company profits

Transport firm Mainfreight says the rest of the year will be better after its earnings went backwards at speed in the first quarter.

Yesterday it reported a 51 per cent fall in profits to $4.02 million for the three months to June. The company indicated at its annual meeting that it had had a difficult first quarter and so it proved.

Managing director Don Braid said the first-quarter performance was not unexpected given the falls in freight volumes during the period. "During this time we have taken the opportunity to respond with better margin management, cost reductions and sales strategies all measures that will stand us in good stead for the future," he said. "Trading in July and August sees some improvement and it is our expectation that this will continue into the third and fourth quarters."

The latest profit was achieved on revenues of $261.67m, a 9.5 per cent fall on the same period a year ago. Operating earnings (ebitda) for the period, at $11.72m, were down 29.2 per cent. The company took abnormal costs (after tax) of $1.27m in relation to further restructuring. These abnormal items reduced overall profit to $2.75m, compared with a post-abnormals profit of $8.23m at the same time a year ago.

Mr Braid said that trading conditions were difficult in all the countries the company operated in during the first three months of the financial year.

The Mainfreight USA division, bought about 18 months ago, had a torrid time, with a $1.74m operating loss compared with a $2.2m operating profit at the same time a year ago. "Domestic freight volumes in Mainfreight USA continue to be depressed," Mr Braid said. When the Mainfreight USA business was taken over, the chief executive of that business, who was a shareholder, was retained along with other senior management, he said. However, in the past three or four months there had been several changes including the departure of the chief executive.

Mainfreight had brought in its own people to run the business, changed the structure, decentralised the operation and made it more sales and branch-management focused "as we run our business everywhere else in the world". "Basically we've got rid of bullshit corporate management in America," Mr Braid said.

He believed the Mainfreight USA business would be turned around. The key was achieving more sales in the American market. "We are aggressively hunting market share in that market right now. We've just got to do some hard work selling."

Mainfreight's other American business, Carotrans, had a solid quarterly performance, increasing operating earnings to $2.7m from $2.5m.

The New Zealand domestic operations produced operating earnings of $5.9m in the quarter, down from $8.2m in the same period last year. Volumes had improved during July and August, Mr Braid said. "Warehousing volumes continue to increase as customers begin to build stock inventories. "Domestic transport volumes are expected to increase as these inventories make their way to market."

Though the group performance during the June quarter had not matched last year's records, the group's New Zealand international, Australia international and Australia domestic operations had all performed better than in the same period in 2008.

Transport company Mainfreight's first-quarter results out next month will reflect the tougher trading conditions the company is facing in the new financial year, Mainfreight's managing director Don Braid said.

He told the annual meeting in Auckland today that while the company continued to make steady gains in reducing costs and improving margins, sales volumes had been impacted by slowing economies. "Conversely our market share continues to increase as our sales strategies for growth find success," he said.

Mainfreight is never short of a forthright view of New Zealand's transport and infrastructure and this was the case again at today's meeting. "We need a government that is prepared to listen and understand the need for better rail, road and port infrastructure," Braid said. "We are a trading nation dependent on an efficient logistics strategy. New Zealand ports competing with each other will never deliver the necessary competencies to provide our exporters, importers and shipping lines the opportunity to improve.

"Our port system needs to be capable of handling larger vessels, and require an effective inland transport network that will interface with a super-port strategy. Not to do so will see New Zealand reduced to a trans-shipment destination, eroding our nation's world competitiveness. Attempting to achieve the right transport infrastructure with boards of directors made up of political appointees with little or no transport or infrastructure experience is just plain stupid," Braid said.

Earlier chairman Bruce Plested, in a rallying speech, told shareholders that Mainfreight was actually enjoying the tough global conditions. "The buy-in from our teams all around the world is invigorating and humbling," he said.

While New Zealand had not been hit as hard as many other countries, particularly in terms of job losses, our standard of living in comparison to other countries continued to slide. Solutions and actions seem few and far between, Plested said.

"It is our belief New Zealand must learn to act like the small country we are. We need to behave in the same way as do small schools, small businesses and small towns. We have to be lean, tough, generous of spirit, entrepreneurial, hard working and dedicated to seeing New Zealand improve its living standards and its place in the world. There is no better time than in a global recession to make some big changes. We must find our own destiny and forget about trying to follow the rules and ways of larger countries.

"Now is the time to fight poor laws, get rid of stultifying bureaucracy and the petty bureaucrats that suck us all dry, and certainly to become vocal when we see poor performance from our governments, both local and national," Plested said.
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The country needed to find "an entrepreneurial spirit", particularly within those industries that if developed further would provide wealth and employment for future generations, like health, education, tourism and agriculture, he said.

Braid said that Mainfreight's trading during July had seen improvements in volumes, particularly in Australia. "We would expect our operations in the bigger economies of Australia, the United States and China to improve more quickly and robustly than that of our operations in New Zealand," he said. Mainfreight was very well positioned to take advantage of the upside, "and we remain committed to global expansion", he said.

When the rest of the sharemarket rallied from early March, one stock, which had previously traded in lockstep with the market, was left behind: Infratil going backwards instead.

That's because some investors now think the company has a debt problem, the big bogey of the moment. Those investors may well think their fears are confirmed when Infratil reports a hefty bottom-line annual loss tomorrow, probably around the $200 million mark.

But Infratil is no Nuplex with recession-battered earnings. The losses will mostly be paper losses from writing down the value of its listed investments, particularly its 3.3% of Auckland International Airport, and 33% of Australia-based Energy Developments.

Most likely, Infratil will also write down the value of its British airports, which have been reporting mounting losses as the global recession bites particularly savagely in that country.

In a sense, that's all noise. A key number will be operating earnings, which should come in at about $350m, up 11% on the previous year. The underlying earnings of its key assets, such as its 51% stake in TrustPower and 66% of Wellington International Airport, continue to grow at a healthy pace. But the value of Infratil's assets does matter in the context of its bank debt.

Rob Bode, an analyst at First NZ Capital, says one of Infratil's three banking covenants is that shareholders' funds must be above 40% of total tangible assets.

In early April, Bode calculated this ratio could have fallen as low as 43.3% from 49% in September last year. Infratil had kilometres to spare within the other two operating earnings-based covenants, he reckoned. Later in April Matt Henry at Goldman Sachs JBWere conducted a similar exercise and estimated shareholders' funds were sitting at about 48%.

Of the company's main $520m banking facility, a third is rolled over each year and $174m was duly extended in February. A presentation the company gave to analysts this month showed $327.4m net bank debt at March 31.

Given how gloomy the mood in global financial markets was in February, I would have thought if Infratil really was in trouble with its banks, it would have shown up then. Assuming the banks keep rolling over debt, the first major refinancing event Infratil faces is in May 2011, when $112m of its listed bonds mature.

Infratil has a total of about $750m in listed bonds, including nearly $240m in perpetual bonds, all of which rank below its bank debt, which no doubt gives its bankers considerable comfort, but which also led analysts to the conclusion Infratil is over-geared in the current environment.

All of Infratil's bonds are trading at significant discounts to face value so issuing replacement bonds now doesn't look like a viable option, but who knows how sentiment will have changed by 2011.

Acting chief executive Marko Bogoievski says the bank rollover was uneventful. "There wasn't really even a conversation," he says, although the margin Infratil has to pay has gone up, in line with margins everywhere. Nevertheless, Bogoievski says investor perception is a reality which the company must address. Rather than raising equity at huge discounts, as other companies have been doing, Infratil has been selling assets.

In April it sold Fullers Ferries for $40m, yielding an estimated $12m profit over book value, and later that month it sold properties for $23.1m, a $4.1m profit over book value.

Bogoievski says Infratil will probably exercise its put option to sell its 90% stake in Luebeck Airport in Germany back to the city. That will yield about $60m.

Another possible source of funds is Infratil's warrants which lapse in July. If exercised at $1.62 they could raise $136.7m. The shares mostly traded above that level last week, increasing the likelihood the warrants will be exercised.

While Infratil clearly has plenty of time to sort out its balance sheet, Bode's argument that the company needs to position itself to take advantage of current conditions is compelling. "Arguably, Infratil's model and the market are probably much more prospective than they have been for a long time," he says. With a deregulation-minded government, likely opportunities for private participation in infrastructure projects, and the exit of private equity buyers prepared to pay over the odds for the sorts of assets Infratil favours, "the market is ripe with opportunity".

Rob Mercer at Forsyth Barr suggests Infratil also consider selling its stakes in Energy Developments, Auckland Airport and Austral Pacific.

* Jenny Ruth is a freelance journalist and a columnist for The Independent.

Postie Plus Group's history as a listed company has been a sorry saga and I'm not holding my breath for anything much to change. That's despite the company promising to deliver a "modest" profit for the year ending July, providing the recession gets no worse.

The commentary around its latest results was mostly upbeat: a slightly smaller first-half loss, a 30% inventory reduction and a 32% debt reduction.

A closer look is far from reassuring. Yes, the bottom-line loss for the six months ended January narrowed to $2.7 million from $2.9m. However, the previous first half included the since-offloaded Arbuckles manchester chain's losses and the company's interest bill was down 31%. Stripping out these two items, the company's operating loss blew out to $3.1m, up 23.5%. Sales were down 5%, although the company was able to point to an improving trend: first-quarter sales were down 8.8%, but second- quarter sales were down only 2.3%. Inventory does seem to be under better control: it was $24.9m at January 31 compared with $35.3m a year earlier - it was up from $20.9m at July 31, but the company's second half is traditionally its strongest, so having more stock heading into it makes sense.

Ron Boskell, who was on holiday last week, has been chief executive since October 2005 and with the company since 2002, ahead of the September 2003 float. It isn't hard to argue he was handed a poisoned chalice. The company was a grab-bag of five retail chains thrown together in an unseemly hurry and floated when it was still an incoherent mess, and many of the strategies aimed at bringing it together simply didn't work.

And its warehousing and distribution system was based in Westport - a more inaccessible base would be difficult to find. It reflected the flagship Postie+ chain's origins as a Westport- based mail-order business.

The company was slow to move, shifting it all to Christchurch in bits and pieces. It finally bit the bullet in January last year and shifted the last bits, the hardly unimportant store replenishment functions, to Christchurch, a move which is saving it about $1m a year in logistics' costs.

Chairman Peter van Rij gave a strong indication then of what took the company so long. "If it was a question of the heart making the decision, we would not be moving.". Implementing adequate information systems took a couple of tries, but was finally achieved in April 2007. And it's now free of Arbuckles continuing losses and pared down to just two chains, the 79-store Postie+ and the 21-store BabyCity, and its Schooltex school uniforms business, which supplies more than 1500 schools.

Boskell has always acknowledged a key change needed to be better stock control. When he took over, the company was buying stock only twice a year and anything it didn't sell was put into storage to be recycled again the following year. The combination was nasty: customers were offered tired goods and the company incurred high storage costs. The aim now is to have fresh stock in all stores every six to eight weeks to give customers a reason to return.

But it seems to be taking Boskell rather a long time to get it right. In January 2006, just after he took over, inventory stood at $29.5m and it sank to $25.8m the following July. However, by July 2007, it had blown out to $37.2m and was still at $35.3m in January last year, well after the new information systems were up and running.

In March 2007, Boskell was talking about the company having a "clean stock position" but it clearly didn't. Van Rij told last November's annual shareholders meeting about the company's "crippling stock overhang from poor buying decisions in 2006".

Perhaps Boskell does have it right now. The results posted earlier this month assured shareholders "the group has entered the second half with a clean stock position for the crucial winter selling period" and that profit margins are lifting. Possibly shareholders are taking him at his word, for now. The share price hit a 20 cent nadir in February, but was trading at 32c last week. More likely it's Kathmandu founder Janet Cameron's continuing interest. Last year she bought all Arbuckles stock and took over 13 of the stores to turn into her Dogs Breakfast Trading Company stores and, earlier this month, she announced she had lifted her stake from 15% to 17.8%.

* Jenny Ruth is a freelance financial journalist and a columnist for The Independent.

THE decision by the retail giant Woolworths to accelerate spending on store upgrades, new stores and systems for its ailing New Zealand supermarkets and Dick Smith businesses has ignited concerns about the size of the outlay in this economic climate.

The Merrill Lynch retail analyst David Errington said yesterday that while he was pleased with the company's progress, the aggressive push to expand its New Zealand stores and Dick Smith by increasing investment was a worry. It appears that Woolworths is in a hurry … and we are concerned that being in such a hurry could cause the company some short-term turbulence. We have concerns with throwing a lot of money into NZ and [Dick Smith electronics] … particularly in current economic conditions and [given that Woolworths is not the leader in those market segments]."

Woolworths should not increase its spending so quickly but improve its businesses more incrementally, he said. Pumping more money into its two weakest divisions could be "throwing good money after bad",

Woolworths had $930 million in capital expenditure in the first half across all its businesses, compared with less than $300 million by Coles.

Spending by Woolworths was 45 per cent up on the $639 million it spent in the same period last year. Over the full financial year total capex is expected to be almost $2 billion, compared with $1.1 billion a year for Coles Group businesses, which are owned by Wesfarmers.

On Friday the chief financial officer, Tom Pockett, implied that capital expenditure would also exceed $2 billion next financial year. The Woolworths decision to increase its capex comes as its British peer, Tesco, cut its allocation by about 11 per cent to less than £4 billion ($9 billion) this year, and Wal-Mart in the US said it would spend about 13 per cent, or about $US13 billion ($20.5 billion), less this year.

In its first-half result announced on Friday Woolworths said earnings in its New Zealand supermarkets fell 8 per cent and at its Australia-New Zealand Dick Smith business 27 per cent.

Woolworths supermarkets in New Zealand slashed grocery prices to win market share from the market leader, Foodstuffs, triggering lower earnings.

Costs also rose due to compulsory increases in the minimum wage for its youngest staff, and the introduction of a superannuation scheme.

Mr Errington criticised the Woolworths decision to buy the New Zealand business for $2.5 billion. "Woolworths bought a distressed, run-down asset a number of years ago, and the business is not improving." The first-half earnings of $NZ92 million ($71.5 million) did not support the $NZ2.8 billion of funds invested and was an unacceptable result, he said.