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[Audio Gap]
[ welcoming you ] to this webcast. I'm Carolyn. Welcome to SATS. Early this morning, we released our results for the fourth quarter and the full fiscal year 2017/'18. With me here are Alex Hungate, President and CEO; and Manfred Seah, CFO, who'll be taking you through a review of our results and answer your questions.
Before we begin, I would like to remind you of our forward-looking statement on Slide 1 of our presentation. I know you have been waiting for a while now.
I hand you over to Alex to begin his presentation.
Thanks, Carolyn, and welcome, everybody. At the end of the year, we take a bit of time to reflect on our performance for the year, of course, like we do every quarter, but we also look forward a bit more actively into the strategy and what we're expected to do in the coming years. So that's the nature of the presentation this morning. I'm going to start with that, the strategy.
And just to recap our strategy, if you look on to the page which reads feeding and connecting Asia, you'll remember that our strategy is quite simple. It has 2 dimensions: the first dimension is to grow our footprint across the region; and then the second dimension is to build platforms across -- to join those individual locations into a comprehensive network that creates value for our customers, whether they be passengers, food customers or shippers. And I want to illustrate that by going on to Slide 5, to talk about some of the locations that we've built out this year for Food Solutions on this slide. We've been strengthening the Singapore operations. Later on this year, we'll do the official launch of a big new expansion of one of our facilities here, which uses much more large-scale production and sophisticated food technologies to allow us to cook in larger batch sizes, giving us more scale and more consistency and, of course, more productivity.
You're aware that we've been expanding in China. We have the kitchen in Kunshan, China, which is part of our joint venture with Wilmar, that's Yihai Kerry. That kitchen is on track and is growing its revenue and customer base consistently.
And then finally, you'll be aware that we announced a memorandum of understanding with Turkish Airlines to create a large catering facility in the new airport in Istanbul. And then in April, we recently announced further details for agreement that we agreed to more detailed agreements around that as well. So hopefully as that progresses, we'll start to build what will become the largest in-flight kitchen in the world based upon the ambition for the new Istanbul airport. So those are examples of locations for our food business as we've expanded our footprint.
And then the next slide talks about what we mean by platforms, the second part of the strategy, the dimension of connecting all those together. One key aspect, of course, is our culinary expertise. Because we've been working for national airlines all this time, we have very demanding customers who demand authenticity in each of the cuisines of the world, their national carrier has to carry authentic food. And then our culinary platform allows us to share that expertise across kitchens so that even if the flight is coming back from a different location, unlike other providers, we can be sure to provide authentic cuisine on the inbound flight to their hub as well as on the outbound flights from their hub. That's something that's very attractive to our customers.
And then a technically large platform that we have made some progress with this year but expect to do a lot more in the coming years is the integrated supply chain. So in the past year, we've been looking at purchasing synergies. But I think the ambition that we have for the supply chain is much broader than that with the integrated business planning capabilities that will allow us to aggregate demand and also further work on looking for logistics synergies as well. So there's a lot more that we need to do in that space.
Going to the next page, let's talk about Gateway now. Same strategy on Gateway, so we want to expand the locations where we have across Asia. So here, a couple of really significant investments this year.
Firstly, with AirAsia. So we took on the management of their ground handling operations across Malaysia and then formed a joint venture here in Singapore Terminal 4 with them as well. That means that our Malaysian footprint is now significantly larger with 15 airports across the country. So the first phase of that was to focus on service improvements, which is going very well. Subsequent phases will involve rolling out technology to those locations. And then obviously, as the business grows both in terms of AirAsia's growth and the third party growth, we expect the financial returns to grow over time as well.
In Hong Kong, you will recall that we actually divested a 51% stake of SATS Hong Kong to Hong Kong Airlines, in fact a wholly-owned subsidiary of Hong Kong Airlines. The purpose of doing that was to form a partnership with a hub carrier in Hong Kong. SATS Hong Kong until that point had been growing its business but it didn't have a hub carrier partner. As a result of this partnership and the co-shareholding, SATS -- Hong Kong Airlines has been moving across its business to do a joint venture. So up until now, it's moved the narrowbody business across. And in November, it will be moving the widebody business across as well. So obviously that increased volume is improving the financial performance of SATS Hong Kong, and that's really the -- fundamental to our strategy across the region as well, partnerships with hub carriers. So that's what's happened in Hong Kong.
And then the last venture I want to talk about on the Gateway side in terms of locations is the joint venture with Cargo Services Center. Mumbai airport has about 800,000 tonnes of cargo that go through it every year. We want this joint venture to be the most successful of the 2 suppliers of cargo terminal operations in that market. So we are aiming to capture the majority of 800,000 tonnes with this new venture, which just started up in April. So those are the locations.
And then as we move on to what do we mean by platform in a Gateway sense, well, you're very well aware of the growth in eCommerce volumes across the region, driven by changes in consumer behavior primarily, but also demand for fresher food produce as well, so eCommerce and perishables both growing very fast. And in the past, we've talked about pharmaceuticals as well. So our network becomes more and more valuable to support those growth trends. So one of the things that we've done is we've launched Tracer, which is a track and trace on a piece-level basis for -- to support the eCommerce volumes. And then we have some underlying technologies. Our operating system for cargo is called COSYS, and we've linked the RFID tracking to COSYS, and we've also linked the pharmaceutical corridors that we've been building between our different facilities as well through that system. And then quietly but significantly this year, we've also upgraded our baggage reconciliation system. And this is very important because this allows us to minimize disruptions due to passengers not showing up and therefore not being able to trace their baggage, and that's a critical requirement in today's security-conscious world. So these are what we think of as platforms in a Gateway sense.
Now we thought we'd look back over the last 5 years, they're important 5 years for me personally because these are the 5 years that I've been the CEO at SATS. So I know these numbers very, very well. I take them all to heart. One of the key drivers of our strategy is to look for more productivity. You know that a lot of what we do is labor-intensive where you need to employ a lot of people to do activities, both in the kitchen and in the Gateway. And so we realized that unless we address the productivity as a subject, we wouldn't be able to prosper financially. So by engaging our people in a technology-driven, people-led approach, we've managed to get our people to help us look for ways to improve our processes and that to embrace the implementation of technology over the last several years. And this slide more than any shows the financial impact of that. So this is the value added per employment cost increasing quite consistently over a 5-year period. So already taken into account here, you have obviously the wage inflation, increasing costs of hiring people in cities, which is where the big airports are. What we said is we are managing to become more productive over and above the wage costs in those places.
Okay, thanks, Carolyn. And then now moving on to the -- how that falls down to the bottom line. You can see here this is the trend for our profit after tax and miscellaneous items, and you can see it's very consistent improvements over time. A lot of this driven from the expansion of our footprint and, in fact, Manfred will talk shortly about that. But you can see that the contribution from overseas associates and joint ventures has been growing consistently as we've grown our footprint. And as we go on, you can see the impact on the return on equity too. Slight decrease this year but the last couple of years, of course, we've had the rebate from Changi Airport, which dropped off this year. So I think there's a fairly consistent pattern over the 5 years of improving return on equity, which we intend to continue to focus on.
We said 5 years ago that we would focus on a dividend policy that was sustainable and progressive. I think you can see from this slide what we mean by progressive. Sustainable, just to be clear, is that we have to continue to generate the operating cash flow necessary to fund this, which we'll talk about a little later on. But this year, if the shareholders approve at the AGM in July, we'll be increasing the dividend again by another $0.01 for a full year $0.18 payout.
So now we're going to look at the financial performance. I'll cover the summary and the operating stats and then hand over to Manfred as usual. You can see that the group revenue was $1.7 billion. There was a slight drop overall in the year, but if you exclude the deconsolidation of SATS Hong Kong, it would have grown, particularly on the Gateway side, which would've grown about 7%, and a slight reduction on the food side primarily due to pricing pressures.
Operating profit therefore dipped slightly, 1.8%. You saw this pattern during the year. It's a similar pattern in the last quarter also. I think the pricing pressure is there. Productivity, though, continued to improve as we saw earlier.
That was compensated -- more than compensated for by the contribution from associates and joint ventures, which rose 9.2% in the year. They're now at $71.2 million. And therefore, PATMI grew 1.4% to a new record high of $261.5 million. We talked about ROE earlier. Free cash flow, $146 million, and Manfred will talk about that later as well. And the earnings per share improved to $0.234, and we talked about dividend earlier.
If we look at the next slide, which is the operating stats, you can see that some outstanding numbers in the market for cargo, it was a good year for cargo volumes across the region but particularly at Changi, growing at 6.5%. As we've talked about before, that is a high operating leverage business that helps us improve our margin. And then the other outstanding number here is the number of ship calls handled by our Marina Bay Cruise Centre. This is a relatively small business but it's been growing steadily. We've been sharing information with you about the ship call increases over time. Just to point out, this is also a high operating leverage business. So as the volumes go up, the fixed costs of running the center don't change that much and, therefore, the margins improve. And Gateway has benefited from that this year with now, I would say, a more significant contribution to the bottom line as well.
I need to point out that both passengers handled and flight handled look lower than they should because of the deconsolidation of the SATS Hong Kong business. So we also -- to make sure this is consistent with the financials, we've taken out those numbers from August when we deconsolidated that entity. So just to reassure you, both of those actually are growing and, in fact, I would say we've increased our market share slightly in our key markets.
Gross meals produced is also growing. That's a combination of both our aviation catering in Singapore and nonaviation catering. But of course, now you've got TFK and you've also got the new venture in Kunshan, the SATS Yihai Kerry, and some growth in our Middle East operation, which is a subsidiary called FASSCO, which does hospital catering in Middle East. So all of those starting to contribute to an over 4% growth in gross meals as well.
So that's the operating stats. And now I want to hand to Manfred who will take you through the full year and quarterly in more detail.
Thank you, Alex. Good morning to all. I will go into the financial slides now.
Our revenue, group revenue for the year is lower at $1.7 billion. This is mainly due to a decrease in food revenue of about $26.7 million, which was partially offset by a $21.9 million growth in the Gateway revenue. Alex mentioned about the deconsolidation of SATS Hong Kong. If we were to exclude the deconsolidation impact of SATS Hong Kong, of which the group actually divested 51% control interest in July 2017, group revenue would have increased by about $25.8 million, with Gateway posting revenue growth of about $52.5 million instead.
Operating profit decreased $4.2 million to $226.4 million due to lower contribution from food. This is mitigated by higher operating profit from Gateway and also lower corporate costs. Share of results of associates grew by 9.2% or $6 million due to strong contribution from overseas operations, specifically from Gateway divisions, namely from PT CAS and as well as AISATS, which show improved performance. PATMI grew $3.6 million to $261.5 million. This is underscored by high contribution from associates and as well as increase in nonoperating gains. Underlying PATMI came in at about $236.1 million, an increase of $1.8 million compared to previous years.
As Alex was mentioning, SATS is actually in a net cash position with debt to equity ratio of less than 7%. So our cash and short-term deposits stood at about $146 -- sorry, $373 million, and was generating about $146 million of free cash flow.
Okay. I will just focus on the fourth Q result in this slide. 4Q '18 revenue decreased $2.1 million to $423.5 million, with food revenue lower by $5.7 million while Gateway grew $3.3 million despite the deconsolidation of SATS Hong Kong. Operating profits improved by $0.3 million for 4Q '18 due to group OpEx being lower by about $2.6 million compared to revenue. So share of results from associates was lower for the quarter due to lower results recognized for the food associates.
Other nonoperating income in the fourth quarter included $8.5 million of nonoperating income recorded in TFK for the disposal of our wholly-owned Brazil subsidiary. This is the TFK Restaurantes and its investment properties. PATMI and underlying PATMI for the quarter were lower at $65.4 million and $51.5 million, respectively, compared to the previous year's results.
Despite the challenging operating environment, our financial indicators have been stable and demonstrated resilience in our operations. Operating margin was higher at 10.9% for the fourth quarter as drop in OpEx outpaced the decrease in revenue.
Not shown in the slide is our group PATMI. Our group PATMI margin for the fourth quarter and full year were at about 15.4% and 15.2%, respectively. Underlying PATMI margin remains relatively steady for fourth quarter as well as for the full financial year. This is at about 12.2% and 13.7%, respectively. As Alex has mentioned, ROE remains creditable at about 16.2%. This is due to a slight decline in -- the slight decline was mainly due to the larger equity base that we have taken on through retained profits generated for the year. EPS for the year was $0.234, of which the board is recommending a full year dividend of $0.18.
A quick take on segmental revenue for both fourth quarter and also for the financial year. Food revenue declined while Gateway revenue improved. The latter on the back -- the latter attributed to strong cargo tonnage as well as flights handled. As you can see, aviation will remain -- has remained the dominant sector for the group accounting for more than 85% of group revenue. Slight decline in aviation revenue and contribution during the year was due to the deconsolidation of SATS Hong Kong.
By geographical spread, Singapore remains the key pillar, accounting for more than 80% of the revenue. And it's worthwhile to point out that if we were to consolidate all our associates revenue, the Singapore portion is actually -- account for less than 50% of the total revenue.
Group OpEx, as discussed in Slide 17, our group OpEx decreased -- for the fourth quarter decreased year-on-year about $2.3 million to $423.5 million due to -- mainly due to the SATS Hong Kong deconsolidation. And for the full year, group OpEx was $0.6 million lower despite an increase of about $16.7 million in license fees and depreciation as well as other costs.
Moving on to the associates slide. This slide actually shows the contribution from the food as well as from the Gateway associates. For the full year, overseas associates continued to show strong growth. The top 5 contributors for the associates are: PT CAS group, the Evergreen group, the AISATS, AAP as well as MIC. Pleased to also mention that our joint venture with AirAsia is beginning to contribute to our earnings in the last quarter.
Okay. Slide 6 -- Slide 22 show our financial position. Our balance sheet remains sound and steady. The increase in associates is mainly due to the joint venture in -- with AirAsia as well as subscription of our 49% interest in Mumbai Cargo. In addition, SATS Hong Kong has also been reclassified in associates category. So total assets here increased by about $68.9 million. Total liability dropped about $6.5 million as a result, total equity actually by about $75 million.
Moving on to group cash flow statement. If you look at this slide, our -- typically, our net cash generated from operating activities is about $300 million to $320 million, and this is slightly lower at 31st March of this year simply because of there's a longer AR days, longer-than-expected AR days for some of the customer groups, which has now since been resolved. And as a result of that, you can see our free cash flow is slightly lower, lower compared to last year. This is due to the change in the working capital which I have already mentioned has been resolved.
Okay, so in conclusion, our -- the group generates $245 million from operating activities, with a free cash flow of $146 million.
With that, I shall hand this presentation back to Alex.
Thanks, Manfred. Okay, so when we look back to this time last year, we were all gathered together having a similar kind of outlook for the coming year. And you will remember that we did flag that this would -- the '17/'18 year was expected to be a very challenging year because we had the ongoing pricing pressure, we had the withdrawal of the rebates from Changi Airport, a withdrawal of a number of incentives also that have been in operation. But I said that nonetheless, we would push ahead with our strategy of focusing on productivity and using technology to drive scale benefits. And I said that we would not pull back on our strategy of expanding our footprint as well because we're investing in Yihai Kerry, SATS Yihai Kerry venture, building new kitchens. We're investing in Saudi Arabia with the Dammam cargo facility, which is a greenfield facility. We're investing in the consumer app and our ability to digitize the customer experience in the airport. And I am -- looking back now, I think we see a resilient performance. We're able to continue to increase our operating profit and -- sorry, our PATMI. And in the fourth quarter, you can see also that the operating profit stabilized after being under pressure for the first 3 quarters. So I think it's a resilient performance despite all of these various challenges.
So now looking ahead to the next year or the impact of the current year for us, the '18/'19 year, what do we see? Well, the good news is that we expect passenger and cargo to continue to enjoy robust growth. And because of our various initiatives to build up the performance of our platforms, we think that we'll continue to do well competitively versus our -- the other competitors in the region. So we hope to benefit from that growth. We'll be focusing in particular on continuing to improve the customer experience at the Singapore hub. This is our showcase, and it's our longest partnership with our biggest customer. So we've got to make sure that we continue to drive the performance on service and technology in this market.
And then beyond Singapore, we'll continue to focus on growing our footprint. Our reputation in Singapore allows us to -- access to a number of interesting investment opportunities in various new locations which are fast growing. So we prioritize those based on our ability to generate superior shareholder returns over time. But you'll expect us to continue that part of the strategy. And you'll expect us also to continue to see through the platform investments that we talked about earlier.
In particular, we want to get more scale through the combination of aviation and non-aviation food. We're a large player in both those markets and increasingly, not just in Singapore, but in other markets where new sectors like the ones served by SATS Yihai Kerry are growing very fast in the major cities. We want to make sure that we get the full benefit from strategic sourcing, category management, integrated business planning and logistics synergies as well. That will be a big focus for us in the coming years for the food business to make sure we can continue to offset the pricing pressures that we expect to be maintained in that space.
So with that, I think we'd like to hear any questions that you have so we can go into more detail on the areas that you're most interested in.
When you ask a question, can you please state your name and the company you're from and please speak to the microphone so that we can hear you better.
Neel Sinha from Maybank. I've got 3 questions. First is if I can get some color on the segmental revenue. So Food Solutions down by 2.4%. A large part of that I can see is Japan. And was that due to just lower traffic or pricing or loss of a customer? And on the segmental revenue, again, Gateway Services, 1.7%. Changi has grown faster than that this quarter. So -- if I look at the slides, so is there some dynamics I'm missing, was there repricing of some contracts? So that's the first question. The second, would be great if I can get some outlook on CapEx for this year and actually the year after. So would I be right in assuming the big numbers out there would be largely China kitchens if Turkish Airlines venture goes through and the cargo terminals in Dammam and India. I'm assuming those would be the big 4. So what should we be looking for CapEx? And then, finally, if you could just run me through the associates Food Solutions, the Evergreen Sky Catering, what exactly is the adjustment for [ the rest of this ] I'm not sure I followed.
Thanks, Neel. I'll take the first 2 and then Manfred will take the second 2. So firstly, TFK, we saw during the first 3 quarters and it continued into the fourth quarter, the impact of a loss of Vietnam Airlines, which was a result of corporate action they had in Vietnam, where ANA actually acquired a minority stake in Vietnam Airlines and as part of that agreement, they shifted to the ANA kitchen in Tokyo. So there's not much we could do about that one. And then the other one was some reduction in the Delta flights into Japan, which I think we had flagged earlier in the year as well but that continued into the fourth quarter. Offsetting that now, we can see that some more positive news. Two new customers that -- and we can see their volume starting to kick in. So we anticipate that in the coming year, that will turn around. So we'll start to see revenue growth again in TFK. Now we have the Gateway revenue. Yes, the -- you're right. The Changi volumes and the volumes around the region, have grown faster than 1.7%. And the reason for the net 1.7% is because we've deconsolidated the SATS Hong Kong revenue, which was north of SGD [ 13 ] million. So if you put that back in, the Gateway revenue for the full year would have grown more than 7%, which I think is pretty healthy compared to the underlying volumes.
Right. On the question on CapEx, the CapEx spent for FY '18 year that just passed is about $100 million to $110 million. This is slightly higher than -- a notch higher than last year. Going forward, we generally don't guide on CapEx but fair to say that some of these projects are actually at the associate level. So -- and we will be funding CapEx through the joint venture. So some of these are still confidential, which we can't share, particularly for our Turkish project. In terms of the Indian project, I think that has -- it would not be [ significant ]
[Audio Gap]
Sorry the -- there will be CapEx on that, which we have budgeted for this year. So we are looking in the region of $20 million to $40 million. On your question on Evergreen, if you'll recall, back in last year, the year before, FY '17, we actually increased our stake in Evergreen from 15% to 25%. As a result of that, we started to equity account for that, and we need to do a fair valuation for all the assets. And due to the -- there's a surplus on the asset revaluation, which we have taken into our income statement, both for FY '17 as well as FY '18. So the -- this year, the adjustment's about $11.6 million which we have taken through the income statement.
Is this -- I mean it's an annual revaluation...
No. It is a one-off. It is a one-off...
Because you took it last year as well, right, so...
So when we took it last year, the purchase price the allocation exercise has not been concluded. So we actually did mention that subject to conclusion of which, which this year it has concluded and the final amount has been established and determined, and the surplus is $11.6 million this year compared to a surplus of $15 million last year. So this is -- this will be all for this particular project.
This is Rachael Tan from UBS. I have a question on the contract negotiations with SIA. I understand that this is a -- I mean, it's a continuous process as Alex said, there is no [ cliff jump ] the last -- a couple of quarters ago. Just do you have any updates in terms of how SIA is seeing some of these contracts that you have with them?
Thanks, Rachael. Yes, as I said, SIA is extremely important to us and a lot of what we do is driven by trying to make sure that they continued their reputation for great service and innovation. The partnership is a long-term one. I think they see it in a long-term light as well. We want to make sure though that they remain cost competitive, too. So I won't say that there's no pricing pressure. There's obviously pricing pressure for them as well as from our other customers. But I think that's part and parcel of making sure we stay competitive. So there's no real new update on that, Rachael, just that we continue to work very closely with them.
This is Jesalyn from CLSA. Just on the Turkish joint venture, given the slump in lira, any words there or any updates there? Secondly on the business for Food Solutions. In general, do you see pricing pressures easing or do you see it still continuing? That's all.
Thanks, Jesalyn. First of all, the lira. Yes, there's a lot of news attention on the lira and the upcoming election in Turkey. This is a very important investment for SATS. So I guess one of the reasons why we haven't finalized the deal is we want to make sure that the deal is constructed very carefully that -- in a way that we can protect ourselves against some of those risks. So I won't say too much because we haven't announced the deal, therefore, we can't talk about details. But suffice it to say that we are trying to structure the deal in a way that we'll be protected against some of those -- some of the currency risks that you talk about.
[Audio Gap]
[indiscernible]
Well, we won't sign the deal until we are convinced that we've managed to create those kinds of protections, so I won't give a hard deadline.
[Audio Gap]
Yes. I would say that we expect Food Solutions pricing pressure to be ongoing. There's no real external change in the environment, so there's still a lot of pricing pressure. That's why our strategy is to focus on productivity and using our scale to make sure that we can become more efficient than anybody else who's catering on a smaller scale. And I mentioned earlier in the outlook statement that we want to aggregate the demand between aviation and non-aviation because, if you look at the combined volume that we have, we're much larger than any other caterers in most of the big cities where we operate. And as we expand into non-aviation catering, obviously that advantage will get even greater. And the supply chain strategy links together the demand across cities. So -- and across countries, so that gives us even more scale as well. So you should expect us to continue to focus on that because we want to make sure that no matter what happens in the market pricing-wise, it will always be able to generate good margins.
Just a quick follow-up on the Turkish. Would you all have flexibility to borrow locally to fund the equity portion? I mean, would that -- could that be an option? Or -- and I just had one quick clarification on the segmental revenue again. By geographical location, that drop is largely due to SATS Hong Kong deconsolidation, right?
Sorry, Neel, can you repeat the first question?
Would you have flexibility to borrow locally in Turkey to fund the equity as opposed to, let's say, IHH, they borrowed in euros and funded their expansion in Turkey?
So like what Alex has guided earlier, we are looking at all possibilities, and we have been exploring with both local banks in Turkey as well as international banks to weigh which will be the best option. And also, more importantly, is actually to cover our ForEx exposure. The answer is yes, we can.
We like to do that. It creates a natural hedge against some of the currency exposure, some of the currency exposure. Obviously, it doesn't hedge you against it.
[indiscernible]
Yes, exactly. Yes, that's right so we have to assess that and look at different structures that can give us a more favorable cost of funding but still give us the lira protection.
This is Richard from Phillip. I just have 3 questions. First one is on the license fees, $84 million. I just want to clarify, would it have been higher than that if SATS Hong Kong were not deconsolidated? The second question is can you give some color on the lower dividends from associates and JVs this year for FY '18? And third question is on the AirAsia JV. Do you -- have you secured any third party customers yet? And how will the implications of the new political regime change be managed in this joint venture as well.
Okay, great. Manfred is going to pick up the license fee question, number one, I'll pick up the dividend and AirAsia.
The quick answer is no. The license fee, the deconsol of SATS Hong Kong has got no impact on that. In fact, the 2 cost buckets that SATS Hong Kong affected is actually staff cost as well as premise cost, premise and utility cost.
Thanks, Manfred. Yes, there's slight reduction in dividends in the quarter. We expect that to be normalized. There is a couple of situations where the dividends are temporarily unable to be sent back but both of those actually should be remedied. So there's no leakage in that sense. You shouldn't start forecasting that we can't get the dividends out of those JVs. And then you mentioned third-party business at AirAsia. The first phase of our involvement in AirAsia, which just started quite recently. If you remember in November we sent people up and then January was the technical completion date. The first phase is focused on improving service in the key airports. And then the second phase is focused on introducing new technologies. During that phase, we expect to have more third-party upside because obviously that will -- we'll have a lot to talk about in terms of the opportunities for the third party customers. And that's why I mentioned the -- after that, we hope to see a consistent improvement in the financial contribution. The contribution was positive already. So contribution on a gross basis and also after amortization was positive. But we expect it to get larger over time as we add the third-party business as well.
[indiscernible] managing the implications of the regime change as well in Malaysia.
Okay. Well, that's obviously something that we're watching very carefully. Hard for us and anybody else in the market to predict exactly what's going to happen. But our philosophy is -- our job is to improve services, make sure the infrastructure is more effective, which is a good thing for Malaysia. So we hope that any government in Malaysia will recognize that SATS can make a contribution in terms of the quality of the infrastructure and the effectiveness of the aviation services in that market.
Okay, let's take a question that has come in from e-mail. Tobias, he asked 2 questions. I think the second one regarding Turkey is really answered. The first question is, do you have a regional focus when seeking new contracts with airlines?
We are increasingly affecting a global account management approach from a prospective relationship management with the key airlines. Because we operate in more than 60 airports, it is true that we have more contacts, if you like, with some of our key airline customers. So we have a systematic approach to try to cover all of the decision-makers, whether they be in the local station or whether they be at headquarters. And I think that is an advantage for us in Asia. A lot of the competitors globally in Europe and the U.S. will do the same in those locations. But nobody else has the same Asia presence as us. And frankly nobody else probably has the cultural and language diversity that our team has in terms of managing those relationships at the Asian headquarters. So we think we have an advantage, and we're increasingly more actively and systematically trying to execute that relationship management approach to do enterprise-wide sales. Contractually, we still believe that the negotiations occur location by location because the competitors are relatively different at each place. But from a relationship perspective, it is an advantage to make sure that we systematically map the relationships and manage those relationships in an enterprise approach.
Okay, we have another question from Sumit from Zaaba Capital. The question is, when you say a dividend is sustainable, the overall cash burn is SGD 133 million this year despite the $0.01 lower dividend last year. This seems like 1/3 of your cash balance have burned this year. How should we think about the sustainability of the dividend especially after considering potentially large investments like Turkey ahead?
Yes. This is a key question because, again, if I look back 5 years ago, we did note that at that time the balance sheet probably wasn't working hard enough in terms of shareholder return. And we would expect to move towards a leveraged position over time. And that's what you see. Our cash balance is coming down as we start to deploy capital into the key opportunities in the marketplace. And we believe Turkey is one of those key opportunities, not to mention the others that we'll be making in Malaysia and China and India, et cetera. So how should we think about the dividend policy? Well, the dividend is progressive and sustainable. When we -- you can see what we mean by progressive now very clearly, if you look at the pattern. By sustainable, we expect that our operating cash flow has to cover the dividend over time, which it has been doing. As you know, for example, this year, there was the increase in -- to $0.18. Our payout ratio is around 80%. So you can see that we're still comfortably covering. The operating cash flow this year looks slightly lower than it is on an underlying basis. As Manfred mentioned, there was one particular payment that has now been regularized but just after the year end. So for the -- for now, you can see that we're definitely on a sustainable basis. If we will continue that progressive policy and make these investments like the Turkey investments, what should shareholders think about? Well, we have to firstly make sure that those investments are generating the returns that we expect them to generate. And that means that, of course, over time, we can continue to increase the dividend. And then that dividend can be funded not only from our existing portfolio of investments but from some of these newer investments as well. Our own view is that investments like Turkey will contribute relatively soon once they're operational. So although this year has been about setting up that investment, once the deal is consummated, then we expect it to contribute relatively quickly. And that will help us fund dividend. But you should expect us to make the balance sheet work harder in the process of executing the strategy. So you would expect us to move to a net levered position. Not excessively levered. I don't think we'd go beyond a 30% debt to equity ratio, for example. I think we wouldn't want to go much higher than -- any higher than that. But you should expect us to take on some leverage, and that can help us to manage our weighted average cost of capital, which I think will be a good thing for shareholders without creating any risk of financial distress. And that's what you see -- that's what you can see happening. So in many cases, as we mentioned earlier, we'll try and take on that debt in the local markets to create a natural currency hedge. But overall, of course, that will show up on our balance sheet as we move into a levered position.
There's another question from Ajith from UOB. This is directed to you, Manfred. Can you explain the $8.5 million gain on disposal of assets? It is related to the surplus from the finalization of valuation?
Ajith, maybe I answer the second question first. No, it's not related to the surplus. Surplus is specifically related to the Evergreen associates, okay? Now in respect to the $8.5 million gain in disposal of assets, we have associates in subsidiary of TFK in Brazil that is housing all the investment properties. So this is noncore to the business. So during the year, we've decided to exit that. And the easiest way to do that is actually to sell the company rather than the individual assets within. So that has created a realized gain of about $8.5 million, is what it is.
Okay. We'll take another question from e-mail. Rigan Wong from Janus Henderson. He's asked 2 questions. How much of the increase in other cost in fiscal year '18 is attributed to higher oil price? What can SATS do to mitigate the impact of higher oil price? Second question is about Temasek signing an MOU with HNA to acquire stakes in Gategroup and Swissport. Given that Temasek is a major shareholder of SATS, how should we think about this development? And how will this shape the longer-term strategy for SATS?
Okay. Manfred will take the first, I'll take the second.
Okay. The higher energy cost is due to the higher fuel prices, really. And the increase was actually about less than a couple of million there.
Yes. I think we haven't focused much in these discussions on sustainability. But you'll see that in our annual report this year, we are focused quite a bit on sustainability. In our energy footprint, we've actually done quite a bit to reduce it, putting solar panels, for example, on our major facilities here in Singapore so that we become less dependent on other suppliers for electricity. Upgrading our chillers and looking at more efficient equipment, all of these are helping to reduce our footprint. Nonetheless, of course, we still are a net consumer of energy. And therefore any movement in the oil price will start to show on our other cost line as we've been pointing out here.
Okay. The next question is about the Temasek-HNA announcement. There was an announcement from Temasek that we're in discussion with the HNA Group. We're not party to those discussions, of course. That's between Temasek and HNA. But it's clear to all observers that 2 of the assets that HNA Group has are Gategroup and Swissport which are in our sector. Although they have relatively small footprints in Asia, they are in our sector. So I don't see any downside in that for SATS or for our shareholders. But of course, I can't comment in any detail because it's not something that we're party to.
We have another question from Ajith. Was staging ground services a negative equity as at March 18? Would SATS then recognize unrecognized losses post injection of USD 8 million into BGS?
Thanks, Ajith. The answer is no, we don't have to do that. So the $8 million accumulated losses was still what it is -- the way it is, yes.
This is Rachael Tan from UBS. Just a question on the deconsolidation of HK SATS. So stripping out that deconsolidation, how much would staff cost have grown on an underlying basis as well as on the OP basis? And then the next question would be on the associates. You mentioned that there are several key contributors. I was wondering if you could just briefly run through the operational performance and what were the key growth drivers for these businesses?
Okay, if we strip out the -- on the full year, it's about 20 -- the staff cost that you need to strip out is about $24 million. So the increase was about 20 -- I think it's about 23 thereabouts, yes.
Yes. So and then, Rachael, your second question about the associates. We got some very strong contributions from places like Indonesia, from India. And then actually for the first time this year, we're seeing some strong contributions on the food side as well from Evergreen, of course, is one of those. New additions to the list that are contributing well are places like Oman, which wouldn't have been on the list before. So -- and also the Indian food subsidiaries also doing well as well. But I think now a much more diversified, broader set of contributions, in the past that might have been more concentrated and more focused on Gateway. Now you see Gateway continuing to grow and then some strong contributions coming from individual associates in the food side as well, which is encouraging.
Sorry, what about the OP impact excluding SATS HK?
Yes. SATS Hong Kong was marginally lossmaking. So if you look at the last year, it would've been a reduction on operating profit. This year, it's moved into associates. It's still marginally lossmaking although obviously as the new volumes from SATS Hong Kong, from Hong Kong Airlines come in, it will -- that will, we expect that to change and we hope that it will move into profit. So you'll see that profit come on the associate line in the future. Whereas in the past, it was a net reduction from the operating profit line. But relatively small, I would say, obviously it's there but the losses it was making were relatively small. So you don't see a big impact there.
We'll cover off one last question from e-mail. Raymond from Paladin Asset Management. He asked several questions, I think some of which have already been answered. First one is on the JVCo sales volume and EBITDA margin in the coming years, further capital expenditure of more than $2.8 million to run the business. The second question about Turkish Airlines, I think they have already answered. And then the third question is on further tenders.
I'm not quite sure I understand the question. So in the JVs, what's the sales volume and EBITDA margin?
In the coming years.
Okay. Well, if I look at the main JV footprint is -- are in fast-growing markets. So obviously China, India, Indonesia are the top 3 markets that we focus on. And you can see that in all of those markets, we have a very attractive portfolio of investments, which put us squarely exposed to growth in those markets. So we would expect the sales volume of those JVCos, although we don't publish the sales volume numbers, we would expect those to continue to increase at or about the pace of the growth in the aviation markets in those areas. In the case of China, we are, of course, entering a new sector on the food side, SATS Yihai Kerry. That's growing quite fast and it's on plan. That's slightly ahead of plan in terms of the bottom line impact. We did mention 3 years for the gestation period before profitability. So that's slightly ahead of plan because we're tracking slightly ahead. We expect to invest in new kitchens in new markets as well in the future. So watch this space for our expansion plans in the coming year. But that should grow slightly above the net rate for aviation because it's an additional market. For EBITDA, I think you can see that places like Indonesia, the new ventures in India are already contributing well as I mentioned. So as we expand the footprint hopefully that the margins will continue to come through there using a similar process that we've used here, which is to try to leverage our scale and to link into the platform across the region. The next question is about capital expenditure. I don't -- I'm not following the 2 -- I'm not following the $2.8 million because obviously our capital expenditure is running higher than that. But as we've talked about, specific growth opportunities can either be inorganic where we go in and acquire an existing business or they can be organic like Dammam where we're the first international player to be allowed into Saudi Arabia, so therefore we build our own facilities in a greenfield and then we build from there and also in China or the nonaviation food, where actually the kinds of high-quality kitchens that we manage with the very high safety standards don't really -- they're not really available to be bought in China. So we have to build them from scratch. So sometimes you see capital investments for those rather than inorganic investment where obviously it's equity investment. So we'll be -- we'll continue to have a blend of organic and inorganic going forward. But we don't expect the capital profile to change dramatically in the next few years. How do we handle currency risk? Well, we like to borrow locally if we can in the native currency so that we can get a natural hedge to our investments. We do not hedge our dividend stream. Maybe you want to talk about how you think about that, Manfred?
Okay. Just to add to what Alex has said about the JVCo CapEx, generally speaking, if it's a JVCo, if it's below subsidiary, we like the JVCo to be self-sustaining. So it will have to borrow or find a way -- find means to fund its own CapEx. Case in point was the lower the business stream that's coming through from our associates, a couple of them the -- have retained the profit to actually fund capital investments. This is actually with the blessing of SATS. As a result of that, you saw there was a lower dividend from the JVCo. These are profitable entities, profitable JVs that we have overseas that's funding its own growth. Insofar as the dividend stream coming through, I think we are looking at ways to -- how to -- we can only hedge if it's -- if we know for sure that a certain flow is coming back to us. Otherwise, the hedge can be
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we'll be looking at ways to do that.
I think the last question on further tenders is referring to expansion plans in our key markets.
Well, one tender we won recently in Singapore is the Seletar facility. As those of you following Changi will know, Changi is becoming quite busy. And so their policy is to move all the smaller private jet flights away from Changi and to focus them on Seletar. And therefore, Seletar requires expansion and also requires a superior customer experience. So SATS was the majority bidder of a successful consortium which will start operations in Seletar using the new facilities there. So that's not as large obviously as the Changi business, but still we expect it to be a business that has similar operating leverage as something like the cruise center.
Alex, maybe I just wanted to clarify a point to Rachael's question earlier on the staff cost. If we were to strip the SATS Hong Kong payroll out, how much would our staff cost have increased? So it will be very marginal, so we are talking about maybe a couple of million.
Okay. I think that's all the questions that we have. Thank you for coming to this session today.
Thank you.