HD Hyundai Heavy Industries Co., Ltd. (A329180) Earnings Call Transcript & Summary

[Interpreted] Good afternoon. Sung Gi-jong, Executive Director, overseeing Investor Relations for HD Hyundai Group. To make the session more efficient, we will keep the presentation short and leave more time for questions and answers. As we proceed English consecutive interpretation, we will also round up certain figures. After we wrap up the earnings presentation, I will briefly touch on the shipbuilding market conditions, and then we will move straight into the Q&A session. Let me start with key takeaways from Q1, and then we will walk you through the operating results. First, on foreign exchange. The average exchange rate in Q2 was up KRW 36 versus the prior quarter, and that gave us the profit benefit of around KRW 30 billion quarter-over-quarter. Second, on steel prices, they were up slightly year-over-year, but roughly flat quarter-over-quarter. So there was little to no impact. And again, there were no one-off items this quarter. Finally, our Q2 revenue mix by vessel type. HD Hyundai Heavy Industries; LNGC, 45%; LPGC and VLACs, 29%; container ships, 19%; and tankers, 6%. Turning to Samho, LNGCs 39%; container ships, 32%; tankers, 16%; LPGC and VLACs 10%, largely unchanged from the last quarter. Midsized vessels, containership share rose from 3% to 12%, while product carrier fell from 50% to 41%, and no other notable items. Moving to Page 4, the consolidated results for HD KSOE. Consolidated revenue this quarter increased by 10% quarter-over-quarter and 20% year-over-year. This was mainly driven by stable vessel price increases and productivity improvements as well as a rise in the average exchange rates. Operating profit increased significantly, up 21% quarter-over-quarter and 73% year-over-year, and I will cover nonoperating items later in the presentation. The table in Page 5 is for your reference, and let's move on to Page 6. Consolidated revenue in the Shipbuilding division increased by 11% quarter-over-quarter and 19% year-over-year, driven by higher vessel prices, increases in working days and production enhancements. And the Hyundai Heavy Industries basis, consolidated revenue in the Naval Ship segment increased by 6.8% quarter-over-quarter and 32.7% year-over-year. Offshore Plants, although the Ruya project is fully ramped up and revenue decreased by 18% quarter-over-quarter and 52% year-over-year as the Trion project is being ramped up. Next, Engine & Machinery revenue increased by 6% quarter-over-quarter, driven by price rise and favorable exchange rates, but decreased by 2% year-over-year. Moving on to Page 7, operating profit by business segment. Shipbuilding operating profit increased by 26% quarter-over-quarter and 74% year-over-year, supported by vessel price rise and revenue increase. And operating profit margin recorded 18.8%, which is 2.2 percentage points up quarter-over-quarter and 5.9 percentage points up year-over-year. And despite higher revenue in the Naval Shipment division, it recorded operating profit that decreased by 48% quarter-over-quarter and 33% year-over-year due to a change in product mix. Offshore operating profit decreased by 31% quarter-over-quarter due to weaker revenue, but increased by 60% year-over-year and sustained positive figures. The Engine & Machinery division's operating profit kept up its rapid growth of 23% quarter-over-quarter and 34% year-over-year, supported by revenue growth alongside higher value vessel prices and a stronger exchange rate, and this was driven by the sales increase of HiMSEN engine and other onshore power plant engines. Please refer to Page 8 for the operating results of consolidated subsidiaries, and I will go into more detail on Page 9. Let's start with HD KSOE on a stand-alone basis. Despite revenue growth in the [ EEP ] and Philippine shipyard, results were lower due to a decrease in dividend income. HD Hyundai Heavy Industries continued to deliver stable growth across its business divisions, including shipbuilding and engines, with revenue up 7% quarter-over-quarter and operating profit up 15% quarter-over-quarter as well. Next, Samho. Despite increased share of tanker revenue, the division continued its steady growth with an even greater improvement in profitability driven by productivity gains. Operating margin reached as high as 22.5%. I will move on to Page 10, turning to Hyundai Marine Engine. Revenue and operating profit both fell 4% quarter-over-quarter due to several days of delay in delivering 2 completed engines. The revenue will be recognized in Q3, so there's nothing to be concerned about. Operating margin was 24.4% with profitability staying strong, thanks to a sharp rise in non-engine parts revenue. Hyundai Energy Solutions, on top of price increases, export volumes to the United States and Europe significantly increased, resulting in historical quarterly peak earnings with an operating profit margin of 21.9%. On Page 11, nonoperating gains were mainly driven by foreign exchange gains from the higher USD-Korean won exchange rate, a KRW 53.9 billion gain from the Kunsan Shipyard sale and valuation gains on existing EVs, totaling approximately KRW 380 billion. Page 12, all 3 of our key subsidiaries are in net cash position. And on a consolidated basis, HD KSOE holds approximately KRW 12 trillion in net cash. So that concludes our presentation of results for HD KSOE and subsidiaries. And next, we will walk you through the outlook for the Commercial Shipbuilding market.

[Interpreted] Good afternoon. I am [ Sung Hee-Hua ], Managing Director in charge of Commercial Rental and Gas Carrier sales at HD Hyundai Heavy Industries. I will now cover the global newbuilding market trends for the first half of 2026 and HD KSOE Shipbuilding division order intake in the first half of 2026. And first, market trends. In the first half of this year, the global newbuilding market -- in the global newbuilding market, we had active ordering happening also continued across major vessel types overall, including LNG carriers, LPG carriers, container ships and tankers, keeping global newbuilding demand at a high level. This is believed to be the result of favorable shipping market conditions combined with aging fleet replacement demand. Accordingly, global newbuilding order volume this year is also expected to remain at a high level. Next, I will present our group's order intake for the first half of the year. Our Shipbuilding affiliates secured a total of [ $16.38 ] billion in orders during the first half of the year, achieving 96.2% of the annual order target. In particular, HD Hyundai Heavy Industries recorded outstanding performance, having already exceeded its full year target. In terms of order portfolio, we achieved strong results in high value-added gas carriers, including 38 VLGCs, 17 LNG carriers and 1 [ FSRU ]. We also secured a substantial number of orders in the tankers, including VLGCs, [indiscernible], medium-range tankers and long-range 2 tankers. In addition, we achieved order wins across a diverse range of vessel types, including container ships, PCTCs and liquefied CO2 carriers, maintaining a well-balanced order portfolio. These results reflect our targeted marketing strategy. Our group has focused the sales capabilities on high value-added vessel types such as LNG carriers and VLACs while continuing order activities in the midsized vessel segment to secure a stable construction volume. We're also focused on enhancing profitability through improved vessel prices and contract terms. And lastly, our market outlook. The second half market is expected to be influenced by geopolitical conditions in the Middle East and the broader global economic environment, and a degree of uncertainty may persist. And that said, we believe the medium- to long-term structural demand drivers, including tightening environmental regulations, the energy transition and a replacement demand remain intact. We will actively navigate the shifting market landscape while continuing our selective marketing strategies centered on high value-added vessel types and pursue a balanced approach to both quantitative and qualitative growth. And this concludes our presentation of HD KSOE's 2026 first half results. Thank you for your attention.

[Foreign Language] So the first question will be provided by [indiscernible] of Korea Investment Securities.

[Interpreted] I have 2 questions. The first question is about your engine business. So 24.4% number in terms of profitability. Based on Q-o-Q performance, can you give us a rough breakdown between low-speed and mid-speed engines in terms of revenue for their proportion against the total revenue between low-speed and mid-speed engines? And also, given that ASP is projected to increase further, do you also expect any further improvement in profitability in your engine business? And my second question is about your mid-speed engine for AI data center purposes. So there was an order intake in mid-April. And given that capacity could increase further, internally, do you have any discussions about its future growth trajectory? And while discussing this specific business, do you think of any specific inflection point for this business?

[Interpreted] To answer your first question about our engine business, so our engine business comprises big-sized engine, midsized engine and parts, so 3 segments. And the proportion of big-sized engines was 50% based on Q2 results, and that is down from 55% from the previous quarter. And midsized engine, that is up from 31% to 32% this quarter. And the rest, our parts business. And I believe our Onshore Plant engine business and its revenue may increase -- could increase further, and especially our HiMSEN engine and Onshore Plant engine and its proportion may increase further. And as you may know, this business can expect further growth in after 2028 forwards, then our performance improvement can quicken further, I believe.

[Interpreted] And to answer your second question, I'm from the Engine & Machinery division. And we have shared with you that our HiMSEN engine capacity is around 3 giga. And considering our order intake and our inquiries -- customers' inquiries about future intake, it's only natural that we increase our capacity further, and we're reviewing capacity expansion from multiple angles. And so this is basically the same answer that I gave you previously but with a bit of details included. So there are 3 points that I'd like to make. The first point is, compared to other engine and machinery companies, I've talked about our superior and exceptional competitive edge. It is because we have an integrated production system. And if for any future plans, we're going to maintain this integrated production system along with the internalization of equipment and parts. The second point is, we have a phased-in plan for capacity expansion, although I cannot give you detailed numbers right now, considering market conditions and order intake, we may progressively expand our capacity. And currently, we have 3 giga capacity in Ulsan, and we have [ Sani ] engines capacity based in [indiscernible]. And we also think of new expansions, and we will make sure that any new expansions will be done in a way to maximize efficiency across all operations. So that is why we are focused on power generation purposes along with other purposes. And the third point is we're facing a different supply chain structure and paradigm because our customers prefer high output engines today. That means we are focused on nurturing a different ecosystem, which is certainly different than before.

[Foreign Language] The next question will be provided by [indiscernible] of Shinhan Investment Securities.

[Interpreted] I have 2 questions. The first question is about operating profit of Samho. As you mentioned, it could be an influence of changing order mix can be one factor to consider, but still, the performance of Samho is better than we expected. So given price increases of vessels and changing product mix and productivity gains, do you believe based on current balance of back order, do you expect further improvement? Or what kind of guidance can you share with us? And you have been talking about productivity gains consistently over the last 1 and 2 years, a couple of years, is it that you are just tweaking out of -- just ringing already dry towel? Or are you pursuing new innovations and increasing your productivity? My second question is about your SMR business. I'm curious about what's going on with your business with TerraPower. And overall, can you give us an update about your SMR business?

[Interpreted] About Samho's performance, yes, it's true they achieved stellar performance. And as to productivity improvement, we have our benchmark, which is our annual plan. So based on that, we give you our productivity enhancements and numbers. And based on the first half of this year, we had a productivity improvement of around 10 days or roughly 2 weeks, and that translated into 7% to 8% productivity improvement. There are varied reasons why, but it is a fact that productivity is improving. And about the second half performance of Samho, we need to wait and see. But in terms of volume-wise, if you look at Samho's performance, 2024 order accounts for 52% and 2025 order 14%. And relative to Hyundai Heavy Industries, the numbers are 31% for 2024 and 8% for 2025. So if the current proportion maintains, then we believe that the second half performance of Samho can improve further. So if I share some updates about our business with TerraPower, Hyundai Heavy Industries, at the end of 2024, signed an agreement with TerraPower for its demonstration -- SMR demonstration project in the state of Wyoming of the United States. So Hyundai Heavy Industries is going to supply a cylindrical-type reactor for that project. And then among the component suppliers for that project as the first supplier, Hyundai Heavy Industries will be initiating production of key components at the end of 2026. In past May, we have already signed an MOU about the manufacturing and production of core components for the TerraPower project. And we were selected as the preferred bidder for the Natrium SMR device. So we are currently consulting with the company, TerraPower, so between the Heavy Industries and TerraPower about the overall schedule and the project development for the commercial SMR development project. And unless our confidentiality agreement is not violated sooner or later, I hope I can share with you some more details about our collaboration with TerraPower. Then our SMR business at the Hyundai Heavy Industries level, back in February of 2025 from ABS, our 105K SMR model that was -- that achieved AIP for the specific model. And then in June from the U.K.-based LI, we also achieved AIP for our PCTC for SMR applications. So we are currently working on both not just about SMR-propelled ships and vessels, we are also working on power plant purposes using SMR as well. And in May of 2025, we also achieved AIP for floating-type SMR devices. So we are exploring a variety of types and also devices for power plant purposes. So together with KSOE, we are currently exploring various marine applications using SMR. It means we are actively participating in international organizations efforts, including those involved in standard setting. That includes regulatory framework proposal.

[Foreign Language] The next question will be provided by [indiscernible] of Power Investment and Securities.

[Interpreted] Two questions basically. The first question about commercial ship market conditions. So VLGCs are known for its high margin performance, but I think it's very good recent days and compared to LNG vessels. Can you give us more update and details about VLGC's margin? I'm not expecting detailed figures, but still. And the second question is about floating data center market. My question is basically about your level of readiness preparing for this market. Are there any customer inquiries about this? And if there are any, is it going to be about small-sized data centers that could be constructed within your dock? Or is it about building a larger sized platforms? And if there is any contract that is to be signed, are you capable of constructing these data centers right away?