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Edited Transcript of FRE.NZ earnings conference call or presentation 25-Aug-19 11:00pm GMT

Full Year 2019 Freightways Ltd Earnings Call

Sep 3, 2019 (Thomson StreetEvents) -- Edited Transcript of Freightways Ltd earnings conference call or presentation Sunday, August 25, 2019 at 11:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Mark Royle

Freightways Limited - CFO & Company Secretary

* Mark Troughear

Freightways Limited - CEO

* Neil Wilson;General Manager of Freightways

* Steve Wells;General Manager of Express Package Division

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Conference Call Participants

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* Andrew James Bowley

Forsyth Barr Group Ltd., Research Division - Head of Research

* Owen Birrell

Goldman Sachs Group Inc., Research Division - Metals and Mining Company Analyst

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Presentation

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Operator [1]

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Good day, everyone, and welcome to the Freightways Analyst Briefing Conference Call hosted by Mike Troughear. My name is Sunder, and I will be your event manager. (Operator Instructions) I would like to advise all parties that this conference is being recorded for training and monitoring purposes.

And now I would like to hand over to Mark. Please proceed.

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Mark Troughear, Freightways Limited - CEO [2]

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Well, good morning, everyone, and thanks for joining us for the Freightways full year presentation from Auckland, not Paris, France, here at the UBS offices. So I've got here with me, Mark Royle, CFO; Neil Wilson, General Manager of Freightways; Steve Wells, General Manager of the Express Package Division. We'll go through the result that was posted up on the NZX website and then just take any questions near the end.

In terms of agenda, we'll work through highlights, the performance of the divisions, talk about the dividend strategy, outlook and conclusion. If you move to Page 6, we'll get into the highlights. So the highlights for us this year were an ever so slight but nonetheless a lift in the full year EBITA margin percentage in Express Package. And this was despite having softer second half organic growth through the EP division. We'll talk a bit more about that later on in terms of what we have seen with organic growth.

Positioning the business with IT and the sales tools, so we can get out and charge more for residential deliveries, so we're happy with what we've rolled out from an IT point of view. The sales team have done a great job in communicating the reasons for the increase and the increase itself.

We've worked really hard on that route density in the residential areas. And I think one of the benefits we've seen in the second half is just some of those improved delivery metrics around residential delivery.

We've increased daily courier earnings by 7%. So that happened in a large part by managing the size of the fleet. We've taken out quite a number of runs, pushed those deliveries back and it makes the rest of the fleet within this point-to-point fleet, we've done similar, really made sure that we've managed the size of the point-to-point fleets to get the best level of productivity through those fleets. So we're really happy to see that lift in average daily courier earnings.

The DX Mail networks, they've been faced with a number of challenges from their main competitor but have performed particularly well, have expanded the network, which Neil will talk about later on. They've taken on more customers and providing a really high-quality service to those customers that want overnight and want 5-day-a-week delivery.

The utilization of the Aussie document storage facility, so we didn't quite get to our target, but nonetheless, the utilization increased by 10%, so we went from 61% to 67%. We were targeting 70%. We're disappointed we didn't get there, but it wasn't for lack of trying. We've got a number of customers where we've won contracts but the box was yet to transition. So that's a work on for us, and we're targeting further improvements in the next year.

The TIMG business has tackled a number of large digitization jobs over the last couple of years, so that kicked off a large job we did in New Zealand in 2018. That was a good high-margin job as we flagged at the time. We're pushing that capability over to Australia. We've done a couple of jobs over there, not quite the same margin, but that's good jobs, nonetheless, and we're targeting some of the larger opportunities that come up for the Australian market in the coming year.

The growth in the destruction division, if we call it that, as you will have seen or might have seen, if you flick forward a couple of pages to the revenue split, has been really encouraging. So we're growing that by 13%. That's across document destruction, medical waste and product destruction. So that's been a particular highlight. We've invested more in that part of the business to capitalize on that growth. That's primarily been pushing out more trucks to create a wider network, but really positive growth, and we'll keep investing and pursuing that in the coming year as well.

And sustained cash generation in the business, and again, we've seen that really good cash reduce our gearing levels and put us in a really good position to keep exploring some of the acquisition opportunities that we have in front of us.

If we go to the financial performance on Page 20. So from a revenue point of view, 6% at the top, 2.9% EBITA, 1.9% NPAT. The nonrecurring items, Mark Royle will talk to shortly.

So from a results view, maybe slightly shy where we'd hoped to get to, but I think that was indicative of the further slowdown that we saw in May and June in Express Package. We called out in May that we'd seen March, April flat year-on-year for same customer growth. May and June, that turned slightly negative. So we attribute that partly to the shortfall versus our expectations in Express Package in particular.

Mark Royle will talk through nonrecurring items, I'll come back to revenue segmentation and then Mark will talk through some of the CapEx and balance sheet items.

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Mark Royle, Freightways Limited - CFO & Company Secretary [3]

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Yes, the nonrecurring items, similar nature to last year, relating to us replacing our racking down in Wellington after the Kaikoura earthquake as a result of the insurance proceeds exceeding the written-down value of the assets that we disposed of, so it created a gain in both years. And we also adjusted the amounts of earnouts payable on some of the acquisitions we've done in recent years. That's a refinement process we go through each financial year and that gave rise to a nonrecurring benefit of $2.4 million overall for the year.

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Mark Troughear, Freightways Limited - CEO [4]

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All right. In terms of revenue segmentation, so under the new accounting standards, we are obliged to give a bit more visibility, so there you go, you're welcome. Categories we've split into -- so Express Package is probably pretty straightforward, so let's just call our courier businesses, we can just say this was Post Haste, New Zealand couriers and a bit of a field revenue that's related to Express Package.

Postal is represented by DX Mail and Dataprint. So Dataprint is our mail house, doing physical and digital mail, and the DX Mail network itself, delivering around New Zealand.

Storage & Handling reflects document storage and media storage. So it's not digital storage, but it reflects the computer tapes that we store in our vaults across New Zealand and Australia.

Destruction activities covers off document destruction, medical waste, product destruction, e-destruction.

And then Other captures digital and it also captures the Lit Support bureau activity. So print and copy for Lit Support and the digital revenue streams that we have.

So interesting story as you look down through those numbers. Express Package, a tale of 2 halves really. From a revenue growth point of view, you think of 7.8% in the first half, 3.5% growth in the second half, and as I say, that was characterized by a little bit of organic growth, January, February; flat organic growth, March, April; and then slightly negative May, June.

We also had a discount that we applied to our largest customer, keep them in 2 tranches, part of it 1st of January, but bigger part of it from the 1st of April. And they were really the key dynamics that played out with the Med-X risk package side of things.

The postal and mail house side, we've got a really well-positioned service in both of those businesses and to get that level of growth in a market that's supposedly declining like nothing else is really outstanding. But it's a continuation on what DX Mail and Dataprint have done for many, many years.

Storage & Handling, you've got the offsets of media storage and really, media activity-related revenue going backwards, so that went backwards by around 6%, 5.9%. And then you had document storage, good strong growth in Australia, 10%; pretty flat in New Zealand, so a slight increase, 1% to 2% in New Zealand, so that gives you a net around about 1% increase in Storage & Handling. So the media storage business is about 14% of the overall information management revenue stream. So it's not massive but it's a material chunk and it's the activity, it's the pickups and deliveries of those tapes that's declining, which we've flagged for many years the number of tapes in the vaults is actually increasing slightly year-on-year, by around 1% to 2%.

Destruction activities, again, really good growth in there, so reflects the medical waste growth where we picked up a couple of big customers that we're really pleased about, but we've expanded the network to service areas that we hadn't serviced previously.

Still growth in document destruction where we're picking up market share and working very hard on a whole heap of sales and marketing tactics in that area. And then product destruction, which is one that we're only just touching the tip of the iceberg on but beginning to understand and learn a bit more about niche products that customers are wanting us to pick up separately from general waste streams and find ways of handling on to recyclers after we've shredded it, mailed it and found a buyer for it.

In terms of Other, the bureau part of Lit Support went backwards a little bit during the year and overall digital activity continued to grow.

So as I say, you've got a nice split now, the whole range of revenue streams within Freightways, most of which is going pretty well and that Storage & Handling, clearly the one we need to keep accelerating document storage and look at other ways of using our media assets and resources to capture revenue there.

Consolidated results on the next page, so the split is 73%, 27%, 71%, 29% for revenue and EBITA, respectively. We talked through Express -- the Express result for the year. And I'll just point out a few of the key things that we have done during the year, which has led to 5.6% revenue, 6.3% EBITA growth. So there's been a really heavy focus on managing margins, particularly in the Post Haste business. We've worked through a lot of their customers, most of which we have retained with higher uprates that we delivered during the year, a few of which that were on really low margin that we've lost and, frankly, we haven't worried about that.

We've worked on the efficiency of the fleet. We've worked on continuing to pull out the lower productivity runs and spread that volume through other contractors. Still got work to go on that, so there's still a lot of the residential fleets that we have opportunities we think in, but I think we're starting to see some of that benefit.

The lower organic growth, really across the board, I guess the big industries that we represent and the bigger brands around manufacturing and wholesale distribution, retail trade, so those are the biggest segments and have come off higher growth rates in the previous period, higher growth rates in the first half of the year to lower growth rates in the second half of the year. And then clearly, some of those segments have had a negative growth rate, meaning that over the course of the second half of the year, organic growth was slightly negative.

We also had number of aviation disrupts through May, June and ongoing currently. So on the 737 fleet, there's been a number of airworthiness directives that have come out from Boeing, which mean that you have to check for particular things on the aircraft. We've gone through and checked for those and that's meant some of those aircraft have had to be parked up in a hangar for a period of time to have work done on them before they can return to service. As a result, we've spent a bit more money. We've chartered a BAE 146, otherwise known as a Whisperjet, out of Australia, to help fill in a hole on the network and so that comes out at a slightly higher cost while the maintenance work is done on these aircraft. That's a global thing so it's affected 737s all around the world on a number of airworthiness directives to come in front of us and we'll talk a bit more when Steve talks about Express Package.

But ahead of us, we have the Pricing for Effort upgrade that we levered on the 1st of July and really keep a very close eye on organic growth rates in this division. But not a bad result given that really the gaps fell out of the market through that second half of the year.

In the information management division, so you've seen the breakdown in terms of where the operating lift on revenue -- lift on operating revenue came from, 6.9%. Again, a couple of things we called out in May were the increased investment in Shred-X, so there was $1.2 million that we invested in that business merging the WA acquisition with our core business together. That took about 6 months, certainly, took a bit longer than we thought it would with arrival of equipment from the U.S., and also expanding the fleet. So we invested in additional runs, particularly around New South Wales and Victoria and invested in a start-up for medical waste in Queensland to keep supporting the growth of that revenue stream.

The other key feature of information management, I guess, was the very good margin we had in '18 on the large digitization project that we did, which was a bit of a first in terms of that scale of job, did really well, made some good money out of it. We have taken a couple of digitization jobs over in Australia, not quite the same margin but given us real optimism around what we might target in the coming year.

The other thing we called out was just paper sales revenue, so we had a slight drop off from that at the end of this financial year but paper prices are certainly lower in the spot market going into the year ahead which we talked about back in May.

So they were a few other key features in that information management division.

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Mark Royle, Freightways Limited - CFO & Company Secretary [5]

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I'll just touch on the balance sheet. The assets, overall, increased by about $24 million. About 1/3 of that relates to the small acquisitions we did during the year. We spent about $10 million on acquisitions. One was the WA shredding business that Mark referred to; another was a record storage business in Victoria; and the other was that 75% stake in the software company that provides our online backup for our customers.

So the increase in the assets basically relates to intangible assets, the customer relationship value, permanent retrieval value attached to the boxes in the storage business, et cetera. The other increases in assets sit around just lifting our activity generally, so pushing up our trade receivables that we continue to maintain very good working capital levels. And we also had a small lift in the liabilities, really, it's just the movement in the borrowings, but you'll also see we've kept a bit of cash right at year-end. We couldn't quite time it to pay off that debt right before 30 June. So we've got higher cash and a little bit of a step-up in our debt. But other than that, there's not a lot of movement in the balance sheet.

From a cash flow perspective, as Mark mentioned, the cash flows continue to be very strong, over $100 million from operating and that's a bit higher than last year, continuing along; the same after paying interest and tax. So we're still managing to repay some of our debt and keep our headroom there for opportunities as we see them.

The investing, as I mentioned, we spent around about $10 million on acquisitions, a little bit more than last year. So that's slightly up on last year in the cash flow statement. And then we also, as I said, borrowed some money towards funding that but we've retained some cash, which will -- we've subsequently paid off our debt with that.

From a CapEx and depreciation point of view, CapEx came in pretty much where we've been indicating, just over $20 million, and we're looking about the same profile for next year. That half of it relates to IT, hardware and software, part of that is underpinning a lot of the initiatives that we were talking about with the Express Package, but also in the information management division. We've done a little bit of replacement work with some of the trucks in the Australian fleet and the information management destruction fleet in New Zealand, so that's contributed to the level as well.

Depreciation should stay around about $15 million to $17 million year-on-year.

As far as the dividend goes, the directors have declared a $0.155 dividend, fully imputed. We've got a supplementary dividend there for the nonresidents to offset the nonresidential withholding tax. The record date is 13 September, and the day we're paying it on is the 1st of October. We've added a slide this year just on the dividend payment history just to show you how that's tracked since listing. Other than with the GFC where we did a small capital raising, we've worked on keeping the upward trend in the dividend payment year-on-year.

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Mark Troughear, Freightways Limited - CEO [6]

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So we'll talk about the year ahead and just the current states and each of the 4 activities we refer to and some of the key strategies in the year ahead. There's a slide in there, 28, which is a little bit soft and fluffy for us, but I think there's a couple of key points on there that we are really (expletive) good at finding opportunities in every area of the business that we operate in. Each one of those activities at the moment are really deepened to talking to customers, talking to receivers, really understanding what it is they want and how we can position our services for those customers.

I think it's -- a couple of really good examples of that are in the mail business, where I don't know if anyone in the mail business has really gone out to customers and talked about what they want and how we can deliver it to them with a mix of physical and digital services. But the DX and Dataprint teams are doing that. And I think we'll have some really encouraging digital growth with a couple of the products that we run out of Dataprint. And it will be augmented by a really high-quality physical delivery. So those types of opportunities are coming from spending a lot of time with customers and really digging into what it is that they need in that area.

We're doing the same thing in this destruction area, talking to customers about how can we take products out of the waste stream that they don't want to go to landfill, what are the opportunities for picking on those niches, separating them out, pointing them into recycling streams. And so some of those opportunities are really early days but they're bigger than any single customers we have in those divisions. So they are encouraging.

And we're doing the same thing from a courier point of view. Steve's team is looking at the Auckland local market and looking at how we transform that because getting around Auckland is nigh on impossible. And without quite going to drones and those types of things, we think we've got a few ideas about how we can tackle the Auckland local market, get the right rate for a real good quality service and start to change that pretty low-cost model that we have there as well.

So there is a whole heap of activity going on in each of those 4 divisions. They really rapped seeing the way our teams are responding to that in terms of prototyping, testing it with customers and then starting to roll out some of those services.

All right. We'll get in to talk about the 4 business activities, so Steve will kick off with Express Package.

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Steve Wells;General Manager of Express Package Division, [7]

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Thanks, Mark. Couple of question points already, but I'll just repeat them.

Look, as Mark alluded to, we had softer same-customer growth second half of the year, particularly coming through April on through to June, particularly in the manufacturing and manufacturing wholesale space. We've seen these type of things in the past, we've got -- we're seeing it's flat right now.

As you can see in point #2 there, higher price increases in full year '20. Now all market participants followed the lead and given what freight was this year in terms of what we've done. And as a general rule, we think the average increase that went out there across the board was in the region of 6% to 7% across the industry. And that's purely a necessity now simply as the market changes around this, particularly with e-commerce and everything within that particular space but also labor cost increases. We're talking labor not only in terms of the wage workers, but it's in supporting their independent contract affiliates.

The third point here talks about Freightways' B2C proportion. I think last year, we talked around 22%, 25%, which we thought might have been the percentage. But as we've fine-tuned it, we're sitting around 20%. That's happened for a couple of reasons. Specifically, we're much more accurate now. We've geolocated just about every address in the country, so we really mail precisely, as far as possible at this stage, residential addresses.

Secondly, some of the smarter businesses have worked out that they can save themselves money if they redirect their freight to a business address, which is an outstanding concept, so we're very pleased with that.

So overall, the consequence is that the progress in that space is going very well and we'll get more and more come through. We have a very stable and loyal customer base, as you probably all know, over the years. So we'll be looking at organic growth year on year on year. And in fact, we've had a number of years with the same customers over a period of time, and we've really built a career of accuracy and just understanding what's going on.

In terms of our strategy, our Pricing for Effort, Stage I, we've talked about last year, our ultimate aim is to get around [eventually 50] over a 2-year period. And this target has seen [fast] sales from year 1, probably sitting around $0.55 to $0.60 at this stage for a number of reasons when the (inaudible) fine-tune things. But certainly, some of our larger customers understood and certainly see the improvement and give us specific time lines, we're ending up [the upright kind of plot]. We understand that is part of the game, so we're enthusiastic. As Mark alluded to, our sales people have done a great job in communicating to the customers the trials and tribulations in residential deliveries in terms of sale, density and cost, which has, so far, been supported very well.

As point 2 alludes to, our residential productivity is now embedded as a part of our business as usual process. We have rationalized a number of branches we've discussed. We will continue to rationalize ones around the country as we bring some of the brands in that particular residential space closer and closer and note thus far, it's been very successful.

In line with the strategy of charging more, we are moving towards giving more service or improving the service enhancement to that receiver customer. We've talked just specifically on the sophistication of tracking process but also, ultimately, notification of delivery times and arrival times, although, the biggest problems, as you can understand, is that whether somebody's at home and so [you'll know,] that's not the time their courier arrives, which is not always very well, so we can actually give them [ours], longer arrivals, but I think with the [opening and closing, holding the stay].

And the last strategy point we talked about was enhanced local delivery service. If we go back maybe 10, 15 years, Auckland, for whatever reason, was [from the -- typically, well providential to compelling]. It's just not achievable in today's traffic. So we're fine-tuning what we think is realistic in terms of service capability in the first instance by area. And then by right, as a general rule, local services tend to be a bit of a lost leader for the industry. And our objective is to turn that round and give customers an outstanding service. But it may or not be restricted to be willing to go through Auckland City and then as Auckland continues to expand, the expectation is that next week with [cyber club card is] going to big part of Auckland (inaudible). Well, it ain't happened. We still keep working through that particular process and we're quite engaged with that as well, through our brands. And ultimately, using the technology, it's going to enhance our services dramatically.

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Mark Troughear, Freightways Limited - CEO [8]

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Neil will talk around business mail and information management.

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Neil Wilson;General Manager of Freightways, [9]

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Yes. So on the business mail side, which Mark touched on, New Zealand Post's thrown us a bit of a curveball with this lower pricing. The way they've structured their pricing as of 6th July is basically beginning with the DX services as the cheapest rate; any other urban area that DX doesn't service is higher as is P.O. boxes and rural delivery addresses. So -- and unfortunately, there's no logic to the way that, that pricing has been applied. You've got this bizarre situation where getting an item delivered in (inaudible) or Gore is cheaper than could be (inaudible) than the entire North Shore Auckland or a P.O. Box around the corner. So there's no logic to it. It's causing customers quite a bit of confusion and it's actually driving more going to digital, as they're struggling about (inaudible) significant (inaudible) between those 4 zones. So whilst it's an issue and it's important to note that DX Mail has done particularly well, they've expanded their network. In spite of the fact, we haven't lost a customer in the New Zealand Post through that pricing action. We -- and customers have had to reduce margins to retain customers. Yes, and despite that DX is growing. I mean 5 years ago, DX Mail didn't have a delivery footprint and now we've got 50-50 postage of what we started at the North Shore delivery service at the beginning of the year, and already with a market that's declining at about 12% per annum, DX Mail continues to grow, which is great. And we're able -- and it's also quite important to speak of the bulk mail, which is what the final pricing applies to, it's only about 30% of DX business. The majority of the revenue DX gets is at a much higher margin than full retail rate, if you like, and they're able to command a premium price rate surplus and that's 70% of the revenue basically because their delivery service is superior in the sector; they can deliver overnight and 5 days a week, whereas they're making [good on these] on coast. It is continually reducing service standards and extending out further delivery times. So people are having to pay a premium for that.

So in addition to that DX at the moment we're looking at -- we're going through a process of looking at how we position ourselves for longer-term growth and changing from being -- if you like, changing from being a [small] mail delivery service you like to a fully integrated communication provider that can provide customers with the full gambit of communication services across physical mail if they want to but equally e-mail, SMS, online customer [delivery] that sort of thing, so.

Lastly then, on DX Mail or on business mail, I want to touch on the fact that we have expressed our concerns to the Commerce Commission about the New Zealand Post's approach to pricing, and they've launched a preliminary investigation which we're looking forward to seeing the results of in the coming months.

On information management. The key for information management really remains premier utilization levels. As Mark said, we've grown. This year we haven't quite hit the target that we want but we've still achieved 10% growth. It's important because our footprint is in place largely across Australia and any additional volume that we put in largely falls to the bottom line. So for us, it's quite a critical thing to do.

While media volumes are around about the same as what they were last year, activity levels have reduced, and therefore, revenue's come down in line with that. It needs to be keep in perspective however because that's -- nearly, it's only 14% of our revenue. So it's about looking long term at what can we do with those vaults. At the moment, the vaults have actually being used. They're being used for some of the digitalization projects we've got in Australia, which is great. But longer term, what else can we do with those vaults? Yes, and specifically, we're saying about valuable items that require higher security or temperature controlled environments, which is what our vaults are. Examples might be hard to find, one, we're -- how to fix on these and move from the like. So the growth then and [doctors] documented more than offsetting the media decline and that'll continue for the foreseeable future. We're lucky -- we're not lucky but we are in a situation where our market share in Australia is still relatively small, still very small. So even -- so we haven't got the capability to grow within and the market that we operate in.

The transition period for an archive customer can take time and because our competitors, once again, a customer often aren't exactly incentivized to give us a box as quickly as possible, so a little bit an issue with the lead time it takes to get boxes out of competitors. But once you got those boxes, as I touched on, they're good because it's gradual, it's not strong, annuity revenues.

So in terms of the key strategies for information management, there's really 3: improved utilization, expanding our digital capability. Because we've done a number of high-profile digitalization projects in Australia and New Zealand now, we're gaining real credibility in that space and that's creating our pipeline, which is quite full of opportunities. So we're quite encouraged about what we're seeing in that space.

And lastly, looking at what else can we sell. So what else can we store in our vaults as we've talked about. Where we're doing pickups and deliveries from our customers in New Zealand and Australia, advantaging trucks, what else can we be packing up and delivering, utilizing our existing infrastructure.

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Mark Troughear, Freightways Limited - CEO [10]

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So secure destruction there, the other part of the IM division numbers. Again, in terms of current state, it's a pretty rationalized market. You've got, really, Iron Mountain and Freightways, so TIMG in New Zealand. Over in Aussie, you've got Shred-X, you've got Iron Mountain, and you've got Shred-X. Shred-X seemed to have lost interest in the Aussie market for whatever reason. So we're picking up good market share off them. And then you've still got a few smaller ones out there, but in terms of the big national players, it's a pretty rationalized market, which is a good position to be in.

Still large volumes of active paper and archives to be destroyed, so we're not seeing any back-off from that point of view and there are millions and millions of archives that at some point will come round for destruction dates. We're positioning ourselves well, not only for our own archives but to pick up some of the archives from our competitors also.

The capabilities we've got -- we've -- we have found are transferable to other niches. So managing and picking up a wheelie bin in the truck and doing it really efficiently, there's a whole lot of stuff that can go in a wheelie bin and so at the real base level, we're looking at what else can go in wheelie bins that we can pick up in our trucks, bring back, shred, bale, sell.

The fixed rates for paper are largely in Australia. So majority of our paper sales over in Aussie, a lot of them are on a couple of contracts, one of those ends at the end of this year. The larger of them has about another 3 years to run. And then the balance of our paper, much of the New Zealand stuff and a bit of the Australian stuff, sits around on the spot market and those rates certainly vary and have come down a bit over the last few months.

In terms of the strategy, we continue to target market share gains, so we always have a very active list of tenders that we compete for and tend to win our fair share of those over in Australia in particular.

Moving into those adjacent markets, and as I said, some of those opportunities around the coffee cup thing really has grown quite phenomenally in terms of picking up plastic coffee cups, paper coffee cups, dealing with all those different streams, shredding them, baling them, selling them off to 2 different buyers, picking up coffee grounds, doing the same thing, combining that, selling it off to composting farms. We've got some really neat examples. We've talked to other waste companies about how we can partner with them because we're good at doing that type of work and the bigger waste companies in Australia aren't. So there's good opportunities for us to partner and collaborate with those guys to meet the needs of customers that are wanting more and more to pull stuff out of a landfill waste stream.

We'll keep looking at a combination of acquisitions. We'll look at alliances and startups to carry on growing those businesses regardless of whether it's paper destruction, medical waste or product destruction.

And in terms of outlook, if we move to Slide 30. In the short term, look, there's nothing we can see in the short term -- when I talk the short term, I guess, I'm talking over the next 2 to 3 months. There's nothing that we see that will necessary turn around that organic decline that we've seen of late. So when we talk to our customers, our customers are saying, yes, things are a bit quiet. And it's not -- we're not talking sheep stations in terms of the amount of the decline, but we're ceding 1%, maybe less, than where we were in the previous year. So we don't see that necessarily turning around unless there's something in the economy that stimulates better growth. Sometimes it can be seasonal, sometimes it's a shift from a mild winter to a colder winter that pushes a bit more through retail and some of those particular channels, but I think on balance, we're seeing it is just a bit quieter out there.

Our focus on pricing and efficiency should still see us growing year-on-year so we're still pretty buoyed by what we've seen in the early days around Pricing for Effort, there's more to come as customers that are phased. So there's plenty of opportunity there to get that high cost -- high price for the cost of delivering residential.

There's also some good new business opportunity, so we're still actively engaged in market share opportunities that'll bring a bit of growth through the business. In Aussie, we have a target of 75% utilization, so we finished up 67%. So the target for those facilities is to get up to 75%. And in the longer term, a year after, up to around 82%, which should be similar to where New Zealand is now.

Really continue to target those big digital opportunities that the royal commissions over in Australia do present really good, chunky opportunities and I think the business model that we have built is probably the most credible in the Australia-New Zealand market for dealing with that type of product.

Build density in the destruction network. So we've expanded WA as sort of twice the size. It's a really neat facility. We're getting good efficiencies out of that. So we want to scale on the WA market. And then we will increase the medical waste networks in New South Wales. And the job for us now is to fill on the remaining capacity within those new networks.

Keep looking for these acquisition opportunities. I think the pipeline of acquisition opportunities has never been greater. We've spent a lot of time looking at a lot of different businesses. These are businesses that either have a direct synergy that we can bolt on or the businesses are complementary and the more we look and we're focusing particularly, Australia and New Zealand, so always look to see if there's something further afield but we think there are a lot of opportunities in Australia and New Zealand for things that are complementary to what we're doing now and that leverages the way we manage business customers, the way we manage margins, how we get efficiencies out of pickup and delivery networks and through processing streams. So we'll carry on having a very strong focus on those opportunities. And again, being Freightways, we will only pick on the ones that are the right ones for our business.

I think we've got a good year ahead and also we think we're in a good position to take advantage of the opportunity.

Conclusion on Page 32. So I think we would have liked the full year results to be a little higher. And really, that trade through May and June put sort of a little bit of a dent, not massive, but enough of a dent that we're a little bit disappointed or a little bit shy of where we would have liked to have ended up.

Really happy about that margin expansion that we've seen. It's only small, but I think at the start of the year when we spoke to most of you, we said where would we like to end up and it was just a shade above where we'd finished in '18 and we've got there despite lower volume.

The pricing initiatives, we'll keep pushing hard on that. So we'll lose the odd customer here and there, but on balance, we think we will get -- we'll get some good uptake out of that from what we have seen in the early days.

Keep pushing that digitalization, eDiscovery services. The opportunities in Aussie are big and we're very keen to get that and advance that we think we've got the right capability. And keep leveraging that secure destruction division, which grew at 13% over the last year.

We'll keep investing in our people, service quality and the right growth opportunities for long-term benefits for all of our stakeholders.

So happy just for the moderator to go back and take any questions now.

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Questions and Answers

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Operator [1]

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(Operator Instructions)

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Mark Troughear, Freightways Limited - CEO [2]

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We might just start -- so we've a couple of people in the room. We might -- yes, sorry. We'll go with the phone first, sorry. Start with the phone. Got a couple of people in the room that can follow up afterwards. Any questions on the phone for those who got those instructions?

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Operator [3]

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Indeed. The first question is coming from the line of a participant who failed to record his or her name. (Operator Instructions)

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Mark Troughear, Freightways Limited - CEO [4]

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Hello, do you want to have a crack at asking that question? Someone entered a PIN but not their name to ask a question.

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Owen Birrell, Goldman Sachs Group Inc., Research Division - Metals and Mining Company Analyst [5]

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It's Owen Birrell here from Goldman Sachs. Sorry, I did leave my name, but anyway, I just had a few question around information management, if I may. The 13% growth that came through in destruction, I'm just wondering if you can give us a sense of what was actually the underlying market growth versus the organic investment that you guys have made versus acquisitions in the period.

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Mark Troughear, Freightways Limited - CEO [6]

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It's probably about 50-50 roughly. So there was some really good new business customer wins in the year. There was a bit of growth out of some of the -- the sort of product destruction startup opportunities. And then there was a bit of growth out of the SSS business that we acquired at the start of the year. And I think we had a little tail through from a bit of medical waste growth as well, so around half-and-half.

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Owen Birrell, Goldman Sachs Group Inc., Research Division - Metals and Mining Company Analyst [7]

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So half acquired, half sort of organic?

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Mark Troughear, Freightways Limited - CEO [8]

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Yes, roughly.

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Owen Birrell, Goldman Sachs Group Inc., Research Division - Metals and Mining Company Analyst [9]

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Okay. And just more broadly in the information management division. I'm just wondering, what drove the negative operating leverage within that business? It had some pretty solid top line growth, but it kind of disappeared once you got to the EBIT level.

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Mark Troughear, Freightways Limited - CEO [10]

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Yes, so it was really the -- those 3 things I talked about earlier which were the expansion of the Shred-X network. So we spent about $1.2 million, about half of it integrating the Western Australian operations. So there's about $600,000 which won't repeat but it was the cost of running it, a couple of different shredding operations while we had equipment come in and before we could combine those businesses. And we eventually got those combined right about the start of May, I think. And around $600,000 weaves into increasing the fleet capacity within the medical waste side of things, so $1.2 million there. You had probably about $1 million arbitrage between a higher-margin digitization project that we had in FY '18 and the margins that we picked up on the some of the digitization work in '19. So it was about $1 million less in that digital services margin because of the one-off project in FY '18. And then you had a small amount of softer paper pricing, probably only $100,000 to $200,000 at the tail end of FY '19. So those 3 things there already had about a net $2 million, $2.3 million impact in IM.

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Owen Birrell, Goldman Sachs Group Inc., Research Division - Metals and Mining Company Analyst [11]

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You just mentioned the softer paper pricing, you mentioned that the majority of your paper was on long-term outtake contracts. I was wondering if you can give us a sense of what their sensitivity to paper pricing is over, let's say, the next 12 months? And then where do we step down to when those long-term contracts roll off?

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Mark Troughear, Freightways Limited - CEO [12]

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So, yes. So there's probably about 30% of the paper that sits on these floating rates, spot rates. Most of the New Zealand stuff is in that category and then there's a bit of the Australian, so it's about 30% of the overall paper sits on the floating spot rates.

We've got one of the fixed contracts that rolls at the end of this coming financial year and then the other one, which is the larger one in Australia, that carries on for about another 3 years. The larger one is actually sort of priced at slightly lower rate. So it's the larger ones really priced at the long-term average for paper pricing. So when that one eventually rolls off, we don't really expect any great impact either way. The short term one at the end of the year is at pretty good rates. It's for a particular project that they need that paper for. And look, we're [really interested only] on where that spot market ends up and the other buyers that we can find for our paper.

What we're pretty good at the doing is offering the blend of paper we produce to meet particular market needs. So we've got a really good ability to either clean up the paper and sell it for a higher white price or we take out a lot of blend cost and sell it for a mixed gray price. So we constantly do that to try and mitigate the impact of whatever's going on in the commodity market.

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Owen Birrell, Goldman Sachs Group Inc., Research Division - Metals and Mining Company Analyst [13]

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Maybe can I ask, can you give us a sensitivity in terms of a $1.00 move in the paper price, to what impact it has on costs for the group? Or sorry, so your revenues as a group?

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Mark Troughear, Freightways Limited - CEO [14]

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Yes, not off the top of my head, no.

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Owen Birrell, Goldman Sachs Group Inc., Research Division - Metals and Mining Company Analyst [15]

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Okay. Fine. And just this finally on IM, you say that you're targeting sort of a high-level of utilization in the Australian market and just missed it at the line. What was the key driver behind the miss? Was it the fact that the customers didn't transition in time? Or was it that they -- it was such a competitive market environment that you couldn't win them?

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Mark Troughear, Freightways Limited - CEO [16]

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It's a little bit but mainly customers -- a bit of both and largely, customers not transitioning in time. They've got a pipeline that's quite full of [50 to 70] which is what we want and with the most opportunity to grow. That's quite a big pipeline. It just takes time to get those customers out, and as I say, the consumers aren't actually incentivized to give them to you quickly because they also retain the volume. They're getting revenue from it, ongoing. So yes.

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Owen Birrell, Goldman Sachs Group Inc., Research Division - Metals and Mining Company Analyst [17]

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Okay, but you feel comfortable you'll win those over time?

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Mark Troughear, Freightways Limited - CEO [18]

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Yes. A lot of the -- I'll just elaborate on that. A lot of the offer in information management, what customers are really interested in is your digital capability. And so building that capability often attracts you to win the customer, and then boxes are as almost a byproduct of it. So yes, so it's quite neat. I think building that digital capability has really helped gain a lot of interest out of customers who, in some cases, don't quite know how they're going to go digital, but they want a firm who knows how to do it to help them along their journey. So that's been our key sales tactic, really, in that space. Next question?

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Operator [19]

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The next question is coming from the line of Andy Bowley.

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Andrew James Bowley, Forsyth Barr Group Ltd., Research Division - Head of Research [20]

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Now a couple of questions from me. First of all, around Express Package and the volume growth environment. We've seen ourselves, particularly over the last 6 months, and you've talked about the slowing growth momentum and it's been negative the last couple of months at least. Can you talk about what you're seeing specifically in B2B, recognizing that you've got a bit more tech enabled to allow you to have the visibility across the business? Because I can -- I guess, I see e-commerce is continuing to grow at reasonably good rates of growth and it's embedded in your business, notwithstanding that the potential seem to have lost some B2C businesses. You've gone through effort pricing. But specifically, can you talk about B2B and what you're seeing around those volume trends?

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Mark Troughear, Freightways Limited - CEO [21]

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Yes. So I'll talk to that at a high level and see if you can talk about just a few of the industry groups where they come off what we'd say were really strong growth rates to lower growth rates. So in NZC and Post Haste, those are the 2 where we've seen this organic drop off, and probably a little bit more in Post Haste which has a bit more in that manufacturing wholesale through to retail part of the supply chain. So it's the part that they typically have the majority of their customers and it's a $12 million delivery service. It's not urgent, parts overnight, having to be there from start of work, so we've seen a slightly greater drop off in that part of the supply chain than we have where you might have had pharmaceuticals or urgent auto parts and some of those types of things going through.

The drop off, as we said, more -- so negative in May and June, which left us, for the half year, at less than 1%, just slightly less than 1% negative organic growth across the division. Messenger services continue to have growth but, again, at a lower level. So their organic growth had been pretty strong in the first half, being quite a bit weaker in the second half but it was still positive in the messenger services business.

Steve can just talk to a few of the different industry groups. So we raise all of those businesses line ANZSIC codes, new standard civil ANZSIC industry codes. And he can probably call out just a few of the ones that have backed off a bit more than others.

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Steve Wells;General Manager of Express Package Division, [22]

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Yes. No, Andy, within Freightways, well just specifically in Post Haste, there's is (inaudible) is sort of the biggest areas of volume come from manufacture and wholesale trade, regional trade, transport, professional health care, et cetera.

So looking across those, manufacturing in particular, it dropped relatively significantly from -- particularly quarter 3 to quarter 4. It's still positive, but nevertheless, a drop. Wholesale trade, literally halved from quarter 3 to quarter 4, still positive, but nevertheless dropped. Retail's down, and that can be referred to also in the nature of the businesses that we no longer have. I believe it all would have seen a general decrease, in fact, a negative in retail trade, particularly in the last quarter of the year. Health care, which is one of the stronger ones [virtually] in that year, is it's with the same consistent base of customers is also showing a slight decrease. So it was -- there were a number of areas, Andy, but they're all fundamentally still strong, but it'd be interesting to see how they get on to the next quarter and how that channels through, but certainly health care is one that's been consistent, particularly New Zealand (inaudible) organization, so this one is quite interesting to see as we rationalize (inaudible) in the system. But overall, yes. Quarter 4 wasn't as strong as what we would have liked to have seen.

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Andrew James Bowley, Forsyth Barr Group Ltd., Research Division - Head of Research [23]

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And then maybe just in terms of your comments, Steve, around some customers who have gone elsewhere as you've moved through Pricing for Effort, can you give us a sense as what magnitude that represents of the overall business?

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Steve Wells;General Manager of Express Package Division, [24]

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Only one?

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Andrew James Bowley, Forsyth Barr Group Ltd., Research Division - Head of Research [25]

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Yes.

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Steve Wells;General Manager of Express Package Division, [26]

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There's a hell a lot of material there. There's nothing material on that. I know that New Zealand lost some because they didn't want to pay for it as such, but nothing material, to be honest. As a general rule, it's more about a debate than it applied to be a fee to be frank.

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Mark Troughear, Freightways Limited - CEO [27]

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So we've traded a bit of market share. We picked up a few, probably more on B2B, to be fair, for some of the gains. There might have been a couple of small ones but in terms of material, we have one B2C go over to Post.

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Steve Wells;General Manager of Express Package Division, [28]

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Yes. (inaudible) Yes, but not of our size and scale went to Post, yes.

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Mark Troughear, Freightways Limited - CEO [29]

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In the last couple of months...

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Steve Wells;General Manager of Express Package Division, [30]

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There were a number of customers over that time, Andy. We had certain, including the Post Haste group, that proactively moved our (inaudible) right in place to hit the right margins, but that's just a combination of reasons, not necessarily the biggest single issue.

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Andrew James Bowley, Forsyth Barr Group Ltd., Research Division - Head of Research [31]

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And then maybe moving on to just the price realization itself. You mentioned, Steve, $0.55 to $0.60 at this stage in terms of the uplift that you've been able to generate. Can you talk about what that means for the whole of Express Package? So if we combine B2B, B2C, what kind of price realization, maybe percentage-wise, can we expect for the businesses as a whole in the next financial year?

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Steve Wells;General Manager of Express Package Division, [32]

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Well, so you've got to combine it with the -- so the GRI we went out at 4.2% and so again, realizing we're pretty early days with most of these, these were all effective 1st of July. But our expectation is still the same as prior where we hope to get 3%, 3.2% out of that GRI.

When you work through your contracted customers and the ones that are always tough to negotiate, we've plenty of volume. PFE, so you're looking at about 2/3 of what we thought we might have got but CFC is this -- with all the phased increases that we've got coming through, so particularly with some of the larger ones where some of them kick in 1st of August, 1st of October, with a pilot plan around 1st of January. So I think they're pretty early days, Andy. Pretty happy with how it's gone generally. I think that phased increase, that will get us pretty close to $0.75 by the end of the first half. But it'd be interesting to see this trend of how many customers direct items to the business address rather than the residential address. And then too, it could be like a clear outcome might be at the moment, but yes, it's more around slightly from where it was.

We've had a reasonable number, so if we talk on the glass half-full side of things, we have a lot of post customers that are knocking on our door because their increases were anywhere between 6% and 9.5% and some of those are big B2C customers as well. And we're still gobsmacked at how cheap some of those rates are. But certainly, some customers that even when we talk about our pricing, they just want to keep talking to us and we try to get the post rates and we see how much a delta there is for some of that stuff, not all of it but some of it, but they're still pretty keen on talking to us. So yes, there's still pretty good pipeline there and I think it will be to up to us as to if we need a bit more volume do we pull the trigger on any of them or do we just really hold our ground on trying to get a heavier -- just trying to get a higher yield. Yes, so it's interesting times in the courier market.

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Operator [33]

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And we have no more questions in the queue. (Operator Instructions)

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Mark Troughear, Freightways Limited - CEO [34]

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Yes, we've got a couple in the room here, moderator, so we'll go to those couple in the room.

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Unidentified Analyst, [35]

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Mark, can you just call out, if you can, the actual dollar impact of the mail for us, changes on bulk, what you think it's going to be for this year and also on the major customer?

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Mark Troughear, Freightways Limited - CEO [36]

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It's not significant and the reason I say that is because I've actually picked up a really large customer off New Zealand Post. So there was a margin on paper on the bulk mail rates; they came down a lot. And the customer we gained more or less offset that. So -- and 20%, 30% of the volume, the majority of it and it's got away a decent increase on the retail pricing, so I don't believe this mail is really at a significant stage. Do you agree?

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Steve Wells;General Manager of Express Package Division, [37]

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Yes, I agree. I think it's still early days and again, those prices coming 1st of July. Customers just seem to look at what New Zealand Post is doing and they're a bit cynical about their motives. And that's quite neat that you've got customers going (expletive), they're out to target you. If they can knock you out of the market, [but it's not us] and we'll keep supporting you so flip is what we're getting so far on that.

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Neil Wilson;General Manager of Freightways, [38]

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And there's quite a number of changes like the -- as I say, (inaudible) on the North Shore and that's why the underlying price in the North Shore was higher priced by New Zealand Post. But now it's hit, it's giving DX Mail the opportunity to go into North Shore and effect the higher rate and opens up in some areas that we wouldn't have otherwise digital on to.

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Unidentified Analyst, [39]

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And then on the major customer?

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Mark Troughear, Freightways Limited - CEO [40]

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Yes, the major customer. So it's a $1.4 million impact in FY '20. Again, we'll offset some of that with growth out of that customer, so the growth will come at a lower margin, obviously, because of the discount we've given them, but we're expecting that we should get around 15% gross, conservatively out of that customer, so the revenue will grow 15%. We'll pick up margin on that. The price impact is about $1.4 million on the pre-growth numbers, I guess. That's what we pulled out of May.

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Unidentified Analyst, [41]

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And finally, you talked about customers' churn from your (inaudible) B2C customers, yet -- as you're modeling (inaudible) name and pricing, (inaudible) granular by which you will actually look to attract customers on the B2C side will be or are all things very good?

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Mark Troughear, Freightways Limited - CEO [42]

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Yes. Look, I'm hoping to be able to have a look through and say what would it be at the incremental level. What is it all on a stand-alone margin basis that we would get if we take on some of those customers. I think the issue that you're going to have, and it'll depend a bit on, I think, international inbound volumes of B2C, is high growth is a bit of a salespeople for us, and most of these customers talking to us didn't have a great experience last Christmas, and that's not a problem that I think is easily solved for them this Christmas. So I think fundamentally, for those customers, it's about the service level they're prepared to tolerate at their critical time of year and we might even get some of those customers who just push a portion of their volume to us. And if they do, they'll pay a higher rate for it. But it means that they'll guarantee they'll get it through the network and have it delivered. So we'll keep assessing all those and keep looking at just the levels of volume through the network and make a decision as to whether it's a good thing or not to push the button on any of those.

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Unidentified Analyst, [43]

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Two questions for me. You mentioned that some of the gains you've made from the franchises, it doesn't sound like you're just fully through that process. Are we still going to see more gains come?

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Mark Troughear, Freightways Limited - CEO [44]

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Yes. You're correct. Yes, there's still more to come. So yes, the guys, they -- we've got a steady list, so what they do is just constantly target for the lowest productivity runs. And so what can we do with those runs? What can we do with those runs? We didn't push particularly harder to the regional areas in FY '19 so we'd only scratched the surface of that really, hadn't we?

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Unidentified Company Representative, [45]

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(inaudible)

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Unidentified Analyst, [46]

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So within that hopeful market group, you've pretty much done what you have...

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Steve Wells;General Manager of Express Package Division, [47]

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Oh, no, no, no. (inaudible) we talked in the past, because I know, you (inaudible) out of a group route optimization rather than things like that (inaudible) route to market.

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Unidentified Company Representative, [48]

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Yes.

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Mark Troughear, Freightways Limited - CEO [49]

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And so those gains, well, the usual gains, we made, we largely achieved with courier fleet. That's how you've got that 7% uplift in courier earnings. The next float we think will be kind of 50-50. So the subsidy portion of whatever runs we've disestablished is a benefit to the company. But genuine courier pay portion goes to the couriers who end up delivering those items.

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Unidentified Analyst, [50]

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And the interrupt changes, what's sort of a dollar value had those changes (inaudible) had impacted you more than you're going for?

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Mark Troughear, Freightways Limited - CEO [51]

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So around -- it's around $300,000.

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Unidentified Company Representative, [52]

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$300,000.

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Mark Troughear, Freightways Limited - CEO [53]

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$300,000 June, July, August and unfortunately, some of these issues, as you work through [this group], they'll say, "Right, you've going to have to look at that particular part." And you'll have a little bit of -- find an issue that you've then got to fix. So civil aviation and Boeing are a hell of a lot more strict on those than they used to be. So in the past, what we used to do is say, "Hope for the all best. Look, here's the state of it. It'll be on the detail for them as they see fit."

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Steve Wells;General Manager of Express Package Division, [54]

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(inaudible)

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Mark Troughear, Freightways Limited - CEO [55]

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No. And...

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Steve Wells;General Manager of Express Package Division, [56]

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So only 100 in FY '19 (inaudible)

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Mark Troughear, Freightways Limited - CEO [57]

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Probably about 100 in FY '19 (inaudible)

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Unidentified Analyst, [58]

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Yes. Going back to what you were talking about with paper prices and you've got that 1 large customer that comes off end...

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Unidentified Company Representative, [59]

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In the end of this year.

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Unidentified Analyst, [60]

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I mean, okay, I understand you try to manage that and are usually optimizing it, but if it they were to roll off today, what would be done on that?

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Mark Troughear, Freightways Limited - CEO [61]

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I'll get back to you on -- I'll wait on -- let me have a look at it because I don't want to just rattle off (inaudible). It's not right, it's a good weight. So the weight per tonnes have dropped around about $120 a tonne. But off the top of my head, I just can't remember how many tones we're pushing to them.

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Unidentified Analyst, [62]

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Okay. And within your -- the IM business, I mean, you've got good -- you say your utilization growth (inaudible) depends on (inaudible). But is that true across all of the regions or is there somewhere we actually see some decent (inaudible)?

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Mark Troughear, Freightways Limited - CEO [63]

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The biggest capacity we've got is New South Wales. That's certainly where the majority of the prospects are. So the big push is New South Wales, which was the big facility we moved into 2 -- about 2 years ago, 2.5 years ago. Quite a bit of capacity in WA, so we're pushing hard in WA as well. Queensland, we added a bit of incremental warehouse space, I think, it was about August -- July or August this year, so we actually have a little bit of capacity in Queensland. ACT we're pretty full. I don't know that we'll go and rush into a new facility there, so we'll just try and manage that pretty carefully. We don't, over the coming year, imagine that we'll have to add much of anything in terms of incremental capacity there. And certainly not New Zealand, I mean even in New Zealand, the 82% is largely because of the one facility in [Higherbrook], which has a lot of capacity in it. So there's couple of things we'll look to so that will (inaudible) we're going to do a little bit of sprinkler system to be able to take it to different types of racking, but that'll be the key focus for New Zealand is to take that Higherbrook facility and get a bit more volume in there.

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Unidentified Company Representative, [64]

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Well, yes, I think that's everything. Thanks, moderator.

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Operator [65]

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Thank you. Everyone, this concludes your conference call for today. You may now disconnect. Thank you for joining. Enjoy the rest of your day.