Hanwha Solutions Corporation (A009830) Earnings Call Transcript & Summary

[Interpreted] Good afternoon. I am Han Sang-Heum, in charge of IR at Hanwha Solutions. First, I'd like to thank all the participants to the call. I would now go over the P&L and the general financials of Hanwha Solutions for the period of fourth quarter and the full year 2021. First, on P&L. Please refer to Page 11 of the presentation. The consolidated sales of the Q4 2021 increased by 15% Q-on-Q to KRW 2,963.1 billion, this is largely due to higher sales volume and ASP of Q CELLS and higher price of chemical products. Due to increasing logistics cost pressure from Q CELLS and 2 not one-off expenses of incentives for all divisions worth around KRW 100 billion, the operating profit declined by 53% Q-on-Q to KRW 84.2 billion. In the net income, due to the narrowing spread of the major products, the aggravating processes and the line change because of the one-off expenses, it turned negative to KRW 172 billion. And please refer to the bottom of the Page 11 for division-specific performances. Next, on annual P&L, please refer to Page 12 of the presentation. The sales for 2021 increased by 17% Y-o-Y to KRW 10,725.2 billion. This is mostly due to higher sales price of the petroleum and petrochemical products coming from higher oil price. Despite increasing COGS and [indiscernible] cost pressure of Q CELLS, the operating profit increased by 24% Y-o-Y to KRW 738.3 billion, thanks to better spread of key chemical products. Next on financials. Please turn to Page 13. As of the end of 2021, the total asset increased by KRW 4,870.3 billion from the end of the last year to KRW 20,007.6 billion. Cash and cash equivalents grew by KRW 451.7 billion from the end of last year to KRW 1,651.5 billion. Total liabilities grew by KRW 2,636.7 billion from the end of last year to KRW 11,806 billion. The total borrowings increased by KRW 186.2 billion from the end of last year to KRW 5,874.8 billion. And the net borrowings decreased by KRW 265.5 billion from the end of last year to KRW 4,223.3 billion, and the total liabilities-to-debt ratio decreased by 10 percentage points from the end of last year to 144%. Net borrowings ratio declined by the 24% point from the end of last year to 51%. Performance by business unit. First, Q CELLS. Operating profit of Q CELLS in Q4 was negative KRW 153.3 billion and the loss continues. And this is due to the higher COGS and logistic expenses despite stronger sales volume and higher EFD. And in the first quarter of '22, while ASP is expected to grow based on solid demand, the sales volume is likely to decline due to supply chain issue. Combined with higher logistics costs, the loss is expected to continue. Next, on Chemical Division. Despite strong PVC and caustic soda markets, the Q4 OP of Chemical Division declined by 13% Q-on-Q to KRW 232.2 billion due to one-off expenses, including incentives. As for Q1, despite the base effect from the one-off expense, the operating profit is expected to decline Q-on-Q due to narrow spread of key products from oil petroleum and naphtha prices. Next on Advanced Materials. As the semiconductor supply issue has improved somewhat during the Q4, the sales increased. But due to higher material costs and incentive payments, the OP recorded negative KRW 2 billion. Moving on to the first quarter. Due to solid profit from the PV materials and expiration of one-off expenses from the previous quarter, we expect the profit to turn around. Next on Galleria. Despite one-off expenses, including incentives during the fourth quarter, the Galleria division recorded 15% growth in operating profit Q-on-Q of KRW 7.8 billion thanks to the strong sales of luxury and home living categories and seasonality. For the first quarter, the sales is expected to decline due to weaker seasonality, but thanks to better base effect from the one-off expense, the OP is expected to increase. Next on equity method gains. Due to the aggravating performances of equity method companies coming from the narrowing spread of key products due to our petroleum and naphtha prices, the equity method gain recorded negative KRW 21.3 billion. For the first quarter, the petroleum and naphtha price will continue to be high, while the key markets fare poorly. Also combined with the YNCC plant suspension, the equity method loss is likely to continue. Finally, mid- to long-term shareholder return policy. Please return to Page 28 of the presentation. Last February, the company has announced the shareholder return policy of about 20% of the consolidated free cash flow for the next 5 years. However, there has been concentrated investments to further grow PV in hydrogen businesses. Last year, such investment exceeded the valuable resources for dividend. And therefore, we cannot provide any cash dividend this year. I'd like to ask for your understanding. This concentrated investment for further growth will result in stronger corporate value. And when such investment begins to create cash flow for dividend, we will be able to provide a cash dividend and to purchase treasury stock in line with the mid- and long-term shareholder return policy. This concludes the IR briefing. Thank you.

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

[Interpreted] So 3 questions in total. First, Q CELLS module shipment for '21, I'd like to have the year ending figure. And also the target or the guidance for the year '22. The second question, you mentioned about the one-off expenses for Q4. I'd like to understand a bit of a breakdown for the one-off expenses of Q CELLS, which, as you have explained, has proposed off the incentives and the higher logistics costs and the increased COGS, I'd like to understand the breakdown, if possible. And the third question is with regard to the petrochemical products and there is also the one-off expenses. I'd like to understand better about that.

[Interpreted] So regarding the first question about the Q CELLS module shipment. In the year 2021, we have had 8.3 gig. According to the revised guidance, it was around 8 gig. So the actual is actually in line with the revised guidance. The year '22 target is around 10 gig will be the production volume. And out of that, 9 gig, more specifically, 9.2 gig, will be for the shipment. And now that we are talking about guidance, I'd like to share with you our prepared guidance. So we ended the year with the 20 -- 12.4, that is 12.4 gig for the end of 2021, and that is nominal capacity. And we expect that by the end of year 2022, it will grow to 13.2. And as you might have noticed, there are some gaps between the actual production and the nominal capacity. And that is because of multiple reasons. First is that we are currently in the process of increasing the size of the wafer. And for some products, then we are in the conversion into n-type and of course, we do have the capacity. But depending on the market demand, then we will be rather flexible more specifically on a certain quarter. We will focus more on the production of the smaller sized cells for the rooftop installation for the residential use. And regarding question #2 and 3, the one-off expenses for Q CELLS and Chemicals, I'd like to explain to that -- to those 2 questions combined. And as you have pointed out, in the fourth quarter of 2021, we have actually included about KRW 100 billion in -- as a form of one-off payment and that are mostly the incentives. And out of that, the Q CELLS share is about KRW 20 billion. That is for the OP related, but there are non-OP related one-off expense that is about KRW 200 billion. And that is the loss from the disposition of the tangible asset, and that is coming from the company's response to cater to the changing technology and the line conversion is the main reason for the one-off expense. And also, you've asked for the breakdown of the one-off expenses or other cost pressure on the Q CELLS side. And as you have pointed out, then there is increase in the logistics expense and the COGS. And out of those 2, that we were more affected by the higher cost. In Q4, we fared better because the ASP has increased, but the supply remained quite tight. So that has caused quite sizable pressure in terms of the COGS. So you might find in the spot price that during the Q4, cost seems to go down, but we do have some lagging effect. So there is some time lag when those lowering -- similar lowering costs are reflected. So we see that the cost has slightly went down and it is going back up. So those fluctuations in the cost or -- will actually determine our performance in the first quarter. So we believe that it is because of the increasing material cost and the logistics costs out of all the SG&A items that has affected negatively to the performance of Q CELLS.

[Foreign Language] The next question will be presented by [ Jaren Lo ] from BlackRock.

I just have 3 quick questions. The first one is on the one-off expense part for petrochem segment. So how much one-off expense has been booked for petrochem in the fourth quarter? And the second question is that you have mentioned that you are modifying the production line for some of the modules and making them -- shifting towards bigger modules. So I'm wondering what's the split or a breakdown of your module capacity by site going into 2022? And when you do those modifications, how long does it take? And sort of what -- how much CapEx do you need to spend?

[Interpreted] So the first question about the expenses for the chemicals for the fourth quarter is the KRW 55 billion, and that includes mostly incentive payouts. And about the second question, the breakdown per site for year '22, for China, it will be 3.9 gig; for Malay, it will grow from 2.3 to 2.6; and in case of Korea, it will grow from 4.5 to 4.9 gig; and in case of U.S., 1.7 are dedicated for module production. So in terms of the CapEx on a consolidated basis, the year 2021, we actually planned to spend over KRW 1 trillion, but we ended up spending KRW 800 billion, but this figure is subject to change according to the outside audit. For year '22, we expect to spend about KRW 1.3 trillion. Some of them are from the previous year. And out of those, the Chemical will receive KRW 500 billion; Q CELLS, somewhere between KRW 400 billion to KRW 430 billion; Advanced Material, KRW 200 billion; and the Galleria, KRW 50 billion. And more specifically about the Q CELLS. So as you have pointed out, that we have invested quite a lot to improve our manufacturing processes to increase the safe size of the wafer. And we expect this process to continue until the end of this year. So it has been a 2-year project that has started from earlier last year from 2021, and end in -- by the end of 2022. And as for the TOPCon and the n-type conversion, it is also happening. So most of the CapEx that I have listed in -- earlier will be for this process change.

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

I have a couple of questions. The first question is on your power plant sales. I see that in fourth quarter, there was actually no power plant sale, I think. Why was this? And what is your revised expectations for 2022? Second question is, obviously, the soda division, margins are under pressure in terms of the module side. And just now you mentioned a bit of a lag in terms of cost. Is this 1 or 1.5 months lag? Could you share more details on that? And considering that lag, are you expecting margin improvement in first quarter or potentially worsening? Third question is on the YNCC fire incident. Could you give us an update? And your expectation on earnings impact in 2022?

[Interpreted] As for the first question about the power plant sales, so we actually forecasted the sale of a similar megawatt in the second quarter of last year, but that has been deferred because of many different reasons, some of them include the cost and the price of modules. So we expect the deferment to continue until the second quarter of this year. So that is the revised time line. And because of that deferment, there has been no recognition in the fourth quarter of last year. And for the year '22, so we project about 1.5 gigawatts of projects that will be -- could be one of many different formats in terms of the type of the project. It could be the total sales or the partial sales of equity or equity IPP. So combining all of those different form, it will have the 1.5 gigawatts. And in terms of its location, it will be both United States and Europe, and the division or the split will be 50-50. And the project that we've had before, that is one in the fourth quarter of 2020 and the second quarter of '21, the type of the project was the total sales. And we actually enjoyed the profit from those sales. But for this year, of course, there are some uncertainties or the decision is still to be -- final decision is still to be made. But out of 1.5 gig capacity, about 20% to 30% will be reserved for either IPP or the partial ownership will be maintained. So because of that reason that we can provide a guidance about the total size. But in terms of the sales and the OP margin, it is still subject to change, is still variable because we are yet to decide on the final form of the project. And our projection for the first quarter is that, of course, that the fourth quarter, we have enjoyed a stronger sales. Sales volume has increased, but some of the key markets, the conditions are still quite tight. And we still have some difficulties in shipments and delivery. And there are historical seasonality in the first quarter. It's usually the low season. So we expect the shipment will decline in the first quarter versus the previous quarter. And ASP, it has increased in the fourth quarter, and we expect that trend to be maintained in this quarter, the first quarter as well. And also the cost, it went up quite significantly in the fourth quarter. And this trend, the higher cost, the trend will continue in the first quarter, but the degree of the cost increase will be much higher in the previous quarter than this quarter. So the cost of sales will be higher or the degree of the cost of sales going up will be higher in the fourth quarter than in the first quarter. So all in all, then we -- our performance in the fourth quarter was rather lower than our expectations, but we believe that the fourth quarter is the timing where we are bottoming out. So in the fourth quarter, we will still record some negative profit, but the things will be much better than the previous quarter. And about the last question. The fire at the YNCC and its impact in our earnings. And YNCC, as you can see, the petrochemical -- petroleum and naphtha price has been quite weak and the overall market has not fared very well. And we've had this incident at the YNCC plant #3 on February 11. And this facility actually received an order of operational suspension. So that will actually prolong the period of loss for a certain period of time. But as you might have noticed in our consolidated performance for the fourth quarter of YNCC, the NCC market overall are in a relatively poor condition. So based upon that, this incident at YNCC plant #3 will have only limited impact on our performance overall.

[Foreign Language] The next question will be presented by Yu-Jin Jeon from Hanwha Investment & Securities.

[Interpreted] So 3 questions in total. First, the sales price of PVC and caustic soda has increased quite significantly these days. And do you have any plan to increase the capacity -- production capacity? And how do you see the future market will fare? And the second question is that S&P price has went up quite significantly. And it is expected that the margin from the PV power plant will also increase globally. So I'd like to understand, has there been any change in the sales of the capacity of this power plant -- solar power plant? And has there been any increase in the transaction? Do you see any increase in the market movement? And the third question is that if the Biden's SEMA passes, then do you expect that there will be the additional cell or module expansion than 1.8 gig? Or it will be for the sale extension only?

[Interpreted] So first, let me start with the market forecast or the market prediction for the PVC and caustic soda. PVC, the facility expansion for this year globally is estimated at 2.48 million. And that -- but that includes the transition into the carbide method of 1.1 million tons. So actual increase in capacity will be much fewer than 2.48 million tons. But as you are aware, the global demand of the PVC is somewhere around 2.5 billion. So the PVC market will continue to fare strongly or remain in the same level as last year. And for the caustic soda, and there are only limited capacity expansion globally, but the demand is growing quite solidly. And the supply and demand situation in Asia is remaining quite tight. So because of those reasons, the global market will fare quite strongly for the caustic soda. And recently, there is an increase in demand for the secondary cell production. So that will also work to its favor. About the second question, the change in the S&P and any change in the power plant market. But there are many variables that we need to take into consideration. That might include the types of contract. Does it have the GPP-8 contract? Will it reflect or absorb the price hike? So there are the flexibility embedded so that it can absorb this hike, then we might be able to expect some additional future value. But if it's a fixed amount of contract then, not so much. And in terms of the module, that we will have to also understand the variables as to when -- what is the current stage in the module installation and how and when the module price has been determined. So there are many variables that we need to take into consideration per project. But if you ask me, if there is any change in the overall trend in the market, not so much. I have not witnessed any major change or -- nor heard. And about the third question. If and when the SEMA passes, then we will have any change in our plant 4, the plant that we already have in Georgia, United States. It has the 1.8 gig of module capacity. And you mentioned that do we have any other plan for the cell expansion. Well, let me tell you that the module is there, but the cell extension is not finalized, so there are some uncertainties surrounding that. So if you ask me if there is anything on top of that, of course, it is undecided. But it is up for review because the U.S. has been and it continues to be a very important strategic market for us. So we have already a facility there. So -- and when the SEMA works to its favor of our operation, the manufacturing in the United States, of course, then we will review positively of the potential synergy that can be created. But in terms of the size and the timing or whether or not we will have this cell or module expansion, well, we need to review that in a more holistic fashion because we do have locations other than the U.S. So we have to look at that. And also, we do have ongoing tradition order project, the n-type conversion. And the platform of tandem, we are targeting to complete that by the year 2025. So the progress and the success of those projects and the timing will need to be reflected when -- if and when we make the decision for the further expansion. Because of the time constraint, we will take one final question.

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

[Interpreted] Two questions. First is that the photovoltaic from polysilicon to change the overall, the cost has increased, and this is the trend that goes against what has happened in the past 10 years. So do you believe that it will work against increasing demand, the demand for the panel? Because what I have found is that in the past 10 years, the price of chain has normalized or has went down. And that actually drove the demand for those products. But because of the change in the price, will it have any impact on your forecast for the year '22? And the second question is about the caustic soda. I understand that you plan to have the facility expansion for the caustic soda for the secondary cell, then do you have any breakdown? Or the idea as to whom or to where it will be made for?

[Interpreted] So about the first question, is that the higher price will undermine the demand for the installation. And to respond to this question that I was able to actually witness those trends, but for a short term. I do believe that it has evolved into a major trend because that has happened only for a short period of time. I have not witnessed any cancellation of project or the major delay of the existing projects. So of course, that the module price went up from the third quarter of last year, and it has continued on for the fourth quarter and into the first quarter. But in terms of the installation that has completed last year, I believe that it was in the similar range. And for the year '22, so the cost increase when that will end and how it will impact the price of module. So we believe that in the first half or by the end of first half that we might see some signs of the supply issue being resolved and there is no longer such a strong upward pressure for the cost. So we expect the situation will be much better in the second half. So the question is what -- when that will happen in the second quarter or the third quarter? But I believe that the prevailing opinion is that this kind of -- the extraordinary conditions that we witnessed last year would not continue so much this year. So that, I believe, is the reason why we are not witnessing such major delay in projects or the cancellation thereof. But of course, until those issues are resolved, it might have some limited impact on the demand. So on a spot basis or isolated basis, we might see some impact. But it is not a trend. I rather see it as a spot incidence or isolated incident. In terms of the demand for the year '22. So it will be somewhere around 30 to 40 gig, so increase from the previous year. And as for the U.S. market, price will be a factor, but not that major. Rather, the policy or the future policy direction will have more impact of slowing down the increase in the demand. But overall, we are seeing about 30 to 40 gig of demand increase that are driven by the main -- the leading markets, namely the U.S., China and Europe. So your second question about the caustic soda and the expansion. Unfortunately, I cannot disclose our customers' information. But to give you the general direction, the general information is that the demand for the caustic soda that goes into the secondary cell for the EV in the next 10 years will grow by 16x, 16-fold increase that is expected. And the caustic soda usage per gigawatt hour is 430 tons. So the forecast is that by the year 2030, the caustic soda usage will be about 1.3 million. So this caustic soda is used for the [indiscernible] of this cell. So I cannot disclose any specific names, but you, just in general ideas, as to who our customer is.

[Interpreted] So this concludes our IR call for the fourth quarter of 2021. Thank you very much for your participation. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]