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] Now we will begin the presentation on Hanwha Solutions' third quarter results for the fiscal year 2025.

[Interpreted] Good afternoon. I am [indiscernible], CFO of Hanwha Solutions. I'd like to thank everyone for joining the call today. I will brief you on Hanwha Solutions' performance, financials and business outlook by segment for Q3 2025. First, performance during the third quarter of 2025. Please turn to Page 8 of the presentation. In the third quarter, the consolidated sales increased by about 7.9% Q-on-Q to KRW 3,364.4 billion, driven by increased sales from the development asset sales and EPC of the Renewable division. Despite the decline in loss from the Chemicals segment, the consolidated operating profit recorded negative KRW 7.4 billion, turning to loss due to aggravating profitability from the Renewable Energy division. Pretax profit was negative KRW 39.7 billion, and the net profit was negative KRW 4.5 billion. Please refer to the bottom of Page 8 for detailed performance by segment. Next, on financials. Please turn to Page 9. As of the end of Q3 '25, the total assets increased by KRW 2,226.4 billion from the end of last year to KRW 32,263.3 billion. And the cash and cash equivalent has decreased by KRW 427.5 billion from the end of last year to KRW 1,883.6 billion. The total liability increased by KRW 1,679.6 billion from the end of last year to KRW 21,109 billion, and the total debt increased by KRW 1,698 billion to KRW 14,420 billion, and the net debt increased by KRW 2,126 billion to KRW 12,536 billion. As of the end of Q3 '25, the total liabilities to equity ratio has increased by 6 percentage points from the end of last year to 189%, debt-to-equity ratio by 14 percentage points to 112%. Next, I will brief you on the Q3 performance and Q4 outlook by segment. First, Renewable Energy. In Q3, the operating profit declined by 95% Q-on-Q to KRW 7.9 billion due to the increased fixed cost burden from the low utilization at the U.S. module plant. By business type, models and others are recorded negative KRW 19.4 billion; development asset sales in EPC, KRW 18.7 billion; and the Residential Energy business KRW 79.6 billion. For your reference, in the Residential Energy business for Q3, a financial instrument valuation loss of KRW 81.3 billion was recognized as other expense under nonoperating profit and loss due to a minority equity investment. In Q4, we expect continued low utilization at the U.S. module plant and a decline in sales volume as customs clearance delays are being prolonged due to the strengthened import regulations, including the supply chain inspections by the U.S. Customs and Border Protection. As a result, the Renewable Energy segment is expected to swing to an operating loss. Also, due to the issue, the estimated AMPC for Q4 is also expected to decline to approximately KRW 40 billion, down from the previous quarter. Reflecting this condition, we revised our full year AMPC guidance from KRW 700 billion to the high KRW 400 billion range, and the shipment guidance from 7.5 gigawatts to 6 gigawatt. During the commission of the Cartersville cell plants in the U.S., the defects were identified in key utility equipments that had not been detected during construction. As the issue was discovered during the commissioning process, the start of mass production for the 3.3 gigawatt cell facility, which was initially scheduled for Q4 '25, is now expected to be delayed to some time in '26. We are currently reviewing the various alternatives, including refurbishing the existing utility equipments or placing new orders. Once the review is completed, we will provide you with an update on the exact timing of the cell mass production. Ingot and wafer production, however, has already progressed to the prototype stage, and we plan to begin internal use from Q1 '26. We will give you the various measures to minimize any loss from the delay in cell mass production, and we'll make every effort to mitigate the impact on our business. And lastly, the Q4 sales guidance for the development asset sales and the EPC is in the range of approximately KRW 1 trillion to KRW 1.5 trillion, and we revised the full year '25 sales guidance to around KRW 2.62 trillion to KRW 3 trillion. Next, on Chemical division. In Q3, despite the decline in raw material costs, operating loss was reduced as the spread improved, supported by solid pricing of key products. In Q4, however, we expect the operating loss to widen again due to weaker demand from seasonal factors and scheduled maintenance. Next, on Advanced Materials. In Q3, while sales declined Q-on-Q due to the summer shutdown of major lightweight composite material customers, the company maintained the profitability, recording an operating profit of KRW 3.6 billion, thanks to the adjustment of the low-margin solar material sales and the cost improvement at the U.S. plant. In Q4, operating profit is expected to improve due to the base effect from the summer shutdown of the lightweight composite material customers and the price increase in the certain products. Next, on equity method gains. In Q3, equity method gains improved significantly Q-on-Q driven by higher profitability at the [indiscernible] due to the lower feedstock cost as well as the recognition of KRW 157.2 billion bargain purchase gain from the acquisition of Paraspala by Hotel and Resort. For reference, our ownership stake in Hotel and Resort is 46.95%. In Q4, equity method gains are expected to decline due to the base effect from the one-off gain of Hotel and Resort booked in the previous quarter. This concludes the earnings briefing. Thank you.

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

[Interpreted] This is Parsley. I have a couple. So the first question is -- congratulations on your solar division, loss control management. I think people were expecting a worse result. So a positive number has been a pleasant surprise. But could you kind of give a little bit more color on the composition because I noticed you cut your full year guidance for AMPC as well. So how much was your 3Q AMPC amount? And what do you expect for your module profitability in 4Q? And I guess, if we look -- so then the second question is on the Residential Energy side of things. I think we have been seeing continued growth in that division. Could you give us some color on what kind of growth rate we should expect from this division over the next few years? And the last question is, if you look at the overall U.S. solar market, we have seen the prices recover a little in third and fourth quarter so far, but we are also seeing a lot more imports coming from Indonesia. So could you give us a bit of comment on the -- on your outlook on what you're seeing with regards to Indonesia price competition. Is this creating margin pressure for Hanwha? And when do you expect this to go away?

[Interpreted] Let me respond to the first question. As you have said during your question, we have recorded minor profit in the third quarter, but it went down significantly versus the previous quarter. And it is mostly from the module and others. And because of -- the U.S. module plants low utilization, it has contributed negatively to the profitability. And the review on our supply chain by the U.S. Customs and Border Protection are being prolonged, and it has an impact on the AMPC. So with that said, the Q3 AMPC that we have recognized, KRW 68.2 billion, and the shipment went down by 10% Q-on-Q. And in Q4, we expect the review on the supply chain by the U.S. Border and -- Customs and Border Protection to be prolonged. So with that factor, then we will continue the low utilization of the module plant. So for the Q4, we expect the AMPC recognition will be around KRW 40 billion, and the shipment will go down by 50% Q-on-Q. Regarding your second question about the Residential Energy business in Q4, there has been some increased demand that was built before the finalization of the details of the OBBA and also the administrative order. And we have the systems of recognizing the revenue based upon the key milestones. So that will take effect in a gradual fashion. And in terms of the preparation for the changing external environment after taking effect of the OBBA is that we are actually in the process of rebalancing our assets. And because of that process, that onetime cost might be reflected into our performance and driving down the overall performance. We expect the residential market will be led by the TPO. So the rebalancing efforts that the company is currently making will, in the mid- to long term, strengthen our competitiveness and will guarantee the continued growth. And a comment on the general Residential Energy market, now that the Section 25D is gone, we expect the Residential Energy market size will decline. But then we have the 48E that actually provides some benefit for the TPO, and the benefit will be valid until the end of '27. And so therefore, the market will transition mostly focused on TPO. We have shifted to TPO starting from the earlier this year. So we expect our profitability will be maintained for the next 2 years. And considering the increasing electricity demand and the high PPA price in the U.S. market, even after the year '27, we expect the Residential Energy market will remain solid.

[Interpreted] Let me respond to your third question. As there is a new AD and the CVD imposed on 4 Southeast Asian countries on their cell and modules, we have noticed that there is an increased import from India, Indonesia and Laos. So in response to this changing situation in July, the appeals for the new AD and CVD on these 3 countries have been submitted to the Department of Commerce. We have the prior experience of filing the PL4, these 4 Southeast Asian countries and have received a positive outcome. So we are responding likewise. So we have originally expected the decision -- the preliminary decision on the AD and CVD to be made sometime later this year, namely for the CVD October and for AD December, and the final decision at ITC to come sometime in February of '26 for CVD and April for AD. But because of the ongoing government shutdown, then we expect some delay in the schedule. And the reciprocal tariffs are being imposed between the 2 countries. If the tariff is low between Korea and Malaysia, then we might secure a competitive advantage over other U.S. companies exporting sales from elsewhere. And in terms of the sale, the tariffs imposed on -- India, Indonesia and Laos is somewhere between 26% to 40%, which is much higher than that imposed on Korean products. And that will contribute to the higher ASP. And it will have some impact on the competition that focuses on module manufacturing.

[Interpreted] The following question will be presented by Jin Ho Lee from Mirae Asset Securities.