POSCO Holdings Inc. (NYSE:PKX) Q2 2023 Earnings Call Transcript

POSCO Holdings Inc. (NYSE:PKX) Q2 2023 Earnings Call Transcript July 24, 2023

Jeong Ki-Seop: Good afternoon, everyone. I am Jeong Ki-Seop, CSO at POSCO Holdings. Before we begin today’s earnings call, I would like to extend my deepest gratitude to all of our investors on behalf of the company for your trust and support to POSCO Holdings as well as our operating companies. Going forward, the company will strive further to promote a balanced growth between steel and the new growth businesses and enhance the long-term corporate value of POSCO Holdings so that we can continue to meet the expectations of our investors. POSCO Holdings in the second quarter of this year recorded an operating profit of KRW 1.33 trillion. This is because the steel business which had been impacted from the Pohang mill flooding and the economic downturn quickly recovered its quarterly OP of KRW 1 trillion.

Such profit recovery in our core business, the steel business, holds a very important meaning for our company. It helps us to maintain global competitiveness in the steel sector as well as generate stable flow of revenue. And when this is coupled with our new business growth strategy, it will indeed create a virtuous cycle in enhancing our corporate value. POSCO is also striving for excellence in its steel making business to meet the demand of the changing times, which is carbon neutrality, POSCO has placed low emission steel production as its top priority such as early operation of HyREX pilot plant in 2026. The company is also advancing low-carbon product portfolio by boosting the high grade Hyper NO production capacity for eco-friendly EV traction motors.

Also to prepare for the commercialization of hydrogen reductions still in the future, POSCO Holdings has developed a 2050 phased hydrogen roadmap, based on specific hydrogen demand outlook. And in the short-term, it’s working hard to deliver success by pursuing CCU and reformed hydrogen-enabled blue hydrogen on top of green hydrogen. Moving on to secondary battery materials business. As communicated during the recent Value Day, the company keeps accelerating investment to gain a strong leadership position in the global market. And especially for lithium, the plan is to commercialize it by this year to deliver strong performance as an independent business. Also, I am glad to announce that significant progress has been made to secure nickel. With that, I will give the floor to IR team Head who will brief you on 2023 Q2 results.

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Han Young-Ah: Good morning, everyone. Let me share with you the 2023 second quarter earnings. So in Q2, POSCO Holdings saw consolidated revenue of KRW 20.12 trillion, up 3.8% quarter on quarter with OP up by 88% at KRW 1.33 trillion. Cumulative investment for the first half of the year were KRW 3.7 trillion on a consolidated basis, and the quarter end net debt ratio was 13.3%. Let me explain by business areas. First, the steel business recovered to the average level of quarterly operating profit since the past 20 years in domestic and overseas combined, posting KRW 1 trillion in OP, following a loss in 2022 Q4 and KRW 338 billion profit in 2023 Q1. And this is because all Pohang mills were back in full operation, recovering both production in sales volumes, and we had no additional restoration costs this quarter and the selling price increased slightly as well.

So not only the domestic but the overseas steel business also showed a recovery posting OP of KRW 93 billion. Now, as for the green infra businesses, revenue and OP all increased Q-o-Q by 9.6% and 16.5%, respectively. If you look at the green materials, the revenue increased by 2.7% Q-o-Q, but OP declined by 55%. Actually POSCO Future M turned around from their previous quarter’s lower profit with OP of KRW 52 billion, up 160% from the previous quarter. However, the initial costs were incurred for the new plant construction for newly established entity like POSCO HY Clean Metal, and the recognition of inventory impairment losses. So this gap will be reduced as the plant becomes operational and generate sales. And POSCO HY Clean Metal began its first shipment at the end of Q2 and is gradually increasing its utilization rates.

Next is the major business activities for Q2. The first thing to mention is the rollouts of low-carbon steel products. In Q1, POSCO launched renewable energy steel with increased use of renewable energy like solar and wind power. And in Q2, we launched a third-party verified low-carbon product called Green certified steel. Going forward, POSCO will secure electric furnace capacity by 2026 and launch products using more scraps and make products with hydrogen direct reduced iron by completing the HyREX facility by 2030. And we — it aims to achieve 10.5 million tons in sales of low-carbon products annually by 2030. So building such a proactive low-carbon system is a process transformation for a more sustainable business and the effort to secure our market leading position with technologies and products in the low-carbon product segment.

Second, we are expanding our production for green industries. As you may well know, POSCO currently produces in our Pohang mill 100,000 tons of high grade NO products annually for green vehicle motor cores. And since the demand for high grade NO is expected to increase due to the accelerated growth of green vehicles and there are only about 10 steel makers in the world capable of manufacturing high grade NO due to manufacturing technology patent issues, so we plan to additionally expand our investment in Korea and abroad and build a plan to — and have a plan to build a system for producing a 1 million tons of high grade NO by 2023 (sic) [2030]. And in April 2022, we broke ground for the construction of a 300,000 ton facility expansion in Gwangyang.

And it’s almost completed and the operation is planned for the fourth quarter of this year. Next page, hydrogen business for hydrogen reduction steel. So POSCO Holdings-led global consortium has won a license to develop and operate Green Hydrogen Project in Duqm, Oman. Renewable energy will be used to produce hydrogen and convert to ammonia. For now, POSCO Holdings has secured the project development license. The company will review project feasibility by 2024 and determine the final project scale. Hydrogen produced overseas will be sold locally as eco-friendly raw materials for steel making and POSCO Holdings is looking into green and blue hydrogen. And the Duqm project is the first step in the company’s journey to hydrogen reduction steel making business.

Now moving on to Page 8. It shows the nickel dry and wet smelting business of Q2. POSCO Holdings signed a deal for joint pyrometallurgical project in which the company has 49% share in Halmahera, Indonesia. Under the project nickel matte production volume is expected to reach 52,000 tons in June in Sulawesi, Indonesia, a hydrometallurgical JV project in which the company invested 20% share was BOD approved. The JV will lead to nickel MHP 62,000 tons generation. As the world’s top nickel producer, Indonesia will help the company secure price competitive nickel by smelting nickel locally. The construction of the two smelting plants is expected to be completed by 2025. And also in June, POSCO Holdings signed a JV to build a refining plant in Pohang.

POSCO Holdings in China’s CNGR owns 60% and 40% share, respectively. The plan is to produce 50,000 tons of high purity nickel under the JV, which will help us complete a nickel precursor cathode value chain by 2025, thereby ensuring supply chain stability. Next, I’ll give you more details of performance by company. Page 10 is POSCO. POSCO’s production and sales volume went up Q-o-Q. And in terms of crude steel production volume operation rate reached 87.3%, achieving normalization. Other production by product, CR production volume declined due to regular repair of the CR line. In addition, WTP sales and the overall sales mix normalized. Starting end of June, we’ve had heavy rain which caused slight delay in product shipment. However, HR sales — sheet sales went up.

Moving on to the next page. As a result, Q2 OP stands at KRW 841 billion with OP rate at 8.2%. So we saw slight recovery Q-o-Q. As you can see down, Q2 saw no additional flooding-related costs in Pohang Steel Works such as recovery causing inventory loss and crude steel production went up 4.1% Q-o-Q lifting weight on fixed costs. Also, if you look at the price, selling price of carbon steel rose 4.6% Q-o-Q to KRW 1.06 trillion boosting profit rate. Now if you look at S&P of the company, during Q1, we talked about this as well. S&P hit bottom this January, then rebounded. However, despite the reopening in China, the pace of economic recovery is slower than expected which has dragged down price starting June. H2 steel making market conditions are still uncertain.

So if you look at steel price, most of the Chinese steel makers are struggling to generate profit. So despite slow demand, attempts are made to bring up steel price. But as I said, uncertainty remains. If Chinese steel makers reduce production in Q4, the market conditions might recover. Now moving on to Q2 overseas steel profit. The level recovered Q-o-Q. In particular, PTKP, the Indonesian JV started operation of new HR as of end of last year. So before, it was based on graphite, but it shifted to high grade HR. And high priced HR sales expanded internally pushing HR steel product domestic sales share to 77%. In May, PTKS suffered fire, which leads us to think that domestic sales, which is highly profitable, will continue for the foreseeable future.

Moving on to PZSS Zhangjiagang. It’s still in the red due to sluggish market and POSCO Maharashtra enjoyed improved profit, thanks to competitive high grade materials. Indeed high economic growth and strong auto sales drove up the sales of high grade materials, such as carbon steel sheet for autos as well as household electrical goods, and we see better profits. Next, POSCO International. OP went up 27.5% Q-o-Q. First, if you look at the steel price, as steel price recovered, the global business revenue went up 12% Q-o-Q, which drove up steel trading profit by 55% Q-o-Q. As for its energy business, despite the sales reduction due to the cyclone, which hit the gas field in Myanmar, profit level went up, thanks to higher payback rate of development cost.

Next, POSCO E&C. Revenue went up 9.6% Q-o-Q, but OP went up only slightly. So new order amounts keep going as the Group won more secondary battery plant projects. So it’s not more construction, but because of the secondary battery plant projects. Now moving on to POSCO Future M. POSCO Future M keeps posting steady growth. In particular, with high end N86 share increasing, cathode revenue went up 10.2% Q-o-Q and 86 sales share reached 31% in Q2, which drove up average selling price by 22% Q-o-Q. However, anode sales for EVs dropped by 15% Q-o-Q. This brings an end to Q2 2023 earnings release presentation. We will now move on to the Q&A session. Thank you.

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Q&A Session

Operator: Now we will move on to Q&A. [Operator Instructions]. So the first question will be by [Park Canon] from Hyundai Motor Securities. Please go ahead.

Unidentified Analyst: Hello. I am [Park Canon]. First of all, thank you for sharing us with a good earnings as well as the presentation. I have three questions for you. So as it was explained in the presentation, the Chinese steel prices are showing stable situation. However, there is a lower expectation for the pickup of demand in the latter half of this year. So as for POSCO Holdings, including the price, how do you forecast the latter half of this year in terms of market condition? And second is regarding the lithium or secondary battery materials. And during the Value Day, all the presentations were very much visible. But I would like to ask a few questions for those who haven’t actually attended the event. So in the latter half as well as in the mid to long-term, how do you forecast the lithium prices?

And last year, our lithium production capacity was 300,000 by 2030, and you actually increased to 420,000 by 2030. Is this increase explained by our increased capability or is it because of the changing market conditions? And when it comes to EBITDA margin, it is slightly lower than what had been suggested last year. So is it because you factor in the lithium prices as well? So can you explain a little bit about the reason for lower EBITDA margin this year? And the third question is the following. So most of the steel makers regarding the hydrogen or reduced iron, they’re very much focused on shaft flow, but we have FINEX. So I think that we have a different path to take. So when it comes to the liquid reduction of flow, what is the difference between ours and the shaft one?

So as for the latter, the capacity will be about 200,000 to 300,000 tons. So I would like to actually have your take on this matter as well.

Jeong Ki-Seop: So regarding the demand forecast, it will be by [Han Dong Ng] from the Market Strategy Office is going to answer. Regarding lithium prices outlook, the answer will be given by Lee Kyung-seop who is in charge of the lithium — Lee Kyung-seop in charge of lithium materials businesses. And as for the answer for the third questions regarding the HyREX, it will be [Tom Bong Su] from Steel Production & Technology Strategy Office from Pohang will give you the answer. So let me first share what the market conditions or outlook for the latter half. So until June, the price was going down continuously, but after July, the global steel makers actually made efforts to increase the prices, because of the cost pressure. And as for Europe, actually, we saw a stop to the 12 consecutive week of price turn.

And [indiscernible] is also making efforts to increase steel prices. And there were also some price increase cases coming from China. So from July, we see a rebound of the distribution prices from China as well as from Europe as well. Fortunately, July 18th in China, steelmaker, there was actually a commitment to see the steel price recovery. And there was also a commitment made to continue with the restructuring as well. So when it comes to the latter half of this year, it is very much dependent on how effective the economic recovery plan in Korea — so in China will take. And also the cut in the production of Chinese crude steel. And there’s also the FX factor as well and we consider the FX factor as an important factor for the next semester as well.