Full Year Report June 2016

From the Chairman and Managing Director

The Directors are pleased to present the consolidated financial result of Freightways Limited (Freightways) for the year ended 30 June 2016. This report discusses the result, reviews the operations of each division and provides an outlook for the financial year ahead.

Operating performance

The below table presents the reported 2016 result compared to the prior comparative period (pcp), both before and after the inclusion of non-recurring items:

 

Notes:
(i) Operating profit before interest, tax, depreciation and amortisation, before non-recurring items
(ii) Operating profit before interest, tax and amortisation
(iii) Net profit after tax (NPAT) before non-recurring items
(iv) Profit for the year attributable to the shareholders

Freightways’ first quarter Trading Update released in October 2015 provided a breakdown of the impact of five fewer trading days in that quarter compared to the pcp, being $7 million of operating revenue, $2 million of EBITDA & EBITA and $1.4 million of NPATA & NPAT. This 2016 full year result also does not include the benefit of those additional trading days recorded in the pcp.

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 underlying trading results:

• 2016: A total non-recurring charge of $6.3 million ($4.6 million after tax) that comprised a one-off expense relating to the write-down of the carrying value of the Convair fleet of aircraft, that will be retired during August 2016, and related spare parts. As a non-cash item, this write-down will not impact on Freightways’ dividend payments to its shareholders.
• 2015: A total non-recurring charge of $9 million ($6.5 million after tax) that comprised one-off expenses relating to the initial write-down of the carrying value of aircraft, related fleet transition costs and property relocation costs.

 

Dividend

The Directors have declared a final dividend of 14.5 cents per share, fully imputed at a tax rate of 28%, being a 16% increase above the pcp dividend of 12.5 cents per share. This represents a payout of approximately $22.5 million compared with $19.3 million for the pcp dividend. The dividend will be paid on 3 October 2016. The record date for determination of entitlements to the dividend is 16 September 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 year ended 30 June 2016 are provided below for the express package & business mail division and the information management division.

 

Express Package and Business Mail

Operating revenue of $370 million was 2.9% higher than the pcp. EBITA of $62 million was consistent with the pcp, although allowing for the 5 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.

In addition to the many initiatives implemented during the year to further enhance the overall service provided to customers, Freightways also made a number of key investment decisions. These included:

• Upgrading the Convair aircraft fleet, as announced, by forming a joint venture company with an established aviation operator to lease and operate three Boeing 737-400s. The scheduled arrivals of the 2nd and 3rd aircraft were delayed due to the conversion programme from passenger to freighter configuration undertaken in the USA taking longer than anticipated. All three Boeing 737-400 aircraft will now be operating in the early part of the 2017 financial year;
• Leasing a new purpose-built and fully-automated facility in Christchurch to enable the consolidation of operations from three separate facilities into one that will have airside access to the Boeing 737-400 aircraft fleet. Capital expenditure relating to this project is tracking in line with the budgeted cost of $11 million. This new facility is expected to be fully operational by the end of the 2017 financial year. A positive return above Freightways’ cost of capital for this project is expected to be achieved through efficiency and quality enhancements. Other property initiatives during 2016 included relocating to larger facilities in Dunedin and Tauranga to create more capacity to accommodate current and expected future volume growth; and
• Increased resourcing of our team of IT professionals and the appointment of a Chief Information Officer to assist in the positioning of Freightways as a technology leader in the markets it operates in.

Freightways’ business mail operator, DX Mail, expanded its postie network and is servicing most urban locations throughout New Zealand. Despite the decline of the overall physical letter market, the demand for DX Mail’s suite of services, that includes overnight delivery for standard-priced letters 5-days per week, 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.

Increased activity from some existing customers and the winning of additional new business contributed positively to revenue growth and the achievement of sound operating earnings margins in this division.

 

Information Management

Compared to the pcp, which also included the benefit of the 5 extra trading days in the New Zealand operations, operating revenue of $137 million was 12.5% higher, while EBITA of $28 million was 18% higher.

Key decisions made during the year that will contribute to the long-term performance of this division included:

• The established information management brands on both sides of the Tasman, with the exception of Shred-X, to operate as The Information Management Group (TIMG) in the future. Shred-X, due to its unique positioning, particularly strong brand presence and existing market leadership position in Australia, will continue to operate under its own name; and
• Approximately $2.5 million to be invested during 2017 in completing the relocation of three Sydney-based information management facilities into a single purpose-built facility. Operating from a single site will deliver operating efficiencies that will contribute to a positive return on this investment.

 

Performance in this division has been strong throughout 2016. Increased utilisation of existing facilities, the successful integration of a number of small acquisitions, improved performance from the recently-acquired LitSupport, and a particularly strong result from Shred-X, that benefited from some large one-off destruction volumes, all contributed to this result.  In addition to growth in the physical services provided by TIMG, demand for its digital information management services also continues to increase.

 

Internal Service Providers

Fieldair Holdings provides airfreight linehaul services to the express package & business mail division along with general engineering and contracting services to the general aviation market. Parceline Express provides road linehaul to our front line businesses. As volumes have grown, the services provided by these businesses have adapted to ensure the provision of quality long-term capacity.

Freightways Information Services provides IT development and support to the express package & business mail division. This team was expanded during the year to address 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. This team reports to the newly-created role of Freightways Chief Information Officer, a role which will oversee IT across the entire Freightways group.

 

Corporate

The maturity dates for all existing bank facilities were extended during the year by a further two years at a slightly reduced cost. Overall, net bank debt has reduced from $163 million in the pcp to $152 million.

Corporate overhead costs continue to be well-contained at a similar level to the prior year. Acquisitions during the year have been funded from operating cash flows.

Capital expenditure of $17 million was invested during the year, primarily to provide capacity for growth, including expenditure on facilities and related equipment, IT infrastructure and airfreight capability.

 

Outlook

Freightways will continue to adapt and position itself to realise the growth opportunities that exist in the markets it operates in.

Subject to factors beyond its control, Freightways expects to again improve its overall year-on-year performance, albeit results from the express package & business mail division will partly be offset by investment in increased capacity in the information management division, specifically:

• The express package & business mail division is expected to benefit from increasing volumes and improve its performance compared to the prior year.  The full benefit of the consolidation of existing facilities at Christchurch airport will start to be realised from the end of the 2017 financial year.
• The information management division is currently expected to perform slightly below the pcp due to the strong year just completed, that included some large one-off project work, and also due to one-off costs to be incurred in 2017 in respect of the Sydney premises relocation. These factors will offset the otherwise positive trading performance expected of the division. The benefits relating to this property consolidation initiative will start being realised in the latter stages of the 2017 financial year.

 

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

Capital expenditure for the year ahead is expected to be approximately $23 million to support the growth and development of both Freightways operating divisions. Overall cash flows are expected to remain strong throughout the 2017 financial year.

 

Conclusion

The positive features of the markets Freightways operates in, the resilience of its businesses to accommodate growth and adapt to change and the successful execution of its growth strategies by an experienced team of people are again evidenced in this full year result.

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

SUSAN SHELDON Chairman		DEAN BRACEWELL Managing Director