Singapore Tech Eng Ltd

Good morning. Welcome to ST Engineering's first half 2024 results briefing. 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. Without further ado, may I invite Cedric to give his presentation, please?

Thank you. For those attending in person and via webcast, a very good morning and welcome to ST Engineering's first half results update. I would like to bring your attention to slide number two, which states, amongst others, that the Group's future performance, outcomes and results may differ materially from those expressed in forward-looking statements. Slide three, please. This slide shows the agenda for today. I will be covering group highlights, business discussions for commercial aerospace, CA for short, Defence and Public Security, DPS for short, and Urban Solutions and SECCOM, which is USS for short. I will also cover contract wins and order book, debt profile, dividends and outlook. First, group highlights. Slide number five shows a summary of our first half 2024 results. Group revenue recorded a very strong 14% year-on-year increase to $5.5 billion for first half of 2024. Group EBIT was $523 million, up 18% year-on-year. Group profit before tax was up 19% year-on-year at $416 million. Group net profit up by a very healthy 20% year-on-year at $337 million, largely from business growth. Slide 6, from left to right, shows the revenue breakdown by segment, by type, and by location of our customers. First, revenue by segment. In first half 2024, CA contributed 40%, DPS 43% and USS 17%. DPS segment includes both local and international customers. It also covers commercial domains such as public security and safety, critical information infrastructure and others. Hence, DPS segment revenue, as you can see on the slide, of $2.4 billion in the first half of 2024 is different from defence revenue. as you can see from the right-hand side of the bar chart, which is $1.6 billion. So basically the $2.4 billion and $1.6 billion is different because the $1.6 billion is a subset of DPS, which also contains commercial businesses as well. In the centre of slide 7, the chart shows revenue by type. So commercial revenue increased from $2.8 billion in 1.522 billion to $3.3 billion in 2023 to $3.9 billion in 2024. Defence revenue increased from $1.5 billion in 2022 to $1.6 billion in 2023 Now both 1.523 and 1.524 defence revenue are showing $1.6 billion due to rounding. But in fact, defence revenue grew around 5% in 1.5 2024 versus 1.5 2023. On the right-hand side of slide 7, it shows the revenue breakdown by customer location. Asia contributed 50%, US 24%, Europe 20% and others 6%. This split is quite similar to that of 2023. Slide 7. Group revenue grew strongly at 14% year-on-year to $5.5 billion, contributed by all segments. Slide 8. First half 2024 EBIT grew by 18% year-on-year to $523 million. In first half 2023, we also incurred $24 million loss on the full divestment of shares in a company called Satisfy, as well as $2 million of servants' costs for Satcom. Excluding the effects of this, the Group would have posted an EBIT increase of 11% year-on-year at the base operating performance level. Slide 9. Net profit improved strongly from $281 million in first half 2023 to $337 million in first half 2024, or a 20% year-on-year improvement. Excluding SECCOM one-offs as mentioned in the previous slide, net profit improved 12% year-on-year on a base operating performance basis. Next, I'll move on to business discussions, starting with commercial aerospace on slide 11. CA segment reported a 20% growth in revenue to $2.2 billion. This segment benefited from the strong growth for its MRO as well as aerostructure and systems sub-segments. However, second quarter 24 revenue, well, if you use the first half 24 and minus the first quarter 24, you will see both first quarter and second quarter 24. The second quarter 24 revenue was lower than first quarter due to project timing and also lower sale of nacelle spares in second quarter 24. $2.1 billion of new contracts was recorded in first half 2024, of which $1.3 billion was for second quarter 2024. Slide 12. Here, DPS segment reported a 12% year-on-year growth in revenue to $2.4 billion. All sub-segments contributed to this strong growth. $2.6 billion of new contracts were recorded in first half 2024, of which $1 billion was recorded for second quarter 2024. We made good progress in international market development. More than $500 million was achieved in the international market sales in first half 2024. Slide 13 talks to USS . This segment reported a 3% year-on-year growth in revenue to $918 million, with growth in URS and partially offset by lower SECCOM revenue. The New York Congestion Pricing Project, as you will have read in the papers, has been paused since mid-June. Nevertheless, I am pleased to inform that the engineering and procurement and construction portion of the contract, which is the EPC part of it, has been completed and delivered as scheduled by Transcor. Currently, we are operating in accordance with the terms and conditions of the contract and do not expect the financial impact from this pause in the New York Congestion Pricing Project to be material on the USS segment. 1.4 billion of new contracts were recorded in first half 2024, of which 0.8 billion was recorded for second quarter 2024. Slide 14. Let me go a little deeper into the SECOM sub-segment. This industry continues to undergo transformation, as we have briefed you previously, and it presents both opportunities as well as challenges. The key challenge is the disruptions from LEO constellations, LEO standing for Low Earth Orbiting Satellite, and the rise of well-funded vertically integrated providers. As you know, LEO satellite communications offers higher bandwidth because it's closer to Earth and lower latency. However, there were reports of bandwidth congestions with LEO satellites. So even as LEO satellites continue to be launched, geo-satellite, which is geo-stationary, are also being launched concurrently. So these geo-satellites offer different kinds of advantages compared to LEO in terms of wider coverage and reliability. Hence, our customers are looking for ground equipment for which we supply through iDirect that are capable of seamlessly switching between satellite networks. whether it's geo or non-geo. And this switching capability is better known as multi-orbit systems equipment. iDirect is currently developing such a multi-orbit system, rendered as Intuition. And in addition to being multi-orbit, Intuition will also be cloud native, standard spaced, and terrestrial satellite convergent. so as to provide seamless connectivity, to tap on the growing demand for digitalisation and also for end-to-end network orchestration. This changing industry landscape and our development of intuition represent both opportunities and of course, execution risks. We are actively engaging our customers in the meanwhile to transition them to intuition and focusing on the operation side to improving the quality of our revenue and also our cost-based. Barring on the seen circumstances, USS financial performance is expected to be better in the second half, so second half waited. And this segment, USS, full year 2024 performance is also expected to be better than 2023. Slide 15. This slide shows the year-on-year increase in segment EBIT. On the left side, CA continues to perform well, with EBIT growth from $178 million to $190 million. If you strip out aircraft sale revenue of $101 million in 1.523 and only $7 million in 1.524, the EBIT margin for CA would have grown by 13%, so instead of 7%. So this is more in line with its revenue growth of 20%. As mentioned earlier, CA revenue grew 20%, and the lower margin in one-half, 24%, is also due to project mix. In the middle of the slide, DPS EBIT grew $301 million to $324 million, or 8% year-on-year. This is driven by higher revenue and better cost management. On the right-hand side, the US S segment improved its EBIT from a loss of $34 million to a profit of $9 million. due to strong trans-core EBIT growth, and also the absence of the SECCOM one-off losses in first half 2024. It was incurred in first half 2023, so it was absent in first half 2024. If we exclude this one-off loss from SECCOM, then the USS EBIT would have improved from first half 2023 to first half 2024 by about 20 million. So the momentum is good. USS Financial Performance is also second-half weighted. Now let me move on to the group's contract wins and order book. Slide 17. Our contract wins totalled $6.1 billion. that's on the left, for the first half ended 30th June 2024. And this is contributed by CA, $2.1 billion, DPS, $2.6 billion, and USS, $1.4 billion. This $6.1 billion of new contracts in first half 2024 more than replaces our first half 2024 revenue of $5.5 billion. So it's a healthy pipeline of new contracts. Consequently, our order book as at 30 June 2024 stood at $27.9 billion. $4.9 billion of this is expected to be delivered in the second half of the year. Slide 18 will focus on Q2 2024 contract wins. In the second quarter of 2024, the Group secured $3.1 billion new contracts, with CA recording $1.3 billion, DPS $1 billion and USS $0.8 billion worth of new contracts. Next, let me move on to the debt profile of the Group. Slide 20. The Group total borrowings is predominantly in US dollar to match the asset side of the balance sheet, which are mostly in US dollars as well. In US dollar terms, the total borrowings was reduced by 2.5% in first half 24 year-on-year, and this is obviously through debt repayment. However, in sink dollar terms, the total borrowings as of 30 June 24 remains flat compared to 30 December 23, at $6.1 billion SING. This is due to a stronger US dollar. So while we are able to pay down the US dollar debt, the balance of the US dollar debt translated to SING shows a similar SING dollar number of $6.1 billion. EBITDA increased 11% year-on-year to $786 million in the first half of 2024. This cash was applied towards capital expenditure for growth, debt repayment, interest expense and obviously dividends. Debt to last 12 months trailing EBITDA leverage ratio also improved from 4.2 times as at 31st December 2023 to 4 times as at 30th June 2024. our fixed to floating interest rate ratio remains balanced at 61% and 39% respectively. Finance Year 2024 weighted average borrowing costs for both fixed and floating is estimated to be 3.7%. And this is assuming there is no Fed rate cut for the rest of 2024, which is not the popular view. I think the popular view is that the Fed will do something in September and so forth. Assuming there is no Fed cut, we forecast 2024 weighted average borrowing cost to be 3.7%. Credit rating remains very strong at AAA stable by Moody's and AA plus stable by S&P. Next, dividends. Slide 20. We are pleased to announce that an interim tax exam cash dividend of $0.04 per ordinary shares has been approved by the Board of Directors for the quarter ended 30 June 2024. Record date will be 23 August 2024 and payment date 5 September 2024. Finally, outlook. This is the Group President and CEO's outlook message. Just read it out for you. We posted strong revenue and profit growth in the first half of 2024. Despite continuing challenges in the operating environment, we see opportunities in aerospace, smart city, defence and public security industry domains. Given these opportunities, and supported by a robust audiobook, we remain confident in achieving long-term sustainable growth. This marks the end of my presentation. Thank you for your attention.

Thank you, Cedric. May I now invite our panellists up on stage, please? The panellists this morning are Vincent Chong, Group President and CEO, Cedric Foo, Group CFO, Ravinder Singh, Group Chief Operating Officer, Technology and Innovation, and President Defence and Public Security. Tan Lee Chew, Group Chief Commercial Officer, Market Development and President, Smart City and Digital Solutions. And Jeffrey Lam, Group Chief Operating Officer, Operations Excellence and President of Commercial Aerospace. I will now hand over the floor over to Vincent to deliver his remarks. Vincent, please.

Good morning to everybody here at SD Engineering Hub and To those joining us virtually, welcome to ST Engineering's financial results briefing for the first half of 2024. With Cedric having presented our results, I will focus on highlighting key points, allowing more time for Q&A. The double-digit growth in group revenue and profits in first half 2024 compared to first half of 2023 is a strong set of results. that reflects the robust performance of our businesses as we continue to execute our growth strategy. All three business segments, Commercial Aerospace, Defence and Public Security and Urban Solutions and SECCOM grew revenue and improved EBIT. Commercial Aerospace performed strongly with a year-on-year revenue increase of 20%. This growth builds on strong quarterly gains following the post-COVID recovery last year, reflecting the segment's momentum performing beyond pre-pandemic levels. Its year-on-year EBIT grew less than its revenue, primarily due to the timing of projects and a shift in sales mix, as well as lower aircraft sales compared to first half of 2023. Excluding the effects of aircraft sale, EBIT would have increased by 13% instead of 7%. Overall, this segment achieved a strong set of results, notwithstanding the ongoing challenges in the aviation industry, including labour shortages, supply chain issues such as parts and components shortages. This segment targets to maintain the operating momentum for the rest of the year. Next, Defence and Public Security segment maintained a strong performance, contributed by a healthy set of revenues from its sub-segments. This period, Digital Systems and Cyber and Marine posted very strong year-on-year revenue growth, with Marine being supported by increased ship repair activities. Our international defence business is making steady gains, though we expect the full impact of our international pipeline to take time to materialise. Notable achievements include our recent first export of NATO standard 155mm ammunition, as we announced some time recently. Additionally, we have seen increased enquiries at defence shows and meetings, opening up new opportunities and geographies. Our international defence contract wins totaled more than $200 million in the first half of 2024. So I am referring to international defence contract wins. compared to about $300 million for the whole of 2023. So in first half, we won more than $200 million of international defence contracts compared to $300 million for the whole of 2023. So that's a good set of results. Urban Solutions and SECCOM segment posted a 3% year-on-year growth in revenue and delivered positive $9 million EBIT with URS-based business and Transcor both contributing to the improvement. CEDCOM-based operating EBIT was flat compared to first half of 2023 despite lower revenue due to cost management efforts. Cedric in his presentation highlighted CEDCOM industry operating landscape which presents both opportunities and challenges for CEDCOM business. We are actively working with customers on migration paths to our future ready platform Intuition and are already operating on a lower cost base due to the manpower rationalisation efforts which we have already provided updates on. As Cedric mentioned, in an industry undergoing transformation, there will be execution risks which we are closely monitoring. As previously Guided in May this year, and barring unforeseen circumstances, we expect the urban solutions and SECCOMS segment to perform stronger this year compared to 2023. Similar to last year, USS segment will also be second-half weighted this year. If you exclude the effects of one-time satisfied divestment and severance cost effects in 2023, first half of 2023, base operating EBIT for the segment, improved by close to $20 million in first half this year compared to first half of 2023, as Cedric already mentioned. On new contracts, we secured $6.1 billion for the first half of 2024 and about $3.1 billion alone for the second quarter of 2024. Lifted by these new contracts' net of revenue delivery in the first half, we ended June with a very robust order book of $27.9 billion, with $4.9 billion to be delivered for the rest of 2024. In summary, the strong first half results highlight our agility in navigating a dynamic global environment. This strong performance is also supported by our disciplined cost management and productivity drives, ensuring that we maintain profitability and resilience. To illustrate the improvements, our unit OPEX, in other words, revenue divided by revenue, OPEX divided by revenue in first half 2024, declined to 10.4% compared to 11.4% in the first half of 2023. Looking ahead, we see continued growth opportunities in aerospace, smart city, defence and public security industry domains and with a strong set of order book providing good revenue visibility, we remain confident in achieving long-term sustainable growth. Finally, Our board of directors has approved a second interim dividend of $0.04 per share, as mentioned by Cedric, which shareholders will receive on the 5th of September 2024. So on that note, we will now take questions from the floor. Thank you.

Thank you, Vincent. We will now move on to the Q&A session. I will 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.

Let's make a small clarification. On slide 13, as you can see from the slide, it states that there's a pause in New York congestion pricing start date. That means the City of New York decides to start later. So they had a pause in the start date. However, the New York congestion pricing project, which the MTA, the city has with Transco, is not paused. So that contract is still running in accordance to its terms and conditions. And we have delivered the EPC part of it, and we are now at the OMM phase of it.

Thanks for the clarification, Cedric. Anyone? Yes, of course.

Hi, thanks for the opportunity. Kenneth from CGS. Three questions first. First one's on aerospace. What's the biggest bottleneck hindering margins at this point? And are we seeing any alleviation if this bottleneck's going to third quarter so far? Second question is on defense. What's driving the spike in depreciation and associated profits this first half? Last question is on urban solutions. Could you share how much did Transcore grow year on year in the second quarter? And given that USS revenue was up 3%, this kind of implies the Southeast Asia smart city business saw a bit of low growth. So what's hindering the Southeast Asia business? Thank you.

Kenneth, thanks for the questions. I will ask my colleagues to answer your question first on USS TransCorp growth. I'll let Lee Chew talk about it. DPS, what's driving the depreciation in first half? And then commercial aerospace, what are the biggest challenges impacting margin? But let me just clarify, we already said in first quarter on your third question, We already said in first quarter of this year that the URS base business will be second half weighted. So that's nothing surprising to us in terms of the URS revenue profile, but I can let Lee Chew address that. I will let Lee Chew start first and then followed by Jeff and then after Ravi.

Thanks, Kenneth, for the question. So let me address the URS growth in the USS segment. I think your question specifically was Transcor. If you see the segment report that we have out there, we have a 9% revenue growth first half of this year versus last year for urban solutions and minus 20% growth in SEPCOM against the same period. Specific to Transco, we are seeing good double-digit growth And as Vincent mentioned, for the base business of our urban solutions domain, we expect it to be second half weighted. Okay, so hopefully that answers that question. I think you also had a query around the Southeast Asia business. We look at our business more holistically across different geographies and we aggregate our business report that way, so I would not say that the Southeast Asia business is what you have mentioned. If you look at our order book for quarter two at 800 million and our first half order book of 1.4 for the USS segment, you can see that the momentum of growth in terms of the order book is strong and is good. Specific to that, I also want to call out that we highlighted the winds in Transco. In fact, we had some press releases that went out to describe the Delaware River electronic tolling wind as well as the wind in Missouri. for the TransSuite traffic management. So we are seeing TransCore winning projects both on the tolling side as well as on the ITS front. So hopefully that answers the question, Kenneth.

Okay, so I'm going next. The commercial aerospace business is a diverse business. We have the OEM business, MRO business and the leasing business. As you may be aware, today there is a lot of dynamics going on that is affecting different segments of the aerospace business. So for leasing, for example, Vincent mentioned we had disposed of some aircraft last year. So these are periodic transactions that we do. and we continue to look for opportunities to do some of these periodic transactions. On the MRO business, some of the key challenges in the market is very known in the industry, including the supply chain challenges, repair, turn time, the spares availability. On the OEM side, you are also aware about Airbus delivery schedules, how that is being... impacted by the spare parts availability. So I would say that broadly, we are managing all of these risks and targeting to deliver on continuing momentum on our operating business. And therefore you have seen that we have been able to deliver and improve on our margins over the last few years. Thank you.

We'll address the question on depreciation. So we did complete the decrypt acquisition in first half and for acquisitions usually what we need to do is to do an upfront amortization of the order book backlog. So that's quite accounting practice. So that explains a big part of that increase in depreciation. I hope that answers your question. There's nothing that is extraordinary apart from that. Of course, some depreciation from the Gao Yat also because we acquired that last year. All right.

Hi, thank you for the opportunity to ask questions. Three questions from me. So firstly, this time around Airbus, they specifically flagged out that LEAP engine delivery delays were one of the key reasons behind the negative revision in their guidance for this year. So could you share maybe the impact on MRAS as a result of this development? And several US airlines have also announced that they intend to scale back capacity growth, specifically in the domestic market. So are you seeing this translate into any signs of weakening demand for MRO in the US market? And just to clarify, one last point on the New York congestion pricing system. The project now is paused, but does that mean that you will continue to still book O&M revenue at this point in time, or will you only book it when it's resumed? Thank you.

So the answer to that question is very simple, yes. So the contract is still in effect, so O&M is still being supported and of course being paid. So I think that's the way to simply put it. I'll let Jeff answer the two questions. First is on leap engine delays. What's the impact on MRAS? Actually MRAS has done quite well and we see continued momentum notwithstanding the near-term challenges. And then we talk about MRO outlook in the US given that some airlines are as you said, reducing capacity growth, but we are in the business of repairing the current fleet with more flights. Given that air travel actually has picked up, I think the prospects are still fairly positive overall. I mean, not specific to any region, but I'll let Jeff talk about it.

Thank you. So Airbus has been revising its delivery schedule over the last basically every few months you see a revision, right? So certainly that also means that we have less deliveries on the the nacelles, but at the same time we are managing our efficiency and productivity. We are also managing a portfolio of products in Middle River, not just on the A320neo, but on some of the more mature products. We also see the Chinese C919 capacity and demand ramp up as well. So there is a balance of various portfolio products within Middle River and I think we have weathered the sort of the Airbus challenges well in terms of the business outcomes for Middle River. As for US Airlines' capacity growth, we're seeing a shift towards retention of the existing older fleet and a later delivery of the newer fleet. So the capacity growth is limited. Nevertheless, the airlines are managing the existing fleet very well. There are still aircraft that are in storage that they can bring back. and for an MRO like us, obviously the impact is we could be working on older aircraft for longer time and we also see a lot more intent by the airlines to keep the older aircraft flying, which means that in a way it affects some of the conversion, the freighter conversion, because the PEX fleet needs to stay flying longer and therefore there is less feedstock for PEX aircraft to be converted to freighters. So what we're seeing is sort of a moderation of the growth or the replacement of the freighter fleet. Thank you.

Jason, I hope it addresses your question. Thanks. Anyone else? Okay. Maybe we'll let Rahul ask his question since his hand's up, and then we come back to you, Roy.

Rahul. Good morning, everyone.

Good morning.

Maybe starting with back to commercial aerospace business, you mentioned about the aircraft disposal and the impact on EBIT and all. So if I think about the underlying basis, we still had a margin decline year on year on the commercial aerospace business, 1H23 versus 1H24. If we go by sub-segment, you mentioned about the product mix and all. If we go by sub-segment and divide into, say, MRAS, PTF, or MRO business, which division had a lower margin? And if you could point out the reasons behind it. So that's on the CA part. Second, on the DPS division, I think in defense you mentioned about winning more international orders, 1H24 being almost at full year 23. Could you talk about the margins profile? Are they anyway different to what you do domestically in terms of the margins, winning the international orders? And do you foresee that as international orders keep on increasing, do you need to invest in more capacity, maybe some big capex that you need to do to serve the growing international demand? Thirdly, on the USS division, I mean, I think you mentioned that the SATCOM EBIT is still flat year on year despite the lower revenue. Is SATCOM as a sub-segment positive a bit or negative a bit if we take off the one-offs? I'm not clear about that. Thank you.

So we will address them in the order that you ask in terms of commercial aerospace margin, but we already said that it's because of margin mix. If you take away the one-off aircraft sale, we're talking about 13% EBIT margin, which is a 13% increase in EBIT, which is a healthy growth. But I'll let Jeff talk about the portfolio mix within commercial aerospace. We did say that this year, will get to mid single-digit EBIT percentage for PTF, passenger to freighter conversion, we are certainly well on track to achieve that. So that hasn't changed. I'll let Ravi talk about international defence business, whether By growing that business, we will have more capex, but really it depends on the situation. Even if we have to, it will be based on sound economics, but our model has always been localising if there are opportunities in the country of demand, As of now, we also, of course, always be looking at whether there's, you know, capacity de-bottlenecking that we can do in Singapore or increase the capacities, you know, spending our capex prudently to capture the growth opportunities in the market. Now, I'll let Lee Chu talk about the SECOM question, to address the SECOM question.

So, let's... Raul, you are right in... In a portfolio of products and businesses, we always have a balance between what is strong at the current moment and what is slightly weaker at the current moment. If we compare the second half 23 margins with first half 24 margins, we actually have an improvement. So I would say that we have to look at the whole business as a balanced portfolio across time. Obviously, when we look at sort of the high growth rate in our PTF revenues, and we also said to you that we are gradually improving margins on the PTF business, even as the revenues grow at double-digit rates, right? And the MRO market, we also shared that we continue to see challenges in the repair market as well as the spare parts. So that also does have an impact on our ability to turn the equipment back to our customers, right, therefore affecting our business outcomes. So there are these, I would say, areas that continue to need to catch up post-COVID. And even as I say catch up, you are fully aware that Airbus is having a hard time catching up. So I would say on balance that we are progressing and we continue to target good progress.

Raul, thanks for the question. So firstly, I think over the briefings in the past, we've said that we are making a concerted effort to grow the international business. And now we are seeing some, I think some of the results of that. And I think we all hope that we can continue to grow that business because I think that gives us another uptake in terms of revenue growth and more opportunities. So in terms of investment, so first of all, we do. I'll give you an example where we are investing to take advantage of the opportunity. So both for 40mm production and now for 155mm production, in fact, we've invested to up the capacity and at the same time also to increase the automation. So then we can bring the volumes up, we can be very responsive to the customers. In fact, probably one of the few can deliver some of this ammunition in just one or two quarters, which is a big differentiator in the market. And then, of course, we reduce our costs. And because of this ability to deliver quickly and also because of automation, we are able to maintain our margins because after all, these are all international competitions and sometimes timing plays a part as well as the price. And of course, quality is one of the one of the big differentiators for us in the 40mm market. For example, we have repeatedly shown that our products are more reliable and for ammunition that's a significant, very important factor in the selection process. So we do compete and we do try to get those margins. And as Vincent mentioned, our strategy also is to localise as much as we can. So we work with partners, we help them transfer the IP, modify it, and then we expect them to do the production, and then while they buy, either pay for the IP or they are buying some components. So one example I'll give you is a 40mm production. One of the big cost items is actually shipping of live ammunition, naturally, because it's explosive. So what we do is we partner with some companies overseas, and they do the manufacturing of the round, what they call lapping, while we provide from Singapore the fuse. which is a much more sophisticated, higher value item, and then they do the lapping and sell to the final customer. So that way we reduce our shipping costs, but at the same time we get high value for the tech transfer as well as the margins of the components we sell. But in terms of investment, I think one of the things that we've always done in defense and public security is to invest in new products. That's the nature of the business. You have to keep on developing the next generation of product, next generation of ammunition, platforms, even defense electronics. And so this we do, we continue to do. But defense, international defense business, defense international sales help us defray the cost. Because when we have customers who have those needs and they can actually, in a way, take up the volume of production, in a way, they are funding the development that we are doing. So when we look at the entire business, international defense business help us to grow, help to fund some of this development. I'll give an example of our USP program. So we have a few contracts to support some of these countries with US demonstrators. And each one of them, of course, the customer is paying for it. But for each one of them, we get to develop, refine the algorithm in different environments. And so finally, we get a better product. So that's why overall, when you look at international defense business, yes, we do invest, but we're getting more value, getting more efficiency. And overall, we want to maintain the margins.

All right, Rahul, I hope your three questions have been answered. So, Roy? Oh, sorry, you have one more. All right, you too.

Thank you. So, Rahul, you know that we don't provide separate financial forecasts of our business, but I will say that we are making losses. in SECCOM by virtue of the fact that we say our operating EBIT is flat against last year, points to that. I just want to reiterate that the USS EBIT has improved as what we shared through the two speakers earlier. I also want to reiterate that we are progressing well with some of the cost optimization and process improvements effort as part of the transformation. So, you know, that coupled with the fact that we are working with our customers to look at long-term migration paths, we are confident that we are, you know, working on a steady recovery.

Alright, Rahul. Roy?

Thank you for the opportunity. Roy from . I just want to follow up on the margins of, I think, both commercial aerospace as well as defense and public security. I think I go with the commercial aerospace first. Yes, I believe, I understand half and half there is some margin improvement. based on my own estimate, is from 6 plus percent to 7 plus percent in terms of the EBIT margin. Just now you mentioned you want to maintain the operating momentum for this segment. So the question is, even for the margin improvement, so should we expect some more margin improvement in the second half of the year? potentially go even higher from 7 plus percent to close to 8%? Yeah, so that's the first question. The second question is on the defense and public security margins. I remember previously Mr. Ravi mentioned you want to sustain a double-digit margin. But in the first half, according to my estimate, the margin is over 13%. It's only slightly lower than the very good margin last financial year in the first half. So the question is, should we expect this 13 plus percent margin to be sustainable going forward? Or should we expect some moderation to maybe lower teens? And what caused the high margin for this first half? Was it because, did you benefit from the Ukraine war, which might have helped the margins? That's the question. Thank you.

So let's answer the question in the sequence that they were asked. So let's go for the, let Jeff talk a little bit about the second half as far as your question goes.

We obviously like to increase shareholder returns, so our target is always to increase our margins reasonably. Having said that, of course, it also depends on factors of production as well as market factors in terms of how we can deliver on time, all the time to our customers, working with all our partners. Thank you.

Ravi? DPS margins, as I mentioned last year, and you recall, 14 is actually quite a strong margin, and I think this half we did about 13.7. So I think the overall for the DPS business, we want to maintain margins, certainly in the double digits, and it depends, of course, a lot on timing on the projects and the the kind of milestones we have. But a double digit margin for DPS is sustainable. And I think certainly, you know, if you look at our international defence business, we are making more effort, as I mentioned earlier, to try to capture more of the sales. Because that also helps when you have volume, then you know you can defray some of the costs, and then that helps us to maintain the margin and still be competitive. So we continue to take that approach.

Thank you. Do we have any questions from virtual participants? And then we come back to the floor.

Okay, now we'll take questions from analysts online. First on the line, we have Silky from CGS.

Hi, good morning. I have a few questions relating to SETCOM. I understand, Liqi, you mentioned that it's still in a lost position. I just wanted to just check what would be the long-term plan for SETCOM, say in three years' time, given the very competitive landscape, will it still be a core segment? Following on to that is when do you expect the business to turn around? And I have a second question just on USS. I understand that it's going to be a second half weighted and the swing just from second half last year to first half this year is quite stuck in an overall basis. So when you are talking about second half weighted, is the strength of recovery going to be as strong as what we saw in the past two years, given what you have on hand in terms of the challenges in SECCOM and everything else? Yeah. Second half weighted is quite a generic guidance. Thanks for the guidance. But, you know, it could be like from 8.8 to like 20 or 8.8 to 60 is not the swing. We just want to establish what is the impact of the swing.

Is that your only question?

Maybe I just have a last one would be for subject in terms of cost of funding. What would be your expectation for FY25?

Maybe we address this because the SECCOM one perhaps Lee Chew can spend a little bit more time to address, and then I will let Cedric talk about the cost of funding in 2025 outlook.

Thank you Siu Kee for the question. As I have said, for 2024 it is still a forecast because we are only at the halfway mark. 2024 is 3.7%, assuming no Fed rate cut. But the popular view is that there will be some cut, don't know when, but sometime this year. So if that happens, then it will lead into 2025, lower interest rate for our floating part of the business. We also have a tranche of bonds, 750 US, which is due April next year. And so we will have to watch the interest rate environment and then probably have to refinance that bond. And depending on what rate that refinancing can be achieved, then that would determine what's the 2025 weighted average interest rate.

Just to add to what Cedric said, as we have been advising the market, we do have US commercial papers that are very much tied to Fed Fund rates as our available interest rate loans. So obviously if the Fed Fund rates are reduced, we would benefit from a reduction in our USCP interest rates. But then we also need to look at how we are going to price our medium-term note next year when we refinance. So some I think watch and see, but if there are reductions in Fed fund rates, we should be, I think, in a better position versus where we are today.

Fed fund rates, if it does come down, will impact the USEP immediately. So we can enjoy lower rates and the floating part of our debt immediately.

Alright, and then let's go to SECOM.

Suki, let me answer the SECOM question. First of all, In terms of plans, we're going to continue to build revenue. I mentioned earlier that we saw a softer revenue than we had hoped for in the first half, and that's attributed to a couple of things. One is delayed customer spend, and also our focus to improve revenue quality while delivering value. On this latter remark, what it meant is that we were shedding revenue that's not in line with contractual and margin expectations. Having said that, we have been in active discussions with customers for long-term migration plans towards intuition. At the end of May, we announced a couple of partnerships. In fact, we talked about our partnership with Arabsat, to deploy iDirect's next-generation hub infrastructure to serve the remote and underserved new markets. For Arabsat, it was specifically in the Middle East, Africa, as well as Western Central Asia. In May, we also shared that we were selected to supply Satria 1 in Indonesia with our next generation hub infrastructure. These couple of engagements that I've quoted are important because it lays the groundwork for future migration to our intuition platform. So we continue to stay focused on that as part of our plan. We are on track to deliver the lab release of our intuition in Q3 of 2024, as mentioned previously. And Cedric mentioned this is an industry that is going through a lot of disruption and change. As we take a look at, you know, the submissions by, or filings into ITU in terms of operators launching constellations over the next five years, We know that the demand for ground segment equipment continues to be robust and continues to be there. Obviously, we want to be able to turn around profitability as quickly as possible, and we expect the momentum that we've been executing to and the positive impact from some of these transformation effort to set us on that path. to capture the opportunities as they stand for us when Constellations launch, but also to put us in the right step to deliver profitability. So that's my view on SECCOM, and of course we will continually reassess our business strategies and take a look at the dynamic market changes and the competitive actions in the market. On second half and where that strength of recovery is, I think Suki must be looking at second half of last year versus sequentially what we are posting first half of this year. I think that's a reason why Vincent and Cedric had mentioned that when we look at 2024 performance against 2023, Barring any unforeseen circumstances, we believe we will deliver a stronger 2024 versus 2023 on a full year basis. So hopefully that answers the question you have.

I also want to point Silky to the very positive momentum that we are getting from Transcor. I'm very heartened by the pipeline. In the United States market alone, there are quite a few good projects that we are working towards. Of course, in Southeast Asia, there are also projects they are working towards. So far this year, TransCorp's results have been very strong. We are obviously continuing our efforts to secure even better projects in this part of the world as well as in the US. Overall, USS has a positive story to tell. This half versus last half, so more to come as we progress the year and we certainly give you more updates as we have more information. And we are not talking about specific to any business segments. I'll say that in the continuum of our business, we always look at business units and business domains where whether they continue to be strategic, whether or not it continues to give us returns, and we look across the portfolio. I know Silky asked a very specific question about in three years' time, how about this business, that business, but this is a very continuous effort that we do regardless of which business unit it is. So we always look at whether the business continues to be strategic, is it giving us the return that we need, and then what is the best outcome for us in terms of our next course of action. So that is a very active process that we undertake. So sometime in first half of next year, we do want to have an investor day conference again, where we will take you through a little bit more holistically what the company has been doing, where are the new growth levers and any tweaks that we expect to make to our strategy. So maybe more to come at that time. Thank you Siu Kee for your questions.

So next on the line, we have Peggy from Business Times, followed by Louis from Citi.

So may I suggest after Peggy, we'll come back to Tzu Wei before we go back to Louis. Okay, sure. Peggy?

Hello, good morning. Can you hear me?

Peggy, yes, we hear you loud and clear.

Thank you. Okay, I have two sets of questions. The first set relates to the New York congestion pricing project. Just now you said that ST Engineering is still being paid for the project itself because it's the pause in the pricing program. Is that correct? Yeah. But What is the role of ST Engineering in this besides offering the engineering project works? Is it supposed to maintain the infrastructure and the system collecting the revenue on behalf of the government? So will that affect your forward revenue? collection, that's one. And also, is the ST Engineering involved in other congestion pricing elsewhere in other parts of US? Because there might be ripple effects of the pores in New York. So those are the first set of questions relating to the New York congestion pricing. The second one pertains to Pensacola. I read that Pensacola mayor has called on SD Engineering to report on their hiring and training plan. If inadequate information is not provided, work on the new hangar and aircraft mechanical school will stop. Can we get the status on this? If this is paused, what is the impact to ST Engineering? Thank you.

So I will let Jeff answer the second question later. The first question, I will let Lee Chew talk a little bit about the scope of our own O&M. So yes, we do maintain the equipment as part of the operations and maintenance phase of the contract. We do not take any revenue risks on congestion pricing. We are just the tolling solution provider. So obviously we're not responsible for, or rather we do not benefit from any revenue, nor are we impacted on any revenue that the government will collect if they implement, when they start to price the congestion pricing program. We mentioned more recently the O&M revenue from the congestion pricing project or the contract that we have is about 2-3% of the USS segment revenue annually. So at the USS segment level, the revenue of the entire O&M contract is not material because it is 2-3% of the revenue. So we obviously continue to support MTA, the customer, during this O&M phase, but that's the scale of the O&M contract. So maybe I'll let Lee Chew expand a little bit more beyond that.

Okay, so for the O&M scope, it will include the maintenance of the front-end tolling equipment as well as the processing of the vehicle identification. for billing. So we do not get involved in the revenue collection like what Vincent mentioned, but we support MTA in the processing of the vehicle identification. So hopefully that gives clarity on what we do for the O&M portion.

Well obviously we hope that the the programme will continue and that will give confidence in the rest of the other cities in the US to follow, but we are watching the situation very closely. Meanwhile, our focus is to support MTA in the execution of our O&M contract. Thank you.

One more point is that the New York Congestion Pricing Programme is the first urban congestion pricing project in the US. So we are not involved in any others. The rest that you read about Transcor is actually highway electronic tolling as opposed to urban congestion pricing. So that one is the first and only one so far.

Yes, being able to execute at least the EPC part of the contract is already completed. That means we have successfully built the system But in other parts of the world, there will also be congestion pricing demands. And having the track record of successfully implementing a congestion pricing project in a very busy and big city like the US will put us in good state to address opportunities both within the US if they are more in the pipeline or outside of the US that will be interested, those cities that are interested in congestion pricing. So I think whatever the outcome is, the track record in implementing that project puts us in good state to address other opportunities around the world.

If I may add, because of the fact that we've already completed the EPC portion of the project, that gives us an opportunity to have the right level of discussions and also exploration with customers outside of the US as well.

Okay, thank you. So just to get your question on Pensacola, we have always provided a hiring report to the Mayor's office regularly and I think this latest request that came from his office is in response to some of the questions he has been getting that has come into his office. So I think he feels that there is a need for a more formal, more public statement on this. So we are actively in touch with the Mayor's office regarding this and I plan to have a meeting with him shortly.

Thank you. There are also news reports that are not actually accurate, so we are also taking steps to correct those reports, those inaccuracies. So Peggy, I hope we answered your questions. Alright, thank you. Maybe we'll come back to... Peggy, thank you for your question. So I'll come back to Tzu Wei, and then after that we'll go to Louis online.

Thanks, Vincent. Congrats on a decent set of results for first half. I have two questions, please. The first question is regarding your admin expense. Cost control business optimisation has been a very defining feature of your strategy. It used to run at about 7.5% to 8% of your revenue, but this first half you managed to push it down to 7% of revenue. So I'm wondering how much more room do you have to optimise the business? Can we push it 6.5% of revenue at some point? Second question is on your debt. So Cedric, just wondering for your fixed portion of borrowings, what is the weighted debt maturity for it and what is the weighted cost on that fixed component? Thanks.

Sir Tzu Wei, I will answer your first question and then we will let Cedric answer your second question, if I may. Cost management is a very important focus subject for us. If you recall during COVID, the years of COVID, we managed to remove more than $700 million of costs over a three-year period, which really helped in the resilience of the business against one of the most difficult crises that the company, if not the most difficult crisis the company had to go through. So cost management was one of the important levers that we managed very well and it will continue to be the case. We don't have an absolute level of OPEX that we target because we believe that every year there will be new opportunities. In fact, Every year, we capture more than $100 million of procurement savings. Of course, the manifestation of those savings will come in several years, but then when you stack year over year, you can say that the procurement savings is an important lever for us to offset the negative effects of inflation, which is why you see that our cost management is very well. We also have the other lever where we look for productivity gains. We have a dedicated team of continuous improvement specialists that will go across the company to identify productivity improvement opportunities and every year we set ourselves a target of more than $50 million in productivity gains. So this is over and above procurement. So these two levers or these two initiatives alone will help us mitigate to a large extent the effects of inflation. So given the scale of the company, we believe that there will always be room for improvement. So it will be a continuous process. We don't have an end-game target of what level it should be, but as you look at our progress, OPEX over revenue, 10.4% is at an all-time low for this year. That means to say that our operating cost, OPEX, is increasing at a lower rate than our revenue increase. Even as we grow our business, we can benefit from economies of scale and also benefit from the cost reduction initiatives that we have structurally put in place to address the business resilience question, so to speak.

So you use a lot of the word mitigate in your answer, inflation and all that. Any scope for all these... productivity gains cost procurement savings to result in maybe 0.5 bps improvement in your EBIT margin at record level, etc.?

Well, if you think of the reduction, and we have talked about procurement is more than $100 million of target every year, and we have managed to achieve them over time, and then productivity gains too, another $50 million or more, so $150 million a year. We don't have, to your specific question, we don't have a target EBIT percentage. But suffice to say, if not for all these initiatives, we would see margin pressure. But if you look at our results, we are trending in the right direction.

On the debt side, as I said, 3.7% is the weighted average between fixed and floating interest rate. On the fixed side, which is your question, so it should be around mid-2%. And on the debt tower, we are very conscious in spreading out the maturity of each tranche of bond. So the bonds will mature one tranche in 2025, as I mentioned, and also another tranche in 2026, another one in 2027, another one in 2032. So they are all well spread out. So as we go about issuing the next tranche in April 25 to replace, to refinance the one that is due, we'll also do it in a fashion, in a way where the tenor would not bunch up with other maturity dates. I think that's a prudent thing to do.

I hope we have addressed your questions. Thank you. Can we go back to Luis then?

Next on the line will be Luis from Citi.

Hi. Thanks for hosting the call and congrats on the results. Most of my questions are answers. I just have one question also on the balance sheet. Would you be looking to increase the weighting of floating debt in the balance sheet or you're satisfied with the ratio it's at right now?

Okay. Thanks, Louis. Our policy is not to speculate on interest rate movements because that's not our core business. Our core business is DPS, commercial aerospace and USS. So our interest rate policy is to maintain a ratio of fixed to floating of about 50% of our total debt. So right now, it tends to be a little bit more fixed in the last few years, which in hindsight works well because interest rate has been high and we have fixed it at mid 2%. So going forward, we have to be guided by the policy and not try to speculate and swing because I'm no fat chairman, and I cannot see where the interest rate is really going.

So that prudent management framework has helped us over the years, and we will continue to follow that approach that Cedric mentioned. Louis, I hope we've addressed your question.

Yes, that's all. Thanks. It's very clear.

I understand there's no question online at this time.

One of the airlines mentioned that the one thing noticed is that the maintenance cost for airlines has been relatively high. One of them mentioned that they're spending a little bit more time on maintenance than pre-pandemic, and I just wanted to check on that comment, whether that, you know, reflects the bottlenecks, obviously reflects the bottlenecks, and also wondering whether you're seeing reducing wage pressures, particularly, I guess, globally in the U.S. in particular, on the MRO front. Second question on that is, what is the current capacity utilization rate? for the airframe maintenance. And going back to Vincent's mention of the mid-single-digit margin target for PTF, whether the lack of feedstock will impede the continued improvement in that, or slow it down, I would say. That's the first set of questions.

First set of questions.

Do you have a second set of questions? Just following up on the question on admin costs as well. I also noticed that distribution and selling as a proportion of revenue has also trended lower compared to historical. So both these elements, I'm wondering whether you can call this the new normal? or whether that you anticipate as you do your budgeting that these are items that will sort of go back to pre-pandemic levels?

No, I think we're never happy with normal because as far as cost is concerned, we always look to reduce them. I must keep in mind for distribution and selling, the result is despite having the air show this year where we spent, actually we had to spend more money and yet we actually managed the cost quite well. So for the same reasons that I mentioned just now, we really keep looking for continuous improvement in cost performance. So that effort will not stop and that has positioned us well for over many years. That will continue to be our focus even as we secure more revenues. We keep looking at how we can reduce costs across the group. So Jeff, maybe I'll let you address the several questions on the aerospace. Thank you.

Sounds like a thesis on aerospace. Good questions. MRO costs are driven by two key factors. One is material, the other is labour. Material, obviously, is primarily provided by OEMs. So the OEMs decide the pricing of materials. And post-COVID, indeed, there was double-digit inflation. on material costs, driven a lot by some of what was happening in the industry, including raw material availability, inflation on many cost factors. And on the labour side, we also saw double-digit increased inflation, because there was a lot of demand for aerospace skilled labour that went away or was retired during COVID. and everybody was hiring. This situation has alleviated largely across most parts of the world, except in the US, where there's still a huge demand and significant, I would say, labour poaching, because there's a lot of growth opportunities. For example, Airbus is delivering aircraft from the US. They have an assembly plant in the US for the US market, so they obviously have to hire. The airlines, as they increase the fleet size, they have to hire more technicians and mechanics. So the situation will continue. On the other hand, when you look at China, there's a significant supply of skilled labour in China, so that situation is not acute at all in China. In Singapore, obviously we benefit from both the local supply base, as well as using foreign labour that comes into Singapore. So the bottlenecks are there. They will continue to be worked by us and by our industry partners and competitors. And in terms of capacity, you raised the question on our capacity. There are two types of capacity. One is hard capacity. The other is soft capacity. The hard capacity primarily comes from the infrastructure you have to build, the tooling you have to buy and certify. And then the soft capacity is the labour and how you manage the production processes. So, for example, as Vincent said, if you are more productive, you streamline your work processes, you get to deliver more with less hard infrastructure. So in all ways, we are working both of these. On the hardware side, we continue to build plants. For example, expanding the Pensacola facility with more hangers. Our Er Chow joint venture facility is being built at this time. Our Changi Creek facility in Singapore is also being progressed. And we also are building an additional engine overhaul shop in our Palemba facility. So there's a hard capacity. On the soft capacity, we continue to hire, to train, to look at continuous improvement processes. So we do intend to grow both hard and soft capacity, as well as to be able to deliver more to our customers. On PTF, you asked about the mid-single-digit growth and how feedstock is affecting us. Indeed, feedstock is affecting the short-term demand for PTF conversions. We have a network of conversion houses across the world, we have a network of parts suppliers across the world, and we are working with all parties to rationalise the short-term capacity and still maintain the long-term capacity. so that when the OEMs can deliver new aircraft, the airlines are willing to give up their old PAX aircraft, then we can continue to convert at a higher pace the nephritis. So in the short term, the answer is we continue to expect margins to improve because we are able to manage our capacity. So even if we have to convert fewer aircraft in the shorter term, we still expect similar and improved margins. And then hopefully we will see within two years a recovery. Thank you.

Just to build on what Jeff said, our PTF target revenue that we set for 2026 of $700 million remains intact at this time. So as Jeff said, in the short term there may be some challenges, but then we are still very positive about the growth prospects of PTF. So we have not changed our five-year plan target. Perhaps on that note, we can put the Q&A session to a close, but let me just say a few things. We had a very strong set of results in first half of 2024, both in revenues and also in bottom line, net profit as well as revenue, as you have seen in our presentation. The message here is that the growth enabled by our very strong order book continues to manifest itself as we continue to execute our strategy. We have been very steadfast in those messages and come first half of next year, we will certainly give you another recap of where we are on our strategy execution journey and also give you more perspectives as we look ahead in the next few years. So on that note, we will put the adjourned the Q&A session and I thank you very much for joining us today and for those who dial in virtually, thank you very much too for your participation.