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Welcome to SATS First Quarter Financial Year 2018-2019 Earnings Call. Before we begin, SATS would like to remind you that certain comments made during this call may contain forward-looking statements. Many of these forward-looking statements can be identified by the use of words such as may, will, expect, anticipate, estimate, assume, continue, project, plan and similar words and phrases. The company's actual results and future financial condition may differ materially from those expressed in any such forward-looking statement as a results of many factors that may be outside the company's control, including, but not limited to, changes in the business environment. The company does not undertake any obligation to update its forward-looking statements.
I will now hand over the call to Carolyn Khiu of SATS. Please go ahead.
Good evening, everyone. I'm Carolyn. Welcome to SATS FY '18-'19 first quarter results webcast. Earlier this evening, we released our results for the first quarter performance. And with me here are Alex Hungate, CEO; and Manfred Seah, CFO, to take you through the results. I'll now hand over to Alex to take you through the presentation.
Thanks, Carolyn, and welcome, everybody, to the quarterly call. I'll go straight to Slide 4, which is the executive summary of the first quarter performance.
Our PATMI grew 11.5% to $63.9 million, basically on higher revenues, so revenue improved 3%. Underlying revenue was even faster at 5.9%, excluding the deconsolidation of SATS Hong Kong. Operating margin rose 2.3 percentage points to 14.8%, particularly driven by a strong gateway performance, whose margin was improved by a strong cruise terminal performance, as we can discuss later.
Earning per share increased $0.006 to $0.057. And the share of after-tax profits from associates and joint ventures dipped 1.3%, with, in this case, actually lower contribution from the Gateway Services' associates, which we'll talk about later also. Going forward, we intend to continue our strategy of deepening collaboration with key customers in their hubs, and that will help us to broaden our network across the region and number of locations that we run across the region.
So with that, I'll hand over to Manfred Seah, CFO. He'll take you through the detailed financials, and then I'll return at the end to talk about the outlook.
Thank you, Alex. Good evening. We are on Slide 6, very quickly.
Our revenue registered growth in both divisions: food division, 2.7%; gateway grew 3.4%. Operating profits improved 21.3%, underpinned by higher revenue and cost efficiency. Our contribution from associates is lower by $200,000. PATMI is 11.5% higher year-on-year. And our position -- our cash position has rose to about $440 million, with the free cash flow improved to $72.3 million from $27.7 million year-on-year. We have a good quarter.
We -- the next slide is the comparatives of this quarter's numbers vis-à-vis last year. And for Slide 8, on financial indicators, our margins, both operating margin and PATMI margin, actually improved to 14.8% and 14.5%, respectively. Group ROE improved to 3.8%. This is on the quarter ROE as a result of higher PATMI. Net asset value per share improved to $0.0152 from $0.0146 of last year, with EPS this quarter improved to -- by $0.006 to $0.057.
On group segmental revenue, food continued to contribute 55% of our total revenue, with gateway contributing 45%. By industry, aviation is about 86%; non-aviation, 14%. And Singapore, on a consolidated basis, continued to contribute about 40 -- 84% of our total revenue.
The higher food revenue mainly comes from the increase in meal volumes across all regions. Gateway revenue improved by 3.4% as a result in increased cargo tonnage volume and flights handled. As Alex has mentioned, in addition, the crews center has recorded additional ship calls, additional 40 ship calls this quarter vis-à-vis the last year and with increased passenger handled as well.
Non-aviation revenue has improved by 16.9% in the current quarter. This is as a result of the revenue growth registered in our central kitchen in China as well as in the cruise terminal.
Next slide. We like to introduce a new slide. This is to show SATS share of revenue by geography. What we have done is we -- for illustrative purposes, we thought it will be good idea to actually aggregate the consolidated revenue plus our SATS share of the associates and joint venture revenue, just to give the market an indication as to what our presence are in the market. And so that on a consolidated basis, you're able to see what SATS share of revenue is. So we do that. And you can see that the bar chart on the right-hand side -- the pie chart on the right-hand side, Singapore contributes up to about 62%. On a consolidated basis, earlier I was saying that Singapore contribute 84%, but on a -- if we account it in SATS share of revenue by region, Singapore is 62%.
Moving along, next slide is on group expenditure. I want to highlight your attention to the 2 rows at the bottom. Group expenditure actually declined by 0.4%, whereas group revenue increased by 3%. So as a result, this has contributed to a increase in our operating margin.
It's worth noting -- it's worth to also mention that we have deconsolidated SATS Hong Kong. And if we normalize SATS Hong Kong numbers, our expenditure would have grown by $14 million.
Okay. So next slide is on the associates and joint venture. Earlier, I mentioned that our -- the contribution from associates actually declined by $200,000 to 15.5 -- $15.3 million in the first quarter. The reason for this is there's -- we -- the lower contribution actually came from PT JAS and PT CAS. This was partly mitigated by our improvement in share of earnings from AAT, AISATS and TajSATS. In addition to that, our new associates and JVs, GTR and also Mumbai Cargo, has started to contribute in total of about $1 million. Thank you.
Now the variance, the lower contribution from PT, our Indonesian associates, amounted to about $1 million. This is due to a positive audit adjustment in the prior year for the late record of revenue.
Group balance sheet. Our total equity is about $1.83 billion, with total assets of about $2.45 billion. And our cash position has improved from $373 million to $440 million. This is as a result of strong earnings contribution. On top of that, we also have received dividend from our associates. That has also contributed to the increase in cash level.
From a free cash flow standpoint, the next slide, the -- our free cash flow for this quarter is $72.3 million. This is about $45 million better than last year.
With that, I will hand you over back to Alex to talk about the outlook.
Thanks, Manfred. So we are all aware of the -- there are a lot of discussions about trade wars, et cetera. So -- but we feel that despite those trade uncertainties potentially affecting the cargo volume, which could happen, it hasn't happened yet. But as you saw in the first quarter, it was quite strong cargo growth, but it could happen. We still think nonetheless that the passenger volumes should increase, trade war or no trade war, in Asia, given the amount of aircraft on order and the plans that we know are in place for airport expansion, et cetera.
We also think that the trends of the rapid urbanization in the region driving demand for safe, high-quality food in the cities will continue. And as we've mentioned already, we're seeing good growth in the cruise business. We run the Marina Bay Cruise Centre in Singapore. And with the increased volume of ship calls that we've benefited from this quarter over last year, that business is now starting to contribute quite strongly to the gateway operating profits and, therefore, the gateway margins. And we expect that trend of the growth in the cruise business in Asia to continue, particularly in Southeast Asia, which is important for our Singapore port.
We talked about price pressures in the last quarters, I think probably going back now almost 8 quarters. And I think that's a fact of life in most businesses, but it continues to be a fact of life for us, particularly because the airline margins are still constrained by strong competition in Asia. So we expect that price pressure to continue.
Our strategy is to invest in technology. We talk about being technology-driven, but people-led because we want to, at the same time, train and enhance the skills of our people and tap them for ideas about how to use that technology. Our digitalization initiatives to tie together the various locations that we have across Asia, to create more productivity, but also to improve services for customers, we believe are gaining traction and enhancing our services. And in particular, they work particularly well in hub locations, where we can partner with strong airlines. So the most important of those, obviously, historically, and going forward is Singapore Airlines here in Singapore, where a lot of our most advanced digitalization initiatives are hatched and used for the first time. But as you're aware, we've also formed hub relationships with Air Asia in Malaysia and with Hong Kong Airlines and also Alpine Air and EVA Air in Taipei as well. So this strategy is allowing us to expand our footprint into Asia and also to deepen our collaboration with some of those key successful airlines.
With that, operator, we'd like to open up for the Q&A, please.
[Operator Instructions] Our first question, we have Louis from Crédit Suisse.
Firstly, congrats Alex on your Best CEO award. I've got a couple of questions on me. Firstly, on Turkey. So if you could give us an update there. And perhaps, given you have about less than 100 days to the official opening of the airport, maybe some color on what would be the operational arrangements around that. Secondly, also saw that you have announced a JV in Langfang. So maybe some color there in terms of your -- when do you expect your revenues to come in? When do you expect it to breakeven, et cetera. And finally, in terms of the very strong EBIT growth that you have seen this quarter, would that also be driven by non-aviation?
Okay. Thanks, Louis. Okay. Firstly, on Turkey, the timing is very good because we're just announcing that we are going -- by mutual agreement, we decided to terminate the memorandum with Turkish Airlines. So that literally has just hit the SGX. So let me -- so it's ideal timing, so I can now talk to you a bit about why we decided to do that. As you mentioned yourself, the airport is -- opening is imminent. They want to push for the October deadline, and there's a huge amount of operational activity to shift the whole Atatürk Airport across to the new airport in Istanbul. That creates a lot of operational risk for the participants in that move. And secondly, the incumbent caterer has an existing arrangement with Turkish Airlines. And I think, in the end, Turkish Airlines was unable to disentangle themselves smoothly from that arrangement. And therefore, that also created a risk for the airline, and that would have been risk that we would have to assume if we were going to go into the situation. So in the end, on the balance of the complexities that we saw and the complexities that the airlines saw, we decided that this is not a good time to proceed with the proposed catering joint venture, so we've decided to pull out. And by mutual agreement, therefore, that we're going to terminate that memorandum. So breaking news for you all.
I'll answer the third question next, the EBIT growth. So a lot of the EBIT growth in gateway was driven by non-aviation. So most notably, it was the cruise center that I mentioned earlier. As you know, we've been trying to use technology to create operating leverage for our businesses. So that as the volumes that we expect in Asia come through, both in aviation and non-aviation, we can benefit more to the bottom line. Well, the cruise center, Marina Bay, is a really good example of that. There were certain fixed costs that we need -- we had to support during the startup of the cruise center over the last, let me see, 5 years since it opened. But now the volume of ships is growing, and we're starting to reap rewards from that investment. And something like half of the improvement in the gateway operating profit came from the cruise center business. That's something that, over the medium and long term, is definitely going to grow in Asia. So we -- I mean, I won't forecast on a quarterly basis because there is some seasonality in that business, as you know. But in terms of the future years, we expect that to continue to contribute strongly.
On the third side, you're well aware that we started a new central kitchen in Shanghai as part of our joint venture with Yihai Kerry. That kitchen, I said at the time, should take about 3 years to reach breakeven. Well, I'm pleased to say in this quarter, actually, it already reached breakeven, so it's ahead of our schedule. And we have recently announced that we're actually creating a second kitchen in Langfang in the northeast, near to Beijing, to tap into the opportunity in the Beijing market. Same opportunity, because we're targeting the food service chains and helping them with their menus and then helping to scale up into large-scale production for them. And that, I think, indicates that we are confident that this segment requires the services that SATS is good at providing out of the central kitchens, and that has contributed to the revenue on the food side. It's not yet making a lot of money, but of course, relative to a year ago, when that was in start-up mode, when it would have lost money, there was an improvement in the food margins for that in this quarter. And maybe you can remind me on this -- remind me on the second question please, Louis?
Yes. So would you also expect that the breakeven for this kitchen to be, say, 2 years instead of 3 years?
Well, it turns out that the one in Shanghai only took 2 years. Our business plan is still for the -- for each of the kitchens to take 3 years. So obviously, if the Beijing kitchen exceeds those expectations, that will be a bonus. But we're still -- I think that it's better if I give you the guidance for 3 years for the Langfang kitchen as well.
Our next question, we have Rachael from UBS.
I have a question on the -- for aviation as well as the gateway for the cruise center. For the aviation side, is it possible to break down the contribution between cargo and passenger services? And in terms of the cruise business, what was the contribution of the cruise business to the top line? And how would the margins compare with your aviation series?
I think the -- we're not giving the breakdown between cargo and pax at this time. Cargo has higher margins than pax in general. We talked about that in the past because the pax side requires more people, so it doesn't create the operating leverage effect that we like to see. But nonetheless, the passenger business improved its profitability in this quarter relative to 1 year ago. And the cargo business also improved its profitability this quarter versus a year ago. In the case of cargo, that was because of increased volumes because it is a high-operating leverage business. In the case of passenger services, it was because we have successfully deployed some of these new technologies that have helped our people to become more productive.
Your next question was the contribution of cruise to the top line and the relative margins of cruise versus the other gateway activities. I just indicated to you that the -- about half of the improvement in the operating profits for gateway was due to the improved contribution from the cruise center. So it's quite a big chunk. And the margins at this point are higher than the average margins in the gateway business because of that operating leverage effect that I mentioned to you. So in the last several years, going back 5 years, of course, we were losing money on the cruise business. But now it's become a -- it's a highly profitable business, and it's exceeding the margins of the aviation gateway business. I hope that's useful.
Yes, it is. And I guess for a final question for now was profit attributable. Do you have a -- so can I check that on the underlying basis, if you strip out the ForEx gains and the disposal of property, your underlying net profit would've probably been closer to $60 million and, therefore, the growth will be in the 4.5%?
Rachael, I'm not sure about the property disposal you're referring to.
No. Sorry. I was just referring to -- no, I'm just trying to get the sense of the underlying profit growth. If you strip out the -- all the other -- the underlying net profit.
Rachel, maybe I'll take that question. This is Manfred here. The disposal is actually -- it's totally insignificant. So this quarter, there was no exceptional item that has distorted our profitability. So for all intents and purposes, you can take the entire chunk as our underlying.
And in terms of the ForEx gain that you recorded, what was this relating to?
Okay. The ForEx gain, if you recall, last quarter, there was some volatility in our ForEx because of our U.S. deposit listing. A big chunk of that was actually a reversal, because those were unrealized. So what you are seeing, the ForEx is basically the improvement of the exchange rate that has caused the favorable gain, if you like. It was reverse of last year.
We've got some questions coming in on online now. Maybe I'll take those next. Carolyn, can you put those up?
The first one is from Azita at Macquarie. She asked, was there any sunk costs related to the Turkish Airlines MOA?
That's a good question. There is some small, immaterial costs associated with travel, time and expenses-type costs. Yes. So those have been expensed along the way, so nothing to worry about there.
And then the second question online we have is from Karthik at Saga Tree. Thanks for coming to the AGM earlier, [ Catherine ]. I saw you in the audience. Please, may you comment on the sustainability of the cruise earnings? Cruise schedules are fixed for at least a year in advance. Is that correct? And are the economics similar to air?
Okay. In terms of the economics, I just answered Rachael's question to indicate that, at this point, with the volumes going through to cruise then, actually the margins are superior to gateway -- to the aviation handling part of gateway, so that's more attractive. The cruise schedules are fixed for a year in advance, so we know exactly what the bookings are for the coming year. And we are confident that these volumes will be sustained into the coming year, therefore. And then sustainability-wise, only about 0.2% of Asians have ever taken a cruise, and the number in America is -- the equivalent number is 4% of Americans have taken a cruise. So as Asia becomes more wealthy and as the infrastructure in Southeast Asia improves and, therefore, the number of itineraries and the variety of itineraries increases, we expect that the -- a higher percentage of Asians will take cruises as an option in the future. So we do expect that the volumes in the medium to long term will continue to improve. Thanks, [ Catherine ].
If you will take the next question now, operator, please.
Our next question, we have Ajith K. from UOB Kay Hian.
Three questions also from me. First, can you give us some indication on the impact on revenue, excluding the deconsolidation of SATS? Second question, I guess, pertains to the first. Was Yihai Kerry consolidated into revenue? I assume so given that you mentioned that the Food Solutions revenue was positively impacted by that. But if you could affirm that, that will be good. Then my next question is on the Gateway Services associates. Given that you founded JV with Asia, why is it that Gateway Services associates recognized a decline in this quarter? One final question, if I may, in the -- with regards to the Langfang JV, what sort of products or what sort of meals will you be providing? Will it be like refrigerated meals and so forth? Yes. That should be it for me.
Okay. Thanks, Ajith. So 4 questions. The first one is the impact of the deconsolidation of SATS Hong Kong. So the consolidated revenue, as stated, as you can see, grew by 3%. But it was 5.9% growth, if you exclude the deconsolidation of SATS Hong Kong. The equivalent expenditure growth, as Manfred mentioned earlier, for -- taking into account the deconsolidation, would have been 4.1% growth if you included the SATS Hong Kong. So we have positive jaws in both cases. In the case of the published number, it's expenditure, down 0.4%; revenue, up 3%. In the case of the -- excluding the deconsolidation, it's revenue, up 5.9%; but costs, up 4.1%.
The SATS Yihai Kerry revenue is consolidated in here. As I mentioned earlier, although it contributes, I wouldn't call it moving the needle at this point. But I think from a profitability perspective, this quarter, 1 year ago, that kitchen was still in start-up mode, so it was carrying costs without much revenue. And therefore, there has been a significant improvement in the -- in its contribution, if you like, to the bottom line. At this point, it has its positive profitability, but it's only marginal. So we -- plenty of chance for more revenue to come through there in fact we have a good pipeline coming into the Kunshan kitchen with some very large food service companies that have signed contracts, where we haven't started to produce for them yet. So we're confident about the future revenue growth for the Kunshan kitchen.
In the case of Langfang, the products will be exactly the same as coming out of the Kunshan kitchen. So our target market are the food service restaurants. What we do for them is we help them develop new menus, which in turn, obviously, helps them attract customers to their restaurants. So there are 2 stages to that: One is where our chefs and our food scientists will work with them to understand the kind of taste profiles that they want to develop. Then we'll develop small batch products that they can then test in maybe 1 or 2 restaurants in their chain. And then based on the performance of those new menus in their restaurants, they will then come back to us, and we will progressively ramp up the volumes. So that when they've rolled out across, let's say, the whole of Shanghai or the whole of Beijing, which can be hundreds, sometimes thousands of restaurants, they will -- we'll be producing in very, very large batches. So not necessarily individual meals. But if you imagine several tons of a particular soup or several tons of a particular sauce being delivered to their distribution centers, and then they will then break that up and distribute to each store individually using their own logistics chains.
You also asked about Gateway Services associates. We are getting positive contributions from 2 new associates: One is the GTR SATS venture in Malaysia, the joint venture with Air Asia. That's contributing positively. And so is the new cargo joint venture, The CSC in Mumbai. The Mumbai CSC is also contributing positively. And as Manfred mentioned earlier, we've had improved performance from AAT because of the new relationship with Hong Kong Airlines, Hong Kong Airlines cargo in that case, improving the contribution from AAT. We've had improved performance also from Air India SATS on the increased volumes in the Indian market. But that's been offset by a reduced performance in Indonesia. So I guess that good news is offset by some bad news because Indonesia's had a soft quarter. Some of that was ones-off. So in this quarter a year ago, there was a ones-off, yes, of about $800,000 of a -- I think it was a tax write-back, was it?
It is revenue that was delayed in recognition.
That's right, yes, some delayed revenue recognition. So in the quarter, 1 year ago, there was $800,000 one-off. And then that didn't reoccur this quarter, so that's part of it. But of course, you can see that there's another part of it that must have been bigger than that, and that's largely due to softness in the business, some volume decreases in Jakarta in the cargo volumes.
Did FX make -- play a part, weaker Indonesian rupiah?
FX. Yes, I think there was some small FX component, but I don't -- it's not the reason for the drop. The main reason is just the soft business.
We have some more questions coming in online. Siew Wai from Saga Tree has a question, a follow-up question on Turkey. With the termination of the Turkish business, this should free up the management bandwidth. What would be the management focus going forward? Are there any opportunities that are of similar scale management is looking at?
The answer is yes. Yes, we do have a good pipeline of opportunities. We have to assess the risk and returns of every one of them, as we usually do. But we're not too deterred by the fact that we've decided to mutually terminate the catering agreement in Istanbul. On the balance of things, given the complexities, there are other things that we can focus on. Some of them are as large as the opportunity in Istanbul, and some of them are more like bolt-ons. But overall, there's plenty of things to keep us busy. Thank you, Siew Wai. But yes, management will focus our bandwidth on other things.
Second question from Siew Wai. We've got, can management give us a sense of what is the current utilization of the cruise terminal?
Okay. The cruise business is a seasonal business. Unlike hotels, cruise ships can be moved around the world depending upon where the demand is at different times. In the summer of the northern hemisphere, there's a lot of demand in the Mediterranean for cruising. It's a very large market. In their case, the main home port for that is Barcelona. And in fact, you might recall that our partner in the cruise center is Port of Barcelona, which was subsequently purchased by Royal Caribbean and Global Port Holdings. So we have a lot of information from them about the growth of the cruise ship business in Europe. I mentioned earlier that only about 0.2% of Asians have ever taken a cruise. About 2% of Europeans have taken a cruise. That's the equivalent number. And then, as I mentioned earlier, 4% of Americans. So there's a big cruise opportunity in Mediterranean. And when the weather is good, a lot of the cruise ships get moved up to that opportunity. And some of them also get moved up to northern China and Japan, Korea, et cetera. So there is seasonality for us here. We have the potential to have an all-year cruise port here because the weather is good all year in the Southeast Asia region.
And in Singapore, we don't have typhoons and all the rest of it. So it's an ideal cruise port location for home porting in Asia. It's a bit similar in that sense to Miami, which as you probably all know, is the epicenter for cruising in the world. So we have -- like Miami, we have a good-all-year weather. We have good local itineraries. We have a good airport for people to fly into. And we also have a very good marine maintenance port facility, which -- where the ships can go to, to get repaired as well. So we have all the right ingredients to have the best home port in Asia.
In the winter in the northern hemisphere, those same ships will come down to Singapore. So we have a peak season that basically runs through the northern hemisphere winter. But the difference this year is that we have some ships, which are home porting all-year round. So in the start-up period, over the first 3, 4 years of the start-up, we actually had an empty cruise center in the northern hemisphere summer. And although we were getting days in the winter here where we had reached capacity, we found that we had months upon months of the northern hemisphere summer where the cruise port was empty. So what we're seeing is that there's still very high demand for slots during the winter period. There are several days where we are sold out. In fact now, there are scores of days where we're sold out in that period. We are -- operationally, we've managed to improve our operation so we can handle not just 2 ship calls a day, but we can handle 3 now. And we've managed to demonstrate to the cruise ship companies that that's something that's -- that doesn't inconvenience their customers because we can do it very, very efficiently, the disembarkation and embarkation. So that's created additional capacity in our peak season.
And in the low season, because of the development of the market and the burgeoning demand from consumers, our Royal Caribbean and Genting have both decided that they will leave ships here all year. So even in our traditional empty period, we now have ships calling regularly, so that really helps the economics of the business.
And then we have a third question from Siew Wai. On the Greater China revenue, would it be correct to assume that a significant portion of the growth in Greater China business is driven by your JV with Wilmar?
On a consolidated basis, all of the revenue growth came from that joint venture. But on a share of revenue basis, the methodology that -- which is non-IFRS, as we pointed out earlier, but something I think that you might find useful, there's been growth at AAT, thanks to the growing relationship with Hong Kong cargo, Hong Kong Airlines cargo. And there's also been growth at our Jilin pig farm. I should probably spend a minute on the pig farm in case you don't recall it. Going back a long time now, the Singapore government and the Chinese government have been working on the development of a food zone in Jilin. And the former Singapore Food Industry, which was acquired by SATS in 2009, was a party to a plan to create a pig farm in that Jilin food zone. We have remained a party to that, although we restructured the relationship somewhat further. We've became more of a financial investor and less of a operating investor. But that initiative accounted for some parts of the revenue growth as well, because they're now operational.
And then we have a fourth question. Can the management provide any color on the margin of your Food Solutions segment? Has the margin stabilized?
Well, this quarter, of course, the margin improved for Food Solutions over a year ago. The components of how that happened are partly to do with China, where I mentioned there'd been a swing from losses during the start-up period for SATS Yihai Kerry in Kunshan to now being marginally profitable. But there was also some significant volume growth in the quarter, particularly for aviation catering, which helped our margin. If you think about the growth in the Qantas flights and some new contracts that we've won in Singapore, plus an improved revenue picture in TFK, all of those contributed to our aviation catering margins.
I mentioned to you about 6 months ago, I think, or even 9 months ago that TFK had won a series of new accounts, people like Air Canada and Air India. And those are now starting to come through. So we saw an improvement in the Japan revenues on a consolidated basis. And as you're all aware, that's basically TFK returning to growth, which is a good thing as well. And that is reflected in TFK's bottom line as well, which has helped the Food Solutions margin.
Okay. Operator, I think we'll go back, if there are any calls queuing, and take some calls on the phone now. Thanks.
Our next question, we have Colin from CIMB.
Just 2 questions. One is a follow-up on the Turkish Airlines. It's whether SATs has ordered any long-lead-time equipment in preparation for the new kitchen for the new airport prior to the termination of the MOU. And if so, what's going to happen to those equipment ordered? Second question is maybe you can just share a bit more color on the TFK Japan operations, whether is it any new customer or the routes.
Okay. Thanks, Colin. The answer to the first question is no. There's no equipment that we've ordered that we're stuck with, so that's good. And the answer to the second question is, as I referred to briefly responding to Siew Wai's question about the food operating margin, TFK has now returned to growth. It's moderate growth, but it's an improvement over the -- what we've seen in prior years. It's slightly lower than the growth for the Food Solutions business. Or I think it was around 2% in this quarter versus a quarter a year ago, but it does reflect those new contracts that I mentioned that the company had signed up over the last 6 months or so.
Our outlook for Japan aviation is positive. We believe that the increasing Chinese traffic is going to help. You may have heard that the Japan government is targeting 40 million, 4-0 million tourists by 2020, which is then they will host the Olympics. The rugby fans on the call will probably also be aware that they're hosting the Rugby World Cup in 2019 as well. And then now recently, just in the last month, they've announced that they're going to target 60 million tourists, I think, by 2026, if I'm not wrong, but I'll need to check that number. So they don't think that the Olympics will be a peak. They think they can continue to grow after the Olympics as well. So we tend to agree with them. We think that there's good growth in the China -- Chinese airline flights into Japan. Japan Airlines itself is recovering from the restructuring bankruptcy. And part of the condition for the restructuring was that they were not allowed to expand their fleet in the short term after that. They've now reached the point where they -- that agreement has expired, so they're now able to expand their fleet. It's all of those reasons we think that the volumes in Japan aviation should continue to grow.
Our next question, we have Neel from Maybank.
Most of my questions have been answered actually. I had a couple of small points to clarify. First is on the dividends from associates. So that's quite a jump. But are there any binding issues responsible for that? Or do you have -- was there even contributions from some of the associates that drove that growth [indiscernible] the run rate [indiscernible]? Second question is [indiscernible] what is the incremental...
Neel, sorry, you're breaking up. We can't really hear your question. Maybe...
Sorry, the first? Okay, the first was on the dividend you received. My questions have been answered.
Yes. I think we've lost Neel. Operator, maybe you can go to the next question.
Our next question with from Jesalyn from CLSA.
Just following up on the Turkish joint venture. Given that it's not going through, what do we see dividends increase? Or how should we see your capital allocation strategy?
Okay. As I mentioned earlier, we do have a good pipeline of opportunities. Where those opportunities produce superior returns for shareholders and where we can manage the risks adequately, we'll pursue them. So I don't think you should feel like it will change our dividend policy. Just to reiterate our dividend policy. Our dividend policy is to pay progressive, but sustainable dividends. That means that we hope to increase the dividends steadily over time. But we also hope to do it in a way where we're covering that increase through improved cash flows. The improved cash flows, of course, will come from improved productivity in our existing operations. But they'll also come from new businesses as those mature, and we're seeing examples of that in today's call. The cruise center business is a great example. But we hope that the AirAsia joint venture, the Mumbai Cargo facility, et cetera, will all be in that category over time. So we'll be looking for more opportunities like that, that can enhance shareholder returns and allow us to continue to make the dividends progressive over time.
Right. In terms of looking at your pipeline of projects, would you be more focused back on to Asia?
Yes. We like to invest in locations where there's a lot of connectivity into our existing network. So usually, if you find a big hub in Asia, it will connect many, many times a day to other airports where we have operations. So that means that as we execute digital connectivity, whether it be for air freight, passengers or their bags, et cetera, we can get a lot more enhancement to our network -- the network effects of our business with an Asian hub than we can, let's say, from a Latin American hub or a European hub, because the frequency of connectivity for those is much lower. Istanbul itself is a -- fits very well because, as you know, the Turkish Airlines is a highly connected airline, and it has, I think, over 400 destinations that they fly to from Istanbul. A good number of those are in Asia. So although Istanbul struggles, Europe as well as Asia, it still met our connectivity requirement because it was such a highly connected hub for Turkish Airlines. And that's why, although some people would say that it's a European hub, it still met the requirement of creating good network effects for us.
[Operator Instructions] Our next question, we have Alfie from DBS.
I have 2 questions. One is on your staff costs. The other one is on your food costs. First, on the staff costs. I just want to review whether there'll be more staff costs productivity gains to be realized. Because the last 2 quarters, due to a restructuring of SATS Hong Kong, you have been seeing lower staff costs. And now you're getting a benefit of a year-on-year impact of a lower staff costs. But going forward, you're also starting your new kitchen. So just wondering where -- how the costs will pan out going forward. Second one is on the raw material cost. Do confirm that the margins and the pricing pressure is getting more severe. Because costs of raw materials have actually gone up, I notice, and your aviation food revenue has actually come down? Has it? Is the pressure more severe this time around? Or are you seeing threatening or are you seeing pressure on your aviation food margins? Yes, that's all.
Okay. Thanks, Alfie. Yes. So the -- we have managed to control the growth in staff costs through improvements in productivity, with or without SATS Hong Kong. I mean we -- you're right, you can't see all the numbers, so the deconsolidation of the equivalent, if SATS Hong Kong had not been deconsolidated. But basically, the pattern is similar to what you see after the deconsolidation as well in a sense that there's positive draws for revenue over total expenditure, and there's positive draws for revenue over the staff costs line as well. So in other words, the staff costs line is growing less fast than the revenue line, so you see that positive draws. And that's because of the technology and productivity initiatives that we've been putting in place.
The new kitchens, the large central kitchens in China that we're building, they're actually more efficient staff-wise than the catering kitchens for aviation. For aviation, the batch sizes are smaller than the batch sizes that the food service chains require. And they also have premium meals, business-class, first-class meals, which require relatively higher labor. And then they also need to be plated and put on the trays. All of that is labor-intensive. Whereas when we sell to the food service chains, they actually take delivery in very large volumes, not individual meal portions. And then they -- at the restaurant, they will assemble and plate the meals for the customers at the restaurant. So I think it should be -- this improvement -- steady improvement in productivity is something that we aim to be able to reproduce over time, and I don't think the central kitchens in China will stand in our way of doing that.
There has been an increase in the quarter in costs of raw materials. That's above the rate of increase in the revenue rate for food. That's -- I wouldn't go ahead and project that as a ongoing pattern. I think there's some volatility in various parts of the supply chain that sometimes comes in an individual quarter. We can't escape from food inflation, of course, but we can put in place effective supply chain arrangements with strategic suppliers so that, by and large, we try to minimize the volatility that the food -- the raw material food markets will go through. In this quarter, we did relatively less well of that. But in other quarters, you've seen that we've done relatively very well in that. So I think over the medium term, you'll see those things even out from quarter to quarter.
Okay. So how about on the revenue side? There's been a decline in aviation food. So is that actually both volume and pricing?
That's largely pricing. Yes, but it's -- just to confirm, Alfie, there's no absolute decline.
In fact, Alfie, the -- our aviation increased, both for SATS catering as well as for TFK.
Yes, okay. I'm referring to aviation food segment on a year-on-year basis.
Yes, so those 2 are aviation food.
Yes. But there is ongoing price pressure in aviation catering. And the average meal price did go down in the quarter, offset by a good growth in volumes, as we talked about, both in Singapore and Japan, which are the 2 consolidated entities.
Okay, I think we might have Neel back. Yes. Neel, hopefully, you've got a better line this time.
I think most of my key questions have been answered. I have 2 residual ones. The first is on the associate dividends. There was quite a jump on a year-on-year basis. So I was curious to know whether there's any timing issues involved. Or did you get any maiden contribution from some of the associates or JVs. And the second is on Qantas. Could you remind me, Alex, on a flights per week basis, what is the frequency increase from them moving the Middle East hub back to Singapore, roughly?
On the associate dividend, one portion of it is from our AAT associates. In fact, they were late in paying their dividend last year, so last quarter, which they have caught up. And the other portion actually came from our associates in Indonesia, yes. So...
Okay. It is mostly timing, Manfred.
That is correct. That is correct.
Yes. You'll remember, 5 years ago, Qantas moved most of their hub flights from Singapore to Dubai, and that actually impacted us quite a bit. I think if you look at our 2014 numbers, you can see a drop in revenue, so it was a material drop at that time. This time, most of the Dubai flights have moved back from Singapore, but they are also overflying both hubs with some direct flights from Perth to London on the kangaroo route. So the increase in frequency is not quite at the same level as they took away 5 years ago, but it's still quite material. And that the airplanes we're talking about, some of them are A380s as well, so it's quite a good growth.
We have one question. It's coming in from [ Sumit ] from Saba Capital. The question is, how much is the dollar value contribution of cargo? You mentioned some seasonality in cargo business. Can you please elaborate on the same? Was there any events in the quarter which helped your non-aviation food revenue? Your associate income has fallen 1% in the quarter after showing strong growth last year. How should we think about this line?
Okay. The dollar value contribution, in other words, the profitability of cargo is an important contributor. We don't break it out, as I mentioned earlier. But when we see growth in cargo, that helps us improve margins, because it has a operating leverage in that business with relatively higher fixed costs and relatively lower variable costs.
So seasonality-wise, there is seasonality in the cargo business. Typically, this first quarter is relatively quieter. The big quarter is the third quarter with the run up to the Christmas gift-giving season. It drives a lot of e-commerce volumes. And it also has the 11/11 date as well, which is a big peak. So we normally expect this quarter to be relatively quieter, but there have been good volumes in this quarter, which is not typical. We don't know going forward whether the new tariffs that are being implemented, primarily between China and the U.S., will drive a change in the air cargo volumes. We do know that our direct cargo volume exposure to the U.S. and to China is relatively low. In terms of the consolidated cargo operations here in Singapore, it's relatively low. But of course, there are other JVs and associates, like AAT in Hong Kong, that have very high exposure to the China volumes. But the volumes between China and America is something that we don't have particularly high exposure to. So we'll have to see what happens with the tariffs and the various counter-tariffs, et cetera, and see whether it has a knock-on impact. It's very hard for us to predict that. But I will say that this quarter was better than we were expecting, given the normal seasonality.
Then you asked whether there were any events in the quarter, which helped the non-aviation food revenue. I don't believe so, no. Nothing that particularly special in the quarter helping that.
And you asked about the associate income. Yes, I think it's a weak quarter for associate income on gateway. The food associates continue to grow, which is good. They're helped by the Evergreen Sky Catering in Taipei. But gateway was weaker, but only really in Indonesia. If you look at the other gateway associates, they've all performed quite well. AAT had a strong growth. Air India SATS had strong growth, and then immediately accretive contributions from Mumbai Cargo and from the AirAsia joint venture. So I think we expect that, in general, as we talked about before, as we make these investments overseas and we increase our network of operations, we do expect that, that line item should improve as a percentage of our overall PATMI. But I think as we mentioned earlier, it was dragged down by Indonesia in this particular quarter. Some of that was one-off, about $800,000 worth. But the rest of it's because there was a relatively weaker performance in Indonesia, and that's something, obviously, that we're going to try to address.
Okay. Thanks, [ Sumit ], for that question.
Okay. We will take the last 2 questions from Catherine from Saga Tree. Right. Any light shed on the market acquisition of Gategroup? Is Gategroup a natural partner for you? And would you be keen to talk with them in some way, especially now that Turkey is no longer on your plate?
Okay. Yes, so for those of you that haven't been following that news, Temasek issued a bond to Hainan group, which is -- has a mandatory convertible element in 5 years' time into equity of Gategroup. Gategroup is one of the 2 largest in-flight catering companies in the world. And Gategroup is relatively smaller in Asia and is very strong in Europe and North America, and also, somewhat strong in Africa as well through its acquisition of Servair. We don't have any immediate plans to do anything with Gategroup, anything big with Gategroup. But of course, with this relationship with Temasek, there's obviously opportunities to hatch in the longer term to do something with them. We do coexist in some markets. So they are present in Japan. They're present in India. We have a co-shareholding with them in Macau. But their biggest holdings in Asia do not overlap with us. They are in Australia, and they're in Korea with a new kitchen in Korea. And that we don't do in-flight catering in either of those 2 markets. So within our Asia target zone, there's very little overlap. But I think for our shareholders, they should look at this and say, well, there's no real downside to Temasek's investment. It's an on-linked investment from SATS. But it's something that, obviously, we'll keep monitoring to see if there are any opportunities that would benefit our shareholders and our customers. And if there are, then we'll proceed. And if there's not, then we won't.
Okay. All right. I think we've come to the end of our webcast. Thank you, everyone, for joining this evening, and have a good day. Bye.
Thank you.
Thank you.
Thank you. Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.