annUal REPORt 2011 J O H n M e n Z I e S A N N U A L R E P O R T A N D A C C O U N T S 2 0 1 1 John Menzies plc 108 Princes Street, Edinburgh EH2 3AA Tel: +44 (0) 131 225 8555 Fax: +44 (0) 131 226 3752 Email: info@johnmenziesplc.com Web: www.johnmenziesplc.com Registered in Scotland with company number SC34970 Registered offi ce address as above PEOPLEPASSIONPERFORMANCE WhO WE aRE RElatEd InfORmatIOn Within this report we highlight further sources of information with the following icons: more info in this report more info online JOhn mEnzIEs Plc Is a cOmPany WIth tWO fast mOVIng dIVIsIOns, mEnzIEs aVIatIOn and mEnzIEs dIstRIbUtIOn. WE aRE PassIOnatE abOUt PERfORmancE and achIEVIng OUR VIsIOn. that PassIOn Is dElIVEREd thROUgh EVERy lEVEl Of OUR bUsInEss and hElPs kEEP Us and OUR cUstOmERs’ bUsInEssEs mOVIng fORWaRd. mEnzIEs aVIatIOn Menzies Aviation is the fastest growing, and now the world’s second largest, global aviation services business. It also owns AMI, the world’s only global wholesale freight forwarder. The business is highly successful – operating at 131 airports in 29 countries, with annual revenue in excess of £676m and employing some 17,000 highly trained people. Best in the class Safety & Security as well as great customer service are core to its success and sets it apart from the other handlers. OUR VIsIOn To be the world’s number one aviation business, and the handler of choice for the world’s leading airlines. mEnzIEs dIstRIbUtIOn Menzies Distribution is a leading provider of added value distribution and marketing services to the newspaper and magazine supply chain in the UK. The division handles around 5 million newspapers and 2.1 million magazines (covering 3,000 magazine titles) each day, with deliveries to more than 25,000 customers. The division employs 4,000 people at 39 sites throughout the UK – and is a strongly cash generative business, with around 45% of the newspaper and magazine wholesale distribution market in the UK. It has a track record of investment in innovation and customer service delivery. OUR VIsIOn To be the most effi cient and profi table player in the news and magazine distribution market, providing innovative solutions for publishers and retailers. dIREctORs’ REPORt and bUsInEss REVIEW OVERVIEW 01 At a glance 02 Chairman’s statement 04 Group strategy OPERatIng REVIEW 06 Group performance 07 Menzies Aviation 10 Menzies Distribution 14 Group fi nancial review 19 Outlook 20 Corporate social responsibility 24 Principal risks and uncertainties gOVERnancE 26 Board of Directors 28 Corporate governance statement 40 Report on Directors’ remuneration fInancIal statEmEnts 51 Independent auditors’ report to the members of John Menzies PLC 53 Group income statement 54 Group statement of comprehensive income 55 Group and Company balance sheets 56 Group and Company statement of changes in equity 57 Group and Company statement of cash fl ows 58 Notes to the accounts 93 Five year summary shaREhOldER InfORmatIOn 94 Notice of annual general meeting 100 General information PEOPlE, PassIOn, PERfORmancE Through this report you will see employees from across our business. We are absolutely dedicated to performance and thrive on the passion that makes up the culture of our business. overview operating review governance financial statements shaREhOldER InfORmatIOn JOhn mEnzIEs Plc annual report 2011 101 InVEstOR RElatIOns cORPORatE calEndaR The Group accounts can be downloaded from our (Provisional dates) website. For other investor relations enquiries, please contact us at: 6 March 2012 Preliminary announcement of Results Call: Fax: 0131 225 8555 0131 226 3752 Web: www.johnmenziesplc.com Email: info@johnmenziesplc.com Write: John Menzies plc, 108 Princes Street, Edinburgh EH2 3AA 30 March 2012 Shares 5 April 2012 Payment of Dividend on 9% Cumulative Preference PRIncIPal adVIsERs auditors Ernst & Young LLP Ten George Street Edinburgh EH2 2DZ Corporate Financial advisers and Joint Brokers Numis Securities Ltd The London Stock Exchange Building 10 Paternoster Square, London EC4M 7LT Joint Brokers N+I Brewin Time Central 32 Gallowgate, Newcastle Upon Tyne, NE1 4SR PRIncIPal bUsInEss addREssEs John Menzies plc 108 Princes Street, Edinburgh, EH2 3AA Tel: +44 (0) 131 225 8555 Fax: +44 (0) 131 226 3752 Email: info@johnmenziesplc.com Menzies Distribution 2 Lochside Avenue Edinburgh Park, Edinburgh, EH12 9DJ Tel: +44 (0) 131 467 8070 Fax: +44 (0) 131 469 4797 Menzies aviation 4 New Square, Bedfont Lakes, Feltham, Middlesex, TW14 8HA Tel: +44 (0) 20 8750 6000 Fax: +44 (0) 20 8750 6001 Annual Report and Notice of AGM released 18 May 2012 Management Statement issued 18 May 2012 Annual General Meeting 25 May 2012 Record date for Final Dividend on Ordinary Shares 22 June 2012 Payment of Dividend on Ordinary Shares 14 August 2012 Announcement of Interim Results Payment of Dividend on 9% Cumulative Preference 1 October 2012 Shares 26 October 2012 Record date for Interim Dividend on Ordinary Shares 13 November 2012 Management Statement issued 23 November 2012 Payment of Interim Dividend on Ordinary Shares This annual report is printed on FSC certifi ed material. 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Designed and produced by Carnegie Orr +44 (0)20 7610 6140. www.carnegieorr.com OVERVIEW operating review governance a REcORd yEaR fOR thE gROUP financial statements shareholder information 01 JOhn mEnzIEs Plc stRatEgy has dElIVEREd REcORd PROfIts, WIth bOth dIVIsIOns PROdUcIng ExcEllEnt REsUlts and mEnzIEs aVIatIOn gROWIng IntO thE bIggEst dIVIsIOn In thE gROUP. fInancIal hIghlIghts £56.4 m UndERlyIng PROfIt bEfORE tax £2,013.8 m tURnOVER £39.4 m fREE cash flOW 73.2 p UndERlyIng EaRnIngs PER shaRE acROss OUR dIVIsIOns mEnzIEs aVIatIOn Menzies Aviation had another great year as it continued to deliver sustainable earnings growth by winning new contracts and entering new markets. PROfIt £32.3 m tURnOVER £676.8 m mEnzIEs dIstRIbUtIOn Menzies Distribution dealt with a year of operational change and difficult markets to deliver an excellent result maintaining profits year on year. PROfIt £28.8 m tURnOVER £1,337.0 m dEfInItIOns & nOn-gaaP mEasUREs UsEd by managEmEnt Management believes that the following non-GAAP or adjusted measures provide a useful comparison of business performance and reflect the way in which the business is controlled: UndERlyIng PROfIt bEfORE taxatIOn is defined as profit before taxation, intangible amortisation and exceptional items. UndERlyIng OPERatIng PROfIt includes each division’s share of pre-tax profit from joint ventures and associates, and excludes intangible amortisation and exceptional items. UndERlyIng EaRnIngs PER shaRE is profit after taxation and non-controlling interest, but before intangible amortisation and exceptional items, divided by the weighted average number of ordinary shares in issue. tOtal dEbt tO EbItda RatIO. Total debt is net debt plus guarantees and excluding financial derivatives and preference shares. EBITDA is underlying operating profit plus depreciation and computer software tURnOVER includes revenue from subsidiaries, joint ventures and associates. fREE cash flOW is defined as the cash generated by the business after net capital expenditure, interest and taxation, before special pension contributions, acquisitions, disposals, cash raised, ordinary dividends and net spend on shares. IntEREst cOVER is EBITA divided by external interest charge. EBITA is underlying operating profit plus computer software amortisation. External interest charge excludes net financial income/(charge) related to pensions. John Menzies plc AnnuAl RepoRt 2011 02 chaIRman’s statEmEnt IaIn naPIER chairman, John menzies plc p.24 risks and uncertainties p.28 corporate governance fUll yEaR dIVIdEnd fOR thE yEaR Of 24p UP 26% UndERlyIng EaRnIngs PER shaRE Of 73.2p UP 26% OUR bOaRd David Coltman retired from the Board in May 2011 after 10 years service. Sadly, David passed away in June and is missed by all who knew him. He was a wise counsel and friend to many people who served on the Board. Ian Harley became our Senior Independent Director from the conclusion of the 2011 AGM. Ian has now been on the Board for 2 years during which time he has become the Audit Committee Chairman. At the end of the year and in keeping with corporate governance best practice, Ian Harrison and Dermot Jenkinson, who have each served more than 9 years on the Board, stood down as members of the Audit and Remuneration Committees respectively. This means that these Committees are now comprised solely of independent Non-Executive Directors. We have a Board comprising 9 members, a Chairman, 3 executive Directors and 5 non-executives, 3 of whom are independent. IntROdUctIOn The Group has again made excellent progress in our continued drive for sustainable shareholder value. Individually, both operating divisions enjoyed a good year with Menzies Aviation emerging as the larger profit contributor after another strong year. Menzies Distribution, however, delivered its plan of maintaining year on year earnings and strong cash generation. REsUlts OVERVIEW The Group has had another very successful year. I am delighted that we continue to grow sustainable shareholder value through delivery of the clear and consistent strategies of our two operating divisions. I am particularly pleased that Menzies Aviation, after delivering profit growth of 31%, is now the larger profit contributor. Menzies Distribution, as planned, maintained profits by driving efficiencies through the business. Growth opportunities exist and we will continue to invest in new projects that meet our investment criteria and produce sustainable returns. Financially, the Group is in a very strong position allowing a continued focus on shareholder value. John Menzies plc AnnuAl RepoRt 2011 OVERVIEW operating review governance financial statements shareholder information DIVISIONAL TURNOVER (£m) DIVISIONAL TURNOVER (£m) Aviation Aviation 2011 2011 2010 2010 Distribution Distribution 2011 2011 2010 2010 03 32.3 28.8 28.8 DIVISIONAL UNDERLYING OPERATING PROFIT (£m) Aviation 2011 2010 24.6 676.8 676.8 626.0 626.0 1337.0 1337.0 1338.2 1338.2 Distribution 2011 2010 efficiencies but also look forward to opportunities in an interesting year that will bring a diamond jubilee, a major football championship and the London Olympics. The Group will continue to deliver its well defined, long term strategy. John Menzies plc is committed to delivering shareholder value through investment in our operating divisions where sustainable returns can be generated. IaIn napIer Chairman Your Board embraces the ethos of diversity. We are fully supportive of the principles of merit and equality in appointing new Directors and senior executives in the business. We strongly believe in selecting the best person for the job in terms of skills and merit, irrespective of their gender, race or background. This approach gives us a strong and healthy mix of Directors, opinions and experiences. The size and structure of the Board and its Committees are reviewed annually. We believe we have an excellent balance, with an appropriate mixture of skills and experience. PEOPlE We operate in uncertain economic times. Our ability to differentiate ourselves and provide value to our customers and stakeholders helps us to not only gain new business, but to retain existing customers. Throughout this report we discuss our People, Passion and Performance as the 3 key aspects to our business model. Worldwide we employ over 21,000 people. We are a people business. Without the dedication of our People, we would not be able to deliver a quality product to our customers, whether it be on an aircraft turnaround or morning newspaper deliveries. It is the Passion of our People that delivers an outstanding Performance time after time. Both of our divisions have seen significant change during the year, and I would like to thank and congratulate the teams driving those changes, and the people who have adapted to new methods of working, as we seek to continually improve our customer services. PROsPEcts Financially, the Group is in a strong position. Both operating divisions hold prominent positions in their respective markets. The dynamics of our divisions mean that the Group is able to continue to offer an attractive blend of stability and growth. Menzies Aviation will continue to expand in 2012 through winning more contracts and by identifying new markets. Menzies Distribution will again focus on operational thROUghOUt thIs REPORt WE dIscUss OUR PEOPlE, PassIOn and PERfORmancE as thE 3 kEy asPEcts Of OUR bUsInEss mOdEl. John Menzies plc AnnuAl RepoRt 2011 04 gROUP stRatEgy p.28 corporate governance OUR mIssIOn JOhn mEnzIEs Plc aIms tO dElIVER sUstaInablE gROWth and maIntaIn an attRactIVE, lOng-tERm ValUE EnhancIng REtURn fOR shaREhOldERs by bEIng thE WORld’s bEst PROVIdER Of aVIatIOn sUPPORt sERVIcEs and mOst EffIcIEnt PRInt mEdIa dIstRIbUtOR. OUR cUstOmER fOcUsEd aPPROach... PERfORmancE Performance matters. That is how we will deliver sustainable Shareholder value. It is by being better than our competitors that we both retain existing business and gain new contracts. We have developed market leading safety initiatives which deliver a safe and secure service. We continually invest in systems to promote efficiency, utilise leading edge systems and encourage constant innovation. s.P.I.R.I.t safEty & sEcURIty PassIOn IntEgRIty RElIabIlIty InnOVatIOn tEamWORk PassIOn We operate in competitive, service dependent industries. Being passionate about what we do is what differentiates us and makes us the first choice for our customers. Being the best each day, every day is our aim. We want to give customers great service. PEOPlE We aim to have the best workforce that delivers service excellence every time. We must attract and retain the best people. We must encourage them to fulfil their potential in order that they can deliver the outstanding performance we strive for. John Menzies plc AnnuAl RepoRt 2011 OVERVIEW operating review governance financial statements shareholder information 05 OUR ExEcUtIVE tEam paul dollman – group finance director craig smyth – managing director, menzies aviation, david mcintosh – managing director, menzies distribution ...Is dElIVEREd acROss bOth OUR dIVIsIOns... ...allOWIng Us tO maxImIsE OPPORtUnIty. Leverage existing customer relationships to expand into new airports Leverage global reputation for service excellence to win new customers Create product, station and regional densities Innovate to continually improve service quality and efficiency mEnzIEs aVIatIOn OUR stRatEgy mEnzIEs dIstRIbUtIOn Optimise branch network Deliver excellent service to our publisher and retailer customers Innovate to continually improve service quality and efficiency Pursue opportunities in adjacent markets to drive new revenue streams a gROWIng WORldWIdE maRkEt cURREnt shaRE Of aVaIlablE maRkEt: 2% EstImatEd maRkEt sIzE: £37 bn EstImatEd 2020 maRkEt sIzE: £62 bn mEnzIEs aVIatIOn OUR maRkEts mEnzIEs dIstRIbUtIOn laRgE EstablIshEd maRkEt maRkEt shaRE: 45 % Uk magazInE maRkEt: £1.5 bn Uk nEWsPaPER maRkEt: £2.3 bn John Menzies plc AnnuAl RepoRt 2011 06 gROUP PERfORmancE PaUl dOllman group finance director, John menzies plc p.14 group financial review www.Johnmenziesplc.com tOtal bank dEbt has nOW REdUcEd bElOW thE gROUP’s EbItda and dIVIdEnds tO shaREhOldERs cOntInUE tO gROW. UndERlyIng EPs UP 26% 73.2 p to 1.2 times. Interest cover increased from 9 times in 2010 to 12 times in 2011. All required facilities are secured with the next facility renewal in January 2013. cash flOW and InVEstmEnt The Group had another strong year with a free cash flow of £39.4m. Capital expenditure increased year on year mainly as a result of the strong contract win momentum in the Aviation Division. The Group’s net capital expenditure at £20.8m was still below the level of depreciation. After increased additional payments into the pension fund and a higher level of dividend the net cash flow for the Group was £18.9m including a currency translation gain of £1.6m. dIVIdEnd The Board has declared a final dividend of 17p which is payable on 22 June 2012 to all shareholders on the register on 25 May 2012. This represents an increase of 26% on the prior year and underlines the Board’s continuing confidence in the Group’s future, the cash generative nature of the Group and the resilience of its earnings. OVERVIEW 2011 was an excellent year. Both operating divisions are performing well and delivering the returns expected of them. Total bank debt has now reduced below the Group’s EBITDA and dividends to shareholders continue to grow. Underlying profit before taxation was up 25% to £56.4m on turnover of £2,013.8m (2010: £1,964.2m).This is a record result for the Group and endorses the strategy followed over the last 3 years. The Group is now on a very strong financial footing. Menzies Aviation’s growth continued after an excellent year where contract gains helped the division to overtake Menzies Distribution as the larger profit contributor. Turnover was up 8% to £676.8m generating operating profits of £32.3m, a rise of 31%. At Menzies Distribution turnover and profit were in line with last year with operating profits maintained at £28.8m. dEbt and IntEREst Group net debt fell further to £80.1m and is now less than the Group’s EBITDA. The covenanted ratio which includes bank guarantees and letters of credit fell from 1.5 times last year gROUP kEy PERfORmancE IndIcatORs REVENUE (£m) UNDERLYING EPS (p) FREE CASH FLOW (£m) 2011 2010 2009 2008 2007 1899.7 1837.6 1725.7 1667.1 1541.1 2011 2010 2009 2008 2007 73.2 57.9 2011 2010 2009 2008 2007 14.9 -11.1 31.3 43.8 47.9 39.4 43.8 26.9 UNDERLYING PBT (£m) FULL YEAR DIVIDEND PER SHARE (p) 2011 2010 2009 2008 2007 56.4 45.0 2011 2010 2009 2008 2007 8.0 7.56 35.2 30.7 38.0 24.0 19.0 25.6 John Menzies plc AnnuAl RepoRt 2011 07 PERfORmancE Menzies Aviation had another great year, benefiting from a clear and consistently delivered business plan. Operating profits of £32.3m were 31% up on the previous year as new contracts were secured and new markets entered. During the year operations commenced at a further 18 airports as existing customer relationships were leveraged and new customer relationships formed. The division now operates at 131 airports in 29 countries. Operational efficiency remains one of our key points of differentiation. During the year a SMART audit programme was implemented which helps drive standardisation across the network. The division’s operating model revolves around doing the same procedures time and again in a safe, secure and efficient manner. During the year 5 airport operations were granted ISAGO accreditation. This industry standard is important and reinforces the commitment to service excellence. The highly cash generative nature of the business was demonstrated again with 100% cash conversion for the third year running. As in previous years, the division had a successful year in securing new contracts. Over all product categories the division were net winners of 50 contracts which will generate £41m of revenue on an annualised basis. Just as important as securing new contracts is renewing existing contracts and during the year some 81 contracts were renewed securing £77m of annualised revenue. The continued excellent record for securing and retaining contracts is helped by investment made into systems and processes. The division’s market leading IT systems are critical to success of the business, creating robust platforms that control global time critical operations. gROUnd handlIng The ground handling business had a very strong year across the network. Absolute aircraft turns were up 12.9% with like for like turns up 6.1%. The growth in the underlying business is pleasing and reinforces the strategy of aligning ourselves with expanding airlines in growing markets. Operating profit from ground handling rose by 11% to £24.3m as a result of the annualisation of contracts gained in 2010 and new contracts acquired early in 2011. Material contracts gained during the year included a start up operation for Jetstar in Darwin, Australia. This contract is the division’s first with Jetstar who are a wholly owned subsidiary of Qantas and are fast growing across the Oceania region. Each week in Darwin we handle some 63 flights. In May operations commenced to handle 168 flights per week for Wizz Air out of London Luton Airport. In the Americas, gROUP PERfORmancE mEnzIEs aVIatIOn cRaIg smyth managing director, menzies aviation mEnzIEs aVIatIOn OPERatIng bOaRd craig smyth – managing director paul dollman – group finance director mervyn walker – evp operations stephen koller – evp it and ami giles wilson – evp finance p.04 group strategy www.menziesaviation.com WE OPERatE In 29 cOUntRIEs and haVE OPERatIOns at 131 aIRPORts IncREasE In absOlUtE aIRcRaft tURns 12.9 % John Menzies plc AnnuAl RepoRt 2011OVERVIEW operating reviewgOVERnancEfInancIal statEmEntsshaREhOldER InfORmatIOn 08 RElIablE WIth yEaRs Of ExPERIEncE, thE stREngth Of OUR OPERatIng mOdEl and PROVEn tRack REcORd, yOU can cOUnt On Us, EVERy tImE. passionateJohn Menzies plc AnnuAl RepoRt 2011 gROUP PERfORmancE mEnzIEs aVIatIOn cOntInUEd 09 caRgO fORWaRdIng PROfIts UP 52 % following the award of contracts by Vivaaerobus, 11 new airport operations commenced in Mexico. The division is now the provider of ground handling services to the airline at 18 destinations across Mexico. Overall 75% of ground handling revenue is derived from handling narrow bodied aircraft which fits the business model of quick, efficient and safe turnarounds. Over the year the division was a net winner of 40 new contracts which secured some £30.1m of annualised revenue. Ground handling accounts for 60% of divisional revenues and remains the most attractive product category with the strongest growth prospects. caRgO handlIng The cargo handling business, which now represents 24% of divisional turnover, performed well during the year. Operating profits were up 62% as a result of contract wins, particularly in Amsterdam and London Heathrow. Absolute volumes fell 1.8% as new contracts partly offset general volume declines. Like for like volumes were down 4.3% reflecting the Japanese earthquake, followed by the slowdown in Asia, which reduced Asian airline traffic into our markets. This event was coupled with the general uncertain economic climate which resulted in a reduction in consumer demand for goods shipped by air. Unlike the events of 2008, volumes, whilst down on the previous year, remain stable. Further progress was made in reducing losses at the 3 underperforming cargo locations that exist within the network. At these locations excess capacity makes it very difficult to maintain economic rates. At London Heathrow, new contracts with Kingfisher Airways and China Airlines were secured increasing throughput by some 20,000 tonnes per annum. Where the market dynamics are good, cargo remains an excellent product category and continues to deliver attractive returns in locations where the market is not over-supplied. caRgO fORWaRdIng The air freight wholesaling business, AMI, had an excellent year with profits up 52% to £3.5m. The business has benefited from market-leading web-based products launched in the UK, capacity in 2 key growing markets (South Africa and Western Australia), and strengthened sales and service delivery across all inter-regional trade lanes. AMI has also benefited by embracing Menzies Aviation’s world class security and safety programme. With global presence, strong product development and a proven management team, AMI is well placed to continue its growth. stRatEgy Menzies Aviation is now the world’s second largest and fastest growing global aviation support services business. Its strategy remains unaltered. Within ground handling the business will continue to grow into a large and available market. With a specialisation for handling narrow bodied aircraft, growth will mEnzIEs aVIatIOn kEy PERfORmancE IndIcatORs GROUND HANDLING labour hours per turn 2011 2010 31.0 30.2 GROUND HANDLING on-time performance (%) 2011 2010 CARGO HANDLING (tonnes per FTE) 2011 2010 * restated AIRCRAFT DAMAGE category A incidents per 1,000 turns 2011 2010 0.04 99.7 98.2 533.8 548.2* 0.06 continue to be predominantly organic as we consolidate positions, enter new airports and seek out new geographies. Within cargo handling new ventures will typically be where a cargo facility is complementary to an existing ground handling business. Away from major airports that are over supplied, cargo handling delivers good returns and growth opportunities will be pursued where the market dynamics are right. The aviation services sector remains highly fragmented with strong and deliverable growth prospects and Menzies Aviation is well placed to capitalise on this. John Menzies plc AnnuAl RepoRt 2011OVERVIEW operating reviewgOVERnancEfInancIal statEmEntsshaREhOldER InfORmatIOn 10 gROUP PERfORmancE mEnzIEs dIstRIbUtIOn daVId mcIntOsh managing director, menzies distribution mEnzIEs dIstRIbUtIOn OPERatIng bOaRd david mcintosh – managing director paul dollman – group finance director catherine Bland – finance director david cooke – commercial director Jane dyson – marketing services director christina mellon – hr director david spiers – it director mark cassie – supply chain director p.04 group strategy www.menziesdistriBution.com PERfORmancE Menzies Distribution produced a strong performance in challenging markets, delivering operating profits in line with the previous year at £28.8m. The division also continued to be highly cash generative producing free cash flow of £22.9m. In magazines, underlying sales value fell 4.4%. Magazines continue to be more of a discretionary purchase and sales are affected by the wider economic uncertainty. Sales received a marginal boost in May as a result of the Royal Wedding, although this upside was relatively short lived. During the year major operational projects were delivered successfully. In November, the implementation of the SAP IT system was completed across the UK mainland and over a period of several months the branch network in the London area went through a period of reorganisation. The division’s excellent track record of taking out cost continued with some £4.6m of cost savings during the year. This ability to constantly increase efficiency and reduce costs in the face of declining volume remains central to the success of the division in maintaining profits. cORE bUsInEss Underlying volumes during the year continued to be in our range of estimates with newspaper volumes down 8% and magazine volume down 6%. In the newspaper market, the volume decline was offset by strong cover price growth which resulted in retail sales value declining by only 2.2% during the year. July saw the unprecedented closure of the largest selling Sunday title, News of the World. However, the habitual nature of newspaper purchasing led to a high rate of substitution purchases which was aided by publisher discounting. The rate of substitution has now eased and developments in this category continue to be monitored. The implementation of the SAP IT system was completed throughout the UK mainland in November 2011. The system is now bedded in and performing well. The teams locally have embraced the new system and are confident that the expected savings will be delivered. During the year a reorganisation of the branch network in the London area was completed. This involved the successful resiting of 1 branch and the closure of a returns processing unit, which resulted in all returns from the London area being split between 2 hub branches. The distribution business in Ireland continued to make progress. In the North the business traded well. In the South operational challenges continue, but real progress is being made and we anticipate that during the coming year this business can start to make a larger contribution to divisional profits. thE dIVIsIOn’s ExcEllEnt tRack REcORd Of takIng OUt cOst cOntInUEd WIth sOmE £4.6m Of cOst saVIngs dURIng thE yEaR. John Menzies plc AnnuAl RepoRt 2011 11 sERVIcE EVERy nIght 5 mIllIOn nEWsPaPERs aRE tImEOUsly dElIVEREd tO 25,000 REtaIl cUstOmERs. integralJohn Menzies plc AnnuAl RepoRt 2011OVERVIEW operating reviewgOVERnancEfInancIal statEmEntsshaREhOldER InfORmatIOn 12 tEchnOlOgy bOth OUR dIVIsIOns haVE dEVElOPEd mObIlE PhOnE aPPs tO ImPROVE thE flOW Of InfORmatIOn WIthIn thE bUsInEss and WIth OUR cUstOmERs. InnovatorsJohn Menzies plc AnnuAl RepoRt 2011 13 mEnzIEs dIstRIbUtIOn kEy PERfORmancE IndIcatORs NEWSPAPERS DELIVERED ON TIME (%) MAGAZINE PACKING ACCURACY (%) 2011 2010 97.96 97.15 2011 2010 * restated 99.75 99.72* MAGAZINES DELIVERED ON TIME (%) NEWSPAPER RETURNS PROCESSED ON TIME (%) 2011 2010 NEWSPAPER PACKING ACCURACY (%) 2011 2010 98.11 97.45 2011 2010 99.92 99.87 85.36 88.68 gROUP PERfORmancE mEnzIEs dIstRIbUtIOn cOntInUEd nEW REVEnUE VEntUREs During the year the businesses formed to pursue new revenue ventures were re-structured into 2 distinct subsidiaries. Menzies Select is involved in the bulk distribution of newspapers to the travel market together with corporate newspaper distribution. During the second half of the year the business performed in line with expectations. Menzies Marketing Services, whose primary focus is on field marketing and retail inventory management, performed well in difficult markets although profits were marginally behind expectations. The creation of 2 distinct business units with dedicated management provides the best structure to deliver the future growth ambitions that exist. stRatEgy The division has been following a 3 pillar strategy, Execute, Re-design, Diversify. Much of the Execute work is complete with the integration of the new business won in 2009 and the changes to the branch network that resulted from this. The focus is now on the Re-design and Diversify stage. With the implementation of SAP and the centralisation that this has brought there will be opportunities to further rationalise the branch network and its processes. The Diversify phase continues to gain traction with the creation of Menzies Select and a new structure for Menzies Marketing Services. Opportunities exist within these markets and will be actively pursued. John Menzies plc AnnuAl RepoRt 2011OVERVIEW operating reviewgOVERnancEfInancIal statEmEntsshaREhOldER InfORmatIOn 14 gROUP fInancIal REVIEW p.51 financial statements www.Johnmenziesplc.com PaUl dOllman group finance director gROUP fREE cash flOW £39.4 m shaREhOldERs’ fUnds The movement on shareholders’ funds during the year was as follows: Shareholders’ funds at December 2010 Profit before tax Taxation Net actuarial loss Currency translation New shares issued Own shares purchased Dividends paid Share-based payment Impact of rate change on deferred tax Other shaREhOldERs’ fUnds at dEcEmbER 2011 £m 85.7 48.5 (10.1) (18.9) (8.3) 1.2 (2.4) (12.2) 1.7 (1.3) (0.5) 83.4 cash flOW The Group generated an operating cash flow of £75.2m in 2011 (2010: £69.1m). Some £28m was invested in the business and £12.2m was paid as dividends. An additional pension payment of £6.3m was made. Tax and interest payments accounted for £15m. Net debt decreased by £18.9m from £99m to £80.1m. cash flOW OPERatIng PROfIt Share-based payments Depreciation Amortisation of intangibles Net pension movement Working capital Exceptional items Cash spend on exceptional items Dividends from associates and joint ventures Non-cash items OPERatIng cash flOW Purchase of property, plant and equipment Intangible asset additions Sale of property, plant and equipment Net capital expenditure Net interest paid Tax paid fREE cash flOW Equity dividends paid Additional pension payment Acquisitions Cash raised from asset sales and leasebacks Net cash acquired with subsidiaries Other investments Net spend on shares Total movement OPEnIng nEt dEbt Currency translation clOsIng nEt dEbt 2011 2010 £m £m £m £m 47.0 1.7 22.5 6.0 (1.8) (3.1) 0.3 (3.6) 6.7 (0.5) 75.2 (21.8) (4.5) 5.5 (11.6) (3.9) 0.7 (20.8) (5.0) (10.0) 39.4 (12.2) (6.3) (1.7) – 0.5 (1.2) (1.2) 17.3 (99.0) 1.6 (80.1) 37.7 0.8 24.0 5.3 (1.0) (2.9) (0.1) (2.9) 7.9 0.3 69.1 (14.8) (5.4) (5.1) 43.8 (7.7) (3.0) (1.7) 5.0 – 1.1 (2.1) 35.4 (132.3) (2.1) (99.0) The above cash flow data provides more information than the statutory IFRS cash flow statement on page 57. John Menzies plc AnnuAl RepoRt 2011 15 The cash spend on exceptional items of £3.6m included £2.7m of redundancy costs and £0.9m of onerous lease payments provided in prior years. PEnsIOns In May 2006 the main UK pension scheme changed from a final pensionable salary scheme to an average salary scheme and benefits accrued to current active members prior to 1 May 2006 are linked to future price inflation rather than future salary increases. Following a consultation period with current active members in early 2010 future accrual is also now capped at 1% per annum. IncOmE statEmEnt Current service cost Gains on curtailments and settlements Expected return on scheme assets Interest on pension liabilities Net financial income/(charge) Net income balancE shEEt Total market value of assets Present value of scheme liabilities Deficit in scheme Related deferred tax asset Net pension liabilities 2010 £m 15.2 (16.6) 2011 £m 16.8 (15.4) £m (0.7) 0.1 (0.6) 1.4 0.8 £m (1.7) 4.6 2.9 (1.4) 1.5 242.0 (306.3) (64.3) 16.1 (48.2) 241.8 (289.6) (47.8) 12.9 (34.9) The current service cost for 2011 decreased as a result of an ongoing reduction in the pensionable payroll. The service cost for 2012 is expected to reduce further. During 2011 the Group contributed cash of £8.7m (2010: £5.7m) to the Fund. Following the full actuarial valuation carried out as at 31 March 2009, the Company agreed with the Trustees of the Fund to contribute an additional annual cash contribution of £6m plus RPI, which commenced on 1 April 2010. The next actuarial valuation will be at 31 March 2012. IAS 19 Employee Benefits (Revised) will become effective for the Group in its 2013 accounts. Under IAS 19 (Revised) the interest charge on retirement benefit liabilities and the expected return on pension plan assets will be replaced by a net interest income or expense on net defined benefit assets or liabilities based on high-quality corporate bond rates. We are still assessing the potential impact, but this is likely to increase our reported net finance costs. The volatility of reported net finance costs is also expected to increase. We do not expect the effect on the net assets of the Group to be material. nOn-UndERlyIng PERfORmancE The results for the year include the following one-off and/or material items, which the Group considers should be highlighted to provide a better understanding of the Accounts: (i) on 6 July 2011 Menzies Aviation and Swissport Handling SA signed a termination agreement bringing the 39% associate undertaking arrangement in Spain to an end. The termination agreement split the existing 6 airport operations whereby Menzies Aviation acquired 100% control of the operations at Alicante, Murcia, Jerez and Almeria while Swissport Handling acquired 100% control of the operations at Madrid and Lanzarote. The split was agreed following an independent review of the individual operations and the calculation of the £4m gain on the transaction remains subject to an ongoing completion valuation exercise John Menzies plc AnnuAl RepoRt 2011OVERVIEW operating reviewgOVERnancEfInancIal statEmEntsshaREhOldER InfORmatIOn 16 gROUP fInancIal REVIEW cOntInUEd (ii) during the year the Group sold a surplus freehold property for consideration of £2.5m resulting in a net gain of £1m (iii) the costs of rationalising excess capacity, comprising asset write-downs and staff redundancy costs, in Distribution amounted to £2.5m (2010: £2.3m) and in Aviation amounted to £1.7m (2010: nil) (iv) a provision for future obligations on a vacated leasehold property of £1.1m was set up following the sub-tenant entering administration. Under IFRS, previously capitalised goodwill is no longer amortised. However, these results include an impairment charge of £1.8m, reflecting the remaining life of the current licence at Menzies Macau Aviation Services Ltd. IFRS requires the price paid for a business to be allocated between goodwill and other intangible assets. The other intangible assets capitalised in Aviation are amortised and this amortisation charge has been highlighted to present a clearer trading position. Further details are disclosed in Note 5 to the Accounts. IntEREst The net underlying interest charge is analysed as follows: Fixed rate sterling term loan Fixed rate sterling loan Floating rate sterling loan Preference shares Cash/overdrafts Other finance (income)/charge Net underlying interest charge 2011 £m 1.5 1.6 0.6 0.1 1.1 (1.4) 3.5 2010 £m 1.7 2.1 0.9 0.1 1.0 1.4 7.2 The sterling term loan is at a fixed rate of 6.23% and is repayable between 2012 and 2020. During 2009 the Group hedged the exposure to interest rate rises by entering into £75m of interest rate swap agreements, whereby the Group pays a fixed rate of interest and receives a variable rate of LIBOR+margin on the notional amount. £50m of these interest rate swaps matured in July 2011 with the remaining £25m maturing in June 2012. Other finance income/charge is the net financial income/charge from the pension scheme under IAS19. taxatIOn The tax rate on underlying profits for the year was 23.4% compared with 24.2% in 2010 and is analysed as: Tax due at UK rate Non tax-deductible items Unrelieved overseas losses Utilisation of tax losses Lower rate of tax on overseas earnings Recognition of deferred tax asset Underlying tax rate % 26.5 3.6 1.5 (2.0) (0.7) (5.5) 23.4 The deferred tax asset relates to available brought forward losses in the Netherlands. Tax paid during the year was £10m. John Menzies plc AnnuAl RepoRt 2011 nEt dEbt £80.1 m REtURn On caPItal EmPlOyEd 20.3 % 17 The tax effect of the exceptional items, described in Note 5 on the accounts, is a net credit of £1m. The overall effective tax rate has reduced from 24.8 % in 2010 to 20.8%, principally related to the deferred tax asset. The UK Government has announced that the main rate of UK corporation tax will be reduced from the current rate of 26%, which has applied from 1 April 2011, to 23%, by means of a series of 1% annual reductions. The reduction in the UK corporation tax rate to 25% from 1 April 2012 was enacted on 19 July 2011. As this rate was enacted at the balance sheet date, and reduces the tax rate expected to apply when temporary differences reverse, it had the effect of reducing the UK deferred tax asset. However, as most of the UK deferred tax asset relates to the UK pension deficit, which has arisen predominantly due to actuarial gains/losses taken to other comprehensive income, the majority of the reduction was debited to other comprehensive income and does not have a material effect on the effective tax rate or on profit for the year. It is expected that this treatment will also apply in relation to the further rate reductions announced by the Government. Those further rate reductions are to be incorporated within future legislative acts and so will not be substantively enacted until later periods. The estimated effect of the further reductions in the rate to 23% by 2014 would be to decrease the net UK deferred tax asset by £0.9m. acqUIsItIOns During the year the Group completed a number of small acquisitions in the UK, details of which are shown in Note 24. PROPERty, Plant and EqUIPmEnt Purchases of property, plant and equipment totalled: Distribution Aviation Property £m 0.1 0.8 0.9 Plant & Equipment £m 5.4 15.5 20.9 Total £m 5.5 16.3 21.8 Aviation’s capital expenditure mainly comprised equipment to service new contracts. IntangIblE assEts Expenditure on computer software amounted to £4.4m during 2011, of which some £3.2m related to SAP. Capitalised goodwill amounts to £54.4m compared to £56.1m in 2010. This goodwill is no longer amortised but rather is subject to an annual impairment review. Amortisation periods for contracts are business-stream dependent and vary from zero to 10 years. Where the contracts are not amortised, they are subject to an annual impairment test at cash-generating unit level, generally considered to be ‘station’ level. OthER InVEstmEnts This includes cash invested in joint ventures and associates. WORkIng caPItal Working capital movement is analysed as follows: Inventories Trade and other receivables Trade and other payables 2011 £m (1.7) (3.1) 1.7 (3.1) 2010 £m (1.6) (3.9) 2.6 (2.9) John Menzies plc AnnuAl RepoRt 2011OVERVIEW operating reviewgOVERnancEfInancIal statEmEntsshaREhOldER InfORmatIOn 18 gROUP fInancIal REVIEW cOntInUEd tREasURy OPERatIOns From a Treasury perspective the main financial risks faced by the Group are liquidity, interest rate fluctuations and foreign exchange exposures. The Board has approved policies for each of these risks, which are managed on a day-to-day basis by Group Treasury. The purpose of these policies, which remained unchanged throughout the year, is to ensure that adequate funds are available to the Group at all times and that financial risks arising from the Group’s operating and investment activities are carefully managed. Accordingly, Group policy is not to enter into transactions of a speculative nature. The Group Treasurer reports formally on a monthly basis to a Treasury Committee under the chairmanship of the Group Finance Director and operates within scope and authorisation levels specified by the Board. The majority of Menzies Aviation’s stations are located outside the UK and operate in currencies other than sterling. The rates of exchange to sterling for those currencies which have principally affected the Group’s results were: US$ Euro average for year to December 2011 1.610 1.150 Year end 31 December 2011 1.554 1.197 Average for year to December 2010 1.546 1.167 Year end 31 December 2010 1.566 1.167 Further disclosure in respect of the above is included in Note 16 to the Accounts. gOIng cOncERn At 31 December 2011 the Group had committed borrowing facilities of £169.1m, with an expiry profile of: £50m £41.8m (US$65m) £30m £25m £22.3m January 2013 May 2014 May 2014 June 2014 March 2020 Under the terms of these facilities, the financial covenants are tested semi-annually. The Group has complied fully with the financial covenant tests. The Group updates trading forecasts covering a forward 15 month period on a regular basis, which together with the supporting assumptions are reviewed by the Board. The current forecast shows that the Group is able to operate within both its committed banking facilities and related financial covenants during this period and the Directors believe that the assumptions underpinning this forecast are both prudent and reasonable. The Directors therefore believe, on the basis of current financial projections and facilities available, that the Company and the Group have adequate resources to continue in operation for the foreseeable future. Accordingly, the Directors continue to adopt the going concern basis in preparing the financial statements. John Menzies plc AnnuAl RepoRt 2011 OUtlOOk The Group has made a positive start to the year and is trading in line with the Board’s expectations. 19 At Menzies Aviation some significant new contracts have been won. Contracts to handle Flybe at London Gatwick and Birmingham International have been secured with operations commencing on 1 April. Operations in Toulouse, France have commenced with a contract to handle some 134 easyJet flights per week and a licence to operate in Naples, Italy has been activated with operations commencing on 1 April. This is an expansion into 2 new countries for the division and it is hoped that customer relationships can be leveraged to grow the business and create airport and ultimately regional density. In Mexico, our relationship with Vivaaerobus has been deepened with the signing of a 5 year contract to provide full passenger and ramp handling services to Vivaaerobus at all 26 airports that they operate in throughout Mexico. To facilitate this, 4 new airport operations will commence. Menzies Distribution continues to drive efficiencies as a result of the implementation of the SAP IT system. Following the centralisation of a number of functions and the creation of a central operations unit, a number of network rationalisation opportunities have been identified and plans are already in place to deliver these changes during the year. On 17 February, News International announced the launch of the Sun on Sunday. It is too early to gauge the impact of this new title. The Group is now financially strong. The reduction in net debt over the last few years has left the Group in a strong position. Within both divisions, particularly Aviation, expansion opportunities exist and we continue to evaluate these against sensible returns criteria. With our two strong operating divisions providing a blend of stability, growth and cash generation the Group is well placed to build on our success. John Menzies plc AnnuAl RepoRt 2011OVERVIEW operating reviewgOVERnancEfInancIal statEmEntsshaREhOldER InfORmatIOn 20 cORPORatE sOcIal REsPOnsIbIlIty p.04 group strategy www.enviromenzies.com 1,300 chIldREn REcEIVE 3 mEals a day at 4 schOOls aROUnd bangalORE, thanks tO PaRIkRma fOUndatIOn OUR fUll csR REPORt fOR 2011 can bE VIEWEd at: WWW.JOhnmEnzIEs.cOm/ REsPOnsIbIlIty OUR POlIcy and stRUctURE We believe that our business conduct, policies and guidelines which we have in place concerning ethics, sound business practices and wider governance issues will not only enhance our standing in the community, but also provide a better business for all our stakeholders. The Board recognises that being a socially responsible company adds to and enhances the Company’s overall value, both short and long term. The impact our business activities have on the environment and communities in which we operate are important to us, and to our stakeholders. We therefore have systems in place to identify, analyse and manage key risks arising from our operations, and develop better business methods. The policies and guidelines we have in place set standards concerning ethics, sound business practices and wider governance issues. The Board expects the Group to conduct its operations based on sound ethical practices which are open and free from discrimination and harassment and will promote a positive representation of the Group to stakeholders. The Group has adopted and disseminated appropriate policies and procedures, including clear guidelines on matters such as competition law, bribery and whistle-blowing, and the Board has tasked each Divisional Managing Director to be responsible for the implementation of all of these policies in their divisions. Both Operating Boards recognise their legal, moral and commercial responsibility for effective policies, robust health, safety and security management systems and controls to identify, recognise and where reasonably practical eliminate or minimise risk. John Menzies plc is included in the FTSE4Good index for socially responsible investment. We chose to participate in this index because the index measures the performance of companies that meet globally recognised responsibility standards. A description of the Company’s internal control system for management, particularly of financial risks, is in the Corporate Governance statement on pages 28 to 39. An analysis of the key business risks facing the Group appears in the Business Review on pages 24 and 25. The Group also publishes on its website an Annual Corporate Social Responsibility Report which details the practices, strategies and policies being implemented across the divisions. A copy of the Report for 2011 can be accessed at www.johnmenziesplc.com. John Menzies plc AnnuAl RepoRt 2011 dIscOVER mORE Of What WE aRE dOIng In cORPORatE sOcIal REsPOnsIbIlIty OnlInE at: WWW.EnVIROmEnzIEs.cOm 2011 saW mEnzIEs aVIatIOn IntROdUcE Its cOmmUnIty tEam challEngE, WIth OUR managEmEnt tEam gIVIng sOmEthIng back tO cOmmUnItIEs WhERE WE OPERatE. InVEstmEnt In cOmmUnItIEs John Menzies plc is aware that it has community obligations, particularly within the countries and localities where it does business. We have a positive duty to improve the well being of individuals and to use our best endeavours to enhance community life. A positive approach to our community relations is in the best long term interests of our Company and of those who work within it. Each year the Group Board sets a budget for its charitable activities and a charities committee allocates the expenditure. cOmmUnIty tEam challEngE 2011 saw Menzies Aviation introduce its Community Team Challenge programme, for the first time combining the development of our talented management team with putting something back (with a focus on helping children) in communities around the world where we operate. There were 3 distinct objectives: 1. to create a developmental experience for our employees, 2. for the Company to become involved in a project with local community benefit and 3. to work with the local community to provide sustainable benefit. To kick start the programme we selected 30 of our highest performing managers from our Leadership Talent Review process, and formed 3 teams to complete 3 extremely worthwhile projects in South Africa, Romania and India. 21 Menzies Aviation fully funded the programme and completion of each project. It also asked key customers, suppliers and airport partners for donations to help sustain the substantial benefits to these children and communities for the long-term. In South Africa, our team worked in conjunction with teachers and village leaders to enlarge and upgrade a preschool in the Zulu village of Hlambanyathi, building an additional classroom and creating onsite restroom facilities for staff and children. Our continued support for this project includes the provision of cooking facilities and financial support to fund the cost of a food programme, which is expected to provide enough food for the children at the school for over 2 years. In Romania our team worked within a children’s village in Bucharest to provide an outdoor pavilion and upgrade the village entrance, which now sports wall murals designed and painted by the children. The villages were introduced as an alternative to the orphanage environment, and groups of between 5 and 7 children under the age of 15 live in a home environment with a long term carer “mother”. The Company has supported this project for a number of years and the Community Challenge provided an opportunity to become more involved. We left the village with funding to provide for an away day for the house mothers and funds to be used to support the young adults as they move from hostel accommodation in preparation for independent living. Our final challenge was in India, where we assisted a school for pupils from Bangalore’s slums to host and run an inaugural under 16’s Bangalore Football Tournament in the Karnataka State Football stadium, in association with the Parikrma Foundation, an organization we have supported for a number of years. The Parikrma Foundation takes children from very challenging backgrounds and provides schooling, in English, and 3 meals a day for 1,300 children in 4 schools around Bangalore. During the week of competition, teams from local schools competed for a place in the final and ultimately the Equality Cup. The children from Parikrma were able to demonstrate that they could compete on an equal footing with other local schools and the overall feedback was of the sense of pride they had in themselves and their school. To continue the relationship with the Foundation, the Company has committed to providing funding for the tournament to run again in 2012. chaRItIEs fUnd The Company’s Charities Fund exists to provide significant levels of support to a small number of charities nominated by each operating division each year, based on the following selection criteria, EffIcIEncy: be involved with charities that are small enough for our donation to make an impact, and not be absorbed in administrative costs; IntEgRIty: make donations on a “needs-based” approach rather than “taste-based” approach; EffEctIVEnEss: charities to have specific aims and to be able to demonstrate how our contribution will benefit their cause. Nominations are considered for charitable organisations suggested by the divisions, although generally donations will not be made to certain causes or activities including political parties, books, research papers or articles in professional journals, religious organisations or anything that conflicts with our Ethics Policy. In 2011, over £80,000 was donated by the Company through this fund. In addition to the main Charities Fund, employees are actively encouraged to support chosen charities through the Community Fund, attendance at events and the ‘Payroll Giving Scheme’ which allows for tax efficient donations to be made to charities. The John M. Menzies Community Fund makes individual cash awards of up to £350 per employee, or £700 per team of employees, undertaking a charitable or community project. Such awards are made in consultation with the Managing Directors of each business. During 2011, almost £11,000 was donated via this fund. POlItIcal dOnatIOns It is the Company’s policy not to make political donations and no political donations were made during the year (2010: £nil). John Menzies plc AnnuAl RepoRt 2011OVERVIEW operating reviewgOVERnancEfInancIal statEmEntsshaREhOldER InfORmatIOn 22 EmPlOyEEs The Group recognises the value in a diverse employment base. The principles are recognised through published employment policies which are designed to attract, retain and motivate quality staff. Full consideration is given to equality legislation and our policies and practices are regularly reviewed and updated to ensure that recruitment and promotion is based on merit and in line with equality principles. Managers are also encouraged to foster a work-based culture based on values espoused as part of a campaign promoting and providing guidance on ethical business practices and professional conduct concerning dealings with all our stakeholder groups including customers, suppliers and, of course, employees. Policies are also in place to cover the following key areas: • attracting the right people • reward and incentives • training and development • communication and consultation • recognising human rights • whistleblowing, anti-corruption and bribery. hEalth and safEty Good health and safety practices are integral both to employee welfare and to the success of the Group. Each Divisional Managing Director is responsible to the Board for Health and Safety in their division. We continually review our procedures and our training in order to develop and adopt methods of working which reduce the likelihood of accidents occurring. Both divisions operate in time-critical environments with any delay increasing costs and causing disruption for ourselves and our customers. Reports on Health and Safety performance are the first operating item at all meetings of the Group Board and at Divisional Operating Board meetings. They include injury statistics and trends as well as lessons learned, training performance, contacts with regulators and legislative changes. The Group’s Health and Safety policy statement, which is published on our website, focuses on establishing a suitable environment, providing proper training, communication and consultation with employees. MORSE is a key tool in our Health and Safety Strategy and is utilised in various forms across the Group. Details of the Health and Safety programmes in each division can be found in the Group’s Annual Corporate Social Responsibility Report on our website, www.johnmenziesplc.com. InJURy and IncIdEnt REPORtIng Both divisions utilise key performance measures to monitor trends and to improve performance. They operate in very different sectors to each other, and so statistics for each division are analysed individually. Safety and Security management in Menzies Aviation is cascaded down through regional Safety and Security managers who are responsible for safety and security compliance within their assigned region. 2011 has seen further changes to the Network Safety and Security Team to meet the needs of the business and include additional resources to raise the security focus within Menzies Aviation operations. The regional Safety and Security managers maintain a strong functional reporting line with the responsible specialists in the central support team. Within Menzies Distribution, the Human Resources Director has Operating Board responsibility for Health and Safety. Detailed annual plans are prepared by a Health and Safety manager, who is responsible for developing and implementing procedures and initiatives within Menzies Distribution and its new subsidiaries, Menzies Marketing Services and Menzies Select, and these are approved by the Board. In respect of Menzies Aviation’s overseas operations, there is no comparable UK RIDDOR, as each country where it operates has different reporting requirements. However, under the MORSE incident reporting system, all injuries are reported under standard categories depending on seriousness, where category A would be for the most serious incidents. Category A level is not the same as UK RIDDOR, but it includes major/serious incidents involving fatality, serious harm, dangerous occurrence or aircraft damage, including significant near misses. EnVIROnmEnt Each of our two divisions has its own environmental policy, which has been approved by the Divisional Operating Boards and is integrated within existing management structures and implemented through normal business practices and procedures. These environmental policies address the following areas: • allocating roles, responsibilities and resources; • complying with legislation and best practice; • monitoring, verification and auditing of compliance; • data collection, analysis and reporting; • risk identification, assessment and management; • communication and dissemination of information; • adopting technology and working practices that are modern, environmentally friendly and energy efficient; and • working with customers and suppliers to address environmental issues affecting our businesses. At Group level, environmental issues affecting the businesses are the responsibility of, and reported by, each Divisional Managing Director to the Board. Environmental risks associated with new businesses are always assessed as part of our due diligence process on all acquisitions. John Menzies plc AnnuAl RepoRt 2011 23 where possible. Its total use of packaging materials through its AMI and cargo businesses in the UK amounted to 594 tonnes (2010: 757 tonnes). Where the division offers an aircraft cleaning service, any waste we remove from an aircraft is, wherever possible, processed via airport waste recycling systems. sUPPly chaIn Our relationship with our customers and suppliers is important to us – without them, we would simply not exist. Both our businesses rely on long-term working relationships as one of the core pillars of their business strategy – for Menzies Distribution this can be a lifelong arrangement with a newsagent, and for Menzies Aviation agreements covering many years at many airports. Airports and airlines operate on an international platform and expect all their suppliers to operate to acceptable standards worldwide. Menzies Aviation shares this commitment to high standards and works with its airline and airport partners to ensure that we all maintain and deliver commitments to high standards throughout the supply chain, at all our locations worldwide. sUPPlIER PaymEnt POlIcy The Group does not operate a standard code in respect of payments to suppliers. Each division is responsible for agreeing the terms and conditions under which business transactions with its suppliers are conducted, including the terms of payment. It is Group policy that payments to suppliers are made in accordance with the agreed terms, provided that the supplier has performed in accordance with all relevant terms and conditions. At the year-end, the amount owed to trade creditors by the Group was equivalent to 34.2 days (2010: 33.8 days) of purchases from suppliers. thE last 5 yEaRs haVE sEEn thE VOlUmE Of WastE dROP by OVER 40% caRbOn tRUst standaRd The Group is proud that at the start of 2009 Menzies Distribution achieved the Carbon Trust Standard for the energy efficiency work that has been undertaken in the division. The Carbon Trust Standard is awarded to organisations that measure, manage and reduce their carbon footprint. It shows which businesses and organisations are taking real action on climate change and reducing carbon emissions and the award recognises Menzies Distribution’s efforts to date and its commitment to further reductions. Following a re-certification process in 2011, Menzies Distribution were awarded the Carbon Trust Standard for the second time. CO2e data for 2009 and 2010 was compared against the base year of 2008 to confirm that the division had achieved an absolute reduction of 2.4% over this period. As with the original application, evidences of governance, carbon accounting and carbon management were required to prove that the company is committed to a sustainable future. Carbon footprint reduction continues across the Group, providing efficiencies and reducing costs to the business and both divisions remain committed to minimising the impact they have on the environment. EnERgy cOnsUmPtIOn Since 2007, all Menzies Distribution mainland UK electricity has been procured from fully ‘green’ renewable resources. The division had a target of reducing electricity consumption by over 12% from its 2008 figures by the end of 2011, and seeks to maintain its accreditation to Carbon Trust Standard. Total energy consumption at Menzies Distribution during the year amounted to 27 million kWh, a decrease of 5% on 2010, and at approximately 13% beating its target set in 2008. In 2012, the division will establish new targets for total energy consumption. WastE and EmIssIOns At Menzies Distribution, packaging waste, namely cardboard and polythene, and office paper are by-products of our activities. We have waste compactors installed at 19 of our largest branches in the UK. Menzies Distribution has been working closely with their waste services provider since the beginning of 2010 to reduce waste and increase recycling, and has set a goal to achieve 90% recycling across the division of all general waste material previously sent to landfill. In 2010 the volume recycled stood at under a third, but due to the concerted effort during 2011, the percentage recycled more than doubled to two thirds. The last 5 years have seen the volume of waste drop by over 40% and the percentage of our waste that is recycled increase from around 13% to over 67%. The division will keep on working to achieve its goal of 90% recycling of general waste, whilst also reducing the total volume of waste. Under our contracts with newspaper and magazine publishers, we are responsible for the collection of unsold copies from retail outlets. Newspaper publishers outsource the physical uplift and recycling from our premises via third-party agents with whom we work closely to integrate an efficient transition from our processes to their collection. For magazines, unsold copy from all of our branches is fed for conversion into future newsprint. Menzies Distribution is active in industry initiatives aimed at reducing the volumes of such material to landfill and supporting initiatives to increase consumer awareness of the magazine recycling opportunity. Menzies Aviation are committed to reducing unnecessary consumption of resources and recycling packaging such as polythene, rope and pallets John Menzies plc AnnuAl RepoRt 2011OVERVIEW operating reviewgOVERnancEfInancIal statEmEntsshaREhOldER InfORmatIOn 24 PRIncIPal RIsks and UncERtaIntIEs p.28 corporate governance www.Johnmenziesplc.com OVERVIEW The risks and uncertainties described below are considered to be those that would have the most significant effect on John Menzies plc. When ensuring that an effective risk management platform is in place it is recognised that by operating 2 distinct businesses their risk profiles differ. Some of the major risks that are faced, such as extreme weather or acts of terrorism, remain outside our full control but they are still considered and mitigating activities are planned for. The Group’s key risks and those of each operating division are reviewed six monthly by the Group Board and in more detail by the Audit Committee. bUsInEss EnVIROnmEnt RIsk RIsk aREa RIsk dEscRIPtIOn ImPact mItIgatIng factORs Distribution Risk associated with changing consumer behaviour and digital media proliferation. This could lead to an acceleration of top line decline as fewer newspapers and magazines are sold as individuals adapt the way they consume media. aviation The risk of global economic recession and its impact on airlines, ground and cargo handling volumes. This could result in a reduction in the number of aircraft movements which have a direct impact on the amount of aircraft turns and cargo tonnes handled. The ultimate impact of this risk would be financial. A focus on cost and productivity efficiency within the core business. New revenue opportunities away from printed media distribution are being pursued. An external consultant review was commissioned that provided a forward looking market overview. A flexible business model exists with geographical diversity that has stood up to previous events. Strategic alignment with more robust, financially strong airlines. Rigorous credit control and weekly analysis of volume across all product categories. cUstOmER RIsk RIsk aREa RIsk dEscRIPtIOn ImPact mItIgatIng factORs Distribution Risk associated with publisher renewals. Distribution Risk associated with retailer consolidation and retailer aspirations. aviation Risk associated with airline industry change. Airline consolidation or failure can lead to opportunities and threats. A risk exists if airline customers fail or are consolidated or significantly reduce volume. Failure to re-negotiate existing contracts at acceptable rates would have a material effect on the current operating model. Ultimately the impact of this risk would be financial. Greater power within the supply chain for large multiple retailers could result in preferential payment terms and increased service level demands. This would have both operational and financial implications. Airline consolidation could result in volume reductions across the main product categories if the acquiring airline is handled by a competitor or drops off a route. This would impact operations at effected airports and ultimately the financial performance of the division. Majority of current contracts secured through to 2015. Strategic analysis of options at the time of the next contract renewals. Constant evolution of the operating model to ensure an optimum cost base. Implementation of current branch re-organisation plans. Continue to drive service excellence and respond to retailer KPIs. Customer survey completed and pertinent actions implemented. A balanced customer portfolio exists. The division attempts to focus on growing, financially strong airlines. Maintain key relationships within airlines. John Menzies plc AnnuAl RepoRt 2011 25 fInancIal RIsk RIsk aREa RIsk dEscRIPtIOn ImPact mItIgatIng factORs Group Risk of inadequate financing facilities and inadequate management of foreign exchange exposures. Failure to arrange adequate banking facilities would have a material impact of the Group’s ability to operate. Failure to adequately manage the Group’s foreign exchange exposures would have a financial impact. The Group maintains strong relationships with a portfolio of high street banks and is confident that it has sufficient headroom available to fund the Group. Monthly Treasury meetings are held which review hedging policy, supplemented by weekly cash forecasts and a daily monitoring of facility headroom. The Board annually reviews treasury policy and takes external advice as appropriate. PEOPlE RIsk RIsk aREa RIsk dEscRIPtIOn ImPact mItIgatIng factORs Group Group Risk of inadequate succession planning and people development. A risk exists that the Group does not have in place adequate succession plans for the key management roles across the Group and that key employees leave the Group if development opportunities do not exist. Health and Safety risk. A risk of failing to provide employees with appropriate training and a safe working environment exists across the Group together with a risk that the Group fails to comply with relevant Health and Safety legislation. The impact of this risk could result in internal candidates not existing for key roles as they become available or individuals with in-depth knowledge and skills leaving the Group due to a lack of opportunity. The impact of a Health and Safety failure could affect the Group’s reputation, operational performance and ultimately financial performance. aviation Security risk. A serious security breach or incident occurs within the division that is directly attributable to the actions of one of our employees or the failure of related processes and/or training. The impact of a serious security related incident would affect the Group’s reputation, operational performance and ultimately financial performance. Succession plans across all areas of the Group exist. The Board annually reviews succession plans for senior management and executive directors. Each division has its own structured development programmes aimed at identifying and developing key employees. Safety is the number one value across the Group. Dedicated Health and Safety teams exist at both operating divisions. Detailed Health and Safety reports are discussed at both Operating Boards and Health and Safety is the first agenda item at all John Menzies plc Board meetings. Continual analysis of accidents allows trends to be identified and prompt action taken. The division works closely with airport authorities. Rigorous checking and vetting of all employees takes place. Central support is provided to all stations to ensure consistency utilising the MORSE intranet based safety and security monitoring system, which provides consistent and regular reporting. tEchnOlOgy RIsk aREa RIsk dEscRIPtIOn ImPact mItIgatIng factORs Group The risk of collapse of divisional IT platforms. Each division operates its own IT platform. Both are critical to the running of each division. A serious outage for a limited period of time would have an operational and reputational impact. All of our data centres have adequate power and facilities for data centres. We ensure that our systems remain up to date with appropriate external firewalls where required. Each division has its own disaster recovery plans which are periodically tested. John Menzies plc AnnuAl RepoRt 2011OVERVIEW operating reviewgOVERnancEfInancIal statEmEntsshaREhOldER InfORmatIOn 26 bOaRd Of dIREctORs ROlE Of thE bOaRd: • The approval of strategic plans. • The approval of financial statements, acquisitions and disposals. • The approval of major non-recurring projects and major capital expenditures. 1. IaIn naPIER NoN-ExEcutivE chairmaN • Chairman of the Nomination Committee • Member of the Audit Committee • Member of the Remuneration Committee Background and experience Iain was appointed Non-Executive Director of the Company in September 2008 and became Chairman in May 2010. He has significant experience at senior levels in international organisations having previously been Group CEO of Taylor Woodrow plc and prior to this CEO of Bass Brewers and Bass International Brewers. Iain is a chartered management accountant. 1. 2. 3. 4. 2. ERIc bORn NoN-ExEcutivE DirEctor 4. Ian haRlEy NoN-ExEcutivE DirEctor • Member of the Audit Committee • Member of the Nomination • Chairman of the Audit Committee • Member of the Remuneration Committee Background and experience Eric was appointed a Non-Executive Director in September 2010. He became Chief Executive at Wincanton plc in December 2010, having previously been Chief Operating Officer. Prior to this he was Group Senior Vice President & President West/South Europe at GateGroup, the global provider of onboard services and products to the passenger airline industry, and has also held senior roles in the retail industry. Committee • Member of the Nomination Committee Background and experience Ian was appointed a Non-Executive Director of the Company in February 2009. Ian was previously Finance Director and Chief Executive Officer of Abbey National plc and spent 9 years on their Board. He also spent 8 years on the Rentokil Initial plc Board and is a chartered accountant and Fellow and Past President of the Institute of Bankers. other appointments • Chairman of Rentokil Initial Pension Trustee Limited. other appointments • Chairman of Imperial Tobacco other appointments • Chief Executive at Wincanton plc. Group plc • Chairman of McBride plc • Non-Executive Director of the Molson Coors Brewing Company • Non-Executive Director of William Grant & Sons Ltd. 3. PaUl dOllman ExEcutivE DirEctor, Group FiNaNcE DirEctor Background and experience Paul was appointed as Group Finance Director in 2002. A chartered accountant, he was previously Finance Director at William Grant & Sons Ltd, and has also held senior financial positions with Inveresk plc, Maddox Group plc and Clydesdale Retail Group. other appointments • Non-Executive Director of Scottish Amicable Life Association Society. John Menzies plc AnnuAl RepoRt 2011 overview operating review gOVERnancE financial statements shareholder information 27 5. 6. 7. 8. 9. 10. 5. Ian haRRIsOn NoN-ExEcutivE DirEctor Background and experience Ian was appointed a Non-Executive Director in 1987. He joined a major UK commodity merchant in 1979 where he established and built up the treasury and foreign exchange department, becoming a Director in 1984. He then joined Record Currency Management, an institutional investment management company specialising in currency management for pension funds worldwide, in 1989. other appointments • Director of Record Currency Management Ltd. 6. dERmOt JEnkInsOn NoN-ExEcutivE DirEctor Background and experience Dermot was appointed to the Board in 1986 and held various executive responsibilities before assuming a non-executive role in 1999. He founded beCogent Ltd in 1999, a contact centre and related consultancy business and was Executive Chairman until 2011 when the business was sold to Teleperformance SA. other appointments • Director of Scottish Friendly Association and a number of other private companies. 7. daVId mcIntOsh ExEcutivE DirEctor, mENziEs DistributioN 9. cRaIg smyth ExEcutivE DirEctor, mENziEs aviatioN Background and experience David was appointed to the Board in June 2009. He joined Menzies in 1989 becoming Finance Director of Menzies Distribution in 1999. More recently as Commercial and Marketing Director, he was responsible for commercial contractual arrangements, key retail and publisher relationships and business information provision. He is a chartered accountant. Background and experience Craig was appointed to the Board in March 2007. He was a founder executive of the Aviation division and has worked for Menzies Aviation for 19 years. In 2003, he moved from being the Chief Financial Officer into the operational and commercial role as Vice President, Americas and was appointed Managing Director of Menzies Aviation in February 2004. He is a chartered accountant. 8. OctaVIa mORlEy NoN-ExEcutivE DirEctor 10. JOhn gEddEs compaNy sEcrEtary Background and experience John was appointed as Company Secretary in 2006. A chartered secretary, he joined the Group in 1997 and was previously Company Secretary of Menzies Aviation. His career has also included posts at Bank of Scotland plc and Guinness plc. • Chairman of the Remuneration Committee • Member of the Audit Committee • Member of the Nomination Committee Background and experience Octavia was appointed a Non- Executive Director in 2006. She has significant experience in managing dynamic, fast paced organisations having previously been Chief Executive of Lighterlife Ltd and Marketing Director and Commercial Director at Woolworths plc. She has also held positions as Managing Director, ecommerce at Asda Stores Ltd and as Buying and Merchandising Director at Laura Ashley plc. other appointments • Chief Executive of Crew Clothing Ltd. John Menzies plc AnnuAl RepoRt 2011 28 CORPORATE GOVERNANCE STATEMENT iAiN NAPiER Chairman The Board remains committed to the principles of good corporate governance, as it continues delivering its strategy. In June 2010 the Financial Reporting Council issued the UK Corporate Governance Code (the Code), which is the product of an extensive review of the Combined Code on Corporate Governance. The Code applies to accounting periods beginning on or after 29 June 2010 and so is applicable for this report, and the Board believes that, having amended the composition of the Board Committees during the year, that the Company is now fully compliant with the principles of the Code. AudiT COMMiTTEE REMuNERATiON COMMiTTEE NOMiNATiON COMMiTTEE 1 3 2 4 Name 1. I Harley Chairman 2. E Born Member 3. O Morley Member 4. I Napier Member MAiN RESPONSibiliTiES To monitor the integrity of the financial statements, internal control and risk management, whilst overseeing the relationship with the external auditors. 2 1 3 Name 1. O Morley Chairman 2. I Harley Member 3. I Napier Member MAiN RESPONSibiliTiES To determine and agree the framework and policy for the remuneration of directors, company secretary and other members of the senior management team as it is designated to consider. 2 4 1 3 Name 1. I Napier Chairman 2. E Born Member 3. I Harley Member 4. O Morley Member MAiN RESPONSibiliTiES To review the structure, balance and composition of the Board and its Committees and propose new appointments. John Menzies plc AnnuAl RepoRt 2011 29 1. THE bOARd 1.1 Structure and Leadership The Board currently consists of 9 Directors, 6 of whom are Non-Executive (including the Chairman) and 3 Executive. The role of the Chairman is distinct from other positions, is clearly defined and, as noted, is Non-Executive. The Company does not have a Chief Executive; instead it has an Executive Managing Director for Menzies Aviation, an Executive Managing Director for Menzies Distribution and an Executive Group Finance Director. Each Executive Director has clearly defined duties and responsibilities which having been agreed by the Board are regularly reviewed with the Chairman. The role of the Board: The Board of Directors’ key purpose is to ensure the Company’s prosperity by collectively directing the Company’s affairs whilst meeting the appropriate interests of its shareholders and stakeholders. In addition to business and financial issues the Board of Directors must deal with challenges and issues relating to corporate governance, corporate social responsibility and corporate ethics. Its key responsibilities include: • the approval of strategic plans, • the approval of financial statements, acquisitions and disposals, • the approval of major non-recurring projects and major capital expenditures. The role of the Chairman: • lead the Board, • lead strategic discussions between the Board ensuring accurate, clear and timely information is available to all Directors, • be available to the Executive Directors to discuss any concerns or issues that they may have, • ensure that sufficient time is made available for discussion of items at Board meetings, and develop an atmosphere which encourages active participation by the Board, • ensure that risk and long term shareholder value remain a key focus for the Executive team, • ensure an open dialogue is maintained with shareholders and be available to meet as required. Non-Executive Directors are required to constructively challenge and contribute to the strategic development of the Company and are appointed for an initial term of 3 years. Under the Company’s Articles of Association (the ‘Articles’) any Director who was not appointed or re-appointed at one of the two preceding AGMs is required to retire from office and offer themselves for re-election. The role of the Executive team is to implement on a day to day basis the strategy for their division that has been agreed by the Board. They are also expected to report regularly to the Board on any issues that are happening within their business and their proposed resolutions when problems occur. In addition to the Chairman, who satisfied the independence criteria set out in the Code on appointment, 3 of the Directors are considered independent (Eric Born, Ian Harley and Octavia Morley) which is in excess of the minimum recommended for a company of our size, and ensures that the Board is well balanced and able to meet the challenges and opportunities that face the business. The Board fully supports diversity, recognising the benefits that diverse viewpoints can bring in key decision making. We are committed to encouraging and developing all our employees and our Board to reach their full potential, irrespective of their gender, race or sexuality. It is our intention to always keep the benefits that derive from a diverse Board in mind when making future appointments. However the Board does not believe that setting a quota is the most appropriate method for achieving a balanced Board, and all appointments will be made on merit. The Board is also committed to developing talent throughout the Group, and provide appropriate training, support and development to those identified as displaying potential. 1.2 Accountability The Board met 8 times in 2011 and has a formal schedule of matters specifically reserved to it for decision. The Board also delegates specific responsibilities with written terms of reference to the Board Committees detailed below, and the Divisional Operating Boards. Information of an appropriate quality is issued in a timely manner to assist the Board in performing its duties. New Directors receive an appropriate induction tailored to their needs. All members of the Board have access to the advice and services of the Company Secretary and may take independent professional advice as appropriate at the expense of the Company. Directors are also encouraged to visit both divisional operations and to undertake such activities and training as is appropriate or may be required or desirable in order to carry out their duties. The Board has established Committees with defined terms of reference and it is the Board’s policy that all Non-Executive Directors should contribute to the membership of its Committees. At the end of 2011, and in line with best practice principles, Ian Harrison and Dermot Jenkinson, our two non-independent Non-Executive Directors, stood down from the Board Committees. This means that our Board Committees now comprise solely of the Chairman and independent Non-Executive Directors with the Audit Committee and Nomination Committee having 4 members and the Remuneration Committee 3. The Chairmen of the Audit and Remuneration Committees are chosen from Directors who are independent under the terms of the Code, whilst the Chairman of the Nomination Committee is also Chairman of the Board. The Board has also delegated operational and strategy implementation matters to the Operating Boards of Menzies Aviation and Menzies Distribution, both of which have 2 Executive Directors on them. John Menzies plc AnnuAl RepoRt 2011OVERVIEW OpERatIng REVIEWgovernancefInancIal statEmEntsshaREhOldER InfORmatIOn 30 CORPORATE GOVERNANCE STATEMENT CONTiNuEd 1.3 Appointments and retirals David Coltman retired from the Board following the AGM in May 2011. The Code requires that on companies of our size, Non-Executive Directors serving for more than 9 years offer themselves up for annual re-election. The Articles also require that Directors not appointed or re-appointed at one of the 2 preceding AGMs must retire and stand for re-appointment. The Directors who therefore retire and, being eligible, offer themselves for re-appointment at the AGM are Ian Harley, Ian Harrison, Dermot Jenkinson, Octavia Morley and Iain Napier. Iain Napier was appointed a Non-Executive Director of the Company in 2008 and became Chairman in May 2010. Iain was formerly main Board Director of Bass PLC, Chief Executive of Bass Leisure and then of Bass Brewers and Bass International Brewers. He was then Vice President UK and Ireland for Interbrew SA until August 2001. He was Chief Executive of Taylor Woodrow International Housing and Development from 2001 to 2005. Currently, he is Chairman of Imperial Tobacco Group plc and McBride plc and a Non-Executive Director of Molson Coors Brewing Company and William Grant & Sons Holdings Limited. Ian Harley was appointed a Non-Executive Director of the Company in 2009. He is Chairman of Rentokil Initial Pension Trustee Limited having previously spent 8 years on the Rentokil Initial plc Board. Ian has previously held a variety of posts in the Finance, Retail Banking and Wholesale Banking Divisions of Abbey National and spent 9 years on their Board as Finance Director and Chief Executive Officer. He is a Fellow of the Institute of Chartered Accountants, and a Fellow and Past President of the Institute of Bankers. He is Chairman of the Audit Committee. Octavia Morley was appointed a Non-Executive Director in 2006. She is Chief Executive of Crew Clothing Ltd and has previously been Chief Executive of Lighterlife Ltd. Before that she was Marketing Director and Commercial Director at Woolworths plc, and held positions as Managing Director, ecommerce at Asda Stores Ltd and as Buying and Merchandising Director at Laura Ashley plc. She is Chairman of the Remuneration Committee. Dermot Jenkinson contributes from his breadth of knowledge gained both from his experiences in the Company and through a wide range of executive management roles, whilst Ian Harrison provides counsel and support to the Board and brings particular skills relating to pension investment and currency management. These 2 Directors also represent the interests of the Menzies family, who collectively are our major shareholder. All Directors standing for re-election have undergone a formal performance evaluation and the performance of each continues to be effective and demonstrates commitment to their role, including commitment of time for Board and Committee meetings in addition to their other duties. The Board recommends to shareholders the re-appointment of Ian Harley, Ian Harrison, Dermot Jenkinson, Octavia Morley and Iain Napier. 1.4 Independence The Chairman satisfied the independence criteria set out in the Code on appointment. There are 3 independent Non-Executive Directors (Eric Born, Ian Harley and Octavia Morley) which is in excess of the minimum number recommended for a company of our size. Dermot Jenkinson and Ian Harrison are not independent under the terms of the Code due to their shareholding and length of service. However, they not only represent the continuing involvement of the founding Menzies family, but also contribute effectively to the Board. They bring to the Board a breadth of skills and experience from their knowledge of the Company and from their backgrounds in business and general management. Since the end of 2011 all of the Non-Executive Directors on each of the Board Committees are independent, and are therefore fully compliant with the Code. 1.5 Senior Independent Director Ian Harley became Senior Independent Director following David Coltman’s retirement from the Board at the 2011 AGM. Ian has indicated that he has sufficient time available to meet with shareholders and other stakeholders where required and will be available where discussions with either the Chairman or the Executive Directors are not appropriate. 1.6 Succession planning and Board recruitment The Board is aware that it is essential to have a suitable succession plan in place for when any members of the Board either move on or retire, and therefore formally reviews succession plans each year. With regard to the replacement of any Executive Directors, the Board has tasked the Nomination Committee with reviewing potential internal candidates John Menzies plc AnnuAl RepoRt 2011 31 and nominating suitable external candidates as and when such a position arises. Alongside this, each of the Divisional Operating Boards have a responsibility to ensure that talented individuals within the business are nurtured and given every opportunity to develop their skills, such that they might become suitable candidates to join the Board. For the Chairman, the Nomination Committee has responsibility for ensuring that there is a suitable candidate on the Board for a smooth transition of Chairmanship when required. The Nomination Committee will also engage external recruitment agencies in finding suitable candidates for either Executive or Non-Executive positions where required and any candidate will be expected to meet with each member of the Executive team and the Nomination Committee prior to any offer being made. 1.7 Board Performance Evaluation The Board is supportive of the principles and provisions of the Code on Board performance evaluation. The Board’s policy is to conduct rigorous performance evaluations internally on an annual basis, using external consultants to refresh the process every 3 to 5 years. An independent external consultant was used during 2011 to evaluate the Board, its members and its Committees. This evaluation was undertaken by Genius Methods and consisted of an online survey of each Board member, questioning their views on their own skills, the skills of the other Directors, the mix of skills on the Board, the performance of the Board as a whole, and the performance of its Committees. This was followed up by a one-to-one meeting between the Directors and evaluators to discuss the surveys’ findings. In addition to this review, the Non-Executive Directors held one meeting last year without the Chairman being present, during which his performance was reviewed. They also held a meeting with the Chairman present at which the performance of the Executive Directors was discussed. The results of the evaluation were reported to the Chairman and the Board in January 2012. Board has a formal system in place for Directors to declare Situational Conflicts to be considered for authorisation by those Directors who have no interest in the matter being considered. In deciding whether to authorise a Situational Conflict, the non-conflicted Directors are required to act in the way they consider would be most likely to promote the success of the Company and they may impose limits or conditions when giving authorisation or subsequently if they think this is appropriate. The Board believes that the systems it has in place for reporting and considering Situational Conflicts continue to operate effectively. 1.9 Directors’ indemnity Under the Articles, the Directors are indemnified to the fullest extent permissible under the Companies Act 2006. These indemnities were in force throughout the last financial year and remain in force. The Company also purchased and maintained throughout the financial year Directors’ and Officers’ liability insurance in respect of its Directors. No indemnity is provided for the Company’s auditors. 1.10 Communication with shareholders The Board has developed a comprehensive programme to ensure that effective communication with shareholders, analysts and the financial press is maintained throughout each financial year. Through its annual and interim reports, results and other announcements and the dissemination of information via the Group’s website at www.johnmenziesplc.com, the Board seeks to present its strategy and performance in an objective and balanced manner. Shareholders attending the AGM are invited to ask questions and also to meet the Directors after the formal business of the AGM has concluded. The Chairmen of the Board Committees will also be available to answer questions from any shareholder at the AGM. Full details of proxy votes cast on each resolution will be made available to shareholders at the Meeting and, in keeping with best practice, are made available on the Company’s website after the Meeting. Overall the evaluation was very positive on the operation of the Board and its Committees and some minor constructive changes have been made to their operation based on the findings. The Board receives reports at each of its meetings on any meetings held with shareholders or analysts. The Chairman and Senior Independent Director are also available for contact with shareholders at any time. 1.8 Conflict of interest The Articles permit the Board to consider and, if it sees fit, to authorise situations where a Director has an interest that conflicts, or may possibly conflict, with the interests of the Company (‘Situational Conflicts’). The John Menzies plc AnnuAl RepoRt 2011OVERVIEW OpERatIng REVIEWgovernancefInancIal statEmEntsshaREhOldER InfORmatIOn 3232 CORPORATE GOVERNANCE STATEMENT CONTiNuEd 2. bOARd COMMiTTEES Board and Committee meetings and attendance in 2011: MEETiNGS I Napier E Born I Harley I Harrison D Jenkinson O Morley P Dollman D McIntosh C Smyth D Coltman* * Appointments and retirals D Coltman retired in May 2011 2.1 Nomination Committee Name I Napier E Born I Harley O Morley D Coltman D Jenkinson Board Audit Committee Remuneration Committee Nomination Committee 8 8/8 8/8 8/8 7/8 8/8 8/8 8/8 8/8 8/8 0/3 3 3/3 3/3 3/3 2/3 – 3/3 – – – – 2 2/2 – 2/2 – 2/2 2/2 – – – – 2 2/2 – 1/1 – 2/2 – – – – 0/1 Position Chairman Member Member Member Past member Past member Changes during 2011: Ian Harley was appointed to the Committee and David Coltman stood down in May 2011. Eric Born and Octavia Morley were appointed to the Committee and Dermot Jenkinson stood down in December 2011. The Nomination Committee has terms of reference modelled closely on those set out in the Code and its responsibilities include recommending new Board appointments and succession planning. A copy of its terms of reference is available on the Company’s website. The Board as a whole is responsible for making new appointments to the Board on the recommendation of the Nomination Committee and nominating recommended candidates for election by shareholders on first appointment and thereafter for re-election at relevant intervals. During 2011, the Nomination Committee reviewed the structure, balance and composition of the Board and its Committees. In line with best practice principles, both Ian Harrison and Dermot Jenkinson, who have been Non-Executive Directors for over 9 years, have retired from all Board Committees. John Menzies plc AnnuAl RepoRt 2011John Menzies plc AnnuAl RepoRt 2011 2.2 Remuneration Committee Name O Morley I Napier I Harley D Jenkinson 3333 Position Chairman Member Member Past member Changes during 2011: Dermot Jenkinson stood down from the Committee in December 2011. The Report on Directors’ Remuneration on pages 40 to 50 details the role of the Remuneration Committee and how the principles of the Code relating to Directors’ Remuneration have been applied. 2.3 Audit Committee Name I Harley E Born O Morley I Napier I Harrison Position Chairman Member Member Member Past member Changes during 2011: Eric Born became a member of the Audit Committee in January 2011. Ian Harrison stood down from the Audit Committee in December 2011. Overview and structure The Audit Committee assists the Board in the execution of its responsibilities for corporate governance and internal control, and has adopted terms of reference modelled on those set out in the Code. The Group Finance Director and certain senior financial executives as appropriate, together with representatives from the internal and external audit teams, attend each meeting. It is a requirement that at least one Audit Committee member has suitable financial experience and Ian Harley, who is a qualified accountant, has been identified as meeting this requirement. A copy of the Audit Committee’s terms of reference is available on the Company’s website. The Audit Committee has delegated authority from the Board for ensuring adherence to the Code provisions and related guidance. Responsibilities The responsibilities of the Audit Committee include: • monitoring the integrity of the financial statements and reviewing significant accounting policies, judgements and estimates contained within them; • reviewing the effectiveness of the internal control and risk management systems, including control over financial reporting; • reviewing the effectiveness of the internal audit function, including the business risk register; • reviewing the Group’s policies and practices concerning business conduct, ethics and integrity and whistle-blowing; and • overseeing all aspects of the relationship with the external auditors, including their appointment, the audit process, the supply of non-audit services and monitoring their effectiveness and independence. The Audit Committee met 3 times in 2011 and a full report of its activities and of findings and recommendations from each meeting is given to the Board. During the year ended 31 December 2011, the Audit Committee formally reviewed and recommended the draft Annual Report (including the statements on internal control and the work of the Committee) and associated business review, and interim results announcements made by the Company. This aspect of its work focused on key accounting policies and estimates and judgements, including significant or unusual transactions or changes to these. In doing so the Audit Committee reviewed the reports of management and the controls assurance (internal audit) provider and took into account the views of the external auditors. John Menzies plc AnnuAl RepoRt 2011OVERVIEW OpERatIng REVIEWgovernancefInancIal statEmEntsshaREhOldER InfORmatIOnJohn Menzies plc annual REpORt 2011OVERVIEW OpERatIng REVIEWgovernancefInancIal statEmEntsshaREhOldER InfORmatIOn 3434 CORPORATE GOVERNANCE STATEMENT CONTiNuEd Internal Control structure and Internal Audit The Audit Committee also reviewed the Group’s internal control structure, approved the scope of work and fees for the controls assurance provider and debated whether the internal audit function should be brought in-house. It concluded that due to the complexity of the Group’s business and the international nature of the aviation business, the internal audit function was best served by continuing to be outsourced to Deloitte LLP, given their global spread and resources. Findings from the internal audit programme (on financial and key non-financial risks) and areas identified for improvement are reviewed by the Committee and prioritised for action by management. The Audit Committee reviews follow-up reports from management to ensure that any weaknesses identified in internal audit reports submitted to it are fully addressed and that improved procedures are adopted. Risk and the Risk Register The Audit Committee also reviewed the work of management on updating the Group’s Business Risk Register, which involved assessing key risks at Group and divisional level according to their significance, likelihood and impact, as well as the Company’s exposure to and management of these risks. After taking into account reports from the controls assurance provider, the Audit Committee was satisfied that management had appropriate risk management strategies and systems in place to address the Group’s key business risks. Group Audit The Audit Committee also reviewed and approved the audit plan, as well as the findings of the external auditors from its audit of the annual financial statements. It also assessed the effectiveness of the external auditors and of the audit process through meetings and interviews with management and key finance staff. In 2009 the Group moved the audit role to Ernst & Young following a tendering process, and the contract was awarded on the basis of cost, expertise and ability to audit the Group’s worldwide activities. The Audit Committee was satisfied then, and remains satisfied, that in accepting the position of Statutory Auditor Ernst & Young are able to remain independent and objective. As part of its review of the effectiveness of the external auditors, the Audit Committee keeps under review their objectivity and independence, and the nature and extent of the non-audit services which they provide. These services have historically consisted mainly of acquisition-related due diligence, where their knowledge of the Group’s business processes and controls makes them best placed to undertake this work cost-effectively on the Group’s behalf. The external auditors also deal with the Group’s tax affairs. The work undertaken for the Group by the audit team is handled by a different partner from the tax and other non-audit services, and is managed out of a separate office. All non-audit work is put out to tender, and non-audit fees paid to Ernst & Young are reported regularly to the Group Finance Director, who reports any significant payments or awards of work to the Audit Committee. The Audit Committee believes that the level and scope of these non-audit services does not impair the objectivity of the Company’s auditors. During 2011, audit fees amounted to approximately £0.5m, whilst non-audit fees to Ernst & Young amounted to approximately £0.7m. The Audit Committee regularly reviews the remuneration received by the Company’s auditors for audit services, audit-related services and non-audit work. These reviews are to ensure a balance of objectivity, value for money and compliance with their duties. The outcome of these reviews was that performance of the relevant non-audit work by our auditors was the most cost-effective way of conducting our business and that no conflicts of interest existed between such audit and non-audit work. These reviews enable the Audit Committee to confirm that we continue to receive an efficient, effective and independent audit service. 2.4 Divisional Operating Boards The Operating Boards of both Menzies Aviation and Menzies Distribution consist of senior executives from within each division, together with the Division’s Executive Managing Director and the Group Finance Director. The Operating Boards have responsibility for the efficient running of their division and the implementation of the divisional strategy as agreed by the Group Board. They also retain responsibility for approving divisional performance targets consistent with the strategic objectives set by the Group Board and monitoring achievement. The Operating Boards also have responsibility to make recommendations to the Group Board and to monitor major initiatives. Each Operating Board meets a minimum of 4 times per year. John Menzies plc AnnuAl RepoRt 2011John Menzies plc AnnuAl RepoRt 2011 3535 The three Executive Directors also meet prior to each Board meeting, with the Chairman and Company Secretary joining them as appropriate. The meetings provide a forum for sharing ideas and experiences from within the Operating Divisions. It also allows the common financial controls, managed at Group level, to be reviewed and discussed. The composition of the Menzies Aviation Operating Board is shown on page 7 and the Menzies Distribution Operating Board is shown on page 10. 3. diRECTORS’ RESPONSibiliTiES The Directors are responsible for preparing the Annual Report, the Remuneration Report and the financial statements in accordance with applicable law and regulations. Company law requires the Directors to prepare financial statements for each financial year. Under company law the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Company. Under the law, the Directors have prepared the Group and Parent Company financial statements in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union. In preparing those financial statements the Directors are required to: • select suitable accounting policies in accordance with IAS 8: Accounting Polices, Changes in Accounting Estimates and Errors and then apply them consistently; • present information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information; • provide additional disclosures when compliance with the specific requirements in IFRSs is insufficient to enable users to understand the impact of particular transactions, other events and conditions on the Group’s financial position and financial performance; and • state that the Group has complied with IFRSs, subject to any material departures disclosed and explained in the financial statements. The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company’s transactions and disclose with reasonable accuracy at any time the financial position of the Company and of the Group and enable them to ensure that the financial statements comply with the Companies Act 2006 and Article 4 of the IAS Regulation. They are also responsible for safeguarding the assets of the Company and of the Group and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. The Directors are responsible for the maintenance and integrity of the website (www.johnmenziesplc.com). Legislation in the UK concerning the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. 3.1 Directors’ statement pursuant to the Disclosure Rules and Transparency Rules Each of the Directors confirms that, to the best of each person’s knowledge and belief: • the financial statements, prepared in accordance with IFRSs as adopted by the EU, give a true and fair view of the assets, liabilities, financial position and profit of the Group as a whole; and • the Directors’ Report contained in the Annual Report includes a fair review of the development and performance of the business and the position of the Group as a whole, together with a description of the principal risks and uncertainties that they face. 3.2 Disclosure of information to and appointment of auditors The Directors have confirmed that they are confident that, so far as they are aware, there is no relevant audit information of which the Company’s auditors are unaware. The Directors have confirmed that they have taken all steps that ought to have been taken in order to make themselves aware of any relevant audit information and to establish that the Company’s auditors are aware of that information. A resolution to re-appoint Ernst & Young LLP as auditors to the Company and to authorise the Board to agree their remuneration will be proposed at the AGM. John Menzies plc AnnuAl RepoRt 2011OVERVIEW OpERatIng REVIEWgovernancefInancIal statEmEntsshaREhOldER InfORmatIOnJohn Menzies plc annual REpORt 2011OVERVIEW OpERatIng REVIEWgovernancefInancIal statEmEntsshaREhOldER InfORmatIOn 3636 CORPORATE GOVERNANCE STATEMENT CONTiNuEd 4. iNTERNAl CONTROl In accordance with the revised Turnbull Guidance, the Directors are responsible for the Group’s system of internal control, which covers financial, operational and compliance controls together with risk management. The system has been in place throughout 2011 and up until the date of this report, except that it did not apply to the Group’s material joint ventures. The use of our standard accounting manual by finance teams throughout the Group ensures that transactions and balances are recognised and measured in accordance with prescribed accounting policies and that information is appropriately reviewed and reconciled as part of the reporting process. The use of a standard reporting pack by all entities in the Group ensures that information is gathered and presented in a consistent way that facilitates the production of the consolidated financial statements. Whilst no system can provide absolute guarantee and protection against material loss, the system is designed to give the Directors reasonable assurance that problems can be identified promptly and remedial action taken as appropriate. The Directors, through the Board’s review of risk and the work of the Audit Committee, have reviewed the effectiveness of the system of internal control for the accounting period under review and consider that it accords with guidance. There were no material weaknesses in the Group’s system of internal control relating to financial control during the year. The key features of the Group’s internal control system are: 4.1 Control environment A key factor in the Group’s approach to internal control is the recognition of the need for risk awareness and the ownership of risk management by Executives at all levels. Each division has its own Operating Board. A Statement of Group Policies and Procedures sets out the responsibilities of these Operating Boards, including authority levels, reporting disciplines and responsibility for risk management and internal control. Each Operating Board has also adopted a Corporate Governance Manual detailing its controls in implementing these Policies and Procedures. Certain activities, including treasury, taxation, insurance, pension and legal matters are controlled centrally with reports reviewed by the Board as appropriate. 4.2 Risk identification and review Key identified risks, both financial and non-financial (the latter including environmental, social and governance risks), are reviewed by the Board as well as at Operating Board level on an ongoing basis, with a formal six-monthly review of risks and controls taking place, supported by the Group’s Controls Assurance provider. The Divisional Operating Boards also review each division’s performance, strategy and risk management. Annual compliance statements on internal control are certified by each Divisional Board. A Treasury Review Committee meets regularly to review the adequacy of the Group’s facilities against potential utilisation and commitments, as well as to monitor and manage the Group’s exposure to interest rate and currency movements. Further details on how the Board manages business risks are shown on pages 24 and 25, and stakeholder risks in particular are summarised in the Corporate Social Responsibility report on pages 20 to 23. 5. SHAREHOldER iNFORMATiON 5.1 Share capital and structure The Company has two classes of shares: ordinary shares and 9% cumulative preference shares. As at 31 December 2011 the Company had an issued share capital of £16,576,922 comprising 1,394,587 9% cumulative preference shares of £1 each and 60,729,343 ordinary shares of 25p each. Of these 60,729,343 ordinary shares, 1,142,845 were held as Treasury Shares and 1,020,387 were held in Employee Benefit Trusts. These figures include 499,753 ordinary shares with a nominal value of £124,938 representing 0.8% of the issued share capital which were purchased as Treasury Shares at an average price of £5.33 per share during 2011, to be used for the satisfaction of share plan awards. No share in the capital of the Company may be allotted at a discount nor shall they be allotted except as paid up both in regard to nominal amount and premium to the minimum extent permitted by the 2006 Act. John Menzies plc AnnuAl RepoRt 2011John Menzies plc AnnuAl RepoRt 2011 3737 5.2 Directors’ share interests Directors’ interests in the ordinary shares of the Company are shown in the table below. There have been no changes between 31 December 2011 and 5 March 2012. 31 December 2010 (or at date of appointment) 31 December 2011 I Napier E Born P Dollman I Harley I Harrison D Jenkinson D McIntosh O Morley C Smyth D Coltman* Beneficial – Beneficial Beneficial Beneficial Non-beneficial Beneficial Non-beneficial Beneficial – Beneficial Beneficial 402,500 5,000 – 80,000 4,000 5,000 – 88,077 4,000 2,122,832 2,122,832 402,500 2,098,360 2,098,360 3,570,360 3,570,360 17,524 – 31,352 35,000 20,052 – 43,468 n/a * D Coltman retired from the Board in May 2011. In addition to the above holdings, Iain Napier and Ian Harley, as Directors of a subsidiary which is a trustee of employee benefit trusts in which they have no beneficial interest, have non-beneficial interests in 1,020,387 shares. There have been no subsequent changes to these interests as at 5 March 2012. 5.3 Substantial shareholdings In addition to the Directors’ interests, the Company has been notified of the following interests of 3% or more in its issued ordinary share capital as at 31 December 2011 and 5 March 2012: D C Thomson & Co. JPMorgan Asset Management Mr D Ramsay Mrs P Menzies Mrs K Slater Legal & General Investment Management Number of ordinary shares at 31 December 2011 5,190,000 3,139,483 2,589,878 2,529,650 2,396,552 1,874,127 Number of ordinary shares at 5 March 2012 % ordinary share capital % ordinary share capital 8.54 5,190,000 5.17 3,265,874 4.26 2,589,878 4.16 2,529,650 3.95 2,396,552 3.08 1,878,043 8.54 5.38 4.26 4.16 3.95 3.09 John Menzies plc AnnuAl RepoRt 2011OVERVIEW OpERatIng REVIEWgovernancefInancIal statEmEntsshaREhOldER InfORmatIOnJohn Menzies plc annual REpORt 2011OVERVIEW OpERatIng REVIEWgovernancefInancIal statEmEntsshaREhOldER InfORmatIOn 3838 CORPORATE GOVERNANCE STATEMENT CONTiNuEd 6. ARTiClES OF ASSOCiATiON 6.1 Transfer of shares There is no restriction on the transfer of shares in the Company, other than as contained in the Articles. Subject to the Articles and the requirements of the UK Listing Authority, the Directors may refuse to register a transfer of a certificated share which is not fully paid provided that this power will not be exercised so as to disturb the market in the shares. 6.2 Voting rights Deadlines for exercising voting rights and appointing a proxy or proxies to vote on resolutions to be passed at the AGM on 18 May 2012 are specified in the Notice of AGM. Every ordinary shareholder present in person or by proxy at a general meeting of the Company shall on a show of hands have one vote unless, in the case of the latter, he has been appointed by more than one shareholder and has received instructions to vote both in favour of and against the same resolution in which case he will have one vote against that resolution and one vote for. On a poll, every shareholder present in person at a general meeting or by Proxy, shall have one vote for every share of which they are the holder, and if the holders of the preference shares have the right to vote on any resolution, each holder shall have one vote for every preference share of which he is the holder. The holders of the preference shares shall have no right as such to receive notice of or attend or vote at any general meeting of the Company unless either; (i) at the date of the notice convening the meeting the dividend payable on such shares or a part thereof is 6 months or more in arrears; or (ii) the business of the meeting includes the consideration of a resolution for reducing the capital of or winding up the Company or for altering the objects of the Company as stated in its Articles or for the sale of the undertaking of the Company or any substantial part thereof or any resolution altering or abrogating any of the special rights or privileges attached to the preference shares, in which circumstances the holders of the preference shares shall have the right to vote on any such resolution. The Company is not aware of any arrangement by which with the Company’s co-operation, financial rights carried by shares are held by persons other than the holders of its ordinary shares or 9% cumulative preference shares. The Company is not aware of any agreement between holders of its securities which may result in restrictions on the transfer of its securities or on voting rights. 6.3 Allotment and issue of shares The Directors are, by shareholder resolutions passed at the AGM of the Company on 20 May 2011, generally and unconditionally authorised to exercise all the powers of the Company to allot shares in the Company and to grant rights to subscribe for, or to convert any security into, shares in the Company, up to an aggregate nominal amount of £4,969,446. The Directors are also empowered to allot equity securities (within the meaning of section 560 of the 2006 Act) of the Company for cash on a non-pre-emptive basis. This power is limited to: (a) any allotment where equity securities have been offered to holders of equity securities in proportion (as nearly as may be) to their then holdings of such securities; and (b) any other allotment of equity securities up to an aggregate nominal value of £9,938,892. Such authority and power expire at the Company’s AGM being held on 18 May 2012, unless previously revoked, varied or renewed. It is proposed that such authority and power be renewed by shareholder resolutions at the Company’s forthcoming AGM, but without prejudice to the exercise of any such authority prior to the date of such resolutions. 6.4 Purchase of own shares The Company is, by shareholder resolution passed at the AGM of the Company on 20 May 2011, authorised to purchase up to 5,963,335 of its own ordinary shares at a maximum price equal to the higher of: (i) 105% of the average of the middle market quotations for such ordinary shares of the Company as derived from the London Stock Exchange for the 5 business days immediately prior to the date of conclusion of the contract for any such purchase; and (ii) the amount stipulated by Article 5(1) of the EU Buy-Back and Stabilisation Regulation 2003 (being the higher of the price of the last independent trade and the highest current independent bid for an ordinary share in the Company on the trading venues where the market purchases by the Company will be carried out, and that the minimum price that may be paid is 25p per share. John Menzies plc AnnuAl RepoRt 2011John Menzies plc AnnuAl RepoRt 2011 3939 The Company is also, by shareholder resolution passed at the AGM of the Company on 20 May 2011, authorised to purchase up to 1,394,587 9% cumulative preference shares at a maximum price the higher of: (i) 110% of the average of the middle market quotations for such 9% cumulative preference shares of the Company as derived from the London Stock Exchange for the 5 business days immediately prior to the date of conclusion of the contract for any such purchase; and (ii) the amount stipulated by Article 5(1) of the EU Buy-Back and Stabilisation Regulation 2003 (being the higher of the price of the last independent trade and the highest current independent bid for a 9% cumulative preference share in the Company on the trading venues where the market purchases by the Company will be carried out, and that the minimum price that may be paid is £1 per share. These authorities expire at the AGM on 18 May 2012 and it is proposed that these authorities be renewed by shareholder resolution at that AGM, but without prejudice to the exercise of any such authorities prior to the date of such resolutions. 6.5 Appointment of Directors Directors may be appointed by the Company by an ordinary resolution of shareholders. The Board may appoint a Director either to fill a vacancy or as an additional Director and any Director so appointed will hold office only until the next following AGM and shall then be eligible for reappointment. If not reappointed at such meeting, such a Director will vacate office at its conclusion, except where a resolution is passed to appoint someone in his or her place (other than with effect from a time later than the conclusion of the meeting) or a resolution for his or her reappointment is put to the meeting and lost (in either which case the retirement takes effect from the passing of the relevant resolution). A Director is not required to hold shares in the capital of the Company. Directors are provided with documentation on the Company and its activities. An appropriate induction is provided for new Directors and ongoing training is provided as and when it may be required. 6.6 Retirement of Directors At each AGM of the Company the following Directors shall retire and be eligible for reappointment: (i) as detailed above, any Director appointed since the last AGM as an additional Director or to fill a vacancy; (ii) any Director who was not appointed or reappointed at one of the preceding 2 AGMs. 6.7 Directors’ powers The business of the Company shall be managed by the Board which may exercise all the powers of the Company whether relating to the management of the business or not subject to restrictions contained in the Articles. The Articles detail the specific powers of the Directors. Copies of the Articles may be obtained from the Company Secretary or the Company’s website www.johnmenziesplc.com. The Articles can only be amended by Special Resolution of the Company in General Meeting. 6.8 Significant agreements – change of control Both Menzies Aviation and Menzies Distribution, have agreements in place with suppliers and customers, some of which contain change of control clauses giving rights to these suppliers and customers on a takeover bid for the Company. A change of control of the Company following a takeover bid may cause a number of other agreements to which the Company or its subsidiaries are party, such as banking arrangements, property leases and licence agreements to take effect, alter or terminate. In addition, the Directors’ service agreements and employee share plans would be similarly affected on a change of control. John Menzies plc AnnuAl RepoRt 2011OVERVIEW OpERatIng REVIEWgovernancefInancIal statEmEntsshaREhOldER InfORmatIOnJohn Menzies plc annual REpORt 2011OVERVIEW OpERatIng REVIEWgovernancefInancIal statEmEntsshaREhOldER InfORmatIOn 4040 REPORT ON diRECTORS’ REMuNERATiON REMuNERATiON COMMiTTEE MEMbERSHiP Name O Morley I Napier I Harley J Geddes Changes during year: Dermot Jenkinson stood down from the Committee in December 2011 iNTROduCTiON by OCTAViA MORlEy OCTAViA MORlEy Chairman of Remuneration Committee Title Chairman Member Member Secretary Attendance 3/3 3/3 3/3 3/3 I am pleased to introduce the Directors’ Remuneration Report for the year ended 31 December 2011 on behalf of the Board. I have been Chairman of the Remuneration Committee (the ‘Committee’) since May 2010 and believe that it is essential that the executive remuneration be fair, balanced and reflective of the general markets and environments in which we operate. For the last 2 years we have had a core structure for executive remuneration which we believe complies with best practice. All executive incentives are based on a multiple of basic salary and it is therefore essential that the basic salaries are set at the correct levels to attract, motivate and retain skilled and capable individuals who can deliver shareholder value against the Group’s defined strategy. During the year ended 31 December 2011, the Committee has: • Reviewed incentive structures. It is important that we continue to ensure that our remuneration structure remains fair and compliant with best practice principles. We have now fully amended all our incentive schemes so that they are calculated on the basis of basic salary. • Introduced a bonus ‘claw-back’. From 2012 and in compliance with best practice principles, all executive bonus payments will include a claw-back clause should information subsequently materialise that would have affected the amount of bonus payable to an individual. • Reviewed basic salaries. Salaries for Paul Dollman and Craig Smyth increased by 2.5% whilst David McIntosh’s, having completed his second year in the role, increased by around 10%. • Reviewed shareholding targets. Shareholding targets have increased to 200% of base salary. For Paul Dollman and Craig Smyth this is during 2012 and for David McIntosh by 2015. In 2012 the Committee will, in conjunction with external consultants, review all of the components of the package to ensure that they remain fit for purpose, compliant with industry best practice and correctly incentivise the executive team to deliver long term shareholder value against the Group’s defined strategy. OCTAVIA MORLEy 5 March 2012 John Menzies plc AnnuAl RepoRt 2011John Menzies plc AnnuAl RepoRt 2011 4141 RESPONSibiliTiES OF THE COMMiTTEE The Committee determines the remuneration of the Chairman and the Executive Directors (Tier 1) and the next level of senior executives (Tier 2) on behalf of the Board. It has formal Terms of Reference set by the Board modelled on the 2010 Code, which are displayed on the Company’s website. REMuNERATiON POliCy, PRACTiCE ANd PRiNCiPlES The Board recognises that the continuing success of the Group depends on the quality and motivation of its executive team and all employees. The Group aims to ensure that its remuneration packages are competitive, thereby enabling it to attract, retain and motivate executives who have the experience, skills and talents to operate and develop each business to its maximum potential. This total reward position is analysed by looking across each of the different elements of remuneration, including salary, pension, bonus, and long-term incentives, to provide a total remuneration package that works as a whole rather than just looking at the competitiveness of the individual elements. Pay, rates of salary increases and employment conditions within the Group are taken into account by the Committee in determining the remuneration packages for Executive Directors, along with current external market conditions and package competitiveness. Directors’ base salaries are maintained at competitive levels for comparable positions reflecting, where appropriate, the international nature of the business. These base salaries are used as the basis for determining the quantum of awards under all the other plans offered. Rewards for success are built into the remuneration package through incentives designed to share with Executive Directors the profitability of the Group and the value generated for shareholders. In considering and determining suitable remuneration packages for the Executive Directors the Committee gives full consideration to the relevant best practice provisions set out in the 2010 Code. The Committee also determines the extent to which all performance targets are met. AliGNMENT OF REMuNERATiON TO ObjECTiVES The total remuneration package is designed to include performance and non-performance-related elements. Non-performance elements include salary, taxable benefits and pension entitlements. In addition, Executive Directors are entitled to participate in the Company’s performance related plans and savings-related share option scheme. The performance-based plans adopt a variety of performance criteria rather than using one criterion over all the plans. This is to align Directors’ rewards with a broadly-based growth and development plan for the business. The Long-Term Incentive Plans are designed to reward improvements within divisions as well as the performance of the Group against external factors. The Committee believes that by using a combination of internal (divisional) and external (Group) targets it can better align Directors’ interests with the interests of shareholders. It is intended that on-target performance payouts should be made where the Company achieves its objectives for the period. Stretch performance will be rewarded where the objectives set have been exceeded, as well as Executive Directors’ individual targets as set by the Board. diSTRibuTiON OF REMuNERATiON (% OF TOTAl) THRESHOLD PERFORMANCE (%) STRETCH PERFORMANCE (%) 2011 2010 64 66 16 16 20 18 2011 2010 34 33 25 25 41 43 Salary Bonus Long-Term Incentive Plans Basis for calculations Cash-based awards are calculated on the real cash value when the award is made. Share-based awards are calculated on the actual share price on the date that the award is made, not an anticipated value on vesting date. John Menzies plc AnnuAl RepoRt 2011OVERVIEW OpERatIng REVIEWgovernancefInancIal statEmEntsshaREhOldER InfORmatIOnJohn Menzies plc annual REpORt 2011OVERVIEW OpERatIng REVIEWgovernancefInancIal statEmEntsshaREhOldER InfORmatIOn 4242 REPORT ON diRECTORS’ REMuNERATiON CONTiNuEd diRECTORS’ REMuNERATiON RECEiVEd FOR THE yEAR ENdEd dECEMbER 2011 (Audited) ElEMENT PuRPOSE dEliVERy PAul dOllMAN dAVid MciNTOSH CRAiG SMyTH bASE SAlARy ANNuAl bONuS lONG TERM iNCENTiVE PlANS Attract and retain high performing individuals reflecting market value of role and executive’s skills and experience. Cash salaries set on date of appointment. Salary reviews annually to take account of divisional and Group rates of increase. Incentivise delivery of Group and individual objectives and enhance performance, including as measured by individual Key Result Areas (KRAs). Maximum payment potential of 75% of base salary, split as: 15% KRAs, cash; 40% Group Results, cash; 20% Group Results, shares (to be held for 3 years). Incentivise long-term delivery of EPS, TSR and Divisional Operating Profit, and align with interests of shareholders. Up to 100% of base salary on date of award in Long Term Incentive Plan, Up to 40% of cash bonus in Bonus Co-Investment Plan. 2011 £’000 2010 £’000 2011 £’000 2010 £’000 2011 £’000 2010 £’000 326 318 262 238 305 300 182 177 27 – 231 210 205 – 13 69 38 – TOTAl VAluE RECEiVEd 713 495 302 69 574 510 REMuNERATiON PACkAGE In 2010 the Committee implemented a revised executive remuneration package designed to reflect best practice. The new package covers 5 key areas and uses the individual’s basic salary as the basis for any awards under any of the other incentive plans. 1. SHAREHOldiNG The Committee has asked each Executive Director to build up a shareholding valued at 200% of their base salary. Paul Dollman and Craig Smyth are to achieve this during 2012, with David McIntosh to achieve it by 2015. This target is reviewed annually by the Committee and the current shareholding for Executive Directors is shown on page 37. 2. bASiC SAlARy ANd bENEFiTS Salaries are reviewed annually, on appointment, or on change in position or responsibility. Base salaries form the basis for all additional performance and non-performance related incentive awards. Therefore in conducting annual reviews of the Executive Directors’ salaries, the Committee considers internal and external factors, including the pay awards and employment conditions across the Group, the Executive Directors’ individual performance and experience, as well as the external competitive levels for comparable positions. This means that all 3 executives have rates of increase in their pay which differs, reflecting increases and pay freezes in their respective divisions. In addition to salary, the Executive Directors may receive additional benefits covering car allowance, private medical insurance and life cover. Craig Smyth and David McIntosh also received a cash allowance in place of any pension entitlement above the ‘earnings cap’. Paul Dollman has withdrawn from the Menzies Pension Fund and now receives a cash payment in lieu of benefit. He also has an unfunded pension undertaking from the Company to provide pension based on earnings above the ‘earnings cap’. Annual salary reviews take place in March each year, with any increase implemented from 1 May. John Menzies plc AnnuAl RepoRt 2011John Menzies plc AnnuAl RepoRt 2011 4343 diRECTORS’ EMOluMENTS (Audited) CHAiRMAN I Napier(1) ExECuTiVE diRECTORS P Dollman(2) D McIntosh C Smyth(2) NON-ExECuTiVE diRECTORS E Born I Harley I Harrison D Jenkinson O Morley FORMER diRECTORS W Thomson D Coltman SAlARy/FEES bENEFiTS bONuS Date of appointment (resignation) 21/05/2009 08/08/2002 24/07/2009 20/03/2007 22/09/2010 21/05/2009 21/05/2010 21/05/2010 21/05/2009 (21/05/2010) (20/05/2011) 2011 £’000 171 326 262 305 38 46 38 38 42 – 21 1,287 2011 £’000 – 14 24 14 – – – – – – – 52 2011 £’000 – 182 27 231 – – – – – – – 440 PENSiON SAlARy SuPPlEMENT 2011 £’000 – 30 25 33 – – – – – – – 88 TOTAl 2011 £’000 171 552 338 583 38 46 38 38 42 2010 £’000 118 509 346 560 10 41 37 37 39 – 21 1,867 64 51 1,812 (1) I Napier became Chairman on 21 May 2010. (2) Before its award, P Dollman and C Smyth each sacrificed part of their cash bonus entitlement. Pension contributions equal to the amounts given up were made into pension plans for the benefit of their dependents. 3. ANNuAl bONuS SCHEME The Executive Directors participate in a discretionary bonus scheme which is subject to the achievement of challenging Group, divisional and personal targets designed to encourage excellent performance. Bonus payments are non-pensionable. The maximum annual bonus is 75% of base salary, split on the following basis: 15% – Key Result Area (KRA) 40% Cash payment CASH ELEMENT SHARE ELEMENT 20% Ordinary Shares The share element is subject to a 3 year retention period. If an Executive is dismissed or gives notice of resignation during the 3 year period the shares are forfeited. The KRA element will only be payable should 95% of the threshold target be met. 10% of salary will be paid on achieving the threshold level rising to 60% of salary for attaining stretch, with results between threshold and stretch awarded on a straight-line basis. Threshold and stretch targets are derived from a review of the historical and projected performance of the Group and its peers, together with an analysis of City analysts’ expectations. Bonuses at the higher end of the range are payable only for demonstrably superior Group and individual performance and the stretch level represents upper quartile performance. John Menzies plc AnnuAl RepoRt 2011OVERVIEW OpERatIng REVIEWgovernancefInancIal statEmEntsshaREhOldER InfORmatIOnJohn Menzies plc annual REpORt 2011OVERVIEW OpERatIng REVIEWgovernancefInancIal statEmEntsshaREhOldER InfORmatIOn 4444 REPORT ON diRECTORS’ REMuNERATiON CONTiNuEd For the year ended December 2011, bonuses were calculated as follows and are payable on 23 March 2012: Name P Dollman D McIntosh C Smyth Measure Group PBT Aviation EBIT Distribution EBIT Key Result Areas (KRAs) Distribution EBIT Key Result Areas (KRAs) Aviation EBIT Key Result Areas (KRAs) Threshold Target Stretch Target Weighting (Percent of salary) Cash value of award (Audited) Achieved – £48.9m £51.7m £27.0m £29.5m £29.5m £30.5m – £29.5m £30.5m – £27.0m £29.5m – – – 20% 20% 20% 15% 60% 15% 60% 15% 100% £181,622 100% 0% 100% 0% £26,730 66% 100% £230,625 100% The bonus scheme rules for all awards from 2012 onwards have been updated to reflect best practice and now include claw back provisions. 4. lONG TERM iNCENTiVE PlANS Following a market and best practice review in 2010, the Committee agreed that the value of any awards under the LTIP would be limited to one times the individual’s salary in Ordinary Shares. Executive Directors may be awarded a number of conditional shares under the LTIP as determined by the Committee up to the salary limit. Long Term Incentive Plan (the ‘LTIP’) Under this plan all awards are subject to a 3 year performance period with appropriate targets. The Group Finance Director’s targets are split equally between the two Group Performance Criteria. The targets for Divisional Managing Directors are based 75% on the Group Performance Criteria, and 25% on their own division’s performance measured using Divisional Financial Results (DFR). The LTIP targets align each Director to the performance of both the Group and future profitability of their division and are appropriate given the structure of the Group to incentivise each Director. Performance conditions are reviewed for each cycle of the LTIP. The performance criteria are set at threshold and stretch level. At threshold, 25% of the award will be paid to an individual, increasing on a straight-line basis to 100% for stretch or greater achievement. Group Performance Criteria (Audited) Total Shareholder Return (TSR) Earnings Per Share (EPS) Threshold Target Stretch Target TSR equals the FTSE 250 median result EPS growth exceeds RPI growth by 3% TSR equals the FTSE 250 median result plus 30% EPS growth exceeds RPI growth by 8% As disclosure of the DFR targets could be considered a profits forecast and is viewed by the Committee to be both price and commercially sensitive, the Committee has decided that it will retrospectively disclose the threshold and stretch targets for an award in its report following the end of the performance period. No awards to Executive Directors are due to mature in respect of the year ended December 2011. Awards made to Executive Directors under the LTIP are shown below: (Audited) P Dollman D McIntosh C Smyth 31 December 2010 Granted during year Market price of award (p) Matured during year Lapsed during year 31 December 2011 Performance Period 91,662 – 65,789 – 35,000 87,719 – – 69,782 – 53,260 – – 65,217 342 460 342 460 487 342 460 – – – – – – – – – – 35,000 – – 91,662 01/01/2010 – 31/12/2012 69,782 01/01/2011 – 31/12/2013 65,789 01/01/2010 – 31/12/2012 53,260 01/01/2011 – 31/12/2013 – 01/01/2008 – 31/12/2010 87,719 01/01/2010 – 31/12/2012 65,217 01/01/2011 – 31/12/2013 John Menzies plc AnnuAl RepoRt 2011John Menzies plc AnnuAl RepoRt 2011 4545 2009 Performance Share Plan (the ‘2009 PSP’) This one-off plan offered Executive Directors the opportunity to benefit from the potential success of the Company over a three year performance period ending December 2011, as measured by an increase in the Return On Capital Employed (ROCE). The performance criteria for this award have been achieved and the award will vest in March 2012. (Audited) P Dollman D McIntosh C Smyth 31 December 2010 Granted during year Market price of award (p) Vested during year Lapsed during year 31 December 2011 Performance Period 450,000 337,500 450,000 – – – – – – – – – – – – 450,000 01/01/2009 – 31/12/2011 337,500 01/01/2009 – 31/12/2011 450,000 01/01/2009 – 31/12/2011 Performance Criteria (Audited) Return On Capital Employed (ROCE) Threshold Target Stretch Target Actual 2011 Result 10% 12.5% 20.3% If ROCE had been less than the threshold level at the end of the performance period, no award would be made to participants. Achievement of the threshold level would have resulted in 25% of the maximum award vesting, whilst results equal to or greater than the stretch level would have achieved 100% of the maximum award. As ROCE for the performance period was above the stretch target, the full award will vest in March 2012. As part of the Group’s commitment to effective corporate governance the following indicative disclosures have been included in relation to the award. Dividends are accrued over the performance period, and will be paid in cash in March 2012. Disclosures in next years Report on Directors’ Remuneration will detail the market price and award value as at the actual vesting date. P Dollman D McIntosh C Smyth Shares vesting Illustrative value of award at 5 March 2012 Dividend value 450,000 337,500 450,000 £2,632,500 £153,000 £1,974,375 £114,750 £2,632,500 £153,000 The value of any award could vary significantly from that shown due to share price movements. Savings Related Share Option Scheme The Company operates an HM Revenue & Customs approved Savings Related Share Option Scheme (the SAYE Scheme) available to all UK-based employees in the Group, including Executive Directors. The Company believes that the SAYE Scheme is an important tool in the motivation and retention of staff. Further details of the SAYE Scheme and the cost to the Company are shown in Note 20 to the Accounts. (Audited) P Dollman D McIntosh C Smyth 31 December 2010 Granted during year Exercised during year 1,684 910 415 – 1,684 910 415 – 2,123 – – – 701 – – – 701 – 1,684 – – – 1,684 – – – – Market price at date of exercise (p) 505 – – – 505 – – – – Lapsed during year – – – – – – – – 2,123 Gain/(loss) (£) 31 December 2011 Option price (p) Exercisable from 3,705 – – – 3,705 – – – – – 910 415 701 – 910 415 701 – 285 279 355 395 285 279 355 395 452 01/12/2011 01/12/2012 01/12/2013 01/12/2014 01/12/2011 01/12/2012 01/12/2013 01/12/2014 01/12/2010 Exercisable to 01/06/2012 01/06/2013 01/06/2014 01/06/2015 01/06/2012 01/06/2013 01/06/2014 01/06/2015 01/06/2011 John Menzies plc AnnuAl RepoRt 2011OVERVIEW OpERatIng REVIEWgovernancefInancIal statEmEntsshaREhOldER InfORmatIOnJohn Menzies plc annual REpORt 2011OVERVIEW OpERatIng REVIEWgovernancefInancIal statEmEntsshaREhOldER InfORmatIOn 4646 REPORT ON diRECTORS’ REMuNERATiON CONTiNuEd HiSTORiCAl PlANS Executive Share Option Scheme (Audited) Pre-2005 Share options were granted to Executive Directors under an Executive Share Option Scheme, normally on an annual basis at a level of one times salary. All grants were discretionary and awards could be varied depending on specific circumstances. The number of Options still held in the Executive Share Option Scheme are shown below and the cost to the Company is shown in Note 20 to the Accounts. The options are exercisable on a sliding scale where growth in underlying earnings per share exceeded RPI plus 3%-8% per annum in the 3 years from grant, adjusted to normalise pension and tax charges. The performance conditions attaching to these options have been met in full and there will be no further awards made under the Executive Share Option Scheme. 31 December 2010 196,048 58,714 43,062 P Dollman C Smyth Granted during year Exercised during year Market price at date of exercise(p) Lapsed during year Gain/(loss) £’000 31 December 2011 Exercise price (p) Exercisable from – – – 96,048 – – 492 – – – – – 157 – – 100,000 58,714 43.062 329 08/11/2005 418 07/05/2007 418 07/05/2007 Exercisable to 07/11/2012 06/05/2014 06/05/2014 2005 Performance Share Plan (the ‘2005 PSP’) (Audited) Under the 2005 PSP shares awarded vest after three years if the Company’s Total Shareholder Return (TSR) is equal to or outperforms the FTSE250 Index TSR for the 3 year performance period. The performance criteria attached to the awards made in 2008 have not been met. It is not the intention of the Committee to issue any further awards under the 2005 PSP. 31 December 2010 Granted during year Market price of award on grant (p) Vested during year Lapsed during year 31 December 2011 Performance Period P Dollman C Smyth 70,000 35,000 – – 487 487 – – 70,000 35,000 – 01/01/2008 – 31/12/2010 – 01/01/2008 – 31/12/2010 5. bONuS CO-iNVESTMENT PlAN (audited) Under the Bonus Co-Investment Plan (‘BCIP’) Executive Directors are invited to invest up to 40% of any cash bonus (net of tax) into the BCIP. Since 2010 matching shares are issued on a 1:1 basis for gross invested bonus, and will be released on the attainment of performance conditions following a 3 year performance period. The performance target is for annual Earnings Per Share (EPS) growth above the Retail Price Index (‘RPI’) growth over a 3 year period, with the number of shares vesting being calculated on a straight-line basis from a 25% award at the threshold target to a full award at the stretch target or above. Performance Criteria Earnings Per Share (EPS) Threshold Target EPS growth exceeds RPI growth by 3% Stretch Target EPS growth exceeds RPI growth by 6% John Menzies plc AnnuAl RepoRt 2011John Menzies plc AnnuAl RepoRt 2011 4747 Awards before 2010 were made on a 2:1 basis. 25% of the matching shares on these awards will be paid on achieving threshold level (3% real per annum EPS growth above RPI), rising on a straight line basis to 100% paid at or above stretch targets (8% real per annum EPS growth above RPI). Any dividends accrued on shares which vest will be paid in cash on vesting. For Executive Directors, the maximum number of matching shares possible is shown below. 31 December 2010 Granted during year Market price of award (p) Vested during year Lapsed during year Gain/(loss) £’000 31 December 2011 P Dollman D McIntosh C Smyth 23,792 20,448 – 4,634 8,698 10,847 20,646 11,177 – – – 11,054 – – – – – 12,370 460 – – 460 – – 460 – – 8,850 – – 1,723 – – 7,680 – – 14,942 – – 2,911 – – 12,966 – – 44 – – 9 – – 38 – – – 20,448 11,054 – 8,698 10,847 – 11,177 12,370 Performance Period 01/01/2008 – 31/12/2010 01/01/2010 – 31/12/2012 01/01/2011 – 31/12/2013 01/01/2008 – 31/12/2010 01/01/2009 – 31/12/2011 01/01/2010 – 31/12/2012 01/01/2008 – 31/12/2010 01/01/2010 – 31/12/2012 01/01/2011 – 31/12/2013 An award made in 2008 had a performance period ended December 2010. The real per annum growth in EPS for the Company over the performance period of the award was above the threshold level, resulting in a 37.2% award. The value of the awards at vesting were as follows: P Dollman D McIntosh C Smyth Shares vesting 8,850 1,723 7,680 Value of award upon vesting £40,710 £7,926 £35,328 Dividend value £3,448 £671 £2,992 The award made in 2009 had a performance period ended in December 2011. The real per annum growth in EPS for the performance period was above the stretch target and therefore the full award is expected to vest in March 2012. As part of the Group’s commitment to effective corporate governance the following indicative disclosures have been included in relation to the award. Disclosures in next year’s Report on Directors’ Remuneration will detail the market price and award value as at the actual vesting date. D McIntosh Illustrative value of award at 5 March 2012 Shares vesting Dividend value 8,698 £50,880 £2,957 The value of any award could vary significantly from that shown due to share price movements. Advisers to the Remuneration Committee Advice sought from PricewaterhouseCoopers and Deloitte was used by the Committee for the year ended December 2011. In addition, legal advice from Maclay Murray & Spens LLP was sought by the Committee where appropriate. Paul Dollman, Group Finance Director and John Geddes, Group Company Secretary, also provide internal support and guidance to the Committee where appropriate. They are, however, specifically excluded from any matters concerning the details of their own remuneration. Members of the Committee have no personal financial interest (other than as shareholders) in the matters to be decided by the Committee and no day-to-day involvement in the running of the business of the Group. John Menzies plc AnnuAl RepoRt 2011OVERVIEW OpERatIng REVIEWgovernancefInancIal statEmEntsshaREhOldER InfORmatIOnJohn Menzies plc annual REpORt 2011OVERVIEW OpERatIng REVIEWgovernancefInancIal statEmEntsshaREhOldER InfORmatIOn 4848 REPORT ON diRECTORS’ REMuNERATiON CONTiNuEd Committee evaluation The Board extended its annual review of its own performance to the performance of the Committee. The results from the evaluation were circulated to the Board as a whole in January 2012 and suitable actions have been taken to address the issues raised. None of the issues raised were deemed material and their implementation will increase the flow of information to the Committee and provide for greater consistency in establishing executive remuneration. Annual General Meeting A resolution to approve this report on Directors’ remuneration will be tabled at the 2012 AGM. The Chairman of the Committee will be available to answer questions from shareholders on this report. Service contracts The Executive Directors have service contracts with the Company, listed below. The Group’s practice on notice periods is that they should be for a period of 12 months. The Committee considers that the notice periods are reasonable and in the interests of shareholders having due regard to prevailing market conditions and practice among companies of comparable size. Payments to outgoing Directors It is the Company’s policy that any termination payment be mitigated and restricted to the actual loss incurred by the Director and our policy is to stop or reduce compensatory payments to former Directors to the extent that they receive remuneration from other employment during the compensation period. Payments that are made to a Director are mitigated wherever possible and will not exceed their entitlement based on their service contract. All Executive Directors who served for the year ended December 2011 have service contracts on this basis. Executive Directors’ Service Agreements Executive Directors P Dollman D McIntosh C Smyth Date of contract 08/08/2002 24/07/2009 20/03/2007 Expiry date Terminable on 52 weeks’ notice Terminable on 52 weeks’ notice Terminable on 52 weeks’ notice External appointments The Board recognises the benefits to the individual and to the Company of involvement by Executive Directors as Non-Executive Directors on the boards of other companies. Prior to accepting an invitation to become a Non-Executive Director of another company, an Executive Director must receive approval from the Group Chairman. This approval will not be denied where the Chairman is confident that the appointment will not interfere with the Director’s ability to perform his duties for the Company nor provide a conflict of interest. Executive Directors are entitled to retain any fees received under these appointments. For the year ended December 2011, Paul Dollman continued an external non-executive appointment with Scottish Amicable Life Association Society. Details of fees received are as follows: Paul Dollman: £33,270 (2010: £31,800) (Scottish Amicable Life Association Society). Non-Executive Directors Appointment and Service Contracts The Chairman and each of the Non-Executive Directors have letters of appointment. The letters of appointment do not contain any contractual entitlement to a termination payment and the Directors can be removed in accordance with the Company’s Articles of Association. The Chairman and all Non-Executive Directors are subject to re-election by shareholders at least every 3 years, with the exception of any Director whose appointment exceeds 9 years, in which case there is a requirement for annual re-election. John Menzies plc AnnuAl RepoRt 2011John Menzies plc AnnuAl RepoRt 2011 4949 Salary The salary mix for Non-Executive Directors comprises a basic payment and additional payments for being Chairman of a Committee or a Committee member, or the Senior Independent Director. It is intended to be a competitive mix broadly in line with comparable companies. From May 2011 the fees paid were: Basic payment Committee Chairmanship Committee membership Senior Independent Director May 2011 May 2010 £36,000 £6,000 £2,500 £6,000 £36,000 £6,000 £2,500 £14,061 Performance graph The following graph compares the Company’s total shareholder return for the 5 years to December 2011 with the equivalent performance of the FTSE250 Index. The Directors consider that, given the scale and global spread of the Group’s activities, the most appropriate comparison is with this Index. 200 150 100 50 0 2006 2007 2008 2009 2010 2011 John Menzies plc FTSE250 Share price The market price for shares in John Menzies plc ranged from 425p to 550p for the year ended December 2011 and was 530p at 31 December 2011. PENSiONS Scheme benefits David McIntosh and Craig Smyth are members of the Menzies Pension Fund, a defined benefit scheme which provides pension on retirement at age 60 of up to two-thirds of pensionable earnings, or the ‘scheme earnings cap’ if lower, together with additional benefits as detailed below. Pensionable earnings are based on salary excluding bonuses. Paul Dollman withdrew from the Menzies Pension Fund during the year, and now receives a cash payment in lieu of that benefit. Unfunded arrangement The pensionable salary of Paul Dollman is restricted as a consequence of the ‘scheme earnings cap’. He has an unfunded pension undertaking from the Company to provide in total the same level of pension as if the ‘scheme earnings cap’ did not apply. This entitlement is effective from his date of appointment as a Director. John Menzies plc AnnuAl RepoRt 2011OVERVIEW OpERatIng REVIEWgovernancefInancIal statEmEntsshaREhOldER InfORmatIOnJohn Menzies plc annual REpORt 2011OVERVIEW OpERatIng REVIEWgovernancefInancIal statEmEntsshaREhOldER InfORmatIOn 5050 REPORT ON diRECTORS’ REMuNERATiON CONTiNuEd Craig Smyth and David McIntosh received a cash payment equal to 20% of their respective salaries above the earnings cap which is shown on the emoluments table. Pension details are as follows: (Audited) Total accrued pensions at start of the period £’000 Cash Equivalent Transfer Value at start of the period £’000 36.4 48.8 43.9 54.3 654.5 879.1 575.1 827.8 Increase in accrued pension during year (net of inflation) £’000 0.7 4.5 1.0 0.6 Transfer value of increases at 31 Dec 2011 (net of inflation and Director’s contributions) £’000 8.8 97.6 4.7 0.8 Total accrued pension at 31 Dec 2011 £’000 38.8 55.7 47.0 57.5 Cash Equivalent Transfer Value at 31 Dec 2011 £’000 851.4 1,217.2 758.7 1,065.0 Directors’ contributions during the period £’000 6.4 – 10.8 10.8 Statutory revaluation £’000 1.8 2.4 2.1 2.6 Increases in Cash Equivalent Transfer Value (net of Director’s contributions £’000 190.5 338.1 172.8 226.4 Name P Dollman(1) P Dollman(2) C Smyth D McIntosh Age 55 55 44 48 Notes: (1) The funded portion of P Dollman’s benefits. (2) The unfunded portion of P Dollman’s benefits. (a) Accrued pension entitlements are the amounts which would be paid at normal retirement date if the Director left service as at 31 December 2011, with no allowances for increases in the period between leaving service and normal retirement date. The entitlements disclosed above include unfunded benefits. (b) Transfer values represent the value of the assets which the pension scheme (together with the Company where appropriate) would need to transfer to another pension provider on transferring its liability in respect of the Directors pension entitlements. They do not represent sums payable to individual Directors. (c) The transfer values have been calculated in accordance with the pension scheme Trustee’s agreed method for cash equivalent transfer values. The ‘transfer value of increase’ figure is influenced by a number of factors, including the level of contributions paid, the age of the Director and the benefit structure and, as such, can differ substantially given similar increases in accrued pension. (d) The total of the transfer values for unfunded pension entitlements as above, held on the Company’s balance sheet at 31 December 2011 for current and former Directors, calculated on an IAS 19 basis, totalled £1,449,127 (2010: £1,277,861), from which annual pensions of £19,961 (2010: £19,083 p.a.) were paid to former Directors. By order of the Board J F A GEDDES COmpAny SeCReTARy 5 March 2012 John Menzies plc AnnuAl RepoRt 2011John Menzies plc AnnuAl RepoRt 2011 OVERVIEW OpERatIng REVIEW gOVERnanCE FiNANCiAl STATEMENTS shaREhOldER InfORmatIOn 51 iNdEPENdENT AudiTOR’S REPORT TO THE MEMbERS OF jOHN MENZiES PlC We have audited the financial statements of John Menzies plc for the year ended 31 December 2011 which comprise the Group Income Statement, the Group Statement of Comprehensive Income, the Group and Parent Company Balance Sheets, the Group and Company Statement of Cash Flows, the Group and Parent Company Statements of Changes in Equity and the related notes 1 to 26. The financial reporting framework that has been applied in their preparation is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union and, as regards the Parent Company financial statements, as applied in accordance with the provisions of the Companies Act 2006. This report is made solely to the Company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the Company’s members those matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company’s members as a body, for our audit work, for this report, or for the opinions we have formed. RESPECTiVE RESPONSibiliTiES OF diRECTORS ANd AudiTOR As explained more fully in the Directors’ Responsibilities Statement set out on page 35, the Directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit and express an opinion on the financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board’s Ethical Standards for Auditors. SCOPE OF THE AudiT OF THE FiNANCiAl STATEMENTS An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of: whether the accounting policies are appropriate to the Group’s and the Parent Company’s circumstances and have been consistently applied and adequately disclosed; the reasonableness of significant accounting estimates made by the Directors; and the overall presentation of the financial statements. In addition, we read all the financial and non-financial information in the Annual Report and Accounts to identify material inconsistencies with the audited financial statements. If we become aware of any apparent material misstatements or inconsistencies we consider the implications for our report. OPiNiON ON FiNANCiAl STATEMENTS In our opinion: • the financial statements give a true and fair view of the state of the Group’s and of the Parent Company’s affairs as at 31 December 2011 and of the Group’s profit for the year then ended; • the Group financial statements have been properly prepared in accordance with IFRSs as adopted by the European Union; and • the Parent Company financial statements have been properly prepared in accordance with IFRSs as adopted by the European Union and as applied in accordance with the provisions of the Companies Act 2006; and • the financial statements have been prepared in accordance with the requirements of the Companies Act 2006 and, as regards the Group financial statements, Article 4 of the IAS Regulation. OPiNiON ON OTHER MATTERS PRESCRibEd by THE COMPANiES ACT 2006 In our opinion: • the part of the Directors’ Remuneration Report to be audited has been properly prepared in accordance with the Companies Act 2006; and • the information given in the Directors’ Report for the financial year for which the financial statements are prepared is consistent with the financial statements; • the information given in the Corporate Governance Statement set out on page 34 with respect to internal control and risk management systems in relation to financial reporting processes and about share capital structures is consistent with the financial statements. John Menzies plc AnnuAl RepoRt 2011 52 iNdEPENdENT AudiTORS’ REPORT TO THE MEMbERS OF jOHN MENZiES PlC CONTiNuEd MATTERS ON wHiCH wE ARE REquiREd TO REPORT by ExCEPTiON We have nothing to report in respect of the following: Under the Companies Act 2006 we are required to report to you if, in our opinion: • adequate accounting records have not been kept by the Parent Company, or returns adequate for our audit have not been received from branches not visited by us; or • the Parent Company financial statements and the part of the Directors’ Remuneration Report to be audited are not in agreement with the accounting records and returns; or • certain disclosures of Directors’ remuneration specified by law are not made; or • we have not received all the information and explanations we require for our audit; or • a Corporate Governance Statement has not been prepared by the Company. Under the Listing Rules we are required to review: • the Directors’ statement, set out on page 18, in relation to going concern; • the part of the Corporate Governance Statement relating to the Company’s compliance with the 9 provisions of the June 2008 Combined Code specified for our review; and • certain elements of the report to shareholders by the Board on Directors’ remuneration. HywEL BALL (SenIOR STATuTORy AudITOR) for and on behalf of Ernst & Young LLP, Statutory Auditor Edinburgh 5 March 2012 NOTES: 1. The maintenance and integrity of the John Menzies plc website is the responsibility of the Directors; the work carried out by the auditors does not involve consideration of these matters and, accordingly, the auditors accept no responsibility for any changes that may have occurred to the financial statements since they were initially presented on the website. 2. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. John Menzies plc AnnuAl RepoRt 2011 53 Group income statement for the year ended 31 december 2011 (year ended 31 december 2010) revenue Net operating costs operatinG profit Share of post-tax results of joint ventures and associates operatinG profit after joint ventures and associates Analysed as Underlying operating profit* Non-recurring items Associate goodwill impairment Contract amortisation Share of interest on joint ventures and associates Share of tax on joint ventures and associates Operating profit after joint ventures and associates Finance income Finance charges Other finance income/(charge) – pensions profit before taxation Taxation profit for the year Attributable to equity shareholders Attributable to non-controlling interests earninGs per ordinary share Basic Diluted Before exceptional and other items £m 1,899.7 (1,849.1) 50.6 Exceptional and other items £m 2011 Total £m – (3.6) (3.6) 1,899.7 (1,852.7) 47.0 Before exceptional and other items £m 1,837.6 (1,796.7) 40.9 Notes 2 3 2 Exceptional and other items £m – (3.2) (3.2) 2010 Total £m 1,837.6 (1,799.9) 37.7 9.3 (3.9) 5.4 11.3 (4.1) 7.2 2 59.9 (7.5) 52.4 52.2 (7.3) 44.9 5(a) 5(b) 5(b) 7 7 4 8 10 59.9 – – – – – 59.9 1.3 (6.2) 1.4 56.4 (13.2) 43.2 – (0.3) (1.8) (3.7) 59.9 (0.3) (1.8) (3.7) 0.4 0.4 (2.1) (2.1) (7.5) – (0.4) – (7.9) 3.1 (4.8) 52.4 1.3 (6.6) 1.4 48.5 (10.1) 38.4 52.2 – – – – – 52.2 1.1 (6.9) (1.4) 45.0 (10.9) 34.1 – 0.1 (1.8) (3.3) 52.2 0.1 (1.8) (3.3) 0.2 0.2 (2.5) (2.5) (7.3) – (0.2) – (7.5) 1.6 (5.9) 44.9 1.1 (7.1) (1.4) 37.5 (9.3) 28.2 42.7 (4.8) 37.9 34.0 (5.9) 28.1 0.5 43.2 – (4.8) 0.5 38.4 0.1 34.1 – (5.9) 0.1 28.2 73.2p 71.2p (8.2)p (8.0)p 64.9p 63.2p 57.9p 57.7p (10.0)p (10.0)p 47.8p 47.7p * Underlying operating profit is consistently presented adjusting for non-recurring exceptional items, intangible amortisation associated with goodwill impairment on associate assets and contract amortisation, and the Group’s share of interest and tax on joint ventures and associates to provide an appreciation of the impact of those items on operating profit. John Menzies plc AnnuAl RepoRt 2011OVERVIEW OpERatIng REVIEWgOVERnancEfinancial statementsshaREhOldER InfORmatIOn 54 Group statement of comprehensive income for the year ended 31 december 2011 (year ended 31 december 2010) Profit for the year Actuarial (loss)/gain on defined benefit pensions Income tax effect Impact of rate change on deferred tax Movement on cash flow hedges Income tax effect Movement on net investment hedges Income tax effect Exchange (loss)/gain on translation of foreign operations Other comprehensive income for the year, net of tax Cumulative exchange movement recycled to income on disposal of associate undertaking Total comprehensive income for the year Attributable to equity shareholders Attributable to non-controlling interests Notes 4 16 16 2011 Total £m 38.4 (26.0) 7.1 (1.3) (0.6) (0.2) 1.8 0.5 (8.5) (27.2) (1.3) 9.9 9.4 0.5 9.9 2010 Total £m 28.2 29.5 (8.4) (0.4) – – 1.3 0.1 4.8 26.9 – 55.1 55.0 0.1 55.1 John Menzies plc AnnuAl RepoRt 2011 Group and company balance sheets as at 31 december 2011 (31 december 2010) 55 assets non-current assets Intangible assets Property, plant and equipment Investments accounted using the equity method Investment in subsidiaries Deferred tax assets current assets Inventories Trade and other receivables Derivative financial assets Cash and cash equivalents liabilities current liabilities Borrowings Derivative financial liabilities Trade and other payables Current income tax liabilities Provisions net current liabilities total assets less current liabilities non-current liabilities Borrowings Other payables Derivative financial liabilities Provisions Retirement benefit obligations net assets shareholders’ equity Ordinary shares Share premium account Treasury shares Other reserves Retained earnings Capital redemption reserve total shareholders’ equity Non-controlling interest in equity total equity Group 2011 £m 2010 £m Company 2011 £m 2010 £m Notes 11 12 13 13 19 14 16 16 16 15 19 16 15 16 19 4 20 105.1 123.4 31.5 – 15.3 275.3 15.3 169.7 1.5 24.4 210.9 (3.4) (1.9) (211.6) (12.0) (2.9) (231.8) (20.9) 254.4 (100.4) (1.8) (0.3) (3.6) (64.3) (170.4) 84.0 15.2 17.4 (8.3) (0.9) 38.4 21.6 83.4 0.6 84.0 100.5 128.2 41.7 – 11.0 281.4 13.6 165.9 1.3 26.6 207.4 (60.5) (2.5) (205.9) (13.4) (3.3) (285.6) (78.2) 203.2 (63.2) (1.9) (0.7) (3.8) (47.8) (117.4) 85.8 15.1 16.3 (5.9) 7.4 31.2 21.6 85.7 0.1 85.8 – 28.8 – 292.8 10.7 332.3 – 188.3 1.5 1.1 190.9 (2.8) (1.9) (291.0) – – (295.7) (104.8) 227.5 (100.4) (5.0) (0.3) – (64.3) (170.0) 57.5 15.2 17.4 – (1.7) 5.0 21.6 57.5 – 57.5 – 30.7 – 292.7 8.6 332.0 – 205.6 1.3 8.4 215.3 (60.2) (2.5) (273.7) – – (336.4) (121.1) 210.9 (63.1) (5.1) (0.7) – (47.8) (116.7) 94.2 15.1 16.3 – (0.9) 42.1 21.6 94.2 – 94.2 The accounts were approved by the Board of Directors on 5 March 2012 and signed on its behalf by: IaIn napIEr Chairman paul Dollman Group FinanCe DireCtor John Menzies plc AnnuAl RepoRt 2011OVERVIEW OpERatIng REVIEWgOVERnancEfinancial statementsshaREhOldER InfORmatIOn 56 Group and company statement of chanGes in equity as at 31 december 2011 (31 december 2010) Ordinary shares £m Share premium account £m Treasury shares £m Cash flow hedge reserve £m Translation reserve £m Retained earnings £m Capital redemption reserve £m Total shareholders’ equity £m Non- controlling equity £m 15.1 – 16.3 – – – – 0.1 – – – 15.2 15.1 – – – – – – – 15.1 – – – 1.1 – – – 17.4 15.8 – – – 0.5 – – – 16.3 15.1 – 16.3 – – – 0.1 – – 15.2 15.1 – – – – – – 15.1 – – 1.1 – – 17.4 15.8 – – – 0.5 – – 16.3 (5.9) – – – – – – – (2.4) (8.3) (3.3) – – – – – – (2.6) (5.9) – – – – – – – – – – – – – – – – (0.9) – (0.8) – (0.8) – – – – (1.7) (0.9) – – – – – – – (0.9) (0.9) – (0.8) (0.8) – – – (1.7) (0.9) – – – – – – (0.9) 8.3 – 31.2 37.9 (6.2) (1.3) (7.5) – – – – 0.8 2.1 – 6.2 6.2 – – – – 8.3 – – – – – – – – – – – – – – – – (20.2) – 17.7 – 1.7 (12.2) – 38.4 (10.8) 28.2 20.7 48.9 – 0.8 (7.7) – 31.2 42.1 (6.4) (20.2) (26.6) – 1.7 (12.2) 5.0 31.5 (2.6) 20.7 18.1 – 0.2 (7.7) 42.1 21.6 – – – – – – – – 21.6 21.6 – – – – – – – 21.6 21.6 – – – – – – 21.6 21.6 – – – – – – 21.6 85.7 37.9 (27.2) (1.3) 9.4 1.2 1.7 (12.2) (2.4) 83.4 39.6 28.2 26.9 55.1 0.5 0.8 (7.7) (2.6) 85.7 94.2 (6.4) (21.0) (27.4) 1.2 1.7 (12.2) 57.5 83.1 (2.6) 20.7 18.1 0.5 0.2 (7.7) 94.2 0.1 0.5 – – 0.5 – – – – 0.6 – 0.1 – 0.1 – – – – 0.1 – – – – – – – – – – – – – – – – Total equity £m 85.8 38.4 (27.2) (1.3) 9.9 1.2 1.7 (12.2) (2.4) 84.0 39.6 28.3 26.9 55.2 0.5 0.8 (7.7) (2.6) 85.8 94.2 (6.4) (21.0) (27.4) 1.2 1.7 (12.2) 57.5 83.1 (2.6) 20.7 18.1 0.5 0.2 (7.7) 94.2 Group At 31 December 2010 Profit for the year Other comprehensive income Recycled exchange gains* Total comprehensive income New share capital issued Share-based payments Dividends paid Repurchase of own shares at 31 december 2011 At 31 December 2009 Profit for the year Other comprehensive income Total comprehensive income New share capital issued Share-based payments Dividends paid Repurchase of own shares At 31 December 2010 company At 31 December 2010 Loss for the year Other comprehensive income Total comprehensive income New share capital issued Share-based payments Dividends paid at 31 december 2011 At 31 December 2009 Loss for the year Other comprehensive income Total comprehensive income New share capital issued Share-based payments Dividends paid At 31 December 2010 * Recycled to income statement on disposal of associated undertaking (Note 5). John Menzies plc AnnuAl RepoRt 2011 Group and company statement of cash flows for the year ended 31 december 2011 (year ended 31 december 2010) cash flows from operatinG activities Cash generated from operations Interest received Interest paid Tax paid Net cash from operating activities cash flows from investinG activities Investment in joint ventures and associates Loan repaid by joint venture Proceeds from disposal of investments Acquisitions Net cash acquired with subsidiaries Purchase of property, plant and equipment Intangible asset additions Proceeds from sale of property, plant and equipment Dividends received from equity accounted investments Net cash used in investing activities cash flows from financinG activities Proceeds from issue of ordinary share capital Purchase of own shares Repayment of borrowings Proceeds from borrowings Dividends paid to ordinary shareholders Amounts repaid by subsidiaries Net cash from financing activities increase/(decrease) in net cash and cash equivalents Effects of exchange rate movements Opening net cash and cash equivalents closinG net cash and cash equivalents* * Net cash and cash equivalents include cash at bank and in hand and bank overdrafts. Group 2011 £m 62.2 1.3 (6.3) (10.0) 47.2 (1.2) – – (1.7) 0.5 (21.8) (4.5) 5.5 6.7 (16.5) 1.2 (2.4) (49.9) 37.7 (12.2) – (25.6) 5.1 (0.1) 18.2 23.2 2010 £m 58.2 1.0 (6.4) (5.1) 47.7 1.0 0.1 1.6 (1.7) – (11.6) (3.9) 4.1 7.9 (2.5) 0.5 (2.6) (88.7) 50.2 (7.7) – (48.3) (3.1) 0.8 20.5 18.2 Notes 21 24 24 22 22 22 22 57 2010 £m (10.4) – (5.5) (0.3) (16.2) – – – – – – – – – – 0.5 (2.6) (88.7) 50.2 (7.7) 64.8 16.5 0.3 – (0.2) 0.1 Company 2011 £m (9.3) 0.2 (5.8) (3.0) (17.9) – – – – – – – 2.5 – 2.5 1.2 (2.4) (49.9) 37.7 (12.2) 41.1 15.5 0.1 – 0.1 0.2 John Menzies plc AnnuAl RepoRt 2011OVERVIEW OpERatIng REVIEWgOVERnancEfinancial statementsshaREhOldER InfORmatIOn 58 notes to the accounts The consolidated accounts of the Group for the year ended 31 December 2011 were approved and authorised for issue in accordance with a resolution of the directors on 5 March 2012. John Menzies plc is a limited company incorporated in Scotland and is listed on the London Stock Exchange. 1. accountinG policies A summary of the more significant accounting policies, which have been consistently applied, is set out below. new accounting Standards and Interpretations The following standards and interpretations have been adopted in these accounts and have not had a material impact on the Group’s accounts in the period of initial application: IAS24 Related Party Disclosures (Revised) IAS32 Classification of Rights Issues (Amendment to IAS32 Financial Instruments – Presentation) IFRIC14 Amendment to IFRIC14 Prepayment of a Minimum Funding Requirement IFRIC19 Extinguishing Financial Liabilities with Equity Instruments The following new standards, amendments to standards and interpretations have been issued but are not effective for 2011 and have not been early adopted: IAS1 Presentation of items in other comprehensive income – effective date 1 July 2012 IAS12 Income Taxes (Amendment) – Deferred Taxes: Recovery of underlying assets – effective date 1 January 2012 IAS19 Employee Benefits (Revised) – effective date 1 January 2013 IFRS9 Financial Instruments – effective date 1 January 2015 IFRS10 Consolidated Financial Statements – effective date 1 January 2013 IFRS11 Joint Ventures – effective date 1 January 2013 IFRS12 Disclosure of interests in other entities – effective date 1 January 2013 IFRS13 Fair Value Measurement – effective date 1 January 2013 IAS19 Employee Benefits (Revised) will become effective for the Group in its 2013 accounts. Under IAS 19 (Revised) the interest charge on retirement benefit liabilities and the expected return on pension plan assets will be replaced by a net interest income or expense on net defined benefit assets or liabilities based on high-quality corporate bond rates. We are still assessing the potential impact, but this is likely to increase our reported net finance costs. The volatility of reported net finance costs is also expected to increase. We do not expect the effect on the net assets of the Group to be material. Other standards and interpretations issued, but not yet effective, are not expected to have a material effect on the Group’s net assets or results. As permitted by Section 408 of the Companies Act 2006 no income statement is presented by the Company. Basis of consolidation The consolidated accounts, which have been prepared under the historical cost convention and in accordance with EU Endorsed International Financial Reporting Standards (IFRS), IFRIC interpretations and the Companies Act 2006 applicable to companies reporting under IFRS, incorporate the accounts of the Company and its subsidiaries, joint ventures and associates from the effective date of acquisition or to the date of deemed disposal. The consolidated accounts of the Group include the assets, liabilities and results of the Company and subsidiary undertakings in which John Menzies plc has a controlling interest, using accounts drawn up to 31 December except where entities have non-coterminus year ends. In such cases, the information is based on the accounting period of these entities and is adjusted for material changes up to 31 December. Accordingly, the information consolidated is deemed to cover the same period for all entities throughout the Group. Joint ventures and associates A joint venture is an entity in which the Group holds an interest on a long-term basis and which is jointly controlled by the Group and one or more other venturers under a contractual agreement. An associate is an undertaking, not being a subsidiary or joint venture, over which the Group has significant influence and can participate in the financial and operating policy decisions of the entity. The Group’s share of the results of joint ventures and associates is included in the Group Income Statement using the equity method of accounting. Investments in joint ventures and associates are carried in the Group Balance Sheet at cost plus post-acquisition changes in the Group’s share of the net assets of the entity, less any impairment in value. The carrying values of investments in joint ventures and associates include acquired goodwill. revenue Distribution – revenue is recognised on the weekly dispatched value of goods sold, excluding value-added tax. Product is sold to UK retailers on a sale or return basis. Revenue for goods supplied with a right of return is stated net of the value of any returns. Aviation – cargo revenue is recognised at the point of departure for exports and at the point that the goods are ready for dispatch for imports. Other ramp, passenger and aviation-related services income is recognised at the time the service is provided in accordance with the terms of the contract. Revenue excludes value-added and sales taxes, charges collected on behalf of customers and intercompany transactions. John Menzies plc AnnuAl RepoRt 2011 59 property, plant and equipment Property, plant and equipment is stated at cost, including acquisition expenses, less accumulated depreciation. Depreciation is provided on a straight-line basis at the following rates: Freehold and long leasehold properties – over 50 years Short leasehold properties – over the remaining lease term Plant and equipment – over the estimated life of the asset between 3 and 20 years. Inventories Inventories, being goods for resale and consumables, are stated at the lower of purchase cost and net realisable value. pensions The operating and financing costs of pensions are charged to the income statement in the period in which they arise and are recognised separately. The costs of past service benefit enhancements, settlements and curtailments are also recognised in the period in which they arise. The difference between actual and expected returns on assets during the year, including changes in actuarial assumptions, are recognised in the statement of comprehensive income. Pension costs are assessed in accordance with the advice of qualified actuaries. With regard to defined contribution schemes, the income statement charge represents contributions made. Pension financing costs are shown separately in the income statement. Taxation Current tax is the amount of tax payable or recoverable in respect of the taxable profit or loss for the period. Deferred tax is provided in full, using the liability method, on temporary differences between the carrying amount of an asset or liability in the balance sheet and its tax base. Deferred tax arising from the initial recognition of an asset or liability in a transaction, other than a business combination, that at the time of the transaction affects neither accounting nor taxable profit or loss, is not recognised. Deferred tax liabilities represent tax payable in future periods in respect of taxable temporary differences. Deferred tax assets represent tax recoverable in future periods in respect of deductible temporary differences, the carry forward of unused tax losses and the carry forward of unused tax credits. Deferred tax is determined using the tax rates and tax laws that have been enacted or substantively enacted at the balance sheet date and are expected to apply when the deferred tax asset is realised or the deferred tax liability is settled. Deferred tax is provided on temporary differences arising on investments in subsidiaries, joint ventures and associates, except where the timing of the reversal of the temporary difference can be controlled and it is probable that the temporary difference will not reverse in the foreseeable future. A deferred tax asset is recognised only to the extent that it is probable that future taxable profits will be available against which the asset can be utilised. Current and deferred tax is recognised in the income statement except if it relates to an item recognised directly in equity or in other comprehensive income, in which case it is recognised directly in equity or in the Group Statement of Comprehensive Income respectively. Intangible assets Goodwill Business combinations from 1 January 2010 are accounted using the acquisition method. The cost of an acquisition is measured as the aggregate of the consideration transferred, measured at acquisition date fair value and the amount of any non-controlling interest in the acquiree. Acquisition costs incurred are expensed and included in administrative expenses. Business combinations prior to 1 January 2010 were accounted using the purchase method. Transaction costs directly attributable to the acquisition formed part of the acquisition costs and subsequent adjustments to contingent consideration have been recognised as part of goodwill. Goodwill arising on acquisitions before 26 December 2004 (the date of transition to IFRS) has been retained at the previous UK GAAP amounts subject to being tested for impairment at that date. Goodwill acquired is recognised as an asset and reviewed for impairment at least annually by assessing the recoverable amount of each cash-generating unit to which the goodwill relates. When the recoverable amount of the cash-generating unit is less than the carrying amount, an impairment loss is recognised. Any impairment is recognised in the income statement. Goodwill arising on the acquisition of joint ventures and associates is included within the carrying value of the investment. Contracts The fair value attributed to contracts at the point of acquisition is determined by discounting the expected future cash flows to be generated from that asset at the risk-adjusted weighted average cost of capital for the Group. This amount is included in intangible assets as ‘contracts’ and amortised over the estimated useful life on a straight-line basis. Separate values are not attributed to internally-generated customer relationships. John Menzies plc AnnuAl RepoRt 2011OVERVIEW OpERatIng REVIEWgOVERnancEfinancial statementsshaREhOldER InfORmatIOn 60 notes to the accounts continued 1. accountinG policies continued Contract amortisation is business-stream dependent. At Distribution, contracts capitalised are not amortised due to the very long-term nature of the business in the UK. These contracts are, however, tested annually for impairment using similar criteria to the goodwill test. At Aviation, contracts are amortised on a straight-line basis over ten years as this period is the minimum time-frame management considers when assessing businesses for acquisition. Computer software Costs associated with developing or maintaining computer software programs are recognised as an expense as incurred. Costs that are directly attributable with the production of identifiable and unique software products controlled by the Group, and that will probably generate economic benefits exceeding costs beyond one year, are recognised as intangible assets. Direct costs include the costs of software development employees. Costs are amortised over their estimated useful lives, usually three to five years. leases Leases are classified as finance leases whenever the terms of the lease transfer substantially all the risks and rewards of ownership to the lessee. All other leases are classified as operating leases. Assets acquired under finance leases are capitalised in the balance sheet at their fair value or, if lower, at the present value of the minimum lease payments, each determined at the inception of the lease. The corresponding liability to the lessor is recorded in the balance sheet as a finance lease obligation. The lease payments are apportioned between finance charges (charged to the income statement) and a reduction of the lease obligations. Rental payments under operating leases are charged to the income statement on a straight-line basis over applicable lease periods. Trade receivables If there is objective evidence that the Group will not be able to collect all of the amounts due under the original terms of an invoice, a provision on the respective trade receivable is recognised. In such an instance, the carrying value of the receivable is reduced, with the amount of the loss recognised in the income statement. Cash and cash equivalents Cash and cash equivalents in the balance sheet comprise cash at bank and in hand and short-term deposits with an original maturity of three months or less. Bank overdrafts are shown within borrowings in current liabilities in the balance sheet. Foreign currencies Foreign currency assets and liabilities of the Group are translated at the rates of exchange ruling at the balance sheet date. The trading results of overseas subsidiaries, joint ventures and associates are translated at the average exchange rate ruling during the year, with the exchange difference between average rates and the rates ruling at the balance sheet date being taken to reserves. Any differences arising on the translation of the opening net investment, including goodwill, in overseas subsidiaries, joint ventures and associates, and of applicable foreign currency loans, are dealt with as adjustments to reserves. All other exchange differences are dealt with in the income statement. Derivative financial instruments and hedging activities The Group uses forward contracts and cross-currency swaps as derivatives to hedge the risk arising from the retranslation of foreign currency denominated items. The Group has derivatives which are designated as hedges of overseas net investments in foreign entities (net investment hedges) and derivatives which are designated as hedges of the exchange risk arising from the retranslation of highly probable forecast revenue denominated in non-local currency of some of our overseas operations (cash flow hedges). In all cases, the derivative contracts entered into by the Group have been highly effective during the reporting period, and are expected to continue to be highly effective until they expire. As a result, all derivatives have been recorded using hedge accounting, which is explained below. All derivatives are measured at fair value, which is calculated as the present value of all future cash flows from the derivative discounted at prevailing market rates. Changes in the fair value of the effective portion of net investment hedges are recorded in equity, and are only recycled to the income statement on disposal of the overseas net investment. Changes in the fair value of the effective portion of cash flow hedges are recorded in equity until such time as the forecast transaction occurs, at which time they are recycled to the income statement. If, however, the occurrence of the transaction results in a non-financial asset or liability, then amounts recycled from equity would be included in the cost of the non-financial asset or liability. If the forecast transaction remains probable but ceases to be highly probable then, from that point, changes in fair value would be recorded in the income statement within finance costs. Similarly, if the forecast transaction ceases to be probable then the entire fair value recorded in equity and future changes in fair value John Menzies plc AnnuAl RepoRt 2011 61 would be posted to the income statement within finance costs. provisions Provisions are recognised when the Group has a present obligation (legal or constructive) as a result of a past event, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation. Share capital Ordinary shares are classed as equity. Where the Company purchases its own shares the consideration paid including any directly attributable incremental costs, is deducted from the equity attributable to the Company’s equity holders until the shares are cancelled, reissued or disposed of. Share-based payments Equity-settled share-based payments are measured at fair value at the date of grant and recognised as an expense over the vesting period. The amount recognised as an expense is adjusted to reflect the actual number of share options that vest unless the options do not vest as a result of a failure to satisfy market conditions. Fair value is measured by use of a relevant pricing model. use of estimates and judgements The preparation of the consolidated accounts requires management to make judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. These estimates will, by definition, seldom equal the related actual results particularly so given the prevailing difficult economic conditions and the level of uncertainty regarding their duration and severity. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised and in any future periods affected. The most important estimates and judgements are set out below. intangible assets On the acquisition of a business it is necessary to attribute fair values to any intangible assets acquired (provided they meet the criteria to be recognised). The fair values of these intangible assets are dependent on estimates of attributable future revenues, margins and cashflows, as well as appropriate discount rates. In addition, the allocation of useful lives to acquired intangible assets requires the application of judgement based on available information and management expectations at the time of recognition. impairment IFRS requires companies to carry out impairment testing on any assets that show indications of impairment and annually on goodwill and intangibles that are not subject to amortisation. This testing involves exercising management judgement about future cashflows and other events which are, by their nature, uncertain. retirement benefits The assumptions underlying the calculation of retirement benefits are important and based on independent advice. Changes in these assumptions could have a material impact on the measurement of the Group’s retirement benefit obligations. income taxes The Group is subject to income tax in numerous jurisdictions and significant judgement is required in determining the provision for tax. There are many transactions and calculations for which the ultimate tax determination is uncertain. The Group recognises provisions for tax based on estimates of the taxes that are likely to become due. Where the final tax outcome is different from the amounts that were initially recorded, such differences will impact the current income tax and deferred tax provisions in the period in which such determination is made. Exceptional items Exceptional items are those material items which, by virtue of their size or incidence, are presented separately in the income statement to enable a full understanding of the Group’s financial performance. These exclude certain elements of intangible asset impairment and amortisation, which are also presented separately in the income statement. Transactions which may give rise to exceptional items include restructurings of business activities (in terms of rationalisation costs and onerous lease provisions) and gains or losses on the disposal of businesses. Dividend distributions Final ordinary dividends are recognised as liabilities in the accounts in the period in which the dividends are approved by the Company’s shareholders. Financial risk factors The Group is exposed to financial risks: liquidity risk, interest rate fluctuations, foreign exchange exposures and credit risk. These are more fully discussed in the Business Review on pages 14 to 18. Definitions & non-Gaap measures used by management Management believes that the following non-GAAP or adjusted measures provide a useful comparison of business performance and reflect the way in which the business is controlled: underlying profit before taxation is defined as profit before taxation, intangible amortisation and exceptional items. John Menzies plc AnnuAl RepoRt 2011OVERVIEW OpERatIng REVIEWgOVERnancEfinancial statementsshaREhOldER InfORmatIOn 62 notes to the accounts continued 1. accountinG policies continued underlying operating profit includes each division’s share of pre-tax profit from joint ventures and associates, and excludes intangible amortisation and exceptional items. underlying earnings per share is profit after taxation and non-controlling interest, but before intangible amortisation and exceptional items, divided by the weighted average number of ordinary shares in issue. Turnover includes revenue from subsidiaries, joint ventures and associates. Free cash flow is defined as the cash generated by the business after net capital expenditure, interest and taxation, before special pension contributions, acquisitions, disposals, cash raised, ordinary dividends and net spend on shares. Total debt to EBITDa ratio. Total debt is net debt plus guarantees and excluding financial derivatives and preference shares. EBITDA is underlying operating profit plus depreciation and computer software amortisation. Interest cover is EBITA divided by external interest charge. EBITA is underlying operating profit plus computer software amortisation. External interest charge excludes net financial income/(charge) related to pensions. 2. seGment information For management purposes the Group is organised into two operating divisions: Distribution and Aviation. These two divisions are organised and managed separately based upon their key markets. The Distribution segment provides newspaper and magazine distribution services across the UK along with marketing services. The Aviation segment provides cargo and passenger ground handling services across the world. The information presented to the Board for the purpose of resource allocation and assessment of segment performance is focused on the performance of each division as a whole but also contains performance information on a number of operating segments within the Aviation division. The Board assesses the performance of the operating segments based on a measure of adjusted segment result before exceptional items and intangibles amortisation. Net finance income and expenditure are not allocated to segments as this type of activity is driven by the central treasury function. The Board does not monitor assets and liabilities on a divisional basis. Segment information is presented in respect of the Group’s reportable segments together with additional geographic and balance sheet information. Transfer prices between segments are set on an arm’s length basis. Business segment information distribution aviation – ground handling – cargo handling – cargo forwarding – discontinued – unallocated costs corporate Joint ventures and associates Revenue 2011 £m 2010 £m 1,337.0 1,338.2 402.8 161.2 112.8 – – 676.8 369.8 156.7 98.7 0.8 – 626.0 – 2,013.8 (114.1) 1,899.7 – 1,964.2 (126.6) 1,837.6 Pre-exceptional operating profit/(loss) 2011 £m 28.8 24.3 8.1 3.5 – (3.6) 32.3 (1.2) 59.9 – 59.9 2010 £m 28.8 21.8 5.0 2.3 (1.2) (3.3) 24.6 (1.2) 52.2 – 52.2 John Menzies plc AnnuAl RepoRt 2011 A reconciliation of segment pre-exceptional operating profit/(loss) to profit before tax is provided below. 2011 Operating profit Share of post-tax results of joint ventures Share of post-tax results of associates Operating profit after joint ventures and associates Net finance expense Profit before tax Analysed as: Pre-exceptional operating profit/(loss)* Gain on disposal of interest in associate (Note 5) Gain on disposal of property, plant and equipment (Note 5) Rationalisation costs (Note 5) Onerous lease provision (Note 5) Impairment provision (Note 5b) Contract amortisation (Note 11) Share of interest on joint ventures and associates Share of tax on joint ventures and associates Operating profit after joint ventures and associates 2010 Operating profit Share of post-tax results of joint ventures Share of post-tax results of associates Operating profit after joint ventures and associates Net finance expense Profit before tax Analysed as: Pre-exceptional operating profit/(loss)* Pension credit (Note 5) Impairment provisions (Note 5a&b) Rationalisation costs (Note 5) Contract amortisation (Note 11) Share of interest on joint ventures and associates Share of tax on joint ventures and associates Operating profit after joint ventures and associates Distribution £m aviation £m Corporate £m 25.2 0.7 – 25.9 28.8 – – (2.5) – – – – (0.4) 25.9 23.1 4.2 0.5 27.8 32.3 4.0 – (1.7) – (1.8) (3.7) 0.4 (1.7) 27.8 (1.3) – – (1.3) (1.2) – 1.0 – (1.1) – – – – (1.3) Distribution £m Aviation £m Corporate £m 24.8 1.2 – 26.0 28.8 – – (2.3) – – (0.5) 26.0 9.5 4.2 1.8 15.5 24.6 – (4.0) – (3.3) 0.2 (2.0) 15.5 3.4 – – 3.4 (1.2) 4.6 – – – – – 3.4 63 Group £m 47.0 4.9 0.5 52.4 (3.9) 48.5 59.9 4.0 1.0 (4.2) (1.1) (1.8) (3.7) 0.4 (2.1) 52.4 Group £m 37.7 5.4 1.8 44.9 (7.4) 37.5 52.2 4.6 (4.0) (2.3) (3.3) 0.2 (2.5) 44.9 * Pre-exceptional operating profit/(loss) is defined as operating profit/(loss) excluding intangible amortisation as shown in Note 5(b) and exceptional items but including the pre-tax share of results from joint ventures and associates. John Menzies plc AnnuAl RepoRt 2011OVERVIEW OpERatIng REVIEWgOVERnancEfinancial statementsshaREhOldER InfORmatIOn 64 notes to the accounts continued 2. seGment information continued 2011 Segment assets Unallocated assets Total assets Segment liabilities Unallocated liabilities Total liabilities Segment net assets/(liabilities) Unallocated net liabilities Net assets 2010 Segment assets Unallocated assets Total assets Segment liabilities Unallocated liabilities Total liabilities Segment net assets/(liabilities) Unallocated net liabilities Net assets Distribution £m aviation £m Corporate £m 174.9 267.5 4.0 (112.3) (93.2) (16.8) 62.6 174.3 (12.8) Distribution £m 176.7 Aviation £m 270.0 Corporate £m 4.1 (113.7) (86.9) (17.6) 63.0 183.1 (13.5) Group £m 446.4 39.8 486.2 (222.3) (179.9) (402.2) 224.1 (140.1) 84.0 Group £m 450.8 38.0 488.8 (218.2) (184.8) (403.0) 232.6 (146.8) 85.8 Unallocated assets comprise deferred tax assets, cash and cash equivalents. Unallocated liabilities comprise retirement benefit obligations, borrowings, current income tax liabilities and deferred tax liabilities. 2011 Capital expenditure Depreciation Amortisation of intangible assets Goodwill impairment (Note 13) Gain on disposal of property, plant and equipment 2010 Capital expenditure Depreciation Amortisation of intangible assets Goodwill impairment (Gain)/loss on disposal of property, plant and equipment Distribution £m aviation £m Corporate £m 5.5 5.3 2.3 – (0.1) 16.3 16.4 3.7 1.8 (0.4) – 0.8 – – – Distribution £m Aviation £m Corporate £m 3.4 5.9 1.7 – (0.4) 9.3 17.2 3.6 1.8 0.7 – 0.9 – – – Group £m 21.8 22.5 6.0 1.8 (0.5) Group £m 12.7 24.0 5.3 1.8 0.3 John Menzies plc AnnuAl RepoRt 2011 65 Revenue Segment non-current assets 2011 £m 1,431.4 147.5 145.9 174.9 1,899.7 2010 £m 1,412.9 128.0 140.9 155.8 1,837.6 2011 £m 146.0 36.7 24.1 53.2 260.0 2010 £m 153.5 32.2 24.3 60.4 270.4 2011 £m 1,388.9 435.0 6.0 22.5 0.3 1,852.7 2010 £m 1,380.9 389.8 5.3 24.0 (0.1) 1,799.9 23.9 29.8 (0.5) (0.3) 19.8 29.6 0.3 0.1 0.2 0.3 0.4 0.2 0.1 0.2 0.3 0.2 0.2 0.1 Geographic information United Kingdom Continental Europe Americas Rest of the World 3. net operatinG costs Goods for resale and other operating charges Employment costs (Note 4) Intangible assets amortisation (Note 11) Depreciation (Note 12) Exceptional items (Note 5) Other operating charges include: Operating leases and hire charges – plant and machinery Rent of properties (Gain)/loss on disposal of property, plant and equipment Net exchange (gain)/loss During the year, the Group (including its overseas subsidiaries) obtained the following services from the Group’s auditors at costs as detailed below: Audit services Audit of Parent Company and consolidated accounts Audit of the Company’s subsidiaries pursuant to legislation Non-audit services UK taxation Overseas taxation Due diligence John Menzies plc AnnuAl RepoRt 2011OVERVIEW OpERatIng REVIEWgOVERnancEfinancial statementsshaREhOldER InfORmatIOn 66 notes to the accounts continued 4. employees Wages and salaries Share-based payments Social security costs Pension charge The average number of persons employed during the year was: Distribution Aviation Corporate 2011 £m 386.7 1.7 36.6 425.0 10.0 435.0 2010 £m 348.8 0.8 31.2 380.8 9.0 389.8 2011 number 4,124 16,873 18 21,015 2010 Number 4,171 15,759 18 19,948 The numbers above include 12,657 persons employed outside the UK (2010: 11,912). pension schemes With regard to the principal Group-funded defined benefit scheme in the UK (the Menzies Pension Fund), to which the employees contribute, the charge to the income statement is assessed in accordance with independent actuarial advice from Hymans Robertson LLP (‘the Actuary’), using the projected unit method. Certain Group subsidiaries operate overseas and participate in a number of pension schemes, which are of a defined contribution nature. The income statement charge for defined contribution schemes represents the contributions payable. The pension charge to the income statement is analysed as follows: Menzies Pension Fund Other schemes 2011 £m 0.6 9.4 10.0 2010 £m 1.7 7.3 9.0 Financial assumptions The Actuary undertook a valuation of the Menzies Pension Fund as at 31 December 2011 (2010: 31 December) under IAS 19. In deriving the results the Actuary used the projected unit method and the following financial assumptions: Rate of increase in salaries Rate of increase in pensions (prior to 1 May 2006) Rate of increase in pensions (from 1 May 2006 to 1 June 2010) Rate of increase in pensions (after 1 June 2010) Price inflation Discount rate 2011 % 2.80 3.40 2.50 1.00 2.80 4.90 2010 % 3.30 3.40 2.50 1.00 3.30 5.40 John Menzies plc AnnuAl RepoRt 2011 67 Assumptions regarding future mortality experience are set based on advice from the Actuary in accordance with published statistics and experience in the business. As a result of the March 2009 triennial valuation, the scheme memberships were analysed into further categories and scheme mortality by category was adjusted in light of better information to take account of experience. The average life expectancy in years of a pensioner retiring at 65 on the balance sheet date is: Male Female 2011 20.1 21.8 The average life expectancy in years of a pensioner retiring at 65, 20 years after the balance sheet date is: Male Female Fair value of assets (and expected return on assets) 2011 20.7 22.9 2010 20.0 21.7 2010 20.6 22.8 Equities Bonds Property Other Total value of assets Defined benefit obligation Recognised in balance sheet Related deferred tax asset (Note 19) Net pension liabilities 2011 2010 long-term rate of return % Value at December £m Long-term rate of return % Value at December £m 6.5 4.9 5.5 0.5 147.4 64.6 27.8 2.2 242.0 (306.3) (64.3) 16.1 (48.2) 7.7 5.4 6.7 0.5 158.4 57.1 26.1 0.2 241.8 (289.6) (47.8) 12.9 (34.9) Sensitivity analysis A reduction in the net discount rate will increase the assessed value of the defined benefit obligation and a rise in the discount rate will decrease the assessed value of the defined benefit obligation. The overall effect of a change in the net discount rate for the Fund of 0.1% would be an increase/decrease to the defined benefit obligation of around 2% or £6m. The effect of changing the assumption regarding life expectancy by one year longer than the disclosed table would be to increase the assessed value of the defined benefit obligation by around 3% or £9m. John Menzies plc AnnuAl RepoRt 2011OVERVIEW OpERatIng REVIEWgOVERnancEfinancial statementsshaREhOldER InfORmatIOn 68 notes to the accounts continued 4. employees continued components of pension expense amounts charGed/(credited) to operatinG profit Current service cost Gains on curtailments and settlements amounts included in finance costs Expected return on pension scheme assets Interest on pension liabilities Net financial income/(charge) pension income amounts recoGnised in the statement of comprehensive income (Loss)/gain on assets (Loss)/gain on defined benefit obligation actuarial (loss)/Gain chanGe in scheme assets durinG the year Fair value of assets at start of year Expected return on assets Company contributions Employee contributions Assets distributed on settlements Benefits and expenses paid (Loss)/gain on assets Fair value of assets at end of year The actual return on scheme assets was a loss of £29.3m (2010: a gain of £33.4m). chanGe in defined benefit obliGation durinG the year Defined benefit obligation at start of year Current service cost Interest cost Gains on curtailments and settlements Employee contributions Liabilities extinguished on settlements Benefits and expenses paid Loss/(gain) on defined benefit obligation Defined benefit obligation at end of year 2011 £m 0.7 (0.1) 0.6 2010 £m 1.7 (4.6) (2.9) 16.8 (15.4) 1.4 15.2 (16.6) (1.4) (0.8) (1.5) £m (12.5) (13.5) (26.0) £m 241.8 16.8 8.7 1.1 (0.3) (13.6) (12.5) 242.0 £m 289.6 0.7 15.4 – 1.1 (0.4) (13.6) 13.5 306.3 £m 18.2 11.3 29.5 £m 211.9 15.2 5.7 1.2 – (10.4) 18.2 241.8 £m 296.4 1.7 16.6 (4.6) 1.2 – (10.4) (11.3) 289.6 The net impact on the scheme liability of changing the inflation measure from RPI to CPI during 2010 was a £7m reduction in the liability. Expected employer contributions for 2012 are estimated to be £9m. John Menzies plc AnnuAl RepoRt 2011 69 History of experience gains and losses (Loss)/gain on scheme assets Percentage of scheme assets Actuarial (loss)/gain on defined benefit obligation Percentage of scheme liabilities Total value of assets Defined benefit obligation Recognised in balance sheet 5(a) exceptional items Gain on disposal of interest in associate Gain on disposal of property, plant and equipment Rationalisation costs Onerous lease provision Pension credit Impairment provisions 2011 £m (12.5) 5.2% (13.5) 4.4% 2010 £m 18.2 7.5% 11.3 3.9% 242.0 (306.3) (64.3) 241.8 (289.6) (47.8) 2009 £m 26.4 12.5% (76.4) 25.8% 211.9 (296.4) (84.5) 2008 £m (78.1) 42.8% 29.4 13.5% 182.4 (218.0) (35.6) 2007 £m (2.7) 1.0% (0.5) 0.2% 250.2 (240.7) 9.5 Notes (i) (ii) (iii) (iv) (v) (vi) 2011 £m 4.0 1.0 (4.2) (1.1) – – (0.3) 2010 £m – – (2.3) – 4.6 (2.2) 0.1 (i) On 6 July 2011 Menzies Aviation and Swissport Handling SA signed a termination agreement bringing the 39% associate undertaking arrangement in Spain to an end. The termination agreement split the existing 6 airport operations whereby Menzies Aviation acquired 100% control of the operations at Alicante, Murcia, Jerez and Almeria (Note 24) while Swissport Handling acquired 100% control of the operations at Madrid and Lanzarote. The split was agreed following an independent review of the individual operations and the calculation of the gain on the transaction remains subject to an ongoing completion valuation exercise. (ii) During the year the Group sold a surplus freehold property for consideration of £2.5m. (iii) Costs of rationalising excess capacity comprised asset write-downs and staff redundancy costs in Distribution £2.5m (2010: £2.3m) and in Aviation £1.7m (2010: nil). (iv) This provision is in respect of future obligations on a vacated leasehold property following the sub-tenant entering administration. (v) During 2010 the Group completed a pension increase exchange exercise whereby pensioners in the Menzies Pension Fund were offered an increased pension in exchange for foregoing future non-statutory annual increases. (vi) As a result of a decline in 2010 volumes and revenues in the UK cargo handling business and an excess supply capacity in the market the acquired goodwill in respect of Menzies World Cargo was tested for impairment in accordance with IAS 36 and a goodwill charge of £2.2m was recognised, leaving a residual balance of £0.3m. The recoverable amount of the cash-generating unit was measured based on a value in use calculation and a pre-tax discount rate of 11%. 5(b) intanGible amortisation Goodwill impairment Contract amortisation (i) (ii) 2011 £m (1.8) (3.7) (5.5) 2010 £m (1.8) (3.3) (5.1) (i) As permitted under the transitional requirements of IFRS 1, the acquisition accounting of business combinations completed prior to the transition date has not been restated. As a result, assets which were previously capitalised as goodwill have not been reclassified as other intangible assets. Accordingly, these financial statements include an impairment charge of £1.8m (2010: £1.8m) reflecting the remaining life of the current licence at Menzies Macau Aviation Services Ltd. (ii) This charge relates to contracts capitalised as intangible assets on the acquisition of businesses. The taxation effect of the exceptional items is a net credit of £1.0m (2010: net charge of £0.9m). John Menzies plc AnnuAl RepoRt 2011OVERVIEW OpERatIng REVIEWgOVERnancEfinancial statementsshaREhOldER InfORmatIOn 70 notes to the accounts continued 6. directors A detailed analysis of Directors’ remuneration, together with shareholdings and options, is provided on pages 37 to 50. 7. finance costs finance income: Bank deposits finance charGes: Bank loans and overdrafts Preference dividends 2011 £m 1.3 1.3 (6.1) (0.1) (6.2) 2010 £m 1.1 1.1 (6.8) (0.1) (6.9) Net finance costs (4.9) (5.8) 8. taxation (a) analysis of charge in year current tax UK corporation tax on profits for the year Overseas tax Adjustments to prior years' liabilities Total current tax deferred tax Origination and reversal of temporary differences Impact of UK rate change Adjustments to prior years' liabilities Retirement benefit obligations Total deferred tax Tax on profit on ordinary activities (b) Current and deferred tax related to items (credited)/charged outside profit or loss Deferred tax on actuarial (loss)/gain on retirement benefit obligations Deferred tax on fair value movement on interest rate hedges Impact of UK rate change Current tax on net exchange adjustments Tax (credit)/charge reported outside profit or loss 2011 £m 4.9 6.6 (0.1) 11.4 (3.6) (0.2) (0.1) (3.9) 2.6 (1.3) 10.1 2011 £m (7.1) 0.2 1.3 (0.5) (6.1) 2010 £m 4.8 4.8 (1.4) 8.2 0.3 (0.1) (1.1) (0.9) 2.0 1.1 9.3 2010 £m 8.4 – 0.4 (0.1) 8.7 John Menzies plc AnnuAl RepoRt 2011 (c) reconciliation between tax charge and the product of accounting profit multiplied by the Group’s domestic tax rate for the years ended 31 December 2011 and 31 December 2010 is as follows: Profit before tax Profit before tax multiplied by standard rate of corporation tax in the UK 26.5% (2010: 28%) Non-deductible expenses (principally goodwill impairment and intangible amortisation) Depreciation on non-qualifying assets Unrelieved overseas losses Utilisation of previously unrecognised losses Lower tax rates on overseas earnings Joint venture and associate post-tax result (included in profit before tax) Adjustments to prior years' liabilities Impact of UK rate change on deferred tax Gain on Swissport transaction Overseas deferred tax assets recognised At the effective corporation tax rate of 20.8% (2010: 24.8%) 2011 £m 48.5 12.9 3.7 0.3 0.9 (1.1) (0.4) (1.5) (0.2) (0.2) (1.2) (3.1) 10.1 71 2010 £m 37.5 10.5 2.7 0.6 1.0 (0.8) – (2.0) (2.6) (0.1) – – 9.3 The UK Government has announced that the main rate of UK corporation tax will be reduced from the current rate of 26%, which has applied from 1 April 2011, to 23%, by means of a series of 1% annual reductions. The reduction in the UK corporation tax rate to 25% from 1 April 2012 was enacted on 19 July 2011. As this rate was enacted at the balance sheet date, and reduces the tax rate expected to apply when temporary differences reverse, it had the effect of reducing the UK deferred tax asset. However, as most of the UK deferred tax asset relates to the UK pension deficit, which has arisen predominantly due to actuarial gains/losses taken to other comprehensive income, the majority of the reduction has been debited to other comprehensive income and does not have a material effect on the effective tax rate or on profit for the year. It is expected that this treatment will also apply in relation to the further rate reductions announced by the Government. Those further rate reductions are to be incorporated within future legislative acts and so will not be substantively enacted until later periods. The estimated effect of the further reductions in the rate to 23% by 2014 would be to decrease the net UK deferred tax asset by £0.9m. (d) Factors that may affect future tax charges The Group has estimated tax losses carried forward, which arose in subsidiary companies operating in the undernoted jurisdictions, that are available for offset against future profits of those subsidiaries. Deferred tax assets have not been recognised in respect of these losses as they have arisen in subsidiaries where it is not probable that future taxable profits will be available against which such assets could be utilised. USA South Africa Germany Norway Sweden Losses £m 39.8 3.1 23.4 10.7 2.5 Expiry Carry forward indefinitely Carry forward indefinitely Carry forward indefinitely Carry forward indefinitely Carry forward indefinitely The Group has capital losses in the UK of approximately £17.7m that are available for offset against future taxable gains arising in the UK. No deferred tax asset has been recognised in respect of these losses. John Menzies plc AnnuAl RepoRt 2011OVERVIEW OpERatIng REVIEWgOVERnancEfinancial statementsshaREhOldER InfORmatIOn 72 notes to the accounts continued 9. dividends dividends on equity shares: Ordinary – interim, in lieu of final, paid in respect of 2009, 8p per share – final paid in respect of 2010, 14p (2009: nil) per share – interim paid in respect of 2011, 7p (2010: 5p) per share 2011 £m – 8.1 4.1 12.2 2010 £m 4.8 – 2.9 7.7 Dividends of £0.5m were waived by employee share trusts during 2011 (2010: £0.1m). The Directors are proposing a final dividend in respect of the year to 31 December 2011 of 17p per ordinary share, which will absorb an estimated £10.3m of shareholders’ funds. Payment will be made on 22 June 2012 to shareholders on the register at the close of business on 25 May 2012. Treasury shares The Company’s ordinary shares are held in trust for an employee share scheme. At 31 December 2011 the trusts held 2,163,232 (2010: 1,727,793) ordinary 25p shares with a market value of £11,465,130 (2010: £8,163,822). 10. earninGs per share Operating profit Share of post-tax results of joint ventures and associates add back: exceptional items (Note 5(a)) intangible amortisation (Note 5(b)) share of interest on joint ventures and associates share of tax on joint ventures and associates Net finance costs Profit before taxation Taxation Exceptional tax Non-controlling interests Earnings for the year basic Earnings per ordinary share (pence) Diluted earnings per ordinary share (pence) underlyinG* Earnings per ordinary share (pence) Diluted earnings per ordinary share (pence) Basic Underlying* 2011 £m 47.0 5.4 – – – – (3.9) 48.5 (10.1) – (0.5) 37.9 2010 £m 37.7 7.2 – – – – (7.4) 37.5 (9.3) – (0.1) 28.1 2011 £m 47.0 5.4 0.3 5.5 (0.4) 2.1 (3.5) 56.4 (10.1) (3.1) (0.5) 42.7 2010 £m 37.7 7.2 (0.1) 5.1 (0.2) 2.5 (7.2) 45.0 (9.3) (1.6) (0.1) 34.0 64.9p 63.2p 47.8p 47.7p 73.2p 71.2p 57.9p 57.7p number of ordinary shares in issue (millions) Weighted average Diluted weighted average 58.363 59.989 58.753 58.892 The weighted average number of fully paid shares in issue during the year excludes those held by the employee share trusts. The diluted weighted average is calculated by adjusting for all outstanding share options which are potentially dilutive, i.e. where the exercise price is less than the average market price of the shares during the year. * Underlying earnings are presented as an additional performance measure. They are stated before exceptional items and intangible amortisation. John Menzies plc AnnuAl RepoRt 2011 73 Total £m 128.9 7.0 4.5 (1.0) 139.4 28.4 6.0 (0.1) 34.3 Goodwill £m Contracts £m Computer Software £m 60.7 0.8 – 0.3 61.8 10.5 – 0.2 10.7 51.7 6.2 0.1 (1.3) 56.7 11.0 3.7 (0.3) 14.4 16.5 – 4.4 – 20.9 6.9 2.3 – 9.2 51.1 50.2 42.3 40.7 11.7 9.6 105.1 100.5 Goodwill £m Contracts £m Computer Software £m 58.3 0.3 – 2.1 60.7 8.1 – 2.2 0.2 10.5 50.0 1.3 – 0.4 51.7 7.4 3.3 – 0.3 11.0 50.2 50.2 40.7 42.6 12.6 – 3.9 – 16.5 4.9 2.0 – – 6.9 9.6 7.7 Total £m 120.9 1.6 3.9 2.5 128.9 20.4 5.3 2.2 0.5 28.4 100.5 100.5 11. intanGible assets cost At 31 December 2010 Acquisitions (Note 24) Additions Currency translation At 31 December 2011 amortisation and impairment At 31 December 2010 Amortisation charge Currency translation At 31 December 2011 net book value at 31 december 2011 At 31 December 2010 cost At 31 December 2009 Acquisitions Additions Currency translation At 31 December 2010 amortisation and impairment At 31 December 2009 Amortisation charge Impairment (Note 5 (a)) Currency translation At 31 December 2010 net book value At 31 December 2010 At 31 December 2009 John Menzies plc AnnuAl RepoRt 2011OVERVIEW OpERatIng REVIEWgOVERnancEfinancial statementsshaREhOldER InfORmatIOn 74 notes to the accounts continued 11. intanGible assets continued Goodwill acquired through business combinations and intangible assets with indefinite lives have been allocated at acquisition to cash generating units (CGU’s) that are expected to benefit from the business combination. The carrying amount of the goodwill and intangible assets with indefinite lives have been allocated to the operating units as per the table below. aviation Netherlands Cargo North American Cargo Australia Cargo UK Cargo South Africa Scandinavia Ogden worldwide Other distribution Turners News EM News Distribution (NI) Ltd Chester Independent Wholesale News Ltd North West Wholesale News Ltd The Network – field marketing Other total 2011 2010 Goodwill £m Contracts £m Goodwill £m Contracts £m 7.8 8.1 7.0 0.3 2.9 3.1 10.3 4.3 43.8 4.8 – – – – 2.5 7.3 51.1 – – – – – – – – – – 3.1 7.1 2.7 2.0 4.1 19.0 19.0 8.0 8.0 7.0 0.3 3.5 3.1 9.5 4.3 43.7 4.8 – – – – 1.7 6.5 50.2 – – – – – – – – – – 3.1 7.1 2.7 1.4 3.8 18.1 18.1 The Group tests goodwill and intangible assets with indefinite lives annually for impairment, or more frequently if there are indications that these might be impaired. The basis of these impairment tests including key assumptions are set out below. The recoverable amounts of the CGUs are determined from value in use calculations. These calculations use future cash flow projections based on financial forecasts approved by management. The key assumptions for these forecasts are those regarding revenue growth, net margin, capital expenditure and the level of working capital required to support trading, which management estimates based on past experience and expectations of future changes in the market. The post-tax discount rate assumption of 8% (2010: 8%) is based on the Group’s weighted average post-tax cost of capital having considered the uncertainty risk attributable to individual CGUs. The equivalent pre-tax discount rate is 10.7% (2010: 11%). The pre-tax rate has been applied to pre-tax cash flows. aviation Aviation contracts are amortised on a straight-line basis over 10 years as this period is the minimum time-frame management considers when assessing businesses for acquisition. The carrying value of Aviation contracts is £23.3m (2010: £22.6m) and the average remaining amortisation period is 7 years (2010: 8 years). Value in use calculations are based on Board approved budgets and plans for a 3 year period. Cash flows beyond the 3 year period are extrapolated by growth rates that reflect management’s specific location expectations for 2015 and 2016 incorporating a long-term growth rate derived using the best available market information (such as Boeing’s 2011 Aviation Industry Review) adjusted for the specific risks and challenges relating to Menzies Aviation. Short-term revenue growth rates over 2015 and 2016 range from 2.2% to 6.5% (2010: 2.2% to 6.5%) and longer term revenue growth rates range from 0.5% to 3.5% (2010: 1% to 3.5%). Net margin assumptions are based on historic experience. John Menzies plc AnnuAl RepoRt 2011 75 Base case forecasts show significant headroom above carrying value for each CGU. Sensitivity analysis has been undertaken for each CGU to assess the impact of any reasonably possible change in key assumptions. There is no reasonably possible change that would cause the carrying values to exceed recoverable amounts. In 2010, the Company recognised an impairment of £2.2m in relation to its UK Cargo operation which was included in Net Operating Costs in the Income Statement. Distribution Distribution contracts are not amortised due to the very long-term nature of the business in the UK. The Group distributes to approximately 45% of the UK retail market and has only one major competitor. In such circumstances the Board considers that there is no foreseeable limit to the period over which the contracts are expected to generate cash flows and have been determined to have an indefinite life. These contracts are, however, tested annually for impairment using similar criteria to the goodwill test. Value in use calculations are based on Board approved 3 year plans extrapolated to a 5-year period using short-term growth rates of between 0% and 2% that reflect management’s specific business expectations for 2015 and 2016 incorporating a long-term growth rate of between 0% and 2%. Net margin assumptions are based on historic experience. Base case forecasts show significant headroom above carrying value for each CGU. Sensitivity analysis has been undertaken for each CGU to assess the impact of any reasonably possible change in key assumptions. There is no reasonably possible change that would cause the carrying values to exceed recoverable amounts. 12. property, plant and equipment Freehold property £m Long leasehold property £m Group Short leasehold property £m Company Plant and equipment £m Total £m Freehold property £m Plant and equipment £m 0.2 – – (0.2) – – 0.2 – (0.2) – – 39.4 – 0.9 (1.8) (0.5) 38.0 19.8 2.1 (1.8) (0.1) 20.0 186.2 3.0 20.9 (11.3) (5.7) 193.1 106.7 19.7 (8.5) (3.0) 114.9 264.0 3.0 21.8 (15.0) (6.2) 267.6 135.8 22.5 (11.0) (3.1) 144.2 36.0 – – (1.6) – 34.4 5.3 0.8 (0.5) – 5.6 0.7 – – – – 0.7 0.7 – – – 0.7 Total £m 36.7 – – (1.6) – 35.1 6.0 0.8 (0.5) – 6.3 – – 18.0 19.6 78.2 79.5 123.4 128.2 28.8 30.7 – – 28.8 30.7 cost At 31 December 2010 Acquisitions (Note 24) Additions Disposals Currency translation At 31 December 2011 depreciation At 31 December 2010 Charge for the year Disposals Currency translation At 31 December 2011 net book value at 31 december 2011 At 31 December 2010 38.2 – – (1.7) – 36.5 9.1 0.7 (0.5) – 9.3 27.2 29.1 John Menzies plc AnnuAl RepoRt 2011OVERVIEW OpERatIng REVIEWgOVERnancEfinancial statementsshaREhOldER InfORmatIOn 76 notes to the accounts continued 12. property, plant and equipment continued cost At 31 December 2009 Acquisitions Additions Transfers Disposals Currency translation At 31 December 2010 depreciation At 31 December 2009 Transfers Charge for the year Disposals Currency translation At 31 December 2010 net book value At 31 December 2010 At 31 December 2009 13. investments Freehold property £m Long leasehold property £m Group Short leasehold property £m Company Plant and equipment £m Total £m Freehold property £m Plant and equipment £m 38.1 – 0.1 – – – 38.2 8.3 – 0.8 – – 9.1 1.4 – – (1.3) – 0.1 0.2 0.2 (0.2) – – 0.2 0.2 37.2 – 0.3 1.3 (0.3) 0.9 39.4 17.1 0.2 2.1 (0.2) 0.6 19.8 186.7 0.1 12.3 – (20.1) 7.2 186.2 97.0 – 21.1 (14.7) 3.3 106.7 263.4 0.1 12.7 – (20.4) 8.2 264.0 122.6 – 24.0 (14.9) 4.1 135.8 36.0 – – – – – 36.0 4.5 – 0.8 – – 5.3 29.1 29.8 – 1.2 19.6 20.1 79.5 89.7 128.2 140.8 30.7 31.5 0.7 – – – – – 0.7 0.6 – 0.1 – – 0.7 – 0.1 Total £m 36.7 – – – – – 36.7 5.1 – 0.9 – – 6.0 30.7 31.6 Group Company Shares in joint ventures £m Shares in associates £m Other £m Total £m Subsidiaries £m net book value excludinG Goodwill At 31 December 2010 New investments Share of profits after tax Dividends received Disposals (Note 5) Currency translation At 31 December 2011 Goodwill At 31 December 2010 Impairment provision (Note 5(b)) Currency translation At 31 December 2011 27.7 1.1 4.9 (4.6) – (3.7) 25.4 – – – – 7.8 0.1 2.3 (2.1) (5.7) 0.1 2.5 5.9 (1.8) (0.8) 3.3 0.3 – – – – – 0.3 – – – – at 31 december 2011 At 31 December 2010 25.4 27.7 5.8 13.7 0.3 0.3 35.8 1.2 7.2 (6.7) (5.7) (3.6) 28.2 5.9 (1.8) (0.8) 3.3 31.5 41.7 292.7 – – – – 0.1 292.8 – – – – 292.8 292.7 John Menzies plc AnnuAl RepoRt 2011 77 The Group’s share of the results, assets and liabilities of joint ventures and associates are: joint ventures EM News (NI) Ltd EM News (Ireland) Ltd Worldwide Magazine Distribution Ltd Menzies Bobba Ground Handling Services Private Ltd Menzies Aviation Bobba (Bangalore) Private Ltd Hyderabad Menzies Air Cargo Private Ltd Zaankracht Holding BV associates Menzies Macau Airport Services Ltd Swissport Menzies Handling Ute Swissport Menzies Handling PMR Ute Country of Incorporation % Interest held Revenue £m Profit after tax £m Assets Liabilities < 1 year £m > 1 year £m < 1 year £m > 1 year £m Total £m UK Ireland UK India India India Netherlands 50 50 50 51 49 49 30 50.0 27.4 0.9 (0.3) 6.7 – 1.3 – (4.6) – (0.1) – 5.1 0.1 1.3 0.1 (1.2) 1.8 0.3 5.1 1.2 (0.1) 5.3 2.6 9.4 4.1 (2.2) 3.7 2.0 1.1 0.2 3.6 0.3 1.0 – (0.5) – – – – – – 3.3 – 0.2 6.2 11.3 4.1 0.3 Macau 29 5.6 1.3 1.2 1.9 (0.8) (0.3) 2.0 Spain Spain – 12.2 1.0 – – – – – 19.5 1.0 114.1 – 7.2 0.6 28.2 0.5 10.1 (0.6) (10.0) – (0.4) 0.5 27.9 Although Menzies Bobba Ground Handling Services Private Ltd, Menzies Aviation Bobba (Bangalore) Private Ltd and Hyderabad Menzies Air Cargo Private Ltd are 51% and 49% owned, and Zaankracht Holding BV is 30% owned, they are treated as joint ventures in the Group accounts because the parties to each of the ventures work together with equal powers to control the entities. Each venturer in the respective entity retains the power of veto, and overall key strategic, operational and financial decisions require the consent of both parties. The Group disposed of its 39% investment in the associate undertaking, Swissport Menzies Handling Ute, on 6 July 2011 (Note 5). The investment in Swissport Menzies Handling PMR Ute is treated as an associate as the Group exercises significant influence under an operational agreement with the other shareholding parties. The Indian joint ventures have a statutory year end of 31 March. Worldwide Magazine Distribution Limited has a statutory year end of 30 April. 14. trade and other receivables Trade receivables Less: provision for doubtful debts Trade receivables – net Other receivables Prepayments Amounts owed by Group companies Group Company 2011 £m 135.2 (2.4) 132.8 16.9 20.0 – 169.7 2010 £m 137.3 (3.9) 133.4 14.3 18.2 – 165.9 2011 £m – – – 8.9 1.4 178.0 188.3 2010 £m – – – 6.6 1.2 197.8 205.6 John Menzies plc AnnuAl RepoRt 2011OVERVIEW OpERatIng REVIEWgOVERnancEfinancial statementsshaREhOldER InfORmatIOn 78 notes to the accounts continued 14. trade and other receivables continued The average credit period on sale of goods is 25.5 days. No interest is charged on any receivables balance. ageing of trade receivables 2011 2010 movement in the provision for doubtful debts Balance at the beginning of the year Amounts provided during the year Amounts released during the year Amounts utilised during the year Balance at the end of the year ageing of past due and impaired receivables 0 – 30 days 30 – 60 days 60 – 90 days Over 90 days Neither past due nor impaired £m 112.6 116.6 Total £m 132.8 133.4 Past due not impaired 30 – 60 days £m 60 – 90 days £m over 90 days £m 16.1 14.0 1.8 2.2 Group 2011 £m 3.9 1.0 (1.0) (1.5) 2.4 Group 2011 £m 0.1 0.3 0.2 1.8 2.4 2.3 0.6 2010 £m 3.4 2.6 (1.0) (1.1) 3.9 2010 £m 0.5 0.1 0.1 3.2 3.9 The other classes within trade and other receivables do not include impaired assets. The Directors consider that the carrying value of trade and other receivables approximates to their fair value. 15. trade and other payables due within one year Trade payables Other payables Other taxes and social security costs Amounts owed to Group companies due after more than one year Other payables Group 2011 £m 111.6 96.3 3.7 – 211.6 2010 £m 110.1 92.1 3.7 – 205.9 Company 2011 £m 2010 £m – 9.9 – 281.1 291.0 – 10.0 – 263.7 273.7 1.8 1.9 5.0 5.1 The Directors consider that the carrying value of trade and other payables approximates to their fair value. John Menzies plc AnnuAl RepoRt 2011 79 16. financial instruments The objectives, policies and strategies pursued by the Group in relation to financial instruments are described within the Business Review on pages 14 and 18. derivative financial instruments Cash Flow Hedges Foreign exchange forward contracts Interest rate swaps Foreign Currency Net Investment Hedge Foreign exchange forward contracts total derivative financial instruments current non-current Group 2011 £m (1.2) (0.3) 0.8 (0.7) (0.4) (0.3) (0.7) 2010 £m 0.3 (1.2) (1.0) (1.9) (1.2) (0.7) (1.9) Company 2011 £m 2010 £m (1.2) (0.3) 0.8 (0.7) (0.4) (0.3) (0.7) 0.3 (1.2) (1.0) (1.9) (1.2) (0.7) (1.9) The Group only enters into derivative financial instruments that are designated as hedging instruments. The fair values of foreign currency instruments are calculated by reference to current market rates. The fair value of interest rate swaps are calculated by reference to current market rates taking into account future cash flows. Fair value hierarchy As at 31 December 2011, the Group held the following financial instruments measured at fair value. The Group uses the following hierarchy for determining and disclosing the fair value of financial instruments by valuation technique: Level 1: quoted (unadjusted) prices in active markets for identical assets or liabilities. Level 2: other techniques for which all inputs which have a significant effect on the recorded fair value are observable, either directly or indirectly. Level 3: techniques which use inputs which have a significant effect on the recorded fair value that are not based on observable market data. financial assets at fair value throuGh the income statement Foreign exchange contracts – hedged financial liabilities at fair value throuGh the income statement Foreign exchange contracts – hedged Interest rate swaps Assets measured at fair value Level 1 £m Level 2 £m Level 3 £m – 1.5 – Liabilities measured at fair value Level 1 £m Level 2 £m Level 3 £m – – 1.9 0.3 – – Total £m 1.5 Total £m 1.9 0.3 John Menzies plc AnnuAl RepoRt 2011OVERVIEW OpERatIng REVIEWgOVERnancEfinancial statementsshaREhOldER InfORmatIOn 80 notes to the accounts continued 16. financial instruments continued During the year ended 31 December 2011, there were no transfers between Level 1 and Level 2 fair value measurements, and no transfers into and out of Level 3 fair value measurements. interest-bearinG loans and borrowinGs Obligations under finance leases Bank overdrafts Non-amortising bank loans Amortising term loan Preference shares Unsecured loan stock total interest-bearinG loans and borrowinGs current non-current maturity January 2012 – July 2013 n/a January 2012 – June 2014 March 2020 Non-redeemable On demand (by July 2012) Group 2011 £m 0.2 1.2 78.6 22.3 1.4 0.1 103.8 3.4 100.4 103.8 2010 £m 0.2 8.4 88.0 25.6 1.4 0.1 123.7 60.5 63.2 123.7 Company 2011 £m 2010 £m – 0.9 78.6 22.3 1.4 – 103.2 2.8 100.4 103.2 – 8.3 88.0 25.6 1.4 – 123.3 60.2 63.1 123.3 Other than trade receivables and payables, there are no financial assets or liabilities excluded from the above analysis. No financial assets or liabilities were held or issued for trading purposes. The Company has issued 1,394,587 cumulative preference shares of £1 each. These shares are not redeemable and pay an interest coupon of 9% semi-annually. The amortising term loan is repayable between 2012 and 2020 with interest payable at a fixed rate of 6.23%. The loan has a weighted average maturity of 3 years (2010: 3 years). Non-amortising bank loans are drawn against unsecured, committed revolving bank credit facilities maturing between January 2012 and June 2014. net debt Derivative financial instruments Interest-bearing loans and borrowings Total borrowings Less: cash at bank, cash in hand and short-term deposits Group 2011 £m 0.7 103.8 104.5 24.4 80.1 2010 £m 1.9 123.7 125.6 26.6 99.0 Company 2011 £m 0.7 103.2 103.9 1.1 102.8 2010 £m 1.9 123.3 125.2 8.4 116.8 John Menzies plc AnnuAl RepoRt 2011 81 financial assets and financial liabilities Short-term borrowings Medium-term borrowings Long-term borrowings Derivative financial instruments Finance leases Bank overdrafts total financial assets and financial liabilities Less: cash at bank, cash in hand and short-term deposits net debt 2011 2010 Book value £m Fair value £m Book value £m Fair value £m 2.0 88.5 11.9 0.7 0.2 1.2 104.5 24.4 80.1 2.4 90.3 13.8 0.7 0.2 1.2 108.6 24.4 84.2 52.0 47.5 15.6 1.9 0.2 8.4 125.6 26.6 99.0 52.2 48.8 17.6 1.9 0.2 8.4 129.1 26.6 102.5 The fair value of the fixed term, amortising borrowing is calculated as the present value of all future cash flows discounted at prevailing market rates. Trade and other receivables and trade and other payables carrying values are assumed to approximate their fair values due to their short-term nature. A separate table has not been prepared analysing the Company’s book values and fair values. The £0.6m difference in book values relates to interest bearing loans and borrowings and is deemed to be short-term in nature. Currency Sterling US Dollar Euro South African rand Net derivative liabilities Floating rate financial liabilities £m Fixed rate financial liabilities £m 54.7 0.2 0.1 0.1 0.7 55.8 48.7 – – – – 48.7 2011 Total financial liabilities £m 103.4 0.2 0.1 0.1 0.7 104.5 At 31 December 2011, the expiry profile of undrawn committed facilities was as follows: Less than one year Between one and two years Between two and five years Group 2011 £m – 0.2 68.1 68.3 Floating rate financial liabilities £m 21.4 – – 0.3 1.9 23.6 2010 £m 58.0 – 12.1 70.1 Fixed rate financial liabilities £m 102.0 – – – – 102.0 2010 Total financial liabilities £m 123.4 – – 0.3 1.9 125.6 Company 2011 £m 2010 £m – 0.2 68.1 68.3 58.0 – 12.1 70.1 Cash flow hedges Foreign exchange forward contracts At 31 December 2011 the Group held foreign currency forward contracts designed as hedges of transaction exposures arising from non-local currency revenue. These contracts were in line with the Group’s policy to hedge significant forecast transaction exposures for a maximum 18 months forward. The cash flow hedges of non-local revenue were assessed to be highly effective. John Menzies plc AnnuAl RepoRt 2011OVERVIEW OpERatIng REVIEWgOVERnancEfinancial statementsshaREhOldER InfORmatIOn 82 notes to the accounts continued 16. financial instruments continued interest rate swaps The Group’s policy is to minimise exposures to interest rate risk by ensuring an appropriate balance of long-term and short-term floating rates. During 2011 the Group hedged the exposure to interest rate rises by use of interest rate swap agreements, whereby the Group pays a fixed rate of interest and receives a variable rate of LIBOR+margin on the notional amount. Of the £75m of these interest rate swaps at the start of the year, £50m matured in July 2011 with the remaining £25m maturing in June 2012. No new swaps were entered into during 2011. At 31 December 2011, 46.9% (2010: 88.6%) of the Group’s borrowings were fixed. Fair value of Cash Flow Hedges – currency forward contracts Fair value of Cash Flow Hedges – interest rate swaps current non-current 2011 2010 assets £m liabilities £m Assets £m Liabilities £m – – – – – – (1.2) (0.3) (1.5) (1.2) (0.3) (1.5) 0.4 – 0.4 0.4 – 0.4 (0.1) (1.2) (1.3) (0.5) (0.8) (1.3) For 2011, if interest rates on UK pound-denominated borrowings had been 0.5% higher/lower with all other variables held constant, post-tax profit for the year would have been £0.3m (2010: £0.1m) lower/higher, mainly as a result of higher/lower interest expense on floating rate borrowings. Foreign currency net investment hedges The Group’s treasury policy is to hedge the exposure of currency denominated assets to foreign exchange risk. This is primarily achieved using forward contracts denominated in the relevant foreign currencies. Gains or losses on the retranslation of these hedges are transferred to reserves to offset any gains or losses on translation of the net investments in the subsidiary undertakings. The notional principal amounts of the outstanding forward foreign exchange contracts are: Euro US dollar Czech koruna Australian dollar New Zealand dollar Swedish krona Indian rupee South African rand Group Company Sterling Equivalent 2011 million 15.0 30.5 99.0 10.9 1.7 25.5 750.0 55.0 2010 million 16.0 31.8 99.0 11.9 2.5 17.5 630.6 67.0 2011 million 15.0 30.5 99.0 10.9 1.7 25.5 750.0 55.0 2010 million 16.0 31.8 99.0 11.9 2.5 17.5 630.6 67.0 2011 £m 12.5 19.6 3.2 7.2 0.9 2.4 9.1 4.4 2010 £m 13.7 20.3 3.4 7.8 1.2 1.7 9.0 6.5 EUR USD CZK AUD NZD SEK INR ZAR Fair value of foreign currency net investment hedges Current Non-current 2011 2010 assets £m liabilities £m Assets £m Liabilities £m 1.5 1.5 – (0.7) (0.7) – 0.9 0.9 – (1.9) (1.9) – John Menzies plc AnnuAl RepoRt 2011 83 Foreign currency sensitivity For 2011, if the UK pound had weakened/strengthened by 10% against the US dollar or the Euro, with all other variables held constant the effect would have been: Change in GBP/USD rate +10% -10% 2011 2010 Change in GBP/EUR rate Effect on profit Before Tax £m 0.3 (0.3) 0.8 (0.8) +10% -10% Effect on Equity £m 3.2 (2.6) 1.7 (1.4) Effect on Profit Before Tax £m 0.3 (0.3) 0.7 (0.7) Effect on Equity £m 3.4 (2.7) 2.0 (1.6) The Group’s exposure to foreign currency changes for all other currencies is not material. Capital risk management The Group manages the capital structure in order to minimise the cost of capital whilst ensuring that it has access to ongoing sources of finance such as the debt capital markets. The Group defines capital as net debt (see Note 22) and equity attributable to equity holders of the Company (see Group and Company statement of changes in equity). The only externally imposed capital requirements for the Group are total debt to EBITDA and interest cover under the terms of the Bank Facilities, with which the Group has fully complied during both the current period and the prior period. To maintain or adjust the capital structure, the Group may adjust the dividend payment to shareholders and/or issue new shares. Credit risk The Group considers its exposure to credit risk at 31 December to be as follows: Bank deposits Trade receivables 2011 £m 24.4 132.8 157.2 2010 £m 26.6 133.4 160.0 For banks and financial institutions, the Group’s policy is to transact with independently rated parties with a minimum rating of ‘A’. If there is no independent rating, the Group assesses the credit quality of the counterparty taking into account its financial position, past experience and other factors. liquidity risk The Group manages liquidity risk by maintaining adequate reserves and banking facilities by continuously monitoring forecast and actual cash flows. The following is an analysis of the Group’s financial liabilities and derivative financial liabilities into relevant maturity based on the remaining period at the balance sheet date to the contractual maturity date. The amounts disclosed in the table are the contractual undiscounted cash flows. Floating rate interest is estimated using the prevailing rate at the balance sheet date. John Menzies plc AnnuAl RepoRt 2011OVERVIEW OpERatIng REVIEWgOVERnancEfinancial statementsshaREhOldER InfORmatIOn 84 notes to the accounts continued 16. financial instruments continued Net values of transaction hedging are disclosed in accordance with the contractual terms of these derivative instruments. Interest bearing loans and borrowings Preference shares Other liabilities Trade and other payables Financial derivatives total Interest bearing loans and borrowings Preference shares Other liabilities Trade and other payables Financial derivatives Total 17. operatinG lease commitments Due within 1 year £m (6.2) (0.1) (0.2) (211.6) (60.5) (278.6) Due within 1 year £m (61.4) (0.1) (0.1) (205.9) (64.3) (331.8) 2011 Due between 1-2 years £m Due between 2-4 years £m (4.9) (0.1) – (1.8) (0.3) (7.1) 2010 Due between 1-2 years £m (3.1) (0.1) (0.1) (1.9) (0.3) (5.5) (94.3) (0.4) – – – (94.7) Due between 2-4 years £m (46.9) (0.3) – – – (47.2) Due over 5 years £m (11.1) (1.5) – – – (12.6) Due over 5 years £m (15.1) (1.5) – – – (16.6) The future aggregate minimum lease payments under non-cancellable operating leases are as follows: Group Property Other 2011 £m 29.0 71.5 39.5 140.0 2010 £m 28.7 58.9 44.9 132.5 2011 £m 20.4 33.6 – 54.0 2010 £m 21.5 45.5 – 67.0 Company Property 2011 £m 0.6 1.9 0.1 2.6 2010 £m 0.6 2.4 0.2 3.2 Within one year Within two to five years After five years 18. capital commitments Contracted but not provided – property, plant and equipment Group Company 2011 £m 4.5 2010 £m 4.7 2011 £m – 2010 £m – John Menzies plc AnnuAl RepoRt 2011 19. provisions deferred tax assets Accelerated capital allowances and other temporary differences Retirement benefit obligations Movement in year: Income Statement – retirement benefit obligations – other – fair value movement on interest rate hedges – exchange adjustments Statement of comprehensive income Transfer from current income tax liabilities Group 2011 £m (0.8) 16.1 15.3 (2.6) 3.9 (0.3) (0.1) 5.8 (2.4) 4.3 2010 £m (1.9) 12.9 11.0 2.0 (0.9) – (0.3) 8.8 (0.7) 8.9 other – property related At beginning of year Provided during year Utilised during year At end of year Current Non-current 85 Company 2011 £m (5.4) 16.1 10.7 (2.6) 0.7 (0.3) – 5.8 (1.5) 2.1 2011 £m 7.1 2.4 (3.0) 6.5 2.9 3.6 2010 £m (4.3) 12.9 8.6 2.0 (0.4) – – 8.8 – 10.4 2010 £m 7.9 3.7 (4.5) 7.1 3.3 3.8 The property related provision is in respect of obligations for vacated leasehold properties where applicable sublet income may be insufficient to meet obligations under head leases. The provision for property costs unwinds over the period between 2012 and 2037. Contingent liabilities In the normal course of business, the Company has guaranteed certain trading obligations of its subsidiaries. 20. share capital authorised 73,056,248 ordinary shares of 25p each allotted, called up and fully paid Opening – 60,340,773 ordinary shares of 25p each Allotted under share option schemes* Closing – 60,729,343 ordinary shares of 25p each 2011 £m 2010 £m 18.3 18.3 15.1 0.1 15.2 15.1 – 15.1 As a result of share scheme allotments, 388,570 (2010: 127,546) ordinary shares having a nominal value of £97,142 (2010: £31,886) were issued during the year at a share premium of £1,068,542 (2010: £511,078). * Included in this total are 3,368 (2010: 644) ordinary shares of 25p each allotted to Directors under the Savings-Related Share Option Scheme and 96,048 (2010: nil) ordinary shares of 25p each allotted to Directors under the Executive Share Option Scheme with a nominal value of £24,012 (2010: £161). John Menzies plc AnnuAl RepoRt 2011OVERVIEW OpERatIng REVIEWgOVERnancEfinancial statementsshaREhOldER InfORmatIOn 86 notes to the accounts continued 20. share capital continued potential issue of ordinary shares Certain senior executives hold options to subscribe for shares in the Company under the Executive Share Option Scheme approved by the shareholders, details of which are shown below. Options on 96,048 (2010: nil) shares were exercised in 2011 and no options lapsed. Date of grant Nov-02 May-04 Exercise price (pence) Exercise period 2011 number 2010 Number 329 2005-2012 418 2007-2014 100,000 101,776 201,776 196,048 101,776 297,824 Employees, including senior executives, also hold options to subscribe for shares in the Company under the Savings-Related Share Option Scheme approved by the shareholders, details of which are shown below. Options on 292,522 shares were exercised in 2011 and 198,376 options lapsed. Year of grant 2007 2008 2009 2010 2011 Exercise price (pence) Exercise period 2011 number 2010 Number 452 285 279 355 395 2010-2011 2011-2012 2012-2013 2013-2014 2014-2015 65,608 – 309,315 22,136 358,566 419,224 420,468 489,081 – 488,556 1,289,726 1,283,228 Company Share Schemes The Company operates the following share-based payment arrangements: (a) 2000 executive Share option Scheme (‘eSoS’) Options under the ESOS were granted to executive directors and senior employees of the Group on an annual basis and mature only after 3 years upon which they become exercisable. The exercise period is usually seven years from maturity and special rules apply to employees who leave the employment of the Group due to ill health, retirement or redundancy. Options were granted with a fixed exercise price equal to the market price of shares under option at the date of grant. No options have been issued under this scheme since 2004. Options granted under the ESOS are subject to performance conditions and lapse if these are not achieved. The performance hurdles require that for each annual grant 3-year growth targets set by the Board are achieved. Growth was typically measured by growth in underlying earnings per share (‘EPS’) as compared to RPI plus between 3% and 8% per annum over 3 years, adjusted to normalise pension and tax charges. (b) 2008 Savings-related Share option Scheme (‘SaYe’) The Company operates a savings-related share option scheme which is open to all eligible UK employees. Typically, all UK employees are eligible to participate including full and part-time employees. Annual grants of options are made in September or October each year and become exercisable after three years. Employees enter into a savings contract with the Yorkshire Building Society, who administer the scheme. The options are granted at a 20% discount of the share price at the date of grant and lapse if not exercised within six months of maturity. Special provisions apply to employees who leave their employment due to ill health, redundancy or retirement. (c) 2005 performance Share plan (‘2005 pSp’) Under the PSP, the Board could grant Executive Directors and senior employees of the Group (selected by the Remuneration Committee) an award of conditional shares. The shares would have vested at the end of three years if Total Shareholder Return (‘TSR’) had reached targets set by the Board. If percentage growth in the Company’s TSR for the 3 financial years was greater than the TSR for the FTSE250 Index by 30% or more, then the percentage of the award vesting is 100%. If the growth was greater than the TSR for the FTSE250 Index but less than 30% greater, then the percentage of the award vesting will be calculated on a straight-line basis. If growth was equal to or less than TSR for the FTSE250 Index, then the percentage of the award vesting is nil. John Menzies plc AnnuAl RepoRt 2011 87 There are no outstanding awards under the 2005 PSP and it is not the Board’s intention to make any further awards under this Plan. (d) 2005 Bonus Co-investment plan (‘BCip’) The Plan offers executive directors and other senior executives selected by the Board the opportunity to invest part of their annual cash bonus for a financial year in the Company’s shares, entitling them, provided certain performance targets are met, to a grant of additional matching shares. In 2010 the ratio of matching shares was reduced for future grants from up to 2:1 to up to 1:1 of the gross deferred bonus. The maximum amount of the annual cash bonus which may be eligible for matching was also reduced from 50% to 40%. The net of tax amount is applied in the purchase of shares. The first bonus award which qualified for investment in shares under the Plan was the award for the financial year ended December 2004 and the last qualifying bonus award will be for the financial year which commences 10 years after the adoption of the Plan. Performance targets are based on real growth in earnings measured over three financial years. For awards before 2010, if the percentage growth in the Company’s EPS is RPI + 8% or more, then the number of matching shares that will vest is 2. For EPS growth of between RPI + 3% pa and RPI + 8% pa, the number of matching shares vesting will be calculated on a straight-line basis. From 2010, if the percentage growth in the Company’s EPS is RPI + 6% or more, then the number of matching shares that will vest is 1. For EPS growth of between RPI + 3% pa and RPI + 6% pa, the number of matching shares vesting will be calculated on a straight-line basis. No matching shares will vest for EPS percentage growth of RPI + 3% pa or less for any award. Similar provisions apply in respect of dividends, transferability of rights and leavers. (e) 2007 Divisional performance Share plan (‘2007 DpSp’) The DPSP was introduced to more closely align Divisional Directors and Senior Employees with the achievement of target divisional financial results (‘DFR’). The DFR for Distribution is based on Operating Profits, Cost Savings and income from new Revenue Streams whilst for Aviation it is based on Operating Profits. The maximum award which can be made to an individual is equivalent to one times their salary per year. Shares will vest at the end of 3 year financial periods. A nil award will be achieved where the DFR is at or below the Threshold Performance Target and 100% will vest where the DFR is equal to or greater than the Stretch Performance Target, with a result between Threshold and Stretch being made on a straight-line basis. Actual performance targets will be disclosed in the Directors’ Remuneration Report in the year following the expiry of the performance period. (f) 2009 performance Share plan (‘2009 pSp’) The 2009 Performance Share Plan was designed to improve the link between reward, performance and the creation of value for shareholders by measuring the increase in Return of Capital Employed (ROCE) over a 3 year performance period. The scheme is a one-off award and awards were only made to Executive Directors. Shares vest at the end of a financial period ending December 2011. Achievement below the threshold level (ROCE 10%) will result in no award being made. Achievement of the threshold level will result in 25% of the maximum award (ROCE 12.5%) vesting, with results equal to or greater than the stretch level achieving 100% of the maximum. Results between threshold and stretch will be calculated on a straight line basis. John Menzies plc AnnuAl RepoRt 2011OVERVIEW OpERatIng REVIEWgOVERnancEfinancial statementsshaREhOldER InfORmatIOn 88 notes to the accounts continued 20. share capital continued Fair values of share options Options are valued using the Black-Scholes option-pricing model. No performance conditions are included in the fair value calculations. The fair value per option granted after November 2002 and the assumptions used in the calculation are as follows: Grant date May-04 Nov-02 Oct-11 Oct-10 Oct-09 Sep-08 Executive Share Option Scheme Savings-Related Option Scheme Share price at grant date (pence) Exercise price (pence) Number of employees Shares under option Vesting period (years) Expected volatility Option life (years) Expected life (years) Risk-free rate Expected dividends expressed as a dividend yield* Fair value per option (pence) IFRS 2 charge per option** 418 418 2 101,776 3 25.0% 10 4 5.1% 329 329 1 100,000 3 25.0% 10 4 4.5% 498 395 1,010 488,556 3 25.0% 3.5 3.5 4.6% 450 355 845 420,468 3 25.0% 3.5 3.5 4.6% 346 279 608 358,566 3 25.0% 3.5 3.5 4.6% 4.0% 76 70 5.2% 50 50 4.0% 97 64 4.0% 77 47 4.0% 77 47 362 285 30 22,136 3 25.0% 3.5 3.5 4.6% 4.0% 77 47 The expected volatility is based on the historical volatility over the last 3 years. The expected life is the average expected period to vesting. The risk free rate of return is the zero coupon UK government bonds of a term consistent with the assumed award life. * Based on the daily 12-month trailing dividend yield averaged over the 12 months prior to valuation date. ** The difference between the fair value and IFRS 2 charge per option is due to adjustments for forfeiture risk. Grant date Jun-09 Mar-11 Mar-10 Jun-09 Mar-11 Mar-10 Jun-09 2009 PSP BCIP 2007 DPSP Share price at grant date (pence) Number of employees Shares awarded Contractual life (years) Expected departure* Expected outcome of meeting performance criteria Fair value per share (pence) IFRS 2 charge per share award** * Risk of forfeiture ** Adjusted for forfeiture risk 130 3 1,237,500 3 0% 486 11 46,709 3 0% 346 13 84,451 3 0% 133 3 20,539 3 0% 460 24 537,400 3 0% 342 22 672,992 3 0% 130 16 670,500 3 0% 41% 113 113 41% 217 217 41% 154 154 41% 113 113 41% 207 207 41% 154 154 41% 113 113 John Menzies plc AnnuAl RepoRt 2011 89 movement in share options A reconciliation of conditional share movements of executive share options, savings-related share options and all other share based schemes is shown below: Executive Share Option Scheme Savings-Related Option Scheme 2011 2010 2011 2010 Outstanding at start of year Granted Forfeited/Expired Exercised Outstanding at end of year Exercisable Range of exercise prices Weighted average remaining life (years) – expected – contractual number 297,824 – – (96,048) 201,776 201,776 329-418 – 1.6 Weighted average exercise price (p) 359 – – 329 374 374 Number 302,824 – (5,000) – 297,824 297,824 329-418 – 1.4 Weighted average exercise price (p) Weighted average exercise price (p) number Weighted average exercise price (p) Number – 360 1,283,228 497,396 391 (198,376) (292,522) – 318 1,276,225 497,008 395 359 (362,459) (127,546) 290 359 1,289,726 22,136 359 279-395 348 1,283,228 65,608 279-452 2.1 2.1 2.1 2.1 318 355 329 426 318 452 2005 PSP, 2007 DPSP & 2009 PSP BCIP 2011 2010 2011 2010 Weighted average price (p) number Weighted average price (p) Number 2,731,354 537,400 (150,362) – 201 2,253,000 460 698,266 (219,912) 477 – – 166 342 286 Weighted average price (p) Weighted average price (p) Number 403 486 534 534 130,887 84,451 (32,048) – 480 347 520 number 183,290 46,709 (49,177) (29,123) 3,118,392 233 2,731,354 201 151,699 360 183,290 403 130-460 130-487 133-486 133-534 0.8 0.8 2.2 2.2 1.4 1.4 2.2 2.2 Outstanding at start of year Awards Made Lapsed Performance achieved Outstanding at end of year Range of award date prices Weighted average remaining life (years) – expected – contractual Total IFrS 2 charge for share-based incentive schemes The total charge for the year relating to employee share-based plans was £1.7m (2010: £0.8m), all of which related to equity-settled share-based payment transactions. After tax, the total charge was £1.2m (2010: £0.6m). John Menzies plc AnnuAl RepoRt 2011OVERVIEW OpERatIng REVIEWgOVERnancEfinancial statementsshaREhOldER InfORmatIOn 90 notes to the accounts continued 21. cash Generated from operations Operating profit/(loss) Depreciation Amortisation of intangible assets Impairment provisions (Note 5(a)) Share-based payments Onerous lease provision Cash spend on onerous leases (Gain)/loss on sale of property, plant and equipment Gain on disposal of investment in associate Exceptional gain on disposal of property, plant and equipment Pension charge Pension credit Pension contributions in cash Rationalisation costs Cash spend on rationalisation costs Increase in inventories (Increase)/decrease in trade and other receivables Increase/(decrease) in trade and other payables and provisions 22. analysis of chanGes in net borrowinGs Cash at bank and in hand Bank overdrafts Net cash and cash equivalents Bank loans due within one year Loan stock due within one year Preference shares Finance leases Debt due after one year Net derivative liabilities Group Company 2011 £m 47.0 22.5 6.0 – 1.7 1.1 (0.9) (0.5) (4.0) (1.0) 0.7 (0.1) (8.7) 4.2 (2.7) (1.7) (3.1) 1.7 62.2 2010 £m 37.7 24.0 5.3 2.2 0.8 – (1.4) 0.3 – – 1.7 (4.6) (5.7) 2.3 (1.5) (1.6) (3.9) 2.6 58.2 2011 £m (1.0) 0.8 – – 0.4 1.1 (0.7) – – (1.0) 0.1 (0.1) (8.7) – – – (0.1) (0.1) (9.3) 2010 £m Cash flows £m Currency translation £m 26.6 (8.4) 18.2 (51.8) (0.1) (1.4) (0.2) (61.8) (1.9) (99.0) (2.1) 7.2 5.1 49.9 – – – (37.2) (0.5) 17.3 (0.1) – (0.1) – – – – – 1.7 1.6 2010 £m (1.0) 0.9 – – 0.2 – (0.9) – – – 0.1 (4.6) (5.7) – – – 0.1 0.5 (10.4) 2011 £m 24.4 (1.2) 23.2 (1.9) (0.1) (1.4) (0.2) (99.0) (0.7) (80.1) The currency translation movement results from the Group’s policy of hedging its overseas net assets, which are denominated mainly in US$ and Euro. The translation effect on net debt is offset by the translation effect on net assets resulting in an overall net exchange loss of £6.2m (2010: gain of £6.2m). This net (loss)/gain is recognised in other comprehensive income. 23. cash flow hedGe reserve This reserve records the portion of the gains or losses on hedging instruments used as cash flow hedges that are determined to be effective. John Menzies plc AnnuAl RepoRt 2011 91 24. acquisitions During the year, the Group acquired 100% of the share capital or trading assets of the following businesses: Division Name Date of acquisition Purchase consideration Cash paid Fair value of assets disposed Deferred consideration Total purchase consideration Fair value of net assets acquired Goodwill The assets and liabilities arising from the acquisitions are as follows: Non-current assets Intangible assets (contracts) – fair value Property, plant and equipment Current assets Cash Current liabilities Net assets acquired 5.1 2.9 4.6 0.5 (3.3) 9.8 Aviation Aviation Distribution Distribution Swissport Menzies 6/7/11 £m Traymate Limited 12/8/11 £m Media on the Move 4/7/11 £m Other £m Total £m – 9.8 – 9.8 9.8 – 0.3 – – 0.3 0.3 – 0.2 0.1 – – – 0.3 1.2 – – 1.2 0.4 0.8 0.3 – 0.5 – (0.4) 0.4 0.2 – 0.6 0.8 0.8 – 0.6 – 0.2 – – 0.8 1.7 9.8 0.6 12.1 11.3 0.8 6.2 3.0 5.3 0.5 (3.7) 11.3 Included in the £0.8m goodwill recognised above are certain intangible assets that cannot be individually separated and reliably measured from the acquiree due to their nature. These items include anticipated business growth, synergies and an assembled workforce. The fair value of the Swissport Menzies intangible asset remains provisional pending an external fair value calculation. The fair value of the trade receivables amounts to £3.2m and the gross amount of trade receivables is £3.4m. None of the trade receivables has been impaired. The acquired businesses contributed revenues of £8.6m from the date of acquisition. If the businesses had been acquired on 1 January 2011 revenues contributed would have been £17.6m. The results from acquisitions were not material. other A performance-related payment of £0.6m became payable in May 2011 in respect of The Network (Field Marketing & Promotions) Company Limited, acquired in 2008. An additional £0.2m was paid in respect of Reed Aviation Limited, acquired in October 2010, as a result of the net asset completion exercise. John Menzies plc AnnuAl RepoRt 2011OVERVIEW OpERatIng REVIEWgOVERnancEfinancial statementsshaREhOldER InfORmatIOn 92 notes to the accounts continued 25. related party transactions During the year the Group transacted with related parties in the normal course of business and on an arm’s length basis. Details of these transactions are shown below: Related party Swissport Menzies Handling Ute Menzies Bobba Ground Handling Services Private Ltd Hyderabad Menzies Air Cargo Private Ltd Menzies Aviation Bobba (Bangalore) Private Ltd Menzies Macau Airport Services Ltd EM News (NI) Ltd EM News (Ireland) Ltd amounts owed to related party at 31 December 2011 £m Sales to related party £m 0.5 0.4 0.9 0.1 0.2 0.5 0.8 – – – – – 4.3 – amounts owed by related party at 31 December 2011 £m – 0.1 0.1 – 0.1 – 0.1 Group share holding % note 5 51 49 49 29 50 50 Key management personnel include individuals who are Executive Directors of the Group and Divisional Boards having authority and responsibility for planning, directing and controlling activities of the key operating divisions as disclosed in the segmental analysis. Remuneration of key management personnel is as follows: Short-term employee benefits Post-employment pension and medical benefits Termination benefits Share-based payments 2011 £m 4.8 0.4 – 1.7 6.9 2010 £m 4.9 0.3 – 0.8 6.0 Certain activities, including treasury, taxation, insurance, pension and legal matters are provided by the parent company to subsidiary companies and are recharged on a cost-plus basis. The amount recharged and settled in respect of 2011 was £0.3m (2010: £0.3m). The amounts owed to/(due by) the parent company from dealings with subsidiary companies is disclosed in Notes 14 and 15. 26. subsidiary companies The principal subsidiaries, Menzies Distribution Limited, Menzies Group Holdings Limited, Princes Street (Jersey) Limited, John Menzies Finance Limited, Menzies Aviation plc and Menzies Aviation Holdings Limited are ultimately wholly owned by the Company and operate mainly in the United Kingdom. The issued share capital of these subsidiaries is mainly in the form of equity shares. The Company is taking the exemption under s410 Companies Act 2006 to disclose details about principal subsidiaries only. John Menzies plc AnnuAl RepoRt 2011 93 five-year summary revenue Distribution Aviation operatinG profit Distribution Aviation Corporate underlyinG operatinG profit Exceptional items Intangible amortisation Share of interest and tax on joint ventures and associates profit before interest Net finance costs Foreign currency loss profit before taxation per ordinary share Dividends Underlying earnings Basic earnings 2011 £m 2010 £m 2009 £m 2008 £m 2007 £m 1,254.5 645.2 1,899.7 1,255.0 582.6 1,837.6 1,218.5 507.2 1,725.7 1,166.2 500.9 1,667.1 1,147.3 393.8 1,541.1 28.8 32.3 61.1 (1.2) 59.9 (0.3) (5.5) (1.7) 52.4 (3.9) – 48.5 28.8 24.6 53.4 (1.2) 52.2 0.1 (5.1) (2.3) 44.9 (7.4) – 37.5 28.6 15.8 44.4 (1.0) 43.4 (6.0) (5.1) (2.1) 30.2 (8.2) – 22.0 23.9 14.1 38.0 (1.5) 36.5 (7.3) (4.3) (1.9) 23.0 (5.4) (7.7) 9.9 23.4 20.6 44.0 (3.0) 41.0 0.1 (2.8) (1.7) 36.6 (2.7) (2.1) 31.8 21.0p 73.2p 64.9p 13.0p 57.9p 47.8p 0.0p 43.8p 25.8p 7.56p 31.3p (2.0p) 25.6p 47.9p 44.2p John Menzies plc AnnuAl RepoRt 2011OVERVIEW OpERatIng REVIEWgOVERnancEfinancial statementsshaREhOldER InfORmatIOn 94 notice of annual General meetinG This document is important and requires your immediate attention. If you are in any doubt about what action you should take you are recommended to consult your financial adviser. If you have sold or transferred all of your ordinary shares in John menzies plc, you should forward this document, together with accompanying documents, to the purchaser or transferee or to the stockbroker, bank or other agent through whom the sale or transfer was effected, for transmission to the purchaser or transferee. Notice is hereby given that the Annual General Meeting (‘AGM’) of John Menzies plc (the ‘Company’) will be held in the Roxburghe Hotel, 38 Charlotte Square, Edinburgh on Friday, 18 May 2012 at 2pm (the ‘Meeting’) to transact the following business: ordinary resolutions: To consider and, if thought fit, pass Resolutions 1-11, each of which will be proposed as an ordinary resolution: 1. report and accounts To receive the Directors’ Report and Annual Accounts of the Company for the financial year ended 31 December 2011 and the Report of the Auditors thereon. 2. remuneration report To approve the Report on Directors’ Remuneration for the financial year ended 31 December 2011. 3. Dividend To declare a final dividend of 17 pence per ordinary share for the financial year ended 31 December 2011. 4-8. re-election of Directors 4. To re-elect Ian Harley as a Director. 5. To re-elect Ian Harrison as a Director. 6. To re-elect Dermot Jenkinson as a Director. 7. To re-elect Octavia Morley as a Director. 8. To re-elect Iain Napier as a Director. 9. appointment of auditor To appoint Ernst & Young LLP as auditors of the Company to hold office from the conclusion of the AGM to the conclusion of the next general meeting at which Annual Accounts are laid before the Company. 10. remuneration of auditor To authorise the Directors to fix the auditors’ remuneration. 11. authority to allot shares That the Directors be and are hereby generally and unconditionally authorised, pursuant to section 551 of the Companies Act 2006 (the ‘2006 Act’) to exercise all powers of the Company to allot shares in the Company and to grant rights to subscribe for, or to convert any security into, shares in the Company, such rights and shares together being ‘relevant securities’: (a) otherwise than pursuant to paragraph (b) below, up to an aggregate nominal amount of £5,008,225 (such amount to be reduced by the aggregate nominal amount of any equity securities (as defined by section 560 of the 2006 Act) allotted under paragraph (b) below in excess of £5,008,225; and (b) comprising equity securities up to an aggregate nominal amount of £10,016,450 (such amount to be reduced by the nominal amount of any relevant securities allotted under paragraph (a) above) in connection with an offer by way of a rights issue to: (i) holders of ordinary shares in the capital of the Company in proportion (as nearly as may be practicable) to their respective holdings; and (ii) holders of equity securities in the capital of the Company as required by the rights of those securities or as the Directors otherwise consider necessary, but subject to such exclusions or other arrangements as the Directors may deem necessary or expedient to deal with treasury shares, fractional entitlements, record dates, legal or practical problems arising under the laws of any overseas territory or the requirements of any regulatory body or stock exchange or by virtue of shares being represented by depository receipts or any other matter; And provided that (unless previously renewed, varied or revoked) this authority shall expire at the conclusion of the next AGM of the Company or, if earlier, on 30 June 2013 save that the Company shall be entitled to make offers or agreements before the expiry of such authority which would or might require relevant securities to be allotted after such expiry and the Directors shall be entitled to allot relevant securities pursuant to any such offer or agreement as if the authority conferred by this resolution had not expired. This authority is in substitution for and to the exclusion of all unexercised existing authorities previously granted to the Directors under the 2006 Act but without prejudice to any allotment of shares or grants of rights already made, offered or agreed to be made pursuant to such authorities. John Menzies plc AnnuAl RepoRt 2011 OVERVIEW OpERatIng REVIEW gOVERnancE fInancIal statEmEnts shareholder information 95 special resolutions: To consider, and if thought fit, pass Resolutions 12-15, each of which will be proposed as a Special Resolution: previously granted to the Directors under sections 570 and 573 of the 2006 Act but without prejudice to any allotment of equity securities already made or agreed to be made pursuant to such powers. 12. authority to disapply pre-emption rights That, subject to the passing of Resolution 11 in the Notice of AGM of the Company dated 5 April 2012 (the ‘section 551 Resolution’) the Directors be and are hereby empowered pursuant to section 570 and section 573 of the 2006 Act to exercise all powers of the Company to allot equity securities (within the meaning of sections 560 (1)-(3) of the 2006 Act) wholly for cash pursuant to the authority conferred by the section 551 Resolution and/or by way of a sale of treasury shares as if section 561(1) of the 2006 Act did not apply to any such allotment provided that this power shall be limited to: (a) the allotment of equity securities in connection with an offer or issue of equity securities (but, in the case of an allotment pursuant to the authority granted under paragraph (b) of the section 551 Resolution, such power shall be limited to the allotment of equity securities in connection with a rights issue only) to: (i) the holders of ordinary shares in the capital of the Company in proportion (as nearly as may be practicable) to their respective holdings; and (ii) the holders of equity securities in the capital of the Company as required by the rights of those securities or as the Directors otherwise consider necessary, but subject to such exclusions or other arrangements as the Directors may deem necessary or expedient to deal with treasury shares, fractional entitlements, record dates, or legal or practical problems arising under the laws of any overseas territory or the requirements of any regulatory body or stock exchange or by virtue of shares being represented by depository receipts or any other matter; and (b) the allotment pursuant to the authority granted by paragraph (a) of the section 551 Resolution (otherwise than pursuant to paragraph (a) of this resolution) to any person or persons of equity securities up to an aggregate nominal amount of £751,233, representing approximately 5% of the issued ordinary share capital of the Company as at 2 April 2012, and (unless previously renewed, varied or revoked) this power shall expire at the conclusion of the next AGM of the Company or, if earlier, on 30 June 2013 save that the Company shall be entitled to make offers or agreements before the expiry of such power which would or might require equity securities to be allotted after such expiry and the Directors shall be entitled to allot equity securities pursuant to any such offer or agreement as if the power conferred hereby had not expired. This power is in substitution for and to the exclusion of all unexercised existing powers 13. purchase of own ordinary shares by Company That the Company be and is hereby authorised pursuant to section 701 of the 2006 Act to make market purchases (within the meaning of section 693(4) of the 2006 Act) of its own ordinary shares of 25p each, on such terms and in such manner as the Directors may from time to time determine, provided that: (a) the maximum number of ordinary shares hereby authorised to be purchased is 6,009,870, representing approximately 10% of the Company’s issued ordinary share capital as at 2 April 2012; (b) the maximum price which may be paid for each such ordinary share under this authority shall be the higher of: (i) an amount equal to 105% of the average of the middle market quotations for any such ordinary share of the Company as derived from the London Stock Exchange Daily Official List for the five business days immediately prior to the date of conclusion of the contract for any such purchase; and (ii) the amount stipulated by Article 5(1) of the EU Buy-back and Stabilisation Regulation 2003 (being the higher of the price of the last independent trade and the highest current independent bid for an ordinary share in the Company on the trading venues where the market purchases by the Company pursuant to the authority conferred by this Resolution will be carried out), and the minimum price which may be paid for any such ordinary shares is 25p, in each case exclusive of the expenses of purchase (if any) payable by the Company; and (c) the authority hereby conferred shall expire (unless previously revoked, varied or renewed) at the conclusion of the next AGM of the Company or at the close of business on 30 June 2013, whichever is earlier, except in relation to the purchase of ordinary shares for which a contract was concluded before the authority expired and which might or will be executed wholly or partly after its expiration and the Company may make such a purchase in pursuance of such contract as if the authority hereby conferred had not expired. 14. purchase of own preference shares by Company That the Company be and is hereby authorised pursuant to section 701 of the 2006 Act to make market purchases (within the meaning of section 693(4) of the 2006 Act) of its own 9% cumulative preference shares of £1 each, on such terms and in such manner as the Directors may from time to time determine, provided that: John Menzies plc AnnuAl RepoRt 2011 96 notice of annual General meetinG continued (a) the maximum number of 9% cumulative preference shares hereby authorised to be purchased is 1,394,587, representing 100% of the Company’s issued 9% cumulative preference share capital as at 2 April 2012; (b) the maximum price which may be paid for each such 9% cumulative preference share under this authority shall be the higher of: (i) an amount equal to 110% of the average of the middle market quotations for any such 9% cumulative preference share of the Company as derived from the London Stock Exchange Daily Official List for the five business days immediately prior to the date of conclusion of the contract for any such purchase; and (ii) the amount stipulated by Article 5(1) of the EU Buy-back and Stabilisation Regulation 2003 (being the higher of the price of the last independent trade and the highest current independent bid for a 9% cumulative preference share in the Company on the trading venues where the market purchases by the Company pursuant to the authority conferred by this resolution will be carried out), and the minimum price which may be paid for any such 9% cumulative preference shares is £1, in each case exclusive of the expenses of purchase (if any) payable by the Company; and (c) the authority hereby conferred shall expire (unless previously revoked, varied or renewed) at the conclusion of the next AGM of the Company or at the close of business on 30 June 2013, whichever is earlier, except in relation to the purchase of 9% cumulative preference shares for which a contract was concluded before the authority expired and which might or will be executed wholly or partly after its expiration and the Company may make such a purchase in pursuance of such contract as if the authority hereby conferred had not expired. 15. length of notice of meeting That a general meeting of the Company, other than an AGM, may be called on not less than 14 clear days’ notice. By order of the Board J F a GEDDES CompanY SeCretarY 5 April 2012 explanatory notes The following information provides additional background information to several of the Resolutions proposed: resolutions 4-8 – Election of Directors Biographical details of the Directors to re-elected can be found on pages 26 and 27 of the Annual Report and Accounts for the year ended December 2011. In accordance with the Combined Code on Corporate Governance Dermot Jenkinson and Ian Harrison who have served longer than 9 years will retire at the Meeting and seek re-election. Ian Harley, Octavia Morley and Iain Napier retire by rotation in accordance with the Company’s Articles of Association and offer themselves for re-election. In proposing the re-election of the Non-Executive Directors, the Chairman has confirmed that, following formal performance evaluation (described on page 31 of the Annual Report and Accounts for the year ended 31 December 2011), each individual continues to make an effective and valuable contribution to the Board and demonstrates commitment to the role. resolutions 11 and 12 – authority to allot shares and disapply pre-emption rights The Association of British Insurers (ABI) guidelines issued in December 2008 state that ABI members will permit, and treat as routine, resolutions seeking authority to allot shares representing up to two-thirds of the Company’s issued share capital. The guidelines provide that the extra routine authority (that is the authority to allot shares representing the additional one-third of the Company’s issued share capital) can only be used to allot shares pursuant to a fully pre-emptive rights issue. At the AGM of the Company held on 20 May 2011, the Directors followed these guidelines and were given authority to allot relevant securities up to an aggregate nominal amount of £9,938,892, representing two thirds of the issued share capital of the Company as at 23 March 2011. This authority is due to expire at the end of this year’s AGM. The Board considers it appropriate that Directors again be granted authority to allot shares in the capital of the Company up to a maximum nominal amount of £10,016,450 representing the guideline limit of approximately two-thirds of the Company’s issued ordinary share capital as at 2 April 2012. Of this amount, 20,032,900 shares, (representing one-third of the Company’s issued ordinary share capital) can only be allotted pursuant to a rights issue. John Menzies plc AnnuAl RepoRt 2011 OVERVIEW OpERatIng REVIEW gOVERnancE fInancIal statEmEnts shareholder information 97 The power will last until the conclusion of the next AGM of the Company or, if earlier, 30 June 2013. The Directors have no present intention of exercising this authority, however, they have confirmed, should the power authorised in Resolution 11 part (b) be utilised, that all directors would stand for re-election at the next AGM. As at 2 April 2012, the Company holds 744,449 ordinary shares in the capital of the Company as treasury shares. Resolution 12 will, if passed, give the Directors power, pursuant to the authority to allot granted under Resolution 11, to allot equity securities (as defined in sections 560 (1)-(3) of the Companies Act 2006 ‘the 2006 Act’) or sell treasury shares for cash on a non-pre-emptive basis without first offering them to existing shareholders in proportion to their existing shareholdings in limited circumstances. In light of the ABI guidelines described in relation to Resolution 10 above, this authority will permit the Directors to allot equity securities: (a) in relation to a pre-emptive rights issue only, up to a maximum nominal amount of £10,016,450 (representing approximately two-thirds of the Company’s issued ordinary share capital excluding treasury shares) as at 2 April 2012; and (b) in any other case up to a maximum nominal value of £751,233, representing approximately 5% of the issued share capital of the Company as at 2 April 2012 (the latest practicable date prior to publication of this Notice) otherwise than in connection with an offer to existing shareholders. The Directors have no present intention of exercising this authority and the authority, if granted, will expire at the conclusion of the next AGM of the Company or, if earlier, on 30 June 2013. resolutions 13 and 14 – authority to buy back shares These special resolutions give the Company authority to make market purchases of its own ordinary and 9% cumulative preference shares in the market as permitted by the 2006 Act. The authorities set the minimum and maximum prices and limit the number of shares that could be purchased to 6,009,870 ordinary shares (representing approximately 10% of the issued ordinary share capital as at 2 April 2012) and 1,394,587 9% cumulative preference shares (representing 100% of the issued 9% cumulative preference shares as at 2 April 2012). The authorities, if granted, will expire at the conclusion of the next AGM of the Company, or, if earlier, 30 June 2013. The Directors have no present intention of exercising the authority to purchase the Company’s 9% cumulative preference shares, but will keep the matter under review, taking into account the financial resources of the Company, the Company’s share price and future funding opportunities. The authority will only be exercised if the Directors believe that to do so would result in an increase in earnings per share and would be in the interests of shareholders generally. As at 2 April 2012, the Company holds 744,449 ordinary shares in the capital of the Company as treasury shares. It may make purchases of its own ordinary shares, taking into account the financial resources of the Company, the Company’s share price and future funding opportunities. The authority will only be exercised if the Directors believe that to do so would result in an increase in earnings per share and would be in the interests of shareholders generally. Any purchases of ordinary shares would be by means of market purchases through the London Stock Exchange. Listed companies purchasing their own shares are allowed to hold them in treasury as an alternative to cancelling them. No dividends are paid on shares whilst held in treasury and no voting rights attach to treasury shares. resolution 15 – length of notice of meeting Before the introduction of the Companies (Shareholders’ Rights) Regulations 2009 in August 2009, the minimum notice period permitted by the 2006 Act for general meetings (other than AGMs) was 14 days. One of the amendments made to the 2006 Act by the Regulations was to increase the minimum notice period for general meetings of listed companies to 21 days, but with the ability for companies to reduce this period back to 14 days (other than for AGMs) provided that two conditions are met. The first condition is that a company offers a facility for shareholders to vote by electronic means. This condition is met if a company offers a facility, accessible to all shareholders, to appoint a proxy by means of a website. The second condition is that there is an annual resolution of shareholders approving the reduction of the minimum notice period from 21 days to 14 days. The Directors have confirmed that they will only use the shorter notice period in limited circumstances where the proposal in question are time sensitive and the short notice would clearly be to the advantage of shareholders as a whole. The Board is therefore proposing Resolution 15 as a special resolution and for it to be effective until the Company’s next AGM when it is intended to propose that the approval be renewed. John Menzies plc AnnuAl RepoRt 2011 98 notice of annual General meetinG continued recommendation The Directors consider all these resolutions to be in the best interests of the Company and its shareholders as a whole, consistent with the Directors’ duty to act in the way most likely to promote the success of the Company for the benefit of its shareholders as a whole, and unanimously recommend that you vote in favour of them. notes to the notice of aGm 1. Information about the AGM is available from the Company’s website: www.johnmenziesplc.com. 2. As a member, you are entitled to appoint one or more proxies to exercise all or any of your rights to attend, speak and vote at the AGM. A proxy need not be a member of the Company. You may appoint more than one proxy provided each proxy is appointed to exercise rights attached to different shares. You may not appoint more than one proxy to exercise the rights attached to any one share. 3. A form of proxy is enclosed. To be valid, your proxy form and any power of attorney or other authority, if any, under which it is signed or a notarially certified copy of that power of attorney or authority should be sent to Computershare Investor Services at The Pavilions, Bridgwater Road, Bristol BS99 6ZZ so as to arrive no later than 48 hours before the commencement of the AGM. 4. It is possible for you to submit your proxy votes online. Further information on this service can be found on your proxy form, or if you receive communications from us electronically, voting information will be contained within your email broadcast. 5. If you appoint a proxy, this will not prevent you attending the AGM and voting in person if you wish to do so. 6. The right to vote at the AGM is determined by reference to the Company’s register of members as at the close of business on Wednesday 16 May 2012 or, if the Meeting is adjourned, at 5pm on the day two days prior to the adjourned meeting. Changes to entries on that register after that time shall be disregarded in determining the rights of any member to attend and vote at the AGM. 7. As a member, you have the right to put questions at the AGM relating to the business being dealt with at the AGM. 8. Any person to whom this notice is sent who is a person nominated under section 146 of the 2006 Act to enjoy information rights (a ‘Nominated Person’) may, under an agreement between them and the member by whom they were nominated, have a right to be appointed (or to have someone else appointed) as a proxy for the Meeting. If a Nominated Person has no such proxy appointment right or does not wish to exercise it, they may, under any such agreement, have a right to give instructions to the member as to the exercise of voting rights. 9. The statement of the rights of members in relation to the appointment of proxies in Notes 2, 3 and 4 above does not apply to Nominated Persons. The rights described in these paragraphs can only be exercised by members of the Company. 10. As at 2 April 2012, the Company’s issued ordinary share capital comprised 60,843,151 ordinary shares of 25p each, and the Company held 744,449 of its own ordinary shares of 25p each in Treasury. Each ordinary share carries the right to one vote at a general meeting of the Company and, therefore, the total number of voting rights in the Company as at 2 April 2012 is 60,098,702. 11. CREST members who wish to appoint a proxy or proxies by utilising the CREST electronic proxy appointment service may do so for the Meeting and any adjournment(s) thereof by utilising the procedures described in the CREST Manual. CREST personal members or other CREST sponsored members, and those CREST members who have appointed a voting service provider(s), should refer to their CREST sponsor or voting service provider(s), who will be able to take the appropriate action on their behalf. 12. In order for a proxy appointment made by means of CREST to be valid, the appropriate CREST message (a ‘CREST Proxy Instruction’) must be properly authenticated in accordance with Euroclear UK & Ireland Limited’s (EUI) specifications and must contain the information required for such instructions, as described in the CREST Manual. The message must be transmitted so as to be received by the issuer’s agent (ID 3RA50) so as to arrive no later than 48 hours before the commencement of the Meeting. For this purpose, the time of receipt will be taken to be the time (as determined by the timestamp applied to the Shareholder information message by the CREST Applications Host) from which the issuer’s agent is able to retrieve the message by enquiry to CREST in the manner prescribed by CREST. John Menzies plc AnnuAl RepoRt 2011 OVERVIEW OpERatIng REVIEW gOVERnancE fInancIal statEmEnts shareholder information 99 Documents The following documents are available for inspection on any day (except Saturday, Sunday and Bank Holidays) from the date of sending this Notice of Meeting up to and including the date of the AGM during usual business hours at the registered office of the Company and at the offices of Maclay Murray & Spens LLP, One London Wall, London EC2Y 5AB. On the date of the AGM, they will be available for inspection at the venue of the AGM from 1pm until the conclusion of the Meeting: (a) copies of the Directors’ service contracts with the Company; (b) the terms of appointment of the Non-Executive Directors of the Company. 13. CREST members and, where applicable, their CREST sponsors or voting service providers should note that EUI does not make available special procedures in CREST for any particular messages. Normal system timings and limitations will therefore apply in relation to the input of CREST Proxy Instructions. It is the responsibility of the CREST member concerned to take (or, if the CREST member is a CREST personal member or sponsored member or has appointed a voting service provider(s), to procure that his CREST sponsor or voting service provider(s) take(s)) such action as shall be necessary to ensure that a message is transmitted by means of the CREST system by any particular time. In this connection, CREST members and, where applicable, their CREST sponsors or voting service providers are referred, in particular, to those sections of the CREST Manual concerning practical limitations of the CREST system and timings. 14. The Company may treat as invalid a CREST Proxy Instruction in the circumstances set out in Regulation 35(5)(a) of the Uncertificated Securities Regulations 2001. 15. Under section 338 of the 2006 Act, members may require the Company to give, to members of the Company entitled to receive this Notice of Meeting, notice of a resolution which may properly be moved and is intended to be moved at the AGM. Under section 338A of that Act, members may request the Company to include in the business to be dealt with at the AGM any matter (other than a proposed resolution) which may properly be included in the business. 16. It is possible that, pursuant to requests made by members of the Company under section 527 of the Companies Act 2006, the Company may be required to publish on a website a statement setting out any matter relating to: (i) the audit of the Company’s accounts (including the auditor’s report and the conduct of the audit) that are to be laid before the AGM: or (ii) any circumstances connected with an auditor of the Company ceasing to hold office since the previous meeting at which annual accounts and reports were laid in accordance with section 437 of the 2006 Act. The Company may not require the members requesting any such website publication to pay its expenses in complying with sections 527 or 528 of the 2006 Act. Where the Company is required to place a statement on a website under section 527 of the Companies Act 2006, it must forward the statement to the Company’s auditor not later than the time when it makes the statement available on the website. The business which may be dealt with at the AGM includes any statement that the Company has been required under section 527 of the 2006 Act to publish on a website. John Menzies plc AnnuAl RepoRt 2011 100 General information internet The Group operates a website which can be found at www.johnmenziesplc.com. This site is regularly updated to provide you with information about the Group and each of its operating divisions. In particular, all of the Group’s press releases and announcements can be found on the site together with copies of the Group’s accounts. share reGistrar and shareholder enquiries Any enquiries concerning your shareholding should be directed to the Company’s Registrar and clearly state the shareholder’s name, address and Shareholder Reference Number (SRN). The contact details are: 0870 703 6303 Call: Web: www.investorcentre.co.uk Email: www.investorcentre.co.uk/contactus Write: The John Menzies plc Registrar, Computershare Investor Services PLC, The Pavilions, Bridgwater Road, Bristol BS99 6ZZ The Registrar should be notified in writing promptly of any change in a shareholder’s address. Computershare’s online Investor Centre also enables you to view your shareholding and update your address and payment instructions online. You can register at www.investorcentre.co.uk. In order to register, you will need your Shareholder Reference Number (SRN), which you can find on your share certificate or tax voucher. share price The current share price of John Menzies plc ordinary shares can be seen on the Group’s website, www.johnmenziesplc.com. telephone share dealinG service A share dealing service has been arranged with Stocktrade which provides a simple way of buying or selling John Menzies shares. Call: 0845 601 0995 (non-UK +44 131 240 0414), quote reference LOW C0014 Charges Commission will be 0.5%, subject to a minimum of £15. Please note that UK share purchases will be subject to 0.5% stamp duty. There will also be a PTM (panel for takeovers and mergers) levy of £1 for single trades in excess of £10,000. Settlement When buying shares you will be required to pay for your transaction at the time of the deal by debit card and you should ensure that you have sufficient cleared funds available in your debit card account to pay for the shares in full. shareGift If you have only a small number of shares which would cost more for you to sell than they are worth, you may wish to consider donating them to the charity ShareGift (Registered Charity 1052686) which specialises in accepting such shares as donations. There are no implications for Capital Gains Tax purposes (no gain or loss) on gifts of shares to charity and it is also possible to obtain income tax relief. Call: 020 7930 3737 Web: www.sharegift.org analysis of shareholdinG at 31 December 2011 Shareholding 1-1,000 1,001-5,000 5,001-10,000 10,001- 100,000 Over 100,000 Total Number of holders 3,391 487 62 104 75 4,119 payment of dividends % of holders 82.4 11.8 1.5 Number of shares 767,928 1,009,380 451,946 % of shares 1.26 1.66 0.74 2.5 3,812,694 1.8 54,687,395 100.0 60,729,343 6.28 90.05 100.00 It is in the interests of shareholders and the Company for dividends to be paid directly into bank or building society accounts. Any shareholder who wishes to receive dividends in this way should contact the Company’s Registrar to obtain a dividend mandate form. 9% preference Shares Dividends will be paid on 30 March 2012 and 1 October 2012. ordinary Dividends A Final Dividend of 17p per share was proposed by the directors on 5 March 2012, and will paid on 22 June 2012 to shareholders on the Register as at the close of business on 25 May 2012. Any Interim Dividends for 2012 will be paid on 23 November 2012 to shareholders on the register on 26 October 2012. John Menzies plc AnnuAl RepoRt 2011 who we are related information Within this report we highlight further sources of information with the following icons: mORE InfO In tHIs REpORt mORE InfO OnlInE john menZies plc is a company with two fast movinG divisions, menZies aviation and menZies distribution. we are passionate about performance and achievinG our vision. that passion is delivered throuGh every level of our business and helps keep us and our customers’ businesses movinG forward. menZies aviation menZies distribution Menzies Aviation is the fastest growing, Menzies Distribution is a leading provider and now the world’s second largest, global aviation services business. It of added value distribution and marketing services to the newspaper and magazine also owns AMI, the world’s only global supply chain in the UK. The division wholesale freight forwarder. The business handles around 5 million newspapers and is highly successful – operating at 2.1 million magazines (covering 3,000 131 airports in 29 countries, with annual magazine titles) each day, with deliveries revenue in excess of £676m and to more than 25,000 customers. The employing some 17,000 highly trained division employs 4,000 people at 39 sites people. Best in the class Safety & Security as well as great customer service are core to its success and throughout the UK – and is a strongly cash generative business, with around 45% of the newspaper and magazine wholesale sets it apart from the other handlers. distribution market in the UK. It has a our vision To be the world’s number one aviation business, and the handler of choice for the world’s leading airlines. track record of investment in innovation and customer service delivery. our vision To be the most effi cient and profi table player in the news and magazine distribution market, providing innovative solutions for publishers and retailers. directors’ report and business review overview 01 At a glance 02 Chairman’s statement 04 Group strategy operatinG review 06 Group performance 07 Menzies Aviation 10 Menzies Distribution 14 Group fi nancial review 19 Outlook 20 Corporate social responsibility 24 Principal risks and uncertainties Governance 26 Board of Directors 28 Corporate governance statement 40 Report on Directors’ remuneration financial statements 51 Independent auditors’ report to the members of John Menzies PLC 53 Group income statement 54 Group statement of comprehensive income 55 Group and Company balance sheets 56 Group and Company statement of changes in equity 57 Group and Company statement of cash fl ows 58 Notes to the accounts 93 Five year summary shareholder information 94 Notice of annual general meeting 100 General information people, passion, performance Through this report you will see employees from across our business. We are absolutely dedicated to performance and thrive on the passion that makes up the culture of our business. OVERVIEW OpERatIng REVIEW gOVERnancE fInancIal statEmEnts shareholder information john menZies plc annUal REpORt 2011 101 investor relations The Group accounts can be downloaded from our website. For other investor relations enquiries, please contact us at: corporate calendar (Provisional dates) 6 March 2012 Preliminary announcement of Results 0131 225 8555 0131 226 3752 Call: Fax: Web: www.johnmenziesplc.com Email: info@johnmenziesplc.com Write: John Menzies plc, 108 Princes Street, Edinburgh EH2 3AA principal advisers auditors Ernst & Young LLP Ten George Street Edinburgh EH2 2DZ Corporate Financial advisers and Joint Brokers Numis Securities Ltd The London Stock Exchange Building 10 Paternoster Square, London EC4M 7LT Joint Brokers N+I Brewin Time Central 32 Gallowgate, Newcastle Upon Tyne, NE1 4SR principal business addresses John menzies plc 108 Princes Street, Edinburgh, EH2 3AA Tel: +44 (0) 131 225 8555 Fax: +44 (0) 131 226 3752 Email: info@johnmenziesplc.com menzies Distribution 2 Lochside Avenue Edinburgh Park, Edinburgh, EH12 9DJ Tel: +44 (0) 131 467 8070 Fax: +44 (0) 131 469 4797 menzies aviation 4 New Square, Bedfont Lakes, Feltham, Middlesex, TW14 8HA Tel: +44 (0) 20 8750 6000 Fax: +44 (0) 20 8750 6001 30 March 2012 Payment of Dividend on 9% Cumulative Preference Shares 5 April 2012 Annual Report and Notice of AGM released 18 May 2012 Management Statement issued 18 May 2012 Annual General Meeting 25 May 2012 Record date for Final Dividend on Ordinary Shares 22 June 2012 Payment of Dividend on Ordinary Shares 14 August 2012 Announcement of Interim Results 1 October 2012 Payment of Dividend on 9% Cumulative Preference Shares 26 October 2012 Record date for Interim Dividend on Ordinary Shares 13 November 2012 Management Statement issued 23 November 2012 Payment of Interim Dividend on Ordinary Shares This annual report is printed on FSC certifi ed material. This product is biodegradable, 100% recyclable and elemental chlorine free. Vegetable based inks were used during production. Both the paper mill and printer involved in the production support the growth of responsible forest management and are both accredited to ISO 14001 which specifi es a process for continuous environmental improvement. Designed and produced by Carnegie Orr +44 (0)20 7610 6140. www.carnegieorr.com annUal REPORt 2011 annUal REPORt 2011 I J O H n M e n Z e S A N N U A L R E P O R T A N D A C C O U N T S 2 0 1 1 J O H n M e n Z I e S A N N U A L R E P O R T A N D A C C O U N T S 2 0 1 1 John Menzies plc 108 Princes Street, Edinburgh EH2 3AA Tel: +44 (0) 131 225 8555 Fax: +44 (0) 131 226 3752 Email: info@johnmenziesplc.com Web: www.johnmenziesplc.com John Menzies plc 108 Princes Street, Edinburgh EH2 3AA Tel: +44 (0) 131 225 8555 Fax: +44 (0) 131 226 3752 Email: info@johnmenziesplc.com Web: www.johnmenziesplc.com Registered in Scotland with company number SC34970 Registered offi ce address as above Registered in Scotland with company number SC34970 Registered offi ce address as above PEOPLEPASSIONPERFORMANCEPEOPLEPASSIONPERFORMANCE