Freightways

FULL YEAR REPORT JUNE 2006

31st July 2006

Full Year Reveiw

From the Chairman and Managing Director

The Directors are pleased to present the financial results of Freightways Limited (Freightways) for the year ended 30 June 2006. It has again been a successful year for Freightways with the company delivering another record result.

Operating performance

Consolidated operating revenue for the year of $257 million was 10% higher than the prior corresponding period.

Earnings before interest, tax and amortisation (EBITA) were $53.4 million, 6% higher than the prior corresponding period.

Consolidated net profit after tax and before amortisation (NPATA) was $29.3 million, 9% higher than the prior corresponding period.

Cash generated from operations before interest and tax was $53.3 million.

Dividend

The Directors have declared a final dividend of $11.2 million, delivering a full year payout in line with the dividend policy. The final dividend translates to 8.75 cents per share fully imputed, which will be paid on 30 September 2006. The record date for determination of entitlements to the dividend is 15 September 2006. This brings the total payout in respect of the year to $22.1 million or 17.25 cents per share (fully imputed), 8% higher than the previous corresponding period.

 

Reveiw of Operations

All subsidiaries have performed soundly and the strength of Freightways’ business model has again been proven within a challenging business environment. Complementing our growth strategies, has been an ongoing focus on the fundamental disciplines of business mix, margin integrity and cost management. Freightways’ culture of operational excellence has pleasingly continued to deliver improved levels of customer service in key areas of our business.

Express Package

Freightways’ core express package businesses contribute the majority of Freightways’ revenue and earnings. The brands of New Zealand Couriers, Post Haste Couriers, Castle Parcels, SUB60 and Security Express were joined by the acquisition of Kiwi Express in October 2005. Kiwi Express is a well established point-to-point courier business operating in Auckland and Wellington. The Kiwi Express brand has been maintained in the marketplace and will continue to operate in its own right while leveraging the existing capability of SUB60.

As expected and as advised to shareholders in our announcements of August 2005 and February 2006, Freightways has experienced lower growth from its existing customers in the express package market than has been experienced in recent years. This has occurred as a result of a less buoyant domestic economy and has been coupled with exceptionally high fuel prices and the increasing cost of doing business generally. Consequently, express package organic growth has been modest, with the primary drivers of revenue growth being good gains in market share and the increased pricing necessary to offset the escalating cost of fuel.

Investment has occurred in a number of areas, including network capacity and additional personnel to assist our service quality and growth strategies. Customer service initiatives further enhancing Freightways’ competitive advantage will continue to be progressed wherever possible. For example, next generation technology and in-van data capture to be introduced during the first half of 2007 will provide customers access to real-time service information.

Business Mail

DX Mail has increased its contribution to the Freightways result as it gains market share in its targeted business mail niche of the Postal Services market. Demand for DX Mail’s broad suite of alternative letter delivery services continues to be strong. In the context of Freightways’ total earnings, DX Mail’s contribution remains relatively modest and our growth strategy is one which will be implemented progressively over a number of years. Strategically, DX Mail is integrated with New Zealand Couriers which picks up and delivers mail bags for DX Mail’s growing customer base. Hence, as DX Mail grows New Zealand Couriers also receives the benefit of this growth.

DX Mail is a nationwide business mail competitor to NZ Post and is seen as an emerging growth opportunity within Freightways’ portfolio of businesses.

Information Management

Archive Security, Document Destruction Services and Data Security Services have again increased their contribution to the Freightways result. Archive Security in particular has achieved significant growth, both from existing customers and from new customers who have chosen to outsource the management of their archived documents. This growth has brought forward plans to extend the facilities we operate from in the main business centres of New Zealand. Having recently completed an extension in Christchurch, we plan to extend in Auckland during the 2007 financial year and in Wellington shortly thereafter.

Freightways also defines its information management business of Online Security Services, which comprises the three brands above, as an emerging growth opportunity. Increased outsourcing of the storage and management of backed-up computer data, archived documents and also document destruction has contributed to the strong growth of this business and growth of the market in general. Outsourcing decisions are being driven by an increasing awareness in the market of the need to professionally manage business information to assist business efficiency and risk management.

The success of Freightways’ existing New Zealand operations has led to the recent acquisition in Australia of DataBank, a business based in Sydney and Melbourne that also services the information management market in the data storage niche. DataBank is the number two operator in Australia by market share, is a successful business with a similar operating culture to Freightways existing information management businesses and has a very experienced and capable management team.

Internal Service Providers

Fieldair Holdings Limited provides airfreight linehaul services to the express package brands through the use of our fleet of freighter aircraft which are operated by its subsidiary, Air Freight NZ Limited. The benefits derived from directly controlling our core airfreight linehaul requirements continue to be evidenced through the provision of outstanding service reliability by this division. Our aviation engineering business, Fieldair Engineering Limited, provides design, manufacturing and maintenance services both internally and for the external aviation market. This division has experienced particularly strong growth.

Parceline Express Limited provides road linehaul services throughout New Zealand to link our nationwide branch network. It has continued to accommodate the growth from our front line brands while providing them with a premium service.

Freightways Information Services Limited, our in-house IT services provider, has successfully progressed the transition to a next-generation information systems operating environment while maintaining the development and integrity of our existing system. This project is scheduled for completion during the 2007 financial year. Capital expenditure associated with this project is running to expectation.

Corporate costs continue to be managed within expectations. Existing finance facilities were utilised to fund the acquisition of Kiwi Express. The acquisition of DataBank, that occurred early in July 2007, was also debt-funded using new Australian dollar bank facilities.

 

Outlook

Freightways’ core express package business is expected to continue to perform soundly, although growth in this market will be influenced by the performance of New Zealand’s domestic economy which continues to show signs of slowing. We have seen evidence of this slowing amongst our customer base for some time now and have not yet seen any signs to suggest the business environment we operate in will be any less challenging in the near term. While growth of our Business Mail division will also in part be influenced by slowing business activity, it is expected that the Information Management division will continue to show strong growth due to increased outsourcing and the ongoing organic growth experienced in this industry generally.

The recent acquisition of DataBank in Australia is a well considered and obviously important step in the development and growth of Freightways. It diversifies Freightways’ interests both geographically and also deeper into the information management market where we have had proven success. In addition, it is expected that the newly-acquired DataBank will in time create the opportunity to develop further growth initiatives in Australasia.

Freightways will continue to take consistent, well developed strategies to the market to maintain and strengthen the positioning of our brands, to retain and develop our teams of people, to deliver premium service to our customers and to ensure the benefits of these strategies continue to be enjoyed by our shareholders. We will also continue to explore acquisitions that complement our existing capabilities.

Capital investment, expected to total approximately $9 million, will be spent during the next financial year in areas that support the growth of our core and emerging businesses. Investment will also continue to be made in the development of our people and to enable the achievement of our positioning and performance objectives.

Conclusion

Freightways has again delivered a record result during a very challenging year. This has been achieved through a continuing focus on fundamental business disciplines by a very capable and highly-motivated Freightways team.

Freightways’ future will in the short term be influenced by the performance of New Zealand’s domestic economy. Medium to longer term, and subject to business factors beyond its control, Freightways is exceptionally well positioned in all aspects of its business to continue to deliver positive performance to its shareholders and all other stakeholders.

The Directors acknowledge the outstanding work and dedication of the Freightways team.

WAYNE BOYD
Chairman
DEAN BRACEWELL
Managing Director

Consolidated Statement of Financial Performance

For the year ended 30 June 2006
  June 2006 June 2005  
  $000 $000 % variance
Operating revenue 256,689 233,725 10%
Other Revenue 173 444 0
Total Revenue 256,862 234,169 10%
Earnings before interest, tax, depreciation and amortisation (EBITDA) 58,318 54,996 6%
Depreciation (4,958) (4,457) 11%
Earnings before interest, tax and amortisation (EBITA) 53,360 50,539 6%
Amortisation of goodwill (4,970) (4,957) -
Earnings before interest and tax (EBIT) 48,390 45,582 6%
Interest (9,347) (9,893) (6%)
Net surplus before income tax 39,043 35,689 9%
Income tax (14,737) (13,698) 8%
Net surplus after income tax (NPAT) attributable to shareholders 24,306 21,991 11%

Consolidated Statement of Financial Position

As at 30 June 2006
  June 2006 June 2005
  $000 $000
Current Assets
Cash and bank balances 1,652 2,237
Accounts receivable 33,417 30,312
Inventories 5,536 3,524
Total Current Assets 40,605 36,073
Non-Current Assets    
Accounts Receivable 293 -
Fixed assets 49,097 46,744
Goodwill 67,356 69,612
Brand names 88,800 87,400
Deferred tax asset - 1,032
Total Non-Current Assets 205,546 204,788
Total Assets 246,151 240,861
Current Liabilities    
Payables and accruals 23,501 24,461
Provisions 167 958
Unearned income 19,219 17,944
Total Current Liabilities 42,887 43,363
Non Current Liabilities    
Borrowings 128,000 127,000
Deferred tax liability 324 -
Total Non-Current Liabilities 128,324 127,000
Total Liabilities 171,211 170,363
Net Assets 74,940 70,498
Shareholders' Equity    
Share capital 57,384 55,611
Retained earnings 17,556 14,887
Total Shareholders' Equity 74,940 70,498
Net Tangible Assets per Security (cents) (0.63) (0.69)

Consolidated Statement of Cash Flows

For the year ended 30 June 2006
  June 2006 June 2005
  ($000) ($000)
  Inflows Inflows
  (Outflows) (Outflows)
Cash flows from operating activities    
Receipts from customers 255,797 233,371
Payments to suppliers and employees (202,497) (178,457)
Cash generated from operations 53,300 54,914
Interest received 152 444
Interest and other costs of finance paid (8,786) (9,506)
Income taxes paid (14,174) (14,313)
Net cash inflows from operating activities 30,492 31,539
Cash flows from investing activities    
Payments for fixed assets (7,486) (8,613)
Payments for businesses acquired (3,959) (390)
Proceeds from disposal of fixed assets 59 -
Net cash outflows from investing activities (11,386) (9,003)
Cash flows from financing activities    
Dividends to ordinary shareholders (21,637) (18,000)
Increase (decrease) in bank borrowings 1,000 (4,000)
Proceeds from unpaid shares fully paid 942 940
Net cash outflows from financing activities (19,695) (21,060)
Net increase (decrease) in cash held (589) 1,476
Cash at beginning of year 2,237 761
Exchange rate adjustments 4 -
Cash at end of year 1,652 2,237
 
Freightways Sales Revenue
 
Freightways EBITA
 
 
 

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.