BBA Aviation plc

2017 Interim Financial Report

Results for the half year ended

30 June 2017

For further information please contact:

David Crook, Group Finance Director                                                                             (020) 7514 3999

Matt Denham, Investor Relations                                                                    

BBA AVIATION PLC

David Allchurch/Michelle Clarke                                                                                       (020) 7353 4200

TULCHAN COMMUNICATIONS

A video with Wayne Edmunds, Interim Group Chief Executive, and David Crook, Group Finance Director, is now available on www.bbaaviation.com

A live audio webcast of the analyst presentation will be available from 09:00 today on www.bbaaviation.com

1. Adjusted performance measures are defined in note 17

2. Total includes discontinued operations

3. % change based on continuing operations for operating performance

4. Statutory measure is basic earnings per share

5. 2016 return on invested capital and net debt are for the full year

Highlights

·      Continuing underlying operating profit up 29% to $174.9 million; enlarged Signature network performing well

·      Divisional summary:  

o  Flight Support (86% of continuing Group underlying OP) 

§  Organic revenue up 3.2% and operating profit up 13.6%, with strong drop through

§  US B&GA market up 3% in H1

§  Network contract negotiations with Signature's largest customers successfully concluded

§  Short-term negative impact on fuel volumes relative to market

o  Aftermarket Services (14% of continuing Group underlying OP) 

§  Operating profit growth of 134% to $26.0m, driven by Ontic

§  Ontic - GE avionics delivering as expected, good contribution from 2016 licence acquisitions

§  ERO - improved operating performance H1 2017 vs H1 2016, stable vs H2 2016

·      Sale of ASIG for $202m completed 31 January 2017

·      Statutory continuing operating profit increased by 97.9% in H1 2017 compared to H1 2016

·      Free cash flow of $56.6 million, de-levered to 2.9x net debt/EBITDA as anticipated (FY 2016: 3.1x on covenant  basis)

·      Group ROIC increased by 0.6% points to 10.7%

·      Basic adjusted EPS increased by 32.6% to 11.4¢

·          Interim dividend increased by 5% to 3.81¢ cents reflecting continued confidence in the Group's future growth prospects

Wayne Edmunds, BBA Aviation Interim Group Chief Executive, commented:

"We are pleased with BBA Aviation's performance overall in the first half of 2017. Against the background of a US B&GA market that grew 3%, we are making encouraging progress in delivering the benefits of Signature's unique global network of FBOs. We successfully concluded during the first half of the year negotiations with our largest customers regarding the delivery of our services across the enlarged, market-leading network and believe that the outcome demonstrates Signature's unrivalled ability to satisfy the needs of its customer base. Although we experienced a short-term negative impact on volumes relative to market during the period, Signature's strong drop through continues to demonstrate our ability to grow underlying operating profit ahead of market growth.

In Aftermarket Services, Ontic had a good first half and we are pleased with the contribution of the portfolio of legacy avionics products acquired from GE Aviation at the end of 2016. Ontic continues to have a strong pipeline of growth opportunities. Although ERO continues to be impacted by reduced legacy mid-cabin fixed wing flying, the slight improvement in operating performance seen in the second half of 2016 was maintained in to the first half of this year.

In summary, the Board's confidence of good growth in 2017 remains unchanged."

INTERIM FINANCIAL REPORT 2017

Overview

BBA Aviation performed well in the first half of 2017 and made further progress with the implementation of its strategy.

Flight Support ("Signature") delivered good operating profit growth of 13.6% against US B&GA movements that grew 3% during the first six months of the year. With the Landmark Aviation acquisition successfully integrated in 2016, Signature is making encouraging headway in realising the benefits of its unique and high quality global network of FBOs and in enhancing its network performance. Ontic continues to perform well, with the legacy avionics business acquired from GE Aviation at the end of 2016 contributing as expected. While trading conditions in Engine Repair & Overhaul (ERO) remain challenging, the actions being taken to reduce the cost and complexity of this business supported a stable operating performance following the slight improvement during the second half of 2016. 

Continuing Group revenue increased by 12.2% to $1,145.5 million (H1 2016: $1,020.6 million) including a $74m contribution from acquisitions. Continuing Signature revenue increased 18.0%, reflecting organic growth of 3.2%, a $52.8m contribution from acquisitions - principally an additional month of contribution from the Landmark Aviation acquisition (completed February 2016) - and the net positive impact of higher fuel prices and adverse foreign exchange movements, which increased revenue by $45.9 million. Aftermarket Services revenue increased by 0.8% reflecting the contribution from the 2016 acquisitions in Ontic, largely offset by an organic revenue decrease in ERO.

Continuing Group underlying operating profit was $174.9 million (H1 2016: $135.6 million). There was a good operating performance in Signature, with strong drop through and a $3.6 million net contribution from acquisitions less the impact of disposals completed in H1 2016. Underlying operating profit at Aftermarket Services more than doubled, including an $8.4 million contribution from acquisitions, and now accounts for 13.9% of the continuing Group. Ontic delivered as anticipated, and the slight improvements seen in ERO's operating performance in the second half of 2016 were maintained in to the first half of 2017.

Continuing Group underlying operating profit margin increased to 15.3% (H1 2016 constant fuel price: 12.6%) with positive margin development in Signature and Aftermarket Services.

Net interest increased by $1.3 million to $31.4 million (H1 2016: $30.1 million), mostly due to higher interest rates and other interest costs offset partly by lower debt. Net debt decreased to $1,256.3 million (FY 2016: $1,335.3 million). Net debt to EBITDA reduced to 2.9x on a covenant basis (FY 2016: 3.1x) and 2.9x on a reported basis (FY 2016: 3.2x). Interest cover increased to 6.7x for the 12 months to 30 June 2017 (FY 2016: 6.5x).

Continuing underlying profit before tax increased to $143.5 million (H1 2016: $105.5 million).

The Group's underlying tax rate for continuing operations was 18.3% (H1 2016: 16.6%). Adjusted earnings per share for continuing operations was up 32.6% to 11.4¢ (H1 2016: 8.6¢).

Exceptional and other items after tax, for continuing and discontinued operations, totalled $64.6 million. Key components of this for continuing operations are the non cash amortisation of acquired intangibles ($46.7 million), restructuring expenses ($5.3 million) and a tax credit of $19.3 million. Discontinued operations includes the disposal of ASIG ($6.6 million) and an associated tax charge on the disposal ($25.3 million).

Continuing statutory profit before tax was $91.5 million versus a $153.3 million statutory loss for the first half of 2016. The improvement arises principally from the lower level of exceptional and other items charged during the first six months of 2017, with the first six months of 2016 including impairment charges in relation to the assets of ERO and ASIG.

Free cash inflow was $35.1 million lower at $56.6 million (H1 2016: $91.7 million). There was a $65.1 million outflow of working capital in the first half of 2017 (H1 2016: $9.3 million inflow, FY 2016: $36.1 million inflow) principally due to the expected reversal of the 2016 year end working capital outperformance for continuing operations and a working capital outflow of $24.8 million on ASIG discontinued operations prior to its disposal on 31 January 2017. It is expected that approximately $15 million of the further outflow on continuing operations will reverse in the second half.

Gross capital expenditure amounted to $38.2 million (H1 2016: $49.6 million), including the construction of a new FBO terminal at Boeing Field, Seattle, which completed in June 2017.

Cash flows on exceptional and other items are largely as a result of restructuring expenses.

The Group made $2.1 million of pension scheme payments (H1 2016: $2.6 million).

The Group's tax payments during the period were $18.8 million (H1 2016: $7.0 million) and interest payments were $28.8 million (H1 2016: $29.5 million). The dividend payment was $91.5 million (H1 2016: $87.2 million).

Total spend on acquisitions and licences completed during the period was $61.3 million (H1 2016: $2,092.0 million), which included $59.3 million for the GE Aviation avionics acquisition in Ontic. The first half of 2016 included the acquisition of Landmark Aviation for $2,086.9 million. Proceeds from disposals of $180.4 million (H1 2016: $186.5 million) relate to the disposal of ASIG, net of costs.

Return on Invested Capital (ROIC) increased to 10.7% (FY 2016: 10.1%).

Business Review - Continuing Operations

Flight Support (86.1% of continuing operations' underlying operating profit)

The Flight Support division ("Signature") provides specialist on-airport services including refuelling and ground handling to the business & general aviation (B&GA) market.

¹ H1 2016 operating margin adjusted for constant fuel prices and disposals (unadjusted H1 2016 operating margin: 20.8%)

*Return on invested capital for full year 2016

Revenue at Signature increased by 18.0% to $802.8 million (H1 2016: $680.5 million). This included a $52.8 million contribution from acquisitions - principally an additional month of contribution from the Landmark Aviation acquisition (completed February 2016) - and the net positive impact of higher fuel prices and adverse foreign exchange movements, which increased revenue by $45.9 million.

Signature's organic revenue, excluding the contribution from acquisitions, increased by 3.2%. This was against the background of US B&GA movements up 3% and European B&GA movements up 6%.

Following the successful integration of Landmark Aviation in 2016, Signature has focused on optimising its unique and high quality global network and on enhancing network performance. This has included Signature engaging during the first half of the year in negotiations with its customers regarding the provision of its services across the enlarged network, focusing initially on Signature's heaviest users. During the first half, a range of important contract negotiations were successfully concluded, including with many of Signature's largest customers, and the Group is confident that the outcome demonstrates the ability of Signature's unrivalled network to deliver value and satisfy the needs of its customers. Signature is continuing to work with its broader customer base to deliver value across the network.

As previously guided, Signature is focused on delivering underlying operating profit growth ahead of the growth in its market.  Although there was a negative impact on fuel volumes in the first half of 2017 while negotiations with Signature's customers were underway, drop through to profit was strong. Underlying operating profit at Signature increased by 13.6% to $160.8 million (H1 2016: $141.6 million) and on an organic basis, adjusting for the net impact of acquisitions and disposals ($3.6 million) and FX ($(0.9) million), increased by 12.4%. The Group remains confident in Signature's ability to continue to deliver significant value creation across the enlarged network.

Underlying operating margin was slightly lower at 20.0% (H1 2016: 20.8%) due primarily to the increase in fuel prices and disposals in 2016. After adjusting for constant fuel prices and disposals, Signature's underlying operating margin increased by 1.7% points compared to the prior period.

Statutory operating profit of $119.7 million has increased by 54.7% (H1 2016: $77.4 million). This increase is a result of organic growth, the impact of acquisitions, net of disposals and lower charges for exceptional and other items.

Operating cash flow for continuing Signature improved to $154.0 million (H1 2016: $145.8 million), principally due to increased EBITDA from organic growth and the acquisition of Landmark Aviation, which completed in February 2016. Return on invested capital increased to 11.4% (FY 2016: 11.2%).

During the period, Signature continued to invest in its existing network, with the opening of its newly constructed facility at Boeing Field, Seattle.  It also secured a new strategic lease at Washington Dulles International Airport, Virginia.   The number of locations in the Group's affiliate FBO programme, Signature Select^TM, remains at 18. The Group continues to see opportunities to expand the Signature Select^TM network.

There are now 202 locations in Signature's global network.

Aftermarket Services (13.9% of continuing operations' underlying operating profit)

The Aftermarket Services division is focused on the support of maturing aerospace platforms through Ontic, the Group's Legacy Support business, and the repair and overhaul of engines through the Group's Engine Repair and Overhaul (ERO) businesses.

*Return on invested capital for full year 2016

In Aftermarket Services, revenue increased by 0.8% to $342.7 million (H1 2016: $340.1 million). On an organic basis, adjusting for FX ($(6.3) million) and acquisitions ($21.2 million), revenue decreased by 3.7%. This decrease was driven by ERO.

Underlying operating profit of $26.0 million increased by 134% (H1 2016: $11.1 million). Both Ontic and ERO contributed to the uplift in profitability. Growth at Ontic was driven by the acquisition of a portfolio of avionics products from GE Aviation at the end of last year and the 2016 licence acquisitions. In ERO, the improved operating performance seen in the second half of 2016 was maintained in to the first half of 2017. On an organic basis, operating profit increased 72.5%. Operating margins improved to 7.6% (H1 2016: 3.3%).

Statutory operating profit of $16.7 million has increased by $14.9 million (H1 2016: $1.8 million), principally as a result of the improvement in underlying operating profit as outlined above.

There was an operating cash outflow for the division of $14.7 million (H1 2016: $6.8 million outflow) reflecting the expected reversal of working capital outperformance from the year end offset by improved EBITDA, including the benefit of acquisitions. Return on invested capital increased to 10.2% (FY 2016: 6.9%).

Ontic, the Group's legacy support business, continues to perform well, with revenue increasing 34.2% to $94.2 million (H1 2016: $70.2 million). On an organic basis, revenue was up 8.6%.

The first half performance included a significant contribution from the portfolio of legacy avionics products acquired from GE Aviation in December 2016. The acquired portfolio of products is delivering as expected and the transfer of the business into Ontic's existing UK facility in Cheltenham is underway, with completion expected in the second half of 2017. Ontic also benefited from the licences added in 2016 with Ultra Electronics, for the Q400 PEC, and with Safran Nacelles, to support the Saab 2000 nacelles and AWACS CFM56 thrust reverser, together with the expansion last year of its licensor relationship with Pratt & Whitney Canada Corp, increasing its portfolio of JT15D products. Furthermore, Ontic benefited in the first six months of 2017 from initiatives being undertaken to achieve a more balanced annual performance profile.  As such, a more even split is expected in Ontic's performance between the first and second half of 2017 than in previous years.

Ontic continues to assess a strong pipeline of opportunities in relation to new products and licence adoptions.  

Engine Repair and Overhaul's revenue declined by $21.4 million to $248.5 million (H1 2016: $269.9 million). While market conditions remain challenging, ERO's operating performance was stable in the first half of 2017 following the slight improvement in the second half of 2016.

Volumes in legacy mid-cabin engines and rotorcraft engine overhauls remained depressed through the period, with reduced workscopes and competitive pricing. Nevertheless, while the small thrust engine repair and overhaul market remains competitive and volatile month-to-month, ERO did see improvements in demand for overhauls in certain Pratt & Whitney and Tay markets, as well as market share gains for the TFE731 over the course of the first half.

ERO's footprint rationalisation programme is nearing completion. The new overhaul facility at Dallas Forth Worth (DFW) is successfully delivering the overhaul operations formerly undertaken at the Neosho and Forest Park facilities. The sale of the Forest Park site continues to be expected this year. It continues to be anticipated that ongoing operational improvements and cost reduction will help to improve flexibility, customer service and financial performance.

Central costs

Underlying central costs have decreased during the first half of 2017 by $5.2 million to $11.9 million (H1 2016: $17.1 million). This primarily reflects the costs of supporting ASIG being absorbed under the transitional service agreement with John Menzies as part of the ASIG disposal.

Discontinued Operations

Discontinued operations for all periods presented include the results of the Group's ASIG business. The disposal of ASIG, which completed on 31 January 2017, generated proceeds of $180.4 million, net of costs during the period. ASIG's results are included up to the date of its disposal.

Other Financial Information

Net debt reduced by $79.0 million to $1,256.3 million (FY 2016: $1,335.3 million). At 30 June 2017 the Group had total borrowings of $1,416.1 million (FY 2016 $1,547.7 million), obligations under finance leases of $1.5 million (FY 2016 $1.7 million) and cash and cash equivalents of $152.6 million for continuing operations (FY 2016: $182.5 million) and cash and cash equivalents for discontinued operations of $nil (FY 2016 $22.8 million).

Net debt to EBITDA reduced to 2.9x on a covenant basis (FY 2016: 3.1x) and 2.9x on a reported basis (FY 2016: 3.2x). Interest cover increased to 6.7x for the 12 months to 30 June 2017 (FY 2016: 6.5x).

Pensions

The Group's net defined benefit pension and other post-retirement benefits liabilities reduced by $2.7 million during the first half of 2017 from $82.8 million at 31 December 2016 to $80.1 million at 30 June 2017, reflecting the favourable impact of better than expected returns on plan assets and employer contributions, more than offsetting the unfavourable impact of foreign exchange movements, net interest costs and administration expenses.

Dividend

The Board is declaring an increased interim dividend of 3.81¢ (H1 2016: 3.63¢) up 5% on an underlying basis reflecting the Board's progressive dividend policy and its continued confidence in the Group's future growth prospects.

Board Changes

As previously announced, Simon Pryce stood down as Group Chief Executive and from the Board with effect from 30 June 2017. Wayne Edmunds has been appointed Interim Group Chief Executive until the process of finding a permanent successor is complete. David Crook succeeded Mike Powell as Group Finance Director on 1 June 2017.

Outlook

We are pleased with BBA Aviation's performance overall in the first half of 2017. Against the background of a US B&GA market that grew 3%, we are making encouraging progress in delivering the benefits of Signature's unique global network of FBOs. We successfully concluded during the first half of the year negotiations with our largest customers regarding the delivery of our services across the enlarged, market-leading network and believe that the outcome demonstrates Signature's unrivalled ability to satisfy the needs of its customer base. Although we experienced a short-term negative impact on volumes relative to market during the period, Signature's strong drop through continues to demonstrate our ability to grow underlying operating profit ahead of market growth.

In Aftermarket Services, Ontic had a good first half and we are pleased with the contribution of the portfolio of legacy avionics products acquired from GE Aviation at the end of 2016. Ontic continues to have a strong pipeline of growth opportunities. Although ERO continues to be impacted by reduced legacy mid-cabin fixed wing flying, the slight improvement in operating performance seen in the second half of 2016 was maintained in to the first half of this year.

In summary, the Board's confidence of good growth in 2017 remains unchanged.