Edited Transcript of BBA.L earnings conference call or presentation 3-Mar-20 8:30am GMT

Lastly, we have an ongoing focus on reducing our own carbon footprint, and I’ll provide a fuller update in August with our interim results.

I’ll now hand you to David to take us through the financial performance for the year.

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David Crook, Signature Aviation plc – Group Finance Director & Director [2]

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Thank you, Mark, and good morning.

The successful execution of our portfolio simplification strategy and the consolidation of our share capital, along with the implementation of IFRS 16, has introduced complexity to this year’s financial disclosures. I will return to these complex disclosures shortly, but firstly, let me focus on the underlying performance within our Signature business on Slide 5.

As Mark said, the 2019 U.S. B&GA market performed as expected, and notably, we continue to outperform that market, even though it had an unpredictable nature from month-to-month. Let’s look at the Signature FBO business in some more detail. Signature FBO outperformed the U.S. B&GA market by some 90 basis points, strengthening that performance to a 100 basis points in the second half. Initiatives, including our direct fuel supply from refiners have started to counter the headwinds we saw on labor that we noted in the first half. Organic operating profit was broadly flat in the second half compared to the same period last year, with the $3 million full year decline being a first half impact.

The acquisition of IAM Jet Center in the Caribbean has been completed, that’s adding 5 sole source locations and 2 ELITE service locations. This contributed $1 million during the year, and that’s reported within the acquisitions bar on the table.

Now let’s look at the performance of TECHNICAir and EPIC. We experienced lower earnings at TECHNICAir, down $4 million, primarily as a result of our rationalization program. $1 million of this reduction is shown as disposals on the table with $3 million being an organic decline. Given that we’ve now rightsized TECHNICAir, going forward, these results will be reported alongside Signature FBO.

EPIC operating profit was up $5 million on the prior year, $3 million of this is shown in the acquisitions bar as being the full year effect following our acquisition of EPIC in July 2018. In addition, underlying EPIC operations were up $2 million. This largely count as the TECHNICAir organic decline I mentioned earlier, resulting in a net $1 million organic decline in TECHNICAir and EPIC combined.

Overall, Signature’s operating profit was broadly flat year-over-year on a pre-IFRS 16 basis. The impact of IFRS 16 at $44 million is broadly as expected, and this represents some 13% increase on the pre-IFRS 16 operating profit.

Now let’s look at central costs. Central costs reduced to $26 million during 2019. This is through cost discipline and foreign exchange in equal measure. As we complete the portfolio rationalization, the central costs naturally become an integral element of operating a pure Signature Aviation group. I will now be disclosing these costs alongside Signature operations going forward, to provide a complete picture of the go-forward Signature Aviation group, which delivered $335 million of operating profit in 2019.

The full integration of corporate functions is well underway. Human resources, shared financial services, safety and project management office have all being transitioned in 2019. The remaining central functions will complete their transition into Signature during this year.

Now let’s turn to the core strength of the Signature business model, free cash flow. Signature delivered underlying free cash flow of some $212 million, excluding the impact of our direct fuel supply agreements and our exceptional cash flows, and it did so in a flat market. As I noted at the interims, the implementation of the direct fuel supply agreements with the refiners has had a onetime impact on working capital in 2019 of $69 million as we agreed shorter payment terms with refiners in return for improved pricing worth some $7 million to our operating profit on an annualized basis. This working capital impact will not repeat and it will not reverse.

The Signature fundamentals are in place and well-established to deliver continued strong free cash flow; notably, long-term leases on the airfields in which we operate across the U.S. of around 17 years; favorable CapEx deployment — sorry, flexible CapEx deployment; flavorable — sorry, favorable net working capital; long-term financing at improved rates; and a low structural cash tax rate. As I highlighted earlier, the free cash flow nature of Signature operating model is a core strength of Signature, and it’s delivered over $200 million of free cash flow in the last 2 years.

Turning to support costs on Slide 8. As we complete the portfolio rationalization to a pure Signature business, we must address the support costs associated with the discontinued businesses. The $2.9 million of Ontic support costs relate to the period prior to its disposal. And CVC have been paying the cost of transitionary services since completion. Therefore, we have a neutral position on these costs during the service period. And we will take these costs out when CVC end transitionary services.

On ERO, we expect to complete a similar arrangement for transitionary services over a period up to a maximum of 12 months. Service charges would commence at the point of legal completion. And we will take support costs out either at completion or at the end of the associated transitionary service.

Based on transitionary service periods, it is likely to be later in 2021 before transitionary services are complete, and therefore, 2022 would likely represent the first year without such support costs.

Let’s complete the review of the continuing group with its income statement on Slide 9. Here, we see the continuing group result of $321 million after taking account of those support costs. This includes the $44 million of IFRS 16 earnings that I mentioned earlier. On a comparable pre-IFRS 16 basis, the continuing group’s operating profit was broadly flat at $276 million.

The continuing group underlying effective tax rate of 6.8% has been significantly impacted with the recognition of a deferred tax asset during 2019. This relates to deferred interest, which is now deductible following the refinancing of the group. This has influenced earnings per share, but has no impact on our underlying cash taxes. As a consequence, earnings per share of $0.182 on a pre-IFRS 16 basis represents 12% growth over the prior year, but this is essentially tax driven.

Given the significant influences on earnings per share, it’s more appropriate to look at Signature at this point on a free cash flow per share basis. Free cash flow per share based on our current consolidated share capital is a position of $0.25 per share. We have declared a final dividend proposed at $0.1057, making a total dividend for the year of $0.1477 per share, representing 5% growth and in line with our progressive dividend policy.

Now let’s turn to the total group income statement on Slide 10. Discontinued operations contributed $120 million with a strong 10-month performance from Ontic at $67 million and a solid performance from ERO of $53 million. This ERO performance includes $12 million related to IFRS 16 and the benefit of suspended depreciation and amortization, the required treatment when an asset is held for sale. On a non-held for sale, pre-IFRS 16 basis, ERO delivered $18 million of operating profit in 2019, flat compared to 2018.

Earnings per share for the total group on a comparable pre-IFRS 16 basis stand at $0.269 compared to $0.233 in 2018. This, again, is influenced by the low effective tax rate within the continuing group.

Turning to exceptional and other items on Slide 11. A lot of detail here, but mostly noncash or transaction driven. On continuing operations, amortization of some $74 million plus restructuring costs of $6 million. On discontinued operations, we recorded a $12 million amortization and a gain of $724 million on the disposal of Ontic. The exceptional charges represent the costs associated with the disposal process for ERO. In addition, we’ve taken a $125 million impairment against our ERO assets. This has resulted in the fair value less total cost to sell of ERO being $178 million as at the year-end. And at the half year, I noted provisions of $10 million, primarily relating to the disposal of ASIG. Following further negotiations during the second half, we reached a final settlement, which resulted in $8 million being cashed into — in the second half and $23 million being cashed in January 2020. This ASIG matter is now closed.

Under other matters, the group has taken a $12 million impairment on its charter management joint venture. And I’m pleased to announce, we signed the deal yesterday to sell our investment in the joint venture for $20 million, of which $7.5 million is deferred. This joint venture contributed $2 million of operating profit in 2019. This further simplifies our group and improves our continued focus on our pure Signature business.

Now let’s complete the overall picture for the total group leverage on Slide 12. Strong free cash flow generation and a final leverage outcome of 2.2x on a covenant basis, which includes the EBITDA contribution from Ontic for the 10 months of 2019.

With regard to the timing, we have 2 specific payments that did not go through in 2019; a circa $85 million tax payment in relation to the disposal of Ontic, which is expected to be paid in April 2020, and $23 million payment on ASIG, which has already been paid in January 2020.

We were also able to finance the acquisitions and the progressive dividend payments during the year as part of our dividend capital allocation policy in reaching this overall leverage outcome. When refinancing during 2019, we agreed revised covenants on our RCF facility. They were reset at 4.25x, significantly improved on our prior covenant of 3.5x, thereby giving us over 2x headroom at the year-end. But nothing changes with regard to our leverage range. That remains at 2.5 to 3x on a covenant basis.

As leases are now recognized on balance sheet at the discounted value of future lease payments, this results in reported net debt increasing by $1.2 billion. But our banking covenants will continue to be measured on a pre-IFRS 16 basis.

Looking to the full year 2020 now and a few items of technical guidance on Slide 13. All technical guide matters exclude any potential impact of COVID-19, which is not quantifiable at this stage. We expect underlying central costs to be broadly flat at $27 million. In addition, the costs associated with supporting ERO are expected to be $11 million for 2020, but clearly, subject to the timing of legal completion. No support costs are expected in respect of Ontic.

Continuing group CapEx for Signature is expected to be in the region of $100 million to $110 million. This continues to reflect our significant investment at Atlanta, for which we secured a 20-year lease with extension option. Other FBO capital expenditure is being managed relative to the developments in the B&GA market, while some projects represent timing from 2019, where we were awaiting local authority approvals. The overall guidance will continue to be dependent in part on the securing of signed agreements with airports and local authorities as we move forward.

On cash, we will make a tax payment in April of circa $85 million for the disposal of Ontic. And as I already mentioned, we’ve made the $23 million payment in respect of ASIG. The underlying effective tax rate is expected to be around 25%, but no changes expected in our cash tax rate, which remains at around 14%. Interest expense on a pre-IFRS 16 basis is expected to be $65 million, and cash interest also expected to be $65 million.

So in summary, Signature is well positioned for 2020 and beyond with a firm foundation of strong free cash flow to fund further growth and value creation with the prospect of ongoing returns to shareholders as we continue to target the maintenance of our leverage range at a minimum of 2.5x.

And that’s a great note on which to hand back to Mark.

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Mark R. Johnstone, Signature Aviation plc – Group CEO & Director [3]

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Thank you, David. So let’s start with the B&GA market. When we spoke a year ago, we said we expected the U.S. B&GA market, as measured by FAA movements, to be flat in 2019. That’s what we’ve seen, nominal growth of positive 0.2% in the year. Month-on-month volatility has continued. For example, November was up 5.5 — sorry 5%, December was down 5.5%. And there’s an element of Thanksgiving timing in there, but you get to see this sort of changes month-on-month.

Global market uncertainty has continued. Briefly, it seems as if the U.S.-China trade situation was on course to be resolved. But now we have the added complexity of COVID-19. The COVID-19’s impact, as David said, is unclear. But it’s unclear on the B&GA flight activity as well. In the past, when we’ve seen global events such as SARS, the B&GA impact was actually neutral. Such events undoubtedly have an impact on commercial aviation, but that’s not the space we operate in. We focus on the B&GA space.

The commercial industry is seeing demand fall, which has also then had a knock-on impact on fuel prices, and we’re seeing fuel prices fall as well. Both of these, however, can be a positive for business in general aviation as premium passengers switch from commercial to private and aircraft’s operating costs fall as the fuel prices come down.

Back to the market in 2019, we’ve seen consistent trends around the flying groups and you can see this on this next slide. We first showed you this slide a year ago, and we’ve updated it for the 2019 data. The gray line at the top was Part 91 fractionals, things alike the NetJets. They continue to show good year-over-year growth. The green line at the bottom is the Part 135 charter. This is more of the discretionary flyer. This continues to be weak, although the year-over-year declines have reduced in magnitude. Given Signature has a presence at 38 of the top U.S. — 50 cities in the U.S., we’ve experienced more of this Part 135 decline in these top cities, where historically a disproportionate volume of the charter demand actually resides. Overall, we still believe the U.S. B&GA market is a long-term structural growth market, strongly correlated with U.S. GDP through cycle.

So with this backdrop, let’s consider our strategic flight path to deliver stakeholder value. You may think you’ve seen this slide before. We showed a previous version of the flight plan at the Capital Markets Day, but we’ve refreshed it. In a year of great change for the group, it now adds employee experience and environmental and social priorities as core strategic pillars. Our flight plan will ensure that everything we do will map to one of these 5 strategic pillars, in order to deliver value for our stakeholders, who include employees, customers, vendors, airports, communities, and, of course, our shareholders. It’s, therefore, important that I spend some time on this, and I’ll cover each of the 5 strategic pillars briefly in turn on the following slides.

So firstly, growth. To grow customer value through expanded networking offerings, that’s what this is about. So 2020 is the start of year 2 of our 5-year journey we set out in the Capital Markets Day in November ’18. And our medium-term target of 250 basis point outperformance very much holds true today. We will continue to invest in and grow the fortification of our network in line with the initiatives we set out in Capital Markets Day. We’ve strengthened our network with the addition of the IAM Jet Center, 5 sole source locations and 2 ELITE in the Caribbean. But our real estate footprint is not just about dots on the map. There needs to be both a network value and a positive operating contribution. And to that end, we exited 3 locations in the year. We will continue to be financially disciplined in our network.

We’ve continued to refine our network revenue and pricing optimization initiatives to both drive and protect our network value. And to give this some context and also to scale the complexity and sophistication of our operation, in 2019, we implemented over 16,000 operator and base fuel price changes.

Nonfuel revenue today represents around 1/3 of our total revenue, and we continue to see this as a great opportunity for growth and a core driver of future market outperformance. A great example is the fuel card. At the Capital Markets Day, we talked about the potential of the EPIC fuel card. And I’m pleased to report that we’ve increased penetration to almost 9% of card transactions, up from 3% at the time of the EPIC acquisition 18 months ago.

Also, and this is something that we didn’t particularly cover at the Capital Markets Day, but we do see a real opportunity to optimize our yield in our real estate income, our 13 million square feet of real estate that we have around our network, particularly in the U.S. And then finally, new services, ELITE, our VIP program for commercial travelers. We made great progress in the year, adding 2 locations through the IAM acquisition, and we’ll launch the VIP services in Atlanta in Q4 following the completion of the new FBO, which you see on the right-hand side of the slide there, and that was taken very recently. So that is both the FBO and the VIP facility that is due to open in Q3 of this year.

Our second pillar is operational efficiency and process improvement. And this is about Signature having the right — sorry, the optimal resource and simple, reliable processes. In Q2 last year, we launched LEEP, which stands for labor and equipment efficiency program, to better manage our 5,000 employees and 8,000 pieces of equipment. And today, I can give you a couple of examples of our progress. Firstly, on labor, in Q4, we developed a labor tracking tool. I think you saw that at the Capital Markets Day. And we’ve identified 35 bases where we’ve got work to do on our labor. And we’re making great progress on that labor efficiency. Secondly, we’re looking much more closely at the asset utilization. We have over 8,000 pieces of equipment, but it’s not always in the right place. For example, in Q4, we replaced 59 fuel trucks and ground power units, that’s 59 units altogether with 41 units. These are more efficient and they’re lower emission substitutes, whereby reducing our total cost of operation. Yes, it’s much more efficient, reducing our emissions, increasing our equipment utilization and reducing our absolute asset count.

I’ve already mentioned the fuel card penetration. But in terms of process improvement, as you know, around 50% of our revenue transactions are on credit card, and we continue to believe there’s a great opportunity to reduce our card fees with the banks over time as we move customers to our in-house card.

And then finally, on this slide, the fuel RFP was a great success in 2019 and is clear evidence of the strategic rationale behind the EPIC acquisition, namely the ability to go to the market with a combined Signature and EPIC gallons of over 500 million gallons a year. The outcome will save us $7 million in a full year.

Our third pillar is employee experience. Signature is the company where everybody wants to work and thrive. It’s one thing investing in our physical infrastructure, but it’s equally critical that we continue to invest in our people. And I’ve spoken previously about an increased focus on people and culture. And this is really, really important to me and drives not only our customer experience, but also safety and employee retention.

In Q4 2019, we completed our second annual engagement survey. I’m pleased to say that participation was up to 84% of all employees, up from 71% the year before in 2018. But more importantly, our actively engaged employees were up to 45%, from 32% the year before. I was also delighted that our year-over-year improvement ranked us in the top quartile of Gallup’s results when looking at the second survey year-over-year.

But it’s not just engagement that is a driver, career prospects and inclusion and diversity are equally important. Today, 36% of our senior-graded employees are female, that’s up from 25% in 2018. We also refreshed our Manager in Training program. I’m delighted that 54% of our current managers in training are female, and 46% are a diverse ethnicity.

We will continue to invest in our leadership. And in January, we had our second leadership conference for 350 leaders. This year entitled bringing us all together. An engaged workforce will drive our future success.

Our fourth pillar, yes, Signature will deliver a personalized service, right the first time and every time. You’re only as good as your last experience, right? Right the first time and every time. In 2019, we’ve accelerated this to enhance your customer experience. We’ve hired a new team with experience in the hospitality industry, but we’ve also recently appointed a new customer experience partner, SMG, who will replace PeopleMetrics. The SMG philosophy is fundamental. It starts with employee engagement, which leads on to the customer experience. Signet 2.0 is making us easier to do business with and enhancing the customer experience further, and we’ll roll out plane-side transactions from the end of Q2.

And lastly, we’ve invested $64 million of CapEx in our Signature facilities. And within that figure, we’ve upgraded 8 facilities in 2019, including the refurbishments of Boston and San Francisco. The picture on the right here is San Francisco today. Historically, the FBO customer service agents were positioned behind the high counter, almost running behind and underneath that window. It’s a barrier to the customer, right? This new design solution replaces the barrier with a podium solution that allows you a much more personal interaction with your customers. You’re probably familiar with this in many modern high-end hotels. If you travel quite as much as I do, you see this increasingly available in Four Seasons, Ritz-Carltons and the newer Marriott chains, for example.

And then our final pillar, the Signature will be recognized environmentally and socially responsible leaders in our communities. For a number of years, frankly, we’ve been quietly getting on with this stuff with our own sustainability initiatives, both on our build projects, but also our operations. So let me share a couple of examples. Since 2007, that’s almost 13 years ago, at our San Francisco FBO, we’ve been running biodiesel as the running fuel for all fuel trucks and ground power units. The remaining power for all our ground equipment there is electricity or gas. We will look to replicate this across the network in every year as we continue to invest in equipment. Today, electric fuel trucks are not yet commercially available. But I mentioned previously, our renewal program is focused on lower emissions and more fuel-efficient engines.

Solar. You probably don’t know this. At 7 locations on the U.S. East Coast, our electricity needs are entirely met by solar paneling we have on top of the roofs. You’ll see an example here of Bradley International. Not only are we self-sufficient at those 7 locations, but we actually sell surplus power, surplus clean energy power back to the grid in those 7 locations and have been doing so for a number of years. When we develop and build new progress — FBOs, such as Atlanta and Bedford, we always look to be LEED certified. In this case, Silver certified. LEED is an internationally recognized green building brand. It provides third-party verification that building is designed and built to improve performance across environmental and sustainable measures. We will always look to go with the LEED program wherever possible. We see that as a differentiator as we are willing to invest in these technologies where others perhaps are not.

Our overall record in ESG means that we’re actually recognized as a constituent of the FTSE4Good Index, which is, again, not often known. And our MSCI rating has recently upgraded from A to AA. Now whilst there is always more that we can do, I’m pleased that our carbon disclosure project or CDP rating is actually B- this year. That’s 2 steps up from where it was the prior year in 2018. So that’s another metric used by certain investors.

So that covers our internal sustainability progress. Let’s take a look at the sustainability of the broader industry. The sustainable future is a core value driver for Signature Aviation. At the macro level, aviation accounts for 2% to 3% of global man-made carbon dioxide emissions, and business and general aviation accounts for near 2% of that 2% to 3%. As an industry, we remain some way of a credible alternative to jet aviation fuel, especially for journeys over 200 miles. But we’re constantly seeking innovation and mitigation opportunities. At Signature, we see 2 medium-term alternatives to fossil fuels, each at varying stages of development, but both ones we’re actively involved in.

Sustainable aviation fuel. We’re working with our fuel suppliers to improve the availability and time and cost. It is expensive and supply capacity is the issue today. But our customers want it, and we’re meeting their needs. We plan to have consistent supplies readily available at key locations by the end of this year.

And then the second technology is electric. As we look to the future technology and travel solutions in the space through our partnership with Uber Elevate, we’re very excited to be working with partners at the forefront of the industry development for electric and hybrid electric solutions.

So pulling this all together, our flight path will deliver value through 5 strategic pillars: growth; operational efficiency and process improvement; employee experience; customer experience; and then environmental and social, which includes the governance aspect as well. We’ve got lots to do, but it’s a really, really exciting time as we move to Signature’s next page in our journey.

Signature Aviation is a truly attractive business model. So let me leave you with a few takeaways. The U.S. B&GA market is a long-term structural growth market correlated to U.S. GDP through cycle. Signature’s network is ideally placed for us to add nonfuel revenues to outperform the market growth. As David said, and I’ve mentioned a few times already, if you haven’t picked it up already, we are a highly cash-generative business. In a flat market in 2019, Signature generated underlying free cash flows of over $200 million. In fact, we did the same in 2018 as well. This cash generation allows us to continue to invest in growth through fortifying our network, our customer offering, our people and our sustainable future.

So let me finish on the outlook for 2020. For 2020, Signature is expected to continue to deliver outperformance in a flat market. We will continue our focus on delivering nonfuel revenue growth across our controlled real estate network. We will continue to be strongly cash generative. And we have a clear capital allocation policy, which allows for potential shareholder returns over and above our progressive dividend policy.

So thank you for your time this morning. Happy to open it up to questions for David or myself.

Rishika?

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Questions and Answers

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Rishika Dipak Savjani, Barclays Bank PLC, Research Division – Assistant VP [1]

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It’s Rishika Savjani from Barclays. I’ll ask 3 questions, if I may, please. Firstly, on the free cash flow numbers. They’re clearly very strong. A quick reconciliation on my part seems to suggest that, that has come from slightly lighter CapEx than planned. Is that the case? And if it’s so, is it entirely timing of projects? Or have you chosen to pull back on CapEx due to the softer trading environment as a strategic decision?

My second question, and thank you for the update on ESG and what the industry is doing. I guess the one thing that might hit you sooner is this kind of idea of flight shaming. I think businesses are under more and more pressure to prove that they are working towards those goals. And potentially business travel and kind of particularly business jet travel could be under pressure. So could you maybe talk about how you’re thinking about that as more of kind of a short-term structural headwind to the industry?

And then thirdly, just what’s happening with your competitor? I mean obviously, Atlantic is on the block. How do you see that playing out? And is there any impact on your sales? Would you be interested in a part sale if certain assets became available?

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Mark R. Johnstone, Signature Aviation plc – Group CEO & Director [2]

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So let me start with those, and I’ll take those sort of in reverse, if I can. So Atlantic is for sale as is the rest of the Macquairie Infrastructure company portfolio. We understand a process has been going on. We think it’s at early stages, sort of first-round bids. There’s some level of attractiveness to us. I think the key issue we’ve got is that some 20, 25 locations overlap from a DOJ perspective. We’d almost certainly have to sell. So if you were to acquire 70 locations, you’ve got to sell 20 to 25, and they’re probably some of the bigger locations. It would be a bit of a hard ask for us. So I think it’s probably more important that we keep our heads down and focus on developing our own business with our strategic plans at this stage and continue to make small — smaller acquisitions as and when they become available. So it’s — yes, we’ll watch it with interest. But I expect there to be strong interest from PE and infrastructure funds in that asset going forward.

In terms of ESG, flight shaming, we’re seeing no evidence of that at all. I think 95% of our business is based in the U.S., and I live in the U.S., and it’ll probably be fair to say that their environmental thinking is not quite as accelerated as over this side of the Atlantic right now. I think the other important factor is that 40% of the routes and journeys flown in the U.S. in B&GA just aren’t possible on commercial airlines. You just can’t do point-to-point for those cities. So it’s a very hard service to substitute.

That said, we are seeing demand from customers, as I mentioned, sustainable aviation fuel. A lot of people are seeking access to it. Typically, it’s blended at 1% or 2%. But it allows the customers to sort of claim carbon credits, et cetera, for that. So we don’t see any decline in demand. We see increasing demand for sustainable aviation fuel, and capacity and supply is the issue there. But we’ve got some good partners on that. We continue to deliver that. We will continue to lead the industry through the year. So no real impact. And I don’t see that happening. Even in Europe, we haven’t seen a material effect, any noticeable impact on B&GA flying. You’ve seen Brexit. You’ve seen other bits and pieces, but certainly nothing on the flight shaming piece.

And in terms of free cash flow, CapEx, I’ll hand it David for the detail. But the simple answer is there were 2 large projects where we’re waiting on local authority approval, not airport approval, but local authority approval, which sort of moved the dial and reduced our CapEx down into the 60s last year. We’re guiding to $100 million or $110 million going forward, but we were always going to have some lumpy projects coming through. David, anything to add on that?

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David Crook, Signature Aviation plc – Group Finance Director & Director [3]

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Not a great deal. I think the $100 million, $110 million does reflect picking up some of those timing matters. We are investing in everything we want to invest in. It does remind us that the nature of the process does allow that flexibility, whether it’s from our side or an airport or local authority working through an approval process. 2019 CapEx number not too dissimilar to the 2018 number as well. And as I mentioned in guidance, my $100 million to $110 million will remain in part reflective of securing those airports or local authority approvals.

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Mark R. Johnstone, Signature Aviation plc – Group CEO & Director [4]

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I see — I mean, our continued investment in the people, the network and the whole business is critical in these flat periods. And you referenced Atlantic, assuming something happens there in transaction, it gets sold to a PE or a financial buyer. They’re going to stick a lot more gearing than our 2.4x in, right? They’re going to be up 5.5, 6x. So that means you end up with a very financially rational competitor at the end of the day, which is never a bad place to be. So it equally means that they probably don’t have as much cash to invest back into the business that we do. So we will continue to invest through these sort of flat periods and determined to drive our outperformance in the 250 basis point goal in the medium-term as we sort of see the market pick up again.

Next. Sam?

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Samuel James Bland, JP Morgan Chase & Co, Research Division – Research Analyst [5]

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Sam Bland from JPMorgan. Two questions, please. First one is on — with the free cash flow being where it is, you’ve got some excess cash flow above and beyond the dividend. Can you just talk about potential uses for that? Do you see — outside of Atlantic, do you see many FBOs transacting and there are interesting prices? And I guess just — can we have a bit of an update on the cause of the further impairment on ERO and basically where that process is? Should we expect anything soon?

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Mark R. Johnstone, Signature Aviation plc – Group CEO & Director [6]

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Okay. In terms of the ERO process, let me just pick up. In terms of — the fact that we’ve impaired, it means there’s something going on to cause that to happen, I think, it’s probably one piece. I think you’ll recall at the interims, we were still short of one OEM approval. We now have a full house of OEM approval. So we’re working through the final deal. Until we sign, nothing is certain. And it’s equally important. And I’ve said this all along, it’s more important that we’re doing the right deal than any deal. So we’ll continue to push on with that.

I’ll let David pick up the accounting in a second. I’ll also ask David to talk about the capital allocation piece. But let me just pick up on the M&A. There are and there continue to be a number of FBOs for sale out there. In the U.S., there’s sort of 20 to 30 we’d look at and probably around Europe between 5 and 10. We will continue to be selective. We will continue to be financially rational. Our competitor bought 1 last week, which sort of set us for the top 200, that wouldn’t even have been on our radar, if I’m honest to you. And we are looking at key locations, which add network value. So if they’re not there, it falls back to the capital allocation policy and what we do with surplus funds, and I need to segue back to David there.

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David Crook, Signature Aviation plc – Group Finance Director & Director [7]

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Thanks, Mark. Yes, I mean, there will continue to be bolt-ons in those targeted locations where we’re not today that we would like to be, and we will remain focused on working to secure those as the opportunity arises. In terms of excess, I mean, we ended the year at 2.2x. We’ve got timing payments I referred to earlier, which puts us essentially bottom of range, but that’s with the contribution in the way the covenant calculation works on a covenant basis from Ontic for the 10 months of its contribution in 2019. What you’ll then see is the continued cash development of Signature during 2020 as we naturally rollout of the contribution of Ontic’s EBITDA in our covenant calculation and therefore, the expectation of being around mid-range across 2020, as those 2 dynamics within the covenant calculation play off against each other. But clearly, a great platform to start out from. And as you saw in 2019, that ability to fund acquisitions and a progressive dividend from that free cash flow base.

And just on ERO, yes, the impairment is there and a recognition of clear progress in working towards completion of a transaction. What I would do is highlight the fair value less cost to sell. That’s a more natural point towards value here. The impairment is not clearly noncash and we’re writing off — even writing off some IFRS 16 assets that we’re obliged to put on the balance sheet. So I’d point you to $178 million of fair value less cost to sell for that asset.

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Mark R. Johnstone, Signature Aviation plc – Group CEO & Director [8]

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Andy?

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Andrew Douglas, Jefferies LLC, Research Division – Equity Analyst [9]

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It’s Andrew Douglas from Jefferies. Most of my questions have been covered, but just 2 small things. With regards to the kind of the first question on the competitive environment, we’ve seen a little bit of pricing pressure during 2019. Have we got to a position now where there has been more rationality in the market? Have people kind of taking down the price just to be able to get as much volume as possible and now they’re being more rational? Or does that kind of continue into 2020? And just a small comment, in the statement, you talked about potentially considering changes to our loyalty program. Can you just give us an indication of what that might mean for 2020 and beyond?

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Mark R. Johnstone, Signature Aviation plc – Group CEO & Director [10]

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Sure. In terms of pricing pressure, look, we’re outperforming the market. That means we’re winning, someone’s losing. It’s probably another way to describe it. We’re very rational, and we described at the Capital Markets Day about how we go assessing some net revenue growth and how we add incremental value. I don’t expect people to ease up on what they’re reacting to. I think you find it’s more the local, smaller competitors who are slightly more irrational because I guess it’s the marginal dollar for them. The chain seem to be reasonably rational, probably because they’ve got a lot of debt in there and they’ve got to pay it at the end of the day. Do I see any changes to that behavior in 2020? No, I think we’ll see the same thing. But I think we have to stand behind the quality and the scale of our network. And remember, this isn’t about getting involved in local pricing initiatives. We will only give people price breaks if they’re loyal to us across the network. So it’s reinforcing the value of the network rather than getting enrolled or caught up or wrapped up in any local actions. If somebody wants to get into that, we’ll just play the network. If some customer wants to go with the local competitors because they’re cheaper, that’s fine. It just means they’re going to pay more when they go to the locations they have less choice or no choice. So they’ll soon work out that their total cost of operating is better working with us instead of try and cherry-pick.

In terms of loyalty program, the loyalty program we’ve had in place for a while has sort of — hasn’t really changed too much. And I’m not entirely convinced that we’re actually incentivizing the right behaviors all the time. For example, we give loyalty points away to certain customer groups, and they actually don’t have a choice. They’re contracted to users. So why would you give loyalty to those customer groups, which costs you pence on the dollar each time. Why would you do that? So we need to look at that. I think the point I’d made there is we’re pushing that out towards the end of this year into next year for the simple reason that we’ve got a hell of a lot going on at the moment, right? We’re taking a look at the brand, we’re looking at the customer experience, looking at the employee piece. We’ve got a focus and do lots of things — sorry, lots of smaller things really well rather than trying to do lots and lots of things very averagely. So it’s about making choices. And that’s a regular discussion we have within the team at the moment. It’s important ultimately. And maybe one day, we’ll actually expand it and link up with some third-party loyalty programs in hotels or others that gives you the ability to use those points because at the end of the day, if you’re filling a plane with $5,000 of gas versus your car with $100 of gas, you’re getting quite a few points on that one. So your ability to attract and retain loyalty is actually quite high here if you link with the right partners.

Anyone else? Yes. Chris?

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Christopher Bamberry, Peel Hunt LLP, Research Division – Analyst [11]

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I was wondering if you could give us an update on how some of the other initiatives going, for example, the advertising one? You’re making — what kind of progress you’re making on that front?

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Mark R. Johnstone, Signature Aviation plc – Group CEO & Director [12]

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Yes. I mean we’re not going to break it down for you and tell you how much we’re making. I think I said in my piece, we’re sort of just starting year 2 on that 5-year journey. We have refreshed a contract within one advertising provider, which provides a lot higher opportunity, should we say, for income as we go forward. And we’re going to target that across probably the top 25, 30 locations we have. That’s where we get the most high-value ovals. So no numbers on that. It sits within the parameters that we guided in the Capital Markets Day. And I think that flight path slide is actually in the appendix page, if I am right, which gives some indication of what that medium-term value will be.

So it takes time to build these up, and I would caution whilst it seems an eternity ago to me that we did Capital Markets Day in November ’18, and a lot has happened since. It really is just over a year and a bit ago. It’s not that long ago. So a lot of the investment we’re making today, and I spoke about today, will continue to yield the returns over that 5-year period as we go forward for the next 3.5 or so years.

Gerald?

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Gerald Nicholas Khoo, Liberum Capital Limited, Research Division – Transport Analyst [13]

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Gerald Khoo from Liberum. In the statement, I think you referred to softness or weakness in heavy jets, basically the bigger fuel uploads. I just want to understand how much of that is — what’s the underlying reason for that? Is that weakness in longer distance flights? Or is that weakness in larger groups associated with the larger aircraft? And also, in the statement, you talked about sort of long-tail value behavior. I was wondering whether you could sort of elaborate on what you actually mean by that? And finally, just wondering whether you could give an indication as to what’s happening on wage inflation and staff turnover trends, please?

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Mark R. Johnstone, Signature Aviation plc – Group CEO & Director [14]

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Okay. One second. So heavy jet. I mean that was something we called out in half 1. Good news is we saw that come back a little bit in half 2. It was a combination of overseas traffic if you think at the time about the trade spat with China, and just to put the Chinese flight activity in context, both from this piece and COVID. In last year, there were only 390 direct flights into the U.S. from China. We handle probably around 2/3 of those. So relative to our 1 million movements a year, it really is a tiny, tiny piece of the market in the U.S. So a lot of the U.S. market, over 90% of the U.S. market is internal. So what was going on with heavy jets and government stuff, hard to really tell. It was just not coming to us. It seems to have come back. We’ve gone back with our pricing programs to encourage them to come back and it has been successful.

In terms of long-tail behaviors, what do we mean by that? I think as I’ve said before, our large customers make up a significant part of our volume. And those customers probably have less than 1,000 planes in operation out of the sort of circa 16,000, which means there’s 15,000 planes out there that we don’t really get our fair share of. So our long-tail initiative is about gaining market share on those sort of 15,000 tails that we see less of. And to be frank, they fly less. They’re not doing 800, 900 hours a year. They’re doing 100 hours a year. But — it’s going after that. And within that, because they fly less, we tend to find they’re slightly more cost conscious. So sometimes they may value price over service, for example. And in some compete locations, we’re never going to be the lowest price. We’ll invest in that network. And if those particular customers don’t often fly to the larger cities, then they’re probably less bothered about the network. So it’s harder to get those over the line.

In terms of wages and salaries, look, you’ll see the public data out there. I mean the vast majority of our business is in the U.S. I think we still continue to have record employment levels over there, which makes it very hard. I think we’ve spoken in the past of turnover rates being or should we say, retention rates being sort of 70% or so. We’ve increased that by around 10 percentage points up to nearly — to 70%. So turnover has gone down from 40-odd to sort of 30 something. So that’s great progress in the year. And to me, that’s very much tied in with this cultural journey we’re on. So trait’s — it’s not only hiring the right people, right, it’s retaining the right people. So I think that’s part of it.

In terms of wage inflation, it’s high. And then you add in medical costs in the U.S., you’re seeing 3% plus. We can recover that through our contracts. It just takes time to sort of cycle that through. So those conditions and those pressures won’t go away, and they’re very well written about in the broader industry beyond just us at this point in time.

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Gerald Nicholas Khoo, Liberum Capital Limited, Research Division – Transport Analyst [15]

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Do you feel you are actually able to recover the wage inflation through the top line because the top line is not growing by 3% and the wages on all the cost base, though?

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Mark R. Johnstone, Signature Aviation plc – Group CEO & Director [16]

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Yes. I mean substantially, yes. I mean medical costs are harder. So we constantly have to look at our medical program. How much the employees’ pays rise each year versus how much we pay. But yes, we pass it through. It just takes a little bit of time sometimes. I think I spoke previously about the inefficiency and the month-on-month volatility, that’s the challenge. If we’re going up 2%, down 2%, you’ve got a 4% swing on 5,000 labor — people. There’s quite a lot of people. And if the cost of hiring somebody between $5,000 and $10,000 a year by the time we got training, recruitment, all the stuff that goes with it. If you can reduce these turnover levels, it makes a material impact going forward.

Anymore? All right. Sounds like, that’s it.

So happy to have a chat with anybody after. But thank you for your time this morning and travel safe. Thank you.