Ladies and gentlemen, we will now begin the POSCO Holdings Earnings Call for the Second Quarter of 2022. You will first hear the earnings presentation from POSCO Holdings, and then we will move onto a Question-and-Answer Session with the participants. We would now like to hear the presentation from the company.

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 in 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 an 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 an 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 anodes in an effort to preemptively secure materials for next-generation batteries. The 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 resurgent 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 meet 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, the Head of the 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. 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. 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, 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 number four BF. But the revamp has been completed, so from the third quarter, we will be able to recover to normal production levels. Impacted by the 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 automobiles are 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 Q2 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. The weaker won has led to an increase in the won transaction amount of USD dominated debt; but this has been accounted for with the exception of 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 maintained overall international performance. This is attributed to two reasons: first, due to the war in Ukraine, the provision of slabs has decreased, causing slab prices to increase, thus boosting profitability. Second, our partner, Krakatau Steel, has our HR, allowing us to sell HR with slabs after processing from KS, which led to adjustments in the sales mix, enhancing operating profit.

As for China's Zhangjiang stainless steel, we have seen that profitability worsened because of raw material increases due to a spike in nickel prices and the well-known lockdown in the Shanghai area. For India, POSCO's Maharashtra recorded a decrease in revenues and operating profits Q-o-Q due to the steel export tax imposed by the Indian government, as well as the slow demand from nonautomotive industries such as construction and distribution. If we look at PYVida in Vietnam, it recorded actually higher revenues and operating profits Q-o-Q, increasing by 1.5% due to a drop in production costs from improvements in production yield and increases in sales prices despite a slight decrease in overall sales volume. Moving on to the earnings report for POSCO International. POSCO International saw substantially increased revenue and profits Q-o-Q, thanks to robust improvements; the price hike in raw materials has helped. But in terms of profit, we also saw gas sales improve about JPY 61 billion, indicating that this contribution from profits was quite substantial. For agriculture and materials, grain sales have decreased due to issues in Ukraine. However, revenue and operating profit expanded Q-o-Q as sales improved from South American soybean and Southeast Asian fat and oil. Moving on to POSCO E&C. POSCO E&C saw an increase in performance; although material costs have hiked in terms of construction, we saw profits increase as payments processed through on completed constructions in the second quarter. The order backlog is about KRW7.6 trillion. Next is POSCO Energy. For POSCO Energy, Q-o-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 has been a scheduled revamping of number 3 and number 7 power plants. 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 over time. Moving to POSCO Chemical. For POSCO Chemical, profits for the cash flow business improved and contributed substantially to POSCO's overall top and bottom line with a hike in lithium and metal prices reflected in increased sales price. Hence, revenue and profits improved Q-o-Q based on this improved performance. Profits for refractories and furnace maintenance, as well as construction, fell due to delay in BOF maintenance and increased labor costs among subcontractors. We've also seen that operating profits for the Quicklime Chemical business improved due to a rise in sales price of chemical products.

Now I would like to discuss the major business activities of this past quarter along with our future plans. First, on secondary battery materials. We are remaining on track regarding the construction of our lithium nickel cathode, anode, and recycling plants. Let me brief you on this process. First, for lithium, POSCO Argentina's Brian Stage 1 plants broke ground in March and will be completed in April 2024. POSCO Pilbara lithium solution is an ore-based plant that is also currently under construction. For nickel, we will begin construction for converting SNNC to produce battery-grade nickel, which commenced as of June. Upstream completion is expected by the third quarter of 2023. For the recycling business, we completed the construction of PLSC Poland in June with a black 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, where construction is currently underway and is on track at about 47% completion. Completion is slated for the second half of 2024 for cathodes. We established LCM Chem, a 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 capacity, and the Sejong 22 plant for graphite anode materials was completed in May. While this has not reflected in revenue in our top line, we believe that all these plants are progressing according to schedule with slated commercialization of production down the road. Next, I'd like to briefly discuss our inorganic growth. We are planning to pursue the next-generation battery materials business, such as silicon anodes and all-solid-state batteries through inorganic growth in M&A. In May, we acquired a 2.1% stake in Prologium, a Taiwanese supplier of commercialized small-sized-state cells suitable for wearables, and signed an agreement to co-develop solid-state batteries for EVs and material applications with Terratec and POSCOJK Solid Solutions, which we established in March. We believe that we can test these supplies in our commercialized products, which is important for our future growth. Recently, we announced a 100% stake investment in Terratec, which possesses production technology for silicon oxide anodes. This will increase production capacity fourfold, up from the current 100 tonnes to 500 tonnes by 2025. With this objective in mind, we have acquired a 100% stake in Terratec. Next, our energy business: POSCO International is planning to increase production from the Senex gas field, which it acquired in April, contributing about KRW12 billion to our operating profit. In fact, the Senex gas field has outperformed our expectations, with its capacity of 420,000 tonnes expected to increase to 1.2 million tonnes by 2025. After securing an additional 400,000 tonnes of increased supply by 2026, we plan to utilize it as fuel for the number 3 and number 4 LNG power plants. POSCO Energy is planning to expand its midstream business by increasing production at its Gwangyang LNG number 2 terminal. It will complete two storage tanks of 200,000 kiloliters of LNG in the Gwangyang Industrial Complex by 2025, along with expanding anchor berth for a 270,000 L ship by 2025 as well. We will utilize these assets in related businesses such as imported LNG storage, ship commissioning, and LNG bunkering. With this, I conclude the earnings report for the first half of this year. Regarding our 2022 year outlook, we expect our consolidated revenue to increase to about KRW86 trillion. We will continue to do our best to meet our top line and bottom line projected earnings. With this, I would like to conclude my presentation on our 2022 second-quarter earnings. Now I would like to begin the Q&A session. If you have a question, please follow the instructions of the operator.

We will now begin the Q&A session. The first question is from Hyundai, and it comes from Pat Canon.

Good afternoon. I am Pat Canon. Thank you very much for this opportunity. I have three questions. The first question concerns 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; what is your view at POSCO Holdings concerning this point? And let's talk about lithium. Early July, there was a 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 believe that lithium will be very helpful in increasing the corporate value of POSCO Holdings in the future. In our relationship with POSCO Holdings, can we consider the value of lithium? What are your investment plans for lithium? Will you be sourcing this from your own capital or will you be doing debt financing? Given the good profitability, EBITDA could be 70%. Regarding the Argentine subsidiary, will we be able to bring a portion of their profits? Is there a contract concerning this? Your final point is about the valuation discount despite strong earnings. One reason for this discount is the lower ROE. Compared to the past, despite the same profit, ROE seems to be lower. When we think about new investments for growth, such as next-generation rechargeable battery materials, could we consider buying shares or dividends? So not any ad hoc measures, but some predictable constant policies that could be shared with the market. Do you have any future plans?

Concerning the first question, which was about the forecast for the second half, and price negotiations related to steel; Mr. Yong will answer that and add predictions for the Chinese market as well.

As you're well aware, demand in the automotive market is expected to normalize, pivoting on supply chain disruptions, which we believe will continue into the second half. The increase in interest rates globally will impact the steel market, and we believe that the recovery of the steel market will be slower than expected. When President Xi confirms his third term through the official meeting in China, I believe that there will be additional stimulus packages to stimulate the economy. In terms of supply, raw material prices have risen; therefore, at breakeven point, production volume may be adjusted, especially since 530 million tonnes of crude steel are produced in China, and this could lead to an intentional reduction in production in the second half. Regarding price negotiations with customers, stable supply is our focus. We need to account for changes in raw material prices as well as steel prices as we conduct price negotiations in the third quarter and the second half. The negotiations are ongoing and will be completed in phases, depending on order schedules. But for the end of August, the price negotiations have been completed. We have automotive companies in Korea where we have six-month contracts, thus the price negotiations for the second half will occur with a slight increase for shipbuilding and home appliances, reflecting raw material and market prices. Regarding China, the GDP growth of 0.4% in the second quarter was below expectations. The overall first half was at 2.5%, lower than expectations. Though the Chinese government still targets 5.5% for the year, many analysts forecast it could be around 3%. However, after lockdowns, manufacturing PMI in China has recovered to over 50 points, indicating potential improvements, bolstered by expected short-term stimulus policies. Sales in automobiles increased by 35% in June, indicating demand recovery, especially in that market. On the supply side, steel manufacturers in China achieved 530 million tonnes of crude steel but may reduce production due to pressures from raw material prices. For POSCO, we aim to divert our exports to markets outside of China because of low prices there, actively monitoring price changes and market trends.

Thank you for your question regarding lithium investments and financing types, so I will turn the floor over to Mr. Li.

Regarding the investment until 2030, we plan to invest KRW6 trillion, with annual investments between KRW1.5 trillion. In Argentina and our plant in Hong Yang, they are expected to operate from 2025, and we believe that the EBITDA created by this operation can finance our investments. For initial investments, we will establish a legal entity for lithium processing, with holdings investing between 30% to 60%. The debt for Argentina is about 30%, while Huangyan has a debt financing of 58%. We don't anticipate an excessive burden from this financing as once production begins, cash flow should improve. Concerning country risk in Argentina compared to Mexico, Chile, and Bolivia, Argentina has a robust legal framework where mining rights are allocated to local governments, allowing opportunities for investments from international firms including U.S., Australian, Chinese, and French companies.

Regarding the concern about the stock price discount attributed to lower ROE, I perfectly align with that analysis. Moving forward, we will explore various approaches to enhance our ROE and return value to shareholders, including discussions around dividend policies and possible restructuring of equity shares held by the holdings this year.

Next, we love to hear from Lee Hansen of Yuanta Securities.

My name is Lee Hansen of Yuanta Securities. I have about three questions. First, on the steel business and raw materials, regarding Australian exports at about $200 per tonne and crude steel at about $100 per tonne. Looking at the second half guidance, many steel manufacturers have production capacity set to increase; however, China's production is set to decrease. Where do you see the steel ore prices heading? Also, regarding oil, as prices have peaked, do you think that cooking oil prices may weaken in the second half? Can you share your projections for iron ore, steel ore, and cooking oil prices? My second question pertains to the performance disparities among overseas subsidiaries. Some did well in the second quarter, but slab prices in Southeast Asia appeared to decrease. Is this influenced by the influx of Russian steel in the market? Will this lead to lower prices in Southeast Asian markets? Finally, about POSCO International, I understand there has been news about a merger. Can you provide insights on this proposed merger with POSCO International?

Thank you for your question. First, on ore and cooking coal price projections for the second half of the year. I would like to hear from our colleague in the Raw Materials Office, Hal. Then, we will follow that with insights from Kim YongJung regarding overseas subsidiaries’ performance outlook. Finally, I'll respond to your query on the energy and international merger.

Hello, my name is Hal Chan. Regarding the price projections for iron ore, in China, steel ore prices have gone down, narrowing the profit margins, therefore leading to decreased utilization rates. Seasonal effects also contribute as we have entered the slow season in Q2 this year, leading to plummeting steel ore prices, which we expect to continue into Q3, with fluctuations around $90 per tonne. However, entering Q4, major ore-producing countries will enter rainy seasons, and Chinese steel companies will adjust production levels; hence prices may fluctuate in Q4. Regarding cooking oil, the industry will contract in the second half of the year as demand falls. Supply will likely stabilize after the rainy season, reaching mid-$200 levels in August. European sanctions against Russian steel are expected to create uncertainties in future market conditions. Discussions about Australian cooking oil imports in China indicate that balanced supply and demand may increase prices.

Addressing the performance of overseas subsidiaries, we noted that global market conditions have impacted prices. Slab prices have declined, and subsequently, product prices have followed suit. Our strategy involves minimizing slab outputs and adjusting our sales mix toward plate sales. In the summer, we predict the Indonesian market may be less active due to Chinese exports, but severe dips are not expected. However, the performance may not match the first half levels.

Regarding the merger with POSCO International, yes, we acknowledge media reports. We are still internally assessing various aspects of this matter. After adopting a holding company structure, our objective remains to bolster our business portfolio, pursue new ventures, and enhance collaboration among existing sectors. This merger may support those aims. Once our internal review is concluded, the board will deliberate, and we will disclose more details regarding the merger and any expected outcomes.

The next question is from Hai Investment, Mr. Kim SungYung. Your questions please.

I am Kim YungSung. I have one question. During value day, you touched on lithium prices, and I appreciated your forecasts. Regarding nickel prices, given the potential for excess supply for battery production, what are your projections for future nickel prices?

Concerning nickel, recent market fluctuations saw prices dip below $20,000, but they have now recovered to around that level. Despite certain economic uncertainties, we observe stable demand. Nickel supply has increased from some sources, stabilizing prices at lower points, but we expect demand for battery materials to compel prices to hold steady around $20,000.

Next, we would like to hear from Tong SungYang of NH Investment Securities.

Hello. Thank you for this opportunity. I would like to discuss steel and market conditions in China. You are anticipating possible stimulus measures from the Chinese government, but with the observed decrease in steel prices and product valuations along with CapEx and investment stimulus plans, can you elaborate on your outlook regarding the Chinese market conditions? Secondly, on lithium, given your forecasts, do you see a potential to accelerate investments, as annual budgets are currently set at KRW1.5 trillion? Finally, regarding renewable energy, considering weak quarterly earnings, do you foresee long-term growth opportunities for POSCO Energy in this sector? Additionally, do you currently face labor shortage issues in your operations?

Chinese market conditions are observed with a cautious outlook, as some analysts remain pessimistic. However, there appear to be positive areas as the growth rate might stimulate government interventions via stimulus packages to bolster the economy. Regarding lithium investments, we agree on their importance and aim to expedite the investment process. We also acknowledge that we must secure supply for lithium ore since access is crucial. Lastly, about the labor shortage, we have seen skilled workers transitioning to semiconductor plants, but we continue recruitment efforts, ensuring we do not face significant shortages in our steel operations.

Regarding the renewable energy business pursued by POSCO Energy, we currently have about 82 megawatts of capacity. Future plans include preparations for offshore wind energy, targeting around 300 megawatts. While profitability in new renewable energy remains uncertain, we proceed conservatively when assessing potential profitability, trying to align expansion with POSCO Group's overall ESG strategies.

The next question is from DBS, and the question will be by Kin Young. Please proceed with your questions.

Good afternoon. Can you hear me? I have a simple question concerning the Chinese market. Recently, the mortgage crisis in China, arising from developers failing to construct purchased apartments, has been concerning. Many developers are facing bankruptcy and protests have arisen. This could pose a significant political risk for Xi Jinping. Although there has been good production in automotive, over 50% of steel is used for construction, especially in real estate and infrastructure. With the numerous bonds issued by local governments, the execution appears lacking, potentially leading to decreased demand for iron ore and lower steel prices. Also, if stimulus packages are introduced by the government, can we realistically expect a demand increase in China? Regarding steel prices in Korea, they've been significantly higher compared to international prices. Why isn't this price gap being addressed, and is it sustainable moving forward?

The uncertainties surrounding the market allow for a variety of perspectives. Pessimism could lead to dire market collapse scenarios, whereas optimism may present potential rebounds. Given these contrasting viewpoints, we could pass the floor to Mr. Andy Chang.

Reflecting on Korean prices, the largest influencing factor is Chinese pricing dynamics. Although there is potential for upsides ahead, we believe the market has stabilized at a bottom level. Recovery in Q4 is uncertain, but networking says many distributors feel a recovery is plausible by year-end. Korean steel prices remain at $800, while international prices have dropped to around $600. The Chinese government announced policies limiting net exports of primary goods, adding further complexity in this equation. While questions remain about the real estate market's resilience amidst local grievances toward the government, we expect renewed stimulus may find effective targets to salvage the retail landscape.

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.