Ladies and gentlemen, we will now begin the POSCO Holdings Earnings Call for the Second Quarter of 2022. For today's conference call, you will first hear the earnings presentation from POSCO Holdings, and then we will move onto a Question-and-Answer Session with the participant's presence. [Operator Instructions] We will now like to hear the presentation from the company.

Good afternoon. I am Chon Jung-Son, CFO of POSCO Holdings. I would like to take this opportunity to thank our investors for your support and interest for POSCO Holdings. During the second quarter, with the war in Ukraine continuing, the concern for inflation has become a reality, accelerating fiscal uncertainties, including sharp increases in interest rates by major nations. The spike in raw material prices, including iron ore and coal did lead to difficulties in production and sales. However, thanks to proactive responses in pricing and efforts to achieve cost cuts, POSCO has recorded a revenue of KRW23 trillion and operating profit of KRW2.1 trillion based on our consolidated business performance. The Steel business achieved a sound performance with higher revenue and operating profit Q-o-Q, thanks to increase in sales prices and efforts to achieve cost cuts despite the raw material cost and decrease in production volume due to the revamping of key facilities. The Green Infrastructure and Green Materials and Energy businesses saw an increase of over KRW2 trillion in revenues Q-o-Q, thanks to improvements in the revenues and operating profits of key units such as POSCO International, POSCO E&C and POSCO Chemical. The Rechargeable Battery business, one of the seven key businesses completed the construction of PLC Poland for recycling to produce black mass from battery scrap. We have also made an equity investment in ProLogium, a Taiwanese company, that produces hybrid solid-state batteries and acquired Tera Technos, which holds technologies to produce silicon anoids in an effort to preemptively secure securities for next-generation materials for batteries. Increase in interest rates by key nations is also expected for the third quarter, uncertainties will continue to increase compared to the second quarter with the respreading of COVID-19. The steel industry plans to upgrade the product portfolio centered around markets…

We will now go into Q&A. [Operator Instructions] The first question is from Hyundai. We have Pat Canon.

Good afternoon. I am Pat Canon. Thank you very much for this opportunity. I have three questions. The first question is concerning the market, during the first half, it seems that the earnings are quite sound, but the market is interested in the second half. I think everyone's quite interested in the second half. If we take a look at shipbuilding, automotive fields and home appliances, how are the price negotiations for the second half for various industries. Furthermore, in China, it seems that the demand and prices may improve in China, but what about your view at POSCO Holdings concerning this point? And let's talk about lithium. Early July, there was the rechargeable battery market conference, which was very helpful. So I hope that we will have more opportunities for communication like this. It seems that the lithium value has not been reflected in the stock prices thus far, but I do believe that lithium will be very helpful in increasing the corporate value of POSCO Holdings in the future. So in our relationship with POSCO Holdings, I think we need to consider the value of lithium. So related to this, what are your investment plans for lithium? And will you be sourcing this from your own capital? Or will you be doing debt financing? And because the profitability is very good, EBITDA, you mentioned could be 70%. Well, for the Argentine subsidiary, the profits from Argentina, will we be able to bring a portion of their profits? Or is there a contract concerning this point? And do you have any responses related to this point. The third question is, despite the very good earnings, it seems that we have a valuation discount. And one of the reasons for this discount is because of the lower ROE. That's what we believe. Compared to the past, we can see that despite the same profit, the ROE seems to be lower compared to the past. And so when we think about lithium or new investments for growth such as investments into next-generation rechargeable battery materials. So maybe we can think about buying our own shares or having dividends, so not any ad hoc measures, but maybe some predictable constant policies that you can show the market. And so do you have any plans for such policies for the future? Thank you for your question.

Concerning the first question, which was about the forecast for the second half. What are the demand predictions and also the price negotiations that's related to steel. So maybe we can have Mr. Yong answering to that, and you can add your predictions for the Chinese market as well.

I am Yong Kim-Jung [ph] in charge of Marketing Strategy at POSCO, so forecast for the second half as well as price negotiations with the partners concerning the market for the second half. As you're well aware, the demand such as the automotive market is expected to normalize, and that will pivot on the supply chain disruptions, which we believe will continue into the second half, and it seems that interest rates are being raised around the world, and this will directly and indirectly impact steel market, and we believe that unlike expectations, the recovery of the steel market will be slower than expected. When the President Chi confirms its third term through the official meeting in China, I believe that there will be additional stimulus packages to grow the economy in commemoration of the third term. In terms of the supply, it seems that the raw material prices have risen. And so the sale prices is at a breakeven point. And so it seems that the production volume may be adjusted, especially for China 530 million crude steel was produced and so maybe the production will be adjusted. And so in the second half, the production may be lowered intentionally. Concerning the second question, price negotiations with the customers Well, currently, we need to make sure that there is stable supply. And so that is our focus. We also need to focus on changes in the raw material prices as well as the steel prices. So we will take the market into consideration to conduct the price negotiations for the third quarter as well as the second half. Negotiations are ongoing. The negotiations will be completed in phases, depending on the order schedules. And so it's difficult to give you a direct answer. But if I may roughly talk…

Next, we love to hear from Lee Hansen of Yuanta Securities.

My name is Lee Hansen of Yuanta Securities. I have about three questions that I would like to ask you. First, on the steel business on raw materials, in particular for Australian exports, it's about $200 per tonne. And for raw crude steel, it's about $100 per tonne. If we take a look at the second half guidance, many of the steel manufacturers production capacity is set to increase. However, China's production is set to decrease. So -- do you believe that the steel ore prices would go down compared to now? Or how do you consider these ore prices to fluctuate down the road? I would like to ask you that? And also for cooking oil as well, the prices have summited but with China because of their given policies, perhaps the cooking oil prices could also weaken in the second half of this year. I would like to ask you more about your projections for the second half of this year for iron ore, steel ore and cooking oil prices. My second question is on the fact that the performance of the overseas subsidiaries have been slightly different. We've seen some of these subsidiaries do well in the second quarter. But from what I've seen from April to May, slab in Southeast Asia, the prices have fluctuated have gone down. So from your point of view, I know that this has been reported in the news with Russian steel coming into the market. So this is low-priced steel coming into the market? And do you think that this is going to lead to fumed prices of steel out of Southeast Asian markets? Because I understand that the steel business has been doing well to the second quarter of this year, but how do you project the performance to be in the second half of this year? My last question is on what we've heard from POSCO International and on yesterday's news, the merger that has been broadcasted. So I understand that this has been disclosed to the official authorities. The POSCO Holdings have anything to say on the proposed merger with POSCO International. And if this merger is being kept under review, what are some of the conditions that you are currently reviewing for the proposed merger?

Thank you for the question. First, on ore and cooking coal prices, projections for the second half of this year, we first like to hear from San of PASCO Raw Materials office. And then the overseas subsidiaries' performance of the second half of this year, whether they will maintain levels of the first half or whether they will fluctuate or perhaps we like to hear from Kim YongJung of the steel business team. we like to hear from Mr. Kim on price outlook. And I would like to respond to the third last question. With the Energy and International merger, yes, I understand that this has been reported in the media. This is very sensitive information. We're still in the process of internally reviewing the different information. We were alarmed that this was made public by the news report Holdings after we switched to holdings structure, our big objective is that we're going to make our portfolio more robust such as pursuing new businesses and also solidify our existing businesses and try to create synergies among the existing businesses, and this is also part of our efforts to try to create a more robust portfolio. This is what a holdings company should do, holding company's job is to try to make our overall portfolio more robust. And that is why we are reviewing a possible international and energy merger of the POSCO subsidiaries. We're still at the internal review stage after the internal review has been conducted, the BOD will vote on this proposed merger. And after that votes, we can disclose more information and details regarding the merger and also some quantitative effects that we would project to see out of the merger. But again, we're still in the review stage of this hospital merger and our official decision-making has not been conducted, so it is not wise for me to comment on this matter as of today. So now I would like to hear from Hal Chan with the raw materials office.

Hello, my name is Hal Chan of the raw materials office one of POSCO. Let me tell you about the price projections for oil. China is a steel or prices have gone down. The margins have narrowed, and this has led to a decreased utilization rates of the BS. There's also seasonal effect as well because we've entered the slow season in the second quarter of this year. So we have seen a price plummet of the steel ore, and we expect to see this continue in the third quarter of this year. We believe that we would see fluctuations around $90 per tonne. However, going into the fourth quarter of this year, we believe that major or producing countries would go into the rainy season and many steel companies in China have -- we'll try to move into beefing up supply or increasing production. So or slowing down production. So we believe that the prices will fluctuate in the fourth quarter of this year. Next on cooking oil. Again, similarly, in the second half of this year, the industry will shrink. The demand will fall. The supply once we will move out of the rainy season might expand. So we believe that it will come very stably managed at around mid-$200 in August. Europe will have strong sanctions against Russian Steel, and this would imply that there will be uncertainties in the market conditions in the future. And there's been discussions on Australian cooking oil in China and of Australian cooking oil is imported into China, given the supply and demand balance, the prices will likely rebound.

My name is Kim YongJung of the steel business team. You asked about overseas subsidiary PPE Yes, it has been impacted by the global market conditions as well. And the sales price has gone down particularly regarding slab. The raw materials have gone down and product prices have gone down as well. For PPE, slab has been minimized, and we're trying to try to come up with a strategy to change around our sales mix. So we've tried to sell most of these with plates. But with P-JKSS, we have allow for 150 tonnes to be processed by PPE. So compared to slab, we have switched to HR and plates to try to increase our production capacity. In the summer season, the Indonesian market would be blocked, so to speak, because of Chinese exports. So we don't believe that the plummet will be too severe. However, it will not be at the same level of the first half. That is certain.

The next question is from Hai Investment, Mr. Kim SungYung. Your questions please.

I am Kim YungSung. I have one question. During value day, you talked about the lithium price, and it was great to see here your forecast. And concerning the nickel prices, I would like to ask you about your forecast, especially because we have seen that there is a possibility of producing nickel for your batteries. And so it seems that there could be excessive supply. So concerning this point as well as the flatter market. So taking all of this into consideration, what are your forecasts for future nickel prices.

I am Lee Kyung-Sub in charge of the lithium battery materials business. If we take a look at nickel, there was the issue in the market, and this issue has been resolved, and it went below $20,000, but now it's recovered to the $20,000 range. And so of course, there are issues with the uncertainties in the economy, but it seems that there's not a drop in demand. It seems that there is an increase in nickel supply from some aspects, and so it's stabilizing at a lower price, that is true. But if we take a look at the inventory, there is an inventory of about KRW60,000, which is lower than the 100,000 tons that we had in the past. And so it seems that there is no more pressure to lower the prices. And if we take a look at NPI of China, their production prices is at KRW18,000 or KRW19,000. And so in the West, they seem to think that KRW20,000 is probably the stable prices for nickel. But for China, they always think it's around the $18,000 to $19,000 range. But if we take a look at nickel for battery materials, the demand is increasing steadily. So the prices are adjusting, but -- and we believe that it will be maintained at the $20,000 range. Thank you.

Next, we like to hear from Tong SungYang of NH Investment Securities.

Hello. Thank you very much for this opportunity. I'd like to talk about the steel and the market conditions for running China, in particular. You are thinking of possible stimulus and the Chinese economy in the second half. But right now, if you look at the speed at which the steel prices have gone down and the speed at which the product prices have gone down as well as China's plans for CapEx and investment stimulus, et cetera. And yes, there is some recovery demand in automobiles, but if we look at the real estate and property market, for example, in China, we have yet to see a turnaround in those market sectors. And there is also some provincial state government debt that has been issued, but they have not been executed right now. In China, so some of the municipal bonds have not been executed. So can you tell us a little bit more about how you expect to see market conditions in China play out in the second half of this year. And next, on lithium, I understand that the Lithium business is bright, has a bright outlook. But can you possibly think about speeding up the investments? Because you said that the annual budget is about KRW1.5 trillion. However, strategically, the listing business can contribute to your corporate value overall. Do you have plans to speed up the investment and possibly expand the size of your investment in the listing business? And then on energy, for POSCO Energy, the quarterly earnings has been weak because of a seasonal factor. But if we take a look at the long-term outlook for new and renewable energies, perhaps that could also be a long-term growth engine for POSCO Energy at large? Do you have plans to expand into the new and renewable energy sector? And just lastly, I'm sorry, one final question. Many shipbuilding companies have a huge labor shortage issues. I was wondering if that is something that steel companies also have or if you do not have a labor shortage issue at POSCO?

Thank you very much. In China, China's market conditions I think that some of the analysts are a little bit more pessimistic regarding China's market outlook in the second half of this year. So perhaps we can hear more from that. And also on Lithium business, I know that we agree that the Lithium business is very prospective for us, and we believe that we should speed up the investment for lithium buds. If that is the case, whether it be lithium ore we need to get access of this. But for the brine lithium in Argentina, we want to very aggressive in our investments. And for lithium ore, it's important for us to secure the supply for the lithium because with the supply that we have, the KwangYoung PASCO Pilbara lithium solution is the only recipient of this current supply because it is quite tight. And so we would have to work really hard on gaining access to lithium ore. Next on energy, I think that we can turn to Kim YongSung of PASCO Energy, who can respond to this question later on. The other question was on labor shortage regarding steel workers in the future. Can anyone respond to this question? Yes. Maybe Mr. Yong can respond to this as well. So Mr. Yong can respond to the two questions. My name is Anton of the Marketing Strategy Office. I know that we are not very optimistic when it comes to the Chinese market outlook. There are some areas where we are pessimistic, but I tried to highlight the optimistic areas. But again, if I were to reiterate, the Chinese government has announced a growth rate of 0.4%. But if we look into this deeper for Shanghai it's minus 13%. And for Beijing, it's minus 2.8%. So this…

Hello, my name is Kim Sang of POSCO Energy. I'm at the Corporate Planning and Finance Office. You asked about the new renewable energy business pursued by PASCO Energy, our new renewable energy capacity includes Xinnan. So it's about 82 megawatts of capacity. And we are currently in preparation for offshore wind and offshore wind, we are currently preparing about 300 megawatts of capacity. As you know, the new and renewable energy sector does not have guaranteed profitability as of yet. We are being very conservative when it comes to making a profitability because we also have to look at POSCO Group. REV as of large. And so we want to expand on profitability while also contributing to our overall group ESG management. Thank you.

The next question is from DBS. And the question will be by Kin Young. Please proceed with your questions.

Good afternoon. Can you hear me? Yes, we can hear you. I have a simple question concerning the Chinese market. Recently, there is the mortgage by cost that is happening in China. For example, they have bought apartments, but it's not being built properly. And recently in the news, we have seen that various suppliers for these real estate. They have not been paid properly. And so we can see that the developers in China are going through difficulties. And so some of the developers are actually going bankrupt. And there are protests related to these issues. Well, Mr. Chon Jung-Son, well, we can't really hear you well. I think the line is not good.

So can you hear me better?

Yes, it's much better.

So recently, in China, we have seen mortgage for costs and the developers the companies that are supplying to the developers are also going through cash flows and so they are going through various difficulties and there are also individuals who are protesting because they have purchased apartment buildings, but they are seeing that it's not being constructed properly. And so some people say that this could be the biggest political risk for Xi Jinping. Of course, the automotive production volume, especially EVs in China, their numbers are good currently, but over 50% of the steel is used for construction, especially the real estate market and the infrastructure. So there are many bonds that have been issued by the local governments, but they have not been executed. And so -- in the end, all of this will build up to lower the demand for iron ore and also that will trigger the decrease in steel prices. And so we are very concerned about this. So the Xi Jinping government, they could use stimulus packages that could boost the steel industry. That's been talked about since the first half of this year. But if we take a look at the realistic numbers, the numbers seem quite weak. And so is it correct to have the perspective that there will be increased demand in the Chinese market? And this is my question. having said all of that, well, if we take a look at the steel prices, it's quite strong compared to the international prices. So if we take a look at the prices in China and the global benchmarking prices, it seems that the prices internationally has dropped to about $600. But in Korea, it's still being maintained at $800. And so we can see that the POSCO's HR oil is about $800 in China, it's about $500 to $550. And so there is that big price gap. Of course, the price gap could be due to various issues is the supply chain but these price gaps have been maintained very well thus far. But is this price gap sustainable in the future? China is a country that's very close by. And China, they usually dump their materials into China -- into Korea when there is a price gap, but why aren't they coming into the Korean market? Will this price gap be maintained in the future? Will it be sustainable in the future? And what is the gap between the domestic prices and the export prices? And so my question mostly focuses on the market as well as the market forecast. Thank you very much.

Well, concerning the second half. So what are the market forecasts?

I think many people are very interested in this, probably because there are so many uncertainties. And when we have uncertainties, we could be as pessimistic as we wish. We could think about the market collapse scenario. And in these uncertainties, we could be as positive as we would like to be. We could take a look at some upside. And maybe that could offset some of our pessimism. So maybe we can go to Mr. Om [ph].

Well, I am Andy Chang of POSCO Marketing Strategy Office. If we take a look at the Korean prices, the biggest variable that impacts the price is the Chinese price. And I think about three analysts have already asked this question. As I have already mentioned, the market is good, and we're not saying that there are as many upsides, but we believe that we have bottomed out. And so that's why we believe that it's time to go back up. And so in other words, will we see a recovery in the fourth quarter. No one knows for sure. But if we take a look at the distributors in China, when we communicate with them and network with them, 2 to 3 out of 10 talked about how there will be a prolonged situation. But 5 to 6 out of 10, of course, it will reflect our hope as well, but they believe that there will be a recovery at year-end. And as you have mentioned, our steel is at $800. But internationally, it's about $600, $500 range in China, but the volume is not that high. This is because if we take a look at China, the Chinese government has announced their net sale policies. And so they are lowering their export volume for these primary goods. And so that actually is a big variable. And in Korea, we don't necessarily only focus on price anymore because there is renewed understanding and awareness of the issue of safety. I'm not a real estate expert, but what you have mentioned is quite true. But if we take a look at those in real estate and the Chinese people, it seems that they there is a buildup of complaints against the government. And so there has not been a big achievement through the stimulus packages in the first half. And so we believe that there will be additional stimulus in the second half because of these reasons.

Thank you very much. This brings us to the end of the Q&A session.

Thank you very much for joining us. Thank you to the investors and analysts who have joined us for the second quarter earnings call. This brings us to the end of today's call. Thank you very much.