Hanwha Aerospace Co., Ltd. (A012450) Earnings Call Transcript & Summary

Good afternoon. I am Han Sang Yun, Head of Investor Relations with Hanwha Aerospace. First of all, I'd like to thank everyone for joining the call. Now I will brief you on the Q2 2023 performance of Hanwha Aerospace. Please refer to Pages 6 and 7 of the presentation. Consolidated sales for Q2 are KRW 1,798.1 billion, which is 23% increase Y-o-Y. And operating profit is KRW 83.1 billion, recording slight decrease year-on-year. Higher sales from Land Systems and the stronger performance of Hanwha Vision and Systems have improved the sales performance versus the same period last year. The details will be explained in performance by segment sections. Pretax profit for Q2 is KRW 344.3 billion, and net profit, KRW 308.5 billion, which reflects onetime gain on valuation of derivatives due to acquisition of Hanwha Ocean worth around KRW 300 billion. As the acquisition has been completed, the gain on valuation of derivatives from the changing share price will not be reflected any longer. Please turn to Page 8 for financials. Total assets are KRW 18,299 billion. Total liabilities are KRW 13,666.8 billion, which is a slight increase from the end of '22. The net debt-to-equity ratio is 28.5%, which also grew from the end of '22. I will share with you the performance by segment. Please turn to Page 9 for Land Systems. Q2 sales are KRW 600.1 billion, which is 80% increase year-on-year. Domestic sales grew by 46% year-on-year to KRW 462.9 billion, and export sales are KRW 137.2 billion, recording a ninefold increase year-on-year. The operating profit is KRW 23.8 billion recording, 58% increase year-on-year. As was the case in the first quarter, the second quarter sales increase was largely due to the addition of Hanwha Corporation munitions. Meanwhile, the export sales declined from the previous quarter where the Poland K9 volume was included. As the delivery of initial contract volume of K9 and Chunmoo to Poland is expected to begin from the second half, we expect additional export sales to be recognized from as early as Q4. Please turn to Page 10 for Land Systems order backlog. As of the end of Q2, the Land Systems order backlog remains at a similar range as that of the end of the previous year with KRW 19,200 billion. Regarding the new order, the company has been selected as the preferred tenderer for the Australia LAND 400 Phase 3 early this morning. Pursuant to the defense strategy review of Australian government, the company will deliver 129 Redback armored vehicles. We will share with you with more details, including the amount and the contract period through a future disclosure and/or press release as soon as they are finalized through contract negotiations. Also, we forecast that the second round of contract of K9 and Chunmoo with Poland to be established within this year. Please turn to Page 11 for performance of Aerospace segment. Q2 sales are KRW 401.9 billion, which is about 10% increase year-on-year, and the operating profit is KRW 5.5 billion, recording Y-o-Y decline. While the sales of both defense project and LTA have increased like the preceding quarter, the operating profit declined. This is due to the base effect of settlement of defense project happened in the same period previous year. In terms of the aviation market condition, the demand for aircraft increased very rapidly overall with an Indian airline placing an order of 500 aircrafts last month, the largest ever single order of all times. The aircraft delivery for Q2 '23 is 325 and maintains a pace of gradual growth from 251 in Q2 '21, 276 in Q2 '22. The operating loss during Q2 from the GTF, RSP was KRW 9.5 billion. 200 GTF engines were sold and continued to demonstrate the increasing trend with 141 sold in Q2 '22 and 133 in Q2 '21. As the volume increase is expected from both defense project and LTA, the annual sales for the Aerospace segment are expected to grow by 10% or more. Please turn to Page 12 for Q2 performance of Hanwha Vision. Q2 sales were KRW 284.1 billion, which is 11% growth year-on-year. And the operating profit was KRW 45.7 billion, 28% growth year-on-year. The sales from the North American market continued to grow, recording over 17% year-on-year growth. As the portion of sales from North America and European markets increases in terms of geography and the portion of higher-end product sales increases, both sales and profits have increased. We expect such trend to be maintained throughout the year and sales and operating profit performance continues to be solid. In the second half of this year, it is likely that the labor costs would increase with headcount increase, and the investment into the next-generation products and services would also increase to be future proof. The brand awareness continues to improve in the North American market and preemptive sales activities are underway outside of North America to further expand its market share. Please turn to Page 13 for the performance of Hanwha Systems. Q2 sales were KRW 610.7 billion, recording 20% growth year-on-year. And the operating profit was KRW 25.9 billion, 58% growth year-on-year. For more detailed information, outlook, and progress on new business of Hanwha Systems, please refer to the information shared during the Hanwha Systems' earnings call, which happened today. This concludes the briefing on the Q2 performance, and now we will have the Q&A.