Mainfreight Ltd

by Jenny Ruth

Tuesday 1st July 2008

Mainfreight is building itself into a global freight and logistics company, although about half its earnings still come from New Zealand. For the year ended March, it reported a 15.3% rise in net earnings from continuing operations and made one-off profits of $60.5 million from selling its LEP and Pan Orient businesses last year. It has just bought Australian freight forwarder Halford International for $A21 million ($NZ26.5 million) which was six times its earnings before interest, tax, depreciation and amortisation. Only 80% was paid up front and the other 20% depends on earnings over the next two years. Last year, it paid $US57 million ($NZ75 million) for Target Logistics in the US. It also bought out the partners in its Hong Kong and Chinese operations.

Sharechat: Why were you able to acquire Halford at such a low earnings multiple?

Mainfreight managing director Don Braid: I'm not sure that it's such a low multiple. I think perhaps people have become accustomed to the excessive multiples that were paid over the last two or three years as the bubble grew and particularly as private equity companies with cheap debt were paying more than they should. I think the price we paid for Halford was a fair price for them and a fair price for us. There are probably a number of companies that still have unrealistic expectations on multiples. I think now that the market in acquisitions is perhaps more trade buyer-focused, the multiples are likely to come down to something that's a fairer number than what we've seen in the past.

SC: Why did you sell the LEP and Pan Orient businesses?

DB: We sold them because we only owned 75% of that business. The other shareholder was becoming a competitor on the global stage. Therefore we were better to sell the business to the other 25% shareholder (global logistics company Agility Group). That took away the competition issues. It allowed us to free up some debt and to be able to develop Mainfreight around the world unfettered.

SC: Have New Zealand trading conditions worsened since year end?

DB: If you listen to the market and the media, obviously the market has softened somewhat. For us, we're seeing softer tonnages, or lesser volumes, moved from established customers, but overall we certainly haven't seen that in trading since year end. It remains quite positive. I think that's probably because we're continuing to pick up market share rather than just relying on current customers. What I'm trying to do for the first quarter results is give a feel for New Zealand sales, a bit like the retailers with same-store sales versus new store sales, same customer sales versus new customer sales.

DB: Why do you think you've been able to increase market share in New Zealand?

SC: We've been here for 30 years. In that time we've continued to intensify the network. We've offered more services, better quality freight services and a larger range of opportunities for our customers. We're taking advantage of that investment of the last 30 years to continue to grow our service ethic to our customers.

SC: Is that market share growth coming from Toll Holdings?

DB: Yes, and others. I don't think we should under-estimate our global strategy as well. Where we might have had just the domestic freight for customers, now we do their international logistics and inbound as well. Our strategy of growing our business offshore is having an ability to feed that freight into the domestic network. That's really what that offshore supply chain growth is all about.

SC: Why have you been able to expand Mainfreight's New Zealand profit margins?

DB: Again, I think it's that network we've got, the utilisation of the network, the facilities and line haul we've established. We're utilising it better. I guess it's a matter of fine-tuning what we've got. In doing so, we've been able to improve margins as well as grow the business.

SC: Can you explain why you did that JV with Mitre 10?

DB: Essentially, it's a joint-venture in warehousing. We've formed a JV with Mitre 10 for the management and operation of the warehouse. The JV doesn't include inbound freight or freight distribution. The JV is just around the warehouse. We saw that as an opportunity to work closer with a very respected customer and one who was looking for a change and it exposes us to more of their supply chain process which will allow us to grow our own business alongside Mitre 10 as they grow.

SC: Are other similar arrangements likely?

DB: It's a case by case. I'm not sure we would do that with every customer. It's something we would analyse and review as each opportunity arises.

SC: Are you expecting a satisfactory outcome from the government's negotiations with Toll?

DB: Who knows. I guess we're going to find out in the next couple of days as to how that will look. Certainly, the arrangements looked like they were quite weak negotiations and produced an anti-competitive environment. We've taken the opportunity to talk with the government and their advisers. We would like to think during this last six weeks they would have toughened their stance and been able to produce a better document or outcome than was initially announced.

SC: What is your current utilisation level of your Australian warehouses' capacity and how long do you expect it will take to reach full utilisation?

DB: It's sitting around 72% at the moment. We declare that in the annual report. I think it will take us at least the next six months. The previous year was about 84%. You never get to 100%. If you are then you've got no room to move whatsoever. The best utilisation is between 85% and 90%.

SC: Are you going to launch the DailyFreight brand in Australia?

DB: Possibly. If the opportunity presents itself, we will. ChemCouriers is well advanced - that's the harzardous goods brand we run here in New Zealand. We've definitely launched that in Australia.

SC: What are the factors which have made Mainfreight succeed in Australia when so many New Zealand companies have failed there?

DB: There's a lot of perseverance. We kept to our strategy, the Mainfreight disciplines and culture. The key was we employed some young enthusiastic Aussie management who understood those disciplines and culture. Alongside the perseverance, we've managed to have better performance than what we had five years ago. I wouldn't have said we're comfortable with what we've got in Australia. There's a lot more growth to come and a lot more profitability to achieve.

SC: Why did CaroTrans' US profit margins fall?

DB: CaroTrans really doesn't have a lot of fixed costs. It's a variable cost business. Where those margins have been impacted a little bit is as we've grown our FCL (full container load as opposed to LCL or less than container load). The margins in FCL are somewhat less than in LCL. As we've grown to become a bigger business, we've had more and more FCLs than what we had before and that's impacted the margins.

SC: Can Target's profit margins be improved in the current economic environment?

DB: That's the opportunity we've seen in the business. Yes, we will grow those margins but it will take time. CaroTrans' margins were negative when we bought that business in 1998 and today we're achieving close to six cents in the dollar. In time, we will improve those margins.

SC: Why is strengthening Mainfreight's presence in Europe such a high priority?

DB: In New Zealand where we've built a network that's quite intensive, we're seeing the results of that network. The reality is we will do the same around the world. As we grow the business internationally, it's better to have control of your international network. As we're already in China and America, whose trade with Europe is quite large, it makes a lot of sense to have control of our destiny in Europe. That will take time but certainly Europe is on the radar screen.

SC: What do you think are the key factors in making acquisitions work?

DB: There are a lot of things. The key thing would be communication and the ability to move with some haste, to be decisive in your decision making. Something which a lot of people forget about is you need to pick the right acquisition. With Halford, for example, it's as much do Halford want to be bought by Mainfreight as Mainfreight wanting to buy it. The Owens acquisition was a hostile acquisition in terms of a market buyout. We were able to make that work because the people within Owens were screaming out for freight leadership. The Halford acquisition we've just completed. I think it's as important as us wanting to buy as they being happy that we buy it. A good indicator of that is the shareholders of the business are remaining with it or remaining with us. All those things are important. I don't think there's any one secret recipe. It's a matter of a lot of things you've got to work on to make them work.

SC: What was behind your slow debtor collection in the March quarter and has that continued since year end?

DB: I don't think it was very good performance on our part. I think we can do a lot better in terms of debtor collection. It's increased by an extra six days from last year to this year. It could be an indicator of where the economy is right now, how much harder it is to collect cash. I think we can do a better job and we're focused on that as we work in this new year.

SC: Has there been any improvement yet?

DB: Yes, a little bit. It will take some time to work that through.

SC: What are your main criticisms of IFRS (International Financial Reporting Standards)?

DB: Take as an example the financial pages in the annual report have gone from 25 last year to 60 just to meet IFRS requirements. I think it's quite rigid in its requirements and could well inhibit good economic decision making when you have to take account of some of the rules IFRS require. With financial lending instruments, if they aren't in place for the full year, it can change in the balance sheet from a term liability to a current liability. We took a hit on our profits in the past year because under IFRS we had fixed the lending for the debt in America for Target at about 3.25% because the Fed (Federal Reserve) reduced their rate to 2.5%. It's a non-cash item be we had to take up the difference between 2.5% and 3.25% as an effect on the profit. Does the accounting rules of IFRS change your thinking from making an economic decision to making an accounting decision? It's very rigid in its process. I think it's overly cumbersome. When you see what it's done to the annual report, you will need to go to the gym for a couple of weeks to be able to lift it up. It's the heaviest one we've ever produced.

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