POSCO Holdings Inc. (NYSE:PKX) Q3 2023 Earnings Call Transcript

POSCO Holdings Inc. (NYSE:PKX) Q3 2023 Earnings Call Transcript October 29, 2023

Operator: We will now begin the 2023 Third Quarter Earnings Release Conference Call of POSCO Holdings. As for today’s conference call, after the presentation of POSCO Holdings, we will have a Q&A session with the participants. [Operator Instructions] Now we will start the call.

Jeong Ki-Seop: 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, 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 the market changes such as IRA, emergency, LFP battery and changes in the price of materials, we will be closely monitoring and partially supplementing the strategy if necessary and when there is a need.

However, for the most part, investment has been made based on the quantities ordered in the mid to long term until 2030 and thus, 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 the financial structure and despite investment being made in the gross business, the 3Q debt-to-equity ratio only amounted to 13.7%. Such sound financials and solid profitability in the steel part 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, head of the IR team will provide details on the third quarter earnings.

Han Young-Ah: Good afternoon, ladies and gentlemen. I will now provide an overview of a 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, [indiscernible] bottomed out in January of this year and began to rise. However, despite the reopening of China’s economy, the pace of economic recovery has been slower than expected. And 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 increase in many countries, including Korea, but given the high level of economic uncertainty, no distinct results are currently evident. But POSCO, with a high proportion of long-term contracts, exhibited a relatively stable performance. Second is 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. Last but not least, our green materials revenue jumped 10% to a few again and posted a record quarterly revenue, but still it incurred losses. In particular, POSCO Future M’s are OP contracted due to margin pressure caused by the decline in prices of key raw materials such as lithium. Initial OpEx 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 into final stages, it is anticipated that these costs or 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. And the commercialized completion has been rescheduled from February to April next year. POSCO high purity nickel refining plant construction has also experienced a delay of approximately one or 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 [indiscernible] Construction Labor Union, which started in early July and lasted longer than expected, eventually coming to an end at the end of September and as a result of the construction projects on the way in the [indiscernible] area experienced some delays but they are now back on track.

A factory worker operating a machine that processes steel products.

Again, other than one or two months 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 one 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 it is scheduled for completion in Q4 of 2024.

Next page, second is [indiscernible] Pohang and automobile steel sheet manufacturing JV between POSCO and China’s HBIS has completed the construction of number one galvanizing plant. The JV has added an additional galvanizing plant to strengthen its presence in China, the largest auto steel sheet market. Plan number two 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 JV 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 its made in China 2025 policy and green car industry development plan, China is experiencing a higher growth of local green car production compared to internal combustion engine vehicles.

Also automotive components and materials are also transitioning from conventional cold rolled steel to zinc plated steel. Next page. 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 on November of this year, 150,000 ton capacity was expanded with a plan for additional expansion of 150,000 in the fourth quarter of next year. Based on such high quality steel materials, POSCO Mobility Solutions used the electrical steel to produce EV motor core to be supplied to Hyundai Motor Group in most parts now. Since November 2022, you can see from the disclosure the total order volume signed with Hyundai Motor Group as a long-term motor core supply contract amounts to KRW10.3 million.

In Mexico, a production base that has the motor core capacity to be installed and 1.5 million was completed and with this we can now supply to North American automobile companies including Hyundai Motor Group. This plant already secured most of the order quantity and we believe that this is the perfect example that RELL represents the value chain competitiveness that our group has on the eco-friendly green automobile material supplier. Next will be the details of the earnings for each of the company. First, page 9 will be about POSCO, the production volume of POSCO products decreased by 100,000 as compared to the previous quarter due to the plant repair of Pohang Steel Plate two plant and [indiscernible] 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 WTP product, it helped to defend the profitability.

Next page will show the P&L. Operating profit of POSCO record is KRW727 billion, which is KRW114 billion lower than the previous quarter. The largest reason in the reduction is the drop in the sales price. During 3Q, the sales price dropped by approximately KRW48,000 per ton as compared to the previous quarter. The net drop in the unit price compared against the same product was KRW53,000 per ton, and this can be considered to have been partially recovered with the increase in sales of high value added product. Despite the drop in raw material cost in the third quarter, the price drop was quicker, leading to a decrease in mill margins. And that is the circumstances that we’re facing. Recently, coking coal price is on the rise. This is because with production issues in key supplying countries, the supply volume has now recovered to a level before 2020, and amidst this, solid demand has continued centering on India and Indonesia.

Based on such a burden on raw material, [indiscernible] increased the price for three months in a row from August to October, and global steel companies are recently also making attempts to raise price. POSCO also slightly increased the price of hot rolled steel in September. However, with sluggish demand and uncertainty of the global economy, the impact of the price increase has not shown yet, and there are also still difficulties in carrying out negotiations for the price increase. As for the price of steel that once again dropped to the level of the start of the year, considering various factors such as the raw materials and the P&L circumstances of the Chinese competitor, it seems unlikely for the price to drop further. However, confidence for recovery is also weak and thus currently POSCO is doing its utmost to carry out various activities such as product mix and cost reduction activities to defend the profit as much as possible.

And that’s why such a difficult environment, we’re expecting it to be possible to a certain extent in the fourth quarter. Next will be page 11. P&L of overseas steel was impacted more by the market condition than POSCO. As for sales price of [indiscernible], sales price dropped by 9% Q-o-Q and it dropped by 6% for [indiscernible] and 1% for PCSS. Even in such a market condition from the structural side, efforts were made to enhance the profit structure. In Indonesia, domestic sales with higher profitability is being expanded and domestic sales cost rose to 73% in 3Q. In India, sales share for automobile rose to as much as 50.2%. That’s a decrease for PCSS and this is because the drop in raw material price such as ferro nickel price was reflected.

Next is POSCO International. Operating profit decreased by 12.9% quarter-on-quarter. More than half of profit reduction was from the steel trading part following the drop in steel price and sales volume. As for energy with the increase in the sales volume of Myanmar’s gas field and the rise in power generation profit demonstrated a sound profit generation capability. Next is POSCO E&C. Revenue decreased against previous quarter, but as a result of cost reduction efforts and so forth, operating profit increased slightly. So we were able to see no big issues here, and new orders decreased to KRW2.1 trillion in third quarter. Plant is being strategically expanded and therefore this one increased, but as for the housing part, there was a decrease in the construction order amounting to KRW1.1 trillion.

POSCO Future M is growing steadily. Despite the drop in the [indiscernible] price, sales volume continued to grow to record a revenue of KRW1.286 trillion, which is 7.8% increased quarter-on-quarter. This is because N86 products’ autumn revenue started to contribute in earnest. The share of high price N86 sales rose from 31% in second quarter to 40% in third quarter. However, with the drop in the lithium and nickel price, average sales price dropped and due to time differences in the price drop of products and raw materials and other unprecedented uncertainties in the raw material price, there was a pressure on margin. This was a brief earnings release of the POSCO Holdings. We will now move straight into Q&A. Thank you.

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Q&A Session

Operator: We will now have Q&A session. [Operator Instructions] The first question is from Hyundai Motor Security [indiscernible]. Please go ahead.

Unidentified Analyst: Hello. My name is [indiscernible]. Thank you very much for giving me this opportunity to ask you questions. I have three questions altogether. First of all, recently we have China real estate policy. But despite the positive policies, I don’t think that the economic recovery outlook is that positive. So Q4, and also next year, how do you foresee the sale market? I’d like to ask for your opinion. And second question, in the same line, if you were to auto, I think that in the latter half you will have some ASP increase. However, for households and for other purposes, what is your forecast for ASP? And my final question has to do with the cell making capabilities. I think that in the long term the capability will increase. Overseas production capabilities, what would that be in the future? And also, HyREX, will they be producing using HyREX technologies going forward? Thank you.

Han Young-Ah: Thank you very much for your questions. From POSCO Marketing, we have Mr. [indiscernible] he is going to take your questions.

Unidentified Company Representative: Hello, my name is [indiscernible] group leader of Marketing Strategy Office. With regard to China real estate policy. As you probably know, in September, Chinese government introduced a policy to boost its real estate market. Even if you have some properties acquired in the past, if you’re purchasing housing today, then you’re going to be acknowledged as first time buyer and will be receiving a lot of incentives. And at that time, real estate transactions did increase. However, if you look at the current state, yes, it is climbing upward. However, I don’t think that it’s that significant to affect the overall Chinese economy. And with regard to Q4 steel market outlook and for housing also shipbuilding, you’ve also asked for ASP.

Well, basically this year for 2023, our market outlook was that in the first half it’s going to be quite active. In Q2, we thought that it’s going to go up, and also starting from Q3, it’s going to turn weak. And Q4, we thought that the weakness will continue. So we stand by that production. China’s production reduction, which we expected is not really materializing because of the Chinese government’s policy and also the business deterioration, the production reduction didn’t really take place. So I think that Q4 market outlook is going to stay weak just like Q3. And also ASPs for different industries, for auto, in the letter F compared to the first half, because of the voluntary costs and fuel costs, we did finish discussing the ASPs and for shipbuilding, the shipbuilding industry overall is quite positive.

However, we have yet to conclude ASP discussions. For home appliances or housing, the market outlook is not that good and so we’re going to maintain the [indiscernible] priced. Thank you.

Unidentified Company Representative: For overseas capacity increase, allow me to make some comments. POSCO does have upstream production. We have about 5 million tons capacity. And if you look at our long-term policy or strategy, 14 to about 9 million tons addition is going to be made in the future. But as you probably know, we have India and Indonesia and the US where we plan to make investments. So we’ve got to higher it so we do have a demo plant rather in 2026 and 2027 is going to be operating and for [indiscernible] plant, I think that we will be able to have it up and running beyond 2030. So our mid to long term overseas capacity addition plan is that the traditional arc furnace or electric arc furnace is going to be used.

The HyREX, again, I think that we have to wait until past 2030. Again, we are trying to focus on the capacity increases in India and also Indonesia. In the case of Indonesia, if you look at carbon neutrality, the target is 2060, and in India, it’s 2070. And so, if you look at its countries, upstream steel making, we have steel arc furnace, the traditional ways of making steel. Thank you.