Ulsan, South Korea – October 26 – Hyundai Heavy Industries (HHI), the world’s biggest shipbuilder, issued a public disclosure of its 3Q15 earnings today. According to the disclosure, 3Q sales came in at 10.9184 trillion Korean won (hereafter “won”), operating loss at 678.4 billion won and net loss at 451.4 billion won.

 

On a quarter-on-quarter basis, sales declined 8.7%, while operating loss and net loss widened by 507.4 billion won and 209 billion won respectively, due to delays in offshore projects and lackluster sales of the construction equipment business.

 

HHI cited the following as the reasons behind the hike in operating loss: early recognition of losses from contract cancellation of a semi-submersible rig; loss provision for adverse changes in the offshore business environment such as the oil price decline; and an increase in the restructuring cost from divestiture of underperforming subsidiaries.

 

A source in HHI said, “The shipbuilding business was hit by cancellation of a semi-submersible rig as oil prices nosedived to $40 a barrel. The offshore business set up a reserve for possible losses that may be incurred from belated change orders, increased manhours or delays in delivery caused by design changes.”

 

HHI also booked the cost of liquidating unprofitable overseas subsidiaries, which started in 2014, as 3Q15 losses. To be specific, HHI has sought to liquidate its JaKe subsidiary in Germany, Hyundai Cummins and Hyundai Avancis, which respectively produce wind power gearboxes, construction equipment engines and solar modules. Moreover, the company is in the process of shutting down its Taian construction equipment subsidiary in China amid the slowdown of the Chinese economy, and its Beijing subsidiary is in talks with its partner to sever joint venture ties.

 

A source in HHI said, “With a heavy focus on profitable businesses, HHI has taken bold steps to eliminate ailing subsidiaries since September 2014, as keeping them would only inflate the losses. The restructuring process is nearing its end, and part of the cost has been recognized as losses this quarter.”

 

Meanwhile, HHI reckons 4Q15 as a critical juncture for earnings turnaround.

 

A source in HHI said, “4Q15 can be the starting point of earnings improvement: the shipbuilding business is recovering, with the phase-out of low-price orders and profit turnaround of commercial vessels. The offshore business has also booked all perceivable losses. Also, other businesses such as electro electric systems and engine and machinery have continued to cut costs.”

 

As such, HHI has made unrelenting efforts to reshuffle its businesses and organization to more effectively steer towards profit. After finishing its HR efficiency enhancement program, HHI is zooming in on boosting liquidity, for instance by disposing of Hyundai Motor shares and issuing convertible bonds of Hyundai Merchant Marine shares. Furthermore, it is making preparations to delegate as much authority as possible to heads of each business division.

 

A source in HHI said, “Even though the company has failed to turn a profit in 3Q15, it will spare no effort to normalize its operations, with a focus on profitable businesses, reshuffle for more responsible management of each business division, cost competitiveness enhancement, disposal of stock holdings and elimination of poor-performing subsidiaries to set the stage for a turnaround.”

 

■ Third Quarter Consolidated Results (Unit: Korean won)

	3Q15	2Q15	Change	3Q14
Sales	10.9184 trillion	11.9461 trillion	-8.7%	12.4040 trillion
Operating Loss	678.4 billion	171.0 billion	-	1.9346 trillion
Net Loss	451.4 billion	242.4 billion	-	1.4606 trillion