Hanwha Solutions Corporation ($A009830)

Good afternoon. I am Han Sang-Yoon, Head of IR at Hanwha Solutions. Thank you all for joining Hanwha Solutions conference call for the first quarter '26 earnings. Also joining the call, we have Lee Jae-Bin, Head of Finance Office; Jung-Kwon Hong, Head of QCells Strategy Office; Kim Seungkook, Head of Planning at Chemical Division; Yeo Hyun-Dong, Head of Planning at Insight Division; and Kim Woo Seok, Head of Planning at Hanwha Advanced Materials. We will first present the financial performance, business updates and outlook by segment and conclude with a Q&A. Now we will begin with the Q1 business performance and financial highlights.

Good afternoon. I am Lee Jae-Bin, Head of Finance Office at Hanwha Solutions. Let me report to you on the business performance and financial status. First, Q1 '26 performance. Please turn to Page 8 of the presentation. On a consolidated basis for Q1 '26, the company recorded revenue of KRW 3.882 billion, operating profit of KRW 92.6 billion, a pretax loss of KRW 42.4 billion and a net loss of KRW 38.2 billion. Revenue increased by about 3% Q-on-Q and operating profit turned positive on a consolidated basis, driven by a return to profitability across key segments, including Renewable Energy, Chemicals and Advanced Materials. In Q1, AMPC of KRW 218 billion was recognized. Please refer to the bottom of Page 8 for performance by segment. Next, on financials. Please turn to Page 9. Total assets increased by KRW 1,786.3 billion from the year-end to KRW 34,930.3 billion, and cash and cash equivalents decreased by KRW 188.4 billion to KRW 2,477.4 billion. As of Q1 '26, total liability rose by KRW 93.6 billion to KRW 22,932.6 billion. Total debt increased by KRW 754.9 billion to KRW 16,046.6 billion, and net debt increased by KRW 43.3 billion to KRW 13,569.2 billion. Total equity increased by KRW 812.7 billion from year-end to KRW 11,997.7 billion. The total liability to equity ratio is 191% and the net debt-to-equity ratio is 133%. Now each division will present from Page 10 and onwards.

Good afternoon. I am Jung-Kwon Hong, Head of Strategy Office at Qcells division. Please turn to Page 10 of the presentation. In Q1 '26, the Renewable Energy division recorded revenue of KRW 2,110.9 billion, up 3% Q-on-Q and operating profit of KRW 62.2 billion turning profitable. The performance improvement reflects not only a recovery in volumes, but also structural margin enhancement driven by recent changes in the U.S. policy and market conditions. Module shipment increased by 80% Q-on-Q to 1.9 gigawatts driven by the normalization of production and sales following the resolution of [ cell-customs ] clearance delays as well as accelerated progress in EPC projects and the normalization of module supply to EPC customers. In line with higher volumes, AMPC in the first quarter increased by 112% Q-on-Q to KRW 216.1 billion. Module ASP increased by about 14% Q-on-Q, driven by higher U.S. regulations on circumvention imports from Southeast Asia and the extended application of FEOC criteria, which strengthened the pricing competitiveness of products based on non-FEOC supply chain. In addition, the continued tightening of the U.S. import regulatory measures, including the ongoing Section 232 investigation has created a favorable market environment for price increases of our products supported by local manufacturing capacity. From a U.S. supply-demand perspective, while total module demand exceeds 40 gigawatts annually, U.S.-made cell production capacity, one of the key requirements to secure the additional 10% tax credit is estimated to face a shortfall of about 10 gigawatts through early '27, even assuming all construction and ramp-up plans in the market are fully realized. As a result, the premium for the U.S.-made sales is expected to strengthen further and the value of the products manufactured at QCell's Georgia Solar Hub is anticipated to continue trending upwards for the third quarter. In the U.S. residential market, following last year's announcement of the [ OBBBA ], the Section 25D benefit expired at the end of last year, trending rather leading to a rapid shift in the solar financing market from a 25D-based loan model to the TPO model based on the Section 48D investment tax credit, which remains in effect through '27. In response to this trend, we first adjusted the business mix of our in-house financing platform and last year to 25% loans and 75% TPO and then further increased the TPA share to approximately 96% in the first quarter of this year, enabling us to provide products aligned with the policy changes and expand our residential energy business. In addition to the TPO business, we have also launched a new homes business, leveraging California's mandate for solar installations on new residential construction through which we provide homebuilders with integrated offerings, including supply, design, installation and financing of solar and battery systems. By extending our market-leading channel and brand value in the residential module market maintained since 2018 into broader energy solutions businesses such as [ Anson ] in new homes, we are further diversifying our earnings structure. In the Utility segment, stronger FEOC regulations are leading to a fundamental reconfiguration of modules posting behavior beyond a simple pricing impact. Project financing participants, including tax equity investors face a structural risk of losing the base ITC if FEOC eligibility is not secured and are, therefore, strengthening due diligence standards to require third-party audits and legal reviews beyond supplier self-certification. As a result, procurement by utility customers is rapidly converging toward products that comply with FEOC requirements based on verified U.S. vertically integrated supply chain, and we are actively leveraging our supply structure aligned with these changes. As a U.S.-based manufacturer of modules as well as an EPC contractor, we provide customers with best-in-class procurement visibility and eligibility under the FEOC framework, thereby enhancing our competitiveness in project awards and expanding volumes. Based on these business trends, we expect further improvement in the Renewable Energy division in the second quarter. We plan to simultaneously drive higher sales volumes in the U.S. residential market and the ASP increases, while increased EPS execution volumes and additional divestments of development assets are expected to support both revenue and profitability growth. In particular, following the imposition of tariffs on four Southeast Asian countries last year, primarily [ AD/CVD ] took determinations covering additional circumvention manufacturing locations such as India, Indonesia and Laos were recently announced in April with final determination scheduled for July. As tariff barriers on imported products are further strengthened, we expect the premium for Qcell products to become even more firmly established. Thank you. Next, we will hear from Chemical division.

Good afternoon. I am Kim Seungkook, in charge of selling at Chemical division. Please turn to Page 11 of the presentation. In the first quarter of '26, the Chemicals segment recorded revenue of KRW 1,340.1 billion, up 16% Q-on-Q and the operating profit of KRW 34.1 billion, returning to profit. Recent performance did reflect short-term supply-demand shift and price increases driven by geopolitical developments in the Middle East, along with some lagging effects. However, despite these external factors, the overall business environment remained highly volatile with constraints on profitability due to logistics disruptions and the supply bottleneck in certain regions. Nevertheless, it would be difficult to attribute the improvement in our earnings solely to one of external factors. We believe the current performance reflects the tangible result of the structural improvement we have consistently pursued in our business fundamentals. First, we restructured our business portfolio by rationalizing nonprofitable and structurally constrained operations. For example, we rationalized [ LP3 ] production line, a less competitive commodity LDPE line to proactively address potential oversupply. At the same time, we have continued our efforts to improve the earnings structure. As a result, both our [ Nimbo ] overseas subsidiary and the TDI business, which recorded losses last year are expected to turn profitable. In addition, further earnings improvement is expected this year through the introduction of the direct power purchase scheme, enhancement of competitiveness in the [ CA ] Vinyl value chain and a PVC portfolio strategy aimed at securing premium pricing. In particular, the introduction of the direct power purchase scheme alone generated approximately KRW 27 billion in earnings improvement in the first quarter. The [ W&C ] business also improved operating profit year-on-year by expanding the share of relatively high-margin products as part of its portfolio strategy. From a product sales perspective, group responded swiftly to changing market conditions. In the first quarter, the ablation of China's [ VAT ] rebate led to tighter supply-demand conditions in certain regions, resulting in improved market conditions, particularly for PVC and EVA. Under these conditions, we reallocated sales towards the higher-margin markets by leveraging regional price differentials to maximize margins. In addition, for certain products such as caustic soda and PVC, we improved the sales terms by capitalizing on short-term supply tightness. In addition, from an inventory valuation perspective, the positive impact of price increases was partially reflected. Overall, the improvement in performance is not really attributable to a cyclical market rebound, but rather the combined result of structural business improvement, enhanced cost competitiveness and strengthened market responsiveness, and we plan to continue this trajectory going forward. Next, Advanced Materials.

Good afternoon. I am Kim Woo Seok, Head of Planning Office with Advanced Materials division. Please turn to Page 12. In the fourth quarter of 2025, we recorded a loss due to one-off nonrecurring expenses such as labor costs. However, in Q1 '26, operating profit turned positive, driven by improved cost structures in solar materials, the ramp-up of sales in the North American market and the margin expansion supported by increased export volumes of lightweight composite materials and favorable foreign exchange movements. In Q2, profitability for [ encapsulant ] and back sheet products supplied to the [ Kou ] Georgia plant for solar modules is expected to improve further, supported by solid demand for premium models benefiting from the domestic content feed [ adder ]. However, rising raw material prices due to the impact of the Iran conflict are expected to increase cost pressure for lightweight composite materials. Nevertheless, we expect to maintain a stable level of profitability similar to the first quarter, supported by price passing through and increased sales of components for electric vehicles. Lastly, on equity method gain and loss. Please turn to Page 13. Equity method income for Q1 '26 turned positive Q-on-Q, driven by improved performance in the petrochemical business of Hanwha [ Impact ] and better investment results. For Q2, we expect the wind conditions to be broadly similar to Q1, though volatility may arise depending on the continuation of geopolitical tensions in the Middle East. This concludes the presentation by segment, and now we will begin the Q&A.

The first question is from [indiscernible] Investment Securities. I have four questions. The first question is, can you give us the breakdown of cell and module production capacity by major country around the time of the completion of the [indiscernible] facility? And the second question is on guidance. With the module and other segment turning profitable, the market expectations appears to be increasing. Please share your outlook on annual shipment guidance as well as expected ASP trends for Q2. Also, considering the shipment volume, ASP and increased AMPC, how much further improvement can be expected in the profitability of the module and other segment? The third question is, while you mentioned an increase in residential energy in the second quarter outlook, can you provide guidance on revenue and the profitability? The fourth and final question is regarding the domestic market, the government has been emphasizing renewable energy expansion. How does the company plan to respond in Korea? The answer is, first, regarding the domestic market, we have historically faced intense price competition with Chinese products. However, following the abolition of VAT rebate in April, there has been increased price volatility, which supported stronger sales in Korea during the first quarter. From a policy perspective, though domestic market has been relatively subdued in recent years, the current administration is actively considering various tax incentives and legislative measures related to domestic cell production. Accordingly, we plan to expand sales in the domestic market and if meaningful demand is confirmed, we will consider further increasing production capacity and sales. In addition, as the government has recently proposed various initiatives such as [ Ari ] Voltage and [ Balcon ] Solar, we are actively collaborating to expand overall market volume. Next, regarding residential energy and the ASP. Residential energy revenue and profitability-wise, we are focused on expanding both revenue and earnings by leveraging our financing platform through the TPO model. While it is difficult to provide a specific cent per watt figures, ASP increased by approximately 14% Q-on-Q in the first quarter, and we expect the upward ASP trend to continue into the second and the third quarter. Regarding the capacity breakdown after the [indiscernible] cell completion, well, capacity can be defined differently depending on whether it refers to the nameplate or effective capacity. As previously mentioned, the total module capacity is approximately 8.5 gigawatts and cell at 7.3 gigawatts. By region, Korea has around 5 gigawatts of cell capacity and approximately 2.5 gigawatts of module capacity. Malaysia, about 2.4 gigawatts of cell capacity in the U.S. through the solar hub, [ Cartusvill ] has approximately 3.3 gigawatts of integrated capacity plus ingot wafer cell and module, respectively, while the [ Dalton ] facility has around 5.3 gigawatts of module capacity. And regarding the shipment guidance for this year, the shipment guidance is approximately 9 gigawatts. Second quarter shipments are expected to be at a similar level to that of the first quarter. ASP is expected to increase further in the second quarter, particularly driven by the residential segment. Full year profitability guidance remains unchanged from what was previously communicated. The next question is from [ Mira ] Asset Investment Securities. I have two questions. First is with rising fossil fuel costs following the U.S.-Iran conflict, demand for renewable energy is expected to increase. While this has not yet been fully reflected in the numbers, are you seeing any tangible increase in exports by market? Has this translated into a stronger pricing power in negotiations? The second question is regarding the new plant. You previously indicated that the ingot and wafer operation would begin in the second quarter and cell production in the third quarter. Can you provide a more specific timeline? The answer is with regard to the new plant's production timeline, the timing for the cell mass production remains unchanged at around the third quarter. Given the remaining variables, it is difficult to specify an exact month at this stage. So please consider it as the third quarter. Regarding the impact of the Iran conflict, the increase in the fossil fuel prices following the Iran conflict, well, this has had an impact on pricing in the U.S., which is our primary export market, and we are seeing an increase in demand for solar energy. That said, the growth in solar demand in the U.S. is not driven by a single event such as the Iran conflict but rather by broader structural factors, particularly rising electricity demand from the data centers and AI-related infrastructure, which are the main drivers of overall market growth. The next question is from [ Hana ] Investment Securities. I have three questions. First is with regard to the [ Cardusvill ] cell plant scheduled to start operations in the third quarter. Does this imply that the utilities-related issues will be resolved by then? Please confirm. Second question is the competitors in the U.S. are aggressively announcing capacity expansions of up to 100 gigawatts. How does the company plan to navigate this environment? Is there a potential for collaboration? Or do you see this as an opportunity? The third question is with regard to the Chemical division. There appears to be raw material procurement issues in the petrochemical business. What is the current utilization rate overall? And how are you addressing the supply constraints? Also, given that the Middle East facilities have been impacted, do you expect any positive spillover effect? The answer is with regard to the [ Cardusvill ] fill ramp-up in the third quarter, utilities-related issues are already in the process of being resolved. The start of the mass production in the third quarter implies that all necessary testing will be completed beforehand. We are continuing testing from April through June and plan to begin mass production at an appropriate point in the third quarter. Second, regarding the U.S. competition and the supply, the module manufacturing capacity in the U.S. already exceeds 60 gigawatts, which is higher than the annual installation demand. As a result, the actual utilization rates are estimated to be below 50%, in contrast, upstream capacity plus the polysilicon, ingot, wafer and the cell remains significantly constrained. Even if all announced projects are realized, there is still expected to be a shortfall of more than 10 gigawatts relative to the U.S. demand. This ultimately necessitate cell imports for module production. With the implementation of the AD/CVD measures, the role of the 4 key Southeast Asian cell supply markets, namely Vietnam, Malaysia, Thailand and Cambodia has diminished. As a result, imports have increasingly been shifted to alternative regions such as India, Indonesia and Laos. However, with the preliminary AD/CVD ruling already issued for these regions and final determinations expected in the second half, their competitiveness may also be significantly reduced. Accordingly, while considering annual ASP trend, these structural constraints serve as a key factor that enhances our competitiveness and supports the ability to command a premium. Lastly, about the chemicals. Key feedstock ethylene is supplied by [ YNCC ]. Following the Iran-related disruption in March, [ YNCC's ] operation rate declined to around 50%, close to turnndown level. However, with the government support measures such as subsidies to facilitate naphtha procurement, utilization is expected to recover to approximately 65% in May and June. In response to the reduced YNCC operations in April, we proactively imported approximately 50,000 tons of ethylene from China during April and May, which helped maintain operating rates. excluding plants undergoing the regular turnaround maintenance, both facilities are currently operating at utilization rates above 90%. While we are supplementing ethylene through external sourcing, the levels remain sufficient to support stable operations. In addition, as YNCC currently relies on the Middle East for approximately 70% of its naphtha supply, we are exploring diversification towards alternative sources such as the U.S. and Africa. The next question is from [ Hana ] Investment Securities. It is understood that not only the refining but also the chemical facilities in the Middle East have been impacted. What is the scale of the impact? And to what extent can we expect any positive spillover benefits? As mentioned earlier regarding the Middle East situation, our [ TDI ] business, which recorded a loss of approximately KRW 40 billion last year, is expected to turn profitable this year with the supply shortage being one of the key drivers. In particular, that our plant in the Middle East has been shut down due to the impact of the conflict. Our headquarters had TDI production capacity of approximately 150,000 tonnes per year. And out of that, about 90% is exported. The rise in international prices has led to a significant improvement in the profitability, contributing the Chemicals division's return to profit. The next question is from [ Mira ] Asset Securities. Europe, Korea and the U.S. are expected to account for the majority of the solar shipment. What is the breakdown by region? And how much has the ASP increased in the U.S.? You mentioned about 14% increase earlier. How much further upside do you expect? Specifically, what level do you anticipate after April and May? In terms of the module shipment mix, the U.S. accounts for over 80%, followed by Korea and Europe. And ASP varies between the residential and utility segment. However, as a reference, residential ASP has historically risen to the high [ $0.30 or low $0.40 per watt range ], which may serve as a useful benchmark. [Statements in English on this transcript were spoken by an interpreter present on the live call.]