Singapore Technologies Engineering Ltd

SGX:S63

Earnings Call Transcript 2019-Q2

[Sylvia Lee, executive]

Good morning, ladies and gentlemen. Welcome to ST Engineering's Second Quarter 2019 Results Briefing. To begin today's briefing, Mr. Cedric Foo, Group CFO, will present the group's performance for the financial period ended June 30, 2019. Following that, we will invite our management team for a Q&A session.

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

[Cedric Foo, executive]

Yes. Thank you, Sylvia. A very good morning to all of you who have joined us here as well as those who are joining us through webcast. ST Engine produced a very strong second quarter 2019 results.

I now refer you to Slide #4. Revenue stood at $1.78 billion for the second quarter this year, which is 8% year-over-year increase; EBIT 9% your increase; and profit before tax, 13% year-on-year increase. Net profit stood at $138.2 million, which is an 18% year-to-year increase.

For the first half of the year, revenue stood at $3.5 billion, which is a 6% increase; EBIT $299.8 million, a 12% year-on-year increase; PBT is 12% year-on-year increase as well; and net profit stood at $269.3 million, which is 14% year-on-year increase. We have a record order book in the history of the company. As at 30th June this year, it stood at $15.6 billion. This is due to a very strong new contract wins during this quarter. And about $3.8 billion of this $15.6 billion order book will be delivered in the second half of this year.

I have included a slide to normalize and add some color to how MRAS has added to our revenue for the second quarter and added to our net profit for the second quarter and henceforth. On the left is the revenue slide, the bar chart. Our CERO business had an opportunistic sale of engines in second quarter 2018, and that accounted for $32 million. So if you take that off, the $1.6 billion as of 2Q last year and if you also take off the absence of Jet Airways business in second quarter 2019 -- unfortunately, this airline entered into an insolvency process in June this year. Before then, it was a very strong customer of ours in our engine business -- then you would see that there is $193 million increase in revenue to $1.78 billion, and this is mainly attributed to MRAS.

On the slide to your right, our net profit. We started off with $118 million in second quarter last year, but we had a divestment gain of about $9 million from the sale of Airbus Helicopters shares in second quarter last year. And we also had the absence of Jet Airways' contribution to profit and the absence of opportunistic engine sale. And if you add to that, there's a net profit impact due to the absence of MTN redemption-relation cost. So if you remember, we redeemed our MTN, the medium-term note, USD 500 million of it, sometime in July last year. And that impact was taken in June, in the second quarter last year, and that was absent this year. So that brings us to the remaining $19 million or so, and this is mainly net profit contributed by MRAS for 2.5 months because we closed the transaction in about mid-April. Now MRAS is now a new but integral part of our group's ongoing business, and we can look forward to its contributing to our bottom line. So I'd also like to highlight that there will be some integration costs related to MRAS going forward.

Now on Slide 6, on group revenue. Aerospace grew at 17% second quarter '19 compared to second quarter '18, and this is largely due to a new income stream from MRAS and offset by the Jet Airways revenue and opportunistic engine revenue, which was absent. Electronics fell slightly by 3% in terms of revenue quarter compared to same period last year, and this is due to timing and revenue recognition for various projects in the CSG group and partially offset by higher revenue from the other groups. Land Systems, higher revenue from all business groups, mainly from Auto and M&W, and also higher project deliveries. So the revenue grew 10%. Marine revenue dropped slightly, and this is due to lower shipbuilding revenue recognized in Singapore operations and due mainly to the chilling off of a defense project and partially offset by improved performance from its U.S. operations. In terms of others, there are higher revenue from Miltope in the U.S.

The next slide, Slide #7, this gives you the breakdown of our revenue in second quarter 2019 by sectors as well as by location of customers. So let's start with the pie chart on the left. The outer ring shows 71% commercial and 29% defense business. The inner ring shows 47% from Aerospace, still our largest contributor, also helped by MRAS; Electronics at 28%; Land Systems at 16%; marine at 8.8%; and others at 1%.

Now on the right side, revenue by location of customers. Europe has gone up by 9 percentage point if you compare to same period -- 1Q 2019, and the U.S. has gone up by 4 percentage point. And both of these are largely contributed by MRAS. Although MRAS is a U.S.-based company, it's sold to customers in Europe, Safran, Airbus and therefore, they are recorded under Europe. And of course, it also sells to some customer in the U.S., and that has the impact of increasing the U.S. percentage share as well. Now this is really largely in line and consistent with our status strategy of expanding outside of Singapore. So the U.S. is now 24%. However, for 2018 or first quarter 2019, this figure was just 20%. And in Europe, it is now 21%. But if you compare to 2018 and first quarter 2019, it's 11% to 12% only. So these 2 figures have gone up. And Asia has come down correspondingly to 49%.

I'll now move on to Slide 8, group profit before tax. Aerospace had a slight dip in profit, and this is due mainly to the absence of gain from divestment of Airbus Helicopters shares as well as Jet Airways' contribution to PBT and the nonrecurrence of opportunistic engine sale and partially offset by new income stream from MRAS. Electronics also slightly down and this lower revenue -- consistent with lower revenue as well as higher distribution and selling expenses as the unit increases its overseas expansion sales programs. Now Marine is up due mainly to improved U.S. operations. The ConRo situation is now behind us.

Next, group net profit. Group sector net profit is directionally similar to the PBT slide that I explained. As a group, in second quarter, we realized a net profit of $138.2 million, which is an 18% or over the $117.5 million we recorded in second quarter last year.

The next slide talks about profit before tax margin. The blue bar shows 2019 second quarter, and the yellow bar shows second quarter of 2018. So as a group, we recorded a higher PBT margin of 10% versus 9% last year. Aerospace is slightly lower at 10% versus 12%, and this was mainly due to less favorable sales mix as well as the absence of the gain from divestment of Airbus Helicopters shares. The Electronics PBT margin is flat year-on-year at 11%, and Marine margin improved due to better performance from U.S. operations at 12% PBT margin versus 7%.

The next slide is group net profit margin, and this is directionally also in line with the PBT margins. Our effective tax rate for second quarter is 17%.

Now let's take a look at balance sheet, which has changed a little as a result of the MRAS acquisition as well as the SFRS 16 accounting standard for leases. In terms of intangible asset, the second row on the slide, it has increased from $1.15 billion as of end last year to $1.66 billion as of June this year. And this is due largely to MRAS intangibles, including goodwill, that is now recorded since acquisition is completed in April this year. In the third row, you will see right-of-use assets, $482 million, and this is mainly due to the capitalization of operating leases under SFRS 16.

I bring your attention now to current liabilities, which has from $3.85 billion to $4.6 billion. And this is largely due to financing to acquire MRAS. Now we have a longer-term plan to term out this financing, and it could be quite advantageous for us as interest rates are trending downwards. The next line I'd like to bring your attention to is the noncurrent liabilities, which has increased from $1.18 billion to $1.87 billion, and this is largely due to lease liabilities and MRAS pension liability. So they are all consolidated in this balance sheet.

Next for our statement of cash flow. In terms of operating activities, we recorded a net cash flow of $54 million, which is significantly higher than the negative $39 million in second quarter last year, and this is largely a result of higher EBITDA. Investing activity, the net cash used in investing activities of $773 million in second quarter was attributable mainly to the acquisition of MRAS, about $700 million, and also CapEx. And this is compared with asset under management proceeds, which is a positive $264 million in the year before.

Finally, in terms of financing, the net cash from financing activities of $431 million in second quarter 2019 is largely due to drawdown of bank loans for the purchase MRAS and working capital and also repayment of lease obligations principally for the Pensacola MRO hangar facility and payment of 2018 final dividend.

That brings me to the end of the presentation. I will leave you with the President and CEO's message, and we would like to invite my colleagues to join me for the question-and-answer. Thank you for your attention.

[Sylvia Lee, executive]

Thank you, Cedric. Can I invite the rest of 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, representing Aerospace; Mr. Ng Sing Chan from Marine; Mr. Vincent Chong, President and CEO of ST Engineering; Mr. Ravinder Singh from Electronics; Dr. Lee Shiang Long, representing Land Systems; and you've met Cedric.

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

[Sy Feng Chong, executive]

Well, good morning to all of you who are here with us at ST Engineering hub and to those of you who are joining us via webcast. Firstly, we are pleased to have delivered improved year-on-year results in second quarter of 2019. And as presented by Cedric, revenue was 8% higher in that PBT and net profit rose 13% and 18%, respectively, compared to the same period last year, including contribution from MRAS. For the first 6 months, group revenue was 6% higher, and PBT and net profit were up 12% and 14%, respectively, versus the same period last year. I'm also pleased to announce that our Board of Directors has approved an interim dividend of $0.05 per share payable to shareholders on 3rd of September. And this payout demonstrates our commitment to continue returning value to our shareholders.

Now I'll now elaborate on our second quarter performance. The waterfall chart, which Cedric showed at the start of his presentation, indicates that MRAS contributed positively to our second quarter results. As we had expected. But it was partly offset by the absence of Jet Airways revenue and opportunistic engine sales, which we had in second quarter of 2018. Net profit was driven largely by MRAS. Net profit growth was largely driven by MRAS and marine sector, absence of MTN-related costs but partly offset by the absence of prior years' divestment gain engine sales and Jet Airways revenue, as Cedric has mentioned earlier.

MRAS contribution was for about 2.5 months in second quarter of 2019. And besides being earnings-accretive with immediate contribution to our order book, MRAS helps to move the aerospace sector of the value chain as an OEM in nacelle manufacturing. Expenditure related to integrating MRAS will kick in from third quarter of this year, and we expect the integration cost to spread over the next few years, but second half will still be accretive as far as MRAS is concerned. We expect integration cost in 2019 full year to be less than $10 million in terms of impact and then 2020 as well, less than $10 million. And then from 2021 onwards it will taper down quite significantly.

Loss of Jet Airways revenue will have a near-term impact on the sector, but the team is actively looking for new revenue opportunities riding on the continued demand for CFM56-5B and 7B shop visits to backfill the freed up capacity. But this is normal run of the business, I mean we have ups and downs, and we manage these over the long term. But it is important that the fundamentals of our Aerospace business is now much stronger than before with now the integration of -- consolidation of MRAS into our results.

As I said, overall, the underlying business of the aerospace sector remained strong. EMS group, now with the addition of MRAS, will help to accelerate growth. As we move into the second half of this year, we will continue to focus on integrating MRAS, synergizing our nacelle MRO capabilities with the nacelle OEM business and building up our new component MRO JV operations in Vietnam, which we previously announced.

Moving to Electronics. Second quarter revenue and net profit were down 3% and 5%, respectively, impacted by timing of project recognition as well as highest business development activities. The higher OpEx reflects our continued investment in international sales and marketing activities to drive long-term growth for our business, specifically for Smart City projects outside of Singapore. One noteworthy development is that in June, we installed 2 smart street-lighting kiosks fitted with community engagement and public safety applications in Honolulu, Hawaii. The objective was to demonstrate the smartness, scalability and modularity of these kiosks and how they can be built on a platform that allows for future integration with other Smart City applications and technologies.

Now U.S. is an important market for our Smart City growth -- Smart City business growth or solutions growth, and this trial in Honolulu follows our recent success in the state of Georgia, U.S. where we won a contract to provide a Smart City platform to remotely control and monitor 50,000 smart streetlights to deliver energy savings and enhance public safety. Still on the U.S., we won a USD 95 million contract to develop a simulation training platform for the U.S. Army Synthetic Training Environment designed to augment live training. Now this is a significant win for us at a time when the U.S. Army moves into the virtual world of training. The proposed acquisition of Newtec is still expected to close in the second half of this year pending approvals from relevant authorities.

At the Land Systems sector, second quarter revenue was up 10% year-on-year driven by broad-based growth across its business groups with a flat net profit largely as a result of continued investment to build our robotics and autonomous bus business. Our nascent robotics business made progress in the last quarter. We are in active discussions with regional and local health care service providers to deploy our TUG autonomous mobile robots for delivery of food, linen and medical equipment.

Here in Singapore, we secured a contract to implement our TUG autonomous mobile robots in the Woodlands Health Campus for delivery of food, linen and medical equipment. We expect this business to continue to grow in the years ahead. We also received a grant from A*STAR to develop and provide an intelligent surgical inventory management system to the Singapore General Hospital and to automate the delivery of sterile surgical tools to operating theaters using autonomous mobile robots. And if this is successful, it can be applied in the global markets. These developments come on the back of our first seaport autonomous material handling solutions contract awarded by PSA in first quarter of 2019, as we announced.

On autonomous vehicles, our AV bus or autonomous shuttle bus for Sentosa will start a 3-month public trial very soon. The trial is to demonstrate, among other capabilities, our autonomous vehicle capability and fleet management system. If you watched the National Day Parade just last week, you might have seen the Hunter Army Vehicle -- Fighting Vehicle, or AFV, in the mobile column. The Hunter AFV, which was commissioned in June this year, was hailed as the centerpiece of the next-generation Armoured Fighting Vehicle in this class. This is the pride of our Land Systems sector. We expect, and as said before, delivery will start in third quarter of this year, and production will step up from 2020 onwards.

On Marine, second quarter revenue was down 6% year-on-year with lower shipbuilding revenue contribution from Singapore primarily. Its second quarter net profit, however, was up 55% year-on-year driven by improved U.S. shipbuilding performance and contributions from its engineering business driven by higher activities in water desalination plant or JIDP project as well as ROPAX charter.

In the U.S., the Polar Security Cutter program is progressing well. Outside of that, the Halter Marine was one of 4 shipyards awarded by Naval Sea Systems Command, or NAVSEA, a USD 2.9 million contract to explore options for future Common Hull Auxiliary mission -- Multi-Mission Platform.

In Singapore, the Heavy Fire Vessel was delivered to the Singapore Civil Defense Force. We also started construction of the Fast Patrol Boats for the Singapore Police Coast Guards, and the floating power plant, which we are partnering with Siemens on.

While we had a good set of results for the group in the second quarter of 2019, we continue to keep a close watch on the slowing global economic growth around the world. Now notwithstanding the macroeconomic environment, our order book at the end of second quarter 2019 stood at a record high of $15.6 billion. And I must also -- I can also share with you that the order book was up in all sectors in second quarter versus first quarter of this year. So all contributed to the record-high order book and was lifted mainly by the $1.5 billion new contracts that we've announced for aerospace. Aerospace recorded new contracts at a strong level of more than $800 million as well as Electronics, which announced a new contract win of more than $700 million.

And of course, we announced the Polar Security Cutter contract win for Marine, which is worth $1 billion for the first vessel, and with option of 2 other vessels to be exercised -- that can be exercised by the U.S. Navy and Coast Guard in due course. We adjusted our order book with the addition of MRAS backlog when we consolidated the results, and we also removed USD 350 million of Jet Airways contract in our order book for the contract that was secured in July 2015. So order book now exclude that but includes MRAS. We expect to deliver $3.8 billion of the order book in second half of this year. I think it's important to note that our robust order book gives us revenue visibility over the next few years.

Now in closing, and taking all developments into perspective, the group continues to be well positioned for long-term growth, and we remain focused on executing our growth strategy. Now on this note, I open the floor for questions. Thank you.

[Sy Feng Chong, executive]

Any first question from the floor? Yes, please.

[Gerald Wong, analyst]

Gerald from Crédit Suisse. My question relates to MRAS. You mentioned that the business was accretive to earnings. Could you quantify how much did that contribute to your earnings in the second quarter? And of your $10 million of integration cost to be incurred this year, how much of that has really been incurred? Lastly, of your $15.6 billion order book, how much of that is from MRAS?

[Sy Feng Chong, executive]

Okay. The chart that Cedric showed just now with the reconciliation which you also have, net contribution from growth activities is mainly from MRAS. We won't go into specifics to the dollar amount, but other than $19 million in net profit contribution from new growth, it's mainly from MRAS. Of course, we also have a stronger performance in marine sector, as you know, but this is mainly from MRAS.

And you asked another question. The integration cost, I said less than $10 million, it's not $10 million, actually, it's a shade below $10 million. And it's largely going to be incurred in second half of this year starting from second half. And then I also said it's roughly the same amount in next year, and then from 2021 onwards it will start to taper down rather quickly, okay? Order book, we do not go into the specifics of any entity within our group. But as I mentioned earlier, order book was stronger at the end of 20 -- second quarter 2019 because all 4 sectors contributed to it. MRAS, of course, within the aerospace sector contributed to it, okay?

[Cedric Foo, executive]

Maybe I just want to add on that the integration is actually progressing very well, and the operation is not at all disrupted by the change of ownership. As Vincent had said, we don't share the performance of the individual SBUs. But I can say that the earnings is accretive and will continue to be accretive, and the integration cost will kick in even despite the kicking in of the integration cost in the second half and next year. And we are also on track to ramp up the production from the 50 per month beginning of the year to 60 by the end of the year as expected by Airbus.

[Sy Feng Chong, executive]

Okay. Just so that we are clear, in the second half of this year, even with integration cost for MRAS, we expect MRAS to be accretive to our earnings. Yes, Siew Khee first.

[Lim Siew Khee, analyst]

Can I just check how much was the opportunistic engine sale profit?

[Sy Feng Chong, executive]

We won't go into details again, but you can see that the revenues impact from Jet Airways and opportunistic engine sale is roughly about split, if you look, $32 million. And the combined effect is $10 million. You can use your own, I think, estimate. This is roughly split in the middle for the purpose of discussion.

[Lim Siew Khee, analyst]

Okay. And the decrease in the AMM profit and margin, is it mainly due to the removal of Jet Airways?

[Cedric Foo, executive]

AMM?

[Lim Siew Khee, analyst]

Yes.

[Cedric Foo, executive]

No, the Jet Airways is under CERO.

[Lim Siew Khee, analyst]

Oh, okay. So that explains why CERO profit is down?

[Cedric Foo, executive]

Yes.

[Lim Siew Khee, analyst]

Okay. Then why is AMM profit and margin down or just generally the profit is down this quarter?

[Cedric Foo, executive]

Okay. For AMM, there are 2 reasons, and one of them, which I talked about in the first quarter this year, is that there's a delay in the relocation of the pilot training school from Vallair to General Cob. And the pilot training school under the AMM cluster, okay? That's one of the reasons. The other reason is that there is a slight program -- modification program due to the customer, okay? It's supposed to start late last year but yes, actually, only started beginning of this year, so it just is a ripple effect now, Siew.

[Lim Siew Khee, analyst]

So you get more cost for the modification program.

[Cedric Foo, executive]

There's a slight -- obviously, there is some cost incurred, but we expect this thing to be recovered as we open the program.

[Lim Siew Khee, analyst]

So this is just a one-off that this quarter you add more costs or...

[Cedric Foo, executive]

As you know, any business, there will always be up and down, and we just have to manage it.

[Sy Feng Chong, executive]

I think suffice to say that, as Cedric mentioned and I also said it in my prepared remarks, the business do go to some pluses, some minuses. But if you look at the fundamentals of the Aerospace business, it's certainly stronger now. The base business continues to be robust. I think that's important. We have good visibility in terms of our contract wins, and we are well positioned for future growth.

[Cedric Foo, executive]

Maybe I'll just add on to what Vincent had said. If we will just strip off all the so-called one-off be it the opportunistic sales of the engines, the divestment of our stake in Airbus, had a couple in Southeast Asia, the core business actually, bottom line-wise, it actually improved by close to 20%, the core business.

[Lim Siew Khee, analyst]

Okay. My last question on EMS. So in terms of margin, is this -- I know that's where you consolidate MRAS, right, EMS?

[Cedric Foo, executive]

Yes.

[Lim Siew Khee, analyst]

So your margin has actually come down to about 6%. Is that a run rate for this division?

[Cedric Foo, executive]

Okay. One is that obviously there is always a sales mix in the EMS. There are projects that we are running. So depending on the time whether the sales -- depending on the sales mix. The other one is don't forget that actually for the EMS, we also have this A321P2F program, okay, and we are in the phase of prototyping, there are learning curves.

[Lim Siew Khee, analyst]

Okay. Can I have 2 more questions? One is to Land Systems. The strength in this quarter, is it because of lower R&D? And should we be -- or is it because of the commissioning of the 1 unit of AFV and whether we should expect this as the base strength going forward?

[Cedric Foo, executive]

We did deliver a few Hunter vehicle, and the delivery will pick up in the second half of this year. In terms of the R&D, actually, we will continue to invest in robotic and autonomous bus. As well, you have heard from Vincent, we will be launching the trial in Sentosa very soon, and we will continue to invest in autonomous bus, KBT, and that will allow us to scale.

[Lim Siew Khee, analyst]

Okay. My last question is are there wider losses, any update on Miltope or...

[Sy Feng Chong, executive]

Actually, Miltope has recorded a better second quarter in 2019 versus second quarter of 2018. As you know, turnaround plan is in place, and we are optimistic about the longer-term potential of this entity. So it has done better in 2019 versus last year. Our others segment actually is stronger, much stronger this quarter in terms of revenue than last year same time.

[Rachael Tan, analyst]

This is Rachael from UBS Research. I have a question on MRAS and the U.S. So first question will be what in MRAS do you sell to U.S. companies because you recorded that U.S. reported for some growth.

[Sy Feng Chong, executive]

Okay. Serh Ghee, answer the question.

[Serh Ghee Lim, executive]

Yes. MRAS is a complete design and manufacture nacelle system, so the major program is the LEAP-1A nacelle system that we supply to Airbus, okay? For the U.S. side, we also work on nacelle system for passport, which is the regional jet, okay? And there are also, I would say, legacy programs that they have been working on, and there are aftermarket sales, okay, for example, the CF6, which is still growing very strong. CF6 is the engine that is powering the 767, and there's quite a significant fleet of CF6 in U.S.

[Rachael Tan, analyst]

And my next question will be on the U.S. So I noticed that in terms of the revenue contribution, 31% of revenue incorporated is in the U.S., whereas customer location from the U.S. is only 24%. Could you just briefly explain this mismatch and comment on the -- whether any tariffs, et cetera, will impact this segment?

[Sy Feng Chong, executive]

So perhaps let me take this, and then Serh Ghee can supplement. As Serh Ghee mentioned, right, sometimes the business unit entity may be a resident in the U.S., but they export products to other regions. Just like MRAS, let's say, A320neo nacelles will be for sale to Europe. So that partly explain what you describe. Now when it comes to tariffs, I've mentioned it in the last quarter, I'll say this again, of course, we continue to watch the situation closely. There is some negative impact but not material or significant enough at this time for us to be unduly worried. But we are keeping very close watch on the situation because ultimately, we're not going to be immune. But so far, based on our assessment and what we see, we have not seen any significant or material impact yet because we are able to mitigate with -- the impact by either contractual clauses that allow us to adjust prices or being able to pass some of the impact, if not all, to the market for some entities. Net-net impact is negative, but it is not at a very -- any significant level both in terms of bottom line and top line.

[Rachael Tan, analyst]

Then could you provide some qualitative examples of how the tariffs could impact some of your businesses so we get a sense of what are some cost levers that will be moved?

[Sy Feng Chong, executive]

Okay. We won't go into specifics of the product type. But generally, if you have hot products, actual, physical product, export, that kind of business would be affected more than the rest, okay? But as I said, it's not significant at this time, it's not material, but we will keep a watchful eye on it.

[K. Ajith, analyst]

This is Ajith from UOB Kay. Some accounting-related questions. Cedric, so earlier you mentioned that you're looking to extend the term loan for the MRAS acquisition. So is it currently a 1-year loan? And perhaps you can give some guidance in terms of what is the approximate duration. Second question is in terms of amortization of intangibles. Did you amortize any of the goodwill pertaining to premium on acquisition for the MRAS? So these are the 2 questions that I have.

[Cedric Foo, executive]

Yes. We have briefed the analysts previously that when we signed the contract to acquire MRAS, we entered into several bilateral loan facility, bridging loan facility, with a few banks. And that's for a 1-year period. So we are now in the midst of looking at introducing commercial paper in the U.S. And that would also -- can run up to 397 days. We will use that to replace the bridging loan, which is not due yet anyway. It's a 1-year term. In terms of amortization, we will have to amortization -- we will have to amortize, of course, the acquired assets and intangibles but not the goodwill, goodwill will be subject to impairment test.

[Zhiwei Foo, analyst]

I'm Zhiwei from Macquarie. I have a question for Serh Ghee regarding MRAS. Okay. So as Cedric has kind of highlighted in his chart, it seems like the bulk of the profit from growth is about -- comes from MRAS. So we're getting to about -- a net margin about 10% from that business. Now taking the production figures that you have provided and working backwards from the revenue, I get the sense that the LEAP-1A engine doesn't really make up the majority of the revenue yet, right, considering that you supply about 43% of the components for this LEAP-1A nacelles. So my question is, as your production capacity comes up, right, and ex these integration costs, should we expect margins to kind of like improve as a result of this higher production from the LEAP-1A?

[Serh Ghee Lim, executive]

As in any program, okay, once you have skill, once you have enough skill, efficiency should improve.

[Zhiwei Foo, analyst]

And maybe just to get a sense, was LEAP-1A a big part of the revenue base in 2Q for MRAS? Or was it less than 50%?

[Serh Ghee Lim, executive]

It's significant. It's more than 50.

[Zhiwei Foo, analyst]

And this is expected to continue growing in size while the other programs are sort of like scaling back in size?

[Serh Ghee Lim, executive]

I'll say the scaling back is just that the growth in LEAP-1A will be faster than the legacy programs, so to speak. Having said that, I think we also speak about the plan that we will be going in to grow the maintenance, repair and overhaul of the nacelle system. So we are in the planning stage, okay, with the start-up this capability probably in the first Q next year.

[Sy Feng Chong, executive]

And that's where we derive our synergy because MRO is our core strength, and we are bringing that to strengthen the MRAS business, okay.

[Lorraine Tan, analyst]

I'm Lorraine from Morningstar. Just follow-up questions on -- mainly on MRAS as well. Just after -- as has been asked, post the integration costs, I'm just curious whether you anticipate to achieve margin enhancements over the current state of MRAS? And also in terms of the refinancing, what would be the sort of interest savings you anticipate on the refinancing?

[Serh Ghee Lim, executive]

Well, for all our business, whether it is MRAS, which is, I would say currently is core already, we are always looking at ways to improve. I mean we're always in a continuous improvement mode, okay? And in fact, just to share that the first thing that we took a look when we go down and take a look at our production floor and we see how we reflow the production, so it's -- our asset business, as usual, okay, we have to do it.

[Sy Feng Chong, executive]

We have a strong track record of continuous improvement within our aerospace sector, which is why our airframe business, as you know, obviously has been very, very competitive in terms of how we ensure quality and cost efficiency. And the same discipline set of processes, I think, we'll share with MRAS, which already today are working on a strong platform. So I think we're going to see how we can collectively make -- get even stronger, but continuous improvement is part of our core business, and we see that as an important part of our business undertaking.

[Cedric Foo, executive]

In terms of financing costs, we always work to improve the margins, but that has to be taken -- but tenure has to be taken into account. So of course, a longer-tenure financing will cost more in terms of margins as opposed to shorter-tenure one, which we have today. But fundamentally, what we're trying to do is to basically improve the capital employed by introducing more debt and put this debt, this cash process into good use like an MRAS type of investment return. I think that directionally will improve our economic value added. And in terms of financing, we will try to match the life of the loan with the life of the asset but also want to have flexibility in terms of, say, commercial paper where you can buy and sell on a daily basis. In fact, you can put up at an auction in the morning and get the money in the afternoon and then return it 1 week later. I think that's important because that allows us to return surplus cash when it is not already needed for investment to keep our capital employed low and tight.

[Sy Feng Chong, executive]

Well, our strong balance sheet and strong credit rating gives us optionality in terms of how we structure our capital, and we obviously continue to work hard on it, as Cedric mentioned.

[Lorraine Tan, analyst]

Yes, just one follow-up. Given the mix of business, can you give some guidance maybe on the effective tax rate?

[Cedric Foo, executive]

For second quarter, it was 17%, 1-7.

[Sy Feng Chong, executive]

Do we have any from online? No. Anymore? Rachael?

[Rachael Tan, analyst]

It's Rachael from UBS. In terms of your shared services and backroom integration processes, is there any big area where you have targeted going forward?

[Sy Feng Chong, executive]

No change to what we shared at the Investor Day. We expect cumulative savings over 5 years to be $150 million. We are continuing to achieve -- work towards that target. Now of course, procurement is one important lever. And we do more, more collective procurement across the group, and we are getting -- we are making good progress. I think to answer your question, that's one big area for us. But for every -- every one of the staff functions, there are opportunities that we are collectively working on.

[Rachael Tan, analyst]

So this target would be across all your operating regions, including America and Europe?

[Sy Feng Chong, executive]

Okay. So we started with Singapore first, but we expect to keep going to the other regions as well. And we are already addressing the low-hanging fruit, so to speak, even outside of Singapore in various aspects. For example, health care insurance costs in the U.S. or other procurement opportunities. So we are already looking at the low-hanging fruits at this time. Okay. But ultimately, we would be looking at the global -- all the global entities eventually, but our focus in the first couple of years is really more in Singapore, okay, where we have more scale and obviously more opportunities.

Okay. There's no questions dialing in from the outside, online people, participants on the webcast. So on that note, we will end our panel discussion. I thank you for your attention. For those of you who joined us via webcast, thank you for your attention. And for those of who can join us for lunch afterwards, you are most welcome. So with that, thank you very much for being here today.