Posco Holdings Inc (PKX) 2004 Q2 法說會逐字稿

Good morning, good afternoon and good evening. Welcome to the Posco conference call sponsored by Merrill Lynch. For the duration of the presentation all lines will be in a listen only mode until the question and answer session. [Operator Instructions] I would also like to inform you that today's call is being recorded. If you have any objections you may disconnect at this time.

Merrill Lynch does or seeks to do investment banking and noninvestment banking business with Posco. Merrill Lynch and or its affiliates own 1 percent or more of the common stock of Posco. The coverage analyst receives compensation based upon among other factors the overall profitability of Merrill Lynch including profits derived from investment banking revenues.

Now I would like to turn the call over to your first speaker for today, Mr. Mark Yoon. Thank you, sir. You may begin and I will be standing by for the question and answer session.

Thank you very much, everyone, for participating in Posco's second-quarter earnings conference call. This is Mark Yoon, the steel analyst for Merrill Lynch based in Seoul, covering Posco.

Participating in the call today we have Mr. Dong-hee Lee, the CFO of Posco; Mr. Young Bok (indiscernible), head of investor relations as well as the rest of Investor Relations staff. Let me now turn the mike over to CFO Lee who will provide you with the rundown of the second-quarter operating performance.

Good morning and good afternoon. This is Dong-hee Lee, Chief Financial Accounting Officer of Posco and I would like to thank all of you for joining this call today. As some of you may have already gone through our first caps earnings release our results were outstanding. The first half of revenue rise by 33.2 percent to more than 9 trillion Korean yuans compared to the same period of 2003. The revenue growth is largely attributable to the increase in sales volume extended sales of high radiated product and 20 percent increase in overall steel shares price.

Operating profit rose by 40.9 percent to 2.2 (ph) trillion Korean yuans (ph). Net profit also rose by the 60.4 percent to 1.6 trillion Korean yuans. As a result our EPS and equity ratio continues to improve clearing (indiscernible) although we believe our stock price doesn't fully reflect our outstanding performance.

As of June 30 per end enterprise sale our EBITDA stand at 4.0 and 2.3, respectively. However, we believe there is a great potential for Posco stock price to increase in the future as we continue to implement various programs to enhance the shareholder value.

Now I would like to shift to the topic of announcing Posco growth strategy. As we plan to expand the galvanized production capacity to 2.1 billion tons by 2007 to extend our (indiscernible) industries. We began the construction of a number (indiscernible) CDF plans in the first quarter this year and plan to commence building No. 6 CDF plans in the second half of this year. Also we plan to extend the production into (indiscernible) especially in China from 1.7 million as of the year end of 2004 to 4.4 million tons by 2007. In our RSD (ph) business construction of a (indiscernible) 60 percent complete. We have also completed a 20-year contract to directing for 550,000 tons per year at (indiscernible) from Indonesia resulting in a 40 percent cost-saving in the purchase of LNG.

Therefore we have continued to increase the sales of 8 -- HIE 80 continuously increase the sales of (indiscernible) this product in stock compared to (indiscernible) in the steel market. The sales of this product among all the products are focused to increase from 12.7 percent in the first half of 2003 to 19 percent in the second half of 2004.

Furthermore we also plan to enhance our competitiveness through the innovation technology. The commercialization of testing the finest is making good progress. And we also began building a (indiscernible) demo plan for stainless product and carrier this year. This is scheduled to be completed by May 2006.

Moreover, the construction of hydroforming plans to begin in June this year which is to directly produce special automotive parts.

Certainly we will be successful in carrying out the various innovation in the former program. We have completed a fourth wave of Six Sigma certifying 977 employees with the Six Sigma belt (ph). Continued effort is made in the corporate (indiscernible) management to spread fiscally serve the community and the shareholders of all varieties.

Now to bring about the more transparency to the management we have secured the strong internal control and devaluation (indiscernible) compliance with the Sarbanes Oxley Act.

Shifting to the topical information of steel market, we've focused at a worldwide steel demand is focused to grow by 6 percent per annum. That's by the stable demand growth in China continues to grow (indiscernible) economy and the economic recovery of developed countries.

Beijing has managed to slow down its current growth, has somewhat moderated its explosive growth in (indiscernible) investment in the steel industry.

At the same time in parts of low-grade steel product used for construction has been declining since April this year. However the import of the high-grade press product have remained strong and are focused to say that way.

Finally, we have newly revised our business guidelines for this year. Due to changing economics as well as the steel environment, this year's crude steel production in the same volume have both been revised upward to 29.6 million tons and 10 8 (ph) or 5 million tons respectively. (indiscernible) revenues, operating revenues focus increased 31 percent year-on-year and 49 percent year-on-year to 18.8 trillion 1 and (indiscernible) 4.6 trillion 1 respectively.

With the continued (indiscernible) cycle and the various (indiscernible) in place I'm confident (indiscernible) embellished but remained out there this year.

Now I would like to have (indiscernible) my colleague and myself take any questions you raise. Thank you very much.

(OPERATOR INSTRUCTIONS) Daniel Altman.

Daniel Altman from Bear Stearns. Two questions. One is -- I think I ask this every call. When will your full financial statements for the quarter be available? My second question is, looking at your operating income, roughly $1 billion in the quarter then we look at your reduction in borrowings or debt was about $200 million in the quarter, roughly. I am just wondering if you can talk us through what the uses of cash flow were in the second quarter particularly CapEx and any other items? Thank you.

This question is regarding what is it your full financial results?

Yes.

Yes I think that probably only that (indiscernible) it is available because we have to do less the full financial statements after the audit. So only August you will get the full financial statement. And the second question will be IR can handle

Regarding our full fiscal year CapEx plan by the end of June we spent about 800 billion Korean yuan. This year is, actually, our CapEx plans about 2.7 (ph) million (ph) Korean yuans so maybe second half of this year we will spend about 1.6 Korean (indiscernible). Major items is the second half of this year August plus part of construction of financing plans is the capacity of 1.5 billion (ph) kuans. And September this year we also start construction on No. 6 continuous carbonized line in (indiscernible) preferred CapEx about 400 (indiscernible). This is enough?

Yes, okay, so it sounds as if your CapEx in the second quarter was just slightly higher than what was in the first quarter.

Yes.

And the Fin ex (ph) what's the total outlay for the Fin ex plan?

(indiscernible) investment outlays for Finex plan will be about 1.2 trillion Korean yuan it will be completed by year 2006.

At this time there are no further questions (OPERATOR INSTRUCTIONS). Matthew Chang.

Matthew Chang (indiscernible) New York. I have two questions. One is related to finance. What sort of cost savings are you looking at from the finance technology? And my second one is whether it's going to do share buyback in cancellation this year?

I will answer to your second question, first. Regarding the share cancellation and buyback. As our management reiterated time last three years Posco canceled and bought back about 8 percent of our outstanding shares, particularly, in the last year we bought back 2 percent of shares on the market and then canceled. (indiscernible) Posco's shareholder (indiscernible) policy (indiscernible) we will maintain 25 percent of cash payouts ratio and at the same time with the consideration of Posco's free cash flow and we will continue activities for increasing shareholder values. For example, share cancellation and buyback but in the second half (indiscernible) regarding the finance, my colleague (indiscernible) --

Reset (ph) around 20 percent cost saving will be when we are using (indiscernible) compared to (indiscernible) deference because we are using (indiscernible) instead of (indiscernible) so around 20 percent (indiscernible) (indiscernible) .

Thank you.

Thank you, does that conclude your questions Mr. Chang? Thank you. (OPERATOR INSTRUCTIONS) Benjamin Moyer.

Merrill Lynch Investment Managers. I'm trying to understand the average selling price for the quarter. I know that you raised prices in early April. And I'm wondering if you received nearly three months of benefit from the higher price levels? And one thing I'm doing is I am looking at the average revenues per ton in the April June quarter and then comparing that with average revenues per ton in the January March quarter. And I see that there was an increase of about 65,000 yuan per ton and then I multiplied that times the number of tons sold to see how much your total revenue went up because of the higher average selling price. And then I kind of think, well what percentage of that increase actually flowed through to operating profit? And I haven't had time to actually do the calculation but it looks like, maybe if a high percentage of the increase in average selling profit went -- average selling price went to profit you probably should've had much higher profit than you show even though your profit was up a lot maybe it should've been a lot higher. Is there -- aside from higher raw material prices, is there any other kind of negative factors that you might have encountered in the second quarter that would have kept you from realizing the maximum benefit from higher prices?

Actually Posco raised the domestic sales twice in the first half of this year. Firstly last January by 12 (ph) percent and last April by 19 percent. But actually the effective date of a last price increase was in the 19th of April but the actual impact will happen maybe May and June. So that's why your cancellation shows (inaudible). In the second quarter of this year we do not make any significant accounting changes.

Okay, so then you expect third-quarter average selling price and third-quarter profits to be above second quarter?

Yes.

Okay. And then on the Finex facility you said the investment would be 1.2 trillion yuan with completion by year 2006. What would the capacity be of that facility?

1.5 million ton.

Okay. And then could you tell me the number of shares outstanding at the end of June and also the number of shares in treasury at the end of June?

80 million 9 5 6 6 (indiscernible)

That shares out. Right?

That's shares outstanding and treasury value (ph) is around 9 million tons. But including buyshares including special trust.

Okay. Fine.

(indiscernible) numbers?

I guess nine is -- 9 million is close enough. I was just I think at the end of March, it was like.

End of June the number of (indiscernible) share (indiscernible) 8.258 (MULTIPLE SPEAKERS)

Okay, so that's the same as at the end of March.

Yes.

And then maybe I will just ask if you could on your outlook for pricing since you announced the price increase on April 19th, have there been any other price hikes?

Not yet. Last June, we raised the domestic sales price of plate for the shipbuilders by 6 percent. Sorry -- about 9 percent.

Okay and when did that take effect?

On third quarter this year.

Okay so from July?

Yes (indiscernible).

Finally if this is okay, can I ask another one? Is it okay if I ask another question?

Sure.

On pricing environment in Asia or in China could you just I don't know, tell me what's happening with pricing in China? I -- I'm kind of -- I keep reading negative negative things about pricing in China but I don't know whether what I am reading is true or not true so maybe you can provide some insight?

As far as we I inform (indiscernible) price of the product is for flat product areas. It's recently stabilized and it's fund to the other upwards trend. If you referred to our presentation materials then there is figures for listing (indiscernible) price changes of each (indiscernible) in the secondary market in China. It was about roughly $500 perform (ph) before the announcement of Chinese government slowdown majors and (indiscernible). But -- And after that it sharply went forward about $400 per ton.

The last two or three weeks it rose by (indiscernible) so now the secondary market price of HR core in China is about $430 level. And in the case of our steel (indiscernible) producer, who sell this product at the contract price about this contract sales price in the second quarter of this year was $450 for ton of HR coils (ph). End of May about (indiscernible) decided to keep this sales level to sub (indiscernible). Although there is allowed a sluggish movement for loan product for construction uses but we are confident that the pricing in the flat part of areas is (indiscernible) covered now.

And now Posco's export price to China is around $500 for ton for HR coil.

Okay. And what's the import price into Korea from Japan for hot-rolled coil?

In the last year Korea imports about 5 million tons of Hot-rolled coil from Japan, mainly (indiscernible) dollars such as (indiscernible) bundled steel is importing Hot-rolled coil from Japan. Current import price of hot-rolled coil is $450 per ton. That's now the GFP (ph) in Japan is proposing offering $100 increase for export to Korea. But now the negotiation is still going on and the (indiscernible) about $50 increase is expected now.

I see. And your hot-rolled coil price in Korea is about $425. Is that right?

Yes that's correct. Now we are closely monitoring the movement of the market and the progress in negotiation with Korean rollers and Japanese supplier. And once the import price from Japan of Hot-rolled coil, half again the second half of this year, Posco will consider price hike.

And then if I may what's the outlook for raw material prices next year? What would you assume for coal and iron ore?

Just in this year in view iron ore and coupling coal (indiscernible) was applied from April of this year and the price increase was so sharp and that's -- in the next year the demand production situation last changes significantly. I mean there's a more tight market situation. So the raw material -- we are also some tight market situation is expected in the next year although many raw material suppliers trying to (indiscernible) and actually to develop new mines (ph). So our raw material procurement department is expecting around a 10 percent price increase (indiscernible) cost in the next year.

Okay. Thank you very much.

Daniel Altman.

Just a couple of questions again. From looking at the difference between the import price and your price in the domestic market is it fair to say that you'd be gaining market share for hot-rolled? It seems as if everyone would want to buy from Posco given the price is below the import price? Second question is, if you think that prices now the differential between Korea and the United States is high enough that Posco would be exporting more product to the U.S. if you think that that's a trend we may see later this year? Posco and some of the other producers in the region. And the third question is relating to China. In your first quarter presentation you provided us with a very helpful projection, I think from (indiscernible) in terms of Chinese consumption and production estimates for 2004.

I wonder if you have updated numbers that you could share with us? Thank you.

Regarding your first question. Of course, there is some price differentials in import files of (indiscernible) and the Posco (indiscernible) price. There is about 20 and certain dollars price (indiscernible) so most Korean customers want to be supplied by Posco or outstand (ph) import and other associates. Plus, Posco also has limited capacity of production and according to the Posco's management policy for more HIE (indiscernible) product assistance now Posco is shifting. And so HR coils towards more (indiscernible) for supplies such as (indiscernible) line and now the market situation (inaudible).

Our strategy (indiscernible) going forward more high barrier as the product areas and further for common grade uses. I would like to encourage some import from other cheap sources such as Russia and other countries.

But now, as you infer that now that U.S. market is the most expensive steel market, so many shaped exports such as eastern European countries and Russia is trying to increase their exports with the United States market.

But in the case of Posco, Posco's expert to the United States is (indiscernible) on Posco's and U.S. joint venture's name is UPI in some parts in the United States. Posco is the supplier of about 700,000 points of HR coils to that net joint venture. Now Posco has no further (indiscernible) export product to the United States.

If I could just follow up on that before I ask the third question. If you could sell to China for $500 for HRC and you could sell to the U.S. for 650 for HRC and freight I presume is, what, around $40 a ton maybe? Why not sell more to the U.S. even outside of your UPI?

In the United States it is a very notorious market because of many trade disputes. And although regarding the freight is more economic and profitable raise Posco is (indiscernible) policy for sale is (indiscernible) 4 percent on domestic sales base. About 75 percent of domestic sales and 25 percent of exports. With that kind of (indiscernible) domestic demand Posco accrued maintains its high capacity utilization in the last -- more than 30 years of operation system. And our steel product is rather different from other final consumables such as appliances. It takes more than six months just to ship (indiscernible) supply associates for the customs.

Thank you and I wonder if you have any Chinese data that you could share with us projections for production and consumption?

Even though as you said (indiscernible) internal research has numbers of the China bus data but I think that it's kind of internal numbers because that is not quite true but (indiscernible) China tightening policy. Internal numbers there is moderating like the Chinese consumption level will be increased less than the last year what originally forecasting the numbers and also the Chinese production level will be slowed down due to the (indiscernible) raw material market and also the (indiscernible) problems like what is electricity like there? So the (indiscernible) demand and supply will be lower than the last year numbers so original numbers originally forecasted the numbers. I can just give the rough idea. Sorry I cannot give the internal numbers. Thanks very much.

John Green.

I am calling from LCG. Just had a couple of questions. First was wondering if I understood correctly you mentioned that you're spending -- it sounds like about $1 billion U.S. are so on the Finex project and you're talking about a 20 percent cost savings per ton. And it would be about a 1.5 million ton capacity project. Are those the right numbers to use? It seems to me that that might save you somewhere on the order of $75 to $90 million a year. And you're spending about $1 billion for it. Are those the right numbers or is there a different way to think about it?

There -- those are the right numbers but based on adjustable 1.5 million tons capacity but when we contemplate the technology developments we may further build on other capacity then we can reduce more cost. When we increase our production from the Finex technology.

I see so you would be able to use that facility to -- you would be able to increase the capacity of that facility?

Yes (indiscernible) over system (indiscernible) so that domestic market. (indiscernible) 9 (indiscernible) 4 in (indiscernible) 5 (indiscernible) rather outdated. For example the No. 1 platform is in 400 watts such as the operations in 1973 and its capacity is only 1 million ton and (indiscernible) time the number one platform (indiscernible) should be operations shut down. This Finex plan in place at capacity and all the other outdated plus points (ph) will be steadily (indiscernible) Finex.

I see. I guess the second question was, wondering if you could speak a little bit about any nickel pass-through provisions you might have in your stainless contracts and how many or what proportion of the stainless-steel that you sell is done under a contract which has a pass-through mechanism for increases or changes in the nickel price?

I understand that when you form a contract with the stainless buyers you have like a base charge and then extra -- extra surcharge. That's basically stipulated in the contract. But in the case of Posco we don't have that exact stipulation in the contract. So we would definitely reflect any increase in the nickel price to our selling price. But we wouldn't have based that formula like the European standards makers.

Just a third, final question. The Company's made or taken some steps to monetize, I guess, some of the equity investments, I guess, notably with some of the South Korean Telecom shares. There was the exchangeable bond that was set up, I believe, last year. Are there any other activities that you plan to do along those lines in the near future in terms of either monetizing or disposing of any of your other non steel equity stakes for South Great Telecom or some of these other equity holdings?

Last year we divested 2.3 percent and 2 percent of (indiscernible) telecom shares. It's very attractive consent conditions. And we're continuously monitoring the market regarding matters. Currently there is ownership premium of telecommunication businesses in Korea and (indiscernible) share is affording ownerships for (indiscernible) but it's not easy for us to issue rather exchangeable bonds (indiscernible) share price (indiscernible) sharing far below our book value. If in this kind of situation changes more favorable and Posco definitely feels divest a lot of portions (inaudible) share and besides the favorable shares so there's no (indiscernible) invested except

(indiscernible) is some kind of (indiscernible) between Posco and (indiscernible). (indiscernible) owns 2.3 percent of (indiscernible) shares.

Actually, there's one other question -- I apologize -- I forgot to ask. The Company has -- I guess I was just trying to understand a little bit better if there's any guidance or any feel for the equity, or basically the net income from the non-consolidated subsidiaries for the quarter. It seems like there's about $2 billion of book value of non-consolidated subs. I was wondering what the equity contribution was this quarter.

The first of this year, we have 36 (ph) subsidiary companies, more than 20 percent shareholding, 14 companies (indiscernible) and 22 companies in overseas (ph). And we have 52 billion 1 equity massive (ph) gain in first of this year, and strong financial performance and -- yes, mainly the strong financial performance.

I see. I mean, does it seem odd that they are far less profitable than the operations of the steel company, per se? It seems like they generate a lot less net income, relative to their book value, than the steel company. I was wondering if there was any particular reason you could point to for that.

Most of them have the profit in first half of this year, and most of them have the profit this year.

Bernard Posh (ph).

This is Bob Marlow from HBK. My question is basically the guidance that I have for maintenance CapEx is somewhere around $40 per ton. If I look at companies in Brazil and Mexico, even in China, the numbers that I see are around 20. So I would like to understand why Posco needs to spend twice as much or if I'm missing something.

Well, you know, Posco is very famous for -- our utilization ratio is more than 100 percent. To keep 100 percent, the timely maintenance is very essential for the Company. That's why we spend the high maintenance CapEx every year. But during the maintenance, we try to increase the capacity. For example, in order for us to (indiscernible), we spend three months for the replenishment (ph) of the (indiscernible) deference. At that time, we try to increase the capacity. And when we have the replenishment in the rolling facility, we change the motor, the newest (ph) one. That meaning is the motor speed is getting increased, and that our production is coming more quickly than before. That's why we spend a lot of money -- maintenance and plus (ph) to increase our capacity.

So what would be the maintenance CapEx, if one excluded the extra amount of spend on increasing capacity?

Roughly speaking, our CapEx for maintenance of the existing facilities for more efficient ways (indiscernible) Korean yuan every year.

Peter Udo.

It's Prosidian (ph) Investment Management. I have two questions. One, I was wondering -- I think you mentioned it before, but what is the the freight rate that you're paying to ship steel to the U.S. from Asia? And my second question is, I think you touched on it as well -- what are long product prices right now in Asia? And what's the current trend? Are they moving up, or are they moving down?

Between America to Asia, the freight this time is around -- to Toronto, US$74 from Canada, and the middle -- the center of America is around US$70 freight.

And that's to the ports. Is that correct?

Right. (MULTIPLE SPEAKERS) Hold on a second. Posco (indiscernible) long products -- long sale (ph) products such as the (indiscernible). So contrary (ph) , we do not have any market data for the prices of long product.

I apologize; I thought you had quoted some prices in your earlier commentary on long products. You were describing hot-roll coil, but I also thought you mentioned long products, as well, in terms of your commentary.

Daniel Altman (ph).

Just to make sure that we all understand the Finex (ph) issue. At times, I hear you refer to Finex as a substitution for some of your older blast furnaces, like the comment you made previously. But at times, I also see Finex being explained as addition to your current capacity, so part of the 3 million tons of additional capacity that you expect to have online in the next few years. So what's the best way to look at Finex? Is it replacing your blast furnaces, or is it new capacity?

In short term it is definitely additional capacity. We start 1.5 million ton increase. And long term, the old -- the blast furnace will be replaced by the Finex facility. That is our strategy.

Just from an economics point of view, maybe you can help me, but wouldn't it be more cost-effective to revamp the blast furnaces than to build a Finex plant when you're talking about using the Finex purely as a substitution for a blast furnace?

Not only the cost of savings, and construction cost also will be decreased, but most of all, the benefit -- the advantageous factor for the Finex is environmental factor. A lot of air pollution is coming from the center in the Coccus (ph) plant. So definitely, we can reduce -- we expect 90 percent pollution will be reduced.

Do you expect that companies in Japan -- say, Nippon Steel (ph) that has older blast furnaces than yours -- do you expect that they will also ultimately replace their blast furnaces with Finex technology?

After we complete the (indiscernible) Finex plant, the Chinese -- most of it will be welcome. They are waiting, and we are also waiting. And definitely, Finex will be the next-generation steel-making process.

At this time, there are no further questions. (OPERATOR INSTRUCTIONS). Carrie Kao (ph).

This is Carrie Kao from Ohio Teachers Retirement System. If China (indiscernible) growth comes to 3 or 5 -- to 5 percent instead of 8 percent that you projected, second half of the year, how would that impact the demand in pricing of your products such as HRC?

Yes. Just in case the Chinese economy should break down, but in China, many economists and also the politicians agree that their minimum necessary gross rate of GDP is at 7 percent. If the GDP growth of Chinese economy is less than 7 percent, then there's concern of social unrest. So it's not likely for Chinese economy -- I guess some kind of a catastrophic situation -- but as far as we understand, in China, there are a number of national events, such as Olympic Games and Expos.

For the next five or six years, China should experience some shortages of HIE (indiscernible) flat product. At least in the last year, 37 (ph) million tons of steel product was imported to China. And more than 86 percent was flat product. So in the next five years, at least 30 million tons of steel product -- mostly flat product, such as cold-rolled and the standard (ph) will be imported in China.

So we do not worry about that kind of situation now.

This is a wild guess. I don't know. If (indiscernible) slows down, how would that impact the pricing of HRC?

Already see here Chinese market was one of the most expensive steel price market. But there is -- changes in the situation, caused by the slow-down measures by the Chinese government. Now, there's about $420 and $430 (ph) a ton of HRC's other very cheap price, compared to other markets such as in the United States and European countries. But because there's the supply and demand situation in China of -- for the flat product areas (indiscernible) -- (MULTIPLE SPEAKERS).

Okay, so if (indiscernible) China slows down, there would not be impact on the flat product?

No.

Okay.

This is Mark Yoon. We've had an hour-long session so far, and in the interest of time, I'm afraid it's better to wrap it up at this point. Thank you very much, CFO Lee (ph), and Mr. Lee on the IR side, and thank you very much, investors, for participating on the call, and I look forward to hearing from you again when the third-quarter announcement is made by Posco. Thank you.

Thank you. That concludes today's conference. All lines may disconnect.