Alpha Retail - Results for the six months ended 31 July 2005
LONDON (Alpha Airports Group) - Alpha’s business is providing retailing and catering services to the world’s airlines and airports. Our essence is “people making travel special”. Alpha currently operates from over 150 retail and catering outlets at 83 airports in 15 countries across the globe.
Commenting on the interim results, Kevin Abbott, Chief Executive, said: “Even though these results are broadly in line with our own expectations, we are disappointed to report a profits decline. We are pleased with the underlying progress made on many of last year’s Flight Services initiatives, and we remain committed both to ongoing active development of our existing strongly positioned businesses and to further acquisitions. Despite our first half result and a weakening UK retail environment, we anticipate a strong second half recovery and are cautiously optimistic for overall Group progress for the full year.” * From continuing operations before separately disclosable items, goodwill impairment and after adjustments for tax on associates.
For the first time, the Group’s results are reported under International Financial Reporting Standards (“IFRS”) for the six months ended 31 July 2005 and the comparative results have been restated accordingly.
We are pleased to report an overall increase in revenue of 12.4% to £268.8m (2004/5: £239.2m) benefiting from ongoing passenger growth in the UK regional airports and the acquisition of new businesses in Turkey, Romania and Bulgaria. Adjusted profit before tax (from continuing operations before exceptional items, goodwill impairment and excluding tax on associates) is down 34.7% to £6.6m (2004/5: £10.1m). We expected a weaker first half profit compared to last year due to a combination of new contract start-up costs for American Airlines in UK Flight Services, increased business development costs in UK Retail, and subdued Asian trading post-tsunami. We have benefited from a first time profit contribution from our recent Romanian and Bulgarian acquisition. However, our first half profit is slightly below our expectations due to subdued underlying UK Retail profits caused by weakening penetration levels.
UK revenue is 8.9% ahead of the same period last year at £218.5m (2004/5: £200.6m) and revenue from international locations is up 30.3% to £50.3m (2004/5: £38.6m) benefiting from the acquisitions made during the last 8 months.
Overall Flight Services revenue increased 9.8% to £146.9m (2004/5: £133.8m). A significant part of the increase arose from the 27% like-for-like ongoing growth of our Inflight Retail business serving UK and European low-fare passengers, which now represents 36% of our total Flight Services business. Adjusted operating profit before interest and tax declined 15.7% to £4.3m (2004/5: £5.1m).
In our major UK Flight Catering business, whilst the number of aircraft serviced increased, overall revenue has declined slightly, as our airline customers continue to seek cost-savings in meal service design. UK Flight Catering successfully launched its largest ever programme of new services to American Airlines at Heathrow and Gatwick and incurred significant one-off start-up costs. However, in a challenging London employment market – now easing – we also had to rely on substantial levels of overtime working to meet the increased service requirements, resulting in a significant first half profit decline in UK Flight Catering.
UK Flight Catering is delighted to confirm the extension of major customer contracts with both British Airways CitiExpress and Continental Airlines for a further 3 and 7 years respectively, and existing major customers have committed to our Blue Sky Service concept, starting both this winter and next summer.
Inflight Retail maintained its strong growth record in the UK and Europe, despite a difficult and costly start-up to the peak summer trading season, as many vendor partners struggled initially to provide adequate stock coverage. In Australia, the new and extended contract for Qantas’ inflight duty-free programme from March 2005 has generated a small profit contribution compared to last year’s significant start-up costs. After a costly 12 months, during which we have established our Australian operation and upgraded our UK Bond infrastructure and IT support systems, we anticipate strong second half progress throughout our fast growing Inflight Retail business.
Internationally, our Middle East business in Jordan has continued to prosper, and has successfully opened four Alpha-designed World News Cafés at Queen Alia International Airport, Amman. In Amsterdam, after significant restructuring last year, the business has achieved a break-even result. The recently acquired Flight and Airport Retail Catering businesses in Romania and Bulgaria have performed in line with our expectations; in addition, new World News Café, Deli Sandwich Bar and Food Hall contracts have been awarded as part of exciting local airport development plans. In Australia, we have secured new flight catering contracts for both Lauda Air and Air Tahiti Nui, and are actively seeking further major international airline customers for our excellent flight kitchen network. In Italy, our joint-venture company has secured several new customers for its recently opened Rome Fiumicino flight kitchen. We anticipate ongoing strong profits performances across our International Flight businesses in the second half.
Overall Retail revenue increased an excellent 15.7% to £121.9m (2004/5: £105.4m) but adjusted operating profit declined by 38% to £3.6m (2004/5: £5.8m). UK Retail revenue was up 9.2%. On a “like-for-like” basis, Alpha Airport Shopping increased revenue 6.2% on passenger growth of 9.2%, despite last year’s EU expansion reducing the growth in sales of duty free liquor and tobacco. Whilst we have continued to achieve significant growth in average transaction spend for those passengers visiting our Alpha ‘pink shops’, we have experienced a decline in the percentage of passengers shopping in our airport outlets reflecting, we believe, weakening UK consumer confidence.
We have committed significant extra people resources to continue to drive our UK Retail performances and to support expansion into Europe. In addition, we have incurred significant tender and due diligence costs associated with our European development plans.
We are in the pre-implementation phase of our upgraded and integrated IT systems and tills project (IRIS) which will be rolled out across the UK Retail estate this winter. The costs of this capital project in the first half, combined with increased business development costs, gave rise to a substantial decline in profits from our UK Retail business compared with the previous year.
We are delighted to have been awarded numerous new UK Retail concessions, many of which are already successfully trading;
Retail Catering – new Alpha-designed World News Café at Birmingham International, new ‘Bar O8’ bars at Doncaster Robin Hood and Eurotunnel, new Deli Sandwich Bars at Belfast City and Inverness, and a new Food Court at Nottingham East Midlands.
We are also delighted that our fantastic Glorious Britain gift offer was voted ‘Best of the Best’ in the prestigious Gift Retailer of the Year awards.
Internationally, our Sri Lankan business, post the devastation caused by the tsunami, has only suffered a 6.6% decline in arrivals passengers. With the benefit of the recently opened and expanded arrivals shop and with an upgraded focus on value offers and promotions, the profit decline has been limited to 7.1%. We anticipate that the better located departures shop which opened in September will help to stabilise both revenue and profit over the next six months.
In the USA, revenue was 2.4% ahead of last year. Our major reinvestment in upgraded and expanded Alpha pink duty free shops is currently underway and this will maximise opportunities from our five year contract extension starting in the second half. Our recently acquired Turkish business traded in line with expectations. As we have said, a key strategic ambition across Retail is to develop in Europe, and we are pleased to have been awarded our first mainland European retail contract for seven speciality retail boutiques, six of which are now open at Rome Fiumicino and Ciampino airports.
Overall, our International Retail businesses registered a 42.5% revenue increase (due primarily to our Turkish acquisition) and a 1.3% increase in profit which reflects the Asian profit decline and Italian start-up costs offsetting the first time contribution from Turkey. We anticipate stronger second half performances from all our International Retail businesses.
During the first half we acquired two small businesses in Romania and Bulgaria. Both businesses provide flight catering services to airlines and operate retail catering outlets at the main capital city airports in each country. The total consideration, including acquisition costs was £3.9m and net assets acquired totalled £0.4m. In Romania we are in partnership with the major state airline, Tarom, and the Bucharest airport authority, with Alpha owning 64% of the company. Bulgaria is a wholly owned subsidiary. Both businesses have performed well since acquisition and have been successful in winning new retail catering contracts.
During the first half, the Group renegotiated its existing banking facility and replaced it with a new £100m revolving five year multi-currency facility with three banks, LloydsTSB, Royal Bank of Scotland and Allied Irish Bank.
This new facility gives us capacity to organically grow the existing business and for future investment opportunities.
Our biggest change under IFRS is the recognition of the pension fund deficit on the balance sheet. Up until 31 January 2005 the deficit was disclosed in the financial statements but not recognised.
The deficit at 31 July, net of deferred tax, is £24.8m (31 July 2004: £15.7m). The principal reason for the increase in the deficit is lower returns on gilts which means the scheme liabilities are discounted at a lower rate compared with January and July last year. We have a relatively immature scheme and the Group still considers it appropriate to have a significant part of the assets invested in equities.
The total profit and loss charge in the first half, including the financing cost was £2.3m (2004/5: £1.9m).
We are currently conducting our triennial valuation of the UK pension fund and await the outcome of this, however, given the increased deficit under IAS 19 we are likely to see a significant increase in contributions going forward. We anticipate finalising the outcome of the valuation and the full cash funding position by 31 January 2006.
The Board has recommended the payment of an interim dividend of 1.0 pence per ordinary share (2004/5: 1.0p per share) which will be payable on 4 November 2005 to shareholders on the register on 7 October 2005.
The Group has adopted IFRS for the first time in reporting the half year results. The areas that have impacted the results are shown below:-
The net pensions deficit has been recorded in the accounts at 31 July. This has reduced net equity in total by £24.8m albeit the prior periods have been restated to reflect this change.
The profit and loss account in the first half has seen an additional charge of £0.8m over and above the SSAP 24 charge reflecting the size of the deficit compared with 31 January 2005. This additional charge is split between operating profit and interest expense.
2 Share Based Payments
The Group has recognised the cost of share based payments within the results. A charge of £0.1m has been made in the first half result.
Under IFRS, acquisition goodwill is considered to have an indefinite life and is not amortised, however, it is subject to an annual impairment review.
The half year amortisation charge under UK GAAP (2004/5: £1.6m) has been reversed out of the comparative periods’ profit and loss account and an impairment review conducted.
There was no impairment charge in the six months ended 31 July 2005.
Dividends are not recognised in the accounts until they are approved for payment hence the interim figures do not contain an interim dividend provision but recognise the 2004/5 final dividend.
5 Tax on Associates
Previously, operating profit included the results of associates and joint ventures on a pre-tax basis. IFRS requires operating profit to include the results on a post-tax basis. This has the effect of reducing profit before tax by £0.4m in the first half.
Ongoing progress in relation to last year’s Flight Services development projects both in the UK and Internationally combined with the absence of the first half’s significant one-off start-up costs, gives us confidence for a strong second half Flight Services recovery. In addition, we are seeking further UK cost-savings this winter, as we upgrade and rationalise our UK Flight Services facilities at Manchester, and extend our Blue Sky Service customer base. We believe UK consumer confidence in the retail sector will remain cautious, and thus our UK Retail environment will continue to be challenging. However, we anticipate significantly improved second half International Retail performances. Despite our upgraded investment in business development – including the £7m implementation of new IT systems across our UK Retail estate this winter – we remain cautiously optimistic for overall Group progress for the full year.