Freightways sticks to core competencies

Freightways sticks to core competencies when eyeing acquisitions

By Jenny Ruth

Sept. 5 (BusinessDesk) - Freightways’ strategy since in listed in 2003 is to stick closely to what it knows it does well, chair Mark Verbiest says.

That’s even though only about half its growth has come from existing operations with the balance from acquisitions.

Verbiest says the company has up to 40 potential acquisition targets in its sights, all within its existing Australian and New Zealand markets, and on average Freightways has done about five actual purchases a year since listing.

Still, everything it has bought revolves around the same core competencies:

“We pick up, we process it and we deliver,” Verbiest told the New Zealand Shareholders’ Association’s annual conference last weekend.

When Freightways decided to diversify about a decade ago, it was still looking to build on its core competencies but it also wanted a business less tied to economic cycles – its various courier and DX Mail businesses tend to be a leading indicator of business activity.

Or as Verbiest put it, express packages are “a bellwether” of what’s going on in the economy.

“The board and management thought it made good sense to look at diversifying and to find another revenue stream that might complement the business we’re in.”

Freightways opted for the document storage or shredding business, choosing that type of business because they involve the same basic processes; the company collects documents and either takes them to storage facilities or to a shredder and, once shredded, it sells the waste to paper buyers.

“The key essence of pick up, process and deliver were there,” Verbiest said.

The information businesses now contribute nearly 30 percent of Freightway’s annual earnings.

“Fundamentally, we don’t stray far from that metric – our people know the metrics extremely well,” Verbiest said.

Once a business with those characteristics has been identified, Freightways then applies what it calls “the four Ps” of position, performance, profits and people.

The company wants investments that can provide sustainable profit margins – the company targets at least 15 percent margins – and which leverage its core capabilities while offering a diversity of revenue streams, he said.

The “people fit” is always a key question. Freightways has a culture of constant improvement.

“You can go to any depot and you can ask anyone what they’re focused on and what improvements they’ve made in the last month and they can just reel it off,” Verbiest said.

“So, when we take a business on, they have to fit that culture. That culture is absolutely central to us.”

The company uses a theoretical framework to think about how it should allocate capital, although this isn’t a hard and fast rule.

Embryonic or start-up operations might deserve no more than about a 6 percent capital allocation while a complementary business that “looks familiar to us” and has growth opportunities might be worth a 50 percent capital allocation.

Synergistic purchases tend to be small and last year Freightways did three or four of these.

And then there are opportunistic purchases.

Freightways also is “very, very focused on not over-paying,” Verbiest said.

For example, if it was offered another mail business, Freightways might be interested in buying it “if we can get it for next to nothing and we can milk some more cash out of it before it’s over, then great,” he said.

“We have a rough figure in our heads as to what we might or could spend over the next 12 months” and it’s always possible that a single purchase of perhaps $150 million might use up an entire year’s capital allocation.

Freightways also looks at parts of its business that might become obsolete or be disrupted by new technologies. DX Mail is a good example because of the steep decline in physical mail volumes.

That business is still growing, although Freightways doesn’t expect that will last, and is producing good earnings without demanding much capital, Verbiest said.

Pilotless drones are talked about a lot and Freightways’ people “are all over it.” But at present it isn’t looking likely in New Zealand, given the country’s geography and sometimes extreme weather conditions, he said. It might possibly work in Auckland at some time in the future, he said.

Freightways' shareholders who bought in the float don’t have much reason to be crying in their beer over how the business is run. The float price was $1.60 per share and they recently traded at $7.99.

(BusinessDesk)

ends

© Scoop Media