Singapore Tech Eng Ltd

Good morning, ladies and gentlemen. Welcome to ST Engineering's first half 2023 results briefing. We will begin today with a presentation by our group CFO, Cedric Foo. Our group's president and CEO, Vincent Chong, will then 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. Thank you very much.

For those attending in person here, very warm welcome. and those via the webcast, similar warm welcome and good morning. Let me add my welcome to ST Engineering's first half 2023 results update. First, I would like to bring your attention to slide two, which states that amongst others, the group's actual future performance, outcomes and results may differ materially from those expressed in forward-looking statements. Slide number three is the agenda for today. I will be covering group highlights, business discussions, segment financiers, and order book, debt profile, and finally the CEO's outlook. Thereafter, Vincent will provide his opening remarks, followed by Q&A. First group highlights. Slide 5 shows a summary of our first half 2023 results. It's a very strong set of results. Group revenue recorded a 14% year-on-year increase to $4.9 billion. Group EBITDA was strong at $711 million, up 16% year-on-year. Group EBIT was $444 million, up 15% year-on-year. Group profit before tax was comparable year-on-year at $351 million, and group net profit stood at $281 million. more or less flat for first half 2023 versus first half 2022. But it actually belies the strong underlying business performance, which I will cover later. Slide six. The pie chart on the left shows commercial aerospace constituted 38% of group revenue. DPS, 44%. USS, 18%. DPS segment includes both local and international customers. So if you look at the pie chart, that $2.1 billion is defense public security, and it includes local and international customers. It also covers defense and commercial domains, and not just military domains. And DPS's commercial businesses would include areas such as public security and safety, critical information infrastructure, and others. Hence, the bar chart in the middle of the slide shows defense revenue as opposed to DPS revenue, which I just defined, of $1.6 billion, and this is a subset of DPS revenue of $2.1 billion. The group's commercial revenue increased to $3.3 billion in first half 2023, driven by the continued recovery in commercial aerospace. The group's defence revenue increased to $1.6 billion in first half 2023, as I have just described. Now, on the right-hand side of the slide, it shows first half 2023 revenue by location of customers, and for Asia, 50%, the US, 24%, Europe, 20%, and others, 7%. Slide 7. As I said, group revenue grew 14% to $4.9 billion, and this is contributed by all segments. And it's despite the loss of revenue which we choked up in first half 2022, since we have sold U.S. Marine in November 2022. That revenue by U.S. Marine in first half 2022 was $119 million. Slide eight. This slide shows the revenue growth in the three segments. On the left, commercial aerospace grew robustly by 32% to $1.9 billion. In the middle of the slide, U.S. Marine contributed $119 million in first half 2022. If we rebase this, then DPS's first half 2023 revenue would be higher by $128 million, or 6%, going to $2.1 billion. On the right side of the slide, USS, which is Urban Solutions and SECCOM, grew 18% to $891 million, contributed by Urban Solutions, which has Transcor in it, and partially offset by SECCOM. Slide number 9 shows the first half 2023 EBIT which grew by 15% all the way to the right, 1.5%. In first half 2022, the group recorded an EBIT of $385 million, which is the first bar chart on the left, the number right at the top. But this included a $72 million one-off pension restructuring gain, as many analysts would have noted, And also in first half 2023, the TransCore transaction and integration expenses were lower by $16 million. So if I take the net effect of the $72 million, which helped 2022, but was absent in 2023, and if I take the lower TransCore T&I expenses in 2023, first half, which is a help for 2023. I offset this too, it's $56 million. If I take $56 million out of the $385, I have the first bar chart of $329. So if I take that as the new base, just to deconstruct so that you get the underlying business performance, and with a business growth of $141 million, the first half 2023 base operating performance is $470 million, which is a very robust $43 million higher than first half 2022 rebates. Sorry, 43% higher. We also incurred a one-off Satisfy divestment loss when we sold all the shares of Satisfy. And also SECCOM is undergoing restructuring and they will have incurred some severance expense. The total of these two is $26 million. And if we take this off, then the first half 2023 reported number is $444 million, which in itself, even if we do not rebase the 2020, is a 15% higher EBIT compared to first half 2022. Next, net profit. The difference between the two slides is obviously finance expense and the tax effects. So similarly, in first half 2023, net profit was flat at $281 million. That's the bar chart at the extreme right. In first half 2022, though, the group recorded a net profit of $280 million, which included $53 million, and now it's not $72 million because of tax effects. In first half 2023, trans-core transaction and integration expenses were lowered by $12 million after tax, which is again a different figure from the one you saw, but it was before tax. If we rebase both these items in first half 2022, that will be $41 million off the $280 million, starting with a new 2022 first half base of $239 million, and then add to that business growth and cost savings of $109 million net of tax in first half 2023, the green bar, 109, and the higher finance cost after tax of $48 million, the base operating profit would be 26% stronger. So at $300 million base operating profit, this probably is our highest in many years. In first half 23, as I mentioned before, we also incurred loss on the full divestment of shares in Satisfy and some severance expense to put SECCOM in a better footing. This totaled $19 million after tax. And all in, the group net profit, as reported, showed it as flat at $281 million, despite higher finance costs. Now let's go into some business discussions. Slide number 12 shows commercial aerospace revenue growth for Q1 and Q2 for three years. First off, as you can see in slide number eight previously, the first half 2023 revenue was 32% higher year on year at $1.9 billion, and this was higher than pre-COVID level. For the chart on the right, 2Q 2023 revenue was $983 million. So we are looking at just one quarter, second quarter 2023, which represented a robust 35% growth year-on-year versus 2Q 2022. So you see the 35% on the right side of the chart. Strong recovery in engines and component businesses together with PTF demand and higher nacelles delivery enabled this growth. This segment also saw robust new contract wins in first half 2023 of $3 billion, including $2.3 billion in 2Q alone. Slide 13. In the month of May 2023, air travel has recovered to 96% of May 2019 pre-COVID level. So we're comparing May 23 to May 2019, 96% of pre-COVID level. So not quite the same level as pre-COVID yet, but 96%. Of this 96%, domestic travel leads and has exceeded the pre-COVID level at 105% of pre-COVID level. whilst international travel lags and is still below the pre-COVID level at 91%. International travel with wide-body aircraft provides more MRO workload for our commercial aerospace segment and has yet to recover fully. Now, if you look at APAC Airlines and their international travel recovery, it is at 69% of pre-COVID level. with potential for higher MRO demand going forward, especially with the reopening of China. And this expected APEC air travel trajectory represents further upside for our commercial aerospace segment, as we have several hangars in Asia Pacific. Slide 14, let's discuss DPS. This segment reported a $9 million increase in revenue, despite a loss of revenue from US marine divestment in November last year. Rebasing for this, DPS saw a healthy 6% base business revenue growth. Strong contract wins of $5.2 billion was recorded in the first half of 2023. It's really very strong. Growth in international defence business saw some early success with about $100 million or more than $100 million contract wins from customers in Europe and the Middle East. So as you can see, we have two very strong segments, commercial aerospace and DPS. And although DPS revenue grew modestly, when you look at the EBIT, it is very, very strong. The one area that we are restructuring to address future needs is in the SECOM area. Next, slide 15, urban solutions. We expect deliveries in urban solutions to be second half-weighted. In June 2023, just a couple of months ago, Transcor received a notice to proceed for New York congestion project, which is a very positive development as we have waited for this for some months yet. This go-ahead means that this project In fact, installation has already begun and is scheduled for completion as soon as 2Q next year. Transition for Transcor into the group has also been very smooth. And several new contracts, including the New Jersey-South Jersey contract, worth more than US$1 billion, which is the largest contract ever, have also been won post-acquisition. Tri-Score is also pursuing other contracts, including urban congestion pricing. Now that the New York Notice to Proceed has been given, we have received many inquiries from other U.S. cities. It is also pursuing synergies, which is the basis of the M&A, and pursuing various leads for road tolling in Southeast Asia, as well as the other way around, selling products of the SD Engine Group into the US by using Transcore's channel. And there are some active discussion in that area as well. And we hope to deliver some good news in due course. Transcore is also positioning itself, not just for today, but for the future. And it has many interesting cutting-edge innovations and R&D in the pipeline. As a result of all this, Transcor earnings accretion in the second year post-acquisition as a target, which we announced when we bought Transcor, remains. So we are confident that this will take place. And project deliveries are also waited in the second half of 2023. Earnings accretion as defined here, when we said Transcor will achieve earnings accretion by the second year of acquisition, it has taken into account amortization of intangibles, transaction and integration expenses, and also financing costs. So it is basically a net profit figure. The other part of USS is urban solutions-based business, which is our smart mobility business. And as you are aware, we won many big contracts in Taiwan, and the notices to proceed for the Kaohsiung yellow line and the red lines are on track. So let me just... devote a bit of time on SECOM since it is an area that we are transforming and restructuring. Slide 16 talks to this. The SECOM business, mainly iDirect, was profitable before COVID. However, COVID impacted many of its key aviation and maritime customers. As you know, these two domains are where SECOM iDirect sells to predominantly. And this results in about breakeven performance in 2020 and 2021. In 2022, however, which is last year, several factors impacted the profitability of SECCOM. This included, firstly, supply chain disruptions, which included cheap shortages, which we talked about. However, we expect relief to come by end of this year. Second, the remaining impact of COVID. Many in the industry, players like iDirect, are still facing remaining impact of COVID, although the effects are lingering off. Thirdly, near-term cost of restructuring, which we talked about. And this, I think, is a positive move by SECCOM as it is very decisive and it really places SECCOM, iDirect, in a much stronger foundation for future performance. And we also have a one-off divestment loss of $24 million when we sold satisfied shares. Let me go into satisfied a little bit. Satisfye is a company which develops ASIC semiconductor chipsets. ASIC is application-specific integrated circuits, basically for edge computing. And iDirectSycom uses such chips. The investment in Satisfye was made in 2014, so it is some nine years ago, for US$7 million to enhance collaboration and to cap on the ASIC technology of Satisfye. By now, Nine years hence, alternative technologies have become available and the collaboration has been successful and fruitful. Hence, the original rationale of holding shares in Satisfye is no longer valid. Satisfye went on listing through a despec mechanism in October 2022, 4Q last year. And this investment was mark-to-market in our 4Q22 results, pursuant to financial reporting standards, because there is a crystallized price in the IPO price. Subsequently, following the expiry of the sale moratorium of those original shareholders of Satisfy, pre-listing, when the moratorium expired, we sold all the shares that we held in Satisfy for about 1.5 million U.S. So actually the cash flow loss is $7 million minus $1.5 million. But because of the accounting ups and downs, the investment loss of $24 million was recorded. It's just one time for this half. Slide 17 now describes what are we doing about it. And the actions we are taking for the SECCOM business is as follows. Firstly, iDirect Satisfy uses several platforms. You may have heard of dialogue, velocity, and so forth. And obviously the industry is transforming from Jio, Mio, Leo, Mio even, Hio even, which is hybrid. So many form of satellites, this is a rapidly developing, but nonetheless developing industry for the satellite players. And obviously a SECCOM, more dam and ground equipment provider has to keep up with these changes. So we have now decided that actually we can build the new generation platform on top of one of these several product lines, rather than a new platform on each of these product lines. So by doing so, we achieve two things. One, cost efficiency, obviously, because you're fixing one product line to be future ready rather than three or four. And less engineering work is required. And secondly, more dedicated efforts to position this new platform to be multi-orbit compatible. So whether it's Jio, Mio, Liu, Hio, and to be cloud native and 5G convergent. All this really is to kind of calibrate our solutions such that satellite communications either become the primary source of communications in remote areas, across continents, across oceans, or to be the redundant source, even on terrestrial communications. And this is the vision which many of the big players are thinking about, connected everywhere, anywhere. Secondly, having done this converging of the platforms, we now have streamlining opportunities. We need less engineering hours, as I described. So approximately 50 employees were released in June. and an additional 250 or so released in July, and these are mostly in the US and Europe. This organization right-sizing will reduce the workforce by approximately 20%, and improving our cost structure and productivity, particularly in engineering and sales, and will enable SECCOM to be more competitive in the marketplace. So we expect cash savings of $40 to $60 million a year, from this as well as other continuous improvement efforts. While the cash savings are between 40 and 60 million a year, the P&L impact, for those of you who are building your model, the savings are expected to be around 30 to 60 million. So instead of 40 to 60 for cash, 30 to 60 for P&L, and that's because the affected employees cost had been capitalized in the past to be amortized going forward and this amortization will continue until it tears down to zero. So that's for SECCOM. We strongly believe and are confident that we have and will put it in a strong foundation for future growth and profitability. Next, I will spend some time talking about the segment financials and then the order book. Slide 19. When we look at EBIT by segment, starting from the left, commercial aerospace, as we have discussed, has a strong revenue growth of 32%. But if we take out the pension restructuring gain, which was one-off in 1.522, then the base operating profit increased 60% year-on-year, from $111 million to $178 million. In the middle of the slide, DPS posted strong EBIT of $301 million. This is very strong, boosted by business growth, cost savings, and margin mix, and also the absence of U.S. marine losses. So we more than make up for the U.S. marine revenue loss, which we have foregone, but on the EBIT side, the absence of U.S. marine loss clearly produced a very strong EBIT for DPS as a whole. So it is even at hindsight, a good decision so far. On the right side of the slide, for USS, lower transaction and integration costs of $16 million, weakness in SECOM, as we have discussed, due to supply chain, remaining COVID impact, and the one-off loss on divestment of Satisfy, contributed to an EBIT loss of $34 million. Having said that, our SECOM organization business, especially iDirect, continue to be a hubs and modems market leader. It has very strong brand equity in the market and help in very high regard by customers. Particularly in the aviation, maritime, government and cellular backhaul sectors. On the whole, we remain positive about the long-term prospects of the second industry. It is going to be a highly connected world. And terrestrial alone will not cut it down. And we expect the restructuring efforts that we are taking now to strengthen the foundation of a SECOM business for future profits and growth. So on the whole, ComAero and DPS performed very strongly. USS segment EBIT is expected to be comparable to 2022 for the full year of 2023. So while SECOM is weak, we believe second half will be significantly strong. sorry, USS as a whole will be significantly strong for second half, such as USS segment EBIT will be comparable to 2022, which was a profit of about $30 million. Next, slide number 20, new contract wins. In second quarter of 2023, the group secured $4.7 billion in new contracts. Commercial Aero recording 2.3%, DPS 1.9%, and USS 0.5%. Together with those in 1Q23 of $4.9 billion, the group secured a record $9.5 billion of new contracts in first half 2023. Which brings me to slide 21. With the strong contract wins, we ended the first half with a record order book of $27.7 billion. I think some of you who have covered us in the past will remember numbers like $13 billion. Now it's almost $28 billion. This is a leading indicator of future revenue growth in future periods. And we expect to deliver about $4.4 billion in the remaining six months of 2023 out of this audiobook. Now slide 23 discusses our debt profile. As you know, in May this year, we issued another tranche of U.S. $500 million three-year fixed rate bonds with an effective yield of 3.3% after the amortization of U.S. Treasury log gains. The full amount of T-log gains of $32 million that remained on the balance sheet, if you recall, we had $92 million amortized, $60 million, there was $32 million in the balance sheet, is now fully applied. Half of this will be amortised over the tenure of this new three-year bond that I just spoke of, and the remaining half is realised as finance cost reduction in the first half of 2023, given that we have no intention to issue any more bonds in the near term. As of 30 June 2023, total borrowings were $6.2 billion. That's the third bar chart. This is lower when compared to $6.5 billion at the end of 2022 and slightly higher compared to March 2023. However, we expect to reduce borrowings to meet $5 billion by end of 2023. And as a result, we will do so through loan repayment, largely from strong operating cash flow and aviation asset sales to joint ventures. For 2023, we expect the group's weighted average borrowing cost to be in the low 3% range. This is a figure we have shared previously, and it stands. For next year, we expect the group's weighted average borrowing cost to be in the mid 3% range, even if we assume, and this is the underlying assumption, that the Fed hides U.S. Fed funds rate by a further 25% post-July, till before the end of the year. So even with one more hike of 25 basis points, we expect the group's weighted average borrowing cost for next year to be made 3%. For our interest rate debt profile, with the issuance of the three-year fixed rate bond, fixed versus floating debt proportion was rebalanced to 65%, 35% accordingly. Our credit rating remains strong. Moody's maintain our credit rating at AAA, but however, favourably changed the outlook from negative to stable as recently as April this year. And S&P reaffirmed our credit rating of AA plus and stable in June 2023 as part of their annual review. Finally, we'll end with the Group President and CEO's message. And let me just read it. It's not that long. Our good performance in the first half demonstrated the strength and resilience of our business portfolio. This is reflected in the strong recovery of the commercial aerospace segment and the strength of the defence and public security segment. Despite near-term challenges in our SECCOM sub-segment, decisive steps are being taken to restructure and transform this business so as to be future-ready. Consequently, we expect Urban Solutions and SECCOM, the USS segment, full year 2023 segment EBIT to be comparable to 2022, supported by a significantly stronger second half 2023 for this segment, i.e. the USS segment. The target for Transcor to achieve earnings accretion from the second year post-acquisition remains remain very focused on delivering on our record high order book of $27.7 billion to achieve growth and value for all our stakeholders. This marks the end of our presentation. Thank you.

Thank you, Cedric. May I now invite our panelists to the head table. The panelists this morning are Vincent Chong, Group President and CEO, Group CFO Cedric Foo, Ravida Singh, Group COO, Technology and Innovation and President, Defense and Public Security, Tan Lee Chew, Group Chief Commercial Officer, Market Development, and President, Smart City and Digital Solutions. And finally, Jeffrey Lum, President of Commercial Aerospace. I will now hand over the floor to Vincent to deliver his remarks. Vincent, please.

Good morning. Can you hear me? Yeah, because... Okay, good morning to all of you at the ST Engineering Hub and participants who are joining us virtually. Good morning. Welcome to ST Engineering's financial results briefing for the first half of 2023. Now, Cedric has delivered the full financial presentation for the first half of 2023, reflecting the strength and resilience of our business portfolio. As you delve into details of our first half performance, the strengths of the group become evident. Even as urban solutions and SETCOM segment faces near-term challenges, the strong operating performance of the other two segments, namely commercial aerospace and defence and public security, enabled the group to achieve a strong first half of 2023 with base operating performance of 26% year-on-year improvement in net profit on the back of a 14% year-on-year increase in revenue as Cedric presented. We reported that group revenue was 14% higher year-on-year despite the divestment of US Marine and that our EBIT was 15% stronger year-on-year despite SEDCOM weakness in the near term. As you are well informed, we have been keeping the market apprised of the near-term SEDCOM weakness for a while now, and our internal transformation as well. We have now taken decisive steps to establish a stronger foundation for growth. In fact, we have been doing so in the last year or two. We have called out the impact of certain variables and non-recurring one-offs, which resulted in flat PBT and net profit in first half 2023. As I just mentioned, our base operating performance was stronger at the net profit level with a 26% increase year-on-year despite ZECOM weakness and higher finance costs. For commercial aerospace, we were able to almost make up for the $72 million pension restructuring gain in the first half of 2022, which did not recur in the first half of 2023. Despite that, we were able to make up for the one-time gain in with base business improvement and cost savings initiative. And of course, this commercial aerospace recovery traction continues to be very good and very strong, as Cedric also showed you earlier on. Now let's go on to our segment performance and strategic outlook for the rest of the year. We are optimistic about commercial aerospace continued recovery, which has rebounded to its pre-COVID level. excluding pension restructuring gain, which was one time in first half of 22. First half 2023 EBIT improved by 60% year on year. This is the base operating performance result of our commercial aerospace segment. As we continue to focus on sustaining this segment's growth and improving the learning curve of freighter conversion program across our conversion sites, we will actively seek and capture productivity benefits While global air travel is fast approaching pre-COVID level, international air travel in Asia Pacific, however, has only reached about 70% of its pre-pandemic level. Further, as we align our Nacelle production rate to that of the OEM, we noted that Airbus' pace of ramp up, including for A320neo, will continue to depend on its supply chain's capability to perform. Now I'll now touch on defence and public security segment. which also recorded strong results in first half 2023. We reported higher revenue despite the divestment of US Marine and stronger EBIT of 41% better than first half of 2022. That reflects the effect of a high graded portfolio and a favorable margin mix. The higher margin mix or better margin mix observed in the period was partially attributed to the lumpy nature of project revenue and profit recognition and diverse margin mix in defence related contracts and this can lead to fluctuations as you may have already noted from following us over the years in the segment's overall blended margin from time to time. On international defence, the segment made headway securing new contracts of over $100 million in the first half of the year. These new wins further affirm the value and appeal of our defence solutions, highlighting the progress we have made in cultivating and establishing presence in our target markets. Moving on to the urban solutions and SETCOM segment, while revenue grew, EBIT was impacted by weaker SETCOM performance due to supply chain disruptions including chip shortages, remaining impact of COVID, near-term costs of ongoing SETCOM business transformation and a one-off loss from the divestment of satisfied shares. Excluding SETCOM weakness and the one-time divestment loss, USS EBIT in the first half of 2023 was $30 million higher compared to first half of 2022, attributed to a combination of business growth, cost savings and lower trans-core transaction and integration expenses. Earlier, you heard the updates from Cedric on how Transcor is pursuing growth and synergies, and notably how the team is focused on executing the New York congestion pricing project since receiving the notice to proceed in June, or a couple of months ago. This is scheduled for completion by the second quarter of 2024, in spring of next year. With this in view, our target for Transcor to achieve earnings accretion by second year post acquisition remains. And as explained by Cedric, being accretive, earnings accretive means Transcall is generating sufficient profits to cover financing costs, integration costs, as well as amortization expense. More on CEDCOM, elaborating on what Cedric has said. The business has had a strong track record of profitability until COVID hit. While it faced the negative impact of the pandemic, it is essential to recognise that it was not the only factor reshaping its performance. Over the past three years, the SECCOM industry has been undergoing significant transformation, as Cedric explained, driven by industry consolidation, technology advancements and disruptions from the development of new satellite constellations. These changes, coupled with the effect of supply chain constraints and chip shortages during COVID, have collectively presented challenges as well as opportunities. The losses incurred in 2022 last year, while partly attributable to chip shortages and remaining impact of COVID, called for a review to ensure that our business continues to offer best value to customers and stakeholders. This led to the strategic review, as you have just heard, to align the STATCOM iDirect organization structure with evolving needs of the industry and to ensure sustainable growth in the long term. The strategic initiatives which followed aim at enhancing efficiency, optimizing costs, and streamlining roles across functions and operations will yield $40 million to $60 million of cash flow cost savings per year each year for the next five years. Meanwhile, we remain positive on the long-term growth prospects of the SECCOM industry and will continue to invest in strengthening our product market leadership as well as SECCOM capabilities. The business is also working towards streamlining its best-in-class technology into a single next-generation platform, as Cedric described, meeting the needs of customers in an industry undergoing transformation. With the restructuring being undertaken, we expect SETCOM performance in the second half of 2023 to be materially better than first half of 2023. We expect 2024 to be stronger than 2023 for SETCOM with the absence of one-time costs from the divestment of SETCOM shares as well as improved, or satisfied shares, sorry, as well as strengthening of our base business. In 2024, there would be a cash savings of about $50 million arising from the organizational rightsizing and continuous improvement initiatives, which we described. Of this, about $30 million will flow directly into SETCOM EBIT, excluding the impact of inflation on base business, which will be well supported by revenue growth. We will provide an update on 2024 SECCOM outlook when we have our full year 2023 results. Taking all the above in, and that Urban Solutions is second half weighted this year, we are targeting and expect the Urban Solutions and SECCOM full year segment EBIT in 2023 to be at least comparable to the prior year. On new contracts, we are pleased to share that our year-on-year total contract value increased more than 70% to $9.5 billion in the first half of 2023, which is a very strong set of performance or contract wins. This comprises $4.7 billion for the second quarter and $4.9 billion for the first quarter, which we announced in May. We are determined to build upon this strong contract win momentum going forward You can refer to slide 20 in the presentation material for new contract details, which Cedric had also highlighted. Lifted by these new contracts and net of revenue delivery in the first half, we ended June with an all-time high record order book of $27.7 billion, positioning us very well for growth. In summary, our group's overall strengths include strength has been evident from our first half 2023 results, notably backed by two strong operating segments, commercial aerospace and defense and public security segments. While urban solutions and SECCOM segment is impacted by SECCOM, we are taking decisive steps to address the near-term challenges to enhance its competitive position, and we are already seeing early results. Additionally, Urban Solutions and SECCOM segment profitability will be bolstered by contributions from its smart mobility business, of which Transcor is part of. We expect Urban Solutions and SECCOM full-year 2023 segment EBIT to be comparable to 2022, supported by a significantly stronger second half 2023 for this segment. The target for Transcor to achieve earnings acquisition from second-year post-acquisition remains Next, our record order book continues to be a leading indicator of growth. We will build upon our performance in the first half as we navigate the operating environment across our business segments and achieve sustained growth throughout the remainder of the year and beyond. While we are not providing specific guidance of profit or revenue guidance for the full year given the dynamic market conditions, we have offered perspectives for our first half 2023 results that position us on a very strong footing. Lastly, our Board of Directors has approved a second interim dividend of $0.04 per share, which shareholders will receive on 1 September 2023. So on that positive note, let us move to Q&A and we'll address the questions that you may have, both from the participants in the room here, as well as those who dial in virtually.

Thank you, Vincent. I will now open up the floor to our participants in the room first. For our online participants, please click the raise your hand icon and we will place you in the queue. Please kindly state your name and the organisation you are from when you ask your question. We have our first question from the floor. Please.

Hi, Rahul Bhatia from HSBC. Congrats on strong set of results. Three questions from my side. First, the CA and DPS divisions had a strong EBIT margin in first half. Could we consider this as a base for future or were there some one-off positive factors helping the margin? For instance, I see aircraft sales of 100 million in 1H. Not sure if this is very high margin or any other big contract deliveries that happened in DPS division. which had a high margin. Second, could you provide more color on the key levers that drive your view on transfer earnings equation? Is it more from high revenue or do you expect some level of cost savings as well? Or the project like in New York congestion, are they higher margin than previous margins? Third, on commercial aerospace, in Q2, the revenue was close to 1 billion. Could I check if there is more space in terms of hangar availability or labor to go further higher from here in terms of revenue? Thank you.

I would ask that in answering this sequence, first I'll ask Ravi to talk about DPS margins first half, whether there's a proxy for second half. in terms of margin, and then for Lee Chew to talk about Transcor, a question, you know, what's the driver? And then for Jeff to talk about, you know, hangar capacity, whether we have the room to grow. But you know that we are continuing to build capacity, you know, building a hangar complex in Pensacola, a work in progress, but we're also building hangars elsewhere where I'll let the Jeff talk about that later on. So maybe I'll let Ravi first address the first question.

Thank you for your question. So first of all, we are very happy with the very strong margins that the team has achieved for the first half. And I think as Vincent also alluded to it, there are two reasons why our margins are very strong. I think firstly, without losses of U.S. Marines, And secondly, I think the core business has done well. As we shared, the revenue has gone up by 6%. And if you look at each of the business areas, all of them have grown quite steadily. One reason why the margin is very strong, the first half, is of course because of project deliveries, because of timing. So overall, I would say that the first half is very strong. We will obviously, moving forward, won't see the losses from U.S. Marine. So that will help us. And then the rest of it, of course, depends on the delivery that we have for the next six months. Our new order win for the first half is $5.2 billion, which is very strong. Even if you look back last year, that's close to what we secured for the whole year. So I think from that point of view, we are in a good position, and we do hope with the right opportunities to deliver good margin.

Okay, thank you.

Thanks, Rahul, for the question. So earning secretion for us naturally will... factor in revenue and revenue as a result of project milestones and project profiles that we have. We also look at the balance sheet that we have, funds, TLOC gains, et cetera. So as we ponder and consider all these elements, we are confident that the commitment that we made to be earnings accretive by second year still remains.

In terms of capacity, we continue to grow capacity in line with market demand. So you know we have invested in the LEAP engine capability. We're building more space to deliver more engines. We are completing our fourth hangar in Guangzhou, and we intend to break ground in the second half of this year at three additional sites in Pensacola for hangars three and four, in Ezo, China for a new hangar, also in Singapore for additional hangars. So we continue to look to build capacity in tandem with market demand. In terms of operating margin, obviously in the first half we've had some one-offs. We continue to be hopeful for the second half. Essentially, we have already achieved recovery from COVID and we're moving into a growth phase and we expect to see continued steady growth gradual growth in terms of nacelle delivery. And our P2F conversions, we also are adding three additional sites this year that are third-party modification sites. In addition, as you can see, the recovery in the engine and component business with the recovery of the air traffic is also steady and strong. So we are hopeful for the second half and hope we can continue to work towards good outcomes.

Thank you, Jeff. So I'd like to build on what Jeff said. One of the strengths of our group is that we have the financial capacity to invest across the business cycle. So even in the trough of COVID, we... did not stop our investments in building new hangars, you know, second hangar in Pensacola, third hangar in Guangzhou, they are both operating. And we continue to look at, you know, opportunities to expand, including in Echou that was discussed in the thick of COVID. So that is, you know, allowing us now to capture the benefits of the strong recovery in commercial aerospace. And this is the point which we mentioned at the Investor Day conference towards the end of 2021. So the benefits are coming through. We also said during our Investor Day that we expected our commercial aerospace to recover to pre-COVID level in 2024. But we also said in the last one year or so that there's a good chance that we may get to pre-COVID level this year. And as of first half of 2023, we're already at that performance level. So I'm very pleased to inform the market that our commercial aerospace is really doing well. Yes, Silky.

Hi, can I just check again the annual P&L savings from divesting static supply is 30 million or 30 to 60 million? That's my first question. And also for USS, I wasn't sure whether you actually answered whether the second half strength, would it come from higher revenue, cost savings or better margin from executing the US New York congestion contract. And also can I just check how much was ship repair orders in this half? We note that ship repair has actually been coming back since last year. Whether you are seeing that as growing or sustainable and what kind of vessels are we looking at? Just following up on aerospace, very strong avid margin this half. What was the one-off and how much was it?

Can you repeat your last question?

I think Jeff mentioned that there was a one-off in aerospace because the EBIT margin was quite strong this half. So I wanted to check what was it and how much was it?

Okay. So we'll go in the sequence which you asked the question. First of all, the annual savings of $40 to $60 million is not from satisfied investment. This is from our own internal transformation streamlining, right-sizing of the workforce, and continuous improvement. So let's just be clear, but then I'll let Lee Chew later on build on this to answer your question with more specificities. Then for USS, I also let Lee Chew talk about why do we expect stronger second half, but it's a combination of both SECCOM doing better and then urban solutions being second half-weighted, as we mentioned earlier on. But I'll let Lee Chew expand on it. And then Ravi to talk about should we pair orders in first half. And then Jeff to talk about the one-off arrow, if that's okay.

Go ahead. Okay. So... On USS for second half, we are expecting revenue to be stronger. As we mentioned, you know, we are second half weighted on revenue. We are also expecting the right sizing of the SECCOM organization. Cedric mentioned that across June and July, we have taken out 20% of our workforce. So the savings from... from that is going to flow also into supporting the second half P&L and business. Specific to the MTA contract, obviously the fact that we are starting installation for the congestion pricing project in Manhattan will contribute to the project milestone revenue that I talked about earlier, explaining to Rahul's question. So in summary, it's a combination of higher revenue that we are expecting both from projects that we will see delivered in the second half, as well as recovering from product availability in the second half for SEPCOM. And on the savings side, we are seeing some of the transformation activities we are implementing or we have implemented in the first half to benefit us on the bottom line for second half.

All right. Well, thanks, Lichu. We say, Ravi, you talk about the ship repair business.

So on ship repair, firstly, it's not meaningful to talk about order books because in ship repair, about 80% of the work is delivered in the year that we acquired, so a bit more faster delivery. In terms of sheet repair for first half, we've done well and actually it looks like we're going to be full for the rest of the year. So it's a very sustainable business and also a very good margin business for us.

Okay. Which is a good situation for our sheet repair business. Our team has been what you call very selective in the customer mix at this time. And so I think we are off to a very good foundation, even for ship repair.

Okay. As you are aware that we did sell aircraft to our joint venture company, and obviously we had a fair and reasonable return based on the holding period we had on those aircraft. We should not forget that we operate in a very competitive market and I should not forget to mention that we continue to face challenges in the market around inflation of wages and raw materials as well as availability of labor and the vendor supply chain continues to present challenges to our kitting operations for P2F. So we are cautiously optimistic going forward. Obviously, we want to do our best and be able to actively manage all the market challenges while focusing on customer needs and growth. Thank you.

Well, just so that you know, when we divest aircraft into joint ventures, this is in alignment with our business model, as we have described over the last few years of our aircraft and engines leasing, so that we continue to focus on our core, which is end-to-end MRO services and passenger to freighter conversion. But we look for partners as we move along for our aviation leasing business. So what we are taking The actions that we've been taking are very consistent with this business model.

Hi, good morning. Thank you for this opportunity. Just a few questions from me. So in terms of the SETCOM business restructuring, I understand that cost savings from workforce reduction will begin immediately. But what's the projected timeline to realize the full annual cost savings of between $30 to $60 million? Additionally, could you also elaborate on the potential top-line impact to the SECOM business as a result of shifting your focus to a single next-generation platform? And one more question. So P&W recently disclosed contamination in more than 1,200 of its GTF engines. Do you foresee any impact to the commercial aerospace segment on this development? Thank you.

Okay. I will let Jeff, later on, talk about the GTF engines, whether there's any impact. And then, just so that you are clear, so thanks for the question. The savings from our organizational streamlining and continuous improvement is expected to give us $40 to $60 million of cash flow savings per year. Next year, we expect the cash flow savings from this $40 to $60 million range to be $50 million. of which $30 million would flow down directly as EBIT improvement because not all the cash savings are related to direct or PECs because as Cedric mentioned, some of those are amortized and capitalized and amortized in the past. So let me just repeat, next year's cash flow, cash savings versus this year from these initiatives that we have undertaken would yield $50 million of cash flow savings, but then $30 million of EBIT improvement next year.

So let me answer the question on top line impact as we converge to one single next generation platform. As we make the decision to develop on top of the Velocity platform that Cedric was mentioning, we've actually been very much in discussion with customers and we have taken their inputs. So the way to look at it is that as we deliver a multi-orbit enabled platform at the end of that journey, we are going to take the needs of our current customer in maritime, in aviation, to give them a platform that leverages the best-in-class technologies that we have on Velocity, which is a proven mobility platform, and layer on top of it the flexible waveform that we have in Dialog, So we're taking the best of multiple platforms and then providing the customer a path forward and a journey into this next-gen platform. So we do not see that as necessarily a negative impact. In fact, we see that as a positive impact as we get them to be more ready in their ability to operate multi-orbit and also their ability to operate in a terrestrial as well as satellite converged world. So hopefully that answers the question.

Okay. Thanks, Lee Chew. I also want to just build on the answer that I provided earlier on on the EBIT impact and cash flow savings from our transformation. Although the EBIT impact or positive help will be $30 million next year, over a period of time, this annual effects will become $60 million as it gets fully depreciated. So the EBIT help Next year is expected to be $30 million from the streamlining exercise. In about five years, the full effect of $60 million will be realized per year in terms of EBIT. This is just accounting. In terms of real cash flow savings, it's $60 million. Earlier on, I also mentioned this is just a benchmark against our starting point 2022-2023 in terms of the difference in cost savings. Our base business will also go through, you know, as in the effects of inflation. But as I also mentioned, revenue growth will more than offset or support this inflation as we always do. Cost savings exercise will continue to be done. And then our revenue growth will, of course, have to take care of or more than absorb the inflationary pressures as we do for all our businesses.

Okay, so a quick response to the Pratt & Whitney GTF engine issues in the market. We do not currently overhaul Pratt & Whitney engines, and we also don't deliver nacelles for the Airbus aircraft powered by the GTF engine, so it will not directly impact us. Nevertheless, the market will see some short-term undercapacity for MRO to address these challenges to change out these contaminated components. The pressure on Airbus will also be there in terms of the need for Pratt & Winnie to supply spare engines into the market to support existing fleet rather than supply new engines or the delivery of new aircraft. So that's going to be kind of double impact on the MRO market as well as the new make market. Thank you.

I'd like to follow up a little bit on Silky's earlier question on the commercial aerospace margin. I also heard Jeffrey mention there was some margins in the first half, but just now Jeffrey was saying, talking about the disposal of the 11 aircraft. to the joint venture. I thought this one was only announced yesterday and the impact has not been recognized yet, right? So it should be recognized in the second half. So, okay. So if it's recognized in the second half, the question is, my question is, what is the size of the disposal? And what is, you also mentioned there will be a good holding investment return from the holding period. So I wonder what is the size of the disposal gain? Yeah, that's my question.

Thank you. I was really referring to an earlier disposal. We do these transfers actively. As Vincent explained, it is our strategy to work with partners in the market to be able to offer complete solutions. So we are actively doing that all the time. So in the first half, we've also done that, and obviously in the second half, as we announced. So it is, of course, inappropriate for us to review the size, but as I said, we've had a certain holding period on these aircraft. We also process them. Sometimes we do work on them, and therefore when we dispose of them to the market and to partners, we do have a fair and reasonable gain as a result.

So the key words there is that fair and reasonable gains. But I think it's more important to look at the business model. So yes, we do expect some fair compensation for 11 aircraft and we would be a positive contribution. But importantly, we are just moving towards our business model where we work with partners while we continue to add value in the services, end-to-end MRO services, repair management, fleet management that we are very good at. And we have been doing this for a few years now. So for various business reasons, sometimes speed to market is We sometimes acquire the aircraft on our own first, add value to them before we transfer into the joint venture, so in case you wonder why it is a sale to JV, but the original intent has always been eventually when the aircraft is ready, will be transferred to the joint venture, be it a converted aircraft or just a typical commercial aircraft for lease. And actually, in Cedric's presentation, we also talked about the expected reduction in borrowings at the end of the year by some $600 million or $500 million, $600 million to meet five. Part of it is from this capital recycling that we're doing with our aviation business, but then the other part is really our strong cash flow. So we can say two-thirds, one-third. So one-third from strong cash flow and two-third of that reduction will come from recycling our capital from the aviation asset business.

Hi, thanks so much for the presentation. I have three questions here. The first question is really about the order book outlook. We have very strong order book and contract wins here today. But looking forward to second half and maybe longer term, which are some of the categories we are more positive on in terms of the segments? And I also saw, you know, in the second quarter, we did win some defense contracts in Europe and Middle East. Do you mind if we share a little bit on that? I understand there's some confidentiality behind the customers, and maybe on Transcall as well, part of the objectives. is always to bring the capabilities to Southeast Asia. Do you mind if we share a little bit about any potential negotiations we're having in ASEAN and what kind of differentiation that we have towards some of the toll road operators in the region, like Jansamaga in Indonesia? And then last question is on P2F EBIT margin. I think previously we were looking at this business turning accretive. Are we on track on this business, and what is the medium-term outlook for the margins?

Okay. All very good questions, Sean. I'll let Li Qiu talk about Transcore pipeline in this part of the world, which we spend a lot of time on, so we can share some info with you. And of course, our differentiation, I mean, just keep in mind that we are executing the congestion pricing project in Manhattan, the most populous city in the U.S., which speaks to the rigor of our solutions and the trust that our customers have placed on us, which we really appreciate. But then how can we then bring those technologies out from the United States? And I think there are good developments and good prospects there. in this region as well, but I'll let Lee Chew talk about them at a higher level, given the sensitivity, as you mentioned. And I'll let Ravi talk about the defence opportunities in Europe and Middle East, and where were some of the wins. And then Jeff to talk about the PDF acquisition that we talked about, and we are certainly on track, versus what we have told you. Order book. It's something that we don't really give forecast because it comes in, you know, lumps and pieces sometimes. But we made it a point to call it out as our record high because it's indeed of material improvement versus before. But quarter to quarter, half on half, we really cannot predict. But one thing I will say is that our order book improvement is contributed by all three segments. It's not like we have a laggard and then the other two is good, but all three were giving good traction, albeit a different magnitude, but all three segments recorded stronger order book this half. Okay, so I would let maybe Lee Choo first talk about the transcore and then Ravi talk about defense.

Okay. Okay. Thank you, Sean, for the question. In terms of opportunities outside of the United States, particularly with reference to Southeast Asia, we have built a very strong pipeline. Of course, these deals take time. to land, and they are in different phases of pursuit as we speak. Within Southeast Asia, we are looking at opportunities across Malaysia, Philippines. We are looking at opportunities also in other parts of Southeast Asia, including Indonesia and Thailand. You know, and in fact, you asked about the differentiation. Transcor is a company that's established itself for 80 years in the United States. And eight out of 10 toll agencies in the United States use Transcor's tolling solution. And what we are doing right now in terms of talent exchange is to get the knowledge and the experience of how they manage some of these toll projects across to implementing projects here in Southeast Asia. But of course, the operating model needs to be different as well. So we're also looking at how do we build up the right delivery model leveraging the know-how as well as the experience that we have, but add to it the knowledge that we have in Southeast Asia from the smart city projects that we have done out of the SE Engineering urban solutions set up, and marrying the two assets and also combining our knowledge capabilities both ways to add to the synergies that we are building right now. So good pipeline, capabilities exchange, and we're also looking at, Cedric was mentioning earlier, exploring new technologies as we cover opportunities outside and within the United States.

Okay. Thank you, Lichu. Ravi? Yeah. John, thank you for the question. First of all, I think as we have shared previously, we have put in a very concerted effort to develop a product and solution for the international defense market for the last couple of years. We've also put in quite a bit of effort in terms of go-to-market, sending people overseas, participating exhibitions, finding partners and talking to end customers. And I think as it would be obvious, a defense business is one where partners Local partners are very, very important because typically the countries that buy defence equipment want it to be sustainable for a long period. So that's something that we've been working on for quite a while. I would say that for the first half and generally the momentum, we're seeing good traction, very good traction in a couple of areas and I'll just mention them. First of all, our 4MM sales, we've had quite good sales in the first half and even as recently as last month, we continue to get orders as some militaries, especially in Eastern Europe, build up their military capabilities. So we are seeing that. We sold 120 MOTAs to the Middle East. We are also doing reasonably well in our training and simulation solutions, especially in Europe. We are working with some of the Western militaries there. On our USV autonomous mass, we have had some good traction. That's an area of interest to many militaries around the world, from Australia to the Middle East to Europe and even the US. And we've been building up the engagement and doing trials, and we hope that that will convert into more significant sales in the future. And in the C-130 area, as you know, we do the C-130 MRO and upgrade, and actually the team has done really well I think most of our capacity for this year is really taken up thanks to the good work of the team and of course the reputation of Defence Aerospace and Singapore for being able to do the MRO upgrade with good quality and also on time. And I just wanted to add, in fact, our marine business, not only are we continuing to support the UAE PD program and we managed to get some variation orders there, But we also do MRO work for foreign vessels coming into the region. So we've done some work for the US, for Australia, New Zealand. And this actually, we put it under ship repair and maintenance, MRO. And this is actually giving marine business steady revenue. So overall, the defense business, I would say that... We are getting traction, we are making good inroads, but we continue to want to grow this business, and in the platform area, which as you know, we do develop and manufacture platforms, we are working with a couple of strong partners, especially in Europe and Middle East, and we hope that in due course, there'll be some opportunity to convert these opportunities into actual contracts. But of course, we have to remind ourselves, defense business, The gestation period is very long and the journey is quite challenging. But we are quite determined to take on these opportunities and see whether we can go further, especially in the platform business.

Thank you, Ravi. So, as you heard, we have a lot of irons in the fire when it comes to defense.

I appreciate the interest in the P2F business. We were gross margin positive in the first half of 2023. We target to be EBIT margin positive for full year 23. In addition, in the medium term, by 2025, we target to achieve high single-digit EBIT margin and hopefully double-digit EBIT margin thereafter.

We will now move on to our online analyst participants. Lauren from Morningstar, we will open up your line now.

Hi, good afternoon. I'm sorry, I'm not there in person. I just want to follow up on the contract wins for the commercial aerospace segment. I was just wondering whether the contracts, are they new clients or renewals, and which regions they are from? Thank you.

Okay. Okay. It's a combination of new and existing clients. Specific to P2F conversion, we had a significant contract win from a lessor, and this gave us a very big leap. It's probably not what you would see every day, but certainly we hope to do more of these sizable contracts. We also have MRO contracts, long-term MRO contracts that we signed with existing customers. So it's a combination of both of those.

Thank you. Thanks, Lorraine, for the question. I hope we answered your question. While we wait for the next question, I will invite Cedric to give a little bit more context to the interest rate forecast, and then I thought it would be so good for Ravi to talk about the digital business, which we And I highlighted, you know, Investor Day, which is really making good progress. So maybe while we wait for the next question, Cedric, please.

If you refer to slide 23, we did talk about what our weighted average borrowing cost would be like this year, and I stated it as low 3%, so that stands. And we also made an estimate of what our weighted average borrowing cost would be like next year, in 2024, and I set it to be mid 3%, even assuming that the US Fed increases the Fed fund rate by 25 basis points, after their July action, so from August to end of the year. And I should add now that even assuming that there is no rate cuts in the whole of 2024, and still our rate to average borrowing cost would be mid-3%. In fact, if you read the literature, some banks are predicting there will be rate cuts from Q24, but we haven't taken that into account when we arrive at the mid-3%.

Cedric, thank you.

Winston, thanks. So on our digital business, which comprise software and AI, cyber and cloud, we are making, we are growing steadily and we are on track for higher revenue growth this year. On the cyber side of the house, we continue to sell the encryption products, new SOCs as well as SOC services and also provide cyber security services. On the cloud side, we continue to win data center opportunities, help companies migrate to the cloud, their current solution, as well as build new software solutions on the cloud. I just want to mention very quickly about generative AI. This is something that we all read about. Our team in our engineering center as well as in digital systems have been building and working on generative AI. There are two areas that we are working on. One is using GNT AI for video analytics. It's something that we really developed and we are delivering in some projects. And the other is using GNT AI to support analytics work for some of our customers. And I think our strength is the ability to develop GNT AI products which are what we call on-prem, not using the cloud and not putting the customers' data onto the cloud. So those are new opportunities and our team is developing solutions and we are quite confident that this will be an area that will continue to drive our digital business. Yes.

We set a target of tripling our digital business revenue to more than $500 million by 2026. I think our progress will tell us that we will certainly meet that target and in fact outperform that target by 2026. So more to come, but we are certainly making good progress.

We will open the floor again to our physical participants. Do we have any next questions? Okay, if not, maybe I will just invite Vincent to give his closing remarks before we close the event today.

Well, thank you for your attention. Thank you for joining us today for the results briefing. As you can see, our first half results really show that the underlying business is very strong. Although we have some near-term challenges in SECCOM, we are taking very decisive action to address them, and we're already seeing early results. So we'll share more with you as we progress. But for now, unless or rather if you have any further questions, you can reach out to us after this call. But I want to thank you for your attention and wish you a very pleasant weekend ahead. Thank you very much.