Full Year Report June 2009
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 2009. While the current economic downturn has naturally affected Freightways’ performance, the resilience of its business model, the strength of its brand positioning, the importance of its recent strategic growth and capital management decisions and the commitment of its people have combined to report a satisfactory overall result.
Consolidated operating revenue of $340 million for the full year was 5% higher than the prior corresponding period.
Earnings before interest, tax, depreciation and goodwill amortisation (EBITDA) of $70.5 million for the full year was 3% higher than the prior corresponding period, while earnings before interest, tax and goodwill amortisation (EBITA) of $61 million for the full year was 1% higher than the prior corresponding period.
Consolidated net profit after tax (NPAT) of $34.6 million for the year was 7% higher than the prior corresponding period.
Included in these EBITDA and EBITA numbers is a one-off profit of $4 million (NPAT included $3.9 million) generated from the sale and lease-back of a property in Wellington.
Cash generated from operations before interest and tax was $66.7 million.
Capital management initiatives
During the year Freightways implemented a number of capital management initiatives that included:
- The sale and lease-back of a property in Wellington. The sale price was $8.3 million, which resulted in an after-tax profit of $3.9 million being recognised.
- The raising of $49 million of new equity (net of issue costs) via an institutional placement and subsequent retail share purchase plan.
The proceeds from these capital management initiatives were used to reduce net bank debt in order to strengthen Freightways’ balance sheet.
The Directors have declared a final dividend of $12.7 million, which translates into 8.5 cents per share, and will be fully imputed at a tax rate of 33%. When determining the 2009 final dividend, Directors have given particular consideration to:
- the Freightways’ dividend policy to distribute 75% of NPATA (NPAT before goodwill amortisation);
- implications of the current economic downturn; and
- the overall funding requirements of the business, including its ability to fund future complementary acquisitions.
The one-off gain arising from the recent sale of a Wellington property has not been included in determining the final dividend, as was indicated to the market at the time the sale was announced.
In light of the current, exceptionally uncertain operating environment, Directors have elected to introduce a Dividend Reinvestment Plan (DRP). As a further capital management initiative, this DRP will provide all eligible existing shareholders at the dividend record date with the opportunity to increase their equity stake in Freightways, should they choose to do so. It will also serve to further strengthen Freightways’ balance sheet by introducing new equity and by enabling the company to maintain its current level of cash reserves that would otherwise have been reduced to pay a cash dividend.
The first dividend that the DRP will apply to will be the final dividend for the financial year ended 30 June 2009, that is payable on 30 September 2009. Directors have determined that on this occasion a discount of 2.5% will be applied against the VWAP (measured over the 5-day trading period following the dividend record date of 18 September 2009) in calculating the issue price for the DRP. The Company has also signed an underwriting agreement in respect of this upcoming dividend.
Full details relating to the DRP in respect of final dividend for the financial year ended 30 June 2009 will be sent to shareholders during August and published on the NZX website. As a capital management initiative, the application of the DRP will be reviewed for each future dividend.
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, NOW Couriers, SUB60, Security Express and Kiwi Express.
The current economic downturn has translated into lower express package volumes from some of Freightways’ existing customers. In addition, volumes are continuing to fluctuate week to week which creates difficulties in financial forecasting and when planning near-term operational capacity. Overall, the full year earnings performance of Freightways’ express package business is below the prior year. The just completed fourth quarter has been particularly quiet when compared to the same period in the prior year.
Freightways first saw signs of slowing activity from existing customers in 2006. Its positive strategies that have been implemented since that time include various acquisitions and alliances that have strengthened its competitive positioning, the introduction of new service lines and new customer interfacing technologies, training and development of its people to enhance expertise and service quality and productivity improvements wherever they have been possible to achieve. The success of the many initiatives associated with each of these points has again resulted in excellent customer retention. While Freightways’ express package division will naturally continue to be impacted by reduced activity from some of its customers, it remains very well positioned with quality capacity, a highly variable cost base, a shared-risk business model, market leading brands and very experienced and highly motivated teams of people.
Freightways’ express package strategy is to continue to defend and extend its presence in the express package market and to actively develop the market opportunities that are expected to materialise in this more challenging operating environment.
DX Mail operates in New Zealand’s postal services market. DX Mail competes directly with NZ Post across a wide range of postal services, including the street delivery of mail in a number of regions around New Zealand and through its box-to-box document exchange business. DX Mail has gained real traction in the market and won several important new customers. This market support demonstrates the value customers attribute to DX Mail’s provision of a competitive postal service. DX Mail is closely integrated with Freightways’ express package business that performs the majority of its pick-up services.
DX Mail’s earnings contribution to Freightways is relatively small. These earnings, while well down on the prior corresponding period, have in latter months started recovering as recent market share gains offset declining volume from some its existing customers.
DX Mail’s strategy is to continue to profitably grow and develop its presence across the NZ postal market.
Freightways entered the information management market in 1999. Since that time it has grown to be a leading operator in New Zealand in two of its three primary service lines and the number two operator in its third service line. In 2006, Freightways entered the Australian information management market. Since that time Freightways has both acquired and started its own businesses to now have a presence in every major state of Australia. While there remain further business development opportunities in each of its service lines, the success of this growth strategy to date has been important in assisting the diversification and strengthening of Freightways’ overall earnings profile.
The full year earnings performance of Freightways’ information management division is well ahead of the prior corresponding period.
The economic downturn has not had any noticeable effect upon either the data or document storage service lines. Demand for these services is expected to continue to grow due to businesses seeking to free up expensive office space by outsourcing document storage, needing to professionally manage the growing volume of business information they are generating and needing to meet their ever-increasing compliance requirements.
In regard to the document destruction service line, revenue is earned firstly through the collection and secure destruction of paper and secondly through the sale of the related paper to the recycling market. The current economic downturn has resulted in reduced global demand for recycled paper, which has subsequently resulted in reduced prices for the paper sold by Freightways to recyclers, particularly in the second half of this financial year.
As flagged in recent announcements, margins in the information management division have contracted in the fourth quarter due to these lower paper prices and also due to our recent investment in increased capacity. This increased capacity is required to satisfy the growing demand for our core information management services.
Having successfully established a sound operating platform across New Zealand and Australia, Freightways’ information management strategy is to now leverage this platform to realise the positive growth opportunities that exist in this market, including the introduction of new complementary service lines, while continuing to investigate potential acquisition opportunities.
The information management business has contributed approximately 19% of Freightways’ total operating earnings in 2009. The overall full year performance of this division has been very good.
Internal Service Providers
Fieldair Holdings Limited provides airfreight linehaul services, Parceline Express provides road linehaul services and Freightways Information Services provides IT support to the Freightways front line express package and business mail businesses. All three internal service providers have continued to deliver exceptional service.
Corporate costs have increased year on year, primarily to assist and support our strategic growth opportunities.
Capital expenditure during 2009 of $21 million has been significant and has included the one-off investment in new facilities in both Australia and New Zealand to accommodate the future growth of the information management division. This cash outlay experienced during 2009 will underpin Freightways’ ability to drive stronger earnings in the future.
Freightways’ has accepted terms to renew its finance facilities for three years, taking effect from 1 September 2009. Freightways has elected to move from its current structure of two primary lenders to three for the term of its new facilities. While competitive pricing in the current environment has been negotiated, the overall bank margin cost has increased significantly.
Freightways has a very large customer base that is spread over many industry sectors, which minimises its exposure to a single business or industry failure. While its credit management policies and processes are well established with its customers, Freightways has been affected by an increased level of doubtful and bad debts, particularly in the latter half of 2009 that has resulted in its year end provisioning being increased substantially from $0.7 million at year end 2008 to $1.3 million at year end 2009.
Until New Zealand experiences a sustained recovery in the economy, performance of the express package & business mail division is expected to continue to track behind the prior year. While organic growth initiatives are being accelerated wherever possible, existing customer activity will ultimately determine volumes and revenues. Overall, costs are expected to decline in the near term, except in those businesses where market growth is still being experienced.
Near term performance in the information management division is also expected to initially track behind last year, due to the increased cost of recent capacity investment and lower paper sales revenue. This performance is expected to improve as the year progresses and spare capacity is utilised and also if we experience an improvement in paper prices. Paper prices are influenced by global demand and accordingly are expected to react positively to global economic improvement.
Forecast capital expenditure in 2010 of approximately $13 million is significantly lower than 2009 levels. Overall, cash flows are expected to continue to remain strong throughout the year.
Proceeds from capital management initiatives executed during 2009 have been used to reduce debt and strengthen Freightways’ balance sheet so that the company is more strongly positioned to navigate through the current economic turmoil. The introduction of a fully underwritten DRP in respect of the 2009 final dividend will also assist in this regard. Newly renegotiated finance facilities provide funding certainty through until August 2012.
In recent years, Freightways has strengthened its earnings profile by diversifying its activities both geographically and deeper into the information management market. Freightways will continue to seek and investigate growth opportunities to support this strategy and will also explore other opportunities that complement its core capabilities.
Freightways will continue to be affected by the current economic downturn. While accurate forecasting remains difficult, the resilience that Freightways has shown in recent years to lower economic activity is expected to continue to be evidenced in its overall performance, subject naturally to any further deterioration in the economy or business factors beyond its control. In the medium to long-term, Freightways is exceptionally well positioned to reap the benefits of any improvement in the marketplace.
In a difficult operating environment, Freightways has delivered a satisfactory result. Its core express package business has performed soundly, albeit below last year, and its information management business has delivered very good performance. The current economic turmoil will clearly continue to impact on Freightways’ performance in the near term. Medium to longer term and subject to business factors beyond its control, Freightways expects to continue achieving positive performance for its shareholders and other stakeholders, and is well positioned to benefit from any improvement in the economy.
The Directors acknowledge the outstanding work and ongoing dedication of the Freightways team in this very difficult trading environment.
Consolidated Income Statement
For the year ended 30 June 2009
|Transport and logistics expenses*||(155,461)||(149,846)||4%|
|Employee benefits expenses*||(76,695)||(68,916)||11%|
|General and administration expenses||(26,807)||(28,771)||(7%)|
|Operating profit before interest, tax, depreciation and software amortisation||70,548||68,463||3%|
|Depreciation and software amortisation||(9,577)||(7,985)||20%|
|Operating profit before interest and income tax||60,971||60,478||1%|
|Net interest and finance costs||(15,094)||(14,420)||(5%)|
|Profit before income tax||45,877||46,058||–|
|Profit for the year||34,593||32,250||7%|
*Employee benefits of $7,618,000 (2008: $6,367,000) have been included in Transport and logistics expenses, due to the function performed by the relevant employees. The total Employee benefits expenses of the consolidated group for the year ended 30 June 2009 were $84,313,000 (2008: $75,283,000).
Consolidated Balance Sheet
as at 30th June 2009
|Cash and cash equivalents||16,970||2,296|
|Trade and other receivables||46,975||45,094|
|Derivative financial instruments||–||197|
|Other current assets||–||127|
|Total Current Assets||70,710||54,002|
|Non Current Assets|
|Trade and other receivables||232||1,381|
|Property, plant & equipment||75,389||67,771|
|Derivative financial instruments||–||1,959|
|Deferred tax asset||1,109||832|
|Other non-current assets||37||65|
|Total non-current assets||323,035||307,402|
|Trade and other payables||40,116||43,279|
|Finance lease liabilities||262||422|
|Derivative financial instruments||49||–|
|Total Current Liabilities||56,881||62,870|
|Non Current Liabilities|
|Trade and other payables||1,862||1,405|
|Deferred tax liability||–||3,728|
|Finance lease liabilities||191||458|
|Derivative financial instruments||8,678||–|
|Total non-current liabilities||190,809||206,810|
|Cash flow hedge reserve||(5,412)||1,870|
|Foreign currency translation reserve||228||258|
Consolidated Statement of Cash Flows
For the year ended 30 June 2009
|Cash flows from operating activities|
|Receipts from customers||341,968||322,253|
|Payments to suppliers and employees||(275,259)||(254,771)|
|Cash generated from operations||66,709||67,482|
|Interest and other costs of finance paid||(16,098)||(12,806)|
|Income taxes paid||(9,139)||(13,966)|
|Net cash inflows from operating activities||42,050||40,863|
|Cash flows from investing activities|
|Payments for property, plant & equipment||(19,902)||(14,367)|
|Payments for software||(1,186)||(892)|
|Proceeds from disposal of property, plant & equipment||8,361||213|
|Payments for businesses acquired||(18,231)||(40,641)|
|Advances to associate||(2,418)||(1,268)|
|Payments for other investing activities||21||(45)|
|Net cash outflows from investing activities||(33,355)||(57,000)|
|Cash flows from financing activities|
|Increase in bank borrowings||(20,333)||42,127|
|Net proceeds from issue of ordinary shares||48,727||–|
|Finance lease liabilities repaid||(408)||(826)|
|Net cash inflows from financing activities||5,764||17,504|
|Net increase (decrease) in cash and cash equivalents||14,459||1,367|
|Cash and cash equivalents at the beginning of the year||2,296||1,673|
|Exchange rate adjustments||215||(744)|
|Cash and cash equivalents at end of the year||16,970||2,296|
Freightways Operating Revenue
Note: Historic EBITA amounts above for the years ended 30 June 1999 to 2003 have been presented
on a pro-forma basis consistent with the Freightways Investment Statement and Prospectus issued
in August 2003.