Earnings Call Transcript - PKX Q4 2022

Operator, Operator

Good afternoon, ladies and gentlemen. From now on, we're going to have POSCO Holdings 2022 Earnings Release Conference Call. During the conference call, we will have a presentation by POSCO Holdings, followed by a Q&A session with our participants. From now on, let us begin the presentation of POSCO Holdings.

Jeong Ki-seop, Chief Strategic Officer

Good afternoon, ladies and gentlemen. I am Jeong Ki-Seop, Chief Strategic Officer at POSCO Holdings. First of all, I would like to extend my deepest gratitude to our investors for your continued support for POSCO Holdings. Before I joined, I worked at POSCO International and was the CEO of POSCO Energy. I joined POSCO Holdings as Chief Strategic Officer at the beginning of this year. Going forward, I will work hard to listen to your feedback and promote balanced growth between steel and new growth businesses to enhance the corporate value of POSCO Holdings. With that introduction, let us begin today's earnings release call. Today, from POSCO Holdings, we are joined by nine members of the management overseeing business strategy, finance, steel, and secondary battery materials businesses. From our operating companies, including POSCO, POSCO Chemical, and POSCO International, we are also joined by nine key executives. During the past year, in 2022, the biggest challenge we faced at POSCO Group was the flood damage due to Typhoon Hinnamnor, which impacted 17 hot-rolling mill lines at Pohang. However, thanks to the efforts of our management and support from private and public partners, we were able to fully normalize all of our mill operations in just 135 days, as of January 20. Other challenges included global monetary tightening and geopolitical conflicts, which dampened global demand, raised raw material prices, and caused supply chain insecurity, leading to a substantial decrease in earnings, particularly in our Steel business starting in the fourth quarter. Fortunately, since transitioning to a holding company in March, we have transformed our business structure to invest in growth areas such as green materials. This year, we expect to see visible results from our past investments, including the first commercial production of lithium. With the merger between POSCO International and POSCO Energy, we plan to aggressively advance our green energy strategies. The business climate for 2023 does not appear to be rosy. However, known risks are manageable. We will continue to capture opportunities amidst these risks and prepare for the future. Lastly, I would like to discuss the dividend payout decided by the Board today. Considering our earnings and midterm dividend policy, the Board has set the dividend at KRW 2,000 per share for the fourth quarter and KRW 12,000 per share for the year 2022. Including the 3% share buybacks from August, we've executed a total of KRW 1.5 trillion in shareholder payouts. Going forward, POSCO Holdings will work to ensure a good balance between increased corporate value and stable shareholder returns. With that, I would like to turn to Young-Ah Han, Head of the IR team, to present the 2022 earnings for POSCO Holdings, and then we'll open the floor for your questions.

Young-Ah Han, Head of IR

Hello, everyone. I would like to share with you the 2022 earnings. Last year, POSCO Holdings saw a consolidated revenue of KRW 84.75 trillion, up 11% year-on-year, with operating profit down by 47% to KRW 4.85 trillion. This decrease is largely attributed to the flood impact on the Pohang steel mills last September, which caused suspended operations and related costs impacting our operating profit by approximately KRW 1.3 trillion. Additionally, the rapid downturn in the steel sector during the second half of the year resulted in a KRW 425 billion deficit in operating profit in Q4. However, the Green Materials businesses, especially the secondary battery materials sector, showed year-on-year growth in both annual revenue and operating profit, increasing by 62% and 27%, respectively, driven by solid performance in the Energy business. The green infrastructure business also grew by 27% year-on-year. Since transitioning to a holding company structure last March, POSCO Holdings has worked diligently to promote new growth areas and streamline our business portfolio. We increased our capital expenditure in non-steel businesses, particularly secondary battery materials and energy, which amounted to KRW 3.1 trillion, representing 47% of total capital expenditure. Our efforts in these investments have paid off, with non-steel business profits having reached 27% year-on-year growth, accounting for 35% of total operating profit. This growth is expected to continue with the completion of major projects like the lithium brine plant in Argentina and other facilities. To summarize our recovery efforts from the Pohang disaster, our 17 mills resumed full operations as of January 20, and while we are closing the #1 plate mill due to its small capacity, we have taken steps to prevent similar future impacts. The total financial impact of the flood on our earnings was around KRW 1.34 trillion, with KRW 904.5 billion accounted for in Q4 alone. We anticipate further recovery costs in Q1, but these should be significantly lower than those experienced in Q4. Additionally, our processing efficiency and recovery efforts have already begun to normalize. Moving on to our completed constructions, we have made significant strides towards our lithium production goals. We expect to start initial production in the second quarter from our newly completed facilities, aiming to produce core materials like lithium for the first time. We plan to capitalize on strong demand for secondary materials, aligning with green policies and new regulations. Lastly, I would like to assure all our investors that our strategic investments in green technologies and partnerships will position us well for ongoing growth in the energy and materials sectors.

Operator, Operator

The first question is from Hyundai Motor Investment Securities, Park Hyun-Wook.

Hyun-wook Park, Analyst

I have three questions for you. First, regarding the steel market conditions: as of the end of December, global and Chinese steel prices seem to be stabilizing and showing signs of rebound. Can you provide your expectations for the steel market for both the first and second halves of this year? Additionally, what are your price outlooks for coking coal and iron ore this year? Second, I would like an update on lithium production. In the Q3 conference call, you provided some insights, and I'd like to check if there have been any updates since then. Will the plants be completed as planned in October? Furthermore, I noticed that lithium prices from China have slightly decreased recently. What is your outlook for lithium prices for the year? Lastly, regarding the EU and the CBAM that will become effective in 2026: how will this impact your business? While the export volume may not be significantly high, what preparations are you implementing to respond to CBAM?

Jeong Ki-seop, Chief Strategic Officer

Yes. First, regarding the steel market, I would like to hand over to Eom Gi-Chen.

Eom Gi-Chen, Head of Marketing Strategy

So you asked about steel markets in the first half and the second half of this year. As projected by the Steel Association last October, demand is expected to increase by about 1% to over 1.8 billion tonnes this year. In the first half, we anticipate additional interest hikes in the EU and U.S., which may lead to a continued global recession. Factors such as the ongoing conflict in Ukraine and supply issues in the automotive sector may limit demand recovery. However, rising costs and raw material prices will likely put pressure on steel prices. In the latter half of the year, we expect to see recovery driven by stimulus packages from various governments, as well as improvements in the property market in China thanks to herd immunity and government initiatives. Thus, we foresee a potential recovery in the steel market at the end of the first quarter to the second quarter.

Jeong Ki-seop, Chief Strategic Officer

The next question is about raw materials. I would like to turn to Seungkwan Oh, who is the Head of Raw Materials Office at POSCO.

Seungkwan Oh, Head of Raw Materials Office

Hello, I would like to discuss the iron ore market. In Q3, the price was around $80 due to expectations of reopening in China and stimulus measures. Currently, the price has risen to around $120. However, we believe that there won't be significant increases in iron ore demand this year due to a lack of drivers. On the supply side, Vale's recovery in Brazil should add approximately 14 million tonnes to the market. In the first half, the prices will remain strong due to weather issues, but we anticipate stabilization as supply increases in the second half, with prices setting around $200. For coking coal, weather conditions in Australia have driven recent price increases, which we expect to stabilize as well.

Jeong Ki-seop, Chief Strategic Officer

Next, on lithium, I would like to ask Lee Kyung-Seop to provide the response.

Lee Kyung-Seop, Chief of Lithium-ion Batteries Materials

Hello, my name is Lee Kyung-Seop. Regarding the lithium business, while there are no drastic changes, our plans have progressed. In Gwangyang, we plan to start operations in October for our first stage production. In Argentina, we are also on track with civil engineering projects. We anticipate moving into our second stage production by 2024. Although we've seen a slight drop in lithium prices, expectations for long-term growth remain high due to increasing demand for EVs. This year, we will accelerate our investments in the nickel sector and seek to ramp up our capacity accordingly.

Jeong Ki-seop, Chief Strategic Officer

As for the CBAM, Kim Kyung-Han from the International Trade Affairs Office will answer.

Kim Kyung-Han, Head of International Trade Affairs Office

According to a recent agreement, as of December 13, the EU's final version of CBAM requires transitional obligations starting in October 2023, during which exporters need to report emissions without mandatory credit purchases. From 2026, we will have to purchase emission credits for our exports. While this could introduce challenges, we believe POSCO has a competitive edge in reducing CO2 emissions compared to our competitors, allowing us to navigate these requirements effectively.

Operator, Operator

Next question is from HI Investment Securities, Mr. EJ Yoon.

Yoon-sang Kim, Analyst

I have two questions. First, can you share your business plans for POSCO International and POSCO E&C for this year? Secondly, can you elaborate on your CapEx plans based on profit outlook, particularly in relation to dividends for this year? Lastly, I’ve heard that your company is a candidate for the HMA acquisition. What’s your perspective on that?

Jeong Ki-seop, Chief Strategic Officer

Regarding the POSCO International business plans, I turn to Park Jeong Bin, Head of the Green Infra Business Team.

Park Jeong Bin, Head of Green Infra Business Team

As for revenue, we expect POSCO International to reach KRW 40 trillion this year, with operating profit of around KRW 900 billion, reflecting a 10% increase from last year. Our investments will focus on LNG expansion and green areas. Conversely, for POSCO E&C, due to adverse conditions in the construction market, we have pessimistically revised our revenue and operating profit forecasts downward by about 10%. Our emphasis this year will be on managing liquidity risk.

Jeong Ki-seop, Chief Strategic Officer

As for CapEx, I will turn to Jeong Dae-Hyung, Head of Corporate Strategy.

Jeong Dae-Hyung, Head of Corporate Strategy

This year, we plan to significantly increase our CapEx budget. Investments will focus on major areas that ensure high growth, especially in steel plate investments and cathode materials. Our investments in lithium are also prioritized. Additionally, we will ensure timely execution of these planned investments.

Jeong Ki-seop, Chief Strategic Officer

Now on dividend expectations, I turn to our Head of IR, Young-Ah Han.

Young-Ah Han, Head of IR

This year, we aim for an adjusted payout ratio of about 26%, close to 30%. We aim for a dividend of about KRW 10,000, as previously communicated to shareholders. Our robust financial position will allow us to sustain this policy even with increased investments.

Jeong Ki-seop, Chief Strategic Officer

As for the HMM acquisition, I will hand off to Park Young-Ju, Head of Strategic Investment.

Park Young-Ju, Head of Strategic Investment

While reports suggest that POSCO may acquire HMM, our midterm outlook shows that such an acquisition would not align with our strategy at this time. Therefore, we are not currently considering this acquisition.

Operator, Operator

Next question is from Kim Securities, Jerry-Li.

Unknown Analyst, Analyst

I have a few questions. Firstly, regarding China's plans to increase its bargaining power in the steel market; will this impact POSCO's competitiveness? What responses do you have in mind? I am also interested in your investment amounts in the lithium business from 2022 to the current year, as well as your plans for CapEx for this year. Lastly, can you confirm the status of your crude production plans?

Jeong Ki-seop, Chief Strategic Officer

For the question on iron ore, I would like to turn it back to Seungkwan Oh.

Seungkwan Oh, Head of Raw Materials Office

China's Resources Group has not significantly changed the bargaining landscape. The major suppliers have strong agreements in place, maintaining significant market control. We believe that if discounts are provided to Chinese steelmakers, we can pursue similar conditions due to our operational capabilities with our invested mines.

Lee Kyung-Seop, Chief of Lithium-ion Batteries Materials

Regarding our lithium investments, we have spent KRW 1.3 trillion on lithium and KRW 240 billion on recycling. This includes our $400 billion projects in Argentina and Gwangyang. In 2023, we plan to invest an additional KRW 1.7 trillion, with significant investments in nickel expected this year.

Jeong Dae-Hyung, Head of Corporate Strategy

As for overseas steel investment, we are actively investing in areas including Indonesia. Our focus is on the ongoing expansion plans while considering environmental carbon emissions. We also plan to explore new partnerships for green steel production.

Unknown Executive, Head of Steel Production Technology Strategy Office

We are working on reducing carbon emissions by integrating smart technologies. We are currently testing and developing processes to optimize production while assessing options for producing renewable energy-based HyREX.

Suh Ji-Won, Head of Materials Officer

Regarding our HBI project in Western Australia, we are completing a feasibility study and aim to solidify our investment strategy by exploring opportunities for regional partnerships.

Jeong Dae-Hyung, Head of Corporate Strategy

For borrowing plans, we do not intend to borrow additional funds since our current cash balances are sufficient. We foresee an increase in our debt due to equity adjustments from the merger, but overall, our funding remains stable.

Operator, Operator

Our next question comes from DBS Bank, Lee Eun Young.

Eun Young Lee, Analyst

I wanted to ask about the steel market earnings outlook, particularly in light of last year's typhoon and fourth-quarter losses. Given the adverse conditions last year, do you anticipate better performance this year? Additionally, what are the plans regarding potential investments in blast furnaces in Indonesia concerning carbon emissions?

Jeong Ki-seop, Chief Strategic Officer

For our view on the steel market outlook for POSCO, I will pass this to Lee Sang-Geol.

Lee Sang-Geol, Head of Finance

For 2023, we aim for an operating profit target of KRW 3 trillion despite the challenges we face this year. Due to the flooding, we faced unexpected costs and inventory losses leading to significant shortfalls last year. However, we anticipate a positive turnaround starting in the second quarter, supported by our emergency operation plans.

Jeong Ki-seop, Chief Strategic Officer

Regarding potential new blast furnace investments in Indonesia, I turn to Eom Gi-Chen.

Eom Gi-Chen, Head of Marketing Strategy

We're exploring opportunities for increased production capacity while assessing carbon management strategies, including partnerships geared toward green alternatives.

Lee Sang-Geol, Head of Finance

The facilities are insured, and we've received around KRW 234 billion so far from the insurance claims related to the flooding. We anticipate that a total of KRW 460 billion could be covered.

Jeong Ki-seop, Chief Strategic Officer

Regarding the net-zero roadmap, we will provide further details in future calls. Thank you for your understanding. Thank you, everyone, for joining us for today's conference call. We appreciate your feedback and questions, which will help us improve. This wraps up the POSCO Holdings 2022 earnings release conference call.