Singapore Technologies Engineering Ltd

SGX:S63

Earnings Call Transcript 2018-Q1

[Sylvia Lee, executive]

Good morning, ladies and gentlemen. Thank you very much for your patience this morning. Welcome to ST Engineering's First Quarter 2018 Results Briefing. To begin today's briefing, Mr. Cedric Foo, Group CFO, will present the group's performance for the financial period ended 31st March 2018. Following that, we will invite our management team for a Q&A session.

Without further delay, I'll hand over to Cedric. Cedric, please.

[Cedric Foo, executive]

Okay, let's do this again. Yes, it's much better. Yes. So for the period ended 31st March 2018, ST Engineering group delivered a very good set of results. Revenue was up 9% at $1.647 billion, and this higher revenue came from the Aerospace sector as well as the Electronics sector, partially offset by the Marine sector.

The earnings before interest and tax, or EBIT, came in at $122.1 million, and this is 8% higher.

The other income came in slightly lower at $8.7 million, and this was largely due to a foreign currency translation reserve which was captured in our balance sheet. But when we liquidated the Dalfort facility in our Aerospace sector, this amount, which is roughly $5 million, one-off, was crystallized and realized in our P&L. So without this impact, actually, our net profit and profit before tax would look even better.

The finance costs came in better, $2.2 million, and because of favorable FX. The profit before tax came in at $144 million or 9% better. And as I said earlier, without the Dalfort FTCR -- FCTR impact, which was realized in the P&L, this 9% would have been 12%.

The profit attributable to shareholders or net profit came in at $117.7 million, and the improvement is 18%. And if you take out the Dalfort effect, it would've been 23%.

Some other highlights for the quarter. Our balance sheet remains very strong at $13.4 billion, and about $3.2 billion of this will be delivered in the remaining months of 2018.

Commercial sales-to-defense sales proportion stood at 63% to 37%, respectively. EBITDA is also strong at $179.3 million compared to $164.6 million in the same period last year. And EBIT, $122.1 million compared to $112.6 million the same period last year. Both EBITDA and EBIT improved by 9% and 8%, respectively, to the same period last year.

Cash and cash equivalent, including funds under management, stood at $1.6 billion, a very strong number, as of end of the March 2018. And if we compare it to end of last year, it was $1.3 billion. And of course, the reason is because of better business performance.

Let's now focus on the group revenue. Revenue was higher by 9%. And all sector, revenue went up except for Marine. If you look at Aerospace, a very strong 36% improvement in revenue; Electronics, 33%; Land System -- sorry, Aerospace was 9% better, Electronics was 22% better and Land Systems was 3% better, Marine was about 16% lower and Others was 20% lower. But all in all, we have a 9% improvement of total revenue to $1.647 billion.

If we break down the revenue by geography, Asia still constitutes the highest, including Singapore in there, 65%; and U.S.A., 19%; Europe, 11%; and others, 5%.

For group profit before tax by sector, the Aerospace PBT dropped, whereas, actually, net profit has improved, as you will see later on, by 2%. Electronics, very -- grew very smartly by 29% in terms of PBT change, stood at $48.3 million. Land Systems has a 5% improvement and at $17 million. Marine, $9.2 million, a 2% improvement. Well, I think the question could be that the revenue from Marine has dropped, but the profit before tax and profit after tax have improved, and this is largely because in 1 quarter 2017, we had doubtful debt provided in the Marine sector from some of the frustrated customer contracts. And this was not present in 1Q 2018. However, this favorable impact for 1Q '18 is partially offset by weaker industry conditions in the U.S. operations, mainly VTHM.

PBT margin. Aerospace is 13%; Electronics, 8%; Land Systems, 6%; Marine, 5%; overall, 9%, which is comparable to 1Q '17. Net profit, correspondingly to our PBT, has also improved. At the Aerospace level, 6% up; at the Electronics level, 23% up; Land Systems level, 34% up; and Marine level, 7% up, and I've explained that; and for Others, we have a smaller loss of $6.1 million in 1Q 2018. So as a group, we came in with $117.7 million of net profit, which is $17.8 million or 18% higher. And again, without the Dalfort liquidation, this would have been 23% higher.

We now move on to the various sector, and just to glean through the high-level numbers. For Aerospace, revenue is up 9%, and all business groups within Aerospace have done well. Net profit up 6%. And of course, this was also partially affected by the Dalfort liquidation.

Electronics. The revenue is -- was up 22%, a very, very high number. Net profit was up 23%, and this was contributed by all business sectors within the Electronics group.

In the Land Systems, revenue was up 3% and net profit up 34%, largely because of higher revenue and favorable product mix.

The last sector, Marine. Revenue was down 16%, largely because of the Shipbuilding business. Net profit was up. And as I explained earlier, because in 1Q 2017, we have provided for some doubtful debts, but in 1Q '18, we didn't have to do that. And this was partially offset also in 1Q '18 because of the weaker U.S. operations and industry conditions as well.

The cash flow statement. Operating cash flow was $431 million, higher than last year at $400 million. We invested in some new businesses, so minus $44 million there. And we have repaid some bank loans as well as other JV proceeds, and these financing activities came in at minus $78 million. But overall, the cash and cash equivalent at the end of the period stood at $1.303 billion compared to $1.272 billion in -- as of end March 2017. And if we add to that funds under management, the total CCE and funds under management stood at $1.637 billion.

Now let's move on to the balance sheet. It's in line with the higher and better performance that we have achieved in the first quarter 2018. And therefore, net assets increased from $2.5 billion to $2.6 billion.

Finally, let me just share with you the President and CEO's message. It will give us a sense of how we have done on a qualitative basis and also some sense of how the company should perform going forward. So we started the year with healthy revenue growth and net profit. As I said before, revenue was 9% up, net profit was 18% up. We also secured numerous contracts including Smart City projects. So in our announcement for new orders, especially in the Electronics sector, you would have read that we have many, many Smart City projects in recent past.

So we have a strong order book, the group remains on track for steady growth. So I'll just leave you with this message, and thank you for your attention. I'll give it -- leave it back to Sylvia. Thank you.

[Sylvia Lee, executive]

Thank you, Cedric. Can I invite the management team on stage for the Q&A session, please?

Let me do a quick introduction of the team. From your left, Mr. Lim Serh Ghee, President of ST Aerospace; Mr. Ng Sing Chan, President of ST Marine; Mr. Vincent Chong, President and CEO of ST Engineering; Mr. Ravinder Singh, President of ST Electronics; Dr. Lee Shiang Long, President of ST Kinetics; and Cedric.

With that, I'll hand over to Mr. Vincent Chong. Vincent, please.

[Sy Feng Chong, executive]

Well, good morning. I hope you can hear me. Can you hear me? You can. Well, as Cedric presented, we had a healthy start to the year. Group revenue was 9% higher at $1.65 billion, and net profit improved 18% to about $118 million compared to a year ago.

All sectors delivered better revenue against first quarter of last year except for Marine, which is still operating in a challenging environment, as we have anticipated. The Aerospace sector saw higher engine throughput, and Electronics sector delivered strong quarterly revenue.

Compared to last year, net profit for the sectors grew between 6% and 34%, including Marine. And this is supported by healthy Singapore operations from Marine and the absence of doubtful debt provision, as Cedric mentioned. The delivery for ConRo, the LNG ConRo 1 has been delayed due to the more-stringent-than-expected regulatory reviews of the LNG systems, as I mentioned in the last quarter, because this is the first-in-class dual fuel vessel. We had also experienced some problems with equipment during the commissioning of the system. But the good thing is that these problems have been solved, and we are continuing with testing the system. If the remaining trials go as planned, and we believe that they will, we target to deliver ConRo 1 in June 2018. That means in the coming month.

We have made necessary adjustments for ConRo 2, learning from what we have experienced from ConRo 1. ConRo 2 is on schedule -- or rather scheduled for delivery in the third quarter of this year. Now we believe that the demand for LNG-powered vessels will be higher in the near future as the maritime industry adopts new technologies to ensure compliance with regulations promoting a green and sustainable marine environment, and we will capitalize on the experience and expertise acquired from managing the ConRo program for future projects.

As Cedric mentioned, there was a one-off, about $5 million, actually $4.8 million, of realized ForEx translation loss incurred from the final closing of 2 U.S. subsidiaries in Dallas for the Aerospace sector, Dalfort LP and Dalfort GP, following the cessation of operations some years back. This impact manifested when the units are finally liquidated in February of 2018 as a one-off exercise. But again, this is a legacy operation that we ceased quite a few years ago.

On a very positive note, in the Singapore Airshow in February, we had a very good exposure and brand exposure for the group. And of course, as a shareholder of Experia, we also benefited from the earnings from the Experia events, the airshow organizer. But each time we have an airshow, our earnings from the event through our shareholdings in Experia would better -- more than offset our expenses as it -- this year marginally so.

And of course, with the airshow in first quarter, it was very productive and very busy for us. We centered many of our business activities around the airshow, during which we showcased more than 100 products and solutions and hosted multiple groups of customers, partners and overseas delegations. Many of you were there also, and I hope you saw the -- beyond the extensive display, the engineering and technology capabilities that we have built over the last few decades to support the aviation, defense and Smart City.

At the show, we've forged a series of collaborative partnerships of the industry technology partners. Our Aerospace sector signed an MOU with CAAS to develop new concepts, procedures and technologies that will enable unmanned aircraft system application in Singapore's urban environment. It also signed an agreement with MUC Inc., MUC Inc. to jointly develop additive manufacturing technology with digital transaction capability to bring about greater efficiency and security in the aviation aftermarket services.

Our Electronics sector entered into an agreement with SatixFy U.K. to jointly develop state-of-the-art satellite antenna system that delivers enhanced in-flight connectivity for commercial aviation.

Our Aerospace sector was also active in announcing new contracts during the airshow, including interior reconfiguration services for Air Canada's Boeing 787 Dreamliner fleet. We also announced a 5-year exclusive MD11 heavy maintenance support contract to support Lufthansa Cargo's MD11 fleet in both light and heavy checks starting from 2019, extending the current relationship since 2014 of having C-checks with us.

For VIP completion, we also announced VIP completion project of a BBJ, Boeing Business Jet 737-700, which will be the third of such aircraft that we have undertaken.

10 A321-200P2F conversions for Vallair was also announced. We also announced a letter of intent that we signed, though not yet a contract, with the Guangdong Aerocity Holdings, Ltd. For 10 A320P2F conversion, and we are very optimistic that, for the A320 program, we'll be acquiring a new -- a launch customer very soon.

A quick update on our A330P2F program, passenger-to-freighter conversion program. The second aircraft for DHL was redelivered in the quarter. And our marketing efforts for this -- at this program, as well as the A320, A321P2F programs have generated new leads, as I've just shared.

Moving on to Electronics sector, we had an equally strong quarter of contract wins, many of them which are in the Smart City offerings areas, including real electronic solutions, smart sensor network for automatic meter reading and Smart Street Lighting solution, satellite communications and public securities such as an integrated counter-drone system.

These new wins, $510 million for Aerospace and $635 million for Electronics, contributed to our order book ending the quarter with $13.4 billion of order book, a very strong level. And we expect to deliver about $3.2 billion in the remaining months of 2018.

Now beyond airshow and new contracts, we invested in Azendian, a Singapore-based data analytics company, taking a minority stake in the company that will allow us to access data analytics technologies and resources. And these investments supports our strategic focus to enhance our data analytics capabilities and enhance the smart data analytics platform that we have produced for developing suites of AI tools with machine learning capabilities.

This is the second company that our corporate venture unit has invested in, and it continues to actively scout for technology companies to invest in and to partner with to cocreate technologies or innovations for our business. And we do have a healthy pipeline of prospects in our corporate venture unit.

We also signed a collaboration agreement with PBA, which is a Singapore-based robotics company, leveraging our complementary robotics and autonomous capabilities to offer logistics automation solutions to address business needs of the manufacturing sector. Our proven technologies, like analytics-driven airport operations, command systems and security solutions that promote safe, secure and efficient airport operations, will also see expanded opportunities. As for export -- as we now have formed a consortium with Surbana Jurong and Changi Airport Planners and Engineers to participate in overseas airport development projects. Now these are just some examples of how we leverage industry collaboration for growth.

Now on a slightly different note, the unfortunate Southwest Airlines engine failure incident has triggered airline regulators, FAA and IASA, to issue emergency air worthiness directives calling for inspections of fan blades on the CFM56-7B engines. Now but that's different from an engine overhaul. There's a lot a difference. An increasing volume of CFM56-5B and 7B engines are due for scheduled maintenance. We have already seen an upward trend for these engine shop visits even before the Southwest incident. Our facilities in Singapore and China are near full utilization, and we are ramping up capacity to meet the demand.

On our China specialty vehicle business. Now moving on to Kinetics. JHK has filed a bankruptcy petition in China, which essentially is a liquidation process, a continuation of what we started at the end of 2016, so as to avoid further cash outlay by the company, as it was not able to dispose its assets, land and buildings, despite best efforts to secure buyers. As you know, we have fully written down our investments in JHK back in 2016, and we do not expect further financial impact from this development. So this is just a continuation of the process that we started in the fourth quarter of 2016.

And you also learned of our 5-year plan during the recent Investor Day. We gave you insights as to how we put all our businesses together and how we are taking a disciplined approach in putting our resources around higher growth areas to achieve our targets, and I will not repeat what we have said at the Investor Day, it's fully available online, but we are continuing to move much towards that those 5-year goals.

The year, it is still very young, so we'll watch our results and provide appropriate updates as the year progresses. In any event, as I said, we remain committed in our pursuit of long-term growth.

So on that note, I'll finish my prepared remarks. We'll take questions.

[Sy Feng Chong, executive]

Yes, anyone? Anyone? Yes.

[Glenn Ng, analyst]

It's Glenn from DBS. I've got 2 questions. First one is one more on accounting-wise. The SFRS adoptions. And I guess a lot of people are looking at SFRS 15 as well. Just wondering, what are the key things and the material things that we should be looking at? And does it affect some sectors more than others? I'm thinking on a Q-on-Q. Does it affect how we look at margins, revenues, et cetera? And second question is any update on the USPS contract? Yes, that's it.

[Sy Feng Chong, executive]

Yes, I think Cedric can take the first question, and then I will give a lead-in, and Shiang Long can take on the second question.

[Cedric Foo, executive]

Yes. The -- as you know, Singapore adopted the IFRS 1 and IFRS 15, and we adopted it as of 1st January 2018. And basically, what IFRS 15 is about is that you have to recognize revenue according to the percentage of completion, yes, rather than the customer contracts that you have, which is based on milestones. And there are also some features about the termination of contracts that has to be taken into account. So as you can see, we had, at the revenue level, improved for 1Q '18 compared to 1Q '17 to the extent of 9%, yes? But that is comparing to a restated 1Q '17, as if we had implemented this revenue recognition system as of 1st January 2017, so as to -- we will compare apple-to-apple. If -- I think that's the right way of comparison because you're applying the same standard to both period, and that's why the accounting standards we passed were restated. But if you're curious about it, then the impact on -- of the IFRS 15 on first quarter 2017 results would have actually raised the revenue by 28-something percent -- $28-something million. So the impact is not very large. So our $1.6 billion is for -- $25 million, $28 million also. So in net profit level, it's much smaller, yes. So it's not very significant in our case. But I would suggest that, that is not the right way to look at it because you're not measuring apple-to-apple. Because in the 1Q '18, we have also deferred some revenue by applying the standard. Yes. So the right way is as we presented it.

[Glenn Ng, analyst]

[indiscernible] On the Marine segment?

[Cedric Foo, executive]

Elec, elec.

[Sy Feng Chong, executive]

Yes. Largely from Electronics. Now USPS, of course, the testing continues -- just to be very clear, we are 1 out of 5 or 6 competitors. Ours is the only electric hybrid version. We don't expect the whole contract to be given, in our view, to one participant. If there is, maybe there's a potential for them to award part of it for electric, just to diversify. But I think we need to make sure that we'd see this in the context of the scale. We don't expect this to be a big significant contract to any. Although, if we were to be awarded, I think it will be positive. But I don't expect this whole contract to be given to just one participant. Yes. So let me just let Shiang Long take on the specifics here.

[Lee Shiang Long, executive]

At the operation level, so we have delivered 6 prototype last September. So originally, the schedule is testing it for 6 months but the evaluation trial period has been extended. So they will finish the testing only in July this year. And then after that, they will be calling for RFP, and the result likely to be end of this year, awarding of contract, or even early next year. Yes, some delay in the overall schedule.

[Sy Feng Chong, executive]

So as -- when the RFP comes out, we also need to learn from the building of the 6 prototype to see if, economically, what is the best mathematics that we need to do before we decide how to address this. But again, we will have to wait and see more of this, but we don't expect this one big contract to be awarded to any single participant. That's at least our view, okay? At best, I think, for Hackney a fraction of it because it's the electric hybrid version. Any other question?

[Unknown Analyst]

I'm [ Tully ] from UOB. I have 2 questions, and the first is regarding the Marine and the second one will be about the Aerospace side. So on the Marine side, I noticed that you actually have a general revenue improvement for the Shipbuilding side. But then because you've changed your reporting standard from PBT to net profit, so I can't really tell whether there was a Q-on-Q improvement within the Shipbuilding margins. Could you perhaps enlighten me about whether -- how it's actually changed on a Q-on-Q basis? The second question is on the Aerospace side, specifically within the components, engine repair and overhaul. I think you mentioned that you said there's an upward trend of inspection. And I'm a little confused whether -- why the -- there's a Q-on-Q decline on the revenue side. I was expected it to probably trend up. Perhaps, you can enlighten me whether I'm viewing this wrongly.

[Sy Feng Chong, executive]

This is for?

[Unknown Analyst]

Aerospace.

[Sy Feng Chong, executive]

Aerospace. All right. I'll let Sing Chan take on the Marine one, and then, Serh Ghee will take on Aerospace. Sing Chan?

[Sing Chan Ng, executive]

Maybe just to be clear. When you say Q-on-Q, you're referring to 1Q, 4Q or 1Q, 1Q?

[Unknown Analyst]

1Q-4Q.

[Sing Chan Ng, executive]

Oh, 1Q, 4Q. All right. Yes, you're right. There's an improvement, 1Q versus 4Q. On -- and it's just a case of -- no, we haven't got new contracts. But based -- we recognize revenue based on POC, right? So we completed more in 1Q, for example. Now on the change from PBT and -- to PAT, your question is, really you cannot see the trend?

[Unknown Analyst]

As in -- I'm trying to understand your -- whether -- your margins have actually improved over that period. I can see that there's a loss still. But 4Q, you're probably had some one-off inside, right? That's why it was a substantial loss. So versus 1Q, was there any one-offs inside? Or...

[Sing Chan Ng, executive]

All right. Vincent explained 1Q 2018. So in 4Q, I think, similarly, we did explain the results of the Shipbuilding segment. It is from additional costs we provisioned for the 2 ConRo projects. That was already mentioned by Vincent.

[Sy Feng Chong, executive]

Okay. Serh Ghee?

[Serh Ghee Lim, executive]

Maybe I give you a little bit of background actually on the Southwest incident. This is actually a second incident. The first incident happened in 2016, a fan blade also did break but there wasn't any casualty. At that point in time, the authority did not issue an airworthiness directive, which is mandatory. They only issued a service bulletin, okay, which is not mandatory. We had to do certain inspection. So after the second incident, okay, the authority actually issued AD, which is airworthiness directive, which mandated that the airlines got to inspect the fan blade of certain -- of engine that have -- if I can remember correctly, that got more than 50,000 cycle. So the inspection is an ultrasonic inspection of the fan blade, okay? For an engine, it's a set of 24 blades. And that inspection could be done [ easily ] by the airlines, where they need not actually drop the engine. If there are blades that we detect certain cracks, the airline can also actually drop engine, replace the blade themselves, and they can actually do a ground run. So the engine doesn't come back to the shop. So there isn't any uptick, insofar as for the so-called the [ MRO ] shops, because the airline can actually do it themselves. So that explain why you say that there isn't any uptick. Then, yes, your question is, why 4Q last year is higher versus 1Q this year? 4Q, there was an impact on the POC, okay? There was an uplift from POC, and that explained why the revenue in the CERO is higher compared to 1Q. It's not due to increase arising.

[Sy Feng Chong, executive]

POC means percentage of completion. Yes. So the new accounting standard...

[Unknown Analyst]

So if you were to basically exclude that, how would it look like on a Q-on-Q basis?

[Serh Ghee Lim, executive]

I would reckon that it's probably $30 million to $40 million.

[Sing Chan Ng, executive]

Okay, there's a question here. There appears to be further delays in deliveries of the ConRo vessels in the U.S. Could you detail the challenges you are facing and what is the latest status of the vessels? Just to -- I think Vincent explained briefly the challenges. He mentioned more than stringent -- more-than-expected requirements from the authorities and also the challenges that we face that we have with the equipment as we commissioned the LNG systems. So just very quickly, this is a Container Roll-On/Roll-Off vessel. It's dual fuel. In other words, it can take diesel oil, it can also take LNG. So this is the kind of ships which we think will prevail in the foreseeable future as shipping companies become more conscious of protecting their environment as they seek greener solutions for their operations. And of course, it's also regulated by countries to -- for the ships to burn cleaner fuel. So you can go on LNG, you can go on -- continue to go on heavy fuel oil, but then you install scrubbers to take out the NOx and the SOx. And of course, the refining industry is also working on what we call low-sulfur fuel. So that's what a dual fuel ConRo is, and I -- and when it comes to the LNG system, oil propulsion system. So as I say, you can take MDO, diesel oil, you can take LNG. We've completed the trials for the ship to take on diesel oil. So those trials passed with flying colors. Then we had to then test LNG system. So as we commission, because this is the first of class, we came across issues with design, all right, but not a very big design issue but we have overcome that, as Vincent said. So then we went on to test the equipment. We also encountered some issues. But the good thing, as Vincent had said, we know where the problems are. We have fixed them. So as we speak today, we are in the final stages of rectifying those issue maybe a day or 2, and then we'll continue with the testing of the LNG system. So on the expected delivery date to the 2 ConRo, I just repeat what Vincent has said, one would be in June and the other one would be in 3Q 2018.

[Sy Feng Chong, executive]

So first, we had to meet more regulatory requirements in terms of the process, the testing, the procedures. And once we have addressed that, then we started the -- testing the system. That's where we found that there were some challenges with equipment, and we have resolved them. And we are quite hopeful that, in the month of June, we should be able to deliver the vessels. Now Sing Chan talked about LNG, dual fuel vessel -- LNG, diesel oil, dual fuel vessels having expected higher demand, partly because, obviously, the ship owners will be more environmentally conscious but also, importantly, regulatory requirements. There are emission control areas in North America, in Europe that would cause ship owners to be using cleaner fuels in those areas. And especially for areas that are within the LNG grid coastline, it would be economic to have vessels to run also on LNG fuel because it's accessible in terms of the fuel supply. So we believe that this is going to be a growth segment for us in the years ahead. So it's good that we have now accumulated the experience to take down -- take on such newbuilds. Okay? Yes.

[Horng Han Low, analyst]

I'm Horng Han from CLSA. I just want to clarify the earlier comment made by the management, Vincent, yourself, about the facilities in China and Singapore enjoying near full utilization on the back of inspection of fan blades and engine checks coming through to Asia. Can I clarify the utilization figure that is near full? Is that specific to the entire facility in Singapore and China? Or is that only with reference to the capacity allocated for engines related? That's my first question. Second question will be, it seems like we are in the early stages of engine checks for your fan blades as well. When will this cycle pick up? 3, 4 years later? Some clarity will be appreciated.

[Sy Feng Chong, executive]

Okay, so let me just clarify what I said. It's about the amount of resources that we have that is near full, but which means that we have -- just have to put out more resources. It's a good problem to have because, for a while, we said that the ramp-up of CFM56 engine shop visits have been -- kind of moved to the right. We are seeing them coming now. So it's a good thing for us. And we are, right now, not capacity-constrained in terms of facilities, but then we are building the team to take on more work there. So I'll let Serh Ghee.

[Serh Ghee Lim, executive]

I just want to clarify. And as I explained, the uptick in the shop visit is not due to the fan inspection.

[Sy Feng Chong, executive]

Yes, yes.

[Serh Ghee Lim, executive]

I mean, the fan inspection could be done by the airlines themselves. So the -- what Vincent had explained is that the CFM-56 engine is very reliable. So the actually forecast -- rather predicted shop visit by the OEM did not materialize and continued to move to the right. But we are starting to see, in last year and this year. In fact, most of the -- actually, most of the shops right now, not just outside, okay, elsewhere, they are actually very full. And to the extent that the actually -- shop actually stopped taking in engine. And that is a -- it's good for everybody. But right now, there's also the capacity ramming up the people.

[Horng Han Low, analyst]

Yes. So pricing power is returning. You are probably in the early stages of a 3-, 4-year cycle when it comes to this particular CFM-56 engine change. Is a 3-, 4-year duration fair to assume?

[Serh Ghee Lim, executive]

Yes, yes. I would say that -- I mean, customers always have a much more power than the shops. So long as there are a lot of shops in the market that's competing for work, I won't say that we have a lot of pricing power.

[Sy Feng Chong, executive]

It's not a walk in the park. I mean, it's good to see the volumes coming but, of course, we have to compete for the work. And it's generally -- the general view is that the ramp-up would take the peak to somewhere in 2022, '23 for CFM-56. That's the general market view. So there's still some room for 4, 5 years. For the pickup, uptick in engine shop visits, that's generally -- but of course, how it pans out, we've got to see. But that's generally what the industry pundits are saying in terms of the peak demand, yes, for the CFM-56 engine type.

[Serh Ghee Lim, executive]

And if I may add also is that, actually, the year for the aviation industries start up with a lot positive actually. The pax traffic and the cargo traffic is on a historical high. That means that, actually, there is a lot of demand for relief, okay? And you know that the Neo and MAX struggling to a certain extent because of certain engine supply chain issues. So the requirement of aircraft has been actually shifted also to the right, okay? So that, in a way, is positive also for the [ armor ] service provider, in the sense that older aircraft are kept longer. And when an older aircraft kept longer, I mean, it's just -- not just the aircraft, but it's all the components and engine. So there could be a possibility that it will be stretched, depending how the Neo and the MAX turn out.

[Sy Feng Chong, executive]

Okay, there's a question on ST Engineering share price movements today, and asking me to explain. I think what I can -- my management team can talk about is to share with you our healthy first quarter results and the factors contributing to the results and contractual wins that we have acquired of -- scored in the first quarter. What we can also share with you is our 5-year growth plan and that -- the Smart City, defense export segment continues to be focused growth areas for us, and we are making good progress. We also want to, of course, continue to strengthen our core businesses as we have articulated in our Investor Day. We have given you some 5-year plan targets, and we think that is a very balanced set of goals that we think are reasonably achievable, and we will give progress updates at appropriate junctures. I can't comment on a single day of price movements here or there. But I think, focus on our fundamentals, the results that we've achieved and the key drivers driving our results. And I think that is critically important, yes, which is what we're attempting to share based on our press release and of course to this Q&A. Yes.

[Unknown Analyst]

So I'm [ Kenny ] from Macquarie, and I have one question about the heavy polar icebreaker. Are there any plans to go forward with the next few phases of that project?

[Sing Chan Ng, executive]

The heavy polar icebreaker is a big project. We are at -- currently assembling a team which comprises, of course, internal resources as well as external resources. At this juncture, we will invest in additional resources to put a bid. There is still some way to go before the deadline, so we will track and monitor the preparation as we go along. But at this juncture, yes, the company has decided to go in for Phase 2, which is really to submit an offer for the design and the building of the ships.

[Sy Feng Chong, executive]

Well, maybe let me just go back to the -- thanks, Sing Chan, to the last question on company performance, share price movements. Our Investor Day presentation materials are available online. We also shared excerpts of Investor Day materials during our Annual General Meeting just a few weeks ago. But let me just recap because we have members of the public dialing in. I just realized that maybe you might not have access to the website for those Investor Day materials. We expect our Smart City business today, which includes public security -- public and cybersecurity, public security, smart environment, smart security, smart environment and smart transportation, Smart City 3 verticals, plus the horizontals, which much includes digital connectivity, Internet of Things. Today, our total revenues coming from the Smart City area is about $1 billion. We expect the revenue to at least double by 2022, 5 years. We also said that 2/3 of this growth will occur outside of Singapore in global markets. While we pursue growth, we also pursue efficiency steps, and we expect our net efficiency capture would be cumulative $150 million over the next 5 years through a combination of streamlining our operations, having shared services to form the foundation for us to capture growth. We also say that we expect, outside of Smart City, the rest of the business to grow at about 2 to 3x global GDP growth rate on a CAGR basis over the next 5 years. So that's kind of the -- what we wanted to share, or rather what we have shared during the Investor Day and during the AGM. So we also expect that during this time, our net profit will grow in tandem with the revenue growth. That's what we have been saying. So that for those who have dialed in from the webcast, you can download our materials from our website. It is actually quite comprehensive from our Investor Day presentation. But again, this is kind of a 5-year plan. We've got to just keep moving towards our 5-year goals and targets focusing on the -- those growth areas. Any other questions?

[Sing Chan Ng, executive]

I have a question here. Sorry, apologies, I didn't sort of state the name of the person and the company who asked the -- where the last question was asked. And so the other question was Gerald Wong from Crédit Suisse. I have another question from Rachael Tan, UBS. But maybe before that, I think I probably didn't answer [ Tully's ] question a while ago, because he said we switched from PBT to PAT, so you couldn't see the trend. So if you look at PBT, PBT, 4Q, 1Q. In Shipbuilding, 1Q 2018, the loss is lesser, all right? So I think in the last few -- somebody asked a question, if we had not the provisions for the 2 ConRo, would the shipbuilding segment be profitable? So I answered yes for 4Q. And for 1Q today, the answer is still the same, yes. All right. After you have tested the LNG portion of the ConRo vessels, are there any other levels of testing that you have to undertake? I've earlier explained that before the tests of the LNG system, the vessel actually went for sea trials like any other normal ship, but burning marine diesel oil. And I also said that we -- the trials were conducted successfully. So once we have tested the LNG systems while the ship is in the yard, so what we call yard acceptance trials, or sometimes we call it sea -- harbor acceptance trial. Once that is done, that is completed successfully, then the ship will go out only to test the LNG system. So there's no other major system to be tested during the sea trial because they've already been tested successfully.

[Horng Han Low, analyst]

Horng Han from CLSA again. I'm -- I was just recently -- there was -- it was reported Singapore government plans to install surveillance cameras with facial recognition technology on top of lampposts, at the same time they can detect water, air quality, et cetera, et cetera. Is STE well positioned for this?

[Ravinder Singh, executive]

So let me take that question. In our industry brief, and also I think in previous engagement, we have shared with -- I think with the analyst that ST Electronics, as part of the Smart City segment, we have developed IoT solutions. And in fact, we have already deployed IoT Smart City solutions for water meter reading, [indiscernible] water meter reading, and also to control lighting solutions. So the -- in the IoT segment, we have actually all the components necessary to do some of these new Smart City projects. So besides lighting control, reading a water meter, electricity meters, now there's a trend towards having intelligent lampposts, and lampposts that can -- besides controlling the lighting and also detect -- say, have environmental sensors, and then going all the way to having video cameras and so on. We have already done some projects together with lighting control in some cities where they have had, for example, put in snow sensors. We have put in pollution sensors and even noise sensors. So from a technology and solution point of view and a track record point of view, we are actually well positioned to take on some of these projects. And we are monitoring them very closely and participating in the request for proposals. And when this turn out, we will certainly want to be an active participant and try to win some of these projects. So I have a -- if I can continue. So I have a question here from Joshua Lee, and the question is, why did EBIT margin compress to 10% from 17% in the fourth quarter of last year? So overall, the Electronics sector has done well from a revenue and profit point of view. If you compare 1Q last year to 1Q this year, the EBIT margin -- EBIT has increased actually quite significantly by 33%. So the reason why the margin has compressed over the, say, last quarter, I think firstly, our business is driven by many cycles. Some are driven by annual cycles, some are driven by project cycle. So it's mainly because of the sales mix we have. And for this quarter, the sales mix is such that, although revenue's gone up, the EBIT margin has gone down. And because we do many projects and we are driven by many large and long term, multiyear projects in the electronics sector, we have to look at our performance more on an annual basis where some of these variations sort of even out when you look on either quarter-to-quarter by season same year or year-by-year performance.

[Sy Feng Chong, executive]

Thank you, Ravi. So in essence, we are not really of concern at this time because of the cyclical nature and project dependency of the business cycle across the year. And Electronics actually has done very well in the first quarter. But we'll continue to watch this space and provide updates for the group as time passes.

[Unknown Analyst]

From [ Tully ] from UOB again. I have one question regarding your U.S. Marine Corps contract. I understand there was some news recently that the results might be -- actually be seen in June. But I understand that your guidance was for 2 half '18. Has there been any -- is there -- would you like to comment on that remark?

[Sy Feng Chong, executive]

It should be about July. July, so we said 2 half '18 because sometimes, the time line, government may adjust and so forth. But as we know now, the result -- 21st June, but then the -- actually, what may be July. And so it's that -- this kind of time frame. Yes. Okay. But we're subject to the government's U.S. Marine Corps' internal process, so we'll see. But this is the expected time line.

[Unknown Analyst]

21st June is result and award is in July?

[Sy Feng Chong, executive]

Thereabout, the time frame.

[Lee Shiang Long, executive]

Yes, Thereabout. Yes, that's right. Yes. Announcement is 21st June. Yes.

[Sy Feng Chong, executive]

We are waiting in anticipation, just like you, obviously.

[Unknown Analyst]

Any indications of who's going to win?

[Lee Shiang Long, executive]

Yes, let me answer that, okay? Which I have no good answer. But thanks for the question, and I just link all the question together. There are 3 questions on this. So this is Gerald Wong from Crédit Suisse. Okay. The question is, could you provide an update on the tender by U.S. Marine and as well as U.S. Postal Service? Which we answered the U.S. Postal Service. So another question is from Joshua Lee from Deutsche Bank. When in June will the U.S. Marine ACV winner be announced? So the actual announcement will be on 21st June. At this moment, there isn't any indication that it will be changed, so the announcement will be 21st June but the award will be sometime slightly later. So far, in terms of the evaluation, we are doing well. We're putting whatever resources that we could, and our team is a very strong engineering team and we partner with SAIC, which is a very strong partner. The thing is that we do not know how the other team is doing because there is competition, and the U.S. Marine Corps and the government is managing it very well in terms of the information management. So we won't have any idea yet, so we have to wait until the last moment.

[Sy Feng Chong, executive]

Okay. Well, this international competition, and we compare it with Olympic Games because we are talking about competing with best in the world. And along the way, as you know, we have eliminated certain world-class competition. So we're now to the final 2 for the U.S. Marine Corps business and the project. So we have given it as best as we could, given it our best shot, so we just wait for the results to come. It was a very collaborative effort with our partner, SAIC. It's a lot of good work, and we hope that, in the next 2 months, we'll share more information as they come. We are also competing for the engineering manufacturing development project for the Mobile Protected Firepower for U.S. Army using our next-generation armored fighting vehicle chassis coupled with a 105 mm gun from another supplier, again in partnership with SAIC. That's another program that we're competing for the U.S. -- in the U.S. And there are some other prospects that in the pipeline. Of course, when we get to global competition, this is a -- requires a lot of preparation, a lot of partnership. And I think all the years of experience in the defense business is -- has put us in a good state to compete for those programs. Yes. And then, of course -- okay. Serh Ghee we've got 3 questions, 3 slips. Now we talked about USPS, and I want to say it again. At best, we expect a fraction of the project. But again, the RFP is going to come out, and we're going to learn from the prototype process before deciding how best to address the RFP for the USPS project. And obviously, something that we have to wait and see because the project time line, as Shiang Long said, has been moved to the right a little bit, yes?

[Lee Shiang Long, executive]

Yes, that's right.

[Sy Feng Chong, executive]

Okay. So maybe Serh Ghee?

[Serh Ghee Lim, executive]

There's a question from Siew Khee, CIMB. Why did the EMS net profit come down by 20% year-on-year? How does this compare to the 4Q 2017? Okay. The EMS includes EFW. Okay. Just -- as just a recap, okay? EFW is our facility in Dresden that do the P2F as well as the floorboard, okay? So we are starting up another facility in Germany, okay, Kodersdorf, and that start-up cost in first Q 2018, that actually drive lower -- reduced margin as far as the EMS is concerned. And we are also currently in the learning phase of the commercial program. That's the reason why, again, if you compare it year-on-year or the preceding quarter, you will see a drop in the margin. Yes, another question from Rachael Tan from UBS. Do you expect demand for the P2F conversion to shift to the right due to the higher feedstock prices? Okay. So for our P2F, we have P2F program, okay? One is the 330 and the other one is the A321, okay? Rachael is quite correct in in a sense that, just now I did mention, that the pax traffic, cargo traffic's at a historical high, and people are keeping the older aircraft, okay, until -- let's say, for the 330, when the 330neo comes on -- is stabilized, Neo come in, the 350 stabilize. Then you will see actually the feedstock pretty tight, okay? And obviously, that would actually drive up the residue value of the aircraft. It's not so much the price, actually. Actually, it's -- the 330-300 is a very, very good freighter platform, okay? It is -- now it's the availability of the aircraft. And I'm very sure that the freight operators will still think that it has a good business case if they can get their hand -- the whole of the 330-300. For us, we're probably a little bit fortunate in a sense -- I say for us because I can touch on [indiscernible] platform. In a sense that we have the launch contract from DHL, which is 8 [indiscernible] plus 10 option. And actually, this is the phase that's -- next 2 years where the feedstock is pretty tight, but at least we can string up a [ north of 10 ] line, that -- then that way you can see the efficiency. I know that -- for a fact that 67, the feedstock actually is very, very tight. And that's why you see gaps, okay, and that affects some of the players like the Israelis and the Boeing. For the 321 and 320, 321, we have a launch. We announced it during February. Again, I would say that we're also a little bit fortunate in the sense that it's 10 aircraft, okay. The first aircraft will be inducted, as planned, in third Q of this year. And our launch customer have actually secured 6 aircraft. And with that, actually, you can actually also string up to a certain extent for the next 1.5 years, okay, [ north of 10 ] line. Okay? But I do see the feedstock of A320 will be a little bit much better. As Vincent said, we hope to secure a launch pretty soon. And the 320 first induction will come in -- if we do secure it, it will be 1 year after the 321. That'll be September next year.

[Sy Feng Chong, executive]

Well, there are a few questions for Sing Chan, and then also a question from Ravi, so I'll maybe ask Ravi to address the question, if you're okay. And then after that, to -- back to Sing Chan.

[Ravinder Singh, executive]

So there's a question from Lim Siew Khee, CIMB, and the question is, can a PBT margin of 8% in 1Q 2018 improve further in second half of 2018? So you look at Electronics sector, if you look at our results, both from a revenue point, profit point and also from an order book point, we actually have a very good start. And typically, in terms of the PBT margins, we aim to achieve at least about 10%, as we have done in the previous years. So when we look at the project margins, gross margins we are getting, they are generally consistent. So we are -- I think we are working towards improving the PBT margin for the rest of the year. And I think we'll do better than where we started this quarter. But if you compare this quarter with last -- first quarter of last year, you see we typically have -- we start with PBT margin of about 8%. So I think we're on trajectory. We should work towards a higher PBT margin by the end of the year.

[Sy Feng Chong, executive]

Yes. But before I hand the mic over to Sing Chan, I just realized that I didn't read out the name of the member of public who asked the question earlier on. So Jason was the presenter. Jason, thanks for asking me that last question. Yes, Sing Chan.

[Sing Chan Ng, executive]

All right. I have a question here from Lorraine Tan, Morningstar. Question is, have the ConRo redesign cost been expensed as incurred or will most of this be reflected when the vessels are delivered? The system that we have is, I think that's probably the same for a lot of companies, we will, every month, we will do what we call a scan of the costs that we have incurred plus the cost that we think we're going to incur. So we have what we call the estimated cost completion. So if we think that there will be additional cost that we're going to incur going forward but we've not provided for it, then we will make the necessary provisions. The second question, again related to the ConRo, is from Siew Khee, CIMB. Can I just confirm that there were provisions made for ConRo in 1Q 2018 but just less versus 4Q 2017? Yes.

[Lee Shiang Long, executive]

Well, there's another question from Siew Khee, CIMB. Why is there a loss in munition in the weapon for the quarter? And is this a one-off? Yes. There are some shifting of the project delivery schedule. So we have a strong order book. So the delivery has been shifted from the 1Q to 2Q and 3Q. So we expect better performance in the second half of '18. Yes. Thanks, Siew Khee.

[Sy Feng Chong, executive]

Well, thank you, Siew Khee, for asking the questions for all 4 sectors. Thank you. Any other question?

[Cedric Foo, executive]

I have an accounting question from Rachael Tan of UBS. She asked if there's a reason why, for segment results 1Q 2018, that we only provided net profit rather than PBT. So our direction going forward is to focus the results on net profit because that's what flows through shareholders. But if there is value in adding PBT line for the segment results, we will certainly consider it as well going forward.

[Sy Feng Chong, executive]

Well, we do provide a lot of information in the package. You should be able to access in our PowerPoint as well as SGX net postings. Okay? Any other questions before we put this Q&A session to a close? Okay. If not, for those who can stay for lunch with us, I appreciate it, and have a good afternoon on Friday, and thank you for joining us.

[Cedric Foo, executive]

Thank you.