Half Year Report December 2009
Half Year Review
From the Chairman and Managing Director
The Directors are pleased to present the financial results of Freightways Limited (Freightways) for the half year ended 31 December 2008. Freightways has delivered a sound result from its express package and business mail division and an outstanding result from its growing information management division. This result once again demonstrates the resilience of Freightways’ business model, the strength of its brand positioning and the importance of the successful execution of its strategic growth decisions in recent years.
Naturally the current economic downturn is impacting Freightways in various ways. This impact is discussed throughout this report in relation to each segment of Freightways’ operations.
Consolidated operating revenue of $177 million for the half year was 10% higher than the prior corresponding period.
Earnings before interest, tax, depreciation and goodwill amortisation (EBITDA) of $36 million for the half year was 3% higher than the prior corresponding period, while earnings before interest, tax and goodwill amortisation (EBITA) of $32 million for the half year was 1% higher than the prior corresponding period.
Consolidated net profit after tax (NPAT) of $17 million for the half year was 1% higher than the prior corresponding period.
Cash generated from operations before interest and tax of $33 million was 3% higher than the prior corresponding period.
The Directors have declared an interim dividend of $10.3 million which translates into 8.0 cents per share, and will be fully imputed at a tax rate of 33%. When determining the 2009 interim dividend Directors have given particular consideration to:
- the current economic downturn, which has resulted in modest overall earnings growth, constrained by lower activity from some existing customers, and the difficulty in accurately forecasting near term operating performance; and
- the overall funding requirements of the business, including the company’s investment in two significant capital projects during 2009 to provide future capacity for its operations and the completion of the acquisition of several businesses. These investments add immediate inherent value and are also expected to contribute to future growth in earnings, however they have naturally required an immediate stepped cash outlay for a future incremental cash benefit.
The Directors have therefore elected to take a more conservative approach than has been normal in recent years when determining the level of dividend to be paid for this interim period. This decision is considered prudent and appropriate at this stage of the year. In looking forward it is difficult to determine the impact of the economic turmoil on Freightways’ operating environment. Due to this uncertainty, Freightways will publish in April a Trading Update that will provide high level financial results for the third quarter. The interim dividend will be paid on 31 March 2009. The record date for determination of entitlement to the dividend is 13 March 2009.
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 earnings performance of Freightways’ express package business is slightly below the prior corresponding period.
The current economic downturn has translated into lower express package volumes from some of Freightways’ existing customers. In addition, volumes are continuing to fluctuate markedly month to month which creates difficulties when planning near term capacity.
Freightways first saw signs of slowing activity from existing customers in 2006. Since that time it has strengthened its competitive positioning through various acquisitions and alliances, introduced new service lines, implemented new customer interfacing technologies, increased the training and subsequent depth of knowledge and experience amongst its team of people, continued to improve its service quality and sought productivity gains wherever possible. While in recent years costs have been difficult to contain, particularly in regard to labour, occupancy and fuel, these pressures have started to abate in recent months. The success of the many initiatives associated with each of the above points has resulted in excellent customer retention, increased market share, pricing improvement and is evidenced in the delivery of this half year result. While Freightways’ express package division will naturally continue to be impacted by reduced activity from some of its customers, it is very well positioned with a highly variable cost base, a shared-risk business model 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. In recent years, DX Mail has developed its own street delivery network in a number of regions around New Zealand to complement its traditional 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 to that of the Government-owned NZ Post. 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 still at a reasonable margin, are well down on the prior corresponding period.
The current economic downturn has primarily affected DX with reduced letter volumes, most noticeably in its traditional legal, travel and finance markets. In addition, some volume has transitioned from physical letters to electronic communication.
Partially offsetting the impact of these issues has been the outstanding growth that DX Mail has consistently achieved since entering the general postal market. While this is a lower margin product than its traditional box-to-box product, the size of the market opportunity remains significant.
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 the 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 acquired other businesses 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 earnings performance of Freightways’ information management division is well ahead of the prior corresponding period. In particular, growth in all service lines has remained very positive throughout the half year.
The current 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, businesses needing to professionally manage the growing volume of business information they are generating and businesses needing to meet their ever-increasing compliance requirements.
In regard to the document destruction service line, revenue is earned firstly through ‘service revenue’ related to the pickup, collection and secure destruction of paper and secondly through ‘paper sales revenue’ from 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 some of the paper sold by Freightways to recyclers. For this reason, Freightways’ New Zealand paper sales revenue is expected to decline in the second half of this financial year. Australian paper sales revenue is not expected to decline due to contracts which are in place until at least June 2009 and due to the majority of paper generated in Australia being used domestically rather than being exported. The majority of Freightways’ New Zealand volumes are exported.
A range of initiatives to offset the impact of lower paper prices for recycled paper are currently being implemented. These include sourcing alternative buyers, market pricing initiatives, stockpiling high grade paper in the expectation of improved prices in the near term and simplifying processes to sort paper into those specific grades where commercial demand remains, which in turn contributes to labour efficiencies. As demand for recycled paper returns it is expected that prices will recover. Overall the benefit of these offsetting initiatives will mean the impact on Freightways of lower paper sales revenue through until June 2009 is not expected to be material.
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 service lines, while continuing to seek out and investigate potential acquisition opportunities.
The information management business has contributed 18% of Freightways’ total operating earnings in this half year. The performance of this division has been outstanding.
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 Australian expansion.
Freightways’ finance facilities were re-negotiated in August 2007 and extend out to November 2010. Freightways has benefited from a lower NZ business tax environment and a lower cost of funds as interest rates have declined in recent months. The full benefit of lower interest rates has been impacted by the unfavourable, non-cash charge of $0.6 million relating to the accounting treatment required under NZ IFRS for certain financial instruments. Freightways hedges a significant portion of its current and forecast bank borrowings. As interest rates have declined Freightways has progressively increased its level of long-term hedging in particular, to ensure lower rates on offer today are locked in for the long-term benefit of the company.
The current economic downturn has not affected Freightways’ ability to finance its operations or growth initiatives. As Freightways seeks to renegotiate its finance facilities in the future, indications are that bank margins may increase, offsetting some of the benefit of lower interest rates.
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 the risk of bad debts has increased for all Freightways businesses, its credit management policies and processes are well established with its customers and a material increase in its provision for doubtful debts is not anticipated at this stage. Credit control is actively managed across all Freightways businesses.
Freightways’ express package and business mail division is expected to continue to perform soundly overall, although fluctuating month on month volume such as has been experienced through until December 2008 makes it difficult to accurately forecast near term performance. Customer activity will ultimately determine volumes and revenues. Cost increases are expected to moderate in the near term across most expense lines.
Freightways’ information management businesses, both in New Zealand and Australia, are expected to continue their positive development. The completion of two significant developments in Queensland and Wellington during 2009 to provide increased capacity has contributed to a one-off stepped increase in Freightways’ capital expenditure. These new facilities will result in a near-term margin reduction, as will lower paper sales revenue, however overall earnings are expected to continue to increase as the benefit of growth initiatives are realised.
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. In the medium to long-term, Freightways is exceptionally well positioned to reap the benefits of any improvement in the marketplace.
In a challenging operating environment, Freightways has delivered a sound result. Its core express package business has performed well and its information management business has delivered outstanding performance. This result has enabled Directors to declare the payment of an interim dividend of 8.0 cents per share, fully imputed at a tax rate of 33%. In light of the exceptional times we are currently operating in, a Trading Update will be provided in April to inform the market of third quarter results. 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 in this very difficult trading environment.
Freightways Ltd Consolidated Income Statement
For the half year ended 31 December 2008 (unaudited)
|6 months ended
31 Dec 2008
|6 months ended
31 Dec 2008
|Transport and logistics expenses*||(80,894)||(73,448)||10%|
|Employee benefits expenses*||(39,156)||(34,371)||14%|
|General and administrative expenses||(16,447)||(15,284)||8%|
|Operating profit before interest, tax, depreciation and software amortisation||36,120||35,028||3%|
|Depreciation and software amortisation||(4,628)||(3,737)||24%|
|Operating profit before interest and income tax (EBITA)||31,492||31,291||1%|
|Net interest and finance costs||(8,402)||(6,754)||25%|
|Profit for the period (NPAT)||16,892||16,765||1%|
*Employee benefits of $5,161,000 (2007: $3,345,000) 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 six months ended 31 December 2008 were $44,317,000 (2007: $37,716,000).
Freightways Ltd Consolidated Statement of Cash Flows
For the half year ended 31 December 2008 (unaudited)
|6 months ended
31 Dec 2008
|6 months ended
31 Dec 2007
|Cash flows from operating activities|
|Receipts from customers||175,420||157,230|
|Payments to suppliers and employees||(142,202)||(125,055)|
|Cash generated from operations||33,218||32,175|
|Net interest and other costs of finance paid||(8,167)||(6,503)|
|Income taxes paid||(5,355)||(5,484)|
|Net cash inflows from operating activities||19,696||20,188|
|Cash flows from investing activities|
|Payments for property, plant & equipment||(13,213)||(5,038)|
|Proceeds from disposal of property, plant & equipment||105||141|
|Payments for software||(813)||(479)|
|Payments for businesses acquired||(12,037)||(21,397)|
|Advances to associate||(2,538)||(347)|
|Payments for other investing activities||(16)||(223)|
|Net cash outflows from investing activities||(28,512)||(27,343)|
|Cash flows from financing activities|
|Increase in bank borrowings||20,946||19,808|
|Finance lease liabilities repaid||(264)||(574)|
|Net cash inflows from financing activities||8,766||7,656|
|Net increase in cash and cash equivalents||(50)||501|
|Cash and cash equivalents at the beginning of the period||2,423||1,786|
|Exchange rate adjustments||163||(4)|
|Cash and cash equivalents at end of the period||2,536||2,283|
Freightways Ltd Consolidated Balance Sheet
As at 31 December 2008 (unaudited)
31 Dec 2008
31 Dec 2007
|Cash and cash equivalents||2,536||2,283|
|Trade and other receivables||47,601||48,353|
|Derivative financial instruments||–||210|
|Total Current Assets||57,151||57,136|
|Trade and other receivables||4,039||528|
|Property, plant & equipment||76,659||60,379|
|Derivative financial instruments||–||3,687|
|Deferred tax asset||3,450||570|
|Other non-current assets||72||351|
|Total Non-Current Assets||323,433||276,955|
|Trade and other payables||41,550||44,708|
|Finance lease liabilities||321||494|
|Derivative financial instruments||392||–|
|Total Current Liabilities||60,055||66,747|
|Non Current Liabilities|
|Trade and other payables||500||–|
|Deferred tax liability||–||2,851|
|Finance lease liabilities||249||540|
|Derivative financial instruments||17,198||–|
|Total Non-Current Liabilities||236,790||177,034|
|Cash flow hedge reserve||(11,539)||3,910|
|Foreign currency translation reserve||166||(13)|
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.