Hanwha Solutions Corporation (A009830) Earnings Call Transcript & Summary

[Interpreted] Good afternoon, ladies and gentlemen. Please allow me to first thank all the analysts, investors and reporters attending today's call. Thank you very much for your time. Today, following the Q4 earnings presentation, we wish to hold a separate session with the Q CELLS management team to present Q CELLS' mid- to long-term business plan and strategy. Today, we have with us Hee Cheul Kim, CEO of Q CELLS; Yong-In Shin, our CFO; [ Dong-Jin Shin ]; Kangsei Kim; Moon Hwan Cha; and [ Chong Guan Hong ], each representing and heading our GES, DES, module and system business divisions. Today, we would be referring to 2 different presentation materials. First, our earnings presentation. And second, Q CELLS' mid- to long-term business strategy. These 2 presentation materials will be provided through our website. First, allow me to welcome Yong-In Shin, our CFO, for the Q4 earnings presentation.

[Interpreted] Good afternoon. I am Yong-In Shin, current CFO of Hanwha Solutions. Thank you very much for your time in joining us today. Before our earnings presentation, please allow me to shortly touch base on Q CELLS' strategy outlook in light of our imminent capital raise. Q CELLS is undergoing a radical transformation shift from a manufacturer of PV modules into a full-scale energy solution provider. We are well positioned and confident that our distributed energy business and solar development business stream will be the main drivers behind the rapid growth we foresee in the coming 5 years. Further details of this growth strategy will be presented by our Q CELLS management later on in today's presentation. Now allow me to move on to your profit and losses and balance sheet items. First, profit and losses. Please bring your attention to Page 5. On a consolidated basis, fiscal year 2020 recorded a revenue of KRW 9.2 billion, a slight decrease year-over-year. Despite growth driven by increased shipment from Q CELLS, module cells and down farming of downstream assets, negative COVID impact on consumer retail and the automotive industry have been the main cause of this reduction. Our 2020 operating profit, on the other hand, was improved 29% to record KRW 594.2 billion, benefiting from profits generated from Q CELLS and our petrochemical business. Q CELLS continues to improve profitability since recovering from losses back in 2018. Please turn to Page 6 for 2021 market outlooks. In 2021, we foresee demand growth for Q CELLS products in our key markets. In the U.S., we expect tailwinds from Biden administration's decision to extend the ITC program. In Europe, we are witnessing Poland and Italy reemerge into gigawatt-scale markets. And also here in Korea, markets are strong in the light of the administration's green new deal policy. Our petrochemical business is also expected to experience strong demand for our CA and PVC products benefiting from an overall up cycle of the market. Please bring your attention to Page 7 for your 2020 Q4 business performance. On a Q4 consolidated basis, realization of revenue from third-party sales of downstream generation assets have contributed to a 5.5% revenue growth quarter-over-quarter, recording KRW 2.56 trillion. Consolidated operating profit decreased 72% quarter-over-quarter to KRW 65.4 billion. Temporal onetime expenses for annual bonuses on top of scheduled plant maintenance and increased cost for photovoltaic manufacturing have been the main cause of the decline. Net profit recorded a loss of KRW 99.3 billion. Profits were hit by a reduction of equity income, along with tangible asset impairment of KRW 130 billion having been recorded in this quarter. For segmental breakdowns, please refer to the bottom table of Page 7. As of year-end of fiscal year 2020. Next, balance sheet items. As of the end of fiscal year 2020, year-over-year, total assets have decreased KRW 543.8 billion to KRW 15.13 trillion. Cash and cash equivalents are at KRW 1.2 trillion, at -- which is a KRW 115.4 billion increase year-over-year. Total liabilities have decreased KRW 705.7 billion to KRW 9.17 trillion. Total debt also decreased KRW 680 billion to record KRW 5.69 trillion. Efforts to strengthen our balance sheet have resulted in a decreased debt and increased cash and cash equivalents. This has led to a KRW 795.3 billion decrease of net debt to reach KRW 4.49 trillion. Net debt-to-equity ratio also has improved 16 percent points to 75%. Segmental breakdowns are provided on the bottom table of Page 8. Next, allow me to elaborate on segmental business performance. I will be referring to Page 9 through 14. First, our Q CELLS Solar business. Q CELLS has turned to quarterly losses in Q4, recording a loss of KRW 2.4 billion despite revenue realized from our downstream development and increased module shipment, onetime expenses, which is annual bonuses of KRW 20 billion along with strong headwinds from increased key component and logistics costs have been the main cause of a weak quarter. Moving into Q1, negative impacts of high cost will continue to linger, but we expect adjusted average sales prices increase total shipments returning Q CELLS back to profits. Normalization of key component costs and recovery of insulation demand will start to positively impact profits starting Q2. Next, our petrochemical segment. Q4 2020, our petrochemical business has recorded an operating profit of KRW 66 billion. This is a KRW 92.8 billion decrease from Q3. Despite strong market demand for key products, large-scale maintenance in Q4 at our own plant and also in YNCC, along with high-cost feedstock, resulted in a decreased profit. Despite a slight rollover of the high cost feedstock into early Q1, and normally Q1 being seasonally a weak quarter, we foresee strong demand to continue for our key products. Maintenance completed during Q4 also will contribute to a sharp increase in profitability in Q1 quarter-over-quarter. Next, our Advanced Materials segment. Our Advanced Materials business recorded a loss of KRW 2.8 billion. Q4 revenue was on par with Q3 as automobile OEMs production levels recovered. However, onetime expenses due to impairment of accounts receivable and inventory items have caused the business to turn to losses. We foresee improved profitability for Q1 based on strong demand from automobile OEMs as they see production levels recover the absence -- and also absence of onetime expense items. Next, our Galleria consumer retail. Galleria recorded an improved operating profit of KRW 10.3 billion. Despite stronger social distancing measures enforced, high seasonal demand contributed to an improved top line. Q1, due to expected step down in social desisting, increased number of inbound customers will, in turn, contribute to a stronger quarter. Next, equity incomes. Equity incomes from shareholdings in Q4 recorded a decrease of KRW 60.1 billion quarter-over-quarter, recording KRW 33.1 billion. The impact from scheduled maintenance of plant 2 YNCC, weak PX and PTA in partners Total and General Chemical, and the third spike of the pandemic hitting our hotel and resort chain have been the main cause of the decline. For Q1 2021, completion of the scheduled maintenance at YNCC and the impact of the increased capacity will gradually start to contribute to the top line. Strong demand for petrochemical products and step down of social distancing will also positively improve equity incomes. Lastly, allow me to present our mid- to long-term shareholder return policy. As mentioned in December at our capital raising and share offering presentation, preemptive investment in solar energy and hydrogen will require an investment at significant scale. Therefore, we will refrain from any cash dividends this year and focus our capital and efforts to increase our enterprise value driven by growth in our solar and hydrogen business aspiration. However, in the mid to longer term, by way of our emphasis on ESG-focused management, we aim to improve transparency in our shareholder return policy. For the coming 5 years, we will commit to return 20% of free cash flow to our shareholders. For further details, please refer to Page 20. Thank you for your attention, and this concludes my presentation of Q4 earnings.

Next, Hee Cheul Kim, CEO of Q CELLS, and also the top management of each business division of Q CELLS will present the strategy of Q CELLS.

I am Hee Cheul Kim, CEO of Q CELLS. Thank you for attending today. Q CELLS' mission statement is to provide affordable and smart energy solutions through our global leadership in technology and innovation with the purpose to create a sustainable future for the planet and humanity. In order to realize this vision, our PV cell and module manufacturing is being transformed into 3 separate business streams: PV system hardware; Distributed Energy Solutions and services; and utility-scale Green Energy Solution development. By this redefinition, our addressable market now will not only be limited to the global PV module market but exponentially expand to the entire power sector where our aspiration is to offer a wide variety of innovative renewable energy solutions. We are confident that our PV systems business will be differentiated by state-of-the-art PV technology represented by our leadership in TOPCon, perovskite tandem. Next-generation PV modules paired with smart modules, ESS hard rail and well synchronized with optimization of VPP software will play a pivotal role in establishing the foundation of our Distributed Energy Solution business arm. Our strategic investment in ESS software powerhouse, Geli, in Q4 2020 is a good representation of our aspiration in this specific field. Q CELLS' Distributed Energy Solutions business will be built on top of our network of distributed assets to produce, distribute and sell renewable power. As of today, we are servicing more than 100,000 retail customers in Germany. We are well positioned to expand this line of business to encompass long-term residential and commercial PPAs, energy retail, virtual power plant operation across Germany and the United States. This line of business will soon be incorporated into the core of our business operations. Q CELLS' utility-scale Green Energy Solutions business originates from solar farm EPC but has now evolved to develop, build and sell utility-scale PV-generating assets. We will continue to expand our scope and geographies. In the near foreseeable future, we will be able to acquire, build and sell utility-scale PV, energy storage and wind assets across the U.S., Europe and Korea. I have full confidence that through the aforementioned transformation of Q CELLS, we will successfully reposition ourselves as a top global energy solution provider. Please allow me to explain our DES business, Distributed Energy Solution. The centrically integrated power industry is undergoing an era of radical transformation. This has been triggered by the rapid penetration of renewable distributed energy resources and new market dynamics in the generation, T&D and retail space due to the liberalization of power markets across the globe. Q CELLS' DES business roots in this fundamental change and aims to build a generation business based on the distributed assets closely in sync with the customer-centric energy retail. Leveraging our significant presence in residential and commercial PV markets such as Germany and U.S., we will expand our product offering to cover the entire PV system hardware and convert our customer proposition to offer not only solar generators but solar-generated power. 1998 marks the year Germany's power market was open to competition. Proactive energy transition policies have driven rapid growth of the renewable distributed power within Germany. However, only one year since its beginning in 2020, Q CELLS' energy retail business is serving 100,000 retail customers as of now, targeting to become 1 of the 10 largest energy retailers within Germany by 2025. In parallel, our aspiration is to build a distributed generating business rooted in residential and commercial customers to maximize synergy between distributor generation and co-located load. In the U.S., based on our strategic and pivotal investment in ESS software powerhouse, Geli, we aim to provide advanced grid services. Q CELLS' market leadership, brand recognition, competitive product offering in the United States are our most valuable asset in rolling out this new stream of business. Geli's software backbone embedded in the energy storage assets will provide a strong testbed for virtual power plant operation, which we plan to aggressively expand in the United States and to other overseas markets. Page 4, Green Energy Solutions business. Q CELLS' sells Green Energy Solutions business is positioned to expand from the current EPC operation into a business that develops, acquires, builds and sells utility-scale PV projects. We have successfully secured profitable pipelines in Europe, U.S. and Korea, which are markets where we see strong demand and acceptance for green renewable power. Building on our aspirations to become a market-leading developer of solar assets, we will continue to expand our horizon to energy storage and wind to truly transform into a global renewable energy company. The success of this business depends on strong localized teams that can develop profitable projects, along with a business model that works on a positive cycle of capital investment and down farming. Our leadership in PV module technology, in hand with advanced EPC experience, will enable us to pursue projects with better profitability. Strictly managed development and build out schedules in hand with a diverse exit and down farming strategy, will enable us to recycle our investment capital in a sustainable and very profitable manner. As of 2020, we have secured 6 gigawatts of projects in our pipeline with a total of 15 gigawatts within the near horizon. In 2021, approximately 6 gigawatts of project pipelines will be added across Europe, U.S. and Korea geographies with 1 gigawatt of projects awaiting completion and down farming. During 2022 to 2025, annual pipeline addition is expected to be at a rate of 6 to 7 gigawatts per year, 28 gigawatts in total. Down farming during the same period is planned to be around 15 gigawatts at an annual pace of 4 gigawatts. We also have to thank the business environments in our key markets turning in favor for renewable energy. As we see Biden administration's policies positively impact the renewable energy sector in the U.S. and green new deal and ESG discussions in Europe continue to gain traction, we are very confident to meet our midterm goals and properly bring this stream of business into the core of our operations. Thank you. That concludes today's presentation. We would now like to move on to our Q&A.

[Operator Instructions] The first question will be presented by Young-chan Baek from KB Securities.

[Interpreted] My question would be regarding 3 different topics. The first would be, I recall that you mentioned the road map for next-generation cell and module development. Could you further touch on this topic in the mid- to long-term plan of this road map? The second part of my question would be about your direction in your DES and GES business stream. So we are very glad to see that the strategic direction is in sync. However, could you further elaborate on the -- what kind of financial returns these businesses will generate by 2025. It would be great if you can shed some light on the expected revenue and profit levels of each business. Then my third part of the question is, I fully understand that the raw material cost is being quite a burden on the manufacturing side of your business. Could you further elaborate on why you expect the costs to improve in the latter half of this year?

[Interpreted] Yes. Please allow me to address your first question about our road map and current developments in our next-generation cell and module development. Our first plan for our n-type TOPCon modules and cells, our plans for year 2021 through 2022, we are currently shooting for commercial mass production during this time frame. And for our perovskite tandem modules and cells, we are shooting for the time frame of 2023 to 2024 for commercial manufacturing. For our n-type TOPCon cells and modules, we are expecting the module output to increase approximately 3%, with an increased cell efficiency of approximately 1%. As for perovskite tandem modules, we are currently expecting the power output for the same amount of space to increase around 20%. To give you further detail on our perovskite tandem development, we currently are operating 2 teams, one team working out of Pangyo in Korea and one team working out of Thalheim out of Germany. So we're currently planning the pilot line to be in operation within the time frame of 2023 to 2024. And our current cell development shipments, we currently are confident that this is -- add market-leading accomplishments. We have seen small-scale cells reach above 28% efficiency. And at a commercial live 6-inch size, we are currently accomplished efficiency over 26%. We currently believe this is a standard that leads the market at this time.

[Interpreted] Yes. To address your second question, when we presented our presentation for the capital raise last December, we did give a guidance on our midterm financial goals, which was a revenue of KRW 21 trillion with a profit of KRW 2.3 trillion. Yes. Going back to the numbers we've provided in December, it's quite hard to give you specific numbers. However, Q CELLS will be about 60% of our midterm revenue. And breaking down the 60% of the Q CELLS, our GES business will be composed of about 40%; our DES, Distribution Energy Services, will compose about 20%; with the remaining being modules. Yes. If I may touch on the profitability of such businesses, we do not specifically divide the profitability within the business segment and divisions. However, the expected profits and returns that we expect from our module business is in the mid and high single digits. However, as we transform our business structure, we will be shooting for a higher profitability, which we aim to be a high single-digit or low double-digit number. Yes. If I can address your third question about our -- the cost increase of raw components. It's really hard to pick which component hit us hardest from wafer glass or silver paste. However, we are currently seeing the cost increase to eat into our spread for about -- the impact to be about KRW 0.02 in quarter 4. However, because our module shipments for each quarter is approximately about 2 gigawatts, a KRW 0.01 spread decrease impacts our bottom line of about KRW 25 billion. So it's easy to kind of imagine how big of an impact the KRW 0.02 cost increase was. Yes, to the second part of your third question, why we expect the second half to be slightly in a more friendly environments. We are currently expecting global wafer capacity to increase by 30% based on the nameplate capacity publicly announced by the manufacturers. So yes, we'll have to see how much of that actually builds out, but increased wafer supply will definitely benefit us in our business as mix. Yes. Moving on to glass, we've seen capacity expansion last year being pushed back, tightening the supply of the glass that we need to build our modules. However, as we proceed into Q1 and into Q2, we are expecting the capacity increase of glass manufacturers to actually realize and kind of easing the pressure on the supply. Yes. We currently expect this effect of the increased cost to linger within Q1. However, we are very positive that these costs will -- structures will improve as we move into Q2.

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

[Interpreted] I ask specifically about 3 questions I would like to address. My first question is about your DES business. You mentioned in the presentation that you have -- you're currently servicing about 100,000 retail customers in Germany. Could you slightly further elaborate on what kind of business model this is? So to my understanding, it would be selling power to these individual customers. So could you elaborate on what unit cost of power -- megawatt hour of electricity would feed to these customers? And how much of a revenue does 100,000 customers represent? And one additional question to your DES business would be in order to roll out this business in -- at scale, do you also foresee yourselves being involved in the installation business also directly? Second question would be about your GES business. You mentioned that you plan to farm down, sell-out about 1 gigawatt of solar generating assets this year. Could you further elaborate on how much of the revenue and operating profit that represents? So going back to some numbers you mentioned in Q4, you mentioned about a KRW 250 billion revenue realized by these down farming assets. Could you touch base on how much of operating profit that down farming contributed to your P&L? And my last question is about the human rights issue currently going on in Xinjiang. So to my understanding, I understand that Q CELLS' reliability within products manufacturing in that region is relatively weaker than other competitors. So could you slightly touch base on how that would positively or negatively impact your business?

[Interpreted] Thank you. First, allow me to address your first question about the retail and distributed energy business of Germany. Yes. In Germany, in servicing our 100,000 customers, our main business at this time would be to supply the entire electricity each household would consume as a normal operation. However, in addition to this business, we are currently shooting to install PV system on residential and commercial rooftops in order for us to sell the electricity generated on site. Yes. If electricity and power is provided by generating on site, the transmission distribution costs can be reducted to -- from the cost of electricity. So therefore, the residential customer would benefit from a 70% to 80% cost reduction from it. Yes. To address the second part of your question about DES, whether or not we have to be directly involved in the installation process, the simple answer would be no because we would be more reliant on the pre-existing channel network and customers that we have established in the European region. In Germany alone, we are currently blessed with more than 1,000 Q.PARTNERs of -- which is the brand name of our installation network and partners. So these partners and networks were currently more devoted and committed to PV sales. However, we are currently planning to leverage this preexisting relationship in order to roll out our DES business.

[Interpreted] Yes, please allow me to answer your second question about the down farming and our sales of utility generation assets. Yes, in Q4, we had successfully down farmed 3 assets contributing to a revenue of KRW 250 billion and operating profit of KRW 13 billion. Yes. And going back on our -- this year's plan to out farm and out sell 1 gigawatts of generation assets, this would be our stretch goal, and this is the goal that we're shooting for this year. However, a more conservative number would be around the 500 to 7 (sic) [ 700 ] megawatt figure. So it's really hard to actually specifically pick out a number of how much revenue this would create. However, if you can refer to the -- I guess, average market price of a PV farm, which varies by region and size, it's approximately about $0.70 to $1 per watt. If you multiply that by 1 gigawatt, that would be approximately the sales price of such projects. Yes. We have currently acquired and safely secured about 6 gigawatts of accumulated pipelines. And we -- our current plan is to add approximately 6 to 7 gigawatts annually. And as you may understand, it takes about 1 to 3 years to actually realize and sell out these pipelines. So the 1 to 3 years that we hold the pipelines would be the amount of time that we need to develop and construct, and to actually have these pipelines contribute to the top line profits will take about 1 to 3 years.

[Interpreted] Yes, to address your third question about the human rights issue in Xinjiang. First I would like to point out that yes, this is -- has become a news article and political issue. However, we are yet to see any actual impact of this issue on any export and import trading. So yes, we are seeing China and the U.S. government debate on this issue. And the Senate is yes, definitely in discussion of such decisions. However, we are not yet seeing any economical impact. Yes. However, because the United States is one of our biggest strategic markets, we have -- we are in preparation of any potential issues that may cause us business impact. But I would like to take [ some effort ] to make sure that -- to announce that we do not have any manufacturing involvement within the Xinjiang area. Yes, the second part would -- and concern would be whether or not the raw material and components that we use in our manufacturing has any involvement within that province. So our response to that issue would be -- so we are addressing the vendors and suppliers with this issue and requesting confirmation letters that their components and manufacturing has no involvement within this region. Yes. We are yet to see any sure economic impacts, but we are seeing increased inquiry from our U.S. customers asking confirmation whether or not we have any involvement within specific province. Yes, we are currently planning ourselves to the worst-case scenario where the U.S.'s relationship deteriorates further from this situation. Yes, we are currently doing internal scenario planning to make sure that we are well positioned and well prepared for such situations where there starts to be some economical impact and the actual Xinjiang issue starts to materialize.