Half Year Results to 31 Dec 2020 and Interim Dividend

HALF YEAR REVIEW From the Chairman and Chief Executive Officer Freightways is a resilient and entrepreneurial business. This has been demonstrated through the most disruptive challenge we have seen in recent times. The ability for our teams to respond to the pandemic and safely provide essential services has been illustrated over the last 9 months through initiatives such as: the swift establishment of a temporary international airfreight service for NZ exporters from scratch; providing high levels of service despite the rapid acceleration of express package and medical waste volumes; growing our contractors' incomes far in excess of normal wage growth; and maintaining a workforce of 5,000 people pre and post the initial lockdowns. Our service performance has been recognised, by both current and newly acquired customers, with our businesses gaining positive feedback and achieving their highest ever NPS scores, which is a tribute to our culture, systems and experienced teams of people. This has translated into a very solid performance across all our business units during the first half of this year. Through a combination of organic growth and new-customer acquisition, as well as a very focused control of costs, we have delivered results that we are very proud of. The performance of our new acquisition, Big Chill, has also been very strong and has resulted in an increase of $19.2m in the accrual for the final payment of the purchase price (part of the contracted arrangement provided for a final payment which would be reflective of performance post purchase). This impacts our reported NPAT for the half year. COVID-19 lockdowns affect our businesses in different ways. While the harshest level 4 lockdowns present significant efficiency, resourcing and financial challenges, outside of level 4 we have seen several new dynamics establish themselves - a larger market for courier services driven heavily by eCommerce and a higher awareness and demand for medical waste disposal. Our Pricing For Effort (PFE) strategy has seen improved margins and enabled us to allocate the appropriate level of contractor income for the increased volume of B2C deliveries which have been performed with a superior level of reliability. On the negative side, we have had to adapt to lower levels of office activity among our customers in our Information Management businesses, which we have partially offset by repurposing vehicles and re-training people to provide alternate services. We have made strategic investments in R&D through establishing a product development team - The Startery - which is charged with developing complementary revenue streams for our businesses so that we can leverage horizon 1 (mature) business with horizon 2 and 3 (emerging) opportunities. As we head into 2021, we are conscious that we operate in a carbon emitting industry (by virtue of the vehicles and aircraft we operate either directly or through contracts) and that operating sustainably is critical for the future of our environment. While we have made great strides in reducing our relative emissions per item through optimisation of the routes and size of our fleets and adopting modern vehicles, we also continue to monitor alternative fuel cell vehicle development that will eventually allow us and our contractors to achieve step changes in carbon reduction. Key to this will be to ensure our contractors are in a position to switch from diesel to alternative fuel cell technology. Within our Secure Destruction business we are investing in our ability to grow circular economy initiatives - through our ability to pick-up, process and deliver high-value waste. From an efficient platform (document destruction where we already divert 50,000 tonnes of paper fibre from landfill), we are adding new high-value waste streams to be repurposed and recycled. We intend to use the power of our networks to pick-up, process (shredding, treating) and deliver to those who demand the end product - reliably and efficiently. Through the latter half of 2020 we have been encouraged by growing eCommerce demand fuelling greater express package volume. This will help our industry grow profitably for those who can meet its challenges. We are also excited by the emphasis on waste reduction and increased sustainability initiatives which our destruction business can leverage. Freightways is well positioned to take advantage of the opportunities that are in front of us with loyal customers, high-performing businesses, a strong balance sheet as well as experienced and adaptable teams. We will return to paying a dividend in April 2021 based on the strong performance of the business in the first half of FY21. Divisional performance Each division's highlights are listed below along with the strategic priorities for FY21. Express Package & Business Mail o Experienced strong volume growth from new and existing customers. The EP brands were successful in winning market share and helping new-to-market customers with their logistics needs. This resulted in 11% improvement in volume over the pcp. o B2C deliveries also contributed positively to revenue and contractor incomes without negatively impacting margins. B2C deliveries increased by 46% over the pcp with peaks during level 2 and 3 lockdowns establishing a sustainable higher base volume for 2021. o PFE peaked at $1.01 per item in the 1st half of FY21, which has assisted courier incomes to grow by an average of 10% on the pcp. o Service performance was particularly strong in spite of materially higher volumes and this was no better demonstrated than through the Xmas peak season. NPS score for all brands have shown consistent improvement through the year. o Big Chill achieved high levels of utilisation for their new 3PL facility in Auckland which aided margins and also saw increased volume from existing and new customers driving revenue growth of 10%. The strong performance of Big Chill is also reflected in the forecast final instalment to be paid to the vendors of the business for its acquisition in FY22. Based on the trading results this year, we have increased our provision by $19.2m. o While the Trans-Tasman airfreight scheme ended for Freightways at the end of November, the operation contributed meaningfully to the business and more importantly for our customers over a 6-month period and gives the group a new-found capability which may present opportunities if international lockdowns persist over the coming year. o By December DX Mail volumes were up 3.9% on the pcp which was a pleasing result and suggest the various lockdowns have not had a detrimental effect on physical mail volumes. The year ahead Express Package will continue to focus on building a strong and profitable market position 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 in February 2021. This will finalise the B2C pricing required to ensure well paid and sustainable courier runs are the norm, rewarding effort appropriately as well as establishing a sustainable operating margin for B2C deliveries. Our new customer facing IT systems are being launched, starting with NOW Couriers and, as they are fully tested by their customers and refined, will be rolled out across our other EP brands. NOW Couriers' guaranteed same-day Auckland service has proven to be a successful model. It builds upon our PFE strategy of rating local same day deliveries appropriately for the effort required and gives our customers market leading local delivery performance. The Big Chill network has expanded storage facilities over the last year in: Auckland, Wellington and Hawkes Bay and we will continue to invest to meet increasing demand in strategic locations. Work will commence on 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 continuing to improve their customer experience by leveraging our suite of express package technology. DX Mail will continue to develop their physical networks in response to demand and our multi-channel offering through closer alignment with Dataprint's capabilities. Information Management & Secure Destruction o We achieved incremental gains in storage volume through the first half of FY21 but understandably many prospective clients had bigger issues to manage through the period - particularly in markets such as Melbourne, Sydney and Auckland. Utilisation has improved to 83% for NZ and 70% for Australia. o Demand for pick-up and delivery of archives and media tapes is lower in both NZ and Australia. o Our litigation support services - in particular print and copy services - have improved their profitability through a number of initiatives to streamline the ways customers interact with us and managing the level of resource required accordingly. o The Australian digitalisation project continues and is expected to carry on well into FY22 but at lower levels of monthly revenue than initially expected. o Document destruction has recovered to pre-COVID levels in NZ and is slowly recovering in Australia as people return to offices in Victoria and, to a lesser extent, Sydney. o Medical Waste revenue was up 100% on the pcp and while there will be peaks around lockdowns, we now have a substantially larger business than we did pre-COVID. The year ahead There are a number of promising avenues to increase facility utilisation in NZ and Australia over the remainder of FY21 whilst still allowing flexibility to cater to growth in archives when customers return to BAU. There is also an encouraging pipeline of digitalisation opportunities in Australia, which our team will look to capitalise on to provide on-going revenue in FY21. In addition to continuing to grow our presence in Medical Waste, we will invest in collecting new high-value waste streams that can be diverted from landfill or treated to add value. Balance sheet strength Capital expenditure for FY21 is forecast to be in a range of $20-22m in FY21 and spent on a range of IT development projects, replacement of vehicles and freight handling equipment. Our gearing continues to reduce, as expected following the BCD acquisition. We remain committed to a solid investment-grade debt profile. Outlook Whilst the immediately foreseeable economic climate remains uncertain, we are encouraged by the strong trade in Express Package and the resilience of our Information Management businesses, as demonstrated in our results over the first half of FY21. We would expect that: o In Express Package, our existing volumes will be supplemented by market share gains and the growth of eCommerce while our existing B2B volume will be influenced by macro-economic activity; o In Information Management, whilst storage revenues will remain resilient, our activity-based revenue streams will be driven by the number of people returning to office environments, noting this could be lower than pre-COVID-19. We have well-established systems and processes to be able to adapt to any future lockdowns in NZ or Australia and we can reasonably expect that B2C Express Package volumes will accelerate in a level 2 or 3 lockdown and that IM activity will decline as office workers move to working from home. Our portfolio of services will be continually reviewed with a view to delivering superior long-term value to shareholders by assessing our short, medium and long-term opportunities and applying the best allocation of capital to them. The company will continue to consider growth or acquisition opportunities that may be complementary to our existing operations and capabilities. We are proud of our achievements to date in growing contractor incomes, developing new services and reducing emissions per item. We will actively explore future opportunities to enhance our position on these key ESG areas. The Freightways directors would again like to acknowledge the efforts of every one of our team across Australasia. End CA:00367927 For:FRE Type:INTERIM Time:2021-02-22 09:48:02