Posco Holdings Inc. Q1 FY2025 Earnings Call

Good afternoon. Thank you for joining us for the POSCO Holdings Earnings Call. Today we will have a presentation by POSCO Holdings followed by a Q&A session with our participants. Now let us begin POSCO Holdings earnings presentation for the first quarter of 2025.

Greetings, everyone. My name is Kim Sung-Jin. I'd like to extend my appreciation to all investors attending this meeting for taking time out of your busy schedule. As we're all aware, the first quarter witnessed the global tariff war materialize, which has intensified economic uncertainty. Despite this headwind, POSCO Holdings achieved improvement against the previous quarter. In Q1, consolidated revenue hit KRW 17.4 trillion and operating profit KRW 570 billion. Looking at the general overview by key businesses, despite lingering volatility in export volume and FX rates, the domestic steel market is showing moderate signs of stability. Additionally, iron ore and coking coal prices have also become more stable. POSCO Future M is selling more CAM and M, while POSCO International's gas field business continues to perform well. While these Q1 results are insufficient to conclude that we have made a turn toward clear recovery, we do have signals that allow positive assessments little by little. Therefore, barring unexpected exigencies, we are cautiously optimistic that things cannot get any worse from here. Next, I turn to a topic that I'm sure many have read in the media. I'd like to address our MOU signed with Hyundai Motor Group. As illustrated in the POSCO Holdings corporate value enhancement program released in December 2024, we have been taking a close look at the high growth market of India, as well as the high profit market in North America. As an outcome of that plan, in October last year, we signed a comprehensive MOU with JSW Group in India to seek collaboration in steel, energy materials, and renewable energy businesses. This time with Hyundai Motor Group, with the goal to address the global trade environment and to enhance our competence in the future mobility materials business, we intend to strengthen our collaboration to jointly invest in building a steelmaking plant in the US and to jointly develop next-generation battery materials. This alliance can be regarded as a strategic choice made to actively address the rapidly changing environment. In steel, in compliance with the USMCA "melted and poured" origin rule, we plan to offer a reliable supply of steel products melted and poured in the US to our auto panel manufacturing plant in POSCO Mexico. Additionally, we will expand volume supply to our US OEMs to whom our volume was limited due to the export quota. Furthermore, by focusing on EV battery materials technology that both companies possess, we hope to advance to a higher level of Korea's next generation battery development once the EV market chasm closes. Currently, we're in discussions with HMG regarding the size of equity investment into a US steel mill as well as more specifics on how we will cooperate. Once we have more details confirmed, we'll make sure to share those with you. I'd like now to invite the Head of our IR department to deliver the first quarter results.

Please refer to Page 4 of the presentation materials. On a consolidated basis, our Q1 revenue and operating profit came in at KRW 17.4 trillion and KRW 568 billion respectively, due to a market downturn in the previous quarter and structural adjustments. Operating profits dropped to as low as KRW 95 billion but have since rebounded across all business segments to KRW 568 billion, reaching the same level as the previous year. EBITDA reached KRW 1.6 trillion and our consolidated CapEx for the quarter amounted to KRW 1.5 trillion. Now, by business segment. In the industrial sector, operating profit improved from 2.3% to 3% Q-o-Q. Notably, POSCO's OP margin recovered to 3.9%. Our overseas steel business also showed improvement, thanks to strong performance in our engine operations and reduced losses at our China's Zhangjiagang plant. In terms of energy materials, thanks to POSCO Future M's turnaround to profit, overall operating losses were reduced by half Q-o-Q. However, due to the ramp-up of newly built plants and investment losses that continued, the infrastructure segment's overall performance remained quite solid. Looking at Page 5, you will find a summary of the MOU on mutual cooperation with Hyundai Motor Group. Our CFO in his earlier remarks mentioned the strategic rationale behind our pursuit. This includes cooperation in entering the US upstream Electric Arc Furnace operations and in the battery sector. We will work together on investments in key material supply chain establishment and joint technology development. Let me elaborate further on Page 6. POSCO currently operates not only in Korea, but also in China, Vietnam, and Indonesia, while running sales subsidiaries, downstream processing lines, and processing centers around the world to sell made-in-Korea products globally. As global steel markets continue to regionalize and form blocks, we have selected India, the US, and Indonesia as three priority regions for upstream expansion. In India, together with AWA, we're working to establish a specialized automotive steel sheet company with an estimated capacity of about five million tons, and we're proceeding with final site selection initial planning step-by-step. The latest announcement regarding offshore cooperation is driven by two needs: first, to expand our presence in the US automotive steel market, our long-term objective, and second, to address the USMCA, which will take effect in July 2027. The USMCA is a revised multilateral trade agreement that replaced NAFTA among three North American countries to qualify for tariff-free automobiles. There are three conditions, one of which is the regional content requirement that stipulates the molten iron of the steel must be produced within North America for steel to be recognized as North American. Currently, POSCO uses cold-rolled steel sourced from molten iron produced at Arakongyang work in Korea; our POSCO Mexico produces coated automotive steel sheets. Starting from July 2027, the operations in POSCO Mexico must use cold-rolled steel made from molten ore, iron produced within North America. So, this new partnership is a critical decision that aligns with our long-term strategic ambition in the automotive steel sheet market and addresses the urgent mid-term need to respond to USMCA. Now on Page 7, we detail progress on our rebalancing efforts through the restructuring of underperforming projects and non-core assets in Q1 of 2025 to generate cash. We divested a total of six assets in the first quarter, raising KRW 286.6 billion. Since last year, the cumulative cash generated reached KRW 949.1 billion with 51 projects completed. In Q1, we sold off loss-making operations like Piano Chemical and the power demand management business of POSCO DX. These rebalancing measures aim not only at securing additional cash but also at eliminating potential sources of loss going forward. Moving on to the CapEx plan for this year: we have established a CapEx plan of KRW 8.8 trillion, slightly down from the previous year. We plan to continue investing in core businesses while adjusting the pace. We have allocated 43% to steel, 34% to energy materials, and 17% to infrastructure. As for the steel segment, we see the construction of the new EAC in Gwangyang, ongoing overseas growth, and replacement of aging facilities to improve operational efficiency. We have budgeted CapEx for these initiatives. For the energy materials, CapEx spending in 2024 was KRW 4 trillion, but major production facilities, including those in Argentina, were completed at the end of last year. This year, despite ongoing construction of second phase plants in Argentina and cut materials plant, CapEx burden will be slightly lower at KRW 3 trillion. Regarding the infrastructure, we have planned the second project in Australia, Stage 4 of Myanmar gas field, and construction of a second LNG terminal. On Page 9, POSCO's crude steel output in Q1 mainly due to overall maintenance works declined by 5.5% Q-o-Q. However, selling prices slightly increased, and raw materials costs remained stable. We have been making cost-saving efforts enterprise-wide, and all of these efforts led to an improvement in OP margin, which rose to 3.9%. The volumes were reduced not because of demand cut, but we believe there will be a recovery in Q2 in terms of sales. Recently, in the domestic retail market, there was a reduction in unfairly traded imported products that had previously disrupted the market, but we are seeing a gradual normalization of market prices in certain categories such as steel sheets, which are positive developments. Moving to Page 10, profits from overseas steel operations partially recovered. First, our Indian subsidiary has steadily expanded sales of high-margin products like automotive steel sheets, resulting in improved profit. Secondly, China's Zhangjiagang experienced reduced losses due to a rise in regional stainless steel selling prices. However, subsidiaries in Southeast Asia continue to underperform. Regarding POSCO Future M, with increased sales volume of cathode materials and higher prices for basic materials, operating profits improved, resulting in a turnaround in the first quarter. In particular, the sales volume of high-nickel cathode materials, our main product, rose by 64% QoQ. The sales of natural graphite-based add-on materials, driven by customer demand for non-China origin added materials, increased by 33% QoQ. On Page 12, at the end of last year, Argentina Plant 1 completed its construction, and ramp-up is underway. It is implementing client certification processes. The completion of Plant 4, in light of the delayed recovery in lithium prices and continued market sluggishness, has been postponed to the first quarter of 2026. Consequently, the POSCO solution domestic downstream subsidiary project has also been rescheduled to the first quarter of 2026. Our POSCO Pilbara Lithium Solution Plant 1, which completed full construction in November last year, began full-scale shipments of contracted volume starting in Q2, and Plant 2, completed at the end of last year, aims for client certification in Q3. Next, let’s discuss POSCO International. Due to increased electricity sales during the winter and solid domestic sales from Myanmar gas fields, operating profit in energy increased, particularly in the LNG power generation business, which saw a recovery in sales thanks to completed major maintenance works. Now let's move on to POSCO E&C. Since several major large projects were completed at the end of last year, first-quarter revenue decreased. However, as completion-related profits were accounted for, operating profit in both the plant and infrastructure segments increased slightly. Lastly, let me update you on our recent ESG-related developments. Our group, as a company with operations around the world, is striving to establish principles and systems for global standard human rights management not just in Korea, but around our business sites globally. In Q1, the Chairman and the CEOs of each affiliate jointly proclaimed the POSCO Group Human Rights commitment. We have established a Human Rights Management framework aligned with UNGC standards, including trends in the global legislative landscape and human rights due diligence and grievances redress mechanisms. This concludes the presentation; we will move on to the Q&A session.

We will begin the Q&A.

Hello, my name is Lee, I'm from Yuanta Securities. Low-performing businesses and restructuring of those businesses are ongoing. The PZSS office in China has been running deficits for some time. I think it's been 12 consecutive periods of red ink. For PZSS, do you have any plans to improve its performance, or has it just fallen into the pit of low-performing businesses and is being considered for liquidation? Second, about energy materials; the size of the deficit has been reduced, but there's still an operating deficit of about KRW 100 billion. I understand some of these plants are in ramp-up stages of initial operation, so some of this loss is inevitable. However, KRW 100 billion of deficits is quite large. If this continues for about four quarters, it could total about KRW 400 billion in deficits. What are some projected revenues and operating profits for the upcoming quarters? I know it's difficult to look out to 2026, but last year during the Value Day event, you proposed some revenues and EBITDA numbers. What are some of the new projections? What adjustments can be made at this moment? Lastly, regarding Posco Future M, is there any possibility of raising more capital, or do you not have any such plans?

The first question will be answered by the sales management department, and I will address the second question.

Regarding PZSS and plans to improve performance, in China for several years, there has been an overcapacity of stainless steel, and we have very little recourse but to look at restructuring. This is also the case for PZSS. We've made diverse efforts to improve its performance, and in the first half of last year, we evaluated many offices that might have to fall into low-performing assets subject to liquidation, and this obviously fell into that list. We need to consider the Chinese market situation, our corporate strategy, and the stainless steel market. Some restructuring efforts are ongoing, but we need to read the situation more closely. Within the year, we believe we will evaluate several more variables to make a more definitive conclusion on this. Regarding the energy materials, companies like HY Clean Metal and PZSS are in their initial stage of operation. Some are still being constructed. We are in ramp-up stages, and some of them are supplying customers. For those plants in ramp-up, until we reach a level of stabilization, there will be fixed costs incurred. For those filling customer orders, we have to provide discounts as they have not yet received quality certification. Therefore, profit will be difficult this year. Sequentially, we will begin receiving customer certifications, so starting in the latter part of next year, we should start seeing some positive numbers in our operating profits. By 2027, most of the companies or plants will likely reach stable operations, and that's when we expect all of our figures will turn positive. Concerning raising more capital for Posco Future M, we initially provided funding of about KRW 500 billion and an additional KRW 600 billion in terms of hybrid securities. There has been a greater CapEx need than we originally anticipated. There is a time lag between when an investment is made and when sales hit our books. However, we are assessing Future M's financial status, financing situation, and the requirement for raising more paid-in capital. Based on our conclusions, we will be making a decision shortly. Next question, please.

I have two questions, so I would like to ask about the production cost that was announced by the steel industry, particularly regarding the estimated 50 million tons. Is this feasible, and when can we expect the production to stabilize? Do you believe that production expansion is possible for the future? The second question is about the integrated mill investment ongoing in India. What is the progress on that? Also, with the investments in secondary battery materials and steel milling, are these two initiatives taking place in tandem?

The first question will be answered by Mr. Hong Munsie from the POSCO Marketing Strategic Office, and I will answer the second question. The volume cut announced, I think the number is around 1 million tons, which is minimal in terms of market impact. At the start of March, during the Chinese National Congress, there was an estimate that the 50 million tons of production cut could be feasible. However, due to the trade war and the Chinese government’s production cut feasibility may not be possible, given their GDP growth and the increasing number of private companies in the sector. Whether we can achieve this 50 million tons production cut is uncertain, but it seems highly likely. Should the cut occur, it would impact raw material prices, which may stabilize. If we analyze our company’s structure, we mainly service automotive and electronics industries, where price contracts are usually semester or quarterly based. We believe this spread could yield us profits going forward. If any additional cuts occur, the over-export volume from China may decrease, positively impacting POSCO. Regarding the integrated mill investment, the total investment is expected to be $8 billion, approximately KRW 11 trillion. As for the investment structure, it will be 50% equity and 50% borrowing. Our portion is about one-fourth of the total investment, which is KRW 2.5 trillion and this will be implemented over the next five years. The annual CapEx will be about KRW 0.5 trillion, which is manageable given that POSCO's annual EBITDA is at least KRW 4 trillion. Investing about KRW 550 billion per year is feasible. The initiatives for secondary battery materials investment are also ongoing. On a consolidated basis, our cash reserve is about KRW 16 trillion. Investments in this sector shouldn't pose significant challenges.

Next question, please.

I have three questions. Tariff barriers, reduced quotas, and clarifications create more intensified trade barriers, impacting not just headquarters but also overseas plants. How are these barriers impacting you? What measures are you implementing in response? The second question is about hot-rolled products; AD complaints have been filed. If this impacts Japan as well, how is Japan likely to react? Finally, could you provide insights on projections regarding lithium prices going forward?

The first question will be answered by Mr. Jung Gi Seop, and the second will be addressed by our International Trade Officer Mr. Hong Yoon-Sik, with the final question by EJ Young from the Energy Materials Business Management. I would like to address the trade barriers. We have many overseas locations, yet by region, the impact varies. For example, POSCO Vietnam's cold rolled products, domestic sales could be impacted by US-bound Vietnamese-made coated steel products. The countervailing taxes range from 40% to 140%. In contrast, US-bound cold rolled products from Vietnam may experience positive impacts. The same applies to Thailand, where we are exporting some products subject to tariffs. With quotas eliminated, our sales volume is expected to remain similar to last year. In the global steel market, there are various movements such as the EU and UK safeguards being reassessed. Canada has also been imposing new safeguards. Turkey and some ASEAN nations are proceeding with separate measures to investigate anti-dumping issues. Protectionist measures are likely to continue for some time. The anti-dumping regulations against Japan by the Korean government require further monitoring of traded volumes and prices to devise countermeasures. However, specific strategies cannot be disclosed right now. Regarding lithium price projections, with the rise in demand due to an EV market recovery, we anticipate a gradual price increase. However, due to uncertainties surrounding upcoming US tariff policies, forecasting prices becomes more complicated. Six agencies have projected prices will rise after 2025, with an average price of around $20,000 by 2028.

Next question, please.

Thank you for the opportunity to ask my questions. First, regarding the Gwangyang electric arc furnace expected to be completed this year, what will the sourcing percentage be between domestic and overseas? It seems challenging to source scrap. Regarding Toyota's acquisition of Radius, is POSCO planning to acquire any steel scrap companies? Furthermore, what is the quality of the products produced by EAF compared to the blast furnace? Second, regarding market conditions in the latter half of this year, how do you anticipate the steel market, particularly in automobiles and shipbuilding? How do you foresee supply prices? Recently, regarding the Chinese steel plates, 80 tariffs have been imposed—do you predict any price increase or increased demand?

The first question will be answered by POSCO's Head of Raw Materials One Office. The second will be addressed by Mr. Kyung-Jin Chung, and the third by Mr. Vu Yongdai, Head of Infrastructure Business Management Office.

The EAF is expected to be completed by the end of this year, but internally we project completion to be in May next year. As for the sourcing of steel scrap, we aim to procure it safely. HBI is an alternative we consider for investment. While I cannot define exact percentages between domestic and overseas sourcing, we will focus on flexible sourcing, primarily domestic. We also plan to invest in high-quality scrap collection hubs and transform low-quality scraps into high-quality ones. If necessary, we are open to exploring investment opportunities overseas. Hello, I'm in charge of POSCO's Technology Strategy. By early 2026, our Gwangyang facility will be producing low-carbon products using EAF. While impurities like nitrogen may exist when using scrap, we are developing technologies to minimize these impurities. As for automotive facility sheets, initially, we've produced internal sheets. As technology matures, we plan to also employ reinforced sheets. Briefly, regarding the steel market outlook for the second half: while the automotive sector is affected by the tariff war, some positive signals are emerging. The construction sector has been sluggish since last year, which affects the home appliances sector as well. We believe markets in the latter half will not perform well, but retail market prices have increased recently. Provisional tariffs regarding heavy plate AD filings, confirmed by the Ministry of Finance and Economy, protect against unfair trade practices, leading to positive effects on prices. Regarding the Gwangyang accident, it was in zone 9.209. Demolition costs will be accounted for, but calculating costs for zone 5.209, which has fully suspended operations, is complex. Fortunately, we have insurance covering demolition and restoration costs to a significant degree.

Next question, please.

Hi, my question is regarding the recent announcement of POSCO's intention to issue a dollar bond. Any updates on that? Additionally, what impact is expected from the recent Hyundai joint venture on leverage?

The first question will be answered by the head of the finance office, and the second by Mr. Ivan from Steel Business Management Office.

Regarding the dollar-denominated bond issuance progress: we had this in our plan, but on April 1, with the announcement from the US, the financial market fluctuated wildly. All bond issuances, including ours, have been put on hold. However, we are seeing signs of market stabilization, and we may have a better assessment on Monday about conditions for issuance. Regarding the MOU signed with HMG and its leverage for our group, this partnership is longstanding; we have a relationship built over five decades. Our strategy has evolved alongside the demands from Hyundai Motor Group in the United States. While there are risks, we see mutual benefits, given the competitive market, ensuring material flows and building links with downstream processes in the US. We believe that the positives outweigh the negatives in this investment. On the dollar-denominated bond issuance, as mentioned, other companies' attempts have also been sidelined. We will analyze financial situations and other companies’ movements concerning bond issuances and assess spreads before proceeding next week.

I have two questions: First, regarding the active investments of Chinese steelmakers abroad in coking coal and iron ore projects, what is your competitiveness strategy and pricing strategy? With raw material prices likely to decrease, do you believe that Chinese strategies pose a threat? The second question concerns next-generation secondary materials and the status of precursor development. How are you securing competitiveness in pricing and capacity?

The first question will be answered by the head of the Materials One office, and the second by the head of the Energy Materials Investment Office.

Regarding the investments by Chinese steelmakers in raw materials, we are actively implementing similar strategies. For iron ore, we are sourcing by making a 50% investment, and for coking coal, the level is about 20% due to ESG issues. We are considering these investments thoroughly and planning to continue to monitor ESG developments and identify promising mines for further investment, using natural hedging for price fluctuations. With respect to lithium sulfate development, we are researching intermediate goods from lithium plants to create low-cost lithium sulfate, and we are now considering implementing a demo plant. Recently, we produced a solid precursor from JKSS, which looks promising. We are conducting tests with OEM and battery companies but cannot disclose further details at this time. Next question, please.

I am Eugen. There was a one-time impairment loss in the first quarter. Can we assume that no other impairments will be assessed? You mentioned leadership in the auto sector, where HBIS was mentioned; any projections on auto industry profits? Regarding automotive steel sheets, what is the tonnage, and when do we expect to hit these profit goals and volumes? Are we experiencing a deficit in steel plates?

The first question will be addressed first, followed by the second by an identified analyst. In the first quarter, we indeed had a one-time impairment loss which occurred during restructuring when we sold assets. Impairment losses typically occur due to disparity between book price and selling price, as well as declines in business value associated with market downturns. We continued restructuring in the first quarter, prompting continued losses. Last year, we had defined prior priorities for restructuring; non-profitable assets were first on our list. Due to the prior market downturn and the liquidation of underperforming assets, we incurred larger impairment losses last year. This year, we continue with restructuring but expect the size and intensity to be smaller than last year. Regarding HBIS joint venture in China, we aim for revenues of KRW 420 billion, which we anticipate will be met with about 170,000 tons in production volume. However, our operating profit may still be negative. As for automotive steel sheets, not including wire and stainless steel, we target about 8.5 million in India. We will not add more capacity before setting up plants in the US and India, so sales will range between 8 million and 9 million tons. Regarding steel plate deficits, different steel grades experience distinct situations, but last year saw many plate grades with difficulties. Many have transitioned to positive figures due to AD filings. The Indian steelworks' construction schedule is being finalized with our joint venture partner in Odisha. Once the site is confirmed, we can share further details. After determining the site, environmental impact assessments and related procedures must also be completed. If we maintain our plans, we aim for plant completion by 2031.

Now, this will conclude the first quarter 2025 earnings report call for POSCO Holdings. I hope through this call, we've gained insights into how we plan to progress our business. Thank you all for your participation. Again, I would like to close the first quarter 2025 earnings report call. Thank you.