SATS Ltd

SGX:S58

Earnings Call Analysis

Significant Profit and Revenue Growth

In the first quarter, the company achieved a net profit of $65 million, reversing a loss of nearly $30 million from last year, primarily driven by a 17% increase in cargo revenue and a 27% rise in aviation meal volumes. Revenue reached $1.37 billion, up 15.5%, with a notable EBITDA margin improvement to 18.2%. Free cash flow grew by $126 million, resulting in a positive $37 million. Management remains optimistic about maintaining current cargo volumes, particularly benefiting from the e-commerce sector's growth. The company is on track to achieve $100 million in synergies from acquisitions.

Profitable Growth in Q1

In the first quarter of the fiscal year, SATS Group posted a substantial net profit of $65 million, a significant turnaround from a loss of $29.9 million in the same period last year. This remarkable turnaround is attributed to strong cargo volumes, a 19% increase in air cargo growth, and a robust recovery in aviation meal services, which saw a year-on-year volume increase of 27%. This indicates a solid recovery trend for the company, setting a positive precedent for future quarters.

Strong Revenue and Margin Expansion

SATS Group reported revenues of $1.37 billion, marking a growth of 15.5%. Notably, the company experienced a substantial EBIT margin expansion, from just 0.7% to 8.2%. This 13-fold increase in EBIT reflects effective cost management, as Operating Expenses (OpEx) grew less than half the rate of revenue, at 8.7%. The company's PATMI margin, which represents profit after tax and minority interest, improved to 4.7%, signaling enhanced profitability.

Improved Cash Flow Position

The company showcased a strong improvement in cash flow, reporting an operating cash flow increase of $125 million and achieving a free cash flow of $36.7 million, compared to a negative $89 million in the prior year. The positive momentum in cash flow is pivotal for SATS, allowing it to manage its operations comfortably and repay debts, including a commitment to reduce total debt by $200 million this fiscal year.

Strategic Growth in Cargo and Food Solutions

Cargo services now account for 51% of SATS' total revenue, highlighting the growing dominance of this segment. The company also reported food solutions revenue growth of 29.3%, driven by increased demand for in-flight meals as travel resumes. This dual focus on cargo and food positions SATS well to capitalize on the ongoing recovery in global travel and e-commerce.

Commitment to Debt Reduction and Balance Sheet Strength

SATS Group's current financial strategy includes a focus on reducing its total debt, which currently stands around $4 billion, down from a gross debt-to-EBITDA ratio of 4.6x to an anticipated reduction to 3.5x. With a cash position of $684 million, increased by $25 million from previous quarters, the company appears well-positioned to meet its financial commitments, signaling fiscal responsibility and investment potential.

Future Growth Prospects and Partnerships

Management expressed strong optimism about future growth, particularly in their cargo segment driven by e-commerce and robust airline partnerships. The company is enhancing its capabilities through strategic partnerships, such as with Mitsui, to improve food and logistics services, while also working to capitalize on synergies from recent acquisitions, targeting a synergy realization of $100 million. The first $51 million has already been achieved, indicating a focused and proactive approach to growth.

Outlook and Guidance

Looking ahead, SATS management has set an optimistic outlook, projecting that cargo volumes will continue robust through the end of the calendar year amid the ongoing recovery. They anticipate EBITDA margins to scale towards the 20% target, with a focus on maintaining strong operational leverage. The company aims to further enhance profitability and shareholder value as they continue executing on their strategic initiatives.

Earnings Call Transcript 2025-Q1

[Carolyn Khiu, executive]

Good morning, everyone. Thank you for joining us today at SATS Group First Q FY Earnings Briefing. I'm Carolyn from corporate affairs. But that's to let you know, we are using a new system today. So if you want to ask questions, please click on the red button on the top right of your screen.

I hope you have time to review the highlights of our results. We have an half of hour here. So appreciate if you could restrict your questions to 2, so to give opportunity for others to ask questions.

For the record, please note that during the call, we may make forward-looking statements related operational, financial and market trends for future periods, which are based on management's current views and assumptions. The actual results may differ materially from this projected or implied in such forward-looking statements. So please exercise caution when using this information.

I will now hand you over to Kerry, President and CEO, to make -- to set off the presentation. And then it will be followed by Manfred, our CFO, to take you through the results. So over to you, Kerry.

[Tee Mok, executive]

Thank you, Carolyn. A very good morning, everyone. Again, thank you for taking time to come to our first quarter presentation. Let me just jump straight into some of the key highlights. I think as you saw in our press release, First quarter net profit has jumped to $65 million. That is a significant improvement compared to last year, of negative [indiscernible] $95 million jump in net profit. And really attributed to a few things. Clearly, from a cargo volume perspective, we are really benefiting from tailwinds of the growth in cargo volume. And that's over a few factors. One, obviously, [indiscernible] congestions as we all know.

We continue to see a challenge in there. And of course, which I think is very pleasing is the continued growth of e-commerce shipments, particularly from Asia into Europe as well as the U.S. So that has really helped drive the continued growth of our cargo business. And in many of our stations, we actually have good operating leverage to benefit from the increase in our profitability.

Second one, obviously [indiscernible]. We have seen an increase in the consumption of [indiscernible], not just in Singapore but also in Japan as well as domestically in China as well. Our [indiscernible] is coming back very strongly in terms of the volume that are serving and we continue to see good growth momentum in the domestic market. So all these helped us to increase our volume in aviation meals. You can see that almost 27% in volume year-on-year. And this led to a 15.5% growth year-on-year. Again, a lot of those growth, you can see dropping a lot into the bottom line itself.

Very pleasingly, it's also EBITDA, we continue to show improvement in the EBITDA margins. As you know, we do have a target to try and hit the 3 Es but is showing good momentum in the growth of EBITDA margin. And of course, cash flow, we continue to grow positive momentum. So this is in and of itself is an increase of almost $126 million to about $37 million in free cash flow. So from a financial standpoint, it is a good first quarter. We are pleased with the results and with a lot of momentum in what we've done over the last year, paying off in this quarter itself.

Let me move on to the next slide. This slide, a very important commercial and operational update. Whilst we write on the volume growth that we're seeing tailwinds in cargo and some of the food business, I think it's important that we continue to establish a strategic growth -- initiative for ourselves. And this slide here really shows what we're doing to establish those future growth trends for SATS. The Mitsui Partnership, which you read as well, this is a very strategic partnership to allow us to get channel access and Mitsui being one of the largest trading company in Japan, combining together as leveraging on our food technology and our foot mobile and through a very targeted demand generation channel, which Mitsui will provide to our team.

And that is going to help us increase our utilization of our food factories that we have established in China, India as well as in Thailand. So that is something for the future, which we believe will put us in good state, they will also open up channels to us in Japan. And that's, I think, going to help us also with our business development opportunities in Japan. Japan is one of the biggest market for really great meals, and we believe having a presence there and being able to grab the market together with Mitsui will put us in a very good position.

The second one other highlight more of the Shun Feng site, which, again, as you know, when we did the acquisition of WFS, e-commerce was a targeted segment for us. And as we start to leverage on the network, we are targeting a lot of the e-commerce players, and we do want to form a more strategic partnership with them. Not just the usual handling of the e-commerce, but looking at how we can provide more value add or specialized handling services for all these e-commerce players. So with this MOU with Shun Feng, we are expanding our relationship with them beyond Asia and [indiscernible], which, as you know, is our [indiscernible] in Europe. That is also where we manage Chinese volumes drop. So with Shun Feng in there. I think the collaboration and all that in e-commerce space is going to help fill up our space as well.

The next one Kuehne+Nagel, in fact, this is something that we signed in October last year. I'm pleased to say that we have now moved on to quite a few POCs. But this particular sea through at SATS is an important one. With a lot of supply chain disruption, having an alternative where you're combining ocean and air. It's a product that I think is starting to gain a lot of traction. And we've started a trial in Long Beach and that's proven to be successful. We're also now starting some trials here in Singapore as well. And if these trials work, hopefully that converts into an actual product that Kuehne+Nagel can sell to their customers. And this is all going to help drive efficiency. But I think important to give consumer or customers in alternate supply chain note, where they can balance cost versus the speed of supply chain.

The next one is the Formation [indiscernible]. You've seen the announcement in there. This is an important shift for us. [indiscernible] allows us to have a focused team to continue to grow Singapore Changi Airport. This is our home base. It's important we continue to be best in class in Singapore and continue to support the growth of the Changi aviation ecosystem in partly the airport as well as our largest customer as well. But I think at the same time, it gives us an opportunity to have a team to now really focus on really growing the business in Asia. We -- then that allows for a global network that's complete with all Americas and EMEA together, AsiaPac. So a team under my colleague Bob will be tasked to really take a handle and grow this APAC business going forward. And [indiscernible] sure the terminal that we have in Madrid, as you know, Madrid, Spain is one of the process growing for us. And that is driven a lot by e-commerce as well. We have been operating in -- I mean, in a stress environment in a sense that volume is huge in Madrid, and we are running our space. So this fifth cargo terminal in Madrid is going to give us additional capacity to grow more business in Spain. And hopefully, that also translates to a higher growth trajectory for us as we have more capacity being put in place.

The bottom chart that shows you an update of where we are in terms of synergy. As you know, $100 million was a target when we did the acquisition. Pleased to say, year-to-date or at least from the time we have acquired this more than a year, we have now closed $51 million of a $100 million. So I have to say very good progress both from a commercial and operational standpoint. Clearly, there's more to go. We are going to shoot for more where possible, but this is much [indiscernible] at the moment.

In financial fiscal savings, you heard in our year-end results, $50 million is there. We do have still some initiatives to try and take up more costs than that, but those are plans that we have going forward. Next slide, please. Now a bit of [indiscernible] in terms of what we have done. But I think it's also important to recognize that our associates are getting recognized the approval. I think being the largest is one, but I think we need to make sure that we do well and service our customers in terms of good performance and quality. So I said for what they've done in the airport in Delhi, AAT, as you know, AAT we are number 3 cargo handler in Hong Kong but I'm pleased to say that they recognized as a service provider here in Hong Kong itself. So we go to the AAT team. On the food side, we continue to be recognized for what we've done, actually around the authentic Asian cuisine. For the sixth year in a row, we have been recognized as an allocator of the year for Asia. So good recognition of what the team has done for airline customers. And then the last one, I think, again, something that we are very proud of, recognized as being the most transparent company in SGX. So this is clearly a recognition for both the finance, legal and onstream in how we actually show our information to all our shareholders as well.

So with that, I will pass it on to Manfred to take us through the financial results.

[Kok Khong Seah, executive]

Thank you, Kerry. This is Manfred here. I'll take you through some very high-level numbers. We would have had the benefit of the results from last next release. I'd like to devote more time for Q&A to make this meeting a bit more purposeful. On summary, Slide 5 here, you can see that the key highlights are set out at the top of this slide. Revenue, $1.37 billion, that's about 15.5%. A growth EBITDA of $249 million, which is about 18.2% margin actually grew about 13x and the -- we'll go into the -- another slide that will show you where our operating leverage kicks in share of results, 35.6%. Even if you back out the one-off about $7.3 million, it still represents a 33% year-on-year growth. PATMI came in at about 4.7% margin. This is about $95 million favorable variance compared to the same time last year. We have set up some notes here. I'm going to need it for you to read. And suffice to say that both gateway as well as food have also grown in tender. Now at the bottom of this slide here, key operating statistics, I'd like to call out cargo growth, air cargo growth of 19% in this outpaced industry growth reported by 6 months of about $13.4 million. Aviation meals coming very strongly and we grew at about 26.8%, all 3 major catering businesses, all firing up, at the same time, SATS catering, TFK as well as Nanjing Weizhou in China. Next slide. I won't go too much into this, except to just give you the orientation here. I've covered the year-on-year growth for the group. We have also included the Singapore data here. Just to give you a sense of how Singapore is also faring.

The blue bubble here actually shows the level of recovery compared to pre-COVID. So you can see that we are almost at 100% of pre-COVID already. And then the bottom of this slide shows you a sequential quarter-on-quarter uptick. You can see that all the metrics have grown, albeit that the last slide at the last box here, shows the headcount. We today have a group headcount of about 51,000, which is about 2,000 increase compared to the same time last year, given the volume that we have to handle.

Slide 7, a quick slide here to show you a segmental growth, the year-on-year change. You can see that revenue increased by 15.5%, cargo grew 17%, ground 3.3% and then food solution grew 29.3%. Now cargo today for the first quarter is now representing 51% of our total revenue. This actually increased from 50% recorded in the fourth quarter of last year. Again Singapore contributed at 34%. You can see that the Asia Pacific, 11%, both EMEA and America combined came in about 55%.

Next slide. I will just go through this very quickly. I just want to maybe focus on the last column. You can see revenue 15.5%, OpEx actually grew 8.7%. You can see the huge positive draw here. As a result of that, the EBIT expanded by 13x from 0.7% margin all the way to about 8.2%. And then I mentioned that share of results SoAJV, even if we back up 7.3%, it still suggests that there's a 33% growth year-on-year. And PATMI, we actually grew by $95 million, reversing a loss of $29.9 million of first quarter last year, to about $65 million.

Next slide, please. Cash flow, I just want to call out the operating cash flow and free cash flow the top and the bottom, you can see that there's a variance -- positive variance of $124 million, $125 million here. And this -- we are very pleased with this. We were able to reverse a negative free cash flow of $89 million to this quarter of $36.7 million. Okay, next slide, yes, this basically gives the oral illustration of how quarter-on-quarter the cash flow is. There's seasonality in our business. As a result of that, every quarter, there will be a different due to timing of collection payments as well as net working capital management, not to mention also the leases have varying a period of payment. One slide on the balance sheet very quickly. You can see that the total debt today is about $4 billion. We made a repayment of about $68 million. I got the call earlier. We committed that we will repay up to about $200 million this year. We've already done about $68 million. And with the increase in cash flow, we're confident that we should be able to meet that commitment of repayment of $200 million. Cash position stood at about $684 million, which is a slight increase of $25 million.

Now there are 3 metrics here, which are annualized in nature. So I just want to call out qualify it. ROE of 10.8% is on an annualized basis. Likewise, for the gross debt EBITDA ratio coming off from 4.6 to about 3.5x. That is also on an annualized basis. One slide on the quarterly trending 12 -- Slide 12, just to call out the sequentially, you can see that both EBIT as well as EBITDA after leases, you can see there's a very nice trending upwards. And that goes to show the operating leverage kicking in. I mentioned that the revenue grew 16%, OpEx grew half of that and 4 more profitability is actually falling through down to the operating level.

As a result of that margin has expanded from 0.7% operating margin all the way to about 8.2%. And we believe that there is some way to go here as operating leverage continue to work in our favor with the scaling up of revenue. Share results, you can see that it's very nicely consistently above $30 million mark, which can suggest that there's a run rate of about maybe $110 million to $120 million per year. And EBITDA margin -- okay, before leases came to about 18.2%, our own expectation has always been that we want this to scale here 20% mark. And then after leases, it's 10%. Again, we would want to continue to focus on quality of earnings and then move this beyond the 10% mark after, yes.

Next slide, I probably could include two slides here to just give you a sense of the progress, most of you would have recognized this slide that we showed in the last quarter. Maybe I'll ask maybe go to the next slide, I'll touch a little bit on the entire transformation journey. A recap on our industrial logic. We have always believed that the acquisition of WFS is the right thing to do, and we are the right owner simply because we believe that by combining with the largest cargo player allows us to diversify our base, number one. Number 2 is actually to chart a new growth path for the company, and we are truly a global aviation services platform today. And largest global air cargo handler with leading position in key strategic in the developed markets, Europe, North America and Asia Pacific provides that growth path.

And we are now in trade routes responsible for more than 50% of the global trade flow. So the industrial logic and the entire investment thesis is playing out and we are very glad that integration is progressing well. With synergy tracking the target that we have set for ourselves. So today, we are more than 50% of the $100 million that we targeted. This is without counting the $50 million to $60 million of annual financing as well as fiscal savings. The combination of the SATS, which provide us a very, very scalable business and operating model. You can see that in Kerry's earlier slide explaining all the different initiatives, commercial initiatives that we are doing.

This is a result of who we are today. And the network that we have, the advantages, the competitive advantage that we have and operating out of the resilient markets, this will provide us with significant growth opportunity. And the last point here is management remains committed to continue to drive value, to continue to drive shareholders' return and hopefully, to be able to deliver on our commitment of restoring profitability to the rightful level as shown in the earlier half.

Now with this, I'm going to hand you over to Kerry to cover the outlook, and then we'll go into Q&A.

[Tee Mok, executive]

Thank you, Manfred. Just in terms of outlook, just on the cargo side, let me just briefly touch that. We remain very positive on the cargo side from now to the end of the calendar year. We believe volume will continue to hopefully maintain at least where they are in the past quarter. And we believe the e-commerce side is still pretty much driving that growth. [indiscernible] issue continues to be a problem for many of the shippers. And hence, the shift to air cargo is there. And I think you would have read in many reports as well, a lot of the airlines themselves are raising rates and because of tight space that's out there at the moment. We believe that puts us in a very good position to continue to benefit from this shift in air cargo.

And hopefully, that will allow us to continue that operating leverage. On food side, we believe that the travel will continue as well, and the momentum will be maintained in terms of the in-flight catering food that we are producing for our customers today. Next slide. I think the integration remains on track. I want to say that the team is working very, very hard to position ourselves even more with our customers. I think Manfred alluded to it. Because of our network, we are having very different conversations with customers. We're very targeted around the trade pin point any customers and using our network to drive differentiated service offerings, that's very key. I mentioned earlier around the initiative of doing to position us for future growth. Those partnerships and those MOUs that we signed. It's all about driving future growth.

It's all about creating something different from where we are today. And that's going to be a big focus for us as we move forward. And of course, as I mentioned, the Changi hub remains a very, very important part of our business and having the team in there to focus and work closely with the ecosystem partners, we believe will enhance our status here in Singapore. At the same time, also offer us opportunities to get on the growing Asia Pacific market.

And again, our associates and JVs out there are working close -- even closer with us going forward, we believe will help drive better growth opportunity for the whole group. With that, I think [indiscernible].