Full year Results to 30 June 2020

Name of Listed Issuer: Freightways Limited Reporting Period: 12 months to 30 June 2020 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: 630,940; 2%; 615,692 PROFIT BEFORE INCOME TAX 66,300; (24%); 87,496 INCOME TAX 18,925; (22%); 24,119 NET PROFIT ATTRIBUTABLE TO ORDINARY SHAREHOLDERS 47,375; (25%); 63,377 Earnings per share 30.0; 40.8 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 In the last quarter of this financial year, every one of Freightways' business units was called upon to provide essential services during the COVID-19 lockdowns in New Zealand and Australia. The challenges were many and varied: from the delivery of food and personal protective equipment (PPE), the retrieval of hospital files held in offsite storage and the establishment of new trans-Tasman airfreight services to keep export markets open, to the collection of medical waste from newly formed quarantine facilities. Freightways' brands helped to pick up, process and deliver over 20 million essential items for our customers. The response by our teams across all businesses was outstanding. We would like to acknowledge the extraordinary efforts of all of our staff and contractors in delivering for our customers during the year, and particularly in the challenging last few months - where COVID-19 has changed the shape of the environments in which we operate. There have been so many heart-warming stories of the efforts our people made to connect essential goods to their intended recipients, on time and in full. Just days into level 4 lockdown in New Zealand the company also completed the acquisition of Big Chill Distribution Limited (Big Chill) after receiving approval from the Overseas Investment Office (OIO). The forced timing of the transaction along with the dramatic drop in volume in the initial week of level 4 lockdown trading, resulted in us renegotiating the terms of the deal to partly settle the transaction in shares, thus preserving cash. The business has demonstrated strong resilience. Our financial results in FY20 are naturally affected by the lockdowns in both New Zealand and Australia. Pleasingly, following the initial drop in activity during lockdowns, our position has steadily improved through the lifting of restrictions, although the recovery in Australia has now been affected by the situation in Victoria and New Zealand has experienced another lockdown, albeit not to the extent of the level 4 lockdown which restricted our customer activity to only essential services. The current environment remains highly uncertain, with a resurgence of COVID-19 across the globe increasing the risk of further trading and travel restrictions. The board feels the prudent course of action is to not declare a final dividend for FY20 given the uncertainty in both the NZ and Australian markets. While recent trading has been strong in NZ, there has been a recent return to level 3 lockdown in Auckland and level 2 nationally along with a continued severe lockdown in Victoria. The consensus is the full economic impact has yet to be felt in either country at this stage. Notwithstanding our current performance, this decision also better positions our balance sheet for an uncertain wider economic impact and preserves headroom for potential growth opportunities which may emerge from the current environment. It is also important to acknowledge that many of our team, including management and directors, took pay cuts through the quarter and that some of our businesses accessed the government wage subsidy to ensure that we kept our people in work. For all of these reasons we feel not declaring a final dividend for FY20 is a one-off decision and is the right thing to do. At this point, we do envisage a resumption of dividends in the current financial year (FY21), subject to a continuation of our current trading conditions. Getting through the work COVID-19 drove changes in consumer behaviour and, following the initial impact of lockdowns in NZ, the courier industry has seen a surge in the number of parcels. While some of our competitors struggled to cope with that flow, our people responded to the change in volumes and got on with making it work. The teamwork amongst the businesses was inspiring. Our people volunteered for roles as freight sorters and couriers to get the job done. We had to react quickly and decisively because level 4 lockdown had such a deep and immediate effect on us. Express Package volumes initially dropped by 65% while Information Management activity in New Zealand ground to a halt, leaving us with just storage revenue. In Australia, the decrease in Information Management activity was around 25% but while the impact has been shallower, it has also been more prolonged than in New Zealand and continues into FY21 particularly in Victoria and NSW. We quickly adapted to this dramatic reduction in activity, cutting our discretionary costs, reducing our wage and salary costs by rostering for lower volumes, taking leave without pay and through most of our team working less hours to reduce our overall labour costs. In line with lower volumes, our businesses moved quickly to right size operations by removing linehaul runs, flights and other variable costs to minimise the impact on profitability. In addition, Directors and senior executives took a 20% cut in fees and fixed salaries in the quarter. We applied for the New Zealand Government Wage Subsidy for those businesses that incurred a greater-than-30% decline in revenue. This enabled us to continue to retain our staff in those businesses. A number of our businesses did not meet this threshold and either did not apply or promptly returned the subsidy when that became clear. Our unfaltering entrepreneurial spirit During this period of time, we managed to do three things that perfectly capture the entrepreneurial spirit that makes Freightways successful. We commenced new services and quickly grew existing ones, such as trans-Tasman airfreight charters through our aviation JV with Airwork, rapidly expanded medical waste collections through Med-X in Australia in response to the need to dispose of PPE, and a new premium same-day guaranteed delivery service across Auckland with NOW Couriers. Secondly, we maintained our service levels through the spikes in B2C (home delivery) volumes which occurred during level 3 lockdown. Finally, while we were in lockdown (4 days in, in fact) we completed the acquisition of Big Chill, settling the transaction with a combination of cash and shares. Business Unit performance Each line of business experienced a range of impacts through the year. The highlights are listed below along with our strategic direction in the near term. Express Package o Steady increases in organic volume up until March 25th (when Level 4 lockdown began in New Zealand) had generated encouraging revenue and margin gains in that month; o As New Zealand moved through lockdown levels 4 to 2, we experienced growth in the proportion of B2C freight from the combination of supporting our customers who were changing their models to enable B2C for their essential items as well as increasing charitable deliveries (performed at cost). By June, this B2C proportion had moderated from around half of all deliveries back to 24%, still 4% higher than pre- COVID-19; o This has accelerated a trend that was already expected before the epidemic, and for which we had been preparing through our Pricing For Effort (PFE) programme. B2C deliveries attract lower margins than B2B, but this situation is improving and we expect to continue to make progress in this area over the coming years; o Pricing for Effort (PFE) of 73c per item has thus helped considerably through the heightened B2C volumes our brands have experienced since level 3 lockdown; o Residential productivity through the lockdown period increased by 17%, assisted by less congested roads and a greater proportion of first-time deliveries because receivers were home to accept items; o Courier pay was impacted by the COVID-19 lockdown period, being 2% behind last year's average of $103k p.a. per contractor. Self-employed contractors were able to draw on the government wage subsidy if their income dropped by 30% in a given month; o Volumes in June, July and August to date have been stronger than expected, which we attribute to market share gains and also higher levels of organic trade from many customers; o We remain wary as volumes are still sensitive to overall economic conditions. At this stage, they seem to be driven by a combination of pent up demand, stronger than expected retail sales and sustained B2C volumes; o Big Chill initially suffered a 22% decline in revenue through level 4 and 15% through nationwide level 3. Despite this, the business was able to adjust quickly and reduce costs in response to lower demand. Business conditions had improved by June, with the last month of the year delivering revenue growth of 15% on the pcp; o Through Q4 we provided 1.4m kgs of international trans-Tasman airfreight capacity as part of the Government's International Airfreight Capacity Scheme. The profitability of this service depends heavily on the degree of utilisation. This has varied, as the Australian States transition through various phases of lockdown but is overall a positive contributor to performance. The agreement has been extended through until the end of August when it will again be reviewed by the Government. The year ahead Express Package will continue to focus on building our market positions through providing superior levels of service and pricing our services appropriately. This focus will include introducing a further phase of our pricing for effort (PFE) strategy for B2C deliveries. It is critical that our contractors are remunerated through item revenue (rather than company subsidies) for the effort required for residential deliveries. We will implement additional customer-facing IT systems to make it even easier for customers to deal with us and provide them and their receivers with greater visibility. We will also continue to exploit our multi-brand strategy through positioning our brands to meet the needs of different customer segments. Our latest initiative sees us position NOW Couriers as our guaranteed same-day Auckland service provider, giving customers peace of mind and surety. Big Chill's expansion into 3PL in Auckland will be a focus as well as taking advantage of a larger temperature-controlled Wellington hub. Customers will be able to benefit from a fully outsourced storage, picking & labelling service that links seamlessly into Big Chill's national delivery network. There are a number of new market opportunities for Big Chill, some of which will leverage the ability to provide a last-mile express delivery service to customers as well as improving their customer experience by leveraging our suite of express package technology. Business Mail o The volume trajectory for Business Mail followed a similar trend to that of Express Package. By the end of June, volumes had recovered to be marginally higher than the previous year. This was particularly pleasing, although we received slightly lower revenue per item as a result of direct price-based competition for mail being delivered to those areas that DX Mail services; o Through lockdown, DX demonstrated the ability to flex its cost base to a greater degree than larger fixed cost operators. It was satisfying to see the co-operation between businesses to lend support as volumes ramped up in the Express Package division. DX employees offered to assist the courier brands, helping us to maintain very high standard of on-time delivery. o Despite a 30% reduction in mail volumes during the months of April and May overall, DX Mail volumes for the full year grew by 4%. This growth was achieved through market share gains obtained on the basis of better and more frequent mail delivery services. The year ahead DX will expand its delivery network in response to customer demand. We expect demand to remain strong although with a lower margin than in previous years due to the ongoing impact of our competitor's zonal pricing programme. Our experience is that many customers request and reward high levels of service and we will continue to focus on providing a high delivery standard to those customers who require it. Information Management o Storage revenue was solid through the year and particularly resilient to the impacts of COVID-19. However, the number of new archives coming into facilities virtually halted as lockdowns occurred in New Zealand and Australia; o Collection and retrieval of archives and media tapes reduced by 90% in New Zealand and by about 25% in Australia in the last quarter of the year; o Our litigation support services - in particular print and copy services - were also heavily impacted as lawyers vacated their offices as a result of COVID-19 and have remained working from home, in many cases reducing the demand by up to 50% for printed material. o There have been positive signs of recovery in New Zealand, but Australia will take longer to recover because staff in many organisations continue to work from home. CBD areas in particular are still devoid of many of their office staff; o The digitalisation project that TIMG had geared up for late last year did eventually commence, but at lower levels of activity than expected because physical data was difficult to collect during COVID restrictions. This project is expected to be broken into stages and will take longer to process than initially anticipated. The combination of these various negative trends has led to our decision to partially impair our litigation support business in Australia. The year ahead With a lower level of storage facility utilisation than we would have liked, we will assess a number of alternate opportunities to generate revenue from our warehousing footprint. There is an encouraging pipeline of digitalisation opportunities in Australia, which our team will look to capitalise on to provide on-going revenue in FY21. We will also continue to review our range of services. In FY20, we created a Product Development team to look at ways we can grow our existing services as well as look to systematically develop new revenue opportunities. The team have assessed 12 concepts to date with 3 progressing to prototypes and early stage customer acquisition. Secure Destruction o In New Zealand, document destruction came to a complete standstill in April but has recovered well since level 2 lockdown came into effect. In Australia, there was a 15% reduction in activity from March and, despite pockets of recovery, the recent lockdown in Victoria has meant that it is likely to take longer to return to pre-COVID-19 levels. However, volumes of paper collected by both businesses have been encouraging and paper pricing is stable; o The collection of medical waste experienced two opposing impacts with many hospitals and clinics seeing fewer patients, but newly established quarantine facilities requiring brand new services; o Revenue from high-value recyclables (eWaste, coffee cups, packaging waste) had been growing well off a very small base but also took a hit during the close down of Quick Service Restaurants in Australia. However, it remains an area of focus for the business as we develop our networks and capabilities. The year ahead Growing non-paper sources of waste that can be diverted from landfill, or treated to add value, will be a key strategy for Shred-X in FY21 as will taking advantage of newly acquired medical waste processing capability in New South Wales. Balance sheet strength Freightways has always been particularly disciplined around capital management, and capital expenditure and management of cash will remain a clear focus. While the initial 65% drop in activity, which occurred the same week that OIO granted approval for the completion of the Big Chill transaction, did present an interesting challenge, the company has managed its position well and is well placed for the opportunities ahead. Capital expenditure for FY20 was $23m. In FY21 capital expenditure will be carefully managed and targeted toward projects that realise the greatest returns. Despite the addition of Big Chill to the group, capex is expected to be managed to a range of $20-22m in FY21 and spent on a range of IT development projects, replacement of vehicles and freight handling equipment. Outlook We are encouraged by strong early trading results consistently achieved in the last few months, however the economic backdrop to FY21 can best be described as uncertain for all business units in Australia and New Zealand. In Express Package, the current higher level of volume, which includes a slightly higher proportion of lower-margin B2C deliveries, will likely eventually track the level of macro-economic activity and of business and consumer confidence. In Information Management, whilst storage revenues are reasonably resilient, the activity-based revenue streams will be driven by the number of people returning to office environments and, in some cases, this will be lower than pre-COVID-19. In both divisions, we will react quickly to any reduction or growth in volumes to ensure we are providing services as efficiently as possible whilst maintaining the service standards our customers expect. Using what we learnt during the period of COVID-19 lockdowns, we will adjust our cost base to protect our margins. We will also assess the portfolio of services we provide and make decisions on the best strategies to deliver value to shareholders over the long term. We expect that COVID-19 will also continue to provide opportunities that our teams can capitalise on, either for new services, market share opportunities from customers valuing our reliability or the potential for accretive acquisitions. While Freightways is not alone in being cautious around the outlook for FY21 in a macro-economic sense, our stakeholders can be assured that our response to movements in volume will be swift but will not compromise on service to customers and the safety of our people. The Freightways directors would again like to acknowledge the efforts of every one of our team across Australasia during these exceptional times. We also thank you, our shareholders, for your continuing support. End CA:00358497 For:FRE Type:FLLYR Time:2020-08-24 09:44:23