U.S. Markets close in 1 hr 55 mins

Edited Transcript of S63.SI earnings conference call or presentation 21-Feb-19 3:00am GMT

Full Year 2018 Singapore Technologies Engineering Ltd Earnings Presentation

Singapore Feb 26, 2019 (Thomson StreetEvents) -- Edited Transcript of Singapore Technologies Engineering Ltd earnings conference call or presentation Thursday, February 21, 2019 at 3:00:00am GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* 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

================================================================================

Conference Call Participants

================================================================================

* Gerald Wong

Crédit Suisse AG, Research Division - Head of Research

* Horng Han Low

CLSA Limited, Research Division - Research Analyst

* K. Ajith

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

* Patrick Yau

Citigroup Inc, Research Division - Director and Head of Singapore Equity Research

* Rachael Tan

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

* Siew Khee Lim

CIMB Research - Head of Research for Singapore

================================================================================

Presentation

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Good morning, ladies and gentlemen. Welcome to ST Engineering's Full Year 2018 Results Briefing. To begin today's briefing, Mr. Cedric Foo, Group CFO, will present the group's performance for the financial year ended 31st December, 2018. Following that, we will invite our management team for a Q&A session.

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

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Welcome, and good morning to all of you who are attending ST Engineering 2018 Results Briefing. Also, a warm welcome to those who are joining our webcast.

The agenda for this morning: we will start with group highlights; then, we will look a bit deeper into each sector's performance; and then ending with the outlook. There are a set of appendices that we have also put on the web, which you can also refer to for further details.

First of all, the group highlights. In 2018, the group registered a 3% increase in revenue at $6.7 billion. So please pay attention to the green bar -- the green fonts, which is plus 3% year-on-year; EBIT stood at $570.3 million, which is 5% year-on-year, again, the green font; PBT, $620.7 million at 1% increase year-on-year; and net profit, $494.2 million, which is a 2% decrease year-on-year.

However, the group took some hard business decisions to rationalize our portfolio in the course of the year and particularly in Q4. And this, obviously, have impacted our P&L, but it would put us in good stead to stay more focused on our cost strategy and businesses.

If we look at the white fonts, if not for these one-off charges, which I will elaborate later, our EBIT would not have been 5% year-on-year but plus 9% year-on-year; our PBT would not be 1% year-on-year but plus 7% year-on-year; and the net profit would not be minus 2% year-on-year but instead, 9% year-on-year. Our order book also remained strong as of end of 2018 at $13.2 billion, and we have a large chunk, $4.9 billion, to be delivered in 2019 this year.

Next, let's just look at what are the impact of the one-off charges. This is between 2018 and 2017. So the net profit as reported in 2018 is $494.2 million. And in 2017, we see this $502.6 million and is a minus 2%. However, we have taken some one-off charges, principally portfolio rationalization and the cost related to MRAS acquisition. I think analysts would realize that MRAS acquisition was warmly welcome, but there are costs associated with it, and we are taking it here.

Also, we have redeemed our MTN, the medium-term notes, ahead of its expiry, which is July 2019, but we did it in July 2018. And this has a onetime impact, but it also comes with interest cost savings, which we will see in the second half of last year as well as the first half of this year. And that amounted to $7.9 million. You will also recall that there was a U.S. tax reform late 2017, and that was a good guy of $20.3 million in 2017. So all in all, the net profit, excluding one-off charges, would have improved from $494.2 million to $526.8 million in 2018 and would have reduced 2017 $502.6 million to $482.3 million. And this would result in a turnaround of the net profit of minus 2% to a plus 9%.

Now what exactly are in the one-off charges? This include divestment losses of a pilot training school in the U.S., road construction business in India and impairment charges for road construction business and automotive MRO business in Brazil and, as I said, transaction costs associated with MRAS acquisition and partially offset. So not all one-off charges are losses. We had some gains by divesting 5% stake in a joint venture in the Guangdong Airport Authority in China and also divesting fully a joint venture with Airbus Helicopters in Singapore. So in context, net profit, if not for one-off charges, would have been plus 9%.

Next, let me describe the 4Q 2018 results. Revenue stood at $1.77 billion, which is a 5% improvement; EBIT, $160 million, which is flat; PBT at $160.5 million, which is a negative 7%, if you look at the green fonts; net profit, $124.5 million, which is a minus 26% year-on-year. Again, I want to reiterate that most of the one-off charges were incurred in the fourth quarter. And therefore, you saw the fourth quarter net profit drop of 26%. However, if you exclude one-off charges, which I will also detail later on, and looking at the white fonts, EBIT would have risen by 10%; PBT by 7%; and net profit, 1%.

So the one-off charges associated with 4Q results are as follows. Our net profit as reported is minus 26% at $124.5 million in 4Q 2018. One-off charges include portfolio rationalization and others. So you notice this number, $29.5 million, is a bit larger than the $24.7 million previously because some of the gains from divestment occurred prior to 4Q.

MTN redemption [led to] savings, again, these are savings rather than cost, thus, having repeat the MTN ahead of its expiry date in July. We had some interest savings in 4Q of $4.9 million. So the net profit, excluding these one-off charges, would be $149.1 million. And in 4Q 2017, we had this U.S. tax reform adjustment of $20.3 million, which is a positive to 2017. Again, if you compare the net effect of all these one-off charges, net profit in 4Q would have reversed from a minus 26% year-on-year to a plus 1% year-on-year. And I have described the divestment losses, which are in the footnote on this slide.

Let me now move on to the revenue breakdown. In 2018, we registered $6.7 billion revenue. 69% of that come from commercial businesses; 31% come from defense businesses. Our largest sector by revenue is Aerospace at 39%; Electronics at 32%; Land Systems, 19%; and Marine at 9%.

Group revenue by sectors. Our Aerospace business recorded a revenue of $647 million in 4Q and $2.6 billion for the full year. This is a minus 13% in 4Q but plus 4% for the full year. The lower revenue in 4Q was due to lower PTF revenue as we begin to ramp up that business and also lower engines output in our CERO sector. But on an annual basis, the sector revenue did come in higher at 4%.

Electronics sector. 4Q revenue was $536 million, full year was $2.14 billion, a very strong 16% increase in revenue for Electronics in the 4Q and also a strong 7% increase in revenue for full year '18 versus full year '17. You will recall that there was a onetime boost of $152 million in 2017 due to a modification of revenue estimates. The Elec sector, if you exclude that factor, would have delivered higher revenue by 15% instead of the 7% shown in the slide. And on a group basis, instead of 3%, it would have been 5%.

The Land Systems recorded 4Q revenue of $435 million, which is a 29% increase; and for the full year, $1.28 billion, which is a 3% increase.

The Marine sector, $139 million in 4Q '18, which is a 6% increase; and $574 million for the full year 2018, which is a minus 10% increase -- decrease, which is mainly due to lower revenue from U.S. operations.

Others recorded a 4Q revenue of $17 million, which is a minus 26% decrease; and full year revenue of $52 million, which is a 45% less than the year before. And others revenue include revenue from Innosparks, which is our Open Lab, to seek new ventures; and also from Miltope, which is a ruggedized computer company in the U.S.

Next, let's talk about sector PBT. Aerospace recorded 4Q revenue of $82.6 million, which is minus 13%. And this is largely from the MRAS transaction costs as well as loss of divestment from the U.S. flight school.

Electronics recorded a $51.5 million 4Q revenue, which is a 17% drop from $62.1 million in 4Q '17. However, on a full year basis, its PBT is higher by 12% at $224.7 million for 2018. The unfavorable sales mix for the quarter was due largely to -- was the reason for the decline in PBT for Electronics for 4Q '18.

For the Land Systems, the loss of divestment for the road construction business in India, which is one-off event, and the impairment for the road construction business in Brazil as well as the auto MRO business in Brazil accounted for the bulk of the drop in the PBT for Land Systems for fourth quarter 2018.

For the Marine sector, it came in higher. PBT for 4Q is $16 million; for the full year is $50.3 million

(technical difficulty)

over the year before. And this was largely because of better performance from the Singapore operations.

For others, the MTN redemption-related cost in 4Q was the reason why it did better -- related savings, rather, and also a recharge of the corporate costs to others in 4Q -- by others in 4Q to the sectors. However, I will highlight that this particular recharge has no impact on the group results.

Finally, the MTN redemption-related costs as well as the poor performance from Miltope, which we are working actively to turn around, is the reason for the full year $36.6 million PBT improvement compared -- loss compared to $14.3 million loss in full year 2017.

Next, the group net profit. You would realize from the previous chart that the group's PBT for the full year actually improved by 1% from $620.7 million to $611.8 million. However, the net profit at the group level stood at $494.2 million in 2018 versus $501.6 million, which is a 2% drop. And this is largely due to the U.S. tax reform gains in 2017. If we exclude the one-off charges that I have discussed earlier, then the full year group net profit at $526.8 million compared to $482.3 million in 2017 would represent a 9% improvement.

Next, the group margins. The as-reported PBT margin for 2018, the first bar on your left, is 9%; and this was the same as the prior year, 9%. The -- however, if we exclude the one-off charges, 2018 would be 10%, which was higher than the prior year.

For the chart on the right, net profit margin, for 2018 was 7% -- of 7% was lower than the prior year. However, this was impacted by one-off charges. Similarly, if we exclude one-off charges from 2018 and the favorable U.S. tax reform adjustment from 2017, then full year 2018 would be 8% versus 7% in 2017, which are the 2 light-blue bars on your right.

I now move on to give a bit of color for each sector's performance, starting with Aerospace. Revenue full year '18 compared to full year '17 is up 4%, $112 million increase, due largely to higher revenue from AMM and CERO business groups but partially offset by lower revenue from EMS business group. PBT increased by $1.5 million -- or flat, rather. And this is due to higher gross profit and net gains from divestment, partially offset by higher operating expenses relating to MRAS acquisition as well as higher R&D and actual expenses. Net profit stood at $244.6 million, which is flat compared to the year before.

For the Electronics sector, revenue stood at $2.14 billion, which is $132 million or 7% higher than 2017. The sector achieved higher revenue from LSG and CSG business groups, partially offset by the SSG business group. PBT was higher at $224.7 million, which is $24.5 million or a good 12% higher than the previous year. And this is due to higher gross profit in line with higher revenue, lower operating expenses and partially offset by share of losses from associates and joint ventures. Net profit was 10% higher year-on-year at $186.5 million, which is $17.7 million higher than 2017, in line with the PBT improvement.

Land Systems. Revenue was 3% higher at $1.282 billion, and this is due to higher revenue from the Auto and S&T business groups, partially offset by lower revenue from M&W business group. PBT was $62.3 million or 27% lower, and this is largely due to loss of divestment and impairment charges, which we discussed before, arising from the road construction business in India and Brazil as well as the auto MRO business in Brazil. The net profit was down and stood at $52.9 million, in line with the PBT drop as well as absence of the one-off U.S. tax reform adjustment, which mainly affected or helped the land sector in 2017 and was absent in 2018.

Finally, the Marine sector. Revenue stood at $574 million, which is a 10% drop. This is due to lower revenue from Shipbuilding and repair business groups, partially offset by higher revenue from the Engineering business group. PBT at $50.3 million is $27.9 million better due to higher gross margins with the delivery of ConRo ships and lower operating expenses. Net profits was 67% better and stood at $45.2 million, which is in line with the PBT improvement and also higher tax expenses.

So finally, let me just leave you with the outlook from the P and CEO, which I think I'll leave you to read it, and I'll leave the slide here for your perusal.

Thank you for your attention. Thank you.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Thank you, Cedric. May I invite Cedric to join our President and CEO and sector presidents on stage for the Q&A session, please?

Let me do a quick introduction of the team. From your left, we have Mr. Lim Serh Ghee, representing Aerospace; Mr. Ng Sing Chan from Marine; Mr. Vincent Chong, President and CEO of ST Engineering; Mr. Ravinder Singh from Electronics; Dr. Lee Shiang Long representing Land Systems sector; and you've met Cedric.

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

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Good morning. Good morning to all of you who are with us at ST Engineering hub today. And for those of you who are joining us via webcast, good morning to you, too.

Now in 2018, we registered a 3% year-on-year revenue growth. And while PBT grew 1% year-on-year, net profit was down 2% compared to the year before. However, as Cedric has highlighted, we would have performed better year-on-year if one-off charges were excluded. Our PBT and net profit would have been 7% and 9% higher, respectively, compared to 2017. Similarly, for fourth quarter of 2018, on the back of a 5% year-on-year revenue growth, PBT and net profit would have been 7% and 1% higher, respectively, if one-off charges were excluded.

Cedric has explained, but let me just recap broadly. The one-off charges were related to the portfolio rationalization of our pilot training school in the U.S.; road construction business in India; full impairment charges of the road construction business in automotive MRO business in Brazil; the transaction costs of the proposed MRAS acquisition, which I'll speak about later on; medium-term note early redemption, which we did in the middle of last year; absence of one-off favorable tax adjustment in 2017, which at that point, we did say that it benefited mainly the Land Systems sector.

At the sector level, revenue on a full year basis, except for Marine, which posted lower revenue, mainly due to lower revenue recognition from its U.S. operations, the other 3 sectors recorded stronger revenues year-on-year. Aerospace revenue was up 4%. Electronics revenue was up 7%. And Land Systems was up 3%. Net profit for Aerospace was flat versus 2017 as the sector incurred transaction costs for its proposed MRAS acquisition. We are looking at a transaction cost of about 2% of the enterprise value of the acquisition, which is quite typical for a transaction of this size. And in 2018, we have incurred a big chunk of that transaction costs. In fact, more than 2/3 of that so-called MRAS transaction costs was realized in 2018.

Net profit for Electronics was 10% up year-on-year, though its profit into 4Q was lower than 4Q 2017 due to less favorable sales mix. Land Systems net profit was impacted by the divestment impact of LeeBoy India and full impairment charges for LeeBoy Brazil and Technicae, the automotive MRO business in Brazil; as well as the absence of favorable tax adjustment, which it received in 2017.

Marine's net profit grew 67% in 2018, and it posted net profit improvements in the last 4 consecutive quarters. Its Shipbuilding business also recorded consecutive quarters of net profit improvements, and its last 2 quarters turned positive or [part] profitable. This shows that our turnaround efforts for our U.S. operation is showing positive results.

Other segment was way lower than 2017, mainly attributed to Miltope and onetime costs incurred for MTN redemption. We are putting resources in place to turn around Miltope's performance and are leveraging on Miltope's marketing network to channel more products, especially those from our Electronics sector to the U.S. market.

We continue to invest in growth initiatives such as Open Lab corporate venture unit and the formation of the new enterprises and ventures team. We are also investing to build stronger capabilities in areas such as data analytics and cybersecurity through the formation of strategic technology centers last year to support the sectors across the group. Excluding the one-off charges, the underlying operating performance of our business sectors remained strong.

I will next move on to give you some business updates. Our order book as at end December stood at a healthy level of $13.2 billion, and we expect to deliver $4.9 billion from this order book in 2019. The revenue recognition forecast is relatively higher than the last 2 years as we expect higher project deliveries from Land Systems and more Smart City-related projects mainly from Electronics.

I would also like to share with you that the Board of Directors has proposed a final dividend of $0.10 per share, subject to shareholders' approval. And together with the $0.05 interim dividend per share paid in August or third quarter of 2018, shareholders will receive a total dividend of $0.15 per share for full year 2018, similar to 2017. This translates to a dividend yield of 4.4%.

Next, going back to new contracts order book. For 2018, we announced over $5 billion worth of contract values. All sectors contributed to the growth of the order book. I'd like to point out that, unlike the Aerospace and Electronics sectors, which are regular quarterly contract win announcements from us, Marine and Land Systems may not always announce their new contracts for reasons pertaining to customer confidentiality.

Let me just do a quick recount of 2018. Highlights, firstly, of the Aerospace sector include our plans to develop the USD 210 million MRO complex in Pensacola, Florida, which is adjacent to our first MRO facility there, was opened in June. We completed -- after 4 years of -- when completed, I beg your pardon, when completed, we expect the Pensacola facility to contribute a total of 2.1 million man-hours of new hangar capacity. We have just secured recently all necessary funding with supports coming from the city, county and the state. Of the total investment, our share is USD 35 million out of the total USD 210 million.

Over in Europe, we expanded our capacity in composite panel manufacturing with the opening of a second plant in Kodersdorf, Saxony, Germany. The new facility boosts the overall composite panel production capacity by about 50%, putting us in a strong position to meet the rising demand for cabin interior components such as floor panels and cargo compartment linings, in line with expected aircraft fleet growth.

An agreement with Vietnam Airlines to set up a joint venture company based in Noi Bai International Airport in Hanoi to provide timely component MRO services to Vietnam Airlines and the region's rising needs in aircraft MRO services. This new joint venture is expected to be set up very soon.

Our A330 and A320 passenger to freighter conversion programs are tracking well in terms of marketing prototype development and redelivery to our customers. With the redelivery of the A330-200 freighter to EgyptAir in August of 2018, we have successfully inaugurated our PTF solutions for the A330 PTF family of aircraft, which includes the larger A330-300 PTF, which we have been delivering to DHL since the end of 2017. Meanwhile, we are converting the A321 prototype for Vallair at our Singapore facility.

The proposed MRAS acquisition has received all necessary antitrust approvals and is pending only the [safe use] approval in the U.S. And that was temporarily impacted by the recent government -- U.S. government shutdown. But now that the safe use review has resumed following the opening of the U.S. government offices, we are hopeful that the deal would close by the end of first quarter 2019. Of course, we will make appropriate announcements in due course.

Still on Aerospace, we noted concerns on the impact of Jet Airways' financial situation on our business. At this point, in terms of debt exposure, we are fully protected as a result of our prudent credit control measures. But I want to add that Jet Airways has been a supportive and long-standing customer of us since the early '90s, and we hope that they will resolve their funding issues very soon. Of course, we wish them the best.

Our Electronics sector, next, continued its upward growth trajectory in 2018 with the Smart City offerings gaining further traction internationally. Notable contract wins in new markets include advanced traffic management system for a Middle Eastern country, Smart Street Lighting in Hong Kong, platform screen doors for the Jabodebek LRT line in Jakarta. In addition, new projects were secured for smart sensors or IoT networks to enable near real-time management of urban water resources and smart lighting in cities across Canada, Israel, New Zealand, Sweden and the United States.

Likewise, our MRT solutions continued to be well received in cities that are either developing or enhancing their MRT infrastructure, such as Ahmedabad, Shanghai, Taipei and, of course, locally here in Singapore.

Our Smart City offerings also include our satellite communications business. On this front, the sector continues to enhance global connectivity, delivering innovative and cost-effective satellite solutions to its customers. For example, our iDirect business is delivering the latest solution in high-throughput satellite capacity as the ground infrastructure provider for Inmarsat's fifth global express high-speed broadband communications satellite.

We're also expanding into the high-growth in-flight connectivity market through a joint venture business to develop state-of-the-art satellite antenna system that delivers enhanced in-flight connectivity for commercial aviation. Overall, we see opportunities in the satellite communication segment and of it becoming an integral part of a new mainstream communications in a 5G converged world.

On Land Systems, specifically on our international defense business, the experiences from our participation in 2 large U.S. defense programs, namely the U.S. Marine Corps ACV 1.1 program and the U.S. Army Mobile Protected Firepower program, have furnished us invaluable learning points and references for future competition. While we're disappointed that we are not shortlisted for the U.S. Army program, we remain confident on the performance of our platform as demonstrated during customer trials and evaluation exercises. And we remain hopeful of other defense opportunities around the world. Outside the U.S. market, the other prospective markets for us include the Middle East, Latin America and the United Kingdom.

The Land Systems sector continues to streamline its business portfolio to focus on growth areas, as evidenced by the rationalization exercise undertaken in 2018. Apart from this, it is tracking well on its buildup of robotics and autonomous vehicle solution. For example, we launched our STROBO series of logistics robots in last quarter of 2018, and our family of logistics automation solution was exhibited at the Industrial Transformation Asia-Pacific exhibition. We also made our debut with our STROBO security robot at the ASEAN Summit in Singapore here in November of 2018.

Now over to Marine. The sector performed well in 2018 relative to 2017 in terms of improving the profitability of its business and securing new contracts amid challenging market conditions. Among its new contracts won were the design and construction of Auxiliary Personnel Lighter berthing barges in the U.S. and oceanographic survey ship for the U.S. Navy; design and construction of 2 logistics support vessels for a foreign government; and the design, construction and maintenance of fast patrol boats for the Singapore coast guard and the building of an Articulated Tug Barge. The 2 ConRo vessels were delivered in July and December, respectively. And we have certainly gained valuable experience and expertise from this project for future LNG, LPG-powered vessels.

Moving on, let me recap our group-level initiatives in 2018. We have secured several collaboration partners in our push to bring our Smart City solutions internationally. These include a partnership with JTC to design, develop and deploy an open digital platform for the Singapore Punggol Digital District and to integrate Smart City solutions into the open platform across the district. Keppel Urban Solutions, we partner with them to design and execute Smart City master plans in Keppel's developments in cities across Asia. We also sealed a partnership with Surbana Jurong and Changi Airport Partners and Engineers (sic) [Changi Airport Planners and Engineers] to deliver holistic and smart end-to-end solutions for overseas airports development projects.

Another notable initiative to build new engines for growth is our MOU, or memorandum of understanding, with the Singapore Economic Development Board for a strategic growth partnership, which we announced latter part of last year. While the partnership is in its early days, we are confident that the MOU, which is EDB's first, is predicated on a shared vision for global success. We will jointly identify and develop growth strategies for targeted businesses or industries such as robotics, smart mobility and health technology.

Now it's a good time for me to provide some updates on our health and medical technology in our business. We do see opportunities in the health care ecosystem as societies age as a multitude of technologies comes to fore and we move from reactive to preventive health care. Now this is not a new business for us. We have business units that have already had an initial footprint in areas such as hospital operational efficiency. For example, we are implementing the hospital operations center system for Tan Tock Seng Hospital, National Centre for Infectious Disease. This is a newly awarded contract by IHiS, or Integrated Health Information System, for 2-year project starting in December of 2018. The HOC, or the Hospital Operations Centre, system is designed to make greater use of real-time data, providing greater insights through smart data analytics to facilitate swift decision-making for health care operators. In this instance, the HOC system will provide situational awareness and decision support to Tan Tock Seng Hospitals' ops and logistics functions to help improve operational efficiency and reduce patient's wait time. These HOCs will eventually be scaled to other government hospitals, and that's, obviously, our plan.

In addition, we have a collaboration MOU with IHiS to incorporate contributions of ideas and use cases from other public hospital institutions to continually improve this HOC platform with new features.

In the U.S., our Aethon autonomous mobile robots are deployed now in 160 hospitals, performing delivery and transportation tasks in these hospitals to give staff more time to focus on patient care. We continue to tap the health and medical technology segment for growth, exploring other opportunities to bring our expertise to the market.

Lastly, on our Corporate Venture Capital unit, I'm pleased to update that we have made 4 investments in promising technology start-ups in the year 2018, bringing our total investments to 5 start-ups since the fund was started towards the last -- latter half of 2017. These investments were made in companies with technology or capabilities in data and analytics, cybersecurity for rail transportation and autonomous vehicles as well as in transportation technology platform.

So as you can see, 2018 was a very busy year for us. And we continue to drive long-term sustainable growth, backed by a healthy level of order book that provides revenue visibility for the next few years.

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

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Horng Han Low, CLSA Limited, Research Division - Research Analyst [1]

--------------------------------------------------------------------------------

Horng Han from CLSA. I have 3 questions. The first refers to the one-off charges there. I mean, if you look at the past decade of ST Engineering, one-off items seems to be -- it does seem to occur quite frequently. So I'm trying to get a sense in regards to the outlook for the next few years. Should we expect this trend to continue? I asked this question also because as ST group enters your second year of a 5-year revenue guidance, the concern is that you -- the revenue and profit may not move in tandem should these restructuring costs occur frequently.

--------------------------------------------------------------------------------

Sy Feng Chong, Singapore Technologies Engineering Ltd - President, CEO & Director [2]

--------------------------------------------------------------------------------

Thank you. You want to...

--------------------------------------------------------------------------------

Horng Han Low, CLSA Limited, Research Division - Research Analyst [3]

--------------------------------------------------------------------------------

Sure. My second question in regards to the Marine. What would the order book be like if the options of the 5 newbuilds are not included? And last question will be on the Aerospace. The order book for last year is about $2 billion. It seems to be lower compared to 2016 and '17 by a fairly large gap of about a few hundred million dollars. Can you give us some guidance in regards to the reason behind the order book trend and the outlook for 2019?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Okay. So let me just take on the first question. So let me just remind all of us that the one-off charges in 2018 included impairment charges related to impairment tests. These are conducted regularly and consistently. And there are also items relating to the sale of noncore business. As I mentioned in -- on many occasions, we adopt a very disciplined approach and systematic process to sell such businesses, taking a long-term view of their fundamentals instead of our near-term aspirations. We will make sure that we continue to do that in a very prudent manner. I mean, these are not -- these are businesses that have been assessed to be noncore to our business. Now we will continue to review our portfolio regularly, but one must not assume that the sale of noncore business will always result in a loss. And we have some divestments that made us some gains. Some could well produce a profit, but we must be looking at disposing them at the right time and the right price. So I wouldn't want to predispose or rather make the assumption that all the divestments is going to be incurring losses. But we do continue to look at our portfolio. We want to be sharper. We really want to make sure that we look at the business using long-term fundamentals, and then we'll make our assessments as we move along. So that's the answer to your next question. Now for your first question, Part B, you asked whether we can meet our 5-year plan. We keep track of our 5-year plan targets very closely through regular stewardships. I must say that our plans are all considered on track at this time. We do have a visibility on the pipeline of projects. As I mentioned, this year, we expect to realize $4.9 billion of revenue from our order book because of some near-term projects. So we take all that into consideration. We are still tracking towards our 5-year plan. So that's your first question. I hope I've answered that.

Now before I hand the mic over to Sing Chan to talk about the Marine order book and Aero, to talk about the Aerospace order book, let me just remind you, I've said this time and again. We don't manage our business based on quarterly changes of order books. So when we have the record quarter of order book, we don't really kind of get too excited about it, as I mentioned in various occasions -- on various occasions. Likewise, if there is 1 quarter where it's a little softer than the other quarters, we are not overly concerned. So I must say that our traction is still very healthy.

So in that context, I'll hand over the floor to Sing Chan to talk about the Marine order book without the options; and then after that, Serh Ghee to talk about Aero.

--------------------------------------------------------------------------------

Sing Chan Ng, Singapore Technologies Engineering Ltd - President of Marine [5]

--------------------------------------------------------------------------------

On your question as to how much is the option value for the 2 releases that we made for 3Q and 4Q is 245 -- it's about SGD 245 million.

--------------------------------------------------------------------------------

Sy Feng Chong, Singapore Technologies Engineering Ltd - President, CEO & Director [6]

--------------------------------------------------------------------------------

So you can back it out. You can calculate what were the firm orders is more than, I think, it's right about $750 million out of that $991 million that we announced for 2 quarters, okay?

--------------------------------------------------------------------------------

Serh Ghee Lim, Singapore Technologies Engineering Ltd - President of Aerospace [7]

--------------------------------------------------------------------------------

For Aero, we are pretty fortunate in the sense that a lot of contracts are multiyear contracts and also with repeat customer. So in 2006 -- in 2016 and 2017, we do see a renewal of some of these multiple-year contracts. Moving forward, I'm confident that we will be able to secure, again, multiyear contract with repeat customer.

--------------------------------------------------------------------------------

Gerald Wong, Crédit Suisse AG, Research Division - Head of Research [8]

--------------------------------------------------------------------------------

This is Gerald from Crédit Suisse. I've got 3 questions. Number one is again on your one-off charges. You have given down the breakdown on a group level. If I were to look at it from a divisional basis, maybe you can provide some details how would Aerospace and Land Systems actually look like on a year-on-year basis without these one-off charges. Second question is on Aerospace. The CERO revenue was down year-on-year in your fourth quarter after having shown improvement in the previous quarters. Maybe you can provide some details on what is driving the decline. And then lastly, on Electronics, you noted that the margins were down because of unfavorable sales mix. Do you also see some of the competition that you highlighted earlier starting to impact margins?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Thank you for the question. Let me just take the first part, which is one-off charges and how they impact the sector, yes, rather than the group. So as I said earlier, the one-off charges would change the net profit delta year-on-year from minus 2% to plus 9%. But if you look at sector by sector for Aerospace, it will change from 0% to plus 1%. So the impact is not very large on Aerospace. For elec, it will change from 10% to plus 13%. For Land Systems, it's very significant because most of the one-off charges occurred in that particular sector and also occurred in the 4Q as well. So that will change from minus 39% to plus 14%. So it's very significant. For Marine, not so. In fact, it's the other way around, from 67% to 44%. So that's basically how they impact each.

--------------------------------------------------------------------------------

Sy Feng Chong, Singapore Technologies Engineering Ltd - President, CEO & Director [10]

--------------------------------------------------------------------------------

Okay. So let me just build on Cedric's point. So we -- some color there. If you combine all the divestments in Land Systems and the impairment charges is looking like in fourth quarter about $20 million, yes, Technicae, Brazil; LeeBoy India, about that region in 4Q, $20 million in Land Systems. In Aerospace, MRAS costs and also pilot training school in total, the impact is between $15 million to $16 million, something like that -- to that $15 million to $16 million of impact in fourth quarter just from MRAS transaction costs as well as the pilot training school divestment.

Now I mentioned in my speech that typically, for a transaction the size of MRAS, you typically have to pay about 2% transaction cost, which is -- so this is well within our expectation. But we know that the benefits would accrue in the years to come, as we mentioned, yes.

--------------------------------------------------------------------------------

Chee Keng Foo, Singapore Technologies Engineering Ltd - CFO [11]

--------------------------------------------------------------------------------

I think associated to that question, maybe just let me preempt this. There will be some curiosity around whether some of these one-off charges are cash or noncash. Because if it were noncash, then the impact would be quite different than if it were cash. So of the items we talked about, those that are cash are MTN redemption. So we do have to pay the bondholders. So -- however, we would also have interest cash savings. And we have presented to you before that net-net, it is a positive cash transaction. And it also reduced our total capital employed, and therefore, better EVA and better ROCE, as you can see from the results.

So that's cash. There were 2 divestments, Airbus helicopter and the Guangzhou 5% stake. Those 2 were divestments of shares, and those were cash. And those were positive cash. So if you think about it, MTN is positive cash in the long term. Hence, Guangzhou and Airbus Helicopter were positive cash. MRAS acquisition expenses is cash out. But as you can see, the underlying fundamentals for that acquisition is -- was very much welcomed by the market. And the rest of it, the LeeBoy India, LeeBoy Brazil, Dalfort and pilot training, Technicae and all that, are mostly noncash.

--------------------------------------------------------------------------------

Serh Ghee Lim, Singapore Technologies Engineering Ltd - President of Aerospace [12]

--------------------------------------------------------------------------------

Your question is on that why is there a drop in the CERO in the fourth quarter, right?

--------------------------------------------------------------------------------

Gerald Wong, Crédit Suisse AG, Research Division - Head of Research [13]

--------------------------------------------------------------------------------

Yes, that's right.

--------------------------------------------------------------------------------

Serh Ghee Lim, Singapore Technologies Engineering Ltd - President of Aerospace [14]

--------------------------------------------------------------------------------

Okay. As what Vincent said, we don't really look at quarter to quarter, okay. If you look at the full year, actually the CERO business is actually up. And a lot of these -- some of these is due to the timing, okay. In fact, since you're asking this question, maybe I just [rub] on the so-called -- the aviation aftermarket performance in 2018 amid the so-called rather volatile -- I said macro backdrop, the fuel cost, the interest rate, the exchange rate and the tariff war, the aviation MRO aftermarket actually turned in a very strong performance. The engine sector is the -- outperforming actually the airframe as well as the so-called components. Aero, I will say that we are tracking actually the industry growth. For the engine side, our output actually is tracking about 10% higher than 2017. So you can look at it from a full year perspective, you look at it from quarter to quarter, okay.

Then this question probably will be going to 2019, how do we see. I see that for 2019, the key risk will be the tariff war, okay. Hopefully, U.S. and Chinese will come to some amicable settlement, okay. If not, then there'll be probably impact on both the freight activity as well as the tax traffic. But the first 6 months, we do see that the growth will continue to be robust, okay.

The softer business segment will be probably be in the component side and the modification business segment. The component side, the main reason is due to the deliveries of the A320neo and the 737 MAX catching up, okay. I think the -- both Airbus and Boeing have actually been putting a lot of effort to catch up on the delivery. And that would translate to basically new aircraft entering into the service, more new aircraft. And the retirement of older aircraft will start to creep up, okay. And that would have an impact, to some extent, on the components repair and overhaul business, new aircraft entering service, warranties, new -- yes, so you'll see -- so a little bit softer.

For the modification segment, which is we do see a slowdown in the freight activity, okay. But the main driver actually for the commercial is the feedstock, okay. In the near term, in the next 1, 2 years, we do see a shortage of wide-body feedstock, okay, be the 67 or the 330. But after that, we do see that the feedstock issue, it will be easing out, particularly for the A330-300, when the series of the A330neo kicks in, and which is good for the conversion business. Because then, the residue value (sic) [residual value] will be coming down, and there'll be more people with -- more amenable to doing the passenger-to-freighter conversion.

--------------------------------------------------------------------------------

Gerald Wong, Crédit Suisse AG, Research Division - Head of Research [15]

--------------------------------------------------------------------------------

Just to sum up. For the fourth quarter, you attribute that to more timing issues, but you're not seeing any slowdown in customer activity?

--------------------------------------------------------------------------------

Serh Ghee Lim, Singapore Technologies Engineering Ltd - President of Aerospace [16]

--------------------------------------------------------------------------------

Actually, we deliver a lot more engine in the third quarter, okay.

--------------------------------------------------------------------------------

Gerald Wong, Crédit Suisse AG, Research Division - Head of Research [17]

--------------------------------------------------------------------------------

Electronic margins, electronic margins?

--------------------------------------------------------------------------------

Ravinder Singh, Singapore Technologies Engineering Ltd - President of Electronics [18]

--------------------------------------------------------------------------------

Maybe you also wanted to answer the question.

--------------------------------------------------------------------------------

Serh Ghee Lim, Singapore Technologies Engineering Ltd - President of Aerospace [19]

--------------------------------------------------------------------------------

No, no. I'll just maybe just follow-up with this sort of related question about the order book as well as the engine activity. There's one question from Shekhar Jaiswal. Is the additional USD 315 million order win that we have announced last, I think, third Q last year from Jet Airways included in the current outstanding order book? No, we did not take that in because we have a policy -- a very prudent policy of taking order book. For this is a more of a time and material basis. We're only taking the order when they are arising. So it is not in the order book.

--------------------------------------------------------------------------------

Ravinder Singh, Singapore Technologies Engineering Ltd - President of Electronics [20]

--------------------------------------------------------------------------------

Okay. So Gerald, on your question on the Electronics profit margins and unfavorable sales mix. So first of all, you look at 2018, 2018 for Electronics has been quite a steady year in terms of both the revenue, profitability and even actually for our order book. But the nature of our business is that the orders are large, and they are also over longer periods of up to 3 years. So when you look at quarter-to-quarter numbers, there are actually fluctuations simply because of the nature of business. If you look at the net profit margin for 2018 compared to 2017, you'll see we've done slightly better. But on your question of is this also an indicator of the challenges for the Electronic sector. I think, first of all, as you see, our business is driven a lot in the Smart City area. And actually, there are a lot of cities and a lot of countries that aspire to go into this area, and we see a lot of opportunities. But of course, this also depends on the global economic climate and on the availability and how the various economies are doing and the availability of fundings for many of the different projects.

So if I can give some -- maybe some more granularity. In the mobility business, especially in road and rail, we see that demand being sustained simply because the need to deal with congestion, growing cities is something that many cities, governments are aggressively dealing with. And I mean, we see that this is going to be a pillar they're going to continue to grow.

In our satellite communication business, similarly, while there is a lot of disruptions because there are a lot of new constellations coming in, doing new constellation hoping to disrupt the market, but basically, bringing down the cost of satellite communication, we believe that the demand for hubs, for networks on the ground and for satellite communication will continue to improve and increase over the years. In fact, we have participated in some demonstrations with the European Space Agency to look at how you can combine 5G and satellite communication in cars and in mobility. And with AV and EV coming on, there's a belief that this is going to be one of the growth areas.

In the public safety and security, again, I think generally, there is a demand among airports, ports around the world. We see this to be a growing opportunity. In fact, we won some contracts, if you read some of our news releases, in South America, in the AgilFence area, growing interest in there.

In the IoT business, there is actually a general shift towards smart electricity meters, water meters as well as smart street lighting. So we -- in fact, this year, we made some inroads into the U.S. for smart street lighting. It is just the start. We think there's a huge potential. And this is another area that the demand is likely to go up in -- in fact, globally in the region, in the U.S., in Europe, we see this to be growing.

So all in all, I will say that the Electronics sector, we have many opportunities. If the global economies continue to do well, there's momentum, and government and cities have, I think, the funds to do many of these Smart City projects and we remain competitive, which we are working very hard to remain competitive, then the opportunities will be there.

--------------------------------------------------------------------------------

Sy Feng Chong, Singapore Technologies Engineering Ltd - President, CEO & Director [21]

--------------------------------------------------------------------------------

There's a question from Mr. Ian Chong from REDD Intelligence. The question revolves -- thanks for the question -- around Singapore budget 2019. The question is Singapore budget 2019 called for $22.7 billion of government expenditure on defense initiatives. And how much upside can you -- can we capture from this?

I believe Mr. Chong is referring to combined Defence as well as Ministry of Home Affairs budget, which has increased. But obviously, we will work very closely with the respective agencies to provide as much -- all the support that we can provide in the area of smart security as well as defense solutions. As we have been over the years, we will work very closely to make sure that we continue to present our innovative solutions and engage with the customers to supply those solutions where appropriate. So we will be certainly be very sharp on that front, okay. I won't be able to give you exact number, as you know. But obviously, it is, for us, a welcome development.

--------------------------------------------------------------------------------

K. Ajith, UOB Kay Hian Research Pte Ltd - Director of Asia Transport Research [22]

--------------------------------------------------------------------------------

Yes, if I may continue. Got 3 questions for me. Ajith from UOB Kay Hian. Again, referring to the budget 2019. I think there was announcement regarding the tweaking of the DRC, dependency ratio for services sector. So would ST Engineering be impacted by this? And if you would be able to give some color or some numbers, if so. Second one is again on the MRAS acquisition cost. Wouldn't it have been possible to capitalize it instead of recognizing that cost and amortizing it in subsequent years? That's my second question. Third question is to Serh Ghee. I read somewhere that ST Aerospace has secured a contract from QantasLink. Would you be able to verify that for maintenance of some of their aircraft?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Surely the -- on the Qantas thing, I read in the papers also. Certain customer doesn't allow us to really talk about the contracts that we secure from them. So that article, some [order appear.]

--------------------------------------------------------------------------------

K. Ajith, UOB Kay Hian Research Pte Ltd - Director of Asia Transport Research [24]

--------------------------------------------------------------------------------

So is the number already in your order book?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

We don't talk -- I think they are very specific to the customer. That environment is very sensitive.

--------------------------------------------------------------------------------

Chee Keng Foo, Singapore Technologies Engineering Ltd - CFO [26]

--------------------------------------------------------------------------------

So on the MRAS transaction cost, some of these are legal adviser cost, financial adviser cost, investment banker costs. So we always look at whether some of them are to be capitalized or some of them to be expensed. So we follow strict accounting rules when it comes to that. But the impact to us in the fourth quarter is about $11 million to $12 million-ish thereabout, okay, on expense.

There's also a question -- Ajith, you asked a question on this, DRC. I'll let -- generally, not for our sector, but except that in Marine, we do have reliance, but not so much in this case. But I'll let Sing Chan talk about it, yes.

--------------------------------------------------------------------------------

Sing Chan Ng, Singapore Technologies Engineering Ltd - President of Marine [27]

--------------------------------------------------------------------------------

This DRC issue is not new. I think -- I cannot remember exactly which year, maybe 5 years ago, we had already been [4:1.] So at that point of time, DRC for Marine industry is [1:5.] Maybe now, it's going to go down to 3.5, 2021. So where are we now? At the end of FY 2018, we are 3.0.

--------------------------------------------------------------------------------

Rachael Tan, UBS Investment Bank, Research Division - Associate Director & Research Analyst [28]

--------------------------------------------------------------------------------

This is Rachael from UBS. I have a couple of questions. So I think our concern has been unexpected costs that hit your bottom line. You have the closure of the automotive business in 2016, the Marine ConRo vessels. And then now we have -- 2018, we have the Land Systems again. How -- are you able to give us a sense of what kind of business you consider noncore and put hypothetically in losses, what they could look like. Could you just try and help us to understand that as well?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Hypothetically what? Can you repeat the last part?

--------------------------------------------------------------------------------

Rachael Tan, UBS Investment Bank, Research Division - Associate Director & Research Analyst [30]

--------------------------------------------------------------------------------

Like hypothetically, how many businesses do you have that could potentially incur losses if you sell them. Just help us to understand, maybe not to quantify it.

--------------------------------------------------------------------------------

Sy Feng Chong, Singapore Technologies Engineering Ltd - President, CEO & Director [31]

--------------------------------------------------------------------------------

No. I think, as I mentioned on many occasions, we actually adopt a very structured approach. I mean, we evaluate our business, taking a long-term view, looking at the prospects of a particular business in our portfolio versus some other businesses that may have higher growth, and our allocation of capital and how do we optimize that. We don't really give an outlook on what is, what is not. But they should not come to you as a surprise. In the road construction equipment business that we rationalized in 2016. Now the road construction equipment business in Brazil and India, these are not a surprise because they're generally subscale businesses that are not the best use of our capital and management time. So therefore, we rationalize them away. We don't actively communicate exactly what those are because the situation, the market fundamentals have to be constantly analyzed and evaluated.

So I won't be able to give you a specific answer that you look at. But I said before that portfolio evaluation is an ongoing process. Sometimes we rationalize business away. Sometimes we acquire new business. And in this process, we make our capital allocation sharper through the disciplined analysis. And I also mentioned that doesn't mean that all divestments will end up in losses. Some will end up in gains. So I don't want to predispose any of you on a certain notion. But still, keep in mind -- and I also mentioned apart from all these one-off charges, our base business remains strong and healthy. And we continue to really work on achieving our 5-year plan, and we hope that the fundamentals of the business will continue to be strengthened as we go forward, okay.

--------------------------------------------------------------------------------

Rachael Tan, UBS Investment Bank, Research Division - Associate Director & Research Analyst [32]

--------------------------------------------------------------------------------

I guess, the next question for -- on the Aerospace side. So last year, you guys announced an LOI with, I think, Guangzhou Aerocity for A321P2F with the option last valid until the end of last year. Do you have any updates on that?

--------------------------------------------------------------------------------

Serh Ghee Lim, Singapore Technologies Engineering Ltd - President of Aerospace [33]

--------------------------------------------------------------------------------

Okay, for the A323 -- A321PTF program, to recap, we have actually secured a launched customer, which is Vallair, order for 10. Vincent mentioned that we have actually inducted the first aircraft. It was inducted in November last year. Progress is on track. We will see a lot activities after we get the STC. Thus, the [LPP] will be looking at -- they want us to have the STC obtained first before we -- they want to commit, okay. So we are engaging a lot of prospective customers, and we are confident that once we get STC, okay, in the third quarter this year, we will see more serious, I will say, discussion with the prospective customer.

--------------------------------------------------------------------------------

Siew Khee Lim, CIMB Research - Head of Research for Singapore [34]

--------------------------------------------------------------------------------

Siew Khee from CIMB. Can I just -- I know we're not supposed to ask you Q-on-Q, but I will just ask for AMM this quarter, it's very strong. Why compared to last quarter? Because it's almost $40 million...

--------------------------------------------------------------------------------

Serh Ghee Lim, Singapore Technologies Engineering Ltd - President of Aerospace [35]

--------------------------------------------------------------------------------

This quarter is not over yet.

--------------------------------------------------------------------------------

Siew Khee Lim, CIMB Research - Head of Research for Singapore [36]

--------------------------------------------------------------------------------

Okay. And haven't really seen such a big increase in AMM. So is anything one-off in AMM?

--------------------------------------------------------------------------------

Serh Ghee Lim, Singapore Technologies Engineering Ltd - President of Aerospace [37]

--------------------------------------------------------------------------------

The AMM, generally -- I mean, this is -- we are largely capacity driven, right. So for the heavy maintenance, we do not see, let's say, quarter to quarter, okay? But 4Q, generally, our stronger quarter. If you look at the airframe maintenance, the third Q is always the weaker one, okay, because of -- I mean, I kind of would call [some -- I mean,] versus other aircraft will be flying. It doesn't come into the hangar, okay. So that's why you see that for quarter to quarter, let's say, versus the third Q, it will be much higher. Other than that, I don't see any additional reason.

--------------------------------------------------------------------------------

Siew Khee Lim, CIMB Research - Head of Research for Singapore [38]

--------------------------------------------------------------------------------

Also, for MRAS, was it $11 million to $12 million or $15 million to $16 million in terms of the acquisition?

--------------------------------------------------------------------------------

Sy Feng Chong, Singapore Technologies Engineering Ltd - President, CEO & Director [39]

--------------------------------------------------------------------------------

So the -- in fourth quarter, there were 2 activities or rather one-off charges for Aerospace: One is MRAS acquisition transaction costs. The other one is divestment of our pilot training business in the U.S. So the combined effect is about $15 million to $16 million.

--------------------------------------------------------------------------------

Siew Khee Lim, CIMB Research - Head of Research for Singapore [40]

--------------------------------------------------------------------------------

So the MRAS $11 million to $12 million is captured in EMS, right?

--------------------------------------------------------------------------------

Serh Ghee Lim, Singapore Technologies Engineering Ltd - President of Aerospace [41]

--------------------------------------------------------------------------------

Within the group. Let me try to...

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Okay, maybe we'll take it offline. Also, I just wanted to check on Land Systems, is Brazil a noncore market that you may not want to spend time? Because you've actually done the impairment. So can we take that maybe you might rationalize the portfolio sometime soon?

--------------------------------------------------------------------------------

Sy Feng Chong, Singapore Technologies Engineering Ltd - President, CEO & Director [43]

--------------------------------------------------------------------------------

Okay. So for Land Systems, I'll let Shiang Long talk about it -- his plans. But I already mentioned it's a full impairment for Technicae and LeeBoy Brazil, so full impairment charge. So I'll let Shiang Long talk about the plans, yes.

--------------------------------------------------------------------------------

Shiang Long Lee, Singapore Technologies Engineering Ltd - President of Land Systems [44]

--------------------------------------------------------------------------------

Yes, there are also other factors when we talk about the rationalization of the portfolio. I mean, like [wide] business, so we take a very structured approach because we are also looking at a new area, like robotic. So actually, all these factors, we will take into consideration when we decide to do new M&A or to do divestment.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

So in as far as the road construction equipment business that we have in Brazil and the MRO business, we are likely to just phase out. We have already taken full impairment. So over time, we don't expect to remain in the business. In fact, the operations have already wound down to a large extent for some of these activities there.

But Brazil, as a country, Siew Khee, is a different question because we do have metro projects there. There's still growth, but this in the Electronics sector. And we continue to look at also defense business in that part of the world, not just Brazil, but in Latin America. So it doesn't mean that we are getting out of Brazil. It's just that the Land System business for the road construction equipment business and the MRO business, at this point in time, we don't see any, I think, significant upside. Therefore, we have taken the decision to make full impairment for those 2 businesses.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Okay. So just to confirm that the road construction business in U.S. is still okay there, right, only the Brazil side. Okay, okay. Also, for Marine, just wanted to get the sense on how do we see the engineering line. I know last quarter, because we had the ROPAX off-charter, and then it came back again. But this quarter, the profit is barely profitable. How should we be looking at this line with your construction in the new plan, et cetera?

--------------------------------------------------------------------------------

Sing Chan Ng, Singapore Technologies Engineering Ltd - President of Marine [47]

--------------------------------------------------------------------------------

All right. So the Engineering segment, you are talking about the charter income. We say that charter commenced September 2018. So before that, from February until the end of August, the ship was undergoing, I mean, repairs, so 7 months. And so we also announced that this charter is for a period of 2 years, okay. So that's one. Two, you are asking why 4Q 2018 versus 4Q 2017, correct? Why the numbers was...

--------------------------------------------------------------------------------

Siew Khee Lim, CIMB Research - Head of Research for Singapore [48]

--------------------------------------------------------------------------------

Can also -- I just wanted to see how should we forecast this line.

--------------------------------------------------------------------------------

Sing Chan Ng, Singapore Technologies Engineering Ltd - President of Marine [49]

--------------------------------------------------------------------------------

So 4Q 2018, we have a little provision in one of the projects. And I think on this note, I think I can say that we're pretty -- we are conservative, okay, when we decided to make that provision. And then 4Q 2017, there was a write-back, which did not happen in 4Q 2018.

--------------------------------------------------------------------------------

Siew Khee Lim, CIMB Research - Head of Research for Singapore [50]

--------------------------------------------------------------------------------

Sorry, just one last question on Miltope. I know that you have been spending resources to improve it. Can you just confirm that it hasn't reached breakeven for the entire year? And then the other is positive is because of interest savings?

--------------------------------------------------------------------------------

Chee Keng Foo, Singapore Technologies Engineering Ltd - CFO [51]

--------------------------------------------------------------------------------

We charge from others to sectors, but no going back.

--------------------------------------------------------------------------------

Sy Feng Chong, Singapore Technologies Engineering Ltd - President, CEO & Director [52]

--------------------------------------------------------------------------------

Yes, that's our internal -- timing of internal allocations. But that's not really -- it doesn't affect the group as a whole. But within the group, we have some reshuffling, which manifests itself in -- under others. But in 4Q, we also have some interest cost savings from MTN. But Miltope has not broken even. We are putting resources to turn around, but then we still also see it as a good entity to leverage upon to, as I said, bring some of our products into the U.S. market, especially those from the Electronics sector.

--------------------------------------------------------------------------------

Patrick Yau, Citigroup Inc, Research Division - Director and Head of Singapore Equity Research [53]

--------------------------------------------------------------------------------

This is Patrick from Citi. So I was just looking at your prepared remarks earlier about order book being $13.2 billion and the bigger number, right, $4.2 billion (sic) [$4.9 billion] of that to be recognized in 2019. You mentioned that there will be a drawdown of Land Systems as well as electronic orders. So I was looking at the margins for the different divisions. And the question is big -- this bigger drawdown from the order book via Land Systems for 2019, does it significantly help the margin profile of Land Systems such that it gets back closer to group average in 2019?

--------------------------------------------------------------------------------

Sy Feng Chong, Singapore Technologies Engineering Ltd - President, CEO & Director [54]

--------------------------------------------------------------------------------

For Land System?

--------------------------------------------------------------------------------

Patrick Yau, Citigroup Inc, Research Division - Director and Head of Singapore Equity Research [55]

--------------------------------------------------------------------------------

Yes.

--------------------------------------------------------------------------------

Sy Feng Chong, Singapore Technologies Engineering Ltd - President, CEO & Director [56]

--------------------------------------------------------------------------------

Well, I mean but for Land System, 2018 there are a lot of one-off charges so the margin...

--------------------------------------------------------------------------------

Patrick Yau, Citigroup Inc, Research Division - Director and Head of Singapore Equity Research [57]

--------------------------------------------------------------------------------

So when you compare to 2017 then yes.

--------------------------------------------------------------------------------

Sy Feng Chong, Singapore Technologies Engineering Ltd - President, CEO & Director [58]

--------------------------------------------------------------------------------

I think the pipeline -- the projects in the pipeline are healthy projects. So we are quite pleased with them. So I would say that these are good revenues that would -- we would be looking forward to in 2019. And I said $4.9 billion will be realized out of that $13.2 billion.

--------------------------------------------------------------------------------

Patrick Yau, Citigroup Inc, Research Division - Director and Head of Singapore Equity Research [59]

--------------------------------------------------------------------------------

So if I could just maybe follow up quickly. Is that if I do the ratio of actually order book recognition, that would actually sort of imply that 2019, you should be expecting a higher-than-usual type of revenue growth for the group overall. Is that the right kind of thinking?

--------------------------------------------------------------------------------

Sy Feng Chong, Singapore Technologies Engineering Ltd - President, CEO & Director [60]

--------------------------------------------------------------------------------

No. I think order book gives you revenue visibility. There are also projects, businesses that we have that are not order book-centric-type businesses because they are product sales and typically, you sell them as you get the contract. We wouldn't want to give you an outlook on what the revenue is or forecast. But this is a good start. I think that's the confidence that we can share with you. We're not going to give you any numerical forecast, but I think we're off to a good start with this kind of order book manifestation or realization of order book revenues in 2019.

--------------------------------------------------------------------------------

Patrick Yau, Citigroup Inc, Research Division - Director and Head of Singapore Equity Research [61]

--------------------------------------------------------------------------------

So just confirming, you said $4.9 billion rather than $4.2 billion.

--------------------------------------------------------------------------------

Sy Feng Chong, Singapore Technologies Engineering Ltd - President, CEO & Director [62]

--------------------------------------------------------------------------------

$4.9 billion, that's what we put in our announcement.

--------------------------------------------------------------------------------

Unidentified Analyst, [63]

--------------------------------------------------------------------------------

This is [Jason] from DBS. So maybe this question is for Serh Ghee regarding the acquisition of MRAS. So I understand with regards to the acquisition, there is bound to be some integration costs that you're likely to incur when you're consolidating a new entity into the system and also trying to understand more what the margins of it. So based off the financials that was disclosed, margin was about -- profit before tax margin was about 9%. So it's slightly lower than the current segment margin. So moving forward, will we see this integration costs and this 1/3 of acquisition cost that has yet to be incurred in 2019 affect the margins and profitability of the segment?

--------------------------------------------------------------------------------

Serh Ghee Lim, Singapore Technologies Engineering Ltd - President of Aerospace [64]

--------------------------------------------------------------------------------

1/3 of...

--------------------------------------------------------------------------------

Unidentified Analyst, [65]

--------------------------------------------------------------------------------

I think 1/3 of acquisition costs is yet to be recognized in -- according to what..

--------------------------------------------------------------------------------

Sy Feng Chong, Singapore Technologies Engineering Ltd - President, CEO & Director [66]

--------------------------------------------------------------------------------

Let me just repeat what I said. I said more than 2/3, a large part of the transaction cost has already been incurred. But doesn't mean that remainder is 1/3. I just say more than 2/3. So substantially incurred. I know the mathematics is like that, but that's -- intuitively, but it's not. But there are some -- and I'll let Serh Ghee answer the rest. But there are some remaining -- a very small cost that may be amortized over a few years. For example, insurance costs because there may be some insurance charges that are applicable for a few years. But that's very marginal, small.

--------------------------------------------------------------------------------

Serh Ghee Lim, Singapore Technologies Engineering Ltd - President of Aerospace [67]

--------------------------------------------------------------------------------

I'll venture a little bit more than what Vincent had said. I think 2018, we took in the bulk of the transaction costs, okay? So what -- this balance is not significant, okay. You're correct. I mean, transaction cost is one. I mean, transaction cost, we pay to city. We pay to city. No response. So -- but there will be integration costs, okay, and the integration is going to be over a period of not just 1 year, okay. So it will be a period of about probably 2 to 3 years. So the cost will be spread over that period of time.

What is more important is that we -- to me is that we need to put in a very robust integration plan, okay. And in fact, we have in place a very robust integration plan already. Once the U.S. government gives the approval on the [safe use], we'll be able to execute straight away. I also assembled a rather experienced integration team. The key leaders are those that are involved in the integration of (inaudible) into the group. So that is key. Plus cost you have to incur, okay, but you want to reap synergy benefits, okay? That's more important. That's our main focus.

The margin, okay, if you look at -- I think that was the last question with regards to the margin from this nacelles system. Currently, they are not at their peak of production, okay. They are probably coming in at about 40-odd chipset per month. And you know that Airbus is trying to get all the supply to ramp up to 60 and even more, okay. And you probably know that for this kind of manufacturing, the more you do, there'll be economy of scale, there'll be efficiency. So I would see that once they hit this 60 mark, you will see a lot of efficiency kicking in.

--------------------------------------------------------------------------------

Sy Feng Chong, Singapore Technologies Engineering Ltd - President, CEO & Director [68]

--------------------------------------------------------------------------------

So let me just build on that. Remember, when we made the announcement in September last year, we said that this acquisition is expected to be earnings accretive. That's still the case. So after considering all the transaction integration costs, we still expect the venture to be accretive. But I think more importantly is the strategic value that this particular acquisition will have for Aerospace. And for those of you who are very interested in numbers, I'll tell you that whatever remnant transaction costs we are talking about less than $1 million a year for the next couple of years, for example, insurance, a few hundred thousand dollars a year. I mean, that's why it's substantially over, but you still have another couple of years where you have to pay the remnant so-called transaction cost. But integration cost is a slightly different thing. But all considered, it's expected to be accretive acquisition, okay.

--------------------------------------------------------------------------------

Sing Chan Ng, Singapore Technologies Engineering Ltd - President of Marine [69]

--------------------------------------------------------------------------------

I have a question here for Marine. From Shekhar Jaiswal, RHB Research. Question is was there any update announced on arbitration proceedings between VT Halter Marine and Hornbeck. The arbitration proceedings are in progress and it is not appropriate for us to comment at this point in time. We will make announcement as and when the need arises.

--------------------------------------------------------------------------------

Sy Feng Chong, Singapore Technologies Engineering Ltd - President, CEO & Director [70]

--------------------------------------------------------------------------------

Any other questions from the audience? Any? Right. Well, if not, thank you very much. Although the -- for those of you who are joining us for lunch, we are pleased that you are able to. So we will chat afterwards. For those of you have dialed in or tuned in, thank you very much for your time this morning. Thank you.