Hanwha Solutions Corp

KRX:009830

Earnings Call Transcript 2023-Q2

[Yong-In Shin, executive]

[Interpreted] Good afternoon. I am Shin Yong-In, CFO of Hanwha Solutions. Thank you for joining the call today. I will brief you on the business performance, financials and outlook by segment for the period of second quarter 2023.

First, Q2 performance -- please refer to Page 8 of the presentation. The consolidated sales of Q2 '23 increased by 9% Q-on-Q to KRW 3.393 trillion. This is thanks to higher sales from the power generation business in the Renewable Energy division and increase in the module sales. The consolidated operating profit declined by 29% on Q-o-Q at KRW 194.1 billion as the operating profit from the Renewable Energy division shrank.

Continuing from the previous quarter, expected tax credit of KRW 27.9 billion from the U.S. IRA was reflected in the operating profit. Pretax profit and net profit at credit, KRW 44.3 billion and KRW 47.5 billion, respectively. Please refer to the bottom of Page 8 for performance by segment.

Next, on financials. Please turn to Page 9 of the presentation. As of the end of Q2 '23, the total assets declined by KRW 600.6 billion from the end of previous year to KRW 23.2311 trillion. And cash and cash equivalents declined by KRW 284.7 billion to KRW 2.515 trillion. Total liabilities declined by KRW 158.2 billion from the end of previous year to record KRW [ 15.782 ] trillion, and the debt increased by KRW 999 billion to KRW 8.207 trillion.

Net debt increased by KRW 1.283 trillion from the end of last year to KRW 5.692 trillion. Total liabilities-to-equity ratio increased by 5 percentage point from the end of last year to 146%, and net debt-to-equity ratio grew by 15 percentage points from the end of last year to 60%.

Performance by segment, first, Renewable Energy. While the Renewable Energy division enjoyed higher sales volume versus the previous quarter, the difference in when the following model and wafer prices reflected has led to the raw materials of relatively higher price was used, and thus drove the operating profit down by 44% Q-on-Q to KRW 138 billion.

We expect that the impact of the higher-priced wafer will continue in Q3, but operating profit will be maintained at a similar range as the previous quarter as the profit from the power generation business will start to be realized in earnest.

The impact of the relatively higher-priced raw material is expected to be relieved from the end of third quarter and the profitability of the module recovered and the profit from the power generation business realized in earnest from Q4, leading to a favorable Renewable Energy performance.

Next, the Chemical division. Q2 operating profit of Chemical division increased by 46% Q-on-Q -- 46%, rather, Q-on-Q to KRW 49 billion due to a decline in freight charge. The operating profit is expected to decline Q-on-Q due to delay in demand recovery.

Next, Advanced Materials, despite higher sales from the strong sales performance from the key customers, the operating profit of the Advanced Materials division declined by 2 percentage points to record KRW 21.2 billion as the effect of the retroactive application of the sales price increase in the previous quarter waned. In Q3, as key customers enter into the summer vacation period, the operating profit is expected to decline.

Next, on equity method gain. The equity method gain turned into deficit due to a decrease in sales volume as major equity method companies have regular turnaround and to drop in equity method gain with the Hanwha impact. Despite a continued sluggish global demand of key chemical products, the equity method gains are expected to improve as major equity method companies' performance would increase when the turnaround in the previous quarter completes.

This concludes the earnings briefing. Thank you.

[Operator]

[Interpreted] [Operator Instructions] The first question will be presented by Parsley Ong from JPMorgan.

[Rui Hua Ong, analyst]

This is Parsley from JPMorgan. I have 2 questions on the solar division. The first question is, if I look at your second quarter solar power plant revenue, it was a lot higher than expected. But the OP contribution is significantly lower. Could you explain why?

And also, what is your expectation for second half and 2024? And if we strip out -- for the Renewable Energy business, if we strip out the power plant and IRA AMPC contribution, then I think the OP margin actually fell to about 8.4% in 2Q. And I think this reflects the gradual decline in the module pricing.

So I have seen quite a sharp drop in June. So could you share with us for your 2Q performance how much was the profit -- what was the profit trend in March and April versus June? Would it be fair to say that most of the weakness in profit was in June? How much was the loss? And therefore, what kind of expectation do you have for the third and fourth quarter?

The second question is on your AMPC monetization schedule. So you have booked, I think, KRW 23 billion AMPC in the first quarter, KRW 28 billion in second quarter. So when do you expect to receive the cash? And do you expect to receive 100% of what you have booked in OP so far? Or should we factor in some costs or sharing arrangement or anything like that? So actually, the cash inflow might be a bit lower than what you have booked in OP.

[Yong-In Shin, executive]

[Interpreted] First, let me respond to the first question about the power generation for the second quarter, thanks to the project sales and EPC that we have recorded at the sales of KRW 304 billion and operating profit of KRW 0.4 billion.

For your information, up until the first quarter of this year, EPC sales volume was not that great. So we actually included that into the performance of other areas as well. But starting from the second quarter, we have witnessed the fast increase in the EPC sales. So that is why we have decided to separate it out.

And let me explain to you why there was such a huge differences between the sales and the operating margin for Q2. During Q2, we have sold 1 project that is to do with the solar power generation, and the margin from that project sales was in the ordinary range of any other project. But the extraordinary effect was that depreciation of the intangible asset was actually reflected in driving down the overall cost and ended up resulting in operating loss in the third and fourth quarter that we are also preparing for additional sales of the project, and that has also increased SG&A costs in this quarter.

So let me give you a guidance figure for the renewable with regard to the power generation for Q3 and for the rest of the year. So we expect to continue with the project sales for Q3, and the sales from this project sales is expected at KRW 1 trillion. So throughout the whole year, the expected sales from the project sales will be KRW 2 trillion or above.

[Unknown Executive]

[Interpreted] So let me respond to your second question about the module price. As you have rightly pointed out, when we exclude the power generation and the IRA impact, the margin from the other part of the Renewable Energy declined, and that is because of the fewer margin from the module sales. And that is, as we have laid out in the presentation, because of the narrowing of the spread.

Throughout the whole value chain, the price started to decline from the fourth quarter of last year. But other than this market trend, there is one factor that is rather unique to our company. That is that the wafer price. So that was increasing, and the time that this wafer price was reflected into our book and put into the actual use, there was some time gap. And that has contributed to the even narrowing of the spread in the month of June and driving down the spread for the whole second quarter.

Because of the differences in reflecting the time that this falling price of wafer and the falling price of module was reflected into the books have led to the narrowing of the spread. So that is why that wafer that was used for the month of June was a bit higher than it was supposed to be. We expect the situation will continue throughout the rest of the third quarter and the situation will gradually improve from the end of third quarter. So we will be able to reflect now lower wafer price from the end of third quarter and then recovering the spread.

So regarding the AMPC related to the IRA. So as you have mentioned that we have put into our book in terms of the tax credit, KRW 23 billion for the first quarter and the KRW 28 billion for the second quarter. And this is according to our internal forecast and also the industry consensus that the monetization will start from next year after the completion of the tax report. So that is why there will not be any sharing of the credit for the moment.

[Operator]

[Interpreted] The next question will be presented by Sung Hyun Hwang from Eugene Investment & Securities.

[Sung Hyun Hwang, analyst]

[Interpreted] Well, I have some questions about the Chemicals division. So according to the consolidated basis and the sales performance, it seems that you fared well for the second quarter. So can you share with us, especially what product performance actually led to such a strong performance for the quarter?

The next question is that -- but when we include equity method, then it didn't seem that positive. So the overall Chemical did not do very well. But that might actually contribute to us for the performance of the company better because the actual cost that you pay to purchase some of the raw materials might decline as well. So if you could also share with us the forecast for the second half, then I would appreciate it.

[Unknown Executive]

[Interpreted] So let me respond to the overall performance of the Chemicals. We cannot find any particular division within the Chemicals that extremely better than the others. But what we can tell is that the CA, PVC and TDI did slightly better than the LDPE and EVA.

And in terms of the improvement in the operating profit in the second quarter, despite the poor overall market condition, all the divisions tried their best to defend their price, and the decline in the freight cost also helped.

Next, about the equity method performance, the total went into the regular overhaul that takes place once every 4 years, and that actually contributed to the lagging effect in terms of operating profit. So the total is the equity method accompany with the Hanwha impact. So the operating loss of total was actually captured by Hanwha impacts performance.

And regarding the forecast for the second half, then, of course, everything depends on the pace and the degree of the demand recovery, so we will have to wait and see very intensely. So we have shared with you early on our forecast for the third quarter that it is likely that the operating profit will decline. But for the fourth quarter, it is likely that the situation will gradually improve.

[Operator]

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

[Jin Ho Lee, analyst]

[Interpreted] So I have 2 questions. First is about the profitability of module. So according to the data source that I rely upon, the wafer price in June declined much more than it did in April and May. And you said that there was some lagging in terms of the falling wafer prices reflected into your P&L.

And if and when that happens, then the profitability of the module price will improve, and you predicted that will happen sometime at the end of third quarter. So the question is that, will that really happen that time? And what is the general period of lagging of any fluctuation in the price of wafer and its actual reflection into the book?

And the second question is that in the second quarter, the EPC sales grew greatly. And can we know of the profitability forecast for EPC?

[Unknown Executive]

[Interpreted] So regarding your first question, so there is definitely the lead time from us purchasing the wafers and to manufacture the finished product module and then to be completed in terms of the sales. And usually, the lead time is 1 quarter but, of course, that the period might be changing depending on the status of the inventory and the sales trend of the modules and the current wafer inventory level. But there is a definite lead time from the purchase of the wafer and the sales of the module.

So that is the lead time from the perspective of wafer. But when you look into the module only, then there is another round of lead time involved, that is, that the production of the module and delivery. So that means that the module was recognized as an inventory, and it moves as an inventory and until it's sold completely. So there is another round of lead time there. But also another factor that might influence that will be the pace and the degree of the price decline.

So what we do is that we look into this period of different factors, and there are some quarters that these factors actually smooth out, but this quarter was not the case because there was a fast decline in the wafer price in the month of June. Of course, there was another round of a price decline earlier during this quarter, but throughout the whole quarter, except for June, the wafer price was maintained at a relatively higher range.

So in terms of June and also for the second quarter that we were not able to enjoy that much of the smoothing effect. And in terms of the lead time, the wafer-associated lead time is generally a bit longer than the module-related lead time.

So based upon these various factors that might impact this price and what happened with the wafer price in June and also in July, there we expect about 3 months or 1 quarter of lead time. So this is when we will begin to see some of the smoothing effect or the widening of the spread end of June and more so in the fourth quarter.

[Yong-In Shin, executive]

[Interpreted] So let me respond to the second question about the profitability of EPC. So EPC does not happen in a single cut form. So EPC could be a hybrid form and, thereby, combined with our other power generation project. So please understand that it is rather difficult to provide you with any definite answer -- definitive answer, when it comes to the EPC profitability.

[Operator]

[Interpreted] The next question will be presented by Dong Jin Kang from Hyundai Motor Securities.

[Dong Jin Kang, analyst]

[Interpreted] So there are several questions that I'd like to pose. The first is that on the third quarter that you said earlier that from the sales of the power generation business that you expect to contribute to the sales of KRW 1 trillion. And what will be the expected profit of that? I ask this question because there has been quite a huge degree of variability. So if you could give me some idea, it will be really appreciated. And if possible, some of the forecast for the fourth quarter as well.

The second question is about the shipment. And what will be the shipment, like for the third quarter versus the second quarter?

And the third question is that the Q3 guidance, you said that on a Q-o-Q basis, the OPM will be maintained in the same range as that of the second quarter. That means that from the sales of the power generation business that you have, the KRW 1 trillion in sales, that means that the margin from module will further decline in the month of July and August, and please share with me -- and also your forecast for the U.S. solar market as well.

[Yong-In Shin, executive]

[Interpreted] So about your first question, profit and the sales from the project sales only was starting from the Q2. Within the power generation business, we include EPC along with the sales of other development projects. So the sales guidance and also the EPC, so that constitutes KRW 1 trillion.

In terms of the guidance, profit guidance that I can share with you. So considering the profitability that we were able to enjoy, when it was only the project sales, then, of course, the EPC by adding the EPC that we could have the higher sales, but in terms of the margin, it is a bit diluted. So what I can suggest is that you might have the OPM band before when it was only for the project sales. But if you could lower the band a little bit, then it might include the margin of EPC as well.

[Unknown Executive]

[Interpreted] So let me share with you the shipment for the -- each quarter. So versus the first quarter, the shipment for the second quarter went up by 10% to 15%. So that is in line with what we have shared with you earlier. For Q3, the shipment is expected to decline a little bit, but it would not be significant. So on a quarterly basis, there could be some fluctuation of the shipment in the range of 5% to 10% that is irrelevant to the market condition.

In terms of the profitability, so in Q3 until the module price spread changes, then, yes, it will continue to do worse. But you might find that, that is only trending because the wafer price has started to decline already. So in time, that will work in our favor.

For the second quarter, the OPM was KRW 140 billion from the Renewable Energy. In Q3, that will be in the same range, but the contribution from the module will be a bit lower. Meanwhile, the contribution from the power generation will be much higher. So overall, sales contribution from the power generation will be in the trillion range.

Of course, the margin, because of the inclusion of the EPC into the power generation, will not be as high as it used to be. But the overall sales contribution or the sales growth is quite significant. And in the third quarter, we are considering a multiple project sales. So all in all, the OPM will be in the similar range, but the contribution from the power generation will be much higher.

So I do not believe that it is appropriate for us to either confirm or deny the current status of other company's facility expansion. But what we can share is our updates on what is happening in the United States with regard to the module. So we have disclosed earlier this year our plan to invest in the facility for module, 1.4-gigawatt and 2-gigawatt, and from ingot to module, 2.4-gigawatt.

So in terms of the schedule for these 3 separate projects, the originally shared schedule for the 1.4-gigawatt is that the construction will be completed by the end of first quarter and started -- ramping-up will start very soon. And the 2-gigawatt will happen afterwards, and the more integrated version from ingot to module, which is 3.3 gigawatts, the construction will be completed by the end of '24, and the commercialization or the ramp-up will begin from '25. The update that I can share with you is that 1.4 gigawatts and 2 gigawatts, these 2 projects will be able to ramp up in around the same time period.

So to be more specific, as of end of July, so the 1.4-gigawatt facility have started to ramp up. The 2-gigawatt facility is located in the same site as the previous one, and we expect the ramp-up to start within the third quarter. So the ramp-up process has almost started, but it will not affect the overall shipment guidance. There might be some adjustment of the volume that goes out to the European countries, but the overall plan is to expedite the facility expansion. But the overall shipment guidance will be maintained in the earlier figure, that is early to mid 8 gigawatts.

[Operator]

[Interpreted] The next question will be presented by [ Rene Lau ] from Goldman Sachs.

[Unknown Analyst]

This is [ Rene ] from Goldman. So today, I have 3 questions. So my first question, how much was the recognition of IRA credit in the second quarter, operating profit for the Renewable Energy segment?

For my second question. So it appears that ex-China polysilicon prices have risen, while China prices have fallen. So is this something Hanwha can pass on to customers?

And for my third question, can you talk about your wafer technology as you plan to build the integrated solar module for city in the U.S.?

[Unknown Executive]

[Interpreted] So regarding the first question, so the IRA tax credit that was reflected in the second quarter as a profit is KRW 28 billion.

About the second question, I believe that this is to do with the purchase of the polysilicon, but we do not purchase polysilicon directly. We purchase wafer, so I believe that your question is that polysilicon, ex-China, would that be carried over to the customer. We don't see the need to do that because we purchase wafer.

And finally, about the wafer technology. So we do not have any wafer facilities under construction or the operational yet. But when it comes to the technologies or the equipment for the wafer that we are in the process of making that operational as soon as possible so that we can cater to the increase in the shipment of the sales in the U.S. market and to support our increasing market presence.

When it comes to the specific technology about the wafer, and that is to do with the facility that is not yet operational, so I do not believe that it is appropriate for us to disclose any further.

[Operator]

[Interpreted] The next question will be presented by Seung-jae Han from DB Financial Investment.

[Seung-jae Han, analyst]

[Interpreted] Our spread between the wafer and the module price seems to be widening. And also what happened to the Chinese module manufacturer? So we expected the profitability to be much better. But as you have explained earlier, this sluggish performance for this quarter is because of the lagging or the lead time of the falling wafer price to be reflected into the module price.

Then I'd like to understand what is the current status of the ASP of the sales price of the module within the U.S. market. So as you have mentioned and when the spread widens with the solution?

[Unknown Executive]

[Interpreted] So regarding the ASP, of course, it has declined gradually. So it is not just a module price that we have witnessed some falling prices throughout the whole part of value chain, but the pace and the degree are slightly different between the price of wafer and of a module. So the ASP started to decline from the fourth, but not wholly but mostly because of the differences in the recognition of the spread -- the narrowing of the spread or the recognition of the falling price of module versus wafer.

And about the shipment for the fourth quarter, I can answer that in conjunction with your second question as well that we maintain the shipment as it is. And that has been the case with the other years as well. There has been the slight seasonality in terms of the shipment. So there is a general increase in the volume in the fourth quarter. So there has not been any particular intervention from our side, and it is more to do with the seasonality.

Although a bit too early for the fourth quarter, so for the second quarter range, so it is maintained at around 10%. If you take out the IRA, so of course, it goes down to 8%, but we still was able to maintain it at a high single range. In Q3, it will drop slightly, but in the third quarter, but in the fourth quarter, it will rebound to offset what has happened in the previous quarter.

And lastly, about the financing. So we have already announced the facility expansion plan worth KRW 3.4 trillion. In terms of the time line, the cash out will happen sometime even after 2026. And of course, not everything will happen in a single year. So in terms of -- when you look into our balance sheet, that you might notice that our borrowing are about KRW 1 trillion higher than the normal range. And we don't have the cash and cash equivalent of the KRW 2.5 trillion, and we can also use that, as the funding for the U.S. facility expansion. And when the IRA monetization starts from next year, we can also utilize that extra fund for the investment.

[Yong-In Shin, executive]

[Interpreted] Thank you very much for joining the call out of your busy schedule. So this concludes our earnings call for the second quarter of 2023 by Hanwha Solutions. Thank you, and goodbye.

[Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]