Hanwha Solutions Corporation (A009830) Earnings Call Transcript & Summary

[Interpreted] Good afternoon, ladies and gentlemen. I am Yong-In Shin, Chief Financial Officer of Hanwha Solutions. Allow me to begin by thanking everyone for joining today's call. I would now like to present the Q2 2021 earnings presentation of Hanwha Solutions. First, profit and losses. Please turn your attention to Page 9 of the presentation material. On a consolidated basis, Q2 revenue has increased 16% quarter-over-quarter, recording KRW 2.78 trillion. Generation asset down-farming in our Q CELLS Division and price hikes of key petrochemical products were the main contributors behind this increase. Cost spikes of PV raw materials continues to weigh down the profitability of Q CELLS, negatively offsetting favorable margin spreads of our key petrochemical products. As a result, operating profit recorded a 13% quarter-over-quarter decrease, recording KRW 221.1 billion. Next, allow me to move on to key balance sheet items. I will be referring to Page 10 of the presentation material. As of the end -- as of end of Q2 2021, total assets have increased KRW 2.81 trillion (sic) [ KRW 2.081 trillion ] to KRW 17.22 trillion since the end of fiscal year 2020. During the same period, cash and cash equivalents have increased KRW 1.23 trillion, with the current levels at KRW 2.43 trillion. Since the end of fiscal year 2020, total liabilities have decreased KRW 21.7 billion to KRW 9.15 trillion. Total debt also fell KRW 478 billion to KRW 5.21 trillion. During the same period, net borrowings decreased KRW 1.7 trillion to KRW 2.78 trillion. Also during the same period of time, debt-to-equity ratio has increased 41 percent points to 113%; and debt-to-capital 41 percent points, to reach 34%. Next, allow me to elaborate in more details of our segmental business performance. First, on Q CELLS energy segment. Q CELLS continues to report quarterly losses of KRW 64.6 billion. Irregular cost levels due to price hikes of raw materials such as PV-grade wafers, overlapped with record-high logistics costs, continued to negatively impact profitability. Our mid- to longer-term strategy continues to focus on project development and operation. Project down-farming through third-party sales uplift in revenue and operating profit, KRW 260 billion and KRW 22 billion, respectively. We will continue to see our downstream business grow and contribute more as we continue to drive our strategic shift. Irregular cost levels will linger into Q3. However, we forecast losses to improve quarter-over-quarter as quarterly shipment and average sale prices increase. Next, our petrochemicals segment. Our petrochemicals division's operating profit increased 15% quarter-over-quarter, recording KRW 293 billion. Favorable market conditions continued to provide high average sale prices and profitable margin spreads. Operating profits are projected to fall heading into Q3. Higher oil and naphtha prices, along with new online capacity, will challenge current margin spreads. Next, our Advanced Materials segment. Our advanced material division's electronic material business showed improved business results as Apple's new-generation iPhone hit mass production. However, because automobile OEM' productions continued to struggle due to semiconductor supply constraints, overall, Q2 has been a weak quarter, recording a 69% quarter-over-quarter decrease at KRW 2.2 billion. As automobile OEMs recover production in Q3 and new model change is also scheduled for the same period, we foresee production and profits to recover in the following quarter. Next, our galleria consumer retail segment. As consumer sentiment recovers in Q2 around luxury goods and home living appliances, we have seen respective recovery of quarterly revenue results. However, as a KRW 11 billion property tax is reflected in the Q2 financials, operating profit decreased 82% quarter-over-quarter to KRW 2.2 billion. Uncertainty continues to haunt Q3, as we are seeing more cases of COVID reported and stronger social distancing measures in place. However, due to the base effect, property taxes reflected in Q2 and the steady recovery of sales of luxury goods, profit levels will show improvement in the following quarter. Next, equity incomes. Despite favorable petrochemical market conditions, Q2 equity incomes from shareholdings decreased due to regular maintenance and weak Chinese domestic PTA demand. Equity incomes will further decrease in Q3 as higher oil and naphtha prices squeeze margin spreads. Lastly, I would like to elaborate on the equity investment of [ WOS ] [indiscernible], which is a strategic investment to strengthen our advanced material business portfolio. With the objective to invest in fine metal mask technology, our share purchase agreement to acquire KRW 60 billion worth of [ WOS ] shares was signed today. Fine metal mask is a key part in the OLED displays currently supplied globally by a duopoly of Japanese manufacturers. As we see demand shift from LCD to OLEDs, key domestic display manufacturers are making large-scale CapEx investments in OLED facilities. We forecast the OLED market to continue to grow and are confident that the investment in WOS will drive our strategy shift to high-value electronic parts and materials. Thank you. This concludes the Q2 2021 earnings presentation.

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

[Interpreted] I have 3, possibly 4 questions. My first question is around the growth of Q CELLS revenue. I can see that the numbers reported are -- i.e., 35% growth. Can you break this down into the quantity and -- the sales prices and the quantity of sales? That would be very helpful. And the second question around Q CELLS is quarterly losses of Q CELLS was around [ KRW 66 billion ] even with KRW 20 billion operating profit recognized through project sales. This means, I guess, we can assume that the cost structure in this quarter was even worse than expected. It would be great if you can provide a projection and outlook of how you see the wafer prices change in the latter of this year and the upper half of next year. That would be also very helpful to see the foreseeable future. [Interpreted] My next 2 questions is around the petrochemical division. I can see that the petrochemical division is reporting good results. However, could you break that down into cost -- your CA and PE business division and how some aspects of the profits may change? That would be very helpful. And last, if you can provide a price forecast of -- how you see the caustic soda market, that would be also very helpful.

[Interpreted] First, to address your first question. We -- you can refer to Page 11 in the presentation material for the details of the revenue and profit of Q CELLS, of which KRW 260 billion of revenue and KRW 22 billion of revenue was due to a down-farming of our downstream generation assets. If you were to neglect the revenue and profit caused by the project sales, the level of revenue and profit for -- the level of revenue for Q CELLS is approximately same as the earlier quarters, of which the quantity of sales and also the average sales price are at similar levels. With revenue quantity and average sales prices at the same levels, the increased losses are caused by higher cost levels due to raw materials. We are expecting the level of losses to reduce as we head into the third quarter, and we are currently internally in -- have the view that the peak of wafer prices are behind us and we are heading towards a downturn. During the months of July and August, we are seeing mixed market signals from polysilicon manufacturers and wafer manufacturers. However, we will -- are expecting that market signals will turn towards a downturn as we head into September.

[Interpreted] To address your questions around our petrochemical business to provide you a breakdown of our CA and PE business. First, allow me to elaborate on our PE business. Second quarter results for PE, we have seen the same level of demand of -- as Q1. However, we are seeing increased supply, which is challenging our margin spreads with a lower-margin spread. And profitability overall in Q2 was slightly lower than that of Q1. As we -- and allow me -- if I could address the results of our CA business: We are seeing, I guess, improved profitability in this business segment because we are seeing maintained high level of demand; however, limited additional supply, therefore resulting in a very profitable quarter. [Interpreted] And to provide you with our projection of the caustic soda market. During the first and second quarter of this year, there was a lot of scheduled maintenance for -- scheduled for the manufacturers, which has provided a limitation to the amount of product that could be delivered to the market. However, despite the constraints in supply, we are -- we have continued to see strong demand. Therefore, the price of the products were on a continuous rise during the 2 quarters. As we head into Q3, yes, we are seeing scheduled maintenance -- capacity come back online. However, demand continues to stay strong and supplies continues to stay tight, therefore maintaining a quite high international market price. We are seeing the additional supply being matched by the economic -- recovery of the global economy in the aftermath of the COVID spread. Therefore, we are projecting a strong and profitable market throughout Q3. And may be a bit early to provide a forecast for year 2022. However, if we continue to see a global economic -- the global economy recover from the COVID outbreak, we do not see any large-scale additional capacity to come online during this time frame. So therefore, we are currently projecting and forecasting a favorable market to continue into the next year.

[Foreign Language] Currently, there are no participants with questions. [Operator Instructions] [Foreign Language] The next question will be presented by Dong Jin Kang from Hyundai Motor Securities.

[Interpreted] My question is around the PV and solar business division. We are seeing news articles mentioning that the United States is very eager to establish a PV supply chain within the continental U.S. by providing tax incentives for PV-related manufacturing CapEx investments. Do you see -- do you have any projection or estimate on when the legal documents will be signed in congress and whether or not this will become reality? And whether -- if so, do you have any plans to expand the current module manufacturing capacity located in the United States? And to -- my second question is about your projection of reducing the losses in -- heading into Q3. We -- even despite additional revenue and profits generated by the downstream project development business, do you think it will be possible to turn to profits in the remaining 2 quarters as we head towards the end of fiscal year 2021?

[Interpreted] We are also aware of the legislation that you mentioned around the manufacturing tax incentives that is being -- is under discussion by U.S. lawmakers. However, this is an issue that is being dealt in the political arena, so it is really hard for us to estimate when and where this legislation will actually be passed in the U.S. congress and senate, so please forgive us for not being able to provide you a time line with that. However, the United States market continues to remain a very strategically important market for us, so yes, with the appropriate incentives, we will consider, I guess, the -- matching the incentives with appropriate, I guess, business decision-making. However, we are not providing any capacity increase officially in line with our new technologies such as TOPCon and perovs tandem module technology. However, as the development of these 2 technologies mature and as we see the legislation being discussed in the U.S. political arena, if we see a maturity in these 2 aspects, we will be able to provide a clear vision on how we intend to expand our capacity with what technology. [Interpreted] To provide a bit more detail in our Q3 and Q4 projections. It is a bit early for us to provide any numbers for Q4. However, we are expecting losses to be reduced during Q3. We do not expect any project down-farming within the next following quarter. The next project sales is currently planned for Q4 of 2021. Q3 manufacturing costs will remain high at irregular levels. However, we will try to offset that negative impact with higher level of shipments and higher level of average sales prices. Our 9 gigawatt guideline for third-party module sales will remain intact. The shortfalls that we have seen in the first half of this year, we will catch up during the latter half of this year. And we currently see that it is highly likely that we will be able to maintain that target of 9 gigawatts. To provide some details of our guidance on the down-farming of our generation assets: We currently provide a guidance at the amount of capacity that we sell to third parties; and down-farm will be around 500 megawatts, up to a maximum of possibly 1 gigawatt. [Interpreted] Please allow me to provide a modification to the previous guidance provided. We would like to lower the guidance of our project down-farming to 400 to 500 megawatts for fiscal year 2021. The reason behind the lowered number is a -- is due to a strategic shift of our downstream business. Up to now, the main focus of our downstream business was to secure track record of project development and down-farm and sell out these projects at an earlier phase and able to maximize the recycling of our cash capital. However, our strategic shift is -- has been refocused around developing, building and holding these generation assets for longer-term operation and maintenance. As we refocus our downstream strategy to a operating and holding model and selectively down-farming and selling to third parties, we are yet to develop a criteria of how much we will hold and how much we will sell down. However, as we head towards the end of this year and revise our mid- to longer-term strategy, we will be able to provide you a -- with a more solid number. During Q2, 3 projects located in the United States and Europe have contributed to our revenue and operating profits. These 3 projects contributing in Q2 is approximately about half of the annual 400- to 500-megawatt capacity we are currently expecting to down sell. And the remaining 200 to 300 megawatts will be recognized during the fourth quarter of this year.

[Foreign Language] The next question will be presented by Woo-Je Chun from Hanwha Investments and Securities.

[Interpreted] Please allow me to address 3 different questions. My first question is about your downstream generation business. Could you provide some numbers around how much of new pipeline was added during the year, fiscal year of 2021? That would be very helpful. My second question is also in regards to your PV energy business. We understand that your n-type technology development is targeted for commercial production in year 2022 to 2023. Could you provide a status update on technology development and whether or not a pilot plant is in progress? [Interpreted] My third question is around your ammonia securement plan that you're scheduling for 2023. It would be great if you could provide some details around what your current plan is and whether or not the new capacity [ and ] plant will be eligible for carbon production rights.

[Interpreted] To address your first question, to provide you some numbers of our newly acquired pipelines. The guidance that we provided for our downstream business is that we start with a pipeline of approximately 6 gigawatts and add approximately 6 to 7 gigawatts of newly acquired pipelines per annum, of which would mean that we also need to secure approximately 6 gigawatts of new projects within this year, of which we have currently secured about 3 gigawatts of [ certain ] freshly added pipelines. And we still have to acquire additional 3 gigawatts throughout the remaining period of this year. To provide you an update of our n-type cell developments: Our initial guidance provided was that there will -- pilot will be run during year 2021 through 2022, with the target to manufacture and commercialize a n-type based perovs tandem module within the time frame of 2023 to 2024. According to this plan, towards the end of year 2021, we have plans to break ground for a n-type pilot production facility. And all relevant schedule and follow-on items are currently being followed as to be on schedule.

[Interpreted] To address your third question, around our nitric acid and DNT manufacturing plans. Our current business scope here at Hanwha solution is to manufacture DNT with secured feedstock of nitric acid. And the question that you have presented to us, I think, is more relevant with how we will secure ammonia and manufacture nitric acid from the ammonia. However, this business and value chain is currently being planned to be covered at Hanwha Corporation and not Hanwha Solutions, so I do not believe we are in a position to address and answer your question. And it would be great if you can address -- take this question and inquire to the IR department of Hanwha Corporation.

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

[Interpreted] I have 2 questions about the solar and PV business segment. My first question is, has there been a change of the sales breakdown, whether it be segment as in residential, commercial and utility; and also your national territories, on what countries or not? So if you can provide a comparison before and after COVID and if there's any meaningful changes, that would be very helpful. Second question is around your strategic shift in your downstream business strategy. You mentioned that there was a strategic revision of not down selling but operating and holding more downstream assets. Does -- and could you clarify whether or not this means that you will directly sell power to the retail market or the wholesale market; and if so, when these numbers can actually contribute and start being reflected in your financials?

[Interpreted] The market -- target markets and segment and countries for our module cells have not seen any large change during the COVID outbreak situation. We continue to sell about approximately 50% to 60% of our modules to residential and commercial markets and the remaining 40% to 50% to utility markets. However, we differentiate with other manufacturers where we do not selectively or aggressively address the utility market to sell large amounts in mass scale. Our highest priority is to, first, allocate our modules to residential and commercial markets and only provide utility markets with the remaining modules that we have after addressing the more high-priority markets. And as for the geographies of where our modules are headed and sold, also in this aspect we do not see any meaningful change. We are currently sending about 50% to 60% of our modules to the United States and European regions, and the remaining will go to other of our key strategic markets. However, we do not see any change being caused by the COVID outbreak situation. [Interpreted] As for strategic shift towards a more IPP-driven business model for our downstream business, yes, you are correct to assume that this means that the product we sell will shift to power from projects. However, this would mean that large-amount onetime sales or projects will be replaced with a longer-term, more stable business stream provided by power sales to IPP power offtakers through a PPA. However, we do not intend to hold and IPP all of our project pipelines. We will take into consideration of the PPA conditions being settled with our offtakers and also the amount of effort and costs being put into the project -- each project development and selectively and carefully select the better projects for IPP business and better projects for down-farming and project sales business. [Interpreted] And to address your question on when the power sales revenue and profits will start hitting our balance sheet. We -- as for -- also this is very similar to project development sales. We currently provide a guidance that, a newly acquired pipeline, dependent on what stage we acquired the project, it takes approximately 1 to 3 years for -- to enable to complete the construction and development of certain projects. And with plans to sell the project at COD, that would mean revenue starts to hit in a large amount at that time period. However, IPP model will also in -- the amount of time that is required to have the project [ reach ] commercial operation is about the same. However, the revenue recognized at the commercial operational stage is not a onetime big project sales revenue but a IPP-, PPA-based power sales revenue that -- which will be spread throughout the lifespan of the generating facility.

[Foreign Language] The next question will be presented by Yusik Hwang from NH Investments and Securities.

[Interpreted] Yes. I have 2 questions, both related to your petrochemical business. My first question is, in your presentation material, you mentioned that the petrochemical business margin spreads in Q3 will be [ challenged and squeezed ] due to newly -- new capacity coming online. However, could you provide some, I guess, detailed insights on what you mean by this and how this will impact the -- a bit more mid- to longer term of demand and supply and how you foresee the market to play out? My second question is about your comments in your equity incomes. You mentioned that the COVID outbreak will negatively impact equity incomes. Could you provide some insight on what product specifically is negatively impacted by the COVID outbreak?

[Interpreted] Thank you for your question. To address the first part of your question of our outlook of Q3 for petrochemical products. Yes, we do mention in our presentation that new capacity will come online during the third quarter. The products we specifically intend to address in this comment was polyethylene products. We are currently expecting to start to hit the market in Q3. However, we do see in the foreseeable future for this additional capacity to negatively impact market prices for these products. However, if we continue to see the global economy recover as we head out of the COVID-19 situation, heading into next year, we are quite confident that the additional capacity will be met with equally increased demand from the global economy. We currently see 2 significant variables to affect the additional capacity that comes online during the third quarter of this year. The first is a relatively slower and sluggish recovery of the developing markets with lower vaccination rates in comparison with the more developed economies. Due to the low vaccination rate, we are seeing the economy activities recover at a slower pace, so this will, I guess, be a significantly important aspect on whether or not new capacity is met with new economic demand. [Interpreted] The second variable that we are closely monitoring is the record-high maritime logistics costs that we are currently seeing. Due to the high logistics costs to trade polyethylene products, we are seeing market -- regional market prices being decoupled due to physical, [ I guess ], transportation restrictions. So limit -- so which will -- which limits the market window for arbitrage trades for commodity products. However, we will continue to monitor these situations to make sure that we are -- have the right information and make the right business decisions. And the comments made for the products that are impacted by the COVID-19 outbreak: This is the scope of this comment does not entail our petrochemical products. This is more focused on our other shareholdings that we have in our hotel and resort business chain. So actually this is not concerning our petrochemical business. In the interest of time, we have enough time for possibly one more question.

[Foreign Language] The last question will be presented by [ Hong Soon-sa from Chemical Energy Investments Management ].

[Interpreted] I have questions around the last page of your presentation material, which is around your mid- to longer-term strategy around the hydrogen business value chain. I can see that the current plan is to manufacture hydrogen through, I guess, green, renewable solar energy; and possibly provide the produced hydrogen to hydrogen, I guess, transportation. My question is around whether or not how you see the economics of hydrogen to match and possibly beat the economics of the current, yes, battery-powered electrical vehicles. And if so, if you see the economics of hydrogen cars to match the EVs, when do you think this will actually be realized? [Interpreted] And the next question is, do you have any plans to utilize gray and not green hydrogen currently abundant in the market? Last question would be how much of CapEx investment do you see is required to realize the current mid- to long-term hydrogen strategy?

[Interpreted] To address your question about the economics of hydrogen-powered vehicles and battery-powered vehicles. Yes, we are seeing a increased sales and production of consumer vehicles; of small, I guess, transportation vehicles powered by batteries. However, we see hydrogen to have better economies around larger commercial applications of transportation. We are currently seeing a lot of global, I guess, start-ups and companies committed to produce and supply the transportation of commercial vehicles through hydrogen -- powered by hydrogen. And we are seeing a lot of actual players and manufacturers selling and producing at commercial scale for these specific commercial applications. However, in order to provide certain or firm numbers on how economic the hydrogen-powered vehicles can be, more solid numbers, however, should be provided through us after we have more, I guess, insight and maturity of the development of our electrolyzers currently being developed by our chemical business divisions. [Interpreted] To address comments around gray hydrogen. Yes, there is no technological restriction on using the hydrogen produced in this manner. However, once economic entities start to recognize the price of carbon and the current emphasis on minimizing carbon footprint is accepted by the global economy at [ largest ] scale, the economics of gray hydrogen will not be able to match, with the carbon price intact, the hydrogen produced in green or blue production methods. So yes, gray hydrogen does -- there's no problem with utilizing gray hydrogen at this time. However, we -- our understanding of that solution is strictly intermittent until we can reach green and blue. The amount of investment that we plan to inject in our hydrogen business maintains in line with the numbers that we provided during our equity raise last year. The accumulated investment up to -- into 2025 will be approximately KRW 500 billion. [Interpreted] Thank you again for joining today's call. That's -- this concludes the Q2 2021 Hanwha Solutions earning presentation. Thank you. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]