Hanwha Solutions Corporation (A009830) Earnings Call Transcript & Summary

[Interpreted] Good afternoon. I am Shin Yong-In, CFO of Hanwha Solutions. First, I'd like to thank all the participants to the call for your time. I will now go over the P&L and the general financials of Hanwha Solutions for this period of third quarter 2021. First, on P&L. Please refer to Page 7 of the presentation. The consolidated sales of Q3 2021 decreased by 7% Q-on-Q to KRW 2580.3 billion . This is largely due to reduced sales volume of Q CELL. The prolonged pressure from raw material and the logistics cost and narrower spread from the chemical division lowered the operating profit by 19% Q-on-Q to KRW 178.4 billion. Please refer to the bottom of the Page 9 for division specific performance. Next, on financials. Please turn to Page 10. As of the end of Q3 2021, the total asset increased by KRW 2,640.5 billion from the end of the last year to KRW 17,777.8 billion. Cash and cash equivalent grew by KRW 629.4 billion from the end of last year to KRW 1,829.2 billion. Total liabilities grew by KRW 201.5 billion from the end of last year to KRW 9,471.1 billion. And the debt decreased by KRW 373.8 billion from the end of last year to KRW 5,314.8 billion. Net borrowings decreased by KRW 1,003.2 billion from the end of last year to KRW 3,485.6 billion. And the total liability to debt ratio decreased by 40 percentage point from the end of last year to 114%. And the net debt ratio decreased by 33 point -- percentage point from the end of last year to 42%. Next, let me go over performance of each division. First, Q CELL. The operating profit of Q CELL in Q3 was negative KRW 95.7 billion, and the loss continues. This is due to reduced sales volume and higher wafer and the logistics cost despite higher ASP. While the shipment volume is expected to increase in Q4, the high cost burden will be maintained as well as the loss. Next, on Chemical. The operating profit for Chemical in Q3 declined by 9% Q-on-Q at KRW 266.8 billion. This is due to the lower sales price and narrower spread for some products. While the fourth quarter is traditionally low season and overhaul is planned, strong PVC and caustic soda market allows for fair performance. Moving on to Advanced Materials. Despite higher raw materials cost and prolonged short supply of the semiconductors for automobiles in the third quarter, the Advanced Materials recorded KRW 2.3 billion of operating profit, thanks to stronger performance of materials for electronics and solar panel. We expect the OP to further increase in Q4, with the new model launched by the key automobiles customer and the lower COGS Q-on-Q. Next, on Galleria. In Q3, Galleria experienced lower sales due to another spike in COVID-19 and ensuing dampened consumer sentiment and seasonality. The operating profit, however, increased by 209% Q-on-Q to KRW 6.8 billion due to the base effect from the property ownership tax payment in the previous quarter. In Q4, the so-called living with corona is likely to boost the consumer sentiment and the sales of luxury goods, and the home and living category is expected to grow. Now I will report to you on the equity method gains. Despite the decline in performance of equity method companies, the Q3 equity method gain grew due to increase in ownership interest from the acquisition of the Hanwha Impact equity. In Q4, the equity method gain is expected to decline as the spread for key products will get narrower with the high petrol and naphtha price. This concludes the presentation on the performance of the Q3 2021. Thank you for listening.

[Foreign Language] [Operator Instructions] [Foreign Language] First question will be presented by Jae Sung Yoon from Hana Financial Investments.

[Interpreted] So 2 questions regarding Q CELL. During the presentation, you mentioned that the sales volume declined in the third quarter. I'd like to understand the reason behind it. And I'd like to also know about the predictions for the fourth quarter in the greater detail. And the second question is that, in the disclosure, there was a mention about the new business, and please specify.

[Interpreted] So regarding the first question on the decline sales volume in Q3, is that in Q2, that we actually expected the sales volume to increase. But because of the shortage of electricity that happened in China, we made a strategic decision to reduce the production volume. And that will impact our sales in the third and fourth quarter. And our prediction for the fourth quarter is that, up until the third quarter of this year, there hasn't been any major outlier in terms of the sales volume. But in the fourth quarter, there will be the concentration of demand, and that is being witnessed globally. So we are forecasting our sales to grow in the fourth quarter. And also in line with that, we are witnessing increasing ASP until the third quarter. And this trend is getting more pronounced in the fourth quarter as we are going into October. And that is, as you can imagine, driven by the increase in demand and the higher COGS because of the shortage of electricity supply, and that is affecting the cell and module price. But these will not necessarily aggravate our forecast for the fourth quarter, but the COGS overall and the logistics expense remains relatively high. So that is the reason why we are forecasting a loss for the fourth quarter. And we are also taking into account reduced sales production volume in the second half of this year. So with all of those considered, the sales for outward usage is reduced from 9 gigawatts previously to 8 gigawatt. In the planned sales of the generation project, it is proceeded as planned. And the total volume applicable for these sales is according to the guidance that is within 400 to 500 megawatt. And that are being done in 2 different stages. The first stage was completed in the second quarter, and that accounted for about 50% of the total volume. And we expect the remaining 50% to take place on time in the fourth quarter. And as to what kind of impact that we can expect in terms of its performance for the fourth quarter, it's too early to tell, because even though the overall scale is within the guidance, it's -- exactly when these projected sales take place will have some implications on the degree of impact it will have in the fourth quarter performance, so then I can share the exact implications with you after the effect. I will now elaborate on the latest disclosure which happened just before this call on the new project. So that is part of the paid-in capital increase that we've had throughout last year and early this year. And the purpose of the capital increase is to invest in our new product development and install the production facilities for that utilizing the next-gen technology. And that will affect our production facilities in -- not only in Korea, but also in Asia, U.S. and others. And that will be our midterm project that was spent until 2025. So the disclosure that you have seen just before was pretty much the same as to what we have shared with you earlier. But it is kind of realigned with more details that spans to the period of 2025. So internally, what we are doing as of now is we are looking into the overall plan readjustment covering the U.S. and other major markets, as to what will be the optimal capacity that this new or next-gen technology will be applied. So we are doing this internal analysis right now. But for Korea that we have a better ideas as to where we are going, how we are going by the year 2025. So that is why we have shared that information with you.

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

So I have 3 questions. The first question is on Q CELLS. Currently, the situation for fourth quarter doesn't look too good, as you've pointed out. But what is your outlook for 2022? Do you see potential for the loss in 2022 to widen? What is the company doing to reduce loss? And the -- when do you expect to turn back to black, if any? And also, what is your shipment guidance for 2022? The second question is on your hydrogen business. Could you give us an update on when do you expect to start generating revenue and earnings? And just could we get a rough estimate of your expected earnings over the next 3 years? And the last question is on your -- could you give us an update on your plans for treasury share cancellation or share buyback over the next 6 months?

[Interpreted] So first, on the forecasts for the 2022. So even though we are going toward the end of this year, October, November time frame, our internal schedule is that we are still in the planning and budgeting processes. So it has been our practice to share our -- following your guidance, when we do the earnings call for the fourth quarter, that will be the February of next year. So I'd like to first ask for your understanding on that. But if I may share, our best possible forecast as of now is that our target is to go black next year in 2022, because we believe that '21 has been an extraordinary year, not necessarily good sense because we were under a lot of strain from the COGS and the logistics expense. So we have to overcome this comprehensive, and the challenges from all fronts and the overall market was -- it's pretty much abnormal condition so it was externally difficult for us to predict how the market will go. So in general, we do not want to repeat what we have experienced this year in 2022. But to do that, we need to have this major condition satisfied. That is the supply of polysilicon and the wafer needs to be much better than this year so that we can expect to have a much better performance next year. Of course, there are some differing opinions with regard to the timing and the scale. But the general consensus puts that the second quarter is the time where the polysilicon and the wafer supply are getting loose or it's -- the situation gets better. And we generally agree to this view. And this year, there has been a major production increase or the facility increase for wafer, and that is also planned for the year 2022. And for the polysilicon, with the increase of supply coming out from the second quarter and onwards, the upstream of our value chain situation will be better. And we might not be able to repeat what we have experienced this year and next. And we will have the detailed shipment guidance also in February. But if I may also share, our best guidance as of now is that by the end of this year, the nominal capacity is 12.4 gigawatt. But considering the reduced sales volume, the outward sales or outside sales will be about 8 gigawatt. And also, the differentials will be reflective of the volume for the power generation and ongoing transition of wafer into the lot size and also the n-type pilot. So it is not to say that the 12.4 gigawatt will be our full production volume for next year. But I can say with some degree of confidence that we will continue to increase our sales volume next year.

[Interpreted] So on hydrogen. So in terms of the -- mostly -- most likely, earnings to be recognized is that, as was introduced in the recent media coverage, is the order that we have received from the U.S. company called Sunbridge, that is KRW 300 billion worth of the CNG tank. So to supply to this customer, then we would need to make an initial investment worth KRW 60 billion into the facility. But we will be able to start the shipment from the second half of next year. And the supply will be maintained for the next 10 years. And we will be able to add additional customers into our portfolio. And as regard to the hydrolysis technology, that we will complete the technological development until the year 2023 and the commercialization will start in the year '24 and '25. So within the next 3 years, we don't have any plan to generate any revenue. And finally, on the treasury stock for the next 6 months, we don't have any plan to purchase treasury stock within the next 6 months. But we might be able to share the greater detail when we complete the annual closure and disclose you -- with you our yearly performance.

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

[Interpreted ] So 2 questions. First is about the latest disclosure about the domestic investment. So this size of investment will have some kind of implications on the domestic production capacity. So what kind of change can we expect? And also, is the planned investment is to do with this tandem technology? And the second question is the investment for the overseas production facilities led by the U.S. market. So when -- by when we will know more about your facility expansion plan?

[Interpreted] So what kind of capacity implication this plant or the announced domestic investment will have? Well, I do not believe that I'm ready to share any official figure with you just yet because we are in the process of doing the general alignment. So I'll be able to share more definite figure when we do the next round of call in the February of '22 along with the plan for other plans as well. And as you have rightly pointed out, that this will combine the next-gen technology integration, so moving into the n-type and the n-type cell and the tandem cell R&D and the commercialization for the domestic and international plans, so all of those are part of this planned investment that we just disclosed. And regarding your second question of overseas facility expansion. So as you have expected, that it will be kind of just difficult to disclose exactly when the expansion will take place. But we are considering [indiscernible] all the possibilities open. And we are keeping a keen eye on any post change that happens. So we will make a timely decision. But going back to -- looking back to what has happened in the past 2, 3 years, there hasn't been any meaningful facility expansion or capacity expansion. And that is because that we put the higher priority on the technological conversion into the newer and better technology. And if and when we see some kind of progress in that front, then of course, we want to expand the implementation of it so that we can secure the market leadership position. So we are in the process of reviewing this plan in a comprehensive fashion. So when that's done, then we'll be able to share that with you through the official disclosure. And I have this updated figure as to the expected capacity expansion after the planned domestic investment, that is 7.6 gigawatt. And that is the natural increase in efficiency with the conversion of the processes and also the technology core conversion. So all of those combined, 7.6 gigawatt.

[Operator Instructions] Currently, there are no participants with questions. We will wait for a second until there is another question.

[Interpreted] If there is no further question, we will end the earnings call for Hanwha Solutions for the period of third quarter of 2021 now. Thank you, everyone, for your participation. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]