Keppel Corporation's (KPELF) CEO Loh Chin Hua on Q2 2016 Results - Earnings Call Transcript

| About: Keppel Corporation (KPELF)

Keppel Corporation Ltd (OTCPK:KPELF) Q2 2016 Earnings Conference Call July 21, 2016 5:30 AM ET

Executives

Loh Chin Hua - CEO

Chan Hon Chew - CFO

Chow Yew Yuen - CEO, Keppel Offshore and Marine

Christina Tan - CEO, Keppel Capital

Ang Wee Gee - CEO, Keppel Land

Ong Tian Guan - CEO, Keppel Infrastructure

Analysts

Aradhana Aravindan - Reuters News

Cheryl Lee - UBS

Gerald Wong - Credit Suisse

Joshua Lee - Deutsche Bank

Ling Xin Jin - Morgan Stanley

Conrad Werner - Macquarie

Operator

[Abrupt Start]

I now invite CEO Mr. Loh Chin Hua for his opening remarks. Mr. Loh, please.

Loh Chin Hua

Thank you Liz, very good evening to all of you. On behalf of my colleagues on the panel, a warm welcome to the conference and webcast on our results and performance in the second quarter and first half of 2016. The global economy continues to grow at an uneven pace with slowing growth in Europe, Japan and China. Recent international developments, specially the vote on Brexit, have further heightened volatility and risk in the already fragile international economy. Capital markets have recovered from the initial shock of Brexit. However, it could take some time before we can see the full impact on the global economy.

Although oil price has rebounded from below $30 per barrel in January to around $47 per barrel currently, the offshore and marine sector continues to face serious challenges. Given the oversupply in the rig market and falling day rates, we do not expect demand for drilling rigs to return soon. Our traditional customers, the offshore drillers, need time to repair their balance sheets. Meanwhile oil majors continue to conserve cash for dividends and potential M&As rather than spend on E&P. The industry's CapEx cycle will take time to stabilize and recover and we must be prepared for not only a long winter, but a harsh one. Eventually E&P CapEx in the industry will return when oil majors have to arrest falling production and replenish their declining reserves to meet the world's continued demand for fossil fuels.

Silver lining for Keppel is a resilient trend of urbanization in Asia, buoyed by a growing middle class and continuing rural urban migration. Whether it is meeting the need for energy, green homes and office buildings or high-quality infrastructure such as power plants, waste-to-energy plants and data centers, the Keppel Group is well placed to seize growth opportunities by providing solutions for sustainable urbanization. This has been a tough quarter. Nevertheless, our multi-business strategy continues to support Keppel's performance amidst the challenging environment. We achieved a net profit of SGD416 million in the first six months of 2016, lower by 45% compared to the same quarter in 2015 due mainly to weaker results from the offshore and marine business and also the absence of one-time gains from the infrastructure division compared to the same period a year ago.

The impact was cushioned by the good performance of our property division which is now the biggest contributor to the Group's bottom line. Our EVA for the period was SGD9 million while our annualized ROE was 7.4%. Our net gearing rose slightly from 56% to 62% quarter on quarter mainly due to the payment of the SGD400 million final dividend distribution for 2015. The pace of growth in working capital requirements by Keppel O&M has plateaued in line with the reduced workload.

Our net gearing level is comfortable and our balance sheet remains institutional quality. Having considered the Group's performance and business requirements, the Board of Directors has approved an interim dividend of SGD0.08 per share for the first half of 2016 which will be paid out in August. Let me begin with the performance of our offshore and marine division. Keppel O&M has captured new contracts worth more than SGD460 million year to date which include those for four FPSO projects, a pipe lay vessel and three dredgers.

We completed the acquisition of Cameron's offshore product division and have commenced operations of Keppel LeTourneau since May this year, with offices in the United States, UAE and Singapore. LeTourneau acquisition complements Keppel O&M's existing competencies. With our combined capabilities, we will be able to provide even better value-added solutions to drilling operators. It also enables us to expand our business in the provision of after-sales and aftermarket services, providing recurring income for the Group. Despite a weak medium term outlook for the oil and gas sector, we believe the LNG market has significant potential given the trend towards the adoption of cleaner fuel technology.

Leveraging our experience and expertise in servicing vessels including gas carriers, Keppel O&M has established a 50-50 joint venture with Shell Eastern Petroleum to supply LNG bunkering operations in the Singapore port. The JV company is expected to start supplying LNG as a fuel for ships in 2017. In line with our efforts to explore new markets, Keppel O&M has formed a Singapore incorporated JV company which will set up a center in the Russian Federation for the design and engineering of mobile offshore drilling units for shallow waters to cater to the needs of the region. Both the JV and the Design and Engineering Center will in the conduct of their activities adhere strictly to the prevailing international sanctions imposed on the Russian offshore oil and gas sector.

In China, our partner Titan Petrochemicals Group has completed its restructuring and resumed trading of its shares on the Hong Kong Stock Exchange on 15 July 2016. Keppel O&M will provide management services to Titan and work with them to develop the Titan Quanzhou Shipyard in phases. This yard in Fujian province is an extension of our Near Market, Near Customer strategy and the partnership will enable Keppel to further grow our presence in the Chinese market without needing to invest in new capacity. Keppel O&M continues to focus on executing its projects well, delivering on safety, timeliness and budget, to the satisfaction of our customers. For the first half of 2016, Keppel O&M delivered a number of major projects which include two KFELS B Class rigs to Grupo R and one drilling rig to GDS.

Just last week, Keppel AmFELS delivered a fourth jackup to Perforadora Central. Earlier in June, Keppel AmFELS also handed over to another customer one of the world's largest harsh environment enhanced mobility land rigs. Apart from rigs, Keppel O&M also delivered a liftboat and a high-specification deepwater derrick lay vessel built to our own proprietary design amongst other projects. Other key projects to be delivered by our yards this year include another jackup, two semis and five FPSO/FSU conversions. We have received requests to defer the delivery of three jackups for Grupo R and one jackup for Parden Holdings to next year. The contracts remain valid.

We will be compensated for the delays and are working towards delivering them based on the new schedules agreed upon with our customers. We have stopped work on the semi-submersibles for Sete Brasil since the end of last year. Sete Brasil has been working with a financial advisor on its restructuring plan and has filed for judicial recovery. While we wait for more clarity on Sete's plans, we believe that the provision of SGD230 million made last year remains appropriate and adequate. We made the provision on the assumption that Sete may not continue its business as before.

Now that Sete has filed for judicial recovery, we have excluded Sete's projects from our net orderbook. The contracts remain legally valid and we will continue to work with Sete towards achieving a win-win outcome. Our net orderbook currently stands at about SGD4.3 billion, excluding the Sete Brasil projects which amount to about SGD4 billion. Since 2015, we have been taking active steps to manage costs and right-size our operations. Although we have a lower top line, we have been working hard to maintain our margins. For the first half of 2016, Keppel O&M reduced its direct staff strength in Singapore and overseas by 4,900 headcount or around 16% of its staff.

Subcontract headcount in Singapore was also further reduced by another 670 persons. Since we started rightsizing our operations a year-and-a half ago, we have reduced our global direct workforce to date by a total of about 11,000 headcount and about 8600 headcount of our subcontract workforce in Singapore. Apart from reducing variable costs, we have also worked at cutting our overheads which have come down by 20% compared to the first half of 2015. These efforts have allowed our gross operating margins to remain at 12.8% for second quarter 2016 and 13.2% for first half 2016 respectively, despite the lower top line. While we remain confident of the long term fundamentals of the offshore and marine industry, we're mindful that a long downturn may be upon us and we have to position our business accordingly. Our cost-cutting and rightsizing efforts will continue.

Beyond natural attrition, we will look at ways to reorganize and streamline our yards and resources to become leaner and more efficient. For example, we can look into integrating our engineering resources across the different units in the division. If necessary, we may also mothball yards with low work volumes. For Keppel, it is not just about cost-cutting. We also want to be ready to have the ability to ramp up when the upturn comes.

As I have updated before, we will through this down-cycle continue to invest prudently in R&D, in training and building capability so that we may stay at the forefront of this industry when the market turns up again. To stay ahead of the curve, we will be agile to seek opportunities in other market segments which have been less affected by the downturn, including floating production solutions such as tension leg platforms and production semis, LNG-related solutions and services and also non-oil and gas projects.

We're also exploring opportunities to build Jones Act vessels in the U.S. The harsh winter will not last forever. Our aim is to keep Keppel O&M profitable during the downturn, while at the same time, explore new opportunities and develop new capabilities to strengthen the Company. This will ensure that we entrench our leadership position in the global offshore and marine industry into the future.

Our property division performed well and achieved stronger home sales in the first half compared to that of a year ago, driven by continuing urbanization trends and strong demand for homes in China. Our strategy of geographical diversification has served Keppel Land well and we continue to strengthen our presence in our core and growth markets. Riding on improved sentiments and growing demand for high-quality homes in Vietnam, we invested SGD182 million in Ho Chi Minh City for prime developments in the Thu Thiem New Urban Area and subscribed for convertible bonds in Nam Long Investment Corporation, a leading local affordable housing developer.

In Singapore, Keppel Land strengthened its commercial portfolio with the acquisition of a 22.4% stake in I12 Katong lifestyle mall which is managed by Keppel Land Retail Management. Keppel Land also made divestments in Hanoi, Bangkok, Colombo and Jiangyin, China. We will continue our strategy to recycle the assets and redeploy capital and focus on seeking higher returns. Charting milestones in Yangon, Myanmar, we topped off our joint venture project, a 23-storey office tower in the Junction City mixed-use development and also opened the new Inya Wing of the Sedona Hotel Yangon. Keppel Land has been in Myanmar for 20 years and has established a reputable brand name in the country. Home sales continued its strong momentum in the first half of 2016. Keppel Land sold 2,140 homes, an 18% increase year on year.

We achieved a total sales value of SGD960 million. In Singapore, we sold 190 units compared to 100 sold in the first half of 2015. However, with the property cooling measures unlikely to be unwound soon, the market remains soft. Keppel Land's home sales overseas have continued to be resilient and contributed strongly to the profits of our property division. The Chinese property market remains healthy in the key cities where we operate, despite the tightening of cooling measures in some tier 1 cities. About 86% of our home sales in the first half of the year were in China, especially Chengdu, Wuxi and Tianjin. We can expect contributions from 3,400 units of overseas homes sold to be recognized as the homes are completed from the second half this year through to 2018.

Keppel leads the Singapore consortium in the development of the Sino-Singapore Tianjin Eco-City, a bilateral project between Singapore and China to build a model for sustainable urbanization. Now into its eighth year of development, the Eco-City has with the support of the Singapore and Chinese government been transformed from barren saline and alkaline land into a green city with more than 50,000 residents and 3,500 registered companies. With improved connectivity and a growing range of amenities, including schools, business parks and community centers, we're seeing a steady increase in demand for homes and land.

In first half 2016, the Eco-City sold around 3800 homes, a marked improvement over the 2,900 homes sold in first half 2015. Reflecting the improved home sales, land prices have also risen. Last week, our 50-50 joint venture master developer in the Sino-Singapore Tianjin Eco-City held an auction where two plots of residential land were sold at record prices of around CNY8000 per square meter of GFA. This is more than three times the price of similar land sold earlier this year in the Eco-City. The Eco-City is a long term project and there is still a lot of work ahead of us. However, the appreciating land price reflects the Eco-City's increasing maturity and the market's growing confidence in the project.

Apart from residential projects, more companies are also investing in and setting up operations in the Eco-City, bringing more vibrancy and jobs to the township. Keppel Land has close to 18,500 launch-ready homes in its pipeline from now through 2018, most of which are in China, followed by Vietnam. To put this number in perspective, Keppel Land sold 4570 homes in 2015 and 2450 in 2014. Our positive home sales have been riding on continuing strong urbanization trends and we have a 70,000-strong pipeline to meet the market's needs. Our aim is to increase the inventory turn and proactively launch more projects in those markets that have favorable conditions.

On the commercial front, Keppel Land continues to strengthen its quality portfolio which is now over 1 million square meters of GFA under development. These projects will be progressively completed, including the retail mall in Saigon Centre which will open very shortly. The completed properties will contribute to our recurring income and will be a source of revaluation and disposal gains when they are eventually monetized. We will now update on our Infrastructure Division. In the first half, we also broke ground for Keppel DC Singapore 4.

This is our fourth data center in Singapore under Keppel Data Centers, a joint venture between Keppel T&T and Keppel Land. This data center features approximately 183,000 square feet of GFA and phase 1 is on track for completion this year. Yesterday, we announced that our data centers Keppel DC Singapore 3 and 4 have secured contracts worth more than SGD144 million. Expanding its data center footprint into Hong Kong, Keppel Data Centers entered into a long term collaboration agreement with Hong Kong's PCCW Global to co-develop and market the international carrier exchange. In our logistics business, the distribution center in Tianjin is undergoing testing and commissioning and when operations start, it will offer cold chain facilities and a warehouse area of 131,000 square feet.

Our Investment Division is Keppel's fourth business vertical, comprising the newly created Keppel Capital and the Group's holdings in associate companies, k1 Ventures, M1 and KrisEnergy. Keppel REIT successfully completed the divestment of its 100% interest in 77 King Street, an office development in Sydney, Australia, for AUD160 million which was about 40% above its original purchase price and an approximate 27% premium over its valuation. Keppel Infrastructure Trust, together with its joint venture partner Shimizu Corporation, has handed over the newly completed 1-Net North Data Centre which commenced a 20-year lease.

Funds under Alpha Investment Partners continue to perform well. The funds realized proceeds of about SGD226 million from divestments in Singapore and Tokyo. The Tokyo assets generated U.S.D IRR ranging from 12% and 15%, while that in Singapore generated IRR of 185%.

During the quarter, the Alpha Asia Macro Trends Fund II also completed the acquisition of various office buildings in Singapore, Tokyo and Seoul. Just yesterday, we announced that two new closed-end private equity funds, the Alpha Data Centre Fund and the Alpha Asia Macro Trends Fund III managed by Alpha, have received initial capital commitments of $410 million out of a combined target size of $1.5 billion. A key development this month is the completion of the restructuring of the Group's four asset management businesses, namely Keppel REIT Management, Alpha Investment Partners and Keppel Infrastructure Fund Management as well as a 50% interest in Keppel DC REIT Management, under Keppel Capital.

With total AUM of SGD26 billion, Keppel Capital will strengthen our capital recycling platform and provide a steady pillar of recurring income for the Group. Keppel Capital will also work closely with the Group's other business units to expand our capital base with co-investors, thus allowing us to seize opportunities for growth without putting a strain on our balance sheet. This may also create potential pull-through projects for the Group's various business verticals. Established institutional investors have told us that they want to get closer to the coal face to own real assets, including those in the offshore and marine, real estate and infrastructure industries.

These investors appreciate a likeminded partner like Keppel who is able to create quality assets and has the ability and capacity to align its interests with theirs. Keppel also has strong operating capabilities in some of the assets that we create such as property, data centers, waste-to-energy plants, power plants and other infrastructure assets. To realize our full potential as a conglomerate and to open up new growth opportunities, our business units are collaborating even more closely with one another, capitalizing on their wealth of expertise, industry knowledge and networks.

The new $500 million Alpha Data Centre Fund is a prime example of how we can synergize our business verticals and leverage our strengths to create sustainable value. The fund will invest in brownfield and greenfield developments across Asia-Pacific and Europe, where there is strong growth in data creation, storage and data center outsourcing. Alpha will raise and manage the fund and work with Keppel T&T to create or acquire assets. Meanwhile, Keppel Data Centre Holdings, a 70-30 joint venture between Keppel T&T and Keppel Land, will develop and project-manage the data centers in the fund as well as serve as the facility manager. There could also be opportunities to rope in other businesses in the Group, such as Keppel Infrastructure, to provide cooling and power solutions where it makes sense. When the assets are matured, they can be injected into Keppel DC REIT as part of the deal flow pipeline or sold to other interested buyers.

There will also be fees that we can earn from this process, all of which will contribute recurring income to the Group. Whether in data centers or other areas of Keppel's expertise, there will be more of such opportunities for Keppel's diverse units to link up as OneKeppel along critical value chains. By bringing in like-minded co-investors, we can give the Group even greater financial capacity to grow, through building and operating a larger number of data centers without straining our balance sheet.

For first half 2016, recurring income contributed SGD178 million to the Group's total net profit. This is comparable to our recurring income in first half 2015 in absolute dollar terms and represents around 43% of our net profit for first half 2016. It demonstrates in challenging times that recurring incomes can be a stabilizer for our performance with its consistent contributions. We will continue our focus on growing stable recurring income for the long term. Through these challenging times, we're working hard to ensure that Keppel remains resilient, underpinned by our rightsizing and cost management efforts in the offshore and marine division, our continuous pursuit of new growth markets and building new capabilities. We're confident that our multi-business strategy continues to stand us in good stead and through these challenges, Keppel will emerge stronger.

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

Chan Hon Chew

Thank you Chin Hua. A very good evening to everyone, I shall now take you through the Group's performance for the second quarter of 2016. In this quarter, the Group's net profit was SGD205 million which was 48% below the same quarter last year earnings per share was correspondingly 48% lower at SGD0.113. Our EVA was at SGD7 million.

The Group's revenue for the second quarter was 37% or SGD938 million lower than the same quarter last year. All divisions except property division recorded lower revenues during the quarter. Operating profit at SGD234 million was 43% or SGD180 million lower compared to the second quarter of 2015. This was due mainly to lower profits from the offshore and marine and infrastructure divisions. Correspondingly profit before tax decreased 43% to SGD285 million. After tax and non-controlling interest, net profit for the second quarter was lower by a wider margin of 48% or SGD192 million due to higher effective tax rate this year.

As last year's profit included gains from the sale of 51% interest in Keppel Merlimau Cogen which is capital in nature. Similarly earnings per share decreased 48% to SGD0.113. Overall the Group's 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 lower volume of work, deferment of some projects and suspension of the Sete Brasil contracts. Infrastructure too saw lower revenues due mainly to lower revenue from power and gas business as a result of lower prices and volume partially offset by higher revenue from infrastructure services with the commencement of the Doha North operation and maintenance contract. This was partially offset by a 16% growth in property division's revenue primarily due to higher revenue from residential projects such as the Eight Park Avenue in Shanghai and The Glades in Singapore.

Offshore and marine division's pre-tax profit was 60% or SGD133 million lower driven mainly by lower operating results arising from lower revenue and net interest expense. The division's operating margin was 12.8% compared to 13% in the same quarter last year. The property division's pre-tax profit was 7% or SGD10 million lower despite recording higher revenues because the prior profit benefited from the write-back of cost accruals.

Infrastructure division reported a 66% or SGD73 million decrease in pre-tax earnings from the same period last year due mainly to divestment gains recognized in the same quarter last year. In 2015, the division's profits were boosted by gains from divestment of 51% interest in Keppel Merlimau Cogen and dilution re-measurement gains from the combination of Keppel Infrastructure Trust and CitySpring Infrastructure Trust partially offset by losses following finalization of cost to complete the Doha North Sewage Treatment Plant. After tax and non-controlling interest, the Group's net profit in the second quarter decreased by 48% or SGD192 million to SGD205 million as compared to the same period last year with property division being the top contributor to the Group's earnings at 46% followed by offshore and marine at 30%.

Next I shall take you through the performance for the first half of 2016. Net profit for the first half of 2016 was down 45% from the same period last year to SGD416 million, earnings per share also decreased by the same extent to SGD0.229. Annualized ROE declined to 7.4%, while EVA was lower at SGD9 million. Free cash outflow decreased from SGD316 million to SGD262 million due to lower operational capital expenditure in offshore and marine division. Net gearing increased from 53% as at the end of 2015 to 62%. This is due mainly to working capital requirements from offshore and marine and the payment of the final dividend for 2015.

We're also pleased to announce an interim dividend of SGD0.08 per share for this half of the year to reward our shareholders for the continued confidence and support. In the first half of 2016, the Group earned total revenue of SGD3.4 billion, a 37% or SGD2 billion decrease from the same period last year. All divisions except property division recorded lower revenues. Operating profit at SGD512 million was 37% or SGD300 million lower than the same period last year. The decrease is led by lower profits from offshore and marine and infrastructure partially offset by higher profit from property. Pre-tax profit fell by a wider margin of 41% or to SGD390 million due mainly to lower share of profits from associated companies and higher net interest expense compared to the same period last year.

After tax and non-controlling interest, net profit was 45% or SGD341 million at SGD416 million. Similarly, earnings per share decreased by 45% to SGD0.229. Overall the Group's revenue of SGD3.4 billion was 37% lower from last year driven largely by the 56% decrease in offshore and marine revenues resulting from lower volume of work, deferment of some projects and suspension of Sete Brasil contracts. Property revenue increased by 37% to SGD972 million as compared to the first half of 2015 led by higher revenue from residential projects such as Eight Park Avenue in Shanghai and The Glades in Singapore. Infrastructure's revenue decrease by 24% attributed mainly to lower revenue from power and gas business as a result of lower prices and volume partially offset by higher revenue from revenue services with the commencement of the Doha North operations and maintenance contract. The Group recorded a pre-tax profit of SGD563 million for the first half of the year, 41% or SGD390 million lower than 2015.

The offshore and marine division pre-tax profits was 56% or SGD262 million lower as a result of low operating profits and higher interest expense. The division's operating margin for the first six months at 13.2% was slightly higher than the 12.5% in the same period last year. In the property division, pre-tax profits increased by 17% or SGD39 million due to higher contributions from residential projects in China and Singapore and lower net interest expense. Infrastructure's pre-tax profit was lower by 62% or SGD88 million due mainly to divestment gains recognized in 2015 as mentioned earlier in our presentation on the results for second quarter of 2016.

Investment division's pre-tax profit decreased 70% or SGD79 million due to share of losses from associated company KrisEnergy and the absence of gains from sale of investments which amounted to SGD50 million in the first half of 2015. After tax and non-controlling interests, the Group's earnings decreased by 45% or SGD341 million to SGD416 million with the property division being the top contributor at 47% followed by offshore and marine at 37%. The Group recorded a net profit of SGD416 million for the first half of the year amidst a very challenging macro environment. On a quarter-to quarter basis, the results from the second quarter of 2016 is comparable to the first quarter of the year. This translated to an earnings per share of SGD0.229 which was 45% lower than the corresponding period in 2015.

In this first half of 2016, our annualized ROE has decreased to 7.4%. Our proposed interim distribution to our shareholder for this period will be SGD0.08 per share. In the first half of 2016, the Group generated SGD629 million of cash flow from operations. After accounting for working capital requirements mainly from offshore and marine division, operating cash outflow for the six months was SGD361 million which is higher compared to outflow of SGD272 million in the same period last year.

Net cash generated from investing activities amounted to SGD99 million, comprising dividend income from associated companies of SGD156 million less investments and operational capital expenditure of SGD64 million. As a result, there was an overall cash outflow of SGD262 million for the first half of 2016. This is lower than a cash outflow of SGD316 million in the same period last year. Keppel continues to harness our strengths in these uncertain times, rallying across divisions to take full advantage of our core competencies in our multi-business strategy. We continue to look ahead and build resilience for the future so that we can be well prepared to deliver sustainable growth and create value for our shareholders and customers in the long run. Thank you.

Question-and-Answer Session

A - Loh Chin Hua

Thank you, Hon Chew. Now is Q&A time. For those of you who are in audience, the view is a bit obscured by the cameras here. So if you don't mind, just stand up. There'll be a mic handed to you and then please tell the room who you are and where you're from. Thank you. Yes.

Aradhana Aravindan

Aradhana from Reuters News. I just wanted to check on your orderbook, when was the last time it reached this low? Has this been--

Loh Chin Hua

You're talking about a net orderbook, right?

Aradhana Aravindan

In the net orderbook, yes.

Loh Chin Hua

Net order were SGD4 billion. Anyone can take a quick look. We'll come back to you. Someone can find the answer. Can we have the next question? Yes, Cheryl.

Cheryl Lee

I'm Cheryl from UBS. I have a couple of questions. Firstly regarding your cash flow, on the operating cash flow there was a negative working capital of about SGD811 million in the first half year and about SGD150 million plus in the second quarter. How much was O&M, can you help us quantify and also how much more working capital will O&M require in the coming half-year? The second question I have is about Tianjin Eco-City and you mentioned about houses on there being sold. Could you just give us a sense of what is the GFA of a residential plot area still left which is available for your JV to sell?

Loh Chin Hua

Okay. The last time the net orderbook, to answer the first question from the lady from Reuters, was in 2010 when the net orderbook was SGD4.6 billion, 2010.

Chan Hon Chew

Yes, I think your question on the operating cash flow, yes, most of the working capital requirements came from offshore and marine. Of course, for the property business there's also the working capital for the development of the properties and I think suffice to say -- I mean I won't be able to give you any projections, but suffice to say that with the slowdown, there is going to be less demand on the working capital, but balanced against that on the other hand with the deferral of some of the projects, with the deliveries shifting to the right, some of the receipts would be shifted to future years. So on balance I think that we do not expect major changes to our working capital requirements.

Loh Chin Hua

I think as I've said in my opening remarks, the growth in working capital requirements for O&M has plateaued in line with the slower work that we see. The second question you have with regards to Tianjin Eco-City, about 40% of the residential, commercial and industrial land in the Eco-City has been developed or has been sold to third parties for development. So we still have about 60% left.

Gerald Wong

Gerald from Credit Suisse. I've got three questions. Firstly, for the offshore marine division, what is the scope for further cuts in your direct and subcontract workforce because I notice that the pace of decline in the subcontract workforce has actually slowed down in the first half of the year? Second question is one the FLNG conversion. Can you provide an update on the first FLNG conversion for Golar and the expectation for the second and third units to go ahead? Lastly on Keppel Capital, can you provide an update on the regulatory approvals?

Loh Chin Hua

I'll ask Mr. Chow to answer the first two questions and then after that Ms. Tan will answer the third question on Keppel Capital.

Chow Yew Yuen

I think for first half of this year, we have reduced our direct staff strength in Singapore and oversea by 4,900. Subcontractor, like you rightly pointed out, we only have a reduction of 690, but to look at what we've done since the beginning of 2015 we have actually reduced our global direct workforce by a total about 11,000 and our subcontract workforce in Singapore by about 8,500. So actually this process of rightsizing actually started more than 18 months ago since the beginning of 2015.

Now we will respond to the changing market condition. So we continue to look at it and see how we can continue to right-size, but at this point in time suffice to say that we're leaving no stone unturned, we will look at projections going forward and that we will have the corresponding action. Thank you. And as far as the FLNG, the first FLNG project which is [indiscernible], as you know that has been contracted and they have a home to go to which is in Cameron. The project is coming along fine, delivery is scheduled for sometime next year in June-July period and we will be on track to deliver that project.

Loh Chin Hua

Before Chris answer the question on Keppel Capital, I think just to add to what I said, we do have some flexibility in how we position our workforce because we have both direct and indirect labor and that is definitely as why I say there's enough scope for us to make changes as required. But in some times like this when the projects -- maybe we have some projects that are completing, it makes more sense to keep some of the indirect labor a bit longer. Chris?

Christina Tan

On the question on the regulatory approval, we have received MAS approval on the consolidation of our interest in various REITs and funds managers.

Loh Chin Hua

So the answer is you have?

Christina Tan

Yes.

Loh Chin Hua

Okay. We also can get questions -- you can also submit your questions over the web. We will answer one more question from the floor before we move to the web. Yes.

Q – Unidentified Analyst

[Indiscernible] from Bloomberg. I have two questions. You mentioned in your release about mothballing your yards as you see demand. Could you elaborate a bit further, are you planning to temporarily shut down some of your yards or what are the yards you are probably looking at doing so if that's the case? My second question is on order. How are the orders coming in? Are the inquires still coming in or have the inquires basically stopped coming in for you?

Chow Yew Yuen

I think as far as we're responding to the market situation and as you know we started from a very high base few years -- I mean the last seven-eight years and I think at this time when the orderbooks are lower than what they used to be, so we have some overcapacity.

So right now we're looking at it to see what is the rational way of looking at the capacity and so we do not rule out the possibility that we may temporarily mothball some of our facility so that we can concentrate and reduce the overhead by temporarily mothballing some of them. I think which yard to mothball is still in our plans and until we have reached a decision I think we will make further announcement when time is right.

Loh Chin Hua

I think when we mentioned about mothballing, this is just something that we can consider. We have not decided yet. That's important. I think as what [indiscernible] said we have built in quite a lot flexibility in our production in terms of the workforce that we have and the yards that we have. We have more modular yards rather than one big yard and not that long ago I think in 2014 we built 21 rigs, so it is a world record.

So that's a sign the market was good so we were able to take orders, we were able to expand our production capabilities. But at the same time we're always mindful that this is a cyclical business. So we try not to over-invest in capacity building and to also allow some flexibility in our production and our workforce precisely to take care of situations like this where temporary things might be a bit slower, but we're not going away, we're going to come back strong.

Chow Yew Yuen

Actually the ability to mothball means that we have a lot flexibility like what Chin Hua say. I think it is a problem when you don't have -- when you're over-invested and you have less flexibility and then becomes a structural problem. So I think to me the ability that to be able to mothball and maybe bring the best efficiency and productivity into a more concentrated work area is a positive.

Now you have a second question which is about when orders and inquires. I think what we have to recognize is that currently like Chin Hua has mentioned in his opening address that some oversupply in the rig market and actually with the falling day rate we actually do not expect demand for drilling rigs to return soon and that's one of the reason why we're looking at mothballing and reducing capacity and rightsizing. However, there are some good positive indication because there's increased inquiry in a number of area.

One is production platform and FSRUs and also gas-related projects and in the specialized vessel segment we have dredgers, we have ice-class vessels and we have Jones Act vessel to look at. So I think while the industry CapEx cycle will take time to stabilize and recover, but we must prepare for long and harsh winter like what Chin Hua says in the opening address. I think that would be the prudent thing to do.

Loh Chin Hua

I will take a question now from the web. This was submitted by Jacqueline Woo from Straits Times. Her question, does Keppel expect to further reduce its headcount for both direct and subcontract staff in the second half of the year aside from natural attrition? If so, by how much, how much more? I think as I have mentioned in the opening remarks, we have to get the organization size appropriately for the tough times ahead. So all options are being considered, but we have not made any decision at this point in time. Okay. There's a question submitted by [indiscernible], didn't put the affiliation. Could you provide us the latest update for the drillship? Any cost overruns as compared to the initial set budget?

A – Unidentified Company Representative

Yes, good news is that there's no cost overrun. In fact I think we're looking at maybe even able to get below budget, small below budget. The progress is coming along fine. I think in the last report, I have mentioned that actually we have the ability because we build it under own account that we're able to slow down to meet so that we can actually time it for the market.

So right now, the vessel will come back from Japan. As you know we have contracted the hull to IHI. The vessel will come back probably end of this year and we will take our time, it will probably take a year to complete the vessel. And so we're timing it to suit the market condition. I think the other thing about the drillship is that because this is not a commodity rig as you know, this is actually designed for a purpose, it's a production drilling unit.

So that one we actually have some inquiry, some active inquiry. So I think we're kind of timing it, but the good thing is that we're able to get everything under control. Thank you.

Loh Chin Hua

Another question submitted on the web by Gary of Value Investing. His question is given the rising debt to equity ratio 2.62, what is the comfortable level of gearing? Is Keppel looking to divest some non-core investments example K1, M1, et cetera, to lower the debt level? Well, Gary, I think you have heard Hon Chew as CFO said, various time said our comfortable gearings we want to stay below 1. So we're quite far from that and I think more importantly you can see that our gearing ratio at least for the last two quarters has not grown as quickly. So as I said in my opening remarks, we're still at a very comfortable level. Having said that, we do have some investments as you pointed out which are non-core. So those investments that are non-core, we're always looking to monetize them. It's not because of our gearing level which I keep adding, I want to emphasize we're very comfortable with the gearing level. But we want to find opportunities to monetize our non-core assets so that we can redeploy them and we can earn a better return so that's more the reason rather than because the gearing is high.

Okay. Maybe I'll take another question from the floor. Yes.

Joshua Lee

Joshua from Deutsche Bank. I'm just wondering whether Keppel O&M is open to collaboration or has collaborated with your other O&M peers such as Sembcorp Marine given this downturn.

Loh Chin Hua

Well, the answer is I don't think we've collaborated before, right? But I think in this cycle if you're asking indirectly what is the possibility of us coming -- I mean the point is that right now as you can see the problem in the industry is capacity. So adding new -- whether it's Sembcorp Marine or it's someone else it doesn't help at this present time. I think it's really about hunkering down and I think Keppel has been real fortunate because whilst we had made good money in offshore marine over the last so many years, over decade, we have been quite prudent in how the moneys have been invested.

Being a multi-business we were able to redeploy the capital or the profits that we made in other parts of our -- or other division within the Group and you can see that actually we have not really invested excessively in a new capacity building. And I think we're in a pretty good position. The market is tough as I've said, but I think we're quite well equipped to handle this downturn.

Ling Xin Jin

Ling Xin Jin from Morgan Stanley. I have two questions regarding the property division. Firstly, would you be able to share if you have a target for the number of units that you plan to sell this year as well as next year, for the remaining part of this year? And also you mentioned that you have about 18,000 launch-ready homes, but you also have a strategy of improving your inventory turn. So at what level of inventory of launch-ready homes would you be comfortable with?

Loh Chin Hua

Thank you. Wee Gee, would you?

Ang Wee Gee

I think we have indicated that we currently have a land bank of 70,000 units of which almost 40,000 are in China and another more than 20,000 in Vietnam and with this land bank we would be able to have this inventory to be developed over many years. And looking our projects, the stages of construction for our projects, we could launch about 18,000 units over the next two-and half years and we could expedite the construction from some of their projects [indiscernible] even bringing more units to be launched in the next few years.

Obviously we would try to turn our inventory as quickly as possible, but it would also depend on the market and the key markets that we're investing in out there in China and Vietnam, the outlook for the next few years looks very good. So certainly for this 18,000 unit, if you look at our past sales numbers, we would be able to exceed them. So for this year we expect to sell more units than what we did last year.

Loh Chin Hua

Thank you Wee Gee. Maybe take -- okay, yes, sir.

Conrad Werner

It's Conrad Werner from Macquarie. You mentioned again that the Sete provisions you're comfortable with those, but you had a few more deferrals since the start of this year in the non-Sete part of the orderbook. How often does that part of the business get reviewed for potential provisioning? Is it once a year or do you look at it every quarter? And given that we've had a few more of these deferrals, are we close to seeing some provisions on that aspect of the orderbook?

Loh Chin Hua

Well, the short answer -- I'll ask Hon Chew to add to it, the short answer is that we review every quarter and I think for those of you who recall at the beginning of the year, we do have a very -- well, we have independent Board, it has a very strong AC and the AC looks at it, we have Keppel Offshore Marine also has a separate Board which also has a risk and audit committee. They also look at it and we also have auditors looking at this and this is done every quarter. Hon Chew, you want to add?

Chan Hon Chew

Yes. I think that's quite comprehensive. The only thing I would like to say is that, yes, we have some further deferrals, but I think as we review them every quarter we look at things like the quality of the receivables and in this case as you know we have always been very disciplined in taking orders. So the order receivables at a minimum would have very substantial deposits and our customers are all very well established, customers, not your typical speculators, yes. So I think as Chin Hua has said we have gone through a very rigorous review with our audit committee, with our auditors every quarter and the conclusion is as of now we do not need any provision.

Loh Chin Hua

Okay, maybe we take one more question from the floor before we turn to the web. Anymore? Yes, Cheryl.

Cheryl Lee

I have a follow up question on offshore and marine. Could you give us an update on the semi-submersible projects not for Sete meaning I think for SOCAR as well as undisclosed and I suppose also things like what is the payment status and yes and the delivery outlook?

Chow Yew Yuen

We will be delivering two semis in the second half of this year. One is for Floatel and the other one is for the SOCAR project like you mentioned. I think the SOCAR project is on progress statement, so I think the reason for owners not taking delivery is definitely not there. In fact the owners are keen to take delivery because they have a lot of drilling to be done in the Caspian Sea. The progress of it is that we're coming along very well. I think we're quite happy with the interim progress that we're achieving and of course as you know that this project is supported by Keppel FELS and Keppel FELS is also sending quite a lot of our experts over there for testing and commissioning. So I think that project is doing very well.

Loh Chin Hua

Okay, I'll take a question from the web. This is from Tan Hwee of Business Times. She has two questions. First question, it is gratifying that Keppel is still looking at pockets of opportunities in offshore and marine. Now that oil is holding up at $40 to $50, can you share your sentiments and projections regarding the sectorial recovery if any? I think if you had followed my opening remarks you will learn that we think that we have -- the long term prospect for the industry is still very bright, but we're prepared for a long and harsh winter.

Second question, the analyst reports warning against loss of human resources in oil & gas and offshore and marine sectors, how quickly do you think your human resource policy can respond to the swings in the O&M market? I think again I have already highlighted that earlier in answer to another question we have in our -- the design of our production system a lot of flexibility in how we respond to market conditions. When times are good we can build 21 rigs. But at the same time we do not over-invest in capacity so that when times are tougher like now we're able to right-size without causing too much disruptions.

Okay. Next we have a question from Lim Siew Khee from CIMB. She has two questions. First question, will you need to review the deferred rigs and potentially provide for impairments? I think that has been answered. She has three questions. Okay. Second question, when do you see a realistic timeline resolution with Sete Brasil? What other options being discussed? The resolution I think is something that will take time.

We're looking for win-win solution. I think the key here is that the rigs that we're building or we're in the process of building are in Brazil and we believe that they are needed there and so we'll have to -- we may have to take a bit of time to work through because they are quite a lot of stakeholders involved. The third question, why did properties profit drop to SGD94 million in second quarter 2016 from SGD105 million in second quarter 2015? I think CFO has answered that, but maybe you can repeat that again.

Chan Hon Chew

Yes, okay. Well, for the second quarter I'm sure you've noticed because despite the increase in revenues in the second quarter the net profit actually dropped. That's largely because last year second quarter there were some write-back of cost accruals after finalization of final accounts with the main [indiscernible]. So as a result because of the one-off last year, this year's profit is lower by comparison.

Loh Chin Hua

Okay. I'll take another question. It's interesting. This is from Morris from Wilmar International. May I know what will be the dividend issue to shareholder? May I know what will be the dividend issue? If you're asking about the interim dividend, the interim dividend is SGD0.08 per share. But if I'm not answering your question, could you please resubmit again? Thank you.

Next question from the web is from Kia from Smartkarma. Given the run-up of the M1 share price recently, is it a better time for your Company to decide on the sale of stake in [indiscernible]? That's not a question that we will answer. Okay.

Okay, next question, based on what is in your order book if there's no further delay request would you expect the O&M revenue to be the same level as first half? If not what would be the ballpark level or run-rate for second half? Again we don't give projections. So, sorry, you have to give me questions I can answer.

Third question, could you recap on the -- what is this -- 1B term loan in the first half? Term loans -- could you recap on the SGD1 billion term loan in the first half? He didn't put a dollar sign there. SGD1 billion term loan in the first half under I think current liabilities. Okay, while CFO is looking to answer that question, I'll turn to your fourth question. What is the total investment expected for the Myanmar base projects? Can I ask Wee Gee?

Ang Wee Gee

Okay. Myanmar we have three projects currently. Two of them are hotels that we have built several years ago. They are being completed and have been operating. And these two hotels we have written it down some years ago and we have just completed a new wing for our hotel in Sedona Yangon and we have invested in a new project, the office component of a mix-used project called Junction City in the heart of Yangon. Our investment for Junction City is $47 million and for the new wing of Sedona Yangon about SGD100 million.

Loh Chin Hua

Okay. Maybe I'll take another question from the floor. We'll come back to your question on the SGD1 billion short term liability. Any burning questions from the audience? Looks like we've run out. Cheryl, no more question? Okay. Well, how come all these questions [indiscernible]. There's a question on the web, Regan Lim. Does the Group have plan to privatize Keppel T&T? I can't answer that.

Okay. One question from [indiscernible] from Nikkei, may I confirm there have been no additional provision made in the past quarter after SGD230 million made for Sete last year? Yes, we can confirm that. Among the deferred contracts are there any contracts that you possibly may need to provide for, for the rest of the year? I think at this point in time we don't think so.

Okay. So question two, your description of winter becoming from long to long and harsh, in the last quarter what made you to change the way how you see it? Well, that's a good question. I think the point is that from what we have seen in the industry and as I've shared, it's not just about oil price has recovered, I think we also have to look at the situation with the oversupply of rigs as well as the current situations with our traditional customers that they may need a bit of time to get their balance sheet repaired before they can order. So for all these reasons we feel that it's prudent for us to be prepared for not just a longer winter, but also a harsher winter so that -- but let me assure you, my colleagues are already. So the moment that we can sniff that there's a recovery, we'll be out there and we will be able to respond to the changed market conditions at that point in time.

There is a follow-up question from Lim Siew Khee, CIMB. Why did infrastructure profit improve quarter on quarter to SGD27 million in second quarter 2016 from SGD14 million in first quarter 2016. TG, would you--

Ong Tian Guan

For the second quarter, the gas-to-power business has performed better, as well as the infrastructure services. So, two of them contributed to better performance for second quarter.

Loh Chin Hua

Okay. Next question from [indiscernible], Retail Investor. The question is, any intention of going in the building of wind turbines or solar panels or even into defense equipment like naval vessels? The short answer is I think you've heard from my presentation, we're looking at different segments and I think renewables is certainly one of them. I'm not sure that we will actually go into building solar panels because that's not really our core competence, but we can certainly look at going into renewable projects in the offshore wind where we have some core competence. That's it? Okay. If there are no further questions, thank you all for your attention.

Operator

Ladies and gentlemen, we've come to the end of our conference.

Loh Chin Hua

Wait, maybe we'll go back to -- there was one question that remain unanswered. So I think to be fair, CFO?

Chan Hon Chew

Yes. Okay. I think the question is really comparing the short term loans as of the quarter-end to, I think, this is against the end of last year, 2015. Now the increase is mainly because of short term loans of over SGD1 billion, they are on short term rollover, but they are actually backed by committed lines that we already got from the bank, yes.

Loh Chin Hua

Well, if you all could bear with us, I understand there are two more questions online, so we will -- okay. Next question is submitted by Max Oxbow from Oxbow, sorry. His question, are there any debt covenants related to multiple of EBITDA? I'm concerned about the leverage given that debt increasing in a period of earning decline, but it is -- is it more prudent to reduce your -- can you [indiscernible] -- your dividend further? Okay, maybe you can speak.

Chan Hon Chew

Yes, well, all our facilities are all quite covenant-light, so we don't really have issue with covenants. And in any case, our gearing as CEO has mentioned earlier, is still at very manageable level. We do not foresee our gearing to go anywhere close to 1 time. So it's not an issue for us.

Loh Chin Hua

I think in deciding the dividend to pay, the Board working together with Management looks very closely at paying a dividend that's sustainable, taking into account our balance sheet and also taking into account the capital requirements for the business. So rest assured, whatever dividend that we have declared, it has been discussed at length and is a dividend that we believe we can pay and is sustainable. Okay. There's another question from Siew Khee from CIMB. With power prices coming down in Singapore, how did gas-to-power do better? What is Infra Services? Okay. This must be a follow-up question to your answer, TG.

Ong Tian Guan

Our power and gas business is an integrated business, so we don't just look at the power price, we optimize our gas as a feedstock to our power productions. So I think through the optimizations we're able to perform better in the second quarter. Infra Services is where we group all our operating staff, we operates all the plants within Keppel infrastructure. We have performed better because Doha North started operations early part of -- since December last year. So there's contributions from the Doha North operations.

Loh Chin Hua

Okay. Thanks, TG. I will answer one last question and this is from Nicholas, an investor. Good day. Any near-tem plans to IPO Keppel Capital once stabilized? Example dividend in species of this business unit if you're listed. Well, they even give you suggestions. Well, the short answer is no. We have one with Keppel Land now privatized, I think all the key divisions are 100% owned. And I think it's quite important for us to be able to allocate capital freely within the Group. It has worked well for us and I believe it'll continue to work very well. So you have to invest in Keppel Corp. Okay. Thank you very much.

Operator

Ladies and gentlemen, we have come to the end of our conference. Thank you for joining us today. Please enjoy the refreshments outside.

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