Singapore Technologies Engineering Ltd (ST Engineering), a global technology, defense, and engineering group, reported a strong performance in the first half of 2024, with a 14% year-over-year increase in revenue to $5.5 billion. The company's earnings before interest and taxes (EBIT) rose by 18% to $523 million, and net profit increased by 20% to $337 million.
The Commercial Aerospace segment accounted for 40% of revenue, Defense and Public Security for 43%, and Urban Solutions and Satcom for 17%. ST Engineering also declared a cash dividend of $0.04 per ordinary share for the quarter.
Key Takeaways
- ST Engineering's revenue increased by 14% YoY to $5.5 billion, with a net profit rise of 20% to $337 million.
- The company secured $6.1 billion in new contracts, with an order book standing at $27.9 billion as of June 30, 2024.
- The debt profile remained stable at $6.1 billion, with an improved debt to EBITDA leverage ratio from 4.2 to 4 times.
- Strong performance is seen across most segments, with Commercial Aerospace facing supply chain challenges and Satcom experiencing losses.
- The company is on track to launch the Intuition lab in Q3 of 2024 and is planning an Investor Day conference in the first half of the next year.
Company Outlook
- ST Engineering anticipates long-term sustainable growth, leveraging opportunities in aerospace, smart city, defense, and public security industries.
- They aim to maintain double-digit margins in defense and public security and increase margins in commercial aerospace.
- The company reassures investors of its adaptability to market changes and the continual reassessment of business strategies.
Bearish Highlights
- The Commercial Aerospace business is impacted by supply chain issues and Airbus delivery delays.
- Satcom reported a 20% revenue decline and is currently experiencing losses.
Bullish Highlights
- Defense division is securing more international orders and investing in capacity and automation.
- Urban Solutions reported a 9% revenue growth, with TransCore experiencing good double-digit growth.
- The company has achieved over $100 million in procurement savings and targets over $50 million in productivity gains annually.
Misses
- Despite overall positive performance, specific challenges in Commercial Aerospace and Satcom could affect future profitability.
Q&A Highlights
- ST Engineering clarified their role in the New York Congestion Pricing Project, emphasizing they do not take revenue risks.
- The company addressed the Pensacola project concerns, ensuring regular hiring reports to the Mayor's office.
- They discussed cost management strategies to combat inflation, with a focus on procurement savings and productivity gains.
- The company provided insights into their debt management, maintaining a balanced ratio of fixed to floating debt and spreading out bond maturity dates.
In conclusion, ST Engineering (SGX: S63) reported substantial growth in the first half of 2024, with a solid increase in revenue and profits. The company remains confident in its future growth prospects, despite some challenges in specific market segments. With strategic cost management and a focus on innovation, ST Engineering is poised to continue its trajectory of long-term sustainable growth.
Full transcript - None (SGGKF) Q2 2024:
Operator: Good morning, welcome to ST Engineering's First Half 2024 Results Briefing. We will begin with a presentation by our Groups 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. Without further ado, may I invite Cedric to give his presentation please.
Chee Keng Foo: Thank you. For those attending in person and via webcast, a very good morning and welcome to ST Engineering's first half results update. I would like to bring your attention to Slide number 2, which states, amongst others, that the Group's future performance, outcomes and results may differ materially from those expressed in forward-looking statements. Slide 3, please. This slide shows the agenda for today. I will be covering group highlights, business discussions for Commercial Aerospace, CA for short, Defense and Public Security, DPS for short, and Urban Solutions and Satcom, which is USS for short. I will also cover contract wins and order book, our debt profile, dividends and outlook. First, Group highlights. Slide number 5, shows a summary of our first half 2024 results. Group revenue recorded a very strong 14% year-on-year increase to $5.5 billion for first half 2024. Group EBIT was $523 million, up 18% year-on-year. Group profit before tax was up 19% year-on-year at $416 million. Group net profit up by a very healthy 20% year-on-year at $337 million, largely from business growth. Slide 6, from left to right, shows the revenue breakdown by segment, by type and by location of our customers. First, revenue by segment. In first half 2024, CA contributed 40%, DPS 43% and USS 17%. DPS segment includes both local and international customers. It also covers commercial domains such as public security and safety, critical information infrastructure and others. Hence, DPS segment revenue, as you can see on the slide, of $2.4 billion in first half '24, it's different from defense revenue, as you can see from the right-hand side of the bar chart, which is $1.6 billion. Basically, the $2.4 billion and $1.6 billion is different because the $1.6 billion is a subset of DPS, which also contains commercial businesses as well. In the center of Slide 7, the chart shows revenue by type. So, commercial revenue increased from $2.8 billion in one half '22 to $3.3 billion in one half '23 to $3.9 billion in one half '24. Defense revenue increased from $1.5 billion in one half '22 to $1.6 billion in first half '23. Now, both one half '23 and one half '24 defense revenue are showing $1.6 billion due to rounding. But in fact, defense revenue grew around 5% in one half 2024 versus one half 2023. On the right-hand side of Slide 7, it shows the revenue breakdown by customer location. Asia contributed 50%, U.S. 24%, Europe 20% and others 6%. This split is quite similar to that of 2023. Slide 7, group revenue grew strongly at 14% year-on-year to $5.5 billion, contributed by all segments. Slide 8, first half 2024 EBIT grew by 18% year-on-year to $523 million. In first half 2023, we also incurred $24 million loss on the full divestment of shares in a company cost SatixFy, as well as $2 million of severance costs for Satcom. Excluding the effects of this, the group would have posted an EBIT increase of 11% year-on-year at the base operating performance level. Slide 9, net profit improved strongly from $281 million in first half 2023 to $337 million in first half 2024, or a 20% year-on-year improvement. Excluding Satcom one-offs as mentioned in the previous slide, net profit improved 12% year-on-year on a base operating performance basis. Next, I'll move on to business discussions, starting with commercial aerospace on Slide 11. CA segment reported a 20% growth in revenue to $2.2 billion. This segment benefited from the strong growth for its MRO as well as aerostructure and systems sub-segments. However, second quarter 2024 revenue, well if you use the first half 2024 minus the first quarter 2024, you will see both first quarter and second quarter 2024. The second quarter 2024 revenue was lower than first quarter due to project timing, and also lower sale of Nacelle spares in second quarter 2024. $2.1 billion on new contracts was recorded in first half 2024, of which $1.3 billion was for second quarter 2024. Slide 12, here DPS segment reported a 12% year-on-year growth in revenue to $2.4 billion. All sub-segments contributed to this strong growth. $2.6 billion of new contracts were recorded in first half 2024, of which $1 billion was recorded for second quarter 2024. We made good progress in international market development. More than $500 million was achieved in the international market sales in first half 2024. Slide 13, 13 talks to USS, Urban Solutions and Satcom. This segment reported a 3% year-on-year growth in revenue to $918 million, with growth in URS contributed mainly by TransCore, and partially offset by lower Satcom revenue. The New York Congestion Pricing Project, as you would have read in the papers, has been paused since mid-June. Nevertheless, I am pleased to inform that the engineering and procurement and construction portion of the contract, which is the EPC part of it, has been completed and delivered as scheduled by TransCore. Currently, we are operating in accordance with the terms and conditions of the contract, and do not expect the financial impact from this pause in the New York Congestion Pricing Project to be material on the USS segment. 1.4 billion of new contracts were recorded in first half 2024, of which 0.8 billion was recorded for second quarter 2024. Slide 14, let me go a little deeper into the Satcom segment, a sub-segment. This industry continues to undergo transformation, as we have briefed you previously, and it presents both opportunities as well as challenges. The key challenge is the disruptions from LEO constellations, LEO standing for Low Earth Orbiting Satellite, and the rise of well-funded vertically integrated providers. As you know, LEO satellite communications offers higher bandwidth because it's closer to Earth, and lower latency. However, there were reports of bandwidth congestions with LEO satellites. So even as LEO satellites continue to be launched, GEO satellite, which is GEO stationary, are also being launched concurrently. So these GEO satellites offer different kinds of advantages compared to LEO in terms of wider coverage and reliability. Hence, our customers are looking for ground equipment for which we supply through iDirect that are capable of seamlessly switching between satellite networks, whether it's GEO or non-GEO. And this switching capability is better known as multi-orbit systems equipment. iDirect is currently developing such a multi-orbit system, branded as Intuition. And in addition to being multi-orbit, Intuition will also be cloud-native, standards-based, and terrestrial satellite convergent, so as to provide seamless connectivity, to tap on the growing demand for digitalization, and also for end-to-end network orchestration. This changing industry landscape and our development of Intuition represent both opportunities and, of course, execution risks. We are actively engaging our customers in the meanwhile to transition them to Intuition, and focusing on the operation side to improving the quality of our revenue and also our cost-based. Barring unforeseen circumstances, USS financial performance is expected to be better in the second half, so second half waited. And this segment, USS, full-year 2024 performance, is also expected to be better than 2023. Slide 15. This slide shows the year-on-year increase in segment EBIT. On the left side, CA continues to perform well, with EBIT growth from $178 million to $190 million. If you strip out aircraft sale revenue of $101 million in one-half 2023, and only $7 million in one-half 2024, the EBIT margin for CA would have grown by 13%, so instead of 7%. So this is more in line with its revenue growth of 20%. As mentioned earlier, CA revenue grew 20%, and the lower margin in one-half 2024 is also due to project mix. In the middle of the slide, DPS EBIT grew $301 million to $324 million. Or 8% year-on-year. This is driven by higher revenue and better cost management. On the right-hand side, USS segment improved its EBIT from a loss of $34 million to a profit of $9 million, due to strong TransCore EBIT growth, and also the absence of the Satcom one-off losses in first half 2024. It was incurred in first half 2023, so it was absent in first half 2024. If we exclude this one-off loss from Satcom, then the USS EBIT would have improved from first half 2023 to first half 2024 by about $20 million. So the momentum is good. USS financial performance is also second-half weighted. Now let me move on to the group's contract wins and order book. Slide 17. Our contract wins totaled $6.1 billion. That's on the left for the first half ended 30th June 2024. And this is contributed by CA $2.1 billion, DPS $2.6 billion, and USS $1.4 billion. This $6.1 billion of new contracts in first half 2024 more than replaces our first half 2024 revenue of $5.5 billion. So it's a healthy pipeline of new contracts. Consequently, our order book as at 30th June 2024 stood at $27.9 billion. $4.9 billion of this is expected to be delivered in the second half of the year. Slide 18 will focus on second quarter 2024 contract wins. In the second quarter of 2024, the group secured $3.1 billion new contracts, with CA recording $1.3 billion, DPS $1 billion, and USS $0.8 billion worth of new contracts. Next, let me move on to the debt profile of the group. Slide 20. The group total borrowings is predominantly in U.S. dollar to match the asset side of the balance sheet, which are mostly in U.S. dollars as well. In U.S. dollar terms, the total borrowings was reduced by 2.5% in first half 2024 year-on-year. And this is obviously through debt repayment. However, in sing dollar terms, the total borrowings as of 30th June 2024 remains flat compared to 30th December 2023 at S$6.1 billion sing. This is due to a stronger U.S. dollar. So while we are able to pay down the U.S. dollar debt, the balance of the U.S. dollar debt translated to sing shows a similar sing dollar number of S$6.1 billion. EBITDA increased 11% year-on-year to $786 million in first half 2024. This cash was applied towards capital expenditure for growth, debt repayment, interest expense, and obviously dividends. Debt to last 12-month trailing EBITDA leverage ratio also improved from 4.2 times as at 31st December 2023 to 4 times as at 30th June 2024. Our fixed to floating interest rate ratio remains balanced at 61% and 39% respectively. Financial year 2024 weighted average borrowing costs for both fixed and floating is estimated to be 3.7%. This is assuming there is no FED rate cut for the rest of 2024, which is not the popular view. I think the popular view is that the FED will do something in September and so forth. But assuming there is no FED cut, we forecast 2024 weighted average borrowing costs to be 3.7%. Credit rating remains very strong at AAA stable by Moody's (NYSE:MCO) and AA plus stable by S&P. Next, dividends. Slide 20. We are pleased to announce that an interim tax-exempt cash dividend of $0.04 per ordinary shares has been approved by the Board of Directors for the quarter ended 30th June 2024. Record date will be 23rd August 2024 and payment date 5th September 2024. Finally, outlook. This is the Group President and CEO's outlook message. I’ll just read it out for you. We posted strong revenue and profit growth in the first half of 2024. Despite continuing challenges in the operating environment, we see opportunities in aerospace, smart city, defense and public security industry domains. Given these opportunities and supported by a robust audit book, we remain confident in achieving long-term sustainable growth. This marks the end of my presentation. Thank you for your attention.
Operator: Thank you, Cedric. May I now invite our panelists up on stage, please? The panelists this morning are Vincent Chong, Group President and CEO, Cedric Foo, Group CFO, Ravinder Singh, Group Chief Operating Officer, Technology and Innovation, and President, Defense and Public Security. Tan Lee Chew, Group Chief Commercial Officer, Market Development, and President, Smart City and Digital Solutions. And Jeffery Lam, Group Chief Operating Officer, Operations Excellence, and President of Commercial Aerospace. I will now hand over the floor over to Vincent to deliver his remarks. Vincent, please.
Sy Feng Chong: Good morning to everybody here at ST Engineering Hub and to those joining us virtually, welcome to ST Engineering's financial results briefing for the first half of 2024. Now, with Cedric having presented our results, I will focus on highlighting key points, allowing more time for Q&A. The double-digit growth in group revenue and profits in first half 2024 compared to first half of 2023 is a strong set of results that reflects the robust performance of our businesses as we continue to execute our growth strategy. All three business segments, Commercial Aerospace, Defense and Public Security, and Urban Solutions and Satcom, grew revenue and improve EBIT. Commercial Aerospace performed strongly with a year-on-year revenue increase of 20%. This growth builds on strong quarterly gains following the post-COVID recovery last year, reflecting the segment's momentum performing beyond pre-pandemic levels. Its year-on-year EBIT grew less than its revenue primarily due to timing of projects and a shift in sales mix, as well as lower aircraft sale compared to first half of 2023. Excluding the effects of aircraft sale, EBIT would have increased by 13% instead of 7%. Overall, this segment achieved a strong set of results, notwithstanding the ongoing challenges in the aviation industry, including labor shortages, supply chain issues such as parts and components shortages. This segment targets to maintain the operating momentum for the rest of the year. Next, Defense and Public Security segment maintained a strong performance contributed by a healthy set of revenues from its sub-segments. This period, Digital Systems and Cyber and Marine posted very strong year-on-year revenue growth, with Marine being supported by increased ship repair activities. Our international defense business is making steady gains, though we expect the full impact of our international pipeline to take time to materialize. Notable achievements include our recent first export of NATO standard 155mm ammunition, as we announced sometime recently. Additionally, we have seen increased enquiries at defense shows and meetings, opening up new opportunities and geographies. Our international defense contract wins total more than $200 million in first half of 2024. So I am referring to International Defense contract wins, compared to about $300 million for the whole of 2023. So in first half we won more than $200 million of International Defense contracts, compared to $300 million for the whole of 2023. So that’s good set of results. Urban Solutions and Satcom segment posted a 3% year-on-year growth in revenue and delivered positive $9 million EBIT, with URS-based business and TransCore both contributing to the improvement. Satcom base operating EBIT was flat compared to first half of 2023, despite lower revenue, due to cost management efforts. Cedric in his presentation highlighted Satcom industry operating landscape, which presents both opportunities and challenges for our Satcom business. We are actively working with customers on migration paths to our future ready platform intuition, and are already operating on a lower cost base due to the manpower rationalization efforts which we have already provided updates on. As Cedric mentioned, in an industry undergoing transformation, there will be execution risks which we are closely monitoring. As previously guided in May this year, and barring unforeseen circumstances, we expect the Urban Solutions and Satcom segment to perform stronger this year compared to 2023. Similar to last year, USS segment will also be second-half weighted this year. If you exclude the effects of one-time satisfied divestment and severance costs in first half of 2023, base operating EBIT for the segment improved by close to $20 million in first half this year compared to first half of 2023, as Cedric already mentioned. On new contracts, we secured $6.1 billion for the first half of 2024, and about $3.1 billion alone for the second quarter of 2024. Lifted by these new contracts' net of revenue delivery in the first half, we ended June with a very robust order book of $27.9 billion, with $4.9 billion to be delivered for the rest of 2024. In summary, the strong first half results highlight our agility in navigating a dynamic global environment. This strong performance is also supported by our disciplined cost management and productivity drives, ensuring that we maintain profitability and resilience. To illustrate the improvements, our unit OpEx, in other words, OpEx divided by revenue in first half 2024, declined to 10.4% compared to 11.4% in the first half of 2023. Looking ahead, we see continued growth opportunities in aerospace, smart city, defense and public security industry domains, and with a strong set of order books providing good revenue visibility, we remain confident in achieving long-term sustainable growth. Finally, our Board of Directors has approved a second interim dividend of $0.04 per share, as mentioned by Cedric, which shareholders will receive on 5 September 2024. So, on that note, we will now take questions from the floor. Thank you.
Operator: Thank you, Vincent. We will now move on to the Q&A session. I will open up the floor to our participants in the room first. For our online participants, please click the raise your hand icon and we will place you in the queue.
Chee Keng Foo: So, while you are taking questions, let me just make a small clarification. On Slide 13, as you can see from the slide, it states that there's a pause in New York Congestion Pricing start date. That means the City of New York decides to start later, so they had a pause in the start date. However, the New York congestion pricing project, which the MTA, the City has with TransCore, is not paused. So that contract is still running in accordance to its terms and conditions. We have delivered the EPC part of it and we are now at the OMM phase of it.
Sy Feng Chong: Thanks for the clarification, Cedric. Anyone?
Kenneth Tan: Yes, of course, Kenneth. Hi, thanks for the opportunity. Kenneth from CGS. Three questions first. First one is on aerospace. What's the biggest bottleneck hindering margins at this point? And are we seeing any alleviation if this bottleneck is going to third quarter so far? Second question is on defense. What's driving the spike in depreciation and associate profits this first half? Last question is on urban solutions. Could you share how much did TransCore grow year-on-year in the second quarter? And given that USS revenue was up 3%, this kind of implies the Southeast Asia smart city business saw a bit of low growth. So what's hindering the Southeast Asia business? Thank you.
Sy Feng Chong: Okay, Kenneth, thanks for the questions. I will ask my colleagues to answer your question first on USS, TransCore growth. I'll let Lee Chew, talk about it. DPS, what's driving the depreciation in first half? And then commercial aerospace, what are the biggest challenges impacting margin? But let me just clarify, we already said in first quarter on your third question, we already said in first quarter of this year that the URS-based business will be second half weighted. So that's nothing surprising to us in terms of the URS revenue profile, but I can let Lee Chew address that. I will let Lee Chew start first, and then followed by Jeff, and then after Ravi.
Lee Chew: Thanks, Kenneth, for the question. So let me address the URS growth in the USS segment. I think your question specifically was TransCore. If you see the segment report that we have out there, we have a 9% revenue growth first half of this year versus last year for urban solutions, and minus 20% growth in Satcom against the same period. Specific to TransCore, we are seeing good double-digit growth, and as Vincent mentioned, for the base business of our urban solutions domain, we expect it to be second half weighted. So hopefully that answers that question. I think you also had a query around the Southeast Asia business. We look at our business more holistically across different geographies, and we aggregate our report that way. So I would not say that the Southeast Asia business is per what you have mentioned. If you look at our order book for quarter two at $800 million, and our first half order book of $1.4 for the USS segment, you can see that the momentum of growth in terms of the order book is strong and is good. Specific to that, I also want to call out that we highlighted the wins in TransCore. In fact, we had some press releases that went out to describe the Delaware River electronic tolling win, as well as the win in Missouri for the transit traffic management. So we are seeing TransCore winning projects both on the tolling side, as well as on the ITS front. So hopefully that answers the question, Kenneth.
Ravinder Singh: Okay, so I'm going next. The commercial aerospace business is a diverse business. We have the OEM business, MRO business, and the leasing business. As you may be aware, today there is a lot of dynamics going on that is affecting different segments of the aerospace business. So for leasing, for example, Vincent mentioned we had disposed of some aircraft last year. So these are periodic transactions that we do, and we continue to look for opportunities to do some of these periodic transactions. On the MRO business, some of the key challenges in the market is very known in the industry, including the supply chain challenges, repair, turn time, the spares availability. On the OEM side, you are also aware about Airbus delivery schedules, how that is being impacted by the spare parts availability. So I would say that broadly we are managing all of these risks and targeting to deliver on continuing momentum on our operating business. Therefore, you have seen that we have been able to deliver and improve on our margins over the last few years. Thank you.
Sy Feng Chong: We will address the question on depreciation. So we did complete the D'Crypt acquisition in the first half, and for acquisitions, usually what we need to do is to do an upfront amortization of the order book backlog. So that’s quite an accounting practice, so that explains a big part of that increase in depreciation. I hope that answers your question. There is nothing that is extraordinary apart from that. Of course, some depreciation from the Gul yard [ph] also, because we acquired that last year.
Unidentified Analyst: Hi, thank you for the opportunity to ask questions. Three questions from me. So firstly, this time round, Airbus, they specifically flagged out that LEAP engine delivery delays were one of the key reasons behind the negative revision in their guidance for this year. So could you share maybe the impact on MRAS as a result of this development? And several U.S. airlines have also announced that they intend to scale back capacity growth, specifically in the domestic market. So are you seeing this translate into any signs of weakening demand for MRO in the U.S. market? And just to clarify one last point on the New York Congestion Pricing system, the project now is paused, but does that mean that you will continue to still book O&M revenue at this point in time, or would you only book it when it is resumed? Thank you.
Sy Feng Chong: Okay, so the answer to the question is very simple, yes. So the contract is still in effect, so O&M is still being supported, and of course, being paid. So I think that's the way to simply put it. I'll let Jeff answer the two questions. First is on LEAP engine delays, what's the impact on MRAS? Actually, MRAS has done quite well, and we see continued momentum, notwithstanding the challenges. And then we talk about MRO outlook in the U.S., given that some airlines are, as you said, reducing capacity growth, but we are in the business of repairing the current fleet, and with more flights, given that air travel actually has picked up, I think the prospects are still fairly positive overall. I mean, not specific to any region, but I'll let Jeff talk about it.
Jeffery Lam: Thank you. So Airbus has been revising its delivery schedule over the last, practically every few months, we see a revision. So certainly, that also means that we have less deliveries on the nacelle, but at the same time, we are managing our efficiency and productivity. We are also managing a portfolio of products in Middle River, not just on the A320neo, but on some of the more mature products. We also see the Chinese C919 capacity and demand ramp up as well. So there is a balance of various portfolio products within Middle River, and I think we have weathered the Airbus challenges well, in terms of the business outcomes for Middle River. As for U.S. Airlines capacity growth, we're seeing a shift towards retention of the existing older fleet, and a later delivery of the newer fleet. So the capacity growth is limited. Nevertheless, the airlines are managing the existing fleet very well. There are still aircraft that are in storage that they can bring back, and for an MRO like us, obviously the impact is we could be working on older aircraft for longer time, and we also see a lot more intent by the airlines to keep the older aircraft flying, which means that in a way, it affects some of the conversion, the freighter conversion, because the pax fleet needs to stay flying longer, and therefore, there is less feedstock for pax aircraft to be converted to freighters. So what we're seeing is sort of a moderation of the growth or the replacement of the freighter fleet. Thank you.
Sy Feng Chong: Jason, I hope it addresses your question. Thanks. Anyone else? Maybe we'll let Rahul ask his question, since his hand's up, and then we come back to you. Yes, Rahul?
Rahul Bhatia: Good morning, everyone. So starting back to commercial aerospace business, you mentioned about the aircraft disposal and the impact on EBIT and all. So if I think about the underlying basis, we still had a margin decline year-on-year on the commercial aerospace business, 1H '23 versus 1H '24? If we go by sub-segment, you mentioned about the product mix and all. If we go by sub-segment and divide into, say, MRAS, PTF, or MRO business, which division had a lower margin, and if you could point out the reasons behind it. So that's on the CA part. Second, on the DPS division, I think in defense, you mentioned about winning more international orders, 1H '24 being almost there at full year '23. Could you talk about the margin profile? Are they anyway different to what you do domestically in terms of the margins within the international orders? And do you foresee that as international orders keep on increasing, do you need to invest in more capacity, maybe some big CapEx that you need to do to serve the growing international demand? Thirdly, on the USS division, I mean, I think you mentioned that the Satcom EBIT is still flat year-on-year despite the lower revenue. Is Satcom as a sub-segment positive EBIT or negative EBIT if we take off the one-off? I'm not clear about that. Thank you.
Sy Feng Chong: So we will address them in the order that you asked in terms of commercial aerospace margin, but we already said that it's because of margin mix. If you take away the one-off aircraft sale, we're talking about 13% EBIT margin, which is a 13% increase in EBIT, which is a healthy growth. But I'll let Jeff talk about the portfolio mix within commercial aerospace. We did say that this year we'll get to mid-single-digit EBIT percentage for PTF, passenger to freighter conversion. We are certainly well on track to achieve that, so that hasn't changed. I'll let Ravi talk about international defense business, whether by growing that business we will have more CapEx, but really it depends on the situation. Even if we have to, it will be based on sound economics, but our model has always been localizing if there are opportunities in the country of demand. As of now, we'll also of course always be looking at whether there's capacity debottlenecking that we can do in Singapore or increase the capacities, spending our CapEx prudently to capture the growth opportunities in the market. Now I'll let Lee Chew talk about the Satcom question to address the Satcom question.
Lee Chew: Rahul, you are right. In a portfolio of products and businesses, we always have a balance between what is strong at the current moment and what is slightly weaker in the current moment. If we compare the second half 2023 margins with first half 2024 margins, we actually have an improvement. I would say that we have to look at the whole business as a balanced portfolio across time. Obviously, when we look at the high growth rate in our PTF revenues, we also said to you that we are gradually improving margins on the PTF business, even as the revenues grow at double digit rates. In the MRO market, we also shared that we continue to see challenges in the repair market as well as the spare parts. That also does have an impact on our ability to turn the equipment back to our customers, therefore affecting our business outcomes. There are these areas that continue to need to catch up post-COVID. Even as I say catch up, you are fully aware that Airbus is having a hard time catching up. I would say on balance that we are progressing and we continue to target good progress.
Ravinder Singh: Rahul, thanks for the question. Firstly, I think over the briefings in the past, we said that we are making a concerted effort to grow the international business. Now we are seeing some of the results of that. I think we all hope that we can continue to grow that business because I think that gives us another uptick in terms of revenue growth and more opportunities. In terms of investment, I will give you an example where we are investing to take advantage of the opportunity. Both for our 40mm production and now for our 155mm production, in fact we have invested to up the capacity and at the same time also to increase the automation. So then we can bring the volumes up, we can be very responsive to the customers. In fact, we are probably one of the few that can deliver some of this ammunition in just one or two quarters, which is a big differentiator in the market. Then of course we reduce our cost. Because of this ability to deliver quickly and also because of automation, we are able to maintain our margins. After all, these are all international competitions and sometimes timing plays a part as well as the price. Of course, quality is one of the big differentiators for us in the 40mm market. For example, we have repeatedly shown that our products are more reliable and for ammunition that is a very important factor in the selection process. So we do compete and we do try to get those margins. And as Vincent mentioned, our strategy also is to localize as much as we can. So we work with partners, we help them transfer the IP modified and then we expect them to do the production and then while they buy, either pay for the IP or they are buying some components. So one example I'll give you is a 40mm production. One of the big cost items is actually shipping of live ammunition, naturally because it's explosive. So what we do is we partner with some companies overseas and they do the manufacturing of the round and what they call lapping, while we provide from Singapore the fuse, which is a much more sophisticated, higher value item and then they do the lapping and sell to the final customer. So that way we reduce our shipping costs but at the same time we get high value for the tech transfer as well as the margins of the components we sell. But in terms of investment, I think one of the things that we've always done in defense and public security is to invest in new products. That's the nature of the business, you have to keep on developing the next generation of product, next generation ammunition platforms, even our defense electronics. And so this we do, we continue to do, but defense international, defense business, defense international sales help us defray the cost. Because when we have customers who have those needs and they can actually in a way take up the volume of production, in a way they are funding the development that we are doing. So when we look at the entire business, international defense business help us to grow, help to fund some of this development. I'll give an example of our USP program, so we have a few contracts to support some of these countries with USP demonstrators. And each one of them, of course the customers paying for it, but for each one of them we get to develop, refine the algorithm in different environments, and so finally we get a better product. So that's why overall when you look at defense, international defense business, yes we do invest, but we're getting more value, getting more efficiency, and overall we want to maintain the margins.
Sy Feng Chong: Alright Rahul, I hope your three questions have been answered. So Roy? Oh sorry, you have one more. Alright, Lee Chew.
Lee Chew: Thank you. So Rahul, you know that we don't provide separate financial forecasts of our business, but I will say that we are making losses in Satcom by virtue of the fact that we say our operating EBIT is flat against last year, points to that. I just want to reiterate that the USS EBIT has improved as what we shared through the two speakers earlier. I also want to reiterate that we are progressing well with some of the cost optimization and process improvement effort as part of the transformation. So that coupled with the fact that we are working with our customers to look at long-term migration paths, we are confident that we are working on a steady recovery.
Sy Feng Chong: Okay, all right Rahul. Roy?
Unidentified Analyst: Thank you for the opportunity. Roy from [indiscernible]. I just want to follow up on the margins of I think both commercial aerospace as well as defense and public security. I think I go with the commercial aerospace first. Yes, I believe, I understand half and half there is some margin improvement based on my own estimate is from 6 plus percent to 7 plus percent in terms of the EBIT margin. Just now you mentioned you want to maintain the operating momentum for this segment. So the question is even for the margin improvement, so should we expect some more margin improvement in the second half of the year, potentially go even higher from 7 plus percent to close to 8%? So that's the first question. The second question is on the defense and public security margins. I remember previously Mr. Ravi mentioned you want to sustain a double digit margin. But in the first half, according to my estimate, the margin is over 13%. It's only slightly lower than the very good margin in the last financial year in the first half. So the question is should we expect this 13 plus percent margin to be sustainable going forward or should we expect some moderation to maybe lower teens? And what caused the high margin for this first half? Was it because, did you benefit from the Ukraine war which might have helped the margins? That's the question. Thank you.
Sy Feng Chong: Okay, so let's answer the question in the sequence that they will ask. So let's go for the thing, let Jeff talk a little bit about the second half as far as your question goes.
Jeffery Lam: We obviously like to increase shareholder returns. So our target is always to increase our margins reasonably. Having said that, of course it also depends on factors of production as well as market factors in terms of how we can deliver on time, all the time to our customers, working with all our partners. Thank you.
Sy Feng Chong: Ravi?
Ravinder Singh: DPS margins, as I mentioned last year and you recall, 14% is actually quite a strong margin and I think this half we did about 13.7%. So I think the overall for the DPS business, we want to maintain margin certainly in the double digits and it depends of course a lot on timing on the projects and the kind of milestones we have. But a double digit margin for DPS is sustainable and I think certainly if you look at our international defense business, we are making more effort, as I mentioned earlier, to try to capture more of the sales because that also helps. Once you have volume, then you can defray some of the costs and then that helps us to maintain the margin and still be competitive. So we continue to take that approach.
Sy Feng Chong: All right. Thank you. Do we have any questions from virtual participants and then we come back to the floor? All right, thanks.
Operator: Okay, now we'll take questions from analysts online. First on the line we have Suki from CGS.
Suki Yeung: Hi, good morning. I have a few questions relating to Satcom. I understand Lee Chew you mentioned that it's still in a lost position. I just wanted to just check what would be the long-term plan for Satcom. Say in three years’ time, given the very competitive landscape, will it still be a core segment? Following on to that is when do you expect the business to turn around? And I have a second question just on USS. I understand that it's going to be a second half weighted and the swing just from second half last year to first half this year is quite stuck in an overall basis. So when you are talking about second half weighted, is the strength of recovery going to be as strong as what we saw in the past two years, given what you have on hand in terms of the challenges in Satcom and everything else? Second half weighted is quite a generic guidance, thanks for the guidance, but it could be like from 8.8% to 20% or 8.8% to 60%. It's not the swing, we just want to establish what is the impact of the swing.
Sy Feng Chong: Is that your only question, Suki?
Suki Yeung: Maybe I just have a last one would be for Cedric, in terms of cost of funding, what would be your expectation for FY '25?
Sy Feng Chong: Okay, maybe we address this because the Satcom one, perhaps Lee Chew can spend a little bit more time to address and then I'll let Cedric talk about the cost of funding in 2025.
Chee Keng Foo: Thank you, Suki, for the question. So as I have said, for 2024, it's still a forecast because we are only at the halfway mark. 2024 is 3.7%, assuming no Fed rate cut. But the popular view is that there will be some cut, don't know when, but sometime this year. So if that happens, then it will lead into 2025, lower interest rate for our floating part of the business. We also have a tranche of bonds, 750 U.S., which is due April next year. So we will have to watch the interest rate environment and then probably have to refinance that bond, and depending on what rate that refinancing can be achieved, then that would determine what's the 2025 weighted average interest rate.
Sy Feng Chong: So just to add to what Cedric said, as we have been advising the market, we do have U.S. commercial papers that are very much tied to Fed fund rates as our available interest rate loans. So obviously, if the Fed fund rates are reduced, we would benefit from a reduction in our USCP interest rates. But then we also need to look at how we are going to price our medium-term note next year when we refinance. So some, I think, watch and see. But if there are reductions in Fed fund rates, we should be, I think, in a better position versus where we are today.
Chee Keng Foo: Fed fund rates, if it does come down, will impact the USCP immediately. So we can enjoy lower rates at the floating part of our debt immediately.
Sy Feng Chong: All right. And then let's go to Satcom.
Lee Chew: Suki, let me answer the Satcom question. First of all, in terms of plans, we are going to continue to build revenue. I mentioned earlier that we saw a softer revenue than we had hoped for in the first half, and that's attributed to a couple of things. One is delayed customer spend, and also our focus to improve revenue quality while delivering value. On this latter remark, what it meant is that we were shedding revenue that's not in line with contractual and margin expectations. Having said that, we have been in active discussions with customers for long-term migration plans towards intuition. At the end of May, we announced a couple of partnerships. In fact, we talked about our partnership with Arabsat to deploy iDirect's next generation hub infrastructure to serve the remote and underserved new markets. For Arabsat, it was specifically in the Middle East, Africa, as well as Western Central Asia. In May, we also shared that we were selected to supply Satria-1 in Indonesia with our next generation hub infrastructure. I mean, these couple of engagements that I've quoted are important because it lays the groundwork for future migration to our intuition platform. We continue to stay focused on that as part of our plan. We are on track to deliver the lab release of our Intuition in Q3 of 2024, as mentioned previously. And Cedric mentioned this is an industry that is going through a lot of disruption and change. As we take a look at the submissions or filings into ITU in terms of operators launching constellations over the next five years, we know that the demand for ground segment equipment continues to be robust and continues to be there. Obviously, we want to be able to turn around profitability as quickly as possible. And we expect the momentum that we've been executing to and the positive impact from some of these transformation efforts to set us on that path to capture the opportunities as they stand for us when constellations launch, but also to put us in the right step to deliver profitability. That's my view on Satcom. Of course, we will continually reassess our business strategies and take a look at the dynamic market changes and the competitive actions in the market. On second half and where that strength of recovery is, I think Suki must be looking at second half of last year versus sequentially what we are posting first half of this year. I think that's a reason why Vincent and Cedric have mentioned that when we look at 2024 performance against 2023, barring any unforeseen circumstances, we believe we will deliver a stronger 2024 versus 2023 on a full-year basis. Hopefully, that answers the question you have.
Chee Keng Foo: I also want to point Suki to the very positive momentum that we are getting from TransCore. I'm very heartened by the pipeline. In the United States market alone, there are quite a few good projects that we are working towards. Of course, in Southeast Asia, there are also projects they are working towards. So far this year, TransCore's results have been very strong. We are obviously continuing our efforts to secure even better projects in this part of the world, as well as in the U.S. So, I think overall, USS has a positive story to tell this half versus last half. So, more to come as we progress the year and we certainly give you more updates as we have more information. We are not talking about specific to any business segments. I'll say that in our -- in the continuum of our business, we always look at business units and business domains where whether they continue to be strategic, whether or not it continues to give us returns. We look across the portfolio. I know Suki asked a very specific question about in three years' time, how about this business, that business. But this is a very continuous effort that we do, regardless of which business unit it is. So, we always look at whether the business continues to be strategic, is it giving us the return that we need, and then what is the best outcome for us in terms of our next course of action. So, that is a very active process that we undertake. So, sometime in the first half of next year, we do want to have an Investor Day conference again, where we will take you through a little bit more holistically what the company has been doing, where are the new growth levers, and any tweaks that we expect to make to our strategy. So, maybe more to come at that time. Thank you, Suki, for your questions.
Operator: So, next on the line, we have Peg Gate [ph] from Business Times, followed by Lewis from Citi.
Sy Feng Chong: So, may I suggest after Peg Gate, we will come back to Zhiwei, before we go back to Lewis.
Operator: Okay, sure.
Sy Feng Chong: Peg Gate.
Unidentified Analyst: Hello, good morning. Can you hear me?
Sy Feng Chong: Peg Gate, yes, we hear you loud and clear.
Unidentified Analyst: Thank you. Okay, I have two sets of questions. The first set relates to the New York Congestion Pricing Project. Just now, you said that ST Engineering is still being paid for the project itself because it's the pause in the pricing program. Is that correct? But what is the role of ST Engineering in this? Besides offering the engineering project works, is it supposed to maintain the infrastructure and the system, collecting the revenue on behalf of the government? So, will that affect your forward revenue collection? That's one. And also, is the ST Engineering involved in other congestion pricing elsewhere in other parts of U.S.? Because there might be ripple effects of the pause in New York. So, those are the first set of questions relating to the New York Congestion Pricing. The second one pertains to Pensacola. I read that Pensacola Mayor has called on ST Engineering to report on the hiring and training plan. If inadequate information is not provided, work on the new hangar and aircraft mechanical school will stop. Can we get a status on this? If this is paused, what is the impact to ST Engineering? Thank you.
Sy Feng Chong: So, I'll let Jeff answer the second question later. On the first question, I'll let Lee Chew to talk a little bit about the scope of our O&M. So, yes, we do maintain the equipment as part of the operations and maintenance phase of the contract. We do not take any revenue risks on congestion pricing. We are just the tolling solution provider. So, obviously, we're not responsible for, or rather, we do not benefit from any revenue, nor are we impacted on any revenue that the government will collect if they implement, when they start to price the Congestion Pricing program. We mentioned more recently, the O&M revenue from the Congestion Pricing project, or the contract that we have, is about 2% to 3% of the USS segment revenue annually. So, at the USS segment level, the revenue of the entire O&M contract is not material, because it's 2% to 3% of the revenue. So, we obviously continue to support MTA, the customer, during this O&M phase, but that's the scale of the O&M contract. So, maybe I'll let Lee Chew expand a little bit more beyond that.
Lee Chew: Okay. So, for the O&M scope, it will include the maintenance of the front-end tolling equipment, as well as the processing of the vehicle identification for billing. So, we do not get involved in the revenue collection, like what Vincent mentioned, but we support MTA in the processing of the vehicle identification. So, hopefully, that gives clarity on what we do for the O&M portion.
Chee Keng Foo: Okay. Well, obviously, we hope that the program will continue, and that will give confidence in the rest of the other cities in the U.S. to follow, but we are watching the situation very closely. Meanwhile, our focus is to support MTA in the execution of our O&M contract. Thank you.
Sy Feng Chong: I think one more point is that the New York congestion pricing program is the first urban congestion pricing project in the U.S. So, we are not involved in any others, the rest that you read about TransCore is actually highway electronic tolling, as opposed to urban congestion pricing. So, that one is the first and only one so far. Being able to execute at least the EPC part of the contract is already completed, that means we have successfully built the system. But in other parts of the world, there will also be congestion pricing demands, and having the track record of successfully implementing a congestion pricing project in a very busy and big city like the U.S. will put us in good state to address opportunities, both within the U.S. if they are more in the pipeline, or outside of the U.S. that will be interested, those cities that are interested in congestion pricing. So, I think whatever the outcome is, the track record in implementing that project puts us in good state to address other opportunities around the world.
Lee Chew: Yes, and if I may add, because of the fact that we have already completed the EPC portion of the project, that gives us an opportunity to have the right level of discussions and also exploration with customers outside of the U.S. as well.
Sy Feng Chong: Okay, thank you.
Ravinder Singh: So, just Peg Gate your question on Pensacola. We have always provided a hiring report to the Mayor's office regularly, and I think this latest request that came from his office is in response to some of the questions he has been getting that has come into his office. So, I think he feels that there is a need for a more formal, more public statement on this. So, we are actively in touch with the Mayor's office regarding this and I plan to have a meeting with him shortly. Thank you.
Sy Feng Chong: There are also news reports that are not actually accurate, so we are also taking steps to correct those reports, those inaccuracies. So, Peggy, I hope we answered your questions. All right, thank you. Maybe we'll come back to -- Peggy, thank you for your question. So, I'll come back to Zhiwei, and then after that we'll go to Louis online.
Zhiwei Foo: Thanks, Vincent. Congrats on a decent set of results for the first half. I have two questions, please. The first question is regarding your admin expense. Cost control business optimization has been a very defining feature of your strategy. It used to run at about 7.5% to 8% of your revenue, but this first half you managed to push it down to 7% of revenue. So, I'm wondering whether there's -- how much more room do you have to optimize the business? Can we push it 6.5% of revenue at some point? Second question is on your debt. So, Cedric, I'm just wondering for your fixed portion of borrowings, what is the weighted debt maturity for it, and what is the weighted cost on that fixed component? Thanks.
Sy Feng Chong: Yes. So, Zhiwei, I'll answer your first question, and then we'll let Cedric answer your second question, if I may. Cost management is a very important focus subject for us. If you recall during COVID, the years of COVID, we managed to remove more than $700 million of costs over a three-year period, which really helped in the resilience of the business against one of the most difficult crises that the company -- if not the most difficult crisis the company had to go through. So, cost management was one of the important levers that we managed very well, and it will continue to be the case. We don't have an absolute level of OpEx that we target, because we believe that every year there will be new opportunities. In fact, every year we capture more than $100 million of procurement savings. Of course, the manifestation of those savings will come in several years, but then when you stack year-over-year, you can say that the procurement savings is an important lever for us to offset the negative effects of inflation, which is why you see that our cost management is very well. We also have the other lever where we look for productivity gains. We have a dedicated team of continuous improvement specialists that will go across the company to identify productivity improvement opportunities, and every year we set ourselves a target of more than $50 million in productivity gains. So, this is over and above procurement. So, these two levers, or these two initiatives alone will help us mitigate to a large extent the effects of inflation. Given the scale of the company, we believe that there will always be room for improvement. So, it will be a continuous process. We don't have an endgame or target of what level it should be, but as you look at our progress, OpEx over revenue, 10.4% is at an all-time low for this year. That means to say that our operating cost, OpEx, is increasing at a lower rate than our revenue increase. Even as we grow our business, we can benefit from economies of scale and also benefit from the cost reduction initiatives that we have structurally put in place to address the business resilience question, so to speak.
Zhiwei Foo: One for, -- you use a lot of word mitigate in your answer inflation [indiscernible]. Any scope for these productivity gains, cost procurement saving to result in maybe [indiscernible] improvement in your EBIT margin at the Group level?
Sy Feng Chong: Well, if you think of the reduction and we're talking about procurement, it's more than $100 million of target every year, and we have managed to achieve them over time, and then productivity gains to another $50 million or more, so $150 million a year. We don't have, to your specific question, we don't have a target EBIT percentage, but suffice to say, if not for all these initiatives, we would see margin pressure, but if you look at our results, we are trending in the right direction. Okay.
Chee Keng Foo: On the debt side, as I said, 3.7% is the weighted average between fixed and floating interest rate. On the fixed side, which is your question, so it should be around mid-2%. And on the debt, we are very conscious in spreading out the maturity of each tranche of bond, so the bonds will mature one tranche in 2025, as I mentioned, and also another tranche in 2026, another one in 2027, another one in 2032, so they're all well spread out. So as we go about issuing the next tranche in April 2025 to replace, to refinance the one that is due, we'll also do it in a fashion, in a way, where the tenor would not bunch up with other maturity dates. I think that's a prudent thing to do.
Sy Feng Chong: Okay, Zhiwei, I hope we addressed your questions. Thank you. Can we go back to Louis then?
Operator: Next on the line will be Louis from Citi.
Unidentified Analyst: Hi, thanks for hosting the call and congrats on the results. Most of my questions are answers, I just have one question, also on the balance sheet. Would you be looking to increase the weighting of floating debt in the balance sheet, or you're satisfied with the ratio it's at right now?
Sy Feng Chong: Okay, thanks Louis. Our policy is not to speculate on interest rate movements, because that's not our core business. Our core business is DPS, commercial aerospace, and USS. So our interest rate policy is to maintain a ratio of fixed to floating of about 50% of our total debt. So right now, it tends to be a little bit more fixed in the last few years, which in hindsight works well, because interest rate has been high and we have fixed it at mid-2%. So going forward, we have to be guided by the policy and not try to speculate and swing, because I'm no Fed chairman, and I cannot see where interest rate is really going. So that prudent management framework has helped us over the years, and we will continue to follow that approach that Cedric mentioned. Louis, I hope we've addressed your question.
Unidentified Analyst: That's all, thanks. It's very clear.
Sy Feng Chong: All right, okay, I understand there's no question online at this time.
Unidentified Analyst: Just going back to the aerospace -- sorry one of the airlines mentioned that the one thing notice is that the maintenance cost for airlines has been relatively high. And one of them mentioned that they're spending a little bit more time on maintenance than pre-pandemic. And I just wanted to check on that comment, whether that reflects the bottlenecks, obviously reflects the bottlenecks, and also wondering whether you're seeing reducing wage pressures, particularly, I guess, globally in the U.S. in particular, on the MRO front. Second question on that is, what is the current capacity utilization rate for the airfreight maintenance? And going back to Vincent's mention of the mid-single-digit margin target for PTF, whether the lack of feedstock will impede the continued improvement in that, or slow it down, I would say. That's the first set of questions.
Sy Feng Chong: First set of questions, you have a second set of questions?
Unidentified Analyst: Yes, just following up on the question on admin costs as well. I also noticed that distribution and selling as a proportion of revenue has also trended lower compared to historical. So both these elements, I'm wondering whether you can call this the new normal, or whether that you anticipate as you do your budgeting that these are items that will go back to pre-pandemic levels?
Sy Feng Chong: No, I think we're never happy with normal, because as far as cost is concerned, we always look to reduce them. I must keep in mind for distribution and selling, the result is despite having the as show this year, where we spent, actually we had to spend more money, and yet we actually managed the cost quite well. So for the same reasons that I mentioned just now, we really keep looking for continuous improvement in cost performance. So that effort will not stop, and that has positioned us well for over many years. That will continue to be our focus, even as we secure more revenues, we keep looking at how we can reduce costs across the group. So Jeff, maybe I'll let you address the several questions on the aerospace.
Jeffery Lam: Thank you. It sounds like a thesis on aerospace. Good questions. The MRO costs are driven by two key factors. One is material, the other is labor. Material obviously is primarily provided by OEMs, so the OEMs decide the pricing of materials. And post-COVID, indeed there was double digit inflation on material costs, driven a lot by some of what was happening in the industry, including raw material availability, inflation on many cost factors. And on the labor side, we also saw double digit increase inflation, because there was a lot of demand for aerospace skilled labor that went away or was retired during COVID, and everybody was hiring. This situation has alleviated largely across most parts of the world, except in the U.S., where there's still a huge demand and significant, I would say, labor poaching, you know, because there's a lot of growth opportunities. For example, Airbus is delivering aircraft from the U.S., and they have an assembly plant in the U.S. for the U.S. market, so they obviously have to hire. The airlines, as they increase the fleet size, they have to hire more technicians and mechanics. So the situation will continue. On the other hand, when you look at China, there's a significant supply of skilled labor in China, so that situation is not acute at all in China. In Singapore, obviously, we benefit from both the local supply base as well as using foreign labor that comes into Singapore. So the bottlenecks are there, they will continue to be worked by us and by our industry partners and competitors. And in terms of capacity, you raised the question on our capacity. There are two types of capacity. One is hard capacity, the other is soft capacity. The hard capacity primarily comes from the infrastructure you have to build, the tooling you have to buy and certify, and then the soft capacity is the labor and how you manage the production processes. So for example, as Vincent said, if you are more productive, you streamline your work processes, you get to deliver more with less hard infrastructure. So in all ways, we are working both of these. On the hardware side, we continue to build plants, for example, expanding the Pensacola facility with more hangars. Our Ezhou joint venture facility is being built at this time. Our Changi Creek facility in Singapore is also being progressed. And we also are building an additional engine overhaul shop in our [indiscernible] facility. So that's the hard capacity. On the soft capacity, we continue to hire, to train, to look at continuous improvement processes. So we do intend to grow both hard and soft capacity, as well as to be able to deliver more to our customers. Now on PTF, you asked about the mid-single digit growth and how feedstock is affecting us. Indeed, feedstock is affecting the short-term demand for PTF conversions. But we have a network of conversion houses across the world. We have a network of parts suppliers across the world. And we are working with all parties to rationalize the short-term capacity and still maintain the long-term capacity, so that when the OEMs can deliver new aircraft, the airlines are willing to give up their old pax aircraft, then we can continue to convert at a higher pace, the freighters. So in the short term, the answer is we continue to expect margins to improve because we are able to manage our capacity. So even if we have to convert fewer aircraft in the shorter term, we still expect similar and improved margins. And then hopefully we will see within two years a recovery.
Sy Feng Chong: Just to build on what Jeff said, our PTF target revenue that we set for 2026 of $700 million remains intact at this time. So as Jeff said, in the short term there may be some challenges, but then we are still very positive about the growth prospects of PTF. So we have not changed our five-year plan target. Perhaps on that note, we can put the Q&A session to a close, but let me just say a few things. One, we had a very strong set of results in the first half of 2024, both in revenues and also in bottom line, net profit as well as revenue, as you have seen in our presentation. The message here is that the growth enabled by our very strong order book continues to manifest itself as we continue to execute our strategy. We have been very steadfast in those messages and come first half of next year, we will certainly give you another recap of where we are on our journey, in our strategy execution journey, and also give you more perspectives as we look ahead in the next few years. So on that note, we will put the Q&A session, and I thank you very much for joining us today. And for those who dial in virtually, thank you very much too for your participation.
Operator: Everyone for your time today, this marks the end of our results briefing. May I invite everyone to proceed for lunch, please?
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