Hanwha Solutions Corporation (A009830) Earnings Call Transcript & Summary

Good afternoon. I am Shin Yong-In, CFO of Hanwha Solutions. Thank you, everyone, for joining the call. Let me report you on the P&L and financial performance of Hanwha Solutions for the period of third quarter 2022. First, on P&L. Please refer to Page 8 of the deck. As of third quarter 2022, the consolidated sales declined by 0.7% Q-on-Q to KRW 3,365.7 billion. This is the cause despite higher ASP for Renewable Energy division, the global price of key chemical products fell thus lowering the total sales of Chemical division. Despite challenging external environment, the operating profit increased by 25% Q-on-Q to record KRW 348.4 billion due to higher model ASP for Renewable Energy division and the lower Ocean Freight. Please refer to the bottom half of Page 8 for detailed performance by division. Next, on financials. Please turn to Page 9. As of the end of Q3 '22, total asset increased by KRW 3,880.2 billion from the end of the previous year to KRW 23,887.8 billion. Cash and cash equipment increased by KRW 561 billion from the end of previous year to KRW 2,415 billion. Total liabilities increased by KRW 2,437 billion from the previous year-end to KRW 40,244 billion. Total borrowings increased by KRW 2,306 billion from the previous year and to KRW 8,180.9 billion. Total borrowings increased by KRW 1,744 billion from the previous year-end to KRW 5,765 billion, and the debt ratio increased by 4 percentage points from the end of previous year to 148%. And the net borrowing ratio increased by 11 percentage points to 60%. Next, performance by division. Renewable Energy division. Q3 operating profit of Renewable Energy division recorded KRW 197.2 billion, which is a 460% increase Q-on-Q. As the global renewable energy demand remained strong, expansion in residential retail sales drove the company's module ASP higher. And gradual stabilization of ocean freight in the second half contributed to a strong increase in the profitability versus the previous quarter. In Q4, the operating profit is expected to further increase with increased sales volume and the continued stable ocean freight. Next, on Chemical division. Q3 operating profit of Chemical division declined by 48% Q-on-Q to KRW 119 billion due to lower global price of key products and narrowing spread due to sluggish demand coming from the concern of the potential global economic slowdown. In Q4, the demand will continue to do and deal with the slow economy, and the operating profit will further decline due to seasonality and turnaround. Next, Advanced Materials. In Q3, the Advanced Materials division recorded operating profit of KRW 19.8 billion, which is 19% increase Q-on-Q, thanks to the strong performance of key customers and lower materials cost. The OP is expected to decline due to the inventory adjustment of key customers during the year-end. Next, on Galleria. Despite the lower sales in Q3 due to the seasonal reasons. Galleria recorded operating profit of KRW 7.7 billion, which is 114% increase, thanks to the base effect of property tax will reflected in the previous quarter. While the market uncertainties remain in the fourth quarter, the sales and OP are expected to grow due to seasonality. Next, on equity method income. Equity method income in the third quarter turned to negative as many equity method subsidiaries recorded loss due to poor market condition of chemical products due to slow economy. We expect minor improvement in equity method income due to the widening of the spread of some chemical products. This has been the performance briefing. Thank you for listening.

[Interpreted] [Operator Instructions] The first question will be presented by Parsley Ong from JPMorgan.

Congratulations on the strong results. I have 2 questions. The first question is on the IRA benefits. Could you give us an update on what kind of benefits you're expecting your U.S. expansion plans as well as how much of the manufacturing tax credit you're expecting? I mean if we assume that Hanwha has 8 gigawatts by 2025 and gets $0.7 per watt. [ Hanwha's ] ability by over 5 years, that could be as much as KRW 3 trillion. So could you share with us some of your expectations on the manufacturing tax credit as well? The second question is on the -- could you give us a status update on your restructuring as well as the tender offer? Will Hanwha cancel some of the repurchased shares? And then the third question is on your solar division. I see that margins were very strong in third quarter and ASP went up as well. How sustainable do you think the tightness in the U.S. and Europe solar market is? And what is your expectation for fourth quarter and let's say, over the next 2 years?

[Interpreted] So let me respond to the first question on the expected benefit of the IRA. So we do have the model capacity of 1.7 gigawatts, and we have just announced, the additional 1.4 gigawatt expansion. Of course, with the passing of the IRA that there will be some benefit. And regarding the plan for the further facility expansion, that is currently under review internally. And I do not believe that we can share any figure of expected benefit from the IRA at this moment.

[Interpreted] So regarding the second question that we're purchasing. So we have started the subscription on October 17 until October 19. And if I may share the volume, is that based upon the common share, it's KRW 1.36 billion. And for the preferred share, it is 10,500 shares. One correction, the number of shares for the common share is KRW 1.36 million.

[Interpreted] And another question about how we look at the U.S. market because we have the rather strong ASP for the third quarter. Of course, there is a balancing act happening in the U.S. market overall, and we are making our own efforts to strengthen our shipments in the retail and the residential section, so with those efforts combined, we expect the strong performance to be continued for the time being.

[Interpreted] And our prospect for the fourth quarter is that versus the third quarter, we expect the shipment to grow. And what is also encouraging is that the ocean freight has become more stabilized in the second quarter. Of course, that in the past that we've had 6 consecutive quarters of loss, and that was due to many of the compounding factors and reasons. And those are finally seen to turning around.

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

[Interpreted] I have 2 questions. First question is that when replying to the previous question, you mentioned about the increase in the shipment for the fourth quarter. And can you be more specific as to disclose by how much do you expect the shipment to grow in the next quarter? And also, can you share what is your forecast for the ASP? The second question is about the European market. So we see that Europe has announced their own version of IRA and what kind of implication do you believe that we will have -- or any other updates on the European market?

[Interpreted] Regarding the shipments for the third quarter, it actually went down versus the second quarter. And we have provided you with the annual shipment guidance that is somewhere between 8.4 to 8.5 gigawatts. And there is not a lot of fluctuation on quarter-to-quarter performances. But the third quarter shipment went slightly down versus the second quarter. Fourth quarter, we expect the shipment to increase versus the previous quarter because some of the demand are concentrated for the period before November for some countries. And we expect because of those seasonal reasons that there will be a meaningful increase in the shipment in the fourth quarter versus the previous quarter. But as I mentioned earlier, we don't have a huge fluctuation quarter-to-quarter. So unless there is a significant market event we believe that the variability, the quarterly variability, will be maintained somewhere between as low as 5% to as high as 10% to 15%. [Interpreted] And regarding the ASP forecast, of course, that the model is under a strong cost pressure, but we were able to turn around because of the strong market demand. Of course, there is a minor differences depending on the particular part of the country, but it is a global trend that the price ASP is increasing. So with that said, I believe that the ASP will be remained rather strong in the fourth quarter as well. [Interpreted] So for the European market, the growth -- the pace of growth, was quite notable. For the annual total, the original estimation for the installation basis, it was at around 30 gigawatt. But there is a revised figure and the revised figure is 40 kilowatts or even more than that. So the European market has been growing very rapidly. [Interpreted] And of course, there is increased expectations with the European version of the IRA will soon to be announced with a greater detail. But without the proper understanding of its strategic details or the policy details, then we cannot say with any certainty as to what will be the expected benefit from this policy. But if I may share, the general comment is that there is a renewed awareness on the importance of energy security in Europe, and there is increased focus and emphasis on the renewable energies. And in the past, the renewable energy policy and the support was around FIT or around a subsidiary. But if there is a minor paradigm change so that there will be a bigger policy order strategy to support, then, of course, as our company, Hanwha Solutions gets European and the U.S. market as the strategic market, so definitely, it will work in our favor.

[Interpreted] The next question will be presented by Hyunryul Cho from Samsung Securities.

[Interpreted] So I have 3 questions. You said in your reply previously, that the shipment for the third quarter was reduced Q-on-Q. And that happened in the midst of the strong overall market demand, and this is something that was unexpected. So can you share what drove the decline in the third quarter shipment? Second question is that regarding the third quarter sales, can you give us, at a high level, regional breakdown, and if possible, the fourth quarter revenue expectation when it comes to the regional breakdown? Third question is that for the fourth quarter profit forecast, you said that operating profit will increase, and that is due to the higher or the strong ASP and the lower ocean freight, and out of those 2 major factors, which do you believe will play a more important role? The reason for me to ask this question is to understand the implication on the overall profitability.

[Interpreted] So regarding the first question, so the shipment, so it declined. But in terms of the variability, it is not that significant as it was the case in the first quarter and the second quarter. So minor decline, and that is mostly due to the scheduling issue, scheduling of the shipment and of course, also the summer holidays. And our original guidance for the third quarter shipment was that it will be in the same range or the minor reduction from the second quarter shipments. So we believe that it is not necessarily out of thing from our original guidance. [Interpreted] So regarding the regional breakdown, because of the sensitivity that we cannot disclose any definite figures, so please understand that. But we are shipping our products to the U.S., Europe, Korea, Japan and Australia. And out of these markets, we do have a high weight or the reliance on the European -- in the U.S. and the Korean market. And this is our strategic imperative to focus on the residential and the retail use. So we will continue to expand our market share in the shipment. [Interpreted] As we have also disclosed our plan to expand automotive facility of 1.4 gigawatt worth for the U.S. market. So if and when everything is implemented on schedule, of course, that our weight for the U.S. market will further expand. [Interpreted] And when it comes to the ASP, so we do not expect there will be any major change between the third quarter and the fourth quarter ASP. And the same is true for the other elements in the value chain, such as wafers and poly. So the market is not experiencing any sudden change at this moment, but it will be maintained at a strong position for the time being. And when it comes to the ocean freight, we believe that it will be further stabilized in the fourth quarter. So the contributing factor for the fourth quarter's stronger performance will be increased in shipment and the stabilization in the freight. And we do not believe that there will be any other reasons for additional concerns and a more favorable environment will be maintained.