Hanwha Solutions Corporation (A009830) Earnings Call Transcript & Summary

Good afternoon. Thank you for joining the conference call for the earnings results of Hanwha Solutions. The conference will start with the presentation from the company followed by a Q&A. [Operator Instructions] And now we'll begin the presentation on Hanwha Solutions' second quarter results for the fiscal year '25.

Good afternoon. I am Yoon An Sik, CFO of Hanwha Solutions. I'd like to first thank everyone for joining the call today. And I will brief you on the business performance, financials and the outlook by segment for Q2 '25. First, the company's performance during the second quarter of '25. Please turn to Page 8 of the presentation. In the second quarter of '25, the consolidated revenue increased by 1% Q-on-Q to KRW 3,117.2 billion as the increased sales from the Chemicals division offset the decline in the residential sales of the revenue of Renewable Energy division. The consolidated operating profit increased by 237% Q-on-Q to KRW 102.1 billion as the performance improved in all divisions of Chemicals, Renewable Energy and Advanced Materials. Pretax profit was negative KRW 148.4 billion, and the net profit was negative KRW 178.4 billion. For detailed performance by segment, please refer to the bottom of the Page 8 of the presentation. Next, on financials. Please turn to Page 9. As of the end of Q2 '25, the total assets increased by KRW 83.8 billion from the end of last year to KRW 30,120.7 billion, and the cash and cash equivalents decreased by KRW 814.1 billion from the end of last year to KRW 1,497 billion. Total liabilities decreased by KRW 145.2 billion from the end of last year to KRW 19,284.8 billion, and the debt increased by KRW 154.4 billion to KRW 12,876.3 billion, and the net debt increased by KRW 968.5 billion to KRW 11,379 billion. As at the end of the Q2 '25, the debt-to-equity ratio decreased by 5 percentage points from the end of last year to 78% and the net debt ratio rose by 7 percentage points to 105%. Next, I will brief you on the Q2 performance and our Q3 outlook by segment. First, renewable energy. In Q2, operating profit improved to KRW 156.2 billion, driven by increased module shipment and the improved spread resulting from higher ASP. By business segment, module and others recorded KRW 162.3 billion, power generation asset sales and EPC negative KRW 61.3 billion and the Residential Energy business, KRW 55.2 billion. For your reference, in the Residential Energy business in Q2, financial instrument valuation loss of KRW 57.6 billion was recognized as other expenses under nonoperating profit and loss due to a minority equity investment. As a result, the cumulative operating profit from the Energy business for the first half amounted to KRW 184 billion, while the cumulative financial instrument valuation loss totaled KRW 143.6 billion. To elaborate on the financial instrument valuation loss, the company made a minority investment in conjunction with the sales of the TPO asset. The purpose of the investment is to secure future revenue through WPP operations and the sales of the -- renewable energy certificate and the contract renewals with the customers utilizing the TPO assets. As these anticipated revenues are expected to materialize in the distant future, they are subject to discount at to present value. Accordingly, there is a high likelihood of recognizing a valuation loss in the near term. However, once actual revenue generation begins, the financial instrument valuation results may turn positive. In Q3, the company is expected to swing to a loss due to increased fixed cost burden stemming from the reduced cell and module productivity caused by cell quality issues that the Korea and Malaysia plant. As a result of this issue, the estimated AMPC for Q3 is also expected to decline to approximately KRW 120 billion down from the previous quarter. Additionally, we informed you that the product is scheduled for the Cartersville plant in the U.S. has been adjusted with a mass production now planned for Q4 and the full-scale sales expected to begin in the first quarter of next year. This adjustment reflects tight conditions in the used construction market as well as the ongoing maintenance work aimed at improving safety and operational efficiency. Reflecting these issues, the company adjusted annual sales guidance to 7.5 gigawatts and the AMPC guidance around KRW 700 billion. And lastly, the power generation asset sales and the EPC business Q3 guidance is around KRW 800 billion to KRW 900 billion and the 2025 annual guidance is around KRW 4 trillion. Next, on Chemicals division. Despite the weak market for some products, including caustic soda, the Q2 operating profit was negative KRW 46.8 billion due to the base effect of the regular turnaround from the previous quarter, narrowing the loss. In Q3, the loss is expected to further decline as certain products enter their seasonal peak. Next, on Advanced Materials. The operating profit turned positive in Q2 as domestic international customers of lightweight composite materials increased their production volume, while Q3 may see some impact from the summer shutdown at lightweight composite customers, the company is expected to maintain profitability, supported by the rising utilization rate at the new solar material plant. Finally, on equity method gains. Equity method gain in Q2 declined due to the narrower spread resulting from the weakness and chemical product prices as well as reduced influence from the Hanwha Ocean's stock performance. In Q3, the equity method gains are expected to increase, driven by improved spread stemming from the lower naphtha input cost and the partial recovery in the chemical part of market conditions. This concludes the presentation. Thank you for listening.

[Interpreted] [Operator Instructions] The first question will be provided by Dong Jin Kang from Hyundai Motor Securities.

[Interpreted] I have 3 questions for you. And the first is about the cell quality issue that was mentioned during the presentation. So I believe that the trend is to move away from the materials that is manufactured in the United States. So the policy that Hanwha Solutions has taken is to utilize the parts manufactured in Jincheon plant in Korea and also the plant in Malaysia and have the module produced in the U.S. plant. So in the process of moving away from the Chinese manufactured parts and materials, especially the question is centered around the securing the wafers which are mostly manufactured by the Chinese company. So in the process of finding an alternative supplier, is there any possibility of the cost to increase? And if that is the case, then is it likely that the increased cost can be transferred to the product cost? And the second question is about the TPO and I'd like to ask for the annual guidance of TPO business. And the third is that the tax credit on the investment seems that it is going away much quicker than people have anticipated. So it is likely that it will be by the end of the first half of '26, where the project that will kick start by the year 2030, then that will be eligible -- still eligible for some amount of the tax credit. So that might drive some escalation or the acceleration rather, of the project initiation. And what kind of impact do you foresee for your module business and also the downstream business?

[Interpreted] So let me respond to the first question first. So as you have rightly mentioned that we are increasing the volume from -- of the polysilicon manufactured not by the Chinese company. And with these manufacturers, we are in very close collaboration to verify the origin. And also in parallel, then we try to diversify the supply network and have that managed very closely. And also, we have the facilities in Cartersville and they will be operational with the facilities to manufacture ingot, wafer and cell and this will leave no room for any doubt in the future. And regarding your second question for the TPO business and the annual guidance, more broadly about our residential business after the enactment of the OBBA Act. So there is a heightened certainty in the market. So we will have more details once the executive order is finalized, and we have more details associated with it. So I believe that you could understand our position that we cannot disclose the guidance for the third quarter and also for the second half of this year. And regarding the third question that AMPC was recently revised. So that means that these Chinese, the solar manufacturers who simply assembled modules will not be eligible for the AMPC, that means that the Chinese company will no longer have the price competitiveness against module manufactured in the United States. To be eligible for the AMPC incentives going forward, you need to satisfy the criteria of the material cost of 65% or higher being manufactured in the United States by the year 2032. And we are making all the necessary preparations to meet or exceed the target by those times. And as you have mentioned, to be eligible for the additional subsidy, this project initiation will be accelerated. So it is possible that the order will be placed for an item where the delivery -- the period for the delivery is rather long and the project groundbreaking of the particular project might be accelerated the timing of which. And some projects might decided to invest 5% of the total investment to get the certification of the project initiation before that. And in case of the C&I, well, the modules are provided to the developers because the modules are -- can be stored on a longer period of time. So there could be some concentration of the demand on modules.

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

So my first question is, I think you mentioned earlier that the Renewable Energy, Residential Energy business, a cumulative KRW 180 billion OP in the first half and KRW 145 billion non-OP loss from financial instrument valuation. So does that mean that the cumulative first half '25 net profit attributable to your residential energy or TPO business is about KRW 39 billion? And what kind of growth outlook do you expect over the next few years? I believe your current market share in the TPO business is low. So what kind of margin and volume growth or our market share do you plan to target over the next 3 years? The second question is on your module business. I think I heard you mention earlier that you're now targeting 7.5 gigawatt module volumes in 2025. Is that correct? And can I assume that the downward revision in guidance is because of the quality issue. So in that case, how much your 2Q modules volumes were up or down by how much Q-on-Q? And then if your U.S. wafer plant starts up, will that resolve the problem? And if so, when does your wafer plant startup? And then lastly, I guess, in the mid- to long term in the TPO market, what do you think are your company's advantages versus disadvantages versus a company like Sunrun? And also for your development asset sales or EPC, I think it was quite loss-making in the first and second quarters. So what is your expectation for second half OP?

[Interpreted] So let me first respond to your question on the TPO and the prospects, because of the revision or the end of the 25D initiative, so it is likely that the overall market size may decline and especially those relying on the cash and loan model and the volume or the demand for that model will transfer into TPO. As you might be aware that our business model is already based upon TPO. So we might be eligible for [ 48E ] incentives. So in the next 3 years, by the year 2028, it might be possible that the total size of the market might decline, but for the company's perspective, we will continue to focus on items that satisfy the non-FEOC and we will actively utilize the DCA model and thereby increase the market share. And as you can appreciate, that there are still large amount of uncertainties in the market and many people have adopted a wait-and-see mode, so please understand that we cannot share any detailed guidance for the near and mid -- near future and mid- to long-term basis regarding the market share and the expected margin. And if I may elaborate on the strength that we have in the residential market, then it could be the market share. The Qcell module have already established its brand value. And if and when it is associated with other financial service providers like EnFin, then with this well-established position or the awareness of our modules, then we can expect as a further upside. And regarding your question about the adjustment in the annual shipment from 9 gigawatts, which was disclosed in the earlier conference call to 7.5 gigawatts, I can share 3 reasons behind it. First, being the delay in the Cartersville operational schedule. So the plan was to have the Cartersville site operational and utilize the high efficiency cell and thereby manufacture the high-efficiency model. But because of the delay that we are currently utilizing, the lower output products and that resulted in the adjustment of the volume of 450 megawatts. And if I may share the reason for the delay in the Cartersville project is because of such tight construction market situation in the United States and also there is additional need to up the maintenance to strengthen the safety and operational efficiency. So that is why there has been some delay in the construction of ingot, wafer and cell facility. So the revised schedule will be for the mass production, it will start from the fourth quarter of this year, fourth quarter '25 and the actual sales of the sales in earnest will be initiated from the first quarter of next year. And the second reason behind the adjustment is because of the quality issue that has happened in the Korean and the Malaysian site. And that translates into the defect volume worth 450 megawatts. And that has contributed to the decline in the export volume from these 2 states. And luckily, we were able to rectify this issue, and we believe that we can resume the export from August and onwards. And because we want to make sure that there is no defective products that are -- or the materials that are used for the U.S. facility, that operation has been at a lower pace, and that also contributed to the lower volume. And the third reason is because of the delay in some of the projects that happened in the European countries and the affected amount is around 500 megawatts, and that is part of the delay in some of the projects that has happened outside of the United States, and we expect the shipment will resume its normal pace from the year '26. And additional information about the quarterly module sales versus the previous year's performance on Q2 -- on the Q2 basis -- Q-o-Q basis, it has increased by 10%. In Q3, we expect that sales volume will be in the same range as the previous quarter. And about the generation asset sales and the EPC. So the guidance that we are sharing with the market is regarding the revenue. And for the third quarter, the figure that we are sharing with you is about KRW 80 billion to KRW 90 billion. And for the whole year, we maintained the KRW 4 trillion. And in terms of the profitability, the project sales are mostly concentrated on the second half of this year. So we expect the figure will be -- will get better towards the end of the year.

[Interpreted] The following question will be presented by [indiscernible] from Samsung & Securities.

[Interpreted] I have one question about the third quarter guidance. So you said earlier that the module sales will be -- for the third quarter will be in the same range as that of the second quarter. And the development asset sales will be concentrated on the second half. That means that the figure will be higher in the third quarter. But the figure that you have given us for the third quarter for this business is still in the negative. So that means that you expect a larger loss in the residential sector? Or can I expect there is a one-off expenses associated with the Cartersville project?