Singapore Technologies Engineering Ltd (SGGKF) Q4 2023 Earnings Call Transcript

Singapore Technologies Engineering Ltd (OTCPK:SGGKF) Q4 2023 Results Conference Call February 28, 2024 10:00 PM ET

Company Participants

Chee Keng Foo – Group Chief Financial Officer

Sy Feng Chong – Group President, CEO & Director

Wai Meng Lam – President of Commercial Aerospace

Lee Chew Tan – Group Chief Commercial Officer of Market Development and President of Smart City & Digital Solutions

Ravinder Singh – Group COO of Technology & Innovation and President of Defense & Public Security

Conference Call Participants

Chee-Hin Lam – DBS

Siew Khee Lim – CIMB Research

Lorraine Tan – Morningstar Inc

Jun Jie Ng – JPMorgan

Zhiwei Foo – Macquarie

Rahul Bhatia – HSBC

Operator

Good morning. Welcome to ST Engineering’s Full Year 2023 Results Briefing. This morning we will begin with a presentation by our Group CFO Cedric Foo. Our Group President and CEO, Vincent Chong will then give his remarks. After that, we will open up the floor to a Q&A session. For participants dialing in, please note that you’ll be placed on a listen-only mode until we open up individual line for the Q&As.

Without further ado, may I invite Cedric to give his presentation? Cedric, please.

Chee Keng Foo

Good morning to everyone here in person at the ST Engineering Hub as well as those joining us via webcast. Welcome to ST Engineering’s full year 2023 results briefing. Before I begin, I would like to bring your attention to Slide 2, which states, amongst others, that the group’s actual future performance and outcomes and results may differ materially from those expressed. Slide 3 shows the agenda for today. I’ll be covering group highlights, business discussions of each of the segments, order book and debt profile, dividends and outlook. Thereafter, CEO, Vincent Chong will make some remarks followed by Q&A.

First, let’s take a look at group highlights on Slide 5. We are very pleased to report a very strong set of results for financial year 2023. First let me take the second half year-on-year figures first. For the second half of 2023, the group achieved double digit year-on-year growth in major financial metrics, 10% growth in revenue, 17% growth in EBITDA, 34% growth in EBIT, 43% growth in PBT and 20% growth in net profit. Strong sets of results. This second half 2023 year-on-year comparison to second half 2022 is a better way to look at momentum compared to, say, second half ’23 versus first half ’23 because this latter sequential method is distorted by seasonal factors. So as you know, in the second half versus second half you take away all the seasonal factors. You’re comparing the correct season to season.

Next the full year results. The group achieved also double-digit year-on-year growth in major financial metrics. Revenue, up 12% and we reached or surpassed the $10 billion mark for the first time. EBITDA, up 16%. EBITDA, as you know, is a proxy for operating cash flow and is at a very strong $1.5 billion. EBIT up 24%, PBT 18% and net profit 10% at $586 million. Our order book came in at $27.4 billion with about $7.9 billion to be delivered in 2024.

Moving on to Slide 6, here we discuss revenue growth. This slide shows year-on-year increase in revenue by segment. The group recorded a 12% increase in revenue and this increase is contributed by all segments including Commercial Aerospace, DPS and USS. In the DPS case, we have normalized 2022 base by taking out the U.S. Marine which was sold in 2022.

Slide 7 from left to right shows the revenue breakdown by segment, by type and by location of customers. Revenue by segment in financial year 2023, Commercial Aerospace contributed 39%, DPS segment, Defence & Public Security segment, 42% and USS, 19%. So USS, as you know, is our [URS] urban solution based business, TransCore as well as Satcom.

I would like to clarify that DPS as a segment included both local and international customers, so not just Singapore defense customers. It also covered commercial domains such as public security and safety, critical infrastructure, and others. Hence, the DPS segment revenue of $4.3 billion is different from the defense revenue of $3 billion because this is only a subset of this, right, because this has non-defense public security elements as well.

Now in the center of Slide 7, it shows the revenue by type of business. Commercial grew steadily to $7.1 billion. Defense grew as well. If you take off the marine, U.S. Marine, $2.6 billion, $2.8 billion and $3 billion. On the right-hand side, it shows the revenue breakdown by customer location. Asia contributed 49%, U.S. 24%, Europe 20% and others 7%. So Asia and U.S. actually climbed a little bit compared to the year before.

Slide 8. This slide shows the revenue by segment and the growth for each of the 3 segments. Commercial Aerospace grew robustly by 31% to $3.9 billion. So we are pleased to share that commercial aerospace surpassed, one, the 2019 pre-COVID revenue level of about $3 billion and two, our November ’21 Investor Day target of more than $3.5 billion by 2026. So this is 2023 and is already exceeding $3.5 billion. This good performance is attributed to strong MRO, but also partly attributed to the success of the MRAS acquisition, which produces the aircraft nacelles. Two, DPS, excluding U.S. Marine revenue of $249 million recorded in 2022 and was sold in that year as well, DPS revenue of $4.3 billion was higher by $229 million or 6%. USS revenue grew 10% to $1.9 billion. It’s contributed by urban solutions, including TransCore and partially offset by Satcom.

Slide 9. 2022 EBIT was $735 million 2023 EBIT was $915 million. So there’s an increase in the EBIT per reporting standards of 24% and driven by business growth and cost savings of $268 million. Now, if we strip out the one-off effects which we term as base operating performance, so excluding the pension restructuring gains that we had in 2022, and also the lower TransCore transaction and integration expenses that we experienced in ’23 versus ’22, the 2022 BOP EBIT is at $678 million. If we take out the one-off for 2023, which is the SatixFy divestment loss and Satcom severance cost totaling $32 million, the 2023 BOP is at $946 million. So comparing $946 million to $678 million at the base operating performance level, there’s an increase of 40%. So the underlying operating performance is indeed quite strong. We discussed a bit about energy in previous briefings. The average energy rate in 2023 is lower than 2022. So the rate, in other words, dollar per megawatt hour is lower. However, consumption increase in 2022 versus — in ’23 versus ’22 to support the higher business volume and higher revenue.

Slide 10, please. Here we discuss net profit. It improved from $535 million to $586 million, an increment of 10% year-on-year. Again, at the base operating profit, or BOP net profit level, it improved from $493 million to $610 million, or a strong 24% at the operating level. All figures here are after tax because we’re discussing net profit.

Now, let’s move on to business area discussions. Slide 12. Here we talk — we will discuss Commercial Aerospace EBIT. EBIT 12% from $301 million to $337 million or very strong 47%. Again normalizing for 2022 EBIT by removing the pension restructuring gain in ’22, base operating performance, EBIT grew 47% from $229 million to $337 million. This strong Commercial Aerospace performance is attributed to the recovery of the aviation industry as well as the very good performance of MRAS and the improving PTF margin as we climb the learning curve.

More on CA for Slide 13. The aerospace MRO business continued to recover in tandem with the aviation market. This business has done well as we continued to invest in it even during the difficult COVID period. So these steady investments included new hangar capacity in Pensacola, in Guangzhou and so forth. And this positions us to emerge stronger when COVID is behind us. Unrelentingly post COVID, we continued to invest in new capabilities like the new CFM, CBSA for LEAP 1A/1B, as well as Changi Creek and others and this will again position us for a brighter future. Continuous improvement in operations has been the modus operandi of Commercial Aerospace. In fact, Jeffrey chairs our Continuous Improvement Committee for the whole group.

For Aerostructures & Systems, MRAS nacelle growth benefited from the increased A320neo fleet deliveries. So as you know for narrow body A320neo if the LEAP engine is chosen, then MRAS is the exclusive provider. MRAS has indeed performed very well and it has been a very successful M&A to date. As I said earlier, PTF has also turned positive at the program level as we climb the learning curve. For asset under management, the AUM, which is under our aviation asset management unit, exceeded USD 2 billion as of end 2023. Again, we have set in November ’21 Investor Day, a 2026 target of USD 2 billion and we have now exceeded it in 2023. Now this AAM business based fundamentally is to purchase aircraft and engines, lease them out, and when we reach a critical mass to securitize it or to sell it down to joint venture or other parties. But even after securitization or selling it down, this portfolio will continue to be managed by AAM of ST Engineering and it avails us to more airframe engine and component MRO opportunities. So it is working well for us.

Slide 14, DPS. DPS EBIT improved from $405 million in ’22 to $567 million in ’23, a very robust 40% year-on-year growth. This is due to business growth, better margin mix, cost savings, as well as the avoidance of U.S. Marine losses which was divested in 2022.

Slide 15. This slide discusses DPS business highlights. Firstly, the strong order book for DPS which comprises the frequent upgrades, MRCV construction, among others, provide clear visibility of future revenue for this segment. For 2023, DPS won international contracts totaling about $950 million. So we are showing this figure to demonstrate our ability to penetrate international markets, even for the DPS segment. We also made good progress in international markets like Europe and the Middle East. The digital business continues to do well and is on track to exceed again our November ’21 investor target — Investor Day target of more than $500 million by 2026. Revenue of $463 million was achieved in 2023, representing a 20% year-on-year growth and with 3 more years to exceed more than $500 million. Finally, we will continue to harness the rapidly evolving digital technologies in cloud, AI, analytics and cyber to see even further growth.

Slide 16 is about USS. So I’m pleased to announce that TransCore earnings became accretive in 2023, which is slightly ahead of plan as we have guided when we made the acquisition. So TransCore was cash accretive in the first year, and it was P&L accretive ahead of plan before the end of the second year. The EBIT for USS dropped 66%, and this is largely due to SatixFy and Satcom weakness. Excluding the SatixFy divestment loss and Satcom severance expenses, the USS base operating performance EBIT declined by 6% from $44 million to $42 million in 2023. Even though the USS EBIT dropped, this segment performed significantly stronger in second half ’23 versus first half ’23. In first half ’23, this segment recorded an EBIT loss of $34 million. In second half ’23, this segment recorded a positive EBIT of $44 million, bringing the full year segment EBIT to a positive $10 million as guided previously. As you know, the satcom industry is rapidly evolving, the industry itself into a multi-orbit cloud convergence space. Hence, our Satcom business, iDirect is also responding and transforming likewise.

Slide 17, we’ll review the business updates for Urban Solutions. So you have USS, you have Urban Solutions, which is the Urban Solutions based business in TransCore, then you have Satcom, right. So we are talking about Urban Solutions. We have announced yesterday that we won a contract to enable automatic and ticketless parking fee collection at the Dubai Mall, which is one of the largest malls in the world, 13,000 car park lots. Just hard to imagine. This is a demonstration of how we could derive synergies from the TransCore acquisition. The project demonstrates the Urban Solutions team’s ability to synergize by combining TransCore’s expertise in the Salik traffic toll system, which they developed for Salik in Dubai with the barrier-free smart car park technology developed here by Urban Solutions in Singapore. So they are combining this to win a good contract in Dubai.

So we were able to tap capabilities everywhere in the U.S., in the Middle East, of course, the folks working on the ground and in Singapore and combining technologies and channel network to offer a superior solution to the customer. So I would also like to reiterate again that TransCore became earnings accretive in ’23 ahead of plan. So it is doing well. Thirdly, URS recorded its first international airport security project win to deploy the agile, secure integrated security management platform at the Dhoho Kediri International Airport in Indonesia. In addition, URS has also won a road project in Abu Dhabi and rail projects in Chennai, Sydney and Ontario, Canada.

Slide 18 describes the measures we are taking for our satcom business. In ’23, these actions were taken. Firstly, we undertook an organization rightsizing with a reduction of about 20% of the workforce. So this puts us doing the better cost base. Secondly, we focus our engineering efforts on developing the next-generation platform, and this leverages on the existing Velocity platform, just one platform, leverage on it. We plan to converge the best-in-class features from both the Velocity as well as the Dialog platforms into our future product offerings. Thirdly, we have successfully completed proof of concept on interoperability and cloud deployment. So these are features of the future. Our Internet of Things and over-the-top services have helped us expand into adjacent markets. In ’24, we will unveil the NGP brand. This will be done at a satellite show in Washington, D.C. in the middle of next month to showcase the NGP’s capabilities to our customers. Secondly, we will continue with cost optimization and process improvements and improve the revenue quality through better pricing and contract management.

Let’s move on to the group’s order book and debt profile. Slide 20 highlights some of our major wins in 4Q ’23. I will leave you to read the details. But in this period, the group secured $3.1 billion of new contracts, $1 billion from Commercial Aerospace, $1.5 billion from Defence & Public Security segment and $645 million from Urban Solutions & Satcom. This brings the total contract value — new contract rather, the total new contract value for the year 2023 to $14.8 billion, the year as a whole, yes.

The group ended the year, Slide 21, with a robust order book balance of $27.4 billion, 19% higher than the $23 billion recorded as at end 2022. About $7.9 billion of this $27.4 billion is expected to be delivered in 2024. This strong order book provides visibility for future revenue in the coming periods.

Slide 22, our debt profile. Our borrowings as of 31st December ’23, has reduced by 7% from $6.5 billion the year before. EBITDA has increased to $1.5 billion by a strong 16%. Debt to EBITDA leverage ratio, which is what rating agencies look at, improved from 5.2, that is more debt to EBITDA in ’22 to 4.2, which is less debt to EBITDA in 2023. More than $500 million has been invested in capital expenditure and capability building to support future growth, such as LEAP 1A/1B, Changi Creek, Gul Yard et cetera. So we are also incurring interest expenses which may not have seen EBITDA for future growth. So this is investing in the future. Our debt profile remains balanced at 62% fixed interest rate and 38% floating interest rate. Group weighted average borrowing cost for 2023 is still at a competitive level of 3.3%. Our credit ratings remain very strong, with a AAA/stable by Moody’s and AA+/stable by S&P.

Next, dividends. Slide 24. As you have read in the press release, we are pleased that the final tax exempt cash dividend will be $0.04 per ordinary share for the year ending December ’23. Payment of the final dividend is subject to the approval of shareholders of the company at the forthcoming AGM in April. If so approved the record date to be eligible is 2nd of May ’24, and shareholders will receive the dividends on 14th of May ’24. For the first 3 quarters of ’23, we have paid 3 interim dividends at a very ratable manner of $0.04 each, making a total of $0.12 for the first 3 interim dividends. Hence the total dividend for the year ending December ’23 will be $0.16 after including the final dividend of another $0.04.

Next slide, please. We now look at the outlook and the group CEO statement. So let me just read it out. In 2023, our group achieved significant financial milestones. Group revenue exceeded $10 billion, while group net profit grew 10% year-on-year to $586 million. This performance was underpinned by the strength of our Commercial Aerospace and DPS segments and a high-graded portfolio. Our investment in TransCore became accretive in 2023 ahead of plan. This strong set of results was also supported by productivity and cost savings measures and investments made during the COVID-19 downturn. We remain focused on executing our robust order book of $27.4 billion, while delivering sustainable growth and creating value for our shareholders.

Finally, in summary, group did well for ’23 and is well positioned for the future. Revenue, EBITDA, EBIT and net profit in ’23 were all witnessed — had all witnessed strong growth. Contract wins $14.8 billion, a robust order book, $27.4 billion will provide visibility of revenue in the periods ahead. Our strong results are underpinned by Commercial Aerospace and DPS good performances. MRAS performed very well. TransCore became earning equity ahead of plan. Satcom transformation is well underway. Cost of borrowings remained comparative at 3.3% per annum, and we have made consistently and steadily investments for capacity expansion and capability building with an eye for better performance and growth into the future. Last but not least, final dividend of $0.04, making the total dividend for ’23 of $0.16.

This brings me to the end of my presentation and thank you for your attention.

Operator

Thank you, Cedric. May I now invite our panelists to the table. The panelists this morning are Vincent Chong, Group President and CEO; Cedric Foo, our Group CFO; Ravinder Singh, Group COO, Technology Innovation and President, Defense & Public Security; Tan Lee Chew, Group Chief Commercial Officer, Market Development and President, Smart City & Digital Solutions; and Jeffrey Lam, President of Commercial Aerospace.

I will now hand the floor over to Vincent to deliver his remarks. Vincent, please.

Sy Feng Chong

Good morning, everyone. Those of you at the ST Engineering Hub and also participants who are joining us virtually welcome to ST Engineering’s financial results briefing for second half and full year of 2023. First, let me just extend my appreciation to those who took time to visit ST Engineering pavilion at the Singapore Airshow, which just concluded over the last weekend. It was really heartening to hear from those who attended to show that the show provided the opportunity for you to review our suite of solutions. And our showcase featured numerous new innovations, underscoring our emphasis on deep tech capabilities for this year’s show. This focus expands beyond our well-established strengths in MRO products and hardware and the feedback we have received indicate that your visit allowed for a deeper understanding of our comprehensive capabilities and value proposition, placing them into meaningful contacts when you have a show and tell, particularly regarding our long-standing investments in deep tech capabilities now.

So let me just now move on to our financial results. In the second half of 2023, as Cedric presented, our revenue grew by 10% year-on-year, driven by improved performance in Commercial Aerospace and DPS as well as USS. Our second half EBIT saw a 34% increase year-on-year with strong contributions from Commercial Aerospace and Defence & Public Security segments as well as a higher Urban Solutions & Satcom EBIT in alignment with our earlier guidance for the segment performance to be second half weighted, if you recall, that’s what we have been performing the market.

Group net profit for second half increased strongly by 20% compared to the year before, boosted by strong business growth, productivity improvements and cost savings. We had a strong sequential half performance in second half 2023 compared to first half of ’23. This being another indicator of our growth momentum. Group revenue was 8% higher sequentially. EBIT was 6% higher, and net profit was 9% higher.

On a full year basis, our results achieved several milestones. The group exceeded $10 billion in annual revenue. We also achieved very strong EBIT and net profit with a year-on-year growth of 24% and 10%, respectively. This set of results was underpinned by the strength of commercial aerospace and Defence & Public Security as well as a high-graded portfolio. Further support came from productivity gains and cost savings as well as positive impact stemming from continual investments made during the COVID-19 downturn. As you would recall, when we were briefing you during the height of COVID, we kept sharing with you that we continue to invest in growth projects so that we are ready for the upturn, and I’m really glad that we made those investments during the downturn.

Amidst inflationary pressures, we achieved notable improvements in our unit operating expenses defined as OpEx per unit revenue, decreasing from 12.1% in 2022 to 11.4% in 2023. So if you use all of our OpEx divided by our revenue, that ratio came down to 11.4% in 2023, underscoring our consistent focus on achieving better productivity and lower cost. This is a result of our ongoing effort. As I mentioned to you, we have a team of people doing continuous improvement across the group and in our functions, including procurement organization, continue to look at opportunities to optimize our purchases and costs. These outcomes underscore our strong group fundamentals and strategic focus. Let me just point to you some highlights.

At the segment level, the Commercial Aerospace segment demonstrated remarkable growth for its full year revenue and EBIT, which increased by 31% and 12%, respectively. Its $3.9 billion revenue exceeded our Investor Day target of $3.5 billion set for 2026. This strong performance was attributed to contributions from all of our Commercial Aerospace business lines, reflecting the ongoing recovery in the aviation industry. I mean, albeit that half-on-half, we have project timing that would cause some intra-half or cross half fluctuations in margins, but overall, our momentum is very, very strong. And just to remind you that our PTF also achieved accretion in 2023, as we have committed and there is continued recovery in air travel.

Asia Pacific has not yet recovered to pre-COVID level as a whole. It was at 83% at the end of last year. So we see more upside in our commercial aerospace business. And our nacelle production is also ramping up in conjunction and in alignment with the growth in aircraft production by the OEM — by Airbus. And we also have new hangars coming on stream in the next few years. We broke ground at Changi Creek, and we’re going to start our fourth hangar at Guangzhou very shortly. And of course, later on, we will have Jeff share more with you. This segment posted a strong 35% year-on-year second half EBIT growth. Now that’s quite remarkable. And as Cedric said, we already surpassed pre-COVID level for Commercial Aerospace in terms of the revenue and EBIT performance ahead of the global industry.

Notably, as I mentioned just now, our Airbus PTF conversion program achieved positive EBIT in 2023, benefiting from improved learning curve and realized productivity savings. So we further progress, we expect the EBIT margin percentage to reach mid-single digit this year and high single-digit percentage by 2025. In ’23, we got low single-digit percent EBIT margin as we also guided early on. This projection is underpinned by ongoing efforts to mature the learning curve, especially at the new PTF sites and a dedicated effort on enhancing turnaround time for each conversion. Importantly, fundamental demand for converted freighters remains strong.

Looking ahead, we expect sustained momentum from the ongoing aviation recovery, especially in Asia Pacific, which was still lagging the other regions. But I think we should get past the notion of recovery to pre-COVID. We are really now very well positioned for growth way past what we achieved pre-COVID, given all the investments that we have made over the last few years and the focus on growing our top and bottom line for our Commercial Aerospace business. And as I mentioned, our decision to invest in capacity expansion during COVID-19 endemic downturn has really paid off for us now that the aviation industry has rebounded strongly.

The second hangar in Pensacola, which was operational since February of last year, following groundbreaking in July of 2021 is a testament to this. Looking ahead, I mentioned just now, fourth hangar in Guangzhou should be ready this quarter. And we have ongoing construction projects, including the first hangar at Changi Creek and the first hangar in Ezhou, Hubei from our JV with SF Airlines, and both of them are slated to be operational at the end of 2025 — by the end of 2025. Overall, our current expansion plans will add about 30% more airframe man hours to our global MRO capacity. And that’s a significant improvement or increase.

Our commitment to strategic investments in global capacity and the expansion of our MRO business, coupled with the introduction of innovative solutions such as our new LEAP 1A/1B solutions or engine MRO, positions us for continued success. Furthermore, on nacelle business, we’ll grow in tandem with A320neo deliveries.

Let me just move on to Defence & Public Security segment. This segment’s annual revenue grew 6% and the second half revenue grew 5% year-on-year if we exclude U.S. Marine business revenue in 2022 — in 2022, I mean, if we exclude those revenues, then 2023 would have grown by 6% and second half, we have grown by 5%. The EBIT was a very strong 40% increase for both reporting periods, driven by a combination of factors, including avoidance of losses from the divested U.S. Marine business, project margin mix and positive outcomes from cost-saving initiatives. While revenue and EBIT may be lumpy at times, that’s nature of the defense business, stemming from project mix and timing, the segment has a very robust order book, providing clear revenue stream in the years ahead, where we are very confident in the performance of this particular segment or our DPS segment.

Notably, as Cedric mentioned, our digital business comprising cloud AI analytics and cyber business recorded 20% year-on-year growth, poised to well exceed our Investor Day revenue target of more than $500 million by 2026. Our international growth — business growth for the DPS segment gained momentum as evident in the full year contract wins of close to $1 billion from its continued internalization. Specifically for our international defense business, we have forged partnerships within global defense ecosystems, strengthening our foothold in Europe and the Middle East, positioning us for continued growth in these target markets.

Next, for our Urban Solutions & Satcom segment. Revenue improved for the reporting periods. Despite full year EBIT being impacted by satcom weakness, second half EBIT was 7% stronger year-on-year. We also had stronger satcom performance second half versus first half of 2023 as we guided. As we guided for the segment EBIT to be second half weighted, I will call out that as projected sequential second half segment EBIT was stronger, contributed by TransCore and smaller satcom losses. This resulted in an improved EBIT from minus $34 million in first half of 2023 to $44 million in second half 2023, with a very strong improvement in performance during the period. As you have heard earlier, our investment in TransCore became earnings accretive ahead of projected second half — second year post acquisition time line.

If you look at second year post acquisition, that will be March of this year, but then we achieved accretion in full year of 2023, a few months ahead of schedule. And when we talk about accretion means after you take all — consider all the amortization and interest expense, we are positive on the bottom line for our investment in TransCore. And as Cedric mentioned yesterday, we announced a new project in Dubai to extend TransCore’s tolling technology currently used in Dubai to a smart car park system at Dubai Mall, one of the largest malls in the world. The significance of this win really is that it demonstrates our urban solution team’s synergistic capabilities by combining TransCore’s expertise in traffic toll system with the barrier-free smart car park technology developed by our teams in Singapore. And we have a good pipeline of synergistic projects that have been worked on prospects in this part of the world in Southeast Asia as well as in the United States. Of course, we’ll share more in due course when we have more success.

We continue to work on cross-selling our smart mobility solutions and then we’ll provide, again, updates of significant development as time passes. Meanwhile, we expect the transformation efforts of our satcom business implemented in the middle of last year to continue this year. Cedric in his presentation has highlighted key focus areas that we have outlined to strengthen the business in ’24 and beyond.

Moving on to new contract wins. In 2023, we secured close to $15 billion of new contracts, including $3.1 billion secured in the last quarter of this year. This is 13% more than a year before. Lifted by these new contract wins, we ended 2023 with a very strong order book of $27.4 billion, and we expect to deliver about $7.9 billion in 2024. The robust order book remains a leading indicator of growth in the years ahead, keeping us on track towards exceeding our 5-year plan targets which we have shared at the Investor Day. So we are confident that we are on the right track, and we will exceed our 5-year plan targets based on our momentum in the last few years. Finally, our Board of Directors has approved a final dividend of $0.04 per share, bringing our total dividend for 2023 to $0.16 per share.

Now I’ve come to the end of my prepared remarks. We will now take questions. So we welcome questions that you may have at this time. Thank you.

Question-and-Answer Session

Operator

[Operator Instructions] Can we have our first question from the floor, please?

Unidentified Analyst

Yes. I am [indiscernible]. So the first question I would like to understand is I noticed that the CapEx for 2023 is significantly lower than the year before at lower than $500 million and is only slightly over $200 million compared to FY ’22, which was about $4.6 billion. So I’m just wondering what’s the key reason behind this drop in CapEx and whether you expect this to climb back up to the $4 billion to $5 billion range in FY ’24. That’s the first question.

Sy Feng Chong

Okay. Would you want to complete your questions or you want us to address one by one? It is your preference.

Unidentified Analyst

Looking at just one by one because it might be a bit overwhelming if I ask…

Sy Feng Chong

Okay. Well, I’ll let Cedric go into a little bit more details, but 2022 reflected our investments in TransCore. Our ongoing CapEx, we expect run rate to be anywhere between $300 million, $400 million, $500 million, depending on the year. So that’s kind of our run rate. So $540 million is really not extraordinary. $540 million-ish CapEx in 2023 is not extraordinary. It’s quite in line with our run rate.

Chee Keng Foo

I think that’s the — almost a complete answer. Indeed, 2023, our CapEx is about $540 million.

Unidentified Analyst

Okay. So the other question I would like to understand is more straightforward. I noticed that you mentioned $7.9 billion of the order book is going to be delivered in FY ’24. So I’m wondering whether it will be evenly spread out across the quarters or would it be maybe more back-heavy.

Sy Feng Chong

There’s no particular exceptions that we would like to highlight. I think it’s no different than the past cyclical or quarterly trends. So what we mentioned here is just the rundown of — drawdown from our order book. There’s nothing that would cause us to believe the so-called the pattern of rundown will be — drawdown will be different than previous years. But of course, quarterly, there are always plus and minuses, but I wouldn’t say that it’s weighted in any way differently than previous years.

Unidentified Analyst

Previous year meaning a bit more back-heavy, right, towards the end of the year?

Sy Feng Chong

Yes. But it’s not — so when we say last year back-end weighted it’s really for USS. And then, of course, for the rest of the sector — sorry, for Commercial Aerospace, it also reflects more projects but also recovery of our — of the aviation industry.

Unidentified Analyst

Okay. Last question is on the margin profile. I’d like to understand across the 3 primary segments how different are their margins and whether you expect the revenue mix by segments to defer significantly in 2024? And how would that look like in this year?

Sy Feng Chong

Okay. So some of the growth momentum, maybe I will invite Ravi and Jeff, especially later on in the Q&A and maybe not now to talk a little bit about their business. The margin profile has been very robust and healthy, I must say, across the group, as you saw the strong EBIT performance. In between quarters, there are always timing of projects. But our overall momentum has been very strong as evident in our sequential half performance. And so I think we are on a very strong footing.

Unidentified Analyst

Would you be able to rank the margin profile from best to worst among the 3 segments?

Sy Feng Chong

Well, you would have seen the EBIT dollar value versus revenue. I think DPS had a very good year. And then aerospace is really climbing up, ramping up because we are accretive for our passenger to freighter conversion. We’ll see more momentum because, as I said, we’re going to improve from single-digit EBIT margin percentage for our PTF business to now mid-single digit for this year. So you will see aerospace margin continue to improve. For Defence & Public Security, we had a good year of margin strength, and that’s the highest EBIT margin sector. But it depends on the project timing. Overall, we are on a very solid foundation. I think our revenue momentum and project momentum will kick in, will continue to allow us to perform very well in this segment.

Unidentified Analyst

So in terms of the revenue breakdown will be similar to FY ’23 or we maybe see more CA revenue in ’24?

Sy Feng Chong

Yes, we do not give any revenue forecast for the segments. Suffice to say that all 3 segments are getting good momentum as we’ve shown sequentially and also across quarter. Between third and fourth quarter, all segments have done well in terms of revenue growth. So short of giving specific guidance on revenue, I think our segments — all 3 segments are on a good momentum.

Thank you, [Jatin], for your questions.

Chee Keng Foo

I think the EBIT margin by segment can be found in this booklet. Yes.

Unidentified Analyst

This is [Kano from CGS]. Congrats team on a good set of results. I have 3 questions, all on the aerospace sector. Firstly, the aerospace EBIT margin was down half-on-half by about 2%. What’s driving the half-on-half softness? And is second half a good run rate that we should expect going to 2024?

Second question is on the labor market. Quarter-on-quarter basis, have we seen any changes in aerospace labor market trends? And is there any difference in the labor tightness across your key markets? Or is it mostly broad-based?

Last question is on clarification whether there was any aircraft sales in the fourth quarter? Are we expecting any more in the 2024 and what’s the guidance?

Sy Feng Chong

Yes. Maybe I’ll invite Jeff to take on these questions.

Wai Meng Lam

Okay. Thank you. The EBIT margin half-on-half, we have to consider the project mix and the project timing. So I would really read the full year EBIT margin and then be able to project forward. We certainly have differences between quarters and between halves. The momentum, as Vincent said, continues. So we do expect to see continued growth and good recovery.

On the labor market trends, it’s abating gradually. Nevertheless, we continue to see challenges, particularly in the U.S. market where there’s a very tight labor market and huge demand, right? So it does drive some inflation. But if we look at our labor cost per head count over 2023, we’ve been able to keep it very moderated. And with the high revenue growth rate and the recovery and the EBIT margin growth, I think we managed to keep it under management. We continue to work with the regional schools. We work with the governments on foreign visas for the foreign contract labor. And of course, we continue to automate our operations.

Last but not least, aircraft sales. We continuously rationalize and develop our portfolio. So you can expect that there continues to be a movement in aircraft sale, purchase, rationalization, working with our partners. So yes, the answer is we will continue to see aircraft sales. They tend not to be constant throughout the year. So once again, don’t read too much into the quarter and half financials. Thank you.

Sy Feng Chong

Just to add that those aircraft sale that we did were profitable, although it’s not a material percentage of our total EBIT, okay? I’m not — in terms of second half versus first half EBIT profile, as Jeff mentioned, it sometimes depends on project timing. I won’t read too much into it. We’re actually quite confident of this continued trajectory for our Commercial Aerospace. Given the project pipeline that we have and the continued strengthening of our PTF EBIT accretion, even in the fourth quarter of 2023, you are able to do the mathematics. Actually, our revenue for commercial aerospace improved — increased 9% versus 3 quarter — third quarter of 2023. So you can see the growth momentum building up because we did disclose Commercial Aerospace revenue in the third quarter of ’23. When you use a second half minus off, then you will see the continued growth momentum for the fourth quarter of 2023.

Chee-Hin Lam

This is Jason from DBS. Yes. So thanks for providing more color on aerospace and on the year, but I wanted to get a bit more color on how MRAS in terms of its margin profile, how does it — how does it trend over the past few years? And how does it compare to 2019? Next question is on TransCore. So very encouraging to see that it has turned EBIT positive ahead of plans. So I just wanted to see what kind of — what level of margins you’re actually targeting for TransCore business this year? And just one more question on your cost of debt. So cost of debt for 2023 has been very impressive. So I want to — I’m hoping that you can provide an update on your expected cost of debt in 2024? And what are the underlying assumptions behind this expectation?

Sy Feng Chong

Okay. Maybe we start with question 3, Cedric to answer, the expected weighted average cost of debt in 2024, which we didn’t give an indication some time back, even assuming no reduction in interest rate at the Fed level. Now then on TransCore margin target, I will let Lee Chew talk about. We don’t really give a forecast on margin that specifically, but we can give you some color on TransCore’s performance. And then we end with the third question in reverse order MRAS margin. Again, we don’t get that specific, but we are actually very pleased with MRAS performance, the cost takeout that has happened in the last few years. So it’s giving us very strong performance. So maybe let’s start with Cedric.

Chee Keng Foo

Thanks, Vincent. The weighted average cost of borrowing between floating and fixed rate for 2023 is a competitive 3.3%. Next year, assuming no Fed interest rate cuts because nobody knows when they will cut, how much they would cut, but assuming no cuts, which is kind of a conservative estimate, we will come out mid-3%. But if they do cut, then we expect that mid-3% to be even better, even lower.

Just a clarification, when you mentioned — when we mentioned TransCore is earnings accretive, it’s not EBIT accretive only, it’s net profit accretive.

Lee Chew Tan

So thanks for the question on TransCore. First of all, I apologize for the occasional coughing, talked too much at the Air Show last week. So like Vincent mentioned, we don’t — we actually look at TransCore as a very integrated part of our smart mobility business right now. And as we look at the margin profile of that business, no different from everything else that we own. We are looking at scaling the business. We’re looking constantly at driving down costs. And we’re also looking at how — as we go to market, we continue to develop partnerships. So we will obviously focus on how we can bring a more high-graded margin profile as we conduct all the projects and the businesses across many parts of the globe, right?

Sy Feng Chong

TransCore certainly did better in the second half of ’23 than first half, both revenues as well as margins. So we expect the performance to be on very strong foundation going into ’24 and the years forward. Especially when we have actually quite a few projects in the pipeline, synergistic projects and of course, when we have some more to share, we will share along the way. Maybe we’ll finish off the question.

Chee Keng Foo

So on Middle River, as we continue to deliver more sales to our customers, obviously, the scale synergies begin to kick in even more. And our focus on productivity to take costs out of the production system so that we can improve our margins. In addition, there’s also spare sales that also can come in based on the market requirements. So we saw a good profile in 2023 that contributed to the margin improvement. We certainly hope this will continue. And we expect, as we continue to deliver more that we will derive more scale synergies. For example, even beyond the A320neo, we saw increases in the deliveries to support the Chinese C919 and the ARJ21 programs, right? So we do have a diverse portfolio that enable us to enjoy these synergies and address market requirements. Thank you.

Sy Feng Chong

Jason, thanks for the question. Yes, Siew Khee.

Siew Khee Lim

Just wanted to check on 2 questions. For USS, we had some severance costs in second half, which is about $6 billion — $6 million. Just wanted to check if there are any more going ahead in 2024? That’s the first one on USS. And without that, I think your EBIT has actually recovered very strongly in the segment. Whether your margin profile is sustainable and all those challenges that you had actually guided us over the past year or so in terms of supply chain update, is it all over, just on USS.

Just on financial costs, you have just seen a big improvement in terms of total debt coming down, whether this would be the run rate that we should be looking at? Or are you looking at increasing it? Is there anything that you’re spending that will actually bring up your borrowings?

Sy Feng Chong

Yes. I think on the second question, we — the strong balance sheet allows us to pursue growth when the opportunities come. The strong cash flow, of course, that we’ll expect to continue would also allow us to pay down our debt when appropriate. But I think we are not constrained in terms of pursuit of growth using our balance sheet. Maybe I’ll let Cedric add a little bit more color to your specific question. And then after that, we get Lee Chew to talk about USS in terms of the severance cost for satcom and then the restructuring and transformation plan, which is going on well. We expect results to continue to strengthen, given all the work that has been put in. Okay.

Chee Keng Foo

I just want to highlight that the EBITDA is very strong for 2023 at close to $1.5 billion. So it’s a good proxy of operating cash flow. It’s slightly lower than EBITDA, but it’s a good proxy. So with this operating cash flow, really the decision before management is, one, do we pay more dividend, do we pay down debt or do we invest? So again, dividend, we have been quite steady at a ratable rate of $0.04 per quarter. We don’t really nearly change dividend rate. On paying down debt, I think we have to evaluate together with investment opportunities and what kind of returns we can get. And of course, we’ll be sensible about size of investment. We’re also digesting some of the big M&As. So I would say on a trend line basis, if we have consistent CapEx and all that, you may see a gradual reduction in total debt. But of course, if we have good investment opportunities, then the debt may rise. But all this we will do in the best interest of shareholders, okay?

So, Lee Chew.

Lee Chew Tan

Yes. So in the second half, we reported that $6 million was spent on severance. In the go-forward, we will be managing our resourcing needs in line with our business. So it will be taken as required when we execute to the business requirements.

The question on whether EBIT is going to be improving. So first of all, in 2023, we have a one-off divestment of SatixFy. Vincent also mentioned that the transformation is progressing well. So we continue to double down and focus. We believe that there will be — and we expect steady improvement of that as we stay focused on the execution. Obviously, as a result of the rightsizing our cost base now is already lower than last year.

Sy Feng Chong

So as Lee Chew mentioned, SatixFy in itself is a onetime minus negative $24 million impact. We won’t see that in 2024. So straight off EBIT effects will be better off by ’24, the absence of this investment. And severance is usually — is always, I think, based on business case and it’s always based on savings that you expect to get. So we cannot give you any forecast at this time, but then normal cost of the business, we think that they need to be, then it’s going to be justified based on cost savings, net cost savings anyway.

Lorraine?

Lorraine Tan

I just have a few questions. Starting maybe with color on TransCore. Just curious what the order book is for TransCore or whether you can indicate whether there were any additional wins in 2023 and as of now. Also — and on that note for this — on the satcom side, whether the transformation — in terms of the transformation, what areas of growth are you potentially looking at going forward for that business?

Second question on the DPS is I noticed that digital — sorry, the digital and cybersecurity, the growth is pretty good 10%. Just wondering whether that will — that is the expected outlook going forward? And also, given that the EBIT margin was also up because of the absence of marine, whether that would be the normal — new normal we should be looking at for that — for the segment. And yes, I may have a follow-up, but I’ll stop there for now.

Sy Feng Chong

Okay. Well, we’ll come back to you if you have a follow-up. So I’ll let Lee Chew talk about TransCore, what kind of win momentum we had in ’23. And then, of course, satcom, which areas of growth — which are — actually, as we shared before, satcom is really a growth sector globally. And now we will move on to Ravi to talk about digital and cyber revenue growth, which is — we are very pleased with the growth momentum and then EBIT margin trend. Right, Lee Chew maybe to you first.

Lee Chew Tan

Okay. So we have been including TransCore’s wins and order book in our quarterly updates. And if you look at our 2023 reports over the various quarters, you would see that we reported new contracts of about $2 billion over the course of 2023. And TransCore projects are really a part of that. And we don’t specifically call out all wins or announce deal value of all wins. But during the acquisition, we did say that our contract renewal rates for TransCore is high at 95%, and the occurring and reoccurring business of TransCore is more than 50%. So as we look at the projects for TransCore, there’s obviously a part of that business that’s from existing customers that we continue to do maintenance and operations. And then there’s the other part of the business where we look at taking on new projects. So that’s TransCore.

And the question on satcom was where are the growth opportunities? Is it Lorraine?

Lorraine Tan

Yes.

Lee Chew Tan

So in the satcom world — and we’ve constantly said over the last, especially, 12 to 18 months, that the whole industry is going through a big shift and a big evolution. And we are seeing actually some of the NGSOs coming in to disrupt the market. Having said that, the aerospace as well as the maritime market has also improved with the whole aero industry improving. And when we look at in-flight connectivity from the aerospace side and when we look at the maritime business now recovering out of COVID, I mean those are the 2 areas we see continued opportunities. And we continue to be a market leader in these 2 spaces. We also see that cellular backhaul and what we call land mobility becoming interesting for our industry and our market. And this is — think about this against the backdrop of why our next-generation platform is focused on multi-orbit and is focused on integrating with 5G, because connectivity — the expectation of connectivity is going to be that no matter where you are, you want to be able to connect to the people and the rest of the world. So even in the announcements that we made in 2023, you’ll see that we went into cellular backhaul opportunities in Argentina. We are looking at broadcast opportunities in Peru. So you will see that as we take satellite beyond just connectivity in those 2 main areas, some of the subsegments like cellular backhaul that has been very fragmented in the past and land mobility will become interesting and important.

Sy Feng Chong

Yes. It’s for the growth potential in the satcom sector that we are developing our next-generation platform with multi-orbit compatibility and cloud virtualization, which we mentioned about in the Cedric’s presentation. And we’re very excited that we will very soon be unveiling our NGP brand in not-too-distant future. This all underscores the growth potential in this particular industry. And of course, for TransCore, we are very heartened by the pipeline of projects, both in our core business in TransCore and also the synergistic ones in this region and also the ability for us to synthesize our solutions together within the group to address new market opportunities. More to come as we have more projects to share in due course. And maybe I’ll move on to Ravi.

Ravinder Singh

So, Lorraine, thank you for your questions. So firstly, on the growth of the digital — on digital systems and cyber, as you noted, we’ve grown by more than 10%. And as Cedric shared our digital business, which is cloud software, AI as well as cyber has actually grown by 20%, and we are on track to actually exceed the target, which we set for ourselves, which is to achieve $500 million by 2026. So the momentum is there. I think at the recent Air Show for those of you who went down, we demonstrated many of our new capabilities, the agile ops hub as well as the agile vision. So we are beginning to implement AI as well as generative AI into our solutions. So we think that, of course, there are a lot of opportunities in that space.

And certainly, on the cyber side, I think we have announced we are acquiring D’Crypt and we are going to close that acquisition soon. So we’re also building our cyber business. And I think the capabilities that we are putting together with the D’Crypt acquisition is going to really help our cyber business to be well positioned for future growth. So overall, I would say that we’re optimistic. There are many opportunities as we see the digital revolution. And our businesses have continued to invest and build up capabilities in new technologies, especially in AI, in cloud, in software and cyber. And this then puts us in a good position. And we also believe that the market demand, as we saw during the Air Show is there for the digital system and cyber business. So we expect that growth.

On the margins, DPS margin was about 9.5% last year, and now we’ve crossed double digit. So the margin growth, I think there are 2 components, as we have shared in the past. I think first, the absolute avoidance of loss because of our divestment of Halter Marine. So that’s, I think, one big part. And the other part really is from our growth and also the way our projects are being managed and also cost cutting. So I would say that we do intend to strive to continue with double-digit margin for DPS business. And if you look at our order book, in fact, this year, we achieved on new orders. This year, 2023, we secured $7.7 billion of new orders. And if you look 3 years back — I was looking over the last 3 years, on average, it was $6.5 billion of orders. So of course, Defence & Public Security projects are longer term, it takes a couple of years to deliver them, but there is actually a strong momentum. If you can deliver those orders that we have in our order book well, then I think the DPS business can certainly maintain the rate we are going. And certainly, we are focused on making sure that the margins are — get good margins for the business and for the group.

Sy Feng Chong

So we are really pleased with the progress that we have made for our Defence & Public Security segment just to add to what Ravi said in Satcom value date. It’s very positive comments. So we are pleased].

Operator

Shawn from JPMorgan, we will now unmute your line.

Jun Jie Ng

Thank you so much for the presentation. I think I just have 2 questions, very quick one. One is on order book. Do we think that the current order book, given its strength has due further legs to go, given — maybe I think the question I really want to announce is do we have enough capacity to take on additional orders? I think you talked about MRO capacity expansion, but what about the other segments across the group.

The second key thing is on aerospace. We have seen OEMs implementing price hikes globally since last year. Do we expect to implement similar price hikes to our customers this year and therefore, have a positive contribution to margins?

And then I think on the third thing is on defense. We secured a lot of international defense contracts last year. We showcased a lot of new products in the recent Air Show. Maybe you can provide an outlook for 2024 in terms of defense. Do we expect defense contract wins this year to be similarly strong, similar to last year or even stronger? And where we see even more overseas orders and for overseas, which category are we targeting? Is it cyber munitions or is it naval vessels?

Sy Feng Chong

Shawn, can you repeat your question on order book? You asked whether we have enough capacity to take on new order. But there’s a second part of that question. Can you remind me, please?

Jun Jie Ng

I think it’s just more about capacity, whether we have sufficient capacity across all 3 segments to take on additional orders.

Sy Feng Chong

The answer is yes. We are very happy to take on new orders. But of course, it’s done in a very well thought-through fashion. We increased our, of course, team size, expanded our capacity to take on new orders, as you see over the years, as our top line and bottom line improved. So yes, we do have capacity to take on the growth in each of the 3 segments. But of course, it has to go through a very thoughtful planning process in terms of equipment, in terms of our human resource manpower, which we have been expanding. Our workforce has also gone up. So I think that’s to your question, Shawn, your first question.

Second question on OEM price hike, similar hike, but we are also in the OEM businesses. Certain parts of our business are in OEM. And of course, we have MRO, we have system integration. Of course, we always try to pass through the cost increases to the market very contentiously. So yes, pricing is being managed at all times. And in fact, in contracts that we sign we always, to the extent possible, bill in escalation factors based on inflationary factors. So we do that a fair bit across all our business lines. Okay?

And then for international defense business outlook for 2024, we’d be similarly strong in terms of new orders, especially for overseas. And which category, perhaps I can get Ravi to give a little bit more color.

Ravinder Singh

So first, Shawn, thank you for the question. On international defense business, we’ve explained previously that we have been making some concerted effort, and you can actually see it in the Air Show, I think first product. So, we’ve been building new products and during the Air Show, we launched a few new products, the ExtremV, which is also the HED version of ExtremV. 40mm ammunition, we have one of the world’s first rocket assisted round. If you haven’t seen it, I’d be happy to talk to you about that. And then, of course, in terms of the commanding control systems, we are building. So you see a lot more products because we recognize that that’s the way to go forward in the international defense business, one. Two is a lot of — we just started building a lot of partnerships. Typically, in the defense business, there’s always a desire especially post Ukraine, there’s always a desire — and COVID-19, post Ukraine and COVID-19, there’s a lot of concern about supply chain. So most countries are beginning to recognize that they actually want some of the work to be done in country or at least the support can be done in country. So we’ve been working with partners in different countries and different regions to build capacity so that the end customer is assured that in the long term, they have support.

And the third, of course, is building up our marketing teams and putting people overseas and finding the right people who can help us who are familiar to this market. So I think we’ve done that. So this last year, we secured for Defence & Public Security, we took out close to $500 million of new contracts. And I can give you a flavor of some of this, so you get a sense of what we are doing. So for example, for the 40 MM, we managed to sell to 3 new Eastern European countries, Poland, Slovenia and Romania. We mentioned also, I think we did — we are doing the C-130 upgrade for Tunisia. And we’ve actually been successful in selling autonomous mass to 2 Middle Eastern countries recently. And we’ve delivered last year the ExtremV to a customer in Germany, actually German Army, Mexico and then during the Air Show to a customer in Sweden, okay? So I think I just want to share this with you because, first of all, defense, as Vincent has always said, takes a long — gestation period is a long time. And then, of course, the approval process, the budging takes some time. So these are early indicators of the — I guess the indicators of the outcomes of the effort that the teams have put in, which I think is good.

What’s our outlook? We are actually working on quite a few major projects, but defense business is defense business. Until you cross the line, it’s not yours. So — because there’s always many, many consideration beyond price and performance. So we have quite a few opportunities we are pursuing, including in the marine business, ammunition, in platforms and so on the cyber side and the digital system side. We have been pursuing these opportunities. Some of these, we believe, should come in. I mean, 40 MM, we are the world leader in 40 MM. And I think the team has done well. We continue to see a lot of repeat orders. We are very confident.

In terms of platforms, we are chasing quite a few with ExtremV. You can see the momentum is building, and we are pushing the team to do more and to increase the numbers. And naval programs take a bit longer. Typically, they are more — they are larger and they take a couple of years to gestate into create a portion for us to win the deals. But we are also working on them. So our focus really in terms of opportunities right now is a lot in Europe, in Eastern Europe, Northern Europe. And of course, in Middle East, I think that’s where the demand has been strong in the last year, and we think in the next couple of years, and that’s where we are going to focus on.

Sy Feng Chong

Yes. So it’s actually quite — we are really quite optimistic about our continued progress in the international defense business. Maybe I’ll just add one more point to my — the question on price hikes. When you have inflationary pressures and higher costs, what we do, yes, we pass through cost to the market. We also try to increase our price. We bill in inflation protection factors in our project — in our contracts. We also take cost out of our equation, productivity savings, cost savings, which explain why in the last couple of years when inflation pressures were high, we maintained a very good margin resilience across the group for those reasons. So thanks, Shawn, for your questions.

May I maybe ask Zhiwei because I think Zhiwei has a few questions.

Zhiwei Foo

Yes. Vincent, congratulations on your strong set of results. I have 3 questions. This question is a bit of housekeeping. I noticed under your segment report for the second half of ’23, there’s a nonoperating income of about $16 million under DPS. And what is that? [indiscernible] smaller one, is this gain on ineffective cash flow hedges that’s in the second half of ’23? What’s that also?

Second question is T-Lock gains. I didn’t see a mention of a number in your slides. How much is left? Third question is on aerospace — Commercial Aerospace margins. Using second half as a fair comparison, right, EBIT margins, excluding your associates and JVs was 6.1% in 2022, became 6.3% in 2023. Now PTF also turned positive in second half of ’23. You likely have some aircraft sales in the second half as well. I’m a bit surprised that given this turnaround between a year, your EBIT margin didn’t expand much more than — I mean it didn’t expand more than 1 percentage point, it’s small. So wondering how to consolidate delta.

Sy Feng Chong

Okay. So thanks for your questions and also your well wishes. Thanks for that. The segment nonoperating income, we have the very simple answer for you and Cedric will take you through. And then on the question on hedges and T-Lock gain, we know more — we don’t have any more T-Locks in our balance sheet, as we mentioned. So that has been fully flushed out in 2023. And then we can talk about Commercial Aerospace and I’ll let Jeff talk about it. As I mentioned, project timing sometimes is bearing. I wouldn’t read too much into the near-term EBIT margin, but I think we are really on a good trajectory.

But I’ll let Jeff give you a little bit more color. So maybe I’ll let Cedric talk about your 2 questions.

Chee Keng Foo

Yes. DPS has nonoperating income. And that’s because we had a favorable settlement on the sale of U.S. Marine business, where at post closing, we have to look at the net working capital settlement because it’s a bigger M&A, you have a target net earning capital and the actual, which will happen post closing because you don’t have the results at the date of closing. So in the end, it will settle in our favor. So that was the reason for the other income. It’s a positive thing.

Sy Feng Chong

And then there’s a question on hedges.

Chee Keng Foo

Yes. T-Locks have all been taken in 2023, right. [Audio Gap] Yes. So that — in ’23, there is some T-Lock gains, which account to about $24 million.

Sy Feng Chong

So that’s the one, okay?

Chee Keng Foo

But they’re all taken already. So going forward, we won’t see the T-Locks, but you will see hedges.

Sy Feng Chong

Yes. We did — I think we will continue to keep you posted. We did share those information along the way. Jeff?

Wai Meng Lam

Thank you. So as we said, project mix and project timing, it also crosses these quarterly and half yearly time lines. In addition, we also said earlier, we continue to invest in capability and capacity. If you just look at the number of projects we’ve executed last year, including the LEAP licensing for the future, including Changi Creek hangar investment for the future as well as all our other capacity expansion projects that we’re doing that Vincent alluded to, from a capability point of view, LEAP is going to bring significant growth in top line and bottom line in the coming years. We also have invested in additional capability for the new aircraft types, for example, the 320neo, 737 MAX, 350 and nacelle MRO capabilities that we’re expanding for the 320neo in particular, across all our MRO sites.

So you can see the activity level. We didn’t just keep up. We actually increased the activity level for investments in the future and all this come with tooling, training and so on. So really, I think you have to look at commercial aerospace as a growth business, and we continue to scale our PTF conversion. So for example, last year, we added 3 new sites to PTF conversion. So — as Vincent also alluded to, we continue to expect the PTF margins to improve in the coming years. So it’s all a combination of the high number of activities we’re doing as well as all the investments we continue to make.

Zhiwei Foo

Just one follow-up on that. So I take your point that there is a bit of past expansion that’s suppressing your margin. If I reverse that out, how much margin percentage points would that cost you?

Wai Meng Lam

I certainly hope it will be — we are working towards expanding margins, okay, in the coming years. We are working towards expanding revenue, expanding margins, scale synergies and certainly, a lot of growth, okay? So that’s my short answer.

Sy Feng Chong

For PTF, we always said that last year, we had low single-digit EBIT margin. This year, we’ll get to mid-single digit. And next year will be high single digits. So you’ll see the traction. And PTF revenue is actually quite a substantial part of our commercial aerospace business. We do expect margin to be quite robust.

Operator

We have come to the end of our Q&A session.

Sy Feng Chong

Okay. Maybe we’ll let Rahul ask a question. And then after that, we’ll see if we have further questions. If not, we can always take it offline later on.

Rahul Bhatia

Rahul from HSBC. I want to get back on the point that you mentioned about dividends — dividend 2023. I want to understand how you’re thinking about using the future cash flows between new investments, dividends and paying out debt. Is there any priority in your mind or you’re trying to maybe have a balance between all the 3? Second question is on the USS division. Could you talk more about the subsegment urban solutions? Obviously, great TransCore became earnings accretive. Congratulations on that. But if we strip out TransCore in that subsegment, how is the business going on? Because it appears that it may be — it may not be growing or the margins might be low. I know you normally look at it on a combined basis. But I’m just trying to understand what is happening on the ground in that particular subsegment.

Sy Feng Chong

Yes, that’s — well, thanks for the question. Good questions. Let me just talk about how we use our cash. And then after that, of course, Cedric can weigh in, and then we’ll let Lee Chew talk about our urban solutions business, which there’s a lot of good projects in the pipeline, including our mobility projects in Taiwan that will kick into full gear very soon. So actually, the momentum is quite good. I’ll let Lee Chew a little bit about that.

So when we talk about our management of our cash, whether it’s a dividend or whether it is continued improved investment, the reality is that because our balance sheet is very strong, it remains to be very robust. It gives us a lot of flexibility. If you look at our track record of dividend payout over the years, even in the deepest most difficult times in COVID, we did not cut dividend, we maintained a $0.15. And 2 years ago, from 2020 onwards, we started moving it to $0.16, $0.04 a quarter, showing the confidence of us being able to return value to shareholders minimally through our dividend in a ratable fashion. And there’s no plan to change that.

Our balance sheet is strong enough that beyond paying dividend — our cash flow is strong enough that beyond paying dividend, we can still invest in growth which is what we have been doing. And in the last few years, we are really transforming — or we have been working very hard and I think very successfully in transforming this company to just not just being a dividend yield company, but also one that is growth, given the very strong order book that we have recorded. So we now have to execute those order book with the margin that we expect. But we have a lot of flexibility. But dividend payout, we want it to be very stable and very reasonable, and we have no plans to change in the near term.

Rahul Bhatia

Sorry. When you say a dividend payout, do you mean by — as a percentage of profit it or you’re talking about absolute dividend?

Sy Feng Chong

Absolute.

Rahul Bhatia

Because in past it has always been absolute.

Sy Feng Chong

Absolute. So $0.04 a quarter is what we are doing now, and we have no plan to change this kind of ratable dividend payout on a quarterly basis in a level that is ratable and predictable. No plan to change that, okay?

Do you want to add any? Okay. Then we talk about subsegment URS, I suppose. So yes, you hit the nail on the head. We now look at TransCore and the rest of urban solutions as one urban solution. TransCore is now our base business. This is third year running or rather, we’re coming to the end of second year of ownership. And I’m very glad to see that the teams are really working as 1 team.

I’ll let Lee Chew talk about the other aspects of urban solutions.

Lee Chew Tan

Yes. Thanks, Rahul. So outside of TransCore the urban solution business is healthy and progressing well. I think during the presentation today, you saw that we are making progress on the road front with Abu Dhabi project. We have also talked about our Platform Screen

Door wins across multiple sites globally. There are a few projects that perhaps in the beginning of 2023 and the end of 2022, that have contributed significantly to our order book and maybe I can just kind of a flag them up here. So you remember the Yellow Line, which is our first turnkey project awarded to us towards late 2022 at HKD 1.4 billion. We continue to execute to that across 2023 and obviously, in the forward-looking years. We also announced a $450 million contract for our Kaohsiung Red Line extension in the beginning of last year as well. In that same measure, we talk about our communications and control system project that we won with LTA about $200 million in the beginning of 2023.

So you can see that the over $2 billion order book that I was referencing in 2023 is going to give us a good solid foundation for us to deliver our revenue. And even on the — because if you look at our smart city focus, there’s smart mobility, there’s smart infrastructure and utilities and then there is smart security. If you were at the Air Show, you would have seen us launch our product on smart building energy efficiency. That whole system is going to meet some of the needs that we know customers are looking for in terms of managing their resources in building even as we add to the smart city OS that we have been developing previously.

And then on the smart security side, so the win that flagged today about the airport security in Indonesia is an indication that we continue to double down on that. So there are many projects that we’re working across outside of TransCore. Obviously, TransCore’s accretion is a big milestone for us. We’re very excited about it. But we are also very positive about the opportunities that we are seeing across the other aspects of the business. So hopefully, that helps.

Sy Feng Chong

Yes. So we will take — thank you, Rahul. We’ll take one last question, please.

Unidentified Analyst

This is [Douglas from VAH]. I just have one question and it’s regarding the Commercial Aerospace segment, which is with the recent sort of interest generated on sustainable aviation fuel, SAF, are there sort of any plans by STE or an area of interest — is SAF an area of interest for STE. I know back in 2022, there was an MOU signed with Safran to sort of study the use of SAF on helicopter engines. So since then, has there — is there an update on that?

Sy Feng Chong

Jeff? Okay. Thanks for the question.

Wai Meng Lam

So firstly, at a broad level, sustainability is one of our key focus areas. Certainly, if you look at the work we’ve done around reducing our carbon footprint as well as using greener energy, we have actually done a huge amount of work. In fact, last year, we won the national award for this by NEA for our efforts in sustainability. And so if you look at SAF, the use of SAF, it will primarily be driven by our customers because we would use SAF in testing these engines in the test cell or even on wing based on our customer requirements.

So kind of unlike the airlines, which consider using SAF and asking passengers to pay, we use it in a more limited scope through the testing of engines. And we certainly have provided the option to our customers. So based on their interest level and of course, also their willingness to contribute to the cost of SAF, then we would adopt it in our facilities. So the answer is yes, we will move as fast as our customers would like us to. Yes.

Sy Feng Chong

So Douglas, thanks for the question. In the area of sustainability, we see ourselves as a responsible corporate citizen. So we do our own — we do our part in making our own business operations sustainable, including using solar energy. We have run off rooftops across the group to fix any more solar. And in fact, solar energy accounts for more than 10% of our group electricity needs. So — but at the same time, we see sustainability as opportunities for us to use our solutions to help and support our customers, for example, smart energy saving solutions for buildings and as Jeff talked about, in an area of sustainable aviation fuels.

And we have many other solutions within the group that help cities manage their carbon footprint, for example, smart traffic management that will reduce traffic congestion and therefore, reduce fuel burn, including congestion pricing solutions. So we have continued to see where are the other opportunities for us to add value to our customers using our technology and innovation. Thanks for your question. This is very relevant and very topical.

So maybe on that note, we’ll bring the Q&A to a close. We thank you very much for your — for attending today’s session, including those who joined us online virtually. And we look forward to further engagement with you as the months proceed in 2024. Thank you very much.

Chee Keng Foo

Thank you.