Half Year Results to 31 December 2021 and Interim Dividend

HALF YEAR REVIEW
From the Chairman and Chief Executive Officer

Freightways’ business model again demonstrated its resilience as both NZ and Australia operated in various states of lockdown or restrictions for much of the first half of FY22. Throughout level 4 lockdown in NZ and in particular during the extended lockdown of Auckland, we continued to see express package and information management activity decrease materially as businesses were forced to remain closed. Those express package volumes then rebounded strongly as online shopping was permitted and NZ began to slowly re-open for business-to-business freight. Australia also experienced material lockdowns, initially in Victoria, but then eventually across all states in some form. While this hindered core information management activity, it provided an opportunity for our burgeoning medical waste business which benefitted from extremely strong customer demand.

Our “half of two quarters” has delivered pleasing top-line revenue growth of 7.7%, EBITA growth of 5.6% and NPAT growth of 7.4% (before changes in the fair value of contingent consideration for the Big Chill earn out). We are also pleased that this was achieved whilst remaining focused on the health and safety of our people in what has been a particularly challenging period to operate in.

While the first quarter of the year was challenging with revenue and EBITA down by 4.1% and 9.2% respectively primarily due to the financial impact of lockdowns, the second quarter generated revenue growth of 20.3% and EBITA growth of 20%, as the network benefitted from a surge in volumes for express courier items and perishables carried through our Big Chill network; a material increase in the amount of medical waste which required collection and processing in Australia; and an increase in Business Process Outsourcing activity within information management. Revenue growth in these three areas was driven by a combination of organic growth, market share gains and improved pricing versus the same period last year.

During the half year, we also announced the acquisition of ProducePronto which complements Big Chill with its same-day temperature-controlled delivery and 4PL capabilities. We also announced a $2.7 million investment in SaveBoard: a building product made from packaging waste such as courier satchels and TetraPak cartons. The plant has produced over 13,000m2 of board for a building sector that welcomed the introduction of 100% recycled building products.

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 customer-focused teams.

The Board has announced an interim dividend of 18 cents for the first half of the year, based on the strong performance of the businesses.

Divisional performance

Each division’s key features are listed below for HY22.

Express Package & Business Mail

• Strong volume growth from new and existing customers after the level 4 lockdown. The express package & business mail division was successful in winning market share and helping new-to-market customers with their logistics needs. This resulted in 7.2% improvement in revenue over the same period last year.
• B2C deliveries also contributed positively to revenue and contractor incomes, without weighing on margins. B2C deliveries increased by 16% over the pcp with peaks during level 2 and 3 lockdowns establishing a sustainable higher base volume for 2022.
• Pricing For Effort (PFE) peaked at $1.41 per item by December, which has assisted courier income to grow by an average of 8.4% on the pcp.
• Volumes placed pressure on existing facilities at the very end of 2021 and, as a result, the EP brands will add further capacity in South Auckland and Christchurch in 2022.
• Big Chill 3PL utilisation approached 95% for the Auckland facility. We have committed to a new 16,000 pallet facility in Tainui’s Ruakura logistics hub which should be ready for completion by July 2023.
• DX Mail volumes were up 3% on the pcp despite the impact of lockdowns.
• Labour costs are forecast to increase in 2022 as the labour market further tightens and the new minimum wage pushes up the overall base rates for labour. We expect to recover these costs in the pricing strategies we will execute over the coming year, to ensure we have the right level of resource and capability so our customers to continue to receive the levels of service they have come to expect.

Information Management & Waste Renewal

• The first half year was characterised by solid revenue and strong earnings gains for the division, off the back of digitisation wins and extremely strong medical waste volumes at premium rates.
• We achieved incremental gains in storage volume through the half year even though the main metro markets are still challenged by Covid-related disruption to their businesses.
• There were a number of contracts signed for digitalisation revenue for FY22 and FY23 on both sides of the Tasman representing $10 million and $21 million respectively.
• Our litigation support services –print and eDiscovery – operated at lower levels for most of the HY due to customers predominantly working from home over that period.
• Document destruction volumes were steady at slightly higher levels of paper pricing during the HY.
• Medical waste revenue increased by 67% on the pcp as Covid required many more sites to be serviced. While we expect some of that pricing to moderate over the second half of the year revenue for FY22 should exceed $20 million for the first time for the full year which would represent a 7x fold increase on the small business we acquired in 2018.

Balance sheet strength

Capital expenditure for FY22 is forecast to be in a range of $24-26 million and invested in a number of IT development projects, medical waste plant, replacement of vehicles and freight handling equipment. Thanks to strong cash flow generation, our gearing has continued to reduce as expected following the Big Chill acquisition. We remain committed to a solid investment-grade credit profile.

Director Movements

After over 11 years on the Board, Mark Verbiest, the current Chair of the Board of Directors, has announced that he will be retiring from the Board with effect from 31 March 2022. Mark joined Freightways Limited as an independent director in 2010 and has been Board Chair since June 2018.

Mark’s strong commercial acumen, knowledge of Freightways and broad experience as a listed company chair, have supported Freightways’ development in particular over the past 3 years. Mark has been a key figure in the expansion of Freightways’ interests into temperature-controlled freight and waste renewal as well as a steady hand as the company navigated the challenges of Covid-19.

The Board has unanimously resolved to appoint Mark Cairns to replace Mark Verbiest upon his retirement. Mark joined the Board of Freightways as an independent director in April 2021. He has been Chief Executive of Port of Tauranga, New Zealand’s largest and most successful port, since 2005, retiring in June 2021 to pursue a full-time governance career.

The Board has also appointed David Gibson to the Board of Freightways, effective on 1 April 2022. David will stand for election at the Annual Shareholders Meeting currently scheduled to be held on 27 October 2022. David is a professional director and investor. His current directorships include the NZX listed companies Trustpower, Goodman (NZ) Limited and NZME Limited. His background is in finance with a 20-year career in investment banking having held senior positions and governance roles with Deutsche Bank and Deutsche Craigs, in New Zealand. He holds a Bachelor of Laws (Honours) and Bachelor of Commerce from the University of Canterbury. He is actively involved with several New Zealand growth companies.

Outlook

Whilst the 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 in HY22. The second quarter delivered strong volume growth after the lockdowns of August and September. Much of this growth was from profitable delivery of B2C and this higher level of volume will be supported by further investment in facilities in Auckland and Christchurch.

We do however expect that the impact of Covid-19 will continue in this financial year through:
• Higher volumes of home delivery (B2C) during periods of higher in-home isolation;
• Potential restrictions to either our customer's businesses or our own networks as Omicron forces; workers into isolating, all in the context of a very tight labour market.

We will continue to target revenue and earnings growth in FY22 and we have plans in place to adapt to:
• A tight labour market putting upward pressure on labour costs,
• The impact of Omicron in AU & NZ;
• A constrained supply chain which could continue to disrupt the flow of goods coming in NZ and ultimately impact the volumes we receive from our customers.

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.

The company will continue to consider acquisition opportunities that are complementary to our existing operations and capabilities.

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.

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