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

Good afternoon. I am [ Han SangYun ], Head of IR at Hanwha Ocean. First of all, I'd like to thank everyone for joining the call on Hanwha Ocean's 2024 Q1 performance. Also joining the call, we have [ Shin Yong-In ], Head of Finance; [ Lee Suk Hyun], Head of Corporate Management; [indiscernible], Head of Strategy and Planning, [ Kang Sang Dong ], Head of Commercial Vessel Sales; [ Choe Yong Seok ] Head of Offshore Marketing; and [indiscernible], Head of Naval Ship Business Development. During the call, the company will explain to you the business performance, market conditions and order outlook followed by Q&A with participating analysts. Now the company will brief you on 2024 Q1 business performance and highlights.

Good afternoon. I am Shin Yong-In, CFO of Hanwha Ocean. I will present on the business performance and financials. First, let me brief you on the 2024 Q1 performance. Please turn to Pages 5 and 6 of the presentation. On a consolidated basis for 2024 Q1, the company has recorded KRW 2.283.6 trillion in sales, KRW 52.9 billion in operating profit and KRW 51 billion in net income. The 2024 Q1 sales increased by 2.4% Q-on-Q to KRW 2.283.6 trillion. This is because of the continuing trend of higher construction volume, and growing LNGC portion out of total sales. Also close process management and ad hoc progress monitoring positively contributed to stabilizing production. The company outperformed its original expectations for 2024 Q1 to turn around again since Q3 2023 to record KRW 52.9 billion in operating profit. The FX rate for this quarter has increased by 57.41% versus the end of previous period which translates into about KRW 35 billion in operating profit. While the expected costs increased by KRW 18 billion due to cost for production stabilization and higher raw material unit price. All segments turned around due to improved profitability of ongoing projects. Though chances of additional estimated costs is a likelihood due to external variables, the company is expected to record profit for the whole year. Please turn to Page 7 for financials. The total assets for 2024 Q1 has increased by KRW 949.7 billion from the end of last year to KRW 14.894.3 trillion, and cash equivalents declined by KRW 139.5 billion from the end of last year to KRW 1.784.8 trillion. As of Q1 '24, the total liabilities have increased by KRW 898.5 billion, KRW 10.531.1 trillion. And the total debt has increased by KRW 1.236.9 trillion to KRW 3.428.1 trillion. Net debt has increased by KRW 1.376.4 trillion from the end of last -- end of previous year to KRW 1.643.3 trillion. This is due to increase in working capital coming from the increased sales from the heavy-tail constructions in 2024. The funds balance is expected to improve from 2025 with growth in LNGC delivery and the debt gradually declining. FYI, the funds raised from the paid-in capital increase will be restricted for investment purposes, as disclosed earlier. While the liabilities to equity ratio has gone down to 223% as of the end of last year due to two rounds of paid-in capital increase, it went slightly up to 241% during the first quarter of 2024, but the company still remains at solid financial structure. Next, 2024 Q1 business performance and the whole year outlook by segment. Please turn to Page 8. First, the commercial vessel business which accounts for 85% of the total sales for the 2024 Q1. The sales from the commercial vessel business grew by 8.7% Q-on-Q to KRW 1.944.1 trillion, due to increase in construction volume and higher portion of LNGC out of total sales. While the container ships reflected for this quarter's sale has recorded loss, the portion of LNGC sales with better profitability has increased from 48% to 51% Q-on-Q, improving overall operating profit and also thanks to favorable FX rate, the segment turned around recording operating profit of KRW 18.2 billion. The construction volume of 20 or more LNGC and large containers, the contribution of commercial vessel business to the corporate sales is expected to be maintained at over 80%. The segment is expected to record profit for the whole year as many low-priced large containers will be delivered during the first half of 2024. Please turn to Page 9, for naval ship business. The sales declined by 50.1% Q-on-Q to record KRW 142.2 billion. This is only temporary happening that precedes a full-fledged production of new submarines. As the new submarine construction begins in earnest from Q2, the quarterly sales for this year will continue to grow. As for the profit, while the sales load is low, the segment continues to record profit from the last quarter with KRW 5.7 billion in operating profit. In 2024, we expect the sales to grow around submarine and submarine MRO and continues to be profitable. Lastly, please turn to Page 10, for offshore business. Offshore sales increased by 4.8% Q-on-Q to KRW 277.4 billion. The sales remained solid with full-fledged production with the progress of NOC fixed platform at 74.3% and [ Eneti WTIV #1 ] at 77.2%. Also as constructions for Jansz-Io FCS, and WTIV #2 started in earnest, the sales is expected to grow slightly year-on-year. For Q1, the segment recorded profit of KRW 18.4 billion with additional change order from ongoing projects. The segment is expected to account for around 10% of overall sales, and will continue to strive for production stabilization. This has been briefing on business performance and financial highlights.

Next, we will hear from each bis unit on respective market condition and order outlook.

Good afternoon. I am Kang Sang Dong Head of Commercial Ship Sales. I will brief you on the market condition and order outlook for the commercial ship business unit, please turn to Page 12 of the presentation. We are surrounded with various internal and external variables such as the concerns from the global economic downturn, prolonged war between Ukraine and Russia. Iran and Israel war, and other geopolitical risks in the Middle East. Complicating the situations are possible vessel oversupply due to large volume orders in the last 2, 3 years. And the concern for order peak out. Despite the fact the market remains solid with stronger sustainability regulations such as carbon neutrality and ensuing new orders for LNG and VLGC VLAC. According to Clarksons forecasting, [indiscernible] order outlook data published last March, regarding the company's target vessel type, the order outlook was adjusted upwards to 80 LNGCs, 50 VLCCs, 55 VLGC and VLAC, et cetera, alleviating the market concerns. While the company has decided to not disclose this year's order target, we have already secured 17 orders worth USD 3.39 billion, which accounts with 12 LNGCs, 2 VLCCs, 2 VLAC and 1 VLGC. As there are many projects for LNGC, VLAC and VLCC under negotiations and considering overall market conditions and the new vessel demand, we are hopeful that we can maintain the current order volume of 2.5 to 3 years until the end of this year. As a qualitative indicator of orders, the price index of vessels continue to increase. And with sufficient order backlog of many shipyards and sudden adjustment in vessel pricing is unlikely for the time being. Therefore, the company plans to -- planned on selective order taking based upon a stable order backlog of 2.5 to 3 years and the limited premium delivery slots. Next, market condition and order outlook per vessel types. First, LNGC. The new order is expected to slow down due to fear for oversupply from the large orders placed in '22 and '23. And the number of new vessels ordered will be fewer than last year. As for mid- to long-term outlook, however, the demand for new LNGC is expected to remain solid with more stringent environments, regulations growing LNGC export to the U.S. market and the demand to replace outdated steam turbine powered LNGC. Regarding the Qatar project that the company has worked on since last year, agreements for 12 vessels has been completed, and we can expand -- expect additional order for more volume from Qatar. If and when we are successful in signing new contracts, we plan to secure maximum profitability by reflecting market price separated from the existing DOA. With declining order volume over the past few years, the order backlog to fleet ratio for VLCC is at our historical low of less than 5%, while the ratio of old vessels is relatively high. Due to price gap between the shipping company and the Korean shipyards, there was no new orders last year for local shipyards. The new orders were mostly with fast delivery slots of Chinese shipyards at a lower price than the Korean counterparts. In '24 and '25, the fleet supply is expected to improve to continue to drive ton miles and as the Chinese shipyards exhaust their available slots, the market condition will be favorable for the company to win order at a price that it wants. The contract price for the company was USD 128 million per vessel. There are other new projects under negotiation and the company intends to utilize fast delivery premiums to secure contracts at a premium pricing. As for VLAC and VLGC, more stringent environment regulations have increased the demand for clean energy significantly. Therefore, ammonia as fuel for vessels and transition into hydrogen economy have created a positive environment for new order. The number of inquiries for VLAC and VLGC that the company has received have increased by about fivefold versus that of '22, and the company is in the process of winning new orders to increase market average tonnage value by negotiating with the shipbuilders for various products, utilizing available delivery slots of the company. Lastly, container. The delivery of large order volume from '21 and '22 has started in earnest from '24, and the freight charge that skyrocketed during the pandemic went down and the concern of economic slowdown would inevitably reduce the total order volume in '24. Coupled with transition into sustainable source of energy, however, there is still solid demand for fleet replacement with sustainable dual energy source. The company will respond to the market by considering available slots of the company, profitability versus other vessel type, market condition and future growth potential. This has been the briefing on market condition and order outlook for commercial vessel. Thank you.

Now let's hear from the naval ship business unit.

Good afternoon. I am [indiscernible], Head of Naval Ship Business Development. I will brief you on the defense market condition and will cover some key issues that the investors might be interested in. Conflicts and confrontations are rampant around the world and are expected to last for the foreseeable future. They include ongoing Russia and Ukraine war, confrontation between the U.S. and China over [ Gemini ], escalating cross-strait strains, growing tensions in the Middle East instigated by the Israel and Palestine war. This instability caused national security insecurity, which in turn leads to arms buildup. It has ripple effect on neighboring countries and the arms race is ever escalating. Against the backdrop, the company has proposed a new naval ship and MRO service based upon our experience on diesel-powered submarine equipped with the world's latest technology and various surface ship construction experience. The company has participated in submarine projects in Poland, Saudi Arabia, Canada, and the Philippines, and as for the overseas surface ship projects of Thailand and Australia. If you have any questions on individual projects, please ask the question during the Q&A. As for the local projects, the company intends to win the [ O SUNG ] Batch-IV 2 ships worth KRW 800 billion in total and the KDDX detailed design and the leadership construction worth KRW 700 billion this year. As always, the company will participate in any bidding in an extremely fair manner, and we'll do our best for a successful outcome. Next, I will brief you on the U.S. MRO business. It is believed that the U.S. Navy wants to hire companies of allied nations where the U.S. armed forces have presence in for the MRO business. In preparation for the move, the company has started to review on any necessary procedures for a future MRO business. The subject of MRO is expected to be support ship rather than the battle ships and the company will actively embark upon preparing and executing MRO projects. While the time line is variable, we expect the project will begin to realize as early as first half of this year. Based upon various local submarine MRO and enhancements project experience, the company plans to expand its MRO capability to all neighbor ships that exports and operates locally and internationally. In case of a new order, especially, we will generate a new business opportunity by offering MRO package solution that offers complete life cycle management from the construction base. As for the acquisition of overseas shipyard, the company has placed a proposal to Austal, an Australian company, and has been reviewing required government approvals and engaged in negotiations. Due to sensitivity of the project, please understand that we cannot disclose any further details. What we can share with you is that we are doing our utmost for the best outcome.

This concludes the briefing for Naval Ship business. Thank you. Lastly, let's hear from the offshore business unit.

Good afternoon. I am Choe Yong Seok, Head of Offshore Marketing. Please turn to Page 14 for the market condition of offshore business. With increasing importance on carbon neutrality, the transition from fossil fuel-based energy to sustainable energy source has been underway, but it will be after a while since such transition becomes the mainstream, which suggests that business opportunities in oil and gas market may continue. According to the predictions by the specialist industry agency, the number of products whose final investment decision will be made in 2024 will increase significantly as high as 30% in some cases, especially where deep oilfield development is active, such as South America and West Africa. The demand for floating production facility is expected to grow. Also with fresh attention to energy security coming from the growing international conflicts, the new investment into oil and gas facility is expected to grow. Against the backdrop, the company plans to develop new product lines featuring latest technology, and to actively pursue new opportunities by establishing close cooperation with the source of demand. The company had a track record of on-time delivery of high-quality products ranging from fixed platforms to floating platforms such as FPSL and FLNG and has demonstrated its competitive advantage. The company's capabilities have been proven by the fact that such oil majors as Chevron has engaged the company repetitively over a long period of time and the 2 companies have maintained a friendly cooperative relationship. Based on such advanced project execution capabilities, the offshore business unit will pursue selective order-taking strategy around large-scale complex projects, considering the profitability potential. As we do have sufficient load internally and as the demand for the oil and gas industry is likely to increase, the current market condition with limited number of large-scale shipyards and fabrication yards may work in our favor of focusing on selective order taking instead of aggressive order taking. Meanwhile, in order to respond to growing demand for renewable energy, the company plans to expand its role in the offshore wind market. To contribute to the stable growth of domestic offshore wind market, it will initially focus on provision of product lines such as offshore substation, where the company's core competency can be used the best. Also, it will establish foundations for additional profit through new product development and capability expansion. The offshore business unit will do our best to preempt the market and maximize the profit by adapting to any change in the conventional oil and gas industry and the renewable energy market. If you have any questions on the specifics, please ask any question during the Q&A. Thank you for listening.

This concludes the briefing on business performance for the first quarter of 2024. And now we will take questions from the participants.

The first question is from Shinhan Investment Securities. First, congratulations on turning around. I have questions about the onetime elements of the operating profit, namely, was there any effect from the FX? And also, was there any other cost elements. The answer is, as was said during the briefing, so there was the cost effect of KRW 18 billion that comes from the stabilization of the construction or the production process and also increase in the raw material cost. And in terms of FX benefit, there was about KRW 35 billion reflected into the operating profit. The second question is from the Tower Investment Securities, and it is regarding Qatar project. Outside of the DOA, it seems that there are about 10 Q-Max project outstanding. So do we have to wait longer? Or can we see anything coming out as tangible within this year? The answer is there is no official announcement from Qatar. What has happened is that we are discussing about these new vessel types with the Qatari shipyards, and we expect the conclusion to come out sometime within this year. Considering our dock size, then we can support the Q-Max and also 114K LNGs. So we are discussing with options open. And it has a little to do with the DOA. So we will pursue to sign a contract at the market going rate. Next question is from the CGS International. The question is with regard to the naval ships. And I understand that you have a plan to increase the capacity. So does that reflect the possible winning of the Canadian submarine project? And also considering the winning of the other overseas project as well. The answer is that the capacity expansion will take over the 3-phase period of time. In the first 2 phase is to increase the production capacity of the surface ship. So we will establish a factory or the plant for in-house installation of key equipment, and also, we will build additional building for multipurpose assembly. And the third phase is to establish the specialized manufacturing or the production facilities that will cover the new order for overseas submarines and next-generation submarine model order coming from locally. And also, it includes the potential new order of submarines coming from Canada and any other new international order. So that's the total size of the investment will be able to cover the new construction volumes. Next question is from KB Investment Securities, and it is regarding U.S. MRO. As this is still a very early phase, so we do not have a lot of information, so how may I figure out the possibility or the overall scope of this project? So what will be the scope -- expected scope for this U.S. MRO project? So will you have an access to from the key facilities? I believe that it makes sense that as a foreign company. So the access to this core facility will only be limited. So in your thinking, is that expected scope of MRO is that you will have an access to the electronic systems or you have an access to mostly the hardware, the engines and the hauls. And what is the expected size of the market and the margin? So as much as you can share, then please do so. And I understand that the Japanese shipyards has already been engaged in the U.S. MRO project, and any reference information will be appreciated. The answer is that the media has covered the U.S. Naval MRO project. And as a local shipyards, it is difficult to understand exact scope. So as was briefed, the extent of information that we know is that U.S. Navy has a plan to start a pilot project hiring the company of an allied country where the U.S. armed forces has been present in and we expect that some time by the end of April or some time in May, then we might know more about the proposed project. And in case of the Japanese MRO, the U.S. 7th fleet is based in Yokosuka, naval base and this is where the MRO project is happening in the Japanese shipyard in the neighborhood. But for us, then we will know more about the scope in due time by May this year. And once we know more, then we will share that with you. The next question is from Hi Investment Securities and it is regarding the emergency slot. According to the foreign media, so you have placed a bidding for the 2 slots that can be delivered in 2026 for the VLCC at an estimated price of KRW 136 million. And according to the Clarksons forecast for the delivery, then it is likely that the vessels to be delivered in 2026 will decline. And the bidding did not pan out for you. So what is your plan for this emergency slot? So if there is no new order for the tanker, then do you plan to leave it open order vacant and continue on? The answer is that the media report covers as if it was an open tender, but it is not the case. We are still receiving quite a large amount of inquiry about VLCC and what has happened is kind of a market campaign that out of all the companies that have shared the inquiry to us, then we want to choose the highest price. So the follow up is still ongoing, so we cannot share any more details with you. So once the order is finalized, then we will communicate with the investors through the public disclosure. Next question is from Shinhan Investment Securities. So the investment to the U.S. entity, what kind of significance does it have? Is it for the MRO project or to establish the sustainable, eco-friendly shipping company. So what is the over viewpoint about the investment into the U.S. market? The answer is that investment is made through the USA Holdings, and we are looking into the various investment opportunities and usually around the shipping and the drilling. The shipping, we are not looking at large-scale shipping company this is just to verify the capability of these new technologies and the new platform that we are developing. The differential technology will be verified through this new shipping company that may be established through our investment. In terms of the drilling, is that we would like to utilize our existing drillships and once things are finalized, then we will share that through the public disclosure. Next question is from the DAOL Investment Securities, and it is to do with the production. I understand that you have hired a large number of international workers and I believe that the trading and education of those new hire was been completed? And can we have an idea as to how many was inputed into the actual production? And what will be the impact that you are experiencing in terms of the manpower? The answer is for the first quarter, the first 2 months, namely January and February, that we were not able to meet our production target. But in terms of March performance, we have overachieved our production target. So combining our workforce directly hired by us and hired through the subcontractors, then as of the end of the period, then we have hired a slightly more than what we have planned according to the production plan. So it has been the chronic problem that we didn't have enough manpower to support our production volume. But now that we are slightly over our target. So we are quite hopeful that we will be able to meet or overachieve our planned volume. But still, they are international workers and the communication could still be a problem. So we are trying to figure out a way to strengthen the communication and once that's sorted out, that we believe that we'll be able to see some tangible benefit in terms of the higher productivity. Next question is from the CGS International, and it is to do with the naval ship. Is that during the briefing that you will be offering the package solutions, will there be any types of discount associated? If so, what will be the ratio? So with the package solution, what will be the expected margin of the overseas project throughout the whole life cycle? The answer is that discount is something that I am struggling to understand what you are asking of. And in terms of the margin for the overseas order, so it is too early for us to disclose. And what we can share with you as of now is that we will identify any associated risks so that we can secure the highest amount of margin. Next question is from HI Investment Securities. And it is to do with the transfer of the wind and the plant business from the Hanwha Corporation. So the purpose is to generate the synergy with the existing business. Also, do you plan to do so? Or will they remain as a separate business entity for the time being? The answer is the business transfer agreement was signed on April 3, and now we are in the process of finalizing the transaction. For the time being, the business unit will remain as an independent business for the time being. But now we are in the process of researching and studying ways to generate maximum synergies. For example, in case of the wind power, we do have existing capabilities with regard to WTIV, OSS and EPC execution. So we are in the process of finding out what could be the potential energies of synergy -- areas of synergy. And as for the plant. So based upon the secure volume coming from the Hanwha Corporation subsidiaries and the local business. So we will continue to expand this business. For example, the sustainable hydrogen and ammonia in the offshore wind and the plant, if there any possible ways to have the synergies in engineering or the project management then we will explore that possibility. Next question is from KB Investment Securities. It is to do with the pricing and the profitability. So you were not very active in winning new orders for the VLCC. But you have disclosed that recently, you have secured a deal at USD 128 million. So versus this time around last and this year, the pricing of a vessel has increased by 6.7% according to the Clarksons data. So last year's pricing was not sufficient for you to enjoy any profit, then this year's pricing is something that you can expect a minimum amount of profit and regarding LNGC. So the Qatar, the pricing was [ KRW 230 million ] and the Clarksons data suggests that it has went up by 14.8%. So that means the BEP is about [ KRW 230 million ], then the OPM will be about 15%. So can you confirm my number? And one final question is that Clarksons due order pricing is down for the 2 consecutive week, even though the degree of decline is very small. So what is your take on this move? So will that be just a short-term noise or do you take any significant meaning out of this move? The answer is that the recent price is something that we can guarantee the sufficient profit. And in case of the Qatar volume. So we have secured the contract of 31 vessels in -- and so comparison might not be meaningful. And in terms of the Clarksons data, so as you're aware, it went up significantly LNGC price. So I believe that it is some temporary break of such trend. Next question is from the DAOL Investment Securities. It is to do with Arc7 6 vessels to do with Russia. There has been talks that FSRU is something of a consideration, then after going through FSRU revision, then the successful will be put to sales. But still, the war is ongoing and the sanction is on. So there are so many variables. So can we expect any tangible decision anytime soon? The answer is that the rumor has been around that there is a possibility of the revision, but that is not true. It is only a rumor. It is not true at all. In terms of the possible resale of these vessels, of course, as you're aware, the economic sanction is currently underway. So we are still trying to figure out a way to go around it or possibly other approaches are being explored. So we will not be bound by this sanction at all. So once it is finalized, then we will communicate through public disclosure. Next question is from NH Investment Securities. So the price of the LNGC recently has been disclosed to be around KRW 260 million, which may not be sufficient. Do you expect to win additional order other than Qatar during the second half of this year? The answer is, so the negotiation for the large-scale project other than Qatar is currently underway, and we are considering new technology other than the conventional 2-stroke LNG. So in terms of the demand, we believe that the demand is quite solid because we are still receiving quite large number of inquiries, not very fewer than what we have received last year. The next question is from the DS Investment Securities, and it is to do with offshore. You said during the briefing that the number of new investment decisions for the 2024 might increase by 30%. And how many of them we are participating in, in terms of bidding? And what will be the geographic coverage of this new investment? Will that be by the related, do you believe that the offshore market has entered in the up cycle? The answer is, when I said the 30% increase, it is the data from the specialized industry agency called [indiscernible]. So they have predicted the total FID project that are [indiscernible] to happen throughout the whole world. And it doesn't necessarily mean that it is the project that we will be participating in. We can share how we feel in terms of the number of increase, it is still there. And in terms of the geographic coverage that it is coming from all the world, especially where the offshore oilfield development is quite active. So we expect some positive development to happen in the future. So we plan to participate in various projects in the future. And some project FID cannot -- can be a possibility. So when it is closer to finalize the contract, then we will share more information through public disclosure. Next question is from Shinhan Investment Securities. It is to do with the international defense market. We know that there are many variables, and we do have a track record, but it is a bit outdated. What will be the impact in the possibility of winning new orders? So what are some of the variables happening in different markets? The answer is that we are participating quite a large number of projects. But if I may share some of the leading projects that we are a part of, and I believe that you are quite interested in is the possible Canada submarine project. It is our forecast that we'll be able to sign or the winner will be able to sign the deal for the Canada submarine deal in 2026 because the RFI and RFP are still under preparation. So we don't know any details regarding the scope or the schedule. So when the RFI and/or RFP is released, that we will know more and we will be able to share more as well. In terms of the Polish project, we believe that the time line is a bit shorter, so the contract sign might be possible during the 2025 because RFI has been issued late last year, and we have submitted our response. And I believe that the RFP is currently under -- prepared. So once it's released that we would know about the scope and the schedule. The next question is from DAOL Investment Securities. So a portion of LNG sales out of the total sales during Q1 this year was 51%. What is your forecast for the whole 2024. And this year, you will be constructing about 20 LNGC, I believe, that it is close to the full capacity. What is your forecast for the 2025? What will be the total size of the sales? And also some other companies have disclosed their pricing for the LNG in 2023, it was KRW 199 million, in 2024, they disclosed that it is KRW 213 million, can Hanwha Ocean disclose equivalent figure for us to have a better understanding of your performance? The answer is in LNGC contributed to the 51% of the sales during Q1. For the whole year 2024, we expect the figure to go up to around 60%. For '24, we will be constructing 20-plus LNGC. For '25 that we expect sales contribution will be maintained or go slightly upwards. In terms of the average pricing, so we don't have any detailed number, but it is on the increase. The contribution to the total sales will be maintained on an annual basis or slightly increase from what was recorded -- what will be recorded this year.