Posco Holdings Inc

KRX:005490

Earnings Call Transcript 2022-Q2

[Operator]

Ladies and gentlemen, we will now begin the POSCO Holdings Earnings Call for the Second Quarter of 2022. For today's conference call, you will first hear the earnings presentation from POSCO Holdings, and then we will move onto a Question-and-Answer Session with the participant's presence. [Operator Instructions] We will now like to hear the presentation from the company.

[Chon Jung-Son]

Good afternoon. I am Chon Jung-Son, CFO of POSCO Holdings. I would like to take this opportunity to thank our investors for your support and interest for POSCO Holdings.

During the second quarter, with the war in Ukraine continuing, the concern for inflation has become a reality, accelerating fiscal uncertainties, including sharp increases in interest rates by major nations. The spike in raw material prices, including iron ore and coal did lead to difficulties in production and sales. However, thanks to proactive responses in pricing and efforts to achieve cost cuts, POSCO has recorded a revenue of KRW23 trillion and operating profit of KRW2.1 trillion based on our consolidated business performance.

The Steel business achieved a sound performance with higher revenue and operating profit Q-o-Q, thanks to increase in sales prices and efforts to achieve cost cuts despite the raw material cost and decrease in production volume due to the revamping of key facilities. The Green Infrastructure and Green Materials and Energy businesses saw an increase of over KRW2 trillion in revenues Q-o-Q, thanks to improvements in the revenues and operating profits of key units such as POSCO International, POSCO E&C and POSCO Chemical. The Rechargeable Battery business, one of the seven key businesses completed the construction of PLC Poland for recycling to produce black mass from battery scrap. We have also made an equity investment in ProLogium, a Taiwanese company, that produces hybrid solid-state batteries and acquired Tera Technos, which holds technologies to produce silicon anoids in an effort to preemptively secure securities for next-generation materials for batteries.

Increase in interest rates by key nations is also expected for the third quarter, uncertainties will continue to increase compared to the second quarter with the respreading of COVID-19. The steel industry plans to upgrade the product portfolio centered around markets expected to have higher demand such as automobiles and shipbuilding. The green infrastructure and green material energy businesses will also do our utmost to live up to the market expectations by continuing to closely monitor oil prices and industrial trends such as EVs, enabling us to secure profitability through preemptive measures.

Let us move on to the earnings reports by the head of our IR team.

Good afternoon. I am Han Yang [ph], the Head of IR Team at POSCO Holdings. Allow me to share with you the Q2 earnings.

First, the consolidated business performance. The consolidated operating profits for the second quarter recorded KRW2.98 trillion, which is a decrease of KRW160 million compared to the previous quarter. Profits for the steel industry increased due to higher sales prices, overseas steel also maintained sound profits of around PTKP [ph]. Operating profits for key units in green infrastructure and green materials and energy businesses, such as POSCO International, POSCO E&C and POSCO Chemical remained strong recording a consolidated operating profit of KRW2 trillion range. And if we take a look at the debt, it seems like it did increase, but it also meant that there was KRW1.5 trillion that was paid back, and so please take that into consideration.

Next, let's take a look at the business performances of major units in detail. First, let's go to POSCO. Crude steel and product production volume, both decreased compared to the previous quarter due to the revamping of [indiscernible] number four BF [ph]. But the revamp has been completed, so from the third quarter we will be able to recover to the normal levels of production. Impacted by decrease in production volume, the sales volume recorded 8.238 million tons, a decrease of 216 million tons. The WTP sales ratio recorded 28.2%, a 2 percentage point decrease Q-o-Q; this is because the materials for automobile is included for WTP, but we see that the recovery of demand from the automotive industry is not as fast as expected.

Next, the POSCO income and financial structure. Operating profit for 2Q recorded KRW1.322 trillion, an increase of KRW123 billion Q-o-Q, thanks to increases in sales prices despite the decrease in sales volume and increases in raw material prices such as iron ore. The financial structure for POSCO shows financial soundness, thanks to an improved cash balance based on improvements in profitability. You can see here that there is the weaker won, and so there is an increase in the won transaction amount of USD dominated debt; but this actually has been accounted for with the exception of the very short-term debt.

Next, performance by overseas steel subsidiaries. Indonesia's PTKP, which is a joint venture, recorded a higher operating profit Q-o-Q and that maintained the overall international performance. There are two reasons behind this. First, due to the war in Ukraine, the provision of slab has decreased; and so the prices of slab has increased, and so that actually helped the profitability. Second, our partner, Krakatau Steel, they actually have our HR, and so we were able to sell HR with slab after being processed from KS. And so that actually led to adjustments in the sales mix, as well as selling HR with slab after being processed with KS, which boosted the higher profit -- operating profit.

As for China's Zhangjiang stainless steel, we have seen that profitability worsened because of the raw material increase due to spike in nickel prices as well as the well-known lockdown in the Shanghai area. For India, POSCO's Marastra recorded a decrease in revenues and operating profits Q-o-Q due to steel export tax imposed by Indian government as well as the slow demand from nonautomotive industries such as construction and distribution. If we take a look at PYVida in Vietnam, it recorded actually higher revenues and operating profits Q-o-Q. It actually increased by 1.5% points due to production costs drop from improvement in production yield and increases in sales prices despite a slight decrease in the overall sales volume.

Next, moving on to the earnings report for POSCO International. POSCO International saw increased -- substantially increased revenue and profits Q-on-Q, thanks to robust improvements -- and you might think that this is due to the increase in unit cost and unit price of steel. And yes, the price hike in these raw materials have helped. But in terms of profit, we've also seen the gas sales improve about JPY 61 billion. And that is why we believe that this contribution from the profits was quite substantial. For agriculture and materials, the grains sales have decreased because of they are in Ukraine. However, the revenue and operating profit expanded Q-on-Q as sales improve from South American soybean and Southeast Asian fat and oil.

Moving on to POSCO E&C. POSCO E&C saw increase of performance. Although the materials cost have hiked, -- in terms of in construction, we saw profits increase as the payment process went through on second quarter completed constructions. The order backlog is about CNY 37.6 trillion. Next on POSCO Energy. For POSCO Energy, Q-on-Q revenue and profits fell. However, for power generation, as you know, the second quarter is seasonally slow. Sales volumes have gone down and also there's been a scheduled revamping of #3 and #7 power plants. And due to these reasons, we saw revenue and profits edge down. If we look at this on a year-on-year basis, however, we can see that the profits have been robust and have recovered down the road.

Next, moving on to POSCO Chemical. For POSCO Chemical, profits for the case business improved -- and the case business profits contributed substantially to POSCO Chemicals overall top and bottom line. We saw a hike in lithium and metal prices, which was reflected in the increased sales price. So the revenue and profits improved Q-on-Q on the back of this improved performance. For refratories and furnace maintenance as well as construction, we saw revenue and profits fell due to delay in BOF maintenance and increase in labor costs among our subcontractors. And also, we've seen operating profits for QuicklimeChemical business improved due to a rise in the sales price of chemical products.

Now, I'd like to move on to discussing the major business activities of this past quarter, along with our future plans. First, on secondary battery materials. We are remaining on track when it comes to the construction of our lithium nickel cathode, anode and recycling plants. So let me brief you on this process. First, on lithium. ASCO, Argentina, Brian Stage 1 plants will break ground has broken ground in March and will be completed in April 2024. HoscoPilvar lithium solution is an ore-based plant and is also currently under construction. For nickel, we will begin construction for converting SNNC to produce battery-grade nickel. And this went into process as of June. Upstream completion will be finalized by the third quarter of 2023. We -- for recycling business, we completed construction of PLSC Poland in June with a blood mass production capacity.

Production of the black mass will begin in September of this year -- this production will then be supplied to the HY clean metal plants in Huangyan. Construction for this plant is currently underway and is currently on track for about 47%. Completion is on schedule. Completion will be slated as on schedule. -- for cathodes, we established LCM Chem, the joint venture between POSCO Chemical and GM in Canada this past May, with completion slated for the second half of 2024. The Kwangyoung Stage 3 and 4 have been completed as of June, capable of 60,000 tonnes of case capacity and the Sejong 22 plant for graphite anode materials was completed in May. For lithium, Cavotnickel, although this has not been reflected in revenue in our top line -- we believe that all these plants, they are moving according to schedule with slated commercialization of the production down the road.

Next, I'd like to briefly tell you a little bit about our inorganic growth. We are planning to pursue next-generation battery materials business, such as with silicon anodes and all solid-state batteries through inorganic growth and M&A. In May, we acquired a 2.1% stake in the Taiwanese frmprolodium, a supply of commercialized small-sized solid-state cells such as wearable that just put in use in wearables, and we signed an agreement on codeveloping saw state batteries for EVs and material application. With Terratec nose as well as the POSCOJKsolid solutions that we established in March. And along with this Taiwanese firm, I believe that we can test these supplies in some of our commercialized products. We believe that this would be very important for our future growth.

Recently, we announced the 100% stake investment in Terra Technos, and let me briefly tell you about this company. It possesses production technology for silicon oxide anodes. The production capacity is fourfold increase as of the batch production. So we believe that this is going to cut down on costs. With this, the production capacity will increase from its current 100 tons to 500 tonnes by 2025. And with this objective in mind, we have acquired a 100% stake in Terratec House Next, on to our energy business. ASCO International is planning to increase production from the Senex gas field, which it acquired in April from its current capacity. And it has contributed about JPY 12 billion to our operating profit. In fact, the Senex gas field has outperformed our expectations. Its current capacity of 420,000 tons will be increased to 1.2 million tons by 2025. And of the approximately 800,000 tons of increased supply, 400,000 tons will be supplied domestically after 2026 to be used as fuel for #3, #4 LNG power plants.

Osco Energy is planning to expand its midstream business by expanding the production of its Gwangyang LNG #2 terminal. It will complete 2 storage tanks of 200,000 kiloliters of LNG in the Gwangyang Industrial Complex by 2025, along with expanding the anchor birth for a 270,000 LI ship by 2025 as well. We'll utilize these assets in related businesses such as storage of imported LNG, ship commissioning and LNG bunkering. So with this, I conclude the earnings report for the first half of this year. And on this, we believe that on our 2022 year outlook, we will expect our consolidated revenue to increase to about CD 86 trillion. We will continue to do our best to meet our top line and bottom line projected earnings.

With this, we would like to conclude my presentation on our 2022 second quarter earnings. And now I would like to begin the Q&A session. If you have a question, please follow the instructions of the operator.

[Operator]

[Operator Instructions] The first question is from [indiscernible].

[Unidentified Analyst]

Good afternoon. I am Pat Canon. I have 3 questions. The first question is concerning the market, during the first half, it seems that the earnings are quite sound, but the market is interested in the second half. I think everyone's quite interested in the second half. If we take a look at shipbuilding, automotive fields and home appliances, how are the price negotiations for the second half for various industries. Furthermore, in China, it seems that the demand and prices may improve in China, but what about your view at POSCO Holdings concerning this point? And let's talk about lithium. -- early July, there was the rechargeable battery market conference, which was very helpful. So I hope that we will have more opportunities for communication like this. It seems that the lithium value has not been reflected in the stock prices thus far, but I do believe that lithium will be very helpful in increasing the corporate value of POSCO Holdings in the future. So in our relationship with POSCO Holdings, I think we need to consider the value of lithium. So related to this, what are your investment plans for lithium? And will you be sourcing this from your own capital? Or will you be doing debt financing? And because the profitability is very good, EBITDA, you mentioned could be 70%. Well, for the Argentine subsidiary, the profits from Argentina, will we be able to bring a portion of their profits? Or is there a contract concerning this point? And do you have any responses related to this point -- the third question is, despite the very good earnings, it seems that we have a valuation discount. And one of the reasons for this discount is because of the lower ROE. That's what we believe. Compared to the past, we can see that despite the same profit, the ROE seems to be lower compared to the past. And so when we think about lithium or new investments for growth such as investments into next-generation rechargeable battery materials. So maybe we can think about buying our own shares or having dividends -- so not any ad hoc measures, but maybe some predictable constant policies that you can show the market. And so do you have any plans for such policies for the future?

[Unidentified Company Representative]

Thank you for your question. Concerning the first question, which was about the forecast for the second half. What are the demand predictions and also the price negotiations that's related to steel. So maybe we can have Mr. Am answering to that, and you can add your predictions for the Chinese market as well. I am Amgen in charge of Marketing Strategy at POSCO, so forecast for the second half as well as price negotiations with the partners concerning the market for the second half. As you're well aware, the demand such as the automotive market is expected to normalize, and that will pivot on the supply chain disruptions, which we believe will continue into the second half, and it seems that interest rates are being raised around the world, and this will directly and indirectly in cakesteel market, and we believe that unlike expectations, the recovery of the steel market will be slower than expected. When the President confirms its third term through the official meeting in China, I believe that there will be additional stimulus packages to grow the economy in commemoration of the third term. In terms of the supply, it seems that the raw material prices have risen. And so the sale prices is at a breakeven point. And so it seems that the production volume may be adjusted, especially for China 530 million crude steel was produced and so maybe the production will be adjusted. And so in the second half, the production may be lowered intentionally. Concerning the second question, price negotiations with the customers Well, currently, we need to make sure that there is stable supply. And so that is our focus. We also need to focus on changes in the raw material prices as well as the steel prices.

So we will take the market into consideration to conduct the price negotiations for the third quarter as well as the second half. Negotiations are ongoing. The negotiations will be completed in phases, depending on the order schedules. And so it's difficult to give you a direct answer. But if I may roughly talk about this issue. So up until the end of supply for August, the price negotiations have been completed. And we did have some automotive companies in Korea where we have 6-month contract. And so we will have the second half price negotiations with a slight increase for the second half for the shipbuilding and home appliances, we will reflect the raw material and market prices -- and you also asked about China, the forecast for the second half as well as the steel market forecast, as you're well aware. If we take a look at the second quarter, the GDP growth was 0.4%, which was less than expected. And if we take a look at the overall first half, it's 2.5%, which is lower than expected. The Chinese government still target 5.5% for the total year. However, if we take a look at the overall economic situation into consideration, 5.5% is very difficult to achieve. And many analysts, both home and abroad are also forecasting somewhere in the 3% range. But after the lockdown is over, we believe that the manufacturing PMI in China has recovered to over 50 points. And so we do believe that there will be improvements and the Chinese government will also have short-term stimulus policies such as investment in infrastructure. And because there is the party meeting to secure the third term. And so we believe that there will be additional stimulus policies for the second half, which means that there will be better growth potential for the second half compared to the first half.

If we take a look at the overall steel market, it seems that the low demand by China may pick up overall because of the stimulus packages by the Chinese government. In particular, if we take a look at June, we can see that sales in automobiles increased by 35%, which is $0.25 million. And therefore, we can see that demand is recovering, especially around the automotive market. On the other hand, if we take a look at the supply side for the first half, the steel manufacturers of China actually achieved 530 million tonnes in crude steel. But because of the stress of the raw material prices, they are decreasing their production volume. And so -- it seems that the production volume may be lower than last year. Therefore, there is a possibility that there will be lower production for the second half. For POSCO, we will try to deviate our exports to other markets side of China because the prices in China are very low. And we will keep a keen eye on the price changes and market changes in China. This will definitely be reflected in our sales policies so that we can flexibly and agilely respond to this. There was another issue related to the rechargeable batteries and the meeting was in July, and I am -- it's great to see that, that meeting was helpful to our investors, and we will surely have regular opportunities to communicate our detailed so that we can communicate concerning our value.

And the second question was about investments in lithium and how we're going to finance the investments. And we also had a question on the Argentina issue. The country -- is there a country risk where we cannot bring the profits back to our country? Maybe Mr. Li can answer this. I am bomb in charge of lithium battery materials business. Well, concerning the investment until 2030, we will invest $6 trillion. That is our plan. And we will have investments of up to $1.5 trillion per year. If we take a look at Argentina and also our plant in Hong Yang, they will operate from 2025, and we believe that the EBITDA created by this operation can finance the investments. But if we take a look at the initial investments, we will establish a legal entity to conduct investment into lithium processing. The holdings will also have capital invested, but there will be a 30% to 60% ratio. If we take a look at Argentina, the debt is about 30%. And for Huangyan. -- there is a debt financing of 58%. And so it seems that there is not an excessive burden on this financing. Because once we start to produce the cash flow will pick up, and so it won't be such a big difficulty. Concerning the country risk from Argentina, Well, Argentina, they are different from Mexico, Chile or Bolivia that you see in the news all the time from Latin America.

In the case of Argentina, they have a legal system in place, and the mining rights does not belong to the central government but the local governments are empowered to have approval rights and other rights related to businesses and licensing. And so because of this legal structure Argentina was able to actively attract investments from multinational companies and to live end of the U.S. and companies also from Australia, China and France are also participating in this market, along with us. And so I don't think there will be any situations where there will be unnecessary and illogical economic sanctions or nationalization of the companies. And there has been the ninth IMF rescue funds given to the Argentinian government. I have actually met the government officials in Argentina in March, and they are actually looking forward to international companies producing lithium and exporting lithium from their country, which will help their exports as well as their revenues. And so I think they are welcoming these opportunities. And concerning the discount of our stock prices, we talked about the lower ROE being the possible reason. I completely relate with that analysis. And in the future, we will take a look at various efforts to boost our ROE concerning returns to our shareholders, we can think about various policies.

Well, in the beginning, we established our holdings, and we did mention that we will get rid of a part of the equities held by the holdings. And this is something that we will discuss within the BOD within this year. And in the mid to long term, we will have to take a look at dividend policies as well as other policies related to our shares. And if we are able to gather the opinions and establish clear policies, we will be able to actively share the policies with the investors and stakeholders. We are actually in the discussion process and therefore, it is very difficult for me to discuss the details at this point in time. We ask you for your understanding.

[Operator]

Next, we love to hear from Han Sung of Yuanta Securities [ph].

[Unidentified Analyst]

My name is Han Sung of Yuanta Securities [ph]. I have about 3 questions that I would like to ask you. First, on the steel business on raw materials, in particular for Australian exports, it's about $200 per tonne. And for raw crude steel, it's about $100 per tonne. If we take a look at the second half guidance, many of the steel manufacturers production capacity is set to increase. However, China's production is set to decrease. So -- do you believe that the steel ore prices would go down compared to now? Or how do you consider these ore prices to fluctuate down the road? I would like to ask you that? And also for coking coal as well, the prices have summited but with China because of their given policies, perhaps the coking coal prices could also weaken in the second half of this year. I would like to ask you more about your projections for the second half of this year for iron ore, steel ore and coking coal prices -- my second question is on the fact that the performance of the overseas subsidiaries have been slightly different. We've seen some of these subsidiaries do well in the second quarter. But from what I've seen from April to May, slab in Southeast Asia, the prices have functuated have gone down. So from your point of view, I know that this has been reported in the news with Russian steel coming into the market. So this is low-priced steel coming into the market? And do you think that this is going to lead to fumed prices of steel out of Southeast Asian markets? Because I understand that the steel business has been doing well to the second quarter of this year, but how do you project the performance to be in the second half of this year? My last question is on what we've heard from POSCO International and on yesterday's news, the merger that has been broadcasted. So I understand that this has been disclosed to the official authorities. The POSCO Holdings have anything to say on the proposed merger with POSCO International. And if this merger is being kept under review, what are some of the conditions that you are currently reviewing for the proposed merger?

[Unidentified Company Representative]

Thank you for the question. First, on ore and coking coal prices, projections for the second half of this year. We first like to hear from San of Pasco Raw Materials office. And then the overseas subsidiaries' performance of the second half of this year, whether they will maintain levels of the first half or whether they will fluctuate or perhaps we like to hear from Kim Yongjun of the steel business team. we like to hear from Mr. Kim on price outlook. And I would like to respond to the third last question. With the Energy and International merger, yes, I understand that this has been reported in the media. This is very sensitive information. We're still in the process of internally reviewing the different information. We were alarmed that this was made public by the news report Holdings after we switched to holdings structure, our big objective is that we're going to make our portfolio more robust such as pursuing new businesses and also solidify our existing businesses and try to create synergies among the existing businesses, and this is also part of our efforts to try to create a more robust portfolio. This is what a holdings company should do, holding company's job is to try to make our overall portfolio more robust. And that is why we are reviewing a possible international and energy merger of the Pasco subsidiaries. We're still at the internal review stage after the internal review has been conducted, the BOD will vote on this proposed merger. And after that votes, we can disclose more information and details regarding the merger and also some quantitative effects that we would project to see out of the merger. But again, we're still in the review stage of this hospital merger and our official decision-making has not been conducted, so it is not wise for me to comment on this matter as of today. So now I would like to hear from Sachin with the raw materials office.

[Unidentified Company Representative]

Hello, my name is Hal Chan [ph] of the Raw Materials Office of POSCO. Let me tell you about the price projections for oil. China is a steel or prices have gone down. The margins have narrowed, and this has led to a decreased utilization rates of the BS. There's also seasonal effect as well because we've entered the slow season in the second quarter of this year. So we have seen a price plummet of the steel ore, and we expect to see this continue in the third quarter of this year. We believe that we would see fluctuations around $90 per tonne. However, going into the fourth quarter of this year, we believe that major or producing countries would go into the rainy season and many steel companies in China have we'll try to move into beefing up supply or increasing production. So or slowing down production. So we believe that the prices will fluctuate in the fourth quarter of this year. Next on coking coal. Again, similarly, in the second half of this year, the industry will shrink. The demand will fall. The supply once we will move out of the rainy season might expand. So we believe that it will come very stably managed at around mid-$200 in August, Europe will have strong sanctions against Russian Steel, and this would imply that there will be uncertainties in the market conditions in the future. And there's been discussions on Australian coking coil in China and of Australian coking cola is imported into China, given the supply and demand balance, the prices will likely rebound. My name is Kim Young Chung of the steel business team you asked about overseas subsidiary PKT Yes, it has been impacted by the global market conditions as well. And the sales price has gone down particularly regarding swab. The raw materials have gone down and product prices have gone down as well. For KP, slab has been minimized, and we're trying to try to come up with a strategy to change around our sales mix. So we've tried to sell most of these with plates.

[Operator]

Thank you very much. This brings us to the end of the Q&A session. Thank you very much for joining us. Thank you to the investors and analysts who have joined us for the second quarter earnings call. This brings us to the end of today's call. Thank you very much.