Singapore Post Limited (S08) Earnings Call Transcript & Summary

Hi, good morning, everyone. My name is Jason from Corporate Planning and Investor Relations. Welcome to SingPost's results briefing for the first half of FY 2021. With me today is our Group CEO, Mr. Paul Coutts; our Group CFO, Mr. Richard Lai; and CEO of Postal Services in Singapore, Mr. Vincent Phang. I will now hand over to Richard to start the presentation. Richard, please.

Thank you. Thank you. Good morning, and thank you for joining us today. SingPost delivered a resilient set of results for the first half of FY 2020/'21 amid a tough operating environment. Revenue rose 9.6% led by growth in the Post and Parcel and Logistics segments, with strong eCommerce volume growth across the group. Notwithstanding the higher earnings contribution from eCommerce, COVID-19-related disruptions impacted profitability, leading to about 50% decline in group's operating profit. Underlying net profit declined by about 40% due to COVID-19-related disruptions, partly offset by higher earnings contribution from eCommerce growth in Singapore and Australia as well as the absence of losses from discontinued operations. Let me now move on to expenses. Volume-related expenses rose by nearly 27% due to higher eCommerce volumes as it is benefited by a spike in international conveyance costs as a result of severe flight disruptions. Labor and related expenses rose by slightly more than 6% due to increased eCommerce-related deliveries in line with volume growth as well as higher costs to deal with COVID-19 disruptions, such as health and safety arrangements, partially offset by JSS. Admin, selling-related and other expenses rose by more than 8% largely due to higher provisions for bad debt. This led to an overall increase in operating expenses by nearly -- by slightly more than 18%. We now move on to an overview of the various segment contribution to group revenue and profit on operating activities. Revenue growth was contributed by the Postal and Logistics segments. For profit on operating activities, the improvement in Logistics was offset by declines in Postal and Property. In the next slide, we will share more details on the various segment profit on operating activities. Post and Parcel profit on operating activities declined 67% to $22.7 million in the first half. There are 3 distinct components in the -- in this movement. The international business suffered from COVID-led conveyance cost impact, and margins were largely eroded. This hopefully will recover -- or this should recover over time. The domestic letter business continues to decline as expected. On the other hand, the domestic eCommerce business has grown strongly and points the way for us moving forward. The Logistics segment recorded a strong turnaround with a profitable position from higher adoption of eCommerce activities in Asia Pacific. Our reengineering of processes also led to more customers for eCommerce logistics solutions, such as warehousing, fulfillment and front-end solutions. Property earnings declined 11.4% largely due to rental rebates provided for eligible tenants, which amounted to around $3.2 million as well as lower car park and atrium sales revenue. In Others segment, expenses were higher by more than 10% due to reversal of one-off expenses amounting to $1.2 million last year. If you exclude this, the Others segment remained stable. Let me now move on to cash flow and financial indicators. For the half year ended 30th September 2020, operating cash flow rose strongly due to positive movements in working capital. Due largely to the net repayment of bank term loans and fixed rate notes of $101 million, our cash position declined by $34.3 million. The repayment was largely for surplus cash due from uncommitted working capital line that has since been replaced by committed working capital lines. The group remains in a net cash position as at September 2020. With the strong operating cash flows, our net cash position improved to $195 million compared to $129 million at the start of the financial year. EBITDA to finance expense ratio was lower due to lower EBITDA generated during the year. We will now provide an update on the contribution of eCommerce to the groups's business. So let me hand you over to Vincent.

Thank you, Richard. And morning, everybody, once again. So I'll give a bit of update and color around the group eCommerce activities. We've seen strong eCommerce volume growth across the group in the first half of this financial year. Domestic Post and Parcel eCommerce continue to gain strong traction as volumes rose 43% to 17.8 million items shipped. CouriersPlease volumes rose strongly with consignment volumes rising 55%. International Post and Parcel business delivered a resilient performance as volumes rose 13% in the first half despite the flight disruptions out of Changi as mentioned by Richard earlier. At the group level, eCommerce-related revenues are now estimated to drive around 65% or around about 2/3 of our revenue compared to 57% in the same period last year. The contribution from domestic Post and Parcel eCommerce business has accelerated in recent months. eCommerce revenue contribution is now 1/3 of domestic Post and Parcel revenue, up 14 percentage points from the same period last year. There's a chart here that shows the rate of eCommerce revenue growth, I hope you see that, compared to the letter revenue decline in the domestic Post and Parcel business. As you can see, there has been a strong uptick in recent quarters. The decline for letter mail will unfortunately continue as is expected for all postal operators. But with eCommerce revenues starting to increase, from an aggregate standpoint, we will start to approach what we term a replacement rate for revenue. I'll explain a little bit more in the next couple of slides. We can see this on -- the slide shows what our eCommerce businesses would look like if they had been stand-alone businesses by themselves. The indicators will show that these are very strong and robust businesses on their own. In the domestic space, eCommerce revenue rose 60% to $34 million, and our estimated market share in Singapore is about 45%. Our international business delivers to around 200 countries globally. And for the half year, revenue grew 13% to $276 million. I'll now talk a little bit more on the decline on the letters and printed papers. This continues to decline as expected, with both revenue and volume down 24% in the first half. Despite this and the COVID crisis, we have continued our focus on service levels and have been meeting consistently high service standards. As for parcels, we have also put in significant investments to improve our service levels, which has no doubt been recognized by our customers, leading to stronger volumes. We've got some charts there that show the SLAs or service level achieved by the Postal and the Parcel businesses accordingly. And we are really and quietly confident of our execution as we move into the year-end peak season. I'll now talk about our international business, the international Post and Parcel business. So compared to pre-COVID period, as we all know, the number of flights out from Changi Airport have reduced significantly. Reports put it at more than 90% reduction. Consequently, the conveyance costs ex Singapore or the airfreight costs have surged by close to 2x that we experienced in June this year and remains close to 2x as at the end of September. These had the effect of largely eroding our profits at the international business despite moving all the volumes through. And we have put in place measures to work around this. We have started to use multimodal ways to transport items as an example. But ultimately, the recovery of this business will depend on how fast Changi Airport flights will resume. Hopefully, that gives you some explanation there about international business. We will now move on to the segmental results, and I will now hand you over to Jason.

Thank you, Vincent. So I'll just quickly cover some of the segment results. In the Post and Parcel segment, revenue rose 5.2% due to international revenue growth, in particular for the first quarter of the financial year. As shared earlier in the presentation, international margins were largely eroded due to higher conveyance costs. As a result, you can see profit on operating activities declining 67% to $22.7 million. This was partly offset by growth in domestic eCommerce contribution. Moving on to the next slide. In the Logistics segment, revenue rose 20.3% to $293 million largely due to eCommerce logistics. In particular, CouriersPlease revenue rose 48% on strong volume growth in Australia. Quantium Solutions and SP eCommerce benefited from process reengineering, leading to more customers for eCommerce logistics solutions. The freight forwarding business was resilient despite challenges in the global trading environment. As such, the segment saw a strong turnaround to a profit position of $5.7 million. Property and self-storage revenue declined 7.8% or $4.7 million due to rental rebates provided to eligible tenants and lower receipts from car park and atrium sales. Consequently, profit on operating activities was lower by 11.4% or $3.0 million. SingPost Centre retail mall remained at close to full occupancy as at 30th September 2020 while committed occupancy for office/enrichment was 99.1%. I shall now pass the time back to Richard to share some details on the retail mall's performance.

Thank you, Jason. And as can be expected, compared to the same period last year, footfall and tenant sales remained down largely due to the circuit breaker period when many shops had to close, as well as the work from home as the default setting means that not everyone is back to the office just about yet. However, there has been a gradual recovery since Singapore's gradual reopening, as shown in the chart on the right. Tenant sales have now recovered to 80% of the pre-COVID-19 levels, which is a very good sign. Next, let me provide an update on leasing. Leases expiring in FY 2020/'21 for both the mall and office has been substantially renewed, and we have achieved a high renewal rate for our expiring leases. At the start of the year, there was a substantial amount on leases due for renewal during the year, in particular for the retail mall. Around 85% of these leases have since been successfully renewed. And consequently, the lease expiry profile has been extended outwards. We will now move on to the outlook. There remains significant uncertainty in the operating environment due to COVID-19. Group earnings and operating cash flows will continue to face headwinds from the disruption to businesses as detailed above. The extent and duration of the headwinds will depend on when the global pandemic situation will ease up. The group is carefully managing its expenses, cash flow and liquidity. Notwithstanding the immediate challenges, SingPost remain committed to its transformation efforts. The group is implementing the Future of Post initiative, which will reengineer the Postal business to capture the broader growing opportunities for smart urban logistics. A key component of this ecosystem, the world's first-ever Smart Letterbox, will commence public trials before the end of this calendar year. Meanwhile, Property contribution from SingPost Centre retail mall and office is expected to remain relatively stable. With a relatively strong balance sheet, the group will continue to seek out new opportunities that will strengthen its capabilities and competitiveness in key markets. On 19 October 2020, the group announced that it has entered into a conditional sale and purchase agreement to acquire an aggregate 38% equity interest in Freight Management Holdings Pty. Ltd. for an aggregate consideration of approximately AUD 85 million. The acquisition will allow SingPost Group to further scale its business-to-business-to-customer logistic capabilities in Australia and capitalize on the growing eCommerce segment. Together with CouriersPlease and Quantium Solutions Australia, the group aims to drive -- aims to derive synergistic benefits, grow volumes and build scale. This provides a strong platform for the SingPost Group to drive revenue and earnings in Australia over the long term. Let me move on to dividends. The outlook remains uncertain due to the ongoing COVID-19 situation, and the group needs to adopt a prudent approach in managing cash flow. For the half year ended 30th September 2020, the group announced an interim dividend of $0.5 per ordinary share, which represents a payout ratio of 36% of the first half underlying net profit. Before we end the presentation, I'd like to provide a recap on our strategy based on our 3 key thrusts: deploying the smart urban logistics to dominate in Singapore, building an integrated B2B2C network to tap growing demand and a renewed focus on property to optimize and grow returns. So with that, thank you. I'll now hand you back to Jason.

Thank you, Richard. We have now reached the end of our presentation, and thank you all for joining us.