Daewoo Shipbuilding & Marine Engineering Co Ltd

KRX:042660

Earnings Call Analysis

Hanwha Ocean Reports Q2 2024 Losses Amid Growth in LNGC Sales

In Q2 2024, Hanwha Ocean saw an 11.1% increase in sales to KRW 2,536.1 billion, largely driven by higher construction volumes and a strong shift towards LNG carrier sales, which made up 50% of total sales, expected to rise to 60% by Q3. However, the company recorded an operating loss of KRW 9.6 billion due to one-time production stabilization expenses. For the full year, Hanwha aims to stabilize production and turn a profit, with operating profit anticipated to be maintained at around KRW 73.4 billion in the second half, supported by higher naval ship sales.

A Steady Increase in Revenue Amid Challenges

In the second quarter of 2024, Hanwha Ocean recorded consolidated sales of KRW 2,536.1 billion, reflecting an 11.1% increase from the previous quarter. This surge is primarily attributed to heightened construction activity in the Commercial Vessel sector and an increase in the proportion of Liquefied Natural Gas Carriers (LNGC), which commands a higher price point. However, the company faced an operating loss of KRW 9.6 billion due to significant one-time expenses related to production stabilization, totaling KRW 140 billion.

Segment Performance: Mixed Results

The Commercial Vessel business, accounting for 83% of total sales, reported an 8.6% growth in sales to KRW 2,112 billion. Despite this, it incurred a net loss of KRW 43.4 billion due to ongoing losses from container ships and production stabilization costs. In contrast, the Naval Ship business saw a significant 131% increase in sales to KRW 328.9 billion, driven by rising contract prices due to higher project costs. This sector is expected to sustain sales momentum throughout the rest of the year with steady project developments.

Financial Health: Rising Debt but Industry Average Ratios

Hanwha Ocean's total assets grew to KRW 16,229.3 billion, up KRW 1,335 billion quarter-on-quarter. However, liabilities increased more sharply, resulting in a liabilities-to-equity ratio of 274.1%, consistent with the shipbuilding industry average. Total debt escalated to KRW 4,269.4 billion due to increased working capital related to heavy-tail construction projects. Net debt also saw a rise to KRW 2,396.2 billion but is expected to stabilize as more LNG ships are delivered.

Guidance and Future Outlook

The management anticipates gradual improvements in profitability throughout the year. The goal includes addressing ongoing losses from containerships as deliveries are finalized. The company expects to execute the delivery of the remaining 15 loss-making container volumes by the first half of 2025, which should help mend profitability issues. Furthermore, the share of LNGC sales is projected to rise from 50% in Q2 to 60% in Q3, which should bolster earnings potential.

Strategic Investments to Enhance Market Position

Hanwha Ocean's acquisitions, including the recent purchase of Philly Shipyard, are set to enhance its competitive edge in the U.S. defense market. The acquisition, valued at USD 100 million, aims to leverage synergies within the Hanwha Group and is projected to yield significant market opportunities, particularly in maintenance, repair, and overhaul (MRO) services. The Philly Shipyard currently reports an order backlog of USD 1.8 billion, with profitability expected by 2027.

Challenges and Market Dynamics

The global economic climate remains challenging, influenced by geopolitical tensions and fears of oversupply in LNGC orders, as noted with a slowdown expected due to past surge orders. The market for containerships is becoming competitive, with rising vessel prices and demand changes driven by new alliances. Nonetheless, Hanwha Ocean's strategy of selective order-taking focused on profitability positions it advantageously amidst market variability.

Earnings Call Transcript 2024-Q2

[Sang Yun Han, executive]

Good afternoon. I am Han Sang Yun, Head of IR at Hanwha Ocean. First of all, I'd like to thank everyone for joining the call on Hanwha Ocean's 2024 Q2 performance.

Also during the call, we have Shin Yong-In, Head of Finance; [ Lee Seok-won ], Head of Corporate Management; [ Choi Yung-ho ], Head of Strategy and Planning; [ Kim Hung-min ], Head of Commercial Vessel Sales; [ Choi Yong-seok ], Head of Offshore Marketing; and [ Kim Ho-jun ], Head of Naval Ship Business Development.

During the call, the company will explain to you the business performance, market conditions, an order outlook followed by Q&A with the participating analysts.

Now the company will brief you on 2024 Q2 business performance and highlights.

[Yong-In Shin, executive]

Good afternoon. I'm Shin Yong-In, CFO of Hanwha Ocean. I will present on the business performance and financials. First, let me brief you on 2024 Q2 performance. Please turn to Pages 5 and 6 of the presentation.

On a consolidated basis for Q2 of '24, the company has recorded KRW 2,536.1 billion in sales, negative KRW 9.6 billion in operating profit and negative KRW 27.4 billion in net income. Cumulatively for the first half, the sales are KRW 4,819.7 billion, operating profit of KRW 43.3 billion and net profit of KRW 23.6 billion.

The Q2 '24 sales increased by 11.1% Q-on-Q from the Q1 sales of KRW 2,282.6 billion to record KRW 2,536.1 billion. This is because of the continuing trend of higher construction volume and the growing LNGC portion out of the total sales, which has a higher ship price. This is partially due to the higher sales from the Naval Ship business, which recorded a temporary sales decline in the previous quarter due to the reduced input cost as the estimated contract price went up with the cost increase of ongoing construction projects.

The P&L for the '24 Q2 has recorded KRW 9.6 billion in loss due to KRW 140 billion of onetime expenses for the production stabilization, which includes production schedule adjustment for commercial vessels and the naval ship businesses, and LD reflected for some ships and increase in outsourcing expenses despite favorable effect of KRW 25 billion and the increased contract price for the naval ship of KRW 60 billion. So the company failed to maintain the profit from the previous quarter.

The company will make focused efforts to honor delivery schedule and to minimize LD by continuously stabilizing production and having close consultations with the shipowners to achieve the annual goal of turning profit.

Please turn to Page 7 for financials. The total asset as of the end of second quarter of '24 has increased by KRW 1,335 billion Q-on-Q to KRW 16,229.3 billion and the cash and cash equivalent by KRW 88.4 billion to KRW 1,873.2 billion.

Total liabilities have increased by KRW 1,359.6 billion Q-on-Q to KRW 11,890.7 billion and the total debt by KRW 841.3 billion to KRW 4,269.4 billion. Net debt has increased by KRW 752.9 billion Q-on-Q to KRW 2,396.2 billion. This is due to increase in working capital with increased volume of heavy-tail construction in '24.

As it is the characteristics of a heavy-tail construction, there is a time lag between the cost input and the payment collection leading to a temporary cash surplus or shortfall. The debt is expected to gradually decline from '25 with the improved funds balance due to more LNG ship delivery.

While the liabilities-to-equity ratio has slightly increased to 274.1% in the second quarter, it is in line with the shipbuilding industry's average and the company maintains a solid financial structure.

Next, I will share with you the second quarter '24 business performance and the whole year outlook by segment, please turn to Page 8. First, the Commercial Vessel business, which accounts for 83% of the total sales for the second quarter of '24. The sales from the Commercial Vessel business grew by 8.6% Q-on-Q to KRW 2,112 billion due to the continued increase in construction volume and higher portion of LNGC out of total sales.

During Q2, the Commercial Vessel business has recorded a negative KRW 43.4 billion in loss due to the onetime costs associated with the production stabilization, including the schedule adjustment LD loss reflected for some vessels and the higher outsourcing expenses. While loss-generating containership continues to have a negative impact, we expect the P&L to gradually improve with decline in delivery of loss-generating containerships and increase in the LNGC sales volume.

Next, Naval Ship business. As the estimated contract price went up, reflecting the higher project cost of the quarter, the sales of the Naval Ship business has increased by 131% Q-on-Q to record KRW 328.9 billion. For Q3, while the Q2 sales may slightly decline due to the base effect of this quarter, the construction of Jang Bogo III Ship II begins in earnest and the sales volume is expected to remain steady throughout the rest of the year.

The increase in estimated contract price due to the higher cost has improved the operating profit to record KRW 73.4 billion. For the second half of 2024, the operating profit will be maintained boosted by the sales increase from the submarine and the submarine MRO.

Lastly, Offshore business. The sales of the Offshore business declined by 28.3% Q-on-Q to record KRW 199 billion due to process adjustment for production stabilization. It also recorded KRW 47.6 billion in operating loss as the fixed cost has increased due to decline in sales while the progress for the [ NOC ] fixed platform and [ NAT ] WTIV #1 would reach the final stages in the second half, the construction for Jansz-IO FCS and WTIV #2 started in earnest to drive the sales upward until the fourth quarter.

This has end the briefing on the business performance and the financial highlights.

Let me share with you the 3 listed investment projects just briefly. First, on June 14, Hanwha Aerospace and the company have invested KRW 180.3 billion, respectively, to secure 13.6% of the NextDecade ownership jointly. With the 9.1% share owned by the Hanwha Impact already, this move will make the group the largest shareholder with 22.7% of ownership. With the investment, the company plans to expand the business opportunities from LNG sales, delivery and the shipbuilding necessary for the delivery at the Rio Grande export terminal owned by NextDecade.

Second, the acquisition of the U.S. Philly Shipyard. On June 21, Hanwha Systems and the company have announced the acquisition of 100% ownership of the U.S. Philly Shipyard. Hanwha Systems and the company acquired a 60% and 40% of the owners, respectively, at the total acquisition cost of USD 100 million. Hanwha Systems will invest USD 60 million and the company, USD 40 million. The closing is targeted for Q4 '24, and the preparations are underway to secure the approval from the committee on foreign investment, which is required to initiate the business in the U.S. The move marks the first entry by a Korean company into the U.S. shipbuilding industry and has helped the company to secure an inroad into the world's largest defense market.

The final investment project is equity acquisition of Singaporean Dyna-Mac shipyard to strengthen the competitiveness in the offshore plant business. In May, Hanwha Aerospace and the company acquired 27.1% ownership of Dyna-Mac shipyard at KRW 119.8 billion. The company expects to secure price competitiveness and have favorable position in overseas bidding due to local construction of topside module, utilizing the company's existing marine product haul construction capability and the competitive local labor.

This has been the briefing of the company's major investments. Next, we will hear from each business unit on respective market conditions and order outlook.

[Unknown Executive]

Good afternoon. I'm [ Kim Hung-min ], Head of Sales Planning team at the Commercial Vessel business unit. I will brief you on the market condition and order outlook for the Commercial Vessel business unit. Please turn to Page 12 of the presentation.

We are surrounded with various internal and external variability, such as the concern for the global economic downturn, the prolonged war between Ukraine and Russia and other geopolitical risk in the Middle East. Despite the challenging internal and external environment, the company, as of the end of June, has secured 16 LNGC, 3 VLAC and VLGC, and 7 VLCC orders, totaling 26 vessels or $5.07 billion order from Commercial Vessel business unit only and maintained a solid order winning track.

The company's selective order-taking strategy has proven to be valid, which utilizes the fastest delivery compared to other competitors. This helped us to sign the contract at a higher price to secure stronger profitability.

We expect the favorable market condition to be maintained with the seller's market driven by the recent increase in containership orders and robust demand for LNGC and the VLGC, VLAC due to the stronger environment regulations.

As for the vessel price, the qualitative indicator of new order, the price continues to increase for all vessel types and the sufficient order backlog of shipyards makes any spend adjustment in vessel prices less likely. Therefore, the company plans to continue its selective order-taking strategy focused on profitability through stable order backlog management. At the same time, the company plans to remain flexible, considering available slots, profitability of different vessel types and the market condition and future potential.

And there still are many projects under discussion regarding LNGC, containership, VLAC and VLCC that the company focuses on. And when considering overall market condition and the new vessel demand, we can maintain additional order volume to maintain the current level of order backlog of 2.5 to 3 years.

Next, market condition and order outlook per vessel type. First, LNGC. The new order is expected to slow down due to fear for oversupply from a large order made in '22 and '23, and the number of new vessels ordered will be fewer than last year. But as for the mid- to long-term outlook, however, the demand for the new LNGC is expected to remain solid with more stringent environmental regulations, growing LNGC export to the U.S. and the demand to replace outdated steam turbine-powered LNGC.

The result of the U.S. presidential election in November will have an important impact on the future LNGC order. And depending on the results, approval on the LNG new pipeline could be accelerated to further drive LNGC order.

Regarding the Qatar project that the company has worked on since last year, agreement for the 12 vessels have been completed, and we can expect additional order for more volume from Qatar. If and when we are successful in signing new contract, we plan to secure maximum profitability by reflecting the market place separate from the existing DOA.

Regarding the VLCC, the company has secured 6 new orders based upon a faster delivery than the competition and closed sales for delivery for 2026. Several other projects are under consultation, but many shipping companies are now in the wait-and-see mode due to the recent hike in the vessel price and the decline in freight charge.

Due to a decline in new orders for the past several years, the order backlog-to-fleet ratio for VLCC is at a historical low of less than 7%, while the ratio of old vessels is relatively high. Therefore, with a potential improvement in the freight charge, which is being adjusted at the moment, we can expect additional order.

As for the VLAC and the VLGC, more stringent environment regulations have increased the demand for clean energy significantly. Therefore, the ammonia as fuel for vessels and transition into the hydrogen economy has created a positive environment for new orders. Currently, all major companies, such as Exxon and Chevron, have embarked upon the blue ammonia development project, and the demand for ammonia delivery is expected to rapidly grow from 2030.

Despite the spike in orders from late last year, there still remains a demand for new vessels. The company is in negotiation with various shipping companies on various projects with available slots to further drive the vessel price.

Lastly, on containerships. The freight charge for the container skyrocketed due to increase in TEU miles because of the diversion of containerships due to the Red Sea shipping crisis, coupled with the port congestion. Also, large shipping companies moved quickly and competitively for new vessels. Changes in alliances from 2025 is expected to reconstruct the competition landscape, which may drive top-grossing liners to place new orders to maintain and/or to expand the market share.

As available slots run out from the shipyards with the capabilities to build large containers, including the Chinese shipyards, the vessel price increases rapidly. Therefore, the company intends to focus on order taking on large-size containerships with higher profitability.

This has been the briefing on margin condition and order outlook for Commercial Vessel business unit. Thank you. Now let's hear from the Naval Ship business unit.

[Unknown Executive]

Good afternoon. I am [ Kim Ho-jun ], in charge of the Naval Ship business development. I will brief you on the defense market condition and cover key issues that the investors might be interested in. Please turn to Page 13 of the presentation.

Conflict and confrontations are rampant around the world and are expected to last for the foreseeable future. They include the ongoing war between Russia and Ukraine, confrontation between the U.S. and China over Germany, an escalating crisis in cross-strait trade, growing tension in the Middle East instigated by the Israel and the Palestinian war. This instability causes national security insecurity, which in turn leads to arms buildup. This has an effect on neighboring countries and arms race is ever escalating.

Against this 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 the various surface ship construction experience.

The company has participated in overseas submarine projects in Poland, Canada, and the Philippines and overseas surface ship projects in Australia and Thailand and MRO projects for U.S. naval vessels. If you have any questions on the individual projects, please address your questions during the Q&A.

Let me briefly share with you the progress of the local projects that the company has been focused on. Yesterday, the company was selected as the preferred bidder for one new shipboard, the second naval auxiliary ship project worth around KRW 460 billion. The main contract for the project is likely to be in mid-August.

Next, Ulsan Batch IV, 2 ships worth KRW 800 billion in total. DAPA issued the bidding announcement on July 4, and the company has established a task force team to prepare and submit a proposal by August 20. As for the KDDX detail design and the lead ship construction worth KRW 700 billion, the company is waiting for the result of the Ministry of Trade Industry and Energy on designation of the defense company. The company will make all the necessary preparation for a proposal to secure new orders from future competitive bidding.

The objectives of the company are to solidify the market dominance with the combat ships and to expand coverage into auxiliary ships to pursue sustainable growth. As we have always done, we will do our utmost for fair business execution.

Next, let me brief you on the Master Ship Repair Agreement, or MSRA, recently signed with the U.S. Navy. The company has signed MSRA with the U.S. Navy Support Systems Command on July 22. This agreement is signed between the U.S. government and the private shipbuilding company for the maintenance and repair of the U.S. naval vessels and the necessary guarantee for quality and credibility for U.S. naval ship repair. After applying for the MSRA in January this year, the company concluded the agreement in July. Considering that the process normally takes more than 1 year, the 7-month span represents the strong recognition by the U.S. Navy on the company's capabilities on vessels and the repair infrastructure.

With the recent MSRA, the company has secured the qualification to officially take part in the MRO bidding defined by the U.S. Navy for the next 5 years and inroads into the world's largest defense market.

Next, let me briefly share with you the MRO projects to be executed in Goeje shipyard. The company participated in the U.S. Navy MRO project and the results will be announced in mid-August. Please understand that we cannot disclose any specific details as this is a project under bidding process. We hope that we can share the potential good news with you in the future.

Starting with the MRO project, the company plans to expand the influence in the U.S. battleship market and will explore the various risks and proactively respond to them for stronger profitability. The Philly Shipyard that the company has recently announced the acquisition of will be used for the new battleship market and for MRO projects in the long term.

Based on the local submarine MRO and the performance improvement experience that it has secured so far, the company plans to expand its MRO services for U.S. naval vessels, the naval ships that the company has exported as well as all the naval ships operational in and out of the country. Especially for any new orders, the company plans to offer MRO package solution to preemptively propose the naval ship life cycle management to generate additional business opportunities.

After inclusion into the Hanwha Group, the Naval Ship BU has enjoyed the biggest synergy. While the unit has 10% of operating profit in '23, we expect even higher operating profit this year. In terms of sales, BU has negotiated exports for a number of countries and, most notably, secured an inroad into the world's largest market, the U.S. I'd like to share with you that the business unit is exerting our best efforts for the best possible outcomes.

With that, I'd like to conclude the briefing on the Naval Ship business unit and thank you. Lastly, let's hear from the offshore BU.

[Unknown Executive]

Good afternoon. I am [ Choi Yong-seok ], Head of Offshore Marketing. Please turn to Page 14 for the market condition of offshore plant.

Until early June, the international oil price fell due to the easing geopolitical tensions in the Middle East, stabilizing supply chain and the announcement of the phased easing of the production cuts after the fourth quarter of this year at the open press meeting in June. From mid-June, however, the escalating geopolitical tension in the Middle East and Europe drove oil price higher due to concerns for unstable oil supply in the second half. With the increased market uncertainty, the international oil price is expected to be at a higher level.

In case of FPSO market, the size is expected to continuously grow with the recent discovery of large deep-sea oilfield. The Galp Energia of Portugal has announced its discovery in April of Mopane oilfield in Namibia, West Africa, with reserves of 10 billion barrels. As the company disclosed its intention to sell the development rights to the field, the interest on the West African oil and gas market has increased quite significantly.

Looking at the trend of oil majors, the U.S. oil majors focus their investment into the U.S. shale oil and other key regions such as Guyana. While securing quality assets through M&A, they also pursue exploration in South America and Africa.

European companies are also adding portfolio on oil and gas business and/or increasing their weight on that region. For example, TotalEnergies have made a strong investment into upstream business to contribute to the supply increase by new oil and gas field development in Suriname and Namibia.

When we take a look at the cases of Guyana oil for development, the sixth FPSO for the Stabroek oilfield development was ordered last April, and many more future FPSOs are expected to be ordered. Thanks to the large oilfield in Guyana and the large deep-sea oilfield discoveries in Suriname, we expect the demand for the deep-sea oilfield development project similar to that of a Guyana development model.

As for the drilling market, the ultra-deepwater oil exploration and development demand drives the charter rate high and the long-term positive prospect. While the global wind power suffered from a series of negative news, including the delay, suspension or cancellation of the construction due to inflation, increase in capital cost, supply chain limitations, the determination of various governments and developers on wind power projects remained strong. For domestic offshore wind market, the company plans to play more role for the fixed offshore wind expanding into the West and South Sea.

Offshore BU of Hanwha Ocean is exerting huge efforts to develop new products and original models, fully harnessing the latest technology to meet changing market demand and also to connect such development efforts with future orders. Through friendly cooperation with the key customers, the company will generate mutually complementary and symbiotic relationships.

The Offshore BU plans to promote selective order-taking strategy for large-scale projects, putting profitability at the highest priority. And we hope the strategy positively contribute to the company's future profit.

The Offshore BU will do our best to preempt the market and maximize the profit by maintaining flexibility to any changes in the conventional energy source and the renewable energy markets.

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 second quarter of '24. Now we'll take the question from the participants.

[Sang Yun Han, executive]

The first question is from CGS International. Can I have the detailed breakdown of the onetime expenses? I have noted that the onetime expenses include the outsourcing expenses and the cost for the production stabilization, which has been already allocated. Is there any reason to add more for this category? And do you expect these onetime expenses to occur in the future? And also a bit more detail of the production stabilization for the Offshore business.

[Yong-In Shin, executive]

The answer is the onetime expenses can be broken down into KRW 21.5 billion for the special support for the in-house partner, KRW 18.6 billion for the external partners, reserves and the incentives. But I'd like to point out that it all is attributable to the poor delivery. So we have improved the delivery on schedule. And that is because of the instability of the predecessor processes, which happened from late last year until the early first quarter of this year. During those troubling times, the achievement ratio was only 30% to 40%, but now it is as high as 85%, and we will continue to increase the ratio.

As was reported by the media, also the impact from the predecessor process is what we are suffering right now. But now that the predecessor process has been stabilized that we expect the overall situation to improve.

[Unknown Executive]

And regarding the Offshore, the production stabilization is that the fixed platform has sailed away and the load on production has been eased. In the past, the 3 or 4 constructions were happening all at the same time, and that has increased the load, and now it has been eased. And the project that has been delayed, we expect that to be delivered sometime in August and September. And afterwards, things will improve significantly.

[Sang Yun Han, executive]

The next question is from Shinhan Investment. What are the remaining container volumes that are loss-making? And what is the order or the share of LNGC out of the total sales?

[Yong-In Shin, executive]

The answer is there are 15 remaining volumes, and during the third quarter of this year, we will deliver 4 ships. As for the containers, there are 20 recorded in the order backlog. And most of the orders that were placed in the year 2020 and '21 were loss-making, and they will be delivered mostly within this year. And by the first half of '25, close to 90% of those orders will be delivered and this trade will be resorted. The share of LNGC out of the total sales was 50% in Q2, and it will increase to 60% in Q3.

[Sang Yun Han, executive]

The next question is from Shinhan Investment. It seems that most of the recent investment that the company has made was done in conjunction with the subsidiaries or the other group affiliates. Is it because of the potential synergies that you can generate? Or is it a simple financial investment?

[Yong-In Shin, executive]

The answer is Hanwha Ocean is a strategic investment by Hanwha Aerospace. So that is why these 2 companies are making the strategic investment together. And as for the Philly Shipyard, the system has a larger share of 60% of the total ownership, and that is in line with the U.S. naval defense trend where the system designers lead the overall investment. So that was in line with the U.S. market trend.

[Sang Yun Han, executive]

The next question is from the CGSI. Two questions, first is about the Goeje MRO. So will it handle the existing MRO engagement that we have from the U.S. or the local MRO? So will there be any scheduling overlap and therefore, creating a bottleneck?

And the second question is about the acquisition of the Philly Shipyard. According to our understanding, is that the local shipbuilding value chain in the United States has been quite disrupted. That might mean that infrastructure at the Philly Shipyard might not be in its pristine condition, which might require additional investment. What is your viewpoint on that?

[Unknown Executive]

The answer is, first, let me respond to you as to our capability for the local MRO. So we are offering the maintenance and repair services so that the marine vessels can maintain its best condition throughout its life cycle. So what we are offering is this MRO for the submarine and the performance improvement.

And in case of any overlap in the domestic capacity, I do feel kind of regret to tell you that as for the surface ship order backlog, we do not have sufficient order volume. So it is not currently full. So capacity overlap in order backlog or the bottleneck is something that is not to be concerned about.

[Yong-In Shin, executive]

And regarding the Philly Shipyard that according to our due diligence and the investigation, so Philly Shipyard has rather modernized assembly facilities there. So compared with Hanwha Ocean's capability, whether that be the welding capability or the automation or the robot-supported or the robot-powered assembly, then it will be able to provide quite a competitive facility and the capability even for the U.S. market.

[Sang Yun Han, executive]

Next question is from the NH Investment & Securities. So what is the order pipeline for the Offshore project that is to be delivered within this year? Considering the time that is required to conduct the design, then don't you need to place more orders for the second half of this year?

[Unknown Executive]

The answer is that bidding is currently underway. So therefore, we cannot disclose any more details. So please understand that. But I can guarantee that we are participating in many new projects and hopefully, we can win several projects within this year.

[Sang Yun Han, executive]

Next question is from DAOL Investment & Securities. I have a question regarding the Qatar project. So regarding the Phase 3, I believe that you are consulting with the [ QMIC ]. So can we expect to hear any positive news within this year?

[Unknown Executive]

The answer is the negotiation is still ongoing. So that is why, again, we cannot disclose too much details. But if things progress as we expect, then we might be able to expect some positive news, good news within this year.

[Sang Yun Han, executive]

Next question is from Nomura. So according to the recent reporting by competition, so it seems that there is some differences in the cost ratio. From our calculation, the changes in the cost ratio is about 9%. So can you explain to me as to why there is a delay in the process and when the situation will improve?

[Yong-In Shin, executive]

The answer is, according to our latest review and investigation, when we look into the work sequence that is happening at our yards, and we do have more than sufficient personnel on hand, but as I said earlier, so there has been some issues with the predecessor processes that happened late last year until very early this year, and that is to do with that incompletion of the block assembly and the poor degree of completion in the predecessor processes that has put some additional strain on the successor processes, and this is what we are suffering from.

And with regard to the cost ratio, I do not believe that there is any major differences between the cost ratio of us and the competition. It is that there has been some design change and the LD addition and in case of the change order, it has happened very close to the delivery. So that is the reason why there has been some delay. So according to the processes, any issue with regard to the shortage of the personnel, that will be addressed during the second half of this year. And it's not to do with cost ratio but it's to do with the contract and the change order happening very close to the delivery. But as I mentioned that in the second half, many of them will be delivered. So that will actually ease a lot of strains.

[Sang Yun Han, executive]

The next question is from DAOL Investment & Securities. The question is with regard to the MRO. So the U.S. MRO project that the company is entering into these days might not have such a high profitability, and that has been the concern that has been shared by the Hyundai Heavy Industries. So what is your forecast?

[Unknown Executive]

So the answer is that in case of the Naval Ship MROs versus the new shipbuilding, the project period is rather short, and it does not require a huge amount of personnel. And we can utilize the stable volume for a long period of time, so it will help us to operate the shipyard in an extremely efficient manner. And also considering that there is a recent increase in naval ship globally, so the overall MRO market will continue to increase.

And also, with the MRO initiative, we can utilize the small- and medium-sized companies located in the southern part of this country that are specialized in the repair, and this will have a ripple effect of increasing the national capability for the MRO and also have other economic impacts as well.

And also in terms of the profitability, so it is unlike the conventional order placed for the new vessel. So the ongoing MRO that we are participating does not have any pre-confined price for the bidding. So the structure guarantees us to secure sufficient amount of profit. So the concern might not hold true in our case.

[Sang Yun Han, executive]

Next question is from the Shinhan Investment. So considering the current order-taking profile, it seems that starting from last year, there has been some pressure from the load. So other than the Qatar LNG, then I have not seen any meaningful new orders. Is that because of the load in the work processes, that you were adjusting or slowing down the new order intentionally? So with the easing of the workload then you will accelerate order-taking process?

[Unknown Executive]

The answer is that there is no correlation between the workload and the speed of order taking.

[Sang Yun Han, executive]

Next question is from HI investment & securities. And after the acquisition of the Philly Shipyard, then we expect for you to generate profit very soon. But if you look into the past few years of performance of the Philly Shipyard, then it has generated loss and even the Philly Shipyard CEO has mentioned that post-COVID period, because of the increase in the cost and the labor cost, then the shipyard has generated loss.

So after the acquisition of the shipyard, whether that be within the new ship order or through MRO, so you need to improve the status quo. But if you consider the human resources, if you hire the local labor, then the situation with regard to the labor cost will not change. And if you were to dispatch so much from Korea, then the associated costs will be even higher. You also mentioned about the potential infusion of the robot technology, but we are talking about the naval vessels and it does not have a huge need for the welding. So I'd like to know more about what is your plan to improve the performance of the Philly Shipyard after the acquisition.

[Yong-In Shin, executive]

The answer is, as of the second quarter of '24, the Philly Shipyard has an order backlog of USD 1.8 billion, spanning the period of 3 years. That means that the profitability or the profit been guaranteed by year '27. And when we look into the order backlog, they include 3 SMV, meaning national security multi-mission vessel; and 1 SRID, subsea rock installation vessel entry containers. And also the Philly Shipyard is one of two leading companies in the large vessel market according to the Jones Act. And we can utilize a variety of portfolio. When we apply the special capabilities that is owned by Hanwha Ocean and Hanwha Systems, we can further improve the potential.

And when we take a look into the U.S. market, so the foreign companies are winning orders for the new naval ships. Case in point is the Fincantieri and Austal. And in case of the MRO, the U.K.'s BAE Systems are one of the most important players, so we can follow these examples and utilize the Philly Shipyard to secure a position in the MRO market in the United States.

[Sang Yun Han, executive]

Next question is from DAOL Investment & Securities, and it is to do with the ongoing bidding for the KDDX and Ulsan Batch IV. What do you believe is the likelihood of succeeding? According to the DAPA's position, it is not likely that a single company will win both projects. Which you believe could be better if you can share your personal thoughts on that?

[Unknown Executive]

The answer is, these are the projects that have been led by the government. So it is not appropriate for a participant into the bidding process to mention about the value in one way or another, meaning the private contract or the competitive bidding.

With regard to the Ulsan Batch IV, I believe that there is an objection that the competitive bidding makes sense in Hanwha Ocean. And I believe that also other companies are working their best to this deal.

Regarding the KDDX, so there are many different opinions, whether the private contract will be better for the KDDX project or the competitive bidding might be relevant in this case as well. And the DAPA has expressed its intention that it will maintain the principles and follow the rules of regulations. And so that is why we are preparing our best to guarantee that we have a positive result in this situation.

[Sang Yun Han, executive]

The next question is from the CGSI and it is to do with the Philly Shipyard. Until recently, the shipyard has experienced loss, and that is probably because of the local assembly. We know that in April of this year, local competition has signed an MOU with the shipyard and it includes the total target supply of the ship equipment and the supplies. So will that be something that you will be considering that it is not just a full end-to-end construction of the whole ship but you provide the models of the ship and locally, you only do the assembly.

[Yong-In Shin, executive]

The answer is that what you have just mentioned is a completely possible scenario, and we know that there are some precedents. Of course, it will be most optimal for a single shipyard to cover the end-to-end process of the shipbuilding, covering from the ship supplies and equipment and so forth. But because of the constraints with time and the production capabilities, it is more common to produce a module for the whole ship and do the assembly in separate locations.

Well, currently, we are in the pre-PMI status. So we are yet to finalize the plans to operate Philly Shipyards after this acquisition. But as you are aware that out of the old competition of the naval ship, the ship supplies and equipment account for the largest portion. So the efficient securing and the utilization of the ship equipment and supplies will determine the success. And we will make sure that we will develop a successful business model for the Philly Shipyard for its operation.

[Sang Yun Han, executive]

Thank you very much, and that is it for the Q&A.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]