then negotiate locally and be far more nimble in how we deal with our customers.

We will have greater input in process around major bid tenders and major renewals. We must be proactive and not reactive. We must demonstrate to our customers the difference we can make to their operations and we must plan well ahead of these events. In targeting growth, we must think about who, where and when. Who do we want to do business with? Where can we achieve this? And when is that contract available? We must also be nimble. The market is changing. Our customers' needs are changing with environmental agendas, composite aircraft and our landscape continues to evolve.

In Europe, EU 261 is now a major issue, and we are seeing similar legislation emerge elsewhere. Airlines and low-cost airlines, in particular, are incurring tens of millions of pounds of cost because their aircraft are arriving at destinations more than 3 hours late. We can help. We can show airlines that we have innovative solutions. We can identify late inbound aircraft and we can apply additional resource to that aircraft to minimize disruption. We can also work with the airport authorities to ensure that late inbound aircraft are allocated a stand, which minimizes taxi time. That could actually make all the difference between a fine being levied and a fine not.

This is not something that all handlers can do, but we certainly can. And so other parts of the world, contracting is changing as well. Cost plus arrangements are prevalent where a handler has a large-scale customer. We are [live] to these changes. We are starting to contract in this way and we'll strive to be nimble with our customer offering.

So to finish, we are making a difference. We still have work to do to get to where we want to be. But we will be structured in our approach. We will have first-class customer engagement. We will deliver great service. By delivering this, we can substantially grow our business.

Thank you. And I'll now hand you back to Giles.

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Giles Wilson, John Menzies plc - CEO, CFO & Executive Director [4]

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Thank you, John. So to finish, I just wanted to set out what we've done since I've taken over and, as I set out at the beginning, how we progress against those key priorities, I want to show the decisive and positive actions and how this helps underpin 2019 and gives us the confidence as we head into 2020.

Starting with the cost reductions. The senior leadership team have taken quick, effective and decisive actions to rightsize our overheads to be fit for 2020. I have particularly asked them to change the way corporate works. And from this, we have driven in excess of GBP 10 million of cost savings. The corporate overhead is there to support operations, provide best practice and standards, audit and check. But the key change is support, not command.

For example, we have taken out 13 roles with 6-figure basic salaries. This change means we work together with our operations and don't tie them up in red tape or vanity projects. However, we must never lose sight of the fact that safety comes first and that through our efficient -- we must drive efficiency through our IT and operating systems. The senior team are, therefore, focused on a lean corporate function with fewer higher quality individuals to support the operations. In addition, we're in the process of actually reducing office space and putting people back into the operations, delivering further savings.

We need to fix our underperforming stations. Under the particular guidance of Mervyn, we have a list of core underperforming stations and 2 markets to focus on. In the U.K., we have an entirely new senior management team, and we're now starting to see some real traction. In the Europe and the U.S., we have a handful of underperforming stations and fixed plate -- plans are now in place to start to turn those in the second half, either to close them or make them profitable in our 2019 exit rate.

Through our better commercial relationships, which I'll pick up shortly, we are able to take more decisive actions not to run stations at a loss in the fear of customer reaction. My particular focus over the last few months has been building our customer relationships. And with that, organic growth will come. I have personally got around a number of our largest customers across the Americas, Europe and Asia and with plans to visit customers in the Middle East next month.

I've met with their senior leadership teams and built one-to-one relationships with many of them. This engagement has now really started to reap benefits. And a particular example is the easyJet renewal at Luton, where through senior engagement, we secured and won the 5-year deal at their home hub, a contract at the beginning of the year, I'm more than certain, we would have lost.

Secondly, I've put in place the new enhanced commercial structure, including the new roles of EVP, Commercial and EVP, Cargo, to target real new opportunities. That, alongside the change in the culture for the sales team with new sale incentives targeting on winning business, we are now set for the future.

In terms of people, this also ties into the focus on cost. I've flattened the EMEA structure and taken out a significant amount of costs through that process. The addition of Mervyn Walker to put operations back at the heart of what we do and given his in-depth knowledge of Menzies in the market, alongside our senior management team, we are structured to deliver operations for the future.

I'm also asking our team to get back out into the business. This includes everybody, including myself, where I spent a day on Luton ramp on a bank holiday servicing our team pizzas. Through Claire Hall and our EVP people, the [widening] HR team, we are focusing on how to be the employer of choice. And finally, the search for a new CFO is underway, when we would hope to conclude that by the end of the year.

We have a new approach to our structured growth plans, we are focusing on the higher margin markets. And through the support and contacts of Philipp, we are focusing on some new markets. Business development doesn't just mean M&A. But it includes targeting higher margin services like our fueling, de-icing executive services, et cetera. We are targeting highly synergistic bolt-on smaller opportunities and have recently completed the small AMI acquisition in Canada with others in the pipeline. We hope finally to start up in the second half [our] JV. And as we look further afield, we have targeted similar smaller JVs.

So my challenge to ourselves, we need to be lean and have a lean and effective corporate overhead; senior managers visible to the business out in the operations and not just behind a desk; working stations that make money and weed out underperforming operations; focus on our customer at all levels, build relationships and be their supplier of choice.

Invest into our people. It's not just about pay reach, but hygiene factors and recognition. Give our staff the right tools to do a job, a clean break room to rest and rosters that work for them. Make every pound count, we must spend the company's money as if it's our own and invest to get the best return.

I am genuinely very excited by what the future holds. In the past few months, we've put some decisive actions in place. We are now starting on that journey and to deliver, and we will help to underpin our position as we head into 2020 and beyond.

So before I open the floor to questions, I'd just like to close by saying we are targeting being the undisputed premium brand in the aviation services market and becoming our customers' supplier of choice. We will continue to focus the high standards in regards to safety, security and performance. We will listen to what our customers want, deliver what they need but at a price that delivers shareholders' profitable growth. We will fix the issues of the past, set our overhead structure at lean and efficient level while at the same time, focusing on our operations to recruit and train the right people.

We have had a tough start to 2019 with trading conditions difficult for us like many others. However, I really do feel enthused by the opportunities ahead of us. With our new management team in place, our better customer engagement building and some real positive momentum now being felt in the business, the future looks good.

So through my short-term priorities we are delivering on and our long-term strategic potential, we are very well set to drive future profitable growth. Thank you.

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Questions and Answers

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James Beard, Numis Securities Limited, Research Division - Analyst [1]

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It's James Beard from Numis. A question on the commercial environment and competition in the first half. Given this challenging macro backdrop that we saw, given the potential for some M&A within the wider aviation services space, what changes have you seen in competitive nature and activity from some of your key competitors during the first half, if any?

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Giles Wilson, John Menzies plc - CEO, CFO & Executive Director [2]

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I don't -- I think competitive environment remains as it always has. I think it's more what are the customers -- particularly in Europe, you're seeing a lot more of the customers focusing on the -- we've seen the cost plus arrangements in the U.K. We're seeing them focused on their -- they've got a big sort of challenge with EU 261 [compliance]. And I think that is becoming a big, big focus of our -- particularly of our low-cost carriers. I think service is definitely now becoming a much more of a priority than perhaps it had been, whereas sort of price was always there.

Don't get me wrong, customers always want the best price. But I think there is a definite drive on service. And you will have seen that with the renewal of the Cathay and the Thai contracts. And I think what are we seeing from our customers? Obviously, they're gearing up. WFS themselves are probably the newer entrants into the U.K. having won from us easyJet at Edinburgh last year. They definitely have a stated ambition of growing a ground handling business. Swissport will always be our biggest competitor. And -- but I do think generally across the market, you're seeing a drive for better service. And we believe that gets paid for.

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John F. A. Geddes, John Menzies plc - Corporate Affairs Director, Group Company Secretary & Executive Director [3]

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I think the more [scale] operators are always relatively sensible. The only time you see real pricing pressure is maybe in somewhere like North America, where you have some mom and pops, who are prepared to take a very low price. But the biggest change, as Giles says, is maybe cost plus contracts or a different way of doing contracting or even -- airlines are now talking about special teams to deal with the EU 261 potential flights and putting more cost into the business.

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Eoghan Reid, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [4]

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Eoghan Reid from Berenberg. Just a couple from me. On the cost synergy side, could you just say where you are now in sort of on that GBP 10 million target, where your exit rate is at H1? And how do you think that will phase over H2 and 2020?

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Giles Wilson, John Menzies plc - CEO, CFO & Executive Director [5]

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So the full GBP 10 million will be in the 2019 exit rate. The benefits, net of the costs that we're putting back in on the commercial will be -- it will be much more in 2020 over 2019. So there's a few -- a lower number of million in this year. But certainly, it will be all in our 2020 exit rate -- 2019 exit rate.

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Eoghan Reid, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [6]

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You mentioned kind of (inaudible). Have you seen more opportunity...

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Giles Wilson, John Menzies plc - CEO, CFO & Executive Director [7]

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Yes. So there are plans afoot -- since we updated the market, we've made some other changes. We've taken out other costs. We're also looking, I think I referenced the fact, we're looking at some of the space in which offices are and putting people back into the operations, which is all part of that whole drive to get ourselves back in -- back at the operational.

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Eoghan Reid, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [8]

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[How dear was that versus the GBP 10 million], is it...

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Giles Wilson, John Menzies plc - CEO, CFO & Executive Director [9]

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It's -- the -- I'm not putting any number exactly against it, but it will help fully secure the GBP 10 million and make sure that it pays for the things that we put back in as well.

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Eoghan Reid, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [10]

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And just lastly, you mentioned subscale in cargo?

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Giles Wilson, John Menzies plc - CEO, CFO & Executive Director [11]

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Yes.

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

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How subscale are you with...

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Giles Wilson, John Menzies plc - CEO, CFO & Executive Director [13]

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So we are about -- so I think -- the exact number is there, but we're about, if you sort of strip out the impact of cargo forwarding, which obviously is a very different business, we're probably sort of 15%, 16%, 17% of our revenue. You'd hope to be near or at least sort of 1/4 of your revenue from that. If you look at someone like a Swissport, that's the sort of levels that they sit at. And yes, it's an odd thing to say in a market where we're seemingly [targeting markets], but actually what you'll find is cargo drives the higher margin. And actually, even in difficult markets, you can grow cargo. So now is the time for the opportunity to do it.

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Eoghan Reid, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [14]

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And is that organic or inorganic for you?

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Giles Wilson, John Menzies plc - CEO, CFO & Executive Director [15]

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It's probably mainly organic. But by nature, you're going to be taking -- we might need to take on new facilities, so it depends how you build those in. But the challenge for our EVP, Cargo is a guy who's going to take on and drive that. We've got big facilities, we've got good facilities, we've got strong business. We're probably going to have to open some new facilities across at some point. Now whether that comes through inorganic or organic, we'll see. Robin?

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Robin Alexander Speakman, Shore Capital Group Ltd., Research Division - Research Analyst [16]

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I've got a few things. [Can I] expressly -- just further to the tough conditions out there and opportunities, organic versus acquisitive. In our sort of home territory around Manchester, clearly PremiAir went bust and you won again from that.

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Giles Wilson, John Menzies plc - CEO, CFO & Executive Director [17]

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We did.

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Robin Alexander Speakman, Shore Capital Group Ltd., Research Division - Research Analyst [18]

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So it seems to me that these conditions could actually play in your favor.

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Giles Wilson, John Menzies plc - CEO, CFO & Executive Director [19]

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I agree.

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Robin Alexander Speakman, Shore Capital Group Ltd., Research Division - Research Analyst [20]

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So just give us a bit more color on the perhaps organic opportunities.

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Giles Wilson, John Menzies plc - CEO, CFO & Executive Director [21]

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I think certainly, you're right. I mean, PremiAir went bust, which was -- which we picked up, Loganair at Manchester. And we built -- and there's another relationship that perhaps wasn't so good last year, which is in a much better place this year. I think the key really is it's about the customer engagement, the organic comes through, understanding new customers and what they need and actually interacting with them. We probably -- where perhaps we've lagged behind of recent times has been that, where we're putting a lot of effort. We are -- as I said, I've visited most of our customers. I've got more to come. Philipp is going to join me on a few shortly as well and we want to get them realizing that we're here to do. We're here for business and we're here to listen to their needs. But also their needs isn't just to do it at any price, so we must make sure we do it at profitable...

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John F. A. Geddes, John Menzies plc - Corporate Affairs Director, Group Company Secretary & Executive Director [22]

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It's about having a process behind who, where and when I talked about. So what's coming up? Let's have -- who do you want to do business with? Where can we -- can we attack somebody else's business? Or is it an insource business that we can then go and say to them, "Well, look, you're doing it in-house at the moment, but we can do it cheaper and more efficiently for you." But also we've got a list of major contracts that are coming up that we'll bid for in the same way as some of our competitors will bid for our contract.

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Giles Wilson, John Menzies plc - CEO, CFO & Executive Director [23]

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I mean that's a good example. So we've set -- for the rest of this year, we set the commercial team a target to deliver and they'll be effectively incentivized on delivering that. And within each region, there's probably between 4 and 5 key contracts that we'd like. Now we won't get them all. But at least they've all got a genuine bonus and a genuine target against those. So in every single region, each SVP or EVP of Commercial knows what they're after between now and the end of the year. And that's just the starting for what we're trying to incentivize people to drive forward on.

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John F. A. Geddes, John Menzies plc - Corporate Affairs Director, Group Company Secretary & Executive Director [24]

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It's about being absolutely proactive as well. It's not waiting for an RFP to come through and say, "Oh, great, we've got RFP from this airline to do that," and we say, "Well, hold on." We should know when that contract is coming up. We should have prepared long before an RFP hits our desk. How can we make a difference? Or it might be that actually we've looked at that, we don't want to go for that contract. Let's be proactive in our approach to commercial.

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Robin Alexander Speakman, Shore Capital Group Ltd., Research Division - Research Analyst [25]

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I guess further to that as well, putting market conditions to one side, last year we were talking a lot about the capabilities of Menzies with data provision. And you've got a very systemized, developed product service area here. So where are we on that in terms of rollout and the economics of that?

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Giles Wilson, John Menzies plc - CEO, CFO & Executive Director [26]

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So we do have some of the best systems in the market, there is no doubt. What we are doing is making sure we target where we -- deploy it to where it's going to get bang for buck. So a good example, WorkBridge, one of our sort of leading rostering systems, will deliver us efficiencies in Los Angeles but unlikely to deliver us efficiencies in a 3 turn a day Mexican station. So what we've done is we've turned it slightly. So we've not changed anything major. We returned it to say, "What is the system that suits the airport? And what is it the actual operation teams are looking for?" And giving them the suite of opportunities to deliver. So none of that changed, we've just slowed the development and we're looking -- driving on the deployment.

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John F. A. Geddes, John Menzies plc - Corporate Affairs Director, Group Company Secretary & Executive Director [27]

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And if you look also at some of our other systems, if we look at it in the risk function in auditing, for example, we've got a very sophistic audit process. We want to make sure that we learn across our operations, that we're doing the right things in each airport. We operate in 211 airports. We audit ourselves. Outside of our own audits, we had 1,100 airline audits last year. It's absolutely bonkers. So what we're now doing, and we've got real traction, and my Head of Audit, Yogesh Parekh, presented to IATA. And after that, he had 7 approaches from major airlines to say, "Well, hold on a sec, we're sending audit teams around the world, at great cost. You seemed to be already doing that. Could we have a chat -- would you be prepared to show us your audits?" "Absolutely, we have nothing to hide."

So I'm actually going over in September with Yogesh to meet Delta and American Airlines. So that -- anyway, if we can start getting airlines to trust us on that, that gives us a hoop to win more contracts. We're also trying to say, "Look, we spend an awful lot of money in training and standardizing of training, each airline likes to load the exact same aircraft slightly different ways." So we're now making traction. And with Delta Air Lines again, they've accepted the Menzies standard of training for one of their operations. So that's the reason we can make a difference because the airlines are saying, "Well, hold on, we're spending money on that, [but source] will support Menzies and dnata, so why don't we trust them?" And that's where you start to get your hoops into airlines and that will help.

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Robin Alexander Speakman, Shore Capital Group Ltd., Research Division - Research Analyst [28]

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Okay. Just one last one. I'm sorry to ask about IFRS 16. Just looking for updated guidance really, interest for the full year and tax, the tax rate for the full year, post IFRS 16, if there's any difference.

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Giles Wilson, John Menzies plc - CEO, CFO & Executive Director [29]

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I will let you know that afterwards.

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Robin Alexander Speakman, Shore Capital Group Ltd., Research Division - Research Analyst [30]

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Okay.

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Philipp Joeinig, John Menzies plc - Independent Chairman [31]

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Probably better take that one off-line because of the individual number of moving parts.

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Christopher Bamberry, Peel Hunt LLP, Research Division - Analyst [32]

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Chris Bamberry, Peel Hunt. Just a couple, if I may. The fix and close stations, just roughly how many are there, the rough scale, in terms of revenues and profit?

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Giles Wilson, John Menzies plc - CEO, CFO & Executive Director [33]

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So probably less on the latter. But there is -- when I say a handful, I mean a handful. So in the U.S., we've got 3 that we have got focus on, which one has got 2 product categories so that makes in my mind 4. And in Europe, we've probably got 3 or 4 that we're targeting. Some of those are things like, for example, Amsterdam cargo, where we're looking to say, "We need to win something to outperform the underlying market."

So fix doesn't mean that we're going to close, but fix means what is it we need to do. Some of it is customer engagement to get the right prices, some of it is rebalancing some of the portfolio. And in some instances, they are profit-making. So they don't always necessarily mean it's just that they could be better.

But no, we are talking about a handful. They are the big -- in some instances, the bigger stations. We don't tend to worry -- we watch -- we don't keep smaller stations open if they're just for the sake of it. But the opportunity there is certainly materially in the sense there's a number of million opportunity that we can drive out.

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Christopher Bamberry, Peel Hunt LLP, Research Division - Analyst [34]

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So one for me. The loss of the licenses in the second half last year, probably the impact the first half. What's the second half...

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Giles Wilson, John Menzies plc - CEO, CFO & Executive Director [35]

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Probably half of that, maybe slightly less. We'll see as we see. Because the other thing you get to win back is the Sint Maarten win -- not win, recovery, sorry apologies. And then of course, you've got Airline Services going into the -- in as well. So there's sort of a bit of ins and outs that come through that.

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Christopher Bamberry, Peel Hunt LLP, Research Division - Analyst [36]

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Can you offset that impact...

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Giles Wilson, John Menzies plc - CEO, CFO & Executive Director [37]

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Yes. We should outrun it in the second half. And of course, the stranded costs don't appear in the second half either.

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Philipp Joeinig, John Menzies plc - Independent Chairman [38]

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Anybody else?

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Eoghan Reid, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [39]

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Follow-up on ASL. How is the sort of synergies going? Is that better than expected?

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Giles Wilson, John Menzies plc - CEO, CFO & Executive Director [40]

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They will be in the exit rate. I think I'm pretty sure that you will have all, at some point, caught The Sun paper, where we got mentioned for a late baggage at Gatwick. Gatwick is -- it will need -- is some work to be done at Gatwick in terms of the ground handing. The de-icing business and all the back-office stuff is done. There's a little bit of work being done in regards to getting the right size of business at Gatwick, which we're working, both with the airlines and the airport for.

And again, still a profit-making station. But we're having to put a bit of extra resource through the summer, given the fact that, one, we've had our own challenges of timing of getting the integration done; but two, also making sure we've got the right structure as we lead into 2020. But generally, very pleased and it should do exactly what we said we expect. Actually, I suppose the bigger frustration to add to that was the delay didn't help.

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Unidentified Analyst, [41]

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(inaudible). Just on the EU 261 comment which you made, have you actually invested at airports for certain airlines or it's just something you're willing to...

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Giles Wilson, John Menzies plc - CEO, CFO & Executive Director [42]

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So the answer is not specifically, but we are in the process of -- with part of the agreement we've put in place when we did the easyJet renewal at Luton. We said we'd work with them to see what we could try to do. We've invested 3 people actually embedded in the airport. [Not one] of them as a key account, but the other is what they call [over there] I wouldn't say it's innovation -- it's the innovation of how we grow and the biggest priority is EU 261.

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Unidentified Analyst, [43]

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Okay. And then just on the environmental side which you mentioned, which is obviously very tough because of the airline. What can Menzies actually do on that in the bidding process for the customer?

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Giles Wilson, John Menzies plc - CEO, CFO & Executive Director [44]

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So I'll leave you on that one.

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John F. A. Geddes, John Menzies plc - Corporate Affairs Director, Group Company Secretary & Executive Director [45]

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Yes. I mean we don't fly planes. So we can deploy more electric equipment. It's very trendy now to have what they call push -- people that -- push back...

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Giles Wilson, John Menzies plc - CEO, CFO & Executive Director [46]

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[Late stocks].

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John F. A. Geddes, John Menzies plc - Corporate Affairs Director, Group Company Secretary & Executive Director [47]

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That's the one I'm searching for. It actually isn't. People say, "Oh, it's driverless." It's not driverless, it's just somebody walking behind it with a walkie-talkie, really. So it's still got a man there. So it in theory takes one person out of the turn, but that's electric. There's lots of innovation going on. You've got autonomous steps, which on the face of it are great. And we're looking at that. But the steps have got to know where to start from otherwise they won't find out where to go to. And in very busy airports, like Gatwick, that would never work. However, that would work perfectly for somebody like Ryanair in Stansted, where they've got dedicated stands.

So there are various things that we can do. It will be around electric equipment mainly. But it is very topical for airlines, it's in every tender.

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Giles Wilson, John Menzies plc - CEO, CFO & Executive Director [48]

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Okay. Thank you very much. Thank you all for coming along.