Singapore Tech Eng Ltd

Good morning, ladies and gentlemen. Welcome to ST Engineering's full year 2022 results briefing. We will begin today's briefing with a presentation by our Group Treasurer, Colin Teo. Colin is presenting on behalf of our Group CFO, Cedric Foo, who is not well today. Following the presentation, our Group President and CEO, Vincent Chong, will give his remarks. After that, we will open up the floor to a 30-minute Q&A session. Without further ado, may I invite Colin to give his presentation, please.

Thank you, Seng Huan. Good morning to everyone, here in person as well as those joining via webcast. Welcome to ST Engineering full year 2022 results briefing. Moving to slide two, I would like to bring your attention to this slide which states that a group's actual future performance, outcomes, and results may differ materially from those expressed in forward-looking statements. Moving to slide three, This slide shows the agenda for today. I'll be covering the group highlights, productivity metrics, debt profile, dividends and outlook, followed by a Q&A session. I'll move on next to group highlights and starting on slide 5. In FY2022, amidst the challenging operating environment, the group recorded a good set of results. Group revenue was $9 billion, or 17% higher year-on-year. The group's earnings before interest and tax, or EBIT, of $735 million was 9% higher year-on-year, despite $203 million reduction in government support. Our profit before tax, or PBT, and net profit stood at $597 million and $535 million, respectively. Both are 6% lower year on year. In 2022, we incurred interest expense to finance the acquisition of Transcore. Transcore is already cash flow positive in 2022 as planned. We expect Transcore to be earnings accretive from the second year of acquisition. In the second half of 2022, the group posted strong double digit year on year growth in both revenue and EBIT of 18% and 10% respectively. PBT and net profit was 17% and 7% lower year on year respectively. Turning to slide six. Over the past three years, the group has emerged strongly from COVID Looking at the middle chart on this slide, in 2020, our group EBIT would have been $243 million without government support. In 2022, we received virtually no COVID-19 government support, yet our group EBIT was $733 million, a significant improvement. Likewise, net profit would have been higher compared to 2022 and 2021 if we excluded COVID-19 government support. Moving to slide seven. This slide analyzes the year-on-year increase in group revenue by segment. The group recorded an increase of 17% in revenue in FY2022. This increase was contributed by all segments, namely commercial aerospace, urban solutions and SECCOM, and defense and public security. Slide eight. In FY2022, commercial aerospace contributed 33% of group revenue, urban solutions and SECCOM 20%, and defense and public security 47%. For revenue breakdown by types of product and service, commercial revenue increased from $4.6 billion in 2020 to $4.8 billion in 2021 and to $6 billion in 2022. Defense revenue grew steadily from $2.6 billion to $2.9 billion and to $3 billion over the same period. As you can see, the diversity of our business portfolio has helped us to reduce the volatility of our financial results and will cushion us from future pandemics as well as recessions. For revenue breakdown by customer location, Asia constituted 50%, US 25%, Europe 18% and others 7%. Moving to slide nine. In 2022, commercial aerospace revenue recorded almost 3 billion revenue, which is a very strong 21% increase when compared to 2021, even though the aviation sector has yet to recover fully. We'll elaborate on this point further in the next slide. Additionally, We are pleased to inform that passenger-to-freighter, or PTFs, gross profit margin at programme level turned positive in Q4 2022. Slide 10. In the month of December 2022, air travel has recovered to 77% of December 2019, which represents pre-COVID level. Of this 77%, domestic travel leads at 80%, whilst international travel lags at 75%. International travel with wide-body aircraft generally provides more MRO workload. Asia-packed international air travel is now at 52%, which clearly indicates room for recovery in Asia-Pacific, which is our key commercial aerospace market. Hence, the reopening of China is an upside for this segment. We have recently announced the setting up of a joint venture with SF Airlines. This JV is subject to regulatory approvals and its airframe MRO facility will be located in Eto'o, Hubei. SF Airlines is the largest air freight carrier with 79 aircraft in their fleet and growing. Our commercial aerospace unit will have 60% share, while SF 40%. SF will become the anchor customer, and this facility will enjoy incentives from the local government. We expect further growth in this segment as the industry recovers. Turning to slide 11. The chart here shows the group EBIT and Base Operating Performance, or BOP in short. Base operating performance excludes the following COVID-related government support, energy inflation, Transcore Transaction and Integration Expense, or TCT&I in short, as well as pension cost savings, which was a positive impact. Our BOP EBIT improved from $469 million in FY2021 to $727 million in FY2022, an increase of 55% year-on-year. Group EBIT, as reported, grew from $674 million in FY2021 to $735 million in FY2022, an increase of 9% year-on-year. This was a result of 258 million of business growth and cost savings, which excludes pension cost savings. And this more than offset the 203 million reduction in government support. Slide 12. For commercial aerospace, EBIT grew strongly from $182 million in FY2021 to $301 million in FY2022, which grew by 65% despite the drop in $115 million of government support. Slide 13 on USS. The USS EBIT grew from $26 million in FY2021 to $29 million in FY2022, or 13% year-on-year. despite the Transcore T&I expenses and SECCOM's product development investment. Ship shortage impact is about 20 million for both 2022 and 2021. Moving to slide 14. EPS EBIT dropped from $466 million in FY2021 to $405 million in FY2022 by 13% year-on-year. However, if we exclude the drop in government support of $51 million in 2021 and the impact from energy inflation of $23 million, the base operating performance EBIT would be $428 million, which is 3% higher. Looking forward, since the US marine business has been divested, future losses and risks from this line of business have been eliminated. Turning to slide 15 on the group's net profit. The BOP net profit improved from $394 million in FY 2021 to $549 million in FY 2022, an increase of 39% year-on-year. Net profit dropped from $571 million in FY 2021 to $535 million in FY 2022 on a reported basis, or 6% drop year-on-year. The improvement in our BOP net profit was a result of $258 million of business growth and cost savings, which excludes the pension cost savings, that more than offset the $203 million reduction in government support. However, as Transcorps will only be earning secretive in the second year of acquisition, this increase in EBIT was not sufficient to fully offset the higher finance costs and other factors shown here. Turning to slide 16 on our new contracts. In the fourth quarter of 2022, the group secured $2.8 billion worth of new contracts, with $0.7 billion from Commercial Aerospace, $1.4 billion from Urban Solutions and SECCOM, and $0.7 billion from Defence and Public Security. This brings the total new contract value for the year 2022 to $13.1 billion. Slide 17. The group ended the year with a robust order book balance of $23 billion. This represents a 31% increase from $17.5 billion, which excluded the US marine business as at the end of 2021. This is also higher than 2019 pre-COVID of $15.3 billion order book. About $7.2 billion of the $23 billion order book is expected to be delivered in 2023. This strong order book provides visibility for future revenue in the coming periods. Next, I move on to our productivity metrics, starting with slide 19. Our productivity metrics are trending well. Firstly, ratio for operating expenses over revenue improved from 13.5% in 2020 11.7% in 2022. Secondly, ratio for staff costs over revenue improved from 32.5% in 2020 to 28.9% in 2022. These two ratios are also more favourable than those that we achieved in 2019 pre-COVID. In addition, we had cost savings of around $250 million in 2022, including the pension cost savings in commercial aerospace. This enabled us to offset the reduction in government support of around $200 million and to invest in our growth areas. Next, I'll move on to our debt profile and turning to slide 21. For our interest rate debt profile, 53% is on fixed rates and 47% on floating rates as at the end of December 2022. This is in accordance with our hedging policy of about 50% in fixed rates, which is a balanced approach to achieve an effective hedge and avoid undue speculation on interest rate movements. The Group's weighted average borrowing cost for FY2022 was 2.4%, a marginal increase compared to 2.3% in 2021. The weighted average borrowing cost of our existing fixed-rate borrowings, which is the darker blue portion of the pie chart shown here, comprising mainly bonds, lease obligations and fixed-rate loans, is around mid-2%. As informed previously, there are US$32 million of Treasury-locked gains remaining in our hedging reserves, and this will reduce the interest rate for our next fixed-rate debt issuance, and we have planned for about US$500 million. For 2023, we expect the Group's weighted average borrowing cost to be in the low 3% range. Assuming even if US Fed Funds rate increases by up to 100 basis points over the next 3-4 FOMC meetings, from 4.5% to 4.75% range to peak at 5.5% to 5.75% range in the second half of 2023. Our credit ratings remain very strong, with AAA by Moody's and AA Plus by S&P. And most recently, Moody's has just reaffirmed this rating on the 21st of February 2023. Next, I move on to dividends and turning to slide 23. The Board has recommended a final dividend of $0.04 per ordinary share, subject to the shareholders' approval at the upcoming AGM in April 2023. If so approved, the final dividend will be paid to shareholders on 9 May 2023. For the first three quarters of 2022, we have paid three interim dividends of $0.04 each, making a total of $0.12. Hence, the total dividend for the year ended 31 December 2022 will be $0.16 per share. Next, I'll move on to the outlook for the Group and turning to slide 25. In summary, the Group is well positioned for the future. Firstly, we will ride the recovery in the aviation industry. Our PTF gross profit margin at program level is expected to improve. Secondly, we will continue to focus on productivity initiatives, including monitoring the OPEX to revenue ratio. Thirdly, Trans-cost transition has been smooth. It became cash flow positive in 2022. There was also good contract win momentum. We expect this investment to be earning secretive in the second year of acquisition. And fourth, we will continue to manage our portfolio. Last but not least, a robust order book of $23 billion that will provide revenue visibility in the years ahead. Turning to slide 26, This slide shows our group P&CO message on our outlook. I'll just give everybody a minute or so to read through. All right. This brings me to the end of my presentation. Thank you for your kind attention. Thank you.

Thank you, Colleen. May I now invite our panelists to the head table. The panelists this morning are Vincent Chong, Group President and CEO, Ravindran Singh, Group COO, Technology and Innovation, and President, Defense and Public Security, Tan Lee Chew, President, Commercial. Joining the ESCO members at the panel are Jeffrey Lum, President of Commercial Aerospace, and Colleen Teo, Group Treasurer. I will now hand over the floor to Vincent to deliver his remarks. Vincent, please.