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 and financials of Q1 2023 and outlook by segment. For your information, as the Galleria division spun off as of March 1st, the divisional performance was categorized to be from discontinued operations and thus excluded from the operating profit and included in net profit as profit loss from discontinued operations. First, Q1 2023 performance. Please turn to page eight of the presentation. The consolidated sales of the Q1 2023 declined by 18% Q-on-Q to KRW 3 trillion, 100.2 billion. This is attributable to declining sales realization from the power generation business of the renewables and reduced module sales volume.
The operating profit increased by 62% Q on Q to record KRW 271.4 billion, due to one-time expense of previous quarter and favorable performance throughout all divisions. It has been decided to record expected tax credit from the U.S. IRA as operating profit from Q1. KRW 22.9 billion out of the KRW 271.4 billion of operating profit represent the related tax credits. Pre-tax profit and next profit recorded KRW 201.2 billion and KRW 133.4 billion respectively, a turning around from the previous quarter. Please refer to the bottom half of page 8 for performance by segment. On financials. Please turn to page nine.
As of the end of Q1 2023, the total assets declined by KRW 1,702 billion from the end of last year to KRW 22,129 billion. Cash and cash equivalents declined by KRW 401 billion from the end of last year to KRW 2,298.5 billion. Total liabilities declined by KRW 1,403 billion from the end of last year to record KRW 12,768 billion. Total debt declined by KRW 146 billion to record KRW 7,062 billion. Net debt increased by KRW 255 billion from the end of last year at KRW 4,663 billion.
Total liabilities to equity ratio declined by 11 percentage point from the end of last year to 136 percentage point, and the net debt to equity ratio grew by 4 percentage point from the end of last year to 50%. Next, performance by segment. First, renewable energy. Due to seasonality, the module sales declined. As one-time expense from the previous quarter disappeared and profit contribution from the power generation business increases, the operating profit increased by 5.6% Q on Q to record KRW 245 billion. Thanks to recovery in module sales volume and continued profit realization from the power generation, solid operating profit is expected to continue in Q2. Next, chemicals.
Operating profit of chemicals for Q1 turned around to record KRW 33.7 billion, as one-time expense from the previous quarter disappeared and a spread of some products slightly improves. In Q2, sluggish demand on key products will drive the spread to narrow and operating profit reduced. Next, advanced materials. As one-time expense from the previous quarter disappears, it turned around by recording KRW 21.7 billion in operating profit. During Q2, as major customers are expected to maintain their production volume, the sales performance will remain strong, driving solid operating profit. Next, on equity method gains. The equity method gains turned around in Q1 with valuation gain from the derivatives related to the acquisition of the DSME by Hanwha Impact and a better spread of some products.
In Q2, the equity method gain is expected to decline due to the base effect of valuation gain from the derivatives reflected in the previous quarter and the regular turnaround of the companies under equity method. This concludes earnings briefing. Thank you.
The first question will be presented by Parsley Ong from JP Morgan.
Hi, congratulations on the good result. This is Parsley from JP Morgan. I have three questions. The first question is on your 1st quarter power plant sale. We saw a relatively high power plant sale volume in 1st quarter. Could you share the background why this is so, and what are your expectations for future quarters? second question is on your IRA investment tax credit. What would be your solar module OP margin without the tax credit? What is your sales volume expectation in the U.S. for 2023? The third question is also on your solar division. If we think about your module margin going forward, would you expect to be able to maintain a 13% OP margin, or do you see potential for margin decline towards the second half of the year? Thank you.
Second 질문드리겠습니다. IRA 관련해서 그 세액공제 ITC 관련해서 질문드리도록 하겠는데요. 그 솔라모듈에 이 ITC가 없는 경우에는 OP margin이 어떻게 되는지 궁금합니다. 2023년도에 솔라모듈에 U.S. 내에서의 그 판매량이 어느 정도 될 것인지, 그 예측치도 같이 공유해 주시면 좋겠습니다. Third 질문도 신재생 관련된 내용인데요. 모듈 마진을 고려를 했을 때 현재 수준의 OPM을 유지할 것인지 하반기에 그 OPM이 하락할 것으로 예상을 하시는지 말씀해 주시면 좋겠습니다.
네, 먼저 그 발전 사업에 대해서 말씀을 드리겠습니다. 우선 발전 사업 같은 경우에는 지난 Q4 대비 매출액은 감소한 반면에 영업이익은 유사한 수준을 기록하면서 OP margin이 상당히 높게 나타났습니다.
First, let me try to respond on your first question about the power generation. Versus the Q4, the sales declined, but the operating profit remained the same, thereby improving the OP margin.
이번에 특히 높은 수익률을 기록할 수 있었던 것은 프로젝트 매각 당시에 단기적인 시장 상황과 그리고 공격적인 매수자의 매수 의지로 인해서 특별히 높은 이익률을 기록을 할 수 있었습니다.
The reason for such high OPM was that when we actually sold the project, we took into consideration the short-term market condition and the very strong willingness from the buyer to acquire this business.
그 이번 프로젝트 같은 경우에는 EPC 이전에 이제 개발이익에 해당이 되기 때문에 그래서 특별히 또 높게 나타난 것으로 보셔도 됩니다.
Additionally, this particular project, and also profit from it, is a profit from development that is pre EPC. That is the reason why the OPM was higher.
예. 그리고 저희 발전 사업에 대한 그 연간 가이던스는 저희가 기존에 말씀드렸던 2023년 연간 매출 기준 KRW 1 trillion 그대로 유지를 합니다. 그리고 이 분기에는 저희가 지금 현재 예상하는 매출액은 약 KRW 100 billion 수준입니다.
If I were to give you the annual guidance from the power generation, that it is not changed. That will be KRW 1 trillion based upon the total sales of the fiscal year 2023. Specifically for the second quarter, it will be around KRW 100 billion. 두 번째 질문에 대해서 답변드리겠습니다. 일단 이번에 그 IRA tax credit은 아까 저희 CFO께서 말씀하셨듯이 1분기에 KRW 22.9 billion의 영업이익으로 저희가 추정을 해서 반영을 하였습니다. 올해 2023 미국향 판매량은 저희 전체 shipment guidance가 8 GW가 초반에서 중반 정도 사이에 머물러 있는데, 이 중에서 작년 같은 경우가 40%-50% 정도가 U.S.에 할당되었고, 2025년까지 70% 목표를 하고 있는 과정에서 올해는 그 중간의 수치를 예상하고 있습니다.
Regarding the second question, the ITC impact from IRA, as was mentioned during the presentation, the KRW 22.9 billion is attributable to the ITC, and that is reflected in our operating profit. Total sales or the total export to the United States, we expect the total output will be about early to mid 8 GW. And the actual was about 40%-60% in the year 2022, and we expect to grow it to 70% by the year 2025. For this year it will be somewhere in the middle. Rather, let me correct that. It is not specifically because of the ITC. It is generally because of the IRA.
그리고 이제 수익성 관련해서는 저희의 사업 구조의 변화를 최근에 좀 보시면 아시겠지만, 이제 더 이상 이제 단순히 모듈을 판매해서 수익을 창출하는 그런 사업 구조가 아니라 지난 분기에도 그렇고 이번 분기에도 그렇고, 발전 사업에서의 이제 꾸준한 수익 창출 기여가 하나의 이제 사업부로 자리매김을 하는 모습을 보실 수 있습니다. Regarding the third question, the overall profitability. You might understand based upon the evolution of our business structure that we are trying to evolve from the company focused on the module sales. There is a growing contribution of sales from the power generation. 이런 발전 사업에서의 수익 기여가 단순히 이제 일회성의 어떤 이익이 아닌 꾸준한 이제 수익으로 창출할 수 있다고 저희는 믿기 때문에 앞으로의 이제 드리는 어떤 수익성의 수준이나...
We expect the sales and the strong performance from the power generation will not be one-off. It will be sustained throughout the rest of the year and onwards. Considering the scope and scale of the current profitability from the power generation, we expect you to take a more comprehensive look at the forecast, looking at the power generation and the module sales together. Based upon that, our forecast for the upcoming quarters and throughout 2023, thanks to the contribution from the power generation, we expect the OPM to be in the same range throughout the rest of the year. Our forecast for the second quarter is that versus first quarter, that we will start to move away from the seasonality, and we will start to see some improvement in the output.
The module sales and also the operating profits from it will increase. On top of that, from the power generation, we expect KRW 100 billion in sales during Q2. We can expect a similar range of the profit contribution. Therefore, we expect the OPM to be maintained in a quite solid level. The next question will be presented by Yong Sik Yun from Hana Investme nt & Securities.
[Foreign language]
Thank you for the opportunity. I understand that there is a general concern about upcoming NEM 3.0. What will be the general impact, and especially for Hanwha Solutions? I understand that many global companies have experienced the stock price fall, and that has actually generated increased interest on this particular new program.
Something went differently than our original expectation because the grace period of NEM 2.0 was extended until April, and we expected there will be a last-minute rush, but it was not witnessed. Based upon that, with the NEM 3.0, there will be no major reduction in the demand, and we have not witnessed any such movement. The impact for from the NEM 3.0 will remain neutral until the end of this year. Any future policy change may happen in whichever direction as it may, and for the U.S. market to grow from the 20 GW to the late 20 GW market this year to the 30 GW market next year.
The growth will be mostly around the utilities, but we also expect there will be a solid growth in the residential and the C&I market as well. On a long-term basis, we do not necessarily worry too much about the NEM 3.0, and over time, the policy change will be absorbed naturally by the market. 그리고 이제, 저희가 어떤 전략을 이제 그 대응하기 위해서 펼치고 있는지를 조금 부연 설명을 드리면은 아시다시피 주거용 시장에서는 ESS의 설치 비중이 굉장히 아직 작습니다. ESS 시장이 앞으로 급격하게 성장할 것이라는데는 시장에 의심이 없는 상황이고요. 저희가 가끔 이제 보도자료나 이런 쪽으로 전해드리는 소식 중에는 ESS를 공급을 한다던가, 아니면 공급할 이제 계획을 가지고 있다던가, 그리고 또 이제 ESS의 발전 쪽으로 해서 저희가 EPC를 수행하고 나중에 이제 ESS 프로젝트 자체를 이제 관리하는 서비스까지 사업의 영역을 ESS 관련된 비즈니스 모델로 굉장히 확장을 하는데 적극적인 모습을 보여드리고 있습니다.
그래서 이런 부분들이 단순히 이제 모듈을 residential에 판매하는 그 델타가 감소하거나 증가하는 변화분과 벗어나서 저희가 또 다른 이제 ESS라는 툴을 이용해서 계속적으로 견조한 수익 창출을 할 수 있는 그런 방향으로 나가고 있다는 부분도 주목해 주시면 좋을 것 같습니다. Let me share our response to the NEM 3.0 and any future policy change. So you might be aware that for the residential use, the ESS installation, the share is still very low. There is no doubt from the market consensus that the ESS market for residential and others will grow significantly in the future. We have shared by multiple times from other press release that we are contemplating offering the ESS and have the plan to supply ESS and also conduct EPC business, including the ESS as well.
We are in the process of expanding our business model to also involve ESS. We will be less vulnerable to any sales fluctuation from module because we will have another tool to utilize, which is ESS. With that, we will be able to maintain solid profit generation. 또한, 반드시 NEM 3.0 관련된 얘기는 아니지만 관련된 유사한 맥락에서 저희는 이제 C&I 쪽에서도 그 상대 측과 파트너와 gigawatt scale의 계약을 추진하는 그런 움직임을 좀 보이고 있는데요. 아마 미디어에서 접하신 분도 계시겠지만 저희가 Microsoft나 Summit Ridge Energy와 gigawatt 단위, 그러니까 Summit Ridge Energy와는 1.2 GW, Microsoft와는 2.5 GW 플러스 알파 정도의 규모의 MOU를 체결을 한다거나 논의를 진행 중에 있습니다.
이런 부분들은 단순히 보통 이제 저희가 Commercial이라고 하면은 뭐 watt에서 megawatt 정도까지 이제 판매가 되는데 좀 장기간의 그 계약 기간을 가져가면서 gigawatt scale로까지 확대를 해서 대량 고객을 확보하는 그런 전략이고요. 이런 부분에 지금 주력을 하고 있어서 이런 형태의 계약이 올해부터 시작해서 향후 2, 3년 동안에는 이쪽으로 좀 집중을 하게 되면 단순히 이런 정책 변화로 인한 sector의 그 수요 변동에 대해서도 조금 더 방어할 수 있는 사업 구조가 될 것으로 보고 있습니다. Not necessarily with regard to the NEM 3.0, but more generally with the C&I, we are contemplating entering into the gigawatt scale contract with some of the partners. You must have heard it through the media report, that we are discussing or signed an MOU with such partners as Microsoft, and Summit Ridge Energy.
The total size for Microsoft is 1.5 GW plus alpha and Summit Ridge Energy 1.2 GW. It is not just the conventional size of the commercial contract was in the W or the MW scale, but we might have the longer term contract and on a larger scale of a gigawatt by tapping into the larger volume customers. This trend will be continued throughout the next two, three years. This will help us greatly in weathering through any future policy change in the sector. One correction, Microsoft is 2.5 GW instead of 1.5.
네, 더 이상 질문이 없으신 관계로 Hanwha Solutions 2023 first quarter 실적발표 기업 설명회는 이것으로 마치도록 하겠습니다. 참석해 주신 모든 분들께 감사의 말씀 드립니다.
As there is no further question, now we'd like to close the earnings call for the Q1 2023 for Hanwha Solutions. Thank you very much for your participation and goodbye.