Good afternoon. First of all, thank you all for joining this conference call. Now we'll begin the conference of the fiscal year 2026 second quarter earnings result by HD Korea Shipbuilding & Offshore Engineering. This conference will start with a presentation followed by a divisional Q&A session. Now we shall commence the presentation on the fiscal year 2026 second quarter earnings result by HD Korea Shipbuilding & Offshore Engineering.
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Good afternoon. I'm Sung Ki-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 shipbuilding market conditions, then we will move straight into the Q&A session.
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Let me start with key takeaways from Q1, 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, 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. 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.
Mid-sized vessels: Container ship share rose from 3% to 12%, while product carrier fell from 50% to 41%, no other notable items.
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Moving to page four, the consolidated results for HDKSOE. 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 rate. Operating profit increased significantly, up 21% quarter-over-quarter and 73% year-over-year. I will cover non-operating items later in the presentation.
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The table in page five is for your reference, then let's move on to page six. 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 enhancement. At HD Hyundai Heavy Industries' bases, consolidated revenue in the naval ship segment increased by 6.8% quarter-over-quarter and 32.7% year-over-year. Offshore plants, although the Ruwais project is fully ramped- up, revenue decreased by 18% quarter-over-quarter and 52% year-over-year as the Trion project is being ramped- up. Engine and machinery revenue increased by 6% quarter-over-quarter, driven by price rise and favorable exchange rates, but decreased by 2% year-over-year.
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Moving on to page seven. 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. Operating profit margin recorded 18.8%, which is 2.2 percentage point up quarter-over-quarter and 5.9 percentage point up year-over-year. 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 and 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.
This was driven by the sales increase of HiMSEN engine and other onshore power plant engines.
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Please refer to page eight for the operating results of consolidated subsidiaries. I will go into more detail on page nine. Let's start with HDKSOE on a standalone basis. Despite revenue growth in the EP 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 the 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%.
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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 two 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 Solution, 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%.
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On page 11, non-operating gains were mainly driven by foreign exchange gains from the higher USD- KRW exchange rate. A KRW 53.9 billion gain from the Gunsan shipyard sale, and valuation gains on existing EBs, totaling approximately KRW 380 billion. Page 12. All three 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 its subsidiaries. Next, we will walk you through the outlook for the commercial shipbuilding market.
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Good afternoon. I am Sang-hwi Kwak, Managing Director in charge of Commercial Vessel and Gas Carrier Sales at HD Hyundai Heavy Industries. I will now cover the global new building market trends for the first half of 2026, and HD KSOE shipbuilding division order intake in the first half of 2026. First, market trends. In the first half of this year, in the global new building market, we had active ordering happening also continued across major vessel types overall, including LNG carriers, LPG carriers, container ships, and tankers, keeping global new building 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 new building order volume this year is also expected to remain at a high level.
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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 VLCCs, Suezmaxes, 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.
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These results reflect our targeted marketing strategy. Our group has focused its sales capabilities on high value-added vessel types, such as LNG carriers and VLGCs, while continuing order activities in the mid-sized vessel segment to secure a stable construction volume. We are also focused on enhancing profitability through improved vessel prices and contract terms. 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. A degree of uncertainty may persist. That said, we believe the medium- to long-term structural demand drivers, including tightening environmental regulations, the energy transition, and aging fleet 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.
This concludes our presentation of HD KSOE's 2026 first half results. Thank you for your attention.
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Now, Q&A session will begin. Please press star and three if you have any questions. Questions will be taken in the order you have pressed the number star three. For cancellation, please press star and four on your phone. The first question will be provided by Kang Kyung-tae of Korea Investment & Securities. Please go ahead.
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I have two questions. The first question is about your engine business. 24.4% number in terms of profitability. Based on Q2 performance, can you give us a rough breakdown between low- speed and mid-speed engines in terms of revenue? Their proportion against the total revenue between low- speed and mid-speed engines. Given that ASP is projected to increase further, do you also expect any further improvement in profitability in your engine business? My second question is about your mid-speed engine for AI Data Center purposes. There was an order intake in mid-April, given that capacity could increase further internally, do you have any discussions about its future growth trajectory? While discussing this specific business, do you think of any specific inflection point for this business?
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To answer your first question about our engine business. Our engine business comprises big-sized engine, mid-sized engine, and parts, three segments. The proportion of big-sized engines was 50% based on Q2 results, that is down from 55% from the previous quarter. Mid-sized engine, that is up from 31% to 32% this quarter. The rest, our parts business. I believe our onshore plant engine business and its revenue may increase, could increase further, especially our HiMSEN engine and onshore plant engine, its proportion may increase further. As you may know, this business can expect further growth after 2028 forwards, then our performance improvement can quicken further, I believe.
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To answer your second question, I'm from the Engine & Machinery division. We have shared with you that our HiMSEN engine capacity is around 3 GW. Considering our order intake and our customers increase about future intake, it's only natural that we increase our capacity further. We're reviewing capacity expansion from multiple angles. This is basically the same answer that I gave you previously, but with a bit of details included.
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There are three 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. 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 intakes, we may progressively expand our capacity. Currently, we have 3 GW capacity in Ulsan. We have HD Hyundai Engine's capacity based in Mokpo. We also think of new expansions. We will make sure that any new expansions will be done in a way to maximize efficiency across all operations.
That is why we are focused on power generation purposes along with other purposes. The third point is we're facing a different supply chain structure and paradigm because our customers prefer high output engines today. It means we are focused on nurturing a different ecosystem, which is certainly different than before.
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The next question will be provided by Lee Dong-heon of Shinhan Investment & Securities.
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Thank you for the opportunity. I have two 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. Given price increases of vessels and change in 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? You have been talking about productivity gains consistently over the last one and two years, a couple of years. Is it that you are just tweaking out of just wringing already dry towel, or are you pursuing new innovations in increasing your productivity? My second question is about your SMR business. I'm curious about what's going on with your business with TerraPower.
Overall, can you give us an update about your SMR business?
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About Samho's performance. Yes, it's true that it achieved stellar performance. As to productivity improvement, we have our benchmark, which is our annual plan. Based on that, we give you our private productivity enhancement numbers. Based on the first half of this year, we had a productivity improvement of around 10 days or roughly two weeks, and that translated into 7%-8% productivity improvement. There are varied reasons why, but it is in fact that productivity is improving. 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%. Relative to HD Hyundai Heavy Industries, the numbers are 31% for 2024 and 8% for 2025.
If the current proportion maintains, then we believe that the second half performance of Samho can improve further.
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If I share some updates about on our business with TerraPower. Hyundai Heavy Industries, at the end of 2024, signed an agreement with TerraPower for its SMR demonstration project in the state of Wyoming of the United States. Hyundai Heavy Industries is going to supply a cylindrical type of reactor for that project. 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 that TerraPower project, and we were selected as the preferred bidder for the Natrium SMR device. We are currently consulting with the company, TerraPower.
Between Hyundai Heavy Industries and TerraPower about the overall schedule and project development for the commercial SMR development project. 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.
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Our SMR business at the Hyundai Heavy Industries level back in February of 2025 from ABS, our 105K SMR model that achieved AIP for the specific model. In June from the U.K.-based LR, we also achieved AIP for our PCTC for SMR applications. 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. In May of 2025, we also achieved AIP for floating type SMR devices. We are exploring a variety of types and also devices for power plant purposes. 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.
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The next question will be provided by Choi Kwang-sik of Daol Investment & Securities. Please go ahead.
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Two questions, basically. The first question about commercial ship market conditions. VLGCs are known for its high margin performance, I think it's very good recent days. Compared to LNG vessels, can you give us more update and details about VLGC's margin? I'm not expecting detailed figures, still. 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? 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 size to platforms? If there is any contract that is to be signed, are you capable of constructing these data centers right away?
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About your first question about the VLGC market. Out of total 55 vessels ordered across the market, we have gained 38 of them. Truly, we are leading the market in this specific segment. Here I'd like to point out that we were very proactive in our marketing strategy. We swiftly developed a 90K new model compared to Old Panamax model, we actively promoted this model. We were in the first half of this year, our order intake amounted to 38 vessels. As of now, actually, that's over 40. We were able to land orders from major players. Unfortunately, we cannot share with you detailed numbers. We would be developing this segment within a boundary that would not be hurting the capacity of LNG carriers. We have optimized the slot for VLGCs, profitability for VLGCs would improve, we believe.
Of course, increases in ton-mile and the ongoing war would certainly have an impact on this, we expect an active VLGC market over the years ahead. We will be focused on our ordering activities in the second half of this year with this in mind.
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About your second question about floating data centers. We are closely consulting with numerous companies in this field in detail. We are working hard to produce tangible performance. Due to non-disclosure agreement and confidentiality issues, we cannot disclose any further. About your question about how FDCs can be constructed in detail and how such projects are being implemented. In thinking of onshore applications, there are variables, there are important variables among them. Location could be one of them, the size of data center can be also one variable. It could be very far sea, it could be a place where the ground is quite solid, we need to consider environmental factors as well. For example, the occurrence of typhoons as well. There will be a variety of types: floating, fixed platform, or semi-submersible.
At Hyundai Heavy Industries, we will be developing FDCs in a way that meets a variety of conditions. That includes customer requirements and any other environmental requirements as well. Also, I think we need to pay more attention to the specific source of power as well, when you look at the broader FDC market. In the short- term, you may think of gas turbines, but that's not free from the bottleneck effect. That's because the timely delivery of gas turbines is limited. As a response to that, now companies are now eyeing towards marine engine and similar devices now. If you look at the requirements of big tech companies, they are seeking carbon-free and decarbonized data center operations. That's one of the key priorities that we need to consider.
We will be keeping an eye on market leads and market demands as well, and over the mid to long term, whether it is SMR or onshore power development. In developing data centers, we would be developing both technology and our business, taking account of all these factors.
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The next question will be from Han Yong-s u of Samsung Securities. Please go ahead.
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Two questions overall. The first question is, I like to know the proportion of hedging between Hyundai Heavy Industries and Samho. Can you give us detailed numbers? The second question is, in your offshore business, relative to revenue, operating profit looks better than revenue. Is it a sustainable structure? I think it's attributable to the others category and a consolidated adjustment category. I wonder whether it is because of good performance of projects themselves, or is it because of other factors?
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For the hedging policy for HD Hyundai Heavy Industries and Samho, these two companies apply the same identical hedging policy. At the time of order intake, the ceiling is set at 60%, but considering any subsequent developments, additional 15% is also allowable, so it is up to 75% in principle. Considering current exchange situations, these ceilings could be exceeded.
Currently, both two companies, HD Hyundai Heavy Industries and Samho, their hedging portion is slightly over 75%. About the sustainability of operating profit in our offshore business, as was the case in Q1, in Q2, we had solid operating profit performance, and it is basically, we have a targeted strategy to focus on profitability. Good cases in point include the Trion project and the Ruwais project. These are the ones that we landed orders for with profitability in mind. Also internally, we are developing our internal capabilities for our offshore plant business, and also at the execution side, we are committed to reducing costs as well. That is why our operating profit performance was solid, and this is despite the fact that we have current issues that we need to deal with as to our onshore plant business.
As to the sustainability question, in fact, we need to land more orders. That is the situation we are facing. As I told you in the first quarter earnings presentation, we are closely working with our customers across the Middle East, the U.S., and Australia. That includes major oil companies and orders placed by major NOCs. In the Middle East, the evaluation process itself is being delayed because of the geopolitical tension. In some projects, we were not awarded the order, but we keep trying, and we are committed to landing orders across those regions. If I make additional comments based on the backlog, if the revenue is KRW 1.2 trillion, it is possible to turn around and generate profits, not suffering losses.
In the second half, in case things do not go well as we plan, we would input and invest in vessels into this business so that the fixed cost expenses can be recovered. This is how we are going to make sure that the net, or the plus position can be maintained within this specific business.
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The next question will be from Jeon Hyun-seung of NH Investment & Securities. Please go ahead.
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I have two questions about your commercial ship order intake. The first question is, what is going to be your order intake strategy in the second half of the year? It is because you already have reached almost your full- year target. What is going to be your priority? Is it going to be increasing ASPs or is it going to be still securing a backlog by opening slots? Also your strategy may differ by vessel type as well. Please share with us your order strategy. The second question is across the global market. In the first half, the orders were so many, very active. It means maybe in the second half of the year, the order momentum may decline. What is your view on that?
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About the commercial ship business, as you mentioned, we have already almost reached our full- year target. If you look at our backlog, it is more than 500 vessels already, translated into 3.5 years of backlog. Up until 2029 and 2030, our sales strategy would be focused on, I think, would be the gas vessels. Of course, we need to look at the market situation in the second half of this year. Our priority is the highest revenue and the highest operating profit per unit slot. It means we will be focusing on high value-added vessels, and that means gas vessels. Of course, because of product portfolio maintenance, we will not be losing sight of tankers, it will be primarily LNG and LPG vessels that we will be focusing on.
If you look at the order activity globally in the second half of this year, it's 1,473 vessels, and that's almost 100 million GT. According to Clarksons, it's going to be 115 million GT this year. It means we're going to be seeing a very bullish market for the three consecutive years, surpassing 100 million GT. Even up until 2027, we believe this market would expand and continue into 2028 and 2029. Here, LNG vessels play a key role. Again, high-value-added vessels, the LNG vessels, and some projects that going to 2029 and 2030, we're going to be having a shortage of LNG vessels as well. If you look at 55 LNG vessels ordered this year, and 30 of them clearly evidently demonstrates that as a shipbuilder, we can have expectations about the market going even bullish and active.
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The next question will be from Baek Hee- yeon of Meritz Securities. Please go ahead.
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My question is about your special, so naval ship business. In the second half of this year, can you share with us an update about your manned surface ship project with the United States government? Any specific time point that you can share with us about this specific project? Secondly, can you share with us any information about RFI that was received from the U.S. side? There are projects across the U.S., Saudi Arabia, Peru, and the Philippines that were mentioned about your special ship and naval ship business in 2026 and 2027. Can you please share with us any specific time points where we can have visibility about your orders and contracts?
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So far, to answer your questions about the surface ship. We are jointly developing a pilot product with Anduril. As to this NUSV, first of all, there needs to be a demonstration, then a concrete order would follow, which we expect to be coming after 2027. Currently, we have notified the companies who may participate in that demonstration. Anduril is not one of those companies, but we are moving quicker and faster than any other companies in manufacturing a pilot product. There will be an opportunity once demonstration is achieved. Secondly, as to the RFI that we received from the U.S. Department of Defense, due to security and confidentiality issues, we cannot mention in detail, but it's going to be about destroyer or certain types of support ships. Within the RFI, there were requirements, and then we timely provided our information responding to that RFI.
That includes price information, our construction capacity, and delivery capacity as well. I think maybe that RFI aims to gather basic information so that the U.S. government can finalize its budget, so that the government may review the possibility of Korean companies participating in its naval ship construction. We will share with you updates as soon as we see any tangible and visible information. As to other projects, in 2026, we're working on the follow-up project in the Philippines, as well as the submarine project in Peru. Maybe in Q3 and Q4 this year, we expect to share with you more detailed information. About Saudi Arabia, we do have delays in projects going on within the region, possibly because of the war. For other regions, Southeast Asia, Latin America, or Europe, we'll again share with you any updated information.
Aside from these naval vessels, we are also working on icebreakers, as you have seen from our business with Sweden, and as well as other special-purpose vessels as well. We're making our preparations, we're developing models and promoting our models, not just for naval ships, but these other special-purpose vehicles.
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Thank you for your participation.