Hanwha Solutions Corp

KRX:009830

Earnings Call Transcript 2023-Q3

[Unknown Executive]

Good afternoon. I am [indiscernible], CFO of Hanwha Solutions. Thank you for joining the call today.

I will brief you on the business performance, financials, and outlook by segment of Hanwha Solutions for the period of third quarter 2023. First, Q3 performance; please refer to Page 8 of the presentation. The consolidated sales of Q3 '23 declined by 14% Q-on-Q to KRW 2,925.8 billion. This is due to decrease in key product sales volume of Renewable Energy and Chemical divisions.

The consolidated operating profit declined by 49% Q-on-Q at KRW 98.3 billion due to decreased operating profit from Renewable Energy division. Pre-tax profit and net profit recorded KRW 33.6 billion and KRW 20.6 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 Q3 2023, the total assets increased by KRW 1,134.7 billion from the end of previous year to KRW 24,966.4 billion. Cash and cash equivalents increased by KRW 209 billion from the end of the last year to KRW 3,008.7 billion. Total liabilities increased by KRW 1,493.1 billion from the end of previous year to KRW 15,427.9 billion, and the debt increased by KRW 2,626.4 billion to KRW 9,834.6 billion. Net debt increased by KRW 2,417.4 billion from the end of last year to KRW 6,825.9 billion and the total liability to equity ratio increased by 21 percentage point from the end of previous year to 162% and net debt-to-equity ratio grew by 27 percentage point from the end of previous year to 72%.

Next performance by segment; Renewable Energy, due to timing difference when the falling module and wafer price is reflected into the P&L, the raw material of relatively high price was used, thereby lowering the operating profit by 75% to KRW 34.7 billion. While the global solar energy demand continues to expand, the supply in some markets, including Europe, exceeds the demand, thus lowering the price of solar products. The company, however, is expected to enjoy higher operating income in Q4, as the impact of relatively higher priced raw materials is expected to be relieved along with the sales volume increase.

The sales from the power plant project grew in Q3 with the sales realized from the solar power plant project development in the United States. But the planned power plant project sales in other regions, including U.S., was delayed to Q4. We expect about KRW 1 trillion in sales to be realized from the power plant project, and overall annual sales of the segment is expected to be around KRW 2 trillion, which is in line with the existing forecast.

Next, Chemical division; Q3 operating profit of Chemical division increased by 14% Q-on-Q to KRW 55.9 billion, due to improving spread of some products with lower-cost raw materials. In Q4, the operating profit is expected to decline, due to the regular turnaround.

Next, Advanced Materials; as key customers entered into the summer vacation period, the sales and the operating profit declined by 20% Q-on-Q to KRW 16.1 billion. Though the impact from the summer vacation is expected to disappear in Q4, the operating income is expected to continue to decline, as the price of key raw materials is expected to increase.

Next, on equity method gains; the overall equity method gains for Q3 turned around, thanks to the base effect of the Hanwha Total Energy's turned around and significantly increased in the equity method gains from Hanwha impact due to the better refining margin. In Q4, as the product spread of major equity method companies is expected to narrow, the equity method gain is expected to decline.

This concludes the earnings briefing. Thank you.

[Operator]

[Interpreted] [Operator Instructions] The first question will be provided by Dong Jin Kang from Hyundai Motor Securities.

[Dong Jin Kang, analyst]

[Interpreted] I have general questions about the renewable energy. First, during the presentation, you mentioned that during the Q3 period, the module performance was relatively low, and therefore the shipment declined. So how can we interpret this performance in terms of the ASP and the total shipment? And if you could share with us the Q4 prediction, of the module performance?

The second question is that, during the presentation, you also mentioned that the lower price of module and wafer were beginning to be used from Q4. Outside of the AMPC impact of KRW 35 billion, what would be expected performance for that -- or the expected impact of that in Q3.

Third question is that with the EPC and the power generation project, then you expect about KRW 1 trillion in sales in Q4 and how does that translate into the profit? And the next question is about the general market condition and the prospect. According to the market analysts is that the high interest rate might not work in the favor of having additional investments into this area. And while the utility market, the module and the battery price declines and that works in the favor of the utility overall. But when it comes to the module, it may not be the case. So can you share with us your overall outlook for the market?

[Unknown Executive]

[Interpreted] So let me first respond to the first question about the third quarter performance. As you have mentioned that the sales for the third quarter declined from the previous quarter, and we believe that there could be 2 reasons behind it. First, the shipment declined by about 10% Q-on-Q, and that is not necessarily because of the market, but it is just a general trend.

And the other reason could be the ASP. So we have been witnessing a decline in the price of key products throughout the whole value chain. And for our company, so we have witnessed a decline in the ASP as well as a decline in the COGS. In Q3, that we have witnessed a wider degree of decline in ASP instead of that from the COGS, and that has contributed to the temporary narrowing of the spread.

As was mentioned earlier, this is due to the temporary impact of the timing differences of the price reflected into the price of the relatively high priced raw materials reflected into the P&L. So we expect that from the Q4, the spread will turn in our favor.

So for the Q4 outlook, we expect the shipment to grow by 20% Q-on-Q, and also spread will turn in our favor. And especially, there will be a very strong demand for the U.S. module, and we expect U.S. LPA will take effect from that period. So we believe that we will be able to defend the ASP price successfully, and the COGS will be stabilized. So we will move away from the temporary narrowing of the spread in Q3, and the operating profit in Q4 will recover.

I believe that I answered your first 2 questions and regarding the annual guideline or the guidance for the total shipment, is that the earlier figure that we have shared with you will be the early to mid 8-gigawatt, but we'd like to correct the figure to the early 8-gigawatt. And the reason for the modification, is that as we are coming closer to the end of the year, then all the plans or the forecasts are beginning to be realized.

Let me respond to the third question about the EPC and the sales of the power generation project. So the guidance figure for the Q4 sales is KRW 1 trillion and that will especially come from the U.S. ESS-only project sales. If you would remember, the same period last year, we've had quite favorable results from the sales of the ESS-only project in the U.S. market.

Looking into the current environment, especially in such market as Europe, because of the inflation, and the high interest rate, and the stabilization of the utility price, some projects are being delayed, but that is not the case in the U.S. market. So we have proven with our actual performance that the demand is quite strong with the development and EPC project and we were able to complete one sales of a project in the third quarter.

So in Q3, because of some of the delay in the project sales that we were not able to record the sales of the performance, that is short of the guidance figure, but in Q4, things will turn around. So from the EPC and the power generation project [ only ], we can have the sales worth KRW 1 trillion and the operating margin -- OPM will be in the mid-one-digit.

So about the fourth question, and the market prospect, so let's first look into the installation. So in terms of battery installation, we have witnessed a strong demand order increase versus last year. So it has been very promising so far.

As for the last year, the actual installation was around 220 gigawatts globally, but this year, the number is expected to grow to somewhere between 300 gigawatt to 400 gigawatt.

Especially in case of the European market because of the added stress on the energy security and the interest on the renewable energy, the initial forecast of the market size of 50 gigawatt has been modified to 60 gigawatt.

In case of China, we expect the installation volume will be around 200 gigawatt. In case of the U.S. as well, the market size will grow to 30 gigawatt.

So as was mentioned that we have witnessed a very solid global demand, but you might wonder how you can interpret the falling price throughout the whole value chain.

So I believe that for my interpretation of what is happening in terms of the falling price throughout the whole value chain is that the past practice of the stronger price that has been driven from the [indiscernible] between the supply and demand for the products that is in the whole value chain are starting to be stabilized, but we need to take a look at the region by region or country by country. So first off, the European region, as there is no trade barriers such as tariffs, especially around utilities, the prices are starting to be stabilized.

But in case of the U.S. market, the ASP is declining, but it is maintained in the premium range. So we have witnessed some downward trend, but there is a very strong force that goes against it.

[Audio Gap] So [indiscernible] installed in the U.S. is operational. So as for the year 2024, we expect the U.S. market share or the company's share of the dependence on the U.S. market will further increase. So barring any stronger or the increase in the COGS, we believe that the spread will work in our favor.

In case of the European market, so we are responding quite actively to the utilities market and increasing our value or the share to the residential and the commercial [Audio Gap].

And for the European market, so we want to further stabilize our profitability and we are focusing on transitioning from the provider of the simple module into the distributed service provider that we first introduced in 2020.

On a long-term basis, for the European market, we will continue to sell our assets and the products, as well as expanding our business area into the sales of electricity and VPP.

When we look into the new residential installation of the solar panels and about 80% to 90% of the cases come along with that [ ESC ] installation. So that is a massive growth from the previous tendency. And also that works in the favor of our aspiration of reinventing ourselves as a distributed power generation service provider.

And one more thing, is that as all of our new production facilities in the United States are operational, so we'd like to update you with the new capacity figure.

So the earlier figure that we have given you, in terms of the capacity, was the 10 gigawatt for cell and 12.4 gigawatt for module. With the opening of the U.S. facilities, we were able to add 3.4 gigawatts from the U.S. and from the Korean facilities that we are beginning to manufacture TOPCon and that comes with the added efficiency, and also from our manufacturing facilities in other regions, that we have actually improved the manufacturing process, thus increased the efficiency. So with that said, the revised figure will be for cells that will be 12 gigawatt, and for module 17.8 gigawatt.

[Operator]

[Interpreted] The following question will be presented by Parsley Ong from JPMorgan.

[Rui Hua Ong, analyst]

This is Parsley. Firstly, I just wanted to clarify, you mentioned that your Korea plan will be TOPCon. So does that mean as of end 2023, you will have 4.9 gigawatts of TOPCon capacity, out of your total capacity of 17.8 gigawatts? Or if not, then what is your TOPCon percentage mix now, and then by 2026 or 2027, what will it be?

And if I calculate based on your shipment numbers in third quarter, I think your module ASP declined by about 25% quarter-on-quarter on average, which region did you see a more severe ASP decline in or maybe residential versus utility, where are you seeing the largest declines? And do you see potential for your ASP to be flat in fourth quarter, because the wafer costs have been going down, so in that case, you might see a margin recovery?

Lastly, on your shipments, you mentioned 2023 shipment is 8 gigawatts, but now your module capacity is 17.8 gigawatts. And I noticed that based on your AMPC volumes, you only produced 0.9 gigawatts in the U.S. in the first 3 quarters of this year, I think, versus your old U.S. capacity or existing U.S. capacity of 1.7 gigawatts.

So going into 2024, given your higher capacity numbers, could you share first, what kind of shipments you're expecting and if there is underutilization of your module or cell facilities in any region, what is causing that? And also if you could split your module shipments for 2024 into U.S. versus entire company, that'll be appreciated.

[Unknown Executive]

[Interpreted] Regarding your first question about the TOPCon is that you're right that we have started manufacturing or utilizing the TOPCon in the Korean facilities and it is very early, so we are still in the marketing phase. So for the existing, the Korean capacity, was 4.5 gigawatts instead of 4.9 gigawatts. But with the transition into TOPCon or the addition of the TOPCon with the improved efficiency, the number has been changed from 4.5 gigawatts to 6.2 gigawatts.

And just to give you the breakdown, out of the total capacity of 17.8 gigawatts, it will be safe to say that about 1.4 gigawatts to 1.5 gigawatts is from TOPCon. So it is very early stage and we would plan to gradually increase the share of TOPCon. And based upon the response that we are getting and we will be getting from our marketing initiative, then we will know for sure, as to what will be the share of TOPCon for the year or the period of '26 and '27. And I would rather not share any details or the work in progress with you, as we are still in mid quarter. So I will be able to share with you with more details in our next earnings call when we give you the annual briefing.

Regarding your second question of any region or any sector that has experienced more wider, or more pronounced ASP decline in the third quarter. So as I have briefly mentioned earlier, we have witnessed the wider range of decline in ASP in the European market. As you might know that Europe and the U.S. combined, that accounts for 60% to 70% of the shipments. So these 2 regions are very important, and we have witnessed some ASP decline in Europe.

In terms of which sector has experienced wider decline in the ASP, if I may share the Q-o-Q basis that we have seen the wider decline in the residential sector. In terms of utility, our ASP is determined based upon the contract where the delivery might take place with the 3, 6 months, or the 1-year time lag. So there will be some of the lagging effects. So the current market condition might not necessarily be in line with the company's ASP. So that is the reason why I share with you, that the company will be more affected by this declining price in the Q4 instead of Q3 and maybe next year. Once again, the trend of the market might not necessarily be in line with what the company is experiencing at the moment, but the general direction is something that we are witnessing all the same, that the price ASP is declining. But it does not necessarily mean that things are going against our favor, because we have also witnessed the decline in the COGS, and what is more important is the spread between the ASP and the COGS.

And you also asked that the expected improvement in the spread in Q4 is, because of the falling wafer, when the ASP might remain [ as that ]. Is that to respond to this point is that, ASP might go down in the next quarter, but in terms of the magnitude, that ASP decline from Q2 to Q3 will be even more than what we will expect to see, in terms of the ASP trend from Q3 and Q4. So if and when ASP falls in Q4, it will not be as much as what we have experienced in this quarter. And we are not yet sure if ASP will continue to decline. But if and when that is the case, then we are also witnessing the COGS decline as well. So what is even more important is the speed or the magnitude of the ASP going down. If it falls faster than the COGS, then it might have a different impact.

And regarding your next question, the differences between the cell and module capacity, so you use the AMPC figure to come up with the production volume of 0.9 gigawatts for the U.S. facility. But one caveat that I'd like to share with you, is that AMPC does not necessarily include the past inventory for the first half. So because of that reason, I can say that our U.S. facility, even before the addition of these new lines, was at the full capacity or the full utilization.

And you also mentioned that the cell volume was lower than the module. And that has been the case consistently, even when we announced our plan to actually increase the U.S. capacity. And regarding the adjustment of this utilization in other parts of the world, that we are looking into many different options, so that we make best use of this added line, and we might implement a differential approach.

And about the next year's shipment, so by the end of this year, we will have the cell capacity of 12 gigawatts and on the assumption that we did not -- we do not actually purchase anything from outside in terms of the cell, then we will have the full 12 gigawatts capacity for cell. But of course, there are some practical considerations or limitations. The planned turnaround and also the ongoing improvement of our process, the transition into TOPCon will prevent us from utilizing the full 12 gigawatts of the cell capacity. So please look at it as a nominal capacity.

So I share with you the actual shipment. The guidance figure for the module shipment was early 8 gigawatts. But considering this increase in the capacity, the figure for next year will definitely increase from that one. And also to maximize the benefit from the AMPC, that we will have the full utilization of the U.S. facility as much as possible. And that is also driven by the fact that the U.S. market -- the market condition is more attractive than that of other markets.

So by the end of '24, the U.S. market capacity or the production capacity will be at about 8.4 gigawatts, and our total cell capacity as of end of this year is 12 gigawatts. So if we just apply very simplistic and a conservative approach, that accounts for about 70% of that, and when we announced our plan to invest in the U.S. to expand the manufacturing facility, that we said that -- we will target about 70% of our shipment will go into the U.S. market by the end of '25, and believe that we are going into that direction and for the distribution into the other regions, such as the Europe, Korea and Japan, then we will look into -- how the market fares and respond to the situation flexibly.

[Operator]

[Interpreted] The following question will be presented by Jae Sung Yoon from Hana Securities.

[Jae Sung Yoon, analyst]

[Interpreted] So I have 2 questions. First is about one-time expense or loss. For example, from the renewable business because of the change in the ASP, was there any inventory impairment and -- or from chemical and [ equity method ] gains or loss, was there any inventory impairment that has been reincluded? And second is about the general forecast of the company's chemical business for next year.

[Unknown Executive]

[Interpreted] Let me respond to your second question first. Our outlook was forecast for the chemical business for the year '24. So it is still unclear when the economy will turn around, will be better and we still have quite threatening geopolitical challenges. So when things will be better, we will have to wait and see. And what I can share with you is that the price, the price of the major products and the spread is already at a very low range. So we do not necessarily expect there will be the further room for decline in the price or the spread. But we are hopeful that there could be an upside potential, if things turn around politically.

And to respond to your first question, as far as we know that there is no one-off expenses related to our inventory.

With that, we'd like to conclude the earnings call for the Q3 of 2023. I promise that we will come back with you -- with better performance on the next call. Thank you and goodbye.

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