Keppel Corporation's (KPELF) CEO Loh Chin Hua on Q4 2015 Results - Earnings Call Transcript

| About: Keppel Corporation (KPELF)

Call Start: 04:30

Call End: 06:21

Keppel Corporation Ltd (OTCPK:KPELF)

Q4 2015 Earnings Conference Call

January 21, 2016, 04:30 ET

Executives

Loh Chin Hua - CEO

Chan Hon Chew - CFO

Chow Yew Yuen - CEO, Offshore & Marine

Ang Wee Gee - CEO, Keppel Land

Ong Tiong Guan - Chief Executive, Keppel Infrastructure.

Analysts

Hon Han - CLSA

Ajay Mirchandani - JPMorgan

Ling Xin Jin - Morgan Stanley

Cheryl Lee - UBS

Unidentified Company Representative

A very good afternoon, ladies and gentlemen. Welcome to Keppel Corporation's press and analyst conference on the company's full-year financial results for 2015. Mr. Loh Chin Hua, Chief Executive Officer of Keppel Corporation, will proceed over today's conference.

Before we begin, let me first introduce you members of our panel. Seated from your left to right are Mr. Ang Wee Gee, Chief Executive Officer of Keppel Land, Mr. Chan Hon Chew, Chief Financial Officer of Keppel Corporation, Mr. Loh Chin Hua, Chief Executive Officer of Keppel Corporation, Mr. Chow Yew Yuen, Chief Executive Officer of Keppel Offshore & Marine, Dr. Ong Tiong Guan, Chief Executive of Keppel Infrastructure.

Mr. Loh will be chairing the conference and Mr. Chan will be presenting the Group's financial highlights and business review. We will wrap up the presentation with a question-and-answer session. Webcast viewers are also invited to join us in the session by submitting your questions online.

Without further ado, I'll now invite CEO Mr. Loh Chin Hua for his opening remarks. Mr. Loh, please.

Loh Chin Hua

Thank you. Good evening and a warm welcome to the conference and webcast on Keppel Corporation's results and performance for the fourth quarter and full year of 2015. May I first take the opportunity to wish all of you present here and those joining us over the web a happy and healthy New Year. Since our last briefing in October 2015, the macroenvironment has taken a turn for the worse. Plunging oil price, below $30 a barrel, its lowest in more than a decade, coupled with the Chinese stock market meltdown this month, have hurled the global economy into a turbulent trajectory.

Recovery in major economies has been uneven. The U.S. Federal Reserve's move to tighten monetary policy even as others are loosening theirs seems to have come at a precarious time. Meanwhile, anxieties over slower growth in China and stock market volatility have prompted investors to retreat from the country.

While the Chinese economy faces a number of challenges, we remain confident of our opportunities in China. Even at a lower GDP growth rate of 6.9%, China's absolute growth is still very significant based on the larger U.S. $10 trillion economy, compared with five or 10 years ago. Moreover, despite frequent media reports of an oversupplied property market, our own experience has been positive. Home sales have picked up in several cities in China since the second half of last year.

Sales in China contributed to 72% of Keppel Land's total residential sales volume in 2015 or 3280 homes, as compared to some 1,900 units in 2014. In Brazil, confidence has been shaken by a series of crises over the past year, as political and economic woes and the Lava Jato scandal continue to spiral. Recent media reports of Sete Brazil mulling over potential bankruptcy protection have incited further market meltdowns. Keppel, being one of the earliest Singapore companies to enter the Brazilian market, has not been spared from this storm.

We have taken steps to mitigate our exposure by slowing the construction of Sete's rigs after payments from our customer ceased over a year ago. On average, the construction of the first four semis has progressed by less than 4% each quarter since the start of 2015. It is worth noting that of these six projects, only the first two semis which are also in the most advanced stages, have been sent to our yard in Brazil. Meanwhile, minimum work has been done on the last two semis.

Prior to the disruption of milestone payments, we had already received about $1.3b from Sete. As we await further clarity on the situation, we have stopped construction of Sete's projects by the end of 2015. We have also made a provision of about SGD230 million for those projects in the fourth quarter of 2015 after assessing our construction progress, payment status and amounts due to our vendors, amongst other areas.

We understand that Sete's board will soon be meeting to discuss future plans for the company. It remains unclear when a final decision will be taken. Until we hear from Sete officially and the situation and options available to us become clearer, the above measures in our opinion are sound and adequate. Against this challenging and volatile environment, Keppel Corporation continued to perform respectably, anchored by our multi-business strategy. For the whole of 2015, we achieved a net profit of about SGD1.53 billion, albeit down 19% from SGD1.89 billion in 2014.

Higher contributions from property and investments were offset by lower profits from offshore marine and infrastructure which included the provisions for the Sete projects and Doha North Sewage Treatment Works, as well as lower income from the power and gas business and the absence of gains from datacenter assets divested in 2014 to Keppel DC REIT.

The Group generated positive economic value added of SGD648 million in 2015. Our return on equity held up well at 14.2%, as compared to 18.8% a year ago. Considering the Group's performance, as well as the company's need for future growth, the Board of Directors will be proposing a final dividend of SGD0.22 per share. Together with the interim cash dividend of about SGD0.12 per share distributed last August, we'll be paying out a total cash dividend of SGD0.34 to shareholders for the whole of 2015.

I shall now take you through the developments in our business divisions. The continuing mismatch between global glut and sluggish demand is expected to keep oil prices subdued in the near future. Industry reports suggest that global exploration and production spending could decline by 15% or more in 2016, should oil prices remain at current levels. However, oil companies are kicking the can down the road and at some point, they would have to spend to replenish reserves. The low oil prices we see today are not sustainable in the long run. How soon the new equilibrium will be reached remains to be seen. We have to plan for a longer winter.

We had kick started 2015 with expected deliveries of 15 drilling jackups. Eight of these have since been pushed into 2016. These projects include five rigs for Grupo R and one each for Parden Holdings, FTS Derricks and Perforadora Central. The delays are not extensive. The contracts are still valid and we're working towards delivering several of them in the early half of this year. In addition to handing over seven quality jackups in 2015, Keppel Offshore & Marine also delivered several non-drilling solutions to our customers throughout the year.

This included a depletion compression platform to Shell Philippines Exploration and a combination semi to Floatel International and an FPSO Turritella to SBM Offshore, among other specialized vessels and equipment. Prudence in pursuing quality projects underpinned by strong execution and productivity enable us to achieve an underlying operating margin of 17.1% for the fourth quarter 2015 and 13.4% for financial year 2015, before making the provision on the Sete projects.

Of our current SGD9 billion net order book, non-drilling solutions make up more than a third, while jackup rig contracts under the deferred payment terms constitute less than 16.7% or under SGD1.5 billion. In 2016, our yards will be delivering some 25 new build and conversion projects. Our order book comprises contracts backed by quality customers, as well as sound pricing and terms that will allow us to make respectable risk-adjusted returns.

Whilst we do not expect cancellation risk to be great, we remain vigilant and mindful to deliver projects to our customers' satisfaction. I'm pleased to share that we delivered our first jackup of the year to Gulf Drilling International earlier today. We also delivered a liftboat to Nakilat Offshore & Marine in Qatar earlier this month which will serve GDI, as well. We closed 2015 clinching SGD132 million worth of contracts from repeat customers for conversion projects and offshore support vessels, bringing our total orders secured in 2015 to about SGD1.8 billion.

With our extensive suite of offshore and marine solutions and continuous investment in research and development, Keppel Offshore & Marine is able to serve a wide spectrum of customers in both drilling and non-drilling markets who continue to require various solutions made for oil production, subsea construction or offshore liquefaction.

Our yards will remain busy for the rest of this year, with the execution of both existing and new projects from our backlog. In addition to a growing base of non-drilling solutions, we're also taking on opportunistic work, such as modifications, upgrading and repairs that will occupy us as Keppel Offshore & Marine hunkers down.

The storm hitting the offshore and marine business is not one which we're unfamiliar. Keppel have braved through many cycles, emerging stronger and more resilient each time. Bracing ourselves for a possibly long winter, we need to ensure that our overheads are well under control and that we're ready if the market conditions get tougher.

We're preparing ourselves to meet the near term challenges by right-sizing our operations and resources. We have considerable flexibility in our workspace deployment, with our contract workers and our network of yachts in Singapore and overseas. Optimizing our operations and allowing a natural attrition of the workforce directs staff strength in our Singapore and overseas yards has come down by about 17% or about 6,000 headcount, since January 2015, while our Singapore subcontract workforce has been brought down by 24% or about 7,900 headcount over the same period.

We have also redeployed manpower to our operations overseas, as well as from offshore to marine operations, for example, Keppel shipyard, where increased resources needed for the steady stream of repair and conversion projects. Even as we work at reducing costs and optimizing current operations, we're still investing prudently in R&D, as well as improving on our productivity and core competencies.

During the year, we inked an agreement to acquire Letourneau rig designs and aftermarket business to broaden our suite of jackup rig design solutions and better support our customers through aftermarket sales and services. We have also expanded our natural gas solution suite with technology for both onshore and offshore liquefaction and LNG transportation.

The present downturn presents the opportunity to build a long term, sustainable, competitive position for Keppel O&M as we carefully position ourselves for the upturn. Keppel has been in property for the past 30 years. We know this business very well and have built up a strong track record and brand name in Asia.

Amongst Asia's leading property developers, Keppel Land's ROE is one of the highest, at 18.9% per annum over 10 years from 2006 to 2015. The privatization of Keppel Land was a strategic move that has fully aligned interests of our property division with the Group and is providing a strong pillar for earnings and long term value creation.

The property division's increased contribution at 46% of the Group's net profit in 2015 speaks volumes of the timeliness and strategic significance of this transaction. Our corporate structure has been simplified. The full ownership of this division gives us the ability to right-size the balance sheet of the property business in response to opportunities, recycling capital and allocating resources across the Group for optimal returns to deliver on our multi-business strategy.

Despite headwinds, 2015 was a stronger year for our property division, as Keppel Land sold about 4570 homes, double the units taken up in 2014. About 72% of these were sold in China and another 20% in Vietnam. The two key markets of Keppel Land continue to be supported by healthy demand and supply dynamics and strong growth. Property prices in China's first-tier cities continues to rise strongly, with high adoption rate and falling stock. High-growth cities, including Tianjin, Wuxi and Chengdu, are also seeing balanced demand and supply with stable price and stock.

China's continued easing monetary measures have improved market sentiments and housing demand and signaled the government's strong support for the sector. Given real estate's status as a pillar industry, the Chinese government will be committed to maintain stable and sustainable growth in the property market over the long term. Vietnam, being our second-largest overseas residential market after China, has recovered after almost five years of housing slump. With the country's strong GDP growth, growing middle class and low interest rate, the residential market is expected to continue its upward momentum.

Keppel Land continues to recycle capital from its property assets in line with the Group's focus on higher returns. In 2015, it sold BG Junction in Surabaya and will be pursuing more divestment opportunities in the year ahead.

Seizing opportunities in promising cities around the world, Keppel Land invested some SGD615 million to strengthen its portfolio with a residential site in West Jakarta, an office building in London and a joint venture for prime residential development in Chengdu with China Vanke. In Singapore, the share swap with Mapletree allowed the Keppel Group to increase its interest in Keppel Bay Tower from 70% to 100%, consolidating our full ownership of the building.

Over the next two years, Keppel Land will continue to tap on demand in recovering property markets across Asia, with about 20,000 launch-ready homes in its portfolio, mostly in China. In parallel, Keppel Land is actively developing its portfolio of commercial properties which has increased to about 840,000 square meters of gross floor area. Some of them will come on stream over the next two years, allowing us to attract quality tenants for steady income streams.

I'm pleased to share that Saigon Centre Phase 2 retail mall in Ho Chi Minh City, whose anchor tenant is the much anticipated Takashimaya Department Store, has achieved pre-commitment of 97.5% and will open in the third quarter this year.

In Myanmar, the new 29-storey Inya Wing was opened, adding another 431 guest rooms and suites, as well as an exclusive retail gallery to the quality offerings of Hotel Sedona Yangon. The latest commercial property Keppel Land has added to its portfolio is 112 Katong, in which it has recently acquired a 22.4% interest.

The remainder interest is held by the Alpha Asia Macro Trends Fund, a fund managed by Alpha Investment Partners. Keppel Land Retail Management has also been appointed as the retail manager and will be working closely with the owners to implement the asset repositioning plans for the property. Here is a fine example of how the different businesses in our property vertical can work together to extract value from various aspects of asset ownership, management and operations.

Total assets under management by Keppel REIT and Alpha Investment Partners have increased 10% from $18.7 billion as at the end 2014 to $20.5 billion as at end 2015. Over the year, Keppel REIT completed its acquisition of three prime retail units at 8 Exhibition Street in Melbourne. Keppel REIT announced last week that it has divested its 100% interest in 77 King Street in Sydney, Australia, for AUD160 million, resulting in a gain of approximately AUD28 million. Its portfolio of office buildings in Singapore and Australia continues to maintain a high occupancy of 99.3%.

Alpha's Asia Macro Trends Fund II has invested in three prime office properties with City Development. With the success of the first two Asia Macro Trends Funds, it will be embarking on its third such fund. Our fund management businesses will continue to feature strongly in the Group's capital recycling strategy for mature projects, while providing stable income streams over the longer term. After several challenging years under the weight of the EPC projects, 2016 opens a new chapter for our infrastructure business.

Just last week, we shared the good news that Keppel Seghers completed a substantial handover of the Doha North Sewage Treatment Works in Qatar to the client on December 10, 2015. In addition, Keppel Seghers has commenced the operations and maintenance phase of the contract for its liquid stream, solids thickening and dewatering facilities for 10 years. In Poland, Keppel Seghers handed over, on schedule and on budget, the Bialystok waste-to-energy combined heat and power project in Poland to the client, Bialystok's municipal solid waste management company, on December 31, 2015.

Our team can now focus on building Keppel Infrastructure into a stable contributor to the Group's bottom line, pursuing growth opportunities in key areas such as gas to power and waste to energy, both in Singapore and overseas. During the year, Keppel Infrastructure injected 51% of Keppel Merlimau Cogen which owns the 1,300-megawatt power plant on Jurong Island, into the enlarged Keppel Infrastructure Trust, as part of its efforts to unlock value from matured assets in its portfolio.

Our datacenter and logistics businesses under Keppel T&T continue to make good progress. During the year, Keppel T&T embarked on its fourth datacenter development in Singapore. Meanwhile, the T27 datacenter in Tampines which is more than 80% occupied, is on track for injection into Keppel DC REIT.

In October, Keppel T&T opened Almere Data Centre 2, its first greenfield datacenter in Europe. In Logistics, Keppel T&T commenced operations at its Tampines Logistics Hub in Singapore and a distribution center in Vietnam. Keppel DC REIT, Asia's first datacenter REIT to be listed on the Singapore Stock Exchange, has successfully crossed its first year of operations. During the year, it acquired Intellicentre 2 in Australia and mainCubes Data Centre in Germany, adding to its portfolio of high-quality datacenters across Asia-Pacific and Europe, amounting to over SGD1 billion of assets under management.

We're confident of developing Keppel DC REIT into a strategic contributor to the Group just as how we have grown Keppel REIT in the property division into one of Singapore's largest listed real estate investment trusts. Another major milestone was the combination of Keppel Infrastructure Trust with CitySpring Infrastructure Trust. The enlarged trust, with the inclusion of KMC, is Singapore's largest listed infrastructure business trust, with total assets of over SGD4 billion.

By remaining as sponsor, Keppel continues to participate in the growth of its infrastructure fund management units, while building up a solid platform for the Group to recycle its capital. Our concerted efforts to reshape and strengthen the infrastructure division as a sturdy third pillar for the Group are bearing fruit and we will continue to nurture the business and invest prudently for growth.

In the investments division, higher profit for 2015 were underpinned by better performance by M1 and KrisEnergy which achieved first oil at two of its offshore fields in the Gulf of Thailand during the year. In addition to our share of gains from k1 Venture's disposal of its U.S. childcare business and the sale of equities in our portfolio contributed to the division's stronger performance. I want to emphasize that Keppel continues to be a very profitable enterprise. In spite of strong headwinds, we reaped over SGD1.53 billion in profits. The Group's performance in 2015 demonstrates how a multi-business strategy can steady the ship in rough waters.

Overall, higher contributions from the property and investments divisions in the past year have helped cushion the impact of offshore and marine's fall in earnings. Had we been a single business company, our results would have been much weaker. Notwithstanding the vast challenges, Keppel O&M is still doing well and has contributed SGD481 million or one-third of the Group's income for the year. From an ROE perspective, Keppel O&M's performance has been solid, owing to its rigor in selecting contracts, strong project execution and discipline in not overinvesting in capacity, considering the cyclical nature of this business.

The same discipline also applies at Keppel Land which has been generating ROEs in the high teens over the past decade. The company's privatization has resulted in SGD252 million of additional contributions to Keppel Corporation's after taking in the interest costs of SGD15 million.

It's okay. We can continue. Our corporate structure has been simplified. A bit of a technical glitch. Please hang on a second. Sorry. With the privatization of Keppel Land, the launch of Keppel DC REIT and the expansion of Keppel Infrastructure Trust in the past year, we will continue to focus on asset turns and capital recycling to improve returns from both the property and infrastructure divisions. With these gears in motion, our ROE may be sustained in the mid-teens without excessive leverage, as we steer Keppel into its next phase of growth.

Meanwhile, to ride out its interim turbulence, we're keeping a watchful eye on our gearing and cash flow. We will continue to stay close to our customers and focus on executing -- on execution, whilst right-sizing the organization so that we can remain profitable even with a lower top line. Recurring income which currently represents about 27% of the Group's earnings, is another area that we will continue to strengthen.

As a conglomerate, with access to capital and the ability to invest when times are tough, we will continue riding on the mega trend of sustainable urbanization, fully exploiting the Group's ability to create good assets which we can own, manage and then recycle at the right time to earn the best risk-adjusted returns.

There will be fees that we can continue to earn along the way, such as for asset management, operations and maintenance and facilities and property management, all of which will build resilience into our bottom line.

As we continue to fortify our growth -- our core competencies, investing in our people and technology, we will also develop new muscles organically as well as through mergers and acquisitions.

Until now, the market has not fully recognized Keppel's merit as a conglomerate with a set of unique strengths and potential synergies that can be harnessed through cross-pollination of its business units. Such synergies are already starting to emerge through collaborations between Keppel T&T and Keppel Land in the development of datacenters, as well as Keppel Land and M1's partnership to offer smart living solutions at our properties.

Indeed, Keppel's diverse businesses shall become even more formidable by hunting as a pack. It is in this manner that we will continue to draw synergies and capture value from all parts of the Group, at every step of the way.

I shall now let our CFO, Hon Chew, to take you through a review of the Group's financial performance. Thank you.

Chan Hon Chew

Thank you, Chin Hua and good evening to all. I shall now take you through the Group's financial performance for the fourth quarter of the financial year 2015. The Group recorded a net profit of SGD405 million this quarter which was 44% below the same quarter in 2014.

Earnings per share correspondingly decreased by 44% to SGD0.223, while EVA was lower at SGD192 million. The Group's results for the quarter were negatively impacted by the provision for losses of about SGD230 million for Sete Brazil rebuilding contracts and positively impacted by revaluation gains from investment properties.

The Group's revenues for the fourth quarter was 37% or SGD1.45 billion lower than the same quarter last year. Lower revenues were recorded by all divisions. Operating profit at SGD331 million decreased by 64% or SGD595 million from the same quarter last year.

Lower profits from offshore and marine, infrastructure and property divisions were partially offset by higher profits from investments. After tax and non-controlling interests, the drop in net profit was at a lower rate of 44% or SGD321 million, as a result of lower non-controlling interests due to the acquisition of additional shareholding in Keppel Land, correspondingly, earnings per share decreased by 44%.

At the Group level, revenue was 37% lower than the same quarter last year, driven largely by the decline in the offshore and marine division as a result of the lower volume of work and deferment of some projects. Property recorded a decrease of 18% in revenue, primarily due to lower revenues from residential projects in China, such as 8 Park Avenue in Shanghai and the Luxurie in Singapore, as well as the absence of revenue from the sale of a residential development in Jeddah which was sold in the fourth quarter of 2014.

Infrastructure's 31% drop in revenue was mainly due to lower revenue from the sale of electricity as a result of lower prices and volume, lower revenue from the EPC projects, as well as the absence of the revenue from Keppel FMO Private Limited which was divested in the fourth quarter of 2014.

The Group recorded SGD574 million of pretax profit for the quarter, 51% or SGD588 million lower than last year. This is mainly driven by the 94% or SGD336 million decrease in offshore and marine division's pretax profit, due to lower revenues and provision for losses of about SGD230 million for Sete Brazil rebuilding contracts.

Pretax profit for the property division declined by 16%, due to lower contribution from residential projects in China and absence of gain from disposal of investment properties, compared to the gain from sale of wanted interest in Marina Bay Financial Centre Tower 3 in 2014, partly offset by cost write-back upon finalization of project costs for the Reflections at Keppel Bay.

Infrastructure division reported a 39% or SGD240 million decrease in pretax earnings from the same period last year, largely driven by reduced contribution from the power and gas business and the absence of gain from divestments compared to the gain of the sale of datacenter assets to Keppel DC REIT upon its listing on the SGX in the fourth quarter of 2014. After tax and non-controlling interests, the Group's net profit decreased at a lower rate of 44% or SGD321 million to SGD405 million.

Net profit of the property division registered an increase of 41% or SGD107 million in the fourth quarter, despite the decrease in pretax profit. This is due to lower non-controlling interests following the Group's acquisition of additional shareholdings in Keppel Land. The increase is offset by the drop in net profit of offshore and marine and infrastructure divisions for the reasons mentioned above.

Next, I shall take you through the performance of the Group for the financial year 2015. Net profit for the full year of 2015 was SGD1.53 billion, down 19% from 2014, earnings per share also decreased by the same extent to SGD0.84. This translates to an ROE of 14.2%, down from 18.8% last year and EVA also lower at SGD648 million.

Free cash flow of SGD694 million is due to higher working capital requirements for the offshore and marine division. In the prior year, cash inflow included the proceeds from the sale of Equity Plaza and the divestments of datacenter assets to Keppel DC REIT. Our net gearing increased to 53% this year from 11% in 2014, due mainly to funds used for the acquisition of additional shareholding and higher working capital requirements for the offshore and marine division, partially offset by proceeds from the disposal of 51% of the Keppel Merlimau Cogen plant this year.

To put the increase in perspective, the SGD3 billion used to privatize Keppel Land contributed 25 percentage points to the increase in the net gearing. Revenue for the Group declined by 22% or SGD2.99 billion to SGD10.3 billion, largely due to lower revenue from the offshore and marine and infrastructure divisions.

The Group recorded a decrease of 36% or SGD859 million in operating profit in 2015, as compared to 2014. The decrease is led by lower revenues from offshore and marine and infrastructure divisions, provision for losses of about SGD230 million for Sete Brazil rig building contracts, as well as losses following finalization of the cost to complete the Doha North Sewage Treatment Works.

This was partially offset by revaluation gains from investment properties and the gains from divestment of Keppel Merlimau Cogen and the combination of Keppel Infrastructure Trust and CitySpring Infrastructure Trust. Net profit after tax and non-controlling interests in 2015 was lower by a smaller extent of 19% or SGD360 million, as a result of lower tax expenses and reduced non-controlling interests in Keppel Land.

The Group earned total revenues of SGD10.3 billion in 2015, a drop of 22%T as compared to the same period last year. The decrease was mainly driven by lower revenues from offshore and marine and infrastructure, partially offset by higher revenues from property and investments.

In the offshore and marine division, major jobs completed during the year include seven jackup rigs and a combination semi, one FPSO conversion, one FPSO indication and three Ice-class vessels. Overall volume of work was lower and coupled with the deferral of some projects, revenue from offshore and marine division fell by 27%.

Property recorded an increase in revenue of SGD197 million or 11%, as compared to 2014, led by higher revenues from residential projects in China. A total of 4,570 homes were sold in 2015, about double that of 2014. 72% of these sales were from projects in China. Infrastructure revenue decreased by SGD876 million or 30% in 2015, mainly driven by lower revenue from power generation business and the absence of revenue from Keppel FMO Private Limited which was disposed in the fourth quarter of 2014. Lower revenues and the provision for losses from Sete Brazil rig building contracts led to a 49% decrease in offshore and marine pretax profit for 2015.

The operating profit margin before the provision was 13.4%, compared to 14.3% last year. The division also recorded lower net interest income, but contributions from associated companies were higher. Despite higher revenues, the property division's pretax profit was lower by 12% in 2015, mainly driven by lower profits from residential projects and absence of gains from disposal of investment properties.

In previous year, the division registered gains from the disposal of Marina Bay Financial Center Tower 3, Equity Plaza and the residential development in Jeddah. The infrastructure division registered a decrease of 43% in pretax profit, largely due to losses recognized for the Doha North Sewage Treatment Works upon finalization of the cost to complete, reduced contribution from the power and gas business and absence of prior year's gain from sale of datacenter assets.

This decrease was partially offset by gains from divestment of Keppel Merlimau Cogen and the combination of Keppel Infrastructure Trust and CitySpring Infrastructure Trust. In previous year, the division also benefited from the divestment gain arising from the sale of datacenter assets to Keppel DC REIT.

Overall, Group pretax profit decreased by 31% or SGD892 million to SGD2 billion in financial year 2015. The overall net profit after tax and non-controlling interests decreased by a small extent of 19% or SGD360 million from 2014, as compared to the 31% decrease in pretax profit.

The decrease in net profit in the offshore and marine and infrastructure divisions was partially offset by increases in net profit in the property and investment divisions. As mentioned earlier, this was mainly due to lower tax expenses and non-controlling interests in Keppel Land. In the face of a very challenging macroenvironment, the Group's net profit for 2015 stands at a creditable SGD1.5 billion. This translates to an earnings per share of SGD0.84 which is SGD0.198 lower than the previous year.

ROE increased to 14.2% in 2015, from 18.8% last year. Our proposed final dividend to our shareholders for 2015 will be SGD0.22 per share. Including interim dividend paid, the total distribution for 2015 will be SGD0.34 per share.

For the full year of 2015, the Group generated SGD1.36 billion of cash flow from operations. After accounting for working capital requirements, mainly from offshore and marine and property divisions, partially offset by proceeds from sale of investments operating, cash outflow for 2015 was SGD705 million, compared to an inflow of SGD5 million for 2014.

Net cash from investing activities amounted to SGD11 million, comprising investments and operational CapEx amounting to SGD357 million, mainly from offshore and marine division, partially offset by the divestment and dividend income from associated companies of SGD368 million. The resulting cash outflow was SGD694 million for 2015, compared to inflow of SGD729 million in 2014.

In previous year, the Group's free cash flow benefited from proceeds from the sale of investment properties, including Equity Plaza and datacenter assets. We would like to also reiterate that we exclude expansionary acquisitions and CapEx and major divestments in our free cash flow statement.

For instance, the cash inflow of SGD952 million from the divestment of the 51% interest in Keppel Merlimau Cogen during the second quarter in 2015 is excluded from the calculation of free cash flow. The Group remains focused on harnessing its core strengths and competencies to build resilience in an uncertain macroenvironment via our robust multi-business strategy. We're confident that in the long run, our discipline and emphasis on excellence in productivity and innovation will help us fulfill our commitment for sustainable growth and value for our customers and shareholders. Thank you.

Question-and-Answer Session

Operator

[Operator Instructions]

Loh Chin Hua

Thank you for your attention. We come to the Q&A. For those of you in the room, when you raise your hands, if you could -- Hon Han [ph], I think. Ajay, okay. Who wants to go first? Hon Han [ph], I think he's waiting for a mic.

Unidentified Analyst

I'm Hon Han [ph] from CLSA. I have a few questions here. First would be the SGD230 million provision for Sete Brazil. May I understand what are the assumptions behind the SGD230 million? Is this for receivables outstanding or is this perhaps for equipment costs, some impairment we could see? Second question, how much profit has been recognized from Sete Brazil so far for the four semi-subs?

Third one, still on Sete, I apologize. If we were to assume a worst-case basis, assuming they were to go to bankruptcy, what kind of write-down or impairment should investors expect? Fourth one, payout ratio is now at 40%. Could you give us some insights what kind of a sustainable dividend payout ratio going forward? Thank you very much.

Chan Hon Chew

As far as the provision for Sete Brazil, it was made after we have assessed the situation, including the construction progress, the amounts that we have received and what's outstanding to us and the amounts that we owe to vendors. So that has been the basis of our provision and our assessment is that this SGD230 million provision is adequate at this point in time. As for your question on the profit, I think that you would know that this is something that is commercially very sensitive. We do not comment on profits by individual projects.

As for your question on bankruptcy, as you know, this situation has been quite fluid. There has been a lot of talk, a lot of speculation. But as far as the bankruptcy of Sete, I think at this point in time, the situation is still fluid and if indeed there are legal proceedings, these proceedings, the process will not be straightforward. It will take some time.

So we will have to look at the developments as they unfold and to make the assessment and monitor the situation, so yes.

Loh Chin Hua

Maybe I can add, on the third question, I think the point is that Sete is still our customer. Of course, they are going through a difficult period at this point in time. In our assessment, I think we have taken into account different scenarios and this provision of SGD230 million is what we believe and we believe that this is adequate and the right thing to do at this point.

Now, on your fourth quarter, Hon Han, on dividend payout, this is -- I think you're referring to the 40% payout ratio. I think as we have shared with many of you, we typically -- we want to share. When things are good, we want to share with our stakeholders and we have always said we will pay around between 40% to 50%.

But the key is that we also want to make sure that dividends are sustainable and this is a level that we believe is sustainable. And, of course, we also have to take into account opportunities that could arise and we want to keep our balance sheet strong, so those are the factors that went into the deliberation by the Board. And we feel that this 40% payout is the right amount. Ajay?

Ajay Mirchandani

Ajay here from JPMorgan. I have three questions from my side. The first one is again going to be on Sete Brazil. Just to get a sense, you did mention that you believe the provisions are adequate, but just to get a sense, if we do go to the extreme case, do you see the profits that you've recognized to date on the projects relatively secure or is there a risk that you would need to reverse those? That's the first question.

Second question is on the associate income in the fourth quarter this year. When I'm looking at the number, it's quite large. It's around about SGD250 million. Just some color on that would be useful.

The third and last question from me is with regards to how is Keppel Corp thinking about cash flows for 2016. It is a tough environment. You are talking about expecting a number of deliveries into 2016, but in case those get further delayed, how is management thinking about cash flows, given the O&M business is obviously going through significant strain? Yes. That's my three questions. Thank you.

Loh Chin Hua

Thank you, Ajay. I'll answer the first and the third question. I will let CFO answer the second question. I think the first question I guess is an indirect way of asking what we have assumed in the provisions and I think we have already shared what we wanted to share based on what CFO has said.

On the third question, on cash flow, I think this is something that we're watching very closely, as I said in my remarks. We're -- we have always said we're determined to keep an institutional quality balance sheet and this has not changed. And so far, as I've said in my remarks, the projects that we have remain strong. The net order that we have remains strong and we're looking to deliver those projects that we're looking to deliver this year.

And our gearing is something that we're watching closely, but at this point in time, we believe that this is -- still we'll maintain our strong balance sheet to allow us to take advantage of any opportunities that may arise.

Chan Hon Chew

Yes, your question on the share of associates, I believe you are referring to the SGD251 million for the fourth quarter. This is actually quite comparable to the amount last year and this would include of course in the fourth quarter revaluation adjustments at the end of the year.

Unidentified Analyst

This is Jerry [ph] from Credit Suisse. I've got three questions. Firstly, just as a follow-up on Sete Brazil, while this may not be your base case, what would be your contingency plans at Sete Brazil with a file for bankruptcy? Second question relates to the offshore and marine division. You highlighted some of the measures that you have taken to right-size the operations in a challenging environment. What are some further steps that you can potentially take if the market were to continue deteriorating?

And lastly, also on the O&M division, at the third quarter results in October, you mentioned you're expecting to deliver six jackups in the fourth quarter, but it seems like only one was eventually delivered. Can you give some color on the discussion with your customers on deferrals and the scope for further deferment? Thank you.

Loh Chin Hua

Okay. I will answer -- to answer the third question, but I think for the first question, on bankruptcy, I think this is -- at this moment has definitely been -- from the reports, it's been talked about. In our own estimation of the provisions that we have, we have taken into account, as I said earlier, all the possible scenarios. And we believe that the amount that we have factored in is adequate.

Your second question is on the right-sizing. As we have shared or as I have shared in my opening remarks, we have really taken decisive steps in 2015 to right-size. Of course, we're watching the situation closely. We have developed plans, trigger points, so if the workflow continues to drop, then we have the plans ready, so that's what I would like to say for that. And YY, you want to touch on the--?

Chow Yew Yuen

Yes. I think on the third question, you mentioned that we mentioned six rigs that would be delivered this year and actually maybe you go back to -- actually, in 2015, we talked about 15 rigs delivery at the beginning of the year, but actually, three of them we have negotiated for it to be shifted to 2016 already.

So the last quarter I mentioned that we would deliver in the last quarter four more rigs and you are right that we have not delivered them in the last quarter, the four rigs, but the four rigs were actually three from Grupo R and one is from Falcon Energy.

So what we have been working very closely with the customer is that we always work with the customer, like we said before. So we believe that at least two of Grupo R rigs, where they have already signed contracts with Pemex, they have more or less discussed with us and they were likely to take delivery in the middle of February.

The third one may have to be pushed back a bit later and Falcon Energy one is also going to be pushed back a bit later. But let me just say that all these four rigs, you must understand that they are technically already accepted by them, meaning that there is no performance or execution risk on our part. And what we're doing is we work with our customers to make sure that sometimes it is important for us to maybe let them have some time also to conclude their contracts and this is precisely what we're doing. So I hope that answers your question.

Now, the second question which Chin Hua has more or less answered is about the right-sizing. I think what we're doing, if you have looked at the report that Chin Hua has given, last year alone, actually, we have already taken steps to right-size the organization. Our operation actually, we have already taken down direct workforce about 17% which translates to about 6000 positions and actually, with the subcontractors, like explained earlier on, our labor structure is like an onion. We're able to peel layer by layer and in the subcontract side, we have actually reduced by 25%.

This year, we will monitor the situation very closely, but I think we want to let you know that we have been looking at all this, so we will respond to the market situation. And if there is a need for us to do so, I think we're ready to even go for the -- what it means is that we have to bring it down. When the top line is down, our overhead will have to come down, but that means that we're striving to still become profitable, even though the market situation is such.

Loh Chin Hua

Maybe I know that the questions understandably are all very concerning the downside risks. Maybe it's appropriate at this point that I also share that whilst the situation in the offshore and marine side is quite tough, there are also a couple of bright spots. For instance, on the gas side, we're also continuing to see good inquiries and we're also looking at some new markets out there.

So we're being realistic. We're kind of getting ourselves ready for a long winter, a longer winter, as I said. But at the same time, we're also preparing for the upturn and there are also -- maybe drilling side might be out for a while, but I think there are also other areas which continue to look interesting, including potentially new markets that could open up, like Iran, for instance.

Okay. This question is from Owen from T Cartel Private Limited. Moving forward, how is Keppel Corporation going to react in the event that Sete Brazil decides to file for bankruptcy? Is there any plans in place that will reduce the damage that Keppel has sustained in this sour deal?

I think as I shared earlier, we have -- when we look at the provisions that we have taken this quarter, we have to factor in all the possible scenarios. And that includes all scenarios and we obviously -- besides figuring out what the appropriate provision is to take, we have also come up with a strategy for dealing with different scenarios and again, as I said, Sete remains a customer of ours. They are going through a difficult time, but of course, we have to be realistic and we have to come up with our own plans. But these plans are to be kept to ourselves for now, okay?

Okay, this question is from Aaron from SPH, Straits Times. Could you please explain what you mean by natural attrition rate? Did the company retrench workers? If so, how many were Singaporeans? Maybe, YY, you can?

Chow Yew Yuen

No, actually, okay. I think natural attrition, actually, we refer to Singapore. Singapore, as you know, we have a labor structure where we have a lot of NTS workers and also, we have people who are retiring. So those people who are retiring, I think that's natural attrition.

Those NTS workers that are here on contracts, work permits, so some of them -- we have kept some of them for a long, long time, because the longer they work with us, the longer they understand the safety culture and also the productivity. So some of these workers actually want to go back home. Some of them, they have been with us for six years or eight years or 10 years and so when they want to go back, then I think these are the people that we do not replace. That is what is meant by natural attrition.

And there's a mention about Brazil, I think in the news and what we did last year was that we actually reduced our workforce there by about 2,000. But in Brazil, you must understand that we still have worked -- that is the happy country, with Petrobras directly and that project is coming along well.

In fact, we're waiting for some of the modules to be delivered to us by Petrobras. And on top of that, we also recently announced that we have got some other FPSO projects from MODEC. And so on the FPO side of the business and some of the repair and upgrading work for even drilling rigs in Brazil and pipe-laying vessels, so we're keeping ourselves occupied and busy, despite the fact that we have stopped work on the Sete projects.

Loh Chin Hua

Okay, we have another question. This question is from Kenny Lim from Oka Investments Private Limited [ph]. I notice there is declining cash on hand on the balance sheet for the past three quarters. Please clarify if there will be any cash flow problems in the coming quarters. I think it's a cash flow.

Chan Hon Chew

I think if you look at the 2015, of course, we started the year with the privatization of Keppel Land, so that we used up SGD23 billion of funds to acquire the shares in Keppel Land that we don't already own, so that was the biggest cash outflow. And then the rest of the year, we have, of course, working capital requirements coming from offshore and marine and property divisions.

So that was for the past quarters during 2015. Going forward, cash flow is something that we watch very closely, but for sure, we do not have any cash flow problems. Our gearing at 53% still remains at very healthy levels. While we do not have a gearing target, but as we have mentioned in the past, we always operate based on the principle that we want to maintain an institutional quality balance sheet. And by that, what we mean is gearing, we don't see ourselves exceeding more than one and that still holds true for 2016.

Loh Chin Hua

Thank you. Okay. Maybe from the floor, anyone? Sorry, can you -- hold on.

Unidentified Analyst

I've got four questions. On O&M, excluding Sete Brazil, your margin was 17%. That's extremely high, compared to your past quarters. Is this a sustainable level and what's the reason for this? The second one is if Sete Brazil or any other contracts cancel and you are actually still working on it, are you liable to pay for the equipment? As in, can you go to the vendors and also say I want to cancel the equipment or are you also liable to just take on, even though your customer cancels?

That's the second one and the third one is interest expense for O&M has actually shot up quite a fair bit, by SGD19 million in 4Q, so this is a level that we should be looking at or will it go on higher? And my final question is on infra. 4Q profit was very high at SGD47 million, compared to 3Q and first Q. What was the reason?

Loh Chin Hua

Okay. I will answer the first question. I think as we have said many times before, we shouldn't look at the margins quarter on quarter, so I'm quite fair. Even when the quarter we do quite well, I tell you don't look quarter on quarter. Projects are executed over a period of time, so we should really look at the long term and we've always said long-term is sustainable, it's 10% to 12%.

Of course, in today's environment, 10% to 12% would be a very good margin. The reason why it's higher in any one quarter really depends on the work that has been recognized during that quarter, so things like repairs and conversion works will probably have a higher margin compared to, say, new builds. On the equipment, I think that's a question on equipment -- I think you want to answer that?

Chow Yew Yuen

Yes, I think the question is on the equipment that while we have stopped work, then the question about the equipment, whether we have to continue to pay and what do we do in the worst-case scenario. I think as far as the equipment is concerned, equipment supply is concerned with the vendors, basically, we have been negotiating with them for quite some time back.

What we have done is we have sat down with them, most of them and we have basically talked about the scenario and we have basically -- since we have already -- a lot of our delivery has been pushed to the right, so we have basically told them to slow down, stop work, stop ordering things, because there's time for us to do it once the situation with Sete is clearer.

So from that point of view, we're working with our suppliers and vendors, equipment suppliers and all these things. But under the contract with them, of course, if he decides to cancel or terminate a contract, then there is a provision in those contracts to make proper compensation also to them. So I think that's fair. That's the way the contracts are being signed and I think in the same way, if Sete can set a contract with us, then of course were have the ramifications with them and we can claim them for damages.

Then, of course, your question is that what if Sete goes under? So what if Sete goes under, I think it's something that there are many issues that need to be gathered. I think at this point in time, I think -- let us see the picture clearer first before we go ahead with that.

I will follow up your question on the interest expense for offshore and marine. The increase is really arising from the higher working capital requirements during the year, so as the funds are drawn down, the interest expense has gone up.

Now, I just need to clarify your fourth question on infrastructure. Actually, for fourth quarter, infrastructure's profit is lower than last year, so is your question on last year or this year? Yes, the quarter? This year quarter is actually net profit is SGD47 million compared to SGD250 million last year, so it's actually lower than last year.

Unidentified Analyst

Compared to 3Q.

Chan Hon Chew

Compared to 3Q. I see. Yes, that's right. I think infrastructure includes datacenter. You're right. Thanks, Loh Fang [ph]. It's the revaluation surplus that is done only at the end of the year.

Unidentified Analyst

Hi. My name is Mayuko. I'm from Nikkei [ph] Japanese newspaper. You mentioned that you will look for the opportunity for merger and acquisition. What are the sort of those inorganic growth opportunities that you are looking at? Will it include the possibility of probably you look at the acquisition of the competitor in Singapore? And also, what's going to be your long-term vision for O&M business and the industry?

Loh Chin Hua

Okay, well, it's a very clever way of asking an interesting question. Well, first of all, I think you are -- in my remarks, I've already mentioned that we're actually in the process of acquiring Letourneau, so that is an example of an acquisition that we're undertaking currently which we believe will add to our suite of services, products, especially after-sale services.

I think M&A covers the whole spectrum and here, I like to remind everyone here that we do have a multi-business approach, so it's not just offshore and marine. We also have property and we have infrastructure, as well. So this is -- of course, we believe very strongly in growing organically, but from time to time, when there is dislocations in the market, there could be opportunities that could come up. And that could span not just offshore and marine, but it could also span property, as well as infrastructure.

So all this will be looked at and there are always things that we're looking at, but we don't -- what you have asked is speculative at this point in time and we don't comment on speculation, so I put a -- and I think at the present time, also looking at the offshore and marine side, I think you have heard what YY and I have said. We're really focused on our existing businesses, on making sure that we continue to deliver on our rigs on time and working very closely with our customers.

We're also looking at right-sizing our organization, especially on the offshore and marine side. So this would imply that in terms of production of resources, we have to right-size the operations.

Ling Xin Jin

Ling Xin Jin from Morgan Stanley. I have three questions regarding the offshore and marine division. Firstly, in terms of at the margins that you mentioned at the fourth quarter, is there any extra interest payments that you have received from your customers with regards to them deferring the delivery of the rigs?

And the second is, given that you have already made provisions for Sete and also frozen the recognition of revenue or earnings, at what point will you actually decide to write down the orders from your net order book? And lastly, could you comment about the undrawn committed facilities that you still have for the marine sector? And in terms of property, I noticed that there was a provision of about SGD58 million in this quarter. Can you actually elaborate on that, as well? Thank you.

Chan Hon Chew

Okay, the last one first. Okay, I'll deal with the last question first. Yes, during the year, there were SGD51 million in provisions for the residential properties under the property division.

Generally, I think all our projects, they are still selling at above breakeven, but at the year end, we do a review of all the projects, so there are certain projects where the selling price is slightly below breakeven, so we made a provision for those projects. I think you had a question on undrawn facilities. That's not something that we disclose.

As for offshore and marine, the margins for fourth quarter, I think as we have mentioned in the past, it's not meaningful to look at margins quarter by quarter, so really, the margins are very much dependent on the mix of the projects that we're working on, so there are no extraordinary items there or your suggestion that are there interests that we charge our customers. There are no exceptional items in there, so it's really dependent on the mix of the projects.

Unidentified Analyst

I'm Jacqueline [ph] from the Straits Times. Two quick questions from me. Regarding the manpower issue, how much in savings does that translate to? And then another one, can you share what is the utilization rate of your yards right now and how this has changed over the year? Yes. Thanks.

Loh Chin Hua

We don't give exact numbers on the savings, but just to give some illustration, the 2,000 workers we have in Brazil, on an annual basis, that will be -- it will cost about SGD100 million. So it's a high-cost place to operate, so clearly, there is quite significant savings that can be made. But like I said, this is about right-sizing. It's really about tailoring the organization to fit the workload that we have. Your second question is on?

Unidentified Analyst

Utilization.

Loh Chin Hua

Utilization, that's not how the offshore and marine yards -- our offshore and marine yards are organized. We're not like a factory with utilization rate. There is some flex in terms of our capacity, so this year, I think as I think YY might have said earlier, we remain very busy, but I think we have to watch carefully. And that's why we have plans in place, so if the workload were to come down, then we will have to continue to right-size.

Chow Yew Yuen

As I said, a bit about utilization, I think the marine industry, like Chin Hua said, is the measure -- it's not like a factory, where we have production flow and you talk about utilization. I think in the marine industry, we have to be nimble. Our ability to be flexible is actually a differentiator from Singapore yards to, say, competitors in other countries.

So that flexibility means that we have the ability to right-size and organize ourselves to where the market is. So if we anticipate that the market is going to somewhat come down, let's say by 20%, this question is our ability to right-size it so that we meet our overhead and our costs, can still give us the kind of margin that we're looking for.

I think just also to mention the question about the 17.1% margin in the fourth quarter, like Hon Chew said, it's quarter by quarter, it's very difficult, because it depends on the mix. Sometimes you get a good repair, upgrade projects and then your margin can go up and so on. But I think on average, we have always said that our range is between 10% to 12%.

So even when the market is a bit down, the question is how are we able to get within that operating margin range that we have always been talking about? And that depends on our ability to right-size it, still continue to motivate our people. We're still continuing to invest in R&D. All those things, productivity, all that, we're still continuing to do. So I think that is where it differentiates us.

Loh Chin Hua

Before I take the next question, I just want to add a point here which I think is quite pertinent. I know that in today's environment, it's natural to ask some of these questions and I think they are all good questions and it's relevant as analysts and as acting or investors, you have to ask these questions on the downside risk.

But I think the point here we have made and we have been making is that Keppel is actually a multi-business conglomerate. I've actually asked for my colleagues just before this to give me kind of a segment -- the different net profit contributions by the different groups in Keppel Corp over the past I think it's up to 2002.

The reason why I chose 2002 is that for those of you who are old enough, there was a time when actually the bank -- we used to own a bank. That's the time when the bank was sold. And at that point in time, when the bank was sold, it constituted about 50% of our net profits. And after the bank was sold, we used the capital from that sale to consolidate KOM, pretty much like what we have done with Keppel Land in more recent times.

And of course, that was -- that proved to be a very prescient strategy, because it worked out very well for us and KOM has been able to be a very strong contributor to the Group's net profit over the last 12, 13, 14 years. But just to give you a sense, if you take that period after we sold the bank, the contribution from offshore and marine from 2002 to 2015, the range was somewhere between 29% to a high of 64%.

So last year, we're at 32% and we explained the reasons why. For the property side, the range was actually from 12% to a high of 48%. And last year, we were at 46%, so not insignificant. Then, if you look at infrastructure, infrastructure is interesting. The range was a negative 12% to a high of 25%, but the 25% was in I think 2002 or 2003, in the early part. In the recent times, it has been single digit. Now, for 2015, infrastructure as a division contributed 14%.

Investments ranged from 1% to 49%. Of course, 49% would be when we dispose of big investments like SPC, etc. And last year, for investments, it contributed 8%. So the point I'm making is that the businesses we're in have some cycles. They will tend to ebb and flow. I think as a Group, we have demonstrated through our track record that we've been able to weather the storm. We've been able to -- when we had earnings from KOM, we have been able to redeploy them into building our KMC, for instance and also into our property portfolio. And even today's time, I think KOM will -- it's still performing very well, because the industry is very tough and we're actively working to make sure that KOM will continue to be profitable.

But even then, even if the market for offshore and marine remains tough, our other divisions -- infrastructure, I think as I've shared earlier, we have come to a point where a number of the EPC contracts that have actually been burdening us over the last few years, they are all now behind us and we're ready to see infrastructure contribute more to the bottom line. And on property side, of course, with the privatization, the alignment of interest is complete with the Group and whilst headwinds are there, I think there are a number of markets, as I shared earlier, China, Vietnam, that remains very promising.

Unidentified Analyst

Bloomberg, Kelly [ph] from Bloomberg. I wanted to ask just two questions. On the investment part, you've been selling some of your assets recently. I'm just wondering if you will be considering more asset sales and could that include possibly your stake in M1? And the second question is you've said aside provisions for the Brazilian contracts.

Do you see a need for setting aside more provisions for other contracts, considering that you said that more headwinds are coming in 2016? Thank you.

Loh Chin Hua

I will answer the first question and the second question, as well. And I think you have two parts of your question. Anyway, the first question is on potential sale of M1. I think, first of all -- first, off the cuff, there was an earlier question about cash flow. I just want to be very clear. Our cash position is not an issue.

We have a very strong balance sheet. In the event that we choose to sell something, it's because we think it's the right time to sell. We remain ready to take investments, as and when we see fit. So I think that's all I will say on M1. I think M1, we've said before, it is not a core investment for us, but as to when we sell depends on many things. In the meantime, we're very happy with the contribution that M1 is making to Keppel T&T and to the Group.

Chan Hon Chew

The second question is on the provisions for [indiscernible].

Loh Chin Hua

I think we have also alluded earlier that the other than Sete, whilst there has been some requests by customers to push some of our projects to the right on the offshore and marine side, by and large, they are not significant changes. And quite often, we do get compensated for the additional costs. And most importantly, these are projects that remain valid, so we don't -- we don't feel that there's a need right now to take provisions on them. Okay, this is from Wee Lee from Nomura. He has two questions. First question, may we know the thought process behind lowering the dividend payout ratio to about 38% which is lower than past years? Should we expect this to be a benchmark going forward?

On the property division, may we know the target number of units to be sold in 2016 forecast and are there any particular cities that Keppel will focus relatively more in terms of marketing of the properties?

I think the first question I have already answered. I think it's really looking at keeping our balance sheet strong. We have always said that 40% to 50% payout, so it's not quite 38%. I think it's 40%. It's just in excess of 40%. And our goal is always to share with our shareholders when we make money and of course, we always look at something that we believe is sustainable. Second question, can I ask Wee Gee to?

Ang Wee Gee

Sure. I think in terms of target of residential units we would like to sell this year, I think obviously the target, we will hope to sell as many units as possible at a good price, but certainly, we're looking towards selling more than what we have sold last year. And on the second part of the question, are there any particular cities that we'll be focusing on, I think as Chin Hua has mentioned just now, I think the two key markets we're in overseas, China and Vietnam, we're very positive about the market in the next few years. I think China, the property sector contributes about 15% to 20% of its GDP.

If you count the other related industries with the property industry, I think we're looking at even higher, 25%, 30%. So we see that the government will continue to support the property market in China and will continue urbanization, growing middle income. We just in China, in the first-tier cities and the fast-growing second-tier cities are still growing.

China is moving towards a consumption-driven economy, so all this augurs well for the property market in China. So we will continue to focus on our five key cities in China, Shanghai, Beijing, Wuxi, Tianjin and Chengdu and we have a huge land bank in China of about 40,000 residential units. And over the next few years, we will continue to sell the units and we're very positive about that.

As for Vietnam, our focus will be Ho Chi Minh City. I think the market in Vietnam has turned around and turned around very rapidly. Last year, we sold a record of almost 1,000 units in Vietnam. We have a land bank of about 20,000 residential units in Vietnam, mostly in Ho Chi Minh City and we will be capitalizing on the market upswing to launch more projects going forward.

Loh Chin Hua

Thank you, Wee Gee. We have a question both on the web. This is from Felix of Felix Investments. What's the expected outlook for the marine segment in 2016? So maybe I ask YY to comment.

Chow Yew Yuen

I think for the marine segment, of course, in our division, we have two divisions in the marine segment. One is ship repair and conversion. That one includes LNG gas strategy. And the other one, of course, is the specialized shipbuilding, so maybe I'll take it one by one.

I think on the repair and conversion division, actually, repair, the number of vessels we repair has actually gone up by about 10% from last -- from the previous year. But, of course, there is margin pressure, because as you know, there is spare capacity out there in the marketplace, but I think we're holding up quite well on that one.

On the FPSO business, FPSO actually, we did quite well last year. This year, going forward, we're very secure of some FPSO projects, but compared to previous years, of course, the FPSO market is also softer than previous years. But that has been more than adequately made up by our FLNG contract with Golar.

So I think going forward, we expect that 2016, that for the marine repair and conversion business, we will be neutral. In other words, we will be about the same level as last year. On the specialized shipbuilding, actually, we have got a quite good number of backlog there. And we're working on some of the high-end projects, pipe-lay vessel, diving support vessels and all these things.

And while the BSVs and OSVs are -- they're oversupplied right now, but we're concentrating on the high end, so actually, in this year we expect activity in the marine segment to be actually on the higher side than even last year. But having said that, I think the gas which Chin Hua has alluded to our gas strategy, I think that has been -- we're getting some results from that one, because the inquiry for FSRU actually -- there's still quite a lot of inquiry on FSRU.

And there is also inquiry on distribution, break bulk LNG-type units, powered barges, gas fired. Those kind of things are where we consider as a non-drilling opportunities, so we're putting a lot of effort in those areas, too. But having said that, we also have certain niches that -- because of our near market, near customer strategy, places like Caspian, new frontiers like Iran. They are non-sanctioned areas for Russia. Of course, even in Mexico -- so I think it's a question of us working -- when they will come, who knows? But I think those are the markets that we're working on, because our near market, near customer strategy.

Loh Chin Hua

Okay, there's a question here submitted by Rumi Hardasmalani from Today Newspaper, MediaCorp Press. The question is, what is the update on investigations by Brazilian authorities into alleged improper payments by a Keppel subsidiary?

I think this is referring to the Lava Jato inquiries. As we had said, at the time when the allegations were first made a year ago, Keppel has a very strict policy on conduct and we do not condone such activities, improper payments and that is our stand. We have not -- so there's nothing further to report on that.

Unidentified Analyst

One question for YY on the Petrobras FPSO topside. You said that work is still ongoing. How much have you completed and when will you deliver those?

Chow Yew Yuen

Actually, for our Brazil FPSO, the two have been conceived directly from Pemex -- from Petrobras. Actually, the first one is we already completed our installation, our mechanical completion we're completing. So we're actually at a phase of commissioning, but of course, you cannot commission it, because there are four modules that Petrobras is supposed to deliver to us and those are not yet -- has not been delivered.

The latest is that it may be delivered in June of this year. So I think that is well in hand. The second unit, the fabrication of the modules, we're well in hand, so we're now actually waiting for the FPSO to be delivered to us for integration.

Unidentified Analyst

So the first one you will complete, you will deliver, by when?

Chow Yew Yuen

That depends on why the module from Petrobras is delivered to us. I will say that for those kind of work, roughly, I would think that about eight months after they deliver to us -- and these are key modules. These are not the modules that are insignificant. These are major modules. So after we have delivered the modules, I think eight months later, that's basically our timeline.

Unidentified Analyst

And payments are okay?

Chow Yew Yuen

Payments, okay.

Loh Chin Hua

Okay. Nancy Wei from UOB Kay Hian, she's not here, but she posted two questions. First question, on Sete Brazil, you mentioned that you have received milestone payments totaling SGD1.3 billion. How much of this relates to deposits for units that have not commenced construction?

Should these units not be required by the customers, would you have to refund the deposits? I suppose the quick answer to that is that we also have -- if this is -- this is if the units are canceled, we also have obligations. And I think these deposits would be kept.

Second question, a question on the four jackup deliveries that have slipped from 4Q 2015 to 2016. How much payment percentage of contracts is outstanding? This would all be the deferred. So we don't give you the exact, but it's typically we would collect at least 20% upfront.

Okay. Sure. Okay, this is from Dan Hui Hui [ph] from SBH Business Times. You have flagged Iran as an opportunity. Which of the O&M sector, drilling, production, offshore support, do you think would take off first in terms of demand in Iran? How do you think O&M players can work around U.S. sanctions that are still in place to tap the immediate opportunities from Iran?

I will answer first and then, YY, perhaps you can add to it. I think first and foremost, we respect all sanctions, so we will not work around the sanctions. Not sure what you mean by that, but clearly that is not something that we would do.

But I think clearly it is -- as you've seen in the reports, likely that they will come off the sanctions, but because of the sanctions, many of the production, as well as the rigs, etc., are quite old. So there is clearly a need for replacement and maybe new rigs to be delivered or they could use new rigs, more efficient rigs, more productive rigs, safer rigs. I suppose to start off with, production would be very strong. I think there should be strong demand for production and on the offshore support, but I imagine that there will be demand for the whole value chain.

Chow Yew Yuen

I think Chin Hua is correct to say that we think that there will be demand for the whole value chain. Because when a market opens up like this, then there will be a lot more repair and maintenance, because there have been platforms that maybe they are quite old. And also, but they are under sanction. The question is to what extent they have maintained those platforms.

And drilling for sure, because there will be new fields that need to be drilled and reserves production. Production, of course, will take time, because it will take a couple of years for production platforms to be built.

So I think the whole spectrum and that's where O&M side of the business, if they want to have an FPSO, we can produce an FPSO for them. If they want to have a repair and maintenance, we can do liftboats. We can do supply vessels. But of course, supply vessels instead of market, there are a lot of supply vessels already in the market.

So I think we look at it as a country, just like -- so when we analyze the opportunity, we look at the whole spectrum of it. And I think for O&M, we have the capability to actually provide this range of services and products that they need. So it's an interesting market for us.

Loh Chin Hua

We have two questions from Simon Jeong [ph] from DBS. First question, Sete Brazil, are you able to disclose the amount of capital that has been deployed to date for the Sete Brazil rigs? Answer, no. And also, how much in payments have you received? I think we have mentioned at one point SGD3 billion. Second question, on gearing, are you currently comfortable with the level of debt? I think that has been answered.

If there are plans to de-gear, what would they involve? Would you consider further sales of property assets? Could you also disclose the amount of undrawn committed facilities that you currently have?

I think the CFO has already given the answers. I just want to stress that we do sell property assets as part and parcel of our business and as what we have already shared, where markets such as China and Vietnam lends itself to us selling units or launching or projects. We've been in China and Vietnam for more than 20 years, so we're actually -- we have a good pipeline, I think over 20,000 units launch ready.

So when the market opportunity allows us to do so, we would, but this is what I would call the normal cost of business and it's also a way of recycling capital and making sure that Keppel Land remains the top in terms of return on equity which it has been -- and one of the top in the last 10 years.

Ang Wee Gee

If I may add to the -- apart from residential units, we're also developing about 380,000 square meters of commercial space in the region, so when the time is right, as the properties are being developed and completed over the next few years -- when the opportunity is right, we will also recycle it. But that is part of our business, part of our strategy of recycling assets.

Loh Chin Hua

Okay, this one is a question and it's quite interesting. This is from the H Singapore, Kang Wen Jin [ph], when and where will Sete creditors meet with the company and what do you think will be the likely outcome? When you say meet with the company, you're talking about with Sete, right, as opposed -- not with us. So I think that's something that we can't tell you. This is -- obviously, from what we all read in the papers, they have some important meetings ahead to discuss their future.

Okay, this is from Abidjan Atiba [ph] from Jefferies. Net debt has increased to SGD6.4 billion this year. Net debt to EBITDA has gone up to 3.7 times from very comfortable levels earlier. At what point will you be concerned enough to cut dividends further to conserve capital?

Chan Hon Chew

Well, I think as we have mentioned earlier, just clearly, we're not in a cash flow crunch. I think we're still -- we have a very strong balance sheet. Our gearing at 53% is still at very comfortable levels.

Now, as for dividends, we do not have an explicit dividend policy, but of course, when the Board meets to deliberate on dividends each year, we have to take into consideration matters like how the Group has performed, the cash flow situation and so on. So that has to be reviewed on an ongoing basis.

Loh Chin Hua

I think as I also shared earlier, if I can add, 40% to 50% is what we have told you, so this is at the lower end of the range, but still within the range. And besides what Hon Chew has said about looking at conserving cash, we're also not only looking at -- we're also looking at opportunities that could arise, so we want to make sure that we have -- it's sufficient dry powder.

Unidentified Analyst

Kim from Malimai [ph] Channel News Asia. I just want to ask, what opportunities does Keppel see in the LNG space and can you elaborate how you are positioning for growth in that space?

Loh Chin Hua

Well, I think the LNG chain is quite interesting, because it actually is of interest to a number of our business units. I think for -- I think what YY and I have said earlier about the KOM side, offshore and marine side, we're already a very major player in that market in terms of building regas, as well as -- FSRU, as well as FLNG, so these are solutions that would be important in the value chain, in the LNG side, that KOM is involved.

So we can come up with proprietary solutions to -- for this gas strategy and it includes potentially going into some of our neighboring countries. I think it's quite interesting, with a lot of opportunities there.

I think the other business area that we have is of course our gas-to-power business. This is Keppel Infrastructure. We do have piped gas coming in and besides generating power, we also sell gas. Maybe I'll ask TG, you want to add something here?

Ong Tiong Guan

I think the lowering of the oil prices also presents opportunity for the gas to power, because we're a buyer of energy, piped gas or LNG. So as our portfolio in Singapore, we take about just in excess of 1m tonnes of LNG a year included. So when the market presents an opportunity for us to enter into a long-term contract to chase LNG, we will do so.

Loh Chin Hua

Okay. This question is from Rama Maruvada from Daiwa Capital Markets. Do you intend to hunker down and ride out O&M downturn or do you see any investment opportunities? If so, would they be for technology or customers and in what areas? Additionally, are there any business segments or areas you intend to diversify into over the next three years, given the long winter scenario for O&M segment?

I think the first question, hunkering down is something that we're already doing, but it's not mutually exclusive in terms of looking for investment opportunities. I think as I shared in the third quarter results, hunkering down, right-sizing, doesn't mean we're just blindly cutting costs. We're also looking very closely at those areas that we need to maintain, those core competencies.

And indeed, there could also be new muscles that we need to build in the offshore and marine side and a good example would be our acquisition or intended acquisition of the Letourneau business. So it's not just about -- can you just remove that? I can't see the questions.

Okay, thank you. So it's not just about hunkering down. I think hunkering down is, as what we have said, is to make sure that operationally, we continue to perform well, we continue to make profits, even if the top line is reduced. But there will be opportunities in all the segments and of course, including offshore and marine.

Are there any businesses or areas you intend to diversify into? I think we run the multi -- it's a good question. We run a multi-business strategy. As we have shared earlier or as I have shared earlier, O&M has been a huge contributor to the Group and we believe that O&M will continue to be a big contributor to the Group going forward, even if in the next few years there could be leaner times.

Then we will expect the other businesses, infrastructure, property, investments, to contribute. So whether we will go into new areas, I think we have shared before as well, we're a multi-business conglomerate, but we will not stray too far from our core competence.

Chow Yew Yuen

I think a little bit, just to add a bit more to what Chin Hua said about the hunkering down. I think in this market, when you can see that actually there is a big CapEx reduction and so on by the oil majors and the more upstream players -- I think for us, hunkering down means that we have to make sure that our operations are right-sized, anticipating what the market will be and we have done that since the beginning of last year.

But I've always said that it is about -- right-sizing is about value engineering which means that our investment in our -- our intended investment in Letourneau, there is a reason, because first of all, Letourneau design has got a very sizable market share.

Secondly, they are in the aftermarket segment of the business. A lot of our rigs, of our design, the B class, A class design and even some of our semi designs, they will be -- some of them will be 15 years old. It offers us the channel for us to go into the after-sales, aftermarket business, too, so there's a rationale behind it.

But having said that, I already emphasized earlier on that we actually continue to invest in new products, R&D, innovation and we're certainly looking at all different kinds of opportunities. The FLNG, for example, when we hunker down, it doesn't mean that everything stopped. In fact, FLNG, the fact is that you read all these reports. Despite oil prices at this level, oil and gas prices have somewhat decoupled, so there are demands for LNG. So we have to make use of our facility to be able to convert existing LNG tankers that are 30, 40 years old, just like we have done for the FPSO, to be able to capture that segment of the market.

So I think for the LNG side of the business, there are other things like FSRU. There are break-bulk distribution vessels. There are type of boats that eventually will, in my opinion, run on LNG. These are all the opportunities that we're pursuing, so while we're hunkering down, we're making sure that our opportunities in those areas will be enhanced.

So when we come out on the other side after this downturn -- after all, it's still a cyclical business -- I think we definitely want to become stronger.

Loh Chin Hua

Thank you, YY. Given the time, we will take two more questions. I think I will take one from the net and I will take one from the floor. So while the people here think about the last question, I will take this one from Wee Lee from Nomura.

Hi, Mr. Loh. With regards to Keppel Land's 22.4% stake in 112 Katong lifestyle mall, in collaboration with Alpha Asia Macro Trends Funds, may we know if this is the beginning, where Keppel will put its balance sheet behind future property projects initiated by Alpha? Wee Gee, you want to?

Ang Wee Gee

Well, first of all, Wee Lee, just to correct you, this is not the beginning, because it's not the first project that Keppel Land has collaborated with Alpha. The first project was actually in Shanghai, our Jinqiao shopping mall, Life Hub, shopping mall, these are good examples of the collaboration that we have amongst the business unit in Keppel Land.

I think when Alpha finds an interesting project and it's an opportunity for Keppel Land to invest, Keppel Land will evaluate it independently and if it's a good investment, we will come into the project from the strategic standpoint, support Alpha or fund management business, as well as from the financial standpoint earn a good return from the project.

Loh Chin Hua

Thank you. Do we have a question from the floor? Ah, Cheryl.

Cheryl Lee

Cheryl from UBS. I have one more question about Sete Brazil. So on the comment that the construction or the first four semis progressed by less than 4% each quarter since 2015, does this mean that -- does this also mean that the revenue booked in for Brazil this year is about SGD640 million?

Loh Chin Hua

Sorry, what's your question -- repeat the question again.

Cheryl Lee

Actually, my question is how much revenue have you booked in in total on the Sete Brazil rigs?

Loh Chin Hua

Okay. How much revenue have we booked?

Cheryl Lee

Cumulatively, to date.

Chan Hon Chew

Oh, to date. I think we don't actually disclose the revenues by project, so we're not able to tell you what is the revenue for the Sete rigs.

Cheryl Lee

And so then can I just clarify one more point? So the construction we see is progressed by less than 4% for each quarter. This is on each rig, right? So it's 4% for the first, 4% for the second.

Loh Chin Hua

No, it's not the [indiscernible].

Cheryl Lee

Obviously, your first one is much more, so that's --

Chan Hon Chew

Yes, anyway, I think that one is that -- just for your information, the last two projects, actually, we have less than 10%. The number five, number six, less than 20% and number four, we're at 21%, I believe.

Cheryl Lee

And then, just for completeness, how about the first three?

Chan Hon Chew

The first three, roughly, around 91%, 92% for the first one and about 70% for the second one and for the third one, about 40%.

Loh Chin Hua

Okay, thank you very much for all your questions. Have a good evening. Thank you.

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