Hanwha Solutions Corporation (A009830) Earnings Call Transcript & Summary

Good afternoon. This is General Manger Sang-Heum Han of Communications Department at Hanwha Solutions Strategy Division. I'd like to extend my appreciation to the investors, analysts, press and all the others for joining the call today. Now I'll discuss Hanwha Solutions first quarter earnings and second quarter outlook. Please refer to the supplementary slides posted on the website. Versus profits and losses. Consolidated total revenue for first quarter of 2020 decreased by 8% over the last quarter to KRW 2,248.4 billion, stemmed from low oil prices, the effective prices of major chemical products and downward pressure on PV module ASP. Consolidated operating income increased by 430% over the last quarter to KRW 159 billion, decrease in feedstock costs for our clinical products driven by lower oil price. The base effect of onetime expense from last quarter for our solar business and strong PV module demand from the U.S., resulted in a big increase in operating income. Equity method income for the first quarter turned into deficit due to higher cost incurred by plunging oil price and the loss from inventory valuation. However, net income turned positive, thanks to increase in operating income. For details on the first quarter performance per business segment, please refer to the table at the bottom of Page 4. Next is our balance sheet. As of March 31, 2020, our total assets were KRW 1.66083 trillion, an increase of KRW 927.2 billion over last quarter. Cash and cash equivalents increased by KRW 963.1 billion over the end of 2019 to KRW 2,047.6 billion, thanks for our efforts to secure liquidity in advance. While our efforts to secure liquidity in advance results in cash and cash equivalents, total liabilities and total debt have also increased by a similar amount. As of March 31, total liabilities increased by KRW 924.3 billion over the end of 2019 to KRW 1.7996 trillion and total debt increased by KRW 995.9 billion to KRW 7,364.5 billion. Net debt over equity has increased by 1 percentage point to 92%. For detailed financial information per business segment, please refer to the bottom table on Page 5. Next, I'll discuss our performance per business segment. First is our Chemicals business. First quarter operating income for Chemicals business turned into profit, recording KRW 55.9 billion. This is due to the lower cost of feedstock resulting from weakening oil price. Despite the impact of COVID-19 pandemic, we are expecting a solid operating income for Q2 as the oil price continues to stay low and allow access to lower cost feedstock. Next is our solar business. First quarter operating income has recorded KRW 100.9 billion, an increase of KRW 24.6 billion from the previous quarter. Even with seasonally soft Q1 and growing price condition in Europe and Korea, the base effect from onetime expense from last quarter and strong demand from the U.S. for safe harbor modules resulted in improved operation income. Income is expected to decrease in Q2 due to delays in installations and decrease in PV module pricing resulting from the COVID-19 pandemic. Next is our Advanced Materials business. COVID-19 pandemic negatively affected our production in China and Korea, but due to the base effect of onetime loss from last quarter, the deficit gap has decreased to an operating loss of KRW 5.7 billion. Profit is expected to further decrease in Q2 due to the worldwide spread of COVID-19, reducing global demand and our capacity utilization in overseas facilities. Next is our retail business. Seasonally soft Q1 and the impact of COVID-19 pandemic resulted in a loss of KRW 5.1 billion for our retail business. For Q2, we forecast the impact of COVID-19 on our sales to lessen but are expecting operating loss for the quarter due to the effect of property tax. Next, I'll provide an update on our equity method income. First quarter equity method income resulted in a loss of negative KRW 89.3 billion due to higher costs incurred by plunging oil price and loss from inventory valuation. Large improvement over the second quarter is expected, driven by stabilization of downward pressure on oil and naphtha prices, which will, in turn, eliminate the negative effect from higher cost feedstock. This concludes our presentation on the first quarter performance for our business segment and second quarter outlook. Thank you.

[Foreign Language] [Operator Instructions] [Interpreted] The first question will be presented by Yusik Hwang from NH.

[Interpreted] I have 3 questions. The first question is regarding the differentiation in timing of employing the feedstock for its business segment. For example, it seems like for the Chemical business segment, there was a positive effect from the decrease in oil price. And -- but it seems like for the companies that are bound by the equity method income, they were adversely impacted by the higher cost of feedstock. So I'd like to know the difference in timing in terms of using the feedstock for this specific business segments. And the second question is the breakdown of the operating income for the companies that are bound by this equity method income accounting. And the third question is regarding your solar business. I'd like to know if there are any changes in terms of your shipment and average sales price in Q1 of 2020 compared to the last quarter?

[Interpreted] So in answer to your first question, I'd like to first touch on our Chemicals business. So for our factories located in Yeosu and Ulsan, we -- the -- our supplier for ethylene is located nearby. So when we use our feedstock for production, the cost of the feedstock will be either from -- will -- maybe based on either the stock we purchase on that specific month or the previous month. So if we average this out, the average time gap between the purchase and production of that -- such feedstock will be about 15 days. And for NCC, they do receive naphtha from nearby suppliers, but they also receive stock from overseas suppliers by vessel. And oftentimes, this will result in a lead time of more than 1 month. And in answer to your second question for the breakdown of the detailed profits of our -- of the companies that are bound by the equity method accounting, it's listed on Page 10 of our supplementary slides. For YNCC, the loss was KRW 30.7 billion. And for Hanwha Total and Hanwha General Chemicals, the loss was KRW 16.9 billion, and the -- and all the other companies are consolidated under the category of others. And to elaborate on the others category, due to the slowed business of Hanwha Hotels & Resorts of the -- due to the slowed business of -- resulting from the COVID-19 pandemic, the losses of Hanwha Hotels & Resorts were reflected on the others category. In answer to your third question, regarding our PV business, we were expecting the shipment for this quarter to decrease over last quarter, but actually, the shipment level was similar to that of Q4 2019. And in terms of average sales price because of the Q1 seasonally being softer, the sales price has decreased.

[Interpreted] The next question will be presented by Dong Jin Kang from Hyundai Motors Securities.

[Interpreted] My questions are regarding your PV business. So my first part of the question is regarding the profit from your PV business. It seems like even after accounting for the one-off expense in Q4 of 2019, it seems that you're records for Q1 of this year was excellent. So I'd like to know what really contributed to the -- this result. And I understand that the decrease in profit is inevitable for Q2, but it seems like from your presentation, the decrease in demand will actually be delayed into the latter half of this year. So my -- I'm wondering if you're expecting your profit level to rise up to the level that's similar to that of Q1. And the third part of the question is whether there was any onetime profit that you have recorded for the first quarter of this year. And the fourth part of the question is your plan for your downstream business, and it's your -- the profit projection for your downstream business for the second half of this year. And last but not least, I'd like to understand your CapEx plan for your solar business for 2020.

So in regards to your question regarding our first quarter results, as mentioned previously, we have recorded KRW 43 billion in onetime expense. And due to the base effects resulting from this onetime expense, if you were to normalize that, actually, even though the shipment level has stayed almost similar to that of the previous quarter because of the ASP decrease, our revenue itself actually has -- could seem to be decreased compared to the last quarter. To further elaborate on our PV business first quarter profit record. Even though the COVID-19 pandemic affected our sales and the impact of the pandemic really took place starting in late Q1. So it had a limited effect on our Q1 sales. And in terms of geographical distribution, our sales to the U.S. and Europe have consisted of about 50% of our entire sales. But due to the demand from the U.S. for safe harbor modules in Q1 of this year, the share of shipment to U.S., the U.S. and Europe have increased to 60%. And in answer to the second part of your question, we do agree that the sales slowdown cannot be avoided due to the effects of COVID-19. And since the pandemic is spreading globally, we expect this to affect sales in our -- affect our global sales. Whether the delays of -- installation delays from Q2 could be rebound or recaptured in the second half of this year? We cannot say with certainty because of the possibility of COVID-19 relapsing. But if the situation improves, we can cautiously expect the market to rebound for -- starting in Q2 and into Q3 and Q4 of this year. And it's still a bit too early to tell, but if this pandemic situation were to be under control, since there are projects that need to be completed by the end of this year to capture the incentive program, we expect this type of demand to be focused in the latter half of this year, and -- which will translate into higher demand for PV modules. In terms of module shipment guidance, previously, we have provided 8.6 gigawatts of shipment for third-party sales and 1.6 gigawatt of modules for our own downstream business. Our updated guidance due to the COVID-19 pandemic is 8 gigawatt of third-party sales for modules and 1 gigawatt of module for our downstream business totaling to 9 gigawatts of module production for the year. We had to revise our guidance -- module shipment guidance since beginning of this year, but considering that we have supplied 8.2 gigawatts of modules in 2019, altogether, we believe, for year 2020, this is an increase in shipment overall. And in regards to your question of whether there was any onetime profit that was recorded for the first quarter, we -- there was none. At the beginning of this year, we have shared our midterm strategy involving our power plant business in addition to our module sales business. And for the first half of this year due to COVID-19 pandemic, the business activities from the power plant business or the downstream business was limited. But there are plenty of pipelines as you could -- you might have seen from our press releases, and we have made meaningful investments, which we believe would begin to make visible and beatable outputs in second half of this year. If -- we'll share more detailed information on our downstream and power plant business as they become available in the future. And in answer to your last question regarding our CapEx plan for 2020, there aren't significant changes compared to what we have shared in the beginning of this year. In total, we'll be spending KRW 1,100 billion, with Chemicals taking KRW 540 billion of the share; and solar business, KRW 290 billion; and Advanced Materials, KRW 58 billion; and the retail business, KRW 250 billion.

[Interpreted] The next question will be presented by [ Gyeongmin ] from [ Hanwha Financial Investment ].

[Interpreted] I have 3 questions. So the first question is regarding the company's bound by equity method accounting. You've mentioned that there were inventory valuation accounting for the first quarter profit. So I would like to understand what that amount was? And what would be the room for improvement in second quarter of this year? And the second question is regarding PVC market. It seems that the demand is rebounding in China and the lockdown has been released in India. So I'd like to understand your view on the demand trend and what the outlook is for past second quarter. And the third question is regarding your solar business. You've mentioned that the competition is getting fierce in Europe. So I'd like to get your insight on this market competition. And I believe SunPower has mentioned from their earnings call that the demand in the U.S. is rebounding. So if you could share your insight on this, and let us know if -- how solutions might be able to increase its share of module sales in the U.S. that will be helpful?

[Interpreted] I'd like to first answer your question regarding the inventory valuation. There was -- the amount of inventory valuation that was used to calculate the first quarter profit. If we add the inventory valuation numbers that were used for YNCC and Total, the number is KRW 200 billion. And for the second quarter profit outlook, we will be able to remove the effect of inventory valuation and the higher cost of feedstock, and we'll be able to enjoy the benefits of the low oil price. However, because of the COVID-19 pandemic situation continuing, we expect the sales price of our mutual products to be weakened. And this would also, in turn, affect our -- the demand for these products. In answer to your second -- the question regarding PVC, it is true that the demand is rebounding in China, but there's also oversupply of PVC in China, so not all the demand increase is enjoyed by suppliers. So we're closely monitoring the situation in key export markets, such as India, Africa and Malaysia and are paying attention to when the economies will rebound in these regions since this will translate into increasing PVC price. And to elaborate on situation in India, the -- a partial lockdown -- for some of the production facilities, the lockdown has been lifted, but this is only a partial measure. So we believe that we need to take more time to monitor the situation in India. In answer to your third question regarding our solar business, I like to first provide update on the market situation in Europe. The first quarter is seasonally a soft quarter for business, and this was reflected in our sales. But at the end of first quarter due to the effect of COVID-19, some of the suppliers mainly located in China had to shut down their factories, which translate into module shortage in the market. Most manufacturers use their pre-built inventory to respond to demands. And the installations in Europe have carried on as usual, but there was a competition in terms of module pricing, which put downward pressure on module prices. We saw that countries like the Italy, Spain, U.K. and France were largely affected by COVID-19, which pushed their demand for the modules to Q3 of this year. But the demand for modules were strong in countries like -- the Q2 demand for modules were strong in countries like Germany and The Netherlands, which were less affected by COVID-19. And for the U.S., some of the supply negotiations that are being made today are for modules that were delayed into Q3 or past Q3. So mostly these are for module demands. They are renegotiating the delivery time schedule. So our understanding is that our -- we believe what SunPower has presented in their earnings call is most likely for modules that are going to be delivered in Q3 of this year. So for Q1, in the U.S. market, we expected the market to be solid, thanks to the safe harbor demand, and -- which turned out to be a pretty solid quarter. But for second quarter because of the COVID-19 effect, the market is going to be slow. But if the market situation were to improve, then we believe some of the projects will come back online to be installed by end of this year to benefit from the investment tax credit rate of -- investment tax credit of 26% before it drops down to 22% next year. And in terms of our cell share for the U.S. market, we -- our strategy is to stay flexible. For example, we have supplied more modules into the U.S. for the first quarter of this year. So depending on the market situation and outlook, we'll be -- we'll adjust our supply to the U.S. But generally, for our strategy in terms of module allocation to different regions for the U.S. market and the European market, those 2 markets put together will be supplying 50% of our entire volume.

[Interpreted] The next question will be presented by Dong Jin Kang from HM Securities.

[Interpreted] My question is regarding the optical lens. There was -- my question is regarding the production of XDIs that will be used to produce optical lens. I'd like to understand your plans for revenue and the profit pool you can expect from this business?

[Interpreted] I believe you're referring to the press release regarding our XDI production, which is a special isocyanate. And this material is used for a high-end ink, food laminates and et cetera. And we have been -- we have begun production of this specific material starting in May of this year. If at full capacity, we expect the revenue from this side of business to be about KRW 30 billion, and the profit to be in 2 percentage points.

[Interpreted] The next question will be presented by [ Gyeongmin ] from [ Hanwha Financial investment ].

[Interpreted] I was hoping you could further elaborate on the Advanced Materials and retail businesses. I'd like to understand what would be some of the highlights or key points that I need to look out for that will help me make investment decisions?

[Interpreted] I'd like to first touch on our Advanced Materials business. The deficit gap for quarter-over-quarter has decreased from the fourth quarter of last year because of the base effect resulting from onetime losses in last quarter. However, Advanced Materials business is also affected by -- negatively affected by COVID-19 pandemic, which would negatively affect our production. So this will be -- we expect Q2 to be a slow quarter for Advanced Materials business. In terms of our retail business, the effect of COVID-19 was mainly dominant starting in February and March. And we expect the effect of COVID-19 to settle down in second quarter of this year, which will, in turn, improve the environment -- sales environment. However, because the second quarter and third quarter are usually slow quarters for department stores and our -- in retail business, we expect the sales -- we expect a -- we are holding a conservative view on our retail business. And we are also having to implement the impact of property tax in Q2 this year. Since this -- there are no further questions, we would like to conclude our conference call today. Thank you all the participants and all the listeners for joining our conference call discussing our Q1 2020 profit today. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]