Singapore Tech Eng Ltd

Good morning. Welcome to ST Engineering's full year 2023 results briefing. This morning, we will begin with a presentation by our Group CFO, Cedric Foo. Our Group President and CEO, Vincent Chong, will then give his remarks. After that, we will open up the floor to a Q&A session. For participants dialing in, please note that you will be placed on a listen-only mode until we open up individual lines for the Q&As. Without further ado, may I invite Cedric to give his presentation. Cedric, please.

Good morning to everyone here in person at the SE Engineering Hub, as well as those joining us via our webcast. Welcome to SE Engineering's full year 2023 results briefing. Before I begin, I would like to bring your attention to slide two, which states, amongst others, that the group's actual future performance and outcomes and results may differ materially from those expressed. Slide three shows the agenda for today. I'll be covering group highlights, business discussions of each of the segments, order book and debt profile, dividends and outlook. Thereafter, CEO Vincent Chong will make some remarks followed by Q&A. First, let's take a look at group highlights. On slide five, We are very pleased to report a very strong set of results for financial year 2023. First, let me take the second half year on year figures first. For the second half of 2023, the group achieved double digit year on year growth in major financial metrics. 10% growth in revenue, 17% growth in EBITDA, 34% growth in EBIT, 43% growth in PBT, and 20% growth in net profit. Strong sets of results. This second half 2023 year-on-year comparison to second half 2022 is a better way to look at momentum compared to, say, second half 2023 versus first half 2023. Because this latter sequential method is distorted by seasonal factors. So as you know, in the second half versus second half, you take away all the seasonal factors. You're comparing the correct season to season. Next, the full year results. The group achieved also double-digit year-on-year growth in major financial metrics. Revenue up 12%, and we breached or surpassed the 10 billion mark for the first time. EBITDA up 16%. EBITDA, as you know, is a proxy for operating cash flow, and it's at a very strong 1.5 billion. EBIT up 24%, PBT 18%, and net profit 10% at 586 million. Our order book came in at $27.4 billion, with about $7.9 billion to be delivered in 2024. Moving on to slide 6, here we discuss revenue growth. This slide shows year-on-year increase in revenue by segment. The group recorded a 12% increase in revenue, And this increase is contributed by all segments, including commercial aerospace, DPS, and USS. In the DPS case, we have normalized 2022 base by taking out the US Marine, which was sold in 2022. Slide seven, from left to right, shows the revenue breakdown by segment, by type, and by location of customers. Revenue by segment, in financial year 2023, commercial aerospace contributed 39%, DPS segment, defense and public security segment, 42%, and USS, 19%. So USS, as you know, is our URS, urban solution-based business, Transcor, as well as Seccom. I would like to clarify that DPS as a segment included both local and international customers, so not just Singapore defence customers. It also covered commercial domains such as public security and safety, critical infrastructure and others. Hence, the DPS segment revenue of $4.3 billion It's different from the defense revenue of $3 billion, because this is only a subset of this, right? Because this has non-defense public security elements as well. Now, in the center of slide 7, it shows the revenue by type of business. Commercial grew steadily to $7.1 billion. Defense grew as well. If we take off the US Marine, $2.6, $2.8, and $3 billion. On the right hand side, it shows the revenue breakdown by customer location. Asia contributed 49%, US 24%, Europe 20%, and others 7%. So Asia and US actually clumped a little bit compared to the year before. Slide eight, this slide shows the revenue by segment and the growth for each of the three segments. Commercial aerospace grew robustly by 31% to $3.9 billion. So we are pleased to share that commercial aerospace surpassed one, the 2019 pre-COVID revenue level of about $3 billion. And two, our November 21 investor day target of more than $3.5 billion by 2026. So this is 2023, and it's already exceeding $3.5 billion. This good performance is attributed to strong MRO, but also partly attributed to the success of the MRAS acquisition, which produces the aircraft nacelles. Two, DPS, excluding U.S. Marine revenue of 249 recorded in 2022 and was sold in that year as well, DPS revenue of $4.3 billion was higher by $229 million or 6%. USS revenue grew 10% to $1.9 billion. is contributed by Urban Solutions, including Transcor, and partially offset by SECCOM. Slide 9. 2022 EBIT was $735 million. 2023 EBIT was $915 million. So there's an increased in the EBIT per reporting standards of 24%, driven by business growth and cost savings of $268 million. Now, if we strip out the one-off effects, which we term as base operating performance, so excluding the pension restructuring gains that we had in 2022, and also the lower performance transaction and integration expenses that we experienced in 23 versus 22. The 2022 BOP EBIT is at $678 million. We take out the one-off for 2023, which is the satisfied divestment loss and SECCOM severance cost, totaling $32 million. The 2023 BOP is at $946 million. So comparing 946 to 678, at the base operating performance level, there's an increase of 40%. So the underlying operating performance is indeed quite strong. We discussed a bit about energy in previous briefings. The average energy rate in 2023 is lower than 2022. So the rate, in other words, dollar per megawatt hour is lower. However, consumption increased in 2023 versus 2022 to support a higher business volume and higher revenue. Slide 10, please. Here we discuss net profit. It improved from $535 million to $586 million, an increment of 10% year-on-year. Again, at the base operating profit, or BOP net profit level, it improved from 493 to 610, or a strong 24% at the operating level. All figures here are after tax because we're discussing net profit. Now let's move on to business area discussions. Slide 12. Here we will discuss commercial aerospace EBIT. EBIT grew 12% from $301 million to $337 million, or a very strong 47%. Again, normalizing for 2022 EBIT by removing the pension, restructuring gain in 2022, Base operating performance EBIT grew 47% from 229 to 327. This strong commercial aerospace performance is attributed to the recovery of the aviation industry, as well as the very good performance of MRAS and the improving PTF margin as we climb the learning curve. More on CA for slide 13. The aerospace MRO business continued to recover in tandem with the aviation market. This business has done well as we continue to invest in it, even during the difficult COVID period. So these steady investments included new hangar capacity in Pensacola, in Guangzhou, and so forth. And this positions us to emerge stronger when COVID is behind us. Unrelentingly, post-COVID, we continue to invest in new capabilities like the new CFM CBSA for LIB181B, as well as Changi Creek and others. And this will, again, position us for a brighter future. Continuous improvement in operations has been the modest operandee of commercial aerospace. In fact, Jeffrey chairs our Continuous Improvement Committee for the whole group. For aerostructure and systems, MRAS nacelle growth benefited from the increased A320neo fleet deliveries. So as you know, for narrow-body A320neo, if the LEAP engine is chosen, then MRAS is the exclusive provider. MRAS has indeed performed very well, and it has been a very successful M&A to date. As I said earlier, has also turned positive at the program level as we climb the learning curve. For asset under management, the AUM, which is under our aviation asset management unit, exceeded US $2 billion. as of end 2023. Again, we have set in November 21, Investor Day, a 2026 target of US $2 billion, and we have now exceeded it in 2023. Now, this AAM business, based fundamentally is to purchase aircraft and engines, lease them out, and when we reach a critical mass, to securitize it or to sell it down to joint venture or other parties. But even after securitization or selling it down, this portfolio will continue to be managed by AAM companies. of ST Engineering and it avails us to more airframe engine and component MRO opportunities. So it is working well for us. Slide 14, DPS. DPS EBIT improved from 405 million in 22 to 567 million in 23, a very robust 40% year-on-year growth. This is due to business growth, better margin makes, cost savings, as well as the avoidance of US marine losses, which was divested in 2022. Slide 15. This slide discusses DPS business highlights. Firstly, the strong order book for DPS, which comprises the frigate upgrades, MRCV construction, among others, provide clear visibility of future revenue for this segment. For 2023, DPS won international contracts totaling about $950 million. So we are showing this figure to demonstrate our ability to penetrate international markets, even for the DPS segment. We also made good progress in international markets like Europe and the Middle East. The digital business continues to do well and is on track to exceed, again, our November 21 investor day target of more than $500 million by 2026. Revenue of $463 million was achieved in 2023, representing a 20% year-on-year growth and with three more years to exceed more than $500 million. Finally, we will continue to harness the rapidly evolving digital technologies in cloud, AI, analytics, and cyber to seek even further growth. Slide 16 is about USS. I'm pleased to announce that Transcore earnings became accretive in 2023, which is slightly ahead of plan as we have guided when we made the acquisition. So Transcore was cash-accretive in the first year, and it was P&L equitive ahead of plan before the end of the second year. The EBIT for USS dropped 66%, and this is largely due to Satisfy and SECOM weakness. Excluding the Satisfy divestment loss and SECOM severance expenses, the USS base operating performance EBIT declined by 6%. from 44 million to 42 million in 2023. Even though the USS EBIT dropped, this segment performed significantly stronger in second half 23 versus first half 23. In first half 23, this segment recorded an EBIT loss of 34 million. In second half 23, this segment recorded a positive EBIT of 44 million, bringing the full year segment EBIT to a positive 10 million. as guided previously. As you know, the SECCOM industry is rapidly evolving, the industry itself, into a multi-orbit cloud convergent space. Hence, our SECCOM business, iDirect, is also responding and transforming likewise. Slide 17 will review the business updates for Urban Solutions. So you have USS, you have Urban Solutions, which is the Urban Solutions-based business, and Transcall. Then you have SACCOM, right? So we are talking about Urban Solutions. We have announced yesterday that we want a contract to enable automatic and ticketless parking fee collection at the Dubai Mall. which is one of the largest malls in the world, 13,000 car park lots, just hard to imagine. This is a demonstration of how we could derive synergies from the Transcall acquisition. The project demonstrates the Urban Solutions team's ability to synergize by combining Transcall's expertise in the SELIC traffic toll system, which they developed for SELIC in Dubai, with the barrier-free smart car park technology developed here by Urban Solutions in Singapore. So they are combining this to win a good contract in Dubai. So we were able to tap capabilities everywhere in the US, in the Middle East, of course, the folks working the ground, and in Singapore, and combining technologies and channel network to offer a superior solution to the customer. So I would also like to reiterate again that Transcorps became earnings secretive in 23 ahead of plan. So it is doing well. Thirdly, URS recorded its first international airport security project win to deploy the Agile Secure Integrated Security Management Platform at the Doho Kidiri International Airport in Indonesia. In addition, URS has also won a root project in Abu Dhabi and real projects in Chennai, Sydney, and Ontario, Canada. Slide 18 describes the measures we are taking for our SECCOM business. In 23, these actions were taken. Firstly, we undertook an organization right-sizing with a reduction of about 20% of the workforce. So this puts us in the better cost base. Secondly, we focus our engineering efforts on developing the next generation platform. And this leverages on the existing Velocity platform, just one platform, leverage on it. We plan to convert the best in class features from both the Velocity as well as the Dialog platforms into our future product offerings. Thirdly, we have successfully completed proof of concept on interoperability and cloud deployment. So these are features of the future. Our Internet of Things and over-the-top services have helped us expand into adjacent markets. In 2024, we will unveil the NGP brand. This will be done at a satellite show in Washington, D.C. in the middle of next month to showcase the NGP's capabilities to our customers. Secondly, we will continue with cost optimization and process improvements and improve the revenue quality to better pricing and contract management. Let's move on to the group's order book and debt profile. Slide 20 highlights some of our major wins in 4Q23. I will leave you to read the details. But in this period, the group secured $3.1 billion of new contracts, $1 billion from commercial aerospace, $1.5 billion from defense and public security segment, and $645 million from urban solutions and SECOM. This brings the total contract value, new contract rather, the total new contract value for the year 2023 to $14.8 billion, the year as a whole. The group ended the year, slide 21, With a robust order book balance of $27.4 billion, 19% higher than the $23 billion recorded at the end of 2022. About $7.9 billion of this $27.4 billion is expected to be delivered in 2024. This strong order book provides visibility for future revenue in the coming periods. Slide 22, our debt profile. Our borrowings as of 31st December 2023 has reduced by 7% from $6.5 billion the year before. EBITDA has increased to $1.5 billion by a strong 16%. Debt to EBITDA leverage ratio, which is what rating agencies look at, improved from 5.2, that means more debt to EBITDA in 2022, to 4.2, which is less debt to EBITDA in 2023. More than $500 million has been invested in capital expenditure and capability building to support future growth, such as LEAP 1A, 1B, Changi Creek, Gal Yat, etc. So we are also incurring interest expenses which may not have seen EBITDA for future growth. This is investing in the future. Our debt profile remains balanced at 62% fixed interest rate and 38% floating interest rate. Group weighted average borrowing cost for 2023 is still at a competitive level of 3.3%. Our credit ratings remain very strong, with a AAA stable by Moody's and AA plus stable by S&P. Next, dividends. Slide 24. As you have read in the press release, we are pleased that the final tax exam cash dividend will be $0.04 per ordinary shares for the year ending December 23rd. Payment of the final dividend is subject to the approval of shareholders of the company at the forthcoming AGM in April. If so approved, the record date to be eligible is 2 May 2024, and shareholders will receive the dividends on 14 May 2024. For the first three quarters of 2023, we have paid three interim dividends at a very rateable manner of $0.04 each. making a total of 12 cents for the first three interim dividends. And as a total dividend for the year ending December 23 will be 16 cents after including the final dividend of another 4 cents. Next slide please. We now look at the outlook and the Group CEO statement. So let me just read it out. In 2023, our group achieved significant financial milestones. Group revenue exceeded $10 billion, while group net profit grew 10% year-on-year to $586 million. This performance was underpinned by the strength of our commercial aerospace and DPS segments and a high-graded portfolio. Our investment in Transcorps became accretive in 2023 ahead of plan, This strong set of results was also supported by productivity and cost savings measures and investments made during the COVID-19 downturn. We remain focused on executing our robust order book of $27.4 billion while delivering sustainable growth and creating value for our shareholders. Finally, in summary, Group did well for 2023 and is well positioned for the future. Revenue, EBITDA, EBIT, and net profit in 2023 had all witnessed strong growth. Contract wins, $14.8 billion. A robust order book, $27.4 billion, will provide visibility of revenue in the periods ahead. Our strong results are underpinned by commercial aerospace and DPS good performances. MRAS performed very well. Transcorps became earning-accurative ahead of plan. SECCOM transformation is well underway. Cost of borrowings remain competitive at 3.3% per annum. And we have made consistently and steadily investments for capacity expansion and capability building with an eye for better performance and growth into the future. Last but not least, final dividend of 4 cents, making a total dividend for 23.16 cents. This brings me to the end of my presentation, and thank you for your attention.

Thank you, Cedric. May I now invite our panelists to the head table. The panelists this morning are Vincent Chong, Group President and CEO, Cedric Foo, our Group CFO, Rabida 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 Jeffrey Lum, President of Commercial Aerospace. I will now hand the floor over to Vincent to deliver his remarks. Vincent, please.