SATS Ltd. (S58.SI) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to SATS Second Quarter Financial Year 2020-2021 Earnings Conference Call. Before we begin, SATS would like to remind you that certain comments made during this call may contain forward-looking statements. Many of these forward-looking statements can be identified by the use of words such as may, will, expect, anticipate, estimate, assume, continue, project, plan and similar words and phrases. The company's actual results and future financial condition may differ materially from those expressed in any such forward-looking statements as a result of many factors that may be outside the company's control, including, but not limited to changes in the business environment. The company does not undertake any obligation to update these forward-looking statements. I will now hand over the call to Carolyn Khiu of SATS. Please go ahead.

Good evening, everyone. Welcome to another SATS webcast. We come in the middle of our financial year, and I'm sure everyone is interested to understand how we have survived this challenging environment. With me here are Alex Hungate, President and CEO; and Manfred Seah, CFO, to take you through the results. I'll hand you over now to Alex to kick off the presentation.

Thanks, Carolyn, and good evening, everybody. Thanks for joining us tonight. I'm going to start with a business update and I'll hand over to Manfred, who will go through the financial review. And of course, we'll have the Q&A at the end. So we look forward to hearing your questions then. The first slide shows the global RPKs, and you can see that there is some gradual recovery coming from the lows in April earlier this year. I'll go into the volumes on the following slide, you can see here that we're starting to see some Singapore special travel arrangements, which we've noted on the right-hand side, probably the most important of which is the Hong Kong air travel bubble, which was confirmed on the 11th that will begin on November 22, and we can talk about that later. There are various reciprocal green lanes in operation for essential travel. And of course, there are air travel pass arrangements, all of which have contributed to the picture that you see. Having said that, this recovery, although it's the recovery is less bullish than IATA themselves had expected earlier in the year, when in July, in fact, when they made their original forecast. So we're running slightly behind their forecast, which they have downgraded subsequently. So we can see that the recovery is a fragile one and depends very much on the trajectory of the epidemic going forward. If we turn to the next slide, it's the half year. We're giving you quite a number of details in terms of the operating statistics. I'm also going to give you some quarter-on-quarter statistics as well to give you a sense for how things are improving from the lows in April and May. So in terms of flights handled in thousands, you can see the first half is down 78% from the prior first -- second quarter. And you can -- I'll tell you quarter-on-quarter, actually, though, it's up quite a bit. Number of flights, more than 200% higher than they were in the first quarter. So there has been -- although it's a massive drop year-on-year from the second quarter last year, the quarter-on-quarter improvement is quite considerable from the lows in the first quarter. Similar pattern in meals served, which includes aviation and non-aviation. So it didn't drop as much year-on-year, down almost 60%. Quarter-on-quarter, there was an improvement in the number of meals served by 20% from the first quarter. Passengers handled, still very small. In fact, you can see the drop is over 90% -- 92% compared to the second quarter last year due to the pandemic, but actually from the trickle of passengers we had in the first quarter, there's been a 700% increase into the second quarter. So you can see that some of those travel arrangements that we talked about on the prior slide are starting to have an impact, albeit still a relatively small one. Cargo, as we talked about last quarter, has been the most resilient of the different services that we offer. The demand has held up, and if anything, is supply-constrained because of the lack of bellyhold flying in the marketplace because of the lack of passenger planes in the air. So Cargo is, in the quarter, was down just over 40% from the second quarter last year and did also improve quarter-on-quarter by 22% from the first quarter into the second quarter. So all of those are signs of an improving aviation picture. But of course, as I mentioned on the prior slide, it's still not improving as fast as IATA had forecast and I think it's very hard to predict how it will go going forward because of the uncertainty over the trajectory of the pandemic. The last column is the number of employees. I did mention at the quarterly conference call last quarter that the number, although it had dropped considerably, would continue to drift down in this second quarter. And that's exactly what's happened. It's fallen by a further 500 from this time last quarter, which is part of our management of costs resizing for what we expect to be a lower-for-longer situation for aviation. Therefore, we want to make sure that our cost base is appropriately sized. And Manfred will give you the numbers around that later on. Moving to the next slide. SATS is playing a key role in supporting the safe reopening through the reciprocal travel lanes and the air travel bubbles to make sure that passengers are safe and that air travel does not become a vector for the transmission of the pandemic. We've also been involved in the safe reopening of the cruise center here. So the cruise is just to remind you, out of the Singapore Cruise Center and the Marina Bay Cruise Center, are not going to foreign destinations. They're actually leaving Singapore and returning to Singapore with Singapore-departing passengers and Singapore-arriving passengers. So it's a relatively low-risk way of restarting the cruise industry. Genting has already started through the sailing thrice per week from 6th of November, and then Royal Caribbean will begin to sail at the beginning of December, 2x per week. The Hong Kong air travel bubble, as I mentioned, is starting on the 22nd of November. There's no quarantine requirement for that, obviously, provided that you're COVID negative on the test that you take before the journey and when you arrive. There will be one flight per day initially and then moving to 2 flights per day from the 7th of December. That's an encouraging sign. We obviously want to play our part to make sure that the air travel bubble is a success and it doesn't result in cross infections or increased infections in either Hong Kong or Singapore because we hope that it can become an example for how air travel can be reopened with other countries. So together with Ministry of Health and Ministry of Transport and the rest of the aviation ecosystem, we're doing everything we can to work closely with Hong Kong to make sure it's a success and a very safe initiative. Now we move to the next slide, which talks -- which recognizes that flying for the foreseeable future is going to be quite different in terms of the precautions one would need for safety. In particular, minimizing contact between crew and passengers, particularly when the mask is removed for taking refreshments and eating meals. So we have been working with our new subsidiary, Monty's Bakehouse, which specializes in the Singapore packaging, in particular, for handheld snacks, to design safe and sealed eating packaging, which can be both hot and cold. And this is just a shot of how that can look. But we've actually introduced launches to nearly all of our Asian Airline customers to try to inject this source of innovation into our Asian marketplace. The next picture just shows some of our aircraft interior cleaning crew. We are actually deploying quite a bit of new technology, the kind of technology that is used in hospitals to do that level of sanitization. We got UV light being implemented, which is a way of perhaps in-flight as well as on turnarounds, making sure that the virus is minimized on any surfaces. The more traditional deep fogging is already underway. That requires a longer turnaround. So for safety reasons that the aircraft goes under deep fogging and then has to be evacuated, so it takes about an hour to do that on turnaround. And then various antimicrobial hospital cleaning substances, which we're using now, which actually remain on the surface for an extended period of time. So this is a whole new set of kind of nanotechnologies, which is very interesting, which has proven to stop the transmission across surfaces, which is being deployed both on the aircraft and in the Chinese airport as well. Let's move to the next slide. We're talking a bit more about some of the new customer segments that we've been growing into. In particular, foodservice and retail, both supermarkets and small footprint, convenience stores as well, where we're having some -- getting some traction with our ready-to-eat meal. And then we're also exploring some of the -- some new F&B concepts with institutions. So the picture here is the Singapore General Hospital where we're collaborating with the hospital to launch a contactless F&B experience. So all the ordering is done digitally, and then the picking up is done through lockers. The food is coming from our central kitchen. So we like this concept because it allows us to serve institutions, but without deploying large numbers of people, which gives us a productivity advantage over traditional people-intensive way of providing food and beverage services in business and institutional customers. We're continuing to promote and expand the range of Farmpride branded products. Farmpride is our SATS-owned brand. It's relatively well-known in Singapore and some parts of Southern Malaysia. So it's a brand that we think has legs, and we'll continue to invest in it. We're also continuing to expand our market share in the distribution of alternative proteins like Impossible, Fable and Growthwell. I mentioned last quarter, we have a partnership agreement with Brakes, which is a well-known distributor of F&B products. So we've been expanding our distribution of Europastry's baked goods into retail chains in Singapore. You might have seen them in Cheers, for example, where they're selling very well. So you should expect to see more of that and they will be distributed via Cheers through food delivery platforms as well. So this is a relationship, which opens up distribution into home food delivery. And then my final slide, before I hand over, is about gearing up for the COVID-19 vaccines. Obviously, there's been a lot in the news with the BioNTech, Pfizer vaccine, showing very good efficacy. There are other vaccines that will follow closely behind that. The transportation of these vaccines globally will be critical. There are some production sites here in Singapore. There are some in places like India and China, and I've mentioned Europe, that will come into Asia. And we believe that Singapore will be able to target, realistically, a disproportionate share of that transit cargo business because of the reputation that we've built out for the precision of our pharmaceutical handling. We are IATA CEIV Pharma certified not just in Singapore, though, were also certified in Beijing, in Muscat, in Bangalore, and we are in the process of gaining certification in Jakarta and in Kuala Lumpur as well. So the shippers, the pharmaceutical companies in this case, will often specify that they require the CEIV certification. And I think in the case of some of these new vaccines, because of the very demanding requirements in terms of temperature handling of some of them, I think that requirement will be even more stringent. We are already seeing an increase in pharmaceutical cargo throughput year-to-date, and we expect that to increase quite a bit as these vaccines start to get distributed through probably starting early in the next calendar year. Singapore as a hub, as many of you will have been following, has been well supported by the government, including the national carrier. So national carrier is actually predicting a relatively small reduction in fleet size compared to some of the other hub carriers around the region. So we are also confident, and what I want to take this opportunity to say that our confidence in the future of the Singapore hub, and perhaps it will be an opportunity for Singapore to gain market share, not just from the point of view of the vaccine, but also from a broader perspective as well. With that, I'd like to hand over to Manfred, but I'll come back later to talk about the outlook, and then we can both answer your questions. Manfred, over to you.

Thanks, Alex. Good evening to all. I shall now take you through the financials, starting with the executive summary. Impacted by COVID pandemic, as SATS 2Q revenue dropped sharply by 54% to $231 million, and group PATMI decreased by 94 -- $93.9 million to a loss of $32.2 million (sic) [ $33.2 million ] compared to SATS 1Q loss of 43.7%, our 2Q loss has narrowed and is better off by $10.5 million. Included in the 2Q results, we have taken an impairment charge of $31.6 million for our overseas investments. Excluding the one-off items, SATS underlying losses for 2Q would reduce to $1.6 million. Share of earnings from associates and joint ventures dropped to a loss of $12.8 million, an improvement compared to 1Q loss of $31.4 million. SATS 2Q EBITDA is back to positive territory of $20.5 million, compared to a negative of $33.9 million in the last quarter. Group revenue, next slide. Group revenue declined 53.5% to $231 million due to the pandemic impact on aviation. Aviation revenue fell by 70%, resulting in lower meals volume and flights handled. Gateway and Food revenue dropped by $138 million and $131 million, respectively. Group OpEx fell $46.6 million with reduction across the board, except for depreciation and amortization. The most significant reduction was in soft costs, which dropped 61% due to government grants, lower contract services and reduction in manpower. In line with lower aviation revenue, license fees decreased by 79.6% to $4.5 million for the quarter. Group revenue continued to outpace the reduction in group OpEx net of government relief, notwithstanding SATS achieve breakeven for 2Q compared to an operating profit of $65 million for the same quarter last year. Our share of losses amounted to $12.8 million in the 2Q. As mentioned, we have taken an impairment charge of $31.6 million and a credit provision of $7.7 million for doubtful debt this quarter. To date, the group has taken a total of $90 million of impairment charges and credit provision since the pandemic started earlier this year, of which $51 million was taken in the fourth quarter of last year and further $39 million this quarter. PATMI declined by 1.5x to a loss of $33.2 million for the quarter. Now we're on Slide 13. Group revenue declined $522 million or 54.2% to $440.5 million. Aviation revenue fell 71.4% in the first half, with Gateway and Food revenue decreased by 46% and 65%, respectively. In tandem, group OpEx was lower at $364 million or 43.3% for reasons similar to that covered in the second quarter results. Share of losses of associates and joint venture deepened to $44.2 million and PATMI dropped by $192 million year-on-year to a loss of $76.9 million for the first half of the year. On Slide 14, segmental revenue for the second quarter. By segment, Food revenue decreased by 48.5%, while Gateway revenue fell by 61.1%. Food contributed 60% of SATS consol revenue this quarter compared to 64% in the same period last year. The change in the mix is due to the lower aviation volume and growth in non-aviation revenue. Food revenue -- non-aviation Food revenue due mainly to the consol effects of Country Foods. By industry, aviation revenue fell 70% and accounted for 55% of the group revenue this quarter compared to 85% in the second quarter of previous year. Non-aviation revenue grew 35%, contributed by Country Foods. Singapore accounted for more than 85% of SATS consol revenue. With the exception of Greater China, revenue in all other region -- regional markets have fallen. On Slide 15, the segmental revenue for the first half trended the same way as the second quarter, which I shall leave you to go over. But worth mentioning that aviation revenue, for the first half dropped, by 71.4%. On Slide 16, group OpEx for 2Q dropped by 46.6% or $201.3 million, most significant being the reduction in staff costs which fell 61.3%. The reduction in staff cost was due to several factors, including government grants, lower contract services and also lower headcount for the quarter. And license fee decreased by $17.6 million to $4.5 million for the quarter. Included in the Other cost is a credit provision of $7.7 million. Excluding such other costs would have decreased further by $26.8 million. Slide 17 shows the SATS share of revenue and our share of losses for the quarter. The impact of COVID-19 has affected all SATS associates and joint ventures in the region, resulting in a sharp decline of $26.5 million in SATS' share of earnings to a loss of $12.8 million for the quarter. All our joint ventures and associates were adversely affected by COVID-19, especially our Food JVs, cushioned by the better performing cargo JVs. On Slide 18, SATS share of revenue by region in 2Q. SATS share of revenue declined by 56% to $298 million, which is worse than the decline of 53.5% for consol revenue. The year-on-year change shows how significant the pandemic has affected our group financial performance across the region. At PATMI level, Singapore remains profitable at $25.2 million, held by the government reliefs extended to SATS. Please note that the impairment charge of $31.6 million was taken into the ASEAN numbers showing a PATMI loss of $42 million. Excluding the impairment charge, ASEAN region would have registered a loss of $10.4 million. Slide 19 sets out our financial position as at 30th September 2020. Total equity and total assets stood at $1.7 billion and $3.2 billion, respectively. Total debt has increased by $271 million due to additional drawdown of $270 million of credit facilities during the period. The increase in total debt has resulted in debt-to-equity ratio increasing to 0.45x. This is ex-IFRS 16. Cash balance as at September 2020 increased by a corresponding amount of $270 million to $818.5 million. Excluding total borrowings of $686 million of term loans and medium term notes, SATS is still in net cash position. ROE is at a negative of 4.9% as the group reported loss for the period. Moving on to the financial indicators in Slide 21, all our profitability indicators for the first half remains negative due to the year-to-date net loss. EBITDA margin for the quarter returned to positive territory at about 8.9%. EPS and ROE are both negative for the quarter because of the losses, and NAV per share has lowered to $1.38 per share as at September 2020. The cash flow slide would be my last slide, and overall, cash position increased by $269.6 million at $818.5 million for the first half. This is due to the additional drawdown in debt financing, as I mentioned earlier. Thank you very much, Alex.

Thanks, Manfred. So let me just talk about the outlook now. We can show the outlook statement, which starts off by saying that the outlook will remain challenging because flight and passenger volumes are still heavily constrained by pandemic related travel restrictions. A demand for air cargo continues to be more resilient, as you saw in the quarterly numbers. Flight passenger and cargo volumes have all climbed from their lows in April, and I gave you some of the increases that we've seen quarter-on-quarter. But the trajectory of the recovery remains uncertain because we see COVID-19 resurgence in some companies, notably in Europe and North America. SATS is committed to supporting the safe reopening of air and cruise travel by helping to implement thorough passenger health testing protocols and innovative low-touch meal services and rigorous in-cabin cleaning. SATS, with our leading cold chain capabilities and protocols, is also ready to help airlines, shippers and forwarders in the distribution of the new vaccine for COVID-19 across our network of certified pharma handling cold chain operations once those vaccines become available. At the same time, we are continuing to grow in new customer segments, such as foodservice, fast casual restaurants, and retail, both supermarkets and small footprint with a wider range of products and services and some of them branded, as we talked about earlier. So that's the outlook. If I can kind of summarize what the takeaways are from the call. Obviously, it's still a challenging environment. We've got uncertainty about the future trajectory of the pandemic. And that's why, as Manfred mentioned, we've made further impairments and provisions this quarter totaling $39.3 million. This adds to the provisions and impairments we made in the fourth quarter of last year of $51.1 million. So that's in light of the considerable uncertainty that the aviation industry is facing. However, when you look underlying at our results, you do see improvement in volumes and revenue quarter-on-quarter. You also can note that there have been further cost reductions from one quarter to the next. So the year-on-year cost reductions in Q1 were 39.9% versus prior year. In Q2, you now see that the cost reductions are at 46.6% versus prior year. So we continue to have good cost management controls. This, when combined with the improvement in revenues, has meant that we've returned to a positive EBITDA this quarter, as Manfred mentioned earlier, with positive cash flow from operations before CapEx, as you can see from Page 22. There's also been a reduction in the losses from our joint ventures and associates. So last quarter, we lost $31.4 million from joint ventures and associates. This quarter, that loss has narrowed to $12.8 million. So although it's still very challenging, we are seeing progress from quarter-to-quarter. And of course, you'll have noticed, as Manfred pointed out, that we're still net cash on our balance sheet. So with that, I think that's a fairly good summary of what the takeaways are from this quarter, but we'd love to have your questions. So Serena, I'll hand back to you. We'll start the Q&A, please.

[Operator Instructions] Our first question, we have Rachael from UBS. Rachael, your line is open.

Sorry, can you hear me?

Yes, we can. You may proceed.

Yes. Sorry, I was on mute. Alex and Manfred, I have a question about your cold chain logistics. I know that the requirement for the Pfizer vaccine is a little bit different from what we see for the typical other pharma stuff in that you are looking at temperatures of minus 80 degrees. Would your cold chain facilities in Singapore as well as around the region, would they be able to handle that kind of temperatures and the sensitivity of the product?

I thought somebody would ask this question because actually, the minus 80 degrees is an extreme requirement that is not normally found for vaccine transportation. Having said that -- so the facilities themselves go down to minus 25. They are electric powered, right? Yes. So they're electric powered. That you can use electricity power to go down to minus 75, minus 80. But it's extremely inefficient. So our protocols for transporting at minus 75, 80, which we've done before, relates to liquid nitrogen cooling. So these units which are -- contains liquid nitrogen with the vaccine inside. We are certified to do handling at those temperatures, and we have done it before at minus 75, 80. The facilities themselves don't go that low, but there are no facilities who go that low because of what I mentioned to you earlier, that electric power cannot get that low under normal circumstances.

Okay. And I guess if we are looking at, say, a vaccine that is flying in from the U.S., has -- is your cold chain facility in Singapore as well as elsewhere, are they certified by, say, the FDA or the pharma companies?

Yes. So the short answer is yes. We are certified for minus 75, minus 80 degrees, and we've done it before.

Okay. And sorry, and is this just in Singapore? Or can all your cold chain facilities that you mentioned, Beijing, Bangalore, Muscat, can they all handle at that kind of temperature as well?

Yes. Yes, part of the CEIV pharma certification covers that very low-temperature requirement.

Next, we have Yew Kiang from CLSA.

Can you hear me?

Yes. Please go ahead.

Yes. My -- I only have 1 question, which relates to the impairment. I recall that previous quarter, there was this impairment done and I remember -- I also feel that the same question, whether on the impairment side, we have been aggressive enough or rather conservative enough. But it seems like this is picking up in the second quarter. And I just want to know, I recall Manfred mentioned that this is relating to Asian operations. But can you talk about in which particular of your associates is it coming from? And also, can we expect this to -- on the impairment side to continue to pick up or should we expect anything else?

Thanks, Yew Kiang, for your question. Yes, I recall your question from last quarter also. I think our answer at that time was that we are continuing to review circumstances for all of our JVs and associates to test for impairment requirement. That's exactly what we did this quarter. In these cases in ASEAN, which we can't name for -- I think you all understand why we can't name them. But for cases in ASEAN, there's new information about the -- either the business, the underlying business or the main customer, which may -- which just made us decide to take the impairments and/or the provisions. As you know, there's a lot of news flow every quarter about the aviation industry and some of its participants. And therefore, we want to be prudent and incorporate that into our outlook for the cash flow forecast for each of these entities. In the case of the ones that we took in ASEAN, the cash flow reductions that we made based upon the new information meant that it was prudent for us to take the impairment. Going forward to the second part of your question, I would give the same answer I gave last quarter or that Manfred gave to you last quarter, which is that we'll continue to take into account any new information that we get and if that requires us to take a -- to be prudent and take further impairments, then we would do so. At this point in time, clearly, we don't have any such information, otherwise, we would have made the impairment. So we've taken into account all the available information that we have at this time. So I can't say with certainty whether it's going to pick up or decline because it depends upon the evolution of what happens over the next quarter or so. So when we come to make the same assessment next quarter, if the news flow is more positive, of course, we won't need to. But if things start to deteriorate, then we may need to make further impairments. So we'll just have to see what the environment looks like at that time.

Okay. Is there any region that you would be particularly concerned, I mean, given what information you have currently?

Well -- we've taken into account all the information that we have and made the impairments. And as you noticed and as Manfred pointed out earlier, those are in ASEAN at this time. We don't have further information about whether ASEAN will get worse or whether other regions could start to be more troubled in the next quarter. Like I said, it's hard for us to predict what the future news flow will be. But we'll -- so for the time being, I think we've made the right impairments and the right provisions that relate to everything -- all the available information that we have.

We have some questions off-line. Maybe we'll take the questions off-line first. The first question is from Kaseedit from Citi. "Why does JSS comps are even higher than the quarter versus the last quarter?"

Okay. Manfred, do you want to talk about how we are recognizing JSS smoothly across 17 months?

Okay. Yes. So thanks, Alex. The JSS that we have is actually spread over a 17-month period. This is to comply with the ISCA guideline that has been issued sometime in August. So what -- how we did that was basically as we total up and basically spread it, by and large, over 17 months equally. Now what you are seeing, I believe this is Kaseedit, asking the question.

Yes. It's Kaseedit. Yes.

Your -- the amount of grants that's been disclosed in our SGX disclosure of $152.1 million, that's not all JSS. This is actually including all the government reliefs, CAG reliefs. And so it's a total number. We can't -- unfortunately, we are not able to share the specific. So we can't guide on how much of that is actually JSS.

One component of that, though, what I'm happy to boast about is that we have been generating revenue from our own training academy called SATS Academy. So it's training not only our SATS people in digital and other future facing skills that we want to use to implement transformation projects, but also, we've training third-party companies like airlines and freight forwarders and even some personnel from other parts of the ecosystem, airports, et cetera. So we've created a profit center actually out of our training academy. And those revenues actually show up in the line that Manfred just mentioned.

Yes, absolutely. Alex, thanks for that. And the government relief also include similar JSS that we receive from overseas. So that is also included in that number. By and large, I think Kaseedit, you can assume that the JSS for both quarters are almost equal.

Okay. Thank you, Manfred. We'll take another question from Jeffrey from The Edge. He's asking, "Non-aviation revenue grew by double-digit percentage in second quarter and first half. Can you explain the drivers behind the growth? Do you continue to see similar growth in non-aviation revenue ahead?"

Okay. Let me cover that one. Thanks, Jeffrey. The majority of the increase in non-aviation revenue, which this quarter rose by 35%, was from the consolidation of acquisitions that we made, in particular, Country Food. Country Food began to be incorporated in June -- no, in...

October last -- no, no. August last year.

August. So in fact, you've got a partial quarter with 1 month from last year and then 3 months from this year of that revenue, which accounts for the 35% increase. Underlying, though, there's some other movements in the constituents of that revenue stream, which I should explain to you. Non-aviation includes cruise, of course. So a year ago, we were -- I think we hosted about 35 cruise ships in that quarter -- second quarter last year, whereas this year, it was 0. So the revenue from cruise has completely disappeared. Similarly, some of you were asking last quarter about the pandemic-related revenues from feeding foreign workers and also from housing foreign workers. So some of that has decreased quarter-on-quarter as you expected. And then making up for those -- the drop in those 2 components, we have had an increase in our new, more sustainable growth strategies for non-aviation, as I described in the slides earlier, selling into retail and food service chains. So it's hard to see that because they somehow net out, but you will see that in future quarters, that's an underlying business which will help us to pivot the business to get a better balance between aviation and non-aviation food revenue in the future.