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Edited Transcript of BN4.SI earnings conference call or presentation 20-Apr-17 9:30am GMT

Thomson Reuters StreetEvents

Q1 2017 Keppel Corporation Ltd Earnings Presentation

Singapore Apr 22, 2017 (Thomson StreetEvents) -- Edited Transcript of Keppel Corporation Ltd earnings conference call or presentation Thursday, April 20, 2017 at 9:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Chin Hua Loh

Keppel Corporation Limited - CEO and Executive Director

* Hon Chew Chan

Keppel Corporation Limited - CFO

* Tiong Guan Ong

Keppel Corporation Limited - CEO of Keppel Infrastructure Holdings Pte Ltd

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Presentation

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Chin Hua Loh, Keppel Corporation Limited - CEO and Executive Director [1]

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Good evening. We welcome you to the conference and webcast on Keppel Corporation's results and performance in the first quarter of 2017. I would also like to welcome Chris Ong, acting CEO, Keppel Offshore & Marine, who is joining us on the panel for the first time. Chris has taken over from YY Chow, who retired last month after 36 years of service. Chris has been in our Offshore & Marine division for more than 17 years and is part of the leadership team we have been grooming for succession.

As we had cautioned at the full year 2016 results announcement in January, despite the increased optimism in the market following the rebound in oil prices, the Offshore business continues to face very challenging conditions. This is due to, among other factors, the oversupply of rigs and support vessels. It will take some time before the industry fully recovers. Notwithstanding the headwinds, the Keppel Group has remained resilient, underpinned by our multi-business strategy, with different engines kicking in to steady the group.

Rapid urbanization, especially in Asia, is creating strong demand for energy, infrastructure, clean environment, high-quality homes, offices and retail developments as well as connectivity, needs for which the Keppel Group has been providing a range of solutions.

While some of the industries that our businesses operate in may have their own cycles, sustainable urbanization will provide the Keppel Group with many years of secular growth.

For the first quarter of 2017, we achieved a net profit of $260 million, an increase of 23% over the same period in 2016.

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a smaller free cash outflow of $80 million compared with the outflow of $306 million in first quarter 2016. Our net gearing remained almost unchanged at 0.57 as at end March 2017 compared to 0.56 as at end December 2016.

Recurring income contributed $78 million or 30% of the group's net profit for first quarter 2017, underpinned by stable and fairly predictable income from our REITs and business trusts; asset management; infrastructure services and operations and maintenance; and rental and charter activities.

We are focused on improving the overall quality of our earnings and the group's recurring income, which will better fund our capital spending as well as dividends.

I shall now take you through the developments in our business divisions.

Amidst the continuing downturn, Keppel O&M managed to break even. The fall in net profit was due to the significantly lower volume of work. While the division continued to make a profit at a gross operating level, it was insufficient to cover our fixed costs. Contributions from associates helped the division to break even. This shows the importance of the rightsizing efforts that Keppel O&M has embarked on since early 2015.

To keep our O&M division lean and fighting fit, our rightsizing efforts have continued. We announced in January that we have mothballed 2 overseas yards, and we're in the process of closing 3 supporting yards in Singapore. We have ceased operations at our yard -- at shipyard route and returned it to JTC Corporation at the end of March. The closure of the other 2 yards will be announced later in the year.

To further optimize operations and rationalize our global network of yards, Keppel O&M has entered into a term sheet agreement to divest Keppel Verolme, our shipyard in The Netherlands, to Damen Shiprepair & Conversion BV. We'll continue to seize opportunities in Europe and the North Sea through our network of yards in Singapore and around the world.

In the first quarter, Keppel O&M further reduced its global direct workforce by about 1,250 or 6% compared to the previous quarter through natural attrition, early termination of contracts and retrenchments.

Since the start of 2015, we have reduced our global direct workforce by close to 18,000 or about 49%. Following the latest reductions, the headcount in Keppel O&M is approaching a steady state that is appropriate for the level of work in our yards. Nevertheless, we will actively monitor market conditions as well as explore ways to achieve further cost savings and ensure that Keppel O&M remains profitable despite the reduced top line.

Keppel O&M's net order book as at end March 2017 stood at $3.5 billion, excluding the projects for Sete. Our yards continue to execute the projects on our books safely, on time and on budget and with the quality that our customers have come to expect from Keppel.

Earlier this year, Keppel shipyard delivered an FPSO vessel to Yinson Production, which is on charter to ENI Ghana Exploration and Production. In Brazil, our BrasFELS yard has marked the sail away of the first of 2 Replicante projects, FPSO P-66, for delivery to Tupi BV, a consortium represented by Petrobras. Our work scope for the projects included the fabrication, integration, testing and commissioning of topside modules. Meanwhile, work on the second Replicante, FPSO P-69, is progressing smoothly.

Other projects we are on track to deliver shortly include the installation and integration of topside modules for a newbuild Catcher FPSO from BW Offshore and a newbuild semisubmersible for the state oil company of Azerbaijan Republic.

In mid-2017, we are also scheduled to deliver Golar Hilli, the first of its kind floating liquefaction vessel conversion in the market.

Amidst the challenges facing the industry, we continue to work closely with our customers to seek win-win outcomes. We have reached an agreement with Fecon International Corp. on the further deferment of its 3 KFELS B Class jackups, originally stated for delivery this year, to second half 2019.

KFELS has also entered into a Heads of Agreement with Borr Drilling for the contracts of Transocean 5 jackup rigs to be novated to Borr Drilling. Under the new agreement, Borr Drilling will take over the contracts, make a downpayment of USD 275 million and undertake the remaining payment terms to Keppel FELS. The delivery of the first 3 rigs has been brought forward to 2017 and 2018, while the remaining 2 rigs will be delivered in 2020. The deal, beyond improving Keppel O&M's cash flow, is a testament to the strong demand for Keppel's proprietary rigs even in the present market conditions.

We'll now move on to our property business.

Our Property division made a net profit of $103 million for first quarter 2017, down slightly from $106 million in first quarter 2016.

Leveraging our first mover advantage in Vietnam were the deepening of presence in this growth market with an increased stake in the Saigon Center development in Ho Chi Minh City. This reflects Keppel Land's confidence and long-term commitment to contribute to sustainable urbanization in Vietnam with our quality portfolio of properties.

We have also signed a Memorandum of Understanding in the presence of the Prime Ministers of Singapore and Vietnam, with Vietnam's State Capital Investment Corporation to collaborate on investment opportunities in the country.

In Yangon, Myanmar, another market which Keppel Land has been in for many years, we have opened the 23-storey Grade A office tower in Phase 1 of the Junction City development. This was jointly developed with the Shwe Taung Group and has received positive interest from international tenants.

In Indonesia, in line with the group's strategy to recycle assets to seek higher returns, Keppel Land has divested its 80% effective stake in the Surabaya property company, achieving a net profit of about $29 million. We will continue to explore opportunities to scale up our presence in greater Jakarta.

In China, we completed the sale of our stakes in the Chengdu and Wuxi townships, which will allow us to channel our capital to other projects.

Keppel Land sold 980 homes in the first quarter, with a total sales value of about $530 million. Our overall sales volume was about 4% higher year-on-year, comprising 730 homes in China, 110 in Vietnam and 130 in Singapore.

Home sales in China slowed slightly, in part due to the property cooling measures and also because fewer new homes were launched in the first quarter. Meanwhile, home sales in Singapore have picked up. The Glades, comprising 726 homes, jointly developed with China Vanke in Tanah Merah, is about 94% sold, while homes at Highline Residences are close to 66% sold, and those at Corals at Keppel Bay are about 64% sold.

Our projects continued to receive interest from discerning homebuyers, with a penthouse at Corals sold in first quarter 2017 for about $18.9 million.

Keppel Land is in a favorable position of having a large land bank comprising over 64,000 homes across key cities in Asia. We are not in a hurry to acquire land. And we'll only do so at a land price that will provide an acceptable risk-adjusted return.

Of the 64,000 homes in our pipeline, about 18,000 homes are ready for launch from now to 2019, and we have over 1 million square meters of gross floor area under development in our commercial portfolio. The commercial projects will be progressively completed and contribute to our recurring income, revaluation gains and eventually, divestment gains where we monetize the assets.

We turn our attention now to our Infrastructure division.

Poised to become a stable contributor to the group's bottom line, Keppel Infrastructure has been actively pursuing opportunities in energy and environmental infrastructure, both in Singapore and overseas.

Keppel Infrastructure's net profit for first quarter 2017 was $30 million, up from $10 million year-on-year, including gains on divestment of our stake in GE Keppel Energy Services to GE Singapore. This is in line with our strategy to divest noncore assets and recycle capital to pursue other opportunities.

Keppel Infrastructure began the year with the signing of the 25-year water purchase agreement with PUB, the national water agency for Singapore's fourth desalination plant. The plant is now going through detailed engineering and is in the process of obtaining the relevant permits. It is expected to commence operations in 2020.

In March, Keppel Infrastructure completed the treatment capacity upgrade of the Ulu Pandan new water plant ahead of schedule and on budget. This is the first large-scale new water plant in Singapore to adopt a third-stage reverse osmosis configuration.

Keppel Infrastructure has just concluded an agreement with the Singapore Economic Development Board to develop, own and operate a state-of-the-art gasification facility on Jurong Island in Singapore. Securing the agreement for development of the facility is an important step in the preparation for the final investment decision, which will be taken at a later date. The facility, now in its project development phase, will use proven and reliable best-in-class technologies to produce hydrogen, carbon monoxide, syngas and other industrial gases from a variety of feedstock, including coal and refinery byproducts. It is well positioned to meet the anticipated future demands of Singapore's refining and chemicals industries and reinforces Keppel Infrastructure's capability as a solutions provider for sustainable development.

Data Centres continue to be an important growth business for the group. This month, Keppel Data Centres and Hong Kong's PCCW Global launched the PCCW Global-Keppel International Carrier and Exchange in Hong Kong. The collaboration leverages PCCW Global's extensive global network connectivity and marks the expansion of Keppel T&T's data center footprint into Hong Kong.

Keppel's fourth vertical, Investments, continues to contribute steady and recurring income streams. Our asset management business recorded a net profit of $13 million for first quarter 2017 compared to $15 million in the same quarter last year.

Besides actively seeking new investment opportunities, Alpha Investment Partners also focuses on divestment activities to lock in and deliver returns to its investors. During the first quarter, Alpha Managed Funds divested a total of 4 assets in Singapore, Japan and Korea. In January, Keppel DC REIT completed its acquisition of Keppel DC Singapore 3, which will be its third asset in Singapore.

As the 30 square kilometer Sino-Singapore Tianjin Eco-City matures, we are seeing increasing demand for its land and homes. Land in the Eco-City can be developed directly by our 50-50 joint venture master developer SSTEC or by Keppel Land or our Chinese partner TECID, or it can be jointly developed with third parties or sold to others for development. We reported in January 2017 that our joint venture had sold 3 parcel of land at a land auction. Such land sales are inherently lumpy and may not be repeated in every quarter. The prices of land and homes can also be affected by the Chinese government's property cooling measures. Nevertheless, the land sales made a notable contribution to the Keppel Group in this quarter and reflects the long-term potential of the Tianjin Eco-City project.

The Tianjin Eco-City is a good example of how different businesses in the Keppel Group can work together to provide comprehensive solutions for sustainable urbanization. We are seeking more growth opportunities, building on our competencies and deepening collaborations across verticals.

Keppel O&M is pushing into new markets and revenue sources. Gas will be an important market of the future, and we are priming Keppel O&M to be an industry leader, with an extensive gas strategy that spans the value chain. We're actively pursuing opportunities in small-scale LNG vessels with our customers and partners. We see many opportunities in this space, especially where Keppel-built carriers and regasification units can be deployed alongside small gas-fired power units. We are also repurposing our offshore technology for applications in other areas, including floating infrastructure assets.

Capitalizing on the substantial residential land bank and commercial portfolio that we have built up over the years, Keppel Land is positioning itself as a multidimensional real estate player. We have built an enviable land bank over the past decade while still keeping Keppel Land's average ROE high at 18.4% per annum. To continue to aim for the highest return on equity in the industry, we will have to work our assets harder to generate higher returns as well as seize opportunities through strategic partnerships. Where appropriate, we could also buy completed properties and create value through asset-enhancement strategies and invest in operating platforms.

In the Infrastructure space, we are strengthening our positions in energy and environmental infrastructure as well as data centers and logistics. The recent desalination and gasification projects are some examples of how we are expanding our breadth of expertise and the range of solutions we provide.

Keppel Capital will continue to expand our capital base with co-investors and work closely with the rest of the group to drive the development of real assets. It will support our business model through growing our recurring income as well as providing a platform for capital recycling. With agility and financial discipline, we are confident that we can harness our synergies as a multi-business group to capture opportunities in sustainable urbanization.

I shall now invite our CFO, Hon Chew, to take you through a review of the group's financial performance. Thank you.

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Hon Chew Chan, Keppel Corporation Limited - CFO [2]

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Thank you, Chin Hua. A very good evening to everyone. I shall now take you through the group's financial performance for the first quarter of 2017.

In this quarter, the group recorded a net profit of $260 million, which was 23% higher than the same quarter last year. Correspondingly, earnings per share increased to $0.143. EVA was higher at $23 million, and annualized ROE increased to 7.6%. Free cash outflow was $80 million as compared to free cash outflow of $306 million in the first quarter of 2016, due mainly to slowdown in working capital increases in Offshore & Marine. Net gearing at 57% was at about the same level as at the end of financial year 2016.

Next, the summary group profit and loss statement.

The group's revenue for the first quarter was 28% or $495 million, lower than the same quarter last year. Lower revenue from Offshore & Marine and Property divisions were partially offset by higher revenue from Infrastructure division. As a result, operating profit for the quarter at $187 million was lower by 23% or $91 million. Lower profits from Offshore & Marine and Property divisions were partially offset by higher profits from Investment and Infrastructure divisions.

Despite low operating profit, profit before tax increased by 24% or $68 million, due to higher share of profit from associates, in particular, the share of gains from the divestments of Central Park City in Wuxi and The Botanica in Chengdu as well as contributions from the Sino-Singapore Tianjin Eco-City from the sale of 3 land parcels. After tax and noncontrolling interest, net profit was higher by 23% or $49 million, translating to an earnings per share of $0.143.

At the group level, revenue at $1.24 billion was 28% lower than the same quarter last year, led by lower revenues from the Offshore & Marine division as a result of lower volume of work and deferment of some projects.

The Property division, too, saw lower revenues, due mainly to the absence of revenue from 8 Park Avenue in Shanghai, which obtained occupancy permit in the first quarter of last year; and lower revenue from The Glades, which already obtained TOP in December 2016. This was partly offset by higher revenue from the handover of completed units in the Waterfront Residences in Wuxi and higher revenues recognition from construction progress in Highline Residences in Singapore. Infrastructure division's revenue rose by 20% due to increased sales in the power and gas business.

The group recorded $346 million of pretax profit for the first quarter of 2017, 24% or $68 million higher than last year. Due to the year-on-year drop in revenue, the Offshore & Marine division was just able to break even compared to the $122 million pretax profit last year. The Property division's pretax profit was 11% or $15 million lower than that of the corresponding quarter in 2016 as a result of lower operating results, partly offset by higher share of profits from associates as a result of gains from the divestment of stakes in trading projects, namely Central Park City in Wuxi and The Botanica in Chengdu.

The Infrastructure division registered a $19 million increase in pretax profit due to higher contributions from the power and gas business as well as the gain from the divestment of GE Keppel Energy Services Pte Ltd.

Pretax profit from the Investment division of $181 million was driven mainly by higher share of profit from Sino-Singapore Tianjin Eco-City arising from the sale of 3 land parcels, write-back of provision for impairment of investments, recognition of fair value gains on KrisEnergy warrants and profit on sale of investments, partly offset by share of losses in KrisEnergy.

After tax and noncontrolling interest, the group's net profit increased by 23% or $49 million to $260 million as compared to the same period in 2016. While Investment's division being the top contributor to the group's earnings at 48%, followed by Property division at 40% and Infrastructure division at 12%, the group's net profit of $260 million for the quarter translated to an earnings per share of $0.143, 24% higher than the first quarter last year.

Cash flow from the group's operations was $118 million in this quarter, down from $342 million in the same quarter last year. Net cash outflow from operating activities was $9 million as compared to the outflow of $335 million in the first quarter of 2016. This was mainly due to a slowdown in working capital increases in Offshore & Marine. Net cash outflow from investing activities was $71 million, comprising advances to associated companies and operational CapEx of $117 million, partly offset by dividend income from associated companies and divestment proceeds. As a result, there was an overall free cash outflow of $80 million during the quarter, a $226 million decrease from a free cash outflow of $306 million in the same period in 2016.

With that, we have come to the end of the slides for the results presentation. And I hand the time back to our CEO, Chin Hua, for the Q&A section. Thank you.

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Chin Hua Loh, Keppel Corporation Limited - CEO and Executive Director [3]

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Yes. Thank you, Hon Chew. We are ready to take questions on the web.

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Questions and Answers

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Chin Hua Loh, Keppel Corporation Limited - CEO and Executive Director [1]

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I think we really have the first question is from Ajay of JPMorgan in Singapore. Two questions from me. Can I -- the first question, can I clarify under which division the project-based earnings of $125 million comes from? Second question, can we see similar such performance from project-based segment in coming years? I think the first question, Ajay, this one, I think you're referring to the Investments division, I presume.

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Hon Chew Chan, Keppel Corporation Limited - CFO [2]

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The project-based earnings mainly from Offshore & Marine and also sale of residential homes.

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Chin Hua Loh, Keppel Corporation Limited - CEO and Executive Director [3]

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Okay. So this would depend on the recognition over the quarters, on the second question?

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Hon Chew Chan, Keppel Corporation Limited - CFO [4]

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That's right.

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Chin Hua Loh, Keppel Corporation Limited - CEO and Executive Director [5]

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All right. We have a question from Cheryl Lee of UBS Singapore. May we have an update on the jackup rigs for Grupo R and Clearwater? It still appears in the slides as scheduled for 2017 delivery. In which quarter is this expected? Second question. Regarding the $46 million write-back of investments in Infrastructure, could you clarify what had changed which allowed the write-back? So for the first question, can I have Chris Ong?

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Tiong Guan Ong, Keppel Corporation Limited - CEO of Keppel Infrastructure Holdings Pte Ltd [6]

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Just an update for Grupo R and Clearwater. For Grupo R, there are 4 rigs to deliver. They will be distributed between the third quarter and the fourth quarter of this year. For Clearwater, it will be at the last quarter of the year.

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Chin Hua Loh, Keppel Corporation Limited - CEO and Executive Director [7]

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Okay. Thank you. I will ask CFO to answer the second question on the write-back.

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Hon Chew Chan, Keppel Corporation Limited - CFO [8]

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Okay. On the second question, the write-back of impairment of investments, the $46 million that you referred to, actually pertains to KrisEnergy. Let me just explain how we account for KrisEnergy. As you know, it is an associated company, so we actually equity account for our share of the results of KrisEnergy. Now given that they're a listed company, there's actually a 1-quarter time lag in equity accounting their results. So the first quarter share of the losses from KrisEnergy is actually KrisEnergy's fourth quarter results. So we actually have to recognize our share of that loss, which amounts to our share of $90 million. Given that last year we also made a provision for impairment at our level, after equity accounting for our share losses, we can then write back the provision that we made last year because otherwise, it will be double accounting, given that we have already recognized part of that in the provision last year. So that's the reason why we are able to write back. But net of it all, it is still a net share of loss this year, even after the write-back to the provision.

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Chin Hua Loh, Keppel Corporation Limited - CEO and Executive Director [9]

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Thank you. As a follow-up question from Ajay from JPMorgan. Can Keppel management help explain the breakup of RIDs of $57 million, given on Page 2 of accounts we see over $150 million on write-backs of impairments, gain on disposal of subsidiaries and associates and gain on investments?

I think on the RID of $57 million, I think, as was covered in my speech, this pertains to the divestment of our associate Keppel GE Energy Services and also partly from the various divestments that we have made in Keppel Land for the quarter. You want to add something?

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Hon Chew Chan, Keppel Corporation Limited - CFO [10]

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Yes. Can I go back to the question? I think...

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Chin Hua Loh, Keppel Corporation Limited - CEO and Executive Director [11]

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Was that the second part? $150 million.

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Hon Chew Chan, Keppel Corporation Limited - CFO [12]

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They asked about the gain from...

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Chin Hua Loh, Keppel Corporation Limited - CEO and Executive Director [13]

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Chew, you want to cover it? And can go back -- can you go back to that question from Ajay?

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Hon Chew Chan, Keppel Corporation Limited - CFO [14]

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I think there are 3 other parts. The write-back of impairments, I think we have covered. That's $46 million. That's pertaining to KrisEnergy. Then the scale of disposal, subsidiary and associates. I think the associates, we have covered. That pertains to the sale of our interest in the Central Park City in Wuxi and also the sale of The Botanica in Chengdu. As for the gain on disposal of subsidiaries, that also includes our share because the holding in the Central Park City in Wuxi was helped through subsidiary and associate. So there's a share of that gain is also recognized as gain on disposal of subsidiaries.

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Chin Hua Loh, Keppel Corporation Limited - CEO and Executive Director [15]

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Okay. Thank you. Can we have the next question? This is a question from Jacqueline Woo of MS Singapore. How many Singaporeans have been let go in your rightsizing efforts since 2015? How many in the first quarter? You said headcount in Keppel O&M is approaching a steady state that's appropriate for the level of work in the yards. Are you expecting further staff reduction in the next quarter?

As I have mentioned, for the first quarter 2017, Keppel O&M has reduced its workforce by about 1,246 or about 6% from the previous quarter. I think we are -- we don't give a breakdown as to the different nationalities. I think it's not pertinent as far as the results are concerned. What is more important is that I think we have also said that we are approaching a steady state. So for now, we think that we are at about the level that we are comfortable with, given what we can see to be the workload for the yards. But of course, we will have to monitor this closely to make sure that this level of work and the workforce that we have is appropriately sized for the work that we can see going forward. Okay?

This question is from [ Abhishek ] of Bloomberg in Singapore. How has been your order inflow in O&M division so far this year? And what is the outlook for the order book for the entire year?

We don't give any outlook for the order book. But maybe just to give some color on how the industry is doing in terms of order book, can I ask Chris Ong to provide some...

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Tiong Guan Ong, Keppel Corporation Limited - CEO of Keppel Infrastructure Holdings Pte Ltd [16]

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Okay. For the order inflow itself for the first quarter so far this year, we have the dredges in the first quarter. Moving forward itself, the team is working hard to pursue other opportunities in terms of LNG, specialized vessels, (inaudible) vessels and also repurposing our offshore technology for non-drilling application.

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Chin Hua Loh, Keppel Corporation Limited - CEO and Executive Director [17]

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Okay. Thank you. This question is from Ms. Lim S. Khee of CIMB in Singapore. On the O&M -- she has 2 questions. On O&M, why did revenue come down so much in first quarter 2017?

Well, the answer is that is due to the lower volume of work.

Her second question, the O&M EBIT so low, any one-off there?

There was no one-off, but I think, as I shared in my speech, the key was that because the volume was quite low, we -- the gross operating profit was not sufficient to entirely cover our fixed costs. And it shows how important it is to keep our rightsizing efforts have been since 2015.

Next question. This question is from Foo Zhiwei of UOB Kay Hian in Singapore. Could you elaborate on the 0.8% operating profit for the O&M division? Were there any one-off that was included within that result that resulted in the low margin? And how should we look at this going forward?

I think my -- I think this question has been answered previously. Okay. Okay. That's it. Well, thank you very much.