Posco International Corporation (A047050) Earnings Call Transcript

Good afternoon. We are now going to begin the conference call for Posco International. Thank you for joining us. There will be a presentation by Posco International, and then there will be a Q&A session. [Operator Instructions]. We will now begin the earnings presentation for Q4 2024 of Posco International.

Good afternoon. I am [indiscernible]. We are now going to begin Q4 '24 earnings presentation. Earnings materials are available in the IR section at Posco International's site. Today's presentation is conducted via conference call with participants from both Korea and abroad, we provide simultaneous interpretation service. Let me now introduce the management team attending today's conference call. We have with us CFO, Kyung-Jin Chung. We also have Head of Planning, [indiscernible], Head of Business Management, Jong-Bin Park; Head of Rolled Steel and Semi Product, [indiscernible]; Head of Mobility Business, [indiscernible]; Head of Industrial Material Business, [indiscernible]; Head of Energy Policy Group, [indiscernible]; Head of Low Carbon Energy Business, [indiscernible]; Head of Power Business, Kim Dae-Yeon; Head of LNG Business, [indiscernible]; Head of Energy Operations, [indiscernible]; and Head of our E&P business, [indiscernible]. Head of Secondary Battery Mineral Group, [indiscernible]; Head of Maintenance Business Development Group, [indiscernible]; and Head of Terminal Business [indiscernible] are also present. And we also have [indiscernible] in attendance. First, our CFO, Mr. Kyung-Jin Chung will deliver opening remarks. Then I will present the company's 2024 performance, key business updates and '25 outlook. Lastly, we will have a Q&A session. Now I will hand it over to our CFO for his remarks.

Good afternoon. I am Kyung-Jin Chung, CFO and Head of Business Planning at Posco International. First, on behalf of the company, I'd like to express my deepest gratitude to all analysts and investors for taking the time to join today's presentation. I also sincerely appreciate the trust and interest you have shown us over the past year. The year 2025 is the year of the Blue Snake, a symbol of wisdom, growth and prosperity. These qualities align closely with the values we aim to pursue this year. Building on last year's momentum, we are fully prepared to embrace new challenges through innovation and progress. Just like the agility and resilience of the Blue Snake, Posco International will swiftly adapt to the evolving market landscape and drive a sustainable growth. Today's session is an opportunity to share our vision and strategies with you as we shape a bright future together. Once again, thank you for your participation. I hope the year of the Blue Snake brings you all good health and great fortune. Now let me briefly outline the company's key activities in 2024 and our plans for 2025. Looking back on last year's achievements despite heightened uncertainties, such as global geopolitical instability, we remained focused on building a foundation for sustainable growth. Guided by our mission to create, connect and complete businesses, we successfully implemented our strategic initiatives across all business areas without disruption. Additionally, we executed our planned investment of KRW 1.1 trillion, laying a solid foundation for future growth. By business area, the Energy business further strengthened its LNG full value chain, which was completed through the merger. In the upstream, we completed the development of Phase 3 of the Myanmar gas field and started the development of a further Phase 4 as well as continuing the expansion of the Senex production system. In midstream, we successfully completed the construction of the 6 LNG storage plant and connected commercial production contributing to a stable supply of LNG. On the downstream side, we reached an important milestone in November by receiving conditional approval for the modernization of Units 3 and 4 of the Incheon power plant, an important step in advancing our Power Generation business. In the Material business, we expanded into future growth businesses with key achievements such as investing in graphite mine in Tanzania and breaking ground on palm oil refining plant in Indonesia. Additionally, we introduced our brand identity seeking answers on a global scale, which reflects the essence of our business. To align brand value enhancement with corporate value growth, we also presented our corporate value enhancement plan to the market, outlining our strategic direction and midterm goals. Looking ahead to 2025, while uncertainties are expected to increase due to monetary policy shifts and heightened financial market volatility, we see this not as a crisis, but as a great opportunity. With a strong and well-balanced business portfolio, we are committed to achieving sustainable growth. To achieve growth, first in energy, we will leverage our unique full LNG value chain to create synergies. We support the successful development of the upstream business, including the fourth phase of the Myanmar gas field development and the triple expansion of the Senex in Australia as well as investments to secure additional reserves through new exploration and development. We will also drive the expansion of related businesses through the acquisition of overseas gas production assets or companies. In midstream, we will support timely completion of the seventh and eighth storage tanks and increase the profitability of terminal-related businesses by increasing the share of [ PTS ] bunkering and improving the profitability of import export operation. We will focus on ensuring timely implementation of the downstream inside Units 3 and 4, which are new challenges and securing opportunities for new energy businesses in domestic collective energy and [indiscernible] such as Vietnam to strengthen our power generation portfolio. Second, we will build on our unique capabilities in Materials business to add value to the groups of businesses. For Mobility business, we will continue to establish overseas production basis, focusing on efficiency and future growth potential. By differentiating its competitiveness through a product packaging market with group companies such as Posco and Future M, we aim to develop into a flagship synergy business for the group. In the Green business, we will continue to expand our value chain by acquiring new palm plantations and investing in refining. We will also proactively prepare for the post Russia-Ukraine conflict to secure new business opportunities. In the Steel business, we will align our marketing strategies with Posco to respond to increasingly protectionist trade policies. We will strengthen our global steel marketing leadership by reinforcing the role of the group's production site at sales and procurement hubs. Finally, we will accelerate the restructuring of noncore assets in order to respond to potential crisis and improve financial soundness, and we will deliver the shareholder returns promised to the market through continuous improvement in profitability. We appreciate your continued support as we navigate challenges and drive growth this year. Next, Mr. In-Chul Chung will present the '24 business performance, progress of key initiatives and 2025 outlook. Following that, we will have a Q&A session. Thank you.

Thank you for your remarks. Now let's begin with the Q4 '24 earnings presentation. Please turn to Page 4. In '24, due to global economic downturn and a decline in the steel market, the operating profit of the Materials business decreased by approximately KRW 91 billion compared to the previous year. However, strong performance from Myanmar gas field and the effect of terminal expansion limited the overall decline in the company's total operating profit to KRW 46 billion Y-o-Y, a slight decrease of about 4%. The company's overall OPM remained unchanged from the previous year at 3.5%. Debt increased slightly by approximately KRW 100 billion compared to the previous year. However, the net debt ratio declined by 4.4 percentage points, further strengthening financial stability. Now let's move on to the detailed performance in the Energy business. Please turn to Page 5. In '24, the Energy business maintained stable earnings driven by the value chain. If you look at the table on the left, in the upstream Myanmar gas field, sales slightly decreased due to lower sales volume. However, operating profit increased by KRW 26 billion Y-o-Y, driven by the improved cost recovery ratio and the impact of exchange rate increase. The sales volume and operating profit of Australia's Senex remained at the same level as last year. Once the expansion is completed around the end of this year, the impact of SG&A expenses will disappear and Senex's profits are expected to contribute significantly to the overall profit growth of the company. On the right side, we have midstream and downstream performance. The Midstream Terminal business saw a KRW 7 billion Y-o-Y profit growth due to the expansion of the terminals and the increased profitability of the Vessel Commissioning business. Although the Power Generation business experienced a decrease in profit due to the decline in SMP, the profit growth in upstream and midstream businesses offset the decline in SMP, resulting in overall 2% growth in Energy business profit compared to the previous year. Please turn to Page 6. This is the Materials business. In 2024, the global economic downturn and worsened conditions for commodities had an impact on both our Materials business sales and profits. However, as you can see on the left table, Steel Trading business sales declined 8.9% Y-o-Y, but the sales decline of eco-friendly materials was limited to 2.8%. So we were able to partially defend the decline in sales and profit of the overall Materials business. The table on the right refers to the EV Motor Core business performance. As you can see on the right table, the HEV overseas sales volume expansion offset the decline of domestic sales volume and the annual sales volume maintained the same 1.88 million unit level, which was the same level as the previous year. Operating profit was sluggish due to the Pohang new plant operation. Next, I will cover key developments for major businesses. Please refer to Page 8. On Page 8, I will cover our 2024 key Energy business developments. Please refer to the left side of the page. In upstream, we expanded asset reserves. We completed Phase 3 development of the Myanmar gas field and commenced commercial [ first ] production from May. On the other hand, additional reserves were discovered in new and existing gas fields and Phase 4 development is also smoothly progressing. We made additional investments to increase production by 3x compared to the existing level for Australia Senex and plans are smoothly being implemented, including a gas processing facility trial operation. Also in the case of Malaysia PM-524 gas field, preparation has been made for the full-scale exploration drilling this year as well. Please refer to the right side of the page. We focused on securing growth drivers in the mid and downstream. Gwangyang LNG Terminal 1 has fully completed 6 storage tanks and commenced commercial operations from Q3. LNG Terminal 2's new units 7 and 8, which are newly being constructed, have a construction progress rate of about 40% and is being carried out as scheduled. Last but not least, Incheon LNG combined Cycle Units 3 and 4 also received conditional approval in November to replace and change to hydrogen co-firing power generator and also are steadily preparing for our transformation into a future Energy business. Next is the Materials business. Please go to Page 9. Please refer to the left side of the page. In 2024, in the Mobility business, based on our group capability, we focused on the qualitative advancement of our Mobility business. In addition, we invested and started construction in a timely manner in overseas hub production subsidiaries, including Mexico Plant 2 and Poland new plant. We have been driving EV motor core market share growth through expanding global production infrastructure. Please look at the right side of the page. In the case of Secondary Battery Materials business on September 3, an approximately KRW 58 billion contract was signed regarding the Tanzania Mahenge Mining project with Australia BRM Company, and we established a secondary battery chain. Lastly, in the Materials-Bio business, we established an operation system to prepare for the commercial operation of our Indonesian palm oil refinery subsidiary, and we are preparing for full operation in the second half of this year. Next, let's cover the forecast for 2025. Let's go to Page 11. These are the key strategic directions for 2025. The Gas business will be expanded through not only by growing our existing operations, including our Myanmar gas field, but also through expanding our business through acquiring new assets. The Power Generation business will focus on preparing for our next LNG business, including implemented hydrogen co-firing transition. For Steel business, we will focus on expanding our group's domestic and global markets. And in case of our Mobility business, we will strengthen OEM customer package marketing to expand global order amounts. In case of Agri Bio business, we will expand business based on new palm oil asset acquisition. From the next pages, I will cover in detail the strategic directions that I have just covered. Please refer to Page 12. Let's look at the Energy business on the left side of the page. In the case of upstream Myanmar gas field and Senex, we will focus on achieving planned sales and operational goals. In case of midstream, we will pull up the Gwangyang LNG terminal to Unit 7 and Unit 8 construction progress rate to the planned 78% by the end of 2025. And in downstream, we will successfully enter into domestic collective Energy business and in overseas, secure the Vietnam [indiscernible] operational rights. Through this, we plan to focus on acquiring new power generation operational rights. Please refer to the Materials business on the right side of the page. In the case of Mobility business, we have plans to continue expanding our overseas capacity to Mexico, Poland, India and other countries to have more than 7 million unit production capability by 2029. In the Materials-Bio business refinery subsidiary, we plan to commence full operation in Q3 of this year. And at the same time, we're going through a process to select a new pump plant for acquisition, and we are going through an internal investment process at the same time, and we have plans to complete our acquisition process in Q4. Let's go to the next page. On Page 13, you can find the performance forecast we are expecting when our major strategies have been executed as planned. Please refer to the material for more details. Lastly, I would like to cover our corporate value enhancement plans. Please go to Page 15. Since you are probably well aware of these points, I will just cover the key points. As you can see on the left side of the page, we set first, stable growth of profits; and second, efficient use of capital as our value-up approaches and selected as key metrics, as you can see on the right, pretax profit and ROIC. Our company for the last few years based on our energy-focused business portfolio has been investing in growth businesses and has consistently grown. In particular, there was profit growth through large-scale M&As, including Senex Energy in 2022 and Posco Energy in 2023. Going forward, through organic growth, which will increase productivity of our already acquired assets, we will maintain our sustainable growth momentum and at the same time, achieve inorganic growth through methods such as M&As in Indonesia and Vietnam. In particular, we plan to invest capital only in areas where we can generate ROIC of WACC 8% or above and achieve annual pretax profit exceeding 8% and maintain for the next 3 years, a 50% range level of shareholder return ratio, which [ benefits ] this growth. Our shareholder return ratio goal is at a level which took into consideration the average of between 30% to 50% ratio, which is being set forth by Korean and 5 Japanese companies as well as the level we confirm through surveys to our company's major institutional investors, and we are also planning to implement interim dividends this year as well. Please refer to the next page. Let's go to Page 16. We expect the company to generate between KRW 5 trillion to KRW 5.2 trillion of cash flow for the next 3 years. We plan to execute about 60% to 65% level, which is the biggest portion of the generated cash for growth investment for the future, and we expect to invest about 20% level to strengthen our financial soundness, including repaying our borrowings. As you are well aware, corporate value enhancement plan is recommended to be disclosed regularly once a year. So accordingly, from our next disclosure, we plan to continuously communicate with the market about our goals, achievements and areas for improvement. Apart from these regular disclosure, through value days for core businesses and [ NDRs ], we will actively conduct IR activities to strengthen communication. With this, I will conclude my presentation. Operator, please start the Q&A session.

[Operator Instructions]. Operator, please start the Q&A session right away.

[Operator Instructions]. And the first question is from Mr. [indiscernible] Shinhan Securities.

My name is [indiscernible] from Shinhan Securities. I have 2 questions. And the first question is this one. This is related to the Trump administration and tariffs. And so would that have any impact on your investment on the graphite and steel? And the second question is this, in 2025, what is your, the natural gas, outlook for LNG in 2025 as well as energy and impact on that -- on your Energy business?

Thank you for your questions. And Mr. [indiscernible] will answer the first question.

I am Head of the Hot-Rolled and Semi-Product. President Trump has announced that his administer is going to be imposing tariff on Canada, Mexico and China. And about the adjustment of the quota for Korea, it was not announced yet. So the steel quota from Korea, well, will that be adjusted for that and how much tariff will be imposed? Well, there are a lot of uncertainties regarding that. Well, Korean products go through Mexico and Canada and those are -- there are some of those products. And for the Korean steel products, we'll have to wait and see. We will have to pay keen attention and we will come up with the measures in cooperation with Posco. Thank you.

I am from the E&P business. About the natural gas outlook and its impact on the upstream business. In '25, the oil price and natural gas with the policy of the U.S. administration will be focused on Americas first. And the oil price, we expect to be stable at a lower price. And the gas prices, we expect a slight increase. And if we connect that to the profit of our company, well, for the Myanmar gas is about 40% related to the oil price. If oil price declines by $10. And so in terms of OP, there will be about minus KRW 8 billion impact. And if the -- in case of Senex, it's only 40% linked to the oil price. And so for Senex, only 30% is connected to the oil price and Myanmar was 40%. And so that is going to have a negative KRW 5 billion impact on our operating profit.

I'm [indiscernible] from LNG business. After the Trump administration has been launched, what sort of impact would that have on the LNG business? LNG gas production and the liquefaction-related approvals, permissions, we expect will be accelerated. But there is a forecast there would be a drop in the LNG price. Well, there will be approvals. There will be permissions. However, what's really important is whether we will be able to get the customers and the long-term customers. With the liquefied gas, we had a demand and supply issue, but the biggest issue -- we had issue with the approvals and the permissions, but what's important is that whether we'll be able to get the contract. And also for the liquefied gas, well, in North American liquefied gas price declining, I find it difficult to agree with that.

The next question is from Daishin Securities, Tae-Hwan Lee.

I'm from Tae-Hwan Lee from Daishin Securities. For 2025, regarding your goals, I have 2 questions. The first question is about your Gas business. So for your Myanmar gas field for your sales for 2024 compared to 2023, you can see that there was a market decline. For 2025, your goals, it doesn't seem to be very different. So for your sales going forward, do you think it will remain at this annual level going forward and be maintained? So that is my first question. And second is your EV Motor Core business. So we do know that in 2024, the shipments actually went up greatly, but on a Y-o-Y basis compared to 2023, the sales was similar. So I'm curious about how it can be improved in 2025. So regarding the business conditions, can you give us your take?

Thank you for your question. Regarding the sales for Myanmar gas field for last year, it was about 160 or so -- $16 billion or so, but it was lower than expected because the domestic sales in Myanmar for some generators, it was shut down. So the sales went down slightly. So that is why our results were less than planned. But if that does not happen this year, then we have a goal of $17.2 billion. And going forward, it is based on the domestic sales. And for domestic sales, it actually goes up during the winter time. So I think we will have some room for improvement.

I am the Head of the Mobility business. And regarding the 2025 EV Motor Core business, I would like to give you my take on the forecast for the production in 2024, as was mentioned in the presentation, it was 1.88 million. And it was a little bit lower than expected. It was because we had a downturn in the sale of EV cars. And for this year, for overseas and domestic, we have about 2.5 million units that we have received orders for, that we secured. And we believe that it will be more or less the similar number of units. So for 2024, it will be about 33% increase compared to the 1.88 million of the previous year. And with the 25% tariff by Trump and with the EV Chasm during the past year, we have had many difficulties. And for the OEMs as well, they have also been thinking about how to relieve this problem, and they have actually been focusing more on the hybrid units rather than on only EV units. And you can see one of the order trends we're receiving for 2025 are for hybrid cars and also for EV cars as well, but also hybrid. And for GM and Ford and for [ Livan ], we see the North America OEMs. So with the 25% tariff that Trump has announced, they are looking at low-cost EV. So $20,000 to $30,000 EV car development projects that they are embarking on, and it will actually be connected to the SOPs going forward. And ITS Markit (sic) [ IHS Markit ], S&P Global is forecasting that for the hybrid portion until 2026 and 2027, it will be maintained at about 40%. And from 2028, there will be a bigger proportion of EVs, which will overtake. So 2025, 2026, 2027, 2028 is when Trump's rain will end. So I think maybe it's a coincidence that they are seeing that the global companies are seeing that EVs will pick up at that time. So it will be reinvigorated. So we will be working hard to secure orders for low-cost EVs. And for this year, hybrid and EV sales will be about 2.5 million units so that we can have 33% increase compared to the previous year.

Next question will come from Mr. Jae-Hyun Ryu of Mirae Asset Securities.

My name is Jae-Hyun Ryu. Related to your capital plan, in terms of Steel and in Power Generation, you didn't actually meet the goals. And also, there was a seasonal factors related to the Myanmar gas field. So if you could give us more details about those businesses. And is this a one-off profit or loss or gain, were there any of them related to any of your business sites?

I'm Head of Business Management. About the one-off cost or -- well, we did not have that much of provisioning. Well, in terms of operating profit, well, if there was an economical issues, there were some assets that we decided to exit. And there were some assets we decided to sell off, and that impacted our operating profit. An example would be the thermal power plant in Vietnam. And so we will be selling this plant at about KRW 110 billion, and that would be our operating loss. And we also have a contract with -- to sell our core motor plant in China and that will be sold at about KRW 40 billion. And also we'll be selling off a plant in Uzbekistan worth about KRW 10 billion. And so that is going to be incorporated as our operating loss. And so we will not have any special operating-related loss, but in nonoperating loss, we will have about a total of KRW 200 billion worth of loss in '25.

And Mr. Jae-Hyun, you asked for your first question about Power Generation, about -- could you be more specific about your question?

Yes, so I have a question related to Myanmar, the EV core motors (sic) [ EV Motor Core ] and Power Generation and Steel.

So I'm going to talk about power generation first. We're going to be giving you the answer related to power generation. My name is Kwang [indiscernible]. Let me provide -- try to provide you with the answers. In the winter time, there's less demand for power and also there was also increase in supply of power. And that is why the reserve increased. And so the utilization of Unit 5 and 9 are decreased and that led to a decline in SMP. So that had an impact for Power Generation business.

So Power Generation in Q4, you have operating loss. You have a deficit. You're saying that there are no special reasons for such a loss besides the ones that you have mentioned?