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.