Posco Holdings Inc (PKX) 2005 Q4 法說會逐字稿

Good day everyone, and welcome to POSCO conference call. For the duration of the presentation, all lines will be placed in listen only mode. A question and answer session will follow the main presentation. [OPERATOR INSTRUCTIONS]. I would like to hand the call over to Mr. Yongsuk Son, and I will be standing by for the Q&A session. Please go ahead sir, thank you.

Thank you. Good morning and evening. I am Yongsuk Son from UBS. Thank you for joining POSCO's Q4 earnings conference call today. We have with us Mr. Cho, Director of IR and Finance Department; Mr. Yoon, IR head, and our team with us. Mr. Cho will present POSCO's Q4 results as well as the guidance for 2006. The presentation will be followed by Q&A. Without further delay, Mr. Cho?

Thank you. It's my pleasure to have you all on this conference call. This is Jae Ku Cho, the general manager of Finance Department in POSCO.

We just have closed the year 2005 accounts. Last year saw sales revenue rising 9.6% to 21.7 trillion won. Operating profit rose by 17% to 5.9 trillion won, and net profit by 4.9% to over 4 trillion won.

Revenue growth was largely aided by the higher AST of the first half of 2005. As a result, the operating margin improved up from 25.5% in 2005 [sic - see CEO Forum presentation] to 27.2% in 2005. EBITDA margin also improved to 34.1%. However, this volume has declined from 29.2 billion tons to 28.7 billion tons due to the increased inventory, while sales volume of strategic products has increased from 10.8 million tons to 12.6 million tons.

Now speaking of the steel market environment, the global steel market experienced strong steel prices in the first half, due to China's strong demand for steel. However China's surging production capacity and its move towards being [best] exporter led to a fall in stainless steel price from the first half, and in carbon steel from the second half. To defend the domestic market from exports of Chinese steel makers, POSCO also cut its domestic prices by 4 to 17% from January 2006. That is, POSCO decided to differentiate the price cuts for high value added and the commodity grade products. This is in line with the company's strategy of expanding the personal high value added production. Going forward, we expect to see the price difference by product quality to continue, considering current tight market condition in high value added products.

In the meantime growing global production are also resulting in increased competitive pressure for raw materials, especially iron ore, coking coal and scrap driving up fierce competition amongst the makers to secure raw materials and the creating unprecedented high level of the raw material price.

Let us move to review on the major business activities of last year.

Firstly, there was an expansion of the post domestic and overseas investment aimed to secure the substantial growth as the global POSCO. For construction of a 12 million ton producing integrated steel mill in Orissa State, India, we have built a local subsidiary, POSCO India. And as the first phase of the project, we have confirmed our construction plan, 4 million tons steel mill by the year 2010. The Indian project will not only strengthen our competitiveness through securing a stable and economic procurement of raw materials, but also help to enlarge production base and market share in newly growing economies.

In terms of domestic investment, completion of the construction of the Gwangyang No. 5 CGL expanded automotive carbonized steel production capacity by 1.6 million tons. Also TWB facility, which cuts then the stainless automotive steel sheets, has also been enlarged to produce 5.5 million sheets on an annual basis. Furthermore, the revamp of Gwangyang No. 2 blast furnace and the upgrade of the Pohang No. 2 plate increased annual crude steel production by 460,000 tons, and the plate 300,000 tons respectively.

To support competitiveness in steel business, non-steel investment was made in construction of LNG terminal for economic procurement and the sales of clean pure LNG, and acquired Korea's biggest private power plant, POSCO Power, to increase the synergy with LNG terminal.

Secondly, in reaction to challenges from the competitors, we have established a strategy to focus on development of innovative technology and acquiring cost competitiveness. In order to secure the technological competitiveness, we will increase the strategic product sales portion from the current 49% to 81% by year 2008, by strengthening high value added product sales, such as automotive sheet steel and the premium API.

Furthermore, the construction of the first commercialized FINEX plant is scheduled to be completed by the end of this year which will lower the emission and still use low cost raw materials. Also POSCO has been putting efforts in constructing this strip casting demo plant which will shorten the manufacturing processes.

In terms of cost competitiveness, in preparation of the -- for the capacity expansion, we have expanded the direct investment in captive mines for stable and economic procurement of raw materials. In addition, we have been promoting outsourcing of the employees of the non-production division, such as roll maintenance and the discharge of the raw materials.

In 2005, the company listed its stock in Tokyo Stock Exchange to diversify the investors. Having already listed in NYSE in '94 and the LSE in '95 and the listing in TSE, POSCO shares are now being traded 24 hours a day in what is three major indexes.

So we held strong to our commitment to [inaudible] management and innovation through the continuous development of the improved management systems throughout the company. Continued efforts were also made in the area of corporate sustainability management, to strategically solve the community and the stakeholders of all priorities. This kind of effort triggered international credit rating agencies to upgrade POSCO's credit standing. Moody's have upgraded the POSCO's foreign currency issue rating from A3 stable to A2 stable, and Standard & Poor's also changed its outlook from A minus stable to A minus positive.

Finally, we have our new business plan for year 2006, incorporating all new economic factors as well as changes in the steel cycle. Our planned production and sales volume in 2006 are 30.1 million tons and 29 million tons respectively. We estimate our sales revenue to be between 19 and 20 trillion won. And our CapEx plan is to invest 11.7 trillion won for three years from '06 to '08, especially in domestic steel area, accounting for 32% of production upgrade and 29% of maintenance of the facilities, and 23% of capacity expansion.

In conclusion, to maintain POSCO's current competitive position in the global steel sector, we are to continue cost-cutting efforts as well as an increasing proportion of the value added product sales through technological development.

Thank you for taking time to join this call, and we now open the floor for any questions you may have.

Thank you Mr. Cho. Operator, we are now ready for Q&A.

At this time we will open the floor for questions. [OPERATOR INSTRUCTIONS]. The first question will be coming from Jonathan [Boyer]. Please go ahead. Thank you.

Hello, good morning, and thank you for your comments. I wondered if you could talk about your outlook for volumes and prices in calendar '06, and how you expect your operating margins to track quarter by quarter?

Sorry. In 2006 we have target to sales around 29 billion tons of steel, which will result in 19 to 20 trillion won of sales revenue, with assumption that the steel price will be a little bit weaker during the first half of this year, but will -- with assumption of the slight recovery of steel in the second half of next year -- this year, I'm sorry -- where the operating margin will be lower, but I'm sorry not to be able to reveal on a quarterly basis; at this moment the cold steel markets seem to be so volatile to give any clean idea for the profitability. We can discuss, probably later, in the middle of this year.

Okay, thank you.

Thank you sir. Does that conclude your question, sir?

Yes.

Thank you very much and the next question will be coming from [Matthew Sterrick]. Please go ahead sir.

Thank you. Just a very brief question on the actual one-offs in the result. If you adjusted for the one-offs, would net profit for 2005 have been in line with the POSCO guidance towards the end of 2005, of about 4.4 billion won?

Yes. You may be right. The bottom line will be around 4.3 to 4.4 trillion won without any the extra losses during the first quarter last year.

Thank you.

Thank you sir, does that complete your question?

Yes.

Thank you sir. [OPERATOR INSTRUCTIONS]. The next question will be coming from [Wee Chua]. Please go ahead. Thank you.

Hi. Just a question on your earlier statement that you expect pricing to go lower in the first half, and then possibly recover in the second half. Do you expect [recover] pricing in perhaps the second quarter?

We made budget based on the December -- the price -- when we dropped the price, so we assume this price trend will be continued during the year, and our CEO mentioned today, and he expects some price recover, not significantly recover, but a little bit recover from second half of this year. But we assume the current price will be maintained over the year.

Well we expect the average price for the key raw materials for this year will be weaker than last year, given the significant weakness of the steel prices in the market. And we expect another weaker price for the nickel for this year as well.

Thank you.

Thank you sir, does that conclude your question, sir?

Yes.

Thank you and the next question will be coming from Katie [Beckler]. Please go ahead. Thank you.

Hello. Could you give us the breakdown of your product mix in 2005, and can you give us any guidance as to how you expect that mix to evolve in 2006? Thank you.

Okay. Our product mix, compared to years 2004 and 2005, let me give you one or two examples. HR, hard rolled product is a little bit dropped -- a 3% drop to 32% year 2005. It was 35% year 2004, so instead of that the cold rolled product is increased from 33% to 36% this year. So this means -- this trend means our high quality, high valued product volume is now getting increased. So this year this trend will be continued. So we will focus on production of the high quality product. So the API and the TMCP plate will -- volume will be increased. So this is our trend.

Do you give a [sort of] breakdown of the product mix?

Give a full breakdown?

Yes.

Right, okay let me give you the volume.

Okay.

Right, we have seven major products and the hot rolled product is about 9.2 billion tons last year and plate is 3.4 billion tons and wire load is 1.9 billion tons and cold rolled product is 10.4 billion and the silicone steel is 0.7 million and stainless is 1.9 million and the others are 1.1 billion. So total will be 28.7 billion tons last year. Clear?

Yes that’s great thank you, and essentially you're expecting cold rolled and plate and wire to increase their participation in the mix, is that right?

Yes from this year we expect some silicone steel and cold rolled product and plate volume will be increased compared to last year.

Okay, but despite that improvement in mix you're not expecting average prices to be higher in 2006?

We assume current price will be maintained for a while.

Okay, thank you very much.

Thank you ma'am. The next question will be coming from [Matthew Sterrick], please go ahead sir. Thank you.

Sorry to ask another question, I'll be brief, but could you just talk about Korean domestic demand for a moment and just try and flesh out a little bit how that’s traveling, or whether it's improving or deteriorating and whether the reason prices are deteriorating is solely because of the supply which is coming on from China?

And also just in regards to that, there's been some news recently about Chinese steel producers potentially shipping -- ship plate -- ship building plate to Korea. Is that a real threat and do you expect to lose a little bit of market share on the back of that? That’s it.

Yes okay [inaudible].

With the demand for steel is okay, but there has been some confusion in the marketplace, especially for the secondary market. In the first half the steel price has been expected to be stronger [further] so there has been a great temptation to build up the inventory which caused the historical build up inventory volume to reach to 3 -- near to the 3.5 million tons of steel. But all of a sudden from the October the China steel makers triggered the drop down of the steel prices and POSCO was first to cut down its domestic prices marginally, effective beginning of this year.

Markets seem to be still expecting further price cuts and they delayed the order, but we know -- we could notice the gradual improvement of the inventory level, I mean the inventory seemed to be [recreating] and we noticed the absolute level of inventory is near to 3 million tons end of last year.

For this year the -- we forecast the steel consumption will grow stably by more than 2% from -- over last year while the steel production will grow by 3.6%, but the surplus production could replace the imported steel, especially from China. So the import of steel is expected to drop down by more than 8% for this year from last year. And the main -- the industry consuming the steel, for example the ship building industry, is still operating up to their full capacity focusing on the high value added ship such as the [LND] carriers. The volume of the building -- the ship building will increase for this year as well.

And as you know the Korean -- the consumption, especially consumers consumption is recovering slightly now which will cause the increase of the demand of automobile and the automobile is growing very strong in the overseas market as well. With the recovery of the economy we expect the electric -- the home appliance industry will be good with the demand for the replacement and for the premium -- the level of the products. The construction has been sluggish last year, but with the new capital project by the government even the construction area as well, to grow strong for this year.

So we are relatively positive for the growth of consumption of steel and the -- POSCO has some -- I mean has built up the inventory inside, but of course it's affected with weaker demand from the market, but at the same time it should be a strategical stance to prepare the revamp of the -- another blast furnace which is scheduled to be from beginning of March for this year.

Is that okay for your question?

So I suppose you're sort of answering saying that imports -- you expect imports this year will be down? Are you seeing Korean competition in the ship making -- ship plate market in terms of what we've been reading in the news recently about China potentially sending more ship plates to Korea?

Okay as for the plate for the ship building especially, POSCO is definitely competitive against the imported plates from China, and POSCO is the only provider of this product and Korea is the definite -- in shortage of this kind of product. So they seem to change the source of the plate for the ship building from Japan to China, but it's not clear yet they could be satisfied with the quality or with the input from China.

But anyway we can maintain the competitive -- cost competitiveness of the price against the imported Chinese steel even for the plate for the ship building.

Okay thanks very much.

Thank you sir. Does that conclude your question sir?

It does, thank you very much.

Thank you very much. [OPERATOR INSTRUCTIONS]. There's a fourth question from Miss Katie [Beckler], please go ahead ma'am thank you.

Thank you. I just have a question on the cost side and your expectations for coal costs and indeed for iron ore costs in 2006 versus 2005. I know that you said that you couldn't talk about the operating margin on a quarter by quarter basis, but if you could talk about the cost pressures you're expecting to see this year?

Okay, well we are still under negotiations -- raw material price negotiation this year. And already we agreed a few coal, not definitely hard coking coal, sorry, semi-soft and PCI coal, we already agreed with a lower price than last year. And the [inaudible] hard coking coal also the price will be down just what we expect, or we hope. And in terms of the iron ore it definitely depends on how much the Chinese import this year. The price will be -- depends on the import volume by China, so it's difficult to say at this time how much the price going up or down. That’s our view on the raw material side, yes.

Just two more questions; can you tell me what percentage of your cash costs are iron ore and what percentage are coal? And can you give me a sense of the magnitude of the decrease that you are looking for in [hot] coking coal, thank you?

Okay, based on last year our raw material cost is around 60% of our total cost and the 30% of the 60% is iron ore and the 30% is coal and the remaining 40% is [inaudible] and the freight and other raw materials.

I'm sorry we cannot give you the precise description or the components for the cash cost; we are not allowed to reveal outside, sorry. It's a rough, sorry --

Okay.

Estimation.

Okay. And in terms of the magnitude of the drop in coking coal prices that you're looking for, just in light of the negotiations that you've had on semi-soft and PCI, can you give me a sense of what you would be looking for there?

Well I think you may know lady some institutions forecast the coking coal we would drop 10 to 15%, that is the market concept. And we are, as I mentioned, we are in the middle of the negotiations so it is very to say how much -- our view is difficult to say, but market concept is 10 to 15% drop compared to last year.

Okay, thank you very much indeed.

Thank you and does that conclude your question ma'am?

It does.

Thank you. The next question will be coming from Mr. [Ivan Coley], please go ahead sir.

Yes thank you for your conference call. The company appears to be growing its level of cash with sales of shares and also operational cash, but the dividend was a little bit flat. What purpose does the company intend to use this cash for and maybe will the share buyback grow from the current level?

Yes we have been building up the excess cash inside, especially since the liquidity prices [inflation] in '97 and continue to redeem the debts. Now we realize the leverage is too low and realize -- notice the lot of the investors are concerned with the high level of cash. But it -- you should understand this is the -- just a strategic stance to prepare ourselves for any possible investment for the growth in the future and the Indian project will be one of them.

This year we have had discussion in the Board of directors to determine the level of the dividend, and with the outlook of a weaker cycle during this year and with the uncertainty for the coming years, we decided to propose the same level of payout for the year of 2005 to the shareholders' meeting which is scheduled February 21. And this means this can indicate the management commitment to maintain the very stable -- the payout for the dividend despite of the cycle. And of course we should use the cash for the interest of the shareholders in the future, but still we'd like to be a little bit [consultative] stance for the future growth of the company. But in conclusion the cash will be used to enhance the return to the shareholders.

And as for the treasury buyback program, we continue to buy back for over the last several years and this year, actually we don't have any fixed plan for another purchase, but it depends on the market condition and the level of the share price during the year.

Does that answer your question?

Yes thank you.

Thank you sir. The next question will be coming from Mr David [Grayman] please go ahead sir.

Hi, thank you for having the conference call. I just wanted to follow up on a comment earlier in this conference call where you talked about you expect -- I guess this was in answering to another question, you expect Chinese imports to be lower into Korea, and given your expectations on pricing do you expect then to get more aggressive on pricing then to reduce the Chinese imports?

And then secondly, what kind of effect are you seeing in the market given, frankly, the conditions of -- in China right now and the production levels of the Chinese mills? Thank you.

Well we -- it's basic policy for the pricing by POSCO to keep it in line with the international price. So we don’t have any intention to be so aggressive against any imported steel; we can't compete with the same level of the domestic price. That’s the basic policy. And the level of production by the Chinese steel mills has been increasing, especially toward the end of the year and well, we had the last discussion this afternoon with the domestic investors and there had been hard discussion especially for the current Chinese market, but the problem is nobody can be sure for the statistical data for the Chinese market.

In general we expect China will have the overcapacity which can cause over supply of the steel, but at the same time we are -- we noticed a sharp drop down of the price by major Chinese steel mills near to the end of last year, and we have the assumption that the current level of the steel prices is near to the cash cost, or probably below the production cost for large numbers of the producers in China. And we understand this time of the -- I mean this time price cut by major steel producers could be guided by the Chinese government who has strong commitment to restructure the industry. So we like to be little bit positive for the further development of the -- in China of the industry in terms of the supply and the demand during this year. So as I've commented, we have opinion for the marginal recovery of these prices from the second half of this year.

Thank you very much.

Thank you.

Thank you sir and does that complete your question sir?

Yes it does.

The next question will be coming from Mr [Annan Chu] please go ahead sir.

Hello this is [Annan] from [inaudible] I have two questions. The first concerns your growth. In your Slide 17 you put out a number 15 million tons for the overseas capacity; of this 12 million tons seems to be the India project, can you elaborate on the other 3 million tons of overseas capacity you're looking at?

And the second question relates to the SK Telecom shares; you have mentioned that you are planning to sell the balance holding in SK Telecom. Can I understand what was the urgency to suddenly sell SK Telecom shares at a loss given that your cash flow situation like you mentioned in answer to the previous question is very strong, and you don’t have any cash flow problems, so what's the urgency to sell SK Telecom at a loss?

We are not so urgent for the liquidation of the SK Telecom shares. The investors have been concerned with the low profit asset and the non-core asset held by the company. So during the Board meetings last year the SKT has been determined to be liquidated especially for the [inaudible] portion over the POSCO which is held by the SKT who is holding around 2.8% of POSCO at the moment, and the total number was 1.7 billion shares. And with exhaustion of the foreign ownership limit we were forced to liquidate among the local investors before the end of the year and have successfully liquidated 1.1 billion shares at that time, so we are still some number, 6 to 700,000 shares of SKT, but once again we are not urgent to liquidate it in any way so it are the -- up to the market performance, SKT's shares performance during the year, so we will not hesitate, I mean hurry to sell it out.

Yes we released the medium term business strategy especially to have the 15 million [onshore] capacity in local and overseas market, and for the local capacity we will expand gradually from 31 million tons the current capacity to 35 million tons. Actually the current capacity is 32 million tons, the 1 million ton of capacity is coming from one of our local subsidiaries which is named the [Taiwan] Specialty Steel. So the additional -- the capacity will be 3 million tons till 2008, but it does not mean any physical add up of the off stream capacities. We will expand or increase the final capacity with de-bottlenecking or the enhanced actual production capacity step-by-step till that time, and with the gradual revamp of the existing facilities blast furnace and with the new capacity from FINEX.

And we will have the [inaudible], we have the target to have 50 millions of production based in overseas. Actually at the beginning of last year we expressed the interest in the opportunities in China which has been -- which is great potential for the growth in the future, but the eventual policy by the Chinese government does not allow the foreign steel producers to have the substantial capacity in China. So we have some problem to achieve the initial target, but we are still looking for the chance in this gigantic market. At the same time we have a positive view for the chance in other parts of Asia such as the South East Asia or in the South America, for example take Brazil which is in reach for the [inaudible]. So the additional or the marginal 3 million tons of capacity will be from the various [inaudible].

Okay thanks.

Thank you.

Thank you sir and does that conclude your question sir?

Yes it does.

Thank you and the next question will be coming from Geoff Boyd, please go ahead sir.

Okay, yes thanks for the call; I missed the first little bit and I was just wondering in terms of the non-operating losses for the shares on SK Telecom, how much was that amount? That’s question one and just question two is, what was POSCO's inventory level at the end of December? And also what was the equity base for POSCO at the end of December because I didn't see that in the presentation?

So just those three questions.

We cut the loss by 120 billion won with the liquidation of the SKT before the end of last year. And inventory, in POSCO [inaudible] just below 900,000; 891,000 tons as of the end of last year, which is coming down marginally at the present. This is a similar trend of the inventory in the second market in Korea as well. But once again of course this is the cost with the weaker demand, but at the same time this is the strategic build up of the inventory for the time of revamp of blast furnace which is scheduled from March this year.

The last question?

Just what was the total equity base in billion won, how much equity was on the balance sheet?

24.2 trillion won.

Okay, great thanks. And was there any other non-operating losses of significance? Because it seemed like the non-operating side was kind of weak this year, in the fourth quarter.

The outsourcing for almost 1,600 employees for around 410 billion won, alright? Yes that is the significant one.

What is that related to, sorry?

Outsourcing.

So restricting our human [resources] --

Yes number of [inaudible] employee.

But this is a non-operating expense or --

Yes, yes, yes in non-operating.

Okay.

Thank you sir, does that conclude your question sir?

Yes that’s fine.

Thank you [OPERATOR INSTRUCTIONS].

Due to time constraints we'd like to take one last question. Thank you.

[OPERATOR INSTRUCTIONS].

Operator there seems to be no questions, in that case we'd like to end this conference call.

Okay sir there appears to be no further questions and I would like to hand the call to Mr. Yongsuk Son for the closing remarks.

Right, thank you very much for participating in the call. If you have any questions please let POSCO's IR team or myself know. Thank you very much, take care. Bye bye.

Thank you and that concludes today's conference call. One behalf of POSCO we would like to thank everyone for participating in today's conference, all lines may disconnect now and good day to you all. Thank you.