2003

Flight Centre Limited Chairman's Address 2003

Thursday, 30 October 2003

Good morning and let me extend a warm welcome to our shareholders and visitors who are with us here today. Once again, it gives me great pleasure as Flight Centre Limited's chairman to report on another year of strong growth for our company. In the 2002-2003 fiscal year, we have enhanced our operations, expanded our presence in all markets, achieved record financial results and delivered improved returns to our shareholders. We have also achieved a number of milestones, including * the opening of our 1000th store * our first $100 million pre tax profit, * the successful completion of our largest acquisition * and our first expansion into the Asian market. These achievements came in what was, without question, a turbulent environment for the global aviation and travel industries. Many challenges arose and our achievements provide tangible evidence of the * strength of our business model and brands * the resilience of the travelling public * and, most of all, the great abilities and dedication of our 6000 people throughout the world. I will speak about our people in more detail later this morning, but first I would like to highlight our key financial performances of 2002-2003. As mentioned previously, Flight Centre Limited extended its record of achieving improved financial results in the 12 months to June 30, 2003, despite the many difficulties. While our achievements in 2002-2003 probably did not meet initial expectations, they did represent a commendable trading performance. Few could have imagined the difficulties that would arise, with the company's results affected by the Bali bombings, War, the threat of terrorism and, late in the year, SARS. Despite these factors, profit both before and after tax increased by 13% on the previous year, with pre-tax profit reaching $102.3 million and after-tax profit being $70 million. Total transaction value for the year increased 26% to $4.6 billion, while total revenue increased 30% to $626 million. In addition, the company declared a final dividend of 25 cents per share, or 43.5 cents per share for the full year, a 16% increase on 2001-2002. Basic earnings per share for 2002-2003 on the increased capital base reached 77 cents, an increase of 7% on the previous year. At June 30, we had 1054 shops and 209 internal businesses in our countries of operation. These achievements cap an impressive decade of growth for Flight Centre Limited. In the 10 years between 1992-1993 and 2002-2003 our * Total transaction value increased from $393 million to $4.6 billion, compounded growth of 28% * Shop numbers increased from 135 to 1054, compounded growth of 23% * And profit before tax increased from $6.17 million to $102.3 million, compounded growth of 32% Today, I can also report that our growth has continued in the first quarter of 2003-2004, with the company achieving healthy global results in the three months to September 30, 2003. During this period, profit before tax increased 19% in comparison to the corresponding quarter in 2002-2003 to $26.7 million. Operating profit after tax increased 17% to $18.2 million. Total transaction value increased 25% to $1.4 billion, while revenue increased 29% to $180 million. Basic earnings per share increased 11% from 17.6 cents in the September quarter last year to 19.5 cents. Overall, we can be pleased with our achievements in the first quarter of the current fiscal year. Growth has been steady and this has helped the company surpass its achievements from the three months to September 30, 2002, which was a strong period - pre Iraq, pre Bali and pre SARS. In terms of our operations, Australia, New Zealand and South Africa have all performed strongly in the first quarter of 2003-2004. Performances in the United Kingdom have improved, with our long established businesses bouncing back after a disappointing year in 2002-2003. Results from our recent acquisition, Britannic Travel, have been in line with budgetary expectations. In North America, the United States operation has continued to improve. However, it is challenging and we can see that the jury will stay out until we can report and deliver profit in this market. Our Canadian businesses have posted disappointing overall figures this year, but we see no reason why these businesses will not return to previous levels of profitability as part of our now combined North American operations. The results of our endeavours last year and in the first quarter of the current year reflect the company's clear strategy to continue to strive for a high level of customer service, coupled with strong growth in our sales outlets and our growing diversification of brands. This brand diversity, in both leisure and corporate travel, is undoubtedly one of our great strengths. It means the company has an extremely effective distribution network, resulting in increased sales and therefore strengthening our position in the travel market. In the leisure area, our brands include the flagship Flight Centre brand, Great Holiday Escape, Student Flights, the respective Travel Associates stores, quickbeds.com, Cruiseabout, Shopper Travel, Overseas Working Holidays and Fanatics Sports Tours. In the corporate travel area, we have Corporate Traveller, SBT Business Travel Solutions, TQ3, Stage and Screen, Britannic Travel in London, American International Travel in Hong Kong and our specialist conference brand, CI Events. This stable of brands includes a number of businesses that have been acquired to enhance our overall operations. In 2002-2003, Flight Centre Limited completed several strategic acquisitions. These included * cruise specialist Cruiseabout, * online accommodation booking service quickbeds.com, * AIT * and Britannic Travel. As you are aware, we successfully raised $79.6 million through a 1:20 Non Renounceable Entitlements Offer at $18 per share to fund the Britannic purchase. The offer was fully subscribed and enabled the company to fund its largest acquisition while preserving cash reserves for future opportunities. In its early months in the group, Britannic has performed well under the continued leadership of founder Alan Spence and, importantly, has retained its "high-end" client base. In addition to these deals, we also launched a new brand in Campus Travel and, since the start of 2003-2004, have acquired a new corporate business in Kistend Travel, as part of our focus on university businesses. Our acquisition strategy is simple in that we have two broad thrusts in targeting profits through acquisitions. The first is to look at opportunities, such as Britannic and ITG, which provide a step change in growth of our total business or which fill a niche in our total business which otherwise would involve a long period of development. The second is the acquisition of, in most cases, small and focused businesses like Kistend Travel or Cruiseabout that add product or sales outlets to our business. We expect the main growth of Flight Centre Limited's business in the future will continue to be by generic expansion of our existing brands, businesses and countries of operation. Acquisitions are likely to account for up to 25% of our future growth. In terms of our international operations, it is important to recognise that the high market penetration achieved in Australia is still very much the cornerstone of our profitability. Our Australian businesses continue to set the standard and, collectively, enjoyed great success in 2002-2003, particularly Flight Centre Brand in New South Wales and Queensland and the teams that were formerly part of ITG. Expansion has continued in all states and new opportunities continue to arise. We do not in any way subscribe to the view put to us by some commentators that our growth in Australia is constrained by our present level of penetration in this market. While Australia remains the flagship of our operations, we have made significant advances in our international markets, particularly in New Zealand and South Africa. In both of these countries, our businesses have reached a mature level and have consistently achieved strong results. New Zealand remains the second largest contributor to our global profit results, while South Africa continues to make rapid progress after the currency-related difficulties of 2001-2002. In the United Kingdom, the acquisition of Britannic Travel, coupled with the generic growth of our established brands, has made Flight Centre Limited a significant player in the travel market. In North America, we have recently brought our three operations - East Canada, West Canada and the United States - together under one centralized leadership team based in Vancouver. Of course, one of the keys to our progress in all markets is the extraordinary group of people that have come together in our shops, teams and support businesses. Our people are a source of great pride and remain our most valuable asset. Great emphasis is, therefore, placed on finding the right people, having them in the right roles and rewarding them for their achievements. In 2002-2003, Flight Centre Limited introduced a new wage structure at shop level to ensure the company retained good people in tough times. We see this investment in our people as a great investment in our future. As a company, we have also received external recognition for our employee relations programs and strategies. Honours in this area have included the Employer of the Year award in Australia for the past two years, a significant achievement considering the trying year the travel industry has experienced and the fact that competitors for this category were across all industries. Recently, we were also judged Australia's best retail travel group. You will again see from the Annual Report that Flight Centre Limited continues to use share options as part of the incentive package for employees. While there has been considerable debate about the use of large-scale option packages for senior executives, the company fundamentally does not take that approach. The essence of the scheme is based on our people overcoming individual and collective hurdles. As announced previously, we have budgeted for options that are achieved to be expensed during the 2003-2004 fiscal year. Flight Centre Limited's Board has a strong belief in making shares available to facilitate employee participation in the company. On a similar note, we continue to operate a Business Ownership Scheme whereby team leaders can, by investing their own money, acquire a participation in the profitability of the business they lead. This scheme continues to operate successfully and provides leaders with an additional incentive to achieve the best possible results. Approval will be sought today to increase the maximum provision for Directors' Remuneration. In recent years, directors' remuneration has, with shareholder approval, been supplemented by an options program. With the ongoing corporate governance debate, the Board has decided not to continue with directors' options. That being so, the Board is of the belief that it is reasonable and necessary to increase the directors' dollar remuneration, which is low by any standard. If accepted, this increase will be the first such rise in the total provision available for our group of non-executive directors since May 1995. It is not the Board's current intention to take up this maximum provision during the 2003-2004 fiscal year. In terms of corporate governance, Flight Centre Limited welcomes the legislative amendments that have taken place in this area and will support reforms and practices that promote the prudent stewardship of companies. Flight Centre prides itself on having a flat and simple management structure and as a fundamental ethos has promoted a high degree of transparency and accountability. We have always placed ourselves under pressure to conduct meaningful evaluations on our performance and effectiveness. As a result, we support the principles and aspirations encapsulated within the ASX guidelines. However, we also need to recognise that these are guidelines and principles. As such, their adoption and appropriateness needs to be considered with due regard to the company, the industry it operates in and its current business practices. Flight Centre is committed to enhancing its corporate governance practices and is confident its corporate values will allow it to do so. We look forward to reporting on our progress in this area, in more detail, during the current year. Technology is a core component of our global business, and our ongoing investment in this area continues to produce benefits. Through Flight Centre Technology Pty Ltd, we have a technology business that oversees our IT needs and develops new systems to improve our overall operations. We have also developed a significant online operation, through flightcentre.com, quickbeds.com and our other brands' websites, which continues to generate enquiry and sales. In fact, research by internet monitoring company Hitwise showed that flightcentre.com was Australia's most visited travel agency site in 2002-2003. The site consistently generates up to 1 million visits each month and is enjoying solid growth in popularity. In addition to these websites, we own advanced travel software that is recognized as state-of-the-art, through our Lumina product. This year, our technology teams are in the final stages of developing a new leisure sales system for our retail stores and a new ticketing system. These developments will improve productivity and help our consultants deliver an improved service to their customers. Our investment in our shops is similarly valuable. At store level, great attention is paid to presentation, appearance and functionality of our shops in all areas of the company. Our shops and the people who work in them are the frontline in providing a service to the customer and are arguably the most important function in the operation of the company. Looking ahead, the uncertainty of recent years means it is impossible to predict full year results with any degree of certainty. Having said that, Flight Centre Limited has started the year in a very strong position, has an extremely strong balance sheet and is well placed to take advantage of the opportunities that arise. Recent history has shown that the young people of the world will continue the trend of more active and widespread travel. Problems have arisen, but the thirst for adventure and to explore the world has not diminished. We recognize and encapsulate this through our company's core purpose To open up the world for those who want to see. As always, our goal for 2003-2004 is for growth in all areas of our business, with one of the targets being profit growth in the region of 20%. It is, of course, very early in the year and there is no clear indication at this stage of our likely trading patterns for 2003-2004. Finally, I would like to take this opportunity to thank Graham Turner and Shane Flynn for their continued leadership of the company. Shane's appointment last year to the position of chief executive officer means we now have two outstanding leaders working in tandem, with Graham focusing on future strategy and Shane concentrating on the "here and now". Our results from 2002-2003 show that this new leadership structure is off to a promising start and we look forward to further improvements in 2003-2004. Flight Centre Limited is extremely fortunate to have outstanding leaders at all levels. Together with their people, the leadership team will ensure that our focus is very much on the future and in building on our achievements of previous years.