Hanwha Ocean Co., Ltd. ($A042660)

Good afternoon. I am Han Sang Yun, Head of IR at Hanwha Ocean. I'd like to thank everyone for joining the call on Hanwha Ocean's 2026 Q1 performance. Also during the call, we have [ Han Seok Hun ] Head of Strategy Planning; Han Sang Min, Head of Planning and Management Team; Heo Yoon, Head of Commercial Vessel Sales; Kim Yoon-ju, Head of Naval Ship Business Planning Team; and Cho Yongseok, Head of Energy Plan Division. During the call, the company will explain the business performance, market conditions and order outlook, followed by Q&A with participating analysts. Now the company will brief you on '26 Q1 performance. Let me present business performance and financial highlights of Hanwha Ocean. First, please refer to Pages 5 and 6 of the presentation for Q1 '26 performance. On a consolidated basis, during the first quarter of '26, the company recorded revenue of KRW 3,000,000,209.9 billion, operating profit of KRW 441.1 billion and net profit of KRW 500 billion. Revenue decreased by 3% Q-on-Q from KRW 3,323 billion. This was primarily attributable to a reduction of 5 working days due to seasonal factors. However, the decline was limited as the proportion of high-margin, high-priced projects secured since 2023, along with LNG carriers remain elevated. Operating profit increased by 78% Q-on-Q to KRW 441.1 billion. This was driven by the normalization of the base effect from the recognition of performance-based compensation in the previous quarter, a significant reduction in the share of low-margin projects and an extended contribution from high-priced commercial vessel projects secured since 2024, which together supported a continued improvement in the profitability structure. In addition, in combination with a partial positive impact from exchange rate movements, cost structures improved as material cost reductions initiatives were implemented, particularly for vessel types that have historically delivered lower margins than LNG carriers. Furthermore, early delivery effects stemming from productivity gains also contributed with these combined factors underpinning the overall improvement in profitability. With respect to the company's forward earnings outlook, the share of low-priced projects such as initial [ cure tranche ] is expected to decline significantly, while revenue recognition from high-priced commercial vessel projects secured since '24 is set to accelerate, supporting a continued improvement in the profitability structure. For the time being, the company plans to maintain a strategy of offsetting fixed cost burdens in other business units, primarily through the performance of the Commercial Vessel Division. In addition, with potential new orders anticipated in the defense and offshore sectors, earnings in the Naval Ship and Energy Plant divisions are also expected to improve gradually over the medium term. Next, on financial highlights. Please turn to Page 7 of the presentation. As of the first quarter of '26, the total assets increased by KRW 655.6 billion Q-on-Q to KRW 20,796.5 billion, and cash and cash equivalents rose by KRW 284.1 billion from the previous quarter to KRW 1,000,072.8 billion. As of the first quarter of '26, total liabilities increased by KRW 4,027 billion Q-on-Q to KRW 13,970.6 billion, and the total debt rose by KRW 496.7 billion to KRW 6.143 trillion. Net debt increased by KRW 212.5 billion from the previous quarter to KRW 5,702 billion. During the quarter, under the continued production stabilization trend from last year, deliveries of high-priced LNG carrier progressed smoothly, resulting in solid operating cash flow. However, net borrowings increased slightly due to cash outflow, including CapEx investment. On a full year basis, operating cash flow is expected to remain solid overall. However, as various investments, including [ MAA-related ] expenditure are scheduled, some degree of cash flow volatility may arise depending on the pace of execution. Taking these factors in account, the company plans to maintain an appropriate level of cash liquidity while continuing a prudent approach to treasury management. The liability to debt ratio declined further from the previous quarter to 205%, indicating that the company continues to maintain a stable level of financial soundness. Next, from Page 8 and onward, I will share with you the Q1 '26 business performance and the future outlook by segment. First, the Commercial Vessel division. The Q1 revenue increased by 4% Q-on-Q to KRW 2,794.5 billion despite a reduction in working days. Operating profit rose by 188% from the previous quarter to KRW 502.1 billion. The strong performance was primarily driven by the continued high margin structure centered on LNG carriers, along with visible improvements in profitability across other vessel types. In addition, favorable exchange rate movements, ongoing cost reduction efforts and early delivery effects resulting from productivity gains collectively contributed to the overall improvement in profitability. With respect to the forward outlook for revenue and earnings, the commercial vessel is expected to account for more than 70% of the total revenue for the full year '26. However, the share of LNG carrier revenue, which currently has the highest margin is projected to decline slightly year-on-year to approximately 50% of total revenue. That said, most of the decline in LNG volume relates to the initial Qatar tranche and the average recognized LNG vessel prices are expected to increase compared to last year. In addition, as the contribution from projects secured since '23 continues to rise, overall earnings are expected to remain on a solid trajectory. Next, Naval Ship division. Q1 revenue decreased by 14% Q-on-Q to KRW 318.3 billion. This decline was primarily due to the absence of a one-off reversal of liquidated damages provisions recognized in the previous quarter following favorable rulings into related lawsuits. Nevertheless, revenue at the KRW 300 billion level has been stably maintained, supported by the full-scale production of the second vessel on the Changbogo-III batch II program as well as the commencement of the construction for the fifth and sixth vessels of the [indiscernible] 3 program. The company recorded an operating loss of KRW 20.8 billion, turning into a loss due to fixed cost burdens resulting from reduced volumes. As for the forward earnings outlook, the company is currently in a transition phase before recently secured orders are fully reflected in production volumes, Resulting in some fixed cost burden on a quarterly basis. However, with new orders planned and under active pursuit during the year, utilization rates are expected to improve once these orders are secured, which should gradually alleviate the pressure on profitability. Last, Energy Plant division established by integration of offshore plant and E&I division. The Q1 revenue decreased by 57% Q-on-Q to KRW 178.9 billion. This decline was mainly attributable to major plant construction projects entering the final stages. While the approval schedules for certain new projects, which is expected to supplement revenue were delayed, resulting in revenue coming in below the initial plan. The company recorded an operating loss of KRW 73.9 billion. As production volumes temporarily declined following the completion of project milestones, leading to lower utilization rate and increased fixed cost burden. In 2026, as most projects enter their final stages, revenue is expected to decline slightly and the associated fixed cost burden is likely to persist to some extent. However, as demonstrated in Q4, the company plans to mitigate the fixed cost pressure by actively pursuing additional change orders and incentives through negotiations with clients. This concludes the briefing on business performance by segment. We will now hear from each division on respective market conditions and order outlook.

Good afternoon. I am Heo Yoon, Head of Commercial Vessel Sales. I will brief you on the market condition and order outlook for the Commercial Vessel Division. Please turn to Page 12 of the presentation. Recently, the commercial vessel market has been experiencing heightened short-term uncertainty and volatility amid the prolonged geopolitical tensions in the Middle East while at the same time, undergoing structural changes in energy supply and global chain supply, global supply chains, major energy importing countries are pursuing supply chain diversification to reduce dependency on specific regions, which is likely to increase transportation business for crude oil, LNG and gas cargoes. As a result, demand for energy-related vessel types such as LNGC and VLCCs remains supported over the mid- to long term. In line with this trend, the company's commercial shipbuilding segment has secured orders for 4 LNGCs and 7 VLCCs as of the end of March '26, reflecting more active newbuilding contract activity compared to the same period last year. In addition, the mid- to long-term direction of stricter IMO environmental regulations and the transition for the eco-friendly and alternative fuels is expected to remain intact. While there is some uncertainty regarding the timing of regulatory implementation, the structural demand for new build is considered to be sustained, driven by the need to replace aging fleets and transition to more environmentally friendly vessels. This year, the company's commercial vessel division plans to continue pursuing orders centered on LNG carriers, along with its core vessel types such as the VLCCs, large container vessels and VLGC and AC. At the same time, the company aims to maintain a stable order backlog equivalent to approximately 3 years over the mid- to long term while building a balanced order portfolio that carefully considers both volume and profitability in line with market conditions. Next, let me brief you on market conditions and order prospects by key vessel types, beginning with LNG carriers. The LNGC market continues to be supported by a solid mid- to long-term demand foundations amid strengthening energy security and ongoing supply chain diversification. In particular, as geopolitical risks undermine the stability of key LNG supply regions, there is growing potential for a structural reshaping of the global LNG supply-demand landscape. New LNG projects led by the U.S. are being advanced and accelerated while important countries are shifting strategies to reduce reliance on specific regions, which is driving an increase in LNG transportation distances for ton-mile demand, which in turn provides structural support for LNGC demand. In addition, the accelerated retirement of older steam turbine LNG carriers is expected to have a positive impact on newbuilding demand as aging vessels are replaced with more efficient and modern ships. Next, on VLCC market. The VLCC market has been most significantly impacted by the current geopolitical risks with a reduction in available seat capacity accompanied by a sharp increase in demand for crude oil transportation. Should supply chain diversification by energy importing countries continues as a follow-on effect of the current situation, ton-mile demand is expected to rise over the mid- to long term, potentially generating additional new building demand. In addition, if sanctions on Iran are eased, the retirement of the aging sharing fleet characterized by a high proportion of older vessels is likely to accelerate, leading to increased replacement demand for new vessels. While uncertainties remain due to elevated order backlogs and the anticipated tightening of IMO environment regulations, the overall demand trend is expected to be sustained for the foreseeable future. Next, on gas carrier market updates. The VLGC market is being supported in the short term by rising spot charter rates driven by the impact of geopolitical tensions in the Middle East, which is stimulating order demand. However, over the mid- to long term, a substantial volume of vessel deliveries relative to LPG trade growth could act as an overhang, and the company is closely monitoring market development. In contrast, VLEC demand is expected to be driven by project-based newbuild orders supported by capacity expansion of ethane crackers among Asian petrochemical companies and the anticipated increase in the U.S. ethane exports, largely independent of short-term market conditions. For VLAC, while there is potential demand linked to blue and green ammonia projects, the visibility of new orders remain somewhat delayed due to factors such as postponed FID. Lastly, container ships. While there is a possibility of demand contraction due to the impact of Middle East conflicts and concerns over a slowdown in global economic growth, some newbuilding demand remains particularly from Asian shipping lines, where ordering activities has been relatively limited in recent years amid alliance reshuffling and changes in the competitive landscape. The need for a transition to environmentally friendly fleets continues under tightened IMO regulations and ordering activity is expected to focus more on small to midsized container vessels rather than large container ships. In addition, ongoing monitoring is required for policy variables such as U.S. administrative measures, including MAP and USTR port fees as well as the response strategies of major shipping lines. This concludes briefing on business performance and market outlook by major vessel types. Thank you for your attention. Next, let's hear from the Naval Ship Division.

Good afternoon. I am Kim Yoon-ju, Head of Naval Ship Business Planning team. The international security environment remains unstable with tensions persisting. The armed conflict surrounding Iran in March once again underscored geopolitical risks in the Middle East with spillover effect across emerging markets, maritime shipping routes and overall military security. Combined with the prolonged Russia-Ukraine war and intensifying U.S.-China strategic rivalry, the expansion of instability into the Middle East has further reinforced the strategic importance of the defense industry. In particular, competition in the maritime domain is accelerating. Heightened geopolitical tension in the Arctic, along with increasing security risks across key shipping lanes in the Middle East and in the Pacific are driving structural increases in investment by countries and service vessels, submarines and integrated unmanned and manned naval capabilities. Against this macro backdrop, Hanwha Ocean is solidifying its position as a strategic player with the Canadian submarine program, CPSP at the center of these developments. For CPSP, the current time line indicates the selection of a preferred bidder by the end of first half '26, followed by the signing of the main contract in '28. With the strong support from the Korean government, the company is preparing a highly tailored proposal aligned with the Canadian government's priorities, including job creation, increased investment and localization-focused economic and industrial packages. This strategy centered on delivering tangible economic benefits is expected to serve as a key differentiator. Meanwhile, the Canadian government has provided an extension period for proposal refinement to allow alignment with the Defence Industrial Strategy announced in February '26. And the company is leveraging this as an opportunity to further enhance its competitiveness in terms of policy alignment and industrial cooperation. The CPSP proposal goes beyond a simple submarine supply program, aiming to establish a comprehensive strategic partnership model that strengthens Canada's industrial competitiveness and sovereign defense capabilities. The company is pursuing this initiative in parallel with efforts to expand global partnerships and enhance profitability through diversified strategies and remain fully committed to achieving a successful outcome. From a domestic business perspective, the KDDX program is also at a critical juncture. KDDX represents a core element of the ROK Navy's future surface combat capabilities and serves as a flagship program that embodies the technological and industrial capabilities of the domestic defense industry. The bid submission process commenced on March 23 with a deadline expected in mid-May and the selection of the preferred bidder anticipated in the third quarter. Despite various constraints and challenges, the company will continue to leverage its accumulated design and shipbuilding experience as well as its system integration capabilities and will approach the project with a strong sense of responsibility to contribute to national security. The company is also making tangible progress in advancing its entry into the U.S. market, while closely monitoring legislative and regulatory developments related to U.S. Navy shipbuilding programs, the company is actively creating both direct and indirect business opportunities by participating in key projects such as securing the concept design for NGLS in collaboration with VARD, Philly Shipyard and Hanwha Defense USA. By organically combining Korea's shipbuilding capabilities with U.S.-based production platform, the company aims to establish a competitive business model in terms of cost, delivery and policy risk. Through this approach, it will strive to proactively position itself for entry into the U.S. naval and maritime defense market. Another area of focus is unmanned surface vessels and integrates manned and unmanned operations. As evidenced by recent conflict, the unmanned systems are no longer auxiliary assets but have become a core element that can fundamentally reshape the battlefield. The company is preparing to expand its presence in the MUSV domain with capabilities such as autonomous navigation and integrated operations with MAD platform in mind and aims to translate these into tangible business opportunities through collaborations with allies and strategic partners. The company is currently navigating a new phase of expansion. While investment for transformation is inevitably entail near-term burdens and challenges, we believe that the strategic initiatives undertaken to date are steadily approaching a point of tangible results. Rather than being swayed by short-term difficulties, we will continue to translate our efforts into meaningful outcomes from a mid- to long-term perspective. Looking ahead, Hanwha Ocean remains committed to writing a new chapter in naval shipbuilding and to making a substantive contribution to both domestic and global security environment. Thank you.

Good afternoon. I am Cho Yongseok, Head of Marketing and Sales with Energy Plants unit. Please turn to Page 14, and I will brief you on the changes in the global energy and offshore markets and the resulting outlook for the oil and gas facilities, offshore plants and renewable energy market. The global crude oil market is experiencing heightened volatility due to expanding disruptions in maritime logistics stemming from tensions in the Middle East. The scale of production disruption to date is estimated at approximately 6% to 7% of global oil output. This increase in geopolitical risk is likely to compel importing countries, many of which have relied heavily on the Middle East for crude supply to pursue diversification of their sourcing strategies from an energy security perspective. Such a shift in the energy landscape, combined with rising oil prices are expected to prompt a reassessment of upstream projects that had previously been deprioritized due to relatively lower economic viability. In the global LNG market, supply disruptions are occurring due to damage to certain LNG production facilities in Ras Laffan Qatar. On the other hand, in the U.S., more than 50 MTPA of new LNG liquefaction capacity is expected to come online sequentially in the coming years, supporting infrastructure expansion and supply. In addition, countries such as Argentina are seeking to transition from domestically focused energy structure to export-oriented models through the development of LNG projects. As a result, short-term supply instability driven by geopolitical risks is unfolding alongside mid- to long-term supply expansion, further amplifying volatility in the global LNG market. The company is closely monitoring such market changes and proactively reviewing business opportunities and plans to secure a stable source of profit mid- to long term by flexibly responding to changing market structure. Let me share market situation by product type. First, FPSO market. The FPSO market is expected to maintain the solid demand, particularly driven by major deepwater fields in Brazil and West Africa. As illustrated in the chart on the right, global offshore oil and gas investment is showing a stable trend following patterns similar to previous cycles, which is likely to lead to an increasing order for offshore production facilities going forward. Foxtons forecasts that the number of FPSO newbuild contracts will reach approximately 18 by 2027. Total Energies is advancing development expansion in Namibia's Orange Basin centered on the Mopane field following the Venus Field, which is scheduled for an FID in '26. In addition, the company has recently expanded its participation in Namibia's deepwater development by acquiring exploration rights for PEL-104 block in Luderitz basin in collaboration with Petrobras. Meanwhile, Petrobras recently announced plans to add 8 new FPSOs by 2030. In line with the extension of upstream development activities, opportunities for FPSO newbuild projects in which the company can participate are expected to be sustainable, be sustained or further extended. The company plans to participate selectively in bidding, taking into account project scale, timing, internal capacity and the competitive landscape. Next, FLNG market. With global LNG demand continuing to grow, export infrastructure expansion is ongoing in North America, while large-scale gas field developments are being advanced in regions such as Mozambique and Africa. Eni is planning to expand its LNG portfolio to approximately 20 MPTA by 2030 and is strengthening its FLNG-based gas monetization strategy. In particular, the introduction of FLNG for offshore gas assets in Venezuela is anticipated and based on agreements to expand the development at the Carbon 4 block and the Perla field, potential FLNG orders for future gas exports are under consideration. In line with these trends, demand for FLNG newbuilds is expected to increase gradually and the company's business opportunities are also projected to expand accordingly. Next, the drilling market. According to Wood Mackenzie, global drilling demand is projected to increase by approximately 8.5% by 2027, driven by the expansion of upstream investment. In addition, as a result of the concentration of floating drilling rig orders around 2010, the current fleet has reached an average age of approximately 12 to 9 years. Considering an average less than around 30 years, replacement demand due to aging equipment is expected to emerge gradually. Taking into account the increase in demand driven by the expansion of deepwater development by major oil companies as well as the long lead times required for drillship construction, there is potential for a new drilling rig ordering cycle to resume around 2030. Next, is offshore wind and WTIV market in the domestic offshore wind market, starting with the fixed price contract auction scheduled for first half of '26, related business opportunities such as WTIV chartering and offshore substation facilities are expected to gradually materialize under government policy support. In Europe as well, demand for offshore substations, particularly larger-scale HVDC platforms is on the rise, while the increasing adoption of large capacity turbines exceeding 15 megawatts is expected to drive demand for high-specification WTIV. Lastly, power plant market. In the U.S. market, power demand continues to rise, driven by the expansion of AI data centers, while major technology companies are increasingly investing in independent energy systems based on gas-fired generations and BESS. In addition, aging transmission infrastructure is undermining grid stability with investments of approximately USD 1 trillion expected over the next 5 years for transmission upgrades and expansion. In Korea, the hydrogen power generation market is expected to gain momentum, starting with the resumption of bidding for hydrogen power projects in '26 under the clean hydrogen portfolio standard. Leveraging its successful experiencing -- experience in hydrogen coal-fired demonstration projects in collaboration with affiliates, the company plans to actively respond to evolving government policies while closely monitoring the expansion of the hydrogen power market. Against this backdrop, Hanwha Ocean Energy Plant division is actively pursuing order opportunities centered on its core competencies, including FPSO, FLNG, WTIV and the power generation facilities. At the same time, it will remain agile in responding to shift across both the traditional and renewable energy markets while striving to achieve a sustainable growth and secure a stable earnings base. This concludes the briefing on this performance for Q1 '26. And now we will take questions from the participating analysts.

The first question is from Shinhan Investment Securities. Can you provide more details on the profitability of the commercial vessel division, specifically the key drivers behind the improvement? Also, what explains the improvement in the nonoperating income.

In the first quarter, the Commercial vessels division led overall profitability. And the key drivers were productivity gains stemming from the series rather repeated build effects, which contributed to early deliveries as well as ongoing cost reduction initiatives that supported margin improvement. While the Middle East conflict presents potential risks, its impact on costs remains limited at this stage and deliveries of Qatar LNGCs are proceeding at schedule. As for nonoperating income, the significant depreciation of exchange rate at the end of March, resulting in higher valuation gains on assets, which contributed to the improvement.

Next question is from Power Investment Securities. Can you provide an updated breakdown of revenue contribution by order year along with annual guidelines?

The answer is on a full year '26 basis, the revenue contribution by order year is expected to be approximately as follows: around 10% from orders secured in '22, around 50% from '23, around 40% from '24 and approximately 30% from '25.

Next question is from Meritz Securities. When do you expect the fixed cost burden in the naval ship division to begin easing?

The answer is the fixed cost burden is expected to ease once additional orders are secured, particularly if the FTDS surface vessel program is awarded in the second to third quarter. In addition, the remaining JNJ orders related to the U.S. MRO business are expected to be reflected in the second quarter, which should also help alleviate the burden.

Next question is from Korea Investment Securities. Based on first quarter performance, should we expect the operating profit to increase gradually going forward? Also, should the 18% OPM be viewed as a baseline for further improvement?

The answer is the key drivers of improvement have been early project deliveries resulting from enhanced productivity as well as cost reduction initiatives implemented following integration into Hanwha Group, both of which have led to a significant improvement in profitability. On the sustainability of the 18% margin, while profitability in the second through fourth quarters may vary depending on external conditions, the company aims to maintain profitability at the current level. As for fixed costs, a similar level of fixed cost burden is expected through the second to fourth quarter. However, this is likely to be offset by a revenue mix increasingly centered on the commercial vessel segment.

Next question is from Yuanta Securities. The key improvement drivers appear to be early deliveries and cost reduction. While cost reduction seems sustainable, is early delivery also a sustainable factor.

The answer is early delivery essentially reflects a timing effect in revenue recognition, whereby earnings are recognized earlier than initially scheduled. In that sense, the improvement in profitability is attributable to the acceleration of earnings recognition through early deliveries. If productivity gains continue to enable early deliveries during the remaining second to fourth quarters, a similar level of profitability improvement could be realized.

The next question is from Samsung Investment Securities. Were there any incentives associated with early deliveries? The raw material prices decline as part of cost reduction efforts? Or was the improvement driven by accounting effects such as the reversal of previously estimated cost for low-margin projects? Also, were there any one-off impacts such as the labor cost adjustment following the fourth quarter earnings release?

The answer is there were no one-off impacts related to labor cost adjustment following the fourth quarter earnings release. In addition, there were no specific incentives tied to early deliveries, although there were a modest contribution from liquidated damages negotiations. The improvement should primarily be viewed as a result of ongoing cost reduction efforts, particularly for lower-priced vessels where total estimated costs had previously been set at relatively higher levels and which have since been reduced through continuous cost optimization initiatives.

The next question is from Tower Investment Securities. Were there any changes in the company's FX hedging policy? Also, could you quantify the FX impact in the first quarter?

The answer is the company does not execute hedging transactions based on a predetermined direction view on exchange rates. Instead, hedging decisions are made by comprehensively considering market conditions, hedging costs, overseas investment, FX market outlook and the company's overall funding and cash flow plans. In this context, hedging activities are carried out as part of an integrated and balanced approach rather than a policy shift in a specific direction.

The next question is from Korea Investment Securities. Regarding CPSP-related marketing expenses, will such costs cease once the company is selected as the preferred bidder? Also, could you elaborate on the Naval ships pipeline for this year?

The answer is even if the company is selected as the preferred bidder within this year, additional marketing-related expenses are expected to be incurred until the contract is finalized. However, as large-scale activities such as advertising in Canada are no longer required, the overall scale of marketing expenses is expected to decline. As for the pipeline this year, key opportunities include the KDDX program and the [ Taejong frigate ] project. Beyond that, submarine programs, including the Canadian CPSP are expected to materialize around 2028. [Statements in English on this transcript were spoken by an interpreter present on the live call.]