Singapore Technologies Engineering Ltd

SGX:S63

Earnings Call Transcript 2018-Q2

[Cedric Foo, executive]

Thank you. A very good morning to all those who are here for the ST Engineering Second Q '18 Results Presentation, and also a warm welcome to those who are -- who have dialed in on the webcast.

So I will cover the following topics. First, group highlights, a little bit on sector performance and then the outlook. All these materials are available on our website, so you can refer to them as I present.

The first slide is a summary of our results. I think, all in all, the group delivered good results for 2Q 2018. Revenue was down 3% at $1.65 billion, and that's largely because, in 2Q 2017, we had a one-off event whereby we adopted a modification of the revenue recognition estimates and thereby boosted the 2Q 2017 revenue. So compared to that baseline, revenue has dropped, but if you back that out, revenue has actually increased for 2Q '18.

EBIT is up, mainly due to better sales mix, and also we don't have, this time around, the problems with the Crowley ConRo vessels. The PBT is up 4% year-on-year, and this is largely because of higher EBIT and also because of the onetime cost, higher interest rates, higher interest expense related to the early redemption of the MTN.

So let me elaborate a little bit on this. If you recall, we have an MTN program issued about 9 years ago where we issued a bond of about USD 500 million with a fixed coupon rate of 4.8%. This bond was not due until July 2019, but in June, we issued an irrevocable notice to redeem them in July 2018, this year. The main purpose is that we want to reduce the capital employed in our business because a large part of these bond proceeds were invested in asset under management or bonds, which is not really directly related to our business. As a result, we basically discount back the principal of USD 500 million, which was to be due in July '19 as well as 2 -- twice a year interest payments of USD 12 million each. So roughly SGD 33 million of interest and the principal of USD 500 million were all discounted back, and we paid out something like USD 511 million. So the USD 500 million knocked off the principal, the USD 11 million of interest expense is actually about SGD 15 million, which we took a hit now. But in consideration for that, we will be saving about SGD 33 million interest rate over the next 12 months. So this is a one-off event to manage our capital structure.

Net profits is up 10% at $117.5 million. For first half 2018, revenue is up 2%, EBIT is up 12%, PBT is 6% up and net profit stood at $235.2 million, or 14% up. Our order book remains strong and robust. As of 30th of June, our order book stood at $13.4 billion, and about $2.7 billion will be delivered in the second half of this year.

Next, the group revenue breakdown. Commercial revenue is 72%; Defense revenue is about 28%. Aerospace contributed 43% of the group revenue; Electronics, 31%; Land Systems, 16%; and Marine, 9%.

In terms of geographical location of our customers, Asia contributed 61%; the U.S, 21%; Europe, 10%; and others, 8%.

Let's look a little bit more in detail for the revenue breakdown by sector. Aerospace was up 12%, and this is largely due to a very strong CERO business relating to engines, MRO in particular. Electronics is down 10%, as I explained before. This was largely due to the absence of the one-time increase in revenue in second quarter 2017 for revenue -- modification of revenue recognition. Land Systems is down 11%, the Auto and the M&W sector was a bit weaker. Marine was down 9%. Shiprepair was also a bit weaker.

On the first half basis, revenue for Aerospace was up 10%; for Electronics, 5%; CSG business did well, and Land Systems is down 4%; Marine is down 13%; and Others is down 55%. And this is largely due to the contribution of our unit in the U.S. called Miltope, which is in the business of providing ruggedized computers. A lot of these orders have been shifted to the right, so you would see better sales performance in second half this year as well as overflowing to 2019.

Next, profit before tax. For second Q 2018 versus same period last year, Aerospace is up 11%, so a very strong performance, partly helped by the sale of our share in an associate's company, Airbus Helicopters. Electronics, a very robust 26% improvement in PBT, and this is due to favorable sales mix as well as lower operating expenses. The Land Systems has a drop of 16%, on a first-half basis is 9%, and this is due to higher operating expenses. In the Marine business, PBT turned from a loss of $8.1 million in second Q last year to a profit of $10.1 million. And in the first half, PBT improved dramatically from $0.9 million to $19.3 million in first half this year, and this is largely due to improved operations, especially in Singapore, as well as lower provisions for the Ezra bad debt which was incurred first half 2017. For Others, there is a bigger loss of $30 million compared to $2.5 million in 2Q 2017, and this is largely due to the redemption of the MTN, $15 million there. We also took proceeds, liquidated the assets under management, which are mainly in bonds, and incurred a crystallized loss of $4.4 million. And if you looked at it as bond prices -- as interest rates rises, which is the popular view now, bond prices would likely suffer, and therefore, actually, a redemption is avoidance of what I think to be even poorer performance if we had kept the bonds.

Next, PBT margins. I prefer to look at them on a first-half basis rather than quarterly fluctuations. So if you look at the right of the chart, all sectors have PBT margins that are either similar or better. So as a group, 9%, same as same period first half last year; Aerospace, 13%; Electronics improved to 10% from 8%; Land Systems is flat; and Marine, of course, turned profitable at 6%.

On a group net profit basis, the explanation is quite similar to PBT. For Aerospace, is up 26% at $66.6 million; Electronics, up 22% at $46.7 million; Land Systems down slightly at $20.4 million; and Marine turned profitable at $9.2 million; Others, as I've explained, SGD 15 million from the MTN redemption, which will be kind of cropped back or recovered -- more than recovered in the next 12 months. And also the asset under management, which we liquidated to redeem the MTN, that's about $400 million impact. All in all, despite the onetime MTN and AUM losses, so that we can save interest expenses going forward for the next 12 months. The group turned in a respectable 10% improvement in group net profit at $117.5 million. For the first half, it's a 14% improvement at $235.2 million.

Net profit margin, again, I prefer to look at the right side. For the first half versus first half, all sectors are up, the group is up from 6% to 7%; Aerospace, up from 9% to 10%; Electronics up from 7% to 8%; and Land Systems, from 6% to 7%; and Marine, of course, turned a profit to 6%.

Now let's quickly review some of the 4 sectors' top line numbers. Revenue for Aerospace is up 12%; PBT is up 11%; and net profit up 26%. So the CERO business has done well, as well as it was helped by gain from the sale of an associate, Airbus Helicopters. For Electronics, again, revenue is up 10 -- revenue is down 10%, but that is because of the absence of the one-time modification of revenue recognition in the second Q 2017, without which, revenue would be up quite a bit. Most of the one-time increase in revenue in 2Q '17 was due to the Electronics sector, as you recall when we announced the results for 2Q '17 last year. PBT is up 26%, and net profit up a very strong 22%.

For Land Systems, revenue is up -- revenue is down 11%; PBT is up -- down 16%; and net profit, down about 3%, largely due to poorer performance of Auto and M&W, and of course, also higher operating expenses.

For the Marine sector, revenue is down 9%, lower revenue from Shiprepair. PBT though is up 18%, largely because of improved performance from both local and U.S. operations. And net profit is up $10.6 million, which is in line with the increase in PBT.

So finally, let me leave you with the outlook message from the President and CEO. Our Aerospace and Electronics sectors delivered strong second Q 2018 earnings. Order book remained robust at $13.4 billion, contributed by new orders, especially many from the Smart City spaces, which is in line with our strategic thrust. On the whole, we are tracking well on our strategy of strengthening our core business, many leading products as well as actively pursuing growth opportunities in defense exports and Smart City projects.

So with that, I will invite the panelists to take questions. Thank you.

[Sylvia Lee, executive]

Thank you, Cedric. May I invite Cedric to join our President and CEO, and Presidents of our 4 business sectors on stage for the Q&A session, please? Let me do a quick introduction of the team. From your left, Mr. Lim Serh Ghee representing Aerospace; Mr. Ng Sing Chan for Marine; Mr. Vincent Chong, President and CEO of ST Engineering; Mr. Ravinder Singh, representing Electronics; Dr. Lee Shiang Long from Land Systems; and you've met Cedric.

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

[Sy Feng Chong, executive]

Okay, a very good morning to all of you who are here with us this morning at ST Engineering hub, and to those who are joining us via webcast. Now I'll sum up broadly what Cedric has just shared. Now despite lower revenue for the group, profits were up versus second quarter 2017 -- in second quarter 2018, profits were up versus same quarter last year, largely due to better sales mix; the absence of additional cost provision made for Crowley ConRo project, which we did last year, same quarter; and the disposal gain of our stake in Aerospace JV, Airbus helicopter, offset by the one-time impact of the early MTN redemption, which Cedric talked about. That's a short-term optimization step for capital structure, but we maintain our flexibility and ability to finance our investments as the opportunities come.

Now let me just give more details on the factors driving our second quarter results. We had better performance from the Aerospace sector, particularly the CERO business group. We enjoyed higher engine output, mainly as a result of more engines streaming in for MRO work. The absence of onetime higher revenue recognition for the Electronics sector, which Cedric talked about, which we highlighted in 2Q of 2017, largely driving the year-on-year revenue increase that quarter in 2017 and that affected the relative results of our Electronics sector in 2Q 2018. If we exclude that impact, the revenue for the sector would have been higher, and the group revenue in second quarter 2018 would have grown by mid-single-digit percentage point year-on-year versus the same quarter last year. We also had lower project deliveries in the Land Systems sector. And for the Marine sector, lower activities in the Shipbuilding operations and naval Shiprepair. On Others, revenue was impacted by Miltope in the U.S., as Cedric mentioned, as sale of this ruggedized computer was shifted to the right and some of them were spilled into 2019.

Now despite lower revenue for the group, net profit was higher as both Aerospace and Electronics sectors delivered stronger earnings in the quarter, 26% and 22%, respectively. The onetime interest cost of $15 million accrued in second quarter of this year for the early notes redemption impacted profits, but we expect interest savings to exceed the one-time cost over the next 12 months.

On our Marine business, the sector remains at the trough of its business cycle. Year-on-year revenue was down 9%, but profits improved as our U.S. operations did better compared to last year. ConRo was delivered on 20th of July this year. So the first ConRo was delivered in second quarter this year. And we expect to deliver the second ConRo in October this year, so in a couple of months' time.

On the U.S. Marine Corps ACV 1.1 program, as you would have read from media news, the Marine Corps selected the competitor's vehicle over our Terrex 2. This decision came after a 1-year trial of 16 Terrex 2 vehicles under the Engineering, manufacturing and development phase. We are obviously disappointed with the decision, and yet, however, to have eliminated global competition and be shortlisted as 1 of 2 EMD contenders for the program in itself is a validation of the maturity of our defense engineering capabilities. Having had our Terrex 2 vehicles rigorously tested for a year by the U.S. Marine Corps, we're evermore ready to take on other global programs as they present themselves. Now this outcome will not materially impact our 5-year plan. And our partnership with SAIC remains very strong as we continue to work together on the MPF program for the U.S. Army. MPF stands for Mobile Protected Firepower, which is a track vehicle which we shared with you early on.

Now U.S. remains a strategic market for our defense exports, and we will take learnings from the ACV 1.1 tender and we move forward from here. Now meanwhile, we're actively pursuing other opportunities with our strong suite of defense systems and solutions, and in fact, in second quarter of this year, we had new success for our small arms export with bigger quantity sales and new market entry for our 40mm grenade launcher and compact personnel weapon.

Now moving on. Our revenue pipeline remains strong as we close the second quarter with a robust order book of $13.4 billion. New contracts announced included $510 million for our Aerospace sector, a notable contract includes the interior reconfiguration involving turnkey solutions for Air Canada. In addition, our cabin interior business area in the U.S. secured a 12-year heavy maintenance contract for its first Airbus corporate jet and A319 aircraft. Our Aerospace business continues to receive accolades, reinforcing its leadership position globally. The sector was voted overall MRO of the Year at the Aviation 100 MRO Global Awards for the second time consecutively. Our leadership team led by Serh Ghee was also named Industry Leader of the Year and MRO Management Team of the Year. These awards were decided by the votes of thousands of industry professionals recognizing the most excellent performance in the Aerospace industry.

Now moving on to the Electronics sector, we announced contracts worth $764 million in second quarter, many of which are in the Smart City spaces in mobility, satellite communications, Internet of Things, public safety and security, cybersecurity as well as defense solutions. A notable new win is a contract to deploy an advanced traffic management system in the Middle East. As you know, as we shared with you before, Middle East is a focus market for us, so we are quite pleased with this contract win there. This is a good start and we'll continue our marketing efforts in this market.

The second quarter saw capacity expansion for -- and with the opening of our new facilities as part of our investments in our core business. Let me just read to you a few. In early June 2018, we opened our new MRO facility in Pensacola, Florida. It joins our facilities in San Antonio, Texas and Mobile, Alabama to serve the North American region, and at steady-state, it will add 600,000 man-hours to our global Aerospace MRO airframe capacity -- airframe MRO capacity, I mean. UPS, a long-time customer, is the launch customer of this newly opened facility, and we are very grateful for their confidence in us.

Over in Germany, we opened our second composite manufacturing plant for the Aerospace sector in Kodersdorf, Saxony. And the first one, as you know, is in Dresden, Saxony. With this expanded capacity, we are now in a stronger position to meet the rising demand for cabin interior components such as floor panels and cargo compartment linings brought about by the expected aircraft fleet growth over the next decade.

Our Marine yacht in Pascagoula, U.S. opened a new state-of-the-art blast and paint facility that will allow ships sections to be prepared, blasted and painted in a controlled environment. In second quarter, in June actually, we also witnessed the launching of a heavy fire vessel to the Singapore Civil Defense Force. Still on Marine, an update on the Jurong Island desal plant or desalination project. As anticipated, together with Tuas Power, we have formed a joint venture company to undertake operations and maintenance aspects of the plant. We also set up an engineering, procurement and construction consortium that has since commenced preliminary design work on the plant.

On other fronts, we continue to tap on partnerships and leverage on technology ecosystem for growth. In April, we signed an MOU with Vietnam Airlines to set up a JV to provide component MRO solutions catering to the airlines' requirements and the region's rising needs for MRO services. Eventually, we expect the collaboration will expand to cover aerostructures and other MRO areas.

Now we are working out the JV details with our partner. While we are doing that, we have set up an inventory base in Vietnam to provide component maintenance by the hour, or MBH, MRO services to Vietnam Airlines' current fleet of A321 as part of our 14-year contract with them.

On another front, with Singapore Power, or SP Group, through our joint venture with them, SP Telecom, we have put on trial a pay per use Internet of Things as a service platform, IoT-as-a-service platform. This is offered on a subscription basis to enterprises to help them move into the IoT space faster and more cost efficiently. In so doing, enterprises can save on setup costs in IT infrastructure, connectivity, data analytics and applications and select an IoT service that best matches their business needs. We're satisfied we have jointly set up Jet-Talk to develop state-of-the-art satellite antenna system that delivers enhanced in-flight connectivity for commercial aviation. Through this business, we are seeking to enhance our global access to emerging high-growth commercial aviation connectivity market. And as we all know, digital connectivity is a key business enabler for our group, and we continue to seek out complementary technologies in this area.

Just recently, in mid-July, we entered into a strategic partnership with JTC for the design, development and deployment of an open digital platform for the Punggol Digital District. We work closely to integrate Smart City solutions onto this open digital platform across this 50-hectare district. Both JTC and us, ST Engineering, will co-invest to bring this project to fruition. So why is this significant for us? Well, because PDD, or Pongo Digital District, is the first district in Singapore to adopt an integrated master plan approach. And it is a multi-agency collaboration project between IMDA, JTC, Singapore Institute of Technology and URA. When completed in 2023, PDD will be a comprehensive Smart City showcase, upon which we'll build the foundation in this end-to-end comprehensive suite for other markets, including other parts of Singapore.

We're also in partnership with Keppel Urban Solutions to design and execute Smart City master plans in cities across Asia, targeting cities and developments looking for end-to-end services that weave in Smart City technologies seamlessly. One of the projects that we will embark on together with Keppel Urban Solutions is the Saigon Sports City. It is a 64-hectare development in Vietnam, envisaged to be Vietnam's first one-stop sports, entertainment and lifestyle hub focused on sustainability, connectivity and community. Quite evidently, we have been intensifying our Smart City expansion plans, actively engaging both public and private sector partners and customers in our global expansion efforts for Smart City.

To facilitate our expansion plans in this area and go to market as one, we have branded our Smart City solutions suites as CitySense. While this is still a new brand, but with our investments to build this brand, it will be synonymous with ST Engineering and our Smart City capabilities.

Separately, we embarked or marked a milestone in our autonomous vehicle development as we started on-road testing of our mobility-on-demand autonomous shuttles on Sentosa. This is done in phases, conducting first along a 1-kilometer stretch before extending it to a 2-kilometer route at Tanjong Beach by end of 2018. The next phase after that would be a 3-month public trial in 2019 when the public will be able to hail any of the 4 autonomous shuttles via their mobile phones or at kiosks along a 5-kilometer route at that time.

In building a robust autonomous vehicle platform, or AV platform, we have roped in partners stepping on their technologies to enhance our AV solutions. And some of these are promising startups with cutting-edge technologies that complement our AV capabilities that our corporate venture unit has invested in. Let me just name 2 of them for you this morning.

SafeRide is a Israeli startup, a specialist in automotive cybersecurity. And they will provide a comprehensive cybersecurity suite to safeguard the integrity and security of our AV systems. The ability to uncover anomaly and prevent cyber threat for connected and autonomous vehicles is critical in-house capability that we must own, and we're working with SafeRide on that. rideOS, a San Francisco-based transportation platform provider, will develop a collaborative framework for an all-demand -- on-demand ability system to manage a city's transportation system end-to-end.

Combined with our AV platform capabilities, these collaborations will bring Singapore closer to operationalizing our autonomous platforms safely in our urbanized mixed-traffic environment.

Before I close, I must also announce that the board, on a very positive note, has approved to maintaining our interim dividend at $0.05 per ordinary share, same as the interim payout in the last 3 years.

In summary, as you see, we had a very strong half of activities actually, including the second quarter of 2018, and we're tracking well on our strategic plan of strengthening our core businesses as well as actively pursuing growth opportunities in defense exports and Smart City projects. And we are confident that we are going to continue to make progress on this front.

So on that positive note, I'd like to open the floor for questions. Thank you.

[Sy Feng Chong, executive]

Yes, Neel?

[Neel Sinha, analyst]

I've got 3 questions. The first is on Aerospace. Can you give us an update on the DHL PTF program? And generally, if I look at the space 6 months ago at the beginning of the year, there were a number of positive drivers, right? Global trade growth, which had mocked up the excess capacity in global cargo fleets and availability of ready stock, which is basically the right ingredient for a PTF cycle. I'd love to get your thoughts on what you think of that now with all the saber rattling on global trade? And do you think that -- what impact it might have?

[Sy Feng Chong, executive]

Is it possible for you to speak a little bit louder? I can barely hear you.

[Neel Sinha, analyst]

Sorry. I was talking about beginning of the year, we had a few...

[Sy Feng Chong, executive]

Would you mind going back to the start?

[Neel Sinha, analyst]

Yes, sure. My first question is on Aerospace.

[Sy Feng Chong, executive]

Oh, I thought for Marine, no.

[Neel Sinha, analyst]

It's -- I'd like to get an update on the -- on how the DHL program is going. And also beginning of the year, there were a number of positive factors for PTF, I think, kind of falling in place, the global trade growth through 2017 had mocked up most of the excess capacity in the cargo fleet, there's ready availability of mid-life aircraft for conversion. But 6, 7 months later now with all the saber rattling on trade, I'd love to get your views on how long do you think the up-cycle in PTF could last? Or do you think it will have any material impact? Also in the Aero business, I'm kind of curious, for this expansion in the second facility in Germany, is there any reason why it needs to be in Germany? Is it driven by customer location, et cetera, if it's a manufacturing facility? Or is there some technology aspect? Why is that not based in Asia? The second question is on Land Systems. You did mention that the 2Q PBT was lower in part because of higher expenses. Is this a one-off type situation? Or is this largely due to Aethon? How should we think about the cost structure of Land Systems over the next 4 to 6 quarters? And the third, for you, Vincent, is generally how do you think your business is going to get affected by -- I know there are many moving parts, by this global trade issue, the trade war issue?

[Sy Feng Chong, executive]

Perhaps let me just take on your last question. Obviously, we are watching this very closely. For the active projects that we have in place, we look at the current impact is not material because we have booked in material costs and we are able to manage the cost components at this point in time. But of course, as you know, it's an evolving landscape we will continue to watch very closely as the months transpire. As you know, every -- there's quite a lot of development, as we speak. So we're going to watch very closely. But at this point in time, we have not seen any significant material impact yet, okay?

[Neel Sinha, analyst]

Just very specifically, on the Aero business in the U.S., is there much input components coming from manufacturing in China?

[Sy Feng Chong, executive]

I will leave the answer to Serh Ghee. Generally, it's quite a U.S.-centric ecosystem. But let's go back to your 2 other questions. You have 2 questions on Aero. Maybe we start with Serh Ghee, and then after that, we'll go to Shiang Long.

[Serh Ghee Lim, executive]

You have 3 questions. I'll take the 2 easy ones first. There's one that is, even for some of our economists, is going to be very challenging to answer. The first question is on the progress of our DHL program. If you were to recall, we actually have a contract for 8 firm conversion and 10 option. We have since delivered 2 that -- one is in work and a fourth aircraft has also been sourced and to my knowledge, DHL has also managed to acquire close to 10 aircraft. So I'm quite positive that the option will turn into firm orders. Your question on why do we set up a second plant in Kodersdorf. Why -- if I must say, why don't we set up, say, in a country that is a lower cost structure, let's say, in China. Okay. First of all, the reason why we set up another facility is that we are preparing for the future, we are -- we have to ramp up our production to cater to the -- also the increase in the production of the aircraft by Airbus. I -- probably you have read that they have stated that they are going to ramp up from 60 to 75 per month, and that is a lot, okay? So we have to set up another facility. And we -- when we look at the possible location, obviously, we will look at obviously the cost structure, the skill set and also whether there's any present in any particular location by our facility. So Kodersdorf, actually, we already have a small offsite production facility that cater for us, at times, such in the past. And the local city government officials also pretty receptive to us in expanding there. So that is the reason why we set up our facility in Kodersdorf.

[Sy Feng Chong, executive]

So at the end, just to be clear, it's based on economics. The economic conditions are favorable for us to set up in Kodersdorf.

[Serh Ghee Lim, executive]

Your last -- your tough question is, I'll put the -- Trump's tweets, would it cause a big disruption here and there? Okay, the industry fundamentals actually remain very strong. I mean, the tech traffic actually has gone up 7% through the May period, and I'm also seeing the retirement of older aircraft trending lower. The -- I'm actually not so concerned with this growth, macro, by this trade war. Actually, I'm more concerned about the oil price. So I've said the industry fundamental is -- remains strong. There is a slight headwind, it's coming a little bit stronger, and the headwind is the oil price. I have not seen any impact on the MRO business as yet. I do not expect to see any negative impact on the second half of 2019 if the oil price remained at the current level, and if it doesn't surge to $90 and above. So I'm more concerned about that. Well, whether this is a trade war and that will reduce trade, it will impact everybody. It will not impact just ST Engineering. So I'm not so concerned, but we will monitor the situation, obviously, and then we will definitely react accordingly. And -- but longer-term prospect, whether it is the tech side or whether it's the cargo side, has always been growing, and that's what we should be looking at rather than the short-term blips.

[Shiang Long Lee, executive]

In terms of the cost structure, just to answer the question, so some of them are -- obviously they are constant, but some of them are mostly depending on the order book and as well as when will be the project delivery, right? So for example, for the -- you know that we have contracted for Singapore Army the next-generation armored fighting vehicle. So this is the period where we need to set up the production lines, so therefore, that will be the cost structure. But when we start to deliver, then the revenue will kick in, right? So that is one part. The other part is also same thing you know that the announcement that we have, the bus for LTA. So therefore, now, this is the time when we need to put in the investment for production. So once the delivery begins second half of this year and early part of '19, you will see the revenue kick in again. So of course, the cost structure would largely depending on what is on the order and we are able to skew it accordingly. In terms of the robotic, yes, we recognize that we have a very good -- acquired a very good robotic company, it's very good, the technology. You probably know that it's listed as 1 of the top 50 robotic companies. So therefore, we are now investing in the marketing and also creating greater range of product, not just in the U.S., but also globally.

[Neel Sinha, analyst]

For the Aethon platform, are their avenues to rationalize costs or it's...

[Shiang Long Lee, executive]

We are, we are rationalizing costs. So therefore, from the production point of view, there will be a threshold where it will make sense to move to somewhere else. So we are actively looking at cost-cutting.

[Sy Feng Chong, executive]

Yes. But it's in the mode of expansion, as Shiang Long talked about, so we are investing in building the business. At the same time, we are cognizant of having a streamlined set of costs that will help us scale up going forward, okay?

[K. Ajith, analyst]

Ajith from UOB. Vincent, there's a lot of talk about aluminum and steel prices raising and so forth. So are your customers talking about this rising cost price -- input cost, and are they talking about their ability to -- better the ST Engineering will absorb the cost increase and so forth? Do you think, in your opinion, that customers will be able to absorb the cost increase? So that's my first question. Second question is for Serh Ghee. In terms of the Aerospace, I noticed there was a gain on disposal. Was the amount close to $9 million in terms of Airbus Helicopters, I think. So was that recognized within Aerospace PBT? Then there was also a, I believe, a provision for stock obsolescence, I believe about $7 million or so. So if you exclude all this, would Aerospace profitability, would it still have been maintained? So these are my 2 questions.

[Sy Feng Chong, executive]

Okay. So let me just talk about the first one. So based on the projects that we have currently up to the first half, the impact is -- on this higher tariff is really not evident based on our scan. And in second half, we expect a small impact, but it's not material. And in many of these contracts, there are provisions for price adjustments over time. At the right opening, we will go in there to renegotiate. We may have some short-term impact at this time, but as I mentioned, it's not very material. But we're going to watch this space very closely because we are talking about not just aluminum and steel, there's a lot of -- many fronts that are being discussed at this time, so we have to watch this very carefully. But at this time, for aluminum and steel specifically, the impact that we see now it's not yet material. And for projects, there are either openings for us to go in and have renegotiation, or over time, we'll be able to pass these through to the market as others would do the same over time. But we're watching this space very carefully.

[Serh Ghee Lim, executive]

Yes, in our second quarter 2018, we do take in the one-off gain of divesting of our stake in Airbus Helicopter. And as for the provision, for the stock obsolescence, is in accordance with our stock obsolescence policy. So it's not something that is out of the ordinary. Your question is actually if we were to strip out this is -- our operation remains healthy. I would like to assure you that our maintenance repair overhaul operation remains healthy. The efficiency, the ship ratio, if not more, is the same. While we have this one-off gain as well as the recurring provision for the stock obsolescence, as I say, we are also preparing for the future. We -- to give as illustration, we talk about the second site in Kodersdorf, we are actually absorbing the so-called the short-term pain a little bit for the sustainable good growth in the future. So for the Kodersdorf, we -- first half, we have a startup cost of close to $4 million, and we are able to stomach all this and get -- have a sustainable growth in our PBT.

[K. Ajith, analyst]

So the stock obsolescence is related to the startup costs?

[Serh Ghee Lim, executive]

No, no. Stock obsolescence is in accordance with our company stock obsolescence policy. It's recurring. It has been -- every month we are actually providing for the stock obsolescence.

[Sy Feng Chong, executive]

I think what Serh Ghee is saying is that on the start-up costs, there are start-up costs associated with the start-up of a second site as we ramp up the facility. And a large part of that $4 million that Serh Ghee talked about manifested in second quarter, okay?

[K. Ajith, analyst]

Sorry. I've got a follow-up question, Sing Chan. Regarding the LMV vessels, was there any milestone recognition in 2Q? And do you expect further recognition in 3Q?

[Sing Chan Ng, executive]

LMV or LNG ConRo?

[K. Ajith, analyst]

Littoral Mission Vessels, right.

[Sing Chan Ng, executive]

Is there any milestone? We have, in fact, a milestone coming up in 3Q. On the 18th of August, we will have a launching and naming ceremony of LMV #7, yes.

[K. Ajith, analyst]

Sorry, you said LNG in second?

[Sing Chan Ng, executive]

LMV. Oh, I thought you were asking about the LNG ConRo. No, you're asking about the LMV?

[K. Ajith, analyst]

Yes.

[Sing Chan Ng, executive]

Yes. So this month, we will have a naming and launching ceremony of the 7 LMV. So we have got another one to go. Yes, there will be milestones, whether it's launching or it's completion of sea trials, completion of ICIT, et cetera, et cetera.

[K. Ajith, analyst]

In 3Q?

[Sing Chan Ng, executive]

Yes.

[K. Ajith, analyst]

So 2Q also, there was recognition?

[Sing Chan Ng, executive]

Was there any -- I think so, yes. I think there was a launch ceremony, #6 maybe, yes.

[K. Ajith, analyst]

#6. So there are a total 7 or 8?

[Sing Chan Ng, executive]

8, yes.

[K. Ajith, analyst]

8. So continue into second half?

[Sing Chan Ng, executive]

Correct. But our revenue recognition is not based on milestones. Our revenue recognition is based on percentage of completion. So milestone, some of them are cash generating and some of them are not.

[Sy Feng Chong, executive]

Maybe we go to Patrick and then after, that we go to Siew Khee and the gentleman behind.

[Patrick Yau, analyst]

Okay. Vincent, simple question from me. So you mentioned different [ spots in ] U.S. is one of those target markets. Because Trump say America first, so this whole idea of trying to target by market with your partner, SAIC. Is SAIC still the partner that will help you achieve big success as far as this big hardware exports to the U.S. is concerned? That's the first question. Second question is on -- the question around the security element of this Smart City cyber contracts. With big profile kind of hacks that's been publicized recently, is that a positive? Or is that going to be a friction in the views that will delay future contract awards?

[Sy Feng Chong, executive]

Okay, so let me just take on the first question, is SAIC the right partner. We are very pleased with the partnership that we have with SAIC. Through the ACV program, the relationship has been very strong. In fact, it got stronger. So we are very optimistic about our chances of giving a good showing for the MPF program. Obviously, for a contract in the U.S., we've got to make sure that we generate enough work content within the local -- within the shores of the U.S. and that's, of course, a consideration. So partnering with a U.S. company and a reputable one like SAIC is a good approach that we continue to believe in. And obviously, we are also looking at other opportunities as they come. But so far, we've been pleased with the collaboration with SAIC. Now later on, I will let Ravi answer a little bit more. I think Smart City, we're talking about across the globe is continuing to be a growth industry. Because of our cybersecurity capabilities, we are able to integrate some of these solutions into our Smart City offerings. That continues to be the case. But the landscape continues to evolve, and we continue to find ways to strengthen our offering in various regards, including the security element. Now maybe on that note, I'll hand over to Ravi who can give us a little bit more insights on the Smart City endeavors, yes.

[Ravinder Singh, executive]

Okay. So for us in ST Engineering, when you talk about cyber, there are 2 parts. The first part is we actually deliver cyber solutions. So we build, deliver and operate cybersecurity op centers. We have cyber products like data diodes that we deploy, file cleansing solutions. So we actually have a cyber business and we design, develop, deliver and run services. So the opportunity actually has increased since SAIC came onboard, identified the learning-critical sectors and there's actually great awareness in Singapore especially in the region for the need for cyber solutions. But this also will take some time because the effort in designing the networks, identifying the needs, defining the specific solutions, there's a lot of interest, but I think certainly the opportunity will increase. In fact, the recent cyber attack has demonstrated the challenges of protecting networks, whether private or government, from cyber. And the importance of having good partners to build, to deploy, even to upgrade, keep the cyber solutions current. So that's, I think, in short, there's an opportunity and we are investing in people and technologies, including investing in companies that can give us unique cyber solutions. So most recently, we invested in a company that has -- that's a start-up in the OT cybersecurity capability. So OT cybersecurity is cybersecurity solution for OT systems like power plants, water plants, which is different from the IT cybersecurity. So we invest in a company because we believe that the company brings some unique capabilities that we can deploy, certainly in Singapore and in the region and probably around the world in some of these areas. The other part of cybersecurity is securing the solutions that we provide, and I think this is an expectation, the messaging delivering solutions. We have to put in some layer of cybersecurity so whether at the platform level all the way up to the systems level. So that has -- certainly the awareness has become higher, the demand is increasing. And we are developing unique solutions to allow us to update. So let me give you example. One of the things we do in our train business is to develop, design, deploy SCADA solutions for the control of our underground trains in Singapore and around the world. And we develop cybersecurity solutions to protect the SCADA System, okay. So that gives us actually additional value when we deliver to the customer. So it's a big differentiator and the absolute value of the product that we deliver. So certainly cyber all around, there are increasing opportunities for ST Engineering.

[Sy Feng Chong, executive]

Yes, let me just maybe build on what Ravi just said. So cybersecurity obviously is important, as Ravi mentioned. We have our own in-house suite of cybersecurity solutions, but where it makes sense and it hastens or quickens our pace of strengthening our capability, we do invest in companies that have promising technologies so that we can co-create new solutions with them. If you look at our ST Engineering Ventures unit, the Corporate Ventures unit, we have invested in 4 companies, 3 of them are cybersecurity-related. First one is -- was, as we announced, is the hardware cybersecurity company, Janus, based in the U.S. We have a minority stake, but then we co-created the Black Computer with them after our investment. Ravi talked about the operations, technology, cybersecurity company that we invested in. That's another example of cybersecurity investment. Shiang Long talked about -- or rather earlier on, I also talked about another one, a cybersecurity company that does cybersecurity solution at the vehicle level as part of our suite of autonomous vehicle solutions. We invested in that very promising start-up with strong capability so that we can co-create solutions that fit the needs of autonomous vehicles. So we kind of look at various different approaches to strengthen our capability as we go and this will continue to evolve as we speak, okay? Yes, Siew Khee.

[Lim Siew Khee, analyst]

I'm Siew Khee. Can I just check with you on the gain for Airbus Helicopter, how much was it?

[Serh Ghee Lim, executive]

$9 million.

[Lim Siew Khee, analyst]

$9 million in CERO with it?

[Serh Ghee Lim, executive]

In AMM.

[Lim Siew Khee, analyst]

Oh, okay. So the CERO increase -- I mean, you do see CERO trend is just fundamentally more repairs coming in? Or is there any one-off in the strong performance in CERO?

[Serh Ghee Lim, executive]

Okay. For CERO, the top line has gone up, as I think both Cedric and Vincent has spoke of, is the -- we are seeing more short visit. And it's not just short visit, but it's also the type of short visit is much heavier in scope rather than the lighter one, okay? So I say we are seeing the trend of more short visit behavior, short visit coming in. And in second quarter also, we also had a sale of 2 engine, okay? So that actually drive up the top line. As for the bottom line, as you have more short visit, obviously just like in any conversion, our efficiency had gone up, so better absorption, so the margin has gone up.

[Lim Siew Khee, analyst]

Okay, thanks.

[Serh Ghee Lim, executive]

But a little bit -- there's -- another one is affected is because we have actually rationalized our rotables trading business out of CERO into EMS, okay, and that's where the stock obsolescence kick in, which we have talked about just now.

[Lim Siew Khee, analyst]

Okay. On Elect, can you explain why the comps is so high this quarter and whether that's sustainable? And also, LSG has been strong for first half because sometimes it goes up and down, but should we just be looking at this as the run rate for both comps and LSG?

[Serh Ghee Lim, executive]

CSG.

[Ravinder Singh, executive]

Thanks for the question. It's going to continue to be up and down. Because we deliver projects and there are different milestones, so on a year-to-year basis, I mean, you can see consistency. But on a quarter-to-quarter basis, it depends on the status of the projects and which projects we complete. But I think in terms of momentum, I would say that where we are today -- there are some challenges in some of our segments, but overall, I would say that for ST -- for Electronics sector, momentum continues.

[Lim Siew Khee, analyst]

But the comps actually went up so much, was it because of iDirect? Or did you launch new product? Or is it -- like why is it up so much?

[Ravinder Singh, executive]

So iDirect, actually they've done better in the second quarter. And they have a certain cycle in their industry that sort of picks up after the -- quarter-by-quarter towards the end of the year, yes.

[Lim Siew Khee, analyst]

Okay. For Marine, can you explain why is the Engineering in a loss position?

[Sing Chan Ng, executive]

Primarily due to the lack of charter income, the vessel, the ROPAX. After 2 years of charter, we had to renew the class certification. So she went to a shipyard, and that's the reason why there was no charter income in the last Q.

[Lim Siew Khee, analyst]

Has she found a charter?

[Sing Chan Ng, executive]

Yes, she has.

[Sy Feng Chong, executive]

So it's been dry docked and it will come out of it in -- soon.

[Lim Siew Khee, analyst]

Okay. Just one...

[Sing Chan Ng, executive]

Sorry, it's already out of dry dock, yes. It's in the harbor. The charter is making preparations to operate the vessel between Poland and Sweden.

[Lim Siew Khee, analyst]

So your start chartering in 4Q? September?

[Sing Chan Ng, executive]

3Q. 4Q is too late.

[Sy Feng Chong, executive]

August.

[Lim Siew Khee, analyst]

Okay. Then for Shipbuilding, anymore provision done in this quarter for your -- any projects or -- I was expecting it to be profitable.

[Sing Chan Ng, executive]

Any provision in 2Q for the projects?

[Lim Siew Khee, analyst]

For anything. I know -- why is Shipbuilding still not profitable yet? I know you don't have enough work, but is this continuously going to be the case? Or do you target to breakeven?

[Sing Chan Ng, executive]

Okay. All right. I think Vincent mentioned about the better performance as a result of lack of provision. I think what he meant is really the provision is not as high as in 2Q 2017. There are some, so that's one reason. The second reason is that the current workload, you know we have -- because of the workload, we have reduced our cost and -- but there's a limit as to how much you can reduce when it comes to, say, SG&A, all right, and we have also got certain fixed overheads that we need to carry. So currently, the workload in the U.S. is not enough to cover all the overheads, I'll put it this way. So that's another reason. But we are optimistic that we will be able to build up the order book in the months or the weeks ahead so...

[Sy Feng Chong, executive]

Yes, please?

[Gerald Wong, analyst]

Gerald from Credit Suisse. I have 1 question about the Terrex 2 for the ACV program. You mentioned that the loss would not materially impact your 5-year plan as you take on some of the learnings. Maybe you can share what are some of the key learnings in terms of capabilities or pricing that will enable you to be more competitive in future programs?

[Sy Feng Chong, executive]

In all aspects because when we talk about a program like this, it's actually a sophisticated, complex undertaking, whole 9 yards. So I think it's difficult to boil down to 1 or 2 soundbites. But it's everything, supply chain, operations, there are many things. But I think the team did very well. Just that for every project, we always pick up the learnings. Even if we are successful or not, we always try to pick lessons learned, including like how the vehicles are being tested. Maybe there are some new insights that we gathered during the process. We do that for successful programs and we do that for the not-so-successful programs so that we continue to get better, yes, as we move along. Yes, Conrad?

[Conrad Werner, analyst]

It's Conrad from Macquarie. First question, just to clarify on this gain in AMM of $9 million, if we were to strip that out, then the trends would look pretty weak, I guess, in the second quarter. Maybe what -- if that is the right way of thinking about it, what is driving that? And is there any reason for it to expect to get better? The second question is, you lost the Terrex deal, learned a lot of lessons, that's great. Could you maybe call out, other than just the MPF contract, any other big contracts over the next 6 to 12 months that you are competing for, whether in the U.S. or elsewhere? And then there was some commentary in Cedric's remarks around some seasonality, which, I think, related to just the rugged computers or was that for the business overall? Should we expect better revenues and better performance seasonally in the second half versus first half for ST Engineering overall? Or is it just for the Other segment? Thanks.

[Sy Feng Chong, executive]

Okay, so the comment on this seasonalization of -- specific to Miltope others, so some of the programs -- or in fact, some of the orders moved to the right, some even spilled into 2019. But we expect second half for Miltope to be better than first half. So that's our expectation, although some of the projects will move to the right. MPF, in itself, is actually quite a significant undertaking. There's also this new generation combat vehicle also in the U.S. that we are participating. And there are some other opportunities, maybe in the earlier stages of development. Also, for the naval exports, there are some other prospects in the pipeline that we are working on. And of course, we'll share more with you as they manifest themselves. But there are quite a few prospects that we work on, yes.

[Serh Ghee Lim, executive]

Would you mind repeating your question because...

[Conrad Werner, analyst]

Yes, I was just kind of saying, if there was a $9 million gain, one-off gain in AMM specifically, as you just highlighted, then if we take that out, the trends look weak, I guess, profitability-wise, for the second quarter. Is that the right way to think about it? And if so...

[Serh Ghee Lim, executive]

Are you referring specifically to the AMM? Or you're talking -- just as I explained, recall MRO operation remains very healthy. The efficiency, the utilization, I mean, we do check, in fact, the profitability of every single MRO projects is in good order. So I'm not concerned about the margin, so to speak, of the operation. So -- and I said that we have this one-off gain, but we also have been absorbing a number of so-called short-term pain to prepare us for the good sustainable growth and I gave the example of Kodersdorf. So AMM just in, core operation remains healthy. The utilization is high. The ship ratio is high. There are also a little bit of a short-term pain there in -- [ given ] is that there is -- some of it is due to the timing of certain projects. One of them is this BBJ, you will recall, which is our VIP completion work in U.S. The aircraft actually came in 6 months later induction, but we have basically ramped up our people. So there is this under absorption, okay. So -- which I'm not so concerned because the fundamentals remain -- remain very good.

[Sy Feng Chong, executive]

Any questions? Yes, please.

[Gerald Wong, analyst]

Serh Ghee, 1 more question on MRO longer term. I think the structural trend that I see is you talked about very positive fundamentals. I mean, I just want to confirm whether my understanding is right. You have a growing fleet globally, so they will need more maintenance and so forth and that's going to be increasing. I guess, the orders have been increasing since the great financial crisis and that's going to be building up. But at the same time, I'm also hearing that the new aircraft types, the longer maintenance cycles, so that will be a negative to the business, right? So at what point do these 2 impacts start to really result in a net positive to your business? Is this starting this year because it's already been several years since the financial crisis? Or how do you guys see this? You're already seeing the pickup and that's why you say it's very strong? Or is that coming in a year? Or just give a bit more color on that maybe.

[Serh Ghee Lim, executive]

I've said earlier the industry fundamentals remains very good, okay, and the new aircraft order is high, okay? We talked about it, it's supposed to grow at about 34,000 by -- in 10 years' time, okay? So the fleet growth, okay? You're also correct that all these new aircraft, new technology, the maintenance between interval is longer, and every time it come from maintenance, the maintenance needs is lower, okay? So you have the positive, okay. You have negative. But there's also another positive that we're also seeing is that airlines are also outsourcing more, okay, particularly the carriers in the U.S., okay? In fact, most of -- in fact, all the carriers actually outsource all their airframe-heavy maintenance and I must say that we are probably the recipient of most of this outsourcing. All the major -- our customer, United, Americans, Delta, and also obviously all the freight operator are our customer. So net-net, I would say there's some positive.

[Sy Feng Chong, executive]

Now beyond MRO services, the Aerospace business has been trying to climb the value chain. Like EFW, a second site is actually for production of the floor panels and that's an OEM-type business. Now we are going upstream also in interior reconfiguration and so forth. And we'll continue to look at opportunities to go beyond just the traditional MRO business that we have today, which is very strong, as Serh Ghee mentioned.

[Serh Ghee Lim, executive]

Just to add on to what Vincent said, I think we have also briefed during our Investor Day that our strategy in 3 prong, okay, strengthen our core through the leveraging of technology to improve our Internet efficiency as well as to create differentiator to our customers. These are areas like digitization and data analytics, automation, additive manufacturing. And as an illustration, we just did a review with one of our major customer. We did a data analytics program because we did 777 for them. We also did 777 for other people. So we actually will be able to analyze this, hey, how come you're doing more maintenance in this particular area, and it's true and then they didn't realize that. Then we will drill down further, we say, okay, probably it's the way that they maintain the panel on the wing, okay? And they find it interesting. And that create a certain value to them and they see us very differently compared to other MRO service provider because we are able to go into the hard-core engineering aspect. So that is on data analytics. And then we have automation. And in fact, they saw our proof of concept, unmanned air vehicle inspecting the aircraft. They are very interested, okay, and thinking of actually for them to deploy at an apron, okay, and then [indiscernible] manufacturing for this particular customer also. We started with a few parts on the cabin interior. Now we are building a portfolio of parts and it creates some kind of a virtual warehouse for them, okay. They don't have to stock up these cabin interior parts. So whenever we need, we have a digital part that needs to be developed, this is certified and it can actually print on demand, okay. So this creates a lot of value. Then we -- the other prong is that we are going up, like what Vincent said, in the value chain and that's why we are focusing quite a fair bit on the passenger freighter, okay. We are also focusing a lot on the cabin interior reconfiguration, and Vincent had mentioned that we actually secured the Air Canada, okay? You talked about [indiscernible] positive because a lot of airline right now is to create differentiator by investing more in the cabin interior and more frequent. My last point is a little bit further outfield is that we always have eye on the future, so we are seeding the future by also investing in unmanned technology. I think we talk about our drill ports, okay. It's a network of UAV that can be deployed to do parameter surveillance, building inspection and so on and so forth, but that will be in the outer years.

[Gerald Wong, analyst]

Sorry, can I ask a follow-up question? Earlier on, you mentioned oil price being a headwind. So is that -- you see that affecting the outsourcing demand that you say airlines are outsourcing more because I would expect MRO to be more or less stable, right, independent of oil price. So how do we understand the oil price in the...

[Serh Ghee Lim, executive]

Our customer are the airlines and the freight operators, okay? When oil price go up, their cost will go up, right? So who will they squeeze? They will squeeze obviously their service provider. So that is one of the so-called negative. On the flip side also, for those who don't outsource, then you realize that maybe it's better to outsource because it's cheaper to outsource than to do it in-house, okay. So it's quite complex, okay. So -- but we are watching this very carefully, okay. So long as it stay at the current level, which I think right now is $70, okay, but if it surged to $90, it'll be a concern for everybody. But the longer term has always been very good. People don't look at just 1 quarter, 1 half or 1 year. So the planning cycle, in fact, whether the airlines or the freight operators, they're relatively long term.

[Sy Feng Chong, executive]

So whatever the macroenvironment is, I mean, we cannot control that. As they change, we have to adapt, and in fact, we have to shoot ahead and just get ourselves prepared. We have seen through oil price cycles across history. I mean, so we have to be prepared. Just that there are always sensitivities of such kind of macro drivers in the industry, we just have to watch the dynamics and adapt as we go along. Neel, you have a question? Yes? Oh, Rachel, you have a question? Maybe after Rachel.

[Cedric Foo, executive]

This is a 4-part question. I think it's a very complex subject, but one good thing about ST Engineering is it has a portfolio of businesses. So if you think about higher oil price, you must also consider the fact that, say, Marine, for example, so if it does drive more rig activities, then our investment in the U.S. like [indiscernible], the VTM (sic) [ VTHM ] will start to bear fruit. If oil prices are high, then older aircraft are rendered less efficient and likely -- airlines are likely to retire them earlier, which means better, lower-priced feedstock for the P2F program for the Aerospace sector. So I think it's a dynamic you have to get into. I think it's too complex for us to really pin it down.

[Sy Feng Chong, executive]

Pin to one or two because the organization has seen as a group, we've seen through various business cycles in various different forms, and we continue to adapt as we go. Because of diversity of our portfolio, we are very resilient. We always keep focusing on our fundamentals and we try to exceed the performance versus our competition to the extent that we can in every area that we compete in. Yes, but that's the, I think, the value that our portfolio brings to us at this point. As Cedric say, it's a very complex topic. I think it's very difficult to just pin down on one, but we just have to watch the space. Yes, Rachael?

[Rachael Tan, analyst]

I have a couple of questions, I'll just run through them one by one. The first is for Shiang Long. You mentioned that on the next-gen [ ERV ] program, you've started to incur some of the setup costs for the production. When do you expect to begin recognizing revenue from this project?

[Shiang Long Lee, executive]

Next year, early next year.

[Rachael Tan, analyst]

Early next year? Okay. The next question will be on your 5-year plan, particularly the Smart City front. You mentioned doubling your revenue to $2 billion, but how do you see the margins performing over the longer term? Will your targets be for margins to be in line with the rest of the business or even better?

[Sy Feng Chong, executive]

So our -- as we mentioned during the Investor Day, we expect profits to be in tandem with the growth. So we expect the margin mix to be pretty much healthy, so we won't differentiate the margins in Smart City, it depends on the project. We expect, as we grow our revenues, our top line and bottom line will grow in tandem. That's what we say and we continue to maintain that view, okay?

[Rachael Tan, analyst]

Okay. And then, finally, when we talk about the cost of components and you mentioned that you -- in the contracts that you have, you have provisions to adjust for cost with customers, how do some of these processes work? For example, Land Systems or Marine or Aerospace, at what point do you incur the cost and then you talk to them? Could you just provide some...

[Sy Feng Chong, executive]

It depends. Every contract is different. Even in the same country, every domain is different. Some contracts have openness for negotiation given the change in macro conditions. The time frame by which you can open the discussion is also different, depending on the contract. All we can say is that we do our best to pass the cost to the market when it comes, subject to the provisions in the contracts that we have signed. At this time, based on the existing contracts that we have, we don't see any material impact yet. Second half, we will see some, but it's not a significant impact given the contracts that we have in place. But we're going to watch this space very carefully. It will not just impact us, but the whole economy, the whole industry and the landscape is still unfolding so we've got to keep watching this space, yes.

[Rachael Tan, analyst]

Surely, for certain industries, there are standard practices and stuff. Are you able to elaborate? Or you'd rather not?

[Sy Feng Chong, executive]

No, it's very difficult to pinpoint one because even in the same industry, let's say shipbuilding, every contract is different, depending on what the provisions are in the contracts and what kind of openness there are. But as I said, based on what we see so far, the contracts that we have currently, we don't see the impact as very huge yet based on the current situation, yes. And there are, obviously, depending on the contracts and the domain, openness for price negotiation, if there are external changes like the one that you just described like tariffs and so forth. Yes, Neel?

[Neel Sinha, analyst]

I had a quick follow-up for you, Serh Ghee, because I just remembered you mentioned that Airbus production start of them ramping from 60 to 75. But your floor panels facilities are not for OEM supplier, right? They're more for the refit interior.

[Serh Ghee Lim, executive]

No, no, no. Our facility invested, is the exclusive floorboard supplier to Airbus. All the Airbus aircraft...

[Neel Sinha, analyst]

So it's the new production growth that it's geared to.

[Serh Ghee Lim, executive]

Yes.

[Neel Sinha, analyst]

And the second facility is also OEM...

[Serh Ghee Lim, executive]

Yes, yes, yes.

[Sy Feng Chong, executive]

So for commercial Airbus aircraft, EFW is the exclusive supplier to all of the floorboards. So as new aircraft production ramps up, we will benefit from it.

[Neel Sinha, analyst]

Okay. So then even if -- I mean, you mentioned it's the location is based on economics, but of course, there's the customer location to consider for these 2 facilities right?

[Serh Ghee Lim, executive]

Yes, you're spot on. Actually, the main production line is in France and Germany. So it's easier for us to actually [indiscernible] wise to ship it to the...

[Sy Feng Chong, executive]

So we looked at quite a few locations in the assessment process and when the final economics come down, Kodersdorf stood out to be the best location for us to build the second facility.

Any other questions from people here in the audience? Yes, Janice.

[Janice Chua, analyst]

Yes. Just follow-up question in Smart City. Can we have more color on the size and duration of some of the major contracts you secured or at least the contribution to top line in the first half from Smart City projects and the amount of contracts you secured in the first half as well as what is in the pipeline in terms of what you're bidding for? So we just want to have a sense of how much you are on track in terms of achieving this doubling of turnover from Smart City solutions?

[Sy Feng Chong, executive]

We are making good progress, as we mentioned. In the second quarter, some of the contracts that we acquired are in the Smart City domain, including this advanced transportation system project in the Middle East. We're talking about a few tens of million dollars, I think roughly $30 million to $40 million kind of range. At the right time, we'll give you an update, but I think the traction has been good so far. Okay.

Any questions from the -- from online? No. So any further questions before we adjourn for lunch? Okay, if not, thank you very much for your active participation. Thanks, once again, for joining us today in our results briefing. I'd like to invite you to join us for lunch as usual. And have a good afternoon for the rest of you who are not joining us for lunch. Thank you very much. And thank you also for those who joined us through webcast. Thank you.