Mainfreight's open approach appeals but can it deliver?

Friday 6th July 2001

A local marketing consultant likes to walk into stores and ask the hapless attendants what type of business they are in. Shoe store staff, for example, routinely reply that they are in the shoe business. "Wrong," says the consultant gleefully, "You are in the foot love business."

Mainfreight is one company that seems to understand the difference between features and benefits.

In its latest annual report, managing director Bruce Plested points out the company's decade-old mission statement makes no mention of trucks, freight or on-time delivery. "Why? Because we have understood for many years that we were attempting to supply our customers not with trucks but rather with solutions, outcomes and ongoing satisfaction ..."

At less than a page of text, Mr Plested's comments make up one of the briefest managing director's reports of any annual report. However, it is superior to many in its ability to communicate a thorough knowledge about the business and enthusiasm for it. The ensuing 17 pages fulfill the usual marketing and explanatory tasks without his having to put his name to them.

He does, however, put his name to a financial summary in which he describes a 73% decline in net profit as a result of businesses performing "unsatisfactorily." A major culprit was newly acquired Australian business K&S Express, now operating as Mainfreight Distribution.

Segmental figures in notes to the accounts show Australian domestic operation operations as the weak link in the chain. Their net loss has increased to $10.5 million from $500,000. Australian-based international freight operations showed a 22% increase from a small base. New Zealand domestic operations recorded a 15% rise in profit while international freight operations here fell 11%.

On total sales of $410.8 million, Mainfreight achieved a profit of just $2.4 million in the year to March. Earnings before interest and tax (ebit) of $10.5 million represented a gross margin of just 2.6%, well down on last year's 5.3%.

Of course, if the company is able to turn around its Australian operations and return to the same level of profitability, then all will be well. The directors' report indicates confidence that this will occur.

"The next 12 months should see Mainfreight start to reap the benefits from the investments of the last few years."

History would suggest otherwise. A five-year review at the back of the report shows the company has an unfortunate tendency to earn less as its earnings grow. Gross profitability went from 6.7% in 1997 to 6% in 1998 to 4.4% in 1999. While last year was an improvement, 2001 has continued the trend.

On a measure shown in the report, return on net tangible assets (NTA), the company has seen its return fall from 29.5% in 1997 to 7.4% this year.

The company does not address this issue in the report but appears to be dealing with it by moving away from simply being a freight company and positioning itself as an integrated logistics business.

A fold-out at the front of the report shows the company's divisions as the drive wheels of a tank track, with information technology as the track itself. Headed "The Mainfreight Integrated Global Supply Chain," it is a glamorous way of describing the movement of a parcel from A to B.

A section devoted to the troublesome asset Mainfreight Distribution, subtitled "a frank and open account," offers little hope for a quick turnaround.

While improvements to the business are being recorded, "it is important that our shareholders understand that the profitable development of this business is going to take time and continued human effort and we are not in a position yet to predict when it will be profitable."

The company should be applauded for its openness but vague promises of improvement in the future may not be enough. Shareholders are not noted for their patience.

Last week I incorrectly accused Carter Holt Harvey of not having a five-year review in its annual report. This can be found on page 60.

David McEwen is an investment adviser and author of weekly share market newsletter McEwen's Investment Report. Web www.mcewen.co.nz. Email davidm@mcewen.co.nz

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