Hanwha Solutions Corporation (A009830) Earnings Call Transcript & Summary

[Interpreted] Hello. I'm Sang-Heum Han from Communication Department of Hanwha Solutions Strategic Department. We would like to thank everyone, including investors, analysts and reporters who attended today's earnings call. Then, I would like to announce second quarter's consolidated performance and third quarter outlook for the Hanwha Solutions. Please refer to the earnings call presentation provided at the home page. First, it is the overall profit and loss status. Consolidated sales revenue for the second quarter of this year has recorded KRW 1,956.4 billion, which has decreased about 13% from the previous quarter. Due to low oil prices and effect of COVID-19, Chemicals and Photovoltaics segments drop of price for key products have caused a decrease of sales. Consolidated operating profit has recorded KRW 128.5 billion, which has decreased about 23% from the previous quarter. Although Chemicals segment's operating profit has been increased due to drop of raw material price from low oil prices, the overall operating profit has been reduced due to decreased demand for Photovoltaics segment and lowered ASP from the impact of COVID-19. From the external auditor's opinion, we informed that the profit and loss of the Polysilicon business division has been classified as the discontinued business beginning from the second quarter financial disclosure and that the profit and loss of the discontinuing business has been included in the net profit after excluding it from the operating profit of last year and this year. The second quarter's net profit has recorded KRW 147.3 billion, which increased about 130% from the last quarter. Despite weak prices of key products and key equity method income companies, net profit for this quarter has sharply increased due to nonrecurrence of inventory write-down and positive contribution from the IPO of Nikola shares held by Hanwha General Chemicals. Please refer to the lower table and the fourth page for each business segment's performance of second quarter in the presentation. Next, we would like to explain overall financial status. The second quarter's overall asset is KRW 16,353.4 billion, which increased KRW 672.3 billion from the end of last year. The cash and cash equivalents is KRW 1,942.6 billion, which has increased KRW 858.1 billion, from the end of last year due to proactive decision to secure liquidity. The total liabilities for this quarter is KRW 10,307.4 billion, KRW 432.1 billion increase from the end of last year. The total debt is KRW 7.86 trillion, which has increased about KRW 717.4 billion from the end of last year. However, cash and its equivalent increased GAAP is more than its increase of liabilities and debts due to anticipated measures to secure liquidity. As a result, net loans summed up to be KRW 5,143.4 billion, decreased KRW 140.7 billion from the end of last year, with net debt-to-equity ratio to be 85%, which is about 6 points lower than the end of last year. Please refer to the lower table of the Page 5 in the presentation for the financial status of each business segments. Next is the key performance for each business areas. First, it is the Chemicals segment. Chemicals has reached KRW 92.8 billion of operating profit for the second quarter, which has increased KRW 29.2 billion from the first quarter. This result was mainly due to drop of raw material input costs from low oil prices. In the upcoming third quarter, Chemicals segment expects to increase its operating profit compared to this quarter due to continuation of lower raw material cost and improved profitability from rising prices of major products. Next, it is Photovoltaics segment. Photovoltaics sales has recorded KRW 52.4 billion of operating profit, increase of KRW 52.2 billion from the last quarter. This result was mainly due to reduced amount of product shipment and a drop of ASP due to weak demand caused by COVID-19. For the upcoming third quarter, the continuing spread of COVID-19 in the U.S. is expected to decline in ASP due to prolonged reconstruction in the residential and industrial marketing. However, it expects to improve its performance compared to the second quarter by increased shipment from gradual recovery of demand in the U.S. utility market and elsewhere. Next, it is Advanced Materials segment. The Advanced Materials has recorded an operating loss of KRW 8.2 billion in the second quarter, which has increased from the previous quarter due to operational setbacks of major customers under COVID-19. For the upcoming third quarter, it expects performance to be improved from gradual recovery in production by domestic and foreign customers. Next, it is the retail segment. In the second quarter, the retail sector recorded an operating loss of KRW 3.8 billion, down from the previous quarter due to a recovery from the COVID-19 impact despite reflecting one-off expense such as property tax. The third quarter expects improved performance compared to the previous quarter due to the base effect of second quarter's one-off expense. Next, it is explanation of equity method income. The second quarter's equity method income has turned into profit of KRW 123.2 billion due to nonrecurrence of inventory revaluation loss and positive contributions from the IPO of Nikola shares held by Hanwha General Chemicals, despite weak prices of majority equity loss subsidiaries. As the effect of valuation gains reflected from the IPO of Nikola shares held by Hanwha General Chemicals has become vanished, the third quarter's equity method profit was slightly decreased compared to second quarter's, despite the improved performance in major subsidiaries due to continued low price oil. Lastly, it is Green Hydrogen business. The transition to low-carbon energy as an alternative to solve climate change is currently being accelerated with active response from each country's policymaking parties and companies. Therefore, we predict that future growth potential of the global Green Hydrogen value chain, which leads from production, storage, transport to charging, is quite high. As a result, we have business plan to produce green hydrogen from Chemicals segment, which is currently developing water electrolysis technology and renewable energy created from Photovoltaic segments, solar power generation and energy storage system, ESS. The produced green hydrogen will be compressed to be stored in the high pressured hydrogen container, which is currently being developed by Advanced Materials, or it will pass-through the hydrogen charging system to be used as fuel for vehicles that do not emit carbon. For more information, please refer to Page 18 of the presentation. This concludes the presentation for the business performance of the second quarter of 2020 and the outlook for the third quarter. Thank you.

[Interpreted] [Operator Instructions] The first question will be presented by [ Sesong Yun ] from Hana Financial Investment.

[Interpreted] There has been information regarding the ECC in the media. And what is the outlook for the Chemicals' stance for the future in the upcoming quarter? And for the second question, the -- there has been the release of the Photovoltaic materials in the market, and what will be the expansion for this for the market growth? And also for the third, for the Chemical -- for the solar -- for the third question, the question was about the polysilicon wafers price increase these days, and there seems like a little bit slower uptrend for the sale and module. So what's the impact for the company?

[Interpreted] Regarding the first question, according to the ECC news in the media, unfortunately, we apologize that we cannot answer any comments at the moment. The main goal for the Chemical business in the future is that we would like to increase the share of the specialty product in our portfolio. And then along with that, we would like to use the common products performance in the same market so that we could spread out the profits evenly. For the M&A companies that is open in the market, we would like to review deeply into whether it is the -- rightly evaluate it and that it has the right -- we would like to seize the right cost to enter -- to participate in the M&A session. For year of 2020, for the outer on sales for the Photovoltaic is around 8 gigawatt, and for the downstream, which is residential is around 1.1 gigawatt. And for the next quarter, we will try to stay the same. After the mid of July, we see that from the explosion accident in the China, we see that the supply chain from polysilicon to wafer to cell, the price of the overall, the raw material, has been increasing. So for now, the -- we have enough stock material for the product, for the raw material. So after the COVID-19 impact in the second quarter, if there is an increase the raw material prices, then we will try to keep our raw material prices evenly spread out.

[Interpreted] The next question will be presented by Young-chan Baek from KB Securities.

[Interpreted] Under the equity income law, there has been -- would you like to please provide us the breakdown for the YNCC, on Hanwha general chemical? And also for the second, there's PE and PVC and Caustic Soda department. Would you like to give us the profit breakdown and also for the outlook for the third quarter's profit breakdown?

[Interpreted] For the breakdown of the profit according to the equity income, the YNCC has reported KRW 50.7 billion, and for the Hanwha General Chemicals, it recorded KRW 86 billion. Including from the KRW 86 billion, there has been KRW 97 billion from the Nikola shares. For the PE department, let me break down into the General Chemical. It sums up to be -- the General Chemicals, the PE division, sums up to be KRW 300 billion for the profit, and this records up to 16%. And for the PVC and the CA business, the revenue is about KRW 403 billion, and this -- the profit sums up to be about 1 digit. For the third quarter outlook, the oil and the naphtha, it will increase for the profit, and this is due to the sanitary products, and this product will remain profitable. For the PVC business, the main imported country is India. And the India has been recently -- the part of it, the lockdown has been taken off. And then it shows the recurve of the -- coming back for the economy. And for the third, even though it's the monsoon season, the profit remains quite stable. In the April and May, in the India market, there has been a lockdown. And because due to the lockdown in the July and August, there has been less demand and also there's a less stock. So the price of increase -- the price has been increasing. For the second half of the year, countries like China and India will bounce back from the setbacks of the profit because there has been a lot of countries, policies, advancement, and also the PVC demand will be increasing for the second half of the year. For the Caustic Soda part, after the COVID-19 virus, the demand will be increased, and also the index price will be also increased. And the period that -- when the price will bounce back is after the third quarter and starting at the fourth quarter. For the TDI segment, for the second quarter, there has been a lockdown, and there has been a shutdown in the logistics, so there has been less demand. After the month of June, there has been a shutdown from the government, and there are also operational effects. However, after the third quarter, the demand will increase because of the government's aid to improve the operation. For the second quarter, the PO business has reflected the good outcome for the business portfolio. For the third quarter, the PVC and the CA will lead the market.

[Interpreted] The next question will be presented by Parsley Ong from JPMorgan.

This is Parsley. My first question is on your Nikola equity method gain. You mentioned KRW 97 billion. Could you share with us roughly what share price was it recognized at? And what is your accounting treatment for recognizing all these gains or losses? Do you use the average price of the last month, for example? And for my second question, could you tell us a little bit more about Page 18 of your slide pack, which showcases your hydrogen strategy. What is Hanwha's plan for this going forward? And you mentioned just now, you have a Green Hydrogen plan for your Chemicals division, like what capacity are we talking about? And roughly when? And how much are we going to spend on it?

[Interpreted] In year 2018, the -- we have invested through the Hanwha General Chemicals with the KRW 1 billion. As of the second -- end of the second quarter, reflected the share price of the Nikola, and then we hold 36% of the Hanwha General Chemicals. So the percentage basis, the amount was reflected to our equity income after the fair value estimation. The definite number for the shares with our fair valuation is going to be provided by IR in the later session. I mean, maybe like you can contact IR after this call. For the hydrogen development, this is very -- at the initial stage, and by the end of 2023, we would like to develop our technology of our hydrogen hydrolysis -- electrolysis by the end of 2023. For Advanced Materials segment, we think that we have the technology for the -- to develop compressed hydrogen tank-related facilities and also the investments, but we think that it is quite early to discuss any developments that is going on inside the Advanced Materials. From the media, as you have heard about -- news about the Nikola is very -- at the initial stage. And if there's any further developments that -- which should be issued to the -- announced to the public, we will let it release through the media.

[Interpreted] The next question will be presented by Sang-won Han from Daishin Securities.

[Interpreted] We would like to ask the questions regarding about the PV downstream, and there has been the -- expected about KRW 600 billion of the revenue for the PV downstream. But what is the update on this situation? For the first question. And for the second question, there has been -- in the media, there's the acquisition of the Geli company, and what is this related with the downstream's PV business for the future?

[Interpreted] About the PV downstream, the license planning from the last quarter, we have expected to proceed with the plan. But -- however, there has been a delay in discussion but we plan to get the license plans to be done within the end of this year or early next year. First of all, about the acquisition of the Geli. This company is actually based in the U.S. that is used for the maintaining the data for the utility basis. There has been 3 plans for the -- according to -- for this business. First of all, it comes with the -- after the module energy has been produced, it has -- we pass it to the ESS, and then it will -- we will try to make the value added sales. For the second, it is related to the factory about the solar energy. For the third strategy, it is a mid- to long-term strategy. It has to do with the energy retail, and this is what it has to do with the acquisition of Geli. For now, we are actually looking into this -- after the walk, we can utilize for this Geli -- acquisition of Geli. And what we are aiming to do is that we are trying to utilize this company as a function to control the frequency or to have the forecast for the demand. And we will try and explore more so that we can develop more business by utilizing Jelly. For the acquisition cost, it is actually not -- the deal has not been completely done yet. So if there has been the completion of the M&A, then we will announce it to the media.

[Interpreted] Currently there are no participants with questions. [Operator Instructions] The next question will be presented by [ Usa Son ] from [ Hangook Securities Research Center ].

[Interpreted] Recently, in the news, the [indiscernible] Chemical has announced that they have stopped production for the PP and -- TPA, and then it seems that the rest of the demand for the TPA has been requested from the Hanwha General Chemicals. And what would be then TPA's operational rate for the Hanwha? And also what would be the increase of margin?

[Interpreted] The sales has been started from the July of 2020. And then for the second half of the year, we will try to sell about 210,000 [ tons ] in the market. Due to the market change of the prices, we cannot clearly say that what is the actual margin that's occurred. In the Ulsan factory that we have, we have tentatively, actually, utilized the factory in the way of the supply and demand for the production. And after receiving the demand from the [indiscernible], we expected over around 10% point increase of the operational rate has been done.

[Interpreted] [Operator Instructions]

[Interpreted] Since there has been no further questions from this earnings call, we would like to close this earnings call for this -- today. And we would like to present more better presentation for the third quarter's earnings call. Thank you. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]