Half Year Results to 31 December 2022 and Interim Dividend

HALF YEAR REVIEW From the Chairman and Chief Executive Officer Freightways' half year result benefited from its diversification across our 4 key pick up, process and delivery activities and 2 geographies despite an environment of higher interest rates, slower growth and higher labour costs. The first half of this financial year has delivered pleasing overall top-line revenue growth of 25% and NPAT growth of 3.5%. This represents an EBITA growth of 8%. We are also pleased that this was achieved whilst retaining our focus on the health and safety of our people and despite the challenge posed by a tight labour market and the increased use of temporary labour over the past 6 months. Express Package delivered a steady NZ result against the prior comparable period (pcp) in 2022, which featured exceptional, covid-related pre-Xmas courier volumes. The ability to improve the per item pricing and to carefully manage costs assisted NZ while the addition of Allied Express (AEX) to the group provided a strong contribution and a platform for growth in Australia. AEX joined the group at the start of Q2 and has enjoyed strong growth in the Australian market by increasing its market share as a result of its compelling service proposition. Despite taking on additional warehouse space to boost capacity for future growth, AEX improved its financial performance by focusing on operating efficiencies and is ready to leverage both organic and inorganic growth opportunities. The Information Management and Waste Renewal division rebounded well in core information management services but was hampered by a decline in medical waste volume and pricing along with a higher operating cost base (which included costs related to a number of initiatives to grow our platform for the longer term). The decline in Information Management earnings was exclusively attributable to these factors. Our focus over the next 6 months is to complete these growth-related IT and facility projects, increase our market share and drive cost efficiencies through the fleet. Freightways is well positioned to take advantage of the opportunities that are in front of us with loyal customers, high-performing businesses, a disciplined balance sheet management as well as experienced and adaptable customer-focused teams. The Directors have declared an interim dividend of 18 cents per share, fully imputed at a tax rate of 28%, in line with the pcp interim dividend. This represents a payout of approximately $32 million, also in line with the pcp. The dividend will be paid on 3 April 2023. The record date for determination of entitlements to the dividend is 10 March 2023. The Directors have determined that the Freightways Dividend Reinvestment Plan (DRP) will be offered for the above interim dividend at a 2% discount. Divisional performance Each division's key features are listed below. Express Package (EP) & Business Mail o Revenue for the EP division grew by 28% compared to the pcp aided by the addition of AEX to the business at the start of Q2. o EBITA grew by 19%, supported by a strong performance from AEX and more modest activity in NZ. o Average daily volume for the NZ courier businesses was 1.3% below the pcp (allowing for the additional public holiday in H1). As signalled in our 1st quarter trading update, we expected Q2 volumes in NZ to fall short of the very strong pcp which was driven by significant eCommerce activity after the various lockdowns of 2022. o The proportion of Business to Customer (B2C) deliveries in NZ was 21% for the half with Pricing For Effort (PFE) averaging $1.53 per item over the period. B2C volume has abated from its post-lockdown highs and we expect it to track more predictably than it has over the past 2 years. o AEX contributed $68.1m in revenue over the period and $4.9m in NPAT. Their volumes remained robust through the peak period and we observe that the trading environment in Australia for our sector seems more resilient than in NZ. o Big Chill Transport grew by 5% over the period (with fuel recovery revenue also at higher levels than in the pcp and neutral to margins). Third Party Logistics (3PL) revenue was flat given the already high levels of utilisation within the Highbrook facility and we eagerly await the opening of new capacity at Ruakura in late 2023. o DX Mail revenue was up 13% on the pcp reflecting a return to normal activity for most businesses compared to the pcp. o Labour costs increases were the key cost feature in H1 as the pressure of a very tight labour market resulted in higher wage rates for drivers and depot teams in particular, as well as additional costs related to temporary labour. While we have noted a slight improvement in the number and quality of new job applicants in recent months, the market still remains challenging. Information Management & Waste Renewal o Information Management returned to higher levels of activity without the disruptions of lockdowns, delivering a revenue growth of 15% for the half. o EBITA was impacted, however, by the performance of the medical waste business, which resulted in a decline in divisional EBITA of $4m for the period. o The decline in medical waste revenue was slightly larger than we expected (due to a reduction in collections of PPE, vaccines and testing kits from public & private health and aged care facilities) and that, along with a significantly higher cost of operating (driver and fleet costs), led to a decline in earnings in the medical waste portion of the business. We expect medical waste revenue of approximately $20m for the full year, an overall decline of $6m for FY22, before resuming growth in FY24. We have also invested in the operating and IT platform during the half with new IT capability and the preparation of a new processing facility in Victoria resulting in $1.2m of additional cost during the half. We expect a similar impact in H2 before returning to normal margins in FY24. o Digitalisation revenue grew in the half by 24% and we expect a strong full year performance with the expectation of a number of large jobs over the remainder of the year on both sides of the Tasman. o Our Litsupport business, which provides print and eDiscovery services to the legal and government sectors in Australia, grew by 7% for the first half. A gradual return to customers working back in the office environment assisted growth. Document destruction volumes recovered strongly compared to the pcp in both NZ and Australia and were supported by steady paper pricing during the half. Disciplined Balance Sheet management Capital expenditure for FY23 is forecast to be in a range of $28-30 million and covering a number of IT development projects, the part payment for the A$10m automated freight sort system in Sydney, a medical waste plant, and the replacement of vehicles and freight handling equipment. We remain committed to a solid investment-grade credit profile and will continue to manage our balance sheet accordingly. This has led to the decision to re-open the Dividend Reinvestment Plan for the Half-Year dividend. Outlook Whilst the economic climate will be a tougher one to operate in in the near term, we remain positive about the resilience of our business model, given its diversification across a number of segments and geographies. Our NZ Express Package businesses will respond by driving efficiency and implementing pricing initiatives to mitigate the decline we are seeing in volume and increase in labour cost. We have also invested in the resources to successfully grow our KiwiOversize business in NZ and AEX in Australia. In Information Management and Waste Renewal we expect to continue to grow our horizon two digitalisation business and continue to foster our emerging (horizon 3) Stocka and SaveBoard investments while implementing a number of business growth and improvement initiatives for medical waste. Across both divisions we will continue to support our existing customers and help manage activity with them closely as well as seek out profitable market share opportunities. In the short term we are cautious about the impact of a slowing economy, in NZ in particular, We will continue to review the portfolio of services we provide, with a view to delivering superior long-term value to shareholders through short, medium and long-term initiatives. We will do so whilst monitoring costs closely and acting quickly if we see additional pressure on our margins. The company will continue to consider acquisition opportunities that are complementary to our existing operations and capabilities and are considered accretive to our shareholders. The Freightways Directors would again like to acknowledge the efforts of every one of our team across Australasia during what have been, and remain, highly challenging times. Note: EBITA is a non-GAAP (Generally Accepted Accounting Principles) measure. Refer to the Income Statement and Note 3 within the financial statements attached for a reconciliation from EBITA to NPAT. NPAT is GAAP compliant. End CA:00406961 For:FRE Type:HALFYR Time:2023-02-20 08:50:55