Announcement

HALFYR: FRE: Half Year Results to 31 Dec 2018 and Interim Dividend 09:48a.m. 
FRE  
25/02/2019 09:48  
HALFYR  
PRICE SENSITIVE  
REL: 0948 HRS Freightways Limited  
 
HALFYR: FRE: Half Year Results to 31 Dec 2018 and Interim Dividend  
 
SUMMARY OF PRELIMINARY HALF YEAR ANNOUNCEMENT  
 
Name of Listed Issuer: Freightways Limited  
 
Reporting Period: 6 months to 31 December 2018  
 
The Directors are pleased to present the consolidated financial results of  
Freightways Limited (Freightways) for the six months ended 31 December 2018.  
This report discusses the results, reviews the operations of each division  
and provides an outlook for the year ahead.  
 
Highlights of the half year include:  
o Overall year-on-year revenue, earnings and dividend growth  
o In the express package & business mail (EP&BM) division:  
- Strong revenue and volume growth;  
- Productivity gains through improving the number of items per courier  
delivered in residential areas, and  
- Development of IT capability to enable 'pricing for effort' initiatives to  
be implemented  
o In the information management (IM) division:  
- Three further acquisitions;  
- Pleasing progress in improving utilisation in the Australian storage  
footprint:  
- A major data digitisation contract win at the end of the half year, and  
- Solid growth in both secure destruction and medical waste revenue in  
Australia.  
o Sustained cash generation from both divisions, maintaining debt headroom to  
pursue further growth initiatives and acquisitions.  
 
Operating performance  
The below table presents the reported half year result compared to the pcp,  
both before and after the inclusion of non-recurring items that were reported  
in the pcp:  
 
Dec-18 $M; Dec-17 $M; Increase %  
Revenue: 314.8; 292.1; 7.7%  
 
EBITA, before non-recurring items (i): 50.7; 49.2; 3.0%  
Non-recurring items: 1.4; -  
EBITA (ii): 52.1; 49.2; 5.8%  
 
NPAT, before non-recurring items (iii): 32.0; 31.4; 2.0%  
Non-recurring items after tax: 1.4; -  
NPAT (iv): 33.4; 31.4; 6.3%  
 
Basic EPS (cents), before non-recurring items: 20.6; 20.3  
 
Notes:  
i. Operating profit before interest, tax 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 half year attributable to shareholders.  
 
The results discussed throughout this commentary exclude the impact of the  
following non-recurring item that the Directors believe should not be  
included when assessing underlying trading performance:  
 
o 2018: Non-recurring benefit before tax totalling $1.4 million (no tax  
applicable) in respect of the gain arising during the half year upon the  
progressive recording of the replacement of earthquake-related damaged  
racking funded by insurance proceeds. A gain on the racking replacement  
arises because the overall insurance proceeds for new racking will exceed the  
written down book value of the structurally-compromised racking written-off.  
 
Dividend  
 
The Directors have declared an interim dividend of 15 cents per share, fully  
imputed at a tax rate of 28%, being a 3% increase above the pcp interim  
dividend of 14.5 cents per share. This represents a payout of approximately  
$23.3 million compared with $22.5 million for the pcp. The dividend will be  
paid on 1 April 2019. The record date for determination of entitlements to  
the dividend is 15 March 2019.  
 
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 2018 are provided  
below for the EP&BM division and the IM division.  
 
Express Package & Business Mail Division  
 
The EP&BM 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.  
 
Operating revenue of $233.5 million was 7.8% higher than the pcp. EBITA of  
$38.6 million was 6.1% higher than the pcp.  
 
Strong revenue growth in the first half was driven by a combination of  
organic growth in volumes from existing customers, which largely tracked as  
it had done in the financial year ended 30 June 2018 (FY18), market share  
gains and improved pricing. The ParcelAir Limited joint venture, that  
provides Freightways' airfreight capacity, leased a 4th Boeing 737 and  
operated it as part of the network from November until the end of December to  
assist with peak volumes. This aircraft will become a permanent fixture in  
the network in FY20, but is not expected to result in any material increase  
in operating costs for Freightways. Labour costs stepped-up throughout the  
half year as a result of the tight labour market and planned increases to  
wage rates.  
 
Freightways' smaller postal businesses, DX Mail and Dataprint, grew combined  
revenue in the half. DX Mail lifted its EBITA by over 7% compared to the pcp  
while expanding its network, however Dataprint's earnings were down on the  
pcp as customers continued the shift from physical mail to digital  
communications.  
 
The EP&BM division delivered a sound half year result, while positioning  
itself well to implement its B2C strategies.  
 
Key Strategies in 2019  
 
Residential Network Review: The programme of residential network  
intensification resulted in 28 fewer courier runs by December. Given higher  
volumes than the pcp and fewer courier runs, our productivity increased as a  
result. An exercise using advanced data analytics will take place in the  
second half of FY19 to assess further opportunities for improved delivery  
efficiency and increased contractor earnings. This initiative is expected to  
have a positive impact on a number of Freightways' environmental, social &  
governance (ESG) initiatives, including, ongoing strategies to improve  
courier earnings & service levels, as well as reducing carbon emissions.  
 
Pricing for Effort: The strategy to appropriately price B2C express package  
(EP) services to ensure both the company and its contractors are motivated to  
facilitate profitable e-commerce revenue growth is being actively pursued.  
The EP brands have been testing the pricing approach with both new and  
existing business customers during the half year and are now rolling the  
programme out to all new business opportunities and it will form part of our  
2019 uprates in July this year. It is expected e-commerce will continue to  
drive increased volumes to Freightways year on year and the group is  
committed to ensuring this growth is both profitable and sustainable and that  
the B2C services provided meet customers' expectations.  
 
Visibility and Data Analytics: New scanning technology for the EP businesses  
was successfully piloted in November and December and will be rolled out for  
the wider courier fleets over the remainder of the financial year. The  
technology enables improved visibility for customers and their receivers.  
This will complement improved reporting capabilities which will allow the EP  
teams to better analyse every aspect of their operations so as to help  
deliver improved efficiency, profit margins and service standards.  
 
Information Management Division  
 
This division operates under the brands of The Information Management Group  
(TIMG), Shred-X and, following the recent acquisition of a business in the  
Medical Waste industry, Med-X.  
 
Operating revenue of $82.2 million was 7.6% higher than the pcp. EBITA of  
$14.7 million was 0.5% higher than the pcp.  
 
Compared to the pcp, revenue growth was achieved by all businesses within  
this division. A number of additional costs relating to acquisitions and an  
increase in sales, marketing and IT labour were incurred during the period.  
Utilisation of IM facilities across New Zealand and Australia continued to  
improve as storage volumes increased. Secure destruction revenues increased  
across the suite of paper grades sold, eDestruction and medical waste  
services. Approximately 10% of IM revenues are now generated by digital  
services, of which some are annuity services, and some are project-based.  
Growth in these digital services, while at an early stage of development, has  
been positive and in 2019 has been boosted by the winning of a large data  
collection & digital transformation project in Australia.  
 
TIMG's Porirua document storage facility, that was damaged in the North  
Canterbury earthquake, has now had its racking fully replaced. This was a  
significant project completed by the business during December 2018 and was  
accomplished on time and with no disruption to customer service. Freightways  
carries comprehensive insurance for events such as this. The $2 million  
write-off of the written down book value of the structurally-compromised  
racking in the division's FY18 result and its progressive replacement with  
new racking since have been funded by insurance proceeds received during the  
project, resulting in a non-recurring accounting gain of $1 million in the  
FY18 result and a further $1.4 million in this half year result. These gains  
have been disclosed as non-recurring items in the respective income  
statements.  
 
Key Strategies in 2019:  
Facility Utilisation: Utilisation of IM facilities in Australia has improved  
steadily throughout the half year and is on track for 70% by the end of the  
financial year, despite taking on a small additional warehouse in Queensland.  
This improvement has been achieved through an equal mix of market share gains  
and organic growth in the volume of records stored by existing customers.  
 
Digital Services Growth: The increased investment in sales & marketing is  
beginning to pay off, with a number of new digital opportunities won toward  
the end of the period. Growing the division's existing digital services and  
exploring opportunities for adjacent digital offerings will continue to be a  
focus for the business in 2019.  
 
Secure Destruction and Medical Waste: These markets present an opportunity to  
apply Shred-X's consistent and high-quality national service standards and  
sales methodologies to grow in a number of adjacent niche markets. The  
business has demonstrated particularly strong revenue growth in all lines of  
business during the half year. Growth has been generated from a number of  
smaller bolt-on acquisitions completed at the beginning of the half year, as  
well as through new business acquired in the 2nd quarter. Management will  
continue to focus on both the integration of these acquisitions, as well as  
closing additional opportunities in the pipeline.  
 
Acquisitions and Alliances: Freightways will continue to explore and  
investigate acquisition and alliance opportunities for both current and  
future complementary service offerings.  
 
Freightways is pleased to announce the recent acquisition of a number of  
small businesses in Australia that operate in the IM and Medical Waste  
industries. Three businesses were acquired early in the half year for a total  
of $10.3 million. These businesses are expected to be contributing annualised  
EBITDA of $1.6 million by the end of the financial year, as the businesses  
become fully integrated. Related capital expenditure will be approximately  
$0.5 million. These acquisitions will be immediately EPS positive.  
 
Corporate  
 
Corporate costs increased by $0.8 million compared to the pcp, primarily due  
to the reclassification of certain managers from the divisions into  
newly-created corporate roles, in addition to an uplift in consulting costs  
relating to internal audit, external reporting and ESG initiatives.  
 
Net debt increased by approximately $9 million to $163 million during the  
year. While cash flows from operations remained strong and adequately covered  
all planned expenditures, an additional $10 million was invested in three  
small acquisitions. Freightways continues to have excellent support from its  
lenders and sufficient headroom in facilities and gearing levels to continue  
actively pursuing its solid pipeline of acquisition opportunities.  
 
OUTLOOK  
 
The markets in which Freightways operates in both New Zealand and Australia  
continue to remain positive, albeit the company will continue to closely  
monitor indicators for any adverse changes in economic activity in New  
Zealand, in particular. Growth opportunities leveraging the current customer  
base and through acquisitions exist in both New Zealand and Australia and  
will be actively pursued. Subject to factors beyond its control, Freightways  
is once again targeting year-on-year earnings growth for the full year.  
 
Within the EP&BM division, the company expects that its strategies to better  
align price and efficiency will gain further traction, particularly in the  
faster-growing B2C market. The inflationary cost of operating in a tight  
labour market, along with a generally higher cost of doing business, is  
expected to be offset by increased pricing, including pricing related to  
higher fuel costs. Freightways will continue to monitor employment law  
reform.  
 
Within the IM division, increased utilisation of existing capacity will  
continue to be a key focus. Freightways is encouraged by recent digital  
services wins and will continue to invest in this capability. The group's  
entry into the Medical Waste industry has tracked to expectation, with a  
presence now in both New South Wales and Victoria.  
 
Overall capital expenditure for the 2019 financial year is still expected to  
be in the range of $20-22 million. Operating cash flows are expected to  
remain strong throughout 2019.  
 
CONCLUSION  
 
Freightways has continued to invest in the future of both divisions, while  
returning a sound result for the first half of the 2019 financial year. The  
key EP&BM strategies are critical to generating both growth and improved  
returns from the growing B2C sector. In Information Management, the group  
will continue to grow scale in existing revenue lines and will be alert to  
new opportunities which can leverage the group's existing customer  
relationships and core competencies. Freightways' agility and entrepreneurial  
outlook should see it continue to adapt to changing markets and conditions  
and continue to be resilient in the face of external factors. Freightways is  
committed to improving the long-term sustainability of its business for the  
benefit of its teams of people, its customers, its shareholders and the  
environments in which it operates.  
 
The Directors acknowledge the outstanding work and ongoing dedication of the  
Freightways teams of people throughout New Zealand and Australia.  
End CA:00331034 For:FRE Type:HALFYR Time:2019-02-25 09:48:45