Posco Holdings Inc (PKX) 2006 Q1 法說會逐字稿

Good morning, good afternoon. Welcome to the POSCO first quarter 2006 earning conference call hosted by Credit Suisse. For the duration of the presentation, all lines will be placed under listen only mode. There’ll be a question and answer session following the presentation. [OPERATOR INSTRUCTIONS]. I would like to hand over the call to Mr. Hocheol Kim, and I’ll be standing by for the Q&A session. You may now begin, Mr. Kim. Thank you.

Thank you for joining POSCO's first quarter conference call. This is Hocheol Kim from Credit Suisse, moderator for conference call. Here with us from POSCO, Yong Keun Kim, Head of IR Group, and Duk Il Yoon, IR team leader. We’ll start with the summary presentation of the first quarter results and followed by Q&A session.

Thank you, Kim. Thank you. Good afternoon. My name is Yong Kim, Group Leader of IR Group at POSCO. It is my pleasure to have all on this conference call. I have brief opening remarks.

As you all know, the downturn of steel market in Asia has started from the latter half of the last year, continued through the first quarter of this year, although we are starting to see a slight pick-up in prices recently. Compared to the last quarter, our financial performance in the first quarter was lower than the last quarter, as expected. Despite the market condition, we have made progress in our key strategic initiatives and were able to minimize the negative effect that swept the steel industry in Asia.

The decreased production and sales volume is mainly due to the refurbishing of number three blast furnace in Pohang. To minimize the effect, we concurrently carried out rationalization projects and other major maintenances for certain downstream facilities, including HR, electrical and stainless steel plant, while maintaining full production at other mills to compensate for the reduction. We also pushed to expand the production and sales of strategic products. Our goal was 52% of total sales; we achieved 54%.

On the financial side, the revenue was down from the last quarter, as expected, but so was cost of goods sold, thanks to our corporate-wide innovative cost saving initiatives. Even though the revenue dropped by more than KRW500b, the operation income dropped only less than KRW300b, keeping the operation income at KRW790b and margin at 1 -- 16.9%. Our stock price reached the all-time high of KRW250,500 on March 31.

As I mentioned, we are making progress in important strategic initiatives. The construction of strip casting demo plant is well on schedule. This new technology is expected to save us 40% in investment and 35% on operation costs when fully developed. India project is proceeding smoothly. We opened Paradeep construction site office and completed the basic design of our port. Also India’s central government held the first monthly inter-ministerial meeting to discuss the progress of POSCO’s India project.

Refurbishing of number three blast furnace and construction of number six continuous galvanized line is also proceeding as planned. The new line is dedicated line for automotive steel products. Furthermore, to accommodate auto industry’s growing needs, we completed hot press forming and hydroforming plant.

Together, the tailored welding black line will expect to provide total solution of our order making customers overseas. And to better serve our overseas customers, we are setting up more processing centers close to our customers. We are also constantly expanding our customer bases by developing new demand and exploring new markets in the world.

One of the most notable initiatives is our cost saving initiative. We have reversed our annual cost cut target -- I'm sorry, revised our annual cost cut target to KRW890b from previous KRW510b. This cost improvement will be structural, meaning that it would not be unit cost reduction through production increase, but rather cash cost reduction through innovative measures such as raw material blending techniques and drastic improvement in production facilities.

Steel industry seems promising for the first half of the year. We believe that the current rebound in steel product price will continue for the most part of the second quarter. Steel demand is still, if not strong, stable, if not strong throughout the world. The price seems to be picking up. As before, however, the uncertainty lies in China. New facilities are scheduled to go into operation this year and net exporting of steel is expected to continue.

Good news is that flat products will continue to be short on supply. And hopefully the Chinese government’s initiative to restructure the steel industry by consolidating and closing down all inefficient mills would begin to show some results.

The biggest concerns for the investors and the steel industry would be the outcome of raw material price negotiation. Coal price negotiations are almost finished, and we are expecting about a 9% drop in our coking coal price year-on-year. Iron ore price, however, is more difficult to predict. Right now it seems that it would take some time to reach an agreement between iron ore suppliers and steel producers.

To sum up, business looks promising but most of bigger uncertainties, such as steel price in China and iron ore price, still remain. Therefore, POSCO’s business plan for the year 2006 is not substantially different from our last announcement at this point.

That would conclude my opening remarks and thank you for taking the time to join us. Now we will take questions.

Okay. We’ll start the Q&A session.

[Technical difficulty - gap in audio]. It was last month we bought the rest of it and a power plant, about 1,800 megawatt plant. And we are also planning to expand that megawatt to about 2,000 megawatt. And also, we have announced that we will be in joint venture with New Caledonia and we bought -- we have joint venture with the New Caledonia company that we will buy the nickel mine and also jointly build a retraction facility.

And we will probably continue to do this kind of investment. And I’m sure those kind of investments will cost a lot of money and I’m sure slowly our ratio will improve.

Okay. Thank you.

The next question comes from [Matthew Chang]. You may ask your question.

Hi. This is Matthew Chang. In Japan, the Japanese steel makers talk about potential putting these [inaudible] potential hostile M&A. So what are you doing about it? It looks like more people talk about that issue.

Well, the Company believes that the best way is to increase our cap, and also the basic thing to do was increase our value of our company. And we see a price -- the stock price is also going up and I’m sure we would like to see that stock price go farther up. And also, we also now are starting to have investors who would be supportive of the POSCO to buy our stock. And, we are definitely -- we are studying about the possibility of having more supportive stockholders on the present management.

Is it legally possible putting in the [indiscernible] like Japanese?

Not at this moment. It’s not legal.

Right. So only way is bring the price up like -- or a share buyback and [bin] the treasury shares?

Yes. And also -- but that -- if it becomes a treasury share, the problem is that that will not give the voting right, so.

But then you can sell it to your friendly party when it comes to the worst.

Right.

Right. Alright. Thank you.

[OPERATOR INSTRUCTIONS]. We have a follow-up question from [Lindsay Taylor]. You may ask your question.

Yes. Hi again. I just saw a report overnight that Chinese net exports are still at a record high in -- I believe it was in March. Can you comment on what you’re seeing in terms of Chinese exports into Korea and does that have any effect on your domestic market operations?

Principally, especially on -- we can say it in three ways. The Chinese exports are mostly on hot rolled coil and not on cold rolled, the high end of the product. And right now, on hot rolled coil, we have a shortage in the domestic market at this point, so we do not see very much effect. Also, the thing is that the Chinese export prices are very in par with or higher than the Korean market, the export prices. So we do not see a tremendous or a strong effect at this point.

Sorry. Can I just confirm that you’re saying that the Chinese landed price of hot rolled into Korea is higher than your domestic prices?

At this point.

Okay. So it’s higher than around $500 a ton?

Yes.

Okay. Thank you.

We have a follow up from Matthew Chang. You may ask your question.

Hi. Just one more question. How is the progress with the Japanese auto makers? Last time you mentioned about you are exporting more steel to Japanese auto makers. So how many tons are you exporting now and what’s your expectation for maybe ’07 and ’08?

Hold on. Well, we didn’t -- our last year -- let’s have it this way. Last year our total export to China is -- compared to last year it’s -- to this year’s planning, it’s about 16% increase we are expecting on the car industry. And we have -- our target for this year is progressing as expected. Our target has been met up until now and we expect that we will meet our target for this year.

[Inaudible].

I’m sorry.

Net exports to China.

This is to Japan, automobile industry.

Okay. Right. So you don’t disclose a specific number of tons?

No, sorry.

Okay. Thank you.

We have a question from [Peter Boardman]. You may ask your question.

I’m sorry. I came a little bit late, but could you please repeat yourself about your outlook for raw material prices going forward, coking coal and so forth?

Well, I think I said that the coking coal, we expect about a 9% drop for the hot coking coal. And -- but for iron ore, we expect it’s going to be very difficult and there are -- they are still under negotiation and there are a lot of words going back and forth and rumors coming out. And, I sum it up, it’s from about 7 to 24%.

Pretty wide area.

Yes. Basically, Chinese are saying -- the Chinese are leading the negotiation. And after Chinese negotiation, the raw material companies are going to negotiate with Japan and Korea. And right now, Chinese, they are saying it’s a maximum of -- in the beginning they came out with a drop, minus increase, and then slowly they adjusted to 5 to 10%, where the raw material side was saying 20 to 25%. And they are still negotiating and I’m sure will decide somewhere in between.

When you decide your -- or when you -- you’re a price follower and compared to the Chinese, your -- the won has strengthened 5 or 6% since the beginning of the year. Does that impact your thoughts on what price you’re willing to accept?

Well, basically, when it’s decided, basically we also negotiate with the raw material companies. And the tradition is that, usually, the negotiation is very smooth and simple.

Okay. Alright. So in your forecast -- in your assumptions for the second half, are you factoring in any sort of increase or actually -- it could actually be a decrease, given the won strengthened?

Well, let’s say it this way. POSCO has no plan to adjust our announcement last time on our business plan.

Okay. Okay. That’s great. Thank you very much.

You’re welcome.

Your next question comes from [Thomas Painter]. You may ask your question.

Hi. I was wondering if you could possibly comment on your evaluation of the Chinese steel makers and where they are at, in terms of on the high-end product and how much of a threat they are potentially to you, maybe not now but a few years, where along the learning curve are they?

Well, if they have -- the Chinese government, basically, have a plan to shut down the furnace size of 200 cubic meters and -- for year 2006 and they have another plan to close 300 cubic meter furnace in 2007. And compared to [Bowsi], I’m sure that it’s about 30 to 34 hundred cubic meter, their furnace. So they still have a lot of companies that is so inefficient and technologically backward dated.

So they have lots of room to restructure and the only -- this is my assessment and -- that the only -- only a few Chinese steel mills are able to produce a high quality steel product. And I’m sure the quantity is not -- probably would not go over 100m tons and so, basically, then the quality -- the high-end quality very few companies have produced.

So, basically, they also import a lot of high quality products. The products they import is mostly the high-end quality cold rolled or galvanized products. And so it will take a long time for them to come to be able to produce automobile products like the cold rolled and galvanized products. So I can’t really say how long it will take for them to catch up with Korea or Japan, but not very near future, I don’t think they’ll be able to catch up.

Is there a date or a year or a number of years that internally you guys just use as a line in the sand in terms of we have to be ready by this point to anticipate that competition?

At this point, we do not have a specific plan. But our target for -- we have a strategical product -- [eight] products, such as automobile steel -- steel for automobiles and API quality hot rolled coil and plate and other things, stainless steel and things like that. And so we are trying -- our target is to produce and sell about 80% of our product by year 2008.

That’s something you’ve communicated in the past, so that hasn’t necessarily changed. You haven’t moved that up or --?

No, no.

If I could ask one last question, from a currency perspective, internally, what are your views or have they changed from your last guidance?

I’m sorry?

Your currency outlook for the Korean won?

Korean won? Well, that’s not really my field, but I think this year -- last year when we made our forecast it was about 1,040 and now we see about 960 around. So we made a tremendous deviation from the reality in our plan. And if I say something, I’m sure I will do the same thing again. So I will just let you guess instead of me.

Okay. Thank you.

[OPERATOR INSTRUCTIONS].

Okay. If there is -- we are going to take the last one question, if there is any.

There currently is no questions, sir.

Okay. If that’s the case, we’re going to wrap up the session and thank you for joining us.