Half Year Report December 2015
Half Year Review
From the Chairman and Managing Director
The Directors are pleased to present the consolidated financial result of Freightways Limited (Freightways) for the half year ended 31 December 2015. This report discusses the result, reviews the operations of each division and provides an outlook for the balance of the financial year.
Operating performance
Compared to the prior corresponding period (pcp) which included 4 extra trading days:
- Operating revenue increased by 5% to $255 million;
- Earnings (operating profit) before Interest, Tax, Depreciation and Amortisation (EBITDA) increased by 5% to $51 million;
- Earnings (operating profit) before Interest, Tax and Amortisation (EBITA) increased by 6% to $45 million;
- Net Profit after Tax (NPAT) increased by 5% to $28 million;
- Net Profit after Tax and before Amortisation (NPATA) increased by 7% to $29 million; and
- Earnings Per Share (EPS) increased by 5% to 18 cents per share.
The benefit of Freightways’ diversification into the Information Management industry is evident in this result, with both the New Zealand and Australian operations of the information management division recording results well above the pcp. Approximately 30% of Freightways’ operating revenue and earnings for the half year was generated by this division. The express package & business mail division contributed a result above the pcp, when allowing for the four extra trading days in the pcp.
Dividend
The Directors have declared an interim dividend of 12.75 cents per share, fully imputed at a tax rate of 28%, being a 6% increase above the pcp dividend of 12 cents per share. This represents a payout of approximately $19.7 million compared with $18.5 million for the pcp dividend. The dividend will be paid on 4 April 2016. The record date for determination of entitlements to the dividend is 18 March 2016.
The Dividend Reinvestment Plan (DRP) will not be offered in relation to this dividend. As a capital management tool, the application of the DRP will be reviewed for each future dividend.
Review of Operations
Divisional results for the half year ended 31 December 2015 are provided below for the express package & business mail division and the information management division.
Express Package and Business Mail
Operating revenue of $187 million was 1% higher than the pcp. EBITDA of $35 million and EBITA of $32 million were both 1% lower than the pcp. Allowing for four extra trading days in the pcp, this result would have been ahead of the pcp.
The express package & business mail division operates a multi-brand strategy in the domestic market through New Zealand Couriers, Post Haste, Castle Parcels, NOW Couriers, SUB60, Security Express, Kiwi Express, Stuck, Pass The Parcel, DX Mail and Dataprint.
Overall activity within the express package & business mail division was above the prior year, albeit the timing of the end of year peak volumes occurred later this year than the prior year. This resulted in some pressure on capacity and some additional operating costs being required to ensure service quality was not compromised.
An aircraft fleet upgrade was recently announced that will see a transition from the existing Convair freighter aircraft to Boeing 737-400s. The project to manage this transition is running to schedule with the first Boeing 737-400 arriving in the country in mid-December and being put to work in assisting with peak Christmas volumes. Two further Boeing 737-400 aircraft are scheduled to arrive in coming months and to be fully operational by May 2016.
Negotiations have been completed with Christchurch International Airport Limited to lease a new purpose-built facility to enable the consolidation of operations from three separate facilities into one that will have airside access to the Boeing 737-400 aircraft fleet. This new facility will be fully automated, enabling a reduction in the manual handling and sorting of freight. Capital expenditure of approximately $11 million related to this project will be invested progressively throughout the next 14 months. This new facility is expected to be fully operational early in the second half of the 2017 financial year. A positive return above our cost of capital for this project is expected to be achieved through efficiency and quality enhancements.
During the half year, branch relocations to larger premises occurred in Dunedin and Tauranga to create more capacity to accommodate our current and expected future volume growth.
Freightways’ business mail operator, DX Mail, continued to expand its postie network and is now offering 5 days a week delivery in an increasing number of urban locations throughout New Zealand. While the overall physical letters market continues to decline, the demand for DX Mail’s service is increasing. Dataprint, which provides physical and digital transactional mailhouse services, also increased market share in all of its service lines, both physical and digital.
Information Management
Compared to the pcp, which also included the benefit of 4 extra trading days in the New Zealand operations, operating revenue of $69 million was 20% higher, while EBITDA of $17 million and EBITA of $14 million were 22% and 25% higher, respectively.
Our established information management brands on both sides of the Tasman, with the exception of Shred-X, now operate as The Information Management Group (TIMG). Shred-X, due to its unique positioning and particularly strong brand presence throughout Australia, will continue to operate under its own name.
Increased utilisation of existing facilities, as a result of increased box and data storage volumes from existing and new customers, the successful integration of recent acquisitions in New Plymouth, Sydney and Brisbane and improved performance from the recently-acquired LitSupport, all contributed to this solid result. LitSupport has however not achieved its initial 12-month performance target and the vendors will accordingly repay Freightways approximately A$5 million of the initial purchase price. Nonetheless, the LitSupport team has, in the latter stages of the half year, increased sales momentum and completed a restructure to reduce overhead costs, both of which position the business well for the future. Demand for the digital information management services offered throughout TIMG continues to increase.
Internal Service Providers
Fieldair Holdings provides airfreight linehaul and Parceline Express provides road linehaul to our front line businesses. As express package volumes have grown, the services provided by the operations of these businesses have quickly adapted, while maintaining service excellence. Freightways Information Services provides IT development and support to the express package & business mail division. This team has been expanded to address the increasing demand for technology-based innovation and to assist in achieving Freightways’ strategic objective of being a technology leader in the markets it operates in.
Corporate
The maturity dates for all existing bank facilities were extended during the half year by a further two years at a slightly reduced cost.
Corporate overhead costs continue to be well-contained. Acquisitions during the half year have been funded from a combination of operating cash flows and borrowings from existing finance facilities.
Capital expenditure of $8 million was invested during the half year, primarily to provide capacity for growth, including expenditure on facilities and related equipment, IT infrastructure and airfreight capability.
Outlook
Freightways is positioned in markets that are expected to deliver long-term growth. In the near-term, however, and at least for the balance of the 2016 financial year, given the current volatility in markets around the world, Freightways is cautious in its outlook.
The express package & business mail division is expected to perform at similar levels to the prior year. Performance within this division is largely dependent on domestic economic activity that will be reflected in existing customer activity.
The information management division is expected to continue to improve its year-on-year performance.
Strategic growth opportunities, including acquisitions and alliances that complement existing capabilities, will be executed where they make commercial sense.
Capital expenditure for the full year is expected to be approximately $20 million to support the growth and development of both Freightways operating divisions. Overall cash flows are expected to remain strong throughout the 2016 financial year.
Conclusion
Freightways has recorded a sound half year result above the prior comparative period. Accordingly, the Directors have been able to declare a fully imputed, 12.75 cents per share interim dividend. The benefits of diversification into the information management industry, where continued forecast growth is expected, will increasingly underpin the company’s performance as the more cyclical express package & business mail industry enters a period where achieving year-on-year growth may be more challenging.
The Directors acknowledge the outstanding work and ongoing dedication of the Freightways team of people throughout New Zealand and Australia.
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| SUSAN SHELDON Chairman |
DEAN BRACEWELL Managing Director |
Freightways Ltd Consolidated Income Statement
For the half year ended 31 December 2015 (unaudited)
| 6 months ended 31 Dec 2015 |
6 months ended 31 Dec 2014 |
Variance | |
|---|---|---|---|
| $000 | $000 | % | |
| Operating Revenue | 254,898 | 241,760 | 5% |
| Transport and logistics expenses | (97,104) | (97,655) | (1%) |
| Employee benefits expenses | (70,140) | (62,236) | 13% |
| Occupancy expenses | (11,708) | (10,396) | 13% |
| General and administrative expenses | (24,759) | (22,867) | 8% |
| Operating profit before interest, income tax, depreciation and software amortisation and amortisation of intangibles | 51,187 | 48,606 | 5% |
| Depreciation and software amortisation | (6,188) | (6,197) | – |
| Operating profit before interest, income tax and amortisation of intangibles | 44,999 | 42,409 | 6% |
| Amortisation of intangibles | (963) | (607) | 59% |
| Operating profit before interest and income tax | 44,036 | 41,802 | 5% |
| Net interest and finance costs | (5,741) | (5,826) | (1%) |
| Profit before income tax | 38,295 | 35,976 | 6% |
| Income tax | (10,547) | (9,669) | 9% |
| Profit for the period attributable to shareholders | 27,748 | 26,307 | 5% |
Freightways Ltd Consolidated Balance Sheet
As at 31 December 2015 (unaudited)
| As at 31 Dec 2015 |
As at 31 Dec 2014 (restated) |
|
|---|---|---|
| $000 | $000 | |
| ASSETS | ||
| Current Assets | ||
| Cash and cash equivalents | 12,378 | 3,780 |
| Trade and other receivables | 73,062 | 69,174 |
| Inventories | 6,432 | 8,025 |
| 91,872 | 80,979 | |
| Assets held for sale | 5,797 | – |
| Total Current Assets | 97,669 | 80,979 |
| Non-Current Assets | ||
| Trade and other receivables | 421 | 452 |
| Property, plant & equipment | 84,851 | 94,268 |
| Intangible assets | 309,091 | 303,454 |
| Total Non-Current Assets | 394,363 | 398,174 |
| Total Assets | 492,032 | 479,153 |
| LIABILITIES | ||
| Current Liabilities | ||
| Trade and other payables | 57,954 | 55,014 |
| Finance lease liabilities | 9 | 210 |
| Income tax payable | 4,411 | 4,648 |
| Provisions | 1,563 | 503 |
| Derivative financial instruments | 72 | 501 |
| Unearned income | 16,308 | 14,892 |
| Total Current Liabilities | 80,317 | 75,768 |
| Non-Current Liabilities | ||
| Trade and other payables | 6,019 | 6,259 |
| Borrowings (secured) | 170,976 | 169,277 |
| Deferred tax liability | 7,182 | 9,993 |
| Provisions | 2,832 | 2,887 |
| Finance lease liabilities | – | 8 |
| Derivative financial instruments | 8,777 | 8,514 |
| Total Non-Current Liabilities | 195,786 | 196,938 |
| Total Liabilities | 276,103 | 272,706 |
| NET ASSETS | 215,929 | 206,447 |
| EQUITY | ||
| Contributed equity | 123,736 | 122,828 |
| Retained earnings | 103,531 | 96,138 |
| Cash flow hedge reserve | (6,509) | (6,754) |
| Foreign currency translation reserve | (4,829) | (5,765) |
| TOTAL EQUITY | 215,929 | 206,447 |
Freightways Ltd Consolidated Statement of Cash Flows
For the half year ended 31 December 2015 (unaudited)
| 6 months ended 31 Dec 2015 |
6 months ended 31 Dec 2014 |
|
|---|---|---|
| $000 | $000 | |
| Inflows | Inflows | |
| (Outflows) | (Outflows) | |
| Cash flows from operating activities | ||
| Receipts from customers | 258,554 | 241,056 |
| Payments to suppliers and employees | (208,114) | (190,711) |
| Cash generated from operations | 50,440 | 50,345 |
| Interest received | 63 | 64 |
| Interest and other costs of finance paid | (5,168) | (5,475) |
| Income taxes paid | (13,048) | (11,603) |
| Net cash inflows from operating activities | 32,287 | 33,331 |
| Cash flows from investing activities | ||
| Payments for property, plant & equipment | (6,764) | (5,802) |
| Payments for software | (881) | (771) |
| Proceeds from disposal of property, plant & equipment | 20 | 129 |
| Payments for businesses acquired (net of cash acquired) | (5,805) | (22,342) |
| Payments for other investing activities | (521) | (117) |
| Net cash outflows from investing activities | (13,951) | (28,903) |
| Cash flows from financing activities | ||
| Dividends paid | (19,345) | (17,384) |
| Increase (decrease) in bank borrowings | (645) | 12,861 |
| Net proceeds from issue of ordinary shares | 296 | 153 |
| Finance lease liabilities repaid | (38) | (55) |
| Net cash outflows from financing activities | (19,732) | (4,425) |
| Net increase (decrease) in cash and cash equivalents | (1,396) | 3 |
| Cash and cash equivalents at the beginning of the period | 13,946 | 3,880 |
| Exchange rate adjustments | (172) | (103) |
| Cash and cash equivalents at end of the period | 12,378 | 3,780 |
The graphs below demonstrate the strong historic performance of Freightways.
