Hanwha Solutions Corporation (A009830) Earnings Call Transcript & Summary

[Interpreted] Good afternoon. This is General Manager, Sang-Heum Han, in Hanwha Solutions Strategies Division. I'd like to thank everyone, including the investors, analysts and the press for joining our call today. Today, I'll present Hanwha Solutions' third quarter earnings and fourth quarter outlook. Please refer to the supplementary slides posted on our website. First, profits and losses. Consolidated total revenue for Q3 increased by 24% for the last quarter to KRW 2,428.4 billion. This stemmed from price increase for key chemical products and increase in PV module shipments. Consolidated operating income increased by 81% over the last quarter to KRW 233.2 billion. Spread for major chemical products has widened, and the number of key customers for Advanced Materials increased, offsetting the effects from PV module production cost increase and resulting in increased operating income. Net income for third quarter increased by 29% over the last quarter to KRW 189.7 billion. Operating income has increased dramatically, and profit from key subsidiaries held under the equity method income were improved. For details on the third quarter performance per business segment, please refer to the table at the bottom of Page 4. Next is our balance sheet. As of October 31, our total assets were KRW 15,559.4 billion, a decrease of KRW 121.7 billion compared to the end of 2019. Cash and cash equivalents increased by KRW 222.8 billion for the end of 2019 to KRW 1,307.3 billion, thanks for our efforts to secure liquidity in advance. As of October 31, total liabilities decreased by KRW 433.7 billion over the end of 2019 to KRW 9,441.6 billion. And total debt decreased by KRW 144.5 billion to KRW 6,224.1 billion. Total debt has decreased and cash and cash equivalents have increased due to our continuous efforts to reduce liabilities, resulting in net debt of KRW 4,916.8 billion, which is a decrease of KRW 367.3 billion compared to the end of 2019. Net debt/equity ratio has decreased by 11 percentage points to 80%. For detailed financial information per business segment, please refer to the table at the bottom of Page 5. Next is our performance per business segment. First is our Chemicals business. Third quarter operating income for Chemicals business increased by KRW 66 billion for the previous quarter to KRW 158.8 billion. This was mainly due to the lower cost of feedstock and higher product price. Fourth quarter is normally a slow period due to seasonality, but market conditions are expected to be favorable. However, we expect profit to decrease from third quarter due to large-scale scheduled maintenance. Next is our solar business. Third quarter operating income for solar has decreased by KRW 16.6 billion to KRW 35.8 billion. Despite increase in PV module shipment, higher cost of raw material including wafer, glass and EVA, played a key role in decreased operating income. Raw material cost is expected to remain high in Q4, but operating income is expected to increase due to an increase in module shipment. Next is our Advanced Materials business. Third quarter has turned into profit and operating income recorded KRW 7.6 billion. This is due to gradual recovery of automotive materials segments from COVID-19 and improved profit from the electronics materials segment resulting from key customers' new product launch. Profit is expected to decrease in fourth quarter due to the period being a slow season for electronics materials and global price increase of key raw materials used to produce solar materials. Next is our Retail business. Retail business has turned profit in the third quarter, recording KRW 1.3 billion in operating income. This is due to the base effect of property tax being recognized as onetime expense in the previous quarter. Fourth quarter earnings are expected to improve over the third quarter due to the lessening impact of COVID-19 and increase in seasonal index. Next is an update on our equity method income. Third quarter equity method income was KRW 93.2 billion, a decrease of KRW 30 billion from the previous quarter. Despite the effect of low-cost feedstock stemming from low oil price due to the recognition of onetime profit in the previous quarter, equity method income has decreased quarter-over-quarter. Market conditions for petrochem is projected to be favorable in Q4. However, equity method income is expected to decrease next period due to scheduled maintenance at Yeochun NCC. Next is overview of our cresol business. Today, our Board has approved investment of KRW 120 billion in high-purity cresol business. The manufacturing facility, to be built in [ Yeosu, Jeollanam ] province will be able to produce 30,000 ton of cresol per year with target commercial production date of 2023. Cresol is a fine chemical used as a base material for various products, including health care products, agrochemicals and electronic materials. Hanwha Chemicals will utilize chlorine, caustic soda and hydrochloric acid produced from the chlor-alkali business segment and toluene from YNCC for a chemical reaction, which will then turn into high-purity cresol through the decomposition and separation process, a key technology behind the production. Once commercial production of cresol begins in 2023, we expect approximately KRW 100 billion in revenue and double-digit operating income ratio. As a part of the diversification strategy, Hanwha Chemicals will continue to pursue health care and nutrition business that will supply raw materials and materials for products used for public health, beauty and health promotion through not only cresol but also C5 petrol resin and XDI, which has been pre-invested in at the initial stage of commercial production. For additional details, please refer to Page 18 of the slide deck. This concludes our presentation on third quarter performance and fourth quarter outlook. Thank you.

[Foreign Language] [Operator Instructions] [Foreign Language] The first question will be provided by Dong Jin Kang from Hyundai Motor Securities.

[Interpreted] So my questions are regarding your solar business. So I have 3 questions mainly. So the first question is regarding the increase in cost of raw materials, especially glass. It seems that the cost of glass is continued to -- is going to continue to increase into Q4. So my first part of the question is whether this raw material cost increase is being passed on to the module pricing. And my second question is regarding the shipment volume for next year. It seems like the module shipment volume for this year will be around 9 gigawatts, and I understand that there's a discrepancy between your cell and module capacity of about 1.6 gigawatts. So do you have any plans to secure cells from external party to produce more modules? And it seems like there -- and the last part of the question is it seems like the demand for solar is going to increase even further next year. Are there any plans for you to expand your capacity?

[Interpreted] To answer the first part of the question, in Q3, there was an explosion caused at one of the major polysilicon manufacturers, which put an upward pressure on the price of wafer. And by August, we used the inventory we had at hand, but at the end of third quarter, we were having to use the newer inventory at a higher cost. Apart from wafer, other raw material costs have also increased, which played a negative impact on our earnings from solar business. And for glass, especially, the impact of COVID-19 has delayed the capacity expansion plans. And also the scheduled maintenance of some of the suppliers have made the supply tight in the market. And we expect the impact of the raw material cost increase to play into the fourth quarter. However, if you take average of the cost increase for the third quarter, we believe that the raw material cost increase is going to have a lesser impact in the fourth quarter. And since we'll be shipping out more modules in the fourth quarter, we believe that the overall impact will result in increased earnings for fourth quarter. To answer your second part of the question, at the end of last year, we had cell capacity of 9 gigawatts and module capacity of 10.7 gigawatts. And by the end of this year, through efficiency improvements, we'll -- our module capacity will stand at 11.3 gigawatts. We're still reviewing our plans for line upgrades that will take place next year. So the exact capacity plan could change. However, if you take a look at this year, we have sold 8 gigawatt of modules to outside party, and we have used 1 gigawatt of modules for our internal projects. So if we expand that into next year, we believe that both the module shipment to the outside party and the modules that we'll be using for our internal projects will both increase. To answer the third part of your question, we do not have a meaningful nameplate capacity expansion plan at this moment. However, our plan is to increase the efficiency of our products to increase the overall power output and capacity out of the same nameplate capacity.

[Foreign Language] [Operator Instructions] [Foreign Language] The next question will be presented by Jae Sung Yoon from Hana Financial Investment.

[Interpreted] So I have 2 questions. So one is regarding your outlook for your petrochem business. If you could lay out the business outlook per product, that will be helpful. And the second part of the question is regarding other income on your financial statement. It seems like you've recognized around KRW 30 billion for other income. If you could elaborate on that, please?

[Interpreted] To answer the first part of your question regarding the outlook for the petrochem business or product, first, I'd like to touch on LDPE. It's true that we are expecting some new capacity to come online next year. However, we believe that the market is going to hold steady, mainly because of the demand for the public health and -- hold steady, and we also are expecting for the demand for the industrial use to increase next year. Regarding EVA, we believe that the demand for the EVA actually is going to increase, especially in China due to its huge solar demand. And for -- we also expect the demand for EVA, especially for foaming segment, to increase by 5%. So there will be new capacity coming online, but we also believe that EVA demand is going to hold stable into next year. [Technical Difficulty] Next is caustic soda. So this year, the demand for the industrial use has decreased. But we believe into next year, since the economy will be revitalized, the demand is going to increase compared to this year. And since we are also expecting newer demand to come online next year, we believe that will put an upward pressure on the global pricing for caustic soda. Next is TDI. We are expecting the demand to be similar to what it was before the pandemic took place due to the economic revitalization plan in the U.S. and Europe. And since -- we are also expecting that the supply shortage that were taking place in this second half of this year will be improved next year, so this will put a slight downward pressure on the market pricing. However, we are expecting the pricing to be -- to hold steady or stable as it was in the first half of 2020 into next year. It seems that the -- my response regarding the caustic soda did not get through the system because we were having some technical difficulties, so I'd like to briefly touch on it again. So the pricing for caustic soda has decreased this year, mainly due to the decreased demand in the industrial sector. However we believe that next year, the pricing is going to improve as the global demand rises, and we're also expecting the newer demand from segments such as alumina and [ mercolized lithium ] to take place next year, which will put an upward pressure on the pricing for next year.

[Interpreted] And in regards to your second part of the question for the other income of KRW 30 billion. This was from one of our subsidiaries for City Development, and they have acquired land for development. But as it is with the construction side of business, as we develop this project and pass it on to the owner, that will be recognized as the costs in fourth quarter. So we do not expect this trend to continue into fourth quarter. In addition, the income or -- from the foreign -- the subsidiaries outside of Korea for the auto industry under Advanced Materials are also recognized under other income category. And since for third quarter, our Advanced Materials business segment has turned profit, there were some profit that was recognized at the overseas level that were included in other income.

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