Earnings Call Transcript - PKX Q3 2023

Operator, Operator

We will now start the conference call for the 2023 Third Quarter Earnings Release of POSCO Holdings. After the presentation by POSCO Holdings, there will be a Q&A session with the participants. Let's begin the call.

Jeong Ki-Seop, CSO

Good afternoon, ladies and gentlemen. I am Jeong Ki-Seop, CSO of POSCO Holdings. First and foremost, I would like to extend my gratitude to all the investors and shareholders for your keen interest in POSCO Holdings. In Q3, we saw increasing global geopolitical tensions as well as persisting worldwide economic slowdown due to the high interest rate policy initiated by the U.S., which resulted in further uncertainties to the business environment. Amidst the ongoing economic slowdown and rising costs due to inflation, there were many challenges in business operations. However, through proactive pricing adjustments and cost-cutting efforts, we achieved a consolidated revenue of KRW18.9 trillion and operating profit of KRW1.1962 trillion. In particular, our steel business generated robust profits through improved product mix, lower raw material costs, and cost-cutting efforts, despite a drop in selling prices due to deteriorating market conditions and a decrease in product output resulting from major equipment repairs. Such performance underscores that our group's global competitiveness and efficiency in the steel sector continue to be a significant foundation for sustaining profits and cash generation, even in challenging economic conditions. The secondary battery materials business is now in its initial phase, as production facilities are being completed. At this stage, what is crucial is consistent and ongoing investment based on a long-term strategy. With regards to market changes such as IRA, emergency, LFP battery and changes in material prices, we will be closely monitoring and partially supplementing the strategy if necessary. However, for the most part, investment has been made based on the quantities ordered in the mid to long term until 2030 and the target to build a global market position in the growing market and to solidly secure a market position through rapid investment will not change. For several years, POSCO Group has continuously improved its financial structure and despite investment being made in the gross business, the Q3 debt-to-equity ratio only amounted to 13.7%. Such sound financials and solid profitability in the steel sector will become a foundation that allows the growth strategy to be pursued without faltering. In the fourth quarter as well, it seems difficult to predict the short-term economic recovery. In line with such a difficult business environment, our company will first make continuous efforts to secure short to mid-term profitability and secondly, keenly allocate investment resources so that we can strive for unwavering growth strategy that raises the long-term corporate value of POSCO Holdings. From now on, the head of the IR team will provide details on the third quarter earnings.

Han Young-Ah, IR Team Head

Good afternoon, ladies and gentlemen. I will now provide an overview of our performance in Q3 2023. In Q3, POSCO Holdings recorded a consolidated revenue of KRW18.961 trillion, a 5.8% decrease compared to the previous quarter, and an operating profit of KRW1.196 trillion, 89.8% decreased Q-o-Q. Despite the sluggish economic conditions, the sale profit was resilient at around KRW852.7 billion and the green infrastructure sector also generated over KRW400 billion in profit, similar to the previous quarter. In Q3, we invested a total of KRW1.9 trillion on a consolidated business basis, bringing our cumulative annual investment to KRW5.6 trillion. Let me elaborate on each business. First, in the steel sector, after incurring losses in Q4 last year, we turned a profit of KRW338.1 billion in Q1 and recorded an OP of KRW1 trillion in Q2. However, in Q3, the profit size slightly decreased to KRW852.7 billion. As mentioned during the Q2 earnings call, we believed that bottoming out occurred in January of this year and we began to see an increase in prices. However, despite the reopening of China's economy, the pace of economic recovery has been slower than expected. As a result, since June onwards, our prices started to decline again, and this trend continued until September. Since September, there has been a movement towards steel price increases in many countries, including Korea, but given the high level of economic uncertainty, no distinct results are currently evident. Nonetheless, POSCO, with a high proportion of long-term contracts, exhibited relatively stable performance. Second, the green infrastructure sector. Both revenue and operating profit decreased by 9% and 7% respectively compared to the previous quarter. Taking into account seasonality, operating profit grew by 19.9% year-on-year resulting in profits of over KRW400 billion for two consecutive quarters. Lastly, our green materials revenue jumped 10% and posted a record quarterly revenue, but still, it incurred losses. In particular, POSCO Future M's operating profit contracted due to margin pressure caused by the decline in prices of key raw materials such as lithium. Initial operational expenditures and newly established subsidiaries like POSCO Argentina and POSCO Lithium Solution have also added to the losses. As the construction of these newly established subsidiaries enters final stages, it is anticipated that these cost burdens will persist for the foreseeable future. Next, I would like to move on and brief you on major business activities in Q3. First, I would like to provide an update on the progress of the construction of secondary battery material plants. The completion of POSCO Pure Battery Lithium Solutions, Lithium Ore, POSCO Types line has been delayed from October to November this year. The commercial completion has been rescheduled from February to April next year. POSCO's high purity nickel refining plant construction has also experienced a delay of approximately one to two months, pushing the originally planned December completion into Q1 next year. As you probably learned through news reports, there was a labor dispute involving the construction labor union, which started in early July and lasted longer than expected, eventually coming to an end at the end of September. As a result, the ongoing construction projects in the area experienced some delays but they are now back on track. Again, aside from one or two months of delay, everything is back on track. Other projects are proceeding as originally planned. POSCO Argentina's lithium plant Phase 1 is scheduled to be completed in Q2 2024 and the completion schedule for POSCO Lithium Solutions' brine lithium plant Phase 2 in Q2 2025 remains unchanged. There are two plans that are newly programmed. The first is POSCO Silicon Solution, Pohang plant, which aims to produce silicon oxide, silicon anode materials. Construction for this facility commenced in June. The MEP work is progressing faster than anticipated and is scheduled for completion in Q2 of 2024. Secondly, the nickel smelting project in Indonesia commenced construction in September and is scheduled for completion in Q4 of 2024. Next, the joint venture between POSCO and China's HBIS for the production of automobile steel sheet in Pohang has completed the construction of the first galvanizing plant. The joint venture has added an additional galvanizing plant to strengthen its presence in China, the largest auto steel sheet market. The second plant will be completed in May next year. The plan is to incorporate the existing Guangdong Pohang Corporation with a production capacity of 450,000 tons into the joint venture to equip it with an annual production capacity of 1.35 million tons in China in the future. Raw materials, including cold-rolled steel sheet, will be supplied jointly by POSCO and HBIS. Under China's Made in China 2025 policy and green car industry development plan, there is a higher growth of local green car production compared to internal combustion engine vehicles. Also, automotive components and materials are transitioning from conventional cold-rolled steel to zinc plated steel. POSCO Mobility Solutions constructed the EV motor core plant in Mexico. As explained in the previous quarter, POSCO is producing electrical steel and hyper-NO of globally competitive quality, and in November of this year, 150,000 ton capacity was expanded with plans for an additional expansion of 150,000 in the fourth quarter of next year. Based on such high-quality steel materials, POSCO Mobility Solutions uses electrical steel to produce EV motor cores to be supplied to the Hyundai Motor Group. Since November 2022, the total order volume signed with Hyundai Motor Group as a long-term motor core supply contract amounts to KRW10.3 billion. In Mexico, a production base that has the motor core capacity to be installed and 1.5 million has been completed, allowing us to now supply to North American automobile companies including Hyundai Motor Group. This plant has already secured most of the order quantity and we believe that this is an excellent example representing the value chain competitiveness that our group has on the eco-friendly green automobile material supply. Next will be the details of earnings for each of the company. First, page 9 will be about POSCO. The production volume of POSCO products decreased by 100,000 compared to the previous quarter due to the plant repair of Pohang Steel Plate two plant and Hot Road three plant. As such, the sales volume also dropped by 52,000 tons, but with the increase in the sales of high-value added products, it helped to defend profitability. Next page will show the P&L. Operating profit of POSCO recorded at KRW727 billion, which is KRW114 billion lower than the previous quarter. The largest reason for the reduction is the drop in the sales price. During Q3, the sales price dropped by approximately KRW48,000 per ton compared to the previous quarter. The net drop in the unit price against the same product was KRW53,000 per ton, which can be considered partially recovered with the increase in sales of high-value added products. Despite the drop in raw material costs in the third quarter, the price drop was quicker, leading to a decrease in mill margins. This reflects the circumstances that we are facing. Recently, coking coal prices are on the rise due to production issues in key supplying countries, with supply volumes now recovering to levels before 2020. Amidst this, solid demand has continued centering on India and Indonesia. Based on such a burden on raw materials, we've increased the price for three consecutive months from August to October, and global steel companies are recently also making attempts to raise prices. POSCO also slightly increased the price of hot-rolled steel in September. However, with sluggish demand and uncertainty in the global economy, the impact of the price increase has not yet shown. There are still difficulties in carrying out negotiations for the price increase. For steel prices that have once again dropped to the level of the start of the year, considering various factors such as raw materials and the P&L circumstances of Chinese competitors, it seems unlikely for prices to drop further. However, confidence for recovery is also weak. Thus, currently, POSCO is striving to carry out various activities such as product mix and cost reduction to defend profits as much as possible. Despite the challenging environment, we are expecting it to be possible to a certain extent in the fourth quarter.

Operator, Operator

We will now begin the Q&A session. The first question is from Hyundai Motor Security. Please go ahead.

Unidentified Analyst, Analyst

Hello. Thank you very much for giving me this opportunity to ask questions. I have three questions altogether. First, regarding China's real estate policy, despite the positive changes, I don't think the economic recovery outlook is very strong. How do you see the sales market for Q4 and next year? I'd like your opinion on this. Second, related to the auto sector, it seems likely that you'll see some increase in ASP in the latter half. However, what is your forecast for ASP concerning households and other uses? Lastly, I want to ask about cell-making capabilities. I believe that these capabilities will grow in the long term. What do you envision for overseas production capabilities in the future? Also, will HyREX technologies be used for production moving forward? Thank you.

Han Young-Ah, IR Team Head

Thank you very much for your questions. From POSCO Marketing, we have Mr. who is going to take your questions.

Unidentified Company Representative, Marketing Strategy Office Lead

Hello, my name is the group leader of the Marketing Strategy Office. Regarding China's real estate policy, in September, the Chinese government introduced a policy aimed at boosting the real estate market. Even if you own properties acquired previously, if you purchase housing now, you will be considered a first-time buyer and will receive various incentives. At that time, we saw an increase in real estate transactions. However, looking at the current situation, while it is improving, I don't believe it's enough to significantly impact the overall Chinese economy. Concerning the Q4 steel market outlook, as well as housing and shipbuilding, for 2023, we anticipated a very active first half. We expected an increase in Q2, but starting in Q3, we predicted a downturn. We believe this weakness will persist into Q4. The anticipated reduction in China's production did not occur as expected, due to the government's policies and business slowdowns, so production cuts did not happen. Therefore, we expect the Q4 market outlook to remain weak, similar to Q3. Regarding ASPs across various sectors, for the auto industry, we anticipate an increase in the latter half of the year compared to the first half due to rising costs and fuel prices; however, we have not finalized ASP discussions for shipbuilding yet. The outlook for home appliances and housing is not favorable, and we plan to maintain current pricing. Thank you. For overseas capacity increase, allow me to make some comments. POSCO does have upstream production. We have about 5 million tons of capacity. According to our long-term strategy, we plan to add around 14 to 9 million tons in the future. As you probably know, we have investments planned in India, Indonesia, and the U.S. So we aim to set up a demonstration plant that's expected to be operational by 2026 and 2027, while we aim for another plant to be operational beyond 2030. Our mid to long-term overseas capacity addition plan will utilize traditional arc furnace or electric arc furnace methods. Regarding the HyREX approach, again, I think we will have to wait until after 2030. Meanwhile, we are focusing on capacity increases in India and Indonesia. In Indonesia, as for carbon neutrality, our target is 2060, while in India, it is 2070. Thus, for these countries, we will utilize upstream steel-making methods analogous to traditional arc and electric arc furnaces.

Operator, Operator

Next question will be Mr. Kim Sang-hoon from HI Investment Securities. Go ahead.

Kim Sang-hoon, Analyst

So I am Kim Sang-hoon from HI Investment & Securities. I have three questions. First, considering the strong raw material prices, I am curious about future prospects. Am I observing investment trends? I want to know if we are seeing previously undervalued areas strengthening. I would appreciate your forecast on this. Second, regarding lithium and battery materials, we are noticing a price decrease, so I would like to hear your thoughts on the future outlook. Lastly, concerning the value day, you mentioned some earnings releases. I am interested in any updates compared to the earnings discussed during the value days. Additionally, in comparison to other steel companies, do we have any distinct advantages such as OEE or anything else? If there are any specifics, please share.

Han Young-Ah, IR Team Head

Let me first answer the question about the raw materials. We will have Mr. from the Raw Materials Office answer the first question. Then the head of lithium battery materials business will respond to the second one. Lastly, the head of the steel business will address the hydrogen and ethanol inquiries.

Unidentified Company Representative, Raw Materials Office Lead

I am the head of the Raw Materials Office. As you may have noticed, we encountered coking coal issues in the second quarter, but we are currently experiencing stronger coking coal for various reasons. In Canada and Australia, labor supply has decreased, including strikes in Australia, which has resulted in lower supply volumes compared to 2020. On the demand side, India's ore mines have expanded, leading to solid demand, especially in India, which is pushing prices up. Regarding future forecasts related to ESG issues, we anticipate challenges in making further investments, a sentiment shared across the industry. Thus, in the next year or two, we might face a slight supply shortage of about 1 to 2 million. Prices could remain stable or potentially see a slight increase, but we do not foresee a significant price rise due to a lack of supporting factors. Additionally, considering POSCO's carbon neutrality roadmap, we expect a decrease in demand. Nevertheless, we are confident in our ability to meet our supply needs through our coking coal mines. I lead the lithium battery material business. We have noticed a drop in lithium and nickel battery prices, mainly due to reduced demand. Last year, prices rose excessively because of supply issues, but now prices are returning to more reasonable levels. We may see short-term fluctuations in electric vehicle demand as a result of the recent economic downturn in Europe, which could lead to companies like Volkswagen experiencing lower sales than expected. These trends might affect the market until the end of this year and into early next year. Currently, the price of lithium is around KRW23,000, and nickel is approximately KRW18.5k. Market predictions suggest that by 2030, lithium prices could be between $25,000 and $35,000, although current estimates are down by $5,000 compared to the first half of the year. Despite these price changes, our medium to long-term plans remain stable. Regarding hydrogen-reduction steel technology, the HyREX method doesn't have a clear timeline. Different regions, like Europe, Japan, and Korea, are exploring various approaches. In Europe, they use the shaft method with high-grade pellets, while in Japan hydrogen is introduced into the furnace with CCU considerations. Each region's mills are developing unique technological paths concerning HyREX. We're actively monitoring promising technologies and exploring potential application scenarios for our fluidized reduction furnace method.

Operator, Operator

Next question will be from Hana Securities, we have Mr. indiscernible. You have the floor.

Unidentified Analyst, Analyst

Yes, thank you very much. I'm from Hana Securities. I also have three questions. First of all, about the lithium price. You commented on that already, but if you look at your previous projections of $25,000 to $35,000 price range, you mentioned it’s going to be similarly wearing. However, do you foresee lithium prices plummeting further? Additionally, regarding U.S. carbon emission-related penalties and trade barriers, I think they will be implemented starting from 2026. If that is the case, do you think that the U.S. and EU will ease their regulations? Finally, could you provide us some updates regarding recent labor strikes?

Unidentified Company Representative, Lithium Battery Materials Business Lead

Yes, thank you very much. I'll take the first question about lithium prices. Currently, we see that OEMs are considering $25,000 to $35,000 per ton as acceptable pricing for lithium. If the lithium price were to drop below $20,000, it could significantly delay the development of new mines, leading companies to refrain from such endeavors. The lithium industry consensus is that the price won't return to levels below $10,000 due to a shift towards lithium ore from brine lithium, which incurs higher costs. Hence, we anticipate the price to stabilize around $20,000, being the lowest feasible price to maintain yield. I am from the International Trade Affairs Office. Regarding the U.S.-EU GSSA and Global Sustainable Steel Agreement issues, there have been recent meetings between the executive council and President Biden. Although there was progress, a conclusive agreement is still pending further discussion over the next two months. The tariffs on exports will remain in effect unless these discussions yield a resolution. The outcome of the GSSA discussions is expected to significantly influence tariff decisions for Korean steelmakers exporting to the U.S. Regarding labor issues, on October 2nd, the labor union decided not to reach an agreement on the collective agreement, and thus they have requested mediation by a government authority. We had two meetings convened by the labor committee, and the mediation period was about 10 days, which we extended for another 10 days. By October 30th, we expect to have a final mediation meeting. The labor union will get their vote results on October 28th and 29th to decide on possible strike actions. Historically, POSCO and the labor union have maintained a constructive relationship without any labor strikes since the foundation of the company, and we anticipate our employees will collaboratively strive to find a solution.

Operator, Operator

The next question is from Mr. indiscernible of NH Investment and Securities. Please proceed.

Unidentified Analyst, Analyst

Hi, I am with NH Investment and Securities. I have two questions. First, regarding the increase in shareholders' equity, which is currently just over 20% in value, is this percentage too large? Do you have any plans to reduce these shares? Additionally, concerning the lithium operation in Argentina, what benchmarks will you use for purchasing raw materials or selling finished lithium oxide? Lastly, what cash costs do you expect for the Argentinian operations?

Han Young-Ah, IR Team Head

As for the shareholders' equity, we have 10.3% being captive, and we had convertible bonds issued under Korean securities institutions around 3.8%. Therefore, our usable stocks amount to under 7%. We extinguished 3% last year and we've made previous shareholders' recoveries. While our consideration of extinguishing additional treasury stocks is open, we do not have any current plans. Should we have additional financing in the future, we will consider our financial situations at that time.

Unidentified Company Representative, Lithium Battery Materials Business Lead

Regarding lithium pricing, sales will rely on recent trades established through fast markets, while for long-term purchases, we consider approximately five different benchmark indices such as Asian metal and Shanghai metal. We primarily depend on the fast market for pricing, using either the mean or median based on trading partners. The average price from the previous month typically guides our lithium sales as part of our contractual agreements. In Argentina, we strive to keep our positioning at the highest tier cash costs.

Operator, Operator

Next question is from an analyst at a security firm. You have the floor?

Unidentified Analyst, Analyst

Yes, thank you very much. I have two questions. First, on value day, you mentioned that lithium prices would be around $30,000 and referred to EBITDA and revenue projections based on that. If lithium prices drop to $25,000 or $20,000, what would that mean for the margins on raw materials? Additionally, what is your cash cost like? What assumptions are you making? Secondly, I understand that one of your plants has started normal operation. What is the cycle and the operating profit margin for this plant at this point?

Unidentified Company Representative, Participation Lead

Regarding lithium pricing indicated on value day of $25,000 to $30,000, we recently observe that actual prices have adjusted with a potential decline of about KRW5,000 compared to earlier expectations. For lithium ore, raw materials comprise about 60% to 70% of total costs, so if lithium prices decrease, the largest portion of raw material costs will also decrease. Thus, we do not believe such fluctuations will significantly affect profitability. When considering Salt Lake, outside of pumping costs, there aren't many variable costs, so long-term projections should not differ much from earlier shared figures. Our commercialization timeline indicates we've targeted the end of the year for certification, with sales beginning in the second half of next year. In terms of operations, we began operations last May. Our target is to achieve full operational certification by the end of this year, ensuring we meet quality standards early next year. Currently, we're striving for a recovery target of approximately 85%, with recent figures reaching as high as 93%. We expect certifications to be completed by the beginning of next year, allowing for product rollouts thereafter.

Operator, Operator

Next question is from BBS. Please go ahead.

Unidentified Analyst, Analyst

Yes, thank you very much for the opportunity. I have two questions. First, what is your projection for Q4 earnings? What is your business performance outlook for next year considering the various uncertainties? Secondly, regarding nickel profitability, you mentioned three major investments related to nickel at the Value Day presentation: Indonesia, precursor in Korea, and the nickel refinery. Are these projects still ongoing? Also, I understand that the Indonesian government decided not to grant any new projects due to nickel prices. Could you clarify your JV partner, which is 49% POSCO and 51%? I would like to ask who your Indonesian partner is?

Unidentified Company Representative, Marketing Strategy Office Lead

Regarding Q4 earnings, as mentioned earlier, the market outlook remains weak, akin to Q3 results. For our sales strategies, we will prioritize shipbuilding and automotive sectors due to a more positive outlook there. Given this, we aim to maintain high profitability through internal cost-cutting efforts. Domestic demand continues to be low, prompting us to focus on exports despite low export prices. We will aim to adjust our sales mix to sell more high-value products to enhance profitability. Regarding projections for 2024, the World Steel Association recently noted an expected global steel market growth of around 2.9%, similar to this year, while Korea is expected to slow to about 1.1%. Mixed factors, including geopolitical concerns and high interest rates, indicate that we will need to wait until Q1 next year for a clearer perspective on the 2024 market. As for nickel projects, we have obtained necessary approvals and are fast-tracking our construction efforts. Regarding the MHP business in Indonesia, we have seen no significant operational issues. When discussing cash costs, while I cannot disclose exact figures, I can confirm that we produce at much lower prices, generally about $1,000 less than competitors. As for the joint venture partner, we will disclose the name of the partner in due course.

Operator, Operator

We will take the last question. It will be coming from Ms. Investment and Securities. Please go ahead.

Unidentified Analyst, Analyst

Hello, I'm from Investment and Securities. I have a question about Argentina. Since we are at 4,000 meters above sea level, I heard there may be some costs associated with that. What are the details regarding transportation costs? Also, can you discuss the spot prices related to the long-term contracts? Lastly, what is your approach to nickel prices?

Unidentified Company Representative, Logistics and Costs Lead

For shipping and transportation costs, we collaborate with another POSCO subsidiary to develop optimal transportation routes. There are two main logistics routes from elevated locations: one straightforward from Chile and the other through Buenos Aires by ship. The transportation cost was roughly estimated over $300 when moving from high altitudes to marine areas. While we are still finalizing calculations, compared to the lithium price itself, transportation costs should not pose a significant burden. As for long-term lithium pricing contracts, prior to 2019, there were deep discounts, but now we avoid lengthy terms. Our present contracts range 3 to 5 years, with plans emphasizing at least 70% long-term agreements exceeding five years. The pricing for nickel is currently around $18.3K. Until the second quarter, premium values continue fluctuating, but as of October, we see stable pricing scenarios that are expected to hold until 2025 or 2026. We would like to thank all the participants who have joined us today. Though facing economic difficulties, POSCO remains focused on long-term growth strategies without faltering. We will conclude the 2023 Third Quarter Earnings Release Conference Call. Thank you.