Hanwha Solutions Corporation (A009830) Q4 FY2025 Earnings Call Transcript & Summary

[Interpreted] Good afternoon. I am Jeong Won-Young, 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 the fourth quarter and full year 2025. First, the fourth quarter performance. Please turn to Page 9 of the presentation. On a consolidated basis, the Q4 sales increased by about 12% Q-on-Q to KRW 3,778.3 billion, driven by increased sales from the EPC business under the Renewable division. Consolidated operating loss widened due to aggravating profitability in the Renewable division recording negative KRW 478.3 billion. Pretax profit was negative KRW 570.2 billion and net profit negative KRW 404.8 billion. Next, I will brief you on one-off factors reflected in the operating profit and profit for other profits for Q4. First, operating profit reflected approximately KRW 100 billion in one-off expenses, including write-offs of obsolete solar inventories and raw material impairment losses, provision recognition and nonrecurring labor-related costs associated with the Advanced Materials business. In nonoperating profit and loss, approximately KRW 110 billion in costs related to the withdrawal from the cresol business of Chemical division, about KRW 36 billion in provisions arising from the fair value assessment of Cimarron and approximately KRW 50 billion in one-off expenses, including the impairment loss on Qcells Cartersville's property, plant and equipment and losses from the disposal of European trade receivables as well as roughly KRW 60 billion in costs related to downstream project impairments and liability recognition associated with the Q ENERGY PRS reflected. Taking this together, a total one-off expenses of approximately KRW 360 billion were recorded. In addition, one-off gains of approximately KRW 640 billion, including gains from the disposal of the Futureproof were recognized, resulting in a net positive one-off impact of approximately KRW 280 billion. Please refer to the bottom of Page 9 for detailed performance by segment. Next, let me brief you on the whole year performance of FY '25. Please refer to Page 10 of the presentation. Driven by the strong sales performance of the Renewable Energy division, the consolidated sales increased by about 8% year-on-year to record KRW 13,354.4 billion. Despite narrowing operating loss in the Renewable division, the consolidated operating loss was prolonged to record negative KRW 353.3 billion due to poor market conditions of major chemical products. Pretax profit was negative KRW 826.4 billion, and net profit was negative KRW 608.9 billion. Please refer to the bottom of Page 10 for detailed performance by segment. Next, on financials. Please turn to Page 11 of the presentation. As of the end of 2025, the total assets increased by KRW 3,085.3 billion from the end of the previous year to record KRW 33,122.2 billion. And the cash and cash equivalents increased by KRW 354.7 billion from the end of last year to record KRW 2,665.8 billion. Total liabilities increased by KRW 2,387.2 billion from the end of last year to KRW 21,817.2 billion and the total debt increased by KRW 2,255.4 billion to KRW 14,977.3 billion. The net debt increased by KRW 1,900.7 billion to KRW 12,311.5 billion. As of the end of '25, the total liabilities to debt ratio increased by 10 percentage points year-on-year to 193% and the net debt-to-equity ratio rose 11 percentage points to 109%. Next, I will brief you on Q4 performance and Q1 outlook by segment. First, Renewable Energy. In Q4, tighter customs clearance regulations resulting from the U.S. customs supply chain expectations led to delays in customs process. This caused lower utilization rates in the U.S. module plant, resulting in a decline in sales volume. In the development assets and the EPC business, the EPC revenue increased significantly with the delivery of battery energy storage system, BESS to EPC projects. However, reflecting the costs associated with valuation changes in certain projects, operating profit in the Renewable Energy division turned to a loss. As the U.S. customs clearance delays were resolved last December, normal operations at the U.S. module plant and an increase in sales volumes are expected in Q1. In addition, a rise in ASP is anticipated, leading to an expected return to profitability in the Renewable Energy division. The estimated AMPC amount for Q1 is expected to be in the low KRW 200 billion range, representing an increase compared to Q4. In '25, annual shipment reached 6 gigawatts, primarily affected by customs clearance delays resulting from the supply chain inspections. For 2026, however, the sales volume guidance is projected at approximately 9 gigawatts, supported by the normalization of the U.S. module plant operations and expanded vertically integrated sales from the Cartersville facility. AMPC recognition is also expected to benefit from these factors with approximately KRW 950 billion anticipated to be recognized in '26. AMPC from the ingot and wafer operations at the Cartersville plant is expected to be recognized from Q2 and at cell plant and Cartersville is planned for operation in Q3, the company will benefit from full value chain-based AMPC in the second half. Revenue from the development asset sales and EPC business is expected to continue growing, mostly around the U.S. EPC business. Full year revenue is projected to be around KRW 4 trillion to KRW 5 trillion and the Q1 revenue around KRW 1 trillion to KRW 1.5 trillion. In Q4, residential energy segment recorded lower sales, mainly due to reduced asset sales as the TPO market adopted awaiting fee stance before and after the OBBA developments. In addition, certain costs were recognized in Q4 as part of the asset rebalancing efforts aimed at improving the profitability of this business in response to changing external conditions. As a result, the residential energy business turned to a loss in Q4. For reference, financial instruments valuation loss of approximately KRW 8.2 billion related to the minority equity investment in the residential energy businesses were recognized under other nonoperating expenses in Q4. In Q1, the impact of the asset rebalancing carried out in Q4 is expected to continue. However, the operating loss is projected to narrow, supported by a rising ASP and increased installation volumes. For reference, the company's residential energy TPO business recorded annual installation of 165 megawatts in '25 and installations of approximately 186 megawatts are planned for '26. Next, on Chemical division. In Q4, operating losses widened due to the scheduled turnaround, reduced sales volume and margin compression resulting from the decline in key product prices. In Q1, the operating loss is expected to narrow mainly due to the base effect from the regular turnaround recognized in the previous quarter. Next, Advanced Materials. In Q4, revenue increased due to base effect from the summer shutdown in the previous quarter within the lightweight composite materials business as well as a pricing increase for certain products. However, operating profit turned to a loss, reflecting a nonrecurring cost incurred labor -- including labor-related expenses. In Q1, operating profit is expected to improve, supported by a recovery in solar material sales volume. Next, on equity method gains. In Q4, the equity method gains turned to a loss of KRW 202.4 billion Q-on-Q. This was mainly due to the absence of one-off gains previously recognized at Hotel and Resort, impairment losses reflecting the scheduled turnaround and operational shutdown at Yeochun NCC and the elimination of approximately KRW 120 billion in unrealized gains cross funding to Hanwha Defence and Energy's 25% ownership share related to the gain from the disposal of Futureproof. For reference, the impairment loss recognized at Yeochun NCC amounted to approximately KRW 120 billion, of which roughly KRW 60 billion was reflected in equity method gains based on the company's 50% ownership interest. In Q1, the equity method gain is expected to improve as the one-off factors recognized in the previous quarter are no longer present. Lastly, let me share the company's shareholder return policy. The company plans to make a decision at a future Board meeting after comprehensively considering its previously announced shareholder return policy, the full year '25 financial results and the overall financial position. This concludes the briefing. Thank you.

[Interpreted] The renewable energy is expected to return to profitability in the first quarter. Could you share the detailed operating profit expectations by segment as well as full year guidance? You mentioned that module prices are rising, but costs may also have increased due to supply chain transitions and higher silver prices. Do you expect the ASP increase to sufficiently offset these cost pressures, both for the first quarter and on a full year basis? And the market is increasingly interested in the development status of perovskite technology. Previously, you indicated plans for commercialization around 2026. Could you provide us on an update on the current progress? The answer is regarding the renewable energy performance in the first quarter, the operating profit is expected to trend positive, mainly driven by the module and related businesses. With custom clearance normalization, module shipment volumes are expected to increase by roughly 50% Q-on-Q and the AMPC recognition is anticipated to be in the low KRW 200 billion range. Please note that the first quarter AMPC excludes incentives related to the ingot and wafer. AMPC from the Cartersville ingot, wafer and cell lines is recognized only when the modules incorporating those components are ultimately sold. As full-scale production and the sales of module using Cartersville ingots and wafers are expected to begin in the second quarter, related AMPC recognition is also expected from Q2. ASPs are also expected to increase in Q1 with the application of FUC and together with the higher shipment volumes, the module and related businesses are expected to return to profitability in the first quarter. Regarding the residential energy business, the impact of asset rebalancing conducted in the fourth quarter is expected to continue in the first quarter. However, the losses are expected to narrow due to higher ASP and increased installation volumes. While losses may continue through Q1 due to rebalancing effects, this should be understood as part of profitability improvement process. The European residential energy business, which had weighed on profitability in '25 has been discontinued. And in '26, both base effects and solid U.S. demand are expected to support earnings improvement. Although specific rebalancing amount cannot be disclosed, most related costs were reflected in the fourth quarter of last year and the first quarter of this year, with profitability improvement expected from the second quarter onwards. Regarding the development asset sales and the EPC projects, operating loss widened in the fourth quarter, while overall revenue achieved the prior guidance and increased by more than KRW 600 billion Q-on-Q, primarily driven by the EPC projects involving the battery energy storage systems, additional costs were incurred due to project-specific factors such as a schedule adjustment and asset valuation changes across the various regions. In the first quarter, base effect from these costs are expected to support improved performance. The full year revenue guidance for development asset sales and EPC remains approximately KRW 4 trillion to KRW 5 trillion with the first quarter revenue expected in the range of KRW 1 trillion to KRW 1.5 trillion. While profitability guidance is not provided, base effects from the year-end adjustment recognized in Q4 are expected to support the first quarter results. Regarding the ASP trends, the U.S. modules ASPs are expected to remain firm this year, supported by strong import restrictions and rising manufacturing costs. Trade measures such as AD/CVD actions targeting imports from India, Indonesia and Laos as well as potential Section 232 tariffs on polysilicon are expected to limit import inflows. Additionally, anticipated FEOC guideline announcements in the first half of the year and the strengthened U.S. content requirements are likely to support ASP increases. Reduced VAT rebates in China and rising key raw material prices are also expected to provide additional pricing momentum. Regarding raw material cost, silver prices have recently increased quite significantly, leading to a modest increase in the unit cost of silver paste, a key input of solar cell manufacturing. However, through supply chain optimizations in the U.S., silver paste costs have been maintained below industry benchmark, and there are currently no supply constraints. Process optimizations to reduce silver paste usage is also ongoing, helping minimize cost pressure. Overall, while higher silver prices have some impact on manufacturing costs, profitability is expected to remain defensible through the premiums on the non-FEOC products and the ability to reflect cost and pricing. Regarding perovskite technology, the company is currently developing perovskite tandem cells and conducting manufacturability validation on pilot products and lines. Once such factors as the long-term reliability of tandem products and market acceptance become more clear, the company will be able to provide a more concrete time line for commercial mass production. The next question is from KB Securities. First, regarding the perovskite technology, I recall that the R&D has mainly focused on polysilicon perovskite tandem structures. When do you expect the transition to the thin film tendon structures to become feasible? Also, is it technically possible to stack multiple perovskite layers with different wavelength absorption characteristics into an all perovskite tandem configuration with 2 or 3 layers? Perovskite solar cells seems particularly suitable for space applications, but their ability to moisture has been a major challenge. Since space is effectively a vacuum environment, could this bring commercialization somewhat closer. Second, China announced that it will discontinue VAT rebates on domestic PVC and solar-related exports starting in April. To what extent do you expect this policy change to benefit the market? The answer is regarding the VAT rebate issue, the planned discontinuation from April is expected to partially narrow the price gap with the Korean market. The Chinese solar industry is currently undergoing internal restructuring and production curtailment. And since around December last year, prices of key raw materials have begun to rebound. The elimination of VAT rebate is likely to become an additional cost factor on top of this upward cost trend. As a result, we believe it could help alleviate aggressive low price competition in the Korean market. In the U.S. market as well, reduced VAT rebates in China and sharp increases in key raw material costs, including silver, are contributing to the higher production cost, which in turn are expected to support higher ASP. Similarly, for PVC, as summarized on Page 8 of the presentation, outlining the 2026 annual outlook by product, recent developments suggest that PVC prices with China have -- within China have started to rise in anticipation of the VAT rebate suspension. After April, exports from China are expected to decline and international prices are likely to recover. Regarding perovskite technology, the term perovskite tandem generally refers to combining different types of photovoltaic modules to utilize a broader range of light wavelength for power generation. Integration with crystalline silicon module is possible and thin film tandem configurations are also technically feasible. The immediate priority remains advancing perovskite technology development and securing scalable mass production capabilities. Once these foundations are established, applications for both terrestrial and space use could be pursued through further R&D. At this stage, however, there are no specific updates we can disclose regarding commercialization time lines. The next question is from Mirae Asset Securities. First question is regarding the residential energy business. With the expiration of 25D tax credit at the end of December, the demand for TPO solutions is expected to expand starting from the first quarter. How do you see the residential energy market trend this year compared with last year? What is your current market assessment? And could you share your outlook for '26? Regarding the ramp-up plan for the new manufacturing facility, wafer production is expected to begin in the second quarter and the cell plant in the third quarter. Since wafers produced in Q2 would need to be fed into the cell plant once it becomes operational in Q3, there may be a timing gap. Could you share how you plan to manage the operation during this transition period? The answer is regarding the Cartersville cell plant. As previously mentioned, the project is progressing smoothly towards mass production in the third quarter. Ingot production began in December last year and wafer production is currently underway with full-scale mass production scheduled to begin in February. The module plant continues operating independently of the cell plants time line to meet ongoing market demand. To minimize any production gap prior to the completion of the Cartersville cell facility, wafers produced in the U.S. will be supplied to cell lines in Korea, enabling module production in the U.S. through approximately September. From the third quarter, Cartersville cell plant is expected to commence operations and beginning in the fourth quarter, the company plans to market fully verticalized and integrated products following completion of reliability testing. Regarding the U.S. residential energy market outlook, the expiration of the 25D tax credit is expected to temporarily reduce the overall market size by approximately 20% year-on-year to around 3.6 gigawatts. However, steady annual growth in the high single-digit range is expected to continue through 2030. Demand may accelerate ahead of the final expiration of tax incentives in 2030 and temporarily contract after -- thereafter in 2031. But the company is preparing its business road map to align with this anticipated market cycle. In TPO business specifically, the company plans to expand annual installations from 165 megawatts this year to approximately 519 megawatts by 2030. The company aims to increase its TPO market share from the current single-digit level to approximately 20% by 2032 and to evolve into an energy asset management company, managing a cumulative portfolio of roughly 3.2 gigawatts. Regarding ASP trends and demand in the residential energy segment, Strong year-end demand in '25, driven by the approaching expiration of the 25D tax credit resulted in higher pricing. Favorable pricing conditions are expected to continue this year. Additionally, anticipated FEOC regulations are likely to strengthen the market premium for the company's products, which are free from supply chain risk. ASPs are expected to remain solid through the first half of '26. Looking further ahead beyond '27, continued growth in the U.S. electricity demand and rising PPA prices are expected to support improving economics and sustained demand for residential solar supported by tax incentives through 2030, the TPO segment is expected to remain a key growth driver, while both cash and loan markets are also expected to trend upwards alongside rising electricity prices. The next question is from Hanwha Securities. Recently, there has been market reports indicating a decline in solar module inventories, whereas just a few months ago, oversupply concerns were widely discussed. It could be possibly because of our factories operational constraints. Could you comment on this? Also, once the cell plant becomes operational in the second half of the year, modules meeting DCA requirements could potentially command higher pricing. Is it reasonable to expect such pricing benefits in the second half? Next question is, despite the current issue surrounding the cell plant, you are guiding for profitability in the first quarter. If the cell plant operates normally from the third quarter, what level of additional cost reduction could be expected? Next question is, are you monitoring recent developments regarding restructuring in China's PVC industry? With improving conditions in Hanwha TotalEnergies PX business, is there further room for earnings improvement? The answer is regarding the inventory levels, there is no official real-time database or the data set tracking solar module inventories in the U.S. So it is difficult to provide definitive figures. However, once the FEOC guidelines are finalized, inventories are likely to be reclassified between products that meet the requirement and those that do not. In this process, the company's non-FEOC products, which offer greater supply chain transparency are expected to face lower inventory risk and could secure a differentiated market position. On whether the ASP premiums are achieved without the DCA benefits, customers must meet the non-FEOC requirements to secure the base 30% ITC incentive. Since all of the company's products satisfy this condition, customers can reliably secure subsidies, which supports an ASP premium relative to the market average. Furthermore, once modules equipped with the Cartersville produced cells become available, the additional 10% DCA incentives could further enhance the price competitiveness. Regarding developments in China's PVC sector and implications for Hanwha TotalEnergies PX business, we have already shared a generally positive outlook for PVC in 2026. In addition to VAT rebate adjustment, the Chinese government may introduce further stimulus measures indicating potential restructuring focused on phasing out of outdated and energy inefficient capacity. If these developments materialize gradually, they could provide additional positive momentum for the PVC market and contribute to the improved profitability in the company's PVC businesses. As for the PX, on the supply side, approximately 4.3 million tons of new PX capacity are expected to come online in the fourth quarter of this year. Though some projects remain pending approval and could face delays. On the demand side, significant PTA capacity additions occurred in '25 with PX supplied additions concentrated towards late 2026 and prior PTA expansions support demand, supply-demand conditions could tighten somewhat. Overall, supported by improving PX market conditions, Hanwha TotalEnergies is expected to deliver solid performance this year. The next question is Hyundai Motor Securities. Could you share the CapEx execution for '25 and the planned CapEx for '26? And recently, the First Solar has reportedly asserted IP claims related to the N-type solar technology. Since Chinese manufacturers are increasingly shifting to N-type, we understand that the mono-PERC module prices where we have significant exposure have been rising. Has this situation had any impact on our sales environment or competitive positioning? The answer is, regarding the CapEx, the company executed approximately KRW 1.9 trillion in '25, including about KRW 1.4 trillion invested in the Renewable Energy division, primarily U.S. solar manufacturing investment and roughly KRW 500 billion in chemicals and other divisions. For '26, the total CapEx is expected to decline to around KRW 1.2 trillion with approximately KRW 1 trillion allocated to renewable energy and about KRW 200 billion to chemicals and other divisions. CapEx is expected to gradually decrease following the completion of major U.S. solar facility investment last year. Regarding the First Solar TOPCon patent disputes reported in January, our understanding is that the U.S. patent office decision did not constitute final validation of the patent substantive validity, but rather a procedural rejection of a further review. Therefore, the question of patent validity has not been fully resolved. The company maintained a firm noninfringement position regarding First Solar's TOPCon manufacturing process patent. Given the strong technological reliability of our products, we believe that we remain relatively insulated from such external risks. In fact, amid ongoing market supplies uncertainties, the situation could reinforce market preference for QCells products. Thank you for listening. This is the end of the Q&A. [Statements in English on this transcript were spoken by an interpreter present on the live call.]