Singapore Post Ltd

SGX:S08

Earnings Call Transcript 2020-Q4

[Operator]

Ladies and gentlemen, thank you for holding. We are now ready for the briefing.

I shall now hand over to the management of SingPost to begin the briefing.

[Jason Lim, executive]

Hi, good morning, everybody. Welcome to SingPost Results briefing for the Fourth Quarter and Full Year of FY 19/20. This is Jason from Investor Relations. I hope everybody is staying safe and healthy. So 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'll now hand over to Richard for the presentation. Richard, please?

[Tak Loi Lai, executive]

Thank you, Jason, and thank you, everyone, for joining us today. I'll take you through the financial highlights. Revenue for Q4 FY 19/20 was lower by 2.7%. This is due to a 5.7% decline for Post & Parcel segment. Profit on operating activities declined 30.6%, largely due to lower contribution from Post & Parcel segment. Domestic post and parcel saw a double-digit percentage decline in letter volumes. Whereas international post and parcel were impacted by the disruption of global chain -- global supply chain due to COVID-19. For the first time in many quarters, the international business didn't register growth as revenue was flat compared to Q4 last year. Due to postal service suspensions and grounding of flights by airlines, we incurred higher conveyance costs of the higher terminal dues also kicked in from 1st January 2020. The above was partly offset by improvement in the Logistics segment. The group recorded an exceptional loss of $9.4 million in Q4, largely due to impairment losses on overseas associates and our $1.6 million fair value loss on our properties. Income tax expense was $3.2 million in Q4 compared to $5 million in the same period last year, which included a capital gains tax on divestment of ITL last year. There was significant losses from U.S. subsidiary last year, which included impairment of $101.6 million. With the absence of U.S. losses, underlying net profit rose 14.6% to $16.6 million.

Next slide. Now we move on to expenses. Volume-related expenses rose 3.5% in Q4. This was driven substantially by higher conveyance cost as a result of COVID-19 impact as well as higher terminal dues for the international business, which came into effect from 1st January 2020. Following the adoption of SFRS 16 for leases, there was a reduction of rental costs under admin and others and an increase in depreciation costs. Labor and related expenses declined due to Jobs Support Scheme relief of approximately $5.2 million, which helped mitigate the impact of COVID-19. Accordingly, operating expenses declined 0.8% in quarter 4. Finance expenses rose 47.9% in Q4 due to the adoption of SFRS 16 Leases. Details on the net impact on the adoption of SFRS 16 Leases are provided in the appendix. We now move on to the overview of the various segments' contribution to the group's revenue and profit on operating activities. The Post & Parcel segment remains the largest contributor to group revenue and profit on operating activities. Post & Parcel segment profit on active operating activities declined with lower letter mails and the impact of COVID-19. Logistics segment profit on operating activities registered a lower loss of $2.2 million in Q4 compared to $6.4 million loss in Q4 last year, while Property POA was stable. Under the Others segment, expenses declined by 27.4% or $2.9 million to $7.7 million in Q4, largely due to lower professional fees and lower accrual of bonuses compared to the same period last year.

Let me move on to the P&L for the full financial year. Revenue was largely stable in spite of the challenges faced in the fourth quarter. If we didn't have the impact of COVID-19 in Q4, we would have done better on revenue. Profit on operating activities declined 21.3%, largely due to lower contribution from domestic post and parcel as a result of lower letter volume and international post and parcel due to disruption in global supply chains, as mentioned in the quarterly slide earlier. This was partly offset by improvement in Logistics segment. The share of losses from associated companies and JV improved compared to last year. As the group ceased equity accounting for 4PX and disposed a stake in Indo Trans Logistics. Exceptional losses was at $9.1 million, and we have shared the main reasons in Q4 slide. Income tax declined by 21.5% from $36.1 million to $28.3 million, largely due to lower profit before tax and capital gains tax that was recorded last year. Loss from discontinued operations declined 91.9% due to deconsolidation of U.S. subsidiaries from September 2019. As a result, net profit improved from $19.1 million to $91.1 million. Excluding exceptional items, underlying net profit remained stable as the absence of the U.S. losses was offset by the lower domestic letter volumes.

Moving on to expenses for the full year. Volume-related expenses rose 4.6% for the full year, largely in line with the 5.9% growth in international post and parcel revenue over the same period. Labor and related expenses was stable. This is in spite of additional postmen hired for the Singapore postal operations as well as higher remuneration as part of the incentives launched at Q4 last year to improve service levels. Despite benefits delivered by our cost savings actions taken across the organization in anticipation of declining letter volumes, operating expenses rose 2.7% due to investments to improve service levels as well as the impact of higher terminal dues. Similar to Q4, following the adoption of SFRS 16 Leases, there was a reduction of rental costs and a corresponding increase in depreciation and finance expenses. For the full year, Post & Parcel segment profit on operating activities declined with lower letter mails. Loss on operating activities from the Logistics segment narrowed to $2.2 million as compared to $6.4 million loss, largely due to improvement in Quantium Solutions. Property contribution remains stable. Under the Others segment, expenses rose by 8.6% or $2.5 million to $32 million, largely due to negative trade-related foreign exchange differences as well as higher corporate costs related to governance and compliance. We will provide all details of results of each segment in the next few slides.

Now let me move on to the cash flow and financial indicators on Slide 10. For the financial year ended 31st March 2020, operating cash flows before working capital charges -- sorry, before working capital changes was higher at $194.6 million. Working capital movement for the year was positive $24.8 million with a positive movement in payables for international postal settlement, partly offset by the negative movement in trade receivable for eCommerce deliveries from China. Consequently, net cash inflow from operating activities for the year rose to $183.2 million compared against $152.2 million in the corresponding period last year. Free cash flow improved to $156 million.

We now move on to the financial indicators. Cash and cash equivalents was higher at $493 million compared to March 2019, and this is as a result of cash from operations as well as net proceeds from a bank term loan. Borrowings will increase on greater flexibility managing any uncertainty from COVID-19. With the higher growth in cash relative to borrowings, our net cash position improved to $128.6 million. EBITDA for the full year improved to $191.3 million with the absence of U.S. losses. EBITDA to finance expense stands at 14.2x compared to 11.4x last year. If we adjust this to exclude the impact of SFRS 16 Leases, EBITDA to finance expenses would have been 20.3x.

Let me move on to the slide on dividends. The outlook remains challenging and highly uncertain due to the ongoing COVID-19 situation, and the group needs to adopt a prudent approach in managing our cash flow. For the financial year ended 31st March 2020, the Board of Directors has proposed a final dividend of $0.012 per ordinary share. Including the proposed final dividend, total dividend for the financial year would be $0.027, which represents a payout ratio of 60%, underlying net profit, at the lower end of our dividend policy of 60% to 80% of underlying net profit. We shall now move on to the segmental results. And in this case, I will pass you back to Jason.

[Jason Lim, executive]

Thank you, Richard. On the Post & Parcel segment, revenue held steady for the full year. International revenue rose to a record of over $500 million on the back of higher cross-border eCommerce-related deliveries, which helped offset lower domestic revenue. However, the above trends were impacted by COVID-19 disruptions in Q4. In domestic post and parcel, admail volumes declined in Q4, in line with the drop in business activities, such as sales and promotional events, although we had successfully grown admail volumes up to February prior to the COVID-19 crisis since making improvements to the service quality. Letter volumes continue to decline at double-digit percentage against last year, while domestic eCommerce volumes continued on a growth trajectory, mainly in the tracked package service, which were launched in December 2019, and this saw strong take-up from eCommerce platforms. On balance, domestic post and parcel revenue declined 15.4% for Q4.

International post and parcel was impacted by the disruption of global supply chains and higher terminal dues, as Richard had said earlier. Due to the above reasons, profit on operating activities declined by 47.7% in Q4 to $18 million. For the full year, profit on operating activities declined 23.2%, led by a decline in domestic letter volumes as well as the impact of COVID-19 in Q4. In the Logistics segment, revenue declined marginally by 0.7% for the full year, largely due to the depreciation of the Australian dollar against the Sing dollar. If the exchange rate had remained stable, Logistics segment revenue would have rose 1%. For Q4, logistics delivered a resilient performance despite headwinds from COVID-19, with revenue higher by 5.3%. This was driven by growth in Quantium Solutions, which continued its strong operational momentum, with revenue rising 28.5% in Q4 through the addition of new customers and higher revenue from existing customers in Southeast Asia and North Asia. In addition, CouriersPlease registered a recovery from the bushfires in Q3 and the floods in January and returned to revenue growth. This helped offset a 2% decline in revenue from the freight forwarding business, which was impacted by the global slowdown in trade. With the improvement in Logistics segment revenue, profit on operating activities registered a lower loss of $2.2 million in Q4 compared to a $6.4 million loss in Q4 last year, which had also included one-off costs of nearly $2 million such as relocation and reinstatement costs. Consequently, for the full year, Logistics segment loss was $5.6 million compared to $7.6 million last year.

Property segment revenue, which comprises commercial property rental and the self-storage business, remained largely stable for Q4 and the full year as the SingPost Centre mall and office remained at close to full occupancy as at 31st March 2020. As the circuit breaker measures to contain the COVID-19 outbreak were implemented at the end of March 2020, there had been no material impact to our financial performance on Q4 and the full year. While profit on operating activities remain stable for both Q4 and the full year, we expect a prolonged closure of businesses arising from the circuit breaker to negatively impact the Property segment moving forward. Let me now hand back over to Richard for the outlook.

[Tak Loi Lai, executive]

Thank you, Jason. Next, I'll share our outlook. Starting with the Post & Parcel segment. In FY 19/20, the Post & Parcel segment contributed 56% of group revenue. Post and parcel operations comprising domestic and international businesses are largely expected to continue given the essential service nature of the business. The segment is well poised to capitalize on eCommerce growth opportunities once the pandemic is over and global economies recover. While letter volumes continued to decline on a double digit percentage, eCommerce growth volumes remain robust, albeit currently forming a relatively small part of the total revenue base. Measures such as Singapore's circuit breaker and Malaysia's movement control order continues to impact costs, if not eased. The international business will continue to target cross-border eCommerce flows. However, there remains uncertainty in how supply chains and trade flows would be affected and how Singapore's position as a transshipment hub could be impacted. Any continued international border closing closures and grounding of airlines would cause further increases in freight costs and service delays. Our higher terminal dues are expected to continue to increase costs.

Let me now move on to the Logistics segment. In FY 19/20, the Logistics segment contributed 38% of group revenue. As the Logistics segment is highly dependent on volumes and revenue, businesses might be further impacted by lower overall demand from an economic slowdown in the Asia Pacific region. To mitigate this, we will increase its focus to capitalize on eCommerce growth trends in key markets. As the international logistics businesses largely operate under an asset-light model, we will tap on our ability to flex the cost base in line with revenue movement. I shall now move on to the property segment. In FY 19/20, the Property segment contributed 6% of group revenue. We have provided via rental and property tax rebates to affected tenants who have to close temporarily due to circuit breaker measures, and the costs will be reflected in the new financial year. Moreover, rental renewals will become increasingly challenging if the situation continues. However, we remain well positioned in the midterm due to its location in Paya Lebar, considered an emerging vibrant commercial hub with its recent transformation.

From an overall perspective, the outlook remains uncertain, and our performance will be affected by factors beyond our control surrounding the global COVID-19 situation. And the duration and extent of control measures undertaken by the Singapore government and that of other countries will impact the global macroeconomic environment and the performance of the group. Group earnings and operating cash flows will face headwinds from the COVID-19 operating environment. In this challenging climate, we are carefully managing operating and capital expenses. As of 31st March 2020, we have completed refinancing of the $200 million fixed rate notes and further strengthened our balance sheet. And we have ample financial resources to meet all our current obligations. Amid near-term challenges, the group remains well positioned to capitalize on growth opportunities, such as eCommerce volumes, once measures are lifted and over the long term.

Before we end the presentation, we would like to share our longer-term focus on the group. While we continue to face headwinds in its postal business with declining letter volumes, there are also opportunities arising from the strong growth of eCommerce logistics, in particular in the Asia Pacific region. Part of this long-term strategy is the fundamental review of postal operations, brought about by changes in Singapore's postal landscape. The Smart Urban Logistics initiatives aims to reinvent a sustainable national mail delivery system and along with it improve service standards so as to drive long-term business performance and value creation. Secondly, we intend to further strengthen and scale up its capabilities to build a strong integrated network that fulfills both B2B and B2C requirements within Singapore and the wider Asia Pacific region. And thirdly, the review of the postal operation as part of the Smart Urban Logistics project will subsequently free up space for our property portfolio for more efficient gains.

So with that, I conclude my presentation.