Keppel Corporation Limited

Loh Chin Hua - CEO Chan Hon Chew - CFO Chow Yew Yuen - CEO, Offshore & Marine Ang Wee Gee - CEO, Keppel Land

Good evening. On behalf of my colleagues on the panel, a warm welcome to the conference and webcast of Keppel Corporation's results and performance in the first quarter of 2015.

Since the precipitous this fall in oil prices last June the price of Brent crude has rebounded from the mid $40 a barrel range to an average of $56 a barrel in March 2015. Despite this improvement oil prices remain highly volatile as market focus swings from politics to a possible shift in OPEC policy, to supply and demand factors, among other aspects.

More recent progress on Iran's nuclear deal, which could trim sanctions on its future crude exports, has dealt another wildcard to the current oversupply situation. Meanwhile, tailwinds from low oil prices are encouraging consumption and maintaining conditions for more accommodative monetary policies.

In the US, growth for the year remains on track. A stronger greenback, among other factors, is expected to stall the interest rate hike for a bit longer.

The Eurozone's fragile recovery has received some oil price Europe central bank is easing. While the outlook for the global economy is generally brighter this year, the boost from low oil prices is expected to be more than offset by softer, medium-term growth projections in many advanced and emerging economies.

China has entered into a relatively slower, but more sustainable, pace of growth, supported by a gradual unwinding of property-cooling measures since the second half of 2014. And while some emerging economies, such as China, are benefiting from cheaper oil, others, such as the commodity exporters, are bearing the brunt of an inversely-stronger US dollar against their depreciating currencies.

Russia, India and the Latin American countries are already seeing their revenues shaved, burden of debt increase and capital inflows choked. Undoubtedly, the present low oil prices, if sustained, will negatively impact our offshore & marine business.

It will, however, be our strategy to tight through such periods of downturn by managing our costs, while preparing the Group to seize opportunities as they arise. We have done it before and we will do it again.

In spite of the challenging environment Keppel Corporation continues to perform creditably. We achieved a net profit of SGD360 million in the first quarter of this year, an increase of 6% over the same period in 2014, which reflects a bigger share of Keppel Land's earnings and the sale of some equity investments.

On annualize basis our return on equity was lower at 12.9% compare to 13.4% a year ago. Economic value added for the period was SGD103 million.

Let me now run through the developments in our key business divisions. Rising costs, low oil prices and flat global oil production are squeezing the cash flows and profitability of upstream companies.

Global exploration and production CapEx is expected to fall by about 10% to 15% this year. As it is, the offshore industry has been sliding deeper into the doldrums.

Across the board, not a single drilling rig unit has been placed since the start of this year and rig enquiries have also not been converted into any new contracts. While we do not expect low oil prices to last indefinitely, we cannot be certain how long it will take for oil prices to stabilize and for E&P spending to recover.

We will, however, continue to leverage our proprietary know-how and focus on partnering our customers to develop better and more innovative offshore solutions for areas beyond drilling, where demand is expected to remain resilient. In the first quarter of 2015 Keppel offshore & marine clinched new orders amounting to about SGD500 million, including a new-build multipurpose vessel based on our own design, and fabrication work for FPSO-related equipment.

Examples of other niche, non-drilling solutions which we are building include accommodation semis, plug and abandonment jack-ups and lift boats. Most of these projects are already a part of our substantial net order book of SGD11.3b at end March 2015, which will keep our yards well occupied for the next two years.

In 2015, our yards will be busy delivering 16 rigs, a Depletion Compression Platform, two FPSOs and a variety of other projects. In the first quarter alone we have completed five jack-ups and upgraded an FPSO on top of other complex integration and repair projects.

Among these deliveries are Keppel FELS's one-hundredth new-build jack-up rig and the hundredth LNG vessel repaired by Nakilat-Keppel offshore & marine in Qatar. At March 31, 2015 the first three of six DSS 38E semi-subs that we are constructing for Sete Brasil were about 89%, 58% and 32% completed.

As we have received payments for them up to November last year, as well as a 10% down payment for the remaining three units, we were in a net cash position for these projects at the end of the first quarter. Considering the good progress that we have achieved on our rigs, as well as our track record for reliable delivery, we do not expect Sete Brasil to cancel their projects with Keppel.

We are engaging our customer to see how we can best work together in the interim and will explore all our options, including the possibility of slowing down construction until Sete Brasil has sewn up long-term financing for our projects. Keppel has been disciplined about picking on well-defined contracts with acceptable pricing and payment terms from reputable customers to ensure that the Group is adequately compensated for the risk that it will assume.

Given all of these we believe the risk of project cancellations for Keppel is low, although a couple of customers have approached us to defer their rig deliveries. As our order book is filled mainly be established customers who have made substantial down payments for their rig it would not make sense for any of them to cancel their projects, which are currently progressing well on track.

Even as we stay watchful of developments in the industry and our supply chain I am confident of our ability to weather the present uncertainties with discipline and agility. On 31st March 2015, we concluded the voluntary cash offer for Keppel Land and obtained 95.1% of the company's shares, shy of the 95.5% compulsory acquisition threshold that we had hoped to achieve.

We have been sincere in our offer, giving Keppel Land's shareholders 47 days, with two extensions, to accept the offer, even though we had crossed the 90% delisting threshold before the final extension. In the coming weeks we will be taking steps to delist Keppel Land, as well as notify remaining shareholders on the process by which they may request Keppel Corporation to acquire their shares at SGD4.38 each.

Keppel has been in property for the past 30 years. We know this business well and have built up a good track record and a brand name in Asia.

The privatization of Keppel Land is a strategic move that will fully align the interests of our property division with the Group. As a wholly-owned subsidiary of the Group, Keppel Land will provide a strong pillar for earnings and long-term value creation.

We will also have the ability to right-size the balance sheet of the property business in response to opportunities and allocate resources across the Group for optimal returns. Keppel O&M is a prime example of the success that we were able to achieve by taking our offshore & marine businesses private over a decade ago.

Full ownership of the division has enabled us to focus on producing returns, cull synergies from the sum of our parts, as well as full -- further develop core strengths to compete more effectively on a global scale. With the flexibility to assign capital, talents and projects across subsidiaries we have been able to fully harness our near-market, near-customer strategy to capture value worldwide.

Our aim is to develop Keppel Land into a multifaceted property player, riding on urbanization trends in Asia. Apart from residential development and trading Keppel Land is also growing its presence in the commercial sector, which continues to do well.

The prolonged cooling measures were intended by the governments of Singapore and China to prevent asset bubbles. While having kept a lid on home demand and prices, they have not undermined the inherent potential of these property markets.

China has been gradually unwinding some of its housing and monetary policies since the third-quarter 2014. In March this year the central government lowered the down payment ratio and exempted homeowners from sales tax, paving the way for a return of property investors and second-home buyers to the Chinese residential market.

For the first three months of 2015 Keppel Land sold 720 homes in Asia, comparable to that of 2014. Of the units sold, about half were in Vietnam, where property market is showing early signs of improvement, while the other half, in China.

Looking ahead, Keppel Land will continue to monitor the markets closely to launch about 3,600 residential units this year from its pipeline of 70,000 homes across Asia. These include projects such as West Vista in Jakarta, Estella Heights in Ho Chi Minh City and Central Park City in Wuxi, China.

Of these potential launches in 2015 over 1,800 units are slated to be launched in China, on top of others in our key markets such as Indonesia and Vietnam. A number of these overseas developments have already completed and revenues will be booked when units are sold.

In parallel, Keppel Land is actively developing its portfolio of commercial properties overseas, which compromises about 823,000 square meters of GFA. Capitalizing on its strong cash, low debt position Keppel Land continued to seek out new investments with good returns to augment its property portfolio.

In the first quarter of this year we announced three projects for which we are investing about SGD576 million. Strengthening its focus on core markets in Asia, Keppel Land acquired its second residential site in West Jakarta as well as extended its strategic alliance with Vanke to develop a prime residential project in Chengdu, China.

We have been able to capture growth prospects in key global cities ahead of economic recovery through selective private equity-type investments, leveraging the expertise of Alpha Investment Partners. The office tower in London that Keppel Land had acquired, and which Alpha will manage, is a good example of the collective strength of Keppel's business units.

Our fund management businesses will continue to feature strongly in the Group's capital recycling strategy for matured projects, while providing stable income streams over the longer term. Keppel REIT kick-started the year achieving 100% committed occupancies at nine of its office towers in Singapore and Australia.

Keppel REIT, together with Alpha, is presently managing over SGD18.7b of assets. Since Keppel infrastructure was formed over a year ago we have steadily sharpened our focus on energy-related infrastructure and services and made good progress on wrapping up the outstanding EPC projects in the UK and Qatar.

In the UK we have successfully handed over phase one of the Greater Manchester energy-from-waste plant to our customer. We have recently successfully concluded a reliability run on phase two and expect to hand it over in a few weeks from now.

Over in Qatar, the Doha North sewage treatment works plant is being tested and commissioned and we look forward to completing the project substantially in 2015. To fully exploit our core strengths in project engineering and development we will build, own and operate our own infrastructure assets, which we can potentially recycle for higher returns when they mature.

We have announced that we will be creating Singapore's largest listed infrastructure trust by bringing together Keppel Infrastructure Trust and CitySpring Infrastructure Trust, as well as injecting 51% of Keppel Merlimau Cogen into the enlarged entity. KIT and CIT are convening their respective EGMs on April 30, 2015 to seek approvals for the transactions.

This enlarged trust, with KMC, will have a market capitalization of more than SGD2b and total assets of over SGD4b. With greater scale and critical mass it will be better able to pursue sizeable transactions fitting its investment criteria, while competing more effectively with larger infrastructure investors on future acquisition opportunities.

The enlarged trust, with enhanced liquidity, will also attract a bigger pool of institutional investors. This is beneficial to existing shareholders of both KIT and CIT.

As sponsor of the enlarged trust, Keppel remains committed to fuel its growth by developing a stable pipeline of quality assets which can be injected over time. The way in which we have structured and stabilized the KMC asset for injection into the trust is a prime example.

Our logistic and data center businesses, under Keppel T&T, are also making good progress. Keppel T&T will continue to strengthen its foothold in chosen markets in Asia Pacific, focusing on integrating its warehousing, distribution and logistics network to capitalize on the creation of the ASEAN economic community.

During the quarter Keppel Logistics expanded its footprint in Vietnam with the opening of a new 120,000 square feet distribution center, which will position it to serve a fast-growing manufacturing corridor in the southern part of the country. Its logistics projects in Lu'an and Tianjin will both be operational within this year.

Riding on the strong demand for data center facilities we will continue to develop a robust pipeline of quality assets and leverage the newly-listed Keppel DC REIT to recycle capital once the assets are mature. Keppel datahub 2, our latest data center in Singapore, is filling up nicely and continues to experience good demand.

Meanwhile, Almere data center 2 in the Netherlands is being fitted out and is expected to begin operations later this year. Keppel's current business mix is the result of a deliberate and considered strategy which has been constantly refined with the guidance of our Board.

We have over the years been disciplined both in investing for growth as well as pruning non-core operations and monetizing assets for better returns. This has instilled in Keppel the acumen, the agility and financial strength to emerge stronger and more resilient through every cycle.

There are immediate tasks in navigating the headwinds we are facing in the offshore & marine and property businesses, but we are staying the course on a multi-year roadmap into 2020, with reasonable targets to achieve growth, build a stronger Keppel and develop and maximize the potential of our people. I shall now let our CFO, Hon Chew, take you through a review of the Group's financial performance in the first quarter.

Thank you.

Thank you, Chin Hua. Good evening.

I shall now take you through the performance for the first quarter of 2015. In this quarter the Group's net profit was SGD360 million, which was 6% higher than the same period last year.

Earnings per share also increased by 6% to SGD0.198 in this quarter. EVA was SGD103 million, while annualized ROE decreased from 13.4% to 12.9%.

The Group generated free cash of SGD226 million during the quarter. Net gearing, however, was higher, at 37%, up from 11% as at December 31, 2014, due mainly to the acquisition of additional shareholding in Keppel Land.

The voluntary unconditional cash offer for shares in Keppel Land closed on March 31, 2015 and the Company now owns 95.1% of the issued share capital in Keppel Land, up from 54.5%. For the first quarter of 2015 the Group's revenue was SGD182 million lower than the same quarter in 2014, representing a 6% decrease, which was mainly due to lower revenues from infrastructure division.

Operating profits decreased correspondingly by 4%, or SGD17 million. However pre-tax profit decrease was larger, by 8% or SGD37 million, due to higher net interest expense and lower contribution from associates such as Floatel and absence of contribution from Marina Bay Financial Center Tower 3.

Despite an 8% decrease in profit before tax the Group's net profit after tax and non-controlling interests registered a 6%, or SGD21 million, increase from last year as a result of lower tax expenses and non-controlling interests. Tax expenses were lower because of lower profits from companies in countries with higher tax rates, while the reduced non-controlling interests was the result of the acquisition of additional shareholding in Keppel Land.

Similarly, earnings per share also decreased -- increased by 6%, or SGD0.011. Overall the Group's net revenue was 6% below that of the first quarter of 2014, driven mainly by lower revenue from infrastructure.

Offshore & marine's revenues was flat as compared to the same period last year, with higher revenue recognition from shipbuilding and conversion projects offset by lower revenue from repair projects. The property division's revenue was also about the same level as the same period last year.

There was an absence of revenue from The Lakefront Residences in Singapore with the project's TOP in May 2014 and lower revenue recognition from the spring deal in Shanghai. These are offset by higher revenues from 8 Park Avenue and Caesars Residences in Shanghai and Park Avenue Heights in Chengdu.

The main driver of the decrease in revenue for infrastructure division was the lower revenue from our power and gas business due to lower prices and volume, as well as the absence of revenue from Keppel FMO, which was divested in 2014. Offshore & marine's division pre-tax profit declined by 17%, or SGD53 million, despite revenues holding at the same level as last year, due mainly to lower operating margins and lower net interest income.

The division's operating margin for the quarter was 12% compared to 14.2% in the same quarter last year. Pre-tax profit for the property division was 22% or SGD29 million below that of the corresponding period in 2014, mainly as a result of higher net interest expense and lower contribution from associates, due mainly to the absence of contribution from Marina Bay Financial Center Tower 3 following the divestment to Keppel REIT in December 2014.

Infrastructure's pre-tax earnings posted a 26% or SGD12 million decrease from the previous year due to lower margins from the power and gas business. The investments division registered a SGD57 million increase in pre-tax profit from the sale of equities, partially offsetting the decrease in pre-tax profits of the other three divisions, resulting in an overall 8% decrease in Group's pre-tax profit, to SGD455 million.

Despite a lower Group pre-tax profit the overall net profit after tax and non-controlling interests was higher as a result of reduced non-controlling interests in Keppel Land due to the increase in shareholding from 54.5% to 95.1%. The higher net profit from the property and investment division offset the weaker earnings from offshore & marine and infrastructure, resulting in a 6%, or SGD21 million, improvement in the bottom line.

The net profit of SGD360 million for the first quarter translates to an earnings per share of SGD0.198, which is SGD0.011 higher than the previous year. Cash flow from the Group's operations was SGD420 million in this quarter.

After accounting for working capital requirements mainly from the offshore & marine and property divisions the Group's net operating cash inflow was SGD284 million, against an outflow of SGD336 million in the same quarter last year. Investments and operational capital expenditure amounted to SGD98 million, mainly for the offshore & marine and property divisions.

Including divestment proceeds and dividend income of SGD40 million net cash used in investing activities amounted to SGD58 million. As a result, there was an overall free cash inflow of SGD226 million during the quarter.

Despite the continued volatility in oil prices the Group's focus on sustainable growth has allowed us to maintain our good performance at the start of the new financial year. Keppel's emphasis on excellence and discipline in execution and our investments in innovation and productivity have served us well and will continue to be the cornerstone of our commitment to deliver value to our stakeholders in the long term.

Thank you.

Thank you.

We are waiting for the questions to come through. Okay, first question.

Hang on a second, I'm trying to get the name. Okay.

Sorry, I can't see the -- there's two. Anyway, I think it's from Mohammad Razali, the -- he is a retail investor.

He has a few questions. So question one.

Back in 2014 Xcite Energy signed an MOU with COSL for provision of a new Keppel N-Class jack-up for drilling offshore UK. Is Keppel still in negotiations with COSL for the new N-Class jack-up, or has the project been shelved due to the current low oil price?

YY, [indiscernible].

Yes. The negotiation is still on, so I think the project is alive.

Thank you. Can I go second question?

Also, back in November 2014 operational updates from Bumi Armada mentioned that it is in advanced negotiations with Keppel for an FSRU project. Is Keppel still in negotiations with Bumi Armada for the FSRU conversion, or has the project also been shelved due to the current low oil price?

For the Bumi Armada FSRU the project is still on, under negotiation.

Finally, is the option -- are the options for the two new jack-ups for Gulf Drilling still valid, or has it lapsed?

The options are still valid. We are waiting for the owner to exercise that option, but the options are still valid.

Okay, thank you. Okay, this is submitted by Ling Xin Jin from Morgan Stanley.

Hi, good evening. Could you provide details of deferment of delivery of rigs?

How many units are there and how long is the deferment? A shareholder of Sete mentioned lowering the rig requirement to 13 units to 17 units.

Would this impact Keppel?

There has been some request for deferment of the delivery of rigs for about six months. All together the request is for eight rigs, five from Transocean and three from Fecon.

As far as the shareholder of Sete, when you mention about the rig requirement from 13 to 17, I think based on our progress of our projects, the semi projects for Sete, we think it's unlikely that the project -- our project will be cancelled because of the progress that we have been -- the good progress that we have been doing.

I think if I can just add on the deferment, I think this is something that we obviously will discuss or we have discussed with customers. And usually there will also be some compensation.

And so this is not -- and [as] the projects are not just a move to the right. And to a certain extent it also helps in terms of our yard -- in terms of our workload at the yard, which is currently quite busy.

Could I add some?

Yes, sure.

Yes. In fact, the deferment for this year -- this year Keppel FELS, who are building all the rigs, we are still actually quite busy.

As you know that we will still be delivering 15 rigs this year, so actually a deferment in a way is actually, like Chin Hua says, is pushed to the right, but it is not in any way affecting our order book. On top of that, Chin Hua's also mentioned that these rigs we are being compensated for that, pushing the delivery to the right.

Thank you. This question is from Cheryl, Cheryl Lee from UBS.

Hi, good evening. On offshore & marine regarding the comment that a couple of customers have approach us to defer their rig deliveries, if construction is slowed down how will utilization of the yards be affected?

Does Q1 offshore results already reflect lower utilization of yards? Thank you.

Well, I think the answers have been provided earlier in the comments that both YY and I have provided. Our yards remain main very busy for this year and next.

Okay, this submitted by Wee Lee from Nomura, Singapore. Good evening, Chin Hua, and thanks for your presentation.

Can we have an update on the plans to redevelop Keppel Land -- I think he meant Keppel GE Towers and Keppel Towers. Is it on track to occur on 2015?

Maybe I'll let Mr. Ang Wee Gee to address that.

Hi, Wee Lee, thank you for the question. We have decided to defer the redevelopment of Keppel and GE Towers, so we will not proceed with the redevelopment in 2015.

This is actually a property that is a freehold property and we are under no rush to redevelop this. And in the meantime it's actually collecting a rental income for us.

Okay. Can you -- sorry, this is from Mr.

Attavar from Jefferies. Can you elaborate on the jump in investment income for quarter-one 2015?

Also, why lower operating margins in O&M in first-quarter 2015 despite the quite a number of jack-up deliveries? Maybe I'll ask Hon Chew to address that.

Yes, thank you. On the first question on the investment income, yes, there was an increase by about SGD50 million that's arising from the sale of some listed equities during the quarter that gave us a profit -- net profit of about SGD50 million.

As for the operating profit margin for first quarter, as we mention in the presentation, it's at 12% compared to 14.2% last year, or quarter on quarter, if you compare to fourth quarter of last year, of [about] 13.3%. As we have guided in the past, our operating margins range between 10% to 12%, so the first quarter's operating margin is still at the top end of that range.

As to your question on deliveries, well, the revenues that we recognize is really based on the progress of construction rather than based on completion and delivery, so it's not correlated with deliveries, but, rather, the progress of the construction.

Thank you.

Thank you.

Gerald Wong submitted the next question from Credit Suisse. Could you provide an update on the JV with Pemex to develop a new yard in Mexico?

YY.

Yes. I think both Pemex and ourselves are still very keen to develop the new yard over there.

We are continuing to discuss. I think when we are able to reach an agreement I think we will make the announcement.

The Mexican market we believe is still a very strong growth market for the future and we are still very excited by this potential venture with Pemex. And I think both sides, as YY said, have reaffirmed our commitment to get this done in the future.

Okay, this is submitted by Lim Siew Khee of CIMB. Hi, can you please provide updates for semi-subs payment from Sete Brasil?'

You do that, Hon Chew?

Yes. Okay, for the semi-subs that we are constructing for Sete Brasil these are based on milestone payments, as we have explained in previous quarters.

And as of now we have received payments. Actually, looking at what we have incurred we are still cash flow positive.

I think you would have read in the press that Sete Brasil is working on -- working with their banks to get the financing and the latest development is that there is actually a 90-day standstill arrangement agreement with the creditors. And I think that's positive for Sete Brasil in terms of the fundraising.

And, as you know, we -- in terms of the semis that we are building for Sete Brasil we are in the most advanced stage and the fact that our payments are based on milestone our subs have the lowest risk in terms of cancellation. So at this point I think this is the status for Sete Brasil.

Thank you. Okay, this is submitted by Mr.

Chugh from CLSA. Hi, good evening, just one question.

Can you update us on the status of the MOU with Pemex? When do you expect to have a firm agreement on this?

I think Mr. Chow has just updated.

We are still -- this will be deferred for the time being. Both sides have agreed to extend the MOU.

So the MOU is still in force, but the agreement, when we have a firm agreement, we will announce it. Thank you.

Well, it looks like that this is all. Thank you so much.