Edited Transcript of MNZS.L earnings conference call or presentation 10-Mar-20 9:30am GMT

Turn to next page. So as the interims in August last year, I set out my key priorities. Internally, this became known as being fit for ’20. They were to reduce our overhead cost, and we have delivered in excess of GBP 10 million of savings. Focus on our underperforming operations. We fixed stations in the U.S. and under the new leadership in the U.K., we are budgeting the U.K. to be profitable for 2020, the first time in a few years.

We significantly upped our commercial activity and customer interactions, a particular focus of mine. And I have visited all our key customers in person during 2019. I’ve upskilled the commercial teams, and we have seen the business return to top line growth in 2019 after 2 years of going backwards.

We see key wins and renewals with Qatar, easyJet, American Airlines, Lufthansa, just to name a few. All this investment is really working, and our pipeline has never been so strong. Our focus on people continues. We’ve put in place the new senior leadership team. And I would argue, we have a management team that is the envy of the industry. Within our HR structures, we significantly increased the caliber of individuals in the regional teams to tackle the staff turnover issues, and through our strategic growth plans, we’ve added 2 small acquisitions in 2019 as well as prepared good groundwork for other opportunities out there.

We took decisive actions. We have delivered on them and they will deliver top line growth and cost reductions in 2020 versus 2019.

Next page. So for the people on the phone, that’s Slide 6. So before we go into detail of the financial performance and the operational review of 2019, as Philipp set out, it’s only right we recognize the extraordinary times we find ourselves in today. In the light of the coronavirus and the implications it’s having on us, our operations, our people and our customers, we have taken immediate and decisive actions to protect our business.

Before I talk about the actions, it is worth noting that we operate a resilient business model, a model that’s benefited 2019. Our model allows us to flex up and down our labor to meet material customer changes. Through the work done, we remain close to our customers and understand their needs, working together to mitigate costs.

Our global business and therefore, naturally — our business is global, and therefore, naturally, we see some markets perform better than others. Today, we see some operations, for example, in cargo, actually increase due to the impact of the virus. And finally, we probably have the most experienced management team in the industry with the experience of navigating our way through tough times from the impact of 9/11, SARS, the Ash Cloud and the credit crunch.

So turning to our actions. I’ve put in place very tight cost controls across both operational and support functions. In the operations, we’re closely monitoring all operations on a daily basis, and the impacts of customer schedule changes. We put in place over time bands. We’re asking our staff to take holidays. We’re delaying all discretionary spend and asking our suppliers for discounts. And we won’t stop there, we’ve established a coronavirus operations room to analyze daily the impacts of changes to customers and their schedules.

In our support functions, all non business-critical travel is banned. All long-haul travel has to be approved by an executive member. Recruitment freezes are in place, and we’re also freezing all management pay increases. All budgets are frozen and every spend has to be accounted for on a zero-based basis. As we look forward for the rest of the year, it’s about putting significant focus on our cash generation and protecting the balance sheet. Menzies is a highly cash-generative business over the year. And this year, we’ll use that cash to delever the balance sheet. The Board has therefore decided not to pay a final dividend in July, put in place a global CapEx freeze, and review our other options of salable assets within the group. We have set the target of being between 2x and 2.5x net debt-to-EBITDA by the end of the year, which, on an exit rate basis, will be below 2x. We take the situation very seriously and have acted very quickly. We have a strong management team who have seen these extraordinary times before, know how to react, take out cost quickly and leave ourselves nimble to take advantage of the opportunities that will come.

With that, I shall hand over to Alvaro.

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Alvaro Gomez-Reino, John Menzies plc – CFO & Director [3]

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Thank you, Giles, and welcome, everyone. It’s an absolute pleasure and an absolute honor to stand here in front of you for the first time. I would like to take the opportunity to introduce myself. Some of you may already know me. My name is Alvaro Gomez-Reino. And I joined John Menzies, as Chief Financial Officer on the 1st of December 2019. So pretty much just, as Philipp said, 3 months into the job. However, I have a long history in this industry. I spent over 7 years with Swissport as Group CFO. As you well know, Swissport is John Menzies’ largest competitor. You would then wonder why I decided to join John Menzies. Coming back to the industry. Well, it’s quite simple. I love the industry. I don’t know, there is something addictive about aviation in general and ground handling, in particular, I found a superb management team led by Giles, who I know from the past, mainly as competitors, sometimes as partners in some ventures that we had in different countries around the world.

And I honestly believe we have the best and most experienced team across the entire industry. And we operate in a structurally growing industry, with numerous organic and inorganic opportunities. I have seen it before. I’ve done it before. During my tenure at Swissport, we doubled revenue and profitability.

On that note, I would like to move to the financial overview of today’s presentation.

I’m now moving to Page 8. Against the backdrop of very challenging market conditions, where we saw cargo volumes reducing more than 10% in some of our stations and the schedules impacted by the grounding of the 737 MAXs, I believe the group delivered a very robust set of results, demonstrating the resilience of our business model, underpinned by the decisive actions management took and that Giles just covered.

The group delivered all-time high revenue at GBP 1.3 billion, which is a 2% increase over the prior — previous year. It’s fair to say that the group’s revenue benefited from a number of acquisitions, but it’s also fair to acknowledge that we lost some exclusive licenses in 2018 as well as exited unprofitable stations, mainly in the U.S. in 2019. So on a like-for-like perimeter, the picture would be quite similar. More importantly, we saw growing momentum towards the end of the year in our contract wins. We will cover the segmental performance later on in the presentation. Our underlying EBITDA stood at GBP 138.7 million or 10.5% margin. It’s worth noting that this number has been boosted by the application of IFRS 16 that impacted positively our EBITDA by GBP 65 million. Underlying EPS — sorry, underlying operating profit was GBP 52.5 million. We believe quite robust, given the market headwinds, underlying EPS at 24.9p, down on prior year due to lower underlying profit, the impact of IFRS 16 adoption, which is positive at operating profit level, but more than offset on the interest line, one of interest charges and higher underlying tax rate. We had an exceptional charge to the P&L of GBP 3 million, which mainly comprises acquisition, transaction and integration costs, claims settlement, restructuring costs and asset right-offs.

Our covenanted leverage ratio was 2.86x within the 3x limit under our old facility and 3.25x under our renewed facility, and our net borrowing stood at GBP 391.5 million. The impact of IFRS 16 in our closing net borrowings was roughly GBP 237 million. And a final highlight that — was that we announced already on the 27th of February, is the fact that the group has successfully refinanced its existing facilities in more favorable conditions that I will cover later in the presentation.

And if we move on to Page 9, I believe, where we show the profit bridge. The reduction of profit was neutral over tonnage and yields in both the cargo handling and cargo forward in product categories. The impact of the loss of exclusive licenses and other trading effects, including the reduction in schedules as a result of the grounding of the 737 MAX and a number of airline failures.

These were partly offset by the closure of underperforming stations. The net positive impact of commercial activity, business development, overall cost savings, the new lease accounting and foreign currency translation.

We move now to Page 10. Segmental performance. The Americas revenue reflects the full year impact of the loss of exclusive licenses in Dominican Republic and Panama in 2018, and the closure of a number of underperforming stations. As you can see, the profit impact of closing the underperforming stations, more than offset the loss of the exclusive licenses. Profit also benefited from contract renewals at improved margins.

In EMEA, the top line is massively impacted by the acquisition of airline services in the U.K. partially offset by the Thomas Cook cessation and low cargo volumes across the network. Unfortunately, the profit did not follow the revenue, mainly due to the low volumes across our European cargo network that I just mentioned, tightening labor conditions in Eastern Europe and airline failures.

Rest of the world, the revenue increase is mainly due to the small acquisition in New Zealand and Indonesia, together with growth in our ground handling operations in Sydney. The profit fell mainly due to adverse cargo mix impacting our yields. And the performance of our cargo forwarding business was driven by reduced volumes in the U.K. and the USA, partly offset by a general uplift in South Africa, new cargo screening business in Australia and an acquisition in Canada.

Moving now to Page 11. Massive movement in our net borrowings that we will explain in a minute. So our operating cash flow generation was close to GBP 135 million, but that includes GBP 65 million from the increased EBITDA on the back of the application of IFRS 16. Tax and interest paid of GBP 32.3 million, again, impacted by IFRS 16 by roughly GBP 8 million. We paid GBP 12.1 million towards our pension deficit. We have a commitment to pay GBP 9 million per year. But in ’19, we prepaid part of the 2020 amount as part of a complex agreement on the back of certain asset disposals.

Net CapEx of GBP 21.5 million, which comprises GBP 35 million of investment in tangible and intangible assets offset by GBP 13.5 million of disposals.

Our net M&A contains a combination of outflows in acquisitions and investments in joint ventures and inflows in disposals, including the disposal of the remaining stake in the Menzies distribution business. We paid GBP 17.3 million in dividends and had cash outflows in exceptional items like acquisition, transaction, integration and restructuring costs of circa GBP 13 million. Sorry.

And now moving to Page 12. Back end of 2019, we decided to refinance our existing facilities well ahead of the June 2021 maturity, which in hindsight, proved to be the right decision. We received strong support from existing and new banks. The key highlights of the new financing are a new 5-year facility with extended maturities until 2025. The same margins as previous financing with improved covenants, so 3.25x and up to 3.5x in case of acquisitions, and improved documentation. So we will use a consistent FX rate on the P&L and balance sheet, which is something that not being consistent in the past, caused us some headaches in 2019.

And also, we have a new asset-backed permitted financial indebtedness that will give us much more flexibility on asset financing and potentially move away from expensive leasing options. And again, to reiterate that we received very strong support from existing and new banks.

So in summary, before I hand over back to Giles. Three key takeaways from my point of view, robust and resilient set of results, despite very challenging trading conditions, the decisive actions taken by management paid off already in 2019 and will continue to do so in 2020. And we have secured a new financing that will underpin our future growth.

And on that note, I would like to hand back over to Giles. Thank you very much.

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

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Thank you, Alvaro. So just turning to Page 14. So before I go through the operational review I felt it was worth giving some of the backdrop of the market in 2019. It is fair to say that 2019 was one of the toughest aviation markets we’ve seen for a number of years, with a multitude of factors impacting both the sector and ourselves. The uncertainty in the economy, driven mainly by the U.S.-China trade wars and, to a lesser extent, the uncertainty around Brexit had its toll on our cargo volumes. But as history will show, these tend to reverse quite quickly. IATA stated the volumes in the market were the worst since the credit crunch in 2009, and we saw drops year-on-year of over 10%. Following the 2 tragic crashes, the Boeing 737 MAX was grounded. This puts pressure on our schedules and our customer schedules and our customers’ own growth plans. That said, there is also a pent-up demand for new aircraft in the industry, with many new aircraft will come back online at the end of the year when the 737 MAX returns to service. The market took the toll on the airlines themselves, and we have seen a number of bankruptcies. The most notable being Thomas Cook, leading to the largest post war repatriation of British people. And all of this is still taken — not — still not taken the heat out of the labor market, where we see staff turnover still in the 80s in the U.S. and a brewing issue in Eastern Europe. So 2019 has been a challenge. I believe the group has reacted well, taking the necessary decisive actions to protect 2019 and set us up well for 2020.

Next, Slide 15. So turning in more detail to our regional performance review, starting with the Americas, 2019 was focused on putting rights on underperforming stations, driving through HR initiatives to tackle some high staff turnover and rebuilding our customer engagement. I’m very pleased with the progress on all fronts made in the U.S. and the benefits are really starting to be seen as we start 2020.

Outside of the core U.S., Canada, Mexico and Colombia, all had strong years with good performance. In EMEA, we restructured the management team, taking out the unnecessary EMEA layer, and I replaced the U.K. leadership team. The U.K. turnaround is now delivering with a number of great wins, renewals and cost actions being delivered. We are confident to see much better results as we head through 2020. The theme of tight labor markets, we saw in the U.S. is starting to come with reality in Eastern Europe. We are taking those learnings we’ve learnt in the U.S. and deploying them in Eastern Europe. Like the rest of the business, our Heathrow and our Amsterdam cargo volumes were also impacted by the general downturn. And then the larger bankruptcies, particularly Thomas Cook impacted this region. However, towards the end of the year, we secured Qatar across 3 locations, which will really underpin a better performance for 2020.

In the rest of world region, 2019 was about significant renewals that underpin our operations in Oceana. We have successfully secured Thai and Cathay for a further 5 years, a great result for the local team. Ironically, Macau has had an exceptional performance in 2019, which is currently significantly impacted by the coronavirus. And finally, we acquired a small cargo business in Jakarta to our existing ground handling operations. Our cargo forwarding business delivered a robust performance in light of the weak operating environment, the new leadership team have put in place a number of new regional managers, started the investment into our global linked IT system and putting good groundwork for the future.

We support — secured a small acquisition in Canada, which is performing very well, and we are overall confident about what the future of this division, which had actually has started particularly well in 2020.

Next Page 16. As I set out when I took over as CEO, a big focus of mine was to drive our commercial agenda. Focusing — following the acquisition of ASIG, our commercial activity was focused around renewals. And therefore, our top line growth had stalled and actually gone backwards. As I said earlier, I personally got around all our major customers and visited them in their home bases and built strong relationships at the executive level. I’ve instilled a sales culture in our organization as well as made sure our teams all build engagements with our customers at all levels. I’ve changed the commercial chains, seriously up-skilling those teams both in the center and in the regions. And I’ve changed the way we pay our salespeople, making them incentivized on selling.

I’m very pleased to report that we now see the real benefit from this. In the second half of 2019, our contract gains turned positive delivering a small gain of GBP 8 million. And as we start 2020, the first few months continue that momentum already securing net gains of GBP 8 million. Our renewal activity remained strong as ever with over GBP 150 million of contracts secured many at improved terms. Of particular note, during the year, following years of losing easyJet business in the U.K., we won easyJet for further 5 years in Luton, something I personally invested a lot of time in rebuilding our relationship.

As already said, we secured a significant deal with Qatar across 3 Europe locations, and we’re looking to build on that relationship. And as part of our South African fixed plan, the local team has secured Mango, the South African low cost carrier. What is most exciting is the new commercial structure is really starting to deliver. Interactions with our key customers across all levels of the organization is really helping. Our commercial pipeline is as strong as it has ever been following the changes. And I feel really confident about delivering a strong commercial performance in 2020.

Slide 17. So just going back a bit in time in history of our sales growth. The top chart sets the slide, sets out on the slide our revenue growth between 2011 and 2019. The revenue through this period has grown by 8% CAGR and stripping out the major acquisition of ASIG by 5% CAGR. The chart on the bottom shows our historical net gains. From 2011 to 2016, we added, on average, around 5% of revenue per year, equating to around GBP 40 million per year. In 2017 and ’18, we went backwards following the acquisition of ASIG and the huge efforts by the teams in the renewal cycle.

As already explained, when I took over in 2019, we changed significantly our commercial focus, and you can see the return to growth in 2019, particularly with a better second half. As we head into 2020, we’ve already delivered GBP 8 million of contract gains. And I’m targeting somewhere in the region of GBP 40 million of net new business wins this year. We have returned to commercial growth, and this slide proves that Menzies’ has in the past outgrown the market and grown our market share. We are, and we can do that again.

Next Slide 18. So as we look forward to 2020 and beyond, I want to set out how we will grow the business. This is split essentially into 2 parts: our strategic priorities and the enablers to support them. The work done in 2019 was about bringing us back on track. Getting us fit for ’20, and I believe we made excellent progress in those areas. So turning to our strategic priorities. We will optimize our product portfolio and continue to focus on balancing the portfolio with increased operations in our higher-margin cargo operations, increased business in higher-margin developing markets and look to offer more products through our ground handling operations. We will increase our footprint of our fueling business by further expansion outside the U.K. and the U.S. markets.

As our history has shown, larger scale operations with fewer customers drives better returns and more efficient operations. So as we look forward, we will target those as a priority. We will listen to our customer and understand their needs, adapting and being solution orientated to meet their objectives. We will make ourselves easier to deal with. And of that, we will win more business. And we will be the employer of choice. Our people are our secret sauce and attracting, retaining, and training the best is key. All of this will deliver our main ambition of margin improvement and profitable growth. Through these actions and strong discipline on costs, controls, investments, safety and security and these priorities, we will see our margin improve.

To deliver this, we need to focus on our strategic enablers. Our business does not exist without a safe and secure operation. It is and will always be our #1 priority. We have market-leading safety statistics, and we must constantly focus on those. Our customers are looking for high-quality services as factors such as carbon composite planes and EU 261 fines are becoming more and more of their focus. Our support through our commercial teams are becoming key, knowing our customers, being solution-orientated, understanding pipeline and what is coming up next. Through our innovative and bespoke systems it’s about having the right systems in the right places. As a group, we have a suite of excellent systems to fit the size of operation they support, we will install what is right for the operation to give both the best long-term value and a cost-effective solution today.

And it’s all about our people. Our people are who deliver that service day in and day out. Through our innovative leadership programs we will give our teams a boss who cares. We will look at the hygiene factors, clean and working break rooms, which are cold in the summer and warm in the winter. We will provide them with a career path, and we will provide them with the right tools to provide a safe and secure service.

As I set out at the beginning, John Menzies’ DNA is about innovation, all the way back from 1833 with industry first, and our people leading the way. Innovation is at the heart of what we do today and spans all our enablers, be that from the state-of-the-art IT systems to drive efficient rosters right through to how we say thank you to our teams on the ramp. Through targeting the right opportunities, deploying the right systems, attracting the best people in exciting and long-term structural growth market, we are ready to seize the opportunities to grow the business this year and beyond.

Slide 19. So even in the backdrop of the coronavirus, our market remains very exciting and strong. We believe that around 7% to 10% growth a year — revenue growth year-on-year was perfectly achievable, and I’ll explain why. The market we operate in today is around $60 billion, of which around $30 billion is outsourced. Of the $30 billion, around 25% of that outsourced market is to the larger players, such as ourselves, which shows the highly fragmented market, with lots of consolidation opportunity. Under all metrics or long-term metrics being cargo, aircraft growth or passenger growth, we see the market growing by about 3% to 4%. Our market, therefore, grows in 3 ways: through the underlying market itself; the legacy carriers moving to an outsourced model; and the low-cost carriers, the likes of easyJet and Ryanair, winning more share from the legacy insourced carriers. All in all, we expect to deliver around 4% per annum from this. In terms of our own growth dynamics, we split those into both organic and business development. We will focus on the organic opportunities through our strong commercial focus and customer delivery. We expect to add somewhere between 2% to 3% from contract momentum. And as I showed on the slide earlier, our history shows we can deliver up to 5%. Business development comes through taking advantage of the highly fragmented market, new licenses, joint ventures and start-ups. When our balance sheet allows, we will target bolt-on highly synergistic deals and joint ventures. We see that adding around 2% to 3% per annum. So all in all, that will give us a growth opportunity in the market somewhere between 7% and 10% before the impact of any transformational deals.

Our history since 2011 shows that we can grow at these rates and that we can deliver that. We have an experienced team, a strong operating model, a new customer-centric focused approach, which will allow us to take advantage of the growth opportunities in our market.

Slide 20. So to sum up, 2019 was a tough market for the aviation sector with weak global economy driving low cargo volumes, the grounding of the 737 MAX and a number of airline failures. Despite this, Menzies delivered a robust set of results. I set out decisive action at the interims, and we’ve delivered against them. We have changed and strengthened the senior leadership team with the addition of Mervyn and Alvaro as well as made changes under the management structures under them. Driven out unnecessary costs and made ourselves fit for ’20, and significantly increased our commercial engagement. Our performance vastly improved and now have real opportunities in the pipeline. As we look forward, 2020 has obviously been impacted by the ongoing coronavirus. So we have taken quick decisive actions to cut costs, preserve cash and mitigate the impact as much as possible. We will focus on our balance sheet, conserve our cash, get our leverage down to 2x to 2.5x by the end of the year. We will target organic growth and our groundwork on our commercial pipeline last year will reap benefits this year.

Given the underlying positive momentum of the business, the short-term headwind of coronavirus is disappointing, but we are well positioned taking quick decisive actions to protect our business. We have the right team and the structure to seize the opportunities and come out the other side of the coronavirus much stronger. Thank you, and I shall open the floor to questions.

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Questions and Answers

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Giles Wilson, John Menzies plc – CEO & Executive Director [1]

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All right. Eoghan?

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Robin Alexander Speakman, Shore Capital Group Ltd., Research Division – Research Analyst [2]

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Yes, it is Eoghan Reid from Joh. Berenberg. Just 3 for me, if that’s right. Firstly, you alluded to saleable assets in your opening remarks. Just any sense to the scale of quantum that could raise from selling assets. Secondly, sort of the coronavirus, you updated 2 weeks ago, you outlined a GBP 6 million to GBP 9 million impact. What’s your latest thinking of that given what’s developed over the last few weeks, kind of the best worst-case scenario, is there a range of outcomes you see in Europe. And then thirdly, under commercially unviable sales, you exited, so there was GBP 5.6 million benefit in 2019. What’s the annualization impact of that coming into 2020 numbers? And then how many more stations that you’ve identified to exit that could impact 2020 numbers as well?

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Giles Wilson, John Menzies plc – CEO & Executive Director [3]

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Okay. Do you want to take the first one?

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Alvaro Gomez-Reino, John Menzies plc – CFO & Director [4]

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Yes. I mean, in terms of the asset and as we said, I mean, we have committed to reduce our leverage to be between 2x and 2.5x in 2020, with an exit rate of 2. So clearly, one of the levers that we can pull is looking at a number of assets that we operate across the group doing so allowing lease backs or getting rid of them, if they are not strategic. And we have targeted within that bucket anything between GBP 20 million and GBP 30 million.

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

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In terms of the coronavirus, so it’s been a very interesting 2 or 3 weeks in terms of the mix as Philipp said out at the beginning. So we are seeing probably slightly better results in our China operations than we expected. So what we didn’t expect was the flights are still not there. The casinos have already reopened, but obviously, the flights are still limited because of the quarantine. But what we’re seeing is big cargo volume going into Macau that we weren’t expecting at all. In terms of the U.S., we’re seeing cargo come back online, so where they’ve taken out the passenger flights we’re seeing additional freighters go into the U.S. and that’s helping hold up the cargo. But negatively, of course, we’ve seen the likes of Flybe go down, and we’ve seen the Lufthansa quite significant cuts, both of those sort of offset that. So I think the answer is, we don’t see any change to the number that we’ve already guided as it stands today. But bearing in mind that position takes us through into sort of towards the half year, as we said, we’ll look forward as we see what the impact is. We saw Qantas this morning make some changes, albeit, again, that will be limited to us, and we don’t think it’s domestic. We think it’s mainly international. And we’ll just react to each thing as it comes. So I think the key for the moment is we’re not changing any — our view on that number and that number holds valid. And then finally, in terms of the question, predominantly those closures were closures we took at the back end of ’18, some of them into ’19. What we’ve done in ’19 is we talked about the underperforming stations that we fixed. So — and a good example was in ’18, we closed San Francisco ground handling. In ’19, we fixed San Francisco fueling. And as we go into ’20, we see a positive on that. And that forms part of the original uplift that we said when we were obviously originally guiding before the coronavirus part of the uplifts that we were looking.

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Alvaro Gomez-Reino, John Menzies plc – CFO & Director [6]

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Yes, that was included. Yes, yes, absolutely. And we continue to do the same across the portfolio. We monitor every single station. And if they’re difficult decisions to be taken, they will be taken. At the moment, we may have 1 or 2 stations in the radar. And we are discussing internally what to do with them.

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

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And those might accelerate a bit with the coronavirus that you might say, “Well, actually, some things maybe are, we’ll deal with.” But you’ve got to remember, and I think the key for me is we are a global business. There’s a portfolio effect that happens all the time in our business. I mean, I referenced in my words that in some instances, we’ve actually seen an uptick in cargo. So our AMI business in the first 2 months was actually somewhere in the region of about 25% up year-on-year so — in terms of actual volumes. So you do see a lot of ups and downs in the business. And what we’ve got to do is react to each situation, which is why we have got ourselves looking at every day of what we do. We look forward, we plan a little bit further ahead than what our customers are saying, just to make sure we’re more nimble. But we’ve also got to be prepared for when the volumes come back and make sure we do have the people in place. And more importantly, one of the things, as we referenced, is the cargo will come back probably with quite a vengeance when it does, and we need to be prepared for that as well. Okay. Chris?

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Christopher Bamberry, Peel Hunt LLP, Research Division – Analyst [8]

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Three questions, if I may. You mentioned adding — targeting GBP 40 million of new revenues, I believe, on the pipeline there. Secondly, saw in increase in Asian Cargo, just that cargo is elsewhere technically to kind of the stations which went tough for last year. And finally, also a lot of measures in terms of cash generation for other steps, perhaps could you take in addition to those.

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

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So starting with, was it cargo first? Yes. Okay. So starting with cargo. So generally, cargo volumes are holding up reasonably well across the network. Certainly, we’ve seen in our Australian businesses and with the exclusion of obviously losing the Asian carriers. We’ve seen a bit of an uptick actually in places like Heathrow. So where there’s been cargo that would — where we don’t have Asian carriers, you’re seeing slight increases out like Middle Eastern carriers. Amsterdam got — has been impacted at the start of the year, but that’s actually an ongoing issue that we have every year with the ABC getting their slot restrictions in the first 2 to 3 months. You never know what they’re going to be until they get told of them. But again, that reverses quite quickly as you go into March and April.

So generally, cargo was actually not — was pretty good as we started January, February. I mean, not to the levels we saw in ’18 and whatever, but we certainly have started to see it turn. And as I said to you, AMI, particularly has had a good start. Sorry, I forgotten the second question.

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Christopher Bamberry, Peel Hunt LLP, Research Division – Analyst [10]

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The GBP 40 million target.

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

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The GBP 40 million of revenue. So that’s net gains. So I’m targeting a lot more than that in gross gains because we will lose stuff. And I’m not saying that we — I have actually targeted all my operational guys not to lose business on service, but by nature we will lose on price. So the pipeline is very strong, and the pipeline is significantly higher than that. And we are — we have a weekly tracker that comes out on our sales. We have a monthly set of calls on pipelines with all the regional teams. And that pipeline is then rated from 0 to 100% of likelihood. And then we then feed in the people that matter at the right time. So at some point, I’ll get involved, and we take that through the structure. Philipp often goes out as well. So we really do target the customers on that basis. So particularly excited about the pipeline at the moment. We’ll see what turns in, I’ll give myself a challenge, see if I’m right at the end of the year.

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Alvaro Gomez-Reino, John Menzies plc – CFO & Director [12]

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On the cash…

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Christopher Bamberry, Peel Hunt LLP, Research Division – Analyst [13]

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Any further potential measures?

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Giles Wilson, John Menzies plc – CEO & Executive Director [14]

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Yes, you take that.

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Alvaro Gomez-Reino, John Menzies plc – CFO & Director [15]

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I mean, as you have seen in the presentation, we had a net CapEx of GBP 21.5 million in the year, but that was made up of GBP 35 million of investment and GBP 13.5 million of disposal. So if you take the gross number, the GBP 35 million that’s more or less what we’re spending CapEx. In our internal plan for 2020 we had GBP 38 million. You could argue GBP 10 million were committed for start-ups like Mango that we already did. And hopefully, almost immediate start-up in Iraq. But then you are left with GBP 28 million that you could — there, you can pick a number and say it’s 100% discretional. Probably that’s been too optimistic, but 50%, you can delay or avoid or switch to leases. Clearly, you can. So in our targeted number of leverage between 2 and 2.5 we have assumed that we would reduce GBP 14 million of CapEx out of those GBP 28 million that we planned.

Also, every year, you see we have bolt-on acquisition here and there. In our plan for 2020, we had some of those that we have put the brakes on, and we can simply not do them or delay them. So that’s another element. And obviously, you have heard from Giles that the board is not recommending paying a dividend in 2020. And it will be temporarily suspended. So with all those levers, we think we can be — well, we will be at those levels.

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Giles Wilson, John Menzies plc – CEO & Executive Director [16]

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And just to add to the dividend, the word temporary is exactly that point. It’s not our long-term ambition not to pay a dividend. It is about measuring and proving to the market and proving to everybody that we can deliver the balance sheet quite rapidly. As we go into 2020, back below 2x, which, if you remember, was a stated ambition of the group, between 1.5x, 2x, we can then move back to being — that’s a more traditional model that…

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Philipp Joeinig, John Menzies plc – Independent Chairman [17]

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Without a spike in leverage because in 2021 that dividend will be paid out of the cash generation in the year. So…

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Giles Wilson, John Menzies plc – CEO & Executive Director [18]

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Robin?

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Robin Alexander Speakman, Shore Capital Group Ltd., Research Division – Research Analyst [19]

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Yes, Robin Speakman from Shore Capital. Just looking at the competitive environment. Clearly, 2019, there was a lot of action to reestablish more commercial, more economic margins. So how do you think you are positioned now relative to the majors. And I guess, part of the context that I’m thinking about here is, well, with COVID pressure in the short-term some may be tempted, some operators, very high leverage, maybe just taking the view, well, let’s just price to get revenue in. So I mean, how do you see the short-term impact versus your long term?

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Giles Wilson, John Menzies plc – CEO & Executive Director [20]

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So I think there is — first 2 parts to that. Firstly, you don’t get contracts overnight. So everything takes time. You make it — even if you were — most of — the shortest you’ll ever see a switch around is probably 60 days. So yes, can be aggressive today, but you don’t know what 60 days’ time looks like. So I think the commercial work and the customer engagement and being able to work with the customer is absolutely priority #1, we get that right, we’re in the room. It will — there is no doubt today our customers are very price-focused. You see day after day airlines coming out with various announcements or cuts and everything else. And I’ve had interactions, conversations with a number of our biggest customers about how we might even adjust service standards to help them take some costs out. So I don’t think — I think actually reversely the challenge that our major competitors are in won’t be just about chasing revenue. They’re going to want to chase cash and profitable because that’s absolutely going to be key because when the core business is really struggling their covenants are going to become tougher and tougher, so I think it probably drives more sensible pricing because if you price for something, and then finally, then take 10% or 20% out of the volume, it’s going to be really brutal. So I think for the moment, we’re not seeing anything. We will always see the odd thing. There’s no doubt about it, with predatory pricing and aggressive, and I suspect we might play our part in that where we see a real opportunity for ourselves. What I would say, the last element of that is some of our competitors won’t survive this. And that’s real opportunity for us. Where? Who? When? Don’t know, but let’s be assured there are a number that have been on the edge for a while, and this is going to be quite brutal for them. So I see more opportunity than I see risk.

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Robin Alexander Speakman, Shore Capital Group Ltd., Research Division – Research Analyst [21]

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Can I just ask just further to the asset sale question. I mean, just about the duration of the lease book, leases in ’19 were slightly lower than I expected them to be. But great, does that reflect a shortening of the duration of the lease book? And with your plan to sell assets at end, should we expect a higher volume of leases coming through in 2020?

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Giles Wilson, John Menzies plc – CEO & Executive Director [22]

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Yes, you can go with that one. Good question. Don’t genuinely — I don’t need to probably speculate a little bit on the answer. So we have quite a flexible model in our leasing. The core of our leasing, if you remember rightly, our main supplier is relatively flexible, so we can return equipment and take equipment on. On U.S., we have slightly longer leases, but we have longer assets, the fueling assets particularly are much longer. I think probably you won’t see major impacts one way or the other, I’ll be absolutely honest. I think what you might see us was returning some equipment, we would have returned equipment just recently on the back of the Flybe cancellation.

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Alvaro Gomez-Reino, John Menzies plc – CFO & Director [23]

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And on the asset sales, probably you will be looking at long-term leases. So…

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Giles Wilson, John Menzies plc – CEO & Executive Director [24]

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3 to 5 years.

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Alvaro Gomez-Reino, John Menzies plc – CFO & Director [25]

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Oh, or even…

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

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Maybe longer, oh, yes, and then some — maybe on the big ones. Yes. Okay. So I think you have to look at each one, but the actual math, we use leasing, certainly on the equipment side, not just for the balance sheet, but also operationally, it makes a lot more sense for us. Eoghan?

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Eoghan Reid, Joh. Berenberg, Gossler & Co. KG, Research Division – Analyst [27]

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Sorry, just a couple more.

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Giles Wilson, John Menzies plc – CEO & Executive Director [28]

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Yes.

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Eoghan Reid, Joh. Berenberg, Gossler & Co. KG, Research Division – Analyst [29]

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If that’s all right. Firstly, on the flexibility in the cost base leases, obviously some flat ground, but in terms of how you think maybe airport closures that happened with just flight cancellations, how quickly can you say in 2 weeks’ time to have some percentage of staff, maybe less hours like that?

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Giles Wilson, John Menzies plc – CEO & Executive Director [30]

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So I would have said, if I — my general problem today is I am short staffed across the world. So a little bit of easing doesn’t — isn’t always the worst thing. So generally across — in the U.S., which is the highest, is still in the 80s. I think, globally, I don’t have the…

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Alvaro Gomez-Reino, John Menzies plc – CFO & Director [31]

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52, 53.

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Giles Wilson, John Menzies plc – CEO & Executive Director [32]

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52, 53. So the key actually is turning off overtime. Making use of times for training, which we have to do. And then looking forward, we then restructure majorly then you have to look at those major restructures. You have to. One of the challenges that I see coming down the line, actually slightly differently, is actually being lack of staff because you’re going to — yes, you might see less flights, but I can see a lot more staff being off sick. So I think the biggest challenge is protecting the staff and keeping the staff actually there so we can provide the operations. So in the U.S., a little bit — we have seen a slowing in staff turnover through the actions we’re taking, but particularly taking some of the peak schedule out will help us reduce our overtime, which is where we often pay more than time on overtime. So actually, you get quite a big impact. So I think that’s the big one. The flexible if you — an airport closes like Macau, nothing closed, but albeit, we’ll use things like holiday, which we’ve done. We’ve put people on holiday. We — there’s a rule there where we’ve converted sick pay into holiday. There’s all sorts of things we’ve done. We’ve worked with the government. We’ve actually just recently agreed some reductions with the airports themselves. So I think you — there is no one-size-fits-all. You have to deal with it, which is — hence why I come back to the point we set up our own sort of operations room to understand. We take the situation, react to the situation, we put it in place, and we look at the next one. And Macau was a great test bed for us all on that. I don’t think we’ll necessarily see that again because it was quite extreme, but you don’t know. We have to be prepared for all options.

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Eoghan Reid, Joh. Berenberg, Gossler & Co. KG, Research Division – Analyst [33]

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And maybe just one quick one on working capital.

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Giles Wilson, John Menzies plc – CEO & Executive Director [34]

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Yes.

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Eoghan Reid, Joh. Berenberg, Gossler & Co. KG, Research Division – Analyst [35]

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Are there any customers that you’re particularly worried about that you’re sort of curtailing your exposures and there maybe demand pains a bit sooner, anything like that in Europe?

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Alvaro Gomez-Reino, John Menzies plc – CFO & Director [36]

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We have not seen any change in behavior that was not anticipated. So we know from some of our customers that they struggle a little bit cash-wise in the first quarter. And then as soon as they start operating their summer schedules they get into a better situation. I guess, you are referring to one particular customer.

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Eoghan Reid, Joh. Berenberg, Gossler & Co. KG, Research Division – Analyst [37]

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Basically small ones as well, yes.

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Alvaro Gomez-Reino, John Menzies plc – CFO & Director [38]

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And we are almost in daily contact with them, making sure that the exposure is at the level that we have set ourselves internally as a management team and with the approval of the board as the absolute limit of credit. And so far that particular customer has been paying to keep it at that level, and we have not seen any deterioration. And we are almost in daily contact with them.

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Giles Wilson, John Menzies plc – CEO & Executive Director [39]

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Any more for any more? Thank you all. Good.

Thank you all.

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Alvaro Gomez-Reino, John Menzies plc – CFO & Director [40]

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Yes. Any questions on the line? There seem to be none.

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Giles Wilson, John Menzies plc – CEO & Executive Director [41]

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Thank you.

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Alvaro Gomez-Reino, John Menzies plc – CFO & Director [42]

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Thank you very much.