Half Year Report December 2016

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 2016. This report discusses the result, reviews the operations of each division and provides an outlook for the financial year ending 30 June 2017.

Highlights include the strength of the underlying volume growth and margin in the express package & business mail division, progress to timetable and budget of establishing major purpose-built facilities in Sydney and Christchurch and the related relocation projects, the execution of robust contingency plans that ensured minimal service disruption following the significant impact of the North Canterbury earthquake and the performance of our information management businesses, other than TIMG Australia, which was primarily affected by a poor result at LitSupport.


Operating performance

The below table presents the reported half year result compared to the prior comparative period (pcp), both before and after the inclusion of non-recurring items:


Underlying trading result
$M Note Dec-16 result Non-recurring items Dec-16 Dec-15 Increase
Revenue 272.8 272.8 254.9 7.0%
EBITDA (i) 55.8 4.0 51.8 51.2 1.2%
EBITA (ii) 50.1 4.0 46.1 45 2.4%
NPATA (iii) 34.8 4.5 30.3 28.7 5.6%
NPAT (iv) 34.0 4.5 29.5 27.7 6.2%
EPS (cents) 21.9 2.9 19.0 17.9 6.1%



i. Operating profit before interest, tax, depreciation and amortisation.
ii. Operating profit before interest, tax, and amortisation.
iii. Net profit after tax (NPAT), before amortisation.
iv. Profit for the half year attributable to shareholders.

The results discussed throughout this commentary exclude the impact of the following non-recurring items that the Directors believe should not be included when assessing the underlying half year trading results:

  • A non-recurring benefit before tax of $5.6 million relating to previously accrued final acquisition payments that are no longer expected to be required. The interim dividend was calculated excluding this non-cash benefit.
  • A non-recurring cost before tax of $1.6 million relating to the relocation of the TIMG business in Sydney.



The Directors have declared an interim dividend of 13 cents per share, fully imputed at a tax rate of 28%, being a 2% increase above the pcp dividend of 12.75 cents per share. This represents a payout of approximately $20.1 million compared with $19.7 million for the pcp dividend. The dividend will be paid on 3 April 2017. The record date for determination of entitlements to the dividend is 17 March 2017.

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 2016 are provided below for the express package & business mail division and the information management division.


Express Package and Business Mail

Operating revenue of $202.5 million was 8% higher than the pcp. EBITA of $34.8 million was 7% higher than 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.

Volume and revenue growth throughout the half year was strong, particularly so in the peak December month. Increased activity amongst existing customers and the winning of new customers contributed to this growth. Disruption surcharges were introduced during December to offset increased linehaul and delivery costs following November’s North Canterbury earthquake. Overall, costs have been well contained and the higher operating costs involved with the transition to a new aircraft operating model reduced through the second quarter. Key matters:

  • The transition to Boeing 737-400 aircraft is progressing well. The four superseded freighter aircraft owned by FRE have all been sold for their combined book value of $1 million. Three of the aircraft were sold subsequent to the end of the half year. The Boeing 737-400 aircraft provided important capacity during the peak volume period leading into Christmas.
  • The new airside facility currently being constructed at Christchurch airport is on schedule. This facility will be automated with physical conveyor equipment, which is currently being assembled on site, and IT developed collaboratively by Freightways’ IT team and the European-based suppliers. Overall this project is running to budget expectations.
  • Increased resourcing of the IT team has enabled the progression of a number of key projects in support of Freightways’ strategic intent to be a technology leader in the markets it operates in.
  • The North Canterbury earthquake had a significant impact on the division’s inter-island and intra-South Island linehaul services. Providing a consistent nationwide overnight and two-day delivery service relies on the network operating to a strict timetable. An issue at one point in the linehaul system has a ripple effect throughout the entire network and if not addressed, will severely affect customers who are reliant on the performance of this service. Immediately following the earthquake, the businesses developed a contingency plan to address the loss of State Highway One in the upper South Island and the initially disrupted inter-islander ferries to ensure the least possible impact on customers. This plan required the deployment of several additional linehaul trucks, drivers and depot handling staff at key sortation hubs throughout the country. The teamwork and passion displayed by Freightways’ people to provide the best possible service in working through this significant challenge was and remains outstanding. Likewise, the support of customers during this period is acknowledged and appreciated.


Freightways’ business mail operator, DX Mail, further expanded its postie network and now businesses in most urban locations throughout New Zealand are able to choose DX Mail for overnight and 5-day per week delivery of their standard-priced letters. Despite the decline of the overall physical letter market, the demand for DX Mail’s suite of services is increasing. Dataprint, which provides physical and digital transactional mailhouse services, increased market share in all of its service lines, both physical and digital.


Information Management

Operating revenue of $71.1 million was 3% higher than the pcp. EBITA of $13.4 million was 6% lower than the pcp.

The information management division operates under the brands of The Information Management Group (TIMG) and Shred-X.

Strong results from Shred-X and TIMG New Zealand were primarily offset by poor performance from TIMG Australia’s LitSupport business, which led to some restructuring and related costs. Key matters:

  • LitSupport has performed at the bottom end of the range of expectations set at the time of acquiring the business. While forecast revenue growth has been achieved, forecast EBITDA growth has not occurred. This outcome was anticipated as a possibility at that time and hence the payment for this business was structured to reduce Freightways’ financial risk should this occur. As previously announced, the vendors of LitSupport refunded A$5 million of the initial A$17.1 million purchase price in March 2016. Based on the forecast for the current year, the effective multiple of EBITDA applicable to the reduced purchase price remains at approximately the same level as originally expected. This has, however, meant that an earn-out payment of $5.3 million previously accrued is not now anticipated to be paid to the vendors and accordingly it has been written back to the income statement as a non-cash, non-recurring benefit. Recent restructuring of LitSupport and the winning of a number of new contracts is expected to assist in improving LitSupport’s performance over time.
  • During the prior year, it was announced that Freightways would invest in the relocation of three Sydney-based information management facilities into a single purpose-built facility. The cost of this relocation has at this stage been $1.6 million of the $2.5 million budget for this project and overall is tracking to budget expectations and timetable. Operating from a single site will deliver operating efficiencies that will contribute to a positive return on this investment from the completion of this project in June this year.
  • Demand for the digital services offered by TIMG and the e-destruction services offered by Shred-X continues to gain momentum. It is expected that these new revenue streams will become an increasingly important part of the overall information management division’s revenue and earnings in the near to medium term.
  • The severity of the North Canterbury earthquake had repercussions for the division’s document storage facilities in Wellington. While the racking did its job and withstood the impact of the earthquake, its structural integrity was compromised, particularly in the major site located in Porirua. This has resulted in the likelihood of having to repair or replace most, if not all, of the Porirua racking and will involve repositioning boxes while repairs are made or replacement racking is installed. Freightways carries comprehensive insurance for events such as this. The related deductible has been expensed as a corporate cost. Thanks to the strong service culture within the TIMG business, the quick actions of its people and the support of key suppliers, the service disruption to TIMG’s customers has been minimal. Again the support of customers during this period is acknowledged and appreciated.


Internal Service Providers

Fieldair Holdings, through its subsidiary of Air Freight NZ, operates a joint venture company that leases and operates the Boeing 737-400 aircraft fleet that provides Freightways’ overnight airfreight linehaul service. Fieldair also provides specialist engineering and contracting services to the general aviation market. Parceline Express provides Freightways’ road linehaul service. As volumes have grown, the services provided by these businesses have adapted to ensure the provision of quality sustainable capacity.

Freightways Information Services provides IT development and support to the express package & business mail division. This team is responsible for providing the front line businesses with robust and secure information management systems and supporting their technology-related strategic objectives.


Corporate costs have increased compared to the pcp, primarily due to expensing the insurance deductibles related to earthquake insurance claims.

Net debt levels are unchanged from the pcp at $159 million. A finance facility has also been established with a US-based lender on the same terms as those that are in place with Freightways’ existing banking syndicate.

Capital expenditure during the half year of $10 million, including the investment made in the new Christchurch and Sydney premises, has been funded from operating cash flows.



Volumes and activity evidenced in this first half result support Freightways’ expectations of again improving its overall year-on-year performance. The markets in which Freightways operates in both New Zealand and Australia remain positive and the company is experiencing increasing demand for the services it provides.

As had been stated in the prior annual result announcement and as is evident in this half year announcement, results from the express package & business mail division will be partly offset by the investment being made in increased capacity in the information management division to accommodate current and future expected growth and poor performance of LitSupport in this half year. Expectations are for improved performance from LitSupport in the second half of the financial year.

The next six months will see the completion of the major projects that are underway to relocate the businesses in Sydney and Christchurch, with the full benefits relating to these projects on target to be realised in the 2018 financial year.

Capital expenditure for the full year is expected to be approximately $24 million. Overall cash flows are expected to remain strong for the remainder of the 2017 financial year.

Strategic growth opportunities, including acquisitions and alliances that complement existing capabilities, will be executed where they make commercial sense.



The strength of the Freightways business models, the expertise of its people and the positive features of the markets it operates in are once again evident in this half year result.

The Directors acknowledge the outstanding work and ongoing dedication of the Freightways team of people throughout New Zealand and Australia.

Managing Director



Freightways Limited Consolidated Income Statement

For the half year ended 31 December 2016 (unaudited)
6 months ended
31 Dec 2016
6 months ended
31 Dec 2015
$000 $000 %
Operating Revenue 272,782 254,898 7%
Transport and logistics expenses (107,862) (97,104) 11%
Employee benefits expenses (75,157) (70,140) 7%
Occupancy expenses (12,082) (11,708) 3%
General and administrative expenses (25,920) (24,759) 5%
Non-recurring items 4,031
Operating profit before interest, income tax, depreciation and software amortisation and amortisation of intangibles 55,792 51,187 9%
Depreciation and software amortisation (5,690) (6,188) (8%)
Operating profit before interest, income tax and amortisation of intangibles 50,102 44,999 11%
Amortisation of intangibles (806) (963) (16%)
Operating profit before interest and income tax 49,296 44,036 12%
Net interest and finance costs (4,711) (5,741) (18%)
Profit before income tax 44,585 38,295 16%
Income tax (10,598) (10,547)
Profit for the period attributable to shareholders 33,987 27,748 22%


Freightways Ltd Consolidated Balance Sheet

As at 31 December 2016 (unaudited)
As at
31 Dec 2016
As at
31 Dec 2015
$000 $000
Current Assets
Cash and cash equivalents 10,690 12,378
Trade and other receivables 77,483 73,062
Income tax receivable 222
Inventories 6,190 6,432
94,585 91,872
Assets held for sale 750 5,797
Total Current Assets 95,335 97,669
Non-Current Assets
Trade and other receivables 1,950 421
Property, plant & equipment 91,946 84,851
Intangible assets 312,493 309,091
Total Non-Current Assets 406,389 394,363
Total Assets 501,724 492,032
Current Liabilities
Trade and other payables 64,460 57,954
Finance lease liabilities 70 9
Income tax payable 1,690 4,411
Provisions 1,101 1,563
Derivative financial instruments 871 72
Unearned income 16,044 16,308
Total Current Liabilities 84,236 80,317
Non-Current Liabilities
Trade and other payables 3,034 6,019
Borrowings (secured) 169,196 170,976
Deferred tax liability 5,239 7,182
Provisions 3,323 2,832
Derivative financial instruments 7,555 8,777
Total Non-Current Liabilities 188,347 195,786
Total Liabilities 272,583 276,103
NET ASSETS 229,141 215,929
Contributed equity 124,304 123,736
Retained earnings 117,345 103,531
Cash flow hedge reserve (6,097) (6,509)
Foreign currency translation reserve (6,411) (4,829)
TOTAL EQUITY 229,141 215,929


Freightways Ltd Consolidated Statement of Cash Flows

For the half year ended 31 December 2016 (unaudited)
6 months ended
31 Dec 2016
6 months ended
31 Dec 2015
$000 $000
Inflows Inflows
(Outflows) (Outflows)
Cash flows from operating activities
Receipts from customers 264,165 258,554
Payments to suppliers and employees (214,918) (208,114)
Cash generated from operations 49,247 50,440
Interest received 43 63
Interest and other costs of finance paid (4,957) (5,168)
Income taxes paid (15,829) (13,048)
Net cash inflows from operating activities 28,504 32,287
Cash flows from investing activities
Payments for property, plant & equipment (8,098) (6,764)
Payments for software (1,865) (881)
Proceeds from disposal of property, plant & equipment 23 20
Payments for businesses acquired (net of cash acquired) (1,991) (5,805)
Payments to associate (1,667)
Payments for other investing activities (231) (521)
Net cash outflows from investing activities (13,829) (13,951)
Cash flows from financing activities
Dividends paid (22,466) (19,345)
Increase (decrease) in bank borrowings 11,143 (645)
Proceeds from issue of ordinary shares 338 296
Finance lease liabilities repaid (38) (38)
Net cash outflows from financing activities (11,023) (19,732)
Net increase (decrease) in cash and cash equivalents 3,652 (1,396)
Cash and cash equivalents at the beginning of the period 7,065 13,946
Exchange rate adjustments (27) (172)
Cash and cash equivalents at end of the period 10,690 12,378