Hanwha Solutions Corporation (A009830) Earnings Call Transcript & Summary

Good afternoon, everyone. I'm Yong-In Shin, current CFO of Hanwha Solutions. First, allow me to thank everyone for joining today's call. I would now like to present the Q1 2021 earnings from Hanwha Solutions. First, profit and losses. Please turn your attention to Page 9 of the presentation material. On a consolidated basis, fiscal year 2021 Q1 recorded a revenue of KRW 2.4 trillion, a slight decrease quarter-over-quarter despite tailwinds from both increased quantity and sales prices of our petrochemical products. This has been offset by weak solar sales of Q CELLS due to Q1 being seasonally a weak quarter for solar. Operational profit, on the other hand, has improved to 289% quarter-over-quarter to KRW 254.6 billion due to improved profit spreads for key petrochemical products. Next, balance sheet items. Please turn your attention to Page 10. As our recent capital raise has been concluded in Q1, Q1 total assets have increased KRW 1.87 trillion to KRW 17.14 trillion (sic) [ KRW 17.014 trillion ] with cash and cash equivalents at KRW 2.69 trillion after an increase of KRW 1.49 trillion. Total liabilities have increased KRW 77.7 billion since Q4 to record KRW 9.25 trillion. Total debt has decreased KRW 311.7 billion to KRW 5.38 trillion. The conclusion of our capital increase has resulted in a sharp increase of cash and cash equivalents, which have led to a KRW 1.8 trillion decrease of net borrowing to levels of KRW 2.69 trillion. Debt to equity has improved 35% points to 119%, and debt to capital improved 40 points to 35%. Next, allow me to elaborate on segmental business performances. First, our Q CELLS solar business. Q1, Q CELLS continued to record losses of KRW 14.9 billion. Reduced shipment due to seasonality coincided with high wafer and logistics costs continued to squeeze profitability in Q1. High material and logistics costs will continue to linger in Q2, delaying profit recovery. However, FPV projects [ awaiting down farming perceived ] closure in Q2, Q CELLS will turn to profit. Next, our Petrochemical segment. Our Petrochemical segment Q1 operating profit increased 286% quarter-over-quarter to KRW 254.8 billion due to strong market tailwinds in both average sales prices and shipment volume for key products. Profitability and operating profit levels will continue to improve as we foresee favorable market conditions to continue into Q2. Next, our Advanced Materials segment. Benefiting from improved average sale prices and onetime cost items reflected in Q4 2020, our Advanced Materials segment has turned to profit, recording an operating profit of KRW 7.2 billion. Automobile OEM production will see reduction in Q2 due to semiconductor supply constraints. However, we foresee new model launches to offset this negative impact, which will allow Q2 to remain in profit. Next, our Galleria Consumer Retail segment. Seasonally, Q1 is a weaker quarter than Q4 for consumer retail. However, and a regularly strong consumer sentiment and onetime cost items reflected in Q4 2020 have improved operating profits. We forecast revenue and profit levels to decrease as seasonality further weakens in Q2 and property taxes also start to impact our financials. Next, Equity incomes. Equity incomes from shareholdings in YNCC, Hanwha General Chemical and Hanwha Total have sharply spiked from Q4. Shareholding companies will continue to benefit from favorable market conditions, resulting in additional improvements in our equity incomes in Q2. Lastly, allow me to briefly cover our Petrochemical segment's midterm strategy focus on establishing a circular economy system in our value chain. Please bring your attention to Page 23. The launch of a designated committee on our Board represents a resolve to refocus our business around ESG. Our petrochemicals segment continues to invest in technologies that will enable us to conduct business in a sustainable manner. Our efforts to refocus around ESG are represented by our investment in research and development in 3 key areas. We aim to establish a circular economic value chain based on our technological investment in biodegradable plastics, biochemistry, plastic -- chemical plastic recycling. Biodegradable plastics are polyolefin polymers given biodegradable properties, which we are generally developing with Yonsei University since 2019. Biochemistry technology utilizes microorganisms to replace crude oil-based production in a more economical manner. Due to its reliance on natural resources, biochemistry products are more environmentally and carbon friendly. Research has been ongoing since 2016 and has now reached R&D for commercial scale production. Plastic to chemicals chemical recycling is a technology to thermally decompose plastic waste to extract naphtha, which is the base chemical for plastic production. This enables reusage and circular economy of plastics. Joint research with the Korean Institute of Energy Research has commenced this year as a government sponsored research project by the Ministry of Trade, Industry and Energy. This concludes today's earnings presentation. Thank you again for joining today's call.

[Foreign Language] [Operator Instructions] [Foreign Language] The first question will be provided by Parsley Ong from JPMorgan.

This is Parsley. Congratulations on your strong result. I have 2 questions. The first question is on your hydrogen strategy. I believe Hanwha is participating in the building of Korea's first integrated green hydrogen production site. Could you give us an update on that? And once this entire project is complete, what do you estimate the hydrogen costs will be? Would it be a lot lower than $6 to $8 per kg, for example? And then the second question I have is with regards to your Solar division. You mentioned that you're expecting profitability to improve in the second quarter, potentially back to breakeven. Could you give us a bit more details on that? So recently, some of the raw material prices have come down, but is there any impact from logistic higher freight rates, for example? And what is your outlook for second half? Do we see a return to, let's say, mid-single-digit OP margin?

[Interpreted] First, allow me to address your first question about our hydrogen strategy. Yes, as you mentioned, we are undergoing development of electrolyzers internally. However, we still have several steps we have to go through in order to have a product that's commercially viable. And we haven't yet publicly announced the projected price levels of our current development. So we would like to ask for your kind understanding on not being able to disclose that at this moment. [Interpreted] As for the time line for our pilot project in Gangwon province, yes, capital has been deployed, and we're expecting the pilot to be completed in the second half of 2022, which will be led into commercial production after that.

[Interpreted] Yes. To address your second question, please allow me to elaborate on the projection of our profitability. Yes, as you have seen in our Q1 results, the price spikes and cost increase starting from a constraint of supply of polysilicon leading into wafer supplies has continued to squeeze our profit spread throughout last year and up to Q1. [Interpreted] And to address the logistics issue, COVID-19 had a very big -- negative impact in logistics costs. And also, we've seen accidents that blocked the Suez Canal. This has also been a very negative impact to our financials. [Interpreted] Yes. Looking at other cost items, such as glass and silver. We've seen extremely high prices leading into Q4 2020. However, as we head towards -- as we headed towards the end of Q1, we've seen glass prices continue to normalize and come back to more normal price ranges. And also, we're seeing silver prices also stabilize. [Interpreted] Yes. Looking into Q2, we are currently foreseeing and expecting the key component prices of our raw materials to remain at similar levels. However, we are more -- we are very hopeful, and we project that these cost levels will continue to stabilize as we head into the second half of this year. [Interpreted] Yes. To summarize, we currently expect raw material prices to peak in this month in May and continue to stabilize and come back to normal as we head into the second half of this year. And during our presentation, we mentioned in Q2, we may expect some down farming of our downstream projects. We have 2 to 3 projects currently subjects for outside sales for down farming. We will yet have to see when these projects close. However, if we are able to recognize some of the sales of these projects in Q2 and Q3, this will be very beneficial for us to offset the weak module sales and high cost structure of raw materials currently we're experiencing in our module production sales.

[Foreign Language] The following question will be presented by Young-chan Baek from KB Securities.

[Interpreted] Yes. I have 2 questions. The first question is about further guidance of your expected outcomes for your Solar business. Yes. As you continue to see high costs for raw material, will you be adjusting the guidance you've provided the market for the Solar business for 2021? That would be my first question. My second question would be -- the second part of my first question would be, do you have any projection on what the total demand of PV installation will be this year? And what portion of that you would supply and ship? And my second question is regarding the petrochemical business. Yes. We're continuing to see a slight drop in PVC and PE prices, especially LDPE. Do you have any price projections you expect to see as you head into the latter half of this year?

[Interpreted] Yes. If I may recall, we haven't been able to yet provide a nominal target for our Solar business's projected outcome guidance for 2021. However, we have provided the market that we will be shooting for a very similar figure as last year, which is reliant and dependent on some upside potential whether or not how we decide to down farm or downstream our business. The change that we have experienced since our last earnings presentation is our projection results for Q1. Our projection and forecast for the market was that as we expected a capacity expansion in the wafer value chain, we expected cost levels to normalize and come back to normal in a faster manner even though we still would experience some constraints from polysilicon production and capacity. However, the price levels are continuing to remain at a higher level than we projected. So that would be the change of the business environment that we are currently experiencing. [Interpreted] Even though today's earnings presentation is for our Q1 results, now we're -- because we're heading into May and we're almost near the end of the first half of year 2021, so if we were to look back and look into our internal targets that we've adjusted, yes, we currently expect the first half of this year to undershoot in our module sales business. However, we are currently more dependent on the results that our downstream business will deliver in the first half. Looking into our internal, I guess, targets that we're currently consolidating, we are currently expecting first half results would be at a very similar level as year 2020, which was around KRW 190 billion. [Interpreted] And as for shipment guidance, the guidance we've previously provided was a total manufacturing capacity of 10 gigawatts, which of 9 gigawatt would be sold to customers and third parties and 1 gigawatt being consumed by our downstream business. We currently intend to hold and maintain the current guidance that we provided. Even though we did see Q1 perform slightly weaker than Q4, but we currently see this as a seasonality impact that we usually experienced during the first quarter of every year. And looking into the global demand, we are continuing to see global demand in global insulation recover starting Q2. And the current market size that we project for this year is around 140 and 145 gigawatts total, so which is a slight increase from -- in regards to market size compared to last year. So we currently think it's logically viable to continue to maintain the current shipment guidance that we provided previously.

[Interpreted] Yes. To address your second question about the market forecast that we have, for our LDPE and PVC products, yes, as you mentioned, you are correct to point out that we did see spreads peak around March and April of this year, and we see the spread slightly decrease as we head into May. [Interpreted] Yes. First, to address the market forecast that we have for our LDPE products, we continue to see strong demand from medical demand of these products. And as you mentioned, one of the issues that we had for Q1 was supply constraints being triggered by the blizzard hitting our North America supply regions. However, as we see the situation in North America recover, the supply constraints that we've experienced in Q1 are also normalizing, which is solving the supply issues that we had for Q2 and results as we head into the second half of this year because we are also expecting some new capacity coming online as we head into the latter half. We will see a slightly weaker market heading into the latter half of this year. [Interpreted] But as we see vaccinations progress in many major economies, we will see economic recovery and activities in these markets. And we also see this as a strong demand and to withhold -- to block the bottom side of the demand for these LDPE products. [Interpreted] And as for our outlook for PVC products, because PVC prices have spiked to historical highs, we've seen very reluctant demand in the markets. And as we see in the COVID-19 situation in India continue to worsen and also have India head into their monsoon seasons, we will continue to see a slow and weaker demand for these products. [Interpreted] Mentioning that the demand is weak is a very relative term because as we head into the second half of this year, even though we are expecting some new capacity to come online in China. However, as major economies start to recover from the COVID-19 situation and also as we see India come out of their monsoon season, we would still expect a very sturdy and strong demand for PVC.

[Foreign Language] Currently, there are no participants with questions. [Operator Instructions] [Foreign Language] The next question will be presented by Parsley Ong from JPMorgan.

Sorry, if you don't mind, I'd just like to ask another follow-up question. Just now you mentioned that you have 2 to 3 so-called down farming projects available for sale, which I assume refers to your solar power plant projects and potential revenue recognition in second and third quarter might help to offset some of the weakness in modules. Could you give us a bit more color on the size of these projects and how much income we can expect? And just from a mid- to longer-term perspective, how will this division, let's say, by 2025, affect your solar earnings?

[Foreign Language]

[Interpreted] Yes. At this point, we are very restricted to disclose a nominal dollar amount of the 2 to 3 projects that we currently plan to down farm and the, I guess, nominal numbers that you would expect to hear would be possibly the -- a megawatt size of the project and per-watts dollar amount for the project sales. However, I apologize for not being able to provide this information at this time. However, if we were to realize and recognize revenue for the sales of these projects, the contribution that the sales will have on our operating profit level, we currently expect to be a single to double-digit billion Korean won level. And if we were to [ maximum ] the scale of projects that we down farm and sell to third parties, we currently believe that this -- the contribution that this sales will have in our Q2 results would be to have Q CELLS business division return and recover to a low to mid-single-digit operating profit. [Interpreted] And as for the longer and midterm contributions over downstream project development business heading into 2025, we currently intend to maintain our -- the guidance that we provided in -- during the presentation for our capital increase, which is to successfully down farm approximately 500 megawatts to max 1 gigawatt this year, which we haven't seen in any down farming in Q1. We'll see all of these projects contribute to our financials starting Q2, heading into Q4. And to give you some -- to recall the numbers that we provided previously during the capital raise, we currently plan to newly acquire projects of approximately 6 to 7 gigawatts annually. And we will gradually by -- step-by-step down farm these projects starting year 2022 heading into 2025. The accumulated amount of projects that we down farmed during this period would be approximately 15 gigawatts and a simple average would be approximately 3 to 4 gigawatt per annum sales. However, we expect the earlier period of this time frame would be slightly heavy and the majority of projects more heavily balanced towards the end of this period.

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

[Interpreted] I have two questions regarding your Solar business. My first question is in regards to how you reflect the higher wafer cost into your module cost, because in the renewable market, we've seen wind turbine players reflect higher costs in their average sale prices. Is this also something that we could expect in the solar business? And my second is, you mentioned that the annual market size you project is approximately 140 to 145 gigawatts per annum. So the other intelligence reports that we see in the solar market, the minimum market size that we came across is approximately 160 gigawatts. So is there any kind of explanation between -- that would explain this discrepancy?

[Interpreted] Yes. To address your first question about whether or not we are currently able to transfer the high cost of wafers to our module average sales prices, yes, we continue to engage with our customers to bring our average sales prices to a higher level, and we have been successful during Q1 because we are seeing higher levels of sales prices. However, because of the spike of the raw materials that we've seen in our cost end was extremely abnormal, we were not able to 100% transfer that immediately to our module sales prices, but we continue to pursue this in order to recover our profitability. [Interpreted] And as we see market demand continue to recover as we head into the second quarter of this year, we are currently seeing cell manufacturers also raise their sales prices. And because we are currently seeing strong demand in the market, we are slightly hopeful that we will also be able to transfer this cost spike to the average sales price of our modules. [Interpreted] So as we see COVID-19 recovery deteriorate in many different countries, it's very hard to actually come up with a very solid figure, and I'm pretty sure all the -- or the market report is also -- are going through a very similar difficulty. However, when we first came up with the market forecast for this year early in January, our current forecast was for approximately 140 gigawatts. And the current projection that we have after Q1 is a slight increase from that figure. Looking back at the numbers that we've seen in the year 2020, which has an annual installation capacity of 116 gigawatts, 140 gigawatts would already be about a 20% market increase from that figure. Yes, so we'll have to see who kind of projected the right number, whether it's 140 or 160. We'll see that towards the end of this year. However, because the general business implication that this figure has is that we still see strong market demand, which -- more than 20% growth from the figures of last year. So that is what we are currently base -- building our business plan upon.

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

[Interpreted] As we see more environmental constraint restrictions being applied to the industries in China, we're currently seeing this development in the steel industry. So do you have -- do you expect any similar implication or impacts of such environmental restrictions hitting your PVC or CA business? That would be my first question. And my second business -- second question would be, how you project the capacity increase in the near term in -- from your Chinese competitors and how you think this will impact the level of competition.

[Interpreted] Yes. Environmental constraints that we see towards Chinese manufacturers is not something that exactly is the headline news that we've experienced for the first time, because we've continued to see restrictions in regards to carbide method PVC manufacturing continue to apply pressure for -- to our Chinese competitors. And this is something that will continue -- that has been continued to apply impact and influence the PVC market.

[Interpreted] Yes. As for how we see the supply increase for our competitors in the module manufacturing industry, as mentioned in a previous question, we currently see the market grow more than 20% to max 30% compared to last year. The current increase of module capacity we currently see in the market is approximately 20%. So comparing these -- the 2 deltas of the demand and supply, we see the capacity and demand remain in a similar level of balance. However, we are seeing more capacity increase in the upper stream and the cell and wafers. So this is why we expected raw material prices to stabilize. But we're sad to see that that's taking a little bit more time than we currently expected. And to address the last part of your question, how this will impact the level of competitiveness in the markets looking into the period of year 2022 to 2025. While we currently see the capacity increase start last year for Chinese competitors, we currently expect the capacity to start producing modules and the modules to hit the market next year. So we'll continue to have to follow the progress of the projects and see when any actual capacity will start to hit the market. [Interpreted] Yes. In summary, we currently think the increase of demand is sufficient to cover the increase of supply of modules. And looking into our competitors and also the level of production that we have, we currently see most of our competitors and major manufacturers already have achieved economy of scale. So having a bit more gigawatt at this level does not give a critical advantage to our competitors. However, in order to have a certain competitor or manufacturer take momentum of the market, we currently think this will require technological breakthrough in module efficiency and cell efficiency, which is why we are currently investing heavily in our TOPCon and perovskite tandem modules, which we are shooting to bring to the market in the year 2022 to year 2024 time frame. To be more specific, 2022 to 2023 for our TOPCon technology, 2023 to 2024 for perovskite tandem technology. So this is the current time line that we have for our new product development, and we continue to invest heavily in this technology. And we're doing all we can to internally accelerate this process so we'll have to see how fast we can bring these new technologies to the market. And in order to -- and the concern that the market may have, whether or not the increase of capacity will oversupply the PV market, this is not a concern that we have at this moment.

[Foreign Language] The following question will be presented by [ Woo Jae-Jeon ] from Hanwha Investment & Securities.

[Interpreted] I have three questions that I would like to ask. My first question is, how we are utilizing the swing capacity we have between LDPE and EVA? The market is -- we currently see a stronger demand for the latter product. So are we utilizing the swing capacity in the proper manner, would be my first question. And my second question is about the module capacity of our manufacturing competitors. So as we see double-digit increase of capacity for our competitive manufacturers, this in relative terms will naturally make the manufacturing facilities of Hanwha Solutions slightly obsolete. So my question and curiosity is around whether or not maintenance or line change or line upgrades are currently being undertaken in order to maintain competitiveness in the manufacturing market. My last question is, it may be a bit early to address in detail, but it's about the plastic chemical, the plastic recycling technology you mentioned in the latter half of the presentation. So is there a time frame that we can expect to see commercial production? And if so, at what capacity would this be brought to the market with?

[Interpreted] Yes. First, allow me to address your first and third question about our petrochemical business. As you mentioned, yes, we do have a swing capacity between LDPE and EVA. However, the normal process and production that we have is to have a relatively steady production capacity for both products, which is approximately about 100,000 tons per annum. [Interpreted] Yes. For the third question about the time frame for commercial production of plastic to chemicals -- plastic recycling technology and also the scale of the commercial production, we will have to ask for your understanding because the technology that we mentioned is in a very infant research and development phase. So we would have to come back to you on -- when we see further development in our R&D, and we see some more, I guess, tangible outcomes of the research.

[Interpreted] And to address your second question on how we intend to maintain competitiveness in our manufacturing technologies, yes, you are correct to point out that we are very -- being very conservative in increasing our manufacturing capacity. However, we are at a very kind of sensitive stage on whether or not to increase capacity at mass scale because we are currently expecting new technology to be able to be commercialized in the year 2022 to 2023 time frame. So it is a very hard time to decide whether or not we want to -- what technology we want to choose to increase capacity with. So the earlier projections that we provided the market was that because of increased efficiency, our current 11-gigawatt capacity will naturally increase to 16 gigawatts as we head towards 2025. However, we will have to see the impacts of our TOPCon and perovskite technology development to correctly address the market and make the management decision to choose which technology we want to expand our capacity with. [Interpreted] And relative to -- we are conservative in increasing our module capacity. However, we are currently more aggressive in expanding the product lineup that we are currently providing to our customers in the Europe and Northern America regions. So yes, our current strategy and tactics towards these markets is to package our current modules with an advanced PV-generating system, which is -- will currently spearhead the increase of revenue and profits in the more near-term horizons. Our current market share for the United States in year 2020 was, especially for the residential market, at around 25%, which is the market-leading market share. And also for our EU customers, the market share for the residential and commercial sector are the module -- the market share for Q CELLS module was approximately 20%. So if we see the global market reach around 145 gigawatts, out of that, approximately 55 gigawatts we see as domestic demand within Mainland China. So because China is not a strategic market we address with our products, so our current capacity we currently think is sufficient to be able to provide our customers in the more developed markets and countries.

[Interpreted] thank you again, everyone, for joining the Q1 2021 Earnings Call of Hanwha Solutions. I would like to take this opportunity to thank everyone for joining us today. Thank you. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]