Half Year Report December 2014

Half Year Review

From the Chairman and Managing Director

The Directors are pleased to present the consolidated financial result of Freightways Limited (Freightways) for the half year ended 31 December 2014. This report discusses the result, reflects on some of Freightways’ achievements and provides an outlook for the future.

Highlights include:

• a record result and interim dividend;
• all businesses in all regions improving their performance;
• organic growth strategies rewarded through the continued support and increased activity from customers, along with increased demand for newly-introduced digital services; and
• acquisition of further Australian-based information management businesses and good performance from businesses acquired in the prior financial year.

Operating performance

Freightways’ first quarter Trading Update provided a breakdown of the benefit relating to five additional trading days in that quarter compared to the prior comparative period (pcp). The second quarter had two less trading days compared to the pcp. Accordingly, this half year result includes the net total benefit of three extra trading days. Given the overall immateriality of the impact of these three days to the half year result, no additional analysis of the result excluding them is provided and the result discussed below is as reported.

Operating revenue of $242 million was 11% higher than the pcp.

Earnings (operating profit) before interest, tax, depreciation and amortisation (EBITDA) of $49 million and earnings (operating profit) before interest, tax and amortisation (EBITA) of $42 million were 16% and 17% higher than the pcp, respectively.

Net profit after tax (NPAT) of $26 million and NPAT before amortisation (NPATA) of $27 million were both 21% higher than the pcp.

Earnings per share (EPS) was 17 cents per share, an improvement of 21% over the pcp.

Cash generated from operations was again strong at $50 million.

Interim Dividend

The Directors have declared an interim dividend of 12 cents per share, fully imputed at a tax rate of 28%. This represents a payout of approximately $18.5 million compared with $15.4 million for the pcp dividend of 10 cents per share; a 20% increase. The dividend will be paid on 7 April 2015. The record date for determination of entitlements to the dividend is 20 March 2015.

The Dividend Reinvestment Plan (DRP) will not be offered in relation to this dividend. As a capital management tool, the application of the DRP will be reviewed for each future dividend.

Review of Operations

Divisional results for the half year ended 31 December 2014 are provided below for the express package & business mail division and the information management division.

Express Package and Business Mail

The express package & business mail division operates a multi-brand strategy in the domestic market through New Zealand Couriers, Post Haste, Castle Parcels, NOW Couriers, SUB60, Security Express, Kiwi Express, Stuck, Pass The Parcel, DX Mail and Dataprint.

Operating revenue of $185 million was 10% higher than the pcp.

EBITDA of $36 million and EBITA of $33 million were 16% and 17% higher than the pcp, respectively.

A pleasing feature of this result was that all businesses improved their year-on-year performance compared to what was a strong second quarter result in the pcp. Planning and resourcing for the peak volumes experienced in the weeks leading up to Christmas occurred well in advance. These plans included anticipating the continued growth of internet shopping and the many new delivery points that would require servicing. Overall service quality, while always able to be improved, held up particularly well throughout this period. Throughout the half year, activity from existing customers progressively increased. Good traction was achieved with pricing strategies to recover cost increases and new customers were introduced across the division.  Variable, and recently volatile, fuel prices are managed through applying a surcharge to customers’ prices to mitigate the impact of this cost as it rises and falls.

Freightways’ business mail operator, DX Mail, has again grown its share of the postal services market, despite the industry’s overall decline due to electronic substitution. DX Mail’s growth has come from customers that still require overnight delivery for their standard-priced letters. The Dataprint business, that positions its services higher on the supply chain than DX Mail with a full suite of both physical and digital mailhouse services, has also had a strong first half. Dataprint’s customers can choose between physical or digital delivery of their mail or a combination of both services, as most do.

Information Management

The information management division is established in New Zealand through the brands of Online Security Services, Archive Security, Document Destruction Services and Data Security Services and in Australia through the brands of TIMG (The Information Management Group), DataBank, Archive Security, Filesaver, LitSupport and Shred-X.

Operating revenue of $58 million was 12% above the pcp.

EBITDA of $14 million and EBITA of $11 million were 15% and 18% higher than the pcp, respectively.

Growth on both sides of the Tasman has again been equally strong. Demand for physical storage services for both documents and computer media continues to increase. Newly-introduced digital information management services have gained encouraging support from within this division’s existing customer base and assisted the winning of new customers. The document destruction businesses, particularly Shred-X in Australia, have seen increased demand for secure destruction services, improved prices from the sale of shredded paper and the benefit of the acquisition of Advance Security Destruction, all of which have contributed positively to performance. The businesses acquired in the prior year are performing well and, as previously announced, further information management businesses were recently acquired in Australia. Investment during this period in future capacity and capability included the establishment of a new document shredding facility in Sydney and the relocation and consolidation of multiple operational sites to a single facility in Queensland.

Internal Service Providers

Fieldair Holdings provides airfreight linehaul services, Parceline Express provides road linehaul services and Freightways Information Services provides IT development and support to the express package & business mail division. All three internal service providers have continued to deliver quality service, and in doing so have strongly underpinned the service offered by the front line businesses.

Corporate

Corporate overhead costs continue to be well-contained. Acquisitions during the half year have been funded from a combination of operating cash flows and borrowings from existing finance facilities.

Capital expenditure of $7 million was invested during the half year, primarily to provide capacity for growth, including expenditure on facilities and related equipment, IT infrastructure and airfreight capability.

Outlook

Both the express package & business mail and information management markets remain positive and Freightways’ businesses remain well-positioned to benefit from the opportunities that exist in these markets.

The express package market is expected to continue to expand due to increasing activity amongst existing users and due to new volume created by online retailers. Within the business mail market, increasing demand is expected from businesses who still value overnight delivery of standard-priced letters and from businesses seeking alternative or new digital mailhouse services.

The information management market is expected to continue to grow due to the lower cost to businesses of outsourcing their document and computer media storage requirements. Privacy of business information will continue to be a primary driver of demand for secure document destruction services. Customers will increasingly seek complementary and substitute electronic services relating to the creation and management of business information.

Capital expenditure for the full year is expected to be approximately $17 million to support the growth and development of both Freightways operating divisions. Overall, cash flows are expected to remain strong throughout the 2015 financial year.

Freightways will continue to seek out and develop strategic growth opportunities, including acquisitions and alliances that complement its core capabilities.

Conclusion

The positive features of the markets it operates in, the resilience of its business models to accommodate growth and adapt to changing market circumstances and the successful execution of its growth strategies by a very experienced and capable team are evident in this record result. Accordingly, the Directors have been able to declare a fully imputed, 12 cents per share interim dividend.

The Directors acknowledge the outstanding work and ongoing dedication of the Freightways team of people throughout New Zealand and Australia.

SUSAN SHELDON Chairman		DEAN BRACEWELL Managing Director

Freightways Ltd Consolidated Income Statement

For the half year ended 31 December 2014 (unaudited)