Toll Holdings (TOL) has joined the downgrade club (unlike Asciano, its former ports business).
It has revealed a $200 million write down of its international freight forwarding business and is looking for cost cuts of $50 million over the next couple years.
The company said in its update yesterday that underlying earnings would still come in around $420 to $430 million for the year to June 30, before the impact of the impairment charge.
The shares rose 9c to $4.34 in yesterday’s 1.7% gain for the wider market – again emphasising that for updating companies market reaction depends on what is happening in the wider market and offshore.
TOL 1Y – Still upbeat despite $200 million write down
Updating (and cutting earnings) into a rising market often brings a much softer reaction than if market conditions are volatile.
Toll said the $200 million write-down in the goodwill of the division reflected the combination of weak market conditions for global forwarding and uncertainty over the timing of any recovery.
Market conditions had deteriorated over the past six months, resulting in reduced growth and margin assumptions for the division and the company now expects its global forwarding business to post an operating loss of between $4 million and $8 million in the second half (which ends on June 30).
Toll said the "combination of ongoing weaker market conditions and uncertainty over the timing and extent of any recovery has resulted in changes to key growth and margin assumptions used in the impairment testing".
CEO Brian Kruger said in yesterday’s statement that Toll intends to reduce the division’s costs by up to $20 million in the 2013-14 financial year, and is targeting longer term reductions of $40 million to $50 million annually.
Mr Kruger said a large part of those costs were labour, indicating that there will be job losses in the division which employs around 5,000 people around the world.
And, in a major strategy change from its previous policy of chasing small ‘‘bolt-on’’ acquisitions, Toll has decided that it will stop making any further purchases in the global forwarding industry until the division improves its performance.
Mr Kruger said the company was focused on the areas under its control, and would drive ‘‘cost reductions and productivity improvements even harder’’.
‘‘For the foreseeable future, our focus will be on driving costs out of the business and we will not look at further acquisitions in the global forwarding market until we are able to demonstrate improved operating performance in this division,’’ he said in the statement to the ASX.
Toll said in the statement that the write down would see a slight worsening in its debt profile.
"The announced non-cash impairment is expected to result in an increase of approximately 2 percentage points to the company’s gearing ratio, but will not have an impact on Toll’s ability to fund its capital expenditure programme, or to pay dividends. The company continues to be well within its banking covenants," Toll said.
Earlier in the week, Asciano (which was spun out of Toll more than five years ago) revealed that its profit would make guidance for the year to June 30, but it did reveal that trading in its ports business had become "challenging".
