HD Hyundai Heavy Industries Co., Ltd. ($A329180)

[Interpreted] Good afternoon. We would like to thank you for your participation today, and we would like to begin the Q1 2026 earnings presentation of HD Hyundai Group. As for this conference call, there's going to be a presentation -- earnings presentation and then followed by a Q&A session. Let us begin HD KSOE's earnings presentation.

[Interpreted] Good afternoon. I am Gi-jong Sung, Executive Director, overseeing Investor Relations for HD Hyundai Group. First of all, apologies for some disruptions, and let us begin. Now let us begin the Q1 2026 earnings presentation. And please note that Q1 results reflect the consolidated financials of HHI following the merger with Mipo completed last December. And with that, I'd like to begin, and I will first cover Q1 key highlights and followed by operating performance. But before that, we would like to examine key highlights. And after the earnings presentation, we will walk you through the market outlook for shipbuilding and offshore plant. We also have attendees from Engine segment and 2 guests from the Engine segment. So if you have any related questions, we will be happy to answer them during the Q&A session. First of all, regarding the impact of exchange rates. The quarter end exchange rate was KRW 1,513 per USD, up KRW 79 from the previous quarter, while the average rate increased by KRW 15. As a result, the earnings improvement attributable to foreign exchange movements was minimal, approximately KRW 10 billion in total. And second, steel plate prices saw only a marginal increase in Q1, resulting in an equally limited impact on earnings. And third, there were no one-off items this quarter, very clean. And performance bonuses, both internal and external, and these bonuses have been allocated in a quarterly basis in line with the estimated annual profit. And finally, I will share revenue breakdown by major vessel type for Q1. So we would like to give you some updates. HHI, LNG carriers, 43.9% decrease. LPG carriers and VLACs, 33.5% increase. container ships, 15% increase; and tankers, 6.5% increase. So LNG carriers declined, but others all increased. Now somehow, LNG carriers, 40.1% increased again. Container ships, 31.2%, stable; Tankers, 14.3% decrease. LPG carriers and VLAECs, 10.8%, slight increase. For midsized vessels, the proportion of gas carriers has increased. And for LNG bunker vessels, bunker vessels that many of you have been asking about, one unit has now begun to be recognized in results. Let us now turn to Page 4, where I will walk you through Q1 consolidated results for KSOE. Consolidated revenue for Q1 decreased 0.1% quarter-over-quarter, while increasing 20.2% year-over-year. This was driven by a modest increase in the average exchange rate and higher vessel prices, a shift in vessel time mix and continued productivity improvements despite fewer working days compared to the previous quarter. Now operating profit grew significantly, up 30.6% quarter-over-quarter and 57.8% year-over-year. Due to the merger with Mipo, I think these stellar achievements were possible. Now performance bonuses and related costs, which are higher than last year, have been allocated and reflected on a quarterly basis. Now this quarter demonstrates a very stable and consistent improvement in earnings with no one-off items. I will address nonoperating items later in the presentation. For consolidated results by major business segment on Page 5, please refer to the table provided. Let's move on to Page 6. I will begin with consolidated revenue for the Shipbuilding segment. Although this is a seasonally affected quarter, stable revenue growth has continued for several reasons I outlined earlier in the overall revenue discussion. The revenue decreased to 0.6% quarter-over-quarter while increasing 14.6% year-over-year. In the Naval vessel segment, a shift in mix and a rebound in the export proportion drove revenue to KRW 281.8 billion, representing a 67.6% increase year-over-year. On a quarter-over-quarter basis, revenue declined 19.5%, largely due to seasonal factors. Turning to offshore plant. Despite fewer working days, the full ramp-up of the Trion FPU and Ruya projects drove a substantial 184% year-over-year increase in revenue. However, revenue declined 17.3% quarter-over-quarter as the previous quarter had benefited from Shenandoah change order recognition. So that should be taken into consideration. For engine and Machinery, despite seasonal headwinds and higher proportion of dual fuel engines and an increase in selling prices drove growth of 14.7% quarter-over-quarter and 7.5% year-over-year. Let us now move to Page 7, operating profit by business segment. Shipbuilding segment. Operating profit increased 28.8% quarter-over-quarter and 42.1% year-over-year, driven by improvements in vessel time mix and productivity. Operating profit margin stood at 16.6%, up 3.8 percentage points from the previous quarter and 3.2 percentage points year-over-year, reflecting strong profit growth momentum. In the Offshore segment, Operating profit surged 1,212% year-over-year, in line with the significant revenue increase. On a quarter-over-quarter basis, however, operating profit declined 10% as the prior quarter had included the benefit of Shenandoah change order impact. Now Engine and Machinery, operating profit grew 23.9% quarter-over-quarter and 41.3% year-over-year. This was driven by revenue growth alongside a higher proportion of dual fuel engines as previously discussed. DF engine ratio increased significantly from the prior quarter, reaching 73% for 2-stroke engines and 79% for 4-stroke engines. And operating profit in the naval vessels segment was KRW 34.3 billion, a substantial increase of 52.4% quarter-over-quarter and 34% year-over-year. This reflects the shift in vessel mix and the increased proportion of export orders as explained in the revenue section. I would like to reiterate that the naval vessels segment may be subject to significant earnings fluctuations on a quarterly basis. And please refer to the operating results table for consolidated subsidiaries on Page 8, and I will provide further details on Page 9. First of all, KSOE and a stand-alone basis. KSOE saw a larger improvement in earnings driven by revenue growth in the SD division and an increase in dividend income from subsidiaries. At Hyundai Heavy Industries, revenue increased 13.9% quarter-over-quarter, driven by a high exchange rate, rising vessel prices and improved vessel type mix and the consolidation of Mipo following the merger. Operating profit expanded 57.5% quarter-over-quarter, reflecting both revenue growth across all business divisions and meaningful improvements in profitability. So this demonstrates a consistent improvement in profitability on a sequential quarterly basis. Beyond shipbuilding, clear signs of revenue growth and profitability improvement are also evident in the Engine and Offshore plant segments. Now Hyundai Samho Heavy Industries, despite booking the highest level of performance bonuses, both revenue and operating profit increased quarter-over-quarter, supported by rising vessel prices and an improved vessel type mix. The operating profit margin for Q1 stood at 18.6%, so far better performance than Q4 last year. Let us now turn to Page 10. Now Hyundai Marine Engine, despite seasonal headwinds, the company delivered revenue growth of 20.3% quarter-over-quarter with operating profit increasing 16.8% over the same period. And this was attributable to a higher ASP for engines and an increase in production volume alongside concurrent growth in the parts business. And what's notable is that both utilization rate and production efficiency continue to improve simultaneously, and this has ultimately translated into a substantial improvement in profitability. The operating profit margin is 24.4%. And next, [ Hyundai ] Energy Solutions, whose results were already disclosed last week. While revenue grew 4.7% quarter-over-quarter, operating profit surged by as much as 100%. So year-over-year comparison will be effective, I think. Sales volumes increased both domestically and internationally and profitability improved significantly through selling price increases. In particular, a substantial expansion in the domestic market sustains sequential revenue growth despite being in the off-season. Page 11, which covers nonoperating income and expenses. The rise in the Korean won, U.S. dollar quarter end exchange rate generated FX-related gains, and there are no other significant items to highlight. Please refer to the slides for the remaining details. Now Page 12, key financial ratios. So all 3 major subsidiaries maintain a net cash position. And on a consolidated basis, KSOE holds approximately KRW 8.7 trillion in net cash. And this reflects an exceptionally solid financial structure. So this concludes the Q1 2026 earnings presentation covering the consolidated results of KSOE and its subsidiaries. Now let us move on to commercial vessels and offshore plant.

Good afternoon. I am [indiscernible], Executive Director of Strategic Sales at KSOE. I will now present an overview of the global newbuilding market trends in Q1 2026, along with KSOE's shipbuilding order target for 2026 and our Q1 order performance. So first of all, global newbuilding market. The newbuilding market in Q1 maintained solid momentum led by tanker orders, -- and according to Clarksons, global newbuilding orders in Q1 reached 36.9 million [ GT ], representing an increase of more than 67% compared to 22.11 million [ GT ] in the same period of the prior year. This growth was driven by favorable freight rates for tankers and robust replacement demand for aging vessels alongside continued ordering activity in LNG carriers, LPG carriers and container ships. In summary, contrary to concerns that ordering volumes might moderate this year due to the weight of high order intakes in recent years, the newbuilding market is performing better than expected. In line with this trend, Clarksons released its updated forecast at end of March, projecting full year 2026 newbuilding orders at 115.7 million GT, a level broadly comparable to last year's 120 million GET approximately. For reference, Clarkson had previously forecasted 2026 ordering volume at 90 million GT in the second half of last year, so 3 consecutive years over 100 million GT. Now our order target for this year. At the start of the year, we had concerns over a global economic slowdown, geopolitical risks and the possibility of entering a down cycle following several years of elevated ordering activity. At the same time, we determined that it was necessary to proactively secure order volume in response to the current unpredictable and uncertain market conditions and set a more ambitious order target compared to the prior year. And this year, HD Group's shipbuilding new order target is in total $170 billion. Breakdown by subsidiary, HD Hyundai Heavy Industries, $11.47 billion; and HD Samho, $4.9 billion; and KSOE, $0.66 billion. I will now discuss our Q1 order performance. Our group's shipbuilding subsidiary secured a combined total of $6.39 in orders during Q1, achieving 37.5% of the full year target by subsidiary, Hyundai Heavy Industries, $4.896 billion; Samho, $1.045 billion; and KSOE $0.45 billion. The order intake by vessel type is as follows: HD Hyundai Heavy Industries secured a total of 45 vessels, 9 LNG carriers, 4 large container ships, 2 Suezmax tankers and 16 feeder container ships, 10 MR tankers, 2 LR2 tankers and 2 LCO2 carriers. so 45 vessels and Samho, 5 Suezmax tankers, VLGC, 3 VLGCs, 1 LNG, 39 and KSOE 6 LR2 tankers through its Philippine yard, bringing the group's total order intake to 60 vessels. In the first half of this year, amid a market environment in which Chinese shipyards focused on expanding their order volumes primarily in tankers and bulkers, we maintained a selective ordering strategy centered on vessel types where we hold a competitive advantage rather than engaging in direct volume competition. As a result, by focusing on high-value vessel types, LNG carriers, VLGCs and container ships rather than tankers, we were able to secure order volume while also improving profitability. Regarding newbuilding prices, shipyards across the industry have secured sufficient order backlogs and current newbuilding prices remain firmly supported at elevated levels. So we're making every effort to achieve qualitative improvements in terms of pricing and contract conditions underpinned by our strong backlog position. I will now turn to the market outlook and our strategic response going forward. While geopolitical risks, including the protracted conflict in the Middle East and concerns over a slowdown in global economic growth continue to persist, current shipping market conditions are, in fact, showing favorable momentum, supported by short-term freight rate premiums stemming from uncertainty. Vessel ordering demand driven by new energy demand also remains robust, including the full-scale resumption of LNG projects centered on the United States. However, if the conflict in the Middle East were to be prolonged, geopolitical uncertainty could potentially lead to a reduction in energy demand and an economic downturn, which in turn may give rise to differentiated patterns in ordering timing and investment decision-making across vessel types and shipowners. Accordingly, we will continue to closely monitor these risk factors while pursuing strategic order activities to capitalize on market opportunities in a timely manner, taking into account the supply-demand dynamics and the competitive landscape for each vessel type. While market volatility is increasing, medium- to long-term structural demand drivers, including tightening environmental regulations, accelerating energy transition and replacement demand for aging fleets remain firmly in place and expected to continue underpinning ordering for our core vessel types. In alignment with this market environment, we will pursue a balanced approach to both quantitative and qualitative growth, leveraging our technological competitiveness and accumulated commercial capabilities. So this concludes our presentation on KSOE's Q1 2026 performance. Thank you.

Good afternoon. I am [indiscernible], Senior Manager of the Offshore Division. I'd like to briefly present our Q1 offshore business performance and market conditions. We're actively participating in upcoming offshore construction tenders across various regions, including the Mediterranean, Australia and the Middle East. Middle East projects, in particular, expected to proceed through contractor selection and final contract from late Q2 through Q3. In our offshore wind power business, a key renewable energy segment, we're strengthening technical capabilities based on our proprietary in-house models while actively pursuing expanded project participation domestically and internationally. In the offshore substation segment, leveraging competitiveness built through our proprietary high [ OSS ] model, we achieved tangible results by signing early works contracts from multiple domestic offshore [indiscernible] projects. Detailed engineering is currently underway and following [ EPC ] contract process, we anticipate this year will mark a remarkable year of offshore wind construction and fabrication. In the [ floating ] Structure segment, we continue to technical -- continue with technical consultations and collaboration discussions with multiple developers based on our proprietary high-float model. As commercialization of floating offshore wind has been delayed relative to initial expectations, we are striving to secure opportunities, not only in the government-led domestic demonstration test bed, but also in small-scale overseas demonstration projects. I will now briefly address our market outlook. And with TerraPower of the United States, we're currently undertaking a demonstration project. After the signing of the contract last October, we are about to begin construction. Based on our close partnership with TerraPower, we will engage in joint -- we are engaging in joint development and research for the commercialization of [ SMI ]. So we would be expanding further business opportunities in this. Now market outlook briefly. In Q1 2026, international oil prices surged sharply alongside a significant widening of price volatility driven by heightened geopolitical risks stemming from the conflict between the U.S., Israel and Iran in the Middle East. That said, as oil prices remain at levels that underpin profitability and energy security continues to be emphasized across nations, oil and gas field development by major producing countries is expected to persist. And accordingly, stable order flows for offshore plant facilities are set to continue across various regions. In the offshore wind power sector, it is true that some developers have begun pacing themselves in response to policy shifts and rising development costs. However, continuous investment and supply growth are expected to continue over the medium to long term. In the domestic market, in particular, the enforcement of the special act on the promotion of offshore wind power deployment and industry development on March 26 has further heightened expectations for the revitalization of the offshore wind market. Against this market backdrop, we're pursuing a balanced approach across our offshore, offshore wind and SMI businesses, continuing our sales activities with a strategy of selectivity and focus in order to secure our projects that ensure profitability and remain within a well-managed risk profile. So with this, I'd like to conclude my remarks on the Q1 Offshore Energy business performance and market conditions. Thank you very much.

[Operator Instructions]

[Interpreted] And this quarter, yes, we had a very good performance. If no orders that we land this year, then the revenue overall in this segment may go down coming into 2027.

The following question will be presented by [indiscernible] from Meritz Securities.

[Interpreted] My question is about the detailed performance. So first of all, can you elaborate on your revenue performance for your SD business? And it seems like your company is engaging in a range of new business opportunities, including India. And how are you going to utilize [indiscernible] reflected in Q2 as a cost as an expense.

[Interpreted] As to the fire incident, you mentioned, we're still investigating remediation or recovery plans have been developed yet. So as you said, within this immediate quarter, this fire incident will not be reflected in our performance. For our SD business operating profit was KRW 11.4 billion.

[Interpreted] The follow-up question will be provided by Han Young Soo from Samsung Securities.

[Interpreted] It's is about the business model of your overseas subsidiaries. And you do have a business operations in the Philippines, but I don't think the Philippines is a country recognized for its shipbuilding industry in terms of name value. So previously, Mipo won orders, then it will give these orders to a subsidiary in Vietnam. That's how business was operated. So is it going to be a case that the same applies to your Philippine operations? For example, HHI who -- operated?

[Interpreted] If I answer your first question as to our midsized vessel business, it was previously in Mipo. There won't be big differences between Hyundai Heavy Industries and our midsized vessel operations in terms of profitability. And thank you for your question. Your understanding about our operating model covering our overseas shipyards would be correct. So leveraging our technological prowess and brand value at the headquarter level in Korea. We're getting positive feedback and evaluations. And in the Philippines, again, we're leveraging our capabilities at the headquarters in Korea and lending orders from overseas. And when we further expand our global footprint, this approach would apply as well. So using our headquarter capabilities and broadening our global presence. Further clarification, when you say , not on heavy industry KSOE.

[Interpreted] The following question will be provided by [indiscernible] from NH Investment & Securities.

[Interpreted] Then what is your internal view about the need for capacity expansion? That's my first question. And my second question is, it seems like Engine business is focused on those companies holding licenses. And given shortages which are happening currently and given market expansion opportunities, is it going to be a focus on those license owning companies or other companies as well?

[Interpreted] If I answer your first question, and mentioning our HiMSEN engine capacity is 4 million horsepower and 3 gigawatts. So given our current capacity, we're recording a quite a high utilization rate and to keep up with our recurring capacity, especially for generation purposes. And -- but we still need to supply our product our Hyundai -- and there is a surge in demand for data center applications as well. So we're reviewing possible feasible options from [indiscernible] perspective. So based on the order and demand our capacity expansion plan will be aligned with future demand orders. Given the current order winning trends -- do not 100% sure about whether licensee engines are also responding to data center demand. But given cost competitive edge, there are license fees to be considered, which means existing licensor companies have a dominant position in terms of cost competitive edge. So in that sense, our company is also better positioned than others in this market. About capacity expansion were under review, but this subject is for disclosure. So when detailed plans are confirmed, we can give you further information.

[Interpreted] The following question will be provided by DongHeon Lee from Shinhan Investment & Securities.

[Interpreted] I have 2 questions about your Engine business. First of all, I know that if you are to expand your capacity, of course, you need to make disclosure -- how difficult would that be? That's my first question. And also according to your disclosure, your supply plan is scheduled through 2030. And I'm asking this question because I'm wondering whether you can further speed up the overall plan so that you can supply your product earlier than 2030? My second question is this very market is just opening. So as an analyst, we're not fully grasping this market development. So what's the atmosphere data center contract, and I'm wondering whether you can elaborate on this very contract with -- for instance, the amount of megawatts to be installed and whether it's going to be for power generation and other aligned matters about this very contract.

[Interpreted] A very well-established supply chain in Korea, and we have an integrated production system, which is one of our strengths. And also, we have internalized the necessary equipment and pipes as well. So if we are to expand our capacity, and you can think of 2 pillars, assembly plant and piping equipment. In terms of the assembly factory, it won't be that much difficult to expand our capacity in terms of assembly plant operations. And as to the equipment as well because we have a very well-established supply chain. Before I answer your second question, this data center market is certainly growing and it highlights the need for more power and electricity. So we continue to see relevant needs and demands and expectations from our clients. But still, we have an issue with -- in installations. And about the contract with the 2030 set as a delivery year, our customer also has a power plant construction schedule. And in alignment with the various schedules, we will be also splitting our supplies in 2028, '29, and in '30. So it is aligned in that way. As to the detailed specifications of this construction, it's going to be 660 megawatts. And so -- there's going to be 11 installations across the 3 different sites. And the scope of this contract will be engine power generation, relevant control, installation and necessary audit as well. But for details about this contract, we have already publicly available data. And because of customer requirements from the United States, we have certifications to achieve, including UL certification.

[Interpreted] The following question will be provided by [indiscernible] from Meritz Securities.

[Interpreted] Auto investment plans targeting India. As you know, President [indiscernible] toured around India in the last month and it seems like that investing in India is being encouraged. So I wonder if there is any commitment to, for example, ordering how many commercial vessels from the Indian side over the next few years. Even though it will be feasible for you to give us any official information at least. Can you let us know that you were going in the right direction -- and recently, that competitor is really advancing into this specific area. And it seems like your company can also think of Offshore or Engine & Machinery business opportunities. For instance, capturing EPC and turnkey business opportunities in this sector. Can you give us any update on this?

[Interpreted] Visited India, our Group Chairman also accompanied him and met key figures, key opinion leaders in India. And we are pretty sure that there's going to be support from India in building a greenfield shipyard in this country. So internally, we're currently engaging in a feasibility study about establishing a greenfield shipyard in the country, so there's going to be support from India as well. But there is no concrete and detailed commitment about how much commercial vessel -- greenfield shipbuilders to be shipyards to be established is going to be meeting the domestic internal demand of India across multiple vessel types. If I answer your question about floating data centers, I believe that we are sufficiently equipped to enter this market, both in terms of technology capabilities and engineering capabilities as well -- for operating those power ships. So we're sure that we have competitive edge over our competitor in this sense. And as was mentioned in the press earnings call of Hyundai Marine Solutions, there could be a variety of ways that we can present to our customers, including new builds and retrofit. And in this is still in its nascent stage, what we believe we can witness growth over the medium to long term in this market.

[Interpreted] The following question will be provided by [indiscernible] from [ IM Securities ].

[Interpreted] So you have an engine business on Hyundai Heavy Industries, but -- and also you have Hyundai Marine Engine and Hyundai Marine Engines, our profitability is remaining rather flat, around 25%. So based on profitability, is it correct or safe to say that Hyundai Heavy Industries engine operations would be having around 29% profitability? And -- the Hyundai Marine Engines, OPM, operating profit margin is around 25%, and this is quite high already and Hyundai Marine Engines utilization rate is lower compared to Hyundai Heavy Industries engine operations. So with further price increases and favorable -- Okay, from the Hyundai Heavy Industries Engine business the proportion of dual-fuel engines is increasing. So in both operations, Hyundai Marine Engine and Hyundai Heavy Industries with engine prices increasing and if FX rates are favorable, then we can surely expect further improvement in profitability. The engine for data center applications and the revenue would be recognized from 2028 onwards. And if you consider that, there can be a further boost to the profitability of our engine business.

[Interpreted] The last question will be provided by Young Soo Han from Samsung Securities.

[Interpreted] Two final questions. The first question is about your Offshore business. You mentioned that if you do not land any further orders this year, then the revenue may decline starting from next year. And the projects that you mentioned are all taking place in the Middle Eastern region. So are there any risks of those projects being delayed -- my second question is about your special vessel business. So in the short term, can you mention any projects that we can put our expectation on in the short term?

[Interpreted] The tenders that we're currently participating, they are spread across the UAE, Saudi Arabia, Kuwait and other countries, and it normally takes 3 to 6 months or even more. If you look at Offshore construction tenders. So because of the war in Iran, maybe slightly, there could be slight delays. But we have already submitted our prices and bids in Q1 already. So the overall process is going on as usual and we're closely contacting -- our significant delays in this sense. Thailand because we have submitted our proposal in April for the frigate project in the country and elsewhere in the Philippines, we also -- we will be participating in next-generation frigate project in the Philippines as well as multipurpose support vessel in Malaysia. So across Southeastern countries, bidding process is ongoing. And so we will be sharing news about these potential projects. We cannot mention any specific country name, but across continents, we're working across -- so as you know, our business presence spans a variety of areas, shipbuilding -- complex and disrupted. I believe our business will be -- would emerge even stronger and we would be even busier amid such uncertain market conditions. With this, we would like to conclude our Q1 2026 earnings presentation. Thank you very much. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]