Announcement

FLLYR: FRE: Full year Results to 30 June 2019 and Final Dividend 09:45a.m. 
FRE  
26/08/2019 09:45  
FLLYR  
PRICE SENSITIVE  
REL: 0945 HRS Freightways Limited  
 
FLLYR: FRE: Full year Results to 30 June 2019 and Final Dividend  
 
SUMMARY OF PRELIMINARY FULL YEAR ANNOUNCEMENT  
 
Name of Listed Issuer: Freightways Limited  
 
Reporting Period: 12 months to 30 June 2019  
 
The abridged financial statements attached to this report have been audited  
and are not subject to a qualification. A copy of the audit report applicable  
to the full financial statements is attached to this announcement.  
 
CONSOLIDATED INCOME STATEMENT  
 
Current Full Year NZ$'000: Up(Down)%: Previous Corresponding Full Year  
NZ$'000  
 
OPERATING REVENUE:  
615,692; 6%; 580,886  
 
PROFIT BEFORE INCOME TAX  
87,496; 3%; 84,666  
 
INCOME TAX  
24,119; 7%; 22,505  
 
NET PROFIT ATTRIBUTABLE TO ORDINARY SHAREHOLDERS  
63,377; 2%; 62,161  
 
Earnings per share  
40.8; 40.1  
 
Final Dividend (fully imputed)  
15.50; 15.25  
Record Date: 13 September 2019  
Payment Date: 1 October 2019  
Appendix 7 is attached.  
 
Detailed information: The preliminary Full Year Announcement and presentation  
are attached and can also be located in the Investor Relations section of  
Freightways' website (www.freightways.co.nz).  
 
FULL YEAR REVIEW  
From the Chairman and Chief Executive Officer  
 
The Directors are pleased to present the consolidated financial results of  
Freightways Limited (Freightways) for the year ended 30 June 2019. This  
report discusses the results for each division and outlines the key  
strategies and the outlook for the year ahead.  
Highlights of the year include:  
o Overall year-on-year revenue, earnings and dividend growth.  
o In the express package & business mail (EP&BM) division:  
- Completing a number of business-critical IT projects to enable our new  
Pricing For Effort initiative for residential deliveries;  
- Improving route density, in residential areas in particular, and using the  
benefits to reinvest into the contractor fleet, which resulted in an average  
increase in contractor earnings of 7% above the previous year, and  
- Expanding our business mail network to take on new customers and once again  
demonstrating growth year-on-year.  
o In the information management (IM) division:  
- Improving utilisation in our Australian document storage footprint by 10%  
(from 61% to 67%). While this was short of our goal of 70%, it reflected a  
strong step forward in generating improved returns in our document storage  
business;  
- The completion of another large data collection/transformation contract  
win, supporting the growth of the division's suite of digital IM services,  
and  
- Strong growth in our secure destruction business, which is successfully  
diversifying into complementary waste streams which require efficient  
logistics and processing.  
o Sustained strong cash generation from both divisions, leading to reduced  
gearing levels.  
 
Operating performance  
The below table presents the reported 2019 result compared to the prior  
comparative period (pcp), both before and after the inclusion of  
non-recurring items:  
 
$millions - 2019 result; 2018 result; Increase %  
Revenue: 615.7; 580.9; 6.0%  
 
EBITA, before non-recurring items (i): 96.7; 93.7; 3.2%  
Non-recurring items: 2.4; 2.6  
EBITA (ii): 99.1; 96.3; 2.9%  
 
NPAT, before non-recurring items (iii): 61.0; 59.6; 2.3%  
Non-recurring items after tax: 2.4; 2.6  
NPAT (iv): 63.4; 62.2; 1.9%  
 
Basic EPS (cents), before non-recurring items: 39.3; 38.4  
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 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 underlying trading performance:  
o 2019: Non-recurring benefits before tax totalling $2.4 million (no tax  
applicable) in respect of reversing $0.5 million of previously accrued  
acquisition payables that are no longer expected to be required and a $1.9  
million gain upon recording the replacement of earthquake-related damaged  
racking funded by insurance proceeds.  
 
o 2018: Non-recurring benefits before tax totalling $2.6 million (no tax  
applicable) in respect of reversing $1.6 million of a previously accrued  
final acquisition payable that is no longer expected to be required and a  
$1.0 million gain upon recording the replacement of earthquake-related  
damaged racking funded by insurance proceeds. The gain on the racking  
replacement arises from the insurance proceeds for new racking ($3.0 million)  
exceeding the $2.0 million written down book value of the  
structurally-compromised racking written-off.  
 
Dividend  
The Directors have declared a final dividend of 15.5 cents per share, fully  
imputed at a tax rate of 28%, being a 2% increase above the pcp final  
dividend of 15.25 cents per share. This represents a payout of approximately  
$24.1 million compared with $23.7 million for the pcp. The dividend will be  
paid on 1 October 2019. The record date for determination of entitlements to  
the dividend is 13 September 2019. The total dividend payout in respect of  
the year ended 30 June 2019 will be 30.5 cents, being 2.5% above the pcp of  
29.75 cents.  
 
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.  
 
DIVISIONAL PERFORMANCE  
Divisional results for the year ended 30 June 2019 are provided below for  
each division.  
 
Express Package & Business Mail (EP&BM) Division  
 
2019 Result  
Operating revenue of $453 million was 5.6% higher than the pcp. EBITA of  
$72.2 million was 6.3% higher than the pcp.  
 
2019 was a year of two halves with respect to organic growth levels within  
the EP&BM division. The first half was characterised by solid organic growth  
(circa 2.5%), whereas same-customer volume flattened off noticeably in the  
second half of the year. Some hard calls were also made on low margin  
business during the year, with pricing reviews for customers where margins  
were unacceptably low for the value provided through our networks. The  
results were pleasing for the year when these factors, alongside material  
contractor earnings and wage increases, were also taken into account.  
Freightways has consistently paid above minimum wage in its freight sorting  
operations and to ensure it continues to do so, wages were lifted at the  
lower levels by around 6% to maintain that premium. Volume growth, and  
consequently revenue and earnings, were stronger in the first half of the  
year than the second half.  
 
Freightways' small postal business, DX Mail, has come under direct attack  
from NZ Post's new zonal pricing structure for bulk mail, which effectively  
offers the cheapest rates to those areas that DX Mail delivers into, and more  
expensive rates to those areas where DX Mail does not deliver. Freightways is  
assisting the NZ Commerce Commission with its preliminary investigation into  
NZ Post's pricing tactics. DataPrint, Freightways' mailhouse business,  
expanded its range of services during the year and is well positioned to help  
customers transition to digital communications augmented by high quality  
physical delivery through DX Mail.  
 
The EP&BM division delivered a sound full year result, and has positioned  
itself well to avoid the pitfalls of many express package operators that  
appear to have thrown themselves into residential deliveries at what we view  
as unsustainably low margins. Freightways is confident that its brands will  
be able to provide higher quality delivery services to residential areas,  
sustainable courier remuneration and ultimately generate returns from the  
growing B2C market.  
 
Key Strategies in 2020  
 
Pricing for Effort: Differential pricing was introduced from 1 July 2019 for  
items travelling to residential addresses as the first of a two-step process  
to generate higher remuneration for couriers performing residential  
deliveries and to begin to recover the higher costs associated with low  
density deliveries. This strategy has been enabled by significant investment  
in geo-mapping and coding of addresses as either business, residential or  
rural, as well as the introduction of systems to enable billing for  
residential delivery. As this strategy unfolds, Freightways expects to  
achieve a higher quality final mile delivery, with couriers earning superior  
returns for their efforts and Freightways' brands also generating positive  
margins. This will motivate the EP&BM division to invest further into service  
quality initiatives for the growing residential delivery sector.  
 
Residential Network Review: In 2019 good progress was made to better  
collaborate across the courier brands to improve the division's delivery  
efficiency in residential areas. This strategy has now become  
business-as-usual, with the use of a number of analytical tools to  
continually monitor and evolve residential runs so as to drive better  
productivity and lower direct costs for couriers through the need to travel  
fewer kilometres each day.  
 
Customer Visibility and Data Analytics: New scanning technology was  
rolled-out during 2019 which positions the business well to provide  
value-added services to customers and receivers by improving visibility and  
ultimately the final-mile delivery experience.  
 
Information Management (IM) Division  
 
2019 Result  
Operating revenue of $164.5 million was 6.9% higher than the pcp. EBITA of  
$29.3 million was 1.9% lower than the pcp.  
 
While utilisation of facilities improved in Australia and New Zealand, the  
margins generated from data transformation were slightly lower. In 2019, the  
Shred-X business invested in growing its fleets through New South Wales,  
Victoria and Queensland in response to demand from medical waste and product  
destruction customers. Shred-X also incurred transition costs while merging  
its Western Australia site with a recently-acquired document destruction  
business. This business was fully integrated by May 2019.  
 
Australian IM annual earnings marginally exceeded those of New Zealand IM for  
the first time in 2019. Given the larger scale of the Australian market, and  
the broader range of opportunities, including in the medical waste industry,  
it is expected that Australia will widen its lead on New Zealand's earnings  
into the future.  
 
Key Strategies in 2020:  
Facility Utilisation: Despite solid growth in the Australian IM facilities,  
there were a number of new customers secured that had not transitioned their  
volume into TIMG (The Information Management Group) by the end of the  
financial year, meaning the division fell 3% short of its 70% utilisation  
target. The focus for 2020 is to on-board and maintain double digit revenue  
growth in this line of business.  
 
Digital Services Growth: In Australia, TIMG will focus on its capability with  
respect to large digitalisation jobs. In 2019, it completed a significant job  
which required data extraction, electronic discovery and delivery of data  
within tight timeframes (mirroring the capability used for the NZ Census by  
the NZ TIMG business in 2018). There are scale opportunities in the  
Australian market for quality providers of digitalisation and e-discovery  
services.  
 
Secure Destruction and Medical Waste: Additional investment was made in  
teams, fleets and facilities in 2019 to support the growth of Shred-X's  
document destruction, medical waste and product processing capabilities. It  
is planned to continue the investment and management focus on revenue streams  
in related markets that complement the physical footprint established by  
Shred-X in the secure destruction market. These related markets present an  
opportunity to apply Shred-X's consistent and high-quality national service  
standards and sales methodologies to grow through a number of niches,  
including eDestruction, medical waste, product destruction and other high  
value recycling.  
 
Acquisitions and Alliances:  
Freightways continues to actively explore and investigate acquisition and  
alliance opportunities for synergistic and complementary service offerings.  
Freightways completed three small acquisitions early in the 2019 financial  
year and these have been successfully integrated into the Australian IM  
division. The businesses acquired included a records storage business, a  
secure destruction business and a majority stake in the software company that  
provides the online back-up service for TIMG's customers.  
 
Corporate  
Corporate costs increased by $0.7 million compared to the pcp, primarily due  
to the reclassification of certain managers from the divisions into  
newly-created corporate roles, but also as a result of an uplift in  
consulting costs relating to internal audit, external reporting and ESG  
initiatives.  
 
Net debt decreased by approximately $3 million to $151 million during the  
year, driven by strong cash flows from operations, offsetting investment in  
operating capacity and a number of small acquisitions. Debt to debt & equity  
gearing levels have decreased further below 40%.  
 
OUTLOOK  
Freightways has observed a slowdown in New Zealand in terms of same-customer  
trade over the second half of 2019 in its express package businesses. Despite  
this headwind, management remains optimistic that pricing and efficiency  
initiatives in express package and Freightways' diversification strategy in  
information management will provide growth opportunities in 2020. Freightways  
is once again targeting year-on-year earnings growth in 2020.  
 
Within the EP&BM division, indications are that organic volume growth will be  
lower in 2020 than it was in 2019. There will be a strong focus on  
maintaining and improving margins, along with improving visibility to  
customers and receivers for express package deliveries. Focus on continuing  
to build courier remuneration through intensification of their runs and  
improved residential delivery pricing will also be a priority.  
 
Within the IM division, there will be a continued drive on expanding storage  
and handling margins through improved facility utilisation. Leveraging  
digital capability to attract new customers will also be a key platform for  
growth in 2020. Within the secure destruction business, the division will  
look to leverage the networks it has invested in to provide medical waste and  
product destruction services to both new and existing customers.  
 
Overall capital expenditure for the 2020 financial year is expected to be  
between $22-24 million. Operating cash flows are expected to remain strong  
throughout 2020.  
 
Strategic growth opportunities, including acquisitions and alliances that are  
synergistic or complementary to our existing capabilities, will be executed  
where they make commercial sense.  
 
CONCLUSION  
Freightways has continued to innovate and invest in its businesses to achieve  
market-leading service quality and return on investment. The results for 2019  
were impacted in the latter half of the year by modest to flat organic growth  
as the New Zealand economy slowed. Despite these headwinds, Freightways  
expects to continue to demonstrate its long-held disciplines in terms of  
managing margins, investing appropriately for growth and exploring new  
service opportunities. There are opportunities for all of the group's  
business activities to continue to grow and evolve their service offerings to  
meet customers' demands. 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:00339784 For:FRE Type:FLLYR Time:2019-08-26 09:45:15  

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