Hanwha Ocean Co., Ltd. (A042660) Earnings Call Transcript

Good afternoon. I am Han Sang Yun, Head of IR at Hanwha Ocean. First of all, I'd like to thank everyone for joining the call on Hanwha Ocean's 2024 Q4 performance and the performance of the whole year. Also joining the call, we have Shin Yong-In, Head of Finance; [ Tan Chang Min ], Head of Planning and Coordination; [indiscernible], Head of Strategy and Planning; Kim Hoonmin, Head of Commercial Vessel sales team; [ Kim Ho Jun ], Head of Naval Ship Business Development; and [indiscernible] Head of Offshore Marketing. During the call, the company will explain the business performance market condition, net order outlook, followed by Q&A with participating analysts. Now the company will brief you on 2024 business performance and highlights.

Good afternoon. I am Shin Yong-In, CFO of Hanwha Ocean. I'll present on the business performance and financials. I'll brief you on the 2024 annual performance. Please turn to Pages 5 and 6 of the presentation. On a consolidated basis for 2024 the company recorded KRW 10.776 trillion in sales, which has grown 45% year-on-year. While the sales was sluggish in '23 due to adjustment in production schedule, the sales increased significantly in 2024 as the production volume increased in '24, thanks to personnel reinforcement, including international hires, efforts to stabilize the production procedures, anchoring share of high-priced vessels including LNGC. The annual operating profit for '24 recorded a subclass of KRW 237.9 billion achieving a turnaround to profitability for the first time in 4 years since 2020. Despite the significant reflection of onetime costs related to production stabilization this year, a large number of low-priced orders from 2021 were delivered, and the product mix has shifted towards higher-margin LNG carriers, leading to a substantial improvement in profitability. Additionally, the exchange rate growth compared to that of last year and the stabilization of raw material prices had a positive impact. Next, let me brief you on the 2024 Q4 performance. Please turn to Page 7 and 8 of the presentation. On consolidated basis for 2024 Q4, the company has recorded KRW 3,253.2 billion in sales, KRW 169 billion in operating profit and KRW 576.3 billion in net profit. The revenue for the fourth quarter of '24 increased by 20% Q-on-Q primarily due to an increase in working days and the smooth execution of planned production. Additionally, the sustained high proportion of sales from high value add LNGC contributed significantly to the revenue growth. In Q4 '24, production delays relative to initial plans were stabilized. The revenue recognition proportion of low-priced container ships ordered in '21 decreased and the proportion of sales from high-margin LNGC remains at a high level. Additionally, extent factors such as a stable exchange rates and raw material prices contributed to the improvement in our performance. As a result, operating profit for Q4 reached KRW 169 billion, significantly expanded the profit margin in Q-on-Q. Looking ahead, the effect of production stabilization and product mix improvements are expected to continue, further accelerating performance improvements in the upcoming quarters. Please turn to Page 9 for financials. The total assets as of the end of '24 has increased by KRW 3,888.6 billion year-on-year to KRW 17,833.2 billion and cash and cash equivalents declined by KRW 1,321.3 billion year-on-year to KRW 603.3 billion. Total liabilities have increased by KRW 3,349.9 billion year-on-year to KRW 12,982.5 billion and the total debt increased by KRW 3,004.7 billion (sic) [ KRW 3,075 billion ] to KRW 5,265.9 billion. Net debt has increased by KRW 4,396 billion year-on-year to KRW 4,662.6 billion. This was due to an increase in working capital requirements as a result of the rise in LNGC construction volumes and the full scale production of offshore project leading to an increase in the heavy construction volume. Additionally, various investment activities aimed at strengthening business competitiveness and building a value chain through new business initiatives contributed to the higher capital outflow. However, with the significant increase in LNGC deliveries year-on-year, the cash flow is expected to turn positive and net debt is anticipated to decrease substantially. This improvement is expected to significantly enhance financial stability. While the liability-to-equity ratio has slightly increased to 268% as of the end '24, it is in line with shipping industry average, and the company maintains a solid financial structure. Now I will share with you 2024, Q4 business performance and the whole year outlook by segment. Please turn to Page 10. First, the Commercial Vessel business, which accounts for 75% of the total sales for Q4 '24. The sales from the Commercial Vessel business grew by 13% Q-on-Q to KRW 2,455 billion due to increase in construction volume and a high proportion of LNGC sales supported by production stabilization. Q4 profit recorded a surplus of KRW 114.5 billion achieved with additional production stabilization costs and driven by a production mix, a mix focus on LNGC. For this year LNGC are expected to maintain a high proportion of sales and the average sales price of LNGC is anticipated to continue rising. As a result, profits are expected to expand further compared to last year. Next, Naval Ship business. Due to the base effect from the sharp decline in revenue in the previous quarter and the concentration cost input for the new submarine construction in Revenue increased by 97% Q-on-Q, reaching KRW 385.5 billion. Profit also improved without any significant onetime factors, achieving KRW 33 billion, a notable increase compared to the previous quarter. This year, profitability is expected to be maximized through a construction of the 3 new submarine overhaul and maintenance projects and the U.S. Navy MRO business secured last year. Lastly, offshore business. In Q4, the Jansz-Io FCS and WTIV #2 construction project progressed in full swing resulting in a 10% increase in revenue Q-on-Q, reaching KRW 322.3 billion. Profitability turned positive supported by the favorable effects of exchange rate increases and production stabilization. While the pace of profit improvement remains slower compared to other divisions, efforts will be made to enhance profitability through tight process management and securing additional change orders. This concludes briefing on business performance by segment.

We will hear from each business unit on respective market conditions and order outlook.

Good afternoon. I am Kim Hoonmin, the Head of Commercial Vessel sales team. I will brief you on the market condition and order outlook for the Commercial Vessel BU. Please turn to Page 14 of the presentation. Since last year, we are surrounded with various internal and external uncertainties such as global economic concerns, the prolonged Russia, Ukraine conflict and geopolitical risk in the Middle East. Despite the challenging circumstances, the Commercial Vessel BU successfully secured orders for 19 LNGC, 5 VLACs fees. VLCCs and 6 container ships. Out of the company's total order value of USD 8.8 billion last year. The commercial vessel BU alone accounted for USD 7.61 billion, maintaining a strong order flow. Notably, our selective order strategy leveraging our competitive advantage and delivery schedules has proven effective by securing a contract at premium prices exceeding [indiscernible] rates, we have also succeeded in ensuring profitability. This year, with the election win of President Trump, policy changes related to fossil fuels anticipated, which are likely to favor Korean shipyards. The resumption of LNG projects that were halted during the Biden administration and the expansion of the oil drilling permits are expected to drive increased transportation demand. As a result, the demand for new builds in key vessel categories such as LNG and the VLGC, and VLAC is projected to remain steady. These market conditions are expected to create a favorable environment for shipyards. As for container ships, although large scale orders have been placed since last year, new demand arising from the alliance, restricting restructuring in February of '25 and the replacement demand for the eco-friendly vessels remain strong. Shipping companies that did not participate in last year's orders are now actively seeking new orders, and we are currently negotiating and bidding on multiple projects. The company still holds a slightly faster delivery schedule compared to the competition, which positions us well to secure orders with healthy profit margins. Concerns have been raised recently due to the expansion of facilities and the large-scale orders by Chinese shipyards. However, with the enactment of the U.S. SHIPS Act strengthened the sanctions against unfair trade practices and the U.S. government's inclusion of Chinese shipping companies and shipyards on its black list, the preference for Korean shipyards is expected to increase further. While there may be some potential for the price adjustment, the likelihood of a sharp decline in ship prices is deemed low considering the stable order backlogs at shipyards. In response, we will continue to pursue a selective order strategy focusing on projects that ensure stable profitability. Though we cannot disclose a specific order targets due to the company's policy, we plan to focus on securing orders for LNGC, containerships, VLACs and VLCCs. Our goal is to maintain our current order backlog equivalent to more than 3 years of production through the end of the year. Next, market condition and order outlook per vessel types. First, LNGC. With the Trump's election win, the acceleration of FID for North American LNG projects in '25 and '26 has become more visible boosting order expectations. However, the possibility of delays in FIDs could also postpone newbuild orders. Nevertheless, the U.S. government shift in energy policy, orders focused on allied nations under the Ships Act, and the replacement demand for aging vessels are expected to sustain the strong demand for the new LNGC this year. Last year, we successfully secured orders for 8 VLCCs, leveraging our competitive advantage in faster delivery. However, the recent sharp increase in ship prices and a decline in freight rates have led many shipping companies to adopt a wait-and-see approach. Despite this, the order backlog to fleet ratio remains at a very low level of around 9%, while the proportion of aging vessels is high. Additionally, the U.S. government further sanctions on the Russia's dark fleet sheets are expected to drive charter rates higher, which could potentially restore confidence and lead to additional new build orders. As for VLAC and VLGC, more stringent environment regulations have increased the demand for Korean energy significantly. Therefore, ammonia as fuel for vessels and transition into hydrogen economy have created a positive environment for new order. Currently, all major companies such as Exxon and Chevron, have embarked upon a blue ammonia development project and the demand for ammonia delivery is expected to grow from 2030. Since the second half of the last year, there has been a surge in orders. And while a slighter decrease in orders is anticipated in the short term, potential demand for new builds remained robust. Lastly, container. Change in the alliance from '25 is expected to restructure the competition landscape, which has driven a top ranking liners to place new orders to maintain and/or expand market share. Shipping companies with the high concentration of orders placed with Chinese shipyards may increasingly seek to secure orders with Korean shipyards to diversify their fleet portfolio risks following Trump's election. We will closely monitor these ordering trends. And this concludes the presentation on the Commercial Vessel, market situation and order outlook. Thank you.

Thank you. Let's hear from the Naval Ship business unit.

Good Afternoon. I am [ Kim Ho Jun ] in charge of Naval Ship Business Development. First of all, thank you for your interest in Hanwha Ocean's Defence business. I will share with you the recent domestic and international trends as well as Hanwha Ocean strategies. This year, the Naval Ship BU achieved an annual revenue exceeding KRW 1 trillion with solid operating profit margin of approximately 12%. Moving forward, the BU aims to maintain high profitability while pursuing continuous revenue growth by actively expanding new orders with guaranteed profitability and exploring new markets. First, let me share updates on the domestic defense industry. recording the KDDX projects, which has gained -- drawn significant interest from investors, the security assessment procedures for designated defense contracts have recently been completed and the designation is expected to be finalized soon. Once the government's project implementation strategy is determined, the selection of the contractor is anticipated to take place in the second quarter. Next, I will discuss the global defense market and opportunities in the U.S. Navy projects. The international geopolitical landscape remains unstable. The prolonged Russian and Ukraine war continues to drive increases in defense budgets across European nations. In the Middle East, while a cease fire has been breached in the Israel-Hamas conflict, regional security remains fragile. Additionally, heightened tension between China and Taiwan, along with the territorial disputes in the South China Sea are further underscoring the growing importance of maritime defense. Against this backdrop, strengthening naval power has emerged as a key priority globally, with the U.S. Navy having a large-scale new ship building and MRO projects. According to the Congressional Budget Offices 2025 shipbuilding plan report, the U.S. Navy aims to expand its fleet from the current 295 ships to 390 ships by 2054. To achieve this, a total of 364 new ships are expected to be constructed over the next 30 years. This initiative is projected to require a budget of approximately USD 10.75 trillion, around KRW 1,600 trillion. However, the outdated state of the U.S. shipbuilding industry makes it challenging for the Navy to procure ships as planned. Consequently, there is a growing need for new orders through the collaboration with allied nations. To facilitate this, amendments to laws such as the National Defense Authorization Act and Buy American Act and the Vance Tolleson Acts are being discussed. Currently, some politicians and industry experts are reviewing these proposals. Amid these changes Hanwha Ocean with its proven competitiveness in the global defense market is well positioned to seize new opportunities that may arise. Hanwha Ocean has been taking proactive steps in the U.S. maritime defense market. In August of last year, the company successfully secured an MRO contract for the USNS Wally Schirra, a navy supply ship. Following this, in November, it won another maintenance contract for the USNS Yukon, part of the U.S. Navy Seventh fleet marking official entry into the U.S. Navy MRO markets. Currently, there is a steady stream of additional MRO inquiries and discussions are underway, considering the scale of the project and the availability of production facilities. Furthermore, on December 19 last year, Hanwha Ocean, together with its affiliates, Hanwha Systems completed the acquisition of the Philly Shipyards, located in the Philadelphia, USA. This marks the first instance of a Korean shipyards acquired a U.S. shipyard. The Philly Shipyard offers a significant geographic advantage being a close proximity to major U.S. naval shipyards, making it an optimal location for constructing new ships and performing MRO work for the U.S. Navy. Hanwha Ocean plans to expand its cooperation not only with the U.S. Naval but also with NATO and allied navies in the mid- to long term. Additionally, leveraging the capability of the Philly Shipyards, Hanwha Ocean aims to actively pursue orders for new naval vessels. Political changes in the U.S. are also playing a significant role as key variables in the defense market. With the recent inauguration of President Donald Trump, the focus on strong naval power has once again come to the forefront. President Trump has expressed his vision to expand the U.S. Navy fleet to over 350 ships, a goal that is perceived as a bipartisan priority beyond any single administration policies. Consequently, the trend of increasing defense budgets and strengthening naval power is expected to continue in the foreseeable future. In response, Hanwha Ocean plans to further expand its cooperation with U.S. Navy while actively utilizing the Philly shipyards to broaden collaboration with the navies of the U.S. and its allied nations. At the same time, the company will establish optimal strategies aligned with changes in device policies to strengthen its position in the global defense market. Furthermore, we will continuously enhance our competitiveness in the global defense market by developing advanced naval technology and maximizing production efficiency. Currently, Hanwha Ocean is actively pursuing new orders, not only in the U.S. defense market, but also for 3,000 ton class diesel submarines in regions such as Poland, the Middle East and Canada. Through these efforts, we aim to elevate the status of Korea's marine defense industry and strengthen our presence in the global market.

Lastly, let's hear from the offshore BU.

Good afternoon. I am [indiscernible], Head of Offshore Marketing. Please turn to Page 16 for the market condition of offshore plants. International oil prices declined in November and December last year due to the easing of geopolitical tensions in the mines and the statements sale made in the Russian-Ukraine war. However, following the U.S. sanctions on the Russian oil at the end of December, oil prices showed an upward trend before the recently falling to USD 74. Given the overall increase in the market and certainty, the international oil prices are expected to remain at an elevated level for the foreseeable future. In the FPSO market, driven by the discovery of large deepwater oil fields, the market size is expected to continue growing. Following last year, demand from the South America and Africa is projected to account for around 50% of the total demand in '25, leading the FPSO orders globally. Looking at the trend of all majors, the U.S.-based companies are focusing their investments on key areas such as domestic shale oil and Guyana, while also expanding exploration activities in core regions like South America and Africa supported by the acquisition of high-quality assets through M&A. Similarly, European companies are increasing their portfolios or reallocating resources to oil and gas businesses, anticipating growing demand in the coming years. The drilling market continues to show strength, with charter rates remaining at high levels due to increased demand for ultra-deepwater exploration and development and the launch of outlook remains positive. While the government and developers around the world remain firmly committed to advancing offshore wind power projects, uncertainties exist in the U.S. market due to present Trump's negative stance on offshore wind energy. However, the potential impact of changes in the U.S. market on the global offshore wind market is expected to be relatively limited. Nonetheless, we will closely monitor the influence of the U.S. policy shifts on offshore wind markets in other regions and respond swiftly and strategically to any development. In the domestic offshore wind market, fixed price contracts are being executed effect following the government's offshore wind competitive bidding road map announced in August of '24. Approximately 1.9 gigawatts of offshore wind farms were awarded fixed price contracts in and annual bids of around 2 gigawatts are scheduled to take place until '26. Additionally, following the result of the '23 offshore wind competitive bidding, concerns arose about the use of low-cost Chinese suppliers and the encroachment of larger scale foreign capital into the domestic offshore wind market. As a result, in August '24, the competitive bidding system was revised to prioritize nonprice factors such as use of domestic suppliers as the primary evaluation criterion. Demand for vessel capable of installing 15-megawatt class turbine is increasing domestically, but the current lack of such vessels highlights the need for orders of domestic offshore wind installation vessels. We plan to focus on expanding our role in fixed offshore wind development projects, which are growing primarily in the southwestern region of Korea as we pursue business opportunities in the domestic offshore wind market. Offshore BU of Hanwha Ocean is exerting huge efforts to develop new product and original model, fully harnessing latest technology to meet changing market demand and to connect such development efforts with future orders. Through friendly cooperation with key customers, the company will generate mutually complementary and symbiotic relationship. The offshore BU plans to promote selective order-taking strategy for larger-scale projects, putting profitability at the highest priority, and we hope the strategy positively contribute to the company's future profit. The offshore BU will do our best to preempt the market and maximize our profits by maintaining flexibility to any change in the conventional energy stores and the renewable energy market. If you have any questions on the specifics, please ask any questions during the Q&A. Thank you for listening.

This concludes the briefing on business performance for the whole year and the fourth quarter of '24. Now we will take questions from the participants. Question is from Shinhan Investment Securities. I have a question on the onetime expenses. So will there be any other onetime expenses than the foreign exchange? If so, can you divide it between the expenses for the operating profit and nonoperating profit?

The answer is in Q4 because of the higher foreign exchange rate, there has been mostly the effect on the offshore products and successful conclusion of the collective wage negotiation, which contributed to about KRW 17 billion. And because of the positive ruling by the Supreme Court on the ordinary wage and there has been some additional onetime expenses. From the nonoperating side, so there was the valuation gain of the assets in the foreign currency, which was also affected by the higher foreign exchange rates.

Next question is from the CGSI. The question is with regard to the commercial vessel business unit and the recognition of the revenue. Based upon the current order backlog that you have, then what is your future outlook for the quality of profitability? Because in the past, the quality of profitability of your existing order backlog were relatively poor compared to the competition. But looking into the existing order backlog of Q4, what do you believe the profitability outlook will be for the foreseeable future? Do you expect that to further improve compared to the competition?

The answer is, as you have rightly mentioned, we had some issue with the production stability. So we were not able to record revenue at the right time. But as you know and as we have mentioned repeated times, that we focus on the production stability and we were able to recognize the revenue and the P&L at the right time. And during Q4, of course, there was an effect from the foreign exchange rate, but now we are in a very stable position. And we are now focusing more on the LNGC construction. So we expect there will be additional profit to be recognized from this shift in the focus. Will it be any faster or the steeper than the competition, I can say for sure, but that will be in the same range as the competition.

Next question is from Shinhan Investment Securities. So the order taking part to 2023 has been rather slow, but the order taking for '24 has been relatively favorable. So what do you expect the Q to grow in '25? And if you can share then please let us know what will be the future flow?

The answer is in 2019 and onwards. So when it comes to the order, there has been some variability and the Q4, the volume has not been stable. So based upon the production or the construction so in '24, it went up quite significantly, but there has been some sluggish performance for the years before in '25. We expect that to be in the same range as of '24. So that would not be a major change in the Q value.

Next question is from Samsung Securities. It's also to do with onetime expenses. Maybe you have elaborated this during your briefing, but I'd like to know more about the offshore business unit change order and also the foreign exchange rate and its positive impact on the steel products price. So will that have a positive impact on the predicted cost? So was there any reversal in the provisions of the loss of construction because of those impacts?

The answer is, so there has been some change order types of a milestone that we have negotiated positively with other customers, and there has been some increase in the total construction rather contract price in a form of incentives. So because of the elevation of the foreign exchange rate, so the total contract value has increased as well. So because of that reason, so the total predicted cost has become much better than our original prediction.

I have a following question about the FX impact on the total contract value. So when it is not that significant, can I know more about the Hanwha Ocean's overall FX exposure?

The answer is outside of those hedged naturally, we are closely monitoring the macroeconomic situation and the foreign currency markets. So we cannot disclose in greater detail as to the overall company's FX exposure. So we maintain the policy of the flexible FX hedging because of the high variability, we cannot disclose the greater detail, but we maintain it in a rational level.

Next question is from CGSI, and this is to do with the defense business. So the Vance-Tolleson act that is something that the President can exercise his waiver. So at the President Trumps will, then as early as next month that companies in Korea and other foreign countries of allied nations or the foreign companies of the allied nations can do in such projects. So is there any time line that is under negotiation or discussion? So can you please share more? And as this is a related topic under the greater umbrella of defense, I'd like to ask another question about the Philly shipyard. So do you have any definite plan of renovations on the CapEx investment depending on the policies of the new administration?

The answer is when it comes to the defense business, so there remains a possibility of the revision of the laws and the act, but it is extremely difficult to actually predict it. And we want to make sure that we are fully prepared for any possible change coming out of this rise of administrative orders, but it is extremely difficult to make any prediction based upon any particular time line. As for the Philly shipyards, the timing of our decision to acquire the shipyards, so considering the U.S. Ships Act and the collaboration of the Allied Nation is something that we were not able to fathom. So our initial target when we decided to acquire the Philly shipyards was to target the commercial vessel businesses. But starting from the late last year and early this year, the policies are coming in droves. So we are also considering the possibility of the use of the Philly shipyards for the defense or the naval use. So with regard to the renovation of the production and the construction facilities and the improvement of its production utilization, the plans are there, and it is implemented as planned. And the plan for the future investment, that remains rather flexible depending on the policies that are coming out of this new administration.

Next question is from iM Securities and is to do with the naval ship. In the fourth quarter, can you divide the revenue and the operating profit for the MRO services that you have rendered for the U.S. Naval vessel? And I'd like to know more about total capacity that you have within your own facilities and the maximum capacity that you can pull out of by, for example, renting out other facilities?

The answer is in '24 that we have performed the MRO services for the 2 Navy vessels of the United States Navy. In 2025, then we plan to actually expand the order taking greatly. So when it comes to the -- when we compare the valuable capacity of our facilities and the overall U.S. MRO market, we believe that we can secure the order of 5 to 6 U.S. Naval vessels. And considering the sudden increase in the U.S. MRO demand and the naval ships, then we definitely expect there could be additional upside. And you might expect that with the increase in the MRO demand then there might be some interference with our existing production facilities for the new build. And considering our valuable slots and the capability that we believe that we can handle 5 to 6 naval vessels at all times for the MRO purposes. But if there is any increase further than that, then we can maximize our own capacity as well as considering collaborating with the mid- to small side shipyards in the [indiscernible] province.