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Edited Transcript of S63.SI earnings conference call or presentation 11-Nov-19 3:00am GMT

Q3 2019 Singapore Technologies Engineering Ltd Earnings Presentation

Singapore Nov 14, 2019 (Thomson StreetEvents) -- Edited Transcript of Singapore Technologies Engineering Ltd earnings conference call or presentation Monday, November 11, 2019 at 3:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Chee Keng Foo

Singapore Technologies Engineering Ltd - CFO

* Ravinder Singh

Singapore Technologies Engineering Ltd - President of Electronics

* Serh Ghee Lim

Singapore Technologies Engineering Ltd - President of Aerospace

* Shiang Long Lee

Singapore Technologies Engineering Ltd - President of Land Systems

* Sing Chan Ng

Singapore Technologies Engineering Ltd - President of Marine

* Sy Feng Chong

Singapore Technologies Engineering Ltd - President, CEO & Director

* Sylvia Lee

Singapore Technologies Engineering Ltd - Manager of IR

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Conference Call Participants

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* K. Ajith

UOB Kay Hian Research Pte Ltd - Director of Asia Transport Research

* Kheng Wee Chua

Crédit Suisse AG, Research Division - Research Analyst

* Rachael Tan

UBS Investment Bank, Research Division - Associate Director & Research Analyst

* Siew Khee Lim

CIMB Research - Head of Research for Singapore

* Zhiwei Foo

Macquarie Research - Analyst

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Presentation

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Sylvia Lee, Singapore Technologies Engineering Ltd - Manager of IR [1]

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

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

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Chee Keng Foo, Singapore Technologies Engineering Ltd - CFO [2]

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Good morning to everyone here at ST Engineering hub and also those who are joining us through the web. This is the financial results for ST Engineering for third quarter 2019.

If I may draw your attention to Slide #4. The group recorded strong revenue growth in third quarter 2019. As you can see from the left of the slide, revenue was $2.069 billion or 27% year-on-year compared to the quarter 2018. EBIT stood at $163.1 million, which is 14% year-on-year higher. The white fonts below the green fonts, which showed 23% year-on-year growth in EBIT, is if we exclude the arbitration outcome from the Marine sector, and this negative outcome was taken into account in our third quarter results. PBT stood at $166.8 million, which is 1% year-on-year higher, but 9% higher if we exclude the arbitration outcome. Net profit, $139.1 million, 3% year-on-year or 12% year-on-year if we exclude the arbitration outcome.

Next, let's move on to Slide #5. So as you can see, the revenue for third quarter 2018 was $1.626 billion. In third quarter '19, the revenue rose to $2.069 billion, which is 27% increase. The breakdown of the 27% increase are as follows: First of all, out of which 22 percentage points of the 27% or $362 million arose from the Aerospace sector, which included new growth areas and end-of-program reviews. Both of these contributed 22 percentage points of the 27 percentage points -- yes, not 22% of 27%, but 27 -- 22 percentage points of the total 27%. Now this -- for this period, the end-of-program review, which is basically our various programs in the Aerospace sectors, be it engine or component, et cetera, where we have Maintenance-By-the-Hour programs, we do regular reviews. But for this particular third Q 2019, the review outcomes were exceptionally high. So one should not expect this to recur at this high level year-on-year in the future.

Secondly, the second green bar on your left, contribution from other sectors to its group revenue was $81 million or 5 percentage points of the 27%.

Next, net profit. Net profit for 3Q 2019 increased 3 percentage -- 3%, to $139 million from $135 million in 3Q 2018. Now the contributions towards this net profit are as follows: If we were to remove the provision for Marine sector arbitration outcome of $11 million, then that in itself was a minus 8 percentage points. If we remove that, then net profit for 3Q '19 would have increased by 3 percentage points plus 8 percentage points, which is 11 percentage points. We have rounded it up to 12 in the SGX statement.

If we look at the secondary bar, which is the $8 million, this represented the absence of divestment gain on STA Guangzhou, our aerospace joint venture in Guangzhou, where in 3Q '18, we sold a 5% stake and there was a gain associated with that. There was also a tax adjustment in Land Systems when we amalgamated 2 of the Land Systems' legal entities. One had tax losses, one had tax gains. Had we not amalgamated them, then the tax losses cannot be utilized. And since we did that amalgamation, there was a tax write-back in 3Q 2018.

Now on the GAAP principle, of course, net profit rose by 3 percentage points. The Hornbeck arbitration outcome is really a one-off event. If you exclude that, the net profit will have increased by 12%. Now we show this $11 million and $8 million to give transparency to the analysts. And of course, you can interpret whether a sale of a minority stake is run of the business, amalgamation for tax purposes is a run of business, I think that is your discretion to make. But I think in trying to give more transparency, we are showing you what we believe as events that are less likely to recur.

So excluding these one-off items, if we tick up both the Hornbeck arbitration outcome as well as the divestment gain and tax adjustment I just spoke about, then net profit would have increased by 18%, or 1-8 percent.

Next, let's move on to Slide #8. This is the revenue breakdown by sectors. In third quarter 2019, in the Aero sector, the revenue rose by 53%. A large part of this is the successful consolidation of the results of MRAS, which we closed in April this year. And also, a large part of it was revenue recognized from various end-of-program reviews. And as I stated earlier, this -- the size of this end-of-program reviews and its contribution to revenue was exceptionally high in 3 quarter '19.

Electronics, the revenue rose by 10%. Land Systems, revenue is typically lumpy because it's very project-based, especially when viewed quarter-to-quarter, but increased by 3 percentage points. Going forward, we expect Land Systems to record higher revenues because of the projects that it has gained recently.

The Marine sector recorded a revenue of 13% increase, largely because of the Jurong Island desalination plant project as well as charter [hire] received from the ROPAX. And by the way, the ROPAX has since been sold for profit. They drew the line below this item.

On others, we had higher revenue from Miltope, a unit in the U.S. manufacturing ruggedized computers.

The next slide, Slide #9, illustrates the breakdown of 3Q 2019 revenue by sector and also by location of our customers. On the left, by sector, Commercial and Defense contributed 75% and 25%, respectively. The Aerospace is our largest sector at 51%, Electronics at 26%, Land Systems at 15%, Marine at 7%.

The next slide talks to our group net profit, and it's broken down by sectors. In the Aerospace sector, the profit grew by 17%, and this is largely attributable to new income stream from MRAS, which we are very happy about. Secondly, the various end-of-program reviews I spoke about and partially offset by certain events that have taken place in third quarter, which caused us to impair some of our assets, especially rotables. So again, we are drawing a line below this subject. And also, the absence of the STA Guangzhou 5% stake sale gains and culminating the 17% increase in revenue for this sector.

Elec sector dropped by 7% due largely to increase in investments in new growth areas, as in our satellite area as well as our SPTel joint venture and so forth. We also incurred higher R&D expenses investing for the future.

In the Land sector, net profit was lower due to continued investments in robotics as well as the absence of the tax gain through the amalgamation of 2 legal units in 3Q '18, as I spoke about just shortly.

In the Marine sector, the main reason for the decline in net profit was largely due to the Hornbeck arbitration outcome. If not for it, net profit would have increased by 14%. So this is at the sector level, 14%. If you look at the group level, if not for the Hornbeck case, then net profit will have increased by 12%.

Next, for Slide 11, on profit margins. The group profit margin was 1% lower in 3Q '19 versus 3Q '18. Aerospace was 2% down due to some weakness in AMM program mix as well as obviously the financing cost that has to be incurred for the acquisition of MRAS. In the Elec sector, minus 1%, and this was due to investments in growth areas that I just spoke about. In the Land sector, minus 1% and absence of the tax credit I also spoke about. In the Marine sector, minus 7%, and this is largely due to the Hornbeck arbitration outcome.

Next, let's move on to the balance sheet. I will just highlight those where changes are more apparent. In terms of right-of-use assets, it has increased to $492 million from balance sheet date ended 31st December 2018, and this is largely due to IFRS 16 because leases are now classified as right-of-use assets and have to be capitalized and recorded on the balance sheet.

Secondly, intangible asset. This recorded $1.6 billion in asset 30th of September this year, and this is largely due to goodwill recorded from the acquisition of MRAS as well as Glowlink, our radar jamming company which we acquired. The current assets, $4.9 billion, which is somewhat higher than as at December last year, and this is largely due to higher cash balance for Newtec acquisition. If you recall, we acquired and closed Newtec on 1st October, and therefore, we have to prepare the funds for it. And that's about SGD 350 million, and that figure was included in the current assets. So 1 day after 30th of September, that figure flowed out, right?

The next item is current liabilities. We did finance our acquisitions through bank loans in the first instance. And as you are aware, the company launched a U.S. Commercial Paper Program to raise U.S. dollars, mainly short-term U.S. dollars, and the financing cost for this program is exceptionally favorable for us, and we have used that to replace the bank loans. And in effect now, USCP is financing the acquisition of our new companies like MRAS and Newtec. So a total SGD 1.5 billion was raised from the USCP program, and this is recorded in our current liabilities. The company has plans to turn out this short-term CP programs sometime next year.

The next item is noncurrent liabilities. That also rose somewhat, and largely due to lease liability because of SFRS 16 and also MRAS pension liability. So these are all noncurrent long-term liabilities. Of course, this liability that we assume is offset from the price consideration that we paid to the seller.

I will now move on to cash flows, and I would just highlight that the operating cash is a bit less than we would have liked. And the reason for that, despite a strong EBITDA for 3Q 2019, is a result of more work in progress that have not been built as well as contract assets and liabilities that's moved in the wrong direction. The management is working hard to reverse this particular situation.

Before I leave you with the CEO's message, which is on Slide 15, I just want to highlight again that, in summary, the group recorded very strong revenue gains, 27%. A part of this should be, I guess, an [additional project] 27% revenue increase next year because the end-of-review -- program reviews was exceptionally high this year. But because of MRAS, we did do well in terms of revenue growth. Net profit was plus 3% if you go strictly by GAAP, plus 12% if you exclude the Hornbeck arbitration case and plus 18% if you believe that those 2 items, like the sale of STAG and the tax gains from the amalgamation of the 2 units in Land Systems are nonrecurring, then it will be plus 18%.

Last but not least, the company has a very strong order book. I think the order book stood at $15.9 billion. This is the highest we have had, and the progress in terms of our strategy has been tracking very well. So with that, thank you.

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Sylvia Lee, Singapore Technologies Engineering Ltd - Manager of IR [3]

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Thank you, Cedric. Can we 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; you've met Cedric; Mr. Ravinder Singh from Electronics; and Dr. Lee Shiang Long representing Land Systems.

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

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Sy Feng Chong, Singapore Technologies Engineering Ltd - President, CEO & Director [4]

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A very good morning to all of you who are here with us at ST Engineering hub, and to those of you who have joined us via webcast, good morning. As presented by Cedric, we have delivered better year-on-year third quarter results and a strong 9 months performance. Compared to the same period last year, our third quarter revenue grew 27%; and PBT and net profit were up 1% and 3%, respectively. And if not for the provision made for the Hornbeck claim settlement, PBT and net profit would have been 9% and 12% higher, respectively. Now that said, the Marine sector legal case, which started in early 2017 -- or legacy contract dating back to 2011, is now closed.

On a 9-month basis, group revenue was 13% higher; PBT and net profit grew 8% and 10%, respectively, versus the same period last year. Profits would have been stronger, by PBT, 11%; and the net profit, 13%, if not for the provision made for the arbitration case, which we described earlier on.

One note on interest expense. It was higher year-on-year mainly driven by borrowings drawdown for the MRAS acquisition and the adoption of SFRS Bracket 1 16 as Cedric mentioned. On financing, we established a USD 1.5 billion Commercial Paper Program in late August this year to allow the group to issue short-term commercial papers in the U.S. at competitive financing costs and with flexible maturities. And to date, we have issued about USD 1.1 billion across various maturities mainly to finance the acquisition -- acquisitions of MRAS and Newtec.

Looking at our third quarter performance of the 4 sectors versus last year same period. Aerospace sector revenue grew 53% and its net profit grew 17%. Apart from the MRAS contribution, the sector benefited from a net positive impact from various end-of-program reviews, particularly in the CERO business group, and as Cedric explained this earlier on, we do not expect to see this kind of exceptionally strong results for CERO in the coming quarters.

Cedric also talked about rotables impairment, which was relatively high in third quarter, and that's mainly from the Aerospace sector. We have been progressively impairing our legacy assets, rotable assets, in the Aerospace business since 2014, and we are substantially done. As Cedric mentioned, we kind of draw a line in the sand. So going forward, we expect rotables impairment in Aerospace to be substantially smaller in -- compared to the last couple of years.

Aero sector had a strong quarter for new orders with several multiyear contracts pointing to customers' continued confidence in our services, and integration of MRAS is progressing as planned. Growth for the sector is firmly in place because of this emphasis on continuous improvement to strengthen its core MRO business and, at the same time, acquiring capabilities to move upstream with the OE business or original equipment business.

Now the focus on investing for growth is no lesser at our Electronics sector. This spending on building future capabilities has impacted its third quarter earnings despite the 10% increase in revenue. As expected, M&A-related costs has also hit profit. Now third quarter 2019 net profit for the Electronics sector would have been $59.9 million or roughly $60 million if such expenses were excluded, and we would have been up 7% for Electronics sector versus the quarter of 2018 instead of the 7% lower, as we have reported. The Electronics sector operates in a competitive high-tech, high-growth segment, but Ravi and his team are not letting the challenging operating environment hold them back. Hence, the team's strategic priorities are, along with strengthening their core business, to pursue growth areas and build capabilities. One example of growth is in the satellite communications business. As you know, we expanded our satcom offerings with Glowlink, a bolt-on acquisition for USD 20 million, specifically for its advanced satcom anti-jamming technology. This transaction was completed before the Newtec transaction was closed on 1st October this year. Both acquisitions support our strategy to build a highly differentiated global satcom business group with iDirect at the helm.

To be successful in this segment, it is imperative for us to own technologies tailored to protect our customers' mission-critical communications, especially in an increasingly dense satellite space. Now Glowlink strengthens that value proposition with IP and proprietary technologies to detect interference, geolocate interference and cancel interference.

Through Newtec, we own high-throughput capabilities, and we continue to demonstrate the alignment of our technology and advancement with 5G. So on the site, you would have learned that we have a JV that's developing flat panel antenna in anticipation of demand for small and integrated terminals that will drive connectivity in aircraft, connected cars, especially when 5G kicks in. So a lot to do and more room for growth.

Now meanwhile, the team is executing a streamlined process to fully integrate new Glowlink, Newtec and iDirect covering business operations, sales and marketing and corresponding product portfolios with the result of being a unified go-to-market strategy, and over time, a converged technology offering.

In terms of contract wins, the sector secured a strong pipeline of contracts during the quarter, with notable wins internationally. Now one example is the contractor supply and next-generation emergency response management system to a public security agency in Asia, outside of Singapore, and that contract is worth about SGD 300 million. And so quite substantial there.

So let's turn to the Land Systems' sector performance for the quarter. Its third quarter revenue grew 3% year-on-year, with 14% lower net profit mainly due to the absence of prior year's favorable tax credit and continued investments to strengthen its robotics and autonomous vehicle capabilities. Now this buildup of autonomous system capabilities involves leveraging our core expertise in vehicle platforms and system integration as well as integrating evolving new technologies in related areas like artificial intelligence, data analytics and cybersecurity. On this front, we achieved a major development milestone since on-road testing of our autonomous shuttles began in June of 2018.

In August this year, we started Singapore's first on-demand autonomous shuttle public trial in Sentosa. These autonomous shuttles are equipped with advanced multi-sensor technology that optimizes navigation. They are built to operate in urban mixed traffic environments with different road users perform complex maneuvers, such as navigating roundabouts and continue to operate even in the rain, a critical capability given the weather conditions of Singapore. Since the start of the trial, we have served more than 2,000 passengers and received at least 4 out of 5-stars rating from more than 90% of those who have tried our autonomous shuttle.

While establishing operational feasibility is a key milestone, the team is working towards commercialization, including larger-scale deployment over time in Singapore and overseas rollout as well. We're currently looking to introduce an AV shuttle in Israel. The vehicle will undergo platform testing and certification in preparation for operational deployment. We are also exploring the sale of autonomous vehicles to Japan.

On this defense business, production of the Hunter AFV is progressing as planned, and we expect the activity to intensify from first quarter of next year.

Now going to the Marine sector. Revenue for the sector grew 13% driven by broad-based growth across its business group. Net profit was impacted by the provision made for the Hornbeck claim. On a separate note, not pertaining specifically to third quarter performance, this will be in fourth quarter, we sold the ROPAX vessel in middle of October. Now while the ROPAX has been generating charter revenue in the last few years, it is not our core to be in this business. And hence, the sale is in line with our plan to dispose the vessel. The transaction resulted in a slightly positive P&L impact of around $4 million, but you'll see that in the fourth quarter of 2019.

Our order book hit another high, as Cedric mentioned, at $15.9 billion, and we expect to recognize $2.2 billion in the last quarter of 2019 out of this order book. While our revenue in the next few years is in place, backed by the robust order book, we know that uncertainties continue to weigh on the global economy. Now nevertheless, we will continue to drive progress, including making strategic decisions that will enable us to deliver long-term sustainable growth.

So on this note, I would like to open the floor for questions, please?

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Questions and Answers

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K. Ajith, UOB Kay Hian Research Pte Ltd - Director of Asia Transport Research [1]

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This is Ajith from UOB Kay Hian. On the improvement in CERO, could you just share with us in terms of what exactly is happening? Is it -- how -- any particular engine checks? So that's my first question.

And my second question is whether -- Cedric, whether you could share with us the financing cost for the CP. That's it.

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Serh Ghee Lim, Singapore Technologies Engineering Ltd - President of Aerospace [2]

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As what Cedric and Vincent has spoke of, the higher turnover in CERO is due to the reconciliation of end of programs. This particular quarter is exceptionally high. Moving forward, we will not expect to see it at this kind of level that we're talking about. But the focus actually for CERO is -- actually is to backfill the work left by Jet Airways. Jet give us about 30 engines a year, okay? We have some successes. We expect actually this year to output almost the same level as we've got Jet.

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K. Ajith, UOB Kay Hian Research Pte Ltd - Director of Asia Transport Research [3]

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Sorry. Can you repeat that answer? A part of the $20 million or something like that. You said Jet Airways...

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Serh Ghee Lim, Singapore Technologies Engineering Ltd - President of Aerospace [4]

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30 engines. They give us about 30 engines a year. So I said the focus for CERO is to actually to secure works to backfill what left by Jet Airways, and we have some successes in the so-called spot market. I'll come back to why is the spot market. But we have some successes, and we expect to actually deliver almost the same level as we've got Jet. When the spot market, I think, earlier on, last quarter, this spot market for engine MRO, okay, generally, is secured at the point of sale, okay? And you enter into long-term Maintenance-By-the-Hour program, okay? So it's quite difficult to really go after such programs. We would have to wait for new buy or end of the program, and we've got to go and chase. But there are part of it, which is that you can go in, like a spot market, and actually a bit for it. And as I said, we have some success in -- we actually will be able to come in almost the same level as last year.

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Chee Keng Foo, Singapore Technologies Engineering Ltd - CFO [5]

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On the CP, U.S. Commercial Paper Program, I guess, our financing philosophy is, first of all, to keep working capital tight and as low as possible and with a focus to achieve higher return on capital employed. And in terms of financing, we are in a fortunate position to be AAA-rated even after the MRAS and the Newtec, Glowlink acquisitions. So we're trying to tap markets that are developed and liquid. And for U.S. dollar short-term financing, the U.S. commercial paper market is the most liquid. So we set up a program to take advantage of that. And the financing cost would fluctuate because of -- it's a short-term program, and I think one can estimate between more or less LIBOR flat.

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K. Ajith, UOB Kay Hian Research Pte Ltd - Director of Asia Transport Research [6]

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LIBOR flat.

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Chee Keng Foo, Singapore Technologies Engineering Ltd - CFO [7]

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Yes.

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K. Ajith, UOB Kay Hian Research Pte Ltd - Director of Asia Transport Research [8]

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So you're not too concerned about rollover costs subsequently?

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Chee Keng Foo, Singapore Technologies Engineering Ltd - CFO [9]

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There is also why I added that we intend to term out this program. And sometime in the first part of next year, we intend to launch a MTN program.

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K. Ajith, UOB Kay Hian Research Pte Ltd - Director of Asia Transport Research [10]

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Okay. Actually, I got a follow-up question to Serh Ghee. Regarding the impairment rate, I think the $50-odd million, does it include anything from MRAS?

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Serh Ghee Lim, Singapore Technologies Engineering Ltd - President of Aerospace [11]

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Sorry?

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K. Ajith, UOB Kay Hian Research Pte Ltd - Director of Asia Transport Research [12]

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There's an impairment -- impairment of trade receivables and contract assets of $52 million. Was that primarily from the Aerospace division?

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Serh Ghee Lim, Singapore Technologies Engineering Ltd - President of Aerospace [13]

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Yes. As what Cedric and Vincent has spoke of just now, we have been impairing our rotable assets since 2014 per our accounting policy. And this quarter, we, likewise -- but we will be closing the chapter actually on this so-called legacy asset. Moving forward, we will not see the impairment run rate as what we have seen in past quarter. In fact, it will be much lower.

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Sy Feng Chong, Singapore Technologies Engineering Ltd - President, CEO & Director [14]

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Yes. Just to also clarify, I think Ajith's question beyond the rotables impairment or even inventory impairment you're asking about, accounts receivables, right? Impairment of receivables, that is part of our annual program review. So the net impact has already been manifested in the results. So that's part of end-of-program reviews across the portfolio.

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Chee Keng Foo, Singapore Technologies Engineering Ltd - CFO [15]

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So despite the end-of-program reviews, whereas some trade receivables were written off under the line of $51.7 million, paragraph 1.1 of our SGX release, we still come out ahead. I think that also illustrates the good credit management of the Aero sector. The rotables write-off, you will see under the -- also paragraph 1.1. So on balance sheet will be inventory on P&L will be cost of goods sold and that figure is $40.5 million, a total write-off, which includes many other things, but largely rotable constitute a big part of that number.

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Kheng Wee Chua, Crédit Suisse AG, Research Division - Research Analyst [16]

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Kheng Chua from Crédit Suisse. I've got 2 questions. The first is on the Electronics division. You mentioned that your margins are lower due to investments in new businesses. Is this something that will continue to persist? Or would you expect it to fade off such that your profit can actually be growing in tandem with your top line?

Second question is on MRAS. The contribution this quarter appears to be still fairly strong. Can you provide some update on how is integration coming along and also the expectation on the integration costs to be incurred in the fourth quarter and 2020?

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Ravinder Singh, Singapore Technologies Engineering Ltd - President of Electronics [17]

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So let me take the question on Electronics. So in terms of some of the investment that we are doing and recognizing this quarter, I think, first of all, there is the M&A in integration costs for Newtec, for Glowlink, which we have acquired in the process of integrating now. At the same time, we have JVs, which we are building up. So SPTel. Cedric mentioned that the Jet-Talk JV, which Vincent mentioned, building the flat panel antenna. And as Geo-Insights, which is another JV that we set up this year to exploit satellite imagery. So we are investing in these JVs. And also, at the same time, for this particular quarter, our R&D expenditure across all our businesses is higher than the same time last year. So all these investments, while they are impacting the profitability this quarter. Overall, they continue to help us build capability to deliver future revenue.

For Electronics sector, if you look at our order book, we -- for the first 9 months, we resecured $2.4 billion, which is more than what we secured the whole of last year. So the order book is very strong, but we need to invest at the same time to prepare for future capabilities.

But in terms of the profitability, if you look at our margins, typically, saw the chart that Cedric showed, we're aiming for 9%, 10%. I think, consistently, there is a target that we are focusing on. But quarter-to-quarter, when there are project completion, then there's some -- there can be potentially some recognition, which can boost up the profitability in that quarter. So it's important to look at it from a longer annual perspective.

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Serh Ghee Lim, Singapore Technologies Engineering Ltd - President of Aerospace [18]

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Integration of Middle River is going very, very smoothly. Actually, the core operation actually in Hamburg very well performed, in fact, better than expected to actually digest the interest expense as well as the integration costs. Last quarter, I think there was a question asked about the integration costs, and we see that it's in the tens of millions, which is spread over the next 6 years. So the second quarter, the integration cost pickup was a little bit low. We are seeing about the same level that you'll be seeing for the next -- actually, I would say, 2 years. But after that, you'll be tapering off.

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Sy Feng Chong, Singapore Technologies Engineering Ltd - President, CEO & Director [19]

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Okay. Well, if you recall, I mentioned that integration costs for MRAS are likely to be less than $10 million this year and next year and then you will start to taper off quite significantly in 2021. So that's still the same message.

I have a question here. "How does the latest U.S.-China trade tensions affect ST Engineering?"

So I mentioned on a few occasions in the past that I think we are not immune for sure. We see some negative impact, particularly for businesses that are involved in selling hardware, physical goods. But the impact -- or the negative impact is really not material because we are able to manage and mitigate through our supply chain activities. So I would characterize it as not very material at this point.

But we have got to watch the situation, which is quite dynamic as you -- if you've been following, but we'll continue to address it. We are not immune, for sure. But given our diverse business and our global supply chain, we'll continue to see how best to mitigate the impact if it intensifies beyond the current situation right now. We are largely able to contain it, a very minor negative impact, but it's not material enough for us to call it out, okay? I hope that answers the question from participant in the webcast.

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Rachael Tan, UBS Investment Bank, Research Division - Associate Director & Research Analyst [20]

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Okay. This is Rachael from UBS. I have 2 questions on the aerospace side. The first is on MRAS. Do you recognize revenue upon completion of work and delivery to Airbus or upon delivery of the aircraft itself to the end customer?

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Serh Ghee Lim, Singapore Technologies Engineering Ltd - President of Aerospace [21]

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Okay. Two questions, that's the first question.

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Rachael Tan, UBS Investment Bank, Research Division - Associate Director & Research Analyst [22]

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And the second question is, would you be impacted by any tariffs that could be placed on Airbus?

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Serh Ghee Lim, Singapore Technologies Engineering Ltd - President of Aerospace [23]

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Okay. On the revenue recognition, it's a little different from the cash flow. So we recognize the revenue on the POC, okay? So it's not so much of the delivery of the NASA system to the potting center where we integrate into the engine. And then the engine would be delivered to the Airbus final assembly line. But the payment will be upon the delivery of the so-called NASA system to the finance of new lines. I hope I answered the question.

Okay. As far as the tariff, yes, I think the -- because this is the outcome of a long time spent between Boeing and Airbus and it went all the way to, I think, the WTO, and then there was a ruling in favor of the U.S. side. And then President Trump actually imposed a tariff. The 10%, if I'm [remember], the 10% is on the aircraft, okay? All right. Selling into the U.S. So it doesn't -- it's not a tariff on the aircraft. So the impact on aftermarket actually is very low, okay? I would say minimal.

As far as Airbus is concerned, I mean, so we are seeing, for my own personal view, is that they do have a final assembly line in Mobile, Alabama. In fact, I think that was really a pretty wise decision move, okay? And I think to a certain extent, to get away for them.

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Rachael Tan, UBS Investment Bank, Research Division - Associate Director & Research Analyst [24]

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Actually, I have one more question.

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Serh Ghee Lim, Singapore Technologies Engineering Ltd - President of Aerospace [25]

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For Ravi, right?

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Rachael Tan, UBS Investment Bank, Research Division - Associate Director & Research Analyst [26]

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For you, sir. The question is actually on the Boeing 737NG cranks. So a number of them have been discovered here and they've been sent to maintenance. Would you be working on any of these repairs?

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Serh Ghee Lim, Singapore Technologies Engineering Ltd - President of Aerospace [27]

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Okay. The -- for those that are not that familiar with this, actually, is a crack on the bigger form. Okay, that's where the wing joins to the fuselage, okay? And it's only after, probably, if I can recall, some 23,000 cycles or something like that. Also there was an [SP]. So the operators have to really go and inspect and if there is a crack, they have to ground it and they've got to do the repair, okay? Currently, the pacing item is not about the manpower to do it. The pacing item is that for Boeing to come up with the manufacturing of the bigger form, and that's a challenge.

So if there are such defects on the aircraft that is operated by our customer, I would say, yes, definitely. Of course, we are doing the heavy maintenance of some of these operators, okay? But so far, I have not seen really a high -- there isn't a lot of findings. What I read was that Qantas, I think they've grounded, I think, 3 aircraft or 2 aircraft, okay? Then U.S., there are a couple, but -- and the most recent one, I think, is yesterday is the Lion, I think they found 2 aircraft they have seen the crack. So I say that if they do have these findings and if it's our customer, we will commit.

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Chee Keng Foo, Singapore Technologies Engineering Ltd - CFO [28]

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Okay. There's -- Siew Khee, sorry, let me just interrupt you. There's a question from the web. [Mr. James Choo], he asked several questions, but I think we'll take one of those questions that talk about what constitute the significant impairment loss of trade receivables, which is the same one that Ajith asked just now.

And the answer is end-of-program review. So also I think we didn't answer Ajith's question about MRAS trade receivables. I think those are negligible.

And next is the inventory obsolescence. What constitute the write-off of some inventory obsolescence?

The bulk of it is rotables. So we have taken those questions.

And what kind of run rate do you expect inventory obsolescence to be.

I think it's very hard to fix the rate. We will go through the rigor of assessing whether, indeed, there's market obsolescence, and we'll take them accordingly.

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Sy Feng Chong, Singapore Technologies Engineering Ltd - President, CEO & Director [29]

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Yes. For the -- as I mentioned, we do expect rotables impairment to be at a significantly lower level versus what we have seen in the last couple of years given where we are, but we cannot give you a precise number because that's an ongoing exercise that we have to follow accounting rules on an ongoing basis.

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Serh Ghee Lim, Singapore Technologies Engineering Ltd - President of Aerospace [30]

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Okay. There's a question from the public, [Mr. James Choo]. How do you see impact, I believe, it's of 737 MAX on our business.

Currently, we do not maintain the 737 MAX, whether the aircraft or even the engine. So the grounding doesn't really affect us. But I did -- I think I said in past quarters that if the grounding persists, okay, there may be a slight tailwind for the MRO, okay, because the operators would have to decide whether they want to invest in the maintenance to keep the aircraft flying a little bit longer, okay, but I see that window is probably in the first quarter of next year, okay? The operators are dealing with a very hard decision on that. But according to what I read, okay, it seems that Boeing is pretty confident that the aircraft will be able to operate in fourth quarter. But I do see that it's going to be more of a phased approach, okay? It will probably be in the U.S., then after that will be in Europe, which, as I said, that's -- earlier said that it will actually lift the AOG.

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Siew Khee Lim, CIMB Research - Head of Research for Singapore [31]

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Siew Khee from CIMB. Can we just -- can I just check on how much is the provision for rotables being split into different categories? Or can I just assume that most of the provision for rotables were in AMM? I'm trying to understand why AMM profit came down. Is it because of the provision for rotables? Okay.

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Serh Ghee Lim, Singapore Technologies Engineering Ltd - President of Aerospace [32]

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I believe you will have subsequent question on AMM. So maybe I address -- the performance of this business segment, okay, is largely impacted by the underperforming of the pilot training business. I think if you recall, we actually parked the pilot training business in the Aircraft Maintenance and Modification business segment. We have taken steps in the quarter, okay, to strengthen our core to carry on this track on our business and will position us well, okay, if there's any opportunity that come by. So I will not see this track moving forward.

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Siew Khee Lim, CIMB Research - Head of Research for Singapore [33]

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So the provisions for rotables and receivables is captured in --

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Chee Keng Foo, Singapore Technologies Engineering Ltd - CFO [34]

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Yes, maybe I should try and help you. On the rotables, it's captured under allowance for inventory obsolescence. If you look at Page 2 of 23, that figure under 3Q 2019 is $40.525 million and a large part of this is rotables.

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Siew Khee Lim, CIMB Research - Head of Research for Singapore [35]

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And which like -- is it in CERO?

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Chee Keng Foo, Singapore Technologies Engineering Ltd - CFO [36]

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And in terms of -- it's in CERO. Yes. And on the balance sheet, it will be inventory. On the P&L, it will be taken out of cost of goods sold in CERO and the Aerospace.

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Siew Khee Lim, CIMB Research - Head of Research for Singapore [37]

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So the inventory obsolescence is in CERO. The trade receivables is in AMM? CERO? AMM?

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Chee Keng Foo, Singapore Technologies Engineering Ltd - CFO [38]

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Actually CERO. Also CERO.

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Siew Khee Lim, CIMB Research - Head of Research for Singapore [39]

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Just a follow-up question on MRAS. Can you elaborate on the plans on capacity expansion? How is it going on? So the Q-on-Q strength, is it because of capacity expansion or just mainly full quarter consolidation?

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Serh Ghee Lim, Singapore Technologies Engineering Ltd - President of Aerospace [40]

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It's definitely a full quarter -- largely due to the full quarter because second Q is probably 65 days or something in that. So due to full quarter. So as far as capacity is concerned, I did say that we have actually been able to ramp up from the 50-plus to about 60 a month, okay? So in accordance with what Airbus wanted, okay.

Maybe I just want to go back to the AMM, I said that we have taken steps, okay, to strengthen our core, remove this track moving forward. The AMM performance, there are some headwinds, okay, which, to me, is temporary, okay? And one of them is the A321 prototyping, okay? You know that we are actually doing the prototyping in Singapore, and AMM is carrying this prototyping cost, okay? So you affect the performance.

And also maybe I want to give you more information we've got to this 321 prototyping. We also have a little bit of a hiccup, not due to us, okay? We have actually completed the order book, and we actually expect to receive the engine back from our customer. Because when aircraft comes in, they dropped the engine and they sold engine actually. They are trying to monetize this, okay? So actually original engine is supposed to come in a month back. And if they come a month back, we would actually complete everything. We'll be able get STC, which I said that probably in the fourth quarter of this year, okay? But because of this delay, okay, the engine just came in -- 2 of them just came in and we would only expect to see the STC be able to obtain in the first quarter of next year.

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Sy Feng Chong, Singapore Technologies Engineering Ltd - President, CEO & Director [41]

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Siew Khee, just want to make sure that we are clear. If you refer to Page 5 of the presentation, which Cedric took you through, MRAS and end-of-program reviews would manifest in that $362 million revenue uplift bar in the quarter 4 chart, Slide 5, okay? Combined MRAS and end-of-program review was Slide 2 in the presentation. But then if you have this printout, it says Slide 5 where we reconcile the revenue uplift from the quarter 2018 to third quarter 2019, okay? It's not 100% MRAS. Just so that you know.

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Siew Khee Lim, CIMB Research - Head of Research for Singapore [42]

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Sure. Just checking on Electronics. So in your very strong order win this quarter, you have said that the $300 million is because of the emergency response from Singapore. But do you classify how much of the Hannover/Berlin contract win is Smart City related?

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Ravinder Singh, Singapore Technologies Engineering Ltd - President of Electronics [43]

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Sorry, is what, Smart City related? Okay. So we don't. But basically, I would say that the general trend continues. So most of -- a lot of the business we do are Smart City related. But quarter-on-quarter, there are cycles. Some of the projects are very huge, $300 million. So occasionally, there are swings. But of course, that particular project, we consider it Smart City related because it's for one of the emergency services. So that's part of the Smart City portfolio that we look at.

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Siew Khee Lim, CIMB Research - Head of Research for Singapore [44]

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And so can you just refresh my memory on the integration cost expected on Newtec this year, next year?

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Sy Feng Chong, Singapore Technologies Engineering Ltd - President, CEO & Director [45]

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Okay. So we -- yes. Okay. So it's about timing, okay, because we closed Newtec only 1st October. We were hoping to have closed it earlier. So therefore, our integration costs also have to shift a little to the right. But if you combine 2 years, '19 and '20, we expect $20 million-ish combined, okay? So not totally symmetrical now that we have only completed the so-called transaction in early October. So expect maybe next year slightly above $10 million put it that way; this year, slightly below $10 million. I hesitate to use directions anymore. So I'd just say slightly above $10 million and slightly below $10 million.

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Siew Khee Lim, CIMB Research - Head of Research for Singapore [46]

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That's very helpful. Okay. And then just last question on the Land System, if there's no tax effect, how much would be the profit for automotive?

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Shiang Long Lee, Singapore Technologies Engineering Ltd - President of Land Systems [47]

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For automotive. Total if there is no tax impact, the automotive, we'll see total for Land System is about exceeding 10% total for Land System for the net profit if there's no tax credit effect.

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Zhiwei Foo, Macquarie Research - Analyst [48]

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Zhiwei from Macquarie. I have a question on this end-of-program review that you all talked about. While you keep mentioning is exceptionally large, I'm not too sure what sort of figure that we should be looking at. And if there's this revenue figure on this, is there a corresponding profit figure that we have to take into account? And how much of that would that make of that $24 million new growth in orders that we see on the waterfall chart?

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Sy Feng Chong, Singapore Technologies Engineering Ltd - President, CEO & Director [49]

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Okay. So certainly it's included best part of $24 million. We will not be able to give you a breakdown. So there is a corresponding P&L effect, that's end-of-program review effect. It's a positive effect. But as we do end-of-program review, sometimes when we do that true-up, sometimes it can be negative, sometimes it can be positive. In this particular case, it's positive, but a little larger than usual. Therefore, we call it up. Otherwise, end-of-program review is a run-of-business activity that we do on an ongoing basis, okay? So to answer your question, the P&L effect is manifested in the $24 million, but we will not be able to break it down for you.

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Zhiwei Foo, Macquarie Research - Analyst [50]

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Okay. Okay. Sure. Then could you just remind me how often do you actually release end-of-program reviews? And what was this particular one that triggered it for this quarter?

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Serh Ghee Lim, Singapore Technologies Engineering Ltd - President of Aerospace [51]

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Okay. Maybe just to elaborate a bit on this. When we say programs, we refer to as many types, okay, one, this could be an aircraft modification program, okay? It's over a period of time. At the start of program, we say that, okay, certain revenues, certain cost, but as we recognize the revenue, it'll be a percentage of completion. So depending on how we capture the cost. At end of program, okay, we do a reconciliation, okay? And what Vincent said that it's a -- could be positive or negative, but already I show you that generally it's positive, okay? In fact, most of the time.

It could be also a component maintenance by the hour programs. Okay, over a 5-year period, there will be, again, revenue recognition. We capture -- [I explain] the costs. But at the end of program, we again do a reconciliation, okay?

It could also be the engine. So I would -- as you look at it, you look at the business segment rather than just a particular area. And if you look at it also over the years, that is more meaningful rather than just focus on one particular quarter, whether there is this spike, okay, which I said that it's exceptionally high for this particular quarter. But if you look at it over a period of time, you'll see it will be more meaningful and I would say that we are probably tracking the historical average.

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Zhiwei Foo, Macquarie Research - Analyst [52]

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Okay. Last question is, since your revenue and your profit -- I mean, your PBT margin is kind of didn't move, right, so if I want to ballpark it. Could I just take the delta of the Q-on-Q revenue increase against your PBT margin to estimate this end-of-program profit? Would that be a fair way to look at it?

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Sy Feng Chong, Singapore Technologies Engineering Ltd - President, CEO & Director [53]

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You can do a lot of analysis in various ways because I mentioned to you that this number includes MRAS. You can look at the run rate then it's -- we're not at liberty to get down to the specifics, but I think it's more important to focus on the -- what is driving this. And then as Serh Ghee mentioned, over the long term, we don't see an exceptional item. But because this particular quarter, it is larger than usual, so we call it out, which we typically don't. So you obviously -- all the information is out there for you to do the analytics.

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Zhiwei Foo, Macquarie Research - Analyst [54]

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Sure. Sorry, last question. On automotive, right, I think your Hunter AFV program has kind of kicked off and you talked about it ramping up in first Q '20. How should we think about the PBT margin for automotive when it starts ramping up?

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Sy Feng Chong, Singapore Technologies Engineering Ltd - President, CEO & Director [55]

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So I'll let Shiang Long talk about margin. It is progressively being ramped up and we think that come first quarter next year, it will intensify. So it's not a binary thing. It's analog. So we are slowly ramping up our production and I'll let Shiang Long talk about...

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Shiang Long Lee, Singapore Technologies Engineering Ltd - President of Land Systems [56]

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So the production is coming along well. So we're starting to deliver in the second half of this year. It will ramp up in the first quarter and the second quarter of next year. I think those are the revenue, you see it. But in terms of the margin, there is no direct correlation as the direct result because there's a lot of product mix as well because the site, Hunter, will also deliver other things to the -- this Singapore Army and also for the military.

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Zhiwei Foo, Macquarie Research - Analyst [57]

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Yes. Okay. Would you say what's the proportion? Okay, never -- it's just...

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Shiang Long Lee, Singapore Technologies Engineering Ltd - President of Land Systems [58]

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The project is lumpy. So quarter-by-quarter, I won't be able to explain proportion. Yes.

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Chee Keng Foo, Singapore Technologies Engineering Ltd - CFO [59]

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Yes. I mean, the way you look at one specific program, of course, when you ramp up, you expect better synergies, scale. But then we are talking about Land System being a portfolio of our business, it's very difficult for me to give you an outlook. But when you ramp up, generally, you get the benefits of scale.

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Shiang Long Lee, Singapore Technologies Engineering Ltd - President of Land Systems [60]

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Okay. There's a question here from [Sean] in JPMorgan. "Are growth plan for autonomous vehicle on track? Can you elaborate more on the Series 12 and Series 7 STROBO bus that were recently showcased? And what is the monetization plan of STROBO Series 12 and Series 7 buses also partnership with BYD using ST Engineering AV kits?"

I will say that autonomous bus development is ongoing well. Based on the public trial that we did in Sentosa, it will be end of this week, we did almost 3 months of public trial. Based on the feedback, we call very positive feedback and a lot of partners also came to visit us and to go ride. And in conjunction with the ITS Congress, I think there's a lot of experts that came down and they give a good positive feedback about our capability.

Going forward, there will be the STROBO Series 7 bus because 7-meter. We are -- next stage is to deploy the autonomous kit onto the BYD 7-meter bus, it has just arrived and we are installing it. The plan is really to monetize it through the deployment in Singapore and also in overseas. You know that there's a [covert] collaboration. To the extent that I can share, we have built and seek to deploy a fleet of 10 buses in one of the town. I can't disclose exactly which one, but that is in discussion with LTA. So that will be the next important operational deployment for the 7-meter.

And of course, after that, there are a lot of opportunity to go overseas. As Vincent already mentioned, we are deploying our 4-meter bus in Israel and also looking at Japan as a market. And also for the 12-meter bus, we have just completed the development and now is on trial in Jurong Island. There will be a public trial as well next year. And once that has been done successfully, we will look into the commercialization and deployment of it.

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Sy Feng Chong, Singapore Technologies Engineering Ltd - President, CEO & Director [61]

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Okay. Actually, yes, there's one more question here.

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Sing Chan Ng, Singapore Technologies Engineering Ltd - President of Marine [62]

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Probably the last one. For Marine, got 2 questions from [Sean], JPMorgan. Question number one," "what is driving the pickup in the Marine sector? Question number two, how do you see IMO 2020 impacting your business?"

For question number one, I will not be able to go into the numbers. I assume that your question is really about the forecast or the outlook for Marine sector going forward.

So on the Shipbuilding segment, the U.S., as we have read, strong order book. And most of the orders won last year and this year come with options. So if these options are excised by a customer, it would mean continued work for our U.S. Shipbuilding segment.

Singapore side, we're tail end of the major programs, i.e., the LMV program. We got a couple of them on our order book right now. And we are also chasing for options for some of these programs. And if you -- and we are positioning ourselves for the switch to greener fuel, for example. So we expect, for example, in the oil and gas segment, the owner will turn to, for example, LNG [fast crew boat].

And on the renewables side, again, one of our portfolio is really the CTV, which is crew transfer vessel for the wind farm industry as well as the, what we call service operation vessel, which is really to service, again, the wind farm industry in maintenance.

For repairs, the U.S. side repair, ship repair in U.S. has a very strong showing in 2019, which explain the rise in year-to-date numbers in ship repairs.

Now as you all know, unlike shipbuilding, ship repairs, the stemming is pretty short. So it can be a month to maybe 3 months. So it is difficult to tell exactly how it will pan out for 2020. But I can only say that, generally, the market conditions are improving and -- which should see, likewise, our revenue to grow in tandem with the improvement in the market conditions.

On the second question about the impact of 2020, as you probably know, 2020 is about the use of low-sulfur fuel, and hence, it means a switch to greener fuel. So again, we -- and of course, on the repair business, it's about the fitting of scrubbers. So we do not expect for ourselves that the business coming from, let's say, the retrofitting of scrubbers to impact us significantly. However, we think there is opportunity for us to pursue in the Shipbuilding segment, design and construction of ships that run on greener fuel, for example, LNG fuel or dual-fuel ROPAX, is something that is also our product -- in our product portfolio.

We are, as you know, in the U.S., we are building what we call LNG-articulated tug and barge bunkering ships. We expect continued interest in this area. We -- the Singapore operations will benefit from the experience that our U.S. colleagues have in the design and construction of these kind of ships.

So then we have, of course, as I said, platforms. They will increase as we switch to greener field. So again, LNG fuel as an example. So these are what I think would be the impact for IMO 2020, and generally, the world's desire to switch to greener fuels.

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Sy Feng Chong, Singapore Technologies Engineering Ltd - President, CEO & Director [63]

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Okay. So I hope that answers [Sean's] question. Do I have any last question from the attendees? Yes, Rachael.

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Rachael Tan, UBS Investment Bank, Research Division - Associate Director & Research Analyst [64]

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I have a question about the order book. So relative to last year, when -- sorry, relative to last quarter, when you said that the order book across all business divisions increased, how would the order book for Land Systems and Marine look like?

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Sy Feng Chong, Singapore Technologies Engineering Ltd - President, CEO & Director [65]

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Now we do not go into specifics when we come to order book. I mean it's safe to say that all sectors have a pretty robust order book across, and we will continue to put our efforts in winning new projects that we have not let up, okay? So -- but we don't break down order book by sector.

Yes. Any final questions from the audience, if I may ask? If not, I would call this session to an end. For those of you who joined us via webcast, thank you very much for joining us this morning. And then for the rest of you who are here, if you have time, please join us for lunch. Thank you.

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Chee Keng Foo, Singapore Technologies Engineering Ltd - CFO [66]

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Thank you.