SATS Ltd. (S58) Earnings Call Transcript & Summary

Good morning, everyone. Welcome to SATS First Quarter Results briefing for Financial Year 2027. This is David Boey, Group Head of Strategic Comms at SATS. With me today are Kerry Mok, SATS President and CEO; and Timothy Tang, CFO. Before we begin, I turn your attention to the forward-looking statement now on screen. Quick safety reminder, whether you're joining us from the office, at home, or the outdoors, do be aware of your surroundings at all times. Please make safety your priority before joining this call, a recording of which will be available on our website in due course. I will now hand over to Kerry to take you through the business update. Kerry, please.

Thank you, David, and good morning, everybody. Thank you for joining us again this Q1 FY '27 results review. Let me just go straight to the deck. I think a couple of things that I just want to highlight. One is this quarter has really been fantastic in terms of revenue growth. At the end of March, we are all thinking about the Middle East situation. But I'm glad to say that the network that we have has allowed us to actually capture quite a lot of the rerouting flow that resulted in actually our cargo tonnage being a record quarter again. And this is actually something that we are very, very positive and happy about. Revenue grown 11.3%. Food Solutions has done fairly well with some new additional wins that help us with our capacity in our overseas kitchen. Unfortunately, EBITDA only grew about 6%. But I think when you balance against some of the challenges that we're faced with. In particular, when you have rerouting, you will have manpower that is probably excess in one location. And then at the other location where the rerouting is being routed to, we would have put in more resources to capture those additional volume. And of course, as we have mentioned last quarter, we're expecting to see input cost increases to start to funnel through our P&L. PATMI grew $4.3 million to now $75.1 million. That's also benefited from some lower taxes as well. But when you look at the segment performances, both from cargo, flights handled, aviation meals and non-aviation meals, you can see it's all showing in a positive growth segment. I'll move on to the next slide. Some key wins. We continue to secure more wins and largely also because of good performances from the guys on the ground that gave the customer confidence to continue to work with us. Qatar Airways, actually, this is actually a win that we've won last year, and this is actually the implementation of the Qatar win. So you'll start to see volumes going through Europe through the Qatar implementation. In fact, next quarter or Q2, you'll see another Qatar implementation, which is actually in Amsterdam. We've renewed our contracts with China Airlines across our North American station market, growing our market share there because, again, China Airlines is important for Asian export into Americas. So these are all important customers of ours in Americas. On the M&A side, we have completed an additional 40% stake. So we now hold 90% of Nanjing Weizhou Airline Food Corporation, which is actually the largest frozen meal manufacturer for domestic China flights. And this is really -- we can see the trend of Chinese carriers all shifting towards frozen meals as their main product as opposed to in the past, it was just more of a just in case and filler product. So this, we believe, is a major trend and a trend that we believe puts us in a good position to continue to capture those volumes as they grow in China. On the food side, we began catering operation also in Noida. As you know, Noida is the airport that is just out of Delhi. We also have our cargo operations there as well through AISATS. And food has also done well. Renewed several key customers of ours with British Airways, Air France and KLM in Singapore. We have also started the work with Temasek Life Sciences Laboratory who really look at how we can utilize some of the -- well, produced through unique sustainable food farming technologies. We're seeing how we can actually advance that and increase our food security and also sustainable product offering to our customer. And then the last one on People and Award. We continue to win a lot of recognition from the industry. One that I want to highlight is actually the Red Dot Design Award. Both our Global Innovation Hub and our Marina Bay Cruise Center teams have won awards for design concepts and innovation, something that we're very proud of because I think it really separates us from the rest of our competitor where we are very focused around innovation, design thinking, and we're glad to see that the team actually given the award for recognition of work done. Global Air Cargo Handling Agent of the Year from Air -- World Air Cargo Awards, Best Air Cargo Terminal Operator. And also, I think this is actually very pleasing as well, ANA gave us International Caterer Award for Medium Haul. Next slide. Again, these are just some of the key drivers. You can see against all business drivers, you can see it's all growth. Cargo, as I mentioned, 2.59 million tonnes. That's an 8.6% year-on-year growth. Flights Handled grown as well, primarily it's driven by the win that we had in Brazil. And of course -- and that's obviously mitigated against some of the flight cancellation that we saw, particularly with a lot of the low-cost carriers. Meals Served has all gone up well. From an associate standpoint, it's reflected with some of the flight cancellation, which is why you can see a bit of a downtrend from the associate side. Again, this is the meals served for non-aviation. You can see a huge jump, 20% jump. That's really reflecting the additional wins that we have both in China and India. And on headcount side, it's more or less balanced. It's really because of the acquisition we made in Brussels for Aviapartner. So that's been integrated right now in Brussels. Next slide. This is the cargo performance. You can see we continue to outgrow higher numbers, and this is something that we obviously track a lot in [indiscernible] again. I think our presence and our network allowed us to continue to reap those benefits, coupled with new wins that we have been also implementing across the region. With that, I'll hand over to Tim to run through the financial summary.

Thank you, Kerry. Good morning to everyone. And once again, thank you for joining us in our quarter 1 update in FY '27. So what I'll try to do now, starting from Slide 7, I'll give you as much additional color as I can, translating the overall results into our numbers. So starting with the group results. I think as Kerry has already noted, we are extremely pleased with the way that the business has been very resilient, leveraging our global network. The obvious translation of the higher growth in particular in cargo volume, which is, in particular, very resilient given the geopolitical volatility is we've got 11% year-on-year growth on our revenue. As we've mentioned, there's no doubt that the margins are impacted due to the inefficiencies of both the operations. So the operations that Kerry noted to is the diversion of the labor. Beyond that, the input costs also impacted our Q1 results, albeit that we think as previously guided, the overall impact has not fully felt in Q1. We do see some lag in the contractual arrangements of the food pricing, and we see that pressure really continue. We do see that so far continue into Q2, and it's still likely to go on depending on the outcome of the conflict in the Middle East. If you look beneath the operations, we continue to invest in our infrastructure and IT and there's additional cost in addressing some of our M&A activity as well, along with some AI investments that -- which we've noted. All of that does contribute towards the overall EBIT year-on-year growth being lower than last year. But primarily, it is the inefficiency coming out from the operations that's driving that number. The SoAJV that we've alluded to that being lower than last year really is a reflection of the Middle East conflict as well. One of the factors that if you look into the airline impact, low-cost carriers are in particular impacted given the higher input cost in avi fuel and the cancellations have certainly been more pronounced on the low-cost carrier side, which is impacting their operations. The direct translation of that into our business is that, yes, it is also in the core business, but it is also heavier weighted into the SoAJV results as well. So barring that, the results still held up considering that we continue to have growth in a number of areas. The delta versus last year then is really us taking some provisions around the performance of some of our JVs who has been impacted by, in particular, the low-cost carriers performances onto the portfolio. Excluding that one-off impact, SoAJV would have been very close to -- or flat effectively on a year-on-year basis. And so therefore, if you look at that as a normalization now onto our overall earnings, we would have been closer to the $80 million PATMI that standpoint. If we dig into the gateway and the food P&L at the bottom of the slide there, ultimately, the gateway is a function of really the cargo. We actually had positive growth on the ground handling side of things as well. But ultimately, if you look at the rewind of 3 months into Q1, most of you will remember that we did have some upside that came through early in the quarter due to rerouting, but a lot of that rerouting has continued to normalize throughout the quarter, where towards the end of the Q1, we were starting to see some of that reshape back to what it was pre the conflict. We are very pleased on the food results. Obviously, the margins and the growth within the portfolio. The overall margin improvement is really a function of a few factors. Number one, we do have the continuation of scaling up our facilities and particularly in Tianjin and India that mentioned -- that Kerry mentioned. Ultimately, it is a scale business and the increase in activity in those facilities have improved our overall results, and we expected that. The utilization continues to be very, very positive. Last year, we were ending the quarter at sort of this low to mid-digit of utilization, and we're up above 30% now in Tianjin and north of 20% in our China facility. So it's a significant year-on-year increase, and we see that path continue as we see the pipeline of our business development. There's no doubt that rerouting benefited the mix and the overall results too in the food side, not to mention that ultimately, the cost -- input costs that we expected to rise has not been fully baked in. So there's a little -- there's a combination of factors that really did drive our overall food performance to be [indiscernible] little bit of outperformance given the factors that we're seeing in the market. Over on to Slide 8 then, if you look at the business in a different way by the business lines, you can see that the translation of the volume really into the core parts of our business. Cargo revenue then is really -- it's been very consistent. The appendix -- I think you can refer to the appendix, we saw operating volume really at this 9% to 10% range across the world. And that's, in particular, very, very positive, obviously, in our U.S. market, which we know that have been softer prior to the Middle East conflict post the liberation tariff impact and de minimis impact from last financial year. There was a one-off from the charters that we've mentioned previously that went into -- from U.S. into the Middle East market that propped up volume. But having said that, it is the reflection of the global network that allows us to do that. And once again, that goes back towards our competitive advantage in the way we serve our customers, number one, but also obviously leveraging our global network on the cargo side of things as we continue to serve our customers better. Beyond that, the ground and non-aviation really drove what I've already spoken about. And ultimately, you can see that the broad-based growth by regions in the bottom corner that speaks to the overall resilience of the network. We've been pleasantly surprised in Singapore, of course, always our home market, and it does allow us to continue to invest into innovation and technology within Singapore given the very positive results here. Changi had a very, very good quarter in serving its customers, both on the ground and the cargo side, some of the highest growth we've seen for some times above the normal cadence due to rerouting and it's fall into the Singapore market, given its status as a hub around the world. On to the next slide, #9, then, the translation of that into the financial metrics. So nothing surprising then given I think what I've already highlighted. You can see that, yes, the SoAJV obviously was down but the translation to PATMI. Cash flow, I'll cover in the next slide. But if you look across the ratios, it is as you would expect it in that we do have slightly softer margin due to the [ invest ] of the business. But beyond that, we are -- if you look within the underlying structural structure of the business, outside of the inefficiencies driven by Middle East, we are obviously very pleased with the structural integrity of the business, and we do continue to see that as things normalize, our scale and our breadth of the business will continue to drive our margins towards our FY '29 targets. Lastly, on Slide 10 on cash flow. It is Q1. So at this stage, from a year-on-year standpoint and then from a cash flow phasing standpoint, it's really impacted by timing. Those receivables grew significantly above our payables growth on a quarter-by-quarter change standpoint. So the timing itself is driven the cash flow -- the negative cash flow on Q1. It is very similar to the timing -- some of the timing issue we experienced in first Q in 2026. So we expect that to normalize over the year, given our normal cadence of cash flow that we produce on a quarter-by-quarter basis given our business run rate. With that, I'll hand it back over to Kerry just to talk about the -- a little bit on the FY '29 targets and on outlook.

Thank you, Tim. Just on this is one page that I think many of you have seen as well, just some progress in terms of where we are in terms of the FY '29 ambition. Clearly, this is 1Q and the number for the margin clearly has dropped because of this quarter. But we remain on track on the FY '29 target. We are confident that as we continue to grow our business and as cost starts to normalize, we will have the levers to continue this margin growth path that we set for ourselves. ROE standpoint, there's a little bit of an improvement now to 10.8%. The rest of it is pretty much as to what Tim has really said. But overall, again, I just want to reiterate, we are confident of FY '29 target. As we navigate through these challenges that we're seeing, we will have those levers to make those adjustments. I think it's important that as the whole environment settles down, we will have a much clearer move forward in order to readjust our cost base in line with the expected volume that we will serve in each of the stations. I'll go next to the outlook. I'm pleased to say cargo continues to show good growth. The rerouting or the closure of some airports or some flights has certainly affected some of the cargo flows, but we continue to see good volume in our facilities, and we expect that to continue to grow. Clearly, rerouting will not be a bigger number compared to the other quarter because as supply chain starts to normalize, we'll see the volume to be normalized as well. But with the disruption, especially in ocean freight, we are seeing good momentum also, particularly in some of the multimodal solutions that we're putting in place. In Europe, de minimis world has really been settled. It will take some time for the e-commerce players to reroute their e-commerce products. But we believe with settled regulatory regime in place. I think most of the e-commerce players will then fall back to the original flows that we saw previously. And we think that's going to normalize by year-end as well. I mean cost pressure is something that we continue to focus on. We are working on productivity measures, including technology investments that will allow us to drive productivity gains. So some of these investments will start to see being implemented towards the second half of the year, which should allow us to then mitigate some of the cost increases that we see coming. Passenger ground handling continues to be one that we monitor. Clearly, the low-cost carriers actually is one that the cancellation obviously has affected us. But it's being countered by additional long-haul flights out of Singapore and elsewhere. Clearly, the long-haul flights are the ones that has got a higher revenue for us as well. Importantly, for us, we continue to win new customers to then prop up the business with new wins. But clearly, operational complexity remains because it is -- flight cancellation can be rather last minute as well. So things that we're working with to enable us to manage our manpower. On the food side, aviation demand clearly will be affected. But I think we are likely -- mostly -- most of the time, we are in Asia only and Asia traffic continues to grow. So we are in a better position compared to others. And our focus on non-aviation food will continue to sustain our growth in there. Our focus in both China and India to continue to drive -- the utilization growth is an important one, and we believe the team is making good progress in there. We will continue to show improvement in our utilization. The inflation side, as Tim mentioned, it will continue to be a headwind, but we are obviously looking at productivity initiative as well to manage that. And as our utilization in the central kitchen increases, that's actually giving us some productivity gains as well. Definitely expanding our network is important as we have more demand endpoints, it will continue to feed into our 3-tier approach, again, helping to reinforce the central kitchen approach that allows us to then increase our production volume in there and drive the margin improvement for central kitchen at the same time, giving us more demand channels to serve our customers. So all in all, I would say we are in a good spot. We have levers to allow us to manage our costs. We have continued growth initiatives with our key customers. And we're obviously using this opportunity to create a more sticky relationship with our key customers, particularly when the world is very uncertain and is disruptive, having a closer relationship with our key customers makes a lot of sense as we help to navigate some of these up and down with them. And I believe that will put us in even better position to continue growing with our key customers on a global basis. And then with that, we end our presentation, and we'll move to Q&A.