Singapore Post Limited (S08) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen. Welcome to the Singapore Post First Half Results Briefing. We are ready to begin, and I shall now hand over to the management of SingPost.

Good morning, everyone. Thank you for attending the call. Welcome to SingPost's results briefing for the first half of FY '21/'22. My name is Isaac Mah. I head up Strategic Investments and Investor Relations. With me today, we have our Group CEO, Mr. Vincent Phang; and Group CFO, Mr. Richard Li. I will now hand over to Richard to start the presentation. Richard, over to you, please.

Good morning. Thank you, Isaac, and thank you, everyone, for joining us today. SingPost delivered an improved set of results for the first half of FY '21/'22 despite a difficult operating environment and the absence of significant support from government grants such as the Job Support Scheme. Revenue rose 3.3% led by growth in the Domestic Post and Parcel, Logistics and Property segments, supported by strong growth in the eCommerce Logistics segment. Together with the careful management operating expenses, this led to a 28.4% increase in group operating profit. First half earnings were also boosted by contribution from Freight Management Holdings or FMH in Australia, which became an associate company in December 2020. After accounting for nonoperating expenses and income tax, group underlying net profit rose 18.8% to $37.4 million in the first half. Let me now move on to expenses. Volume-related expenses rose 2.4% due to higher freight forwarding and eCommerce volumes. Labor and related expenses rose 0.6% mainly due to higher labor costs in Australia in line with strong volume growth. Admin and selling-related expenses were relatively stable as we continue to carefully manage expenses, while depreciation and amortization expenses increased slightly due to addition of right-of-use assets. Overall, operating expenses increased by 1.8% compared to the first half last year but would have fallen slightly if we exclude the impact of government grants. We now move on to an overview of the various segments' contribution to group revenue and operating profit. The higher group revenue was driven by strong growth in the Logistics segment as well as growth in the Property segment. In the Post and Parcel segment, revenue fell largely due to the international business, recording a decline in revenue as compared to a high base last year, where there was a surge in shipment volumes out of China prior to its border closure in early 2020. However, the decline was partially offset by strong growth in domestic eCommerce Logistics revenue. Turning to operating profit. The improvement was driven again by the Logistics and Property segments as well as lower corporate costs. We will share more details on the operating profit for each segment in the next slide. Post and Parcel operating profit declined 52.6% in the first half, mainly due to the absence of government grants such as JSS and property tax rebates, et cetera, which totaled about $13 million. Normalizing for this, the underlying operating profit for Post and Parcel was relatively stable compared to last year, arresting the decline seen previously. Operating profit for the Logistics segment more than doubled, driven by Famous Holdings, which benefited higher freight forwarding volume and sea freight rates. Despite the disruption to global supply chains, Famous was able to leverage strong supply relationships to secure capacity for customers. In Australia, CouriersPlease continue to perform well on the back of strong eCommerce growth. However, higher labor costs were incurred due to disruptions caused by COVID-19 infections in the workforce. Moving on, Property earnings grew by 13.5%, largely due to lower rental rebates given to tenants compared to last year as well as due to higher footfall in the -- at the SingPost Centre. In the Others segment, expenses fell 26.8% mainly due to the reversal of share option costs as the performance conditions were not satisfied. Let me now move on to cash flow and financial indicators. Operating cash flow for the first half fell mainly due to movements in working capital as there were large favorable one-off movements in trade receivable last year. Investing cash flow fell mainly due to lower proceeds from the maturity of financial assets compared to last year, partially offset by lower CapEx. Cash outflow from financing activities fell significantly due to lower net repayment of bank loans. This movement led to a net decrease in cash of $20.7 million in the first half of this financial year, an improvement compared to last year. In addition to the above movement, $15.5 million in cash was transferred to assets held for sale, mainly due to reclassification of Lock+Store, the self-storage business. If you add this back, our position in terms of cash flow [ isn't materially ] different from last year. The group remains in net cash position as at September 2021, with a slight decline from March, mainly due to the settlement of terminal dues and payment of dividends. The EBITDA to finance expense ratio was lower due to an increase in finance expenses. We will now go through the key business highlights for each segment. Let me hand you over to Vincent.

Thank you, Richard, and good morning, everybody. Good to speak to everybody again. I'll first touch on the domestic business. So beginning with the Domestic Post and Parcel segment, we'll talk a bit about the letters and printed papers, which is the traditional regulated postal service. That business as expected continues to decline in the first half. Revenues and volumes were down by 15% and 10%, respectively. So despite that challenging situation, we continue our high service standard that can be seen in the improvement in service quality metrics in the latest quarter. Moving on. The domestic eCommerce Logistics business, on the other hand, continued its strong growth, as Richard mentioned earlier, with revenue and volumes up 32% and 29%, respectively. This business now accounts for 40% of all domestic revenues in the first half, up from 32% last year. Looking back at the growth trajectory over the past 18 months, as you can see on the chart on the right, we saw a normalized rate of growth following the initial acceleration of eCommerce adoption during the circuit breaker last year. But in recent months, there has been an uplift again, and update in growth was also partly due to some of the landmark national projects that we've undertaken, the ART test kits, for example, to every household. We are proud to serve and contribute to these initiatives, and we see an opportunity to collaborate with national agencies on more such projects going forward. So when you put both of those together, you see that the year-on-year growth in the eCommerce Logistics segment has made up for the decline in the letter revenues over the same period, indicating that we have likely turned the corner, though we've had this impact for the last 4 straight quarters of getting this replacement rate. And from an earnings perspective, the underlying performance of the domestic business has also stabilized, and this provides for a foundation for this future growth that we expect. Looking ahead, we will continue to drive growth in eCommerce volumes, focusing on the tracked letterbox service which delivers a higher margin. We will also continue to reengineer the Postal Infrastructure in line with our future Post strategy, and our smart letterbox PostPal is a key component of this. Lastly, we recognize the importance of sustainability, and we have certainly stepped up our efforts on this front. For example, we commenced pilots for fully electric scooters and vans in August. And we have a view of having this electric fleet fully deployed by 2026. I'll now talk about our International Post and Parcel business. The decline in first half revenues was in comparison to a high base effect last year when during the early part of the COVID situation, China closed its borders and quite a bit of volume came through to us. Meanwhile, as shown in the chart, the flight capacity out of Changi Airport continues to be significantly reduced and conveyance costs and options remain around double that of a pre-COVID levels. Under these challenging conditions, we have rationalized volumes to achieve a balance between retaining the business yet avoiding losses. And we have done this by carefully selecting trade lanes, optimizing the routes and selecting partners to manage our costs. With these measures in place, we're happy to say the business remains stable from an earnings perspective. But of course, at the same time, we continue to develop income streams and diversified trade lanes beyond Singapore and to continue to build on the synergies between International Post and Parcel and our Logistics business. I'll move on now to our Logistics segment. I'll start the CouriersPlease. In Australia, CouriersPlease continues to do well with higher volume and revenue supported by accelerated eCommerce adoption and new business wins. As with everywhere else in the world in our operations as well, CouriersPlease was affected by a number of COVID-19 infections in the workforce. And while there was minimal disruption to the service, higher costs were incurred to hire temporary staff. Given the strong growth over the past 18 months, we are expanding network capacity and capability to handle larger volumes and also upgrading technology to improve efficiency and customer service. Going forward, as you heard from Richard as well, we are taking a bigger interest in FMH. So CP, CouriersPlease, also increased this collaboration with the FMH business that we are acquiring to better derive synergies. I'll now touch on Quantium Solutions, which provides cross-border and last mile transportation as well as warehousing and fulfillment services across Asia Pacific. While QS saw some reduction in trade from cross-border customers, the underlying performance continues to improve due to new business wins, cost management and process reengineering efforts. Warehouse utilization rates have improved and is now close to full, and we are expanding capacity to better serve our customers. In the cross-border and last mile transportation business, we are building resilience and strengthening capabilities, leveraging on the synergies with our International Post and Parcel business and collaborating with strategic partners. Moving on to the freight forwarding business. Famous Holdings has done very well amid the disruption to global supply chains and has been able to leverage its strong network and relationships to secure capacity and capture new volume. A key pillar of our group strategy is to build this second home market in Australia. Today, our Australian business comprises quite a few business units, CouriersPlease, Quantium Solutions and Famous as well as FMH, which became an associate company of SingPost Group in December 2020. On the 8th of October, we announced revised terms that will accelerate our investment in FMH and to bring them into the fold as a subsidiary. FMH is a leading 4PL business providing integrated tech-enabled supply chain solutions. And by better combining FMH with our existing businesses, we will be able to offer customers the complete suite of end-to-end eCommerce Logistics services. I'll now hand you back to Richard to cover the Property business. Richard, over to you.

Thank you, Vincent. Despite the soft leasing market as at 30th September 2021, SingPost Centre Mall was fully occupied and committed occupancy for the office remained high at 97.6%. In the Industrial segment or SPC, occupancy fell as the sole external tenant exited, and we are in the process of sourcing for a new tenant. But we recognize the challenges given the accessibility for this particular space, given that it's within the operations area for our postal services as well. But in any case, with this additional 30,000 square feet industrial space available for lease, the committed occupancy for SingPost Centre as a whole declined to 93.3%. In the Others segment, which comprises smaller properties such as shophouses and the portion of delivery bases leased to external tenants, committed occupancy increased to 98.4% as new tenants were secured. With this movement, overall occupancy for properties stood at close to 95% in September 2021. Again, I look at the SPC Mall's performance, footfall and tenant sales were higher compared to last year, partly because of the prior period coincided with the circuit breaker where many shops had to close. Footfall was up 11% while tenant sales were up 33%, indicating higher spending per shopper. The majority of the leases expiring in this financial year has been renewed or replaced, 77% for SPC Mall, 60% for SPC office and 85% in the Others segment. And discussions are ongoing for the remaining unrenewed spaces. Looking at the lease expiry profile as at September 2021, the majority of leases for SPC Mall and office only expire in FY '23 and '24 and beyond. The lease expiry profile will continue to change as leases are renewed or replaced. Next, let me cover a little bit on the group perspective. So from a group perspective, we have seen strong eCommerce revenue and volume growth in Singapore and Australia. While this was offset by lower revenue from International Post and Parcel, meanwhile freight forwarding revenue grew significantly, driving up its contribution to group revenue and demonstrating the benefits of having a diversified logistics business. With this movement, eCommerce-related revenue accounted for around 55% of group revenue in this first half. So with that, I shall hand you over to Isaac to cover the segment results.

Thank you, Richard. So I think both Vincent and Richard has covered a lot of the details, but just quickly going through the segmental results. In the Ports and Parcels segment, revenue fell by 17.5% in the first half. This was predominantly due to the international business, which had a higher base comparison here in the previous year due to backlog in China that Vincent mentioned. Domestic revenues rose driven by eCommerce Logistics, which continues its strong growth trajectory. With lower revenue and the absence of government grants, operating profits fell by 53% roughly. But when you adjust for the grants and other subsidies last year, the business is stable. Now Logistics revenue grew about 30% due to the higher eCommerce Logistics and freight forwarding revenue. Revenue from eCommerce Logistics business rose 4% compared to last year, driven by CouriersPlease, which continue to benefit from accelerated eCommerce adoption in Australia amid COVID-related lockdowns. Famous Holdings recorded strong revenue growth on the back of higher volume and seen freight rates leaning to a sharp rise in Logistics earnings. Now on to property. Property and self-storage revenue increased by about 8%, mainly due to lower rental rebates given to tenants compared to last year. The Property business also benefited from higher footfall and tenant sales, and revenue from self-storage increased due to higher occupancy. Consequently, operating profit was 13.5% higher than last year. I will now pass the presentation back to Richard to cover outlook and dividends.

Thank you, Isaac. As the COVID-19 pandemic continues to create disruption across the global economy, the group is actively adopting measures to navigate the current environment including seeking new eCommerce group opportunities in Singapore, Australia and Asia Pacific region. COVID-19 has led to an acceleration of eCommerce adoption as consumer habits have changed, and this in turn has accelerated our plans to grow our eCommerce business. This can be seen in Australia where we plan to accelerate our investment in FMH, the International Post and Parcel business continues to be impacted by COVID-19. While the recent easing of travel restrictions is a positive step, the current scope is limited and therefore not expected to have a significant impact on business performance. As and when the scope of permitted travel expense more significantly, we would expect performance to gradually improve accordingly. Even as we deal with the current impact of COVID-19, there's a need to address long-term structural challenges such as the decline in letter mail and the limitation of a small home market. To this end, we continue to be fully focused on executing our strategic initiatives to reposition SingPost for long-term success. I'll speak more about strategy in the next slide. This slide shows the 3 pillar of our transformation strategy. In Singapore, we continue to pursue the future of post initiative on the back of strong eCommerce growth. The group will continue to be steadfast in reengineering the domestic business to develop a smart urban logistic ecosystem, which will create value for the business, customers and residents in Singapore. In July 2021, we extended the trial of PostPal to Punggol, making the next stage of our smart letterbox development. We are also looking on other initiatives to strengthen our domestic network and drive further eCommerce growth and hope to share more details in the coming months. Given the limitation of a relatively small domestic market, the second pillar of our strategy is to build a second home market in Australia. Australia is a large, attractive and developed eCommerce market that's structurally profitable, and we have been operating there for many years through CouriersPlease and Quantium Solutions. We will better integrate our Australian assets to achieve more synergies and continue to look for more opportunities to build our business and capabilities there. This begins with the acceleration of our investment in FMH. We shall speak more about in the next slide. Beyond Singapore and Australia, we have a strong and sizable international logistics business including Quantium Solutions and Famous Holdings. The performance of these businesses continue to improve, helping to turn our logistics segment from a loss-making to a profitable one since the last financial year. We will build on the progress made thus far and work towards improving efficiency and capability to drive further earnings growth. Meanwhile, we continue to view property as a key business enabler and a soft or relatively stable income as we have demonstrated through COVID-19. Let me touch on Freight Management Holdings. FMH, as you have heard from Vincent earlier, is an asset-light, technology-driven fourth-party logistics service company that serves over 500 businesses across Australia. As a control tower business, FMH leverages its proprietary technology platform to match customer supply chain and distribution requirements with the optimal carrier helping to increase efficiency, utilization and profitability for both parties, a very ideal technology given the current disruption to global supply chain. The performance of FMH in the last 12 months have been ahead of expectation, and this has given us the confidence to take this significant next step in accelerating our investment. With FMH being a subsidiary of SingPost Group, it will enable us to better derive synergy and build scale to further capitalize on the accelerated growth in eCommerce in Australia. This transaction will also be immediately earnings accretive upon completion. Finally, let me move on to dividends. While the group's performance has improved, the International Post and Parcel business continues to be affected by COVID-19. And it remains unclear when the situation will improve more meaningfully. As such, the group will continue to adopt a prudent approach in managing cash flows and conserving cash, taking into account the ongoing execution of strategic initiatives. For the half year ended 30 September 2021, the Board has announced an interim dividend of $0.05 per share. So that concludes our presentation. Thank you for joining us. Let me now hand you back to Isaac. [Audio Gap]