POSCO Holdings Inc. (NYSE:PKX) Q4 2024 Earnings Call Transcript

POSCO Holdings Inc. (NYSE:PKX) Q4 2024 Earnings Call Transcript February 2, 2024

POSCO Holdings Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Ki-Seop Jeong : Good afternoon. I am Ki-Seop Jeong, CSO of POSCO Holdings. First of all, I would like to thank our investors for your continuous support and attention to POSCO Holdings. 2023 was a difficult year, both internally and externally. Looking inward, the early recovery from flood-related damage was encouraging. However, high-interest rates in the U.S. weighed down on the global economy, while China’s underwhelming reopening suppressed steel prices. On the backdrop of the ongoing war in Ukraine, the conflict in Gaza in the fourth quarter escalated geopolitical risks in the Middle East and pushed up energy prices. This has been coupled with softening EV demand and the downturn in critical metals prices, bringing our consolidated revenues in 2023 to KRW 77.1 trillion and operating profit to KRW 3.5 trillion, a decline in profits from last year.

Despite the challenging environment, POSCO Group continued to lay the groundwork for its future. First, the steel-making business expanded introduction of low-carbon bridge technologies for the BF-BOF route and defined our transition strategy to HyREX, positioning us for sustainable growth. Second, in the rechargeable battery materials business, construction was completed on lithium hydroxide and recycling plants in Gwangyang. We are progressing with Phases 1 and 2 of the Argentine lithium brine project and the nickel JV project. The strong uplift in lithium and nickel production will put us on a solid path into the EV supply chain. POSCO Pilbara Lithium Solution completed construction on POSCO type plant 1, which uses hard-rock lithium, and now final testing with raw material feed is underway.

The first batch of products will soon come off our production line. Third, the reshaping of our business portfolio, such as the merger of POSCO International and POSCO Energy generated synergy and enhanced operational efficiency. Finally, we increased board oversight on group-wide ESG governance and a preventive workplace safety system was established by the group’s safety council. As a result, major local and global ESG rating providers such as Sustainalytics, ISS, and the Korea Institute of Corporate Governance and Sustainability upgraded our ESG scores. Uncertainties remain high about demand for steel and prices of critical battery metals. But our executives cautiously conjecture that we are moving past the most difficult period of time for our business.

To offset mid- to long-term price volatility, we will continue to strengthen our bottom line by lowering costs and improving P&L management. New investments in long-term growth projects will be put under closer scrutiny to enhance capital efficiency. My final point is on the dividend payouts and record date announced at the Board meeting earlier today. Based on our mid-term shareholder return policy, business performance, and dividend yield, the Board approved the KRW 2,500 per share Q4 dividend, bringing the total annual payout to KRW 10,000 per share. As our shareholders agreed at the March AGM, we have renewed our shareholder return program that defines the dividend prior to posting the record date. The year-end record date is set to February 29.

Going forward, POSCO Holdings will continue to pursue a balance between stronger enterprise value driven by growth and reliable shareholder returns. With that, I would like to hand over the call to the Head of our IR team for an in-depth briefing.

Young-Ah Han : Hello. On our website, we have posted the earnings report, so we will take note of that as I give you this presentation. First, year-on-year, the 2023 annual revenue and operating profit fell by 9% and 27%, respectively, each closing with KRW 77.127 trillion and KRW 3.531 trillion. We generated annual EBITDA of KRW 7.355 trillion. Inclusive of CapEx and share repurchases, total investment came to KRW 8.6 trillion. Consequently, net debt rose to KRW 8 trillion, but net debt ratio was kept consistently low at about 13.4%. Looking at the fourth quarter, the consolidated revenue and operating profit, respectively, were KRW 18.664 trillion and KRW 304 billion, recording significant losses compared to the previous year.

Year-on-year, in the fourth quarter, despite the very strong 24.2% profit in eco-friendly infrastructure business, other businesses, namely steel and eco-friendly future materials suffered weakened performance. Let’s first look at steel. Price decline that began in the third quarter continues today while cost of raw materials such as iron ore held on strong. Then in December, feed costs actually rose. The rare and momentary decoupling of prices associated with raw feed and steel drove down steel business profits from KRW 853 billion in Q3 to KRW 346 billion in Q4. Eco-friendly future materials recorded a KRW 169 billion deficit in Q4 with the fall in price of metals, including lithium, price of cathode active materials also declined. Profit was also driven down by the reverse lag effect generated by the time difference between raw materials feed and product sale.

Reflected in the current earnings report is the loss of inventory valuation or inventory repairment that results from metals price decline. In eco-friendly future materials, that inventory valuation loss across 2023 was KRW 148.2 billion, of which KRW 130.6 billion was recognized in the fourth quarter. This impairment was felt not only at POSCO Future M but also in the entity that fed the raw materials into initial plant ramp-up, which involved Posco Hy Clean Metal and other new incorporations whose valuation losses were larger than normal. These valuation losses will likely shrink meaningfully once raw materials price stabilize. Next, allow me to briefly discuss ’23 key business activities by each business sector. First, again, steel. We completed 150,000-tonne capacity high-grade NO plant expansion in Gwangyang.

Additionally, another 150,000-tonne plant will come online by the end of this year, making a positive dent in enlarging our production capacity of high value-add products. Moreover, we aim to build a 300,000-tonne capacity hydrogen reduction process pilot plant in 2027. Therefore, design, engineering, and construction work is being lined up since the Board approved in February 2023, the installation of a 2.5 million tonne electric furnace required to produce decarbonized steel. And with the goal to commission the plant in 2026, we have begun work on construction. This exemplifies our commitment and action to invest toward decarbonized steel production. Finally, to enhance our position in China, we have a JV with HBIS, a #2 steelmaker in China.

Secondly, eco-friendly infrastructure by merging POSCO International with POSCO Energy, a new combined entity has launched. This was a deliberate decision to complete the LNG value chain loop and to cultivate our sustainable energy business as a means to galvanize the growth engine of POSCO Group. We invested to increase capacity at Senex in Australia. EV Motor core plant was completed in Mexico, too. And at this plant, we’re already picking up speed on orders from OEMs. In eco-friendly future materials at the end of ’23, construction of PPLS plant 1 was completed. Solid progress is being made in the brine lithium plant in Argentina, helping to build out our lithium production system. After 2026, we need to be ready to put our hydrogen reduction steelmaking facility into operation.

So we’re all in on ways to acquire the requisite hydrogen. In Duqm, Oman, we have secured exclusive rights to business development and operation to produce green hydrogen. Feasibility study is underway. On the next slide, I would like to discuss our ESG performance, and Mr. Kim, our CSO, already mentioned some of this. But in 2023, many local and global agencies such as Sustainalytics, ISS, and Korea Institute of Corporate Governance and Sustainability published reports that revealed POSCO Group’s phenomenal improvements in ESG indicators. Since transitioning to a holding company structure, we dramatically enhanced our ESG governance. For instance, we actively respond to issues identified at different affiliated companies, real-time disclosures are made on key ESG controversy issues.

In effect, there is a broader disclosure. Emissions per tonne of crude steel made is expressed at POSCO by carbon intensity. To improve this index, we use a variety of bridging technologies, which led to a 3% reduction against the baseline year. By strengthening the group safety council, preventive index, such as LTIFR assessments have taken root. Finally, I’ll discuss dividends and dividend record date. In April ’23, we released the mid-term shareholder return policy based on which today, the Board approved KRW 2,500 per share Q4 dividend payout. That brings the total 2023 annual dividend to KRW 10,000 per share, which will be submitted to the Annual General Shareholders’ Meeting. Year-end dividend record date will be changed for your information based on the new and advanced policy to determine dividend distribution first, then post dividend record date.

For your information, 2024 first quarter quarterly dividend record date is March 31. Next, I’d like to dive deeper into each company earnings. Once again, first up is POSCO. On POSCO’s crude steel output because operations recovered in the first quarter after the severe inundation caused by the river overflow, production grew 4% year-on-year to record 35.687 million tonnes. Sales also climbed 1 million tonnes year-on-year in that growth because automotive WTP sales comprised 50%. It helped to defend [Technical Difficulty] the on the right side, you have the PL chart. So taking a look at some of these data, despite increased sales in fourth quarter, the average price of carbon steel fell by about KRW 34,000 per tonne. So due to price declines, revenue fell 9% year-on-year to close at KRW 38.972 trillion.

Operating profit was also impacted by price declines, KRW 212 billion loss year-on-year to close at KRW 2.83 trillion. Looking at each quarter, you can see that most of the loss was in the fourth quarter. And key reasons for that is that as we entered into the fourth quarter, there was a sharp decline in steel price and this continued. And some expectations about China’s stimulus program has not panned out. And so because of these various factors, the mill margins or the spread shrank, and I’ve marked these in our charts. On the high-cost raw materials, we actually saw a little bit of a spike in the month of December, and that’s why you can see that some of our performance looks lackluster, especially in December. However, during Q1, the material price hike will be reflected in higher price of our products.

The effort to raise our price will help to enhance the likelihood of our Q2 profit recovery. And because we have a lot of fixed contracts, this will impact a lot of our second quarter earnings. So I think there will be some improvement that we can see there. Looking at the spot prices in various different countries, we are seeing a trend toward increasing prices. So I believe we’ll be able to push up our price as well. Let’s go to Page 10. Overseas steel subsidiaries are experiencing different signs by region. PT. Krakatau POSCO is relatively profit healthy, supported by profit dominant domestic HR sales. That has expanded to 82% of its total sales. That helped to defend overall profitability. However, given the weak market situation, price continues to fall, causing overall operating profit to shrink by about 20%.

Zhangjiagang STS in China. Due to delayed economic recovery in China, steel demand has fallen while competition have expanded their production capacity fomenting oversupply. This has caused operating profit to record deficits in ’22 and in ’23. At POSCO Maharashtra strike in India, while global steel market slowdown led to low-tier import products, causing further price squeezes thanks to the Indian government’s investments in infrastructure building and the ensuing steel demand rise as well as the stable demands generated in the automotive steel sales. Operating profit in ’23 saw a 92% growth year-on-year, $75 million. BYD in Vietnam through diversified sourcing of raw materials caused reduction efforts and the ability to purchase low-cost feeds, they have helped to grow operating profit year-on-year in spite of the global construction market recession.

Next is POSCO International. Consolidated operating profit was similar to the previous year, closing at KRW 1.163 trillion. Despite increased sales in eco-conscious industrial materials, the decline in palm oil price and the initial start-up costs associated with Mobility Solutions’ new traction motor core plant in Pohang squeezed the profits. Consequently, global business profits fell 9% compared to the previous year. However, in the energy business through direct sourcing of LNG, costs have been reduced, yielding better profits in power generation. Overall, POSCO International was able to sustain similar levels of profitability as the year before. Next is POSCO E&C. With new project starts, revenue increased over the year before. However, price hikes in raw materials and the subsequent cost escalation led operating profit to decline.

New orders expanded in construction by KRW 700 billion. This is a KRW 300 billion increase over the previous year. It closed at KRW 11 trillion. Next is POSCO Future M. N86 cathode active materials and low expansion natural graphite anode active materials are 2 of our high-end products that are made to new client demands. Their growth in sales led to continuous revenue expansion for the rechargeable battery materials business. But because metal prices have been falling, including lithium price, inventory impairments have hit fourth quarter profitability in a big way. So this concludes the brief earnings report of POSCO Holdings. And now I’d like to move into the Q&A.

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Q&A Session

Operator: We will begin our Q&A session. [Operator Instructions]. The first question is from Park Hyun-Wook from Hyundai Securities.

Park Hyun-Wook : Hello. My name is Park Hyun-Wook. I have three questions. The first, in Q1, you explained that you believe that steel price can be pushed up. But because demand still remains sluggish, I think that posted some limitations on price hikes. So how do you see the market for steel in the first quarter in automotive and shipbuilding as well as other demand industries? How do you see the demand? Second, PPLS, POSCO Pilbara Lithium Solution, the first plant complete — was completed in — at the end of last year. So this year, you’re going to ramp up and actually begin production. When will you see products rolling off the conveyor belt? And lithium demand is actually lower than what we had anticipated. So we are snowballing.

Looking at current prices, how do you anticipate the profitability? On the third question, because there is discussions about next leadership at POSCO Holdings, as investors, we believe that there will be a lot of consideration given to the rechargeable battery materials industry and leadership in that field. So during this leadership change or afterwards, will there be some strategy changes in conducting this business? Those are my 3 questions.

Young-Ah Han : So on the first half steel market prospects, we will have Mr. Ban. And on the profitability of lithium, from rechargeable battery materials business, we will have Mr. Lee, Kyung-Sub respond. And on the holdings’ leadership, yes, there’s a lot of buzz about that.

Ban Don-ho: So what are our growth strategies? I will address that question. I’m at POSCO marketing strategy office. My name is Ban Don-ho. So Ms. Young already spoke about the market prospects in the first quarter. So just to repeat, last year, we saw a lot of recessionary factors, such as China as well as the sluggish demand of steel. And in the domestic market, we saw a slight increase in imports, about 20%. And so it was very difficult for us to hold on to our price levels. In the fourth quarter of ’23, as Ms. Young already mentioned, with iron ore, about 20%, and with coal, about 51% cost increases were experienced. The raw materials price hikes are really impacting us in a big way. And so we failed to see this happening.

And already about a month has passed in 2024. We are anticipating 3 highs, high inflation, high interest rates, and high prices. So we’re going to have to anticipate a little more slowdown in recovery. By industry, automotive and shipbuilding industries did very well. We’re going to anticipate a little bit of slowdown in that this year. In infrastructure building and SOC, there are some restraints that will cause the market to slow down. And so that’s why we believe that steel market is going to continue to experience a recession. And you’ve — I’m sure you’ve heard through media coverage that not only us but also other steelmakers are suffering from profit losses, and we are taking all things into consideration to try and improve our profit structure.

Especially this year in China through the lowering of interest rates in China by about 5%, we are anticipating a little bit of a pickup there. And so we saw some prices go as low as $700 and then jump right back up to about $1,100. What’s significant is that in the distribution industry in Korea because inventory is low, we believe there may be a little bit of a possibility for price rebounds. So anyway, steelmakers are looking to raise prices. So we will collaborate with other steelmakers in the market to see if that can happen. And we already raised prices by about KRW 30,000 in the previous quarter. And on a monthly basis, starting with the first quarter, we have plans to incrementally increase price just by a little bit. Looking at other companies, they are also in the same boat with us.

So we all fail to anticipate this rise in raw materials price, and we are now beginning to apply that to our books. You had a question about the automotive industry. We have long-term contracts with OEMs and the automotive industry. So because of the raw materials price fluctuation in the second half, we are renegotiating some of our agreements. So to apply some of this hike in raw materials price, we will be renegotiating. In the shipbuilding industry, we will look at the supply, the total volume as well as what our production situation is to adjust price and to renegotiate as well. That will conclude my response. The mic is off.

Kyung-Sub Lee: My name is Lee, Kyung-Sub, in charge of battery materials business. I will address the second question. So lithium production, projections as well as the lithium market projections. So I know that you’re all very curious. So I will take this as a general question and try to address as much of it as possible. PPLS completed construction at the end of last year. And so raw materials are being fed in and we are ramping up production. So we consider the first year, the period of ramp-up, and we are going in phases. By the end of the year, we will see about 80% to 89% operation rate. So by the end of the year, our target is to operate the plant at 80%. So purchasing agreements are in place with Pilbara as well as Fastmarkets based on the benchmarked price formula.