Full Year Report June 2011

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 2011. This result is underpinned by progressively improving performance from the core express package & business mail division and again outstanding performance from the information management division.

Operating Performance

Consolidated operating revenue of $353 million for the full year was 7% higher than the prior comparative period (pcp).

EBITDA (excluding non-recurring expenses) of $66 million for the full year was 4% higher than the pcp and EBITA (excluding non-recurring expenses) of $57 million for the full year was 5% higher than the pcp.

Consolidated NPAT (excluding non-recurring expenses) of $31 million for the full year was 7% higher than the pcp, excluding the abnormal tax charge of $5.7 million in the pcp.

Cash flows generated from operations were again strong at $63 million.

It has been necessary to record a one-off expense in the income statement for the full year in respect of direct costs associated with the Christchurch earthquakes, net of insurance proceeds received up until 30 June 2011 and the associated insurance deductibles (“non-recurring expenses”). The amount recorded was $1.3 million ($0.9 million after tax).

During the year Freightways’ businesses were affected by both the Christchurch earthquakes and the Queensland floods. Most importantly none of our team was seriously injured in any of these events, despite several being at work during the times of the earthquakes. Contingency plans were implemented locally and through the support of team mates in other centres to ensure minimal disruption to service, except where access was restricted. The document storage operation of our Christchurch information management business was most severely affected with collapsed racking. The project to extract archive boxes, replace and rebuild racking and return to normal service was completed during the second half of the financial year. The Christchurch earthquakes impacted Freightways firstly through reduced activity and revenue, resulting in an estimated $1.5 million loss of operating earnings, as announced to the market during March. Secondly, the earthquakes caused considerable damage to the information management business. The cost of re- establishing the Christchurch operations of this division, exclusive of insurance proceeds already received, was $1.1 million and for the express package & business mail division was $0.2 million. Insurance claims have been submitted to recover these costs. As at 30 June 2011, the claims had not been settled by the Group’s insurers so it is not yet possible to determine what amount will be recovered. During all the natural disasters noted above, the Freightways team demonstrated its tremendous service ethic and team work to ensure minimal disruption to customers.

Highlights of 2011 include the core express package & business mail division returning double digit earnings growth in the second and fourth quarters; the roll out of the information management division’s service capability throughout Australia; the outstanding performance of the information management division; and the overall resilience again shown by Freightways, despite the challenges of nature and the economy.

Dividend

The Directors have declared a final dividend of 7.25 cents per share, fully imputed at a tax rate of 30%. This represents a pay out of approximately $11.2 million compared with $11.1 million for the interim dividend, bringing the full year’s dividend in line with the Company’s dividend policy of paying out 75% of annual NPAT before goodwill amortisation. The final dividend will be paid on 30 September 2011. The record date for determination of entitlements to the final dividend is 16 September 2011.

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 almost 80% of Freightways’ revenue and earnings through its brands of New Zealand Couriers, Post Haste Couriers, Castle Parcels, NOW Couriers, SUB60, Security Express, Kiwi Express and DX Mail.

Operating revenue of $278 million for the full year was 5% higher than the pcp.

EBITDA of $50 million for the full year was 2% higher than the pcp and EBITA of $45 million for the full year was 4% higher than the pcp.

Strongly improving performance at the half year, that included double digit earnings growth in the second quarter, stalled as a result of the February earthquake in Christchurch. In latter months, volumes have again recovered in most businesses and again in the fourth quarter double digit earnings growth has been achieved. Increasing volumes from many customers, positive market share gains and modest price increases underpinned the revenue growth in this division, as customers continued to recognise the premium service levels provided by the Freightways express package businesses. Revenue related to fuel surcharges that were implemented in the second half to offset the impact of higher fuel prices are also included in the revenue growth result. Management’s focus will remain directed on service quality and cost containment, while continuing to innovate and execute growth initiatives to further broaden the suite of services offered by this division. During 2011, a small postal service provider was acquired, parcel products were marketed for the first time through national retail chains, growth in newly- established international services outpaced domestic growth and the brands of ‘Pass the Parcel’ and ‘Stuck’, that were established in 2010, continued to gain increasing market support.

Despite nature’s challenges and the lacklustre domestic economy, Freightways express package & business mail division has been able to once again demonstrate its resilience and its growth attributes to deliver a sound full year result.

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 DataBank, Archive Security and Shred-X.

Operating revenue of $76 million for the full year was 15% above the pcp.

EBITDA of $17 million for the full year was 13% above the pcp and EBITA of $14 million for the full year was 12% above the pcp.

During 2011, Freightways leased additional capacity in Auckland, Wellington, Sydney, Melbourne, Adelaide and Perth. With this increased capacity has come a stepped increase in lease costs that, as communicated in past announcements, has had some initial detrimental impact on margins. As this capacity is utilised these margins are expected to be restored. Demand for our document management services is such that our utilisation of each of these new facilities is running ahead of our initial expectations.

Strategic growth opportunities for the information management division continue to be explored and executed. During the year Shred-X started up operations in South Australia, New South Wales and Western Australia, meaning that Freightways’ information management division can now offer customers a nationwide service in New Zealand and Australia in all three of its primary service lines. Initial demand for Shred-X’s document destruction services in these Australian cities and for its now national service capability is strong.

Prospects for the information management division remain positive. New capacity, a national service capability throughout both New Zealand and Australia and a highly motivated team of people will continue to drive the growth of this division.

Internal Service Providers

Fieldair Holdings provides airfreight linehaul services, Parceline Express provides road linehaul services and Freightways Information Services provides IT support to the express package & business mail division. All three internal service providers have continued to deliver exceptional service that underpins the service offered by our front line businesses.

Finance Facilities

Freightways’ finance facilities were renegotiated during the first half of the financial year to provide 5-year funding for around a third of the finance facilities until September 2015. Post balance date, Freightways’ total finance facilities were renegotiated with improved pricing and a new structure, effective from 1 September 2011, subject to final documentation. Total facilities of NZD110 million and AUD70 million, spread equally between 3-year, 4-year and 5-year maturity have been approved by Freightways’ banking syndicate. This new multi-currency facility, with an evenly spread maturity profile, demonstrates the support of Freightways’ banking syndicate and provides important diversity of tenure and funding certainty for the company.

Corporate

Corporate overhead costs continue to be well contained. Interest costs for the full year have increased compared with the pcp due to slightly higher average bank debt levels during the period and the higher margins charged by Freightways’ lenders compared with the pcp. The bank debt levels at the end of the full year are $4 million higher than at 30 June 2010, however all of this increase is as a result of the movement in foreign exchange rates applicable to the translation of Australian-denominated borrowings, which of itself does not contribute to any increase in interest costs.

Tax expense for the full year is lower than the pcp (excluding the $5.7 million abnormal tax charge in the pcp) due to higher interest deductions compared with the pcp.

Outlook

Based on our experiences in 2011 we expect to see our market segments continue to gradually improve throughout 2012. While Freightways expects it will benefit from this improvement, it will also complement any natural growth by continuing to actively manage its cost base, by striving to further improve its service quality and by continuing to execute growth initiatives wherever possible.

The express package & business mail division, remains reliant on growth amongst its existing customer base to sustain its year-on-year performance improvement, albeit the market share gains and pricing improvement achieved during 2011 will contribute positively to its overall performance. Freightways has consistently demonstrated its ability to compete successfully in an openly competitive environment and it will continue to do so. Our express package brands are among the most recognised in New Zealand, our people have a depth of experience second to none and our service culture, that was so clearly demonstrated during the tough times earlier this financial year in Christchurch and Queensland, will continue to stand us apart from our competitors.

The information management division is transitioning successfully through a period of significant investment in capacity. It is expected to complete this transition while still delivering sound earnings growth, albeit margins will be lower in 2012 than they were in 2011. Already our new facilities are filling faster than we had expected.

Capital expenditure for 2012 is expected to be $17 million and includes a one-off $4 million depot refurbishment at our main Auckland site to accommodate the relocation of NOW Couriers, who are currently based off-site. Cost savings as a result of this project are expected to be achieved in the 2013 financial year. Overall, cash flows are expected to remain strong throughout the financial year.

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 well positioned to reap the benefits of further improvement in the markets in which it operates.

Conclusion

Freightways has delivered a full year operating result that demonstrates good progress and is above the prior year in all respects, 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. Accordingly, the Directors have been able to declare a fully imputed 7.25 cents per share final 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 year ended 30 June 2011