Announcement

HALFYR: FRE: Half Year Results to 31 Dec 2019 and Interim Dividend 09:45am 
FRE
24/02/2020 09:45
HALFYR
PRICE SENSITIVE
REL: 0945 HRS Freightways Limited

HALFYR: FRE: Half Year Results to 31 Dec 2019 and Interim Dividend

The Directors are pleased to present the consolidated financial results of
Freightways Limited (Freightways) for the six months ended 31 December 2019.
This report discusses the results, reviews the operations of each division
and provides an outlook for the balance of the financial year ahead.

Key matters of note in respect of the half year include:
o The agreement to acquire Big Chill Distribution Limited (Big Chill) is
pending Overseas Investment Office (OIO) approval, which is expected around
the end of Q3 in FY20.
o In the Express Package & Business Mail (EP&BM) division:
- After suffering a decline in organic volume through much of 2019, due to
lower same-customer trading, December showed a slight uplift in terms of year
on year activity levels.
- Pricing for Effort (PFE) delivered an average of $0.66 per item by
December, up from $0.55 at the end of October.
- Despite needing to match cheaper competitor pricing in the letters
business, DX Mail successfully retained its customers.
o In the Information Management & Secure Destruction (IM&SD) division:
- Poor performance in a number of smaller service lines and the delayed
commencement of digitisation contracts proved a drag on first half year
Australian earnings. A number of initiatives are in place to improve this
performance in the 2nd half of FY20.
- Growth in the Australian records storage business of 10% for the half year.

- A major data digitisation contract was secured, which will commence in Q3
and continue through most of calendar 2020.
- 14% revenue growth in the SD and medical waste business in Australia.
- A decline in SD paper pricing of approximately $1m (and $0.5m in NZ) in the
half year. The earnings impact of the decline in paper pricing was mitigated
to some extent by higher paper volumes than the prior comparative period
(pcp) and lower processing costs.
The results discussed throughout this commentary exclude the impact of:
o The new NZ IFRS 16 Leases accounting standard, which became mandatory for
Freightways from 1 July 2019. The pcp results are not required to be restated
in the first year of adopting NZ IFRS 16 and accordingly, the Directors
believe that providing commentary excluding the impact of NZ IFRS 16 provides
a better comparison to the pcp. The table below presents the results
including and excluding the impact of having adopted NZ IFRS 16; and
o Non-recurring items - The Directors believe the following non-recurring
benefit should not be included when assessing underlying trading performance:
the non-recurring benefit before tax totalling $1.4 million (no tax
applicable) in 2018 in respect of the gain arising during that half year from
the progressive recording of the replacement of earthquake-related damaged
racking funded by insurance proceeds. A gain on the racking replacement arose
because the overall insurance proceeds for new racking exceeded the written
down book value of the structurally-compromised racking written-off.

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, and inclusive and exclusive of the newly-adopted NZ IFRS 16
Leases accounting standard adjustments:

(Refer NZX Preliminary Announcement Dec 19 attached for results table)

GAAP - Generally Accepted Accounting Principles (IFRS-compliant)

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.

Dividend
The Directors have declared an interim dividend of 15 cents per share, fully
imputed at a tax rate of 28%, in line with the pcp interim dividend. This
represents a payout of approximately $23.3 million, also in line with the
pcp. The dividend will be paid on 1 April 2020. The record date for
determination of entitlements to the dividend is 13 March 2020.

As previously announced, Freightways is awaiting OIO approval to acquire Big
Chill. While it is planned to fund this acquisition from Freightways'
existing syndicated bank facilities, the Directors have determined that the
Freightways Dividend Reinvestment Plan (DRP) will be offered for the above
interim dividend and may be offered for the final dividend in October 2020 to
mitigate the level of debt funding required. In this regard, when the DRP is
offered, it is intended that it will be fully-underwriten for the applicable
dividends to maximise the cash flow benefit for Freightways of activating the
DRP, while still allowing shareholders the choice of shares or cash for their
dividend payments.

As a capital management tool, the application of the DRP will be reviewed for
each future dividend.

DIVISIONAL PERFORMANCE
EP&BM for the half year ended 31 December 2019
Operating revenue of $237.6 million was 1.8% higher than the pcp. EBITA of
$39.1 million was 1.1% higher than the pcp.

Activity levels: After suffering a noticeable decline in organic volume
through much of 2019, due to lower same-customer trading, December showed
signs of that decline abating. Revenue growth on the pcp of 1.3% in Q1
increased to 2.1% in Q2. All things being equal, it gives rise to some
confidence that through the remainder of 2020 the EP businesses may see a
steady improvement in volume trends.

Pricing for Effort: By December, average PFE revenue reached $0.66 per item,
up from $0.55 at the end of October. December also saw a peak in terms of the
number and proportion of residential items travelling through the network,
with residential on-time delivery performance levels tested and measured at
93%, 1% higher than our main competitor for the same period.

DX Mail: Despite needing to match cheaper competitor pricing for bulk mail,
DX Mail successfully retained its customers through quality and timely mail
services. The NZ Commerce Commission has advised, for the time being, it will
not be pursuing an investigation into NZ Post's targeted discounted zonal
pricing. The level of discounting has had an adverse effect on earnings in
this division.

Key Strategies in 2020
Pricing for Effort: The EP brands will continue to work at increasing average
pricing per item through the remainder of FY20 toward our goal of $0.75 per
item. The additional courier income generated from this price increase has
been meaningful for contractors who work residential areas and has assisted
in delivering a higher level of productivity and on-time delivery.

Customer Visibility and Data Analytics: A number of new customer &
business-facing IT projects are delivering better visibility for parcels
travelling through the network and more accurate information on utilisation,
freight-mix and margins by customer, route and brand. There are further
customer-facing enhancements planned for the remainder of FY20 and for FY21
which will streamline the experience for customers and enable new services to
be offered to the market.

New Service offerings: In the 2nd half of FY20 the EP division will commence
a same day delivery service for Auckland, which will be positioned between
cheaper hub & spoke services and the more expensive point-to-point
deliveries, to provide customers with guaranteed same-day delivery. These
services will be Priced for Effort to ensure that both contractors and the
Company benefit from the initiative.

IM&SD for the half year ended 31 December 2019
Operating revenue of $82.2 million was 0.1% higher than the pcp. EBITA of $11
million was 24.8% lower than the pcp, primarily due to lower volumes moving
through the largely fixed cost print & copy bureaus and the impact of lower
paper prices experienced in the SD businesses on both sides of the Tasman.

Australian IM Performance: Poor performance in a number of smaller revenue
streams (including the print & copy business) proved a drag on Australian
earnings. A number of initiatives are in place to address this performance,
including right-sizing the business and strategically reviewing the portfolio
of services offered by TIMG Australia. Conversely, strong revenue growth of
10% was recorded in the Australian records storage & service business for the
half year.

Digitisation: Work will commence in late-January (later than originally
anticipated) and will continue through calendar 2020 on a major digitisation
contract. The work leverages TIMG's secure logistics and storage capability,
as well as its data transformation experience. It will engage up to 250 staff
at its peak.

Secure Destruction: Strong momentum has continued in the Australian SD and
medical waste business, with 14% revenue growth in the half year. This
included the acquisition of a number of smaller businesses in the later part
of the half year. The benefits of this growth for the overall IM&SD division
have been somewhat muted by the decline in paper pricing of approximately
$1.5m in the half year. The earnings impact of lower paper prices, while
still significant, was mitigated to some extent by higher paper volumes than
the pcp and efficiencies that were gained in processing costs.
Key Strategies in 2020
Facility Utilisation: The IM division will continue to target profitable
records storage growth, particularly in facilities where there is low
utilisation.

Digital Services Growth: TIMG has been successful to date in winning
significant digitisation contract work. We will continue to target scale
opportunities in the Australian market for digitisation and e-discovery
services.

Secure Destruction and Medical Waste: Additional investment was made in
teams, fleets, facilities and acquisitions in calendar 2019 to support the
growth of Shred-X's document destruction, medical waste and product
processing capabilities. It is planned to continue management's focus on
revenue streams in related markets that complement the physical footprint
established by Shred-X in the SD 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 is pleased to announce it completed a number of small
acquisitions during the half year as discussed in the Q1 trading update.
Additionally there was a subsequent acquisition in Q2 of a small medical
waste business in NSW, which will provide additional processing capacity and
broaden the footprint of the business in that state.

The application for OIO approval for the Big Chill acquisition is in
progress. A further announcement will be made when this approval process is
complete.

Corporate
Corporate costs were marginally below the pcp and continued to be well
contained.

Net debt increased by approximately $24 million to $175 million during the
period. While cash flows from operations remained strong and adequately
covered all planned expenditures, approximately $15 million was invested in a
number of acquisitions and $14 million was spent on capital expenditure.
Freightways continues to have excellent support from its lenders and
sufficient headroom in debt facilities and gearing levels to complete the Big
Chill acquisition and actively pursue its solid pipeline of other acquisition
opportunities.

OUTLOOK
The EP&BM division observed a slowdown in terms of same-customer trade over
the 2nd half of FY19 and into the 1st half of FY20. In December this trend
showed signs of abating, which provides some confidence that the 2nd half of
FY20 may return modest organic growth.

Freightways' businesses are yet to see any material impact from Covid-19. If
in future it has a broader impact on the economies in which they operate, it
could ultimately impact Freightways, and this will be monitored closely.

While the 1st half result for IM was disappointing due to the performance of
the print & copy bureau, lower paper pricing and the delayed start to a major
digitisation contract, we expect a turnaround in the 2nd half as we take
action on the poorer performing service lines and the digitisation contract
work commences.

Within the SD business, the division will look to leverage the larger
footprint it has invested in to provide medical waste and product destruction
services to both new and existing customers. Paper pricing is not expected to
recover materially in the short term.

Overall capital expenditure for FY20 is still expected to be between $25-26
million, not including any potential capital expenditure associated with Big
Chill, if that acquisition proceeds before the end of the financial year.
Operating cash flows are expected to remain strong throughout 2020.

Management will be focused on integrating the Big Chill business into
Freightways in 2020, assuming OIO approval is granted, as well as driving
synergies from the smaller medical waste and destruction businesses acquired
during calendar 2019.

CONCLUSION
The 1st half of FY20 exhibited a continued level of lower same-customer
volumes in the EP businesses, although signs at the end of the half year were
that this situation may be beginning to slowly improve. Paper pricing in the
SD business is also well below the pcp, which has an impact on the IM&SD
revenue and margin. Notwithstanding these two macro issues, Freightways has
made significant advances in improving returns from residential courier
delivery work and at the same time improving those contractors' incomes and
productivity and as a result we have reduced emissions in these areas.
Freightways has also built a strong platform in Australia for large-scale
digitisation work and has a small, but fast-growing, medical waste business
to complement the national SD footprint established over the previous decade.
Freightways is well positioned with its impending acquisition of Big Chill to
leverage another niche of the New Zealand express freight market. The Company
is committed to continuous improvements within its portfolio of businesses,
as well as focusing on long-term sustainability for the benefit of
Freightways' people, customers, shareholders and the environments in which it
operates.

The Directors acknowledge the outstanding work and continuing ongoing
dedication of the Freightways teams of people throughout New Zealand and
Australia.
End CA:00348850 For:FRE Type:HALFYR Time:2020-02-24 09:45:49

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