Singapore Post Limited (S08) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, welcome to Singapore Post results briefing for the second half and full year ended 31st March 2021. We are now ready for the results briefing. I shall now hand over to the management of SingPost to begin the briefing.

Thanks, Edwin. Good morning, everyone. Welcome to SingPost's results briefing for the half year and full year ended 31st March 2021. My name is Jason Lim, Head of Corporate Planning and Investor Relations. With me today is our Group CEO, Mr. Paul Coutts; our Group CFO, Mr. Richard Lai; our CEO of Postal Services in Singapore, Mr. Vincent Phang. I'll now hand over to Richard to start the presentation. Richard, please?

Good morning, and thank you for joining us today. SingPost delivered a resilient set of results for FY 2020/'21 amid a challenging operating environment. Revenue rose 6.9% led by strong eCommerce volume growth in the logistics and domestic Post and Parcel segment. Operating expenses rose 13.6% due largely to increase in volume-related expenses as a result of COVID-19 disruptions and eCommerce volume growth. We will share more details on that in the next slide. With the above increase in costs, profit on operating activities declined 44.8%. Consequently, underlying net profit declined 40%. This was due to COVID-19-related disruptions, partly offset by higher earnings contribution from the Logistics segment as well as the absence of losses from discontinued operations. Moving to the next slide. Volume-related expenses rose 18.5%. This is due largely to a spike in per unit international conveyance costs and line-haul costs as a result of COVID-19 disruptions. In addition, volume-related expenses rose as a result of higher eCommerce volumes at CouriersPlease in Australia and domestic Post and Parcel in Singapore. Labor and related expenses rose 7.7% 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 the Job Support Scheme, or JSS. Admin, selling-related and other expenses rose 5.3% largely due to the rollout of a new information system in Australia to improve customer service and manage higher volumes. That all led to an overall increase in operating expenses by 13.6%. Finance expenses declined by 12.8% to $11 million. We now move on to an overview of the various segments' contribution to group revenue and profit on operating activities. Revenue rose to $1.4 billion driven by Logistics segment, which rose to $619 million. Profit on operating activities declined to $79.3 million largely due to a decline in Post and Parcel profit, offset by growth in the Logistics segment. In the next slide, we'll share more details on the various segment profits and profit on operating activities. Post and Parcel profit on operating activities declined 63.7% to $43.5 million during the financial year. The international business suffered from COVID-related conveyance cost impact, and margins were largely eroded. The domestic letter business continues to decline as expected. There were also higher costs relating to COVID-19 disruptions. 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 into a profitable position from higher adoption of eCommerce activities in Asia Pacific. Our reengineering of processes also led to more customers coming on board, which led to improved revenue and economies of scale. Property earnings declined 7.2% largely due to rental rebates provided for eligible tenants in the first half of the financial year as well as lower carpark and atrium sales revenue. In the Others segment, expenses were higher by 3.5% largely due to reversal of one-off expenses recognized last year. Excluding this, the Others segment remained stable. Next, we'll go to the half year results, second half year results. Revenue rose 4.3% led by strong eCommerce volume growth in the Logistics and domestic Post and Parcel segments. This was offset by lower international Post and Parcel revenue. Notwithstanding the higher earnings contributions from eCommerce, COVID-19-related disruption impacted profitability, leading to a nearly 37% decline in group operating -- profit on operating activities. Consequently, this led to a 40% decline in underlying net profit. More details are provided in the following slides. Volume-related expenses rose 11% due to higher per unit line haul and conveyance costs as well as higher eCommerce volumes. Labor and related expenses rose 9% due to increased eCommerce-related deliveries in line with volume growth as well as higher cost to deal with COVID-19 disruptions, such as health and safety arrangements, partly offset by JSS. Admin, selling-related and other expenses rose 2.5% largely due to rollout of a new information system in Australia, which led to an overall increase in operating expenses by 9.5%. Finance expenses declined by 5.3% to $6 million. We now move on to the overview of the various segments' contribution to group revenue and profit on operating activities in the second half of the financial year. Revenue rose $696.9 million driven by Logistics segment. On profit on operating activities, improvement in Logistics was offset by declines in postal and Property, leading to a $39.5 million profit for the second half of FY '20/'21. Let me now move on to the cash flow and financial indicators. For the financial year ended 31st March 2021, operating cash flow rose to $215.4 million largely due to positive movements in working capital. Investing cash outflow rose to $67.5 million largely due to the group's investment in FMH. Financing cash outflow rose to nearly $140 million due largely to a net repayment of the bank term loan and fixed rate loans compared to net profit last year. As a result, the group recorded an increase in cash of about [ $8 million ] in FY '20/'21. However, if you go to the next slide, despite the challenges brought about by COVID-19, the group has strengthened its financial position. The group remains in a net cash position as at 31st March 2021. With a higher cash position and lower borrowings, our net cash position improved to $179 million compared to $129 million at the start of the financial year. EBITDA to finance expense ratio was lower at 12.4x due to lower EBITDA generated during the year. We now move on to an update on the contribution of eCommerce to group business. And for this segment, I will hand you over to Vincent.

Good morning, and thank you, Richard. I'll now take everybody through a bit of narrative on our eCommerce business. We're seeing strong eCommerce volume growth across the group in the FY. The domestic Post and Parcel eCommerce business continues to gain strong traction as volumes rose 45% and we shipped a total of 37 million items. CouriersPlease volumes also rose strongly with consignment volumes rising 53%. Unfortunately, IPP volumes declined, and as explained by Richard, we had a slew of challenges. We were carefully managing volumes amidst a spike in the air conveyance costs due largely to the flight disruptions of Changi Airport. At a group level, eCommerce-related revenues are now estimated to drive around 65% of revenue for the FY that closed. Moving on to the next slide. You'll see that the contribution from eCommerce to our domestic business [indiscernible], and it now amounts to about 34% of the domestic revenues, up from 21% last year. And on the chart on the right, you'll see that while there was a spike in eCommerce volumes in the first half due to the acceleration of eCommerce adoption to [ cope to ] the initial days of COVID circuit breaker [ and such ], we have seen a normalization and that's along with the industry metric that we see. However, the growth trajectory even in quarter 4 continues to be strong as you can see [ from the chart ]. I'll move on to the next slide, which is a good depiction of how the Post and Parcel business is orientating. So let me just give you some color around this slide. So it shows the rate of eCommerce revenue growth compared to letter revenue decline. And as you can see, there has been a strong uptick in recent quarters. The red line shows the rate of replacement. And I'm happy to say that in the past 2 quarters and in the second half of the year, the growth in eCommerce revenue, that's actually more than offset the decline from letters and printed papers. So this is the first time that we are actually seeing this in a half year basis, and this has led to a growth in DPP revenue in the second half, which has traditionally been in decline, as you are aware. I'll move on to the next slide, which gives a bit more color around the continued decline of our letter and printed papers business. And this is -- as expected, this is actually even was accelerated through COVID, and both revenue and volume were down 19% for FY '20/'21. So despite this and the COVID crisis, [ we're just happy ] about the impact that we had on cost. We continue to focus on our service levels, and we have been meeting consistently high service standards, as you can see from the SLAs tracked on the right side. And these numbers continue to be reflected even in this reporting period, which covers the year-end peak season. I'll now talk a bit about our international Post and Parcel business, which certainly has been a challenge for us through COVID. The slide that you see gives you some color around the number of flights from Changi Airport that we reduced -- it has been reduced significantly. We [ are obviously facing ] a big challenge to [ get freights ] on aircraft and as such, the conveyance cost [indiscernible] and [ sales close to ] double the cost of pre-COVID [ level ]. This had the effect of largely eroding [ of profit ] at the international business, which Richard has [indiscernible]. We have put in place measures to work around this, including careful management of the volumes in order to continue this service without actually going into a negative margin position, and we've been largely successful [ at expanding the revenues ]. That said, we also have proven to be fairly resilient in the majority of [ global lanes ] and [indiscernible], we have grown new intra-Asia volumes. So in particular, we have grown revenue well in the higher service [ CMS ] product and in second-tier Asia cities. This is in line with the drop in revenue by about 2%, although the cost of doing business has increased dramatically. Ultimately, the recovery of this international business will depend on how fast Changi Airport passenger flight will resume [indiscernible] the passenger [ fleet ]. We will now move on to the segmental results, and I shall hand you back to Jason.

Thanks, Vincent. In this segment, the slides will provide a slightly more detailed breakdown of these segments. So as you can see in the Post and Parcel segment, revenue declined 2.7% for the full year and 10.1% for H2. This was actually due to a decline in international revenue as we managed volumes carefully. You can also see that in the second half of the year, domestic revenue actually rose 6.6%. This was driven by a strong 57% revenue growth from eCommerce-related deliveries. In terms of profit on operating activities, we had shared that international margins were largely eroded. And coupled with COVID-19-related costs at the domestic business, this led to a decline in profit on operating activities. In the Logistics segment, revenue rose 23.5% for the full year and 26.6% for H2. Our eCommerce Logistics businesses, which is -- which are Quantium Solutions, CouriersPlease and SP eCommerce, benefited from increased eCommerce adoption across the Asia Pacific region. For our freight forwarding business, it experienced higher volumes and higher sea freight rates, in particular, for the second half of the year, leading to a strong 27% revenue growth. As such, the segment saw a strong turnaround to a profit of $11.3 million for the full year and $5.6 million for the second half. Property and self-storage revenue declined 4.7% for the full year and 1.6% for the second half. As shared earlier, Property revenue declined largely due to rental rebates. Self-storage revenue declined marginally in line with the slow economic environment. Consequently, profit on operating activities was lower by 7% for the full year and 3% for the second half. I will now pass the presentation back to Richard to cover some property operating indicators. Richard, please.

Thank you, Jason. Despite a challenging leasing market, the SingPost retail -- SingPost Centre retail mall and office has remained at a high occupancy, quite close to full occupancy in fact. The reported committed occupancy as at 31st March was 94% for the mall and 96.6% for the office. It's a slight lower number than where we began the year with. And a lot of this has got to do with, well, firstly, half of the property for the retail segment was up for renewal during the 2020. So you can imagine, for us to keep the occupancy levels at a high rate means that we have been successful in our renewal rates. And in fact, we've also [ hit 91% ] in terms of our renewal rates and still manage to find some new tenants to come in. All in, I think, generally, it has been fairly resilient in spite of a rather challenging year. So we -- the reason why it's still low -- on the low [ side now ] at 94% versus 100% at the beginning of the year was because we are repositioning one of the quite a fairly sizable space, about 9,000 square feet of space that was exited, was -- we've taken it back from a F&B tenant. So we currently repositioned part of it. We have tenants or prospective tenants signing up for it. So we would expect this space to be fully operational by the end of the first quarter of this new financial year. Since the close of the financial year, we would expect the office rate to move up as well. There's been some additional space that new tenants are actually in the process of documentation. So when all things said and done, we would expect that our -- the occupancy levels to go back up to close to full occupancy. On the next slide, as indicated in the prior slide, lease expiry in FY '20/'21 has been substantially renewed or replaced. There are, of course, still ongoing discussion for [ single and renewed ] lease for the office space. Footfall in the next slide. In terms of footfall and tenant sales, compared to the same period last year, footfall and tenant sales remained down year-on-year largely due to the circuit breaker period when many shops had to close. However, comparing the first half versus the second half of the year, it's clear that in the second half, there has been a strong recovery sequentially. Footfall was up 37%, while tenant sales were up 47%, indicating higher spending per shopper. Tenant sales have now recovered to 85% of pre-COVID-19 level. The next slide shows the lease expiring moving forward. For retail mall, 29% of total NLA or 49,000 square feet will be expiring in FY '21/'22. For office and enrichment areas, 31% of NLA or 87,000 square feet will be expiring in FY '21/'22. Still a challenging things we have to do. But given that we had the bigger challenge during the pandemic year, we're quite cautiously optimistic that we should be able to renew or replace any of these renewals coming up. We'll now move on to the outlook section. As the COVID-19 continues to create disruption across the global economy, the group is strictly adapting measures to navigate the current environment. This includes seeking new eCommerce growth opportunities in Singapore, Australia and Asia Pacific region. The group's performance in certain business segments will continue to be affected by factors beyond its control, including the impact of higher international conveyance costs out of Changi Airport. While the recovery of the international Post and Parcel business will largely be driven by any recovery in the number of flights departing from Singapore, the group is also actively exploring different ways to improve the performance of the international Post and Parcel segment. In Singapore, 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. Public trials have commenced for a key component of this ecosystem called PostPal, the world's first-ever smart letterbox. On 31st December 2020, the group completed the Tranche One acquisition of FMH, Freight Management Holdings, in case you guys are searching for that. This will allow us to further scale its business-to-business-to-consumer, B2B2C, logistic capabilities as well as to make further inroads in the eCommerce market in Australia. This will further entrench Australia as a second home market for the group. The group will continue to execute its transformation initiatives to reposition itself for the long term while carefully managing expenses, cash flow and liquidity [indiscernible]. Let me move on to dividends. With an uncertain outlook due to ongoing pandemic, the group continues to adopt a prudent approach in managing cash flows and conserving cash for the ongoing execution of transformation initiatives. So for the financial year ended 31st March 2021, the Board of Directors have proposed a final dividend of 0.6 cent per ordinary share. Including the proposed final dividend, total dividends for the financial year would be 1.1 cent, which represents a payout ratio of about 40% of the underlying net profit. The final dividend is subject to shareholders' approval at the AGM in July. So this concludes our presentation, and thank you for joining us. Let me hand you back to Jason.

Thanks, Richard. This is the end of our presentation. Thank you for joining us.