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Executives

Choo Chiau Beng – CEO

Loh Chin Hua – CFO

Ong Tiong Guan – Managing Director, Keppel Energy

Analysts

Cheryl Lee Choo – UBS

[Suraba chook] – CLSA

Chong Wee Lee – Bank – America Merrill Lynch

Lim Siew Khee – CIMB

[Nancy Ray] – [UBK Research]

Ling Xin Jin – Morgan Stanley

Jason Soh – DMG Partners Research

Gerald Wong – Credit Suisse

Keppel Corp Ltd (OTCPK:KPELF) Q1 2013 Earnings Conference Call April 18, 2013 5:30 PM ET

Choo Chiau Beng

Good evening. Keppel Corporation marks its 45th anniversary in 2013. I would like to take this opportunity to thank all our stakeholders for their continued confidence in Keppel. Your support and trust have enabled the management to strategize for the long term, pursue our goals [boldly], and grow the company from strength to strength.

After a highly volatile 2012, the global economy today is showing some improvement. IMF expects global growth to slowly strengthen in 2013, averaging 3.3% on an annual basis. Nonetheless, setbacks in the EU and large spending cuts in the US will still cause downside risks. Meanwhile, emerging economies are expected to grow at a subdued pace. China, now the world's second large economy, aims to maintain its GDP growth at 7.5% in 2013. And Singapore expects to grow between 1% and 3% this year.

In the first quarter of this year, Brent crude price was resilient at above $100 per barrel. Oil price is likely to remain stable in 2013 as the global economy improves gradually.

Keppel's net profit for first quarter 2013 was $331 million, 56% lower than the same period last year in the absence of one-time gains from the sale of Reflections at Keppel Bay units. Accordingly, annualized ROE dropped to 13.9% and EVA to $191 million.

This quarter results are consistent with what we have been saying since early 2012, and that is we do not expect to repeat 2012 results in 2013. Nevertheless, looking ahead, the industry fundamentals for Keppel's business remain compelling. We will continue to sharpen our performance and position the group to capture growth and value in our market segments.

The Keppel Offshore & Marine sector continue to benefit from growing energy demand. Years of under-investment and the need to replace reserves and increase production are sustaining high levels of offshore CapEx. Inquiries and demand for our products and services continue to ride on these trends. The global demand for high specification jackup rigs still persist and has now translated into a number of new orders for the quarter.

In the year to date, Keppel Offshore & Marine has secured seven new KFELS B Class jackup rig contracts. Semisubmersibles are still prominent in the radar screen of drillers and operators worldwide. Inquiries are healthy for this proven deepwater solutions, although new contracts are taking time to come through.

Projects are successful only on account of the value they create for the shipyard and its customers. As we strive to win our fair share of new contracts, we also ensure that they are delivered safely, on time and within budget. In fact, this quarter we delivered five rigs safely and all of them ahead of schedule.

Our sustained investment in research and development, technology and innovation, and process improvements are bearing fruit. Today Keppel has built about 50% of the world's jackup rigs delivered since the year 2000. We also have a suite of 27 proprietary offshore rig designs in various stages of commercialization. Of these, the KFELS B Class has become an industry standard with proven operating track records worldwide. Keppel Offshore & Marine has delivered 42 units of KFELS B Class jackups since the year 2000 and has another 21 such units on order. We aim to sell more of these units from our growing proprietary portfolio.

We have previously shared macro trends such as rapid urbanization infrastructure development and the related opportunities that Keppel is preparing relentlessly to capture. We will continue build stability into the infrastructure division, sharpening our focus on the areas of energy, power and connectivity. The businesses will be reshaped and aligned closer to our core strengths. Wherever we can, we will maximize the synergy between the operating units and select projects that are value enhancing.

By midyear, KMC's 1300 megawatts of power-generating capacity at Jurong Island will be fully operational. Keppel Energy will focus on further improving the plant's efficiency for healthy and stable returns.

Meanwhile, Keppel Integrated Engineering Qatar and Greater Manchester projects are progressing with close monitoring. The company will continue to grow its operating and maintenance business for recurring income.

At Keppel T&T, efforts are being made to enhance its capability for high value and time-critical logistics, as well as data center management. The Securus Fund has just acquired a stake in the Citadel 100 data center in Dublin, Ireland, and the Almere Data Centre in Amsterdam, The Netherlands.

In the Property division, residential markets in Singapore and China are digesting the effects of cooling measures by the government. The policy such as higher taxes and down payment are targeted at speculators to prevent asset bubbles. We are considering that these will help sustain healthy property markets, which will benefit us in the longer term.

In Singapore, we have a pipeline of over 1000 launch-ready homes in Tanah Merah and Keppel Bay. In China, we are planning to launch [or sell] several new projects in cities such as Chengdu, Nantong and Shanghai. We are constantly on the lookout for new prospects and strategic alliances to drive sustainable growth in our property business. In this respect, Keppel then has partnered China's foremost property developer, Vanke, to explore opportunities both in Singapore and China. The Tanah Merah development in which Vanke has acquired a 30% stake from Keppel Land will be the first joint residential project.

Despite a slow start to the year, demand for office space in Singapore is expected to remain healthy for the rest of 2013. Grade A offices, particularly in the Marina Bay area, continue to enjoy healthy pickup in rental rates, from businesses beyond the banking and finance industry. To illustrate, Keppel Bay Financial Centre Tower 3 was 67% committed this time last year, but today's occupancy has risen to about 86%.

As we firmly believe in the long-term potential of Singapore, ASEAN and China markets, Keppel Land and its fund management units will continue to seek out good sites and projects, leveraging the group's financial capacity to develop and grow. At 45, while we are steadfast in building our strengths, we will continue to stay nimble to meet customer needs in an ever-changing business landscape. We will continue to be prudent with our resources, concentrating on projects and ventures with good risk-adjusted returns and growth potential. We have been grooming a strong pool of talents, and leadership remains a key pillar in our strategy to shape the group's future.

I shall now let Chin Hua to take you through the group's development and financial performance for the first quarter of this year. Thank you.

Loh Chin Hua

Thank you, Chiau Beng. Good evening.

The group posted a net profit of $331 million in the first quarter, representing a 56% decrease compared to the same period last year. Profit for the first quarter last year hit a record high due to profit recognition arising from the delivery of Reflections at Keppel Bay apartments sold under the deferred payment scheme. As we have pointed out last year, this level of profit will not be repeated as the bulk of units sold at Reflections at Keppel Bay was delivered in the first half of 2012.

Earnings per share decreased to 18.4 cents, annualized ROE was lower at 13.9%, while EVA was $191 million. Net gearing at the end of the first quarter increased to 0.26.

Financial highlights: all key line items registered a decrease from the previous year mainly due to lower revenue and margins.

Revenue by segments. The largest contributor group revenue was Offshore & Marine division, contributing 62% of the total revenue. Infrastructure division's higher revenue was attributed largely to Keppel Energy's higher contracted load. Property revenue was lower mainly due to the lumpy revenue recognition from the delivery of units at Reflections at Keppel Bay in the first quarter last year.

Offshore & Marine division saw a 40% dip in pretax profit due to lower operating margins. Infrastructure registered a slight increase in pretax profit driven by better performance at Keppel Energy. Pretax profit for the Property division dropped as a result of lower profit recognition from Reflections at Keppel Bay.

Net profit by segments. Offshore & Marine division, which accounted for 63% of the group's earnings, recorded a 12% decline in net profit due to lower revenue and margins. Net profit from investments was higher in the previous year due to sale of investments.

Net profit for the first quarter is higher compared to the same period for the four years preceding 2012. As we had stressed at the first quarter briefing last year, the net profit for the quarter was boosted by lumpy profit recognition from Reflections and would not be repeated. Indeed if one takes out the net profit contribution from sales of units at Reflections and sales of quoted investments, which is part of our capital recycling initiative, from last year's first quarter results, the net profit for first quarter 2013 is largely in line. If we include revaluation, major impairment and divestments, net profit for the first quarter is $357 million, 53% below the corresponding period in 2012.

Free cash flow: net cash of $418 million was used in operating activities was largely due to higher working capital requirements for the work in progress at the Property division. The group spent $365 million on acquisitions and capital expenditure. This included mainly the capital expenditure for the expansion of Keppel Merlimau Cogen plant, investment in Life Hub in Jinqiao in Shanghai, and other operational CapEx. The resulting cash outflow was $732 million for the quarter.

Business review and outlook. The Offshore & Marine division started the year well with new order wins of $1.66 billion secured from both new and repeat customers globally. Our net order book at the end of the first quarter stood at $13.1 billion with deliveries expanding through to 2019. The division is on track for record deliveries in 2013, with successful deliveries made in the first quarter, demonstrating our commitment to quality and on-schedule execution.

Infrastructure. The 800-megawatt expansion of the Keppel Merlimau Cogen plant is progressing well, with the first 400 megawatts in operation and the remaining 400 megawatts on schedule for completion in the middle of 2013. This increase in capacity will position Keppel Energy to better capture opportunities from the evolving local energy market.

Keppel T&T continues to expand its warehouse capacity in Singapore with the development of an air logistic hub in Tampines. Expected to complete in early 2015, this facility will boost Keppel T&T's local operating warehouse capacity by 20% and meet the anticipated demand for critical component logistics.

Following the successful closing of Securus Fund at $170 million Keppel T&T has committed to invest an additional $50 million, making it the single largest shareholder of Securus. This capital commitment will enable Keppel T&T to participate in Securus expansion in the global data center markets. In line with plans to grow its portfolio of high-quality data center assets, Securus has recently acquired stakes in Citadel 100, a data center in Dublin, Ireland, and Almere Data Centre in Amsterdam, The Netherlands. The acquisition of Citadel 100 increases Keppel T&T's effective stake to 66% and provides a joint platform for Keppel T&T and Securus to leverage on the strong data center demand growth in Dublin.

In the absence of new launches in Singapore, the first quarter saw the sale of 59 homes from our existing stock. In our overseas markets, 890 homes were sold in this quarter, mainly from our properties in China. The outlook for China's property market remains challenging in the short term as the Chinese government continues to introduce stringent cooling measures to curb speculative demand.

On the commercial front, committed occupancy rates for MBFC Tower 3 and Ocean Financial Centre continue to strengthen, driven by good leasing momentum and healthy demand for quality office space. Keppel Land China and Alpha Investment Partners have collaborated to acquire a mixed-use development Life Hub @ Jinqiao in Shanghai's Pudong District. This acquisition of a premium well-located property is in line with Keppel Land's strategy to scale up its commercial portfolio in high-growth cities in China. Our fee-based fund management business continue to generate good returns with total assets under management of $15.4 billion. The proposed dividend in species distribution of Keppel REIT units will increase the public float of Keppel REIT and improve the trading liquidity of the units.

Although global macroeconomic conditions have stabilized in recent months, economic recovery is likely to be sluggish and patchy as downside risks remain. On the home front, Singapore is still grappling with inflationary pressures and slowing growth.

As we look ahead to another challenging year, Keppel will continue to fortify our core competencies and build our financial resilience to weather the cyclicality of our underlying businesses and capitalize on the right opportunities. Harnessing our competitive strengths in our core businesses and driving execution excellence will be imperative in laying the firm foundations for our future growth. To stay nimble in this challenging business environment, we have also consistently invested in productivity and technological investments. As we focus on building sustainable business in the long term, we remain watchful for attractive investment opportunities and new capabilities to create more value and produce sustainable profits for our stakeholders. Thank you.

Choo Chiau Beng

We welcome your questions, ladies and gentlemen. Please submit through the web.

Question-and-Answer Session

Choo Chiau Beng

We have one question from Ms. Cheryl Lee of UBS.

Good evening and very best wishes for your 45th anniversary. May I find out, one, what is the percentage of revenue recognized in the first semisub for the Sete Brazil project so far? When do you expect to commence revenue recognition on the second semisub? And what is expected to be the completion milestone achieved by the end of 2013?

Two, could we have an update on the projects at Doha and Greater Manchester? Were there any further provisions taken on either project this year? During the last quarter, given some delays at Manchester, what is the status? Thank you.

Loh Chin Hua

On the first quarter, on the Sete Brazil first semisub, we have already started recognition of revenues from that project. We have not started recognition on the second semisub.

Choo Chiau Beng

On the Manchester, right? Our milestone, expected completion milestone for end of this year. You have anything to add to that?

Unidentified Company Representative

As has been reported, the Doha project is gaining traction and would be coming to end of the year this year.

Greater Manchester, I think they are the two -- I will correct -- there are two projects, phase one and phase two. Phase one will also be towards this year and phase two -- phase two following for next year.

Choo Chiau Beng

Next?

Unidentified Company Representative

Provisions?

Loh Chin Hua

Sorry?

Unidentified Company Representative

Provision for this year.

Loh Chin Hua

Okay. We have taken provisions in end of last year and we are continuously to monitor for, you know, for the project's progress.

Choo Chiau Beng

Next question please.

Good evening. Submitted by [Suraba Chook] of CLSA.

Hi, I have two questions. While jackup segment has been very strong, orders for deepwater filters have been relatively weak year to date. Can you give us some insight on the outlook for deepwater orders? Do you expect a pickup in semisub orders in the second half? Can you please provide an update on the progress of the FLNG FEED study and outlook for FLNG vessels over the next two years?

Unidentified Company Representative

There's not been any drill ship ordered from the last nine months. But of course as far as the semi is concerned, the inquiry is still active. We are pursuing but so far none has been ordered. We look forward to one at least being ordered second half.

The study is still ongoing and the outlook of the FLNG vessels over the next two years remains hopeful and bright, but until such time, we can't really know -- well, what to expect.

Choo Chiau Beng

Thank you. Next.

Submitted by Chong Wee Lee of Bank of America Merrill Lynch.

Good evening, Mr. Choo, thanks for the presentation. Can you share with us an update on the key pushbacks to date from potential buyers of Keppel's proprietary drill ship DS-1200? Thanks.

Probably there's no drill ship being ordered because there is a [bunch of other] construction in Korea, and until most of them are deployed, I think new buyers will hesitate. Thank you.

Next question is by Lim Siew Khee of CIMB.

Hi. What is the reason for high operating margin for O&M in 1Q '13? Thanks.

Loh Chin Hua

Well, the operating margins for O&M in the first Q is at 14%. You're right, it's a bit higher than the fourth quarter of last year. We, as we have said, we think that margins long term between 10% to 12% is quite sustainable. So we are, you know, quite happy with the, so far, the first quarter's margin.

Choo Chiau Beng

Also we delivered many [5D Class] jackups, and as learning curve improves, similar designs will improve the margin. Thank you.

Next we have Ms. [Nancy Ray] of [UBK Research].

Would you please -- would you expect O&M operating margins to be lower than 1Q 2013 [inaudible] when the recognition of semisubs for the Brazil kicks in?

Loh Chin Hua

We don't expect any -- we don't necessarily expect that.

Choo Chiau Beng

Chong Wee Lee again from Merrill Lynch.

Good evening. Can you please confirm the initial revenue recognition for first Sete Brazil project was in 1Q '13? Were there any profit recognized for this project? Thanks.

Loh Chin Hua

The answer to the first question is yes, we have recognized the revenue from the first Sete Brazil project for first quarter 2013. We typically don't -- we are more conservative in terms of recognizing profit until the projects are farther along.

Choo Chiau Beng

Thank you.

Next question by Ling Xin Jin of Morgan Stanley.

Good evening to all. Could you please comment on the reason for lower manpower cost for O&M division? And how Keppel will manage the lower local to foreign worker ratio going forward? When did the additional 400-megawatt project start operation? Was there contribution in 1Q 2013?

Choo Chiau Beng

First part, lower manpower costs, because revenue is lower.

Yeah. Secondly, regarding the power plant, I think we can ask Tiong Guan, the MD of Keppel Energy to answer.

Ong Tiong Guan

The first 400 megawatts entered commercial towards end of March. So the profit recognition will start from second quarter onwards.

Choo Chiau Beng

Thank you.

This one over then. [inaudible] has answered it. [inaudible] answered it.

Unidentified Company Representative

Anyway, as you know that the -- for our local/foreign worker ratio, you know, we're not taking -- we still enjoy the 1 to 5 and it will only be effective in 2015 onwards. In 2015 we have to move from 1 to 5 to 1 to 3.5 by 2018. So for the next two years, I think we are -- there should not be any change.

So, meantime what we have done is that we have satellite yards in the group, in Nantong, in [Bintang], in Philippine yards. So what we are planning to do is actually to move some of our production overseas to these satellite yards. And by doing that, I think our dependency ratio to foreign worker will reduce. But that also allows us high capacity to take on actually more jobs once we utilize our overseas yards. Thank you.

Choo Chiau Beng

Thank you. Next question please.

Submitted by Jason Soh [inaudible] of DMG Partners Research.

Hi. How can you share -- can you share how much you received bonus for early delivery of rigs in 1Q 2013?

Unidentified Company Representative

Total of $5 million. Thank you.

Choo Chiau Beng

Next question is submitted by Gerald Wong of Credit Suisse.

Could you explain why was the LOI for two semisubs with Naftogaz not exercised?

Choo Chiau Beng

Our Board find that the terms are not acceptable, so we didn't proceed. Thank you.

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