Hanwha Solutions Corporation (A009830) Earnings Call Transcript & Summary

[Interpreted] Good afternoon. I am Shin Yong-In, CFO of Hanwha Solutions. First of all, thank you for joining the call today. I will brief you on the business performance, financials and 2023 Q1 outlook by segment. First, Q4 22 performance. Please refer to Page 9 of the presentation. The consolidated sales of the Q4 '22 increased by 16.7% Q-on-Q to KRW 3,928.8 billion. Despite the decline in global price of key chemical products, this is due to increase in revenue as the renewable division started to see some profit realized from the power generation business. Despite profit from the power generation business, the operating profit declined by 47.7% Q-on-Q to KRW 182.2 billion due to narrowing spread of key chemical products. Earnings before income tax and net income are negative KRW 105.3 billion and KRW 108.2 billion, respectively, taking a negative turn from the previous quarter. This is due to one-off expense reflected in the nonoperating income category. Onetime expense reflected in Q4 '22 is slightly over KRW 100 billion, which includes about KRW 50 billion in asset impairment loss from asset rationalization of the Advanced Materials and KRW 26 billion in derivatives valuation loss. Please refer to the bottom half of Page 9 for performance by segment. Next, '22 annual performance. Please turn to Page 10 of the presentation. For FY '22, the consolidated sales is KRW 13,653.9 billion, which is 27.3% growth year-on-year. This is thanks to the general growth of sales of all business segments and especially the growing global solar panel installation demand drove sales volume of Renewable division and profit realized from the power generation development project. Despite smaller operating profit than that of the last year due to the worsening profitability of the key chemical products, the turnaround of the renewables drove the operating profit higher by 30.9% Y-o-Y to KRW 966.2 billion. Next, on financials. Please turn to Page 11. As of the end of '22, total asset grew by KRW 3,824 billion to KRW 23,831.7 billion. Cash and cash equivalents grew by KRW 877.4 billion to KRW 2,731 billion. Total liabilities increased by KRW 2,365.9 billion to KRW 14,172 billion. Total debt grew by KRW 1,333 billion to KRW 7,208 billion. Net debt grew by KRW 456 billion from the end of last year to KRW 4,476 billion. Total liabilities to equity ratio increased by 3 percentage points of 147%. Net debt-to-equity ratio declined by 3 percentage points to 46%. Next, performance by segment. First, Renewable Energy. Q4 operating profit of Renewable grew 18% Q-on-Q to KRW 231.9 billion, thanks to the higher sales volumes and the sales of the power generation product in the U.S. and Europe despite minor decline in module ASP and performance bonuses. During Q1, despite the seasonality, the Renewable Energy will remain solid profit or maintain solid profit as onetime expense from the previous quarter no longer affects the business. Next, on Chemicals. Due to narrowing spread of PVC, PE and other key products and onetime expense of performance bonus, the Q4 operating profit of Chemicals turned negative, recurring negative KRW 32.1 billion. In Q1, due to base effect of onetime expense and expected recovery of spread of our chemical products, we expect the segment to turn around. Next, Advanced Materials. During Q4, due to the inventory adjustment by customers and onetime expenses, the operating profit turned negative to record negative KRW 4.1 billion. In Q1, thanks to base effect of onetime expense of the previous quarter, it is expected to turn around. Next, on Galleria, boosted by improving seasonal index, sales from Galleria division increased in Q4, and operating profit grew by 121% to KRW 17 billion. Due to the worsening seasonal index in Q1, both sales and operating profit are expected to decline. FYI, Galleria division will be spun off to a newly established company called Hanwha Galleria from March 1. Therefore, this will be the last quarter where the full quarterly performance of Galleria division is included in the consolidated operating profit for Q1 '23. The performance of January and February only will be reflected as discontinued operations' net income. Next, equity method gains. Due to narrowing product spread of equity method companies, the equity method gain recorded negative KRW 80.1 billion, and the loss continued. During Q1, as China changed its COVID response policy and the demand for the key products recovered after the Lunar New Year holidays, the size of the equity method loss is expected to be smaller. Last, on this year's dividend plan, based upon the company's mid- to long-term shareholder return policy. Please turn to Page 26. In February last year, the company announced its mid- to long-term shareholder return policy saying that 20% of consolidated free cash flow for the next 5 years will return to our shareholders. In '22, the company continued its investment into growth industries such as solar panel, and therefore, the consolidated free cash flow recorded negative amounts. Considering the cash influx from the partial equity sales of Ningbo entity and Advanced Material, as the total consolidated free cash flow is in negative figures, there is no resource for shareholder return. When the company's continued investment into the growth areas are to bear fruit in the form of sustainable corporate value enhancement and cash flow generation sufficient for dividend, the company will execute the shareholder returns such as cash dividend and purchase of treasury stock. This concludes the IR briefing. Thank you.

[Interpreted] [Operator Instructions] The first question will be provided by Nikhil Bhandari from Goldman Sachs.

Thank you so much for the opportunity. I had 3 questions, if I can ask. The first is, can you elaborate more on the solar business guidance for 2023 in terms of heading into 1Q, you mentioned it's a low season, but any sense you can give us on the quarter-on-quarter or year-on-year range of growth? And also similarly for the operating profit margin, do you expect 2023 to be a low to mid-teens OPM business for solar or high single digits? So any more color you can give on the solar guidance that will be helpful, both on the revenue level and OPM. Second is for the U.S. plant, ingot-to-module plant that was announced, can you talk about your strategy for -- or your plans on the wafer technology? What technology are we going to be using? I'm asking, in particular, because there has been news flow around what if China control the export of wafer technology. How do we think about creating or building our own wafer in the U.S.? What technology are we using? If you can give some clarity on that, that will be helpful. And third is, any thoughts around a potential Europe IRA as well or IRA-style act to come as well? And how could that help Hanwha Solutions for their business development in the European market?

[Interpreted] So regarding your first question, as you might be aware that we do not actually provide any actual guidance with any definite figures for the total year or a quarter, but we can share the overall direction. As we are in the process of reinventing our business model from the sales of the solar modules into the comprehensive power generation business, which includes development, sales and EPC. So we are in the process of actually expanding our business area. So what we can expect by this business transition is that the sales and operating profit from not just the module, but from this newly expanded business area is something that we can expect. Same is true for the OPM we don't have any annual guidance for the OPM, but as this business structure evolution continues on the mid- to long-term basis, that what we can share for the mid- to long term basis, the keyword here is a sustainable figure is that we are shooting for the mid- to high single-digit OPM sustainably. That means that on a quarterly or sometimes hopefully, on an annual basis that we can shoot for even higher performance than the mid- to high single digit. As was the case for the fourth quarter of last year, and this is where it looks to be the case for the first quarter of this year is that we are demonstrating low to mid 10s. So what we are hoping to maintain the mid- to long-term basis is the mid- to high single digit. But if the business transformation continues on as we have expected that we could hope for, the low teens. [Interpreted] And to respond to the expected performance for the first quarter of this year. I'd like to elaborate on the performance of the fourth quarter of this year for the renewable energy. So we have recorded sales of KRW 2.082 billion in sales and operating profit is [indiscernible] KRW 231 billion. But that should take -- we have to take that with the caveat that we have paid out the performance bonus of the KRW 40 billion. So the operating profit without those one off expense item will be about KRW 270 billion. [Interpreted] So as you can see on Page 12, in this quarter, meaning the fourth quarter of '22, there was some profit realized in the power generation business, so the contribution from those projects or the sales was KRW 550 billion (sic) [ KRW 590 billion ] in revenue and KRW 70 billion in operating profit. [Interpreted] So with that reflected, so meaning the KRW 70 billion coming from the sales of the power generation facility in the fourth quarter, that means that during the fourth quarter, the net profit from the rest of the business will be about KRW 200 billion. So based upon that, let me try to give you the guidance for the first quarter of 2023. We believe that the solid profit will be maintained in the range of KRW 230 billion. Of course, there is a potential for additional upside coming from the power generation business. But we can also, and also we can expect some base effect of the KBW 40 billion that has been paid out in the fourth quarter of '22 as a performance bonus. So because of those reasons, we expect the profit range will be in -- the same as that of the fourth quarter. Just additional -- one additional piece of information about the revenue and the sales volume, so in the fourth quarter of '22 versus the previous quarter, the sales increased by 10% Q-on-Q. That means that the sales volume increased likewise. And as was said during the presentation, the first quarter is traditionally a low season, so we expect a slight decline in the sales volume. But thanks to the expected incremental from the power generation and the base effect of the one-off expenses, the overall profit range will be maintained in the same range as that of the fourth quarter. [Interpreted] And regarding your second question about the wafer technology, it is too early for us to disclose anything that is tangible because now we are preparing for the groundbreaking of the facility. The plant in the United States and the technology is rather a sensitive topic. It is not necessarily because it has a political implication, but it is a technology itself. So it is our policy to not disclose officially as to our choice of technology until it's tangible. What we can share at this moment is that we are keeping an eye on the media report as you do, and we will make sure that our project will pan out as we have planned without any interruption. [Interpreted] About the third question of the EU or the European version of the IRA. So we are still waiting and see how the market is actually interpreting this move. As this is to do with the policy or the political landscape of a particular country. So this is not something that we can share lightly. But what we can tell you for now is that if there is any positive development happening in the market that we put the strategic importance on, then we will view it positively. [Interpreted] And not just focusing on the policy aspect that we were able to witness a very solid growth of demand in the European market last year. And it is not necessarily a short-term phenomenon, but we expect -- we view that as something that will stay for some time because of what has happened in -- what is still happening in Europe, there is a growing awareness on the importance of the energy independency or the energy security, so this is something that many European countries and regions will focus on. So that will actually open up new opportunities for us, not just the sales of the modules, but possibly to the power generation and the system sales.

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

[Interpreted] So 2 questions. In the presentation, you said that in the fourth quarter, the ASP for the solar panel went down slightly. So could you give us the breakdown by the region? And also, what is the current trend of ASP by region for the first quarter. And there was also the news that module that does not include any materials or the processes from Xinjiang are starting to be imported to the United States. And are you aware of this development? And will it have any impact on us? That's the first question. And the second question is that with the IRA that we can expect to have some subsidy, the support from the government? And do you have any idea as to what will be the impact of the IRA-related support on our books?

[Interpreted] So to respond to the first question of solar ASP for the fourth quarter, so based upon the market data, we can share what has happened to us. So according to the market data, there has been a huge amount of fluctuation from the fourth quarter last year and the first quarter this year. It is not just with regard to the module, but more of an upstream. But that might have a different impact on who the player is in terms of Hanwha Solutions. Then in Q4, the fluctuation was not very high for the European and the Korean market. Of course, there was some impact from the seasonality and others. So the ASP for those market went down slightly. But as you are aware that we have a high dependency on the U.S. market. So given this weighting on our sales distribution, we disclosed that our ASP for the fourth quarter went down slightly. [Interpreted] So for Q1, so first, relying on the short-term market data. So there was a huge amount of fluctuation starting from the end of November and February of this year. So the level of the variability or the fluctuation was really high for the past couple of months. So that means that there is still room for the additional fluctuation or variability. So instead focusing on the ASP, it's -- what you have asked that we would rather focus on the spread because it is not just ASP that was affected by this variability but the cost as well. So we'd rather focus on the spread. So for Q1, the spread looks to be in the same -- looks to demonstrate the same pattern as that was until Q4. So that means that there is both upside and downside potential for the cost and the ASP. So looking into the spread and given the period that we are looking at is a single quarter, the 3 months, that there is a smoothing effect. And of course, from the manufacturing and the sales, there is some kind of lead time. So considering all of those factors that the spread that we're looking at for the first quarter would not have major impact on our overall performance. [Interpreted] And regarding the part 2 of the first question of the module that does not include any parts or the supplies from the Xinjiang being imported to the United States, so it has -- it might have some political implications. So I would not share any official position. At this moment, we are following the media report as you do. But according to the media report that we predict or expect that the tight supply that has happened in the United States is likely to be eased a little bit this year. And also looking into the statistics, it seems that there hasn't been any interruption of the volume flowing from country A to country B. So I don't believe there is a major change but we are waiting to see as to what that means for the market overall. But if you ask me what that will impact us business-wise is that we are focusing on the areas and the markets that we have the strength in. So in terms of the geography that we are focusing on the U.S. and the European market, and in terms of the factors that our strategic focus area is rooftops. So given the fact that we will try to maintain the solid profit that we were able to enjoy in the past couple of quarters. [Interpreted] And about your second question, the IRA-related subsidy and the progress so far is that we don't have anything tangible to share with you as of now. So now it's February, and we are actually in the process of waiting for a third-party interpretation of the potential benefit that we can enjoy or other impact that we might face with. We expect that to come within several months. So that will help us to understand better as to the impact will be on our P&L or the balance sheet. So please be patient and as soon as we have anything tangible from the official third party, then we will share.

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

[Interpreted] So 2 questions. First is that with the recent change in California and NEM 3.0, it is suspected that it might have some negative implication on the rooftop installation. So given the NEM 3.0 and IRA and overall market situation, what do you expect the future of the market will be? What will be the impact that you are expecting from this recent policy move? And the second question is that in the fourth quarter that there was a major project sale. And can you give us as to the size or the scale of this project that was sold? And for this year, if there is anything planned for this kind of development facility or the project sales or additional upside that we can expect from other business areas than the power generation.

[Interpreted] So the first question about the potential impact of the NEM 3.0, this is something to be expected after the acceleration of the NEM 2.0 and the size of other compensation will be much lower than that of the previous version. So for our customers, that means that the payback period will be a bit longer than in the previous regime. But there is a grace period given. So we expect application for -- under the NEM 2.0 regime will be higher. But of course, there is installation capacity to think about. So in terms of the demand, we expect the rush to happen for a short term. And the longer-term basis or depending on how long you are looking at, but if you focus on the timing that is transitioning from the NEM 2.0 to 3.0, that there could be some negative impact. But what we need to focus on is that the U.S. market overall is a growing market. There has been many different policies that was introduced in the past 10 years and that the amount of subsidy went down quite significantly. But after the initial aftershock was absorbed by the market, that the market continued to grow, and this is something that we expect to see again in this round.

[Interpreted] And the next question about the guidance for the development power generation project. So in the past, we have shared in the gigawatt basis, so that actually caused a lot of difficulties and confusion for some of you to actually translate that into the implication in monetary terms. So starting from this year, that we will provide the guidance for the power generation in amount. [Interpreted] The power generation project sales, the revenue-wise for the year 2023, the target or the total budget is KRW 1 trillion. For the fourth quarter, we expect to see about KRW 100 billion. And the most of the project sale will be concentrated on the second and the third quarter.

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

I have 2 questions. The first question is you mentioned just now, you expect near term 10% to 15% OP margin for your solar division and mid- to long term, high single digit or mid- to high single-digit OP margin. Can I confirm if that refers just to your module sales business and it doesn't include the power plant sales and IRA tax credits? And then the second question is, if -- can you kind of split out the fourth quarter one-off impacts by division on both the operating profit side and nonoperating profit side. So for example, you have maintenance, impairment, year-end bonus payment, et cetera. Could you just summarize the details for us on both the operating profit and nonoperating side.

[Interpreted] So regarding the first part of the question, the clarification of the 10% to 15% OPM for solar is that the 10% to 15% OPM is what we have achieved in the fourth quarter and what we are looking to achieve in the first quarter only. So that is for the 2 consecutive quarters, and it is not something that we can predict any longer than that. So because there is a top line performance that we need to predict into. But based upon the absolute value of what we have achieved in the fourth quarter, we can predict that this is what we are expecting to see in the first quarter, and that's that. [Interpreted] So it has been our consistent communication that for the module, when we were focused on the module only business -- module sales business, the major long-term basis, the sustainable, the OP margin target that we are shooting for is the mid- to high single digit. But as we have shared with you multiple times in the past couple of years that we focused on the sophistication of the business model and expansion of the business area that we can actually provide you with additional upside that now we might be able to shoot for the early teens. [Interpreted] Regarding the one-off expense for the fourth quarter, so the operating side is mostly the performance bonus and corporate-wide -- enterprise-wide there was about KRW 100 billion. [Interpreted] For nonoperating side, the one-off expense was slightly over KRW 100 billion, and they include the asset rationalization that happened in the overseas entity for the Advanced Materials that actually led to the asset impairment loss of about KRW 50 billion. And there was the derivative valuation loss of KRW 30 billion. So including those 2, the nonoperating side one-off expense was slightly over KRW 100 billion. [Interpreted] And one additional comment regarding your first question on OPM. And that figure does not actually include tax credits from the IRA. And I'd like to just mention that the reason why we are focused on the sustainable target for the OPM is that you might remember historically the renewable business or the solar business had demonstrated a very high degree of variability. So we want to move away from that into more solid and a stable business structure. Of course, it could be even after this transition, the Q-on-Q variability, but hopefully, in the long-term basis, we might be able to demonstrate something sustainable going forward.

[Interpreted] The following question will be presented by Jin-Myung Lee from Shinhan Investment and Securities.

[Interpreted] So two questions. First is about the chemicals, and there is a regular overhaul planned for the third quarter. What would be the opportunity loss that will be associated with it? And it also mentioned about the recovery of the demand from China. So can you share your forecast, the prospect per major items or key products? And the second question is, can you share the CapEx per business segment and overall financial structures and net borrowings and overall P&L.

[Interpreted] So first, on PE. So the demand from China has declined and there was a facility expansion for more capacity. So because of that, the market has been sluggish in the year '22 and '23 because of the prolongation of the slowing market. The demand for the PE product will remain slow, and this large scale facility extension is planned. So we cannot expect that there will be a major rebound in PE category. [Interpreted] The LDPE. So there will be the 50% of the original volume to be -- that will go into the actual facility expansion. So the pressure on the supply will be eased. And EVA, the EVA that goes for the solar panel will increase as the solar business prospers. [Interpreted] So in case of PVC, the global economy and also because of the sluggish Chinese property market. Up until the Q4 of last year, the PVC price went down. But now we are seeing some signs of the rebounding of the price maybe because of the expectation of the reopening of China. [Interpreted] But it would not lead to the major rebound in the market condition because we are not yet seeing any major recovery in demand and the facility expansion is happening on a limited basis. So given the fact and then expected economic recovery in the United States and European countries and a possible rehabilitation after the war, then we could paint a rosier picture for PVC than before. [Interpreted] And there was a price decline in the caustic soda and that, we believe, is not something structural. The sudden price increase that was instigated by the war in Ukraine, are now becoming more stable. As you're aware, that many of the caustic soda manufacturer, their operation was suspended during the '22. So for '23, we expect the price of caustic soda will be maintained at the USD 500 range. [Interpreted] And the TDI, the cost has shown a favorable trend as the energy price is set at the very stable range and the price is going down. And that also affects the price of ammonia positively. So the spread will be maintained solid and the TDI market will remain solid as well. [Interpreted] The regular overhaul is planned for the fourth quarter that is in line with the past practice and the [ opportunity ] costs associated with it will be about KRW 20 billion. [Interpreted] So next, about the CapEx, for FY '22, the plan was somewhere between KRW 1 trillion to KRW 1.2 trillion. But it turned out that in actuality, we have spent about KRW 1 trillion in CapEx for FY '23, including the already published investment or the facility CapEx in the United States. So the enterprise-wise, the CapEx amount will be KRW 2.7 trillion. [Interpreted] So to give you some breakdown by segment, the chemical will have about KRW 400 billion in CapEx, that is in the same range as that of year '22. Advanced Material, KRW 200 billion, same range or slightly higher than that '22. And the Renewable, that includes the investment plan for the United States and the current transition into the large area, solar cell or for wafer. So it is part of the maintenance, and the TOPCon and the cell-module conversions, all those areas are included in the CapEx. [Interpreted] And lastly, about the net borrowings, versus the end of the year '21, as of the end of '22, the net borrowings increased by KRW 450 billion. And that is because a massive investment is still ongoing, and there are many other project plans. So that means that there could be more borrowings and additional cash flow that comes in will be put into the investment project. So for the time being, the net borrowing will be on the increasing trend. But looking into the EBITDA and the cash flow, also when we can expect the IRA tax credit, then it will actually alleviate some of the financial burdens that we are feeling.

[Interpreted] So thank you for your participation. Now we will end Hanwha Solutions Earnings Call for the fourth quarter of '22. Thank you. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]