Full Year Report June 2008

Full Year Review

From the Chairman and Managing Director

The Directors are pleased to present the financial results of Freightways Limited (Freightways) for the year ended 30 June 2008. Highlights for the year have included the successful execution of Freightways’ growth strategy in the Australian market, a sound result from our core express package business in a challenging domestic market, outstanding performance from the information management division and the delivery of another record result.

Operating performance

The results for this full year have been prepared in accordance with NZIFRS for the first time. As there is no longer a charge for goodwill amortisation, the EBIT and NPAT for the prior corresponding period have also had goodwill amortisation excluded for comparative purposes.

Consolidated operating revenue of $324 million for the full year was 14% higher than the prior corresponding period.

Earnings before interest, tax and depreciation (EBITDA) of $68.5 million for the full year was 9% higher than the prior corresponding period, while earnings before interest and tax (EBITA) of $60.5 million for the full year was 7% higher than the prior corresponding period.

Consolidated net profit after tax (NPAT) of $32.3 million for the full year was 5% higher than the prior corresponding period.

Cash generated from operations before interest and tax of $67.5 million was 8% higher than the prior corresponding period.

Dividend

The Directors have declared a final dividend of $11.9 million reflecting this sound full year result. This translates to 9.25 cents per share, fully imputed at a tax rate of 33%, which will be paid on 30 September 2008. The record date for determination of entitlements to the dividend is 12 September 2008. This brings the total payout in respect of the year to $24.1 million or 18.75 cents per share, fully imputed, and is 4% higher than the prior year.

Reveiw of Operations

Express Package and Business Mail

The core express package business contributes the majority of Freightways’ revenue and earnings.  Freightways operates the brands of New Zealand Couriers, Post Haste Couriers, Castle Parcels, SUB60, Security Express and Kiwi Express. In addition, the business of NOW Couriers was acquired during the year.

Freightways’ primary objective is to defend and grow its core express package business. A vast number of initiatives are implemented by a very experienced and capable team of people to achieve this objective. The express package operating environment has been challenging with negative organic volume growth, fluctuating month on month volumes and rising costs, particularly in relation to fuel. Despite these pressures, Freightways has been careful to continue to make decisions for the long-term good of the business. As such, it has continued to carry capacity in its air and road linehaul network and invest in its facilities, technology, customer service initiatives and most importantly in the training and development of its people. Freightways’ experience is that the work it does today during these quieter times will determine its ability to reap the benefits from future growth.

The increased cost of fuel has naturally had a significant impact on Freightways’ express package businesses. Recovery of this cost from customers lags the actual cost incurred and in a period of rapidly escalating fuel prices, as has been experienced throughout the second half of 2008, it means that some cost recovery will not occur until the point in time when the fuel price levels off or decreases. Freightways’ business model is such that it incentivises productivity right through to the contractors that perform its front line courier deliveries. As such Freightways ensures it is operating as efficiently as possible and is using its fuel resource wisely.

The NOW Couriers business has in its first three months of ownership delivered against initial expectations. NOW Couriers operates a package delivery business in the metropolitan Auckland market and provides nationwide overnight services through the established networks of Castle Parcels and Post Haste Couriers.

The earnings performance of Freightways’ express package business is slightly above the prior corresponding period. The strength and flexibility of Freightways’ business model and the focus of its people are evident in the delivery of this result in a very challenging operating environment.

DX Mail operates in New Zealand’s postal services market. In recent years, DX Mail has developed its own street delivery network in a number of city centres around New Zealand and gained real traction in the market by winning several important new customers. This market support demonstrates the value customers attribute to DX Mail’s provision of a competitive postal service to that of the Government-owned NZ Post.

DX Mail is closely integrated with Freightways’ express package business that performs the majority of DX Mail’s pick-up services. DX Mail also operates from the premises of the express package businesses, as well as from its own network of over 250 postal exchanges located throughout New Zealand. DX Mail completes its own street delivery of mail in selected areas of Southland, Canterbury, Wellington, Manawatu, Wanganui, Taranaki, Hawkes Bay, Bay of Plenty and Waikato. DX Mail’s strategy is to continue to develop this street delivery network. In the meantime it also accesses the NZ Post network for the delivery of a significant share of its mail volumes in areas where it is not represented itself.

Despite significantly growing its overall volume and revenue, DX Mail has returned a disappointing earnings result for the second half of the year due to a changing business mix affecting margins. A reduction in higher margin box-to-box business mail, particularly from the legal and travel sectors where DX Mail has traditionally had a very strong presence, has contributed to this change in business mix. In particular, physical airline tickets and documentation related to property conveyance has been substituted by electronic options. DX Mail has replaced this lost volume with lower margin general postal volumes. In addition, DX Mail has also had to invest in adjusting its operations to enable it to comply with the new pricing-in-proportion regime introduced to the market by NZ Post in March 2008.

DX Mail’s contribution to Freightways’ earnings remains at this stage relatively small.

Information Management

Freightways views the information management market as an emerging growth opportunity, as evidenced by the recent acquisitions it has completed, both in New Zealand and Australia. Within the information management market, Freightways offers specialist off-site management of electronic media in climate-controlled vaults, archiving and physical storage of documents  and document destruction services to a wide range of business customers.

Freightways’ information management businesses are experiencing strong growth on both sides of the Tasman and continue to demonstrate their resilience to the current economic downturn. In New Zealand, the businesses of Archive Security, Data Security Services, and Document Destruction Services are based in five key locations that enable the provision of a national service. In Australia, the businesses of DataBank and Shred-X are concentrated in New South Wales, Victoria and Queensland. During 2008 DataBank established a new branch in South Australia and recently acquired the businesses of National Records Managers (Australian Capital Territory) and Moorside Document Storage (Victoria).

In July 2007, Freightways announced the acquisition of the document destruction businesses of Shred-X and Document Destruction & Paper Recyclers in Queensland. These acquisitions have delivered against Freightways’ initial expectations and also enabled the closer investigation of further growth opportunities within Australia. Shred-X recently acquired Fine Paper Suppliers in Victoria.

Both DataBank and Shred-X offer a national service, using agents in states where they have no established operations.

Accelerating growth has contributed to the strong performance of Freightways’ information management businesses. This growth is being driven by an increasing awareness in the market for the need to professionally and securely manage the increasing volume of business information, meet increasing compliance requirements including those mandated by Australian privacy legislation, manage risk and assess the cost-benefit of outsourcing. Specifically, in regard to document destruction, there is a growing market demand to securely destroy documents and recycle paper.

During 2008 Freightways embarked on increasing its operating capacity in a number of locations in both New Zealand and Australia to ensure it was able to cope with the growing market demand for its information management services. The information management business currently contributes approximately 15% of Freightways’ revenue and earnings. The performance of this business has been outstanding. Freightways’ information management business has delivered a strong contribution to the group’s overall result.

Internal Service Providers

Fieldair Holdings Limited provides airfreight linehaul services, Parceline Express provides road linehaul services and Freightways Information Services provides IT support to Freightways front line businesses. All three internal service providers have continued to deliver outstanding service. Capacity in all three of these businesses exists to accommodate the future growth that is expected from the express package & business mail division.

Corporate costs have increased with the establishment of an office in Australia to support the development and growth of our Australian businesses. Freightways’ finance facilities were re-negotiated in August 2007 and extended out to November 2010. Additional funding headroom has also been negotiated to enable the execution of any near-term incremental acquisition opportunities. During the year, Freightways increased its borrowings to support its recent growth and capacity initiatives. While approximately 50% of Freightways’ total debt is hedged, the group’s weighted average interest rate on its borrowings has increased as a result of the higher cost of variable rate borrowings during a time of increasing interest rates in the general market.

Outlook

Freightways’ core express package business is expected to continue to perform soundly overall, although fluctuating month on month volume such as is currently being experienced makes it difficult to accurately forecast near term performance.  While some cost increases are expected to moderate in the 2009 financial year, the cost of fuel is naturally very difficult to predict. Pricing strategies are however in place to re-charge the cost of fuel when it rises above published benchmarks. Cost surprises, such as the decision taken by the New Zealand Government to significantly increase the cost of Road User Charges without notice, do not contribute to a stable operating environment. Nevertheless, Freightways remains optimistic about the prospects of its core express package business.

Freightways’ business mail operation is expected to improve its year on year performance in 2009. Despite operating in a relatively volatile market and competing against a Government-owned business, DX Mail continues to enjoy growing market support.

Freightways’ information management businesses both in New Zealand and Australia are expected to continue their positive development. The cost of recently increased capacity to accommodate demand will result in a near-term margin reduction, however total earnings are expected to increase as the benefit of growth initiatives are realised. As new capacity is utilised over the medium-term, incremental revenue growth is expected to drive margins back to 2008 levels.

In recent years, Freightways has successfully embarked on diversifying its activities both geographically and deeper into the information management market. Freightways will continue to seek and develop growth opportunities to support this strategy and continue to explore other opportunities that complement its existing capabilities.

In the near term, management expect Freightways’ performance to continue the trend shown in this and recent results announcements, albeit the performance of the New Zealand economy will influence this outcome. In the medium to long-term, Freightways is exceptionally well positioned to reap the benefits of any improvement in the New Zealand marketplace.

 

Conclusion

In a challenging operating environment, Freightways has delivered a record result and better positioned itself for future growth. Its core business has performed well and its information management business has delivered outstanding performance. This result has enabled Directors to declare the payment of a final dividend that lifts the annual payout 4% above last year’s level. Freightways expects to continue achieving positive performance for its shareholders and other stakeholders, subject to business factors beyond its control.

The Directors acknowledge the outstanding work and ongoing dedication of the Freightways team.

WAYNE BOYD Chairman		DEAN BRACEWELL Managing Director

Income Statement

For the year ended 30 June 2008