Singapore Tech Eng Ltd

Good morning ladies and gentlemen. Welcome to SD Engineering's first half 2022 results briefing. Thank you for joining us this morning. We will begin today's briefing with a presentation by our Group CFO Cedric Foo, following which our Group President and CEO Vincent Chong will give his remarks. After that, we will open up the floor to a Q&A session. Without further ado, may I invite Cedric to give his presentation please.

Good morning to everyone. Those who are joining us here physically, it's good to see you in person, and also those who are joining us over webcast. On slide two, I would like to bring your attention to these statements, which says that the group's actual future performance and results may differ materially from those expressed in forward-looking statements as a result of a number of risks, uncertainties, and assumptions including COVID-19, the Russian-Ukraine conflict, inflation in general, and global supply chain disruptions. Agenda for this morning is financial highlights. We'll talk about the group highlights, some of the segments, and the outlook, followed by Q&A. First, group highlights. Slide number five shows a summary of our first half 2022 results. On your left, group revenue achieved a 17% growth year-on-year, which is first half 2022 versus first half 2021, to reach $4.3 billion. Despite a drop of $125 million in government support to almost nil in first half 2022, EBIT or interest before interest and tax was 8% higher at $385 million for first half 2022. Profit before tax was 3% higher at $351 million. Net profit stood at $280 million for first half 2022, however excluding the transaction and integration expenses for the Transcore acquisition, which is one-off in nature, as well as the tax exam effect of the job support scheme which we enjoyed last year and no longer enjoy this year since the government support has dropped to almost nil. If we exclude those effects, the net profit will be $307 million or 4% higher year on year. Slide number 6. Commercial aerospace constituted 33% Urban Solutions, USS, 18%, and DPS, Defense and Public Security, 49% of the group's revenue. And that's the pie chart on the left. DPS, to clarify, includes defense, public security, critical information infrastructure, as well as commercial businesses, both local and overseas. Hence, If you look at the bar chart in the middle of the slide, the defense revenue of $1.5 billion in first half 2022 is a subset of the DPS revenue of $2.1 billion in the pie chart. Commercial revenue increased to $2.8 billion. driven by continued but not yet complete recovery in commercial aerospace and the addition of Transcor. We have some technical interferences. Are we okay now? Alright, very good. Let me just repeat the last sentence. The group's commercial revenue increased to $2.8 billion and that's in the middle of the slide. One slide back please. and is driven by continued, so that's the dark blue bar in the middle of the slide there, $2.8 billion, that's commercial revenue. It is driven by continued but not yet complete recovery in the commercial aerospace and of course the addition of transport. Geographical spread of revenue for Asia is 52%, that's on the right, the US is 23%, Europe is 19% and others 6%. Next slide please. Slide 7. Here is the waterfall to bridge first half 21 revenue to first half 22 revenue. As I said, group revenue grew 17% to $4.3 billion with contribution from all segments Excluding Transcor, our revenue would still have grown by more than 10%. Next slide. Slide 8. Commercial aerospace revenue reached $730 million, which is on your far right of the slide, the dark blue bar chart, in second quarter of 2022, or 25% higher year-on-year compared to second quarter of 2021. With the continued opening of borders for aviation travel, strong PTF growth for passenger to freighter, healthy orders for nacelles coming out of MRAS, and gradual but not yet full recovery in MRO businesses, our commercial aerospace business area continued to ride the path of recovery. PTF slots for A320 and A321 as well as A330 are booked through 2025 and 2026 respectively. A very healthy growth in orders. Commercial Aerospace also secured $2.1 billion of new contracts in the first half of 2022. Slide number nine. The TransCore acquisition, the biggest to date for the company, was completed in mid-March 2022. We are pleased to say that the integration activities are on track and Transcor is expected to be cash flow positive in year one, as we have informed earlier. In the second quarter, Transcor won more than $170 million worth of electronic tolling projects and also RFID sales, both in the US as well as in Dubai. The New York Congestion Pricing Project is also on track and expected to resume by end of this year, pending the outcome of the Environmental Assessment Study. Slide number 10. This is a slide that talks to EBIT or Earnings Before Interest and Tax. EBIT for the first half saw growth and cost savings, which is the green bar, More than offset the drop in government support of $125 million, the red bar, and the one-off transfer transaction and integration expense of $21 million, also shown in red. The growth and cost savings has an element of pension restructuring, which is basically a gain by the company's proactive efforts to align pension plans, for example, from defined benefit to defined contribution, to what is market practice. And this particular one happens to be in the US. We will continue to look for such opportunities and we think there are some more ahead of us. The government's support in 2021 and 2020 during COVID was most helpful, especially to our aerospace business, which was heavily impacted when aviation came to a stop. These have helped us ride through the downturn, and we are very appreciative of that. However, in 2022, this government support has teared off to a mere $0.5 million, compared to $125 million in the first half of 2021. But despite that, as the chart illustrates, our growth as well as our cost savings, which was assiduously pursued, more than offset this drop. Base operating performance, as we defined, without the government support, one-off pension and without core transaction and integration expenses. In other words, removing all these items from both 1Q2022 and 1Q2021. And then comparing these two figures, which is on the right, it's a 45% increase, which really illustrates the efforts behind working hard and keeping to our pledge to offset drop in government support. Slide 11. These charts here show the impact of government support on each of the business segments EBIT in first half 2022 compared to the prior year. As shown in the chart on the left, commercial aerospace, business recovery and cost savings more than offset the drop in garment support of $86 million. So this is the sub-segment which received the most garment support back in 2021 and it's been fully offset. For USS, Urban Solutions and SECCOM, excluding lower garment support, which is not as significant, $3 million, and Transcore Transaction and Integration Expenses, which is significant, at $21 million. The EBIT on a base operating business performance basis was $1 million higher year-on-year. Our SECCOM EBIT, which is a subset of the USS, was weaker in first half 2022 because of an exceptionally high and strong base in first half 21. So in other words, in 21, it was exceptionally strong for first half, and therefore compared to that base, the first half 2022 performance looks weaker. This is somewhat outside of the norm. Usually in the SECCOM business, the second half is usually stronger, and we believe that will return. It was also impacted by the shortage of semiconductor chips. Defence and Public Security had a $36 million reduction in government support, which was partially offset by a better operating performance and posted an EBIT of $240 million. Excluding government support, the DBS EBIT would be 5% higher. So in other words, excluding the government support both sides, it would be 5% higher. Slide number 12 talks about net profit. The group reported a net profit of $280 million for first half 2022. So we started off from the net profit of $296 million in first half 2021. We took the delta of the EBIT and then we built in the finance cost and tax that brings it to net profit and then we take out the transaction and integration expense for Transcor, net of tax. If we then we reached $280 million. However, if we exclude the TransCore transaction and integration expense and the tax-exempt effect of JSS, which we enjoyed the previous year but not this year, the first half 2022 net profit would be $307 million or 4% higher year-on-year. Slide 13. During the second quarter, new contract wins totalled $3.1 billion. As highlighted above in the slide, with very notable wins all across the segments. Together with the wins recorded in one quarter 2022, because this slide shows two quarters, second Q, in one quarter we had a new contract win of $2.4 billion. We totaled that with $3.1 billion in the second quarter. Total wins for the first half is $5.5 billion, a very healthy level of new wins. The next slide illustrates the areas where new contracts were won in the second quarter, including those from Transcor. Slide 18. With a strong new contract win, we ended the first half year with a very robust order book of $22.2 billion. We expect to deliver $4.6 billion in the remaining six months of 2022. Slide number 16. Our balance sheet remained very strong with credit rating by Moody's at AAA and by S&P at AA+, post the Transcor acquisition and financing. Slide 17. Lower operating cash flow for first half 2022 but still a healthy level of $321 million. was mainly due to working capital movements, including investments in inventories and WIP, as well as passenger to freighter conversions projects, MRO contracts and other projects supporting revenue growth. Higher investing outflow and higher financing inflow are mainly related to the acquisition of Transcorps, as well as aircraft and engines for our AAM business, and of course, creating new capacity to support demand like new PTF lines. Finally, in slide 18, I will leave you with the Group President and CEO's message, and maybe I will just read it out. Despite a challenging operating environment in the first half of 2022, our businesses continued to demonstrate their underlying strengths and resilience Year-on-year revenue growth and the base business profitability, continued cost savings and productivity initiatives more than offset the substantial reduction of $125 million in government support. The TransCorp acquisition, which was completed in March this year, will accelerate the Group's smart city growth. Contract win momentum continues to remain strong and our robust order book provides a healthy revenue visibility for the next few years. This ends my segment of the presentation. Thank you for your attention.

Thank you, Cedric. May I now invite Cedric and our panelists to the head table. The panelists this morning are Vincent Chong, Group President and CEO, Group CFO Cedric Foo, who just gave us a presentation, Ravida Singh, Group COO, Technology and Innovation, and President of Defense and Public Security, and Tan Lee Chew, President, Commercial. Joining the ex-co-members at the panel is Jeffrey Lum, President of Commercial Aerospace. I will now hand the floor over to Group President and CEO to deliver his remarks. Vincent, please.

Hi, good morning, and welcome to ST Engineering's first half 2022 financial results briefing. For those of you who join us through webcast, thank you very much for joining. Welcome. Now, since our last briefing in May, our businesses continue to navigate a challenging operating environment. Against this backdrop, we held up relatively well, delivering year-on-year revenue growth and robust base business profitability in the first half. Business recovery, supported by continued cost savings and productivity measures, more than offset the substantial reduction of $125 million in COVID-related government support over the same period compared to the same period last year. Group revenue was up 17% year-on-year, with growth coming from all business segments, including a full quarter contribution from Transcor since the transaction closed in mid-March this year. Revenue growth at the group level, excluding Transcor, was also healthy. Group EBIT was 8% up year-on-year, driven by business recovery, strong operating performance, backed by cost savings from various efficiency initiatives in first half of the year, including a one-off pension restructuring at one of our overseas business units. The improved EBIT more than offset the impact of the Transcor acquisition related costs and the substantial drop of $125 million worth of COVID-related government support received in the same period last year. Group PBT was 3% higher against last year and Group Net profit for first half of 2022 was 5% lower than prior year same period. However, excluding TransCorp transaction and integration expenses of $16 million on a net of tax basis and the tax exempt effect of GSS of $11 million last year same period, group net profit would have been 4% higher year-on-year, driven by strong base operating performance and cost savings which more than offset the substantial reduction in government support, a point which Cedric also mentioned just now. I'd like to point out that in first half of 2022, our profits were primarily from our base operations, as we were essentially off COVID-related government support globally. On this note, I'd like to call out our appreciation to the governments of Singapore and those at our operating locations for the COVID-related support the funds received during the last couple of years. helped us to retain jobs when the businesses were significantly impacted by the pandemic. Now let's turn on to our business segments. For commercial aerospace, it continued to recover with another quarter of year-on-year revenue growth in second quarter this year. Against last year, revenue grew 24% in first half of 2022 versus first half of 21, with higher contributions from aerospace MRO and aerostructure and system sub-segments driven by increased MRO services as well as nacelle delivery. Its second quarter 2022 revenue grew 25% compared to the second quarter of 2021. Its EBIT was 78% up helped by stronger operations and one-off pension restructuring effect which more than offset the reduction of $86 million in government support. The pension restructuring was proactively undertaken at one of our overseas business units and changes were done after comprehensive and detailed studies considering latest trends in retirement programmes and practices among industry peers. Our A320neo nacelle production rate is keeping pace with OEM's requirement, which is a gradual increase in production from the rate of 45 per month at the end of 2021 to the rate of 53 shipsets by the end of 2022. That's our plan. We produce an average of 48 shipsets per month in the first half of this year. We continue to see strong interest in our passenger to freighter conversion solutions across all our Airbus PTF programs with a number of airlines placing repeat orders with us in the second quarter. We also entered into an LOI for 10 A320 PTF with China Southern Leasing. In July, I'm glad to mention that we re-delivered our head of version and the world's first A320 PTF aircraft, and with that, our Airbus PTF programs, including A330 PTF and A321 PTF, are now all operational. On Urban Solutions and CETCOM, revenue rose 43% year-on-year with higher smart city project deliveries including contribution from Transcore offset by lower revenue from CETCOM. Apart from the impact of Transcore acquisition costs, profitability was also impacted by Transcore's acquisition costs I'm sorry, apart from the impact of Transcall acquisition cost, profitability was also impacted by continued global chip shortages, particularly for SETCOM and IoT projects. Now this translated to an EBIT loss of $12 million for Urban Solutions and SETCOM segment. On chip shortages, as shared before, we have taken various measures to address the supply chain challenges including sourcing strategy, price adjustment and product redesign to mitigate the full impact. But we are certainly not immune like many companies around the world. On Transcore, we continue to focus on business development and winning new contracts as reflected in the healthy new wins in the second quarter of this year. Consistent with our investment case, as Cedric also mentioned, we expect Transcor to be cash flow positive from first year and earnings accretive from second year post acquisition. Moving on to Defence and Public Security, revenue rose 6% year-on-year, contributed by revenue growth by all sub-segments, land systems, digital systems and cyber security, as well as a defence aerospace, except marine, which saw a slight drop due to lower revenue from shipbuilding. Despite stronger operating performance, EBIT for this business segment was lower year-on-year, impacted by the absence of $36 million of COVID-related government support. Excluding this government support received in first half of 2021, EBIT for this segment would have been 5% higher year-on-year despite challenging conditions in the marine business area, supply chain disruptions and higher energy costs. Our defence business progressed further internationally. Recently in July, after having signed agreements with the Saudi Arabian Military Industries, better known as SAMI, for the provision of supplies and services of defence equipment and capabilities as well as technical support and training. The partnership is a notable development in line with our go-to-market approach to partner with local defence champions to deliver differentiated defence solutions. So we are very pleased with that development in Saudi Arabia. Our new contract momentum remains strong across the group We secured $3.1 billion of new contracts in the second quarter, comprising $1.2 billion from Commercial Aerospace, $0.4 billion from Urban Solutions and SECCOM, and $1.4 billion from Defence and Public Security. Including the $2.4 billion contracts secured in the first quarter, our total contract value for the first half was $5.5 billion. Now you can refer to slides 13 and 14 for further details which Cedric also highlighted in his presentation. Now I'd like to call out that following our last contract win in November last year in Rio de Janeiro to deploy city-wide public smart street lighting, we have secured new smart street lighting contracts in two other Brazilian cities, further expanding our presence in that country. Our digital business had a good quarter, securing various projects across market segments to provide cloud, AI and other cyber solutions. Lifted by these new contracts, as well as after subtracting revenue deliveries in the first half, we ended June with a robust order book of $22.2 billion, and we expect to deliver about $4.6 billion in the remaining months of 2022. Moving forward, we expect the operating landscape to continue to evolve. While we are mindful that these may present short-term pressures on our businesses, we will continue to focus on consistently executing our long-term strategy for global success. We will continue our disciplined approach towards cost management and investing across business cycles. Our Board of Directors has approved a second interim dividend of $0.04 per share, which shareholders will receive on 2 September 2022. On that positive note, we'd like to open the floor for questions and answers.

Thank you Vincent. We will now move on to the Q&A session. I will open up the floor first to our physical participants. For our online participants, please click the raise your hand icon and we will place you in the queue. May we have our first question please? If you have any question, please approach the mic in the center of the room.

Hello, management. I'm Roy from UBK. So for the results, I have four to five questions. I'll go one by one. So first question is regarding the restructuring of the pension. There is 72 mini well-off gain from the restructuring, and I would like to understand about the tax impact. whether there is, if I want to exclude the net tax gain from this one-off restructuring gain, should I apply a tax of 25% or was the tax rate applicable? Second is regarding the USS probability. I mean, even though we removed the one-off restructuring cost, sorry, the one-off transaction related cost as well as the integration cost. The operating profit of this segment did not improve as actually I have expected previously because we were expecting some positive contribution from the TransQuad, at least at the EBIT level, although the net profit maybe can be breakeven or slightly loss making. The third question is regarding the defense and public security business margin or look. So I noted that over the last four half years, the margin has been coming down. Last half year, I mean, the second half of 2021, the margin was 10.8%. But this quarter, sorry, this half year, the margin is 9.3%. Sorry, I don't have my number with me, but I think it's around that level. So what caused the decline in the operating margin and should we expect the 9 point something percent operating margin for the defense public security business to continue to be the new norm going forward? Fourth question is regarding the refinance cost for the commercial bill related to transfer acquisition. Would like to have some update on the refinancing. Last question is regarding the commercial aviation. From the company's perspective, do you see this business segment has more or less fully recovered in the last quarter? That's all. Thank you.

Thank you very much for your questions. On commercial aerospace, I will ask that Lee Chew address that question. As we mentioned just now, we are gradually recovering, but not fully yet, as our commentary would say, but we are heartened by the recovery. But I will let Jeff actually to maybe shed a little bit more light on commercial aerospace and then for USS profitability I'll let Lee Chew talk about it. We're not immune to the global chip shortage situation and we also have to undertake many initiatives to mitigate the impact of higher energy costs and supply chain disruption so we are not immune and plus seasonality effects that are inherent in the USS business as we mentioned just now during Cedric's presentation but I'll let Lee Chew talk a little bit more about that. I'll invite Cedric to talk about the tax effects of the one-off pension restructuring effects. And then I'll have Ravi talk about the defence and public security business margin. Maybe I'll let Jeff talk about the recovery for now. And then, of course, finally, I'll let Cedric talk about the refinance costs also for Transcor and give you an update.

Jeff. Thank you. The commercial aerospace segment is not fully recovered. If you look at the MRO business, we are seeing near full hangar capacity usage. However, on the engines and component MRO businesses, we are still gradually recovering. We expect to see greater recovery in the second half. On the OEM businesses of commercial aerospace, we are seeing that the deliveries are getting near to pre-COVID levels. And of course, once we achieve pre-COVID levels, we plan to exceed pre-COVID levels based on the market demand for these new aircraft deliveries. So there is still a growth opportunity in commercial aerospace. Thank you.

So thank you for the question on USS. Let me just reiterate that as we look at the first half results for USS, clearly from a revenue standpoint, we have been impacted by the remaining effects of COVID-19, especially in our SECCOM business in two segments, aviation as well as maritime. We are seeing the demand for aero in-flight connectivity as well as cruise connectivity now improving, but it's going to take time for that to recover. We also talk about the chip shortage, you know, resulting in or impacting our revenue opportunities both in the IOT side but also in satellite communications ground segment equipment that we provide and if you think about that backdrop, we have to operate against longer lead time. Whilst we have been mitigating this risk with supply chain diversification, redesign of products, all this would take time. We've also announced price increases, which is the reason why we are seeing, you know, or we are saying that the second half is probably going to give us more grounds mitigating the challenges and the headwinds that we are seeing. Cedric also mentioned the stronger business seasonality in the SECCOM business in 2021. which is not run rate. I would just say that as we look at the overall USS segment, we are seeing prospects returning in road traffic management, toll solutions, smart street lighting projects that Vincent alluded to. And as we think about the smart utilities and infrastructure and its alignment to the sustainability agenda, that's also an area that we are seeing pick up. So on that note, I would say that whilst we've had headwinds that we had to deal with in the first half, as we look at the second half and as we look at the trends, we remain cautiously optimistic, obviously holding ourselves close to look at the global economic situation and all the geopolitical tensions that's happening.

So let me address that question. Thank you for the question. So first of all, if you look at the margin of one-half last year and one-half this year, they are both about 10%, 10.3, 10.1%. So I think what I'll say, we are maintaining our margin, but as Vincent also mentioned, and I think in the slides, in the slide that you know that there are some challenges, the cheap shortage is one, that's affecting one of our business, Hackney in particular. But I'll say that although it's affecting our business, but the orders continue to come in and it's a matter of delivering. And the other one of course is the energy cost. So again, this is something that we have been very conscious of, mentioned before. and we are passing as much of that cost to our customers as possible so that we will not impact us as much. So despite the chip shortage, despite the energy cost, we've been able to maintain the one-half margin as compared to last year. And the margin also fluctuates depending on how our projects unfold over the year.

I'd like to build on what Ravi said. So if you look across the group, in the first half we did feel pressure from higher energy costs, we talked about chip shortage and then of course supply chain challenges, but despite all that we were able to undertake steps to mitigate the impact from being fully felt, but we certainly are facing those headwinds and we are taking many steps to mitigate them and they are all manifested in our first half results which remain resilient against those near-term pressures.

Thank you Roy for the question on the tax rate. The tax rate, as I said, it is basically a conversion of a defined debt benefit plan for which it is out of sync of market practice to a defined contribution plan, and it's in the US. So the tax rate of 25% also would make sense. I want to highlight it is an accounting tax, it's not a cash flow tax. On the second question of financing for Transcor, if you followed our announcement earlier about when we issued the bonds, the MTN, the $1 billion in combination of 5 years and 10 years bond, We did update that if we weighted average the interest cost together with some parts of it, of the acquisition cost with US commercial paper, it would have been 1.8% at that time. But obviously since then the short-term interest rate has risen, so the weighted average cost is still a very low 2.2% overall, bonds plus CP. Having said that, if you take a more higher vantage point view of the group's borrowings in total, about 55% of our borrowing are already in fixed interest rate. So we believe there is a good balance. Nobody knows where interest rate will go, whether there is recession risk, whether the Fed will slow it down or have to use interest rate as a lever to re-spur the economy. But I think at 55% fixed interest rate is a good balance. Now, how do we raise the remaining amount which we have not yet raised? Because the acquisition is $2.7 billion, we raise $1 billion. We will continue to use short-term paper to have flexibility to pay down when we generate cash from operations. So perhaps we will be looking to raise another $700 or so and we are looking at the right window where the 10-year Treasury or 5-year Treasury is at a level which we think we can strike. We also think about private placements, which is easier to do and is one-off with a few investors and we can get it done. Alright, thank you.

Roy, I believe we have addressed all the questions. Anyone, any other questions from the live audience?

May we invite our next question, please?

Is there any question from online at this time?

If not, we will now move on to our online participants. Rahul, we will now unmute your mic. Rahul from HSBC.

Hi, good morning. Could I check if I'm audible to you?

Yes, you are.

Thank you. I have three questions. My first one is related to Vincent, the commentary that you made after the 1Q 2022 business update. You had stated that assessment of global events on ST as not material. Could you share latest thoughts on it at the back of 1H results? In particular, if you think about the profit excluding the pension one-offs. My second question is related to the Urban Solutions and SATCOM division contract wins. They seem to have lagged in absolute terms compared to the other two divisions consistently in the last few releases. What is the run rate that you are targeting for this division in future? More so with Transcore acquisition outdone. Finally, a quick check. Will there be any more Transcore integration related expenses that we need to be aware of? Thank you.

Okay, so I'll talk a little bit about the... Rahul, the first question is on materiality of which factor. Can you repeat your question?

Yes, Vincent. You mentioned about the global events, the Ukraine situation and the COVID-19 after the 1Q 2022 business update.

Okay. The first question, we'll come back to that. We are talking about the headwinds that we are facing, chip shortages, supply chains, challenges, inflation and also geopolitical situations and whether they are giving any material impact on the business. I guess that's your question and whether we are able to manage those impact. The second question is on urban solutions and SECCOM on the new contract wind momentum. What kind of runway are we looking at? I think Lee Chew did mention, respond or address part of it earlier on in terms of our outlook. but I'll let her address it. And then trans-core integration costs, I think transaction expenses and integration costs in particular, we expect this to continue for another couple of years. As we mentioned, this is a multi-year activity. We expect maybe about $10 million a year or so on integration costs. Transaction costs probably a little bit more left in the next one to two years, but at a shade lower than integration costs. And we mentioned that transaction costs in total is going to be about 1% of the transaction value, so we still maintain that. So we do expect some integration costs to go in the next couple of years, about $10 million a year to that effect. $10 million a year. May I ask... I'll lead you to talk a little bit about the U.S.S. or Urban Solutions and SECCOM contract win outlook, and then I'll talk about the global challenges later on.

Thank you Vincent and thank you Rahul. So with regards to new order momentum and what we are seeing in USS possibly as a run rate, I would just say that we are on track to deliver what we have committed in our investor day sharing. And we communicated at that time that the smart city agenda for us is going to deliver $2.5 billion of business and a strong double-digit growth in terms of CAGR leading up to that. We've also been very clear that in our acquisition for Transcor, that is a strengthening of our smart mobility strategy and agenda. On Transcor, I must say that We are very pleased with the progress of the integration. The Transcause team's focus on the customers and also on execution has translated to the good business momentum that you have seen in what we reported as the Q2 orders that more than $170 million that Cedric referred to. So if you look at the USS business, which has its components in Smart City as well as in satellite communications, I mentioned earlier the fact that we are seeing prospects improving in many of these areas that we are targeting. But more importantly, as we look at the underlying technology enablement needs, which is the adoption of AI, global urbanization, and also infrastructure investment that we are seeing pick up. We know that that will anchor kind of our momentum in the go forward. So, you know, we continue to monitor and be cautiously optimistic, but I think we have the pillars and the foundation to get us on that journey towards committing the 2.5 million of smart city business.

Thank you, Lee Chew. Let me just clarify on the integration cost for Transcom, just looking at the detailed figures. So it should be in the range of between $10 to $20 million a year for integration, but closer to the midpoint of that range. For transaction costs, I think we're at the tail end. I think in the next couple of years, we're going to see a single digit in total of transaction cost-related spending. So that kind of sets the stage. Now in terms of the global headwinds, I think it's not getting better, as we know. It's evolving. But suffice to say that we have taken a lot of steps and initiatives, including productivity measures, including price adjustments, supply chain reconfiguration, and even product redesign in some cases to mitigate the outcome. I would not want to... perhaps give any numerical range. Suffice to say that given all these measures that we have taken, we are able to mitigate the full impact and our first half results are an outcome of those steps that we have taken. But because the situation continues to evolve, I think it's a bit too soon to give any order of magnitude. For example, in recent weeks, we've heard about demand on chips softening somewhat in the near term. But would it last and continue? We don't know. But we have to just continue to watch the space. But we're certainly feeling those headwinds, and we are taking many steps to address and mitigate the outcome. Thank you, Rahul.

Thank you, Vincent.

Thank you, Rahul. Do we have any more questions from our physical participants, perhaps?

Hi. It's a way for my query. I have three questions. The first two pertain to aerospace, so it's for Jeffrey. If I were to ask out the pension restructuring gain from your EBIT numbers, it shows a small improvement in terms of the margin. So I'm trying to understand where that margin improvement is coming from. Is it more from your MRO side, your PTF, or is it from your natal business? And then second question on aerospace, you said that I think engine components, MRO is still lagging. And so in terms of a percentage, where do you see the business now relative to say 2019, right? And when you talk about improvement in second half 22, how much do you expect it to improve to? The last question is more about... What are you hearing your non-aerospace clients talk about in terms of how they see placing of projects? Are they starting to hold back on spending or are they starting to push out when they want to commit to projects? I'm keen to hear your feedback of what you're hearing from clients.

Thanks. Which clients, sorry? Non-aerospace clients. Non-aerospace clients. Okay, I'll let Jeff address the first two questions. I think as Lee Chew mentioned, we are seeing some good developments in the urban solutions SETCOM space, albeit that we still see some near-term pressures. But our businesses in our portfolio is a bit diverse. Defence, I think we are seeing more inquiries and it's actually quite, quite, how to put it, relatively positive given the inquiries that we are getting. So it depends on the sector but overall we are seeing more and we are cautiously optimistic about customer projects However, there are near-term headwinds that we've got to watch this space quite carefully. So every business sector would have a different set of dynamics, but all in, we are still cautiously optimistic, especially with aerospace seeing the recovery momentum that we have just described. Does it address your question? Do you have a specific sector question in that regard?

So maybe on the urban solutions side, your smart cities, are you seeing your customers cut back the sort of CAPEX that they're willing to commit this year or the near term? Or are you also seeing them push out projects to when they want to sign on the dotted line? So while demand is still there, are you seeing shifts of spending to the right?

So you're specific to urban solutions and ZECOM. I'll let Lee Chew address it. I believe she's mentioned that quite a bit. on quite a few fronts earlier on, but I'll let her build on the answers.

Okay, Tzu Wei, I think on the urban solutions front, are we seeing budget pressures? Yes, right, because at the end of the day, we are not immune to everything that's happening. We do see in the strong orders through Q1 and Q2 for the first half specifically. Projects that's related to, for example, I mentioned tolling. I talked about smart infrastructure and utilities just because there's increased concern about the sustainability agenda. So I would say it's a mixed bag. Because there are some projects that would be under more pressure because prioritization of funds are going to still support COVID recovery, et cetera, across the globe. And so it is uneven. I don't know if I can say unilaterally one way or the other, but we are grateful to see that whilst prioritization of projects are happening, there is a continued focus in terms of supporting urbanization, supporting digitalization, because at the end of the day, these are enablers. that will help build more resilient economies. So I hope that kind of gives you a picture of where we are and what our customers are up against.

Jeff?

So on margin improvement, where is it coming from? The good news is that we are seeing margin improvement across the whole business. It's quite natural when you have more volumes coming back. and obviously the workload is also diversifying meaning that for example we're seeing that we're able to sell more spares as more airlines get back to flying so we do anticipate that the Chinese market will open up more in the coming months and that's a very important market for us because There's a lot of traffic between China and the rest of Asia. So we do see more volumes coming back in the coming months and years, obviously. On the engine and component workload versus pre-COVID, in terms of soft capacity, meaning manpower, we are around three quarters of capacity. pre-COVID, in terms of hard capacity, meaning infrastructure, we are at about two-thirds. So there is room to grow as the market recovers, especially in Asia, where we are largely exposed for the engine and component MRO businesses. Thank you. Thank you.

We will take our next question from online. Jamie from Citi, your mic has been unmuted.

Hi, good morning. Thanks a lot for the presentation. I just have a few questions on Transcore. Maybe could you share what TransCost order book was at the end of the first half? And also if you could share what the revenue and EBIT contribution to the overall group was in the first half, that would be good. And secondly, just wanted to find out on the opportunities for the business. How quickly are you expecting that TransCost capabilities could be transferred to other markets outside of the US? And are you seeing demand currently to sort of bundle it together with ST's other smart city solutions? And I guess, you know, where some of these market opportunities could be where you maybe are targeting some project opportunities. If you could share a bit more detail on that, that would be great. Thank you.

Yeah. Well, first of all, I'll let Lichu address your questions. We are actually very pleased with the synergies that we were already anticipating before the acquisition. That was one of the reasons why we wanted to progress the Transcore acquisition. We are hard at work. in bringing our solutions to the US, developing business opportunities and also bringing Transcore's capability to this part of the world as we committed. So I'll let Lee Chew give a little bit more insights to that. Now, we don't reveal EBIT level to business sub-segments, but certainly Transcore at the base business level, excluding the transaction costs, it is, of course, profitable. But we would not be able to get down to the specifics. And I'll let Lichu maybe talk about the other questions that came. Thanks, Jamie.

Okay, so on cross-selling opportunities, as Vincent mentioned, we are hard at work. And the two teams, the Transcorps team as well as our Urban Solutions team are already very engaged looking at opportunities. We mentioned at the acquisition that we want to start out with Southeast Asia as a market, bringing the toll solutions here. So we are executing to that plan. So cross-selling for us includes the electronic toll collection and also the congestion pricing solution that we talked about at the point of acquisition. And then conversely, as we look at our projects or projects that we have done in urban solutions on the intelligent transportation front, ITS, we are also looking at how do we bring some of our IT and some of our successes in smart road junctions, you know, transport op centers and all that, and also, I guess, traffic optimization operations to the customers in the U.S. So, suffice to say that I'm very pleased with the engagement on both sides in being laser-focused, not just executing to the business that we have, but also to the potential of the business that we can now leverage as well as expand. Hopefully that answers your question, Jimmy.

So in terms of order book, first quarter we said that TransCorp order book is about 1.6 billion Sing dollars. I think we are maintaining at that level because revenue drawdown from the order book is pretty much matched by new orders that we acquire but there's a pipeline of healthy pipeline of opportunities in front of us so we remain very optimistic about the potential of this business.

Thanks a lot for that. Thank you.

We will now take our next question from Siu Kee, CIMB.

Siu Kee, please go ahead.

Do we have any questions from our physical participants? Suki, we will come back to you shortly. We will hand over to Roy.

Hi, sorry. I have one follow-up question to the one Drew asked regarding the commercial aviation margin. So if we exclude the pension restructuring, the commercial aviation operating margin last half year was 7.3%. It was a good improvement during the first half. But my question is, let's say when we recover to the full capacity, full potential, what level of margin the commercial aviation business could stabilize at. We cannot get the figure from the historical number because of the company reporting restructuring. Lufthansa technique before COVID, I checked the operating margin is between 7.6% to 8% for Lufthansa technique in 2017 to 2019. So for us going forward, should we expect the, I mean, last half year it's already 7.3%, but going forward, should we expect some high single digit margin or even there is potential to go beyond 10%? Thank you. Jeff? Okay.

I don't think we are going to commit to any kind of margin or make any forecast, but what I can say is that There is continued room to grow. And even if you compare with pre-COVID versus post-COVID, actually the situation is also different because we now have more passenger to freighter conversion business. We actually have full middle river nacelle business. We are growing more engineering businesses. So really the business continues to evolve and our intent is to actually improve our margins obviously with businesses that have more intellectual property, that rely more on technology that we develop and own. and also to create more synergy across the customer market segments across our geographical footprint so what i can say is we do expect continued improvement in margins we we realize that the market is quite fragile at the moment with issues around labor availability labor mobility around the supply chain issues on raw materials, logistics costs and inflation. So many things we are balancing right now to try to make things happen. So we obviously will do our best to make it work.

May I just add to what Jeff mentioned? Of course, as we ramp up our passenger-to-freighter conversion, there will be more scale, so we expect positive contribution. And also keep in mind that in 2019, MRAS was only part-year because we completed the transaction in April. So even when we compare to 2019, MRAS still has room to have full-year contributions going forward as the OEM-type business, OEM class of business recovers further. so we are cautiously optimistic.

Okay, Siu Kee, we are coming back to you now. Your mic has been unmuted.

Hi, can you hear me?

Yes, we can.

Go ahead. Thanks. I have two questions. One, sorry to hop on USS Lichu. We I think last year or second half last year, we mentioned that the supply chain impact for the group was about 20 million, mainly on USS. And then for this half, we are looking at 12 million. So if I were to just exclude this supply chain impact out from last year and this year, and also taking out the 21 million integration and transaction costs, We are still seeing year-on-year drop, half-and-half drop in overall EBIT margin for USS from 6% last year to now 2.8%. You also mentioned that seasonality was a key factor, but is it purely seasonality that actually caused the big swing? And what should we be looking at in terms of sustainable margin? Because it's quite hard to see a trend now with all these supply chain and transaction calls and trans call coming in. So I think any guidance would be helpful. I just can't wrap my head. Why did the EBIT drop so much? That's my first question. And second question, Patrick, you mentioned just now that there could be more potential more of the restructuring pension coming up? Are we looking at this year? And should we be looking at similar quantum? Thanks.

Yeah, I think what Cedric was mentioning is that we'll continue to look for cost initiatives and productivity initiatives, not necessarily limited to whichever type. He was only using the pension restructuring as an example of the types of initiatives that we'll be looking for. If you look at what we've committed in the last few years, we committed to cost savings, continued cost savings, and so far we've been delivering. And we will certainly look for more such opportunities across the group. We have a dedicated team of people looking at continuous improvement across the group. There's a dedicated team full-time just looking at productivity measures and cost savings opportunities group-wide. And we're confident that we'll find more such opportunities. Even on the procurement front, we are leveraging on the scale of the group to have more leverage against our service providers and vendors around the world but giving them also certainty of our group purchase over time and through that effort we also manage our cost reduction that way. So multiple measures, so not just limited to pension restructuring which was a one-off for one of our US business units as we mentioned in first half of this year. Now, I think we'll talk about supply chain impact. I'll let Li Qiu go into that. We did not disclose the exact figure. Yes, last year we said that chip shortage, coupled with other factors, was in the region of 20 million. We expect this year, as I mentioned, Siu Kee, that the situation continues to evolve. We don't know what the effects would be in the second half. Suffice to say, in the first half, we managed to take all those headwinds on board and then still deliver the results that we mentioned. And of course, USS is more impacted because of the reliance on chips. That continues to be an area that we're working very hard to mitigate. So I'll let Lee Chew maybe give a little bit more colour.

Hey Suki, this is Lee Chiu. So, you know, as we look at the USS segment, and I know we made a lot of reference to SECCOM and the chip shortage impact to the SECCOM business. I just want to say that when we look at the shortage of semiconductor chip, it also impacts our IoT business and the product business for Transcall. And against that backdrop, other than chip shortage, I mentioned earlier also that we are seeing the remaining impact of COVID on some of our SETCOM verticals. And I specifically call out the aerospace in-flight connectivity as well as on the cruise side, right? So those are the two key elements and, you know, as we think about maybe from a forward-looking standpoint, obviously, you know, On the cruise side, we are seeing that there is a report out to expect a full recovery of the cruise business in late 2022 to 2023. On the aviation side, that's going to be a little bit more prolonged to probably 2024. But the efforts that we have made in the beginning of the year with regards to mitigating some of these supply chain constraints, which included the measures that we talked about earlier, We know that we'll be able to take benefit from some of those actions as we go into the second half of this year, notwithstanding how the geopolitical situation and the economic situation will evolve. So I hope that kind of gives you a bit more colour with regards to where we are and why you are seeing such headwinds in the first half business for USS. And of course, Cedric also mentioned earlier that the first half seasonality for us in 2021 for SECCOM was unusual. So it is not just chip shortage, it is how COVID has impacted some of the industry verticals we serve, but also the fact that 2021 was an abnormal first half for us in terms of business seasonality.

Thank you, Lee Chew. Now I want to talk a little bit about Transcore to clarify a point that I made just now. I mentioned that EBIT at the operating level is positive, if we exclude the transaction cost. At the company level, yes. However, at the group level, if we consider amortization of intangibles and acquisition interest, we're not yet profitable. As we say, we will be profitable in year two, accretive in year two. So that's consistent with what I said. So I just want to differentiate between the company level and the group level. And obviously we maintain our expectation that cash flow will be positive in first year of post-acquisition. That continues to be the case and profitable, equitive in terms of profits in second year of post-acquisition.

We're going to take another question from online. Lorraine from Morningstar, please go ahead.

Hi, good morning or good afternoon everyone. Just a quick question regarding some of the headwinds. In terms of your European operations, EFW for example, are there any contingency plans or risk mitigation if there are a worsening of the energy crisis or development of the energy crisis in Europe this winter?

I'll let Jeff talk about it. So the team has been hard at work given the energy constraints. So I'll let Jeff elaborate on it.

That's a difficult question because there's a lot of uncertainty around energy in Europe. Obviously as a sizeable user, industrial user, we have considered various options and scenarios. We do have, we work with the local government which actually supplies, the city supplies most of the power that we use and if you look at what the German government is doing, they are looking at alternative sources of energy, reactivating coal, oil, oil-powered plants versus gas. They have come to rely a lot on gas but the government is actually looking at alternatives. For us in the facility, we are also looking at alternatives for some of the energy sources that we use, including solar energy, converting the use of gas to other electric sources. So this is the work that is ongoing, and we will continue to work with the local government to ensure that there is minimal impact or any impact is mitigated. Thank you.

Great, thank you.

Thank you, Lauren.

Thank you, Lauren.

May we invite our next question from the participant from the room?

Hi, I have two questions. The first one is on aerospace again. EFW, which I presume to be the centre of your PTF conversion, given what you are experiencing in Europe, Would you expect this unit to turn profitable given your pipeline of PTF orders? And as it scales up the learning curve, would we be able to see the similar sort of margins that we saw historically for your Boeing PTFs for EFW? And roughly when will we be able to see that? Second question is more on strategy, and I think it's for Vincent. So strategy question for you. Given this current environment, what is your plan to kind of drive STE's earnings growth to reach your 2026 targets, or at least keep it on target? Which areas do you wish to push on harder to derive more growth?

That's an excellent question because I was about to talk about it at the end too. Our target for 2026 remains steadfastly unchanged. In fact, if you look at the progress that we have made, despite the headwinds and despite the substantial absence of COVID-related government support, This year, we still managed to keep an even keel because of the cost savings and productivity initiatives that we have undertaken. We mentioned to you that in 2020, our savings was north of $300 million. Last year, it was north of $180 million. In the first half this year, it's north of $50 million. We still have a lot of opportunities in the second half, procurement and other productivity. So things that we can control, we control them very well. We have been digitalizing our processes. We have implemented data analytics, digital solutions for many of our work processes to get efficiencies. We are leveraging on group scale to pursue savings, continuous improvements. Aerospace recovery is very heartening and we said in our 2026 goal that we will ride the recovery of our commercial aerospace business and this is exactly what we're doing. Passenger to freighter conversion is on track. We are very heartened by the fact that our pipeline of order is full until 2025-2026 for the Airbus programs. For white body I think it's through And then for narrow body for 2025. So our hangers are full, as Jeff talked about. And our OEM business in Nassau is chugging along really fine. And we are getting good momentum. And our transcore acquisition is going very well. So if you put all these positive developments in the context of near-term challenges, we are very optimistic about the long-term traction of this business, notwithstanding short-term headwinds. And even though we see short-term headwinds, we are able to mitigate the impact and we continue to invest across the business cycle. Last year, we broke ground on our Pensacola new hangar facilities because we have the financial way we thought to do that. in midst of the toughest challenges that the external environment could impose on us. But of course we are not immune. We have to work doubly hard, triply hard to make sure that we continue to mitigate those effects, but not losing track and keeping steadfast in our long-term growth, notwithstanding the short-term headwinds. So we remain steadfastly focused on delivering our 2026 targets, and I must say we are still very much on track. All three. All three. So you see, and this is the whole team effort, we said our strategy is to strengthen base business while pursuing new growth levers in a few places. When we say strengthen core businesses, that includes aerospace, our defense, but then we also see new growth levers like international defense business and we have been putting scores on the board including our recent development in Middle East. So we have been pursuing our strategy very with laser focus. And we say strengthen core business and we will grow international defence business and smart city business. We will also grow our digital business as part of smart cities and we will also grow our sustainability linked businesses in the years to come. So this is a very comprehensive suite of strategy that leaves no stones unturned. There's no focus on just one sector and not the other, so all three segments will be pushing very hard.

Thank you, Tzu-Wei. Yes, Jeff. I think we have time for one or two more questions. Are there more?

Let me just finish this question first. Question around profitability of ESW. Obviously, this is a ramp-up year. We fully expect the stand-alone business to be profitable. And we are seeing risks in the supply chain. I think that is a key risk driver for us scaling the margin curve as we create more conversion lines and each line scales the learning curve, we expect margin group-wide for the conversion activity to improve as to exactly where it's going to hit. We certainly like to be benchmarked to the best in the market eventually. Thank you.

Do we have any more questions from participants in the room?

Hi, this is Sean from Crisis. First question is on the OSCOSH, wondering if there might be any updates around that. Second is related to the commercial aerospace. Perhaps, you know, if you could share what was 2019's commercial space debit margins, that would be very helpful. And the third is on the the one-off benefit that we enjoyed this time around, I noticed that there's still quite a sizeable amount on the balance sheet, post-employment benefits. So should we be thinking about lowering costs through that? Yeah, just three questions.

think we will not want to get into such kind of specificities because obviously we've got to make sure that we make all the necessary studies and evaluations to make sure that we are competitive at the industry level so we would not be able to give you any specificities in relation to the question that you have but suffice to say if you look at what we have done We will always be doing and pushing for cost savings, productivity gains, while at the same time remain competitive in the markets that we operate in terms of how we reward our people and how we compensate our people. That's very important. So that will not be let up. So maybe I'll let Ravi talk about Oshkosh.

Sean, thanks for the question. So as I mentioned the last time, we completed the winter trials in January and then in the March period, the US Army requested for final submission. So working very closely with Oshkosh, we provided our final submissions. So the evaluation is in progress now and we should have the outcome sometime in the second half.

waiting in anticipation. We are confident of our solution but in this international competition obviously we expect competition to be keen as usual. Now in 2019 we were on a different set out. So we are not at liberty to break the EBIT margin out for you. But in 2020, we did give you a recast. But we are not at liberty to get into the specificities of commercial aerospace EBIT margin in 2019 because that was pre our restructuring. It was stewarded in a different basis before our reorganisation back then.

We have a follow-up question from Rahul. Rahul, your line is open.

Hey, yes, thank you. It's more of a continent question, I think Zubay asked. So if we think about, you know, maybe it's a bit early, but if you think about 2023 versus 2022 in terms of profit, there's already more than 70 million of one-off cost savings that you're done in 2022 that you will need to, you know, somehow offset in 2023. So as a management, are you getting bit off? cautious about thinking of how these cost savings are going to come and looking for more of one-off opportunities in each of the following years? Or you think that there are a lot of cost saving opportunities that can be recurring, like the one you did in 2020 and 2021, and you're enjoying the benefit now in 2022? Thank you.

We started with, which we appreciate, right? We started with $350 million of government support back in 2020. And we say that in 2021, we target to offset the lower government support that we anticipated in 2021 and we achieved it by two things. One, continued productivity gains and cost savings and also partial business recovery. In first half this year, when we announced our full year results in February this year, we also say our target this year is to offset the effects of lower government support, which will come down to essentially nothing. This year, absence of it this year, we expected that. And we said that we target to offset the absence of COVID-related government grant in 2022 through cost savings, and partial business recovery. And in first half, we achieved that. Now, whether it comes, the form by which it comes, the cost savings type, form, domain, I think it's not something that we are fixated on because we are looking at group-wide opportunities. So suffice to say that our target remains unchanged. Of course, it's not a walk in the park. We continue to look at such opportunities, but we also hope and expect business recovery to help us bridge the gap. You know, be it second half of this year or next year, as we already mentioned, we are seeing really good signs of recovery in several of our businesses, especially aerospace. So let's Keep watch on the space and we'll give you further updates at the appropriate juncture. Rahul.

Thank you, Vincent. Sorry, just a follow up. So my question was more about putting the cost savings in the bucket of recurring and non-recurring. I completely understand your point about group wide opportunity, but I'm just trying to understand that for 2023 already there is a kind of a minus 70 million, which you will need to offset. So that was a side I'm looking at. Thank you.

Recurring or non-recurring, I think there's abundance of opportunities for us to control our costs and manage productivity. And that's what we set out to do all the time. So whether it's recurring, non-recurring, we take it all in. So I think you rest assured that we'll be leaving no stones unturned in this journey. But at the same time, Keep in mind that we also need to reinvest back into the business so that we can sustain long-term growth and we need to reinvest and invest across business cycles. I think in the combination of all these initiatives and business recovery, we remain cautiously positive about our ability to offset the reduction in government grant or the absence of it. We will keep you updated in time to come because there are certainly near-term headwinds. But that does not take our efforts away from our keen focus on productivity gains and cost reduction. Okay, Rahul.

Thank you, Vincent. I appreciate the detailed response. Thank you.

Okay, thank you.

Our next question comes from Divya Numura. Divya, please.

Hi, thank you for the call. I just have a quick question on the polar security cutter program. So how is that going? And I think there was an option for more vessels. I think an option. So has that been exercised by the US Navy? Or when will you know about that? Thanks.

Let me take that question. So Firstly, just maybe some general comments on marine. So with the marine industry, there are some challenges, and although oil prices have gone up, we still see a lag in the business. For us, on the ship repair part, the business is being maintained, and the shipbuilding part, as was mentioned earlier, we are down by 1%. So overall in this industry we continue to see some challenges but of course we are working to overcome some of the supply chain disruptions and also the labour challenges which Jeff also mentioned in the aerospace. So Marine similarly has those issues. Specifically on the polar security cutter, this is of course the first of class of a fairly complex ship and at the current stage We are in the process of doing the design and the engineering for the first of the ship and that's progressing. And also of course we are working with the customer very closely. This is a large and complex project and so they have come back to us with some change requirements and so we have of course taken on those changes and the team is working very hard to include those changes in the design and in the engineering. So the project is progressing but shifted slightly to the right because of these new requirements but overall I think the efforts are continuous and we expect that more effort will be put in as we move towards the milestones that we are working with the customer.

Thank you. Any other questions from the live audience? Okay. Well, let me just close the Q&A session. Thank you for, first of all, your attendance. Obviously, as I mentioned earlier on, we remain steadfast in delivering our strategy despite the near-term headwinds. We've demonstrated our ability to keep our eyes keenly on growing the business as well as managing the near-term impact that the external environment could impose on us. On this note, I would like to put the Q&A session to an end. For those of you who are able to, please join us for lunch here physically. For those of you who join us through webcast, thank you very much once again for your participation and wish you a very pleasant weekend.