HD Hyundai Heavy Industries Co., Ltd. (A329180) Earnings Call Transcript

[Interpreted] Good afternoon. First of all, thank you all for joining this conference call. And now we will begin the conference of the fiscal year 2026 Third Quarter Earnings results by HD Korea Shipbuilding and Offshore Engineering. This conference will start with a presentation followed by a divisional Q&A session. Now we shall begin the conference of the fiscal year 2026 third quarter earnings results by HD Korea Shipbuilding and Offshore Engineering.

[Interpreted] Good afternoon. I am Song, Executive Director, overseeing IR for HD Hyundai Group. As in the previous quarter, we will keep today's earnings presentation as brief as possible and allow more time for Q&A. English interpretation will be provided consecutively. After the earnings presentation, I will comment on the shipbuilding market before moving on to Q&A. Let me begin with the key highlights for the third quarter, followed by our operating results. First, the FX impact. The average exchange rate in the third quarter fell by approximately 6% or by KRW 79 from the previous quarter, resulting in an operating loss impact of approximately KRW 70 billion, which includes KRW 45 billion for Hyundai Industries. Second, one-off costs, Hyundai Heavy Industries recorded 47 working days in the third quarter, a decrease of approximately 14 days quarter-on-quarter, and this represents about 4 more days than the typical seasonal decline, and the additional reduction lowered operating profit by approximately KRW 50 billion. Regarding wage and collective banking agreement, which we successfully concluded yesterday we recognized 70% in the third quarter call, this amount in any relevant for the interest. [Technical Difficulty] We apologize for the inconveniences caused by the technical issues that interpreted the conference call. Investigators, understanding for this, the conference will be very appreciated. Apologies for the technical glitch. Let me resume and second, one-off costs. Hyundai Heavy Industries recorded 47 working days in the third quarter, a decrease of approximately 14 days quarter-on-quarter, and this represents about 4 more days than the typical seasonal decline and the additional reduction lowered operating profit by approximately KRW 50 billion. Regarding the wage and collective bargaining agreement through which we produce the desirable outcomes yesterday, we recognized approximately 75% of the related additional costs in the third quarter with the remainder to be reflected in the fourth quarter. We are unable to disclose the specific amount, and we kindly ask that you refer to relevant press reports for further information. Finally, our third quarter revenue mix by vessel type, HD Hyundai Heavy Industries large-sized ships, LNG carriers, 42%, LPG carriers and real EVs, 23%; containerships 24%, tankers 9%. For the midsized ship segment, container ships accounted for 24%, product carriers 32%; LPG carriers 26% and bunkering vessels, 8%. HD Hyundai Samho LNG carriers 40%, container ships 32%, tankers 14%, LPG carriers and real EVs 10%, with no significant change from the previous quarter. Moving to Page 4. Here are the consolidated results for HD KSOE. Consolidated revenue decreased 7.2% quarter-over-quarter and increased 9.3% year-over-year. Despite the continued rise in vessel prices, revenue declined slightly from the previous quarter due to seasonal factors, fewer working days and the lower exchange rate. Operating profit decreased 12% quarter-over-quarter and increased to 37% year-over-year, reflecting the lower exchange rate, fewer working days and higher one-off costs. I will cover the nonoperating items later in the presentation. Please refer to the table on Page 5, and let me move on to Page 6. Consolidated revenue in the Shipbuilding division decreased 8.2% quarter-over-quarter and increased 10.3% year-over-year. The quarter-over-quarter decline reflected fewer working days and the lower exchange rate despite higher vessel prices. On an HD Hyundai Heavy Industry basis, consolidated revenue in the naval and special vessels segment decreased 14.6% quarter-over-quarter and 30.8% year-over-year. The decline was mainly attributable to fewer working days and a change in project mix. In the offshore segment the project continued to ramp up, while the Trian project entered its final stage. As a result, revenue increased 1% quarter-over-quarter and 35% year-over-year. Next, Engine & Machinery revenue was quarter-over-quarter and decreased 10.3% year-over-year, mainly due to fewer production days and the lower exchange rate. Moving to Page 7. I will now cover operating profit by business segment. Shipbuilding operating profit decreased 18.1% quarter-over-quarter due to the lower exchange rate and one-off costs, but increased 32.3% year-over-year. The operating margin was 16.7%, slightly lower quarter-over-quarter, but continuing to improve year-over-year. Operating profit in the Naval Vessel business increased sharply 114% quarter-over-quarter despite lower revenue, supported by higher export mix but decreased 24.5% year-over-year. Offshore operating profit surged 110% quarter-over-quarter and turned profitable year-over-year, supported by the full scale recognition of revenue from the project and KRW 18 billion in change order. Engine & Machinery operating profit continued to grow, increasing 8% quarter-over-quarter and 19% year-over-year. Higher selling prices and a greater share of dual fuel engines more than offset the lower exchange rate and reduce the revenue, and it is for the first time that we disclosed our revenue from onshore power engines, which is approximately KRW 11.4 billion this quarter. Please refer to Page 8 for the operating results of the consolidated subsidiaries, and I will provide more detail on Page 9. First of all, HDK SOE on a stand-alone basis. Higher revenue from the SD business division and overseas yards helped the company return to profit, while dividend income also contributed to a significant increase in operating profit. HD Hyundai Heavy Industries, its revenue decreased 9.1% quarter-over-quarter, and operating profit declined 13.5% quarter-over-quarter due to fewer working days, the lower exchange rate, one-off costs and a change in vessel mix, including a lower share of LNG carriers. The Engine & Machinery, Offshore and Naval and Special Vessels businesses nevertheless delivered stable operating results. Now HD Hyundai Samho, despite fewer production days, which were around 10 days lower from the previous quarter and the lower exchange rate in the third quarter, the company continued to deliver solid operating results, supported by a higher share of LNG carriers and continued productivity improvements. Revenue remained at the previous quarter's level, while operating profit decreased to 10.3%. The operating margin was 20.2%. Now let us move on to Page 10. HD Hyundai Marine Engine despite the lower exchange rate, revenues surged 55% quarter-over-quarter, and operating profit increased 92% quarter-over-quarter, driven by effective FX hedging, higher selling prices and increased share of dual fuel engines and higher delivery volumes. The operating margin came in at 28.5%, which is the highest in its history. And next is HD Hyundai Energy Solutions, despite the seasonal slowdown and the lower exchange rate, revenue increased year-over-year and operating profit rose 38.8% year-over-year, supported by higher selling prices and increased exports to the United States. On Page 11, nonoperating results included approximately KRW 610 billion in foreign currency-related losses following the sharp decline in the USD Korean won exchange rate as well as KRW 307.8 billion in gains on financial instruments. On Page 11, all subsidiaries remain in net cash position with consolidated net cash of approximately KRW 11 trillion. And that concludes our presentation of results for HD KSOE and its subsidiaries, and then we will walk you through the outlook for the commercial shipbuilding market.

[Interpreted] Good afternoon. I am Tim Bangu, Senior Executive Director, in charge of HD KSOE's Strategic Marketing Division. I will now walk you through global newbuilding market trends for the third quarter of 2026, and the order intake of HD KSOE Shipbuilding division. And first of all, market trends. From January to September this year, the global newbuilding market saw very strong ordering activities across all vessel types, reaching a record high that surpassed the same period of 2007, the previous peak in terms of GT. In the third quarter, containership led the market, while solid ordering momentum continued across major types, including tankers, which has been strong since the start of the year as well as LNGC, LPGC, bulk carrier and car carriers. Geopolitical risk including the wars in the Middle East and Ukraine persists and disruption to shipping logistics caused by factors such as transit restrictions in the Panama Canal are deepening the supply-demand imbalance in the shipping market. Against this backdrop a combination of factors, including unprecedented shipping market conditions, a growing focus on energy security, response to environmental regulations and demand for replacing aging fleet is having a significant impact on the new building market as well. Global newbuilding investment this year has already approached last year's full year level as of the third quarter, reflecting unexpectedly strong demand for new building investments. Newbuilding prices has also continued to rise, driven by sustained ordering from ship owners who have secured substantial profit and by shipyard accumulated backlog. And lastly, our new order trend. The group's shipbuilding subsidiaries secured a total of 176 vessels with $19.1 billion on a cumulative basis during the third quarter exceeding our annual order target. These results reflect the success of our selective order taking strategy and our sales efforts focused on high value-added vessels, and once again demonstrates the group's competitiveness in winning orders in the global market. In terms of our new order portfolio, we secured a number of high value-added large gas carriers. In particular, we won a total of 45 VLGCs, including real ICs and a cumulative basis through the third quarter, capturing more than 50% of global orders. In the midsize segment, we diversified our order portfolio by winning orders across wide range of vessel types, including not only medium range and long range tube tankers, but also midsized and large LPG carriers, liquefied CO2 carriers, PCTCs and roll on and roll off vessels. Last but not least, the market outlook. Going forward, the shipbuilding market has favorable factors, including limited capacity and major shipyards, steady growth in seaborne trade volumes and demand for replacement with eco-friendly vessels. At the same time, risks remain, such as geopolitical tensions, uncertainty in the global economy and expansion of shipbuilding capacity worldwide. In this environment, the group will continue its order strategy focused on high value-added vessels, leveraging our extensive shipbuilding experience, technological capabilities and stable supply chain. We will also respond more flexibly to make changes in customer needs, striking a balance between profitability and growth, and this concludes our presentation of HD Korea Shipbuilding and Offshore Engineering Third Quarter 2026 results. Thank you for your attention.

[Foreign Language] [Operator Instructions] The first question will be presented by Korea Investment Securities.

[Interpreted] I have 3 questions about your engine business. The first question is, you mentioned that your engine business revenue for this quarter is KRW 951.1 billion. And can you clarify, can you give us a breakdown of this revenue by low speed, mid-speed engines and then piping components? The second question is about your onshore power generation engine. As you said, the so we have 2 cases of H54GV and H3540GV. So is it for large output power generation engine? Or is it an engine that is used for usual onshore power generation? Can you also give us the classification or distinction? Lastly, out of the inquiries that you have received this year, are there anything that would give you visibility in terms of actually being awarded any contracts? It's because we need to ensure a bit of visibility about the 4 gigawatt facility utilization that you mentioned.

[Interpreted] For your first question, give you our revenue breakdown. The large size engine will be 50% and midsized engine, which also includes power generation one, 35%; and the other category, 15%.

[Interpreted] To answer your second question, I am from the engine business. As to the power generation engine project, we have been quite steady in undertaking existing projects which amounts to 100 to 300 mega project. So these orders were given 2 to 3 years ago, and this is ongoing. As for now, as to the ones that you mentioned, I mean, H54 GV and 15 H54GV, we cannot produce these engines with our factory alone. So there would be a split of production between our -- so the production will be made feasible when we have a new plant ongoing. So there's going to be a split of production between our existing plants and our plant.

[Interpreted] And to answer your third question, which was about inquiries we have both PPPs and project, 1.6 giga which were already close, but we have 1.4 gigawatt project, which we are undertaking but we have disclosed targets because they did not meet disclosure criteria. And by year, we would be operating at our full capacity by 2028 and 2029. So as to additional order awards, we need to see what's going to be happening. And as I mentioned last year, we have continuing demand in the AI data set of sectors and as well as national electricity grid development. And as you know, electrification is a global trend. So we continue to receive inquiries about national redevelopment as well as AI data centers. What's different is previously, AI data center project has been undertaken with us serving as an intermediary kind of intermediary. So there would be demand, but they will not be coming directly to us. But these days, hyperscalers tend to come to us directly and contacting us directly. That's 1 difference. Our strategy will lead to striking the right balance between our capacity and projected revenue and our order taking capabilities.

[Interpreted] And as to the power generation volume that have -- that are quite firm or that are projected, it's going to be 1.5 giga in 2028 and 3 giga in 2029.

[Interpreted] The next question will be presented by Jeong Dongik from KB Securities.

[Interpreted] I have 2 questions. The first question is about our offshore plant. You mentioned there's a one-off gains of KRW 80 billion, and that's very high because that's almost a 30% increase in operating profit. And in the previous quarter, your OP margin in offshore plant was also 16%. I think these are unsustainably high levels of operating profit. So I'd like to know the background or logic behind these 2 consecutive very high margins were made available. And what you -- what's your view on the following quarter or next year in your offshore plant? My second question is about your commercial vessel market outlook. As you mentioned, ordering activity was the highest ever, maybe better than what was recorded back in 2007. Then how do you view the 2027 next year? Because estimated and forecast that there's going to be around 30% decline in the overall market. So I wonder what your internal view is about the commercial ship market next year.

[Interpreted] To answer your first question, yes, that's KRW 18 billion in change order and that's recognized as revenue. We have the and project and the Rua project specifically is proceeding at its full capacity. So these 2 projects are very high margin ones. And aside from this, there is nothing specifically -- nothing specific that I'd like to mention. But in the following quarter, on the projects, revenue may decline a bit, but the project will be making good progress. And again, in the following quarter, we believe we can produce profits with high margin. And in the offshore sector, we don't believe we will be suffering losses or any sudden drop in our revenue. It's because revenue may decline slightly in 2027, but I think we will be able to produce the profit because we would be considering block construction as well as the LNG inputs as well in preparation for any possible decline in our offshore business.

[Interpreted] Let me give you my answer to your second question as to the market prospects especially new build orders for 2027, while we expect for this year was around 190 million. So that was above the 176 million that was recorded before. And as just said, Clarkson is expecting around 30% reduction, and that would be amounting to 125 million or 130 million tonnes in 2027, but still the level is quite high compared to usual years. So beyond 2027, yes, new build orders may decline compared to 2026, which was the highest ever in history. But still, we expect a solid market outlook in this new build -- new build activities. There are ever reasons why. First of all, we are experiencing supply chain disruptions because of transit restrictions on the Strait of Hormuz, the Panama Canal and the Swiss Canal, and this leads to increases in tonne mile, the overall tonne mile, which respite demand for new builds as well. And now ship owners have the financial capability and they can afford investing in new vessels as well. So that increases demand for new builds. And even though this war in the Middle East comes to an end, we believe supply chain disruption will be established as a new normal, which means there won't be big changes in seaborne trade volumes. So in 2027, yes, there could be a slight reduction, but still, we believe that we're going to have solid performance in the new build market.

[Interepreted] I'd like to make some additional comments about our offshore plant business, both the and projects are increasing their contribution to our overall revenue, and these 2 projects are highly profitable, and that's our expectation. So until they are fully delivered in 2027, these 2 projects will be producing desirable outcomes with improvement in our overall profitability. But as to additional orders and additional projects after beyond these 2 projects, in fact, earlier this year, we were working in a project in the Middle East, which did not lead to successful outcomes. But there are some new projects that we haven't disclosed yet, but are ongoing. For instance, there's an offshore substation project and only work has already been done, but due to contractual reasons, we're not disclosing this project. And we also have a gas production facility project for which early work is ongoing as well. So we believe early 2027, we will be able to disclose relevant information about the subsequent projects. And as to our offshore energy business, I think all projects would be and are being undertaken just as planned. So they would be producing profits just as planned as well. And behind this stellar performance lies our selective order-taking strategy, which focuses on profitability and as well as our excellent execution, which ensures that these projects are undertaken just as planned.

[Interpreted] The following question will be presented by Investment Securities.

[Interpreted] My first question is, please give us an update in each year for your order taking activities for the third quarter. That's -- and then the question is about your projected joint venture in the United States with. So your company has been rather conservative. So you are now pursuing this block manufacturing operation, we're a joint venture with the U.S. counterpart, which is Kirit. And without amendment being made to the Jones Act or Act, many people concerned that such projects or business may entail greater risk. So I'd like to know more about the background behind making this rather bold investment decision. And who are the major players in this joint venture or future U.S. operations. It's going to be 6 subsidiaries of your group.