Hanwha Aerospace Co., Ltd. (A012450) Q4 FY2025 Earnings Call Transcript & Summary

Good afternoon. I am Han San Yung, the Head of IR at Hanwha Aerospace. First of all, I would like to thank everyone for joining the call today. Let me now brief you on Hanwha Aerospace's financial performance for the fourth quarter of 2025 and share the 2026 outlook by segment. Please refer to Pages 6 to 9 of the presentation. For the full year 2025, sales amounted to KRW 26,607.8 billion, and operating profit reached KRW 3,345 billion, an increase of 137% and 75% year-over-year, respectively. Consolidated sales for Q4 reached KRW 326.1 billion, up 73% year-over-year, and operating profit came in at KRW 752.8 billion, a 16% decrease year-over-year. For the full year 2025, both sales and operating profit increased, driven by the growth of the Land Systems and Aerospace segments alongside the consolidation of Hanwha Ocean's financial results. Further details will be provided in the performance by segment section. Q4 pretax profit amounted to KRW 602.4 billion and net profit recorded KRW 933.7 billion. Please turn to Page 10 for financials. Total assets stood at KRW 5[ 3,824. ]6 billion, total liabilities at KRW 37 [ trillion ] line 7.5 billion, and net debt-to-equity ratio recorded 27%. Please turn to Page 10 for financials. Total assets stood at KRW 53,824.6 billion, total liabilities at KRW 37 97.5 billion and net debt-to-equity ratio recorded 27%. Let me now share with you the performance by segment. Please turn to Page 11 for Land Systems. Q4 sales came in at KRW 3,092.6 billion, an 8% decrease year-over-year. Domestic sales dropped by 5% year-over-year to KRW 1,463.7 billion, and export sales decreased by 11% year-over-year to KRW 1,628.8 billion. Operating profit was recorded at KRW 616 billion, down 29% year-over-year. Domestic sales were impacted by early deliveries shifted to Q3. Export sales also saw a slight year-over-year decline as delivery schedules were evenly distributed throughout the year, unlike previous fiscal years when sales tended to be concentrated in the fourth quarter. In Q4, a delivery of '26 canine self-propelled housers and 30 Chunmoo multiple rocket launches to Poland were recognized as sales. With these shipments, the company completed delivery of all 212 units under the first K9 Execution Contract within just 3 years of contract signing. Furthermore, the delivery of the first six K9 SPH is under the second execution contract was also finalized once again demonstrating the company's excellence in meeting delivery schedules. Meanwhile, main equipment delivery under the first K9 Execution contract is now complete. The delivery of ancillary items and provision of follow-on support is expected to continue until 2028. With respect to profit, results were affected by a slight increase in the portion of domestic sales and the recognition of certain domestic project volumes with relatively lower margins. In addition, one-off expenses totaling approximately KRW 95 billion were recognized consisting of approximately KRW 55 billion in pre-provisions related to business operations and approximately KRW 40 billion in expenses deferred to the second half of the year. As noted during the previous quarter earnings call, these deferred expenses, which include items such as sales expenses, represent the remaining 2/3 of the total amount deferred to the second half following the recognition of the initial [ 13 ]. With respect to deliveries in Poland in 2026, based on contract time lines and remaining volumes disclosed through the media and other channels. Deliveries are expected to exceed 30 K9 SPH and 40 Chunmoo multiple rocket launchers. While deliveries of primary equipment improvement, our projected decline, as previously noted, volumes of ancillary items such as Chunmoo Guided Missiles are expected to increase year-over-year. In addition, deliveries under the Australian K9 contract are scheduled to commence in earnest this year. Notably, the Egyptian K9 program is expected to see approximately 40% to 50% of its total production volume delivered this year. Consequently, Land Systems is expected to continue its growth momentum this year, supported by a robust and steadily expanding order backlog. Please turn to Page 12 for Land Systems orders. As of the end of 2025, the order backlog of Land Systems stood at approximately KRW 37.2 trillion representing an increase over the 2024 year-end figures. Last year, the company secured multiple supply contracts, including K9 SPH were delivered to India, all components for the Polish crop SPH guarded weapon systems for the Middle East, K9 SPH [ Norway ] 155-millimeter modular chart system at [ CES ] for Sweden and mass production of launchers and components for the Iraq MSM and SAM program. In addition, since the Q3 earnings release, the company has secured further contracts, including a domestic mass production contract for L-SAM launchers and ABM valued at approximately KRW 700 billion, a Phase II domestic mass production contract for [ Tongon ] valued at approximately KRW 220 billion, an export contract to Estonia for Chunmoo and [ RLS ] valued at approximately KRW 440 billion. A third execution contract for the Chunmoo for Poland valued at approximately KRW 5.6 trillion. All of these contracts have been included in the company's 2025 order backlog. In particular, the third execution contract for the Chunmoo for Poland represents a significant milestone to treat for proactive efforts to establish a local joint venture amid the intensifying global trend of defense block formation. The contract was secured through the Hanwha WB Advanced System, or HBW, established last October in joint WB Electronics, a subsidiary of the WB Group, the largest private sector defense company in Poland. Under this contract, Chunmoo Guided Missiles are to be manufactured at Poland local production facilities that will be established for delivery to the Polish armed forces. Furthermore, following the selection of the Chunmoo MRSL for Norway's long-range precision for our system, LRPFS acquisition program. The company signed an export contract valued at approximately KRW 1.3 trillion in late January. This contract will be reflected in the Q1 order backlog for 2026. As a result, the Chunmoo MRLS has expanded its global export footprint beyond the Middle East and Poland to include Estonia and Norway. The company plans to strategically position the Chunmoo as its next global bestseller weapon system following the K9 SPH. Leveraging a diversified product portfolio, the company is actively participating in various business opportunities in key global regions as evidenced by media reports by domestic and overseas media outlets, we are seeing a steady flow of inquiries by existing customers for expanded exchanges of weapon systems and additional supply. Furthermore, with a proactive diplomatic support at the government level, the company will continue to carry out activities to expand new orders throughout this year. Please turn to Page 13 for the performance of the Aerospace segments. Q4 sales reached KRW 729.3 billion, a 23% increase year-over-year. Operating profit for Q4 recorded KRW 7.6 billion, making a return to profit compared to the same period last year. Performance growth was driven by significant increase in defense-related volumes and the ongoing productivity enhancement efforts also contributed to improved profitability. Accordingly, despite the operating loss related to GTF RSP and one-off expenses such as the year-end performance bonus payments, the company was able to achieve a return to profitability. Operating loss related to GTF RSP for Q4 of 2025 was KRW 22.3 billion. In Q4, 311 GTF engines were sold, bringing the full year 2025 total to 1,045 units. This represents a steady upward trend compared to the 863 units in 2023, 990 units in 2024. Notably, for the first time since the introduction of GTF engines, annual sales exceeded the 1,000 unit milestone. This reflects a steady expansion of the company's aircraft engine market share, supporting expectations for future performance growth [ during ] the aftermarket phase when engine maintenance demand accelerates. As for aircraft deliveries, Boeing and Airbus delivered a combined total of 1,392 aircraft for the full year in 2025, up from 1,263 aircraft in 2023 and 1,114 aircraft in 2024. Boeing, in particular, recorded annual deliveries of 600 aircraft achieving its highest annual delivery volume in 7 years since 2018. The aviation industry is expected to maintain this favorable momentum supported by robust growth in air passenger demand and an increase in new orders driven by fleet aging. In 2026, the Aerospace segment is expected to enjoy robust performance growth, driven by the full scale ramp-up of KF-21 mass production and increased volume from the recovering aviation market. However, there also exists the potential for an increase in operating losses related to the GTF RSP due to the projected rise in GTF engine deliveries. With respect to the space business, Hanwha Aerospace entered into a contract with the Korea Aerospace Research Institute in December last year for the development assembly and testing of propulsion system components for a lunar lander. As part of the government's lunar exploration initiative, the company will be responsible for the production and testing of the landing engines and [ altitude ] control thrusters for a lunar lander scheduled for launch in 2032 via the next-generation launch vehicle. In addition, the company will manage the assembly and testing of the entire proportion system leveraging over 30 years of expertise in air spacecraft propulsion, the company is committed to securing Korea's autonomous lunar exploration capabilities. In addition, the fifth launch of the Korea's [ based ] launch vehicle annuity scheduled for Q3, and assembly of the launch vehicle is currently underway. The launch date will be finalized following a comprehensive review by the launch Management Committee, which includes the Korea Aerospace administration and the Korea Aerospace Research Institute. This meeting is scheduled for Q2 of this year. The committee will assess the readiness of the launch vehicle satellite and launch site, as well as weather conditions and potential collision risks with space objects. Please turn to Page 14 for the performance of Hana Systems. Q4 sales reached KRW 1,398.1 billion, a 50% increase year-over-year, while operating profit stood at KRW 9.4 billion, representing a 67% decrease Y-o-Y. For more detailed information regarding Hanwha Systems' financial results, outlook and business progress, please refer to the earnings release materials presented on February 6. Please turn to Page 15 for the performance of Hanwha Ocean. Q4 sales reached KRW 3,227.8 billion, and operating profit stood at KRW 189 billion. For more detailed information regarding Hanwha Ocean's financial results, outlook and business progress. Please refer to the earnings release materials presented on February reports. Last but not least, let me briefly share the performance of [indiscernible] included in the other section of the presentation. Q4 sales reached KRW 72 billion, a 49% increase year-over-year. operating income jumped by approximately threefold year-over-year, amounting to KRW 4 billion as major projects based on the order backlog moved into full-scale execution, both sales and profit increased. In addition, profitability improved significantly through operational efficiency enhancements, enabling [indiscernible] to record annual operating profit for the first time in 4 years since 2021. This concludes the briefing, and we will have a Q&A.

[Operator Instructions] The first question is by Shinhan Investment and Securities. And the question is as follows. My first question concerns the operating profit margins in the Land Systems segment, even after taking into account the one-off items, the margin appears slightly lower than expected. Can you clarify the scale of performance bonuses or any other one-off expenses inverted? In addition, can you please comment on whether there are concerns regarding these factors recurring in the future? The answer is, yes. Let me answer your question. The slight compression in Land Systems margin for Q4 was mainly driven by the product mix. Specifically, there was a 2% increase in the proportion of domestic sales. And at the same time, correspondingly, there was a 2% decrease in exports. Furthermore, the increased domestic portion included deliveries of certain products with relatively lower profit margins. So please take those factors into consideration. And regarding the outlook for this year, our quarterly product mix will continue to fluctuate based on delivery schedules for specific products, and customers. As we have indicated and noted previously, quarterly margins are subject to some swings or volatility depending on the schedules. However, on a full year basis, growth is expected to continue consistently. And we forecast that both revenue and operating profit will continue to show an upward trend, a trajectory clearly supported by robust -- our robust order backlog. The next question is from Daol Investment & Securities. And the question is -- the question is regarding this year's top line performance, specifically focusing on Land Systems. During Q2 of last year, you mentioned the top line growth target of around 20% for this year. Given that significant new orders have been secured since then, has there been any revision to this guidance for the top line and additionally, -- regarding the product mix, you mentioned profitability remained stable, but I would like to ask if there will be any shifts in margins because Polish deliveries decreased while volumes for Egypt and Australia are expected to increase for this year? And the answer is regarding our Land System sales, if I speak on a consolidated basis as the overall performance is significantly driven by Land Systems, along with [indiscernible] the [indiscernible] segment, well, not [indiscernible] as our parent company, Hanwha Corporation has also announced. We currently hold and order backlog that secures a delivery pipeline through around 2030. And this applies to land systems, Hanwha Ocean and Hanwha systems alike. We are providing guidance for CAGR or compound annual growth rate for sales of approximately 20% to 25% annually from 2025 through 2030. And in my view, the primary drivers for this 20% to 25% growth rate would be Land Systems in Hanwha Ocean. Regarding your question on profitability, if you look at our overall domestic and export portfolio, we expect that exports or the proportion of exports would increase rather than decrease this year. And within the export portfolio mix, while we have completed the delivery of the main equipment in Poland, so early this year, we will continue to deliver ancillary items and components to Poland. For Egypt, as mentioned in the briefing, we expect to deliver a considerable volume of approximately 40% to 50% of the mass production quantity. And along with deliveries to Australia commencing this year, we do not anticipate a significant variance in the overall annual profitability compared to last year. The next question is from KB Securities. And the question is -- the question is related to Chunmoo Execution Contract [ 3 ], EC3 for Poland. Unlike previous contracts involving finished products, this involves local coproduction and the scope has shifted from mounters and hardware to the production of missiles, the munition. Given the contract value being KRW 5.6 trillion. I am curious whether the total contract value amount would be recognized as sales revenue for Hanwha Aerospace. And in addition, regarding profitability, can you explain if there are any factors that might cause margins to be higher or lower compared to the previous model that you had of manufacturing here in Korea and delivering what has been manufactured here? Yes. This project is in very initial stages, I think that we need more time to provide further updates. As you mentioned, launches are not included in this contract. And this contract consists entirely of munitions. Regarding revenue or sales recognition since the project will be executed through a joint venture. And in this joint venture, we hold a controlling stake of 51%. Both revenue and profit will be consolidated and reflected 100% in our financial statements. We are scheduled to produce and deliver these munitions locally from 2030 to 2033. Regarding profitability, we have to think of it from two perspectives. One would be the selling price and another would be the local production cost. The selling price, this is relatively clear, well defined, but the cost structure is something that we will have to further define and finalize. However, we do estimate that margins will remain in line largely with the profitability levels that we had achieved in the past in the export munitions market. The next question is from DAOL Investment and Securities. The question is, as you mentioned, Chunmoo has been performing very well. And based on various media reports, I am curious to know about the pipeline of additional European countries interested in purchasing the Chunmoo. So can you give us an update on Chunmoo? And the answer is, yes, let me answer your question. We are, in fact, receiving inquiries from a wide range of countries, and we are currently responding to these inquiries. However, each is different in terms of the stage of progress. The details that you see in the media are generally coming from what has been discussed and the inquiry stages. And we have not yet finalized and export contracts for these cases. And as you know, there are intense competition in each region, and that is why we are cautious about discussing specific progress made or the probability of successfully winning an order at this moment. So broadly, speaking, if you look at the regions that we expect some demand from Chunmoo, well, there is, of course, our existing customers in Europe, such as Estonia and Norway. And we are in a good position to respond to these inquiries from these countries because they have already received delivery for K9, and we have a good level of trust with them. They have a high level of trust in our products. So naturally, these countries would be our primary target countries. But in addition to these countries, their pipelines could include Eastern Europe, Northern Europe and then Middle East. I think that also there is potential to include Asia Pacific as well. And also, I think that in the future, North America would be also a possible market. The next question is from iM Securities. Reverting Chunmoo delivery or contract for Norway. The public disclosure indicates that delivery is to be carried out until 2029, by 2029. Under the contract terms will be entire volume be manufactured here in Korea? Or is there a possibility that manufacturing will take place and the Polish production facilities and be delivered from there. And the answer is, yes. As disclosed, we plan to complete the delivery to Norway. Here in Korea by 2029, and the entire volume will be manufactured completely here in Korea and will be exported. The next question is from Daol Investment & Securities. And the question is, there were at the end of last year, some media report regarding Spanish SPH project, especially we could see this from the foreign media outlets. It seems the process has been somewhat dampened due to a lawsuit filed by General Dynamics European Land Systems. But do you expect any progress relating to this case in the first half of the year? And in addition, there was mention of the basic agreement for Poland, including a third execution contract, so I'm curious whether that contract would be possible to be finalized within this year. And the answer is regarding the Spanish SPH project, it is our understanding that the Ministry of Defense of Spain is pursuing the acquisition of both [ Tract ] and [ Wild ] [indiscernible] as part of [indiscernible] modernization plan. Currently, there has been some reports about discussions ongoing, involving firms such as intra and various procedures and reviews being in progress. But of course, we are committed to achieving a successful outcome related to this However, unfortunately, we are not able to provide more specific details at this moment. So once we have some issues finalized, then we may be able to share the updates via press release or public disclosure. As for the K9, third execution contract EC3, when we mentioned about this, and that was part of your question, we are focusing on local production. Once negotiations are regarding these specific conditions, terms and conditions for localized manufacturing are concluded. We plan to finalize the contract within this year. The next question is from Shinhan Investment and Securities. The question is, I would like to shift focus and ask a question about the Space business. Hanwha Aerospace or as the main pillar of the group's base hub. Given the high level of interest in the market regarding the space sector this year because we see the SpaceX IPO and et cetera, I'm curious whether there are any major events that we can look forward to this year? Or are there any specific areas that you would like to emphasize regarding your space business? The answer is -- on a stand-alone basis for Hanwha Aerospace, the most significant milestone would be for this year, the fifth launch of annuity. And this is scheduled for third quarter of this year. But on a consolidated basis, if we integrate the capabilities of Hanwha Aerospace and Hanwha System and [indiscernible] we are the only group in Korea capable of providing a total space solution. So this would cover everything from launch vehicles to satellites to satellite services. And we believe the market is beginning to really acknowledge this capability that we hold. We will continue to communicate with you as we make progress on these fronts, including the fifth launch of [indiscernible] that will take place. The next question is from Marie Securities. And the question is thank you for giving me this opportunity to ask a question. the delivery numbers for K9 and Chunmoo to Poland this quarter seems quite solid. But at the same time, it appears that defense export revenue has gone down. So this makes me think that export sales from regions outside of Poland has declined. Can you confirm whether this is correct? And if so, what were the primary factors behind this decrease and do you forecast that performance will improve this year in 2026 as other projects are launched? And the answer is, well, first, we compare 2024 against 2025. Revenue was heavily concentrated in the second half, specifically Q3 and Q4. And while revenue growth trend continued last year, if we look at the distribution of sales revenue across each quarter, we can see that 2025 had a more balanced distribution. So that is why there is a variance when you compare Q4 of 2025 versus Q4 of 2024. But regarding exports, excluding the Poland K9 and Chunmoo volumes, there were some initial deliveries for Egypt and Australia that was reflected. But we expect larger contribution from Egypt and Australia to be reflected more this year compared to Q4 of 2025. Therefore, while the volumes or the delivery for Poland may seem to be slightly adjusted, decreased, but you will see that there is greater contribution coming from Egypt and Australia. And that would be how largely the export mix will be composed this year. The next question is from iM Securities. And the question is, I have a follow-up question regarding the previous points, and I have one more additional question. You touched upon deliveries to Egypt and Australia being -- coming into well, beginning in full fledge this year. So could you clarify when this will begin to become more prominent, if you can mention a specific quarter or whether it will be the first half or second half, that would be helpful. And my main question is about quarterly seasonality. You mentioned that efforts were made to reduce seasonality and also efforts were made to have a more even delivery distribution throughout 2025. However, my understanding is that even if products are manufactured, the sales recognition often depends on the customer side, whether the customer is ready to take on such delivery, which is actually outside of the manufacturers direct control. So to what extent can the company manage this internally? And can we expect to reduce seasonality and more predictability in terms of results in 2026? And the answer is, as you are aware, probably both our export and domestic business tend to show a seasonal pattern with lower performance in the first half and higher performance in the second half. So we expect this seasonality to persist through 2024, 2025 and into 2026. Whether 2026 will show a more balanced distribution over the different quarters compared to 2025 or follow the pattern that we saw in 2024 that will largely depend on, of course, the customer's readiness to accept the delivery. The specific schedules have not been finalized yet, and therefore, we cannot provide any concrete details at this stage. However, as we move through our earnings release for the first quarter and second quarter of this year and obtain greater visibility, we will continue to communicate these updates with the market. Let's take the next question. The next question is from [ Maury ] Securities. The question is, can you provide us with an update regarding NCS modular charge system business? So you have established in main contract and the first execution contract with Sweden? So have there been additional discussions about the EC2 or EC3? And also, I would like to know, were there by further discussions with other countries in Europe. And regarding recent news, it appears a site has been selected within the United States for [ MCS ] [indiscernible] factory. Are you still targeting 2030 for revenue generation in that market? And could this serve as a competitive advantage in relation with the US military SPH modernization program? The answer is, well, actually, you raised a number of questions together. But I think that ultimately, these questions are related to our order pipeline, the synergy between NCS and also our SPH as well. So in terms of the NCS, I do believe that we were successfully established a strong foothold in Sweden, due to the nature of the munitions business, where customers tend to secure steady supply until inventory reaches a certain level. We are receiving inquiries from Sweden and other countries in Europe. We plan to respond to this demand using our existing and future production capacity. We have been doubling our domestic MCS production capacity starting in the second half of what we will be doubling our domestic MCS production capacity starting in the second half of 2027. So there will be capacity expansion, which we intend to leverage to meet the MCS orders that are currently under discussion. Regarding the U.S. MCS facility, we are exploring various entry strategies for the U.S. munitions market and are currently conducting a detailed review of site conditions. In connection with this media reports suggest, the U.S. Army will select a contractor for the modernization program this July. Once we receive an official notification that confirms the details. We will respond accordingly. But whether or not the exact time line is in July, we have been preparing for this for some time. And as we our efforts with local schedules. We will provide further updates through public disclosures once we have more visibility obtained in this regard. There seems to be no further questions. And so we would like to conclude this Q&A. Please contact our IR team for more detailed information. Thank you. We would like to conclude the earnings release call for the fourth quarter and full year of 2025. Thank you very much. [Statements in English on this transcript were spoken by an interpreter present on the live call.]