Singapore Technologies Engineering Ltd. (OTCPK:SGGKF) Q2 2022 Earnings Conference Call August 11, 2022 11:00 PM ET
Company Participants
Cedric Foo – Chief Financial Officer
Vincent Chong – Group President & Chief Executive Officer
Jeff Lam – President & Head of Commercial Aerospace
Ravinder Singh – Chief Operating Officer
Lee Chew Tan – President of Commercial Business
Conference Call Participants
Rahul Bhatia – HSBC
Jame Osman – Citigroup
Siew Khee – CIMB
Lorraine Tan – Morningstar
Operator
Good morning, ladies and gentlemen. Welcome to ST Engineering’s First Half 2022 Results Briefing. Thank you for joining us this morning. We will begin today’s briefing with a presentation by our Group CFO, Cedric Foo, following which of a Group President and CEO, Vincent Chong will give his remarks. After that, we will open up the floor to a Q&A session.
Without further ado, I invite Cedric to give his presentation please.
Cedric Foo
Good morning to everyone. Those who are joining us here physically, it’s good to see you in person, and also those who are joining us over webcast.
On Slide 2, I would like to bring your attention to these statements, which says that the group’s actual future performance and results may differ materially from those expressed in forward looking statements as a result of a number of risks, uncertainties and assumptions, including COVID-19, the Russian-Ukraine conflict, inflation in general, global supply chain disruptions.
Slide 3, please. Agenda for this morning is financial highlights. We’ll talk about the group highlights, some of the segments and the outlook, followed by Q&A. First, group highlights.
Slide number 5, shows a summary of our first half 2022 results. On your left group revenue achieved a 17% growth year-on-year, which is first half ‘22 versus ‘21 to reach $4.3 billion. Despite a drop of $125 million in government support to almost nil in first half 2022. EBIT on interest before interest in tax was 8% higher at $385 million for first half ‘22. Profit before tax was 3% higher at $351 million. Net profit stood at $280 million for first half 2022. However, excluding the transaction and integration expenses for the Transcore acquisition, which is one-off in nature, as well as the tax-exempt effect of the job support scheme, which we enjoyed last year and no longer enjoy this year. Since the government support has dropped to almost nil. If we exclude those effects, the net profit will be $307 million or 4% higher year-on-year.
Slide number 6. Commercial aerospace constituted 33%. Urban Solutions, USS 18%. And DPS, Defense Public Security 49% of the group’s revenue. And that’s the pie chart on your left. DPS to clarify, includes defense, public security, critical information infrastructure, as well as commercial businesses, both local and overseas. Hence, if you look at the bar chart in the middle of the slide, the defense revenue of $1.5 billion in first half 2022 is a subset of the DPS revenue of $2.1 billion in the pipe chart. The commercial revenue increased to $2.4 billion driven by continuous [indiscernible] but not yet complete recovery in commercial aerospace, and the addition of Transcore. We have some technical interferences. Are we okay now? All right, very good.
Let me just repeat the last sentence. The groups commercial revenue increased to $2.8 billion, and that’s in the middle of the slide. One slide back please. And it’s driven by continue. So that’s the dark blue slide in the middle, that blue bar in the middle of the slide deck $2.8 billion. There’s commercial revenue is driven by continued but not yet complete recovery in the commercial aerospace. And of course, the addition of Transcore. Direct geographical spread of revenue for Asia is 52%. This on the right. The US is 23%. Europe is 19% and others 6%. Next slide please.
Slide 7. Here is the waterfall to breach first half ‘21 revenue to first half ‘22 revenue. As I said, group revenue grew 17% to $4.3 billion, with contribution from all segments. Excluding Transcore, our revenue would still have grown by more than 10%. Next slide.
Slide 8, commercial aerospace revenue reached $730 million, which is on your far right of the slide, the dark blue bar chart in second quarter of 2022 or 25%, higher year-on-year, compared to second quarter ‘21. With the continued opening of borders for Aviation Trevor, strong P2F growth passenger to freighter healthy orders for new cells coming out of MRAS. And gradual but not yet full recovery in MRO businesses. Our commercial aerospace business area continues to ride the path of recovery. P2F slots for A320 and A321, as well as A330 are booked through 2025 and 2026, respectively. A very healthy growth in August. Commercial aerospace also secured $2.1 billion of new contracts in the first half of 2022.
Slide number 9; the Transcore acquisition the biggest to date for the company was completed in mid-March 2022. We are pleased to say that the integration activities are on track. And Transcore is expected to be cashflow positive in year one, as we have informed earlier. In the second quarter, Transcore more than $170 million worth of electronic tolling projects, and also RFID sales, both in the US as well as in Dubai. The New York congestion pricing project is also on track and expected to resume by end of this year pending the outcome of the environmental assessment study.
Slide number 10; this is a slide that talks to EBIT or earnings before interest and tax. EBIT for the first half. So growth and cost savings, which is the green bar. more than offset the drop-in government support $125 million, the red bar and the one-off Transcore transaction and integration expense of $21 million. Also shown in red. The growth and cost savings. Cons has an element of pension restructuring, which is basically a gain by the company’s proactive efforts to align pension plans, for example from defined benefit to defined contribution to what is market practice. And this particular one happens to be in the US. We will continue to look for such opportunities. And we think there are some more ahead of us.
The government support in 2021 and 2020 during COVID was most helpful, especially to our aerospace business, which was heavily impacted when aviation came to a stop. These have helped us right through the downturn. And we are very appreciative of that. However, in 2022, this government support have paid-off to a mere $0.5 million compared to $125 million in first half 2021. But despite that, as the chart illustrates our growth, as well as our cost savings, which was hazardously pursued more than offset this drop. Base operating performance as we define without the government support one on pension and without Transcore transaction and integration expenses. In other words, removing all these items from both 1Q ’23, 1Q ‘21. And then comparing this to figure which is on the right is a 45% increase, which really illustrates the efforts behind working hard and keeping to our pledge to offset the drop-in government support.
Slide 11; these charts here show the impact of government support on each of the business segments EBIT in first half ‘22 compared to the prior year. As shown in the chart on the left, commercial aerospace, business recovery and cost savings more than offset the drop-in government support of $86 million. So this is the sub segment which received the most government support back in 2021. And it’s been fully offset for USS Urban Solutions and Satcom excluding lower garments support, which is not a significant $3 million and Transcore transaction and integration expenses, which is significant at $21 million. The EBIT on a base operating business performance basis was 1 million higher year-on-year.
I was — SEC on EBIT, which is a subset of the USS was weaker in first half 2022 because of an exceptionally high and strong base in first half ‘21. So in other words, in ‘21, we was exceptionally strong purpose app, and therefore compared to debt base, the first half 2022 performance looks weaker. This is somewhat outside of the norm. Usually in the second business, the second half is usually stronger, and we believe that will return. It was also impacted by the shortage of semiconductor chips. Defense and public security had a $36 million reduction in government support, which was partially offset by a better operating performance and posted an EBIT of $214 million. Excluding government support, the DPS EBIT will be 5% higher. So in other words, excluding the government support, both sides will be 5% higher.
Slide number 12, talks about net profit. The group reported a net profit of $280 million for first half 2022. So we started off from the net profit of $296 in first half ‘21. We took the data of the EBIT, and then we built in the finance costs and tax that brings it to net profit. And then we take out the transaction and integration expense for Transcore net of tax. If we then we reach to $280 million. However, if we exclude the Transcore transaction and integration expense, and the tax has an effect on JSS, which we enjoyed the previous year, but not this year, the first half 2022 net profit would be $307 million, or 4% higher year-on-year.
Slide 13; during the second quarter, new contract wins total $3.1 billion as highlighted above in the slide, with very notable wins all across the segments. Together with the wins recorded in one quarter 2022. Because this slide shows two quarter second Q. In one quarter we had a new contract winner $2.4 billion with total debt with $3.1 billion in the second quarter. For the wins for the first half, this $5.5 billion a very healthy level new wins. The next slide illustrates the areas where new contracts were won in the second quarter, including those from Transcore.
Slide 15; with a strong new contract wins, we ended the first half year with a very robust order book of $22.2 billion. We expect to deliver $4.6 billion in the remaining six months of 2022.
Slide number 16, our balance sheet remains very strong, we credit rating by Moody’s at AAM [ph] and by SMP at Aa Plus post the Transcore acquisition and financing.
Slide 17; low operating cash flow for first half 2022 but still a healthy level $321 million was mainly due to working capital movements including investments in inventories and WIT as well as passenger to freighter conversions projects, MRO contracts and other projects supporting revenue growth. Higher investing outflow and higher financing inflow are mainly related to the acquisition of Transcore, as well as aircraft and engines for our AAM business and of course, creating new capacity to support demand like new P2F lines.
Finally, in Slide 18, I will leave you with a Group President and CEO’s message, and maybe I will just read it out. Despite a challenging operating environment in the first half of 2022, our businesses continued to demonstrate the underlying strengths and resilience. Year-on-year revenue growth and the base business profitability. Continued cost savings and productivity is the initiatives more than offset the substantial reduction of $125 million in government support. The Transcore acquisition, which was completed in March this year will accelerate the group’s smart city growth. Contract win momentum continues to remain strong and robust. And our robust order book provides a healthy revenue visibility for the next few years.
This ends my segment of the presentation. Thank you for your attention.
Operator
Thank you, Cedric. May I now invite Cedric and our panelists to the heat table. The panelists this morning are Vincent Chong, Group President and CEO; Group CFO, Cedric Foo, who just gave us a presentation; Ravinder Singh, Group COO, Technology and Innovation and President of Defense and Public Security; and Tan Lee Chew, President of Commercial. Joining the executive members at the panel is Jeffrey Lam, President of Commercial Aerospace.
I will now hand the floor over to Group President and CEO to deliver his remarks. Vincent, please.
Vincent Chong
Good morning. And welcome to ST Engineering’s first half 2022 financial results briefing. For those of you who join us through webcast, thank you very much for joining. Welcome. Now since our last briefing in May, our businesses continue to navigate, challenging operating environments. Against this backdrop, we held up relatively well delivering year-on-year revenue growth and robust base business profitability in the first half. Business recovery supported by continued cost savings and productivity measures more than offset the substantial reduction of $125 million in COVID related government support over the same period compared to the same period last year. Group revenue was up 17% year-on-year, with growth coming from all business segments, including a full quarter contribution from Transcore. Since the transaction closed in mid-March this year. Revenue growth at the group level excluding Transcore was also healthy. Group EBIT was 8% up year-on-year driven by business recovery, strong operating performance, backed by cost savings from various efficiency initiatives in first half of the year, including a one-off pension restructuring. At one of our overseas business units.
The improved EBIT more than offset the impact of the Transcore acquisition related costs and the substantial drop of $125 million worth of COVID related government support received in the same period last year. Group PBT was 3% higher against last year, and group net profit for first half of 2022 was 5% lower than prior same period. However, excluding Transcore transaction and integration expenses of $16 million on net of tax bases, and the tax-exempt effect of GSS of $11 million last year, same period, group net profit would have been 4% higher year-on-year, driven by strong base operating performance and cost savings, which more than offset the substantial reduction in government support a point which Cedric also mentioned just now.
I’d like to point out that in first half of 2022, our profits were primarily from our base operations, as we were effect essentially of COVID related government support globally. On this note, I like to call out our appreciation to the governments of Singapore, and those are operating locations for the COVID related support. The funds received during the last couple of years, helped us retain jobs when the businesses were significantly impacted by the pandemic.
Now let’s turn on to our business segments for commercial aerospace. It continued to recover with another quarter of year-on-year revenue growth in first half in the second quarter this year. Against last year, revenue grew 24% in first half of ‘22 versus first half of ‘21 with higher contributions from aerospace MRO and aero structure and system sub segments, driven by increased MRO services, as well as the sale delivery. Its second quarter 2022 revenue grew 25% compared to the second quarter of 2021. Its EBIT was 78% up helped by stronger operations and one-off pension restructuring effect, which more than offset the reduction of $86 million in government support. The pension restructuring was proactively undertaken at one of our overseas business units, and changes were done after comprehensive and detailed studies considering latest trends in retirement programs and practices among industry peers.
Our A320neo in the sale production rate is keeping pace with OEMs requirements, which is a gradual increase in production from the rate of $45 per month at the end of 2021 to the rate of 53 ship sets by the end of 2022. That’s our plan. We produce an average of 46, I’m sorry, 48 ship sets per month in the first half of this year. We continue to see strong interest in our passenger to freighter conversion solutions across all our Airbus P2F program programs with a number of airlines placing repeat orders with us in the second quarter. We also entered into an LOI for 10 A320 P2F with China Southern Leasing. In July, I’m glad to mention that we delivered our head of version and the world’s first A320 P2F aircraft.
And with that our Airbus P2F programs including A330 P2F and A321 P2F are now all operational. On urban solutions and Satcom revenue rose 43% year-on-year with highest Smart City project deliveries including contribution from Transcore offset by lower revenue from Satcom. Apart from the impact of Transcore acquisition costs, profitability was also impacted by Transcore acquisition costs. I’m sorry, apart from the impact of Transcore acquisition costs, profitability was also impacted by continued global chip shortages, particularly for Satcom and IoT projects.
Now, this translated to an EBIT loss of $12 million for urban solutions and Satcom segment. On chip shortages as shared before, we have taken various measures to address the supply chain challenges including sourcing strategy, price adjustment, and product redesign to mitigate the full impact but we are certainly not immune, like many companies around the world. On Transcore, we continue to focus on business development and winning new contracts, as reflected in the healthy new wins in the second quarter of this year. Consistent with our investment case, as Cedric also mentioned, we expect Transcore to be cashflow positive from first year and earnings accretive from second year post acquisition.
Moving on to defense and public security, revenue rose 6% year-on-year contributed by revenue growth by all sub segments, land systems, digital systems and cybersecurity as well as defense aerospace except marine. We saw a slight drop due to lower revenue from shipbuilding. Despite stronger operating performance EBIT for this business segment was lower year-on-year impacted by the absence of $36 million of COVID related government support. Excluding this government support receiving first half or 2021 EBIT for this segment would have been 5% higher year-on-year despite challenging conditions in the marine business area, supply chain disruptions and higher energy costs. Our defense business progressed further internationally.
Recently in July, after sign agreement — having signed agreements with the Saudi Arabian Military Industries, better known as army for the provision of supplies and services of defense equipment, and capabilities, as well as technical support and training. The partnership is a notable development in line with our go to market approach to partner with local defense champions to deliver differentiated defense solutions. So we are very pleased with that development in Saudi Arabia.
Our new contract momentum remains strong across the group. We secured $3.1 billion of new contracts in the second quarter, comprising $1.2 billion from commercial aerospace $0.4 billion from urban solutions and Satcom, and $1.4 billion from defense and public security. Including the $2.4 billion contracts secured in the first quarter, our total contract value for this first half was $5.5 billion. Now you can refer to slides 13 and 14 For further details, which Cedric also highlighted in this presentation.
Now, I like to call out that following our last contract when not in November last year in Rio de Janeiro to deploy city wide public smart street light street lighting. We have secured new smart street lighting contracts in two other Brazilian cities, further expanding our presence in that country. Additional business had a good quarter, securing various projects across market segments to provide cloud, AI and other cyber solutions. Now lifted by these new contracts, as well as after subtracting revenue deliveries in the first half, we ended June with a robust order book of $22.2 billion, and we expect to deliver about $4.6 billion in the remaining months of 2022.
Moving forward, we expect the operating landscape to continue to evolve. While we are mindful that these may present short term pressures on our businesses. We will continue to focus on consistently executing our long-term strategy for global success. We will continue our disciplined approach towards cost management and investing across business cycles. Lastly, our Board of Directors has approved a second interim dividend of $0.04 per share, which shareholders will receive on 2nd, September 2022.
On that positive note, we’d like to open the floor for question-and-answers.
Question-and-Answer Session
Operator
Thank you, Vincent. We will now move on to the Q&A session. I will open up the floor first to our physical participants, but our online participants, please click the raise your hand icon and we will place you in the queue. May we have our first question please. If you have any question, please approach the mic in the center of the room. [Operator Instructions]
Unidentified Analyst
Hello, management. I’m Roy from UBK Hen. So for the results, I have four to five questions. I’ll go one by one. So first question is regarding the restructuring of the pension. There is $72 million well of gain from the restructuring and would like to understand about the tax or tax impact. Whether there is if I want to exclude the net tax gain from this one-off, restructuring gain? Should I apply a tax of 25%? Or what’s the tax rate applicable? Second is regarding the USS probability. I mean, even though we remove the one-off restructuring costs, sorry, the one-off transaction related costs as long as the integration costs.
The operating profit of the segment did not improve as actually I have expected previously because there’s we were expecting some positive contribution from the Transcore. At least at the EBIT level, although the net profit may be can be breakeven or slightly loss making. Yes. The third question is regarding the defense and public security, business margin or look. So I noticed that over the last four half years, the margin has been coming down. Last half a year, the — I mean, the second half of 2021, the margin was 10.8%.
But this quarter, I’m sorry, this half year, the margin is 9.3%. I don’t have my number with me, but I think he’s right on that level. Yes. So. So what caused the decline in the operating margin? And should we expect the nine point something percent operating margin for the defense public security business to continue going to be the new normal going forward? Fourth question is regarding the refinance cost for the commercial bill, are related to transfer acquisition, would like to have some update on the refinancing.
Last is regarding — last question is regarding the commercial aviation. From the company’s perspective, do you see the DSP segment has more or less fully recovered in the last quarter? Yes, that’s all Thank you.
Vincent Chong
Thank you very much for your questions on commercial aerospace. I will ask that Lee Chew to address that question. As we mentioned, just now we have gradually, we are gradually recovering, but not fully yet, as our commentary would say, but we are heartened by the recovery. But I will let Jeff actually, they will maybe shed a little bit lighter on commercial aerospace. And then for USS profitability, I’ll let Lee Chew talk about it. We’re not immune to the global chip shortage situation. And we also have to, undertake many initiatives to mitigate the impact of higher energy costs and supply chain disruptions. So we are not immune and plus seasonality effects that are inherent in the USS business, as we mentioned, just now doing Cedric’s presentation, but I’ll let you talk a little bit more about that.
I’ll invite Cedric to talk about the tax effects of the one of pension restructuring effects. And then I’ll have Ravi talk about the defense and public security business margin. Maybe I’ll let Jeff talk about the recovery for now. And then of course, finally, I’ll let Cedric talk about the refinance costs also for Transcore and give you an update.
Jeff?
Jeff Lam
Thank you, the commercial aerospace segment is not fully recovered. If you look at the MRO business, we are seeing near full hangar capacity usage. However, on the engines and component MRO businesses, we are still gradually recovering, we expect to see greater recovery in the second half. On the OEM businesses of commercial aerospace, we are seeing that the deliveries getting nearer to pre-COVID levels. And of course, once we achieve pre-COVID levels, we plan to exceed pre-COVID levels based on the market demand for these new aircraft deliveries. So there is still growth opportunity in commercial aerospace. Thank you.
Lee?
Lee Chew Tan
Yes. So thank you for the question on USS, let me just reiterate that as we look at the first half results for USS, clearly, from a revenue standpoint, we have been impacted by the remaining effects of COVID-19 especially in our second business in two segments, aviation as well as maritime we are seeing the demand for aero in flight connectivity as well as cruise connectivity now improving, but it’s going to take time for that to recover. We also talk about the chip shortage, resulting in our impacting our revenue opportunities, both in the IoT side but also in satellite communications ground segment equipment that we provide.
And if you think about that backdrop, we have to operate against longer lead time. Whilst we have been mitigating this risk with supply chain, diversification, redesign our products, all this would take time we’ve also announced price increases, which is the reason why we are seeing a — while we are saying that the second half is probably going to give us more grounds mitigating the challenges and the headwinds that we are seeing. As Cedric also mentioned stronger business in that seasonality in the second business in 2021, which is not run rate. I would just say that, as we look at the overall USS segment, we are seeing prospects returning, and road traffic management, toll solutions, smart street lighting projects that Vincent alluded to.
And as we think about the smart utilities and infrastructure and its alignment to the sustainability agenda, that’s also an area that we are seeing, pick up. So on that note, I would say that, whilst we’ve had headwinds that we had to deal with in the first half, as we look at the second half, and as we look at the trends, we remain cautiously optimistic, obviously, holding ourselves close to look at the global economic situation and all the geopolitical tensions that’s happening.
Vincent Chong
Thank you, Lee Chaw. Ravi?
Ravinder Singh
Yes. So let me address that question. Thank you for the question. So first of all, if you look at the margin of one half, last year and one half this year, they’re both 10%, 10.3%, 10.1%. So I think what I’ll say we are maintaining our margin. But as Vincent also mentioned anything in the slides in the slide, that there are some challenges, the chip shortage is one that’s affecting one of our business, Hackney in particular. But I will say that, although there’s the effect is affecting your business, but the orders, continue to come in, and it’s a message of delivering. And the other one, of course, is the energy costs. So again, this is something that we have been very conscious of mentioned before. And we are passing as much of that cost to our customers as possible, so that we will not impact us as much. So despite the chip shortage, despite the energy costs, we’ve been able to maintain the one half margin as compared to last year. And the margin also fluctuates, depending on how our projects unfold over the year.
Vincent Chong
I’d like to build on what Ravi said. So if you look across the group in the first half, we do feel we did feel pressure from higher energy costs. We talked about chip shortage, and then of course, supply chain challenges. But despite all that, we’re able to undertake steps to mitigate the impact from being fully felt. But we certainly have are facing those headwinds. And we are taking many steps to mitigate them. And they are all manifested in our first half results, which remain a resilient against those near-term pressures.
Cedric Foo
Yes, thank you, Roy, for the question on the tax rate, the tax rate, as I said, it is basically a conversion of a defined benefit plan for wages is our single market practice to a defined contribution plan and is in the US. So the tax rate of 25% also makes sense. I want to highlight that it is an accounting tax. It’s not a cash flow tax.
And the second question of financing for Transcore. If you followed our announcement earlier about when we issued the bonds, the MTN 1 billion in combination of five years and 10 years bond, we did update that if we weighted average the interest costs together with some parts of it, of the acquisition cost US commercial paper, it would have been 1.8% at a time, but obviously since then the short-term interest rate has risen. So the weighted average cost is still a very low 2.2%, overall bonds plus CPE.
Having said that, if you take a more higher vantage point of view of the group’s borrowings in total, about 55% of our borrowing already in fixed interest rate. So we believe there’s a good balance. Nobody knows where interest rate would go, whether it is recession with whether the Fed will slow it down, or have to use interest rate as a lever to re spur the economy. But I think at 55% fixed interest rate is a good balance.
Now, how do we raise the remaining amount, which we have not yet raised? Because the acquisition is $2.7 billion, we raise a billion, we will continue to use short term paper to have flexibility to pay down when we generate cash from operations. So perhaps we’ll be looking to raise another 700 or so. And we are looking at the right window where the 10-year treasury or 5-year treasury is at a level with which we think we can strike. We also think about private placements, which is easier to do and it’s one-off with a few investors and we even get it at.
Unidentified Analyst
All right, thank you.
Vincent Chong
Roy, I believe we have addressed all the questions.
Unidentified Analyst
Yes. Thank you very much.
Vincent Chong
Thank you.
Operator
Anyone, any other questions from the live audience? May we have our next question, please? Is there any question from online at this time? Yes, if not, we will now move on to our online participants. From whom we will now mute your mic. Rahul from HSBC.
Rahul Bhatia
Hey. Hi, good morning. Could I check if I’m audible?
Vincent Chong
Yes.
Lee Chew Tan
You are.
Rahul Bhatia
Yes. So, thanks. So I have three questions. My first one is related to Vincent documentary that you made after the 1Q 2022 Business Update. You had stated that assessment of global events on a sea as not material, could you share latest thoughts on it at the back of 1H results in particular? If you think about the profit excluding the pension one-offs My second question is related to the Urban Solutions and Satcom division contract wins. They seem to have lagged in absolute terms compared to the other two divisions consistently in the last few releases. What is the run rate that you’re targeting for this division in future most of it Transcore acquisition done? Finally, a quick check. Will there be any more Transcore integration related expenses that we need to be aware of? Thank you.
Vincent Chong
Okay. So talk a little bit about the — Rahul, the first question is on materiality of which factor, can you repeat your question?
Rahul Bhatia
Yes, Vincent. You mentioned about the global events, the Ukraine situation and the COVID-19. And after the 1Q 2022 business update.
Vincent Chong
Okay, yes. So, the first question will come back to that we are talking about the headwinds that we are facing chip shortages, supply chain challenges, inflation and also geopolitical situations and whether they are giving any material impact on the business. I guess that’s your question and whether we are able to manage those impacts. The second question is on Urban Solutions and Satcom on the new contract with momentum. What kind of runway are we looking at? I think, Lee Chew did mention, respond or addressed part of it earlier on in terms of our look, but I’ll let her address it. And then Transcore integration costs, I think transaction expenses, and integration, integration costs, in particular, we expect this to continue for another couple of years.
As we mentioned, this is a multi-year activity, we expect, maybe about 10 million a year or so on integration costs. Transaction costs probably a little bit more left in the next one to two years, but as a shade lower than integration costs. And we mentioned that transaction costs in total is going to be about 1% of the transaction value. So we still maintain that. So we do expect some integration costs ago in the next couple of years, about $10 million a year off to the effect. Okay, $10 million a year.
May I ask Lee Chew, to talk a little bit about the USS Urban Solutions and Satcom contract win outlook, and then I’ll talk about the global challenges later on.
Lee Chew Tan
Thank you, Vincent. Thank you, Rahul. So with regards to new order momentum and what we are seeing in USS possibly as a run rate, I would just say that, we are on track to deliver what we have committed in our Investor Day, sharing. And we communicated at that time that the smart city agenda for us is going to deliver $2.5 billion of business and a strong double-digit growth in terms of CAGR leading up to that. We’ve also been very clear that in our acquisition for Transcore, that is a strengthening of our smart mobility, strategy and agenda.
On Transcore, I must say that, we are very pleased with the progress of the integration, that Transcore’s teams focus on the customers and also on execution has translated to the good business momentum that you have seen in what we reported as the Q2 orders that $100 and more than $100 million and $70 million that Cedric referred to. So if you look at the USS business, which has its components in, smart city, as well as in satellite communications, I mentioned earlier, the fact that we are seeing prospects improving in many of these areas that we are targeting. But more importantly, as we look at the underlying technology enablement needs, which is the adoption of AI, global urbanization, and also infrastructure investment that we are seeing picked up, we know that will anchor kind of our momentum in the goal forward.
So, we continue to monitor, and be cautiously optimistic that, I think we have the pillars and the foundation to get us on that journey towards committing that $2.5 million of Smart City business.
Vincent Chong
Thank you, Lee Chew. Let me just clarify on the integration costs for Transcore. Just looking at the detailed figures. So it should be in the range of between $10 million to $20 million a year for integration, but closer to the midpoint of that range. For transaction costs. I think we’re at the tail end, I think in the next couple of years, you’re going to see single digit in total of transaction costs related spending. Okay, so that kind of sets the stage.
Now, in terms of the global headwinds, I think he’s not getting better, as we know, is evolving. But suffice to say that we have taken a lot of steps and initiatives, including productivity measures, including price adjustments, supply chain, reconfiguration, and even product redesign in some cases to mitigate the outcome. I would not want to perhaps give any numerical range. Suffice to say that, given all these measures that we have taken, we’re able to mitigate the full impact and our first half results, outcome of those steps that we have taken. But because the situation continues to evolve, I think it’s a bit too soon.
To give any order of magnitude, for example, in recent weeks, we’ve heard about demand on chips softening somewhat in the near term, but would it last and continue? We don’t know. But we have to just continue to watch the space. But we certainly feeling those headwinds, and we are taking many steps to address and mitigate the outcome. Rahul?
Rahul Bhatia
Thank you, Vincent.
Vincent Chong
Thank you, Rahul. Do we have any more questions from our physical participants perhaps?
Unidentified Analyst
Hi, I’m sorry for my query. I have three questions. The first two pertain to aerospace? That’s for Jeffery. If I were to ex out the pension restructuring gained from your EBIT numbers, right, it’s shows a small improvement in terms of the margin. So I’m trying to understand where that margin improvement is coming from. Is it more from your MRO’s. Or your P2F? Or is it from your retail business? Right? And then a second question on aerospace. You said that engine components MRO is still lagging. And so in terms of a percentage, where do you see the business now relative to say 2019? Right. And when you talk about improvement in second halfway to how much do you expect it to improve to?
The last question is more about what are you hearing your non-aerospace clients talk about in terms of how they see facing or projects? Are they starting to hold back on spending or trying to push out when or when they want to commit to projects? You’re keen to hear your feedback on what you’re hearing from clients? Thanks.
Vincent Chong
Toggle, which clients are…
Unidentified Analyst
Non-aerospace clients?
Vincent Chong
Non-aerospace clients. Okay, I’ll let Jeff address the first two questions. I think. As Lee Chew mentioned, we are seeing some good developments in the Urban Solution Satcom space, albeit that we still see some near-term pressures, but our businesses is in our portfolio is a bit diverse. Defense, I think we’re seeing more inquiries. And it’s actually quite hard to put it relatively positive, given the inquiries that we are getting. So it depends on the sector. But overall, we are seeing more. I mean, we are cautiously optimistic about customer projects. However, there are near term headwinds that we’ve got to watch this space for quite carefully. So every business sector would have different set of dynamics, but all in, we are still cautiously optimistic, especially with aerospace, or seeing the recovery momentum that we have just described. The way does it address your question? Do you have a specific sector question? In that regard?
Unidentified Analyst
So you may be on the urban solutions side, right? Your smart cities, are you seeing your customers are cut back the soft CapEx that they’re willing to commit this year? Or the near term? Or are you also seeing them push out projects in order to when they want to sign on the dotted line? So while demand is still there? Are you seeing shifts of spending to the right?
Vincent Chong
Okay, so your specific to Urban Solutions and Satcom. I’ll let Lee Chew address. I believe she’s mentioned, quite in quite on quite a few fronts earlier on, but I’ll let her build on the answers.
Lee Chew Tan
Okay. So we — I think on the urban solutions front, are we seeing budget pressures? Yes. Right. Because at the end of the day, we are not immune to everything that’s happening. We do see in strong orders through Q1 and Q2 for the first half, specifically. Projects that’s related to, for example, I mentioned tolling. I talked about smart infrastructure and utilities, just because there’s increased concern about, the sustainability agenda. So I would say, it’s a mixed bag, because there are some projects that would be under more pressure, because prioritization of funds are going to still, support COVID recovery, etcetera, across the globe.
And so, it is an even, I don’t know, if I can say unilaterally one way or the other that we are grateful to see that, whilst prioritization of projects are happening, there is a continued focus in terms of supporting urbanization, supporting digitalization, because at the end of the day, these are enablers that will help build more resilient economies. So, I hope that that kind of gives you a picture of where we are and what our customers are up against.
Vincent Chong
Okay. Jeff?
Jeff Lam
Okay. Yes. So, margin improvement, where is it coming from? The good news is that we’re seeing margin improvement across the whole business. It’s quite natural when you have more volumes coming back. And obviously, the workload is also diversifying, meaning that, for example, we’re seeing that we are able to sell more spares, as more airlines can back to flying. So we do anticipate that the Chinese market will open up more in the coming months. And that’s a very important market for us because there’s a lot of traffic between China and the rest of Asia. So we do see more volumes coming back in the coming months and years, obviously.
On the engine and component workload versus pre-COVID, in terms of soft capacity, meaning manpower, we are around three quarters of pre-COVID in terms of hard capacity, meaning infrastructure, we are at about two thirds. So there is room to grow as the market recovers, especially in Asia, where we are largely exposed for the engine and component MRO businesses. Thank you.
Unidentified Analyst
Thank you.
Operator
We will take our next question from online. Jame from Citi. Your mic has been unmuted.
Jame Osman
Hi, good morning. Thanks for presentation. I just have a few questions on Transcore. Maybe Could you share what Transcore order book was at the end of the first half. And also, if you could share what the revenue in EBIT contribution to the overall group was in the first half, they’ll be good. And secondly, just wanted to find out on the opportunities for the business, how quickly are you expecting that Transcore capabilities could be transferred to other markets outside of the US? And are you seeing demand currently to sort of bundle it together with ST’s other smart city solutions? And I guess, where some of these market opportunities could be, where you maybe are targeting some project opportunities. If you could share a bit more detail on that. That’d be great. Thank you.
Vincent Chong
Yes. Well, first of all, that Lee Chew address your questions, we are actually very pleased with the synergies that we were already anticipating before the acquisition, or that was one of the reasons why we wanted to progress, the Transcore acquisition. We are hard at work in bringing our solutions to the US developing business opportunities and also bringing Transcore’s capability to this part of the world as we committed. So I’ll let Lee Chew give a little bit more insight. So that now we don’t reveal EBIT level to business segments, but certainly Transcore at the base business level, excluding the transaction costs. It is, of course profitable. But we will not be able to get down to the specifics and I’ll let Lew Chew maybe talk about the others? The questions that came? Thanks.
Lee Chew Tan
Okay, so on cross selling opportunities. So as Vincent mentioned, we are hard at work. And two teams, the Transcore team, as well as our Urban Solutions team are already very engaged looking at opportunities. We mentioned at the acquisition that we want to start out with Southeast Asia as a market, bringing the total solutions here. So we are executing to that plan. So cross selling for us includes the electronic toll collection, and also, the congestion pricing solution that we talked about, at the point of acquisition. And then conversely, as we look at our projects, or projects that we have done in urban solutions on the intelligent transportation front, ITS, we’re also looking at how do we bring some of our IP in some of our successes in smart road junctions, Transcore off centers and all that. And also, I guess, traffic optimization operations to the customers in the US.
So, suffice to say that I’m very pleased with the engagement on both sides, in being laser focused, not just executing to the business that we have, but also to the potential of the business that we can now, leverage as well as expand. Hopefully that answers your question, Jame?
Vincent Chong
Yes. So in terms of order book, first quarter, we said that Transcore order book is about SGD1.6 billion. I think we are maintaining at that level because revenue drawdown from the order book is pretty much matched by new orders that we acquire but there’s a pipeline of healthy pipeline of opportunities in front of us so we remain very optimistic about the potential of this business.
Jame Osman
Got it. Thanks a lot for that. Thank you.
Operator
We will now take our next question from Siew Khee with CIMB. Siew Khee, please go ahead. Do we have any questions from our own physical participants? Siew Khee, we’ll come back to you shortly. We will hand over to our to Roy.
Unidentified Analyst
Sorry, I’ll have one follow up question. I want to ask regarding the commercial aviation margin. So, if I — if we add to the pension restructuring the commercial aviation operating margin last half year was 10.3%. It was the good improvement margins and during the first half, but my question is, let’s say when we recover to the full capacity, full potential, what this can have what level of margin, the commercial aviation business stabilized at? We cannot get the figure from a certain number because of the company reporting restructuring Lufthansa technique before COVID. I checked the operating margin is between 7.6% to 8% fall within the technique into 17 to 19. So for us going forward. Should we expect the I mean, last year is already 7.3%. But going forward, should we expect some high single digit monitoring? Or is there is also or even there is potential to go beyond 10%? Thank you,
Vincent Chong
Jeff? Yes, go ahead.
Jeff Lam
Okay, I don’t think we are going to commit to any kind of margin or make any forecasts. But what I can say is that there is continue room to grow. And even if you compare with pre-COVID versus post COVID, actually, the situation is also different because we now have more passenger to failure coalition’s business, we actually have a full metal ribbon and sell business, we are growing more engineering businesses. So really, the business continues to evolve. And our intent is to actually improve our margins, obviously, with businesses that have more intellectual property that rely on more technology that we develop and own and also to create more synergy across the customer market segments across our geographical footprint.
So, what I can say is we do expect continued improvement in margins. We realize that the market is quite fragile at the moment with issues around labor availability, labor mobility, around the supply chain issues on raw materials, logistics, costs, and inflation. So many things we are balancing right now to try to make things happen. So we obviously will do our best to make it work. Thank you.
Vincent Chong
Yes. May just add to what Jeff mentioned, of course, as we ramp up our passenger to freighter conversion, there’ll be more scale so we expect positive contribution. And also keep in mind that in 2019 MRO’s only partner because we completed the transaction in April, so even when we compared to 2019, MRO’s still has room to have, full year contributions going forward as the OEM type business. OEM class of business recovers further; so we are cautiously optimistic.
Operator
Okay. So Siew Khee coming back to you now. Your mike has been unmuted.
Siew Khee
Hi, can you hear me?
Vincent Chong
Yes, we can. Go ahead.
Siew Khee
Thank you. I have two questions. One, sorry to have on USS, Lee Chew. I think last year or second half last year, you mentioned that the supply chain impact for the group was about training in mainly on USS. And then for this half, we’re looking at 12 million. So if I were to just exclude this supply chain impact up from last year, and this year, and so taking the 21 integration and transaction costs. We are still seeing do year-on-year drop, half and half drop in overall EBIT margin for USS from 6% last year to now 2.8%.
You also mentioned that it was a key factor but is it pure this is unlikely that actually cause a big swing. And what should we be looking at in terms of sustainable margin? Because quite hot registering your trend now we have the supply chain and transaction costs and Transcore coming in. So I think any guidance would be helpful. I just can’t wrap my head. Why did it drop so much? That’s my first question. And second questions, Vincent, you mentioned just now on that there could be more potential of the restructuring pension coming up. Are we looking at this year and looking at things happen in near term? Thanks.
Vincent Chong
Yes, I think what Cedric was mentioning is that we’ll continue to look for cost initiatives and productivity initiatives, not necessarily limited to whichever type. He was only using pension restructuring as an example of the types of initiatives that we’ll be looking for. If you look at our, what we have committed in the last few years, we committed to cost savings, continued cost savings, and so far, we’ve been delivering. And we will certainly look for more such opportunities across the group. We have a dedicated team of people looking at continuous improvement across the group. There’s a dedicated team full time just looking at productivity measures and cost savings opportunities.
And we’re confident that we will find more such opportunities even on the procurement front, we are leveraging on a scale of the group to have more leverage against our service providers and vendors around the world, but giving them also certainty of our group purchase over time, and through that effort, we also manage our costs reduction that way. So multiple measures, so not just limited to pension restructuring, which was a one-off for one of our US business units, as we mentioned in the first half of this year. Okay?
Now, I think we all talk about supply chain impact all that. Did you go into that we did not disclose the exact figure. Yes, last year, we said that chip shortage, a couple of other factors was in the region of $20 million. We expect this year, as I mentioned, Siew Khee, that the situation continues to evolve. We don’t know what the effects would be. In the second half. Suffice to say, in the first half, we managed to take all those headwinds on board and then still deliver the results that we mentioned. And of course, the USS is more impacted because the reliance on chips that continues to be an area that we’re working very hard to mitigate.
So, I’ll let Lee Chew maybe give a little bit more color.
Lee Chew Tan
Hey Siew Khee, this is Lee Chew. So as we look at the USS segment, and I know we made a lot of reference to Satcom and chip shortage impact to the Satcom business. I just want to say that when we look at the shortage of semiconductor chip, it also impacts our IoT business and the product business for Transcore. Okay? And against that, against that backdrop, other than chip shortage, I mentioned earlier also that we are seeing the remaining impact of COVID on some of our Satcom verticals.
And I specifically call out the aerospace in flight connectivity as well as on the cruise side. Right. So those are the two key elements. And, as we think about maybe from a forward-looking standpoint, obviously, on the on the cruise side, we are seeing that there is a report out to expect a full recovery of the cruise business in ‘20, late 2022 to 2023.
On the aviation side, that’s going to be a little bit more prolonged to probably ‘24. But the efforts that we have made in the beginning of the year, with regards to mitigating some of these supply chain constraints, which included the measures that we talked about earlier. We know that we’ll be able to take benefit from some of those actions as we go into the second half of this year. Notwithstanding how, the geopolitical situation and economic situation will evolve, right. So I hope that kind of gives you a bit more color with regards to where we are and why you are seeing such headwinds in in the first half business for USS, and of course, Cedric also mentioned earlier that, the first half seasonality for us in 2021, for Satcom was unusual.
So it is not just chips shortage, it is how COVID has impacted some of the industry verticals we serve, but also the fact that 2021 was an abnormal first half for us in terms of business seasonality.
Vincent Chong
Thank you, Lee Chew. Now, I want to talk a little bit about Transcore to clarify a point that I made just now on I mentioned that EBIT at the operating level is positive. If we exclude the transaction costs at the company level, yes. However, at the group level, if we consider amortization of intangibles and acquisition interests, we’re not yet profitable, as we say we will be profitable in year two accretive in year two. So that’s consistent with what I said. So I just want to differentiate between the company level and the group level. And obviously, we maintain our expectation that cash flow will be positive in first year of post-acquisition that continues to be the case and profitable equity in terms of profits in second year of our post acquisition.
Operator
We’re going to take another question from online. Lorraine from Morningstar. Please go ahead.
Lorraine Tan
Hi, good morning and/or good afternoon, everyone. Just quick question regarding some of the headwinds. In terms of your European operations, i.e., EFW, for example. Are there any contingency plans or risk mitigation in if there are a worsening of the energy crisis in or development of the energy crisis in Europe, this winter?
Vincent Chong
Yes, I’ll let Jeff talk about it. So we, the team has been hard at work, given the energy constraints. So I’ll let Jeff elaborate on it.
Jeff Lam
Okay. Yes, that’s a difficult question, because there’s a lot of uncertainty around energy in Europe. Obviously, as a sizable user, industrial user, we have considered various options and scenarios. We do have. We worked with the local government, which actually supplies the city supplies most of the power that we use. And if you look at what the German government is doing, they are looking at alternative sources of energy reactivating coal, oil, oil power plants versus gas. They have come to rely a lot on gas, but the government is actually looking at alternatives. For us in the facility, we’re also looking at alternatives for some of the energy sources that we use, including solar energy, converting the use of gas to other electric sources. So this is the work that is ongoing. And we will continue to work with the local government to ensure that there is minimal impact or any impact is mitigated. Thank you.
Lorraine Tan
Great. Thank you.
Jeff Lam
Thank you, Lorraine.
Vincent Chong
Thank you, Lorraine.
Operator
Maybe invite our next question from participant from the room.
Unidentified Analyst
Hi, I have two questions. The first one is on aerospace again. For EFW, which I presumed to be the center of your P2F conversion. Given what you’re experiencing in Europe, would you expect this unit to turn profitable given your pipeline of P2F orders, right, and as it scales up the learning curve, will we be able to see the similar sort of modules that we saw historically for your Boeing P2Fs? For EFW and roughly when will we be able to see that.
Second question is more on strategy things for Vincent. So, strategy question for you. Given this current environment, how do you — what is your plan to kind of drive ST’s earnings growth to reach your treatment targets, or at least keep it on target which areas do you wish to push on harder to derive more growth?
Vincent Chong
Yes, that’s an excellent question because I was about to talk about it at the end too. Our target for 2026 remains steadfastly unchanged. In fact, if you look at the progress that we have made, despite the headwinds, and despite the substantially absence — substantial absence of COVID related government’s support this year, we still managed to keep an even keel because of the cost savings and productivity initiatives that we have undertaken. We mentioned to you that in 2020, our savings was north of $300 million, last year, was north of $180 million, and in first half this year, is north of $50 million, we still have a lot of opportunities in the second half procurement and other productivity. So things that we can control, we control them very well. We have been digitalizing our processes. We have implemented data analytics, digital solutions for many of our work processes, to get efficiencies, we are leveraging on group scale, to pursue savings, continuous improvements.
Aerospace recovery is very heartening. And we say — we said in our 2026 goal that we will write the recovery of our commercial aerospace business, and this is exactly what we’re doing. Passenger to freighter conversion is on track. We are very heartened by the fact that our pipeline of order is full until ’25, ‘26. For the Airbus programs for wide body, I think it’s through ‘26. And then for narrowbody for ‘20 through ‘25. So we are our hangars are full, as Jeff talked about, and are all EM business in the sale is chugging along really fine. And we are getting good momentum. And our Transcore acquisition is going very well. So if you put all these positives, positive developments in the context of near term challenges, we are very optimistic about the long term traction of this business, notwithstanding short term headwinds. And even though we see short term headwinds, we are able to mitigate the impact and we continue to invest across the business cycle.
Last year, we broke ground on our Pensacola new hangar facilities, because we have the financial wherewithal to do that. In midst of the toughest challenges that the external environment could impose on us, well, of course, we are not immune, we have to work doubly hard triply hard to make sure that we continue to mitigate those effects, but not losing track and keeping steadfast in our long-term growth. Notwithstanding the short-term headwinds. So we remain steadfastly focused on delivering our 2026 targets. And I must say we’re still very much on track. [Indiscernible]; that’s why you see — so you see the whole team effort. We said, our strategy is to strengthen base business while pursuing new growth levers in a few places. When we say strengthen core businesses, that includes aerospace and/or defense, but then we also say new growth levers like international defense business, and we have been putting scores on the board, including our recent development in Middle East.
So we have been pursuing our strategy very, with laser focus, and we say strengthen core business and will grow international defense, business and smart city business. We will also grow our digital business as part of smart cities, and we will also grow our sustainability linked businesses in the years to come. So this is a very comprehensive suite of strategy that leaves no stones unturned, there’s no, focus on just one sector and not the other. So all three segments, you’ll be pushing very hard.
Unidentified Analyst
Thank you, Vincent.
Operator
I think we have time for one or two more questions. Are there more?
Unidentified Analyst
[Indiscernible].
Vincent Chong
To this question, first question around profitability or EFW. Obviously, this is ramped up here. We fully expect the standalone business to be profitable and we are seeing risks in the supply chain. I think that is a key risk driver for us scaling the margin curve, as we create more conversion lines, and each line is scales the learning curve, we expect margin group wide for the conversion activity to improve as to exactly where it’s going to hit. We certainly like to be benchmarked to the best in the market, eventually. Thank you.
Operator
Do we have any more questions from participants in the room?
Unidentified Analyst
Hi, this Shawn from Crisis. First question in on Oshkosh, wondering if there might be any updates around that. Second is related to the commercial space. Perhaps you could share what was 2019 is commercial space EBIT margins, they’ll be very helpful. And the third is on the posts, the one-off costs and one of benefit that we enjoyed this time around, I noticed that there’s still quite a sizable amount on the balance sheet and post-employment benefits. And so should we be thinking about lowering costs through debt? Or? Yes, just three questions?
Vincent Chong
I think we will not want to get into such kind of specificities because obviously, we’ve got to make sure that we make all the necessary studies and evaluations to make sure that we are competitive at the industry level. So we will not be able to give you any specificities in relation to the question that you have. But suffice to say, if you look at what we have done, we will always be doing and pushing for cost savings, productivity gains, while at the same time remain competitive in the markets that we operate in terms of how we reward our people and how we compensate our people. That’s very important. So that that will not be left out. Okay. So maybe I’ll let Ravi, you talk about Oshkosh.
Ravinder Singh
Shawn, thanks for the question. So as I mentioned the last time we completed the Vintage trials in January, and then in the March period, the US Army requested for final submission. So working very closely with Oshkosh, we provide our final submissions. So the evaluation is in progress now. And we should have the outcome sometime in the second half.
Vincent Chong
Waiting in anticipation, we are confident of our solution, but then this international competition, obviously we expect competition to be keen as usual. Now, in 2019, we were on a different setup. So we are not at liberty to break the EBIT margin up for you but in 2020, with a few recast, but we are not at liberty to get into the specificities of commercial aerospace EBIT margin in 2019, because that was pretty our restructuring, it was stewarded in a different basis. Before our reorganization, back then.
Operator
We have a follow up question from Rahul. Rahul, your line is open.
Rahul Bhatia
Hey, yes, thank you. It’s more of a continent question. I think Zhi Wei asked. So if we think about, maybe it’s bit early, but if you think about 2023 versus 2022 in terms of profit, there is already more than $70 million of one-off cost saving study are done in 2022, that you will need to somehow offset in 2023. So as a management, are you getting bit cautious about, thinking of how these costumes are going to come and looking for more of one of opportunities in each of the following years. Or you think that there are a lot of cost saving opportunities that can be recurring, like the one you did in 2020 and 2021. And you’re enjoying the benefit now in 2022. Thank you.
Vincent Chong
We started with which we appreciate, right, we started with $350 million of government support back in 2020. And we say that in 2021, we target to offset the lower government support that we anticipated in 2021. And we achieve it, but by two things, one, continue productivity gains and cost savings and also partial business recovery. In first half this year while at when we announced our four-year results in February this year, we also say our target this year is to offset the effects of lower government support, which will come down to essentially, essentially nothing this year absence of it this year, we expected that. And we said that we will we target to offset the absence of COVID related government grant in 2022, through cost savings, and partial business recovery. And in first half, we achieved that.
Now, whether it come the form by which it comes the cost saving type form domain, I think it’s not something that we are fixated on, because we are looking at group wide opportunities. So suffice to say that our target remains unchanged. Of course, it’s not a walk in the park, we continue to look at such opportunities. But we also hope and expect a business recovery to help us bridge the gap, bit second half of this year or next year, as we already mentioned, we are seeing really good signs of recovery in several of our businesses, especially aerospace. So let’s keep watch on the space. And we’ll give you further updates at the appropriate juncture, Rahul.
Rahul Bhatia
Thank you, Vincent. And thanks, sorry, just a follow up. So my question was more about putting the cost savings in the bucket of recurring and non-recurring. I completely understand your point about group wide opportunity. But I’m just trying to understand that for 2023, already, there is a kind of a minus $70 million, which you will need to offset. So that was that was a sight I’m looking at. Thank you.
Vincent Chong
Our recurring or non-recurring, I think the abundance of opportunities for us to control our costs, and manage productivity. And that’s what we set out to do all the time. So whether it’s recurring, non-recurring, we take it all in. So I think you rest assured that we will be leaving no stones unturned in this journey. But at the same time, keep in mind that we also need to reinvest back into the business so that we can sustain long term growth. And we need to reinvest and invest across business cycles. I think in the combination of all these initiatives and business recovery, we remain cautiously positive about our ability to offset the reduction in in a government grant or the absence of it. But we’ll keep you updated in time to come because there are certainly near-term headwinds, but that does not take our efforts away from keenly focused our keen focus on productivity gains and cost reduction. Hey, Rahul?
Rahul Bhatia
Thank you, Vincent. I appreciate the detailed response. Thank you.
Vincent Chong
Okay. Thank you.
Operator
Our next question comes from Divya Nomura. Divya, please.
Unidentified Analyst
Hi, thank you for the covers. I just have a quick question on the polar security cutter program. So how is that going? And I think there was an option for more vessels, I think 1 billion options. So has that been exercised by the US Navy? Or when will about that? Thanks.
Rahul Bhatia
Let me take that question. So, firstly, just maybe some general comments on marine. So with the marine industry, there are some challenges and although oil prices have gone up, we still see a lag in the business. For us on the ship repair part the business is being maintained in the shipbuilding plant, as was mentioned earlier, we are down by 1%. So, overall, in this industry, we continue to see some challenges. But of course, we are working to overcome some of the supply chain disruptions and also the labor challenges which are also mentioned in the aerospace. So marine similarly has those issues. Specifically on the polar security cutter. This is of course, the first of class of a fairly complex ship. And at the current stage, we are in the process of doing the design and the engineering for the first of the shipment this progressing. And so of course, we are working with the customer very closely. This is a large and complex project.
And so, they have come back to us with some change requirements. And so we have of course, taken on those changes and we are and the team is working very hard to include those changes in the design and in the engineering. So the project is progressing by shifted slightly to the right because of these new requirements. But overall, I think the efforts are continuous and we expect that more effort will be put in as we move towards the milestones that we are working with the customer.
Operator
Any other questions from [indiscernible].
Vincent Chong
Thank you. Any other questions from the live audience. Okay, well, let me just close the Q&A session. So thank you for first of all your attendance. And obviously, as I mentioned earlier on, we remain steadfast in delivering our strategy, despite the near-term headwinds, and if we demonstrated our ability to keep our eyes keenly on growing the business, as well as managing the near-term impact that the external environment could impose on us.
On this note, I would like to put the Q&A session to an end. For those of you who are able to please join us for lunch here physically. For those of you who join us through webcast, thank you very much once again for your participation and wish you a very pleasant weekend.
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