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