Half Year Report December 2010
Half Year Review
From the Chairman and Managing Director
The Directors are pleased to present the financial result of Freightways Limited (Freightways) for the half year ended 31 December 2010. The successful execution of a range of strategies focused on service quality, cost management and growth, along with a return to improving volumes from many existing customers, have combined to deliver a positive result above that of the prior half year.
Consolidated operating revenue of $176 million for the half year was 7% higher than the prior comparative period (pcp). Revenue from 1 October to 31 December 2010 (Second Quarter) was particularly strong at 9% above the pcp, whereas previously announced revenue from 1 July to 30 September 2010 (First Quarter) was 4% ahead of the pcp.
EBITDA of $34 million for the half year was 6% higher than the pcp. Second Quarter EBITDA was 9% above the pcp, whereas previously announced First Quarter EBITDA was 2% above the pcp.
EBITA of $29 million for the half year was 7% higher than the pcp. Second Quarter EBITA was 10% above the pcp, whereas previously announced First Quarter EBITA was 3% above the pcp.
Consolidated NPAT of $16 million for the half year was 9% higher than the pcp.
During the half year the Christchurch earthquake affected all Freightways businesses in some way. Most importantly none of our team was injured, despite several being at work during the time of the earthquake. Our express package & business mail teams implemented contingency plans locally and through the support of their team mates in the rest of New Zealand ensured minimal disruption to service, except where access was restricted. The document storage operation of our Christchurch information management business was more severely affected, with collapsed racking restricting our ability to provide normal levels of service to our customers. The project to extract archive boxes, rebuild racking and return to normal service is all but complete. Commercially the impact of the earthquake on Freightways has not been material. The information management business is insured for this type of incident in relation to its equipment and earnings.
More recently the flooding in Queensland has affected the operations of Shred-X, DataBank and Archive Security. Again, most importantly, none of our team has been injured. While our facilities have also been unaffected, access to our customers, particularly in the Brisbane CBD, has been severely restricted. The full commercial impact of the flooding on Freightways is yet to be determined, but it is not expected to be material.
In both the above instances the Freightways team demonstrated its tremendous service ethic and team work to ensure minimal disruption to customers.
The Directors have declared an interim dividend of 7.25 cents per share, fully imputed at a tax rate of 30%. This represents a payout of approximately $11.1 million compared with $10.8 million for the pcp interim dividend of 7 cents per share. The dividend will be paid on 31 March 2011. The record date for determination of entitlements to the dividend is 11 March 2011.
The Dividend Reinvestment Plan (DRP) will not be offered in relation to this interim 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 approximately 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 $140 million for the half year was 5% higher than the pcp. Second Quarter revenue was 7% above the pcp, whereas First Quarter revenue was 3% above the pcp.
EBITDA of $26 million for the half year was 3% higher than the pcp. Second Quarter EBITDA was 8% above the pcp, whereas First Quarter EBITDA was 2% below the pcp.
EBITA of $23 million for the half year was 5% higher than the pcp. Second Quarter EBITA was 10% above the pcp, whereas First Quarter EBITA was on par with the pcp.
As the half year progressed, the improving performance of the express package & business mail division gained momentum, assisted by modest price increases, some market share gains and a return to increasing volumes from many existing customers. Management’s foremost focus remains directed at service quality and cost management strategies, while continuing to explore and execute growth initiatives to further broaden the suite of services offered by this division.
In November, the acquisition of a small New Zealand domiciled international postal service provider was finalised and subsequently merged with DX Mail. The initial cost of this acquisition was $1.75 million and the total cost is likely to be $3 million, with the balance only being paid upon the achievement of financial hurdles through to June 2013. Both DX Mail and New Zealand Couriers will benefit from the initial 12 months’ incremental EBITA contribution from this acquisition, which is expected to be $0.7 million.
Agreements have recently been finalised to trial the retailing of parcel products via nationwide retail chains. The objective of these initiatives is to provide customers with greater access to the range of services offered by the express package & business mail division.
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 excellent revenue and earnings growth. Operating revenue of $37 million for the half year was 14% above the pcp. Second Quarter revenue was 16% above the pcp, whereas First Quarter revenue was 11% above the pcp.
EBITDA of $8 million for the half year was 21% above the pcp. Second Quarter EBITDA was 19% above the pcp, whereas First Quarter EBITDA was 23% above the pcp.
EBITA of $7 million for the half year was 22% above the pcp. Second Quarter EBITA was 19% above the pcp whereas First Quarter EBITA was 26% above the pcp.
Recent investment in additional document storage capacity in Melbourne, Wellington, Sydney and Auckland has increased the cost base of this division for this half compared to the pcp, however the strong growth we continue to achieve is contributing to the offset of these increased costs. Accelerated demand for the services offered by our information management division has meant that further purpose-built storage capacity will be leased in Perth and Adelaide during the second financial half of 2011. This investment is expected to reap future rewards as increasing utilisation of this extra capacity is achieved.
Strategic growth opportunities for this division of Freightways continue to be explored and executed. During the half year Shred-X started up operations in South Australia, New South Wales and Western Australia. Freightways is now in a position to offer its Australian information management customers a full nationwide service, with its own representation across all three primary service lines in all major states and via an established agent network in outer-lying areas.
The information management division has contributed approximately 20% of Freightways’ total EBITA for this half year and its overall performance continues to be outstanding.
Internal Service Providers
Fieldair Holdings 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.
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. The balance of the facilities is available through to September 2012. This new 5-year component of the finance facilities demonstrates the support of Freightways’ banking syndicate and provides important diversity of tenure and funding certainty for the company.
Corporate overhead costs continue to be well contained, as are 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.
Interest costs for the half 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 half year are $6 million higher than as at 30 June 2010, however $5 million of that is as a result of the movement in foreign exchange rates applicable to the translation of Australian-denominated borrowings, which itself does not contribute to any increase in interest costs.
Tax expense for the half year is lower than the pcp due to higher interest deductions on cross-Tasman intercompany borrowings.
While Freightways has shown its ability to deliver quality growth in a still difficult market, we have not yet experienced increased volumes across all sectors of our customer base. It is also too early to suggest that the growth we have experienced, particularly in the Second Quarter, is sustainable. Accordingly we must at this stage remain cautious in our outlook. We are nevertheless encouraged by this half year result and are optimistic about a further gradually improving marketplace. In the meantime, Freightways will continue to 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 continuing growth amongst its existing customer base to sustain its year-on-year performance improvement, has again shown its ability in the Second Quarter of this half year to return double digit EBITA growth. If the recent level of revenue growth can be maintained, and subject to other factors beyond the division’s control, it is expected that similar levels of earnings growth should also be achieved in the future.
The information management division is expected to continue its strong growth. While the cost of increased capacity will continue to come to bear throughout the balance of the 2011 financial year, the benefit derived from the recurring nature of this division’s revenue will drive sustainable long- term value. The initial market demand for this additional leased capacity has also been particularly encouraging; meaning the impact on margin of a higher cost base may be for a shorter period of time that initially expected.
Capital expenditure for the half year was $6 million. Full year capital expenditure is expected to be $13 million. This investment will be evenly distributed between the express package & business mail division and the information management division. Overall, cash flows are expected to remain strong throughout the balance of 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.
Freightways has delivered a half year operating result that demonstrates sound 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 interim dividend.
The Directors acknowledge the outstanding work and ongoing dedication of the Freightways team in a continuing difficult trading environment.
Freightways Ltd Consolidated Income Statement
For the half year ended 31 December 2010 (unaudited)
|6 months ended
31 Dec 2010
|6 months ended
31 Dec 2009
|Transport and logistics expenses*||(81,624)||(75,182)||9%|
|Employee benefits expenses*||(39,224)||(37,164)||5%|
|General and administrative expenses||(15,511)||(15,037)||3%|
|Operating profit before interest, tax, depreciation and software amortisation||33,539||31,785||6%|
|Depreciation and software amortisation||(4,858)||(4,925)||(1%)|
|Operating profit before interest and income tax (EBITA)||28,681||26,860||7%|
|Net interest and finance costs||(7,795)||(6,871)||13%|
|Profit before income tax||20,886||19,989||4%|
|Profit for the period (NPAT)||15,796||14,457||9%|
*Employee benefits of $6,625,000 (2009: $5,637,000) 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 2010 were $45,849,000 (2009: $42,801,000).
Freightways Ltd Consolidated Statement of Cash Flows
For the half year ended 31 December 2010 (unaudited)
|6 months ended
31 Dec 2010
|6 months ended
31 Dec 2009
|Cash flows from operating activities|
|Receipts from customers||171,747||162,451|
|Payments to suppliers and employees||(140,651)||(134,193)|
|Cash generated from operations||31,096||28,258|
|Interest and other costs of finance paid||(6,965)||(8,897)|
|Income taxes paid||(7,148)||(8,061)|
|Net cash inflows from operating activities||16,983||11,300|
|Cash flows from investing activities|
|Payments for property, plant & equipment||(5,791)||(5,867)|
|Payments for software||(456)||(487)|
|Proceeds from disposal of property, plant & equipment||18||83|
|Payments for businesses acquired||(1,603)||(389)|
|Advances repaid by associates||–||3,783|
|Payments for other investing activities||(495)||–|
|Net cash outflows from investing activities||(8,327)||(2,877)|
|Cash flows from financing activities|
|Increase (decrease) in bank borrowings||1,000||(20,298)|
|Net proceeds from issue of ordinary shares||25||9,423|
|Finance lease liabilities repaid||(187)||(191)|
|Net cash outflows from financing activities||(9,916)||(20,775)|
|Net decrease in cash and cash equivalents||(1,260)||(12,352)|
|Cash and cash equivalents at the beginning of the period||4,996||16,970|
|Exchange rate adjustments||135||24|
|Cash and cash equivalents at end of the period||3,871||4,642|
Freightways Ltd Consolidated Balance Sheet
As at 31 December 2010 (unaudited)
31 Dec 2010
31 Dec 2009
|Cash and cash equivalents||3,871||4,642|
|Trade and other receivables||48,978||45,413|
|Total Current Assets||60,376||57,225|
|Trade and other receivables||378||303|
|Property, plant & equipment||79,688||76,782|
|Deferred tax asset||1,229||1,008|
|Other non-current assets||26||24|
|Total Non-Current Assets||336,668||323,967|
|Trade and other payables||40,565||36,078|
|Finance lease liabilities||10||262|
|Derivative financial instruments||49||500|
|Total Current Liabilities||56,047||51,630|
|Non Current Liabilities|
|Trade and other payables||1,000||1,859|
|Deferred tax liability||7,234||1,217|
|Derivative financial instruments||3,951||4,707|
|Total Non-Current Liabilities||173,880||168,059|
|Cash flow hedge reserve||(3,200)||(4,058)|
|Foreign currency translation reserve||1,272||(258)|