Hanwha Solutions Corp

KRX:009830

Earnings Call Transcript 2023-Q4

[Yong-In Shin, executive]

Good afternoon. I am Yong-In Shin, CFO of Hanwha Solutions. First of all, thank you, everyone, for joining the call. I will brief you on the business performance, financials and outlook by segment for Q4 and the whole year 2023.

First, Q4 '23 performance. Please turn to Page 9 of the presentation. The consolidated sales of Q4 '23 increased by 32% Q-on-Q to KRW 3,869 billion. This is due to the Renewable Energy division's increase in module sales volume, sales of power generation assets and increased EPC profit. Despite growth operating profit from the renewable division, consolidated profit declined by 59% Q-on-Q to record KRW 40.7 billion due to the fall in profit from the Chemical division and onetime increase in labor costs.

Pretax profit turned negative recording KRW 381.1 billion in loss. It is partially due to KRW 350 billion in additional expenses from suspension of module production at Eumseong plant and impairment loss associated with the production facility for small cell products. The net income recorded KRW 230 billion in loss. Please refer to the bottom of Page 9 for detailed performance by segment.

Next, 2023 annual performance. Please turn to Page 10 of the presentation. For fiscal year '23, the consolidated sales increased by 1.2% year-on-year to KRW 13,288 billion, while the Chemical division experienced decline in sales due to aggravated market conditions and fall in sales price of key products. Sales from the power generation assets and EPC, which is a part of the business sophistication strategy for the renewable division, increased by more than 3x versus that of the previous year to record around KRW 2 trillion. Thanks to this, consolidated sales have increased.

Consolidated operating profit declined by 35% year-on-year due to narrowing spread from the worsening market condition of the Chemical division to record KRW 604 billion. The pretax profit recorded negative KRW 102 billion due to onetime expense from increase in interest expense due to interest rate hike, the net income was net to KRW 155 billion.

Next, on financials. Please turn to Page 11. As of the end of '23, the total asset grew by KRW 661 billion from the end of last year to KRW 24,492 billion, and cash and cash equivalents declined by KRW 715.7 billion from the end of last year to KRW 2,084 billion. Total liabilities increased by KRW 1,547 billion from the end of last year to KRW 15,482 billion, and the total debt grew by KRW 2,140 billion from -- to KRW 9,349 billion. Net debt grew by KRW 2,857 billion from the end of last year to KRW 7,265 billion, and liabilities to equity ratio increased by 31 percentage points from the end of last year to 172%, net debt-to-equity ratio by 36 percentage points to 81%.

Next, performance by segment for Q4 '23. First, Renewable Energy. The operating profit grew by 334% Q-on-Q to KRW 150.5 billion. Module sales volume grew Q-on-Q to reach the annual targets. And the sales from power generation assets and the EPC projects has recorded the highest quarterly sales of around KRW 1 trillion. During Q1, it seems inevitable that the module sales volume, as well as the ASP would decline due to increase in inventory from oversupply and seasonality. It is likely that it will turn negative.

However, the increased utilization and new U.S. plants and profit realization of power generation assets are expected to defend the performance, and we expect the performance to bottom out during the first quarter and to gradually recover for the second half. Despite sudden market fluctuation, the company continues to push forward to business structure sophistication to guarantee sustainable income. We forecast the Renewable Energy's power generation asset sales and EPC would continue to generate solid sales. The sales target in this area is KRW 300 billion in the first quarter and KRW 2.5 trillion annually.

Next, Chemicals. Q4 operating profit of Chemical division turned negative to record negative KRW 79.3 billion due to price decline of key products from sluggish demand and narrowing spread and regular turnaround. In Q1, the operating loss is expected to continue as [indiscernible] and the COGS increase with the geopolitical risk and segment demand.

Next, Advanced Materials. Though the impact from the summer vacations, which was evident in Q3, has disappeared, the operating profit declined by 67% Q-on-Q to KRW 5.3 billion due to price increase for main raw materials. In Q1, thanks to falling raw material price, we expect the operating profit to grow.

Next, on equity method gains. With the sales of using equity previously owned by the REC Silicon, and thus recognition of this onetime profit, the Q4 equity method gain increased by 27% Q-on-Q to KRW 36.1 billion. While we expect the product spread to improve for major equity method companies, the equity method gain might decline as the onetime profit from the previous quarter expires.

Lastly, shareholder return policy. Please turn to Page 25. If you take a look at consolidated cash flow of 2023, when applying the existing shareholder return policy, the cash flow for 2023 is negative with investment for future growth such as solar energy, thus no dividend. However, considering that the company has not paid any dividend in the past 3 years and that there is a need to elevate the short-term shareholder value, the company intends to modify part of the existing shareholder return policy and provide some cash dividend. According to the modification for this year and next, we will offer dividend of higher amount between 20% of the free cash flow and KRW 300 per share. And this year's free cash flow is in the negative. The dividend of KRW 300 per ordinary share will be paid.

This concludes the briefing. Thank you.

[Operator]

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

[Dong Jin Kang, analyst]

[Interpreted] I have 1 question for you. During the performance presentation, there was a mention about onetime labor cost. And can you give us the details breaking down by division? And I was wondering it could include some of the cancellation payment for the closure of operations.

[Unknown Executive]

[Interpreted] So let me respond you to this question regarding the onetime expense that was reflected in the operating profit in the fourth quarter. So this is mostly the payment -- the cancellation payment that was paid out due to the closure of the Eumseong plant and that was reflected in the Q sales, and the amount is about KRW 30 billion.

In terms of the nonoperating profit and loss impact, so there was some of the financial impact associated with the interest rate or the FX change. And there was some impairment loss associated with the small scale or the small-sized wafer that is about KRW 300 billion.

[Operator]

[Interpreted] The next question will be presented by Nikhil Bhandari from Goldman Sachs.

[Nikhil Bhandari, analyst]

Two questions. One is, for the Renewables business, it seems the core margin, excluding -- not core, but excluding the project development and excluding the IRA recognition of KRW 124 billion, it looks like the implied, just the module business margin was negative without IRA. When you're guiding for the first quarter, it will be again in loss for the Renewable Energy business. Is that guidance with or without IRA tax credit assumption? So that's the first question.

And the second question is, can you talk about your CapEx plan for 2024? It will be helpful if you can also provide the breakdown of that CapEx, and also how you're looking at the funding plans.

[Unknown Executive]

[Interpreted] So regarding the first quarter figure, so you are right that the AMPC and also the profit from the project development was reflected. So your interpretation might be the correct one. But considering that there was this onetime labor expenses in the Renewables in the fourth quarter, the actual figure might be slightly positive. And regarding the inclusion or the exclusion of the IRA or the AMPC is that please understand that all of our performance analysis and the future forecast is inclusive of AMPC.

Regarding the second question, let me brief you on our CapEx plan for the year '24. The company is estimating about KRW 3.2 trillion in CapEx, which can be broken down into KRW 2.6 trillion for the Renewable, which includes about KRW 2 trillion investment into the U.S. facilities, and KRW 600 billion for Chemicals and others. And in terms of the source of funding, we will utilize the operating cash flow and outside borrowing.

[Operator]

[Interpreted] The next question will be presented by Woo-Je Chun from KB Securities.

[Woo Jae Chun, analyst]

[Interpreted] So 2 questions to the Renewable Energy division. The first question is, regarding the Q1 forecast, you said that the module sales volume and the ASP will both decline. And can you elaborate as to how much you expect the sales volume and the ASP to decline for the first quarter, and if possible, your projection for the whole year for the U.S. market? And the second question is utilization. What is the target that you have for the new U.S. facilities and where it stands right now?

[Unknown Executive]

[Interpreted] So with regard to the sales, our target for '23 was 8 gigawatts, and we were able to reach the target. For '24, our sales target has grown to 10 gigawatts. So we have slightly elevated or increased the target. But if you look into the quarterly or the seasonal breakdown is that for the first quarter that you noticed that there is inventory buildup that is happening not only in Europe but also in the United States that is partially driven by the expiration of the circumvention, alleviation that will come to the end sometime in June for Southeast Asian countries.

And coupled with that, the seasonality, we expect the performance will be the lowest in the first quarter, but slightly rebound throughout the year. And with that, and also the higher or the improvement in the utilization of the new plant that we are opening or we will open in the United States, so we are hopeful that we can reach this 10-gigawatt sales target. And because of those reasons, globally, the ASP has been rather weak and competition has been aggravating.

And coming into the second half of this year, we believe that the inventory pressure will be eased. And there are some facilities that were completed in '23, and they are currently operated in a normal fashion. And there is another facility that will have this vertical line from ingot wafer to modules, and we expect that facility to be operational from second quarter -- hopefully, early second quarter. So with that in place, then starting from the second half of this year, we'll be able to actually provide large amount of products made in USA, and that will contribute to improve the ASP as well as the volume.

[Operator]

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

[Jin Ho Lee, analyst]

[Foreign Language]

[Unknown Executive]

[Interpreted] Two questions. First, regarding the AMPC. So can you give us the how much of the AMPC has been recognized in the Q4 because it seems that the amount has increased quite significantly Q-on-Q. So some of the annual guidance for the AMPC for '24. And regarding the amount that was already recognized, can you elaborate as to how much was recognized? When?

And the next question is about EPC. In terms of the profit that the EPC project has generated looks to be they are slightly below the projection. So can you share with us your EPC project profitability guidance or the forecast for the year '24?

Regarding the AMPC, what we have recognized in '23 was KRY 200 billion for '24. So there will be the higher utilization of this new plant and the planned opening of this new site with a vertical line that we expect the amount to further grow. If I were to give you some range, so it will be somewhere between KRW 500 billion to KRW 600 billion plus potentially some upside potential.

You also pointed out the fact that in Q4 of '23, the AMPC amount seems much higher than your expectations or what was disclosed, and that is because there was some amount which effectively recognized during the Q4. The amount is around KRW 30 billion and then should have been reflected during Q1 to Q3. And as you might know that the IRI guideline has recently been revised or came out, and that led to some change in timing of the AMPC recognition. So we need to recognize the credit at the time of the production at the manufacturing entity. So that means that there were some additional AMPC amount that needed to be recognized during the first 3 quarters, which didn't happen. So that was all reflected during the Q4, and that can explain the seeming increase during that period.

So regarding the EPC profitability, so we have not disclosed or shared any profit guidance for the short-term basis. We have shared with you the mid- to long-term profitability target, which we project to be somewhere in the mid- to high single digits.

And please consider the fact that we started to recognize the revenue from the EPC development or the EPC project from the fourth quarter of '22. So it has been only a year since we recognize revenue from this business. And we definitely see some additional growth potential in this area. And as I mentioned earlier, in the fourth quarter, we have recorded the highest quarterly sales. So when the project is further expanded and be more stabilized, then I'm confident that we will be able to reach this profitability target.

[Operator]

[Foreign Language] The next question will be presented by Hyunryul Cho from Samsung Securities.

[Hyunryul Cho, analyst]

[Foreign Language]

[Unknown Executive]

[Interpreted] I have 2 questions for you. First is about the onetime labor expenses that you recognized to be about KRW 30 billion. But if we take that into consideration for the module, if we exclude the AMPC, the operating profit for the module seems to be in the low single digits because the module related revenue will be about KRW 9.5 billion. So the low single-digit operating profit for module seems to be a bit lower than the forecast. So can you elaborate as to what has changed from the earlier projection that has led to this lowering of the operating profit?

And the second question is with regard to the AMPC. So in case of other companies in a similar situation, they have started to securitize or started to securitize the AMPC. So the question is that do you have any plan to do so in the first quarter or general strategy as to what to do with this credit?

So during the Q4, we have witnessed inventory buildup and the declining ASP much faster than our original expectations. So we predicted the falling wafer price and the ensuing lagging effect will give us some room for breath. And that is actually in line with our original forecast. But unfortunately, there's irregular, may I say, the development with the ASP that is to do with a very short decline in a very short period of time. It has affected negatively.

So in terms of the demand, so in 2023, it is true for our projection and the market's forecast that the volume of insulation was the late 300 gigawatts. So that is a very solid growth versus the performance of '22. In terms of the performance or the projection for the '24, I believe that we are, in general consensus with the market forecast that the market will continue to grow in a very solid fashion. But then we need to overcome this sudden oversupply situation and ensuing tough price competition. So we are focused on the U.S. market, and we were able to defend our price somewhat relatively so. But when you look into the global market overall, objectively, that price is having a huge toll.

So we have 2 strategies in Hanwha Solutions with the Renewable Energy division. The first is to focus on the market or the area that we can do well, and we have the strategic advantage and to differentiate and move quickly or faster than anyone else. So that is the reason why we were quick to expand our facilities in the United States and also have this vertical facilities covering from ingot wafer to module, though there might be some ups and downs on a short-term basis, but most of our projects are underway according to our plan. And we are hopeful that starting from the second half of this year, we were able to demonstrate some solid results. And we are currently in the process of those transitions and need more time. So in due time, they will be able to show you that the demand is indeed growing again in the United States, and the customers will definitely show the preference for the products made in U.S.A.

So in terms of the volume that will be produced in '24, as you might have guessed from our very long-term contract with the very quality customers. So we are offering modules but that are higher value add. So this is part of our second initiative or the second strategy is to further sophisticate our business structure. So, so far, we have been focused more on the residential and the C&I market instead of utility, but we believe that the stronger or the faster growth will come more from the C&I and utility. So this is where we will focus on going forward. So in line with those changes, we will reflect some changes in our contract structures and allocate volume accordingly.

And some of the visible or the tangible results from this business structure sophistication is the sales of the power generation assets and the EPC. So 2023 has been the first year that we were able to generate the quarterly sales or the quarterly performance from this business area. And we will be able to meet our KRW 2 trillion guidance. For '24, we're targeting about KRW 2.5 trillion for this area and the profitability might have a slightly different profile depending on projects, but we are hopeful that we'll be able to actually make up for the variability that we are experiencing from [indiscernible]

Regarding your second question about the AMPC, are we considering the securitization of AMPC? Yes, we are. And we have contacted the global IDs on that. So we cannot disclose anything more specific because these are underway, but we have received a positive response, and we will continue to move in that direction and we'll share with you when there is anything tangible.

This concludes the Hanwha Solutions earnings call for the fourth quarter of '23 and the whole year. Once again, we apologize for the delay, and we hope to see you next time when we bring out the performance for the next quarter. Thank you, and goodbye.

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