Posco Holdings Inc (PKX) 2003 Q3 法說會逐字稿

Welcome to the POSCO conference call hosted by Morgan Stanley. (OPERATOR INSTRUCTIONS). Now I would like to turn the conference over to your speakers, and I will be standing by for the question-and-answer session. Thank you gentlemen, you may begin.

Good afternoon. This is Jae from POSCO. I am the head of the Investor Relations team. I thank you for joining this call today. Yesterday we announced the third quarter of business results. Revenue for the first three quarters rose 23 percent compared to the same period of last year to KRW10.4 trillion. Operating profit rose by 92 percent to KRW2.3 trillion, and net profit by 106 percent to over KRW1.5 trillion during the same period.

Revenue growth was largely aided by the continued strength in steel pricing and the slight increase in our sales volume. The average contracted pricing for the third quarter continued to improve versus the previous second quarter. Operating profit margin was 19.8 percent in this quarter. The number is much higher than last year, but a slight drop from second quarter due to the cost from the employees' stock ownership program in July, and the rise in some raw material costs such as nickel.

Although there is concern about the raw material price increases, POSCO has successfully improved its mix of raw materials to reduce costs. Also the appreciation of the Korean won also makes a positive impact in reducing raw material costs, which are mostly imported. As a result, our return on equity improved to 17 percent for the first three quarters results this year.

The balance sheet also continued to strengthen as we paid down debt. And our net debt to equity ratio has fallen further to 11.1 percent, and probably will drop down below 10 percent toward the end of the year.

Now, if I can comment on some of our strategy initiatives. Firstly, POSCO's focus market remains China. We're targeting China as the main export market for POSCO products in the future. Whether it is through direct exports or through low-cost production facilities invested by POSCO, in order to streamline our operations in China, we already established a new China headquarters this year.

The newest venture into China has been a new joint venture cold rolled steel facilities with Benxi Steel. The new facility will be completed by the end of 2005, and have a capacity of 1.8 billion tons. We are also continuing to expand our existing downstream capacity in China focusing on cold rolled (indiscernible) products. We are also setting up an auto ship (ph) processing center there with annual capacity of 200,000 tons.

As you can see, our focus remains fully on the high value added products, which cater to the growing demand from China. We believe China's demand remains strong and will continue to drive global demand for steel. And POSCO is well-positioned to benefit from such growth.

Another key focus for POSCO is to enhancement of shareholders value. In order to do that we decided to buy back and to cancel 1.8 percent of the Company's shares. We are nearing the completion of this share buyback program, and we will cancel immediately upon completion. This is equivalent to 2 percent of the total outstanding numbers of shares.

In conclusion, we believe POSCO will be able to deliver strong earnings growth this year. And our strategy initiatives mentioned above will put us on a solid footing for the future. And this is my brief comments for the business results for this third quarter. And you can get more details on the presentation material we distributed by the e-mail to you already. Thank you for your taking time to join the call. And I welcome any question you may have. Thank you.

(OPERATOR INSTRUCTIONS). Daniel Altman, you may ask your question, and please state the company you represent.

It is actually Robert Cunningham (ph) from Bear Stearns. Good morning to you. I have a couple of questions. The first one is on the bond offering of the SKT (ph) shares. Is that already in your cash account? And actually, what are your cash levels at the end at the end of the quarter?

And my second question is on China. Do you have an estimate on the steel capacity in China for 2003? And do you have any expectation of growth for 2004? Thank you. (silence)

(indiscernible) Yes, we issued exchange book (ph) bonds with the (indiscernible) current holdings of the SKT by the amount of 54 billion Japanese yen, which was issued to repay the maturing (indiscernible) bonds by the amount of 51 -- 35 billion Japanese yen. So most of the amount from the EB (ph) has been used to repay the maturing (indiscernible). And at the end of third quarter, the cash balance stands around KRW2.1 trillion. So the issue of the EB has not contributed to the cash account much.

We regarded to the steel capacity in China. Actually, it is very difficult to define the exact capacity at the moment. They are expected to produce around 250 million tons of steel this year. And the operating capacity is viewed to be around 90 to 95 percent of the total capacity. So in other terms, the total capacity is estimated to be around 270 to 280 million tons. But once again, it is not clear how much would be the total (indiscernible) capacity, because they have too many steel companies. They are known to have more than 2,500 steel companies in China.

Anyway, the market concern is focused on the (indiscernible) extension of the capacity in China, with our (indiscernible) growing of the demand. There are some periods assumption for the capacity expansion in China in the future, but what I know is most of the assumption is based on the capacity expansion program by each major steel company in China, who are much ambitious, who have the ambitious capacity expansion. According to them, the capacity is scheduled to expand by double in two or three years time. But it is too much with regard to the capital constraints and some others.

For example, the China iron and the steel association released their concern for the steel industry expansion in China in the future. Namely, I mean they seem to be concerned with the shortage of the raw material for this industry, and at the same time the water resources and the developments of the infrastructure related to the physical distribution, etc., together with environment preservations.

So, yes, there should be a great potential for the capacity expansion in China, but at the same time there should be definite constraints for the expansion. And in addition, you know, China is in the planned economy by the Chinese government. The Chinese government is keen to reorganize the industry (indiscernible) the competitiveness and the efficiency. And the Chinese government seems to be keen to focus for the expansion of the quality steel capacity. So where we have a rough idea the capacity expansion should not be so fast as much as expected.

But do you have an estimate of how much capacity could expand next year? Just a rough estimate?

In China?

Yes, in China.

The demand is expected to grow by around 12 percent, 12 to 13 percent next year, and production will increase by 15 percent, roughly. (indiscernible).

Okay, thank you.

All the attention nowadays is focused in the China at the moment, but actually we don't have any exact data or the pictures (indiscernible) there. Could you be kind enough to give me more the data or the reference for these industries in China in the future? Okay. Thank you.

Thank you very much.

Does that conclude your questions, sir?

Yes, it does. Thank you.

(OPERATOR INSTRUCTIONS). Benjamin Moyer (ph), you may ask your question, and please state the company you represent.

This is Benjamin Moyer with Merrill Lynch Investment Managers. I have a question about your profitability in the third quarter versus the second quarter. If I look at your average selling price, I see there was an increase from the second quarter to the third quarter. However, your operating profit declined in an absolute terms from the second quarter to the third quarter, and your operating profit margin also declined from 22.3 percent to 19.8 percent. Can you tell me the special factors, one time, if there are any -- I think there were. But what the one time factors were that occurred in the third quarter and contributed to this decline in margin? And could you quantify the effect of those factors?

Hi, good afternoon, Mr. Moyer. Yes, definitely we had some one time expense to cause the decline of the profit margin. The main expense was the expense for the employee stock ownership program in July. The Company expensed KRW74 billion for this program. And the basic salary for this year for the employees has been negotiated to go up by 5 percent as we discussed in New York. It has been retroactive in July until the beginning of this year by the amount of KRW34 billion.

The nickel price has been stronger especially in the third quarter from around US$7,000 per ton to US$9,000, which caused the increase of the cost of the production by roughly KRW40 billion. That is the main cause of the squeeze of margins in the third quarter. But the nickel price is expected to be stronger for the remainder of this year. So I cannot say this should be the one time expense. So eliminating the one time expense, we estimate the margin for the third quarter should be around 22 percent.

Okay. Thank you. And what is your annual consumption of nickel, given what you are consuming now in the third quarter. If we annualized that, what would your consumption be per year? And do you think you can raise your price of stainless steel to recover the higher cost of nickel?

For the total, the annual consumption for nickel will be around 80,000 tons. We started to operate the new facility from April this year. But we are focusing to produce the 400 series rather than 300 series. The 400 series does not consume the nickel at all, so the original facility doesn't lead to more nickel. The annual consumption for nickel is 80,000 ton again.

And we have increased all the nickel price. We raised the domestic price by 5 percent in early September. It is not enough to be compensated the hike of the price. But if the price would get stronger, we should be serious to adjust the supply price as well. But at the same time, we have a view, the recent strength -- I mean, the strength of the nickle price is caused mainly by the speculative trading in the market. But of course, we are much concerned with the shortage of supply as well.

Okay. And you said your consumption is 80,000 tons? Is that correct?

Yes.

Okay. And what is the domestic stainless steel -- the standard product price in Korea now in won approximately?

Hold on. In September the standard hot rolled coil was priced KRW1.7 million per ton. And the cold rolled product was KRW1.8 million. While the export price for the standard hot rolled coil was 1,300, and cold rolled product was 1,350.

And just one final question here on the stainless. What is your expected sales volume of stainless steel products this year?

Mr. Moyer, the total production for the standard will be 1.5 million tons for this year.

Thank you.

The next question comes from Mr. Michael Markrider (ph). You may go ahead and please state the company you represent. Mr. Markrider, your line is open. We will proceed. Mr. Markrider, if you would like to ask a question, press one star one, or star one on your touchtone phone.

At this time there are no further questions in the queue. (OPERATOR INSTRUCTIONS). Mr. Markrider, you may go ahead.

Sorry. I lost you. Good morning, gentlemen. A couple of things. First I would like to clarify one thing. You said in the third quarter there was an ESOP of 75 billion, as well as a 34 billion retroactive? Is that correct?

Yes, correct. KRW75 billion for ESOP and 34 billion for the wage increase.

So it would actually be 800 -- the operating profit will be about KRW825 billion in the third quarter otherwise?

That's right, yes.

Could I just go through -- I went through the net debt to equity, and to find out the next net debt in the first, second, and third quarter, and found out the change of net debt. And the net debt in the first quarter, 2.7 trillion; second quarter, 1.9 trillion; third quarter, 1.3 trillion. Basically the debt is being paid down in the second quarter by 760 billion and then 600 billion in the third quarter. How are you actually accomplishing this? Is it from working capital or is that pure free cash flow?

With the free cash flow.

So if you are generating 760 and 600 billion won, your run rate of free cash flow is nearly 3 trillion a year?

That's right. Yes, yes, go on.

Okay. So 3 trillion. Now a further question. Could you just clarify for me what the Capex will be for this year and next year?

Our Capex for this year will be around KRW1.5 trillion, mainly for the maintenance. For next year we're making the business plan for next year at the present time. But the Capex will be similar with that of this year as well. We are starting the transfer, the investment in China, at the moment, as you well know. This will cause some increase of the Capex for next year. Otherwise the Capex will be similar with this one this year. But I cannot -- I mean indicate the exact amount for the investment size toward China for next year, at the present.

I'm a little puzzled, because if you are generating nearly 3 trillion of free cash flow, and your profits are really -- (indiscernible) the non-cash items, you are going to be somewhere around 2.2 trillion for this year. How do you get that extra 800 billion of free cash flow? Where does that come from?

All right. The cash flow in terms of the capital for this year is estimated to be KRW4.5 trillion, and Capex will be around KRW1.5 trillion. So the free cash flow after the Capex will be around KRW3 trillion. (multiple speakers). And the KRW1.2 trillion will be used to float a redemption of the maturing debt during this year. And probably the cash dividend will reach to 5 to KRW600 billion, which is not the (indiscernible) yet.

And at the same time, we should (indiscernible) the corporate tax by around KRW 700 billion during the year. And after that, we still have around KRW500 billion of the free cash, which will cause increase of the cash accounts at the end of this year.

Thank you. Could I ask you one final question? You have 9.7 percent of your shares outstanding as treasuries, 8.8 million shares at 91 million. How do you deal with that in terms of cancellation, because most analysts using the 91 million to get to be market cap?

We cancelled two times during the last two years by 3 percent each. Still we have -- we're holding 8.8 million shares in our treasury accounts. The further disposal for the current holding should be discussed and fixed by the BOD (ph). But the top management confirmed several times the Company will not sell it back, or the reissue of the treasury shares, at any circumstance. So you can eliminate the numbers of the current holding from the total outstanding for the ESOP calculation.

Thank you very much.

The next question comes from Benjamin Moyer. You may go ahead with your question, sir, and please state the company you represent.

Merrill Lynch Investment Managers. Thanks again. I just wanted to get the share count. In your handout, your quarterly handout, you don't show the total number of shares outstanding. Can you give me the number of shares outstanding at the end of the third quarter and the second quarter? And also the number of shares in treasury at the end of the third quarter and the end of the second quarter?

Both change for the number of shares from second to third quarter, the total outstanding -- the total issue of the shares at the end of second quarter was 90,781,795 shares. And the total outstanding of the treasury is 8,776,510 shares.

Okay. And those are both end of second quarter numbers?

Yes.

Okay. And third quarter?

Same numbers of shares.

The same number for both?

Yes.

And then finally, if you repurchase and cancel what you plan to do for this year, let me see, what will we would have at the end of the year then for shares outstanding and treasury? Or maybe you could just tell me, how many more shares are you going to repurchase between the end of the third quarter and the end of the year?

We started to buy the shares, and we will complete the buy back program within three months. The target number is 1,815,640 shares, probably before the end of October. On the completion, we will retire immediately. Then the total number of shares should be down by this amount. So the number will be around (indiscernible) million shares.

Okay. Great. And the shares held in treasury at the end of the third quarter, they will remain in treasury at the end of year?

Yes, that's right.

Okay. Thank you.

Thank you. At this time there are no further questions. (OPERATOR INSTRUCTIONS). It appears there are no further questions. I will now turn the call back over to your speakers for any concluding remarks.

Thank you very much for your joining this call. Probably this is very late Thursday afternoon in New York. This is very good morning in Seoul, Friday morning. Thank you again for your interest. We will be in New York probably in mid-November. I hope I can meet you face-to-face at that time. Thank you again. Bye now.

Thank you. And this concludes the the conference call. Once again, on behalf of Morgan Stanley and POSCO, we would like to thank you all for your participation. You may disconnect at this time.