Daewoo Shipbuilding & Marine Engineering Co Ltd

KRX:042660

Q4-2025 Earnings Call

[Sang Yun Han, executive]

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 2025 whole year and Q4 performance.

Also joining the call, we have [ Sungchan Yun ], Head of Finance Office; Bang Chang Min, Head of Planning and Management Team; [ Joohyung Han ], Head of Management Planning; and Hoonmin Kim, Head of Commercial Vessel Sales Team; and Choi Jounghyun, Head of Planning and Naval Ship Division; and Yongseok Cho, Head of Offshore Business Development; and [indiscernible], Head of E&I Planning.

During the call, the company will explain the business performance, market condition and order outlook, followed by Q&A with participating analysts. Now the company will brief you on 2025 performance.

[Yong-In Shin, executive]

Good afternoon. I am [ Shin, Yong-In ], CFO of Hanwha Ocean. I'll present on the business performance and highlights of Hanwha Ocean for the fiscal year 2025.

First, I will brief you on FY '25 full year performance. Please turn to Page 5 and 6 of the presentation. On a consolidated basis for '25, the company recorded KRW 12,688.4 billion in sales, which is 18% growth year-on-year.

The commercial vessel BU has led to sales growth with the increase in the high-margin LNGC sales based upon production stabilization. The naval ship BU recorded a slight increase in sales, driven by smooth progression of constructions of ships # 1 to 3 of Jangbogo-III, Batch 2 and also contributing to the company-wide sales increase.

The consolidated operating profit recorded KRW 1,109.1 billion, recording 366% year-on-year growth. The significant profit improvement from the previous year was driven by product mix improvement focused on the profitability and higher productivity due to product stabilization -- production stabilization rather and continued cost reduction initiatives.

Let me report to you on the business performance of Q4 '25. Please refer to Pages 7 and 8 of the presentation. The consolidated sales for Q4 '25 were KRW 3,227.8 billion; operating profit, KRW 189 billion and net profit, KRW 539.1 billion. The Q4 sales increased by 7% Q-on-Q, and this is mostly driven by 8 more business days versus the previous quarter.

Meanwhile, the operating profit declined by 35% Q-on-Q to KRW 189 billion. This is due to business incentives paid in same ratio to both direct employees and subcontractor employees and increase in other overhead expenses of KRW 230 billion.

Next, let me brief you on the financials. Please refer to Page 9 of the presentation. As of the end of the fiscal year '25, the total assets were KRW 20.307 trillion, increased by KRW 2,186.9 billion from the end of last year. Cash and cash equivalents were KRW 788.7 billion, increased by KRW 185.4 billion from the end of last year. Total liabilities were KRW 13,928.9 billion, increased by KRW 948.4 billion from the end of last year.

And the total debt has increased by KRW 380.4 billion from the end of last year to KRW 5,646.3 billion. The net debt was KRW 4,857.7 billion, increased by KRW 195.1 billion from the previous year, mostly driven by CapEx and increase in overseas equity investment. In Q4, the pace of increase slowed and the net debt recorded only a mild increase.

In 2026, as delivery of the high-priced vessel would begin in earnest, the cash flow is expected to improve, but there exists some variability as various investment initiatives are scheduled to take place, which includes MASGA and the CapEx investment in Okpo Yard to further improve productivity. Therefore, the company plans to maintain and manage an appropriate level of cash flow and to guarantee financial security.

As of the end of '25, the liabilities to debt ratio is 228%, declined by 39% from the previous year-end, and the company's financial structure has improved stably. The company has recorded profit for 2 consecutive years, securing profit eligible for dividend and gradually improved the financial structure.

With that as a foundation in the mid- to long-term basis, we will consider shareholder return policy, including dividend within the range that does not undermine financial stability. For this year, however, there are a series of investment plans, including Okpo Yard CapEx investment for higher productivity and the investment in the U.S., including the MASGA project. Therefore, the company does not plan to declare any dividend for the current period, considering the priority placed on growth investment and the maintenance of financial stability.

Going forward, the company plans to review its shareholder return policy on a phased basis, taking into comprehensive consideration its investment execution status, business performance and trends in improved cash generation capacity.

From the Page 10 and onwards, I will share with you the Q4 '25 business performance and the future outlook by segment. First, the commercial vessel [ VU ]. The Q4 sales increased by 9% Q-on-Q to KRW 2,685.8 billion due to increase in the number of business days. The operating profit was KRW 202.5 billion due to business incentive payment and other overhead expenses declined by 34% Q-on-Q.

As for the future sales and profit prospects, we expect the commercial vessel BU is expected to account for 70% or more of the enterprise sales. The proportion of LNGC sales with the highest profitability is expected to decline slightly from the previous year to be around 50% of the enterprise sales.

However, as most of the declining LNGC volume relates to the initial tranche of the quarter project, the average LNGC price recognized as revenue is expected to increase compared to last year. In addition, as the revenue contribution from the projects secured since 2023 continues to rise, overall profitability is expected to remain on a solid trajectory.

Next, Naval Ship BU. The Q4 sales declined by 27% Q-on-Q to KRW 273.7 billion. This was due to adjustment in the progress of certain ongoing projects, reflecting cost pressure, including higher fabrication costs, which reduced the volume of sales recognized during this quarter.

Operating profit turned to a loss, recording a negative KRW 87.2 billion due to one-off factors, including the reflection of performance-based compensation, an increase in SG&A expenses such as bid support costs, advertising and promotional expenses and R&D to ensure competitiveness in overseas project bidding, including Canada as well as losses arising from higher estimated cost and fixed cost burdens.

In '26, with the full-fledged production of the second vessel of the Jangbogo-III Batch 2 program as well as the fifth and the sixth vessel of the Ulsan-class Batch 3 program, revenue is expected to increase slightly year-on-year.

While operating profit is likely to be impacted by higher costs stemming from workforce expansion and enhancing marketing activities in line with the expansion of overseas operations, the company will endeavor to secure a sound level of operating profit.

Meanwhile, 2 LD-related lawsuits are currently ongoing, with judgments scheduled to be rendered next week. The combined claim amount of the 2 cases is approximately KRW 150 billion. The current disclosed financial results do not reflect any amounts that could potentially be revised in the event of a favorable ruling in these lawsuits. Accordingly, depending on the outcome of the judgments, there is a possibility of an increase in revenue and operating profit.

Considering that in the past, there have been numerous cases in the neighborship businesses where amounts were reversed through the LD litigation, LD-related litigation, the possibility of a favorable outcome cannot be ruled out. The company will continue to respond diligently with the aim of achieving positive results.

Lastly, offshore BU. The Q4 sales declined by 15% Q-on-Q to record KRW 87.4 billion as major construction projects enter final stages. The operating profit turned positive to record KRW 38.8 billion as change order from the Petrobras FPSO projects was reflected in the performance.

In 2026, sales are expected to decline slightly as most projects will enter their final stages, which is anticipated to result in some fixed cost burden. However, as demonstrated in Q4, the company plans to mitigate the fixed cost burden to the greatest extent possible by pursuing additional change order and incentives through the consultations with the customers as was verified in Q4.

This concludes the briefing on business performance by segment. We will hear from each business unit on respective market condition and order outlook. First, we will hear from the Commercial vessel BU.

[Hoonmin Kim, executive]

Good afternoon. I am Kim Hoonmin, Head of Commercial Vessel Sales team. I will brief you on the market condition and order outlook for the commercial vessel [ VU ].

Please turn to Page 14 of the presentation. Since '22, various geopolitical factors have continued to affect the market, including the prolonged Russia-Ukraine war, the ongoing Red Sea situation and following the inauguration of the President Trump in the U.S., tariff policies, the USTR's [ interpretation ] of port entry fees on the China-built vessels and the legislative initiatives such as the SHIPS Act.

In the midst of an exceptionally high level of uncertainty surrounding geopolitical variables affecting the shipbuilding industry, unprecedented in recent years; the company secured orders in '25 for a total of 50 vessels amounting to USD 9.55 billion, comprising 13 LNG carriers, including 4 under shipping contracts; 20 VLCCs, including 3 under shipping contracts and 17 container vessels.

While global newbuilding orders for the company's core vessel types declined to less than 70% in terms of the number of vessels, the company achieved a year-on-year growth in order intake through proactive sales efforts and strong technological competitiveness.

Following the inauguration of the Trump administration in the U.S. in early '25, tariff and trade policies, including port-related measures by the USTR, had a direct impact on shipbuilding and shipping sectors, weighing on newbuilding order momentum. However, as the U.S. moves to expand energy exports and resume LNG projects in earnest, newbuilding demand for major vessel types such as LNG carriers and the VLCCs have been gradually increasing.

Around October 25, uncertainty increased following the postponement of the adoption of the IMO's midterm GHG reduction measures under the net zero framework. However, across the industry, there is a growing consensus that the long-term direction towards environmentally friendly technologies and alternative fuels remained intact. And accordingly, demand for eco-friendly vessels is expected to continue.

While the company does not plan to disclose a special order intake targets for this year, it intends to focus on securing orders for LNGC, large container vessels, VLACs and VLECs and VLCC with the aim of maintaining an order backlog equivalent to approximately 3 years or more by the year-end.

Next, on market conditions and order prospects by vessel type, beginning with the LNG carrier. Following the rebound in freight rates since October last year, the LNGC market has been showing gradual improvement as new LNG export terminals in the U.S. and Qatar and other regions commenced operations on a step-by-step basis. LNGC demand has increased, leading to a rise in shipowners' interest in newbuilding.

Meanwhile, the pace of scraping for older, less efficient steam turbine LNG carriers whose charter periods have ended, is escalating. As a result, in addition to newbuilding demand associated with new LNG export terminals, replacement demand for new LNG carriers is expected to grow progressively. Moreover, if the conversion of older vessels into the FSRUs accelerate, this is also anticipated to provide a further upside to newbuilding demand.

While uncertainty has heightened following the postponement of the adoption of the net zero framework at IMO MEPC 83, the underlying long-term trajectory remains intact and the demand for LNGC is expected to continue.

In addition, policy developments, including the potential advancement of the U.S. SHIPS Act could affect new build demand. However, the actual impact will depend on the degree to which such policies are specified and implemented and thus, requires continuous monitoring.

Next, VLCC market updates. Since the latter half of last year, VLCC market has experienced a stronger demand, supported by increased crude oil transmission in China and India and OPEC+ production hike announcement. Sanctions-related delays following cargo loading have reduced effective vessel availability, contributing to higher freight rates and supporting new building demands.

Structurally, replacement demand remains robust, with the VLCCs aged 20 years or older accounting for more than 20% of the global fleet. However, the acceleration of scraping is likely to require the easing of sanctions on Iran and Russia, which would allow for ownership transfers of aging vessels currently part of our shadow fleet.

More recently, following the arrest of Maduro in the U.S. and the subsequent announcement of the Venezuelan crude oil importers, the tanker market is expected to undergo a broader realignment. Should the U.S. imports of the Venezuelan crude increase, overall ton-mile demand is expected to rise, while Suezmax and Aframax and LR1 and LR2 tankers is likely to benefit the most.

Despite uncertainties from the U.S. policy developments and the anticipated tightening of the IMO environmental regulations, a solid new build order flow is expected to be maintained.

Next, gas carrier market updates. Following the large-scale orders of 70 VLGCs in 2023 and 81 VLGCs in 2024, newbuilding orders moderated to 20 vessels in 2025. Going forward, the company will continue to closely monitor the market conditions and participate in new building projects in a timely manner while sustaining efforts to secure orders.

For VLECs, demand for vessel capacity is expected to remain solid, driven by capacity expansions of ethane crackers by Asian petrochemical companies. In particular, due to U.S. policy-related factors, VLEC demand may increasingly concentrate on Korean shipyards, from which the company also benefits -- expects to benefit.

As for VLAC, demand is anticipated to be linked to blue and green ammonia project. However, at present, the number of clearly identifiable projects remains limited.

Lastly, update on the container ships. As a result of the realignment of the shipping alliances, European carriers led the ordering of the large container vessels through '24; while in '25, Asian carriers increased their ordering activity following a period of comparatively subdued orders. Despite the currently high backlog ratio for container vessels of 16,000 TEU and above, demand for newbuilding is expected to remain to support fleet competitiveness with ordering trends among Asian carriers likely to continue.

However, the possibility of shipping lines returning to Suez Canal has recently been raised. Should the Red Sea situation ease and the Suez Canal resume the normal operations, container vessels could be among the most significantly affected segments, facing reduced ton-mile demand, lower freight rates and potentially oversupply. Accordingly, close monitoring is required.

While the adoption of the IMO's net zero framework has been delayed, replacement demand for aging container vessels is expected to continue. Over the mid- to long term, ordering activities is anticipated to shift toward the small and midsized eco-friendly container vessel below 10,000 TEU, where the pace of fleet renewal has been relatively slow.

In addition, container vessels are likely to be the most directly exposed to reciprocal port-related measures between the U.S. and China. The company will closely monitor order opportunities for Korean shipyards arising from changes in fleet strategies by major carriers in response to the developments in U.S.-China relations.

This concludes the briefing on business performance and the market outlook by major vessel types. Thank you for your attention. Now let's hear from the Nighborship BU.

[Jeong-hun Choi, executive]

Good afternoon. I am Choi Jeong-hun, Head of Neighborship Planning. The global maritime security environment is undergoing unprecedented levels of complexity and rapid change. Amid the prolonged Russia-Ukraine conflict, Russia has further strengthened its military postures in the Arctic alongside increasing active engagement with China.

Consequently, the Arctic and the wider North Atlantic region are emerging as a critical area for submarine operations, surveillance and maritime patrol missions. In particular, the GIUK gap connecting Greenland, Iceland and the U.K. is once again in focus as a critical choke point for North Atlantic defense.

NATO and the U.S. are advancing discussions to enhance submarine surveillance and early warning architectures in the area, reflecting the renewed strategic salience of North Atlantic Security.

Moreover, rising accessibility of Arctic sea routes driven by climate change is materially altering maritime security dynamics. With the progressive opening of the Arctic passages, submarine capabilities and ASW assets and Polar operational competencies are becoming indispensable for force elements.

In response, NATO members as well as the Asian and the Middle Eastern countries are steadily expanding their naval capabilities, supporting a structural increase in global demand for naval assets and naval ships.

Amid intensifying maritime disputes and growing prominence of the Arctic security, Hanwha Ocean is proactively identifying and capturing strategic opportunities in the global specialized shipbuilding market. At the center of this shift is Canada's next-generation submarine program, the Canadian Petrol Submarine Project or the CPSB.

Anchored in proven platform performance and localization, the company has pursued a consistent approach to supporting allied and partner countries in developing both operational sovereignty and self-reliant maintenance and sustainment capabilities.

In CPSB, in particular, through a one team partnership with Babcock, the company is proposing a Canada-based long-term sustainment ecosystem model that includes local job creation, technology transfer and comprehensive in-service support. The company has also proposed the delivery of full vessels by 2035 in order to address Canada's key priority of timely delivery.

As the G2G nature of the project has become more pronounced, the engagement and support at the government level, including senior-level communications have been advancing. In this context, the company continues to cooperate closely with the government while focusing its efforts and achieving optimal results.

Regarding the U.S. Navy shipbuilding opportunities, the company is monitoring potentially legislative changes and is evaluating various direct and indirect business options, including construction at its [indiscernible] facility and collaboration with overseas shipyards such as fly shipyards. The company intends to continue exploring an efficient and timely approach to entering the U.S. naval defense market by leveraging production capabilities in both Korea and the U.S.

In addition, should discussions mentioned at the recent Korea-U.S. Summit regarding the Korean nuclear-powered submarine program progresses into an actual project, this could serve as a meaningful milestone for Korea's maritime defense industry. Based on its long-standing experience in submarine design and construction, the company will seek to contribute to the national security objectives.

Amid rapidly changing global and domestic security conditions, the company will continue its efforts to enhance its naval shipbuilding capabilities and to support security needs in both domestically and internationally.

Lastly, let's hear from the Offshore BU.

[Yongseok Cho, executive]

Good afternoon. I am Cho Yongseok, Head of Marketing and Sales with the Energy Plant unit. Please turn to Page 16, 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 plant and renewable market.

As for the oil and gas market, major institutions such as the U.S. Energy Information Administration and the International Energy Agency forecast solid demand increase while also highlighting the potential for increased downward pressure on price due to oversupply.

At the same time, the possibility of heightened short-term price volatility remains, driven by geopolitical factors such as the Russia-Ukraine war, the potential strengthening of sanctions and export control on Iran and Venezuela and changes in the OPEC+ policy.

Natural gas is following a similar trajectory with the production continuing to increase, particularly in the U.S. and LNG liquefaction capacity expanding rapidly. As a result, overall downward pressure on prices is expected to intensify.

At the same time, energy majors have remained cautious about near-term oversupply risks while maintaining a constructive mid- to long-term outlook, expecting structurally rising energy demand driven by improving living standards and accelerating electrification in developing countries.

OPEC also projects that global energy demand will increase by approximately 23% by 2050, with oil accounting for around 30% of total energy mix, equivalent to roughly 123 million barrels per day. To meet this demand, OPEC emphasized that more than USD 18 trillion in investment will be required between 2025 and 2050.

Natural gas markets are expected to experience growing downward price pressure as increased U.S.-led production coincides with the expansion of the global LNG supply capacity. The U.S. Energy Information Administration forecasts that although Henry Hub prices in '26 may recover from '25 levels amid supply-demand adjustment, the annual average is still expected to remain below $3.5 per MMBtu, slightly under the '25 average of 3.53 MMBtu.

Overall, the company expects that its key energy plant-related businesses, including FPSO and FLNGs that are directly tied to the development of traditional oil and gas resources, are well positioned to operate within an increasing supportive business environment over the mid- to long term.

First, FPSO market. Demand continues to expand centered on major deepwater fields in South America, West Africa. And Petrobras initiated a formal tender process last October under a BOT structure for an additional FPSO to be installed at the Buzios field, one of the Brazil's flagship pre-salt development. In '26, additional FPSOs planned for development rather deployment at other major fields, including Mero, are likewise expected to be tendered under BOT arrangements.

According to the industry research firms such as Rystad Energy, a substantial number of FPSO projects are expected to be proposed and sanctioned between '26 and '27, with approximately 60% to 70% of the total demand projected to originate from South America and West Africa.

TotalEnergies have expanded its exploration and development activities in Namibia by securing operatorship of Block PEL 83 through an equity stock, exchanging a 10% interest in Block PEL 56, which includes Venus field for a 40% interest in Block PEL 83, where Galp recently discovered the Mopane field. As a result, additional demand for FPSO and the FLNG new builds in the region is expected to expected going forward.

Overall, the company expects that FPSO newbuilding opportunities valuable for participation in '26 will be sustained over or expanded further. Accordingly, the company plans to participate selectively in tenders, taking into account project scale, internal capacity at the time of bidding and the competitive landscape.

FLNG market. As new LNG projects and expansion of existing facilities accelerates, led by the U.S., the overall outlook for the natural gas export market has turned increasingly positive. According to the U.S. Energy Information Administration, the U.S. LNG exports already reached a record high in '25, with further growth expected in '26 as new liquefaction facilities commence operations.

In addition, global LNG supply in '26 is projected to increase by approximately 30 million to 35 million tonnes year-on-year. Restart Energy projects that total global FLNG capacity may grow to around 42 MTPA by 2030 and 55 MTPA by 2035. In this context, there is a growing possibility that medium-term demand for FLNG newbuilds could outpace valuable global fabrication capacity.

At present, development initiatives aimed at monetizing underdeveloped gas fields are gradually increasing across the regions, including North, Central and South America, West Africa and Asia. Against this backdrop, the company expects that new building opportunities where it can participate will continue to emerge going forward.

Next, on drilling market. The offshore drilling market is currently experiencing a temporary slowdown. However, a gradual recovery is expected, supported by the pace of replacement of aging units and trends in deepwater development. Clarksons Research indicates that utilization rate for the deepwater floating drill units, including drillships and semisubmersibles, are currently around 80% as of 2025.

Looking ahead to '26 and '27, the growing prevalence of multiyear contracts focused on high specification assets is strengthening expectations for higher day rates. As a result, floater utilization is expected to rise steadily, potentially reaching cost of 90% by the end of '26.

Next, on offshore wind power and the related installation vessels. The offshore wind market had shown some near-term moderation due to policy changes in certain countries and challenges to project economics. Nevertheless, within the broader context of energy diversification and decarbonization, it continues to be regarded as a market with a strong long-term global potential.

In Korea, policy-backed volumes are translated into the actual project, as evidenced by the selection of 689 megawatts in 2025 offshore wind fixed price competitive bidding process.

In addition, with the successive announcement of fixed-price auction tenders, the near-term project pipeline is being sustained. As a result, project visibility in '26 is expected to improve gradually, particularly for projects that meet permitting, grid connection and financing requirements.

Internationally, leading European countries have reconfirmed their collective ambition to reach 100 gigawatt of offshore wind capacity by 2030. In the U.K., recent auction round resulted in contracts awarded approximately 8 gigawatts, underscoring the continued presence of a robust pipeline of large-scale offshore wind project.

In the WTIV market, installation demand remains anchored by ongoing developments at existing offshore wind fields. while the reassessment of the certain new projects has introduced a short-term volatility at the global level, major European projects, including those covering installation activities for -- from 2026 to '28 are accelerating once again. As a result, demand for high-specification WTIVs capable of installing next-generation turbines of 15 megawatts or larger is expected to remain structurally strong.

As the domestic offshore wind market expands, the demand for offshore substation installation is also expected to increase. In Europe, demand for offshore substation is likewise on onward trend -- on upward trend, driven primarily by large-scale HVDC platforms.

Overall, even amid the global energy transition, stable supply of traditional energy sources such as oil and gas and the growth of the renewable energy market centered on offshore wind are progressing in parallel. In response, Hanwha Ocean's Offshore BU is actively pursuing other opportunities focused on its competitive product portfolio, including FPSO, FLNG and LNG modules, floating and fixed platform and WTIV.

By responding flexibly to changes across the conventional and renewable energy markets, the company will continue to strive for market leadership and sustainable profit generation.

[Sang Yun Han, executive]

This concludes the briefing on business performance for the fourth quarter and the full year of 2025. Now we will take questions from the participating analysts.

The first question is from Yuanta Securities. Please explain approximately KRW 230 billion performance-based compensation expenses separately from other expenses. Is it -- it is understood that allocation in '25 was not evenly phased. Are there plans to allocate these expenses on a quarterly basis starting in '26?

In addition, net income increased sharply during the period. Please comment on the key drivers behind this increase. And with respect to the naval ship-related commentary, the discussion focused primarily on Canada. Were the on-off costs incurred entirely in Canada? Or were there also amounts executed in other regions, including the United States?

[Unknown Executive]

The answer is with respect to the approximately KRW 230 billion performance-based compensation expenses, discussions and negotiations are still ongoing. Accordingly, it would be premature to disclose detailed breakdown or classifications at this stage.

In addition, no internal decisions has been finalized regarding the potential quarterly allocation from '26 onwards. Therefore, the company is not in a position to provide guidance on this matter at this time to ask for your understanding.

The sharp increase in net income during the period was primarily attributable to the recognition of a deferred tax asset refund of approximately KRW 400 billion, which was reflected in the financial results.

Regarding the naval ship-related one-off cost, approximately KRW 20 billion has incurred in the fourth quarter alone. These expenses were mainly related to the preparations for the submissions scheduled to be made to Canada by March of this year as well as advertising and other related expenditures executed since the end of last year.

In addition, exhibition-related costs associated with events in Thailand and Poland totaled approximately KRW 10 billion. Furthermore, recurring R&D expenses were recognized in the fourth quarter, bringing the total naval ship-related one-off and associated expenses to approximately KRW 20 billion. These costs were not incurred exclusively in Canada and certain expenditures were also executed in other regions.

[Sang Yun Han, executive]

The next question is from Tao Securities. Regarding the revenue top line, it was mentioned that the commercial vessels account for approximately 70% of the total company revenue. Given that the revenue from naval ship is expected to increase only modestly and offshore plant revenue is likely to remain flat due to a limited backlog, should I assume that the revenue growth in '26 will be smaller compared to '25?

[Unknown Executive]

The answer is revenue recognition may vary depending on the factors such as foreign exchange and changes in total estimated cost. However, based on the current outlook, the company believes that achieving a revenue level comparable to that of '25 should be possible in '26 as well.

[Sang Yun Han, executive]

Next question is from Korea Investment Securities. This is the additional question regarding the performance-based compensation. The labor-related costs have been reflected and are expected to be recognized. Does this represent an event that affects the overall margin of the commercial vessel backlog? Or should it be viewed as a onetime event?

[Unknown Executive]

The answer is the one-off profit and loss items such as the performance-based compensations are allocated at the corporate level and are not directly linked to individual project cost. Accordingly, these items are independent of margins or the consensus assumptions by commercial vessel types.

[Sang Yun Han, executive]

The next question is from Tao Securities. Regarding the foreign exchange management, the company maintains a relatively high level of FX hedging. The current government policy encourages export-oriented companies to actively engage in FX hedging when the rate rises.

Is this government policy expected to influence the company's FX hedging strategy going forward? In addition, with respect to the performance-based compensation, was the expense reflected only in the commercial vessel BU or was it allocated across other BUs as well?

[Unknown Executive]

The answer is with respect to the FX hedging, the company does not follow a policy driven by a single external factor. Rather, its hedging strategy is determined by a comprehensive consideration of factors such as the ongoing U.S. investments and the company's overall financial position. Accordingly, the current government policy is not expected to result in any significant changes to the company's existing FX hedging approach.

As for the performance-based compensation expenses, it was not allocated solely to the commercial vessel BU. Instead, it was distributed across the business divisions based upon internally determined allocation ratios.

[Sang Yun Han, executive]

Regarding -- the next question is also from Tao Investment Securities. Regarding LNG carriers, ordering activity this year is expected to be strong. A competitor has indicated that annual LNG carrier orders could reach around 80 vessels. What is the company's perspective?

Separately, LNG carrier order intake does not appear to be increasing any further. This has been attributed to the Chinese shipyards securing a significant portion of recent LNG carrier orders. How does the company view this situation? And to what extent does the company factor Chinese LNG's carrier construction capacity into the strategic planning?

[Unknown Executive]

The answer is with respect to the competitor's estimate of approximately [ 80 ] LNGC orders per year, we believe that this figure is broadly in line with our own outlook and is likely based on similar market data sources.

With regard to recent leveling off in performance can be partially attributed to the fact that several LNGC contracts concluded with the Chinese shipyards have created downward pressure on pricing for orders that would otherwise be placed with Korean shipyards.

That said, the volume of LNG carrier orders that can realistically be awarded to Chinese yard is limited, and we believe that there remains a larger pool of demand that is not suited to the Chinese construction. Therefore, even considering the China's LNGC construction capacity, once that is exceeded, the degree to which the pricing for the Korean-built LNGC is influenced or linked to Chinese pricing is expected to diminish.

[Sang Yun Han, executive]

The next question is from NH Securities. What is the expected order intake amount for the offshore plan project? And what is the target number of units?

[Unknown Executive]

The answer is, while it is difficult to disclose a specific target in terms of the number of units, the company is broadly targeting approximately 1 to 1.5 offshore projects, FPSOs or FLNG.

[Sang Yun Han, executive]

The next question is from Korea Investment Securities. Beyond Canada's CPSB, please share the company's forward-looking order pipeline for the global market, including the U.S. Specifically, could you provide the guidance on the expected number of vessels, types and anticipated timing of order intake?

[Unknown Executive]

The answer is, while it is difficult to disclose the detailed information on the forward order pipeline at this stage, but as you are aware, the company is currently engaged in the Canada CPSB project, and there is also an opportunity in Thailand, which is originally expected towards the end of last year, but has been deferred into the first quarter of this year. The Thailand project is about one surface vessel, and it is expected that Hyundai will also participate in the bidding.

In addition, there is a potentially potential opportunity in Saudi Arabia, though it remains uncertain whether an RFP will be issued within this year. Beyond this, the company is in ongoing discussions with the customers in regions such as South America and Northern Europe regarding the potential submarines and the surface vessel programs.

[Sang Yun Han, executive]

The next question is from iM Investment Securities. Regarding the AD-related litigation for the naval ship, a court ruling is scheduled for next week. Is this ruling expected to be a final judgment? Even if it's not, is there a possibility of reversal or recovery depending on the outcome of the ruling?

[Unknown Executive]

The answer is regarding the ruling scheduled for next week, the likelihood of a favorable outcome cannot be determined at this stage. The total amount subject to the potential recovery is approximately KRW 150 billion. Based on past experience with a similar AD-related cases, recovery ratio have typically ranged between 30% to 60%.

However, the specific percentage applicable in this case will ultimately depend on the court's decision. And the recovery will be then recognized in the financial statement. And in addition, the associated interest costs are also significant, and it is expected that the government will compensate for such related costs as part of the resolution.

[Sang Yun Han, executive]

Next question is from Yuanta Investment Securities. It was mentioned that market conditions are expected to be more favorable for the smaller-sized tankers and the container vessels. Are these vessel segments well suited to the company's capabilities? In addition, even if the pricing trends for the midsized and slightly larger vessel improved, should we expect pricing for the large-sized vessel to remain linked or correlated to those trends?

[Unknown Executive]

To a certain extent, such linkage is expected. As dock availability becomes increasingly constrained and the capacity tightens, customers with urgent requirements are likely to proceed with newbuildings even at the higher price levels. In that sense, the improvement in the pricing for the midsized and moderately large vessel is considered to have meaningful implications.

[Sang Yun Han, executive]

Next question is from Tao Investment Securities. Regarding the offshore business performance, can you provide details on demand of the Petrobras [ CEO ]? The offshore revenue appears to have declined by approximately KRW 600 billion to KRW 700 billion. How should we view the breakeven points under these circumstances?

In addition, following Hanwha's acquisition, some offshore personnel have been told to be reassigned to the naval ship BU. Has the shift had an impact on offshore performance?

[Unknown Executive]

The answer is the amount recognized in relation to the Petrobras [ CEO ] during the current year was approximately KRW 60 billion. And as for the offshore business, the breakeven revenue level is generally around KRW 1 trillion. However, following the launch of the EPU business unit, various related costs have increased. And as a result, the effective BEP is currently in the range of approximately KRW 1 trillion to KRW 1.5 trillion.

[Sang Yun Han, executive]

Next question is from Korea Investment Securities. Regarding the naval ship capacity at [indiscernible] Yard, could you compare the investment that have already been completed with those that are planned? How are the resources currently allocated to the naval ships? In particular, what is the current newbuild capacity for the surface vessels and submarines? And to what extent is this capacity expected to increase going forward?

[Unknown Executive]

The answer is currently, excluding MROs, based upon the newbuild capacity, the company's naval ship capacity stands at 2 surface vessels and 2 submarines. At the end of last year, construction Phase 4, which is dedicated to the submarine production, was completed with an investment of around KRW 110 billion. As a result, the submarine capacity has expanded to 4 units, while the surface vessel capacity remains at 2.

Looking ahead, Phase 2 and Phase 3 expansion projects are planned. However, the timing and scale of these investments will be determined flexibly depending on the future order intake, including outcomes related to the CPSB, potential projects in Saudi Arabia and other submarine programs.

In the long term, the company's internal target is to reach a capacity of 3 surface vessels and 5 submarines, though this remains subject to change depending on the actual order conditions and market developments.

[Sang Yun Han, executive]

Next question is from Yuanta Investment Securities. Regarding the annual profitability perspective, it was mentioned that the decline in the LNGC deliveries related to the Qatar Phase 1 orders secured in 2021. On the other hand, the tanker orders secured in '24 and '25 are increasing, while the profitability may vary by project between the Qatar Phase 1 LNGC orders and the tanker orders that are replacing them. Which segment offers higher profitability?

[Unknown Executive]

The answer is Qatar Phase 1 LNG carrier orders were largely consumed over the '24, '25 period and the remaining volume is gradually declining. By contrast, vessels orders from the late '24 through '25 were secured at prices approximately 10% to 15% higher than those of the Qatar Phase 1 LNGC. As a result, the vessel replacing the Qatar Phase 1, including tankers, are expected to have higher price levels. Looking ahead, the newbuilding prices are expected to remain broadly in line with the current year levels.

[Sang Yun Han, executive]

The next question is from Tao Investment Securities. There appears to be a discrepancy between the offshore BEP range of KRW 1 trillion to KRW 1.5 trillion presented in the IR materials and the figures disclosed in the business report. Does this BEP represent a combined amount for the offshore and the planned business?

In addition, following the acquisition of Austal, the company has indicated that it is preparing for the integrated operations between the Korea and the U.S. It has also been mentioned that various preparations are required for Austal to undertake shipbuilding activities in the U.S. Could you provide an update on the current status on this preparation?

[Unknown Executive]

The answer is with respect to the BEP, the EPU business encompasses both offshore plant and E&I plant business. It also includes wind-related activities. On this basis, the BEP is estimated to be in the range of KRW 1 trillion to KRW 1.5 trillion.

Regarding Austal, the company has received an approval for the equity acquisition and is currently at a very early stage of exploring potential collaboration opportunities between shipyards in Korea and the United States. As discussions and evaluations progresses, the company will provide updates as appropriate.

[Sang Yun Han, executive]

The next question is from Nomura Securities. Regarding the Philly Shipyards, how does the company assess its fourth quarter performance and the outlook for '26? According to the media report, there has been a mention of about USD 5 billion investment plan. Could you share additional details regarding the plans by year?

[Unknown Executive]

The answer is regarding the investment plans, it is difficult at this stage to provide precise details on the scale or annual breakdown of investment. The Philly Shipyard has been designated as the core strategic hub in the U.S. and the company established a mid- to long-term investment direction focused on infrastructure upgrades and productivity improvements.

However, special plans remain subject to further clarification of market conditions and the regulatory and institutional frameworks. While the overall strategic direction will be maintained, the timing and scale of investment will be managed flexibly in response to changes in external conditions.

Regarding its performance, Philly Shipyard recorded losses until last year. However, the company expects a turnaround starting this year.

[Sang Yun Han, executive]

The next question is from Korea Investment Securities. Regarding the E&I business, offshore revenue for this year appears likely to fall short. And it seems that the key performance drivers for the EPU business will come from the E&I segment. The Shinan Ui project is understood to be the largest project. What is the expected revenue contribution for this year? In addition, as of the end of last year, what are the backlog, excluding Shinan Ui project?

[Unknown Executive]

The answer is revenue from the Shinan Ui for '26 is expected to be around KRW 520 billion. As of December 25, the total order backlog, including Shinan Ui project is approximately KRW 2.19 trillion.

[Sang Yun Han, executive]

The next question is from the Yuanta Securities. Regarding the U.S.-related investment, the company mentioned that the need to establish an institutional framework, if we limit the discussion to Korea, should this be understood to mean that once the MASGA fund becomes effective, the company intends to leverage policy financing as part of its investment strategy?

[Unknown Executive]

The answer is Yes, once the MASGA Fund is finalized and details such as its duration and the scale become clear, the company will be able to further specify and refine its investment plan. At this stage, it is premature to provide more concrete guidance.

[Sang Yun Han, executive]

And that is it for Q&A. Thank you very much for joining us.