M EMORANDUM OF I NFORMATI ON FOR THE SALE OF THE BUSINESS OF
FAIRFAX INDUSTRIES LTD BACKGROUND Fairfax has been building special vehicles using composites since 1971, and has developed a unique method of monocoque (large single structure with no frame or joints) construction offering superb insulation, structural strength and longevity. The dominant market niche is the manufacture of heavy transport equipment for food transport in all its forms: frozen, chilled and livestock transport. It has had a significant present its NZ market niche for many years. It enjoys an enviable reputation for quality, longevity and lower running costs, as well as building innovative and practical solutions for its customers. It has also produced ambulances for St John for nearly 30 years, but has recently lost the supply contract. This contributed significantly to the decision to place the company into Voluntary Administration as the capital structure of the company could not withstand this event. SPECIAL CAPABILITY The particular skill of Fairfax is the manufacture of complex specialized vehicles of all types. Over the last 35 years, customers
have included Health Boards, Ambulance Boards and television stations, for:
Ambulances Mobile dental units Mobile medical vehicles (eg mammography, xray) TV outside broadcast units Environmental and waste management (recycling and wood chip) vehicles Mobile Breast Screening
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The most common body types produced by the company are:
fRigid for frozen goods hardCase dry-goods trucks and trailers, as above stockTake bodies for livestock transport campervan spec thin-walled bodies Classic and lifeSaver ambulance bodies
Mobile Dental Unit
These bodies are used on trucks, B-trains and semi-trailers, between 6.5 and 15m length for the following applications:
Frozen and chilled food transport Furniture delivery Recycling vehicles Medical: breast screening, dental and ambulance Intermodal containers Rail bodies Buses
WHAT MAKES THE INTELLECTUAL PROPERTY UNIQUE? The speciality and source of primary competitive advantage is derived from its unique ability to construct frameless truck bodies and trailers using fibre reinforced plastics. This method results in trucking bodies that provide superior flexibility, durability, capacity and quality. The whole body is a single piece. There is no internal framework and no joints; therefore there is no opportunity to leak or crack. The structural rigidity is such that no chassis beam is required, which reduces overall
Outside Broadcast units
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weight. Openings can be cut at almost any place as there is no framework, which also reduces electrical interference. The body is also the lightest built, which gives an operator an advantage in payload. The materials used are similar to that of the marine industry, but the process and methodology is unique and developed over 35 years. The melding of marine technologies with transportation is very unusual. MANUFACTURING PROCESS The manufacturing process Fairfax uses is not a panel process. The two sides, roof, front and rear walls are vacuum-moulded in a continuous operation (unique to Fairfax) to deliver a onepiece body shell. Fairfax refers to the material it has developed for construction as "FRP" or fibre-reinforced plastics. The process it calls accelerated composite technology or "ACT", created by using "VART" or vacuum assisted resin transfer technology. This process results in a product of superior strength, able to withstand high-impact crashes better than traditionally made product (interior and exterior lining of a variety of soft and hard materials over steel frames). Local reinforcing in critical areas to meet particular operational requirements can further enhance safety. Features of this manufacturing process: A body made from robust reinforced composite construction. High-strength fully radiused external corners (i.e. moulded). Low maintenance, with no metal to fail through fatigue. High impact reinforced interior skins. Higher thermal efficiency through balanced insulation and absence of heat-conducting metal in the construction. No rivets to loosen or joints to leak due to onepiece moulded construction. Easier to design and deliver custom-made solutions to clients. Repaired more readily due to minimal need for specialist tools or skills. More readily cleaned delivering obvious benefits for efficiency and food safety (see also point 5 above). Significantly lower tare weights allowing greater payloads and thereby still able to meet regulatory gross tare limits. . Engineering certification, where required, of vehicles built by Fairfax have been by Registered and Certified transportation engineers. COMPETITIVE ADVANTAGE
34 years of industry knowledge, experience and relationships with the NZ road and rail
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transport industries Unique construction methods (see above), history of innovative product design and rapid response to new opportunities Strong market position and market share. Focus on sustained relationships and "solution-selling". Proven product qualities and durability Excellent health and safety record and strong, loyal work force. Ability to serve a range of product categories and adapt technology to different product types (e.g. Ambulances and campervans)
THE MARKET Because of the NZ terrain and geography, road transport has been and remains the principle means of moving goods from place of manufacture or processing to place of storage, sale or export. This is even more substantive in food transport, where the alternatives of rail has not proven sufficiently reliable or flexible. Fairfax operates in a premium market position in NZ. The market for refrigerated vehicles is dominated by Fairfax and Maxitrans (an NZ subsidiary of Australian company). There are a number of truck builders which are capable of building low-end bodies <6m, which does not form part of Fairfax’ current target. The gross margins on new heavy vehicles can be expected to be between 28 – 42% of selling price. Fairfax’ major competitive advantage derives from its use of advanced composite technology Fairfax ceased production of buses in 2001 with the entry of Stagecoach as the dominant owner of metropolitan buses, at which time sale prices no longer reflected fair value for quality. Fairfax has a broad customer base, including transport operators (eg Transotway, Halls, Big Chill, TR Group, Linfox) and store owners (Foodstuffs, Progressive Enterprises). Its typical customer, however, is the smaller (5-10 fleet) family-owned regional / metropolitan transport operator which contracts to the larger logisitics operators. In addition, Fairfax has a strong ongoing repair and maintenance business. While most minor or nonstructural repairs can be undertaken by an body repair workshop, major accident damage can only be undertaken by Fairfax (for reasons of road certification). In general, the gross margins on repairs can be expected in the range 50-65% of selling price. Fairfax operates in several different markets. These are:
Road transport (truck and trailer, Insulated and dry goods). Recreation market - RV / Camper Van bodies. Rail (Insulated and dry goods). Ambulances. Livestock. Specialised Trailers (eg TV Outside Broadcasting).
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Repairs and Maintenance. Fairfax's predominant market sector served is road transport (it typically accounts for between 50 - 65% of annual sales) and the products carried by its customers are generally foodstuffs. Key Customers for each major subsection of the road transport industry are as follows: Insulated Goods Dry Goods & Furniture Livestock TransOtway Big Chill Halls Transport Ltd TR Group Foodstuffs Coolstores Toops Gilmours
Fliways Waste Management Efficient Furniture Conroy Furniture Star Moving Crown Removals Canterbury Bulk
Clutha Valley Ellesmere Progress Manawatu Nevilles
COMPETITORS Until 1995 Fairfax did not have a major competitor based in NZ. At that time Australian listed company, Maxitrans, which had previously serviced larger clients from its base in Melbourne, established a manufacturing operation in Auckland, also in Takanini. It continues to focus on the manufacture of traditional metal-framed truck and trailer bodies. According to market information, the largest volume of Maxitrans’ production is in conventional trailers and vans (curtain-siders, flat beds, skeletals, etc).
BARRIERS TO ENTRY Fairfax's competitive position is strengthened due to the following: The industry is capital-intensive and relies on specialist know-how and experience of local conditions and legislation. • The large size of truck and trailer bodies makes importing of competing product impracticable Should importing be contemplated, the industry still relies heavily on strong customer relationships and service support. Fairfax's use of advanced composite technology and its own FRP process and materials for its one-piece truck and trailer bodies is unique and proven. The market is small and tightly held and provides a limited opportunity for an aggressive attack by a foreign competitor.
GROWTH OPPORTUNITIES While the business is mature in NZ there are a number of factors underpinning continued sustained sales and further growth. Age of Existing Fleet
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Approx 60% of trucks and trailers still on ·the road are over 15 years old and are lower in height, narrower and lighter than permitted by current regulations. These units are therefore inefficient in terms of load capacity. (See above). Regulation Change Weights and dimensions were recently increased by NZ Land Transport Safety Authority (LTSA - 2010) allowing longer trailers with more axles and therefore greater payloads. For most rigs in NZ this allowed an increase of 15%+ in allowable volume. This will make an increasing proportion of the current road fleet obsolete due to the improved economy of the larger vehicles. The effect of this legislation is only starting to be felt. Export There is clear opportunity to export the technology for large bodies to be used in box bodies and buses. There is also opportunity to export ambulances, where Fairfax has a competitive advantage. There has been considerable interest from companies in each of China and Vietnam to produce a considerable number of buses and coaches. The form of this is a licence agreement. Viability has not been fully established. However once established, this initiative should lead to other opportunities in the region. A company railing food is looking for a fleet replacement, and Fairfax has successful achievement with this company in the past with rail bodies. Timing of this project might conflict with a sale of Fairfax. Cool-chain Supermarkets now increasingly require greater levels of certification from transport operators with regard to the temperatures and atmospheric conditions in which foodstuffs are moved and stored. Fairfax's FRP materials provide far superior temperature and atmosphere control features during transport over both curtain-sided trailers (draughts) and metal-framed, fixedsided trailers, (due to the heat-conducting qualities of metal frames). Certification regulations with regard to the "cool-chain' have been introduced in Australia and are therefore expected to be introduced in NZ. Overall Growth in NZ Transport The NZ Road Transport Forum estimates that freight volumes moved by road increase at the rate of 7% p.a (or have done so in the last 3 years). This equates to approximately 1.5% x the NZ annual GDP growth rate that, incidentally, has run at 4% p'.a. over the last 3 - 4 years. While a slow-down is assumed to approx. 2 - 3% in the current financial year, growth in road freight volumes is likely to continue to track at 4%-plus in the medium term.
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INDUSTRY ANALYSIS AND LIFE CYCLE Growth in the transport industry, particularly as reflected in investment in plant by road transport operators has tended (over the last quarter centrury) to run over 8-yr cycles. Fairfax records a relative slow-down in sales, both in the early 90s and, more recently over its 2000/01 and 2009/2010 financial years. This should provide a basis for substantial growth in the near future, due to underinvestment in recent years in replacement vehicles by the Industry.
THE NEW ZEALAND ROAD FREIGHT TRANSPORT INDUSTRY IN SUMMARY
Distance travelled by trucks grew by 3.1% p.a. over the 1997 - 2003 period. The industry operates 22,500 trucks, mostly 15 tonnes and over. Directly employs 22,600 people (2% of the work force). Generates $4bn each year (5% of NZ's gross domestic product). Carries more than 80% of NZ's total land-based freight (45m tonnes) - the balance is moved by rail. A major driver in the NZ economy; New Zealand and International studies show that, as a general rule, a 1 % rise in economic growth is required to support a 1.5% rise in transport industry activity. (NB - information taken from Road Transport Forum NZ - 2004 Publication of Road Transport Facts). The heavy truck fleet grew by 2.8% a year between 1997 and 2003, with trailers increasing by 2.9% over the same period. The greatest growth has been in four-axle trucks (6.1 %p.a.) Most trucking companies are family-owned. Over 80% have five or fewer employees and five or fewer trucks. The trend is to fewer and bigger companies. Those employing five or fewer people fell 10% between 1997 and 2003. All other categories grew. Estimates are that 80% of truck trailers have curtained sides. Only 5% covers flat-deck trucks and trailers, specialist plant for log haulage and fixed sided bodies.
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