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Edited Transcript of S58.SI earnings conference call or presentation 13-Feb-20 10:00am GMT

Q3 2020 SATS Ltd Earnings Call

Singapore Feb 20, 2020 (Thomson StreetEvents) -- Edited Transcript of SATS Ltd earnings conference call or presentation Thursday, February 13, 2020 at 10:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Alexander Charles Hungate

SATS Ltd. - President, CEO & Executive Director

* Carolyn Khiu

SATS Ltd. - VP of Public Affairs & Branding

* Kok Khong Seah

SATS Ltd. - CFO

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Conference Call Participants

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* Alfie Yeo

DBS Bank Ltd., Research Division - Senior Associate

* K. Ajith

UOB Kay Hian Research Pte Ltd - Director of Asia Transport Research

* Kheng Wee Chua

Crédit Suisse AG, Research Division - Research Analyst

* Rachael Tan

UBS Investment Bank, Research Division - Associate Director & Research Analyst

* Siew Khee Lim

CIMB Research - Head of Research for Singapore

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Presentation

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Operator [1]

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Welcome to SATS Third Quarter Financial Year 2019/2020 Earnings Conference 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 result 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 these forward-looking statements. I will now hand over the call to Carolyn Khiu of SATS. Please go ahead.

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Carolyn Khiu, SATS Ltd. - VP of Public Affairs & Branding [2]

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Thank you, Serena. Hello, welcome to the call. A while ago, we released our results for the third quarter FY '19/'20. With me here are Alex Hungate, President and CEO; as well as Manfred Seah, CFO, to take you through the results. I'll now hand you over to Alex to take you through the results, and we'll start our presentation. Okay.

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Alexander Charles Hungate, SATS Ltd. - President, CEO & Executive Director [3]

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Thanks, Carolyn. For the third quarter results call, I'm going to start my presentation on Slide 4, which talks about the volume statistics for the group.

Strong volume growth in passengers handled year-on-year for the 9 months from 44.8 million to 69.4 million. This is primarily driven from the GTR business in Malaysia, which was consolidated during the period. Similar picture on the catering side, 57.2 million meals served last year but now 65.1 million. There's been growth in all markets, China, Japan and Singapore, where we're operating. China had the fastest growth. Japan, you'll see the data shortly, and Singapore also increased. So we're seeing good growth across the board on catering. And then a very large growth in flights handled because this includes all the AirAsia volume across 15 airports in Malaysia through GTR. And even in Singapore, we saw positive growth also for the 9 months. Singapore volume grew. In fact, Chinese volume growth in the same period was negative. So we're definitely winning market share in terms of flights handled in Singapore also.

Cargo has been the weaker story for all of this year and should continue. So overall, for the 9 months, there's a reduction in cargo handled. The market has been soft across Asia for the entire period. Our Singapore volume was negative still for the third quarter, but the Changi total volume for cargo was more negative than the SATS volume. So again, it looks like we're winning market share on the cargo side.

Turning to the next slide, Slide 5. Just a recap of some of the growth initiatives that we started in the third quarter. This fits with the message at the Capital Markets Day back in July where we said we would be investing heavily in growth across the region because we saw great opportunities, and we still see great opportunities. Here are 4 good examples which are very much in line with the strategy that we described at the time called Feeding & Connecting Asia.

On the supply chain side, we bought out the 49% of SATS BRF that we didn't own from BRF, the Brazilian company, but what we think is a good price of $17 million. That was back in September. So we now have 100% ownership of this food trading company which is very important during times of disruption because we use it as a way of managing our supply chain costs and it can also become a growth vehicle as well. Those of you who follow SATS closely would have seen that Country Foods hosted a showcase of alternative proteins where we combined our culinary expertise at SATS with the distribution capabilities of Country Foods to bring a number of alternative protein provided into Asia for the first time and showed how those products could be used in Asian dishes.

Now moving to the top right corner. Sustainability is a very important aspect of our business. We feel that our focus on people makes us a particularly sustainable company in the context of Asian service industries, but we're also focused on food wastage, carbon, water usage, et cetera, as you would have seen, if you read our sustainability report last year. A big initiative this year focused on carbon and water will be on the partnership with SATS and Sembcorp where Sembcorp is going to help us to reduce our environmental footprint, in particular, looking at increasing our array of solar panels across the roof space here in Singapore.

Moving on to Greater China. One of the announcements we made was that we have an indirect wholly owned subsidiary through Nanjing Weizhou Airline Food Company. That was a recent acquisition in China, and Nanjing Weizhou has its own wholly owned subsidiary now in Ganzhou which is a small airport, but it fits with the strategy we described at the time where we would choose Nanjing Weizhou to address the smaller airports, in this case, as a subsidiary which will be based at the airport but will be plugged into the supply chain that Nanjing Weizhou has been building across China. Each one of these is relatively small in terms of capital. This one is only about capitalized to CNY 5 million. So you can see that they're relatively small, but they all plug into the same supply chain.

In Malaysia, I'm pleased to say as we described on the last call that we would be launching a cargo capability in KL. So we -- this is a picture of us making the launch. They're doing about 5,000 tonnes per month at the moment, but that will soon increase more than double in April where we take on some additional widebody traffic. And then they've also signed up 3 new smaller customers in the Malaysia market that are not AirAsia. So that's encouraging because the upside of that business is not just growing with AirAsia itself as the base customer, but importantly, it also is to win market share from the other customers operating out of Malaysian airports.

One item which is not on this page but which was announced just after the end of the quarter on the 13th of January is that we won the RFP to provide cargo handling at Riyadh airport. This is part of our strategy in the Kingdom of Saudi Arabia, building on our successful entry in the Dammam airport market. Riyadh, of course, is much larger than demand, but we will link those 2 airports together with one another. And we will also link Saudi Arabia to our Asian network. So that's a very good extension of our strategy to feed and connect Asia in line with Capital Markets Day.

Moving to the next slide, Slide 6. This is what we call SATS share of revenue where we look at on a non-IFRS basis the revenue footprint that we're building across the region. Overall, that footprint grew 8.6% during the year. 10% growth in Japan, which is encouraging as we -- particularly as we head into Olympics year. It shows that the new kitchen capacity that we described that we were building in Haneda is filling up nicely, and there are other opportunities in the market as well during the Olympics year. ASEAN has grown very strongly, and that's mainly because of the GTR consolidation. And then Greater China has grown mainly because of the Nanjing Weizhou acquisition but also because of very strong organic growth from our new kitchen in Kunshan which we've been keeping you updated and that continues to grow very well as you can see here.

I know many of you asked questions last quarter about the impact of Jet. And I had said that the capacity that Jet -- that left the market when Jet was closed down would fill up again progressively over several quarters. And you can see that here, the India business is 4.7% down from the same quarter last year, whereas when I spoke to you a quarter ago in the second quarter results call, it was more than 10% down. And the day that it closed down, it was something like 15% down. So I think there's quite a clear pattern emerging where it's gone from 15% to 10% in 1 quarter, now 10% to 4.7% in the next quarter.

The reduction in others is the deconsolidation of FASSCO, which we sold. I believe that was $4.6 million in revenue in the third quarter of FY '19. So that's disappeared from these numbers.

You can see PATMI. I think we're going to talk more detail on PATMI later during Manfred's slide. So we'll leave that one to discuss later.

And I will move on to the executive summary of the financial results, Slide 7. Revenue grew 17.6% in the quarter. That's the fastest quarterly revenue number we've had for more than 10 years, and it's in line with what we outlined was the key objective of the Capital Markets Day, which was to invest in growth opportunities. You can see this coming through both inorganically. So I gave some examples earlier already impacting the numbers, but we're also seeing organic growth. So there is underlying positive growth in revenue as well.

The EBITDA continued to grow. So that's positive in terms of the cash flow capability of the company. That grew 7.1%, but PATMI decreased 13.9% to $59.3 million. I think there's the ongoing impact of the lower cargo volume. In this quarter, that was the biggest impact in terms of the operating profit. There was also some year-on-year reduction due to volatility in ForEx and grants and some smaller impact from the IFRS change to lease accounting, plus, of course, our underlying commitment to invest in growth both in terms of new businesses like starting out in new markets like Saudi Arabia and building the kitchens in China.

The other driver for the reduced PATMI was the fall in the share of earnings from associates, which fell to 29% to $14.7 million. The biggest driver of this fall was that there's no one-off benefit from the sale of DFASS in this year, whereas in the third quarter last year, there was a benefit of $5.5 million from the sale of DFASS. And of course, there's some start-up losses in Daxing airport which opened operations from the 1st of October last year. So that was in the third quarter also.

The operating margin has dropped quite a bit, 2.6 percentage points to 11.5%. A big part of this, the factors that I've just run through. But also, there is a business mix shift impact here of the consolidation of Country Foods, which has a food trading operation, carries a lower margin than our core catering businesses or -- and lower margin than our Gateway businesses as well. Overall, a decline of $0.009 earnings per share to $0.053.

So to give a bit more detail on the financial information, I'll hand over to Manfred Seah, our CFO.

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Kok Khong Seah, SATS Ltd. - CFO [4]

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Thanks, Alex. Good evening, everyone. I shall now take you through SATS' financial results for the third quarter.

We are now on Slide 9, if you're following the slide deck. Group revenue grew $81.6 million in 3Q to $545 million. Revenue from Food Solutions increased by $58.4 million, with growth registered in core subsidiaries as well as consolidation of Nanjing Weizhou and Country Foods. For Gateway, revenue increased. $23.5 million was attributable to consolidation of GTR, partially offset by the decrease in cargo and cruise center revenue as a result of lower cargo volume and lower ship calls.

OpEx increased by $84 million, of which $76.8 million was due to the consolidation of GTR, Nanjing Weizhou and Country Foods. Excluding this -- excluding these, there were -- there was a lower increase in OpEx which was driven by higher IT expenditure for digitalization and transformation. As a result, EBIT decreased by 3.7% to $62.9 million, mainly due to lower cargo performance as well as higher OpEx for the quarter.

Share of results decreased by $6 million due to absence of one-off gain on transfer of DFASS to KrisShop. Excluding this, share of earnings decreased marginally by $0.2 million due to startup costs of BCS, lower performance by cargo associates, offset by improved contribution from Brahim's and PT CAS Group. A result, PATMI decreased by $9.6 million to $59.3 million. Core PATMI decreased by $3.8 million, mainly due to absence of one-off gains as mentioned earlier for DFASS.

Slide 10, this is for the 9 months results. Group revenue grew $151.6 million to $1.508 million -- sorry, $1.508 million, with growth in both Food and Gateway revenue. Revenue for Food Solutions rose by 10.8%, with consolidation of Country Foods and Nanjing Weizhou, with growth registered in core aviation subsidiaries. Gateway Services revenue increased $71 million, of which $69 million was attributable to the consolidation of GTR. The growth was partially offset by a decrease in cargo revenue as a result of lower cargo volume.

EBIT decreased by 5.9% to $184.7 million, mainly due to lower cargo performance as well as lower foreign exchange gain, plus IT spending as part of SATS' transformation drive. Share of earnings from associates decreased by $7 million or 14%, mainly due to absence of one-off gain and provision of credit losses amounting to $3.3 million. Normalizing the provision and one-off gain, share of results of associates would have increased by $2.1 million or 4.8%. PT CAS Group, Evergreen Group, AAT, Maldives and TCS remains top contributors to the share of results. For the 9 months, PATMI decreased by $23.8 million to $174.7 million.

Next, we look at some of the financial indicators. Group EBIT margin dropped to 11.5% for 3Q and 12.2% in the first half -- in the third Q -- for the 9 months, sorry. PATMI margin are lower at 10.9% for the quarter and 11.6% for the 9 months. EPS and ROE are lower due to lower reported earnings. As for net asset value per share, this is lower at $1.45. Debt over equity ratio has increased to 0.18x. The increase in debt/equity ratio is due to the recognition of lease liabilities arising from the adoption of the IFRS 16 standards. Excluding the impact of the new accounting standard, D/E ratio would have remained healthy at 0.6x.

We are now on Slide 11, segmental revenue. Food revenue has increased by 23.1% and 10.8% for the 3Q and year-to-date, respectively. Though impacted by lower cargo volume and lower ship calls, Gateway revenue improved by 10.9% and 11.6% in both periods, mainly due to the consolidation of GTR. Revenue split between Food and Gateway year-to-date is roughly 55% to 45%. Aviation continued to account for more than 80% of the group revenue. An increase in non-aviation revenue is mainly due to consolidation of Country Foods.

In terms of geographical spread, Singapore contribution to group consolidated revenue has decreased from 83% to 79%, while ASEAN ex Singapore contribution has increased by 5% due to consolidation of GTR.

For the third Q group expenditure, on Slide 13, group OpEx has increased by $84 million to $482.7 million, mainly due to the consolidation of GTR, Nanjing Weizhou as well as Country Foods. And this accounted for $76.8 million of the increase. If we normalize the consolidation of the new entities and the divestment of FASSCO, group OpEx would have recorded a lower increase of $12.3 million in the current quarter. Higher depreciation and amortization charge is mainly due to the adoption of the IFRS 16 from 1st April 2019. Other costs rose due to higher maintenance of ground support equipment and vehicles and IT expenses to support the digitalization projects.

Now we move on to the balance sheet on Slide 14. Total equity and total assets stood at $1.8 billion and $2.6 billion, respectively. The slight increase in investment in joint venture and associates is mainly due to the capital injection in the Daxing investments or for Gateway as well as in-flight catering, and this is partially offset by the reclassification of Country Foods from investment in JV to investment in subsidiary following the acquisition of the 49% interest.

For IFRS 16, the group has recognized about $200 million of right-of-use assets and the corresponding lease liability of the same amount as at 31st December '19. Cash position has decreased to $212 million, following the dividend payment in August as well as December of this year.

On this last slide, before I move on to outlook, Slide 16, this covers the cash flow position for the group. Net cash from operating activities for the current period came in at $163.7 million, which is $21.1 million lower than previous period. Net cash used in investing activities was higher mainly due to acquisition of equity interest in Country Foods, Nanjing Weizhou, Daxing investments and also a couple of smaller investments that we did. And this is partially mitigated by the dividend received from associates and joint venture.

Finally, net cash used in financing activity was higher by $12.6 million, and this cash was used in financing activity for dividend payments, repayment of lease liabilities of $7.5 million and dividend of $4.7 million paid to noncontrolling interest.

Thank you for that. And Alex, I'll hand you over to do the outlook statement.

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Alexander Charles Hungate, SATS Ltd. - President, CEO & Executive Director [5]

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Thanks, Manfred. I guess the outlook statement has never been more keenly anticipated perhaps in recent times, and for this call, I have to comment on the tragic COVID-19 epidemic which continues to cause significant reduction in air traffic in China and sharp declines in passenger and cargo volumes across Asia. Depending on the duration of this epidemic, there will be a consequential impact on the short-term financial performance of SATS. We are taking proactive steps to mitigate the risks and impacts of the situation. Safety is our first priority, of course. So we've implemented plans to protect members of the public and our staff from the virus, working closely with the relevant authorities, suppliers and customers in each country we operate in, support a coordinated and effective response. We feel that the company is in a strong position to weather the disruption to our business with resilience.

Ongoing supply investments in supply chain processes and systems will also provide greater traceability that will further strengthen our ability to respond to contingencies across our network. I had mentioned the role that Country Foods can play in mitigating volatility in supply and raw material costs earlier, as an example. And recent investments in overseas kitchens in Japan and China, along with ground handling investments in India, Malaysia and Saudi Arabia, have enhanced our capabilities, strengthened our market position and diversified our revenue base.

I'm sure you'll have questions about the outlook. So at this point, I'll hand back to you, Serena, and we can start the Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question, we have Louis from Crédit Suisse.

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Kheng Wee Chua, Crédit Suisse AG, Research Division - Research Analyst [2]

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Alex and Manfred, I just got 3 questions, if I may. I think, firstly, given the COVID-19 situation, could you give us a sense of the kind of volume reductions they are seeing at Changi, be it your passenger, flights or cargo volumes that you've said being handled right now?

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Alexander Charles Hungate, SATS Ltd. - President, CEO & Executive Director [3]

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Yes. Louis, do you want to go through with all 3 of your questions, and then I'll -- we'll respond at the end? Thanks.

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Kheng Wee Chua, Crédit Suisse AG, Research Division - Research Analyst [4]

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Okay, sure. Second question is in -- again, in relation to this situation, are there any plans at this point in time to undertake some form of a cost-restructuring exercise similar to what the group has done so back in the past period?

And the final question is on dividends. How should we be thinking about it given the expected near-term impact? Should we be seeing payout ratios potentially increase to above 100% to maintain the dividend? Or how should we be thinking about the dividend from here?

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Alexander Charles Hungate, SATS Ltd. - President, CEO & Executive Director [5]

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Thanks, Louis. For volume reductions, I will direct you to some of the statements by STB who have estimated that Singapore arrivals are -- have dropped -- or are dropping to -- by about 30%. That's for the Singapore market. We're also active in China, of course, which is hit even harder. The IATA numbers for China suggests a drop of 40% in February this year versus the year before. So you can see that if you look at those kind of external statements, that will give you a pretty good proxy for the impact on our revenues.

There are some ways in which we can mitigate the costs, and of course, we are already implementing some plans to do -- to mitigate costs, and there are others that we have as contingency. If things -- if the virus continues unabated, we will be able to implement further measures. We're also in discussions with government in various countries, including Singapore, to provide some support to allow us to minimize the impact on the community. So that's something that we don't have the full details to share with you. But my understanding is that there might -- there may be some information in the budget analysis in Singapore on the 18th.

It's too early to comment on the dividend. So I won't comment on the dividend. It obviously depends on the progression in terms of severity of the virus, and in particular, the duration of the virus as we mentioned in the outlook statement.

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Operator [6]

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Our next question, we have Ajith from UOB Kay Hian.

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K. Ajith, UOB Kay Hian Research Pte Ltd - Director of Asia Transport Research [7]

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Two questions from me. Firstly, could you share in terms of the extent of increasing your staff costs, if excluding the impact of the consolidation of the 2 entities? That's my first question.

And the second question is to Manfred. With regards to the sale of DFASS, how much did you say the amount was? Is it $5.5 million? Yes, so that's just about it.

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Kok Khong Seah, SATS Ltd. - CFO [8]

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Ajith, thank you for the call -- thank you for the questions. Now I'll ask -- answer the second question first. The DFASS gain booked last year was $5.8 million.

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K. Ajith, UOB Kay Hian Research Pte Ltd - Director of Asia Transport Research [9]

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$5.8 million. Okay.

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Kok Khong Seah, SATS Ltd. - CFO [10]

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And in terms of the normalization of the consolidated revenue as well as OpEx, if you normalize that, our staff costs would have increased by about $23 million.

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K. Ajith, UOB Kay Hian Research Pte Ltd - Director of Asia Transport Research [11]

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$23 million. Okay.

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Kok Khong Seah, SATS Ltd. - CFO [12]

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$23.4 million [thereabouts], yes.

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Operator [13]

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Next, we have Rachael from UBS.

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Rachael Tan, UBS Investment Bank, Research Division - Associate Director & Research Analyst [14]

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I would like to check about your Food Solutions business. Could you just maybe elaborate how your -- the supply of raw materials has been disrupted? I know that there is quite been a decline in demand, but how are you managing your raw materials and the procurement right now?

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Alexander Charles Hungate, SATS Ltd. - President, CEO & Executive Director [15]

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Yes, there's been a lot of press commentary about disruption of supply chain, particularly in China. We have food trading operations that we use. We're both locally and then internationally cooperating between them. We seek to create some trading advantage in terms of the managing the volatile ups and downs of the prices. We also tend to have -- prefer to have strategic supply relationships with long-term suppliers. BRF is one good example of that for protein. But we also have seafood suppliers, for example, where they will dedicate particular production facilities for seafood farms, for example, to SATS. And we will be able to monitor the quality of -- even the feeds that's being used for those fish.

So we -- in those cases, we are able to secure long-term sustainable sources which allow us to cushion our raw material prices from volatile situation. This helps us quite a bit recently during the swine flu epidemic that came ahead of the COVID virus. But it's helped us in the past as well for various other poultry-type epidemic, et cetera. So it's something we've been doing for several years, and that's currently helping us quite a bit in the -- with the situation with the COVID virus. We haven't suffered from any serious disruptions in our raw material supply chain for food. There was some small increases due to the swine flu in the third quarter, the quarter we're looking at now. But we manage those fairly well, as you can see from the raw material ratios in the results.

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Rachael Tan, UBS Investment Bank, Research Division - Associate Director & Research Analyst [16]

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Okay. And then I have another question, and this relates to the cargo handling. How -- sorry, I'm just trying to find a way to phrase the question. So let's assume that the disruption is ongoing and then eventually it comes to an end, how would the cargo supply bottleneck adjust? And how would you be -- how would you have to react to that? Do you know what I mean?

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Alexander Charles Hungate, SATS Ltd. - President, CEO & Executive Director [17]

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I do know what you mean, yes.

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Rachael Tan, UBS Investment Bank, Research Division - Associate Director & Research Analyst [18]

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A little bit muddled.

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Alexander Charles Hungate, SATS Ltd. - President, CEO & Executive Director [19]

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No, I understand what you mean. So the -- it's hard to predict, obviously, because all of these events are one-off by their nature. But what we tend to do is we have a lot of experience in handling these various epidemics, in particular, SARS, which is, I think, a very relevant example to look back on. The SARS recovery was very much a rebound. If you look at all of the data for both passenger volume and cargo volume, maybe it was because there was a pent-up demand that was needed to be fulfilled. Not quite sure, but you can see that's very clear in the data that there's kind of a V-shape to jump back into normal volumes about a quarter to 2 quarters. And by the end of the second quarter, after the recovery, it was back to normal again.

The cargo -- and in that case, cargo and passenger came back at the same rate, if that's helpful as a comparison. And I believe that the airline cargo rates during that period picked up very fast as well. So the yields from the airline perspective, from what I'm told, came back very rapidly back to normal levels as well.

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Operator [20]

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Next in queue, we have Siew Khee from CIMB.

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Siew Khee Lim, CIMB Research - Head of Research for Singapore [21]

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I've got 5 questions. Manfred, you mentioned about the start-up costs in Daxing. Did you mention the quantum? I have actually missed that.

Second question is in -- also, I probably missed the decrease in Food Solutions associates profits from 2Q to 3Q.

And third question is can you refresh us on the relief that you received during SARS and what was it in the form of and whether that was just a pass-through to any of your costs.

And then the fourth question is your operating leverage in China. It means total OpEx or rather fixed costs that you need to incur maybe a quarter for Chinese operations.

That's it, yes. Actually, that's 4 questions.

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Alexander Charles Hungate, SATS Ltd. - President, CEO & Executive Director [22]

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Yes. That was accounted for. Great. I'm glad you mentioned [about it]. Okay. Let me pick up the SARS relief one, while Manfred put some numbers together for the other question. During SARS, we received a wage credit relief, some tax concessions and then some specific expense relief as well against particular expenses. So we're not quite sure what the current package will be, as I mentioned earlier, but that's helpful. Then that gives you an idea of the kinds of things that we're in discussion about.

So Manfred, are we disclosing Daxing startup costs?

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Kok Khong Seah, SATS Ltd. - CFO [23]

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I think, Siew Khee, it's safe to say that it's between $2 million or $3 million.

And I think you're asking -- the second question was Food Solutions associates earnings quarter-on-quarter from 2Q to 3Q. You've got to give us some time to get that number.

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Alexander Charles Hungate, SATS Ltd. - President, CEO & Executive Director [24]

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Siew Khee, we normally look the year-on-year, not quarter-on-quarter, but you're famous for asking quarter-on-quarter. So we'll just try and calculate that now.

And then the last one was the fixed cost in China. Yes, we don't disclose that. But I can give you -- I mean, I can contextually talk about what those are. Obviously, there are various associate companies. At Capital Airport, for example, we operate a very large ground handler, cargo and catering entity. They were minority shareholders. [They shop] during associates. So I won't focus on those.

The 2 subsidiaries that we have are the factory in Kunshan and the Nanjing Weizhou subsidiary. In both cases, they have similar cost structures to other catering operation. There's underlying lease costs as the depreciation cost of the equipment and the building, and then the food business is primarily driven by the variable costs. So raw materials, typically something like 30% of revenue, and staff can be something, depending upon the type of -- whether it's about customization, small batches or whether it's large production, could be anything from 10% to 30%. So you're looking at up to 60% in variable costs. So most of it is variable.

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Rachael Tan, UBS Investment Bank, Research Division - Associate Director & Research Analyst [25]

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Okay. While we are waiting because your outlook...

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Kok Khong Seah, SATS Ltd. - CFO [26]

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All right. Siew Khee, I have the answer for you. Your 2Q food solution share of earnings is 2.9, and then we -- this quarter is 4.3.

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Rachael Tan, UBS Investment Bank, Research Division - Associate Director & Research Analyst [27]

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Okay. Also on your outlook, you mentioned that there will be consequential financial impact in the short term. When you say consequential, you would have some idea of what is the consequence in terms of your impact. Can we actually use STB guidance for the year? Would that -- wouldn't that be too pessimistic?

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Alexander Charles Hungate, SATS Ltd. - President, CEO & Executive Director [28]

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Yes. I said it depends on the duration of the crisis caused by the virus. So if you want to look at the impact in the month -- in the March month, for example, it should be similar to the numbers that I mentioned earlier, so 30% in Singapore on a revenue basis. And then in China, the volumes, they're down by 40% in the aviation space, not necessarily nonaviation but in the aviation space. So that gives you an idea of the revenue impact.

As I mentioned earlier, when I was talking about -- responding to Louis, the mitigation in cost is something that we're very actively involved in already. We're also pursuing the relief measures from government. And then we have further more radical mitigation efforts that we can implement to reduce costs if the crisis -- the duration continues. But for the time being, we obviously, like everybody else, can't really make a prediction about the duration of the crisis.

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Operator [29]

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Our next question, we have Ajith from UOB.

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K. Ajith, UOB Kay Hian Research Pte Ltd - Director of Asia Transport Research [30]

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My question is addressed -- is going to be addressed to Manfred first, followed -- yes, but Manfred, I think he can take both questions. So initially, I asked about what's the increase in staff costs. Excluding the deconsolidation impact, I think Manfred, you mentioned $23.4 million. But I think that's just the [door] or delta in terms of the change for the quarter. So I'm not too sure whether you can provide the deconsolidated staff cost increase. I guess what I'm trying to get at is to see whether staff costs -- [but the growth of it], it was flat excluding the deconsolidation.

Second question, I guess, is more a broad-based question. Is -- in China has set [contrans] customers like Starbucks or Haidilao and so forth. They have given some indication as to when they will open the restaurants and so forth.

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Kok Khong Seah, SATS Ltd. - CFO [31]

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Ajith, the increase in staff -- sorry, the increase in staff costs after normalizing the consolidated entities is about 2%.

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K. Ajith, UOB Kay Hian Research Pte Ltd - Director of Asia Transport Research [32]

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2%? Okay.

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Alexander Charles Hungate, SATS Ltd. - President, CEO & Executive Director [33]

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And Ajith, in answer to your second question, during the holiday period, obviously, the -- most of the malls were closed. Now there's a big difference regionally across city by city because a lot of the directives to close particular malls are issued by local provinces, not on a national basis, provinces and cities. So -- but we are seeing an increase in demand from the very low levels we had during the public holiday period. We are seeing a small increase in demand in this current week, and then we'll have to see obviously how the virus and the restrictions that those provinces and cities are placing will evolve over the next several weeks and months.

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Carolyn Khiu, SATS Ltd. - VP of Public Affairs & Branding [34]

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I think let's take a question from Siew Wai. Siew Wai is asking, "Can management explain the operating leverage on the staff cost line for both Food and Gateway business? How much can such reduce our costs due to the lower volume?"

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Alexander Charles Hungate, SATS Ltd. - President, CEO & Executive Director [35]

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Okay, Siew Wai. I'll give you a kind of qualitative feel for the different operating leverage that we see across the different aspects of the business. Probably the highest operating leverage businesses, in other words, the ones where there are mainly fixed costs and very little variable costs will be things like cargo and the cruise center. And then the lower operating leverage businesses, in other words, the ones where it's mainly variable costs are things like Apron, passenger handling. And then the food business because we run large-scale food operations with quite a lot of automation involved, are somewhere in between those. So I would say those are mid-leverage-type -- mid-operating leverage type businesses in between the high operating leverage businesses of cargo and cruise center and then the low operating leverage businesses of Apron and passenger handling. I hope that's useful.

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Carolyn Khiu, SATS Ltd. - VP of Public Affairs & Branding [36]

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We have 3 questions from Kaseedit from Citibank. The first one: Hong Kong Airlines appears to be under financial difficulties. Are the payments still on time?

Second one: Assuming an unfortunate event on Hong Kong Airlines, what will be the size of account receivables? Any contingency plans that Hong Kong is preparing?

And the last

(technical difficulty)

nothing and what operation currently?

I think the last question is probably answered earlier with regards to what Rachael has said. Manfred?

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Kok Khong Seah, SATS Ltd. - CFO [37]

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Kaseedit, thanks for the question. We are monitoring the Hong Kong Airline situation quite tightly. In fact, they have been good partners to us. And obviously, if they have any financial difficulties, it will have an impact on our ongoing business.

In terms of the receivables, I think the -- we have a certain plan with them -- for them to settle them. So at this point in time, we don't see that as a risk. Insofar as the SATS Hong Kong is concerned, I think we can't disclose the terms and condition of our shareholders' agreement. But suffice to say that there are mitigation conditions or provision in place for us to (inaudible).

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Alexander Charles Hungate, SATS Ltd. - President, CEO & Executive Director [38]

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And I think the last one, the startup losses at Daxing, you mentioned the $2 million to $3 million earlier.

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Kok Khong Seah, SATS Ltd. - CFO [39]

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Yes, $2 million to $3 million, yes.

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Operator [40]

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(Operator Instructions) Our next question, we have Rachael from UBS.

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Rachael Tan, UBS Investment Bank, Research Division - Associate Director & Research Analyst [41]

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I have a question on the working capital side. Do you expect any significant disruptions in payments coming from your customers in China as a result of the COVID-19? Or maybe if you're not full quantitative, could you just describe how the payments -- I mean when -- how often customers see you for the various businesses like cargo, ground handling for your food kitchen? Maybe you can elaborate on that?

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Alexander Charles Hungate, SATS Ltd. - President, CEO & Executive Director [42]

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Thanks, Rachael. I think that -- I mean normal processes of monthly billing are in place with all of our customers. One would expect during a crisis, that's a particularly strong impact on aviation, that there could be an extension of the receivables. But we're prepared for that. And obviously, that will be something that our balance sheet is set up to handle. It's not that we will -- that we won't try to prevent that from happening. But sometimes in these situations, it might happen. So we'll have to look out for that and work with each of our customers one by one to make sure that, that doesn't become a problem. And it's something that remains manageable during the situation.

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Operator [43]

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Next in queue, we have Alfie from DBS.

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Alfie Yeo, DBS Bank Ltd., Research Division - Senior Associate [44]

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I have one question for Japan. It seems to be growing very nicely. Can you share with us the development over the last quarter? That's all.

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Alexander Charles Hungate, SATS Ltd. - President, CEO & Executive Director [45]

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Alfie, can you repeat your question, please? The developments of what?

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Alfie Yeo, DBS Bank Ltd., Research Division - Senior Associate [46]

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Japan has been growing quite nicely. So can you share with us the development, yes, over the past quarter?

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Alexander Charles Hungate, SATS Ltd. - President, CEO & Executive Director [47]

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Yes. Actually, the last quarter is significant because they've finished work on the extension of the kitchen at Haneda. I think I mentioned in the previous call that we were investing in extension at Haneda, and we were the only one in the market that was able to find additional land that was on airport. And we believe that we're the only one of the competitive set that actually has increased capacity. You will know from the -- all the public disclosures that Haneda Airport is increasing dramatically the number of slots for international airlines both for American airlines, Chinese airlines as well as the Japanese airlines themselves. They have -- all 3 of them have done very well with new slots. The other competitors will not have the capacity to meet that increase in demand, but we now will. We are starting to see, in the quarter, some increases in Haneda because of those new slots and that's coming through in the data.

We've also had a small increase in the nonaviation catering business as -- in the runup to the Olympics. And we think that, that has potential to grow further during the Olympic period where pricing power will improve because there will be a limited capacity in the market. However, I would say on the -- as a downside risk to the Japanese business, a lot of the increase in tourism into Japan has been from China. So the -- notwithstanding our optimism about the medium- and long-term opportunity in Japan for increased volumes, it is possible that the Chinese -- the restrictions on Chinese visitors into Japan will have a short-term impact to reduce that potential and dampen the short-term momentum that we're seeing in the marketplace. But I thought I should give you a fully rounded picture. Thank you.

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Alfie Yeo, DBS Bank Ltd., Research Division - Senior Associate [48]

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Yes. Just a follow-up question on the profitability of Japan. I remember a couple of quarters that you are coming out from breakeven levels. So right now, just want to confirm if it is profitable already and for how many quarters.

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Alexander Charles Hungate, SATS Ltd. - President, CEO & Executive Director [49]

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Yes. It's been profitable now for, I think, at least the last year. I'm thinking [to the year] before as well, probably 2 years now since we talked last. That breakeven time that you mentioned has been consistently profitable. The margin has been improving, and in fact, this last quarter was a higher margin than we've seen during that period. So the work that we've been doing there has been to introduce more automation and process improvements so that we can get better operating leverage out of the kitchen.

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Carolyn Khiu, SATS Ltd. - VP of Public Affairs & Branding [50]

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Yes, I received a question from Kaseedit about the big change in flight kitchen as well as medium-class services. He wants to know if there's a drop in revenue or profitability following the opening of Daxing in September 2019.

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Alexander Charles Hungate, SATS Ltd. - President, CEO & Executive Director [51]

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Thanks, Kaseedit. Yes, the revenues in the short term for our Capital Airport will drop -- have dropped and will drop as slight shift over from Capital Airport into Daxing Airport. China, Southern China, East and -- sorry, China Southern and China Eastern, all have moved flights across. However, China Southern and China Eastern have also maintained flights at Capital Airport that we weren't expecting. So we were planning for this. The mix of airlines at Capital Airport is slightly different than what we thought, but the drop is kind of in line with the plans that we anticipated. We've obviously tried to adjust the variable costs accordingly in anticipation of that drop. But the virus puts an entirely different complexion on the expected revenue patterns both at Capital Airport and at Daxing Airport. The international flights and the domestic flights have both been impacted, but our market share of international flights is higher than domestic. So that's the one that's impacted us the most.

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Operator [52]

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(Operator Instructions) If there are no further questions, I will hand the time over back to the speakers for closing. Thank you.

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Alexander Charles Hungate, SATS Ltd. - President, CEO & Executive Director [53]

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Thanks, everybody, for the call. I understand there's a lot of uncertainty with the COVID-19 virus impacting the flows. We've said as much as we can today. There's a lot of uncertainty, I think, in the marketplace in general. But hopefully, what we've pointed you towards some of the publicly disclosed changes in passenger volumes will give you at least some guide for use -- to use in your models. Thank you very much.

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Operator [54]

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Thank you. Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.