John Menzies plc

Interim results for the period ended 28 June 2008

William Thomson, Chairman said:

"The Group continues to follow its strategy of selectively growing Menzies Aviation while maintaining earnings from Menzies Distribution. At Menzies Aviation the focus on creating regional densities by targeting attractive airlines in attractive markets has been invaluable as our airline customers face unprecedented challenges. The division has again succeeded in winning a number of new contracts and successfully started major new operations in India and South Africa.

At Menzies Distribution the stability achieved during 2007 has continued. The division continues to drive down costs through productivity initiatives. Good progress has been made on new revenue ventures and we have successfully entered the market in the Republic of Ireland.

The Board is satisfied that the current strategy is continuing to drive the Group forward in this challenging market and overall the Group is performing broadly in line with the Market's expectations."

For further information:

Notes to Editors:

Group Performance

Revenue in the period for the Group increased by 10.3% to £826.5m. Menzies Aviation continued on its growth path with an increase in revenue from a combination of organic and acquisition growth, whilst Menzies Distribution delivered another stable performance with revenue 3.5% higher at £587.2m.

Group underlying profit before tax fell by 21.9% to £11.4m. After the impact of the start-up costs of £3.5m (2007: £1.1m) to support the continued organic growth and contract win momentum, the Aviation underlying operating profit was £2.1m down at £4.1m. Aviation's underlying operating profit before start-up costs was £0.3m up on 2007 at £7.6m. 

Aviation revenues increased by 31.4% in the period. Return on sales (excluding start-up costs) fell from 3.7% in the first half of 2007 to 2.9% in 2008. This was mainly as a result of higher turnover at AMI, the cargo forwarding business which attracts lower margins, the underperformance of the USA cargo business and profits still to be fully realised from new ventures in Scandinavia and South Africa. 

In line with last year, Distribution delivered underlying operating profit of £10.9m. Like for like sales of Magazines were down year-on-year, while Newspapers like for like sales were marginally ahead.  

Corporate costs were a further £0.5m lower than 2007 at £0.9m for the period. Interest costs of £2.7m were £1.6m higher than last year reflecting higher net debt levels owing to the continued investment programme in Aviation.

Exceptional Items

Group profit before tax and basic earnings per share benefited from a net exceptional gain of £2.4m compared to the exceptional gain of £2.5m in 2007. Menzies Aviation's disposal of its interest in Talma Menzies in Peru gave rise to a gain on disposal of £8.2m. This was partially offset by an impairment charge of £3.4m mainly relating to our investment in Aeroground and provisions for onerous leases of £2.4m. 

Cashflow and Investment

Operating cashflow was £10.5m, an increase of £8.7m compared to 2007 reflecting an improved working capital position. Free cash outflow of £21.4m compared to £19.1m in 2007 reflects increased capital expenditure in the period.

The Group net debt at the half year totalled £152.7m, an increase in the period of £41.4m, reflecting the continued investment programme in Aviation. The Group continues to have a strong Balance Sheet.

Interim Dividend

The Board has declared an increase of 5% in the interim dividend to 7.56p reflecting the Board's continued confidence in the businesses. The dividend will be paid on 28 November 2008 to shareholders on the register at the close of business on 31 October 2008.

Menzies Aviation

Performance

Menzies Aviation made further progress during the first half with revenue up over 30%, despite a market place where its customers faced unprecedented challenges.

The division has a focussed strategy of creating regional densities by targeting attractive airlines in attractive markets. This strategy has been enormously valuable at a time when airlines are facing severe financial pressures in the light of soaring oil prices and a global economic slowdown. While the division is not immune to the industry problems, its strategy combined with the geographical diversity of the business leaves it well placed to progress in these difficult times. 

The business now has three core product categories, namely ground handling, cargo handling and cargo forwarding. 

Fig1. - Core Product Categories - Revenue Split

Fig 2. - Top 10 Customers by Divisional Revenue

The division has a good balance of products and customers and it is a strength of the business, particularly in current markets, that it is not over reliant on any one customer. In addition, the customers listed have all been identified as "attractive customers" and fit into the divisional strategy of working with attractive airlines in attractive markets. 

Three businesses were acquired during the first half. The excellent contract gain momentum also continued with the division winning more customers at existing locations and entering new markets with new and existing customers. 

Overall the division was a net winner of 27 contracts in the period. Start-up costs associated with these contracts are expensed in year one and have impacted the half year earnings and consequently the full year. However, they leave the division well placed to deliver further earnings growth in the medium term. 

Significant contract renewals during the period included cargo and ground handling contracts with bmi (UK), Lufthansa (UK & Czech Republic), Emirates (New Zealand), Virgin Atlantic (Australia) and Asiana (USA).

Ground Handling

The ground handling business continues to prosper operating at 102 airports worldwide. Underlying regional performance varied, with weaker performance in the Czech Republic, the Netherlands and Hong Kong offset by stronger performance in Spain, UK, New Zealand and Mexico/Caribbean. New contracts were gained at existing stations and start-ups commenced at 16 airports. Overall turns were up 16.6% driven by contract gains and the new start-ups in South Africa.

The division aims to provide airlines with a safe and secure service that turns their aircraft round on time, every time. To allow the division to invest sufficiently to provide this high level of service, it is necessary to secure contracts for an appropriate length of time. The division aims to secure all new business on a five year basis. Leading airlines understand the benefit of this and are willing to work in partnership to ensure a first class service is provided. 

Cargo Handling

The division operates 38 cargo centres across the world. The cargo handling market continues to disappoint with volumes soft and yields under pressure. Overall volume was broadly flat. 

In North America, where the division operates cargo centres in 10 locations, the year has started poorly and is loss making. The business is under-performing due to a combination of yield decline and labour management issues. In addition, operational issues in Chicago resulting from the construction of a new highway have also affected earnings. Management actions are in place to mitigate these issues and it is expected that real progress will be made by the year end.

The division's cargo business has a diverse spread of customers and locations. Therefore it is not over reliant on any one region and this leaves it well placed when volumes increase again.

Cargo Forwarding

AMI, the world's largest trade-only airfreight consolidator, performed well. Turnover was up 86.1% following the annualisation of acquisitions made in the previous year and a good performance from the core business. During the period MMA Consolidators Pty Ltd, a business based in South Africa, was acquired. The combined business now has a significant presence in the world's key cargo markets. The AMI business represents c16% of divisional turnover and although it has a lower average margin than the other parts of the business it makes a welcome contribution to divisional earnings. 

New Ventures 

During the period regional density opportunities were created in South Africa, India and Scandinavia. 

In South Africa, operations started at six airports on 1 March after the division, following a competitive tender process, secured ground handling licences at ten airports. Commercially this venture has been a great success with customer wins exceeding expectations. However, 2008 earnings are being suppressed by labour issues. Currently the region is over staffed and actions are underway to reduce labour levels to those required. This short term issue will be resolved by the year end and the region is expected to make its projected returns during 2009.  

To supplement the ground handling business the division acquired Air Cargo Resources, a cargo handling business based at Johannesburg, Cape Town and Durban and MMA, a freight forwarding business operating from Johannesburg. This ensures that as well as capturing the benefits of regional density we are able to offer our customers a full service offering. 

In India, operations commenced at new greenfield airports at Hyderabad and Bangalore. Both were major operational start-ups and are performing well. In Hyderabad, ground and cargo handling commenced on 23 March 2008 and in Bangalore our cargo operations commenced on 24 May 2008. From a standing start the division now employs some 1,360 people. India is an attractive growth market with excellent expansion opportunities.  

In Scandinavia, the acquisition of Novia Sverige AB was integrated with the business of Finnhandling AB, acquired in November 2007, and an organic start-up in Copenhagen which commenced on 1 January 2008. This combination makes the division the major independent ground handler in the region handling some 1,040 flights per week at 5 airports in 3 countries across the region. 

Outlook

The marketplace for the aviation industry is very challenging and it is expected that this will continue into next year with pressure on cargo volumes and flight schedules. However, the division through its geographic diversification, aligned with its strategy of focussing on attractive airlines in attractive markets remains resilient and is well placed to continue on its expansion path that has been successfully delivered over the last five years.

Decisive management actions have been implemented in response to the current market conditions, with costs being taken out of the central overhead and selectively from operational management, including addressing the current challenges within the USA cargo business. While the costs will be incurred in 2008, the benefits will be realised fully during 2009.

In India, where our new operations have made a solid start, tenders are underway for further ground handling licences.

Menzies Distribution

The Distribution division produced a solid performance, maintaining the profitability achieved in the previous year. Revenue was up £19.7m (3.5%) in total, boosted by the acquisitions of Grays of York and new business in Chester during the second half of 2007. Like for like sales growth was 0.8%.

During the first half the marketplace performed broadly in line with expectations. Newspapers continued to perform well with cover price growth more than offsetting volume reductions, particularly on Monday to Friday titles. Overall newspaper revenues rose by 2.3% on a like for like basis.

Performance in the magazine market remained mixed but in line with expectations. Sales of monthly titles continued to decline, the weekly sector again produced modest growth, while the relatively small partwork market declined further. Overall magazine sales were down 2.5% on a like for like basis. 

During the period contract re-negotiations were successfully concluded with News International, maintaining our overall market share. New terms have been secured for five years with effect from July 2009. The outcome was very satisfactory and underpins our expectations for the business.

Cost and Productivity Initiatives

Further progress was made on cost and productivity initiatives. Year on year benefits were achieved from initiatives implemented in 2007: hub and spoke network changes, magazine packing technology investment and centralisation of newspaper allocations. In addition, the programmes to implement state of the art returns machinery and to fully centralise customer services are nearing completion and delivering the projected operational efficiencies.

The project to implement the SAP Enterprise Resource Planning (ERP) solution continues and remains scheduled to go live during 2009. Importantly, costs and progress are in line with budget, with blueprint and prototype phases complete and the project moving into the realisation stage. 

New Revenue Streams

The division's joint venture with Eason & Son Ltd commenced trading in the Republic of Ireland in January 2008. The early stages of the integration involved converting existing operations to Menzies' standard systems. By bringing the division's technology and logistics expertise to the marketplace, the service provision available to both retailers and publishers is being greatly enhanced. As a result, there is an opportunity to grow market share in the short to medium term.

The joint venture's operations in Northern Ireland, which commenced in early 2007, continued to trade satisfactorily.

The development of Menzies Digital, our virtual wholesaling initiative continues. The venture was launched on-line in partnership with WH Smith Retail in May. Progress since the launch has been encouraging although the venture, while exciting, remains in the embryonic stage at this time. 

D-Cipher, the retail category management service business, traded well in the period adding Boots UK Ltd to its portfolio of clients. 

Office of Fair Trading

In March the Office of Fair Trading announced its intention to publish the result of its review in late summer of this year. At this time there has been no announcement. We continue to participate in the review and await their findings. 

Summary and Current Trading

At Menzies Aviation, the industry is experiencing turbulent times, which will inevitably lead to some volume reduction in the remainder of this year and into 2009. However, the division will benefit from its robust business model focussing on attractive airlines and is well placed to deliver further growth in the second half.

New contract momentum has continued since the period end with the division securing contracts with Star Alliance at London Heathrow, Virgin America at Seattle Tacoma and at London Gatwick with US Airways and Clickair.

At Menzies Distribution, the problems facing the entire print media sector continue to have a detrimental effect for us as a result of the decline in core sales.  Cover price increases help offset volume losses somewhat and, therefore, the outlook for future sales remains in line with recent trends.  The division continues to drive cost initiatives and aggressively pursue new revenue streams.

The Board is satisfied that the current strategy is continuing to drive the Group forward in this challenging market and overall the Group is performing broadly in line with the Market's expectations.

Notes:

(1)     Underlying profit before tax is defined as profit before taxation, intangible amortisation and exceptional items.

(2)    Underlying operating profit includes each division's share of pre-tax profit from joint ventures and associates, and excludes intangible amortisation and exceptional items.

(3)    Underlying earnings per share is profit after taxation and minority interest, but before intangible amortisation and exceptional items, divided by weighted average number of ordinary shares in issue.