Hanwha Solutions Corporation (A009830) Earnings Call Transcript & Summary

Good afternoon. I am Shin Yong-In, CFO of Hanwha Solutions. Thank you for joining the call today. I will brief you on the business performance and financials of Q1 '23 and outlook by segment. For your information as the Galleria division spun off as of March 1. The divisional performance was categorized to be from discontinued operations and thus excluded from the operating profit and included in net profit as profit loss from discontinued operations. First, Q1 '23 performance. Please turn to Page 8 of the presentation. The consolidated sales of the Q1 '23 declined by 18% Q-on-Q to KRW 3,100. -- billion. This is attributable to a decline in sales realization from the power generation business of the renewables and reduced modern sales volume. The operating profit increased by 62% Q-on-Q to record KRW 271.4 billion due to onetime expense of previous quarter and favorable performance throughout all divisions. As it has decided to record expected tax credit from the U.S. IRA as operating profit from Q1, KRW 22.9 billion out of the KRW 271.4 billion of operating profit represent the related tax credits. Pretax profit and net profit recorded KRW 201.2 billion and KRW 133.4 billion, respectively, at turning around from the previous quarter. Please refer to the bottom half of Page 8 for performance by segment. Next, on financials. Please turn to Page 9. As of the end of Q1 '23, the total assets declined by KRW 1.72 billion from the end of last year to KRW 22.29 billion. Cash and cash equivalents declined by KRW 401 billion from the end of last year to KRW 2,298.5 billion. Total liabilities declined by KRW 1.43 trillion from the end of last year to record KRW 12.768 trillion. Total debt declined by KRW 146 billion to record KRW 7.62 trillion. Net debt increased by KRW 255 billion from the end of last year at KRW 4.663 trillion. Total liabilities to equity ratio declined by 11 percentage points from the end of last year to 136 points and the net debt-to-equity ratio grew by 4 percentage points from the end of last year to 50%. Next, performance by segment. First, renewable energy. Due to seasonality, the model sales declined. But as onetime expense from the previous quarter disappeared and profit contribution from the power generation business increases, the operating profit increased by 5.6% Q-on-Q to record KRW 245 billion. Thanks to recovery in module sales volume and continued profit realization from the power generation, solid operating profit is expected to continue in Q2. Next, Chemicals. Operating profit of chemicals from Q1 turned around to record KRW 33.7 billion as onetime expense from the previous quarter disappeared and a spread of some products slightly improves. In Q2, clubs demand on key products will drive spread to narrow and operating profit reduced. Next, Advanced Materials. As onetime expense from the previous quarter disappears, it turned around by recording KRW 21.7 billion in operating profit. During Q2, as major customers are expected to maintain their production volume, the sales performance will remain strong, driving solid operating profit. Next, on equity method gains. The equity method gains turned around in Q1 with valuation gain from the derivatives related to the acquisition of the DSME by Hanwha Impact and a better spread of some products. In Q2, the equity method gain is expected to decline due to the base effect of valuation gain from the derivatives reflected in the previous quarter and the regular turnaround of the company's under equity method. This concludes earnings briefing. Thank you. [Foreign Language]

[Interpreted] Now Q&A session will begin. [Operator Instructions] The first question will be presented by Parsley Ong from JPMorgan.

Congratulations on the good results. This is Parsley from JPMorgan. I have 2 questions. So, the first question is on your first quarter power plant sales. We saw a relatively high power plant sales volume in first quarter. Could you share the background why this is so? And what are your expectations for future quarters? Second question is on your IRA investment tax credit. What would be your solar module op margin without the tax credit? And what is your sales volume expectation in the U.S. for 2023? And the third question is also on your solar division, if we think about your module margins going forward, would you expect to be able to maintain a 13% op margin? Or do you see potential for margin decline towards the second half of the year?

[Interpreted] So first, let me try to respond on your first question about the power generation. Versus the Q4, the sales decline but the operating profit remained the same, thereby improving the op margin. The reason for such high OPM was that when we actually sold the project, we took into consideration the short-term market condition and a very strong willingness from the buyer to acquire this business. And additionally, this particular project and also profit from it is a profit from development that is pre-EPC, so that is the reason why the OPM was higher. And if I were to give you the annual guidance from the power generation that it is not changed. That will be KRW1 trillion based upon the total sales of the fiscal year 2023. And specifically, for the second quarter, it will be around KRW100 billion. [Interpreted] So regarding the second question, the ITC impact from IRA, as was mentioned during the presentation, the KRW22.9 billion is attributable to the ITC and that is reflected in our operating profit. And total sales or the total export to the United States, well, we expect the total output will be about early to mid-8 gigawatt and actual was about 40% to 50% in the year '22, and we expect to grow it to 70% by the year 2025. So for this year, it will be somewhere in the middle. So whether -- let me correct that. So, it is not specifically because of the ITC, it is generally because of the IRA. So regarding the third question, the overall profitability. So, you might understand based upon the evolution of our business structure that we are trying to evolve from the company focused on the module sales. So, there is a growing contribution of sales from the power generation. We expect the sales and the strong performance from the power generation will not be one-off and it will be sustained throughout the rest of the year and onwards. So, considering the scope and scale of the current profitability from the power generation, we expect you to take a more comprehensive look at the forecast, looking at power generation and the model sales together. So based upon that, our forecast for the upcoming quarters and throughout the year '23, thanks to the contribution from the power generation, we expect the OPM to be in the same range throughout the rest of the year. And our forecast for the second quarter is that versus first quarter, that we will start to move away from the seasonality and we will start to see some improvement in the output. So, the module sales and also the operating profit from it will increase. And on top of that, from the power generation, we expect KRW100 billion in sales during Q2, and we can expect a similar range of the profit contribution. Therefore, we expect the OPM to be maintained in a quite solid level.

[Interpreted] Currently, there are no participants with questions. [Operator Instructions] The next question will be presented by Yongsik Yoon from Hanwha Investment & Securities.

[Interpreted] So, thank you for the opportunity. I understand that there is a general concern about upcoming NEM 3.0. What will be the general impact and especially, for Hanwha Solutions?

[Interpreted] I understand that many global companies have experienced the stock price fall and that has actually generated increased interest on this particular new program, but something went differently than our original expectation because the grace period of NEM 2.0 was extended until April and we expect that there will be a last minute rush, but it was not witnessed. So, based upon that, with the NEM 3.0, there will be no major reduction in the demand and we have not witnessed any such movement. So, the impact for -- from the NEM 3.0 will remain neutral until the end of this year. And any future policy change may happen in whichever direction as it may. And for the U.S. market to grow from the 20 gigawatt -- to the late 20 gigawatt market this year to the 30 gigawatt market next year, the growth will be mostly around the utilities, but we also expect there will be a solid growth in the residential and the C&I market as well. So, on a long-term basis, we do not necessarily worry too much about the NEM 3.0. And over time, the policy change will be absorbed naturally by the market. And let me share our response to the NEM 3.0 and any future policy change. So, you might be aware that for the residential use, the ESS installation, the share is still very low. And there is no doubt from the market consensus that the ESS market for residential and others will grow significantly in the future. As we have shared by multiple times from the press release, that we are contemplating offering the ESS and have the plan to supply ESS and also conduct the EPC business, including the ESS as well. So, we are in the process of expanding our business model to also involve ESS. So, we will be less vulnerable to any sales fluctuation from module because we will have another tool to utilize, which is ESS. So, with that, we will be able to maintain solid profit generation. So -- and also not necessarily with regard to the NEM 3.0, but more generally with the C&I, we are contemplating entering into the gigawatt scale contract with some of the partners. You must have heard it through the media report that we are discussing or signed an MOU with such partners as Microsoft and Summit Ridge Energy. The total size for Microsoft is 1.5 gigawatt [ first alpha ] and the Summit Ridge Energy, 1.2 gigawatt. And it is not just the conventional side of the commercial contract was in the watt or the megawatt scale, but we might have the longer-term contract and on a larger scale of a kilowatt by tapping into the larger volume customers. And this trend will be continued throughout the next 2, 3 years. So, this will help us greatly in weathering through any future policy change in the sector. So one correction, Microsoft is 2.5 gigawatt instead of 1.5 gigawatt.

[Interpreted] Currently, there are no participants with questions. [Operator Instructions]

[Interpreted] As there is no further questions, now I would like to close the earnings call for the Q1 '23 for Hanwha Solutions. Thank you very much for your participation and goodbye. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]