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Freightways, Dean Bracewell

By Jenny Ruth

Wednesday 22nd December 2004

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 Jenny Ruth
Freightways shares started trading in October 2003 after the company's former owner, ABN Amro Capital, its third owner in two years, floated the company raising $141.5 million. The company has consistently beat its prospectus forecasts. By mid-December 2004, the shares were trading at $3.04 compared with the $1.60 issue price.


ShareChat: Why do your company's senior management stay with the company for such long periods?

Freightways managing director Dean Bracewell: Our people form the competitive advantage of Freightways. The environment we operate in is demanding. It's fast-paced, it's competitive and service is foremost. Working in that environment with a big team of people you form bonds with those people, particularly in a company which succeeding. Others have come and gone. We've been able to provide career progression opportunities. I've obviously been able to benefit from the opportunities available (Bracewell has only ever worked for Freightways.) Job satisfaction, a challenge, a successful working environment: naturally, rewards come from that. It's pretty simple. You've got to constantly work at that and, as a company, we are. It demands visibility, it demands lots of communication. We've all got to know what's going on and where in the business. Ultimately, it demands service to your customers. Getting the job done right is very satisfying. We are competitive people.


SC: How do you feel about Freightways being a public company? "A breath of fresh air," as your chairman says?

DB: There's no question about it. Having had three owners in two years, the business has gone through one due diligence process after another. They can be very demanding and very distracting. It is a breath of fresh air to be focusing on positive activities, your company, your market, rather than having to deal with side issues such as ownership changes.


SC: What were the key ingredients in keeping the company performing through its ownership changes?

DB: One of our core strategies right from the outset of any due diligence was the way we were going to survive the sales process was to keep the subsidiaries and keep the people focuses on what their business was. While those subsidiaries were well communicated with, the due diligence process was managed by a very small team.


SC: Your shares are very widely held. Do you have any concerns that there might be a further change of ownership?

DB: You can't worry about what you can't influence. Our company's for sale every day on the NZX. Our job is to focus on what we can do.


SC: Has there been any shift in market share in the courier businesses over the past year? How much? Why?

DB: All market share numbers are purely estimates because New Zealand Post doesn't segment the performance of any of their businesses. Our view of the market is that in the last year we've picked up two percentage points. There's only been subtle market share shifts. Prior to that, in the last five years we've probably picked up about one percentage point per year. We don't focus on market share gains for the sake of market share gains. Our focus is on market share gains that improve margins. There are fairly subtle market shifts, but they're positive for Freightways.


SC: How much is a percentage point market share worth?

DB: We estimate the market to be about $400 million or $450 million. It's probably too simplistic to view it just like that. It depends on the type of freight and where it's sent. Local revenue will be less than inter-city revenue.


SC: How does your multi-brand strategy defend your market position?

DB: In essence, new entrants to the market typically compete at the economy end of the market. That's where our Post Haste and Castle brands exist. It's very difficult to set up the infrastructure to compete against our premium brand, New Zealand Couriers. We offer same-day services throughout New Zealand and an overnight service. You need significant infrastructure to deliver that service. Our pricing is relatively low by world standards so you need more volume. Having Castle and Post Haste operating at that (lower) end of the market, they're a natural barrier protecting the premium brand, New Zealand Couriers.


SC: The company seems to grow in both slow and fast GDP periods. How cyclical is the business?

DB: A major contributor to growth is our existing customers sending more volume through us. If there was some correction in the economy, we would expect to fell that through our customers sending lower volumes. At the same time, any decline in volume can be somewhat mitigated by the just-in-time principle. In tough times, a business will reduce the stock they hold on their own shelves or in their storeroom and they will demand more regular deliveries of smaller quantities. That just-in-time supply chain principle does drive business. However, if there is a correction out in the market place, we will feel it like everybody else. Our five-year trend through until 2004 has seen 7% on average (annual) revenue growth and 18% EBITA (earnings before interest, tax and amortisation) operating earnings growth. We're able to achieve a multiple from the top line to the bottom line. The economy doesn't need to be racing ahead for us to do well. We're quite comfortable with the economy as long as it's positive.


SC: What's the likelihood the government will give you the opportunity to buy NZ Post's courier businesses? Aren't there Commerce Commission and market dominance issues?

DB: Firstly, any sale of an asset should, in my humble opinion, be completed through a contested process. We've come through three changes in ownership. It's my experience that you gain the best outcome through a competitive process, just like selling your house. There are a number of reasons why Freightways should be involved in the sales process so hopefully we will be. In 1997, New Zealand Post was granted Commerce Commission approval to buy Freightways but didn't go through with the process. We would see a lot of the principles of that 1997 decision applying to the case today. However, that's not for me to decide, that's for others to decide. We're a New Zealand-owned business. DHL is owned by Germany Post. We've got a history of operating successfully in the domestic New Zealand environment so you would expect we would be a lower risk option for New Zealand Post's shareholders. A reason given for the sale initially by New Zealand Post was that it made strategic sense to form an alliance with an international player. Both ourselves and New Zealand Post already have alliances with international players. You don't have to have share equity to set up alliances. I believe there would be lower risk and greater upside for New Zealand Post's shareholders, the New Zealand tax payer. They certainly should at least consider Freightways as a potential owner through a formal process.


SC: Weren't your prospectus forecasts unduly conservative?

DB: We simply performed stronger in 2004 than we expected. So have many others. When you're putting together your forecasts, you must consider the history of the market place in balancing out your expectations for the next year. We chose to take a responsible approach to forecasting for the IPO.


SC: There's a big difference between your operating cashflow and NPAT. Are your depreciation and amortisation rates too aggressive?

DB: No. Goodwill is amortised over 20 years. That's the maximum allowable period. Depreciation of our assets occurs over quite usual periods up to 10 years. We're spending on average about $6 million on capex each year. This year we're spending a little bit more, about $8 million. We then expect it will go back to the long run average of $6 million. This year we depreciated just over $5 million so depreciation isn't out of sync. It's all very standard.


SC: How are you managing rising fuel costs?

DB: When your business is faced with costs running at exceptional levels, you need to pass those increases on to customers. That's achieved either through a fuel surcharge or general price increases, depending on the specific brand strategy at the time. Because we must pass on additional increases to our sub-contractors, the guys who pick up and deliver the freight.


SC: Your margins are very tight, aren't they?

DB: Very. Right through the whole business. That's why it's a volume game. When you have exceptional cost increases, you must go to the market to ensure you're in business tomorrow.


SC: Has there been much resistance from customers to the price increases?

DB: We don't make light of a decision to increase costs to customers. Over many, many years, we've not increased costs aggressively at all. In fact, the real cost of delivering an item is probably less than it was five to 10 years ago. Whilst customers don't appreciate any cost increases, they do understand where fuel's at. They only have to go to the petrol station themselves. The whole industry has typically responded to that increase.


SC: What's the thinking behind your agreement with Mainfreight?

DB: Firstly, Mainfreight is now a customer of New Zealand Couriers whereas they weren't yesterday. New Zealand Couriers has won a significant customer and that appeals to us. We now have the opportunity to develop consumer initiatives further across the spectrum with Mainfreight than we could've done on our own. Customer-driven solutions will come out of this relationship. We also have the opportunity to investigate efficiencies between our two networks. Ultimately, however, we expect the benefits to shareholders from the relationship will be incremental and they will develop over time.


SC: Is a merger possible? How do you and Don Braid get on?

DB: There's been no discussions between the two companies of a merger. Don Braid and I do get on well, absolutely. More importantly, the people within our businesses also have a mutual respect for what each company's achieved and the way they go about their business. The two companies have similar operating values.


SC: How much of a competitive threat does Toll Holdings pose?

DB: The Mainfreight relationship had been developed over six to eight months of discussions. It wasn't a relationship formed in defence of any one single competitor. It just puts two successful New Zealand businesses further on the front foot against all competitors. All competitors pose a threat. It's our job to make sure we're not complacent against any of them. The express package industry is a competitive industry. We've competed for 40 years. New Zealand Post has been particularly aggressive over a number of years. It was only in the mid-1990s that they were moving particularly aggressively into our market and we survived quite successfully against them. We do back ourselves to compete. However, we're not going to be complacent. There will be a measure of respect. Names may change, but we will always have competition. We expect it. It's healthy.


SC: Why would a business choose DX Mail rather than NZ Post?

DB: It operates in the business mail niche of the greater postal services market and they have developed alternative services to New Zealand Post predicated on overnight delivery whereas New Zealand Post's core service is up to three days. The DX mail brand has developed over many, many years in the box-to-box document exchange service in the finance and legal field, two very demanding areas to service. They've done it very successfully. They've taken a brand to market a service that's well-proven. They've done it at a competitive price. We've also bundled an number of services together. There is a demand for its services and the growth of DX will develop over time. It's a long term growth strategy.


SC: Do you have a target for market share of the information management sector?

DB: We have no cap on our expectations for our information management business. This goes for any of our businesses.


SC: Why do you do your IT in-house?

DB: Freightways pioneered the express package industry. We also pioneered a unique billing methodology for the industry based on pre-paid tickets. We've also developed within our business a number of management principles that require very timely information. Because we're operating in New Zealand in a unique fashion compared to overseas express package businesses that still typically use consignment notes, off-the-shelf packages that suit our business don't exist. Therefore we elected to run our own IT service. We bring in contractors where required. We've got fantastic focus. The IT business sits on the same site. The IT parallels the business. We get timely information produced by our core systems which enables us to produce a weekly P&L (profit and loss) and KPI (key performance indicators) and business mix information. Information in the express package industry contributes to your competitive advantage. The timeliness we get from our systems assists our competitive advantage.


SC: Why did you join Freightways?

DB: I had the opportunity to go into a commercial traineeship that was going to give me exposure to a lot of different jobs within a number of different companies. When I started my career, I didn't know what direction I wanted to go. I felt this was going to be one way of me ultimately finding my career. I think I knew what I wanted the end game to be, I just didn't know how I was going to get there. It was a great opportunity. We still to this day provide commercial traineeships to young people.

Bond Offer: Infratil Ltd, 7.2 year & 10.2 year unsecured unsubordinated bond


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