Singapore Technologies Engineering Ltd (S63) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen. Welcome to ST Engineering's Full Year 2020 Results Briefing. We will begin today's briefing with a presentation by our Group CFO, Mr. Cedric Foo. Following that, we will invite management to join us for a Q&A session. Without further delay, I'll hand over to Cedric. Cedric, please?

A very good morning, ladies and gentlemen. Welcome to the ST Engineering Full Year 2020 Results Briefing. Let me also extend a warm welcome to those who are dialing in through webcast. The agenda for this morning is the group highlights, followed by outlook, and we'll leave you to go through the appendices. First, the group highlights. May I refer you to Slide #4. The COVID-19 pandemic has impacted the group because of demand reduction, supply chain challenges and workforce disruptions. The group's Aerospace sector is affected more than the other sectors. In line with our revenue guidance the group provided in its third quarter 2020 market update, the group recorded revenue of $7.2 billion for full year 2020, which was 9% lower year-on-year. We have guided at 10% at that time. The group's profit from operations of $560.9 million for full year 2020 was 17% lower year-on-year. Profits from operations, you will find, is a new term that we are using here. It replaces the term EBIT, which we have been using in past years. The figure shown in the top-right box, $560.9 million, is operating profit before other income and share of associates. Hence, profit from operations is a better description, and we have adopted it now and going forward. Our profit before tax stood at $534.4 million, which was 23% lower year-on-year. The second half of 2020, as you know, was more impacted than the first as the pandemic took hold across the world. Lastly, we ended the year with net profit of $521.8 million, which was 10% lower year-on-year. Slide #5. This slide shows the revenue and net profit movement between 2019 and 2020. First, on the left-hand side. In full year 2020, the group recorded $7.2 billion of revenue or 9% lower compared to the $7.9 billion in full year 2020 -- 2019. The decrease was largely attributable to our Aerospace sector with its revenue decreasing by $737 million. Revenue for the rest of our sectors registered an increase of $27 million. Net profit, which is on the right-hand side. In full year 2020, the group recorded a net profit of $522 million or 10% lower year-on-year. This was the result of, one, impairments and unfavorable fair value changes of associates in line with the poorer business outlook for some lines of business impacted by COVID-19. This impairment amounted to $54 million or 10 percentage points during the year. Secondly, our Shipbuilding business. The loss from the Shipbuilding business widened by $15 million or 3 percentage points due to project losses in the U.S. for contracts secured in the trough of the marine industry to cover fixed costs; and thirdly, a positive $13 million due to a combination of government support, cost-reduction initiatives and offset by the effects of COVID-19 and others. This figure also include provisions for onerous contracts for various projects, some of which as a result of poorer outlook arising from COVID-19. If the outlook improves this year, and we expect a partial recovery, you will not -- one would expect not to see so many onerous contracts for 2021. This brought our net profit for full year 2020 to $522 million or 10% lower than 2019. Slide 6. Aerospace contributed 38% of group revenue; Electronics, 32%; Land System, 19%; Marine, 10%; and others, 1%. In terms of breakdown between commercial and defense, defense revenue declined from $5.6 billion in 2019 to $4.6 billion in 2020, whilst defense revenue grew from $2.3 billion to $2.6 billion as defense is less affected by COVID-19. By customer locations, Asia constituted 53%; the U.S., 24%; Europe, 17%; and others 6%. Slide 7. In the fourth quarter of 2020, Aerospace and Electronic sectors collectively secured $1.3 billion worth of new contracts. For the full year 2020, these 2 sectors collectively secured $5.7 billion in new contracts. This $5.7 billion value excludes contracts secured by the Land Systems and Marine sectors. Slide 8. The group ended the year with an order book balance of $15.4 billion, slightly higher than the $15.3 billion as of end of 2019. This is despite order cancellations of about $1 billion, of which the bulk came from the Aerospace sector, and certain contracts were deferred and only finalized in January 2021. Notwithstanding these reasons, our order book remains robust at $15.4 billion as of end 2020 with about $5.3 billion to be delivered this year. Slide #9. This slide shows the breakdown of revenue by sectors. For full year 2020, Aerospace revenue was $2.71 billion, down by 21%. This sector was most impacted by COVID-19 as a result of the weak aviation sector. The revenue from Electronics and Land Systems dropped marginally by 1% to 2%. Marine sector recorded a revenue of $710 million, which was 10% higher than 2019. Others include our subsidiary, Innosparks, which generated higher revenue in 2020 as a result of its sale of masks. All in, the group recorded a total revenue of $7.2 billion, which was 9% lower than 2019 and in line with our guidance. Slide 10, net profit. The group's Aerospace sector recorded a net profit of $192.9 million, which is 28% lower than 2019. The Aerospace sector experienced a more pronounced impact brought on by COVID-19 as its customers were in the aviation industry. With the poorer business outlook resulting from COVID-19, some of its lines of business recorded impairment charges. The impact of COVID-19 was partially mitigated by cost-reduction measures and government support which the sector received. However, excluding government support, the Aerospace sector would still be in the black. Our Electronics sector recorded a profit of $203.9 million, which was 11% higher than full year 2019, mainly helped by cost-reduction measures and government support. Land Systems sector recorded a profit of $101.4 million, which was 31% higher than 2019, due primarily to increased vehicle production in Singapore, cost-reduction measures and government support. This was partly offset by weaker performance from its associates and its U.S. Specialty Vehicle businesses. Our Marine sector recorded a profit of $28.3 million, which was 45% lower than that of the year before. As I said, the Shipbuilding business in the U.S. registered losses in several projects which were priced and contracted at the trough of the Marine industry. In summary, the group recorded a net profit of $521.8 million, which was 10% lower than 2019. Slide 11, net profit margin. The group's full year net profit margins on the right-hand side of this slide was 7%, which is similar to 2019, and a large part of it was contributed by self-help cost-reduction measures as well as government support. Aerospace sector came in 1 percentage point lower than 2019; electronics came in 1 percentage point higher; while Land Systems came in 2 percentage point higher. The net profit margin for Marine sector was 4 percentage points lower due to project losses in the U.S. Slide 12. The major changes in the balance sheet are: current liabilities. Our current liabilities as of end of 2020 stood at $3.9 billion. This was down from the $5.45 billion as a result of the repayment of our short-term U.S. commercial paper and some bank loans which were used as a bridge for the acquisition of MRAS and Newtec, which is now named iDirect. Noncurrent liabilities, on the other hand, increased to $3.09 billion as of end of 2020 from $1.58 billion as of end of 2019. This increase was largely due to the bond issue in April 2020 as well as higher noncurrent contract liability balances from [Technical Difficulty] [ advances received from customers ]. Apologies for that technical hitch. Next, Slide 13, statement of cash flow. Net cash from operating activities was very strong at $1.53 billion compared to $590 million in 2019. The difference was largely a result of higher advanced payments received from customers as well as favorable working capital movements. The group's net cash used in investing activity stood at $295 million as at end 2020 compared to $1.27 billion in 2019. The group made major acquisitions in MRAS and iDirect Europe in 2019. In 2020 the group recorded a cash outflow from financing activities of $959 million, primarily due to the dividend payment, repayment of commercial papers and bank loans and offset by the bond issue. In 2019 the group had a drawdown of short-term bank loans and issued U.S. commercial papers to fund the acquisition of MRAS and iDirect Europe. Slide 14. The Board has announced a final dividend of $0.10 per ordinary shares, subject to shareholders' approval at the forthcoming Annual General Meeting. The dividend will be payable on 7th of May this year. Full year 2020 interim dividend was $0.05, and with this $0.10 of final dividend, it brings our total dividend for the year to $0.15. The final dividend payable in 2021 can be adequately funded out of past year's retained earnings. The retained earnings was $1.4 billion or equivalent to $0.449 per share as at the end of 2020 at the group level. Before I leave you with the CEO's comments and message, I'd like to discuss Slide 16. The group expects a reduction in government support of about $250 million. So in 2020 we received about $350 million. This year, we expect to receive about $100 million, so the reduction is $250 million. We target to offset this $250 million amount through cost savings and partial business recovery, which we expect; and lower impairments, which we also expect as a result of this recovery that we are forecasting. The $180 million targeted cost savings includes reduced manpower costs and productivity measures. This includes reduced contract labor, reduced outsourced contractors, retirements, natural attrition and reduced overtime, especially in the earlier part of this year until demands pick up. These measures were taken across our global network, not just in Singapore, and will be manifested in both the cost of goods sales and OpEx for this year. And many of these items, I would say most of these items, were already acted upon in 2020 and will flow through into 2021 with full year effect. Hence, we are confident that the targeted savings of $180 million will be achieved. Finally, the CEO's message, which we will leave you to read for maybe half a minute. Now the next topic I have is our external financial reporting framework, and this is necessitated because we have reorganized the company. And in line with the FRS 18, we would like to acquaint you to how we will be reporting our results from first half of this year onwards. So may I refer you to Slide #2. To recap, the new organization structure that we have put in place from January this year is to align with our growth strategy, which we communicated to investors as early as March 2018. And these are: one, to strengthen our core business; two, to grow our Smart City business; and three, to also grow our international defense business. Our new organization is structured through 2 clusters: first, commercial; and second, defense and public security cluster. This is so as to deepen customer focus, accelerate domain expertise and position the group for international growth. Slide 3. Within each cluster, there are business areas with specific domain expertise. Under the commercial cluster, the business areas are: Commercial Aerospace, which is one of our main core business; two, urban solutions; and three, satellite communications. Under defense and public security, the business areas are: one, digital systems and cyber; two, Land Systems; and three, marine; and four, defense aerospace. Both clusters will be supported by the group engineering center and the group technology center as well as the group HQ functions and shared services to derive synergies across the group. Slide 4. The principles that we have abided to is, firstly, to reflect the management structure, how we steward and how we place accountability to the various segments; two, to enable analysts to make comparison to peer group companies of how we are performing; and three, to provide the performance of each of the 3 segments. This is consistent with the requirements of the accounting standard. Slide 5. As such, we'll be reporting 3 segments: one, commercial aerospace; two, we will be reporting urban solutions and satellite communications together as a segment; and finally, defense and public security as a third segment. Commercial aerospace is one of our core businesses, and it's distinct from our Smart City business. Analysts has often asked, "Who is the President of Smart City?" -- I mean when we were presenting our Investor Day materials. I think now we have a Smart City segment which is really urban solutions and satcom. Defense and public security cluster serves as our local defense -- serves our local defense customers but also other government agencies, so it's not just local defense. It also has public safety and security, and many other agencies are served by this particular unit. But in order to preserve synergies within the Marine and Land Systems sectors, they were largely placed under this cluster. So we are not very purist about it, and we are taking a practical approach to this reorganization. And as you know, both Marine and Land have substantial commercial businesses and so does digital systems. So in other words, the defense and public security cluster should not be seen as noncommercial cluster. Additionally, the defense and public security cluster do not only comprises businesses in Singapore but also comprises a large footprint overseas, like what we do for the U.S. Army, U.S. Coast Guard and so forth. So let me repeat: defense and public security is not just noncommercial, yes. There are commercial elements in it. And it's not just defense but also public safety and security, serving other government agencies other than our local defense customer. It also has footprint outside of Singapore and not just Singapore. Slide 6. Beneath these 3 segments, there will be 9 subsegments. And under commercial aerospace, we have Aero MRO, which you're very familiar with; aerostructures and systems, which is really the OEM part of the Aerospace segment; and aviation asset management, which is really your aircraft leasing, engines and asset management. Under urban solutions and satellite communications, you have all your urban solutions and satcom lines of businesses falling beneath it. And under defense and public security, digital systems and cyber, Land Systems, Marine and Defense Aerospace. So in all, there are 9 subsegments. Slide 7. This slide shows the transition from the previous reporting framework to the new reporting framework. The subsegments are color coded. So for example, defense, aerospace, digital systems and cyber, Land Systems and Marine, colored in green on the left, will move to defense and public security on the right. So the first 2 segments, based on 2020 numbers, would be roughly 50%, whilst the DPS, defense and public security segment, will be the other 50%. Commercial aerospace and urban solutions and satcom were in the trough of the business cycle in 2020 due to COVID. And therefore, these percentages, the 50% and 50%, would move and change over time. Slide 8. In terms of financial disclosures, the group financials will remain unchanged and will include the full suite of financial statements. Business segments will include revenue, EBIT -- the new EBIT that is purely earnings before interest and taxes but after other income and associates -- and segment assets and liabilities, the balance sheet side of it. Subsegments will include just revenue. Now we have attached an appendix in the deck that we have distributed so as to enable you to find out what products and services falls under each of these 9 segments. So I'll leave you to browse through them. If you have any questions on the new framework, feel free to clarify with us, and we'll be happy to take those questions. Otherwise, thanks for your attention. Thank you.

Thank you, Cedric. May I now invite the panelists to join us at the head table for Q&A, please? I'd like to introduce the panelists for today. They are Mr. Vincent Chong, Group President and CEO; Mr. Cedric Foo, the Group CFO; our Group Chief Operating Officers, Mr. Lim Serh Ghee and Mr. Ravinder Singh; Mr. Jeffrey Lam, President, Head of Aerospace Sector; Dr. Lee Shiang Long, President, Head of Land Systems; and Mr. Ng Sing Chan, President, Head of Marine. For best safe management practice within this meeting room, please proceed to the standing mics lined up along the aisle to ask your questions. Kindly state your name before asking your question. [Operator Instructions] I now hand over the mic to Vincent to deliver his remarks before we begin our Q&A. Vincent, please.

Okay. Good morning, everyone. Thank you for joining our Full Year 2020 Results Briefing, those here as well as those who join us in the webcast. We started 2020 positively, but the growth momentum was impacted when COVID-19 pandemic disrupted economic activities from the early months of 2020. Since the beginning, we acted decisively to mitigate the impact on our business while maintaining a safe work environment for our employees and business continuity for our customers. We were impacted broadly in the areas of reduction in customer demand, supply chain challenges as well as workforce disruptions. Against this backdrop, our revenue was down 9% year-on-year and in line with what we guided in our third quarter market update. Our Aerospace was most impacted due to the weak aviation industry as passenger air travel was curtailed. The group PBT was impacted negatively by impairment of intangible assets and fair value changes of associates in line with poorer business outlook for some of our business due to COVID-19. Further, our U.S. Shipbuilding business registered project losses in the execution of several projects that were contracted and priced at the trough of the Marine industry. The PBT drop was also impacted by lower group revenue, mitigated by savings from productivity and cost-reduction initiatives and government support. On government support, we recognized about $350 million at PBT level in 2020. This is in line with what we shared last August, that the government support would be more than $300 million for full year 2020. The group net profit similarly saw a reduction, but alleviated by the nontaxability of the Singapore government job support scheme, and came in at 10% lower year-on-year. Let me now turn to our sector performance. At Aerospace, all its business groups were negatively impacted by the pandemic. Both revenue and net profit came in lower year-on-year, while profitability was propped up by cost-saving initiatives and government support. The sector would still have been slightly profitable in 2020 without government support. Our Aerospace sector's relative resilience is driven by our global diverse portfolio, which includes PTF, or passenger-to-freighter conversion; our ability to securitize our engine leasing portfolio, as we shared with you last year. We also implemented cost-reduction and productivity measures to mitigate the impact of COVID-19. As we all know, this is against the backdrop of a very challenging aviation industry that all have seen. While there are signs of gradual pickup in MRO work, we will continue to focus on cost management while keeping close watch on market developments. The silver lining is in the air cargo segment, which shows resilience in part driven by the precipitous fall in passenger demand, which took out belly capacity for cargo. To this end, we have achieved several milestones in our freighter conversion business in time to help airlines breathe new life into underutilized aircraft while addressing market shortage in air freighter capacity at a time when the belly cargo load in passenger aircraft is greatly reduced. In September, we redelivered the [ header ] version A321 passenger-to-freighter converted aircraft to launch customer Vallair in September. In November, we set up a A321 passenger-to-freighter conversion line in Guangzhou, China. That's in addition to the one that we have in Singapore. We will soon set up a new line at our facility in Mobile, Alabama, U.S.A.. Also in November, we opened a second line for our Boeing 767-300 passenger-to-freighter conversion in Singapore to support Boeing in its conversion program. Apart from converting retired passenger aircraft to freighters, we also helped to temporarily turn passenger aircraft into cargo planes. We worked with Scoot to launch its first cargo plane in August by removing seats to introduce cargo-carrying capacity to the cabin interior. As for our MRO business, we continue to expand our service offerings. We added CFM56-7B and V2500 engine nacelle MRO capability to MRAS aftermarket solutions to provide more integrated solutions in nacelles to our customers. In doing so, we have built up an engine nacelle MRO presence in the U.S. at the same time. Let's move to Electronics. Revenue for the sector was 2% lower year-on-year, largely because of COVID-19 impacting project milestones and delivery schedules due to travel and movement restrictions imposed in countries we serve as well as supply chain disruptions. Its net profit was up 11%, largely helped by savings from cost-reduction initiatives and government support. The sector did better in the second half of 2020, consistent with past performance of having a stronger second half, but also because its businesses experienced partial recovery amid COVID-19 in the last few months. Our satcom businesses in Europe and the U.S. are fully integrated and, as an enlarged satcom group, contributed positively to the sector revenue, even though demand fell for ground infrastructure for some satcom customers, especially those in the aviation and maritime segments. In 2020 we were about breakeven on iDirect Europe, or Newtec as it was known when we closed the transaction in October 2019, at a net profit level. Now on Land Systems, its revenue was comparable, partially due to lower Specialty Vehicle business, offset by stronger defense sales. Its net profit was up 31%, helped by savings from cost-reduction initiatives that also resulted in lower operating expenses as well as government support. The sector continues to pursue opportunities in international defense business. Now that we have reorganized our new structure, it will to enable us to go to market more effectively. Having said that, defense programs have long gestation periods, and we will continue to focus on segments where our niche capabilities can give us advantage. Locally, we are focused on the production and supply of the Hunter Armoured Fighting Vehicle. Turning to Marine. Its revenue was up 10% year-on-year, mainly due to higher contribution from U.S. Shipbuilding, offset by lower revenue contribution from Singapore as yacht activities were disrupted by COVID-19 earlier part of -- towards the mid of last year, especially during the circuit-breaker period. Despite higher revenue, the sector's net profit was down 45%, largely because our U.S. operations incurred cost overruns in several vessel constructions. These projects were contracted and priced low at the trough of the marine industry in 2018 to cover fixed overheads. In addition, operating costs increased due to COVID-19 disruption on yacht operations and workforce. Meanwhile, we are working hard to better manage our resources and control of costs in the U.S. operations. We are also focused on delivering existing contracts in the U.S. and ensure that the shipyard and its workforce can successfully construct the Polar Security Cutter, or PSC, which remains profitable. Now on new contracts and order book. Notwithstanding a slowdown, our Aerospace and Electronics sectors secured new contracts of $821 million and $516 million, respectively, for the fourth quarter. Our contracts -- new contracts secured by Aerospace in the fourth quarter included a 5-year airframe heavy maintenance contract to support an international air cargo carrier signet of multiple fleet types and a 4-year airframe heavy maintenance contract to support a North American airline's Boeing 777 fleet. Our A330 passenger-to-freighter conversion program also gained traction as we signed up several new customers and more orders in the last quarter. As for the Electronics sector, apart from securing new contracts locally in the fourth quarter, the team picked up the pace of new contract wins outside of Singapore as some customers resumed business activities. And these contracts included Smart City-related projects in various cities for solutions in smart mobility and Internet of Things such as smart lighting and smart water metering as well as in satcom ground systems. Together with other contracts won but not disclosed, and after adjustments of revenue delivery and project cancellations of $1 billion, as Cedric presented, largely for Aerospace, we ended the year with a robust order book of $15.4 billion or slightly higher than 2019 year-end order book level. And that's despite the challenges we faced in 2020 as a result of COVID-19 pandemic. The expected delivery of $5.3 billion from the order book in 2021 continues to provide a healthy revenue pipeline this year. And this would be the last set of results briefing that is sector centric for 2021 results. We will present our financials in the new reporting framework, which Cedric has earlier presented. It is important for me to reiterate that the reorganization doesn't change who we are, as only the customer-facing part of the group is reorganized. Our new structure is designed to enable better execution of our global growth strategy of strengthening our core businesses and pursuing growth in Smart City and international defense business. The new reporting framework is based on how we drive management stewardship and accountability for our leaders' respective areas. Now going to 2021, we'll continue to focus on business recovery, even though we expect it to be uneven across the industries we participate in. The aviation industry remains subdued and is unlikely to recover to prepandemic levels this year. However, the bright spots are in areas like passenger-to-freighter conversions and cybersecurity as governments and enterprises ramp up their focus on protecting their IT and OT infrastructure. Our defense business continues to bring stability to the group. We target to offset the lower government grants in 2021 through our ongoing cost-reduction initiatives and partial business recovery and low impairments in the areas which Cedric has already touched on earlier on. With our new organization structure, we are well positioned to better serve our customers, respond nimbly to macroeconomic changes and poised to achieve long-term sustainable growth. In keeping to our commitment to continue returning value to our shareholders despite near-term aberrations, our Board has proposed a final dividend of $0.10 per share. When approved by the shareholders, the total dividend will be $0.15 per share for the full year 2020. On that note, I finish my prepared remarks. I will open the floor for Q&A.

Yes, Horng Han.

Very happy Lunar New Year. I'm Horng Han from CLSA. I have 3 questions here. The first with regards to the guidance of $100 million job support scheme in 2021. Can I check if this number has reflected the recent job support scheme given by Singapore government? I ask this question because I do recall in November 3Q briefing last year, the guidance for 2021 support scheme will reach $100 million. However, these numbers appear similar, even after the recent support scheme from Singapore site. Second question in regards to the $350 million support scheme we received last year. Is management able to provide some clarity with regards to the different segments that received the incentives? And my last question is the $1 billion order book cancellation and adjustments. Is management able to provide segmental breakdown? And how do you see this rate of cancellation or adjustments going into 2021?

Yes. Well, let me take the first question. The government grant that we show on the slide is not all in Singapore. It's Singapore and overseas. There are some rounding. So we have taken the most recent tranche of JSS into consideration, but rounding errors -- or, rather, rounding up/down results in still about $100 million. Or, rather, I think it's more important to focus on the difference between the 2 years, 2020 and 2021, a difference of about $250 million. But that's net of government grants in locations that we operate. Of course, Singapore is one of the main locations. We will not be able to -- I will not provide a breakdown in terms of segment, but suffice to say that Aerospace, because of the industry that we are in, did receive a high share of the JSS support as well as other government support around the world, as we should be familiar with. The $1 billion cancellation of order book is primarily in the Aerospace sector. Yes, [ Terrence ].

I have 2 questions. How much of the 4Q '20 contracts that were deferred went to Jan 2021? And the second question is have we assumed that the bulk of rightsizing that you will do this year will come from the Aerospace and Marine segment? And if so, what's the split?

Yes. First of all, your first question, we don't really focus a lot on quarterly swings in order book, and we have been articulating that for a very long time. I think, ultimately, what's important is that our order book is still at a very robust level at the end of 2020. So that gives us revenue visibility. But some of the contracts that we expected to secure in December did roll into January. I mean, in January, you will see some of our announcements in Aerospace. But we will not go get into the details of how much. I think in a continuum of business, I think it's more important to look at the overall picture of our order book that's still at a very robust level. The rightsizing that we conducted is mainly in 2020. The benefits will flow through 2021. It's carefully thought through, considering what is required for our business that operates in diverse industries, our respective business demands and needs as well as business outlook, according to how we're impacted by the pandemic. So I wouldn't be able to give you a breakdown, but we did most of the -- in fact, all the rightsizing that we talked about in 2020. What we look forward to is a recovery of the market conditions in 2021. And in a way, we are hopeful that there will be a recovery. And we also hope that when there is a stronger-than-expected recovery, we can rechannel some of the resource back to grow the business; reinvest, so to speak, our resources to pursue new growth as the market recovers. But we're well positioned right now because of the productivity steps that we have taken in 2020. So we start off 2021 on a strong footing. Ajith?

Ajith from UOB Kay Hian. Can you hear me?

Yes.

Several questions from me. One, about the order book, you secured a 5-year maintenance contract from a U.S. carrier fleet. And I was wondering whether this is fully reflected in the current order book or do you recognize it partially, say, for 1 year. So that's my first question. Second question is with regards to ForEx losses. Cedric, perhaps if you could help me understand in terms of the hedge, the current hedging exposure. And also if you could provide me with sensitivity in terms of U.S. dollar changes. Third question is regards to contract liabilities. I notice a significant increase in the contract liabilities. Could you share whether or not it's related to M&A or whether it's because of organic growth? Lastly, on MRAS. Could you share with us on -- to what extent it was impacted, if it's possible, because of COVID-19, at least in terms of revenue? And also, whether MRAS will be affected by the U.S. government's imposition of a 15% tariff on Airbus. So these are my questions.

Cedric, perhaps on the order book, 5-year maintenance, how we recognize, I can leave it to you. And then as far as the ForEx losses, contract liability. Basically, there's advance agreement. Yes. And then MRAS question, I'll leave it to Jeff to address.

So first of all, we have a very disciplined way of hedging ForEx exposure on the cash flow -- through cash flow hedges, basically pure plain vanilla forward contracts. So if our first action is try to negotiate with the customers to have a natural matching and natural hedge. If we have a contract that requires U.S. dollar supplies, we will try to have the payments in U.S. dollars. So that's the first action. But in some cases, you cannot achieve that, so there's a difference. Then we will forecast, going forward, what is that difference. And in our case, we are basically long U.S. dollars for our business. And then we will buy forward contracts to sell U.S. dollars. And we do so in a [ wedge ] basis, starting from this point in time to 3 years out in a declining [ wedge ] basis because when you reach into the outer years, what you will see is that, actually, your forecasting error become larger than your FX movement error. So I think that's a good policy to adopt. The -- after having adopted those policies, and we do so for all major currencies, you will find that the unhedged portion and the impact on the bottom line is very small in the context of the group's net profit, so in single-digit millions at most. Now -- but in the financial results for this year, you will see there's a ForEx loss of about $19 million or so. Unfortunately, this is where accounting conventions didn't catch up with economics. What happened is that the treasury center -- we have centralized our treasury operations. I think it's a good thing to do because you do not want different segments to take care of the hedging requirements without netting them off centrally because you really only want to hedge the net position and exposure to the group. So this treasury center actually lends money, U.S. dollar money, to several U.S. functional currency businesses like our U.S. entity, [ Standard ], and some of our aviation asset management entity. And because in 2020 the U.S. dollar actually depreciated, so the loan asset on the treasury center would record a loss that goes straight to P&L. But because the 2 entities, mainly [ Standard ] and the aviation asset entities, are U.S. dollar functional currencies, the FX movement goes to OCI. So it does -- actually, there's no movement because they're U.S. dollar and U.S. dollar movement. But when they consolidate as a group, those movement goes to OCI. So there's an equivalent offset in OCI versus the P&L impact on the treasury business. So that is why there's an accounting impact, but it doesn't negate our hedging policies, which we believe are still very effective. On the contract liabilities, the increase is largely due to advances. So as I have explained on our current assets, advances has gone up. Yes. No, it's not related.

Recognition of COVID.

Okay. The MRAS impact by COVID-19, the OEMs have announced a reduction in aircraft deliveries of between 40% to 60% today versus pre-COVID. So you can expect that as a major supplier of components to OEMs, we would see an impact in that range, okay? And as the OEMs announce a gradual increase in aircraft deliveries, then we should see a gradual recovery in MRAS deliveries and revenue. As for the U.S. government tariffs on the sale of aircraft, those tariffs are really for the sale of the whole aircraft. So in terms of components, spare parts, material supply, there are no additional tariffs on these parts. So there is no impact on us. Yes.

On order book recognition. So I think I just gave an example of the 5-year contract with a major U.S. carrier, MRO, that we have won. We call it type 2 contract because the contract is basically over a 5-year period, and it depends on how much arising, how much shop visits that the particular contract entails year-on-year. So in those cases, we just take 1 year. We estimate how much is the 1 year's arising, and we take the 1-year value into the order book. But when we have a contract that is -- the volume of the business is fixed, then we'll take the full amount. Yes.

Siew Khee?

Siew Khee, please go ahead.

Yes. Okay. On Aerospace, can you actually elaborate on the impairment of assets? Is it only -- or rather why is EMS in a loss? Is it because of impairment? Or is there any other impairments in other categories? Do you want me to actually go through all the questions?

Yes. Go ahead.

Okay. So that's on Aerospace. And also Aerospace contract we won in the last quarter, you mentioned that [ achieved ] some strength in the PTF [ synergy ] split or rather -- just educate us on how good is the outlook in PTF or how much contract that involve in 4Q with PTF for Aerospace. And also for Marine, I understand that you say that there are some project losses, but how should we look at it going ahead? And also, provision for onerous contracts. How much is it in total that you have actually provided for this year for the group?

Can you repeat that question?

Provisions for onerous contracts.

Yes. And also, for dividend, I mean we have been very generous this year. Looking forward, should we expect -- if you manage to control costs, [ it's a ] trough, this is what we should actually expect? And finally, the new financial reporting segment, you will only do EBIT for 2 segments and then revenue for all subsegments. Is that right?

Okay. Maybe on impairment of assets and new financial reporting, we can let Cedric address those 2 questions. And then for Marine, Sing Chan can help us walk through. And then for the strength of the PTF business, I'll get Jeff to talk about it. I'll talk about dividend first, yes? The message has not changed. We have enough retained earnings to help us ride through any aberrations in the industry. We look at dividend over the long term. We ask our investors and shareholders to look at our track record. But that's only one way for us to return value to shareholders. And obviously dividends are subject to shareholders' approval. But we continue to see that as an important lever for us to return value to our investors and shareholders. As our track record would show in the last 8 years, we have maintained our dividend at $0.15 per share. And as our presentation material showed you, we have close to $0.45 -- $0.449 of retained earnings at a group level at the end of last year. So we are sufficient in terms of our ability to buffer any short-term aberrations in the industry. And I think that's a message that we have been sharing with our shareholders and the investment community over the last few years.

Yes. On the impairment of $54 million and fair value changes of associates, Siew Khee, the bulk of it will be in Aerospace, yes, because that's the sector that's most affected by COVID, and therefore some of the intangibles and goodwill associated to different businesses in Aerospace have been impaired according to the accounting, I guess, DCF model, of the value in use versus the carrying value. In terms of provisions, this is not called out in the bar charts, but it's actually put together with the slide where we talk to how we're going to offset the $250 million difference. Again, I think the bulk of the provisions are also from Aerospace sector, yes, and it's basically double-digit millions. Yes. Your other question is segment reports. I think we will have 3 segments, not 2 segments, and we will report for the segments revenue, of course; and EBIT as newly defined, yes, which is profit from operations. It's the sum of the profit from operations plus nonoperating income plus income from associates and JVs. Only for subsegments, the 9 subsegments, where we will stop at the revenue line. Yes.

May I ask Jeff to talk about PTF? Yes.

Okay. Thank you for your continued interest in PTF. Maybe a good way to share with you the demand is that last year, we inducted over 10 aircraft to convert across the A320, 321, 330 and the Boeing 767 lines. This year, we will be inducting more than 30 aircraft. So that's 10 to 30, okay? And then next year, we will be inducting over 40 aircraft. So we're seeing a significant ramp-up in demand. As a result, we are increasing capacity across our global network, where last year we had 3 lines and we added 1 line. And this year, from 4 lines, we're adding 4 additional lines. So we're going to have a total of 8 production lines by the end of the year. So we continue to see increasing interest, and we're fully booked through the end of 2022. So any new customer would have to book into 2023.

Yes. Thank you.

Thank you.

May I get Sing Chan to address the question on U.S. operations for Marine?

Yes. I'd like to thank Siew Khee as well for the continued interest in Marine. As you are all aware, we appointed a new CEO in VT Halter Marine in June 2020. So in the last 6 to 7 months, the CEO has been very preoccupied with reviewing the projects, reviewing the operations, putting in place improvement measures, investing in CapEx to derive productivity savings in the current projects as well as projects in the pipeline, which explains why you see the numbers that you saw. The project, if you remember, we had the Q-LNG articulated tug/barge. The delivery experienced a little problem. We took a bit longer to deliver that pair of LNG bunkering vessel. It was expected to be delivered in September, but we really managed to deliver it at the end of 2020. So the CEO is also -- with all the reviews, with all the improvements in the processes, he is also very preoccupied. We're trying to renegotiate contracts with options which have expired. But at the same time, with the benefit of all the lessons learned from the current projects, he's also negotiating new contracts for 2021 and beyond. Caveat is really, as you know, this is large-scale engineering, so it can be quite binary. We have indirect costs. We're provisioned for some soft sales in 2021. So depending on when the soft sales come in, the ability to allocate so-called indirect cost overheads to this project may differ depending on when the projects come in.

Yes. Maybe we'll -- Siew, go ahead -- okay, Patrick, go ahead.

I've got kind of 2 questions there, relating to the same topic. So the question really revolves around the quality of the contract wins that was shared, of course, the quality of the order book ex PTF. Of course, in the environment like this, I want to understand, right, the state of the competitive forces out there in terms of customers coming back to talk about pricing for contracts previously signed as well as the pressure coming from what is actually a very underutilized sector, many of the areas that you participate. So really around what we can see for the margins, for the order book, kind of in terms of the revenue over the next 12-month performance.

Yes. This question was asked at the last quarter, same question. As a business, we look at our pricing very carefully. We are not trying to just buy contracts by pricing artificially low. No. I think we need to be price competitive, but at the same time, we're going to make sure that our projects are profitable. And PTF is not on a stand-alone because with PTF, oftentimes, it comes with MRO business, and it's a package deal. So that gives it some support. So we continue to be very diligent in the way that we manage our business and our contract proposals. So I wouldn't really say that there's any significant difference this time. Of course, competition is keen, but at the same time, we also have other value proposition. It's not just price. It's quality, great ability, commitment to customers, turnaround time, things like that, which is why even our Singapore MRO operations, even before COVID-19 hit, has always been competitive even against some lower-cost locations, so to speak. So I mean that's what we've been doing. We invest also in productivity tools to reduce our cost base. But at the same time, we also focus on our value proposition to customers in various other areas.

Okay. Let -- we will take one more question from the room before we move on to our webcast participants. Suvro, please.

What is the whole amount of the contracts that you secure -- managed to secure last year, including the Marine and also the Land Systems sectors? And the second question would be what is the target of the order book are you looking to secure in the financial year 2021? And third question would be, are you expecting to see any signs of rebounds in terms of the outlook of the revenue in financial year 2021?

Okay. We do not disclose other new contract wins, apart from Aerospace and Electronics, for customer confidentiality reasons. But those order book -- those new contract wins would have manifested in the overall order book. So obviously, we also won contracts in Land Systems and in Marine as well, but we generally do not disclose, for confidentiality reasons. We do not also set a target for order book. As I mentioned to the -- in -- at the results briefing over the last few years, we continue to be competitive in the marketplace winning new contracts. Even in a year where we are besieged by COVID-19, we ended our year with a slightly higher order book than 2019. We will continue to work on securing new contracts. We do not put a target order book in front of all of us. Of course, internally, we have our own financial metrics and targets, but we do not disclose that. But if you look at our order book record in the last few years, we continue to build relatively good momentum, okay? Do we expect a rebound in 2021? I think there will be partial -- we think that there will be partial recovery in 2021, which is why in our waterfall chart that shows you how we bridge the lower government grant to be expected this year, there is a bar that shows the effects of partial recovery and the absence of impairment and, of course, partial recovery contributed to that bar, $70 million. And we hope -- we are going to watch the space very closely. And if there's higher recovery, obviously we'll benefit from it, and we will invest or reinvest resources to pursue those growth. We have a long-term strategy. While COVID-19 has given us some near-term impact, our long-term objectives have not changed. We still are positive about the Aerospace business. In the meantime, while we are in the difficult situation, we have to continue to focus on cost management so that we are better prepared when the recovery becomes stronger. We do see some gradual recovery for now, but we'll continue to watch this space to make sure that we focus on the areas that we can control, especially in the area of cost management.

Thank you, Vincent. We have Rahul waiting on the line. Rahul, thank you for your patience.

Can you hear me?

Yes. Very well.

Perfect. Happy New Year to everyone. I have a few questions. My first question is that related to Smart City's business. So due to COVID-19, we are seeing structural change of people working from home and, in many countries, moving to Tier 2 cities. How do you see it impacting the demand of Smart City business? My second question is, if it's possible, could you please share with us a rough split of contribution from government support in first half of 2020 versus second half 2020? My third question is for the Aerospace division. Could you share with us the contribution to overall profit from MRAS and EFW? Also, if you can indicate the level of profit contribution from the P2F business. My fourth question is related to the cost-savings measures. Could you please share more details about the split of $180 million, and how much of it? And how was the progress in 2020 related to it? My final question is related to EV side. So in the budget, the government laid emphasis on electric vehicles, which involves setting up of charging stations. Is it something that you would intend to participate in or you're looking forward to?

Yes. Okay. Thank you for your question. I will perhaps let Ravi talk about the Smart City opportunities as a result of some of the structural changes, work from home. We do not -- on your second question, we do not get into the details of split between first half and second half government support. Suffice to say that we have showed you the full year government support. I will let Jeff talk about the contributions on MRAS -- from MRAS and passenger-to-freighter conversion. The details of the $180 million of cost reduction and productivity measures, we do not want to get into the details, but we are confident that we are -- that we will be able to achieve, which is why we presented the slides -- the slide earlier on to you. And many of the productivity gains or measures and cost reduction steps have already been taken in 2021, so the benefits would flow through for the full of '20 -- I'm sorry, many of the steps have been taken in 2020, so we expect the full benefits for many of the initiatives to flow through for the full year of 2021. And of course, if there's a stronger-than-expected recovery, then these cost-reduction measures will also have to be adjusted along the year so that we can reinvest our resources or invest more resources to capture profitable growth. So that's how we look at this. For EV charging, obviously it's a new frontier for us. And under the -- our urban solutions group, we do have a Smart Mobility division that is looking at how we can capitalize on this trend. More to come, but we certainly -- we're looking and evaluating how we can participate in this nascent but soon-to-be-growing sector, okay, be it electric vehicle or charging infrastructure. As you know, we delivered the first 20 electric vehicle bus, EV bus. So we are already participating in the sector, but we want to see how much more we can do in the years ahead. Jeff, would you like to talk about the...

We -- Middle River and EFW are both very significant contributors to Aerospace, both in the OEM business and EFW, in particular, in the MRO business. So I would say that they are very important components. However, in 2020, it was a very challenging year for both areas, OEM and MRO. Okay. So certainly, we look forward to better contribution in 2021. I think we really should focus on opportunities. And I would say that for Middle River, we have very good opportunities in delivering for the Airbus 320 aircraft nacelle. We are also working actively with the Chinese COMAC on the delivery of the C919, the ARJ nacelles. In addition, we are seeing start-up PTF lines in EFW. We're seeing EFW looking at new areas to use the composite panels that today we only use on aircraft. I mean we are looking at other areas of applications for composite panels. So we're looking forward to a better contribution from both very important subsidiaries.

Thank you, Jeff. Ravi?

Thank you for the question on Smart City. So first, let me say that the trend -- the technology trend of working from home digitization, cloud, 5G, IoT is very, very strong, including robotics and automation. So this trend is very strong, and we are seeing this across the world, and we continue to see this momentum. What we are seeing is that a lot of this is not just being done in the first-tier cities but also being done in the second-tier smaller cities as well as in the state. So a good example is our IoT solution. If you recall, we talked about telematics winning contracts in the U.S., in some of the big states actually, to provide smart street lighting solutions. So this will continue. In our train business as well, there are still many, many cities that have only just begun to embark on the MRT equivalent of train systems, and we see the momentum. In fact, if you recall some of the wins we announced last year, we continue to see a lot of momentum, both in the road business as well in the rail business. And as long as, I think, the global economy continues and both the government budgets and the commercial budgets are there, I think this trend of digitization, automation will continue. And therefore the opportunities for the Smart City business will remain strong as we move forward.

Thank you, Ravi. We have 3 more participants waiting online.