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Edited Transcript of 009830.KS earnings conference call or presentation 7-Aug-19 5:00am GMT

Q2 2019 Hanwha Chemical Corp Earnings Call

Seoul Aug 19, 2019 (Thomson StreetEvents) -- Edited Transcript of Hanwha Chemical Corp earnings conference call or presentation Wednesday, August 7, 2019 at 5:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Sang-Heum Han

Hanwha Chemical Corporation - Head of Corporate Planning Division & Director

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Presentation

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Sang-Heum Han, Hanwha Chemical Corporation - Head of Corporate Planning Division & Director [1]

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Good afternoon. I'm the Head of IR at Hanwha Chemical in Dongguan. Let us commence the Earnings Call of Hanwha Chemical for the Second Quarter of 2019.

I would like to thank the investors, analysts, press and others for joining this call.

Now let me brief you on the Hanwha Chemical 2019 Q2 consolidated performance and Q3 outlook. Please refer to the earnings presentation material released on our website.

First, profits and losses. The second quarter consolidated sales increased by 6.2% Q-on-Q to KRW 2,374.2 billion. Basic Materials sales moved upward. The sales volume increased with extended business days and certain products price going up.

Photovoltaics' sales went up as ASP increased, and Process Materials sales grew due to strong sales performance of new car models in the domestic market.

Q2 consolidated operating profit dropped by 0.8% Q-on-Q to KRW 97.6 billion. Basic Materials experienced an increase in raw materials prices and underwent facility turnaround. Photovoltaics' raw materials costs went up temporarily following accelerated execution of the switch of multi module lines to mono lines.

And in the Retail segment, property and retail real estate tax expenses were recognized and DFS discount rates were further increased. These factors led to the decline of earnings.

For the same period, EBITDA was recorded at KRW 236.9 billion. Net profit for Q2 stood at KRW 23 billion, and equity method income declined due to turnaround of major equity method companies, impairment loss of approximately KRW 10 billion driven by the sell-off of Galleria Suwon and tangible asset impairment loss of approximately KRW 20 billion being recognized following the conclusion of this DFS business.

For 2019 Q2 performance by segment, please refer to the table on the bottom of Page 4 of the earnings report presentation deck.

Next, let me explain the financials. As of the end of Q2 2019, total assets increased by KRW 307.3 billion compared to the end of last year to reach KRW 15.5388 trillion. Cash and cash equivalents decreased by KRW 181.4 billion compared to the end of last year recording KRW 842.7 billion. Total liabilities increased by KRW 268.1 billion from the end of last year to reach KRW 9.2725 trillion. And debt increased by KRW 216.5 billion to stand at KRW 6.105 trillion. Total liability to equity ratio went up by 3 percentage points from the end of last year to 148%.

For financials by segment, please refer to the table on the bottom of Page 5 of the presentation deck.

Next, performance by segment. First, Basic Materials. Basic Materials' operating profit dropped by KRW 3.5 billion Q-on-Q to KRW 50.2 billion. This is driven by higher raw material prices of major products and decreased sales volume caused by caustic soda facility turnaround. More specifically, prices of major products such as PE and PVS (sic) [PVC] weakened, this was driven by a decline of raw material prices stemming from strong international oil prices as well as a sluggish product demand generated by the U.S.-China trade dispute as a result narrower spread and drop in profitability were witnessed.

In Q3 of 2019, earnings are expected to improve from the previous quarter due to widened product spread resulting from weaker oil prices and a base effect driven by the end of caustic soda facility turnaround. By product, PE spread is expected to improve with the decline in raw material prices, and PVC prices are expected to rebound following a gradual recovery of demand with the end of the monsoon season.

International price of caustic soda is expected to be in a plateau after a slight decline due to sluggish demand stemming from a slowing global economy. And TDI prices are expected to increase by a small margin as major makers facility turnaround will lead to a supply drop.

Polysilicon market conditions are expected to gradually recover as polysilicon supply and demand for mono is expected to improve in the second half of this year.

Next is Photovoltaics. Operating profit of Photovoltaics decreased by KRW 16.2 billion Q-on-Q and stood at KRW 32.7 billion. Selling price went up as strong demand for mono products regenerated in major sales regions such as the U.S. and Europe. However, the decision to accelerate the execution of the switch of multi module lines to mono lines in the end of Q2 instead of gradually carrying this out throughout the year temporarily brought up raw material costs resulting in a decrease of operating profit.

Q3 profitability is expected to improve from that of the previous quarter and the transformation of multi production lines to mono lines, which took place earlier than initially scheduled in Q2, is expected to help produce products with higher efficiency, offsetting the increased amount of raw material costs. We also expect increased shipment to positively contribute to profitability improvement.

Next is Process Materials. Despite the sluggish sales, major customers in the Chinese market, the new car model sales in the domestic market has gone up. In addition, there has been greater demand for solar installation pushing up sales in the Photovoltaics materials segment. As a result, operating loss has reduced.

Q3 is expected to be similar to Q2. However, as major customers are to launch new models in the North American market in the second half of this year, additional performance improvement is expected in Q3 as was witnessed in Q2.

Next is Retail. Operating profit of Retail turned to a deficit due to the recognition of a one-off property and real estate tax expense and greater discount rate at the [6 3] downtown DFS.

Department store operating profit declined due to the recognition of property and real estate tax around KRW 10 billion despite increased sales coming from MD overhaul and VIP promotions.

Operating loss of DFS furthered as greater discount rates were introduced to exhaust inventory before the end of the DFS business. Q3 will no longer be influenced by the real estate and property tax recognized in Q2, but department stores will enter into a down season and discount rates of DFS will continue to increase ahead of the termination of the DFS business. As a result, the deficit of the Retail segment is expected to continue.

Next is the equity method companies. Equity method income dropped by KRW 64.7 billion to record KRW 31.8 billion. Decline in product sales driven by facility turnaround and unexpected suspension of plant operations along with worsened market situation of major products resulted in lower earnings of major equity method companies and a decline in equity method income. Q3 equity method income is expected to improve due to the conclusion of the regular maintenance in Q2 and base effect of the one-off expenses recognized in the previous quarter despite there being negative factors such as sluggish demand for and price weakening of chemical products.

This concludes the presentation of the 2019 Q2 earnings by segment and outlook for Q3 2019. Thank you.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]