Hanwha Solutions Corporation (A009830) Earnings Call Transcript & Summary

Good afternoon. I am Shin Yong-In, CFO of Hanwha Solutions. First, I'd like to thank all the participants to the call. I will go over the P&L and the general financials of Hanwha Solutions for the period of the second quarter of 2022. First, on P&L. Please refer to Page 8 of the presentation. The consolidated sales of the Q2 '22 increased by 14% Q-on-Q to KRW 3,389.1 billion. This is largely due to higher sales volume and the ASP in Renewable Energy and a quarterly increase in revenue in Chemicals, Advanced Materials and Galleria as well. As higher ASP turned around the Renewable Energy division, the operating profit increased by 76% Q-on-Q to KRW 277.7 billion. Please refer to the bottom of Page 8 for performance by division. Next on financials. Please turn to Page 9. As of the end of the second quarter of '22, the total asset increased by KRW 2,476.8 billion from the end of the previous year to KRW 22.484 billion, and cash and cash equivalents increased by KRW 262 billion from the previous year-end to KRW 2.116 billion. The total debt increased by KRW 1.558 billion from the previous year-end to KRW 13,364 billion, and the total borrowings increased by KRW 845 billion from the previous year-end to KRW 6,719.8 billion. The net debt increased by KRW 582 billion from the previous year-end to KRW 4,602 billion. And the total liabilities to equity ratio increased by 3 percentage points from the year-end to 147% and the net debt-to-equity ratio increased by 1 percentage point to 50%. Next performance by segment. Renewable Energy. Q2 sales of the Renewable Energy division recorded KRW 35.2 billion and turned around. As the fast rise enterprise of fossil fuel drove electricity price higher, it created a conducive environment for stronger margin price. Coupled with overall strong demand, the sales increased. In Q3, boosted by the strong global installation demand, the model price is expected to show strong upward tendency allowing for additional profit improvements. Next on Chemicals. The prolongation of higher materials costs, including the oil price due to the war in Ukraine and the seasonality of some key products, rendered the spread to narrow. The Q2 operating profit for Chemicals decreased by 11% Q-on-Q to KRW 228 billion. As the strong materials price is expected to continue in Q3, the sluggish economy will dampen the demand to further narrow the spread and smaller operating profit. Next Advanced Materials. Due to strong production and the sales of automotive and solar customers, the Q2 OP of Advanced Materials increased by 453% to KRW 16.6 billion. For Q3, however, the operating margin will decline as major customers will go on summer vacation. On Galleria. Despite sales recovery during the second quarter with the relaxing social distancing measures, the property tax payment impacted operating profit to decline by 60% to KRW 2.6 billion. While the seasonality is expected to affect the sales negatively in Q3, the base effect of property tax in the previous quarter will drive the Q3 operating profit. Equity method income. Equity method income in Q2 recorded KRW 55.2 billion thanks to stronger performance of key equity method companies due to better spread of key products and favorable exchange rate. In Q3, the slow economy will weaken the market of key products, reducing the equity method income. This concludes the earnings presentation. Thank you for listening.

[Interpreted] Now Q&A session will begin. [Operator Instructions] The first question will be presented by [indiscernible].

[Interpreted] So there are 2 questions. But because of the poor connections that try to connect -- cover as much as possible, but there could be some missing. So the first question -- or there are 2 questions about the Renewable Energy. And it seems that the performance is actually much better than the expectations. And the question is that, was there any increase in the volume? And any price-related changes that is out of the bounds of expectation? And the second question is that it has been recently reported that the solar energy-related legislation in the United States is in a more favorable position to be passed. So if it turned out that the bill is to be passed within the time frame that is supposed to, then what kind of impact do you expect to see for Hanwha solutions?

[Interpreted] So the first question is that on the Q-on-Q basis, the sales increased by 34%, and is that attributable to the price or the volume. I would answer that the 2 factors affected to the stronger performance all at the same time. ASP, of course, helped, but there was a meaningful increase in the sales volume. We have given you as a guidance for the external sales of the Renewable Energy to be 8.2 gigawatt, but we'd like to revise this figure for this quarter slightly to 8.5 gigawatt. So if that we divide that into quarterly -- evenly into quarter, then we would expect to see somewhere between 2.2 to 2.5 gigawatt sales. But I have disclosed to you earlier that for the first quarter we were not able to meet that quota. That is because of the seasonality and other issues. And for the second quarter in the previous call, I have signaled that there is a sign of recovery. And true to that, for the second quarter, we were able to record about 2 gigawatts of sales. [Interpreted] And also there were questions about some descending disparity or the gap of the company's ASP versus the market ASP, and that could be explained with the different concentration of the sales area of the company. As you are aware, that ASP vary by region, by country. And if you refer to the data published by the research agency, then it is mostly centered around the domestic Chinese product. But as you're well aware, then our customers are mostly located in the United States and the European countries. So it has some disparity or some gaps in terms of the ASP versus the domestic price of the Chinese market. So considering our sales mix and the geographical mix, the ASP of the company is slightly different than the market average. [Interpreted] And the next question is the U.S. energy bill that is more likely to be passed and what kind of impact it will have on the company overall. So we are still waiting for the final bill to be passed. So -- but we have shared with you on multiple occasions that we are developing our mid to long-term expansion plans and also some of the additional growth strategy. So 4 various scenarios that we are actually reviewing our response strategy. So we will have to wait and see what the final bill will look like, but I believe that we will have plans and strategies in place to respond to any upcoming scenarios.

[Interpreted] The next question will be presented by Dong Jin Kang from Hyundai Motor Securities.

[Interpreted] So first of all, congratulations to turning around in the renewable energies after a long slow quarters. I have 3 questions around that topic. The first is that according to your IR presentation, you have predicted the ASP for the third quarter to remain in a very strong upward trend. But it also is predicted that the price of wafer and the polysilicon is expected to be higher than the previous quarter. But despite the fact that you expect the profitability to be further expanded, do you forecast that the other raw material costs and the logistics cost will turn to your favor? And the second question is that out of the total or volume of 8-plus gigawatt, then can you share with us the regional breakdown as to where does this volume go? And the third question is that it is expected that the ASP increase will be much faster in European region. What is your forecast for your main markets of Europe and the U.S.?

[Interpreted] So for the third quarter, we expect the strong profit will be continued. And let me explain the background behind that. So as you are aware, the electricity price are on the rise, and that is creating a conducive environment to drive the demand for the solar panel. And as you are aware that we have had some hard times or difficult times because of the cost pressure, and we might be able to overcome this pressure with a higher ASP because of this conducive environment. And as the electricity price will expected to remain high, so our forecast for the second half will remain positive. [Interpreted] So for the raw material cost during the second quarter, the price of the raw material dropped slightly, but it has rebounded. And for other materials, it remained on the rise. And we actually recognize the cost on the average. So if there is any change on the volatility, so we are in the better position because some of the inventory that we have purchased at a lower price could be reflected. But overall, the raw material costs will remain strong. And in the third quarter, this wafer and the polysilicon price will continue to rise. And also the EVA sheet and the glasses and especially glasses are manufactured and/or purchased from China. And in China domestically, the model price remains rather strong. And so there is the price resistance, so it -- there is a possibility that the price of other materials might be weakened, but we are actually favored by the stronger ASP or higher ASP that is boosted by the higher electricity price, and that will further drive the spread. [Interpreted] So to sum up, the price for the materials will remain high and will do so for the foreseeable future. And we do not expect to see some major fluctuation. So the high price will be maintained, and we are not forecasting also any sudden rise in the dollar price. [Interpreted] And about the second question, the regional breakdown of 8-plus gigawatt is that to give you the regional breakdown, the U.S. and the European market accounts for 50% to 60% of our overall sales. Of course, there could be slight up and down on a quarterly basis, but this portion of these 2 markets remain very high. And they have a very strong strategic importance for us. So we will continue to focus on these markets to have a higher market share. [Interpreted] And overall, market forecast, including the U.S. and European market. So the global installation demand was forecasted at 200 gigawatt. And that was the bottom line, but it is the current trend that this forecast is being revised upwards. So in line with that, we are looking at the global installation demand to increase to 230 gig, and that is a huge increase from the previous year where it was somewhere between 180 to 190. [Interpreted] And for the European market, we expect the 30 gig will be met. And because the continued war on Ukraine is driving the electricity price higher and there is a renewed awareness on the importance of energy security and the sense of urgency around that. So for the photovoltaics company, then we are in a better position to secure the demand for the mid to long-term basis. And the market is more accepting the higher ASP than before. And in Q3, as the summer holidays are in earnest in major markets, we are not witnessing any major increase in ASP, but it is maintained at a very high range. [Interpreted] And the situation in the United States are pretty much the same, but the supply is in a tighter position and there is the policy implications as well. The WRO that was further escalated into UFR LPA actually impose some restrictions into the volume that are being entered into the U.S. market. So because of a very strong demand, we expect the ASP to remain in a favorable position. But because of the shortage in subside, the overall installation might decline than our original expectation. But overall, the Europe and the U.S. market will demonstrate a very strong demand, and that has contributed to our stronger performance for this quarter.

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

And congratulations on the strong results. So I have a couple of questions. First question is on the solar division. If I look at 2023 or 2025, could you share with us your expected sales mix by geography? Will U.S. and Europe still be 50% to 60% or could it be higher? And also what kind of volume growth are you expecting in the mid to long term? And what is your margin outlook? Do you expect it to be sustainable at mid-single-digit margin? The second question is on your REC Silicon assets. I think you acquired a state back in the past and that there is an 18,000 ton per annum polysilicon asset there. Under what conditions do you expect the plant to start up? And if so, what earnings contribution do you expect? And the third question is on your hydrogen business. I think in the past, we were expecting some brisk sales to be booked in the second half. Is that still the case? And if that happens, will it be booked and which division will it be booked and will be booked under Renewables division.

[Interpreted] So about the first question, to midterm forecast for the regional sales mix for the period of 2023 to '25, as I've mentioned earlier, the U.S. and Europe are our strategic key market. So we do have a plan to further expand sales mix. Of course, we do have internal targets, but I do not believe that it's appropriate for me to actually disclose this internal target. But what I can share with you is that our focus remains in these 4 markets or the 4 countries namely the U.S., Europe, Korea and Japan. In case of the United States, considering the size of the land and the potential demand, the annual volume is only 20 gig. So we definitely see some upside potential. In case of Korea, considering the size of the total marketing demand, we are doing about 3.5 to 4 gig. And out of the European countries and Germany is traditionally very strong in the solar energy. They are doing the 4 gigawatt plus alpha. So considering that, then there is a definite high potential for the U.S. market. And combined with the expected change in the policy with the expected testing of the bill or getting closer to the passing of the bill, then if and when we see more favorable conditions in the U.S. market, we will definitely focus on further increasing the sales in the U.S. market. So even though I cannot disclose any definite figures, we are going in that direction to increase the volume growth. [Interpreted] One correction. The German volume was 4 gigawatt plus alpha, but it is expected to be 7 gigawatt for this year. And for midterm volume, we -- I have shared with you that we are actually reviewing the facility expansion and when the review process is completed and when we have some tangible figure to share, then we will do so. But in the meantime, we are in the process of transitioning the wafers into the larger size. And also we are introducing this next-gen technology. And so that will be completed somewhere in -- so that is something that is currently underway. And when that is completed, then we will definitely see the stronger performance. But in terms of the nominal capacity, the figure that we are using as baseline is 12.4 gigawatts. That is the figure as of the end of 2021 in terms of the production and the sales that we are slightly behind that. And -- but I have shared with you the outside sales for the modules is 8.5 gig for this year. But without any capacity expansion, the current lead plant, process improvement will be able to support that increase. And as was reported by the media, we will add 1.4 gigawatt to the U.S. module facility. The facility has 1.7 gig in its existing capacity, and we will add 1.4 gig sometime next year. So this is something that we are planning in the next couple of years, the capacity expansion and the improvement in the processes and also the commercialization of the next-gen technology. So we are still trying to figure out the best way to commercialize or to complete the technology and also there are some uncertainties around gating the policies or the regulatory environment. So we are trying to figure out the best possible strategy as to where do we focus on and what and by how much. So when we have something more tangible, then we will share that plan with you. [Interpreted] And also with regard to the margin outlook, so we are shooting for the mid to high single-digit OPM. But as you are probably aware that we are making a huge initial investment, so to -- so the front forward investments are making the margin outlook a bit weaker in the front. But as time passes, we will definitely see a higher margin. And if I may share some ambitious goal that we are shooting for the double-digit. [Interpreted] So for us to further improve the profitability, it all depends on the next-gen module and also the generation business. And the module price -- the recovery of the spread is our utmost important test. But if we maintain the mid to high single-digit OPM, then that will help us to recover from the prolonged deficit.

[Interpreted] And for the hydrogen business, there is no update with regard to electrolysis. But for the Advanced Material, the high-pressure tank, the investment is currently underway for the facility in the U.S. We expect the facility to be completed -- the construction of it will be completed sometime this year. And with the contract with the Sunbridge Sunlight Energy and the Shell, then we will expect to see some meaningful performance starting from next year. Sunbridge Energy, correction.

[Interpreted] And about the REC Silicon and it is a listed company. So we are sharing any updates in the disclosure, but we are targeting 2023. So the reoperation -- reopening of the facility is currently under discussion. So I might not be able to disclose any further details. But REC Silicon, we are recognizing that under the equity method and unfortunately, loss for the time being. The facility has been suspended -- the operation of it has been suspended for some time. We would need to make sure that everything is in order, including the technology and the capability before we start the reopening, but we are trying to reopen the facility as soon as possible.

[Interpreted] The next question will be presented by Sung Hyun Hwang from Eugene Investment & Securities.

[Interpreted] So 2 questions. Based upon your sales guidance, and it is forecasted or it can be estimated that in the third and the fourth quarter, there will be 10% to 15% growth. And am I right in expecting that? And what will be the impact of the supply chain issues or the logistics cost for the second quarter? And with the increase in the volume of the shipment, what kind of impact does it have on the unit cost?

[Interpreted] So as I said earlier, the first quarter, the shipment was the lowest. It was below 2 gig, but it was all below 2 gig. But for the remainder of the quarters, it will record and it has recorded over 2 gigawatt. So with that combined, we'll be able to meet the guidance. The fluctuation per quarter, we expect that to be somewhere around 5% to 10%. So it will be somewhere around 200 million gigawatts -- megawatts 200 million megawatts. And in the first quarter, that -- well, that was extraordinary situation on a quarter-to-quarter basis. And on some occasions in the previous fourth quarter, there was some huge increase in the demand and that has led to the 20% increase Q-on-Q. But that is an extremely extraordinary situation, and we do not expect that kind of major fluctuation to happen in the remainder of this quarter. Of course, we have forecasted the quarterly volume to increase quarter-by-quarter until the end of this year. [Interpreted] And in terms of the freight or the logistics cost, and in the second quarter, it went down slightly. And in case of Korea in June, we had a trucker strike. So on a Q-on-Q basis, even though the sales has increased, the overall shipment volume has decreased. And when the volume increase, of course, associated cost, SG&A will increase as well. And international shipping fee or the shipment freight charge was expected to be further stabilized in the second quarter, but it will not return to what it was before COVID. So it is the generic consensus that the price will be remain in the slight downward trend, and we are not forecasting the freight cost to increase. [Interpreted] And additionally, we requested the breakdown of the non-operating income, is that please refer to Page 15 for the detail. So if I may share some of the key highlights is that on the second quarter, the financial income or loss was recorded to be negative KRW 43 billion and other income is recorded at KRW 45 billion and equity method income or loss was recorded at KRW 55.2 billion, and there is nothing out of ordinary.

[Interpreted] The next question will be presented by Woo-Je Chun from Hanwha Investment & Securities Co., Ltd.

[Interpreted] So 3 questions about the solar power generation. According to the previous announcement or the statement that you have started the construction from 2020, and you're supposed to start recording the sales from this year, and that is expected at somewhere between KRW 2 billion to KRW 3 trillion. So I'd like to ask for the sales guidance for this and next year. And you have also stated that you have revised their original plan to operate some of the facilities yourself. And what is the reason behind it because you can expect a higher profit by direct operation? And the third question is that in the Q2, was there any profit recorded from the operation of the power generation facility? And was that recognized under the renewable. So do you expect the sales to be recorded or the increase in the second half of this year or 2023?

[Interpreted] So for the power generation, the last time that we have shared anything was the second quarter of 2021. That was the guidance that we have given to you, but ever since that we have shifted our strategy direction instead of selling out all the facilities. We are currently debating between different options of the partial sales or the equity sales or as you have mentioned, they might operate on our own. So because of those uncertainties, I did not disclose any sales guidance for this year, and I will remain doing so. We do have a quite large number of projects, but it is too premature to share with you any definite prediction as to what and where and when will be sold this year. So when anything becomes feasible, then we will share immediately. And as you have rightly mentioned, we have started projects from the year 2020. So this year marks the year 3 and next year 4. We are in the process of building various portfolio. And in terms of the total pipeline, it is somewhere around 13 gig. So next year, I believe that I will be able to share something more tangible. If and when we will be able to sell the facility in what form and what types of transaction we are entering into, hopefully we can share more detailed information with you starting next year. [Interpreted] And the biggest driver for the shift in our strategic direction is the price of electricity because the power generation is the business that generates electricity and selling out. And as you're aware, the PPE has increased quite significantly, especially in the European market. So we are considering many different options to maximize the future profit. So that is the reason why we are even considering operating on our own. And in the beginning, of course, it's very early phase of the project we were concerned or more conscious of the cash conversion option. So that is why we consider the overall sales of the facility, but the market situation has changed. So we are looking at a more strategic mid to long-term basis to maximize the profitability. [Interpreted] And for anything that has been recognized as a profit in the second quarter, I do not have any meaningful figure to share with you and when it does, then I will do so.

[Interpreted] Because at the time, I'd like to take one final question.

[Interpreted] The last question will be presented by Jae Sung Yoon from Hana Securities.

[Interpreted] So 2 questions. On the Renewable Energy, can you share the Q-o-Q ASP increase? And how do you translate the impact? Is this not something that you cannot disclose? Then can you enlighten us on the ASP in the Chinese domestic market versus that of the U.S. and Europe? And it has been recently announced that there will be the facility expansion in China for polysilicon. But despite that, the price of polysilicon remains very high. Can you tell us the reason why?

[Interpreted] So if I want to give you the percentage of ASP, then it might further confuse you. But what I can tell you is that we have recorded KRW 110 billion in loss, but we have turned around and recorded KRW 35 billion in profit. And I have shared with you on a quarterly basis, we are selling about 2 gig. So if we consider that watt per dollar, then the FX rate, of course, work in our favor and for us to have meaningful benefit from the spread, it has to be further than the $0.03. So with those performance on a quarterly basis that we expect to see some further improvement in the performance. And the ASP has remained highly confidential by the leading players. And therefore, I am also quite hesitant and very cautious to share this ASP data with you. [Interpreted] So the polysilicon and the wafer as well remain in very high price range for an extended period of time. So for the buyers like us, then we were under the price pressure for an extended period of time. So -- and the facility expansion was able to contain the further price increase. And that is something that we were able to witness from the end of the first quarter until the beginning of June.

[Interpreted] This concludes our earnings call for the second quarter of '22. Thank you very much for joining us.