Full Year Report June 2010
Full Year Review
From the Chairman and Managing Director
The Directors are pleased to present the financial result of Freightways Limited (Freightways) for the full year ended 30 June 2010. While below the prior year, this result demonstrates progressively improving Freightways performance in line with the gradual recovery of the domestic New Zealand marketplace.
Consolidated operating revenue of $328.5 million for the full year was 2% lower than the normalised* prior comparative period (pcp). Second half revenue from 1 January to 30 June 2010 was 1% above the normalised pcp, whereas previously announced first half revenue from 1 July to 31 December 2009 was 4% below the normalised pcp.
EBITDA of $63.7 million for the full year was 2% lower than the normalised pcp. Second half EBITDA from 1 January to 30 June 2010 was 5% above the normalised pcp, whereas previously announced first half EBITDA from 1 July to 31 December 2009 was 8% below the normalised pcp.
EBITA of $53.9 million for the full year was 3% lower than the normalised pcp. Second half EBITA from 1 January to 30 June 2010 was 6% above the normalised pcp, whereas previously announced first half EBITA from 1 July to 31 December 2009 was 10% below the normalised pcp.
Consolidated NPAT (before a $5.7 million abnormal tax charge) of $28.9 million for the full year was 2% lower than the normalised pcp. Second half NPAT from 1 January to 30 June 2010 was 4% above the normalised pcp whereas, previously announced first half NPAT from 1 July to 31 December 2009 was 8% below the normalised pcp.
An abnormal tax charge of $5.7 million relates to the previously announced tax changes arising from the Government’s Budget of 20 May 2010. The Government will be reducing the corporate tax rate from 30% to 28% with effect for Freightways from 1 July 2011 and will be removing the tax deductibility of depreciation for buildings with a life of 50 years or more. These changes result in the need for an increase in the deferred tax liability and accordingly an abnormal charge to tax expense for the year ended 30 June 2010 is necessary to achieve this.
*To ensure a like-for-like comparison for the purposes of this commentary only, references to the prior comparative period (pcp) are after normalising the actual result to remove 5 extra trading days that were accounted for in July of the pcp and the removal of the one-off $4m benefit of a property sale that was accounted for in June of the pcp. These one-offs had contributed approximately $6 million to revenue, $5.5 million to earnings before interest, tax, depreciation and goodwill amortisation (EBITDA) and earnings before interest, tax and goodwill amortisation (EBITA) and $5 million to net profit after tax (NPAT) in the pcp.
The Directors have declared a final dividend of 7 cents per share, fully imputed at a tax rate of 30%. This represents a payout of approximately $10.8 million, on par with the interim dividend, bringing the full year’s dividend payout in line with the Company’s dividend policy of paying out 75% of annual NPAT before goodwill amortisation (NPATA), when excluding the $5.7 million abnormal tax charge which is a non-cash accounting adjustment only. The dividend will be paid on 30 September 2010. The record date for determination of entitlements to the dividend will be 17 September 2010.
The Dividend Reinvestment Plan (DRP) will not be offered in relation to this final dividend. As a capital management tool, the application of the DRP will be reviewed for each future dividend.
Review of Operations
Express Package and Business Mail
The core Express Package & Business Mail division currently contributes 80% of Freightways’ revenue and 78% of its earnings through its brands of New Zealand Couriers, Post Haste Couriers, Castle Parcels, NOW Couriers, SUB60, Security Express, Kiwi Express and DX Mail.
As the year has progressed the performance of the express package & business mail division has gradually improved.
Operating revenue of $263.5 million for the full year was 4% lower than the normalised pcp. Second half revenue from 1 January to 30 June 2010 was 1% lower than the normalised pcp, whereas previously announced first half revenue from 1 July to 31 December 2009 was 7% below the normalised pcp.
EBITDA of $48.9 million for the full year was 5% lower than the normalised pcp. Second half EBITDA from 1 January to 30 June 2010 was 3% above the normalised pcp, whereas the previously announced half year EBITDA from 1 July to 31 December 2009 was 11% below the normalised pcp.
EBITA of $43.2 million for the full year was 5% lower than the normalised pcp. Second half EBITA from 1 January to 30 June 2010 was 4% above the normalised pcp, whereas previously announced first half EBITA from 1 July to 31 December 2009 was 12% below the normalised pcp.
Overall lower express package volumes from existing customers have meant lower revenue was earned this year than the prior year. The successful implementation of a wide range of strategies by a committed and very experienced team has meant the economic factors external to the team’s direct control have not had a more serious impact on performance. While a great deal of focus has naturally been on service quality and cost management, Freightways has been careful to continue to very actively seek quality market share growth and to continue to develop strategic growth opportunities. Among a number of key successes has been:
- the winning of Australia Post’s international inbound express mail service, air parcels and courier product deliveries into New Zealand; and
- the launch of two new sub-brands – ‘Stuck’ which is positioned to satisfy demand for hard to deliver express freight jobs (refer www.stuck.co.nz) and ‘Pass the Parcel,’ which is positioned to service customers of TradeMe (refer www.passtheparcel.co.nz).
While overall volumes have improved in recent months to be on a par with the previous year this is not yet the case in all businesses within this division. Until a more broadly-based performance improvement is evidenced, we anticipate the recovery of the economy, and how it translates into the performance of Freightways’ core express package businesses, will continue to be gradual.
DX Mail operates in New Zealand’s postal industry and competes directly with NZ Post. DX Mail has established itself as a viable alternative to the state-owned NZ Post and has developed many important customer relationships. This market support demonstrates the value that customers attribute to DX Mail’s provision of a competitive postal service.
Due to NZ Post’s inherent advantages, obtained from the era during which it had a statutory monopoly, and the high barriers to establishing a competitive postal network, DX Mail remains in the formative stage of its development. As such, it must access NZ Post’s network for the final delivery of some of the mail it manages. Whereas in the past NZ Post has determined how, where and at what price this access occurs, it is intended that future access arrangements will be determined by an independent access committee. The establishment of this independent access committee is expected to be positive for the overall postal industry, including independent operators such as DX Mail. DX Mail is a small contributor to Freightways’ consolidated results, but forms a strategic part of the Group’s overall service portfolio.
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 DataBank, Archive Security and Shred-X.
This division continues to demonstrate positive revenue and earnings growth, particularly as paper sales revenue has returned to more normal levels as global demand and pricing for paper rebounded from 2009’s lows.
Operating revenue of $66.2 million for the full year was 9% above the normalised pcp. Second half revenue from 1 January to 30 June 2010 of $34.1 million was 9% above the normalised pcp, whereas previously announced first half revenue from 1 July to 31 December 2009 was 9.5% above the normalised pcp.
EBITDA of $15.5 million for the full year was 12% above the normalised pcp. Second half EBITDA from 1 January to 30 June 2010 was 25% above the normalised pcp, whereas previously announced first half EBITDA from 1 July to 31 December 2009 was on par with the normalised pcp.
EBITA of $12.3 million for the full year was 12% above the normalised pcp. Second half EBITA from 1 January to 30 June 2010 was 28% above the normalised pcp whereas previously announced first half EBITA from 1 July to 31 December 2009 was 4% below the normalised pcp.
Freightways’ Trans-Tasman information management businesses have continued to show great resilience to the economic cycle. While the document destruction arm was initially severely affected by lower revenue from the sale of its recycled paper, due to reduced global demand, this impact was largely offset by the growth and development of the document and data storage businesses and efficiency gains as the benefits associated with consolidating operations in a number of locations were realised. More recently, recycled paper prices have returned to the long run average for this product.
Recent investment in additional capacity in Melbourne and Wellington has increased the cost base of this division. Accelerated demand for the services offered by our information management division has meant that further storage capacity will be leased in Sydney, Perth, Adelaide and Auckland during 2011. This investment will reap future rewards as utilisation of this capacity increases. While highly competitive, the information management market continues to perform to expectations, including providing Freightways with a very real and important platform for strategic growth.
The information management division has contributed approximately 22% of Freightways’ total EBITA this year and its overall performance 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.
Following the capital management initiatives of 2009, Freightways has maintained its lower debt levels. This lower level of debt has contributed to Freightways’ ability to offset the higher margins that are currently being charged by its lenders. Freightways’ finance facilities were renegotiated during the first half of the financial year and came into effect on 9 September 2009.
Corporate overhead costs continue to be well contained, as have all other major areas of cost within the operating businesses, other than occupancy. Occupancy costs have been impacted by investment in increased capacity for our growing information management division.
We have not yet experienced a sustained, across-the-board improvement in all our businesses, which indicates to us ongoing market uncertainty and suggests that the impact on Freightways of an improving economy will continue to be gradual. In the meantime, Freightways will actively manage its cost base, seek to further improve its service quality and continue to develop growth initiatives wherever possible.
The express package & business mail division, while reliant on growth amongst its existing customer base to improve its year-on-year performance, will also benefit from the quality market share wins it has achieved during 2010 and new revenue created by innovative new services.
The information management division is expected to perform strongly and continue to benefit from its recurring and growing revenue base and growth of its overall market, albeit new capacity will come at an initial stepped cost. It remains difficult to accurately forecast demand and pricing for recycled paper, which both influence overall earnings in this division. Current pricing levels are in line with long run averages. The sustainability of the global economic recovery will affect paper prices.
Forecast capital expenditure for the financial year ahead is $13 million. This investment will be evenly distributed between the express package & business mail division and the information management division.
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 develop growth opportunities to support this strategy and will also explore other opportunities that complement its core capabilities.
Subject to business factors beyond its control, Freightways is particularly well positioned to reap the benefits of further improvement in the marketplace.
Freightways has delivered a full year operating result that, while below the prior year, is considered sound, again demonstrating the resilience of the Group, the positive features of the markets it operates in and the high quality of its subsidiary businesses and teams of people. Performance in the second half of the year showed good improvement compared to the pcp. Accordingly, the Directors have been able to declare a fully imputed 7 cents per share final dividend.
The Directors acknowledge the outstanding work and ongoing dedication of the Freightways team in a very difficult trading environment.
Consolidated Income Statement
For the year ended 30 June 2010
|Transport and logistics expenses*||(149,072)||(155,461)||(4%)|
|Employee benefits expenses*||(75,202)||(76,695)||(2%)|
|General and administration expenses||(28,733)||(26,807)||7%|
|Operating profit before interest, tax, depreciation and software amortisation||63,742||70,548||(10%)|
|Depreciation and software amortisation||(9,861)||(9,577)||3%|
|Operating profit before interest and income tax||53,881||60,971||(12%)|
|Net interest and finance costs||(14,356)||(15,094)||(5%)|
|Profit before income tax||39,525||45,877||(14%)|
|– Tax applicable to operating earnings||(10,667)||(11,284)||(5%)|
|– Tax charge as a result of tax law changes||(5,694)||–||–|
|Total income tax||(16,361)||(11,284)||45%|
|Profit for the year||23,164||34,593||(33%)|
* Employee benefits of $8,689,000 (2009: $7,618,000) 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 2010 were $83,891,000 (2009: $84,313,000).
Consolidated Balance Sheet
as at 30 June 2010
|Cash and cash equivalents||4,996||16,970|
|Trade and other receivables||44,724||46,975|
|Derivative financial instruments||–||–|
|Other current assets||–||–|
|Total Current Assets||57,490||70,710|
|Non Current Assets|
|Trade and other receivables||360||232|
|Property, plant & equipment||77,111||75,389|
|Derivative financial instruments||1,034||1,109|
|Deferred tax asset||1,109||832|
|Other non-current assets||22||37|
|Total non-current assets||325,018||323,035|
|Trade and other payables||37,679||40,116|
|Finance lease liabilities||189||262|
|Derivative financial instruments||233||49|
|Total Current Liabilities||54,836||56,881|
|Non Current Liabilities|
|Trade and other payables||1,842||1,862|
|Deferred tax liability||6,106||–|
|Finance lease liabilities||–||191|
|Derivative financial instruments||7,150||8,678|
|Total non-current liabilities||169,746||190,809|
|Cash flow hedge reserve||(5,582)||(5,412)|
|Foreign currency translation reserve||(302)||228|
Consolidated Statement of Cash Flows
For the year ended 30 June 2010
|Cash flows from operating activities|
|Receipts from customers||329,078||341,968|
|Payments to suppliers and employees||(265,566)||(275,259)|
|Cash generated from operations||63,512||66,709|
|Interest and other costs of finance paid||(18,605)||(16,098)|
|Income taxes paid||(11,860)||(9,139)|
|Net cash inflows from operating activities||33,335||42,050|
|Cash flows from investing activities|
|Payments for property, plant & equipment||(10,783)||(19,902)|
|Payments for software||(1,674)||(1,186)|
|Proceeds from disposal of property, plant & equipment||127||8,361|
|Payments for businesses acquired||(526)||(18,231)|
|Advances to associate||3,764||(2,418)|
|Payments for other investing activities||–||21|
|Net cash outflows from investing activities||(9,092)||(33,355)|
|Cash flows from financing activities|
|Increase (decrease) bin bank borrowings||(24,553)||(20,333)|
|Net proceeds from issue of ordinary shares||9,423||48,727|
|Finance lease liabilities repaid||(265)||(408)|
|Net cash inflows (outflows) from financing activities||(35,787)||5,764|
|Net increase (decrease) in cash and cash equivalents||(11,544)||14,459|
|Cash and cash equivalents at the beginning of the year||16,970||2,296|
|Exchange rate adjustments||(430)||215|
|Cash and cash equivalents at end of the year||4,996||16,970|
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.