Posco Holdings Inc (PKX) 2004 Q1 法說會逐字稿

Welcome to the Merrill Lynch conference call. (OPERATOR INSTRUCTIONS) Now I would like to turn the call over to Ms. Jennie Lee (ph). And I will be standing by for the question-and-answer session. Thank you, madam, you may begin.

Thank you everybody for joining us. We have Mr. Dong-Hee Lee, Chief Financial and Accounting Officer of POSCO; Mr. Kwang-Woong Choi (ph), head of Finance Department; and Mr. Yong-Woon Kim (ph), head of IR team. And I will hand this over to the POSCO management.

Good morning and good afternoon and good evening. This is Dong-Hee Lee, the Chief Financial and Accounting Officer of POSCO. I would like to thank all of you for joining this call today. As some of you may have already gone through our first quarter earnings release, the results are outstanding.

The first quarter saw revenue rise by 31.4 percent to KRW4.3 trillion compared to the same period of 2003. Operating profit rose by 30.2 percent to more than KRW1 trillion, and net profit by 53.5 percent to KRW720 billion. The first quarter's revenue growth was largely attributable to the continued strength in steel price and the slight increase in our sales volume. As a result, the operating profit margin and EBITDA margin recorded at 23.3 -- 36.5 (ph) percent and 32.0 (ph) respectively. Net debt to equity ran from 24.2 percent in the first quarter of 2003 to 7.2 percent this quarter. ROE also improved from 16.3 percent to 21.9 percent during the same period.

Now if I may shift to the copy (ph) of the steel business environment, I would like to emphasize the global steel industry is in the midst of a steel shortage. The strong demand growth from China and unprecedented strong domestic demand for steel together with the supply-sided discipline (ph) have maintained and will maintain steel price at higher levels for us to achieve a stronger return for the remainder of the year. In this regard, we have officially announced that POSCO will raise our domestic steel price by approximately 20 percent across the board effective April 19, 2004.

Checking out the cost side, we have been successful in securing adequate amount of (indiscernible) through expanding long-term contracts with the commodity providers despite flagging (ph) raw material shortage among steel producers around the globe.

So on the operation side of POSCO, we have made some strategic moves to put our business in high value added product. We commenced the building the number fifth (ph) CGL plant, which is called cold galvanized line in February this year as part of our continued effort to expand our business in high value added product. We also plan to commence building the number six CGL plant in November this year. Once completed, these two plants will add 850,000 pounds of auto steel sheet to our current capacity, catering to the growing demand for auto steel sheet around the globe. In addition, we have strategically recognized and functionally integrated out (ph) the stainless division in line with the aforementioned strategic moves.

Of course, we will continue to focus on enhanced shareholder value and improving corporate governance. This is evidenced by old (ph) approved agenda of the 36th annual meeting of the shareholders. Just to mention a few, we have increased the number of outside Directors, introduced cumulative voting, and repealed the convertible preferred stock clause. Moreover (ph), we've approved the nominal dividend rate for the fiscal year 2003 towards unprecedented 120 percent.

Finally, we have revised our business plan in March, as we do on a quarterly basis, incorporating old, new economic factors as we are challenged (ph) in the steel cycle. Our newly revised production and the sales volume are 29.4 million pounds and 28.2 million pounds, respectively. All that (ph) we have also revised upward our (indiscernible) and operating incomes to KRW17.4 trillion and KRW3.63, respectively. Please note that these numbers are very conservative numbers, not reflecting the 20 percent across-the-board increase of steel price mentioned clearly in this presentation.

In conclusion, on the veil (ph) of the solid first quarter result and continued strength of the steel cycle, we're quite confident that we'll achieve strong earnings for the 2004. And the strategic initiatives mentioned above will put us on solid footing for the future. Thanks once again for taking the time to join this call. Thank you very much.

If you have any questions, please begin.

(OPERATOR INSTRUCTIONS). Daniel Altman.

It is Daniel from Bear Stearns. Well, first of all congratulations on this new guidance and pricing info. I wanted to just clarify a comment that you just made that -- how much of your projected price increase, the $70 price increase, is included in your new guidance? I'm not sure I understood the comment that you made.

And also, looking at your shipments for this year, I'm wondering if you have any room to increase your volumes on a year-over-year basis? Thank you.

Daniel, good afternoon. This is Choi (ph). Whereas mentioned by Mr. Lee the revised annual plan doesn't reflect the recent price increase. Actually in this revised -- the plan has been drafted in mid-March, well before the recent price hike. So the numbers such as the revenue, the incomes, should be much better than the numbers commented this morning, -- this afternoon.

And we have been increasing the actual capacity and the final volume of the production marginally during the last few years with the rationalization and the deep up-linking (ph) of the facilities. We have the definite target to increase the actual production up to 32 million tons until 2007. We doubt any material addition of the capacity. So you can see that the volume will increase marginally, probably by around half a million tons each year until 2007.

I noticed your guidance for this year was sales volumes of 28.5 -- I am sorry, 28.2 million tons. That would be in line with '03. And you actually have production (multiple speakers).

No, No, Daniel, I should clarify the numbers. The sales volume last year was 28.2 million tons. But it included the semifinished product there. But this number for this year, for 28.2 million tons doesn't include those things, the semi product. It is the final product.

Jack Frank (ph).

Jack Frank from Ducane (ph) Capital. The question I had was if you assume a $70 a ton increase on all your steel products, is that all going straight to the bottom line, or is there going to be some raw material increases that you're seeing?

And then secondly, I noticed your stainless production is up about 60 percent. Is this mainly being shipped to China? Or where is this product going?

The incremental increase cost with the (ph) recent price hike will go down to the bottom line directly. Of course, the major increase of the cost, such as the material cost, has been reflected in the previous projection. But there should be some other consideration, such as the price fluctuation of the nickel for the stainless and the currency movement. But roughly speaking, the incremental increase of the revenue cost with the price hike will go down directly (ph).

The majority of it should, you're saying?

Yes, that's right. We started the -- we started operation of the number three stainless steel, which has been completed in the first half of last year. So the stainless production has been increased quite a lot. Most of all the sales will be for the domestic sales for reorders in the local market. And we will increase marginally through the sales to the joint venture in China.

So most of this product is going to meet the Chinese demand?

Well, partly, not mostly. But, yes, partly for the Chinese sales.

And then do you have nickel pass-through on that stainless steel in the contracts?

Yes, in principle, yes.

At this time, there are no further questions in the queue. (OPERATOR INSTRUCTIONS). Judd Nussbaum (ph).

I am calling from Redwood Capital. I just had a quick question. Looking at your results in the month of March, I know it is always dangerous to just look at one month. But just kind of taking the quarterly results and subtracting the results you posted on our website for January and February, it looks like operating profit trended down sequentially and was flat year-over-year in spite of higher average prices, a better product mix, more production. And I was just trying to reconcile that and understand what had happened or whether it was just an accounting issue?

As you pointed out, the sales volume and the product mix has been increased during the period. But so it should be constant, the improvement for the margin, during the period. But there has been sharper fluctuation of the nickel price. So that should be the only one reason for -- to deteriorate the operating margin in March especially.

And so is that -- would you attribute -- it looks like operating margins went from a year ago 22.8 percent to 17.8 percent. So would you basically attribute that entire 500-basis-point decline to just a lag in pricing -- passing through nickel costs? Were there any other major cost items that went up (multiple speakers)

No, there should be other major costs to the deteriorated margin except the nickel price, differently.

There is not anything else?

No.

Okay, so then I guess we shouldn't be overly concerned about the trending downward throughout the course of the first quarter?

Yes, that's right.

As a sign of what's to come --

And (multiple speakers) recently we see the nickel price has been stabilized to go -- head down a little bit from 16,000 to 14,000 bucks these days (ph).

What is -- just the last question is what is the actual nickel pass-through provision that you typically have with your stainless?

We assume that price -- nickel price will be around 15 K all through the year. But as I have said, it has been stabilized already to be around 14,000. So we can see the margin for the sales of this pen (ph) is improving a little bit already.

Sherman Chao (ph).

With Impala Asset Management. I'm kind of curious as far as your long-term investment plans. You mentioned that you expect to be at 32 million tons by the end of 2007. But your balance sheet clearly will allow you to be much larger, if you choose to do so. So I'm kind of curious how you think about -- how much capital do you think you will be deploying, where and in what particular products? Thank you.

We drafted a medium-term (ph) business plan for coming five years' time. The main focus is to make another big cross (ph) after the completion of the local facility steel 92. As I have said, we have designed capacity around 28 million tons in local market at the moment here. But we have the definite target to improve the actual capacity to 32 million tons. And we will expand the production base in overseas markets, probably in neighboring countries like China, India, and the Southeast Asia. That is the main idea for the second growth of the Company.

To achieve this target, we have the Capex target to be around KRW13 trillion for coming five years' time, of which roughly 80 percent is for the domestic investment and 15 percent is for the overseas investment to have the 10 billion (ph) tons of the capacity. 80 percent of the capacity for the domestic investment includes the annual capacity for the maintenance. As you well know, POSCO used to spend around KRW1.2 to KRW1.5 trillion each year over the last few years for the maintenance, to maintain the facilities as efficient as possible. That should be -- go on.

So including this amount for the maintenance, we will spend around KRW2.1 trillion each year for the domestic -- the investment and maintenance. And which will result in the marginal capacity up to 32 million tons. But at the same time, we'd like to improve the product mix to expand the production for these so-called strategic items, mainly for the high value products such as the auto rolled (ph) sheet, high-quality API, and others.

So as for the stainless steel we produced 2.5 million tons of the stainless sheet last year, which will -- which is targeted to improve KRW4.5 trillion in the year of 2007. And roughly speaking, the operating margin last year for the cable (ph) steel in average was just above 20 percent. But the automobile, the margin for the automotive sheet was much higher than 30 percent. So we will focus to improve the production of high value added product during the period.

So including the improvement of the product mix and marginal -- the improvement of the volume, we will spend around 8 percent of the total Capex for coming five years' time. And as I mentioned, we will be keen to find out the growth opportunity in the neighboring countries during the period.

If I could follow up, at this present time do you think that you could accelerate your plans, or are you finding it difficult to put your capital to work as quickly as you would like it?

You mean for the overseas investment?

Both domestic and overseas.

Well, for the domestic it is going on as scheduled. But for the overseas investment, of course that should depend on the various environments country by country. As you see, China is offering lots of the opportunities. At the same time, there should be some potential risks as well. We see the Street guidelines -- I mean the guidelines for the investment by the central government in China early this year, which can defer the timing of the investment by POSCO, for example.

And from what you have seen so far from China, is that going to alter how much you may be spending this year and next year, or it will be in the outer (ph) years?

Well, it depends. As you well know, before our business plan, we have been scheduled to spend KRW370 billion for this year for the overseas investment, and another KRW450 billion for next year, and around KRW500 billion for the overseas investment for the years to come. But we cannot identify which is for China or India and how much is for any specialty (ph) product at the moment. We would like to evaluate the potential risks before the final decision for the spending money.

Benjamin Moyer (ph). Mr. Moyer, please go ahead with your question. This is the operator. Do I have Benjamin Moyer on line? Hello, Mr. Moyer?

I'm going to go ahead to the next question. (OPERATOR INSTRUCTIONS). The next question comes from Mr. Peter Uno (ph).

Praesidium (ph) Investment Management. I have three questions, and I apologize -- I think I'm going to make you repeat one of your answers. But how much of your stainless steel production gets shipped to China, is my first question?

My second question is over the last couple of months, February, March, and April, have you seen any increase or decrease in Chinese demand for stainless steel?

And my third question is you obviously have, I guess, a price forecast for nickel for the remainder of the year. How are your inventories of nickel right now compared to a normal period? Are they higher or lower? Thank you.

We sold 57,000 tons in January, I mean (indiscernible) to China in January -- 57,000 tons, and 61,000 in February and 65,000 tons in March. In total, it is 185,000 tons in China. As you see, the sales have been increasing consistently during the recent months. And we have noticed a definite strong demand for the stainless from China.

Last year, we sold 530,000 tons of stainless steel toward China. And we expect the volume will be more than that over last year, for the year of 2004.

I'm sorry, I don't have the exact number for the inventory of the nickel at the moment. But as you well know, it's very important for the steelmakers to reserve the level of the inventory for the kirometry (ph) at the moment here. And what I know is that POSCO has the comfortable level of inventory for the kirometry at this stage.

Jack Frank. Mr. Frank has withdrawn from the queue. Our next question comes from Barry Haines (ph).

Sage Asset Management. I wonder if you could tell us what percentage of the 28.2 million tons approximately are automotive, stainless, and other higher-value steels where you're getting the better margin? And then when you finish your five-year plan and you get to the 32 million tons, I think you mentioned that you wanted to further improve the mix. What percentage would it get to at the end of the plan? Thank you.

The portion of the strategic items to the total sales in the year 2003 was 11.7 percent. And we will improve it to 20.6 percent of the total sales in the year 2007.

Daniel Altman.

I'll just ask a few follow-up questions. I haven't been able to find a full financial statement, so if I could just ask you to fill in some blanks. First of all, if you can tell us what Capex was in the first quarter -- also, what the net debt figure was in the first quarter? And the price of stainless steel products also, both domestic and export in the first quarter?

And I also wanted to ask you on the topic again of China if you are perceiving any slowdown? I know you made some comments a few minutes ago, but we're seeing more and more talk in the press about efforts to slow down demand. Is that in anyway reflected in your projections for China? Maybe you could kind of combine that with a comment on what you think maybe the worst-case scenario that the Company sees right now, obviously it would be (ph) steel prices? Thanks.

Daniel, I'm sorry -- I don't have the Capex for the first quarter at the moment. I will send it to you by e-mail after this call. Is that okay for you?

Okay, thanks.

That has been -- number of the net debt is not yet available at the moment as well. But what I have is the net debt to equity of around 7.8 percent at the end of the first quarter.

The stainless steel (multiple speakers) (Korean language) (indiscernible) for the domestic sales is around 2002 hundred (ph) U.S. dollars, while the export price is around US$2,000 presently. And where the Chinese demand for steel is said to be sluggish a little bit, but it is not (indiscernible) not to deteriorate the price at the moment here. We have noticed the weaker cones (ph) for the steel price in the middle of the first quarter. But after the correction -- after the correction, the price hasn't (ph) jumped again to the previous level -- billed (ph) to the end of the first quarter.

Together with the somewhat the weaker demand, we noticed the production has been controlled with straight investment guidelines by the Chinese government in the first quarter, as well. So I can say the balance for the supply and the demand has been well-balanced at the present. I don't think any significant fluctuation of the balance for the time being. So we have the view the steel price, regional price, will be maintained or be heading upward throughout all the year, mainly driven by the tight supply in China.

After a surprising growth of demand during the few years, there should be some sluggishness in the growth or the demand in terms of the growth rate in China. But it does not mean the Chinese demand is heading down from now on. And given the constraint on the supply side caused by the strict policy by the government and with a tighter supply of the raw material, together with the poor intra (ph) and shortage of water supply, the balance will be tight with the 40 to 50 million tons of shortage of supply of steel in China for this year, which will support the strong price throughout the year. That is our view.

And you show -- on page 15 of your presentation, you show that the hot rolled price in the export market is 470 to China. But you also say that you are selling above 500 on average. How do you reconcile that number? Are you selling higher -- is it to Japan or Southeast Asia? Where are you getting a higher number for it to average over 500?

The spot price in China or the other places in Southeast Asia jumped to over 500. But also our sales is on a contract basis, and the recent price for the contractor -- the export stands around 470, 480, especially toward China. So I can say the price -- the normal price, the regional price is 474 hot rolled core (ph).

Michael Marksbrother (ph).

I'm a private investor. I have a very simple question to ask you please. The average sales price is going to increase by 20 percent. In a normalized basis, say in May, what is the cost of goods sold? What will be the increase of that cost to you as a percentage?

We finalized the price negotiation for the steel raw (ph) material recently. The price for the iron ore jumped up by 19 percent from head of last year. And it was a 23 percent increase for the coal from last year. And the new price will be applicable from April, which will be effective on the cost side probably in one month time, given the transportation time. And another cause of the increase of cost should be the price for the nickel, which has been quite (indiscernible) recently.

Cost for the raw material accounts for -- accounted for 46 percent of the total production cost last year. But this year, roughly speaking, the raw material price went up by around 20 percent -- roughly 20 percent from the level last year (ph). (multiple speakers) (Korean language) Okay, the 20 percent increase of the raw material can cost around 10 percent of the production costs -- roughly half of the total production costs.

So what will the -- I'm trying to get to a very simple number. If your sales figure in the first quarter is 4.2 trillion, and you are going to increase that by 20 percent, you are going to have another 850 billion of income on a run rate. And your cost of goods now is at 3 trillion. What will that increase be so that one can work out the spread? Because if your average sales price is KRW596,000 per ton and your cost of goods price is 420,000 per ton, you should be able to make a calculation reasonably precisely with your longer-term contracts of what the incremental operating income should be on a normal run rate compared to the first quarter, which was KRW1 trillion.

That is what I am talking about. The average price for the first quarter was 596, which doesn't reflect the recent 20 percent increase of the sales price.

Absolutely, so the incremental income on a normalized basis will be KRW850 billion per quarter -- 20 percent increase on 4.2 trillion of sales a quarter? Correct?

That's correct.

So I am just trying to calculate -- cost of goods sold -- what will that increase on a normalized rate per quarter? Will it increase by 300 billion, 500 billion, 200 billion?

Okay, I'll give you the answer -- make it very simple. Last year, our operation volume was 21.3 percent. Our first quarter was 23.5 percent. We expect this year's position will -- above the operating margin will be the 23.5 (ph) percent. Is that a good answer to you?

No, I am just trying to understand, and I'm sorry about being a little slow on this. Your sales are going to increase about KRW850 billion per quarter. What is the -- and that is just by pure pricing, no volume increase. What will on your long-term contracts the price increase affect your cost of goods sold? It's now 3 trillion per quarter. What will it be on a normalized run rate, say, in the third quarter, all things equal with your long-term contracts? Because we already know your sales are going to increase about 850 billion per quarter because of your price increases. So I am just trying to work out the incremental increase in your operating income per quarter or run rate for the year? (multiple speakers)

(Korean language) Well, the cost of goods sold for the first quarter was around KRW3 trillion, right?

Correct, yes.

And half of the cost should be the cost of the raw material.

So 1.5 trillion. And what will the increase be on a normalized basis?

As I have mentioned, the cost will go up by roughly 20 percent.

So it is going to cost you 300 billion more per quarter, and you're going to get 850 billion more of revenue? So you'll have 550 billion more of operating income. So per quarter, you should have about 1.55 billion of operating income, which is -- sorry, 1.55 trillion, which is 6 trillion a year of operating income. Is that correct? And this compares to your 3.6 trillion you have on your forecast, which is the old one?

At the same time, we should -- the calculated price increase for the nickel, which has been variable, and the price that should be made in the spot market, not on a contract -- on an annual basis. At the same time, we should consider the currency impact out of the operation at the moment -- together.

But am I being very simply saying that your operating profit can increase by 500 billion a quarter on an operating -- on a run rate? Would that be fair to say?

Roughly, yes. (multiple speakers) But there's a lot of other factors.

Absolutely. I understand that.

I can secure a list so (ph) you can make KRW4.2 or KRW3 billion of the operating profits, not the 5 billion operating profit.

Why is it 4.2?

We don't have the specific figures by the quarterly basis, but our rough projection shows there were --

I mean you are already doing 1 billion in the first quarter with no price increases -- 1 trillion in the first quarter, sorry, with no price increases.

There was a price increase in early February.

Yes, but you're going to have another 20 percent coming in April 19.

And also that there will be a raw material price (multiple speakers) a little bit higher in the second quarter.

I apologize for making this complicated. Now I will get off the call now. Thank you.

Sherman Chao.

I actually was looking for a clarification on the timing of the raw materials cost increase, which you just explained. So I don't have any further questions. Thank you.

Mick Alquin (ph).

It is Mick Alquin from Merrill Lynch in Taiwan. First question regarding the inventory. What is POSCO's current inventory, and what is that compared to the end of 2003? And going forward, do you expect inventory to stay at current level or decreasing or increasing? That is my first question.

My second question goes to the pricing. I note that you just mentioned about pricing expectation. It is likely to stay around current level or up slightly, but do you have any view on 2005? Thanks.

You mean the inventory for the --?

For POSCO.

POSCO for the finished product?

Yes. And also do you have any idea about inventory level -- or inventory level in China as well? Thanks.

First, for POSCO, the inventory at the end of the first quarter was 361,000 tons.

How does that -- in terms of inventory days? Sorry.

It is for 5 to 6 days. And it was 387,000 tons at the first quarter of last year. So inventory is coming down consistently. It was -- it used to be around 700,000 tons, but with the implementation of the management campaign called the profit invasion (ph), we have been reducing the inventory significantly. And at the same time, it can indicate the strong demand from the local market. So we would like to maintain the inventory at around the current level for the time being.

We don't have the exact number for the inventory in China, but with the various information, we are sure the inventory is in a very comfortable level in China. For example, the inventory in the eastern part of China has been around 500,000 tons. And we noticed it is around 470 at the end of the first quarter. So there should be some speculation with building up of the inventory for the price hike, but the supply is very tight. It cannot help you further building up the inventory in any rate.

For the pricing, as we discussed earlier, given the strong demand mainly driven by China and the constraint on the supply side, we would like to get further strong trends of the steel price in Asian markets. And the local market -- local price, which has been adjusted recently, is still far behind the recent price. So in a word, we have the view the price will head up further throughout all the year for the regional price and the local price.

Mr. Lai (ph), does that conclude your question?

Yes.

Benjamin Moyer.

Merrill Lynch Investment Managers. Sorry I was called away earlier. That is why I wasn't able to ask my question earlier. I have two questions. The first one is on the timing of the effective implementation of the price cut -- the price increase that you just announced. You announced a price increase to take effect April 19. And the earlier price increase this year was to take effect February 9. Now in Korea, you have contract terms with your customers. And should I understand that this price increase takes effect on April 19 regardless of whether the contract period has expired or has not expired for your customers? That's the first question.

In other words, will this take effect on a rolling basis -- as each contract expires under the previous terms, the new price will take effect? Or does this price increase take effect immediately on that date for all customers in Korea? That is the first question.

Mr. Moyer, yes, you are right that the new price will be effective from the 19th of April, but it is for the new order from 19th of April. And it takes around two weeks for the delivery and the settlement of the payment. So the exact time for the new price will be effective up to two weeks -- I mean in two weeks after the 19th of April. And we have the contract for the volume toward the major customers on a quarterly basis. But it cannot define the price adjustment. So I can say the new price will be effective immediately -- effective 19th of April.

The second question is on FINEX and Hambo -- Hambo Steel. Earlier this year, your Chairman mentioned that you would like to announce the commercialization of the FINEX process some time this year. I wonder if you could give me an update on how you're progressing with regard to that goal? And then also I had heard that you might -- maybe you could update me on your bid for Hambo and how that would fit into your plans for domestic supply?

We have plans to announce the commercialization of the FINEX plant either the end of the second quarter or early third quarter. It is not fixed yet, but I think our management will decide quite soon.

As for the Hambo steel plant -- bidding for the Hambo steel plant -- we already announced we have an extension plan up to the 32 million tons (ph) in domestic. So now we need an additional 4 million tons in order to achieve that target.

So just two years ago we are worried about overcapacity of the steel. But now owing to all the economic areas -- economic recoveries -- we are now enjoying a shortage of steel. So by using -- we think that by using our FINEX plant we can utilize the Hambo plant. So we have already plant grant (ph), which is located on the east coast, and Pohang is located on the southern coast, and Hambo is located on the west coast. So it will make our plants stand (ph) in triangle basis.

So especially Hambo plant is the shortest and the most economical production base now to penetrate China's market. So we're quite interested in the bidding at the Hambo plant. And especially the FINEX plant has got a very good advantages which can shorten our processing life. And it can use the raw material -- the low cost of raw materials. And it has got a very flexible -- for reproducing (ph) steel volume. So we're quite interested in bidding on the Hambo plant. And now the potential candidate for the Hambo is the Hyundai (ph). And Yamamoto (ph) with the neutral (ph) and the POSCO (indiscernible).

So we are -- our due date for the proposal is this coming -- tomorrow, tomorrow. So we're preparing for providing the proposal for bidding. So far our progress now, especially in consideration of the last bidding by the (indiscernible) I remember there was $390 million. So we expect our timing is quite interesting (indiscernible). And we think we have the ability to (indiscernible). Only POSCO has the ability to make that efficient. That is all.

And I understand that you would be purchasing the rolling part of the plant. And Dongkuk would purchase the minimill.

Yes.

With the feedstock that your rolling mill uses be prepared from Dongkuk?

It's different. Dongkuk has the hot-cold (ph) area aim (ph) to produce the long product or the deformed bar. And POSCO has interest in another project called B (ph) area, which is the rolling facilities to produce the hot-rolled coils or the cold-rolled coils. It is a different product.

And in addition, we are sure POSCO can beat the others with the new technology called the FINEX -- it is applicable and on completion of the new technology in this new area. That's a rough idea at the moment. But we don't have any further idea how much we should pay, and how we can realign our producing facilities at the moment. It should be after the due diligence from now on.

John Neece (ph).

I am calling from Deutsche Bank. Sorry for sounding a little bit repetitive, but I just want to double confirm a couple of the comments and numbers that you gave out earlier, because the financial impact is quite dramatic. I just want to confirm, both the price increases for your product at 20 percent, as well as the raw material price increase of roughly 20 percent. None of these had any effect on your first-quarter result. So based on your first quarter revenue and cost of goods sold, one should apply the 20 percent increase in your output as well as the increase in your raw material price on top of those numbers.

And then the second point is the revised 2004 target of 3.7 trillion of operating profit -- that number does not include the output price increase. And then you also gave out a 4.2 trillion operating profit figure. And that number is what you estimate would result because of the higher selling price. Are these the correct interpretations?

We revised -- we revised the domestic sales price recently, but it is effective probably near to the end of April. And we finalized the price negotiation for the raw material recently, and it will be effective near to the end of April as well after the transportation. So these two -- the impact on the sales and the cost side should not be reflected in the operation results for the first quarter, right.

So the margin has been just a little bit better than average of the level last year. But the debt should be different after the real reflection of these two -- the sales price and the raw material price. KRW3.3 trillion (ph) of operating profit that we have been released at this time. Hold on. (multiple speakers) The revision has been made in the middle of March -- the middle of March, well before the finalization of the price negotiation for the raw material and before the recent price hike.

Up till then (ph), we have noticed -- the raw material price -- it went up a little bit than debt (ph) we have assumed at that time. So after the destruct (ph) -- I mean, in other terms, there has been some other cost increase on raw material and the nickel price, as well.

So we'd like to be a little bit conservative to indicate any target margin at the present or given the uncertainties ahead. So you can -- it's very simple to analyze the business projection of POSCO. And you can get some numbers with your logic, which we have based upon -- we have indicated already. But as the management of the Company, we would like to be a little bit conservative. We indicated the operating margin will be better than KRW4.2 trillion. Please understand the hesitation (ph).

At this time, there are no further questions in the queue. I would now like to turn the call back over to your speakers for any concluding remarks.

Thank you very much. It was my first debut for the capital market. So I'm not sure we will give you enough information or not, but we will try to do our best to make you very happy. Thank you very much.

Thank you. And this concludes today's conference call. Once again, on behalf of Merrill Lynch and POSCO, we thank you for your participation. You may disconnect at this time.