Toll profits up and up, wants rid of Virgin Blue

Toll Holdings has announced an after tax profit of $237 million for the six months to December 2007, continuing its

unbroken record of increased earnings over the past 10 years.

Toll managing director, Paul Little, said “the company is very pleased with the result. On a like for like basis, Net Profit grew 18% to $248 million excluding discontinued operations and Virgin Blue development costs”.

“We have continued to grow revenues and earnings organically, as well as make significant acquisitions and integrate new businesses,” said Mr Little.

“In Australia, we have achieved record EBIT margins and maintained strong revenue growth. In New Zealand, despite difficult conditions, we have increased margins and in Asia we are making great strides in our strategic development, said Mr Little.

During the six months revenue totalled $4.1 billion, an increase of 8.3% over the prior period for continuing operations. Underlying EBIT, from continuing operations and pre Virgin Blue development costs was $431 million, an increase of 13% over the prior period.

The company continued to invest in new infrastructure, technology and fleet to drive further capacity and efficiency across its operations. The Company’s balance sheet remains very strong with gearing of 28% and interest cover of over 10 times.

Earnings per share (fully diluted) from continuing operations and pre Virgin Blue development costs, was 37.7 cents for the six months compared to 32.8 cents in the previous corresponding period. This represents a 15% increase on a continuing business basis.

Directors have declared an ordinary share interim dividend of 13.5 cents per share payable fully franked. The dividend payout ratio is consistent with prior periods and represents an increased payout of 14% over the prior year on a comparative continuing business basis.

In Asia, the Company has been successful in securing over 98% of the issued capital of the Hong Kong listed BALtrans Group. This is a major step forward in developing our global freight forwarding presence, and will greatly complement our investment in Cargo Services as well as the existing Toll Asia network. BALtrans will contribute positively to earnings from day one. With the integration of BALtrans we will have achieved in the order of 20% of our annual transport and logistics revenues in Asia.

In relation to Virgin Blue, Mr Little said “whilst the business continues to be heavily impacted short term by fuel prices and a competitive environment, the continued development of the business is proceeding well and the success of V-Australia in securing rights on the Trans Pacific route will add a valuable additional dimension to the business.”

Toll is working with Virgin Blue management and its Board, together with advisors, to evaluate options to enhance shareholder value, which would likely see Toll reduce its investment in the company. It is expected that the Board will complete its assessment during the next few weeks.

Across the core transport and logistics businesses, the outlook for the June 2008 year and beyond remains positive, and the company expects ongoing strong earnings and cashflow growth.

Growth momentum has been accelerated following the demerger of rail and port assets in June 2007. As anticipated, strong organic growth was complemented by growth from bolt-on acquisitions in Australia and significant acquisitions in Asia.

Progress with the takeover of Hong Kong based freight forwarder BALtrans has been very successful with the Group having secured in excess of 98% acceptances and will now move to compulsory acquisition and delisting. Further acquisitions to support our international forwarding strategy are expected in coming months.

Growth initiatives will also focus on small to medium size bolt-on acquisitions, particularly in Australia, New Zealand and throughout Asia.

During the last six months the Group increased its investment in Brambles to AUD $84 million and held a series of discussions with representatives from Brambles. Whilst the company believes that a merger of Brambles and Toll would create exceptional value for shareholders of both companies, Brambles have not embraced any prospect of a merger and the strategic benefits available. Accordingly at this stage, Toll will simply monitor the performance and strategic direction of Brambles with a view to assessing any opportunities for the companies to work together at some time in the future.

Investment in Virgin Blue

The Company has previously foreshadowed that it intends to reduce its investment in 63% owned Virgin Blue, in order to deploy the capital in the growth of its logistics base.

The Company has supported the Virgin Blue Board and management in conducting a detailed review of options to generally enhance shareholder value. Goldman Sachs JBWere is assisting Virgin Blue in this process, and the Board has recognised that the equity markets currently do not reflect the true underlying value of the business.

Highlights during the six months included :

– establishment of the Joint Venture with DNATA

– acquisition of Victorian Express operation and integration into Toll IPEC

– completion of a long term freight operations agreement with Virgin Blue

– acquisition of SkyNet International air express operations in Australia and New Zealand

– investment in the establishment of a national air linehaul network.

– acquiring full control of Print Management Provider, Stream Solutions

– continued integration and rationalisation of Patrick warehousing and logistics activities.

Underlying revenues and earnings across the Australian business maintained its growth momentum, with a number of new customer contracts won.

The time sensitive operations of Toll IPEC and Toll Priority continued to drive improved results, notwithstanding Toll Priority absorbing additional one-off costs in establishing its air linehaul network.

During the last six months the Company has established itself as a key player in air freight operations as well as aviation logistics. The long term freight operations agreement with Virgin Blue together with the dedicated air freighters and the regional air freight network, has provided Toll with a comprehensive national network capable of servicing increasingly complex needs of customers.

In addition, the Company recently completed the acquisition of the SkyNet business in Australia and New Zealand. This international air express operation will provide additional scale and growth opportunities to the Toll Priority Global Service particularly within the Asian Region.

In relation to aviation logistics, the Company has established a joint venture with Emirates owned airport services business DNATA. The Toll DNATA joint venture, which acquired the Toll Air Services operation, has continued to develop over the past six months throughout most major airports.

In December 2007, Toll DNATA acquired the Skystar business in Perth and Brisbane providing increased airport coverage as well as additional critical mass in key east coast capital city airports.

Toll DNATA also acquired the international airline passenger handling operations of Aerocare at Sydney and Adelaide.

It is expected that Toll DNATA will continue to grow both its range and scale of services going forward.

Toll IPEC continued to invest in infrastructure and grow volumes strongly. During the six months Victorian Express, a regional Victorian based road express operator, was acquired and it will provide improved regional services for customers through the IPEC network.

National road forwarding operations, Toll Express and NQX benefited from solid revenue growth, particularly emanating from resource sector activity in Queensland and Western Australia.

QRX, the Group’s Queensland based rail forwarder, suffered from a number of one-off incidents including derailments and severe flooding conditions which disrupted services. Flooding conditions have continued during January 2008, resulting in additional costs being incurred.

Domestic automotive manufacturing experienced flat conditions as imported vehicles were favourably impacted by the strong Australian dollar. Toll Automotive is working closely with its customers to support Asian based sourcing of components, as the domestic manufacturers strive to remain competitive against fully imported products.

During the six months to December 2007 the Company acquired the outstanding minority interest in Stream Solutions, a leading Integrated Communications Solutions provider of print management logistics. This business traded well for the period, securing a number of new customer contracts, as well as benefiting from integration into the Toll Australia Group.

PDL Toll Defence Logistics continued to successfully grow its operations and traded strongly during the six months. Further expansion is expected as opportunities develop throughout the Asian Region and Africa.

Toll International, the Company’s Australian based international forwarder, has positioned itself to benefit from Toll’s growing Asian based forwarding capability, and traded in line with expectations over the six months. In line with the Global forwarding strategy, the Company has continued the process of rationalising its agency network and focussed on building direct customer relationships.

The integration of Patrick’s warehousing and distribution operations remained a major focus throughout the period. Further rationalisation of poor yielding revenue and consolidation of property, systems and administration occurred during the six months.

In terms of results for the full year to 30 June 2008, the Company expects that overall core transport and logistics operations throughout Australia, New Zealand and Asia, will continue to perform strongly, and well ahead of last year. Trading since December 2007 has been in line with those expectations.


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