Hanwha Solutions Corp

KRX:009830

Earnings Call Transcript 2024-Q1

[Yoon An-sik, executive]

Good afternoon. I am Yoon An-sik, CFO of Hanwha Solutions. I'd like to thank everyone for joining the call today. I will brief you on the business performance, financials and outlook by segment for Q1 of 2024. First, the company's performance during the first quarter of 2024. Please refer to Page 8 of the presentation. The consolidated sales of Q1 2024 declined by 38% Q-on-Q to KRW 2,392.9 billion. This is due to decline in module sales and ASP, sales of power generation assets, a reduction in EPC sales. The consolidated operating profit recorded negative KRW 216.6 billion, due to loss from the Renewable Division. Pretax profit recorded negative KRW 517.5 billion, due to decline in equity method gain and asset impairment loss of KRW 140 billion coming from suspension of Chinese solar manufacturing facility. The net income is negative KRW 448.4 billion.Please refer to the bottom of Page 8 for the performance by segment. Please refer to Page 9 for financials. As of the end of the first quarter of 2024, for non-financial business, the total assets increased by KRW 1,707.6 billion from the end of last year to KRW 24,820 billion. Cash and cash equivalents increased by KRW 859.7 billion from the end of last year to KRW 2,941.7 billion. Total liabilities increased by KRW 2,317.4 billion to KRW 16,604.2 billion and the debt increased by [ KRW 2,977 billion ] to KRW 11,447 billion and the net debt increased by KRW 1,238 billion to KRW 8,505.9 billion. The liability to equity ratio and the net debt ratio on Page 9 are also based on non-financial businesses. As of the end of the first quarter '24, the liabilities-to-equity ratio increased by 40 percentage point from the end of last year to 202% and the net debt ratio by 22 percentage point to 104%.Next, performance by segment for Q1 '24. First, Renewable Energy. Due to seasonality and aggravating global supply, including the company's key target market of the U.S. the module sales volume and the ASP declined significantly from the previous quarter. Also, in this quarter, there was no sales of the power generation asset, but the cost and expenses were reflected, resulting in the division to turn negative with KRW 187.1 billion in operating loss. However, the second quarter will be free from seasonality and we expect the module sales volume to recover as the sales of the previous order from the utilities are realized. This would narrow the size of the loss in a meaningful fashion. The Q2 sales from the sales of power generation asset and EPC is forecasted at around KRW 450 billion.Next, Chemical Division. The Q1 operating profit of Chemical Division is negative KRW 18.9 billion and the size of the loss was reduced due to base effect from the regular turnaround happened previous quarter and the minor improvement of some product spreads. We expect that the geopolitical risk will continue during Q2 and the global recovery of demand would be delayed, thus delaying the turnaround time. Next, Advanced Materials. Due to the growth in the sales of lightweight complex material boosted by the strong sales of the key customer, the operating profit of the Advanced Materials Division grew by 100% to record KRW 10.6 billion. In Q2, strong sales performance of the key customer is expected and both sales and operating profit of the division are expected to further improve.Next, equity method gains. Equity method gain for the first quarter recorded negative KRW 51.6 billion due to non-operating loss from Hanwha impact and expiration of the one-time elements of equity method companies. For Q2, as we expect a better spread from the major equity method companies, the size of the loss would narrow.This concludes the earnings briefing. Thank you.

[Operator]

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

[Rui Hua Ong, analyst]

I have a couple of questions. First question is on your Solar Division. Could you share with us first quarter shipments? How much AMPC you booked and your shipment expectation for the next few quarters? Right now, your module business is extremely loss-making. So, when do you expect to turn to profit? And what are some of the catalysts you think can take us there? And for your GES, our power plant sales, you mentioned that no revenue was booked in first quarter, but the costs were booked in first quarter. So, could you give us a sense of what is your full year revenue expectation and what kind of profit we can expect from this division over the next few quarters?

[Yoon An-sik, executive]

So, the sales for the first quarter went down quite significantly that might have surprised some of you. In terms of the sales because of the high build-up of the inventory and the conventional or the historical seasonality of the first quarter, it went down by 50% Q-on-Q. So, the decline in the sales is attributable to the decline in the shipments as well as the decline in the ASP. Starting from the second quarter, we expect the shipment to recover in a meaningful fashion. So, we expect as much as 40% of the shipment to recover.In terms of the ASP fluctuation, it went down from the fourth quarter of last year and it continued on in the first quarter and we expect this trend to continue until the beginning of the second quarter. Starting from the second quarter, we expect the ASP and the cost will be normalized and it will establish some kind of a [ pattern ]. So, on the Q-on-Q basis, there would not be any major change in terms of the spread. And as for the annual guidance, the original figure was 10 gigawatt and we'd like to change that to 9 gigawatts and that reflects the declining shipment during the first quarter. And as was mentioned during the earlier briefing that we will soon suspend the solar manufacturing facility in China and the ensuing reduction in the production volume is also reflected.So, the shipment will improve. So that means that in the second half of this year, we can expect to generate profit. So, in the second quarter, we -- I said earlier that we expect the shipment to improve. So, in the second quarter, we expect the size of the loss will decline in a meaningful fashion. And the second half, once again, we will be able to expect not only the decline in the size of the total loss and we can expect to see some profit. You also asked about our kind of catalyst will work.So, looking into the current situation, there has been quite the long-standing build-up of the inventory started from the fourth quarter of last year and we do not expect any immediate change in the situation because, as you are aware, the tariff exemption coming from the volume on tariffs on the volume coming through Southeast Asia will -- exemption will be suspended from the June of this year. So that is one of the reasons why there is a major inventory build-up in the United state. So because of the expiration of the exemption, we expect the situation to improve in the second quarter and there will be some relief in -- from the build-up of the inventory and the same is true for the ASP. Like I said earlier, the pace of the ASP decline has been the fastest during the fourth quarter and the first quarter and we expect the pace will be somewhat flat on a Q-on-Q basis in the second quarter. And as we expect, the slowdown of the volume coming into the U.S. market, then that means that the pace of the ASP decline will slow down as well.So, one of the reasons why we focus on the U.S. market is because of the AMPC and the amount booked for the AMPC for the first quarter is at KRW 96.6 billion and we expect the amount will go up slightly for the second quarter. And we have completed the construction of the plant in the United States and we have additional volume or the additional facility of the 3.3 gigawatts and it has been -- the construction of which has been completed and it is operational from April. So starting in the second half, then we expect the AMPC amount will grow even further. And also about the power generation assets and the EPC. So, we focus more on the second half of this year instead of the first half and we will share more detailed information with you.

[Unknown Executive]

As you have mentioned during your question, there was no project sales or the pilot generation asset sales for the first quarter, but we were able to meet the sales guidance in terms of the EPC, but because of the cost and expenses, the operating profit from this business area was negative. For the second quarter, though rather small in size, we plan to have some projects to be sold and the sales guidance for the second quarter will be KRW 450 billion. So, for the first half of this year, the guidance that we can share is KRW 800 billion. For the whole year, we expect the sales to be around KRW 2.5 trillion. So, as was mentioned earlier, we expect the second half to be much better than the first half, considering what I've shared with you earlier for the sales guidance for the first half. Second half, we expect the sales to be about KRW 1.7 trillion.

[Yoon An-sik, executive]

So, one additional information I'd like to share with you is that you must have read through the media report that we have the second large contracts signed in the area of C&I. And that the size of it is about 450 megawatts and it covers the module and the EPC and this will be not the end of it. We will continue to strive to have a large-scale contract for the C&I market of the net states.

[Operator]

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

[Jin Ho Lee, analyst]

So, I have 2 questions for you. The first is about the public disclosure that happened immediately before this earnings call, that is the suspension of the production facility in China. So, I'd like to know what was the utilization before the suspension. And what was its share out of the total policy capacity. I believe that the move is driven by the need to improve the efficiency of, coming from the oversupply that happened in Chinese market. And if it is otherwise then please correct me.And the second question is about the financial structure. So during the briefing, you said that the net debt is KRW 8.7 trillion. So, do you have a plan to have a different source of funding or the financing or plan to improve the financial structure?

[Yoon An-sik, executive]

So first, about the Chinese manufacturing facility. So, we -- if you look into the disclosure material, the suspension or the shutdown is as of June 30. So, during the second quarter, there will be some sales activities and the production that will happen. So for the first quarter, though, fewer than what we have planned earlier -- so we continue to do the production there, so we can live up to the promise or deliver the promised volume to the customers in China. And the planned shutdown was reflected in our earnings presentation. So, if you look into the Page 19, so you will find the production volume and the number has been adjusted for as of end of '24. So, if you compare the figure as of end of '23 and end of '24, you will find the differences.So, if you take a look at the Page 19. So, as of end of '23, the capacity for cell is 10.8 gigawatt and the module is 10 gigawatt. And as of end of '24, the capacity for cell is 12.2 and for module 11.2. So, we have disclosed the capacity for the Chinese market to be around 2 to 3 gigawatt. Of course, there has been some fluctuation on the capacity because the tradition has been underway to focus more on the larger wafer. So, by the end of '24, of course, there will be some efficiency improvement for other plants. But when it comes to the module, once we complete the planned investment into the U.S. market and the U.S. site, module will be mostly produced in the U.S.

[Unknown Executive]

So, in terms of the improvement of the financial structure, so our planned investment for the solar facility in the United States will come to a closure within this year. So, once the investment peaks out, we expect some kind of cash flow to coming out from the existing project and that will be used to repay some of the debt. On top of that, we have just received a dividend from Hanwha impact, which is about KRW 50 billion and we plan to sell or the securitized AMPC worth KRW 200 billion. Other than the expected operating cash flow, we are looking at other ways to further improve our financial structure. And finally, we have suspended reviewing on the consideration of any new investment and to focus on finishing the investment project that is going on in the United States.

[Operator]

[Foreign Language] The following question will be presented by Woo-Je Chun from KB Securities.

[Woo Jae Chun, analyst]

So, I have 3 questions for you. I understand in the United States, there are some Chinese companies who have planned the facility expansion or the capacity expansion. But after the announcement of the plan, it was later canceled. So, if you could share with us your knowledge of this planned capacity expansion that was announced in 2023 and what is currently happening in 2024 in terms of the gigawatt of modules.And the second question is with regard to the new facility that is operational from April. So, if you could share with us the utilization for the first, second quarter and the whole year, it will be really helpful. And the third question is about the LDPE and the EVA, what is the current market situation? And when do you believe this market will improve?

[Yoon An-sik, executive]

So, it is always rather cautious for us to actually share the data or the information of other companies. So with that in mind, so I believe that I can share what has been circulating in the market. So, some companies have been very aggressive in entering into the United States, especially they made announcement about the module investment into module. The size of which is not very clear, it could be the dozens of gigawatts for this year. And for next year, it will be 50% of what was announced for this year. What we are paying more attention to is cell. And for 2024, we expect the total volume will be less than 10 gigawatt and that will be particle volume we expect. So, looking into the total investment required for the sell versus module, then it require -- the investment is much smaller for module. Maybe that is the reason why the companies are more aggressive with regard to the modules. And I believe that some might start production as early as this year.I believe that you must have come across with the news of the cancellation of the planned investment and that is to do with the declining AMPC and the inventory build-up in the United States as was proven by our recent performance. So, this is the reason happening in the U.S. market. But for other markets around the world, this has happened many quarters before, and this reflects the current status of the global solar market. So, in order to overcome this challenging environment, the plan is to operate our U.S. facilities as soon as possible. So the 3.4 gigawatt facility that was completed last year, they are fully operational. I believe that utilization on a quarterly basis is close to 100%. For the new facility of 3.3 gigawatt that was operational from April of this year. So, they are still in the process of ramping up and we want to make sure that, that happens as soon as possible. So, those were reflected into our AMPC figure and the number that we have shared with you was somewhere between KRW 500 billion to KRW 600 billion.

[Operator]

[Foreign Language] The following question will be presented by [ Yoon Sung Ta ] from Chemical Energy Investment Management.

[Unknown Analyst]

So, even though you have shared a bit of information in the earlier responses, I'd like to understand your long-term perspective in terms of the solar energy competition against Chinese companies. Do you believe that you will prevail, the current company will prevail? And will that be because of the economy of scale? And/or will that be boosted by the U.S. and the European countries' move to move away from China? And the competing source of the sustainable energy will be the natural gas or the nuclear power generation and their price has went down quite significantly recently. So, what is your viewpoint on a longer-term basis? And same is true with chemical. So, what is your long-term view on the competition with the volume coming from China? And any updates on hydrogen?

[Yoon An-sik, executive]

So, let me first respond to the earlier question about the chemical market forecast. In terms of the LDPE, so there has been some geopolitical uncertainties in the first quarter and that drove the price of naphtha and that translates into the added pressure on the cost. But in turn, it drove the overall global price of LDPE. So, the product spread had went up slightly. During the second quarter, we expect the geopolitical risk to continue and that will further drive the international price and we also expect the spread to improve slightly.So overall, there is still many uncertainties and the prolongation of the geopolitical risk is something that we expect. So, it will be rather difficult to predict when the market will turn around. But compared to last year, we are under less pressure in terms of the supply. And as was mentioned earlier, we expect a better second half than before. In terms of EDA, so for the first quarter, the price remained weak, and we do not expect the situation will improve in the second quarter. Because of the inventory build-up of the solar module and the capacity expansion, we do not expect any improvement for 2024. So 2024, EDA market will remain weak.So, let me respond to your question about the long-term competitiveness of the solar energy as a source of energy. So, to look into the competitiveness, we do look at the cost. So, in terms of the LCOE, of course, that's the LCOE of the conventional energy source has went down. But when it comes to the source of energy that we believe that the solar has remained most competitive. And of course, there could be some questions or the doubts as to the LCOE after it's attaching to the ESS, but believe that the recent change or the change that happened in the U.S. market, namely the NEM3.0, then the growth of the demand in the U.S. residential market has slowed down a little bit. But the fact that such program or the system was possible was only because that the solar is attractive source of energy. And we believe that the ESS attachment rate will grow in the future and we believe that it will remain competitive. And that has been proven by the speed and the pace of installation. Of course, on a short-term basis, we are suffering from the declining price and the build-up of inventory, but the demand is there. We believe that for the whole year of '24, we expect the demand to be around 400 gigawatt. So that means that solar is an attractive source of energy and it is valid.And moving on to the solar module manufacturing instead of solar as a source of energy, so in terms of the solar module, the price of the solar panel went down and that has put some strain on us generating the performance. But as the price went down in terms of the LCOE, we were relieved from the pressure of the higher rate. So ultimately, so you would not have any negative impact on the demand. And what is the implication for the manufacturing company, of course, that it is up to the individual company to figure out a way out of this challenging situation. So that is one of the reasons why we are focusing on sophisticating our business structure. And we have been focusing on, we have been pursuing -- focusing on the particular region and we have been expanding our business area to cover the power generation as well.And also, as was disclosed in a media report earlier this year that we have started to offer some financing programs for the U.S. residential customers. Though this service is at a very early stage, we expect it will be sophisticated towards the end of this year and into next year. So, with this diverse move that we plan to further increase the value-add and promote profitability. So, for the chemical market, so first half of this year will remain quite weak. But in the second half, with the bottleneck, we move that we believe that the market will slightly recover.

[Unknown Executive]

In terms of hydrogen, R&D is underway and we don't have anything in particular to share with you at this moment. So, this has been the earnings call for the first quarter of 2024 for Hanwha Solutions. It is regrettable that we would not be able to share with you any better performance. I hope that for the next quarter's earnings call that we can share better news with you.[Statements in English on this transcript were spoken by an interpreter present on the live call.]