Regulatory Announcements

 

 

 

 

 

 

 

 

 

William Thomson, Chairman said:

 

"2007 was a strong year. The Group had clear objectives for the year, namely to continue the rapid expansion of Menzies Aviation and to stabilise Menzies Distribution. I am pleased that we have achieved both our objectives.

 

The expansion of Menzies Aviation has continued with a fourth consecutive year of profit growth in excess of 20%. New markets were entered and customer relationships developed and strengthened. Major investment into infrastructure and new projects in India and South Africa will deliver earnings growth in the second half of 2008 and fully in 2009.

 

At Menzies Distribution, stability returned to its core markets. 2007 was a year of major operational change with the centralisation of newspaper allocations and the further installation of new technologies within the branch network. Cost initiatives were aggressively pursued as we remodelled the business to fit its changing marketplace.

The Group is delivering on its strategy and to reflect the Board's confidence in the future prospects and performance of the Group the final dividend has been increased by 28% to 18.4p, making a full year increase of 25% to 25.6p."

 

 

 

For further information:

 

 

 

 

 

 

 

2007 has been a good year for the Group with a 6% increase in underlying profit before tax. Underlying earnings per share were 2% up year on year. At the start of the year we set out with two clear objectives namely, continuing the growth in profitability at Aviation and stabilising Distribution. We have delivered on both of these objectives.

 

Menzies Aviation had another strong year with underlying operating profits up 24% to £20.6m. This is now the fourth consecutive year of profit growth in excess of 20%.  The division has made good progress driven by strong organic growth, with a number of significant contract wins supported by two modest acquisitions. It also strengthened its reputation for quality and service delivery within the industry as evidenced by contract tender successes in India and South Africa. In the year we secured licences at 10 airports in South Africa which, along with the new Indian airport openings in early 2008, resulted in a significant level of capital investment in the latter part of the year. We maintained our strategy of investing in infrastructure to support the rapid growth plans for the division and to deliver future earnings growth. Results for the year were impacted by the adverse movement in exchange rates, particularly against the US Dollar.

 

Menzies Distribution delivered an underlying operating profit of £23.4m, broadly flat compared to 2006. The magazine market which dropped in revenue terms in 2006 returned to stability this year.  Monthlies still fell back year on year but this was offset by the growth in weeklies. Newspapers continued their long term trends with volume losses being largely offset by cover price increases. 2007 was also a year of focusing on cost and productivity and we reduced the cost base by in excess of £3m as planned.

 

 

As expected we continued our significant level of investment to fuel the growth in the Aviation division, particularly in our joint ventures in India and South Africa where we have invested in excess of £15m during the year. Capital expenditure once again exceeded depreciation in Aviation reflecting the strong net contract wins in the year. We believe that the division will see substantial benefits from our well planned investment programme as these ventures start to deliver the anticipated returns.

 

We also invested in process automation in Distribution which will streamline the business processes and improve efficiency, as well as spending £3.6m on acquisitions during the period including the acquisition of Grays of York and Leadenhall News.

 

The Group's net debt at the end of 2007 was £111.3m, an increase of £34.3m on 2006 reflecting the continued investment in both divisions.

 

 

Profit before tax and basic earnings per share reflect two exceptional items with a net credit of £0.1m.

 

During the year, there was an exceptional gain of £2.5m, resulting from Distribution entering into a joint venture agreement with Eason & Son Ltd in Northern Ireland and the Republic of Ireland.

 

Since the year end we have surrendered an onerous long term lease for a property in Buchanan Street, Glasgow for the value of the dilapidations required.  As a result we have provided an additional £2.4m.

 

 

Bank interest costs increased in the year from £5.6m last year to £8.2m in 2007 as the Group's debt increased resulting from the investment activity particularly in our Aviation division.

 

In addition, the Group executed cross-currency basis swaps which reduced its interest charges. The foreign currency loss of £2.1m was exactly matched by tax relief of £2.1m resulting in no economic effect on the results and as such this charge has been excluded from underlying profit before taxation.

 

 

 

 

 

 

Menzies Aviation enjoyed another record year and is now firmly established as one of the world's leading independent ground handlers. During the year the division continued to grow and now operates at 120 airports in 28 countries.

This growth resulted from the division following its planned expansion which is underpinned by a focus on providing excellent customer service.

 

Acquisition activity during the year was quieter than we expected with only two new businesses being acquired. This was partly a result of the rapid organic expansion and a strict policy of only acquiring businesses that fit strategically and can be acquired at a realistic price. Organically, the division had an excellent year winning more customers at existing locations and entering new markets with new and existing customers, driving regional density. Overall the division was a net winner of 54 new contracts.

 

Start up costs associated with these contracts inevitably result in a drag on earnings in the year that the contracts are won and this has held back the full year result. However, the division is well placed to deliver substantial earnings growth once the full annualised effect of these contracts is realised.

           

As the division continues on its rapid expansion plan it has been necessary to put in place the infrastructure to support the business for both now and the future. Accordingly a significant investment was made during the year in systems and people.  Our business objective is to provide our airline customers with excellent service and to do this our IT systems, finance, training and safety functions have all received significant investment. The deepening of our customer relationships and contract win performance is evidence that this investment is paying dividends.

 

 

In July it was announced that following a competitive tender process, the division had been awarded one of only three licences to operate at ten airports in South Africa, including Johannesburg, Cape Town and Durban. These ground handling licences have allowed entry into another attractive market.

 

The major projects in India announced in late 2006 progressed well during the year. Operations at the new Hyderabad and Bangalore airports are due to start at the end of March 2008. Both airports are new greenfield site ventures. At Hyderabad we will offer ground and cargo handling services. At Bangalore we will offer a cargo handling service. At both airports our teams and systems are in place and intensive training is underway as we look for both operations to deliver the standards of service the customer demands.

 

These entries into new attractive markets will allow the division to create regional densities and build on its existing strong customer relationships with international carriers as well as attracting new customers. By the end of 2008 we expect both regions to be making a significant contribution to earnings.

 

During the year two businesses were acquired. Universal Air Cargo Pty Ltd (UAC) was acquired in April.  UAC is an international airfreight consolidator operating at 11 locations in Australasia and the USA. The business is highly synergistic with the existing Air Menzies International (AMI) business and was quickly integrated. It exceeded expectations during the year and further expansion is planned.

In November, the ground handling businesses of Northport Norway AS and Finnhandling AB were acquired from Northport Oy, a wholly owned subsidiary of Finnair, which offer full ground handling services at Stockholm and Oslo international airports. The integration has been successful with many of the core back office functions being merged into our existing Amsterdam operation. The Scandinavian market had been identified as an attractive one and this acquisition was the best route to establish a presence. Expansion plans are in place for the region and the division will seek to create regional density.

 

 

2007 was a difficult year in cargo handling. As we predicted at the start of the year, global volumes remained soft. Cargo handling is an operationally geared business and the soft volumes made for a tough year. However, due to its geographical spread, the business remains well placed to benefit when cargo volumes start to strengthen.

 

Like for like tonnes were up 1.6% although overall cargo tonnes were up 15.9% as a result of new contracts and the annualised effect of the new businesses acquired during the previous year.

 

In Europe, the division's largest cargo region, volumes were flat (like for like up 2.0%) after the loss of Dragonair in Manchester following their merger with Cathay Pacific. This was partly offset by contract wins from Emirates in Prague and Dragonair/Cathay Pacific in Amsterdam.

 

In North America tonnage was up 49.9% (like for like down 1.1%) as a result of the annualisation of the Aeroground and Catamount acquisitions and significant contract wins including Aer Lingus at seven airports across the USA and Emirates in Houston. The USA remains a difficult marketplace with overall tonnes weak and high staff turnover. We continue to install the Menzies ethos to this area and are focussed on improving customer service and reviewing customer rates across the region.

 

Asia Pacific, where the division does not have a significant cargo presence, saw a moderate uplift in tonnes, with contract wins in Australia and New Zealand offsetting disappointing volumes in Macau.

 

During the year the division continued to roll out Hermes, its industry leading cargo IT system. Hermes is an integral part of the cargo offering and differentiates the division from its competitors. The system is now being progressively rolled out to our major cargo operations and any significant new cargo operations will have Hermes installed as part of the integration process.

 

AMI, the world's largest trade-only airfreight consolidator, had a very good year. Turnover was up £22.6m following a good performance from the core business and the acquisition of UAC. The combined business now extends the geographical reach of AMI and this business makes a welcome contribution to the division's earnings.

 

Cargo handling is an integral part of the division's service offering and we are continuing to develop our business model and looking to establish network cohesion. The model focuses on providing leading edge systems and first class customer service to attractive customers in attractive markets.

 

 

Across the network the ground handling business had an excellent year. Overall turns were up 34% (like for like up 3%).

 

The division's specialisation in handling low cost airlines was enhanced during the year. Our partnership with easyJet was extended to six new stations, and the contracts to operate their hubs at London Luton and Amsterdam were extended for a further five years. We also started up operations for Virgin America at their San Francisco and Los Angeles hubs. 

 

The contract tender process was particularly pleasing with our conversion rate significantly higher than the previous year. This justifies the investment we have made to create the highest standards and builds on the division's reputation for placing customer service and safety as its core values whilst securing business at a price which provides acceptable levels of return.

 

Europe continues to be our largest region. Our operations throughout Spain performed ahead of expectations. Through the acquisition of Northport, we started operations in Sweden and Norway for the first time.  In addition to this acquisition, the contract to handle easyJet at Copenhagen Airport in Denmark was secured late in the year, further expanding operations within Scandinavia and providing an opportunity to create regional density.

 

In the Americas region the turnaround of the business continued. At Los Angeles, loss making contracts were re-priced or exited and new replacement business was secured at acceptable rates. Labour continues to be an issue with staff turnover much higher than in other regions. However, management are focussed on improving staff retention rates.

Asia Pacific, where much of the management focus was on the Indian start-ups, enjoyed some significant new contracts notably British Airways at Sydney and United Airlines at Sydney and Melbourne. These wins were offset by the loss of Emirates at Sydney, Melbourne and Brisbane who moved their handling to Dnata, who are part of the Emirates Group.

 

 

Menzies Aviation is continuing on its rapid growth path. The strategy is clear. The division will continue to expand by targeting attractive customers in attractive airports at sustainable margins. There will always be a focus on firstly getting the basics right and then growing from a scaleable platform. Providing great customer service in a safe and secure environment is embedded in the culture. We will also continue to seek out appropriate acquisitions at the right price that fit strategically with our existing businesses.

 

There are few global economies of scale in this business but there can be regionally, and by creating regional density with shared service centres for back office functions such as Finance and Human Resources the business can grow rapidly but also sensibly and profitably.

 

As the business grows the commercial activity and structure has evolved. An enhanced Commercial function in the head office now exists with key account managers looking after targeted customers centrally. This new focus is paying dividends as the division looks to strengthen customer relationships and cross sell its services as it expands into new markets.

 

 

 

 

 

2007 was a key year for the division after the fall in earnings experienced during 2006. The focus for 2007 was to deliver in three key areas. Namely;

 

a) stabilise earnings

b) deliver cost initiative plans

c) investigate new revenue streams

 

The division was successful in all three areas.

 

Revenue was up 1.4% (like for like 1.1%). Significantly the trends highlighted at the time of the Interim Results have continued and underlying operating profit for the year was broadly flat.

During the year stability returned to the core markets. Newspapers continued their recent trends with gradual volume decline, but this was broadly offset by increased cover prices.

 

Overall, volume in the magazine market declined but gross profit was flat as a result of cover price increases particularly in the weeklies sector.

 

 

Cost initiative plans remain on track. During the year the division installed new technology to improve the efficiency of both the product returns process and magazine packing. The new returns technology revolutionises the process with a significant increase in the amount of product scanned per hour. The new magazine packing technology streamlines the process and is now operating in eight hub branches.

As a result of this new technology the division was able to accelerate its hub and spoke programme, which involves the merging of the magazine packing and back office processes into a hub branch, and the downsizing of a previous full service branch into a spoke which solely packs newspapers. During the year, three hub branches were created which allowed four previous full service branches to become spokes.

 

A centralisation programme was also progressed during the year. The allocation of newspapers was taken out of individual branches and centralised within three regional centres. A second call centre was opened during the year allowing all calls outside the London area to be handled from two centres. This function was previously carried out at branch level.

 

 

Grays of York, an independent which previously served retailers in the York area with a portfolio of newspaper titles, was acquired and integrated into our existing York operations. The combined business is performing well and delivering the anticipated returns.

The challenging position in the Chester area, which was being served by both Menzies Distribution and Dawson News, was resolved after Dawson agreed to subcontract their business in the area to Menzies. This was a logical outcome and provided compelling rationale why the existing industry template is the most efficient way of serving retailers and consumers.

From the outset the joint venture with Eason & Son in Northern Ireland proved challenging with a number of operational issues dragging down earnings. Most of these issues have now been resolved and by the end of the period the venture was delivering improved levels of return.

 

Leadenhall News, a competitor to the division's Jones Yarrell subsidiary, was acquired during the year. Both businesses are distributors of newspapers, principally to banks and institutions in the City of London area and operations were quickly and successfully integrated. 

 

D-Cipher, the retail category management service business, made progress during the year. Full range planning services are now provided to Marks and Spencer, Boots, Easons and Musgrave.

 

Menzies Digital, a virtual wholesaling venture, remains at the embryonic stage but is an exciting concept that will launch during 2008.

 

A trial is underway with Tesco, investigating the potential to broaden our offering to them to include papershop related products. In addition, in some of our areas we have piloted a logistics partnership with Ceva (ex TNT) to link our local delivery fleet with their large scale trunking capability, to provide a delivery service for "packet traffic", including some home delivery.

 

 

The division, as well as responding to continuing information requests from the OFT, has been working with all sections of the industry to develop proposals for consideration by the OFT and relevant Government departments to ensure a competitive, efficient and sustainable supply chain for the future.  The OFT have still to confirm specific timelines, but at this stage we anticipate publication later in the year, most likely late summer. 

 

 

 

 

In India, our start up ventures in Hyderabad and Bangalore remain on track. Both airports are brand new and are due to open before the end of March 2008. Our staff, systems and equipment are in place and ready to start. A number of customers, both existing and new, have been secured and we look forward to making both of these significant new operations a success.

 

In South Africa, following the award of the required licences, operations at six airports (including Johannesburg, Cape Town and Durban) commenced on 1 March. We have secured a large portfolio of international airlines including Cathay Pacific, Malaysian, Qantas, SA Express, British Airways, Air Botswana and Cargolux and we look forward to this new region delivering positive returns.

 

Since the year end the division acquired Air Cargo Resources, a cargo handling business based at Johannesburg, Cape Town and Durban in South Africa. This acquisition provides the division with a cargo business to complement the ground handling licences awarded during 2007 and allows a full service provision to be offered to airlines.

 

Current trading is in line with our expectations. US cargo, where poor volumes persist, continues to disappoint offsetting positive trading across the rest of the network.

 

 

The outlook for Menzies Distribution continues to be stable. Our cost rationalisation project has been successful and our investment in technology has improved efficiencies within the business.

 

The division has entered into formal agreements with SAP to invest in the implementation of an Enterprise Resource Planning (ERP) solution throughout the business. This initial investment, which will be around £7m over a two year period, will increase efficiency and productivity as well as providing our publisher and retailer customers with an enhanced service offering. Project scoping is underway and the implementation will start in the second half of the year with completion expected to be during 2009.

 

Magazine volumes, particularly monthlies, remain challenging, but trading is in line with our expectations.

 

 

The Group strategy is clear. Aviation will continue on its rapid growth path creating regional density organically by targeting attractive customers in attractive markets and selectively acquiring complementary businesses. Distribution will maintain its core earnings while mitigating cost inflation and pursuing new revenue streams.

The Board is satisfied that with this clear strategy in place the Group is well placed to deliver further shareholder value.

 

 

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Notes:

 

(1)      Underlying profit before tax is defined as profit before taxation, intangible amortisation, exceptional items and foreign currency loss on cross-currency basis swaps.

(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.

 

 

 

 

 

Notes

 

   

2006

£m

Net operating costs

2

 

 

(1,507.9)

  

1,450.4

(1,416.4)

 

2

   

  

34.0

Share of post-tax results of joint ventures

and associates

 

 

 

2.7

2

   

 

36.7

   

 

 

 

 

 

  

 

Underlying operating profit

 

   

 

36.9

Exceptional items

4

   

 

3.0

Intangible amortisation

4

   

 

(2.2)

Share of interest and tax on joint ventures and

associates

 

 

 

(1.0)

Operating profit after joint ventures and associates

 

 

 

36.7

 

Finance income

5

 

 

15.6

Finance charges

5

 

  

(16.7)

 

 

 

35.6

Taxation

6

 

 

(8.4)

 

27.2

 

Attributable to equity shareholders

 

27.0

Attributable to minority interests

 

0.2

 

 

27.2

 

8

 

 

  

 

Basic

 

 

 

46.4p

Diluted

 

 

 

46.1p

 

 

 

 

 

 

GROUP STATEMENT OF RECOGNISED INCOME AND EXPENSE

 

 

for the year ended 29 December 2007 (year ended 30 December 2006)

 

Profit for the year

 

 

 

27.2

 

 

 

 

 

  

 

Actuarial (loss) / gain on defined benefit pensions

3

 

 

23.4

Deferred tax associated with defined benefit pensions

 

 

 

(7.0)

Net exchange adjustments

 

 

 

(1.7)

Net gains recognised directly in equity

 

 

 

14.7

 

Total recognised income for the year

 

 

 

41.9

 

 

 

 

 

 

Attributable to equity shareholders

 

 

 

41.7

Attributable to minority interests

 

 

 

 

0.2

 

 

 

 

 

41.9

 

Group

 

Company

 

 

Notes

  

2006

£m

2006

£m

Intangible assets

9

 

59.0

 

-

Property, plant and equipment

 

 

133.3

 

39.0

Investments

 

 

18.9

 

99.8

Derivative financial assets

 

 

0.3

 

0.3

Deferred tax assets

 

 

3.8

 

-

Retirement benefit obligations

3

 

5.4

 

5.4

 

 

 

220.7

 

144.5

 

Inventories

 

 

12.0

 

-

Trade and other receivables

 

 

110.8

 

152.6

Derivative financial assets

 

 

1.5

 

1.5

Cash and cash equivalents

 

 

18.8

 

0.5

 

 

 

143.1

 

154.6

Borrowings

 

 

(8.8)

 

(4.9)

Derivative financial liabilities

 

 

(0.4)

 

(0.4)

Trade and other payables

 

 

(153.1)

 

(94.3)

Current income tax liabilities

 

 

(9.8)

 

(3.0)

 

 

 

(172.1)

 

(102.6)

 

 

(29.0)

 

52.0

 

 

 

191.7

 

196.5

 

 

 

 

 

 

 

 

Borrowings

 

 

(88.3)

 

(88.2)

Other payables

 

 

(0.9)

 

-

Derivative financial liabilities

 

 

(0.1)

 

(0.1)

Provisions

 

 

(7.0)

 

-

Deferred tax liabilities

 

 

(3.2)

 

(2.4)

 

 

 

(99.5)

 

(90.7)

 

 

92.2

 

105.8

Ordinary shares

13

 

14.8

 

14.8

Share premium account

13

 

12.6

 

12.6

Investment in own shares

13

 

(3.5)

 

-

Retained earnings

13

 

46.3

 

56.8

Capital redemption reserve

13

 

21.6

 

21.6

 

  

91.8

  

105.8

Minority interest in equity

 

 

0.4

 

-

 

 

92.2

 

105.8

 

Group

 

Company

 

 

Notes

  

2006

£m

2006

£m

Cash generated from operations

11

 

29.7

 

(14.5)

Interest received

 

 

2.1

 

1.7

Interest paid

 

 

(5.5)

 

(5.4)

Tax paid

 

 

(8.5)

 

(3.3)

 

 

17.8

 

(21.5)

Investment in joint ventures and associates

 

 

-

 

-

Loan repaid by joint venture

 

 

0.1

 

-

Disposal of investments

 

 

-

 

-

Acquisition of subsidiaries

 

 

(38.1)

 

-

Net cash acquired with subsidiaries

 

 

1.1

 

-

Purchase of property, plant and

equipment

 

 

(25.4)

 

-

Intangible asset additions

 

 

(0.5)

 

-

Acquisition of minority interest

 

 

-

 

-

Proceeds from sale of property, plant

and equipment

 

 

1.1

 

-

Dividends received

 

 

4.1

 

-

 

(57.6)

 

-

Net proceeds from issue of ordinary

share capital

 

 

1.8

 

1.8

Finance lease additions

 

 

0.1

 

-

Repayment of borrowings

 

 

(15.3)

 

(15.2)

Proceeds from borrowings

 

 

58.9

 

58.9

Dividends paid to ordinary shareholders

 

 

(11.6)

 

(11.6)

Dividends paid t