Posco Holdings Inc (PKX) 2006 Q2 法說會逐字稿

Good morning, good afternoon and good evening to all participants, and thank you for standing by. At this time I would like to inform all parties that your lines have been placed on a listen-only mode until the question and answer session of today’s conference. 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.

I would now like to turn the call over to your first speaker for today, Mr. Yong-Suk Son. Sir, you may begin and I’ll be standing by for the question and answer session.

Thank you. Good morning. My name is Yong-Suk from UBS. Welcome to POSCO’s Q2 earnings results conference today. We have here with us Mr. Kim, Director of IR Group, Head of Team. Mr. Kim will briefly summarize POSCO’s Q2 performance followed by Q&A. Without further delay, shall we begin, Mr. Kim?

Yong-Woon Kim: Good morning. This is Yong Kim. I’m in charge of Investor Relations Group at POSCO. It is my pleasure to have you all on this conference call. I’ll give a brief summary of our second quarter performance and talk a little about current trends of steel industry. Then I can take some questions.

During the second quarter we carried out many rationalizations and upgrades of facilities, as laid out on our strategic plan, to shift our production to prime grade. As a result, our production and sales volume decreased slightly from the last quarter. But now that constructions are over we will see more productions of better steel and greater value for the rest of the year. So, accordingly, we have raised our target for strategic product sales to 55% from previous 52%.

Thanks to recovery in export market and in stainless steel we were able to keep the revenue around the same line as first quarter. And with our cost-saving measures starting to show results, our operating profit rose by KRW150b to KRW940b, raising OP margin to 20%. This, I believe, is about what we most expected.

Our capital structure is going through some change as well. Of 4% buyback announced, about 70% are purchased. To fund this purchase we have increased our debt level slightly, bringing our liability to equity ratio back to about 20% level.

Many of our strategic initiatives are becoming visible. We completed number six continuous galvanizing line, bringing POSCO’s status in automotive steel production to second in the world. Along with automotive-specific process centers all over the world, we will make Gwangyang works the world’s number one automotive steel mill. On growth side, we finished construction of integrated stainless steel mill in China. POSCO’s combined capacity for steel -- stainless steel now is the third in the world.

For non-steel business we are finally commercializing with our own manufacturing technology of magnesium sheet. Magnesium sheet business has lucrative future and with our technological advantage we plan to become an important player in the market.

As I said before, we made numerous investments to lay out our foundations for qualitative growth. We completed refurbishment of number three blast furnace and rationalization of number two hot roll mill in Pohang. We also upgraded and rationalized number one cold roll mill in Gwangyang, as well as wire rod mill and electrical sheet mill. Finally, we have announced our plan to expand our up -- expand and upgrade plate capacity.

Most notable is our cost-saving initiatives. Our annual cost cut target is KRW980b. We saved KRW497b so far, achieving well above 50% of our target during the first half.

Turning attention to outside, Mittal and Arcelor finally announced their plan for a merge. This is the biggest M&A in the steel industry. You are probably all aware of the event. So, we won’t go into detail, but the transition in the structure of steel industry will be accelerated for certain.

Looking forward, we believe the recovery of -- in the global steel market will continue, at least for another quarter. The demand is strong. And although we are hearing about a slight setback in China spot market, the rest of the world still shows strong market. Even in China demand is strong. Auto production went up 32% and shipbuilding 13%. Its import and export structure is still the same. Exports are mostly commodity steel and imports of flat products continue. Also, Chinese government recently reaffirmed their determination to restructure steel industry. The announced plan has realistic goals and measures, and will accelerate the change in Chinese steel industry.

Domestic steel market will also enjoy stable growth. Steel consuming industry would have modest growth too - ship building 5% and car production almost 6%.

For the raw materials, as you would know, both iron ore and coal prices are settled. Looking forward, the supply and demand situation for both iron ore and coal is expected to ease. As for nickel and zinc, price still fluctuates, so we are adjusting stainless steel price to accommodate price change in nickel and recently introduced surcharge on galvanized steel offset the burden of zinc prices.

To sum up, business is less cloudy and most of the big uncertainties over capacity in China still remain. Therefore, POSCO’s business plan for the next 2006 is not substantially different from our last announcement at this point.

This would conclude my opening remarks and thank you for taking time to join us. Now I’ll take some questions.

Thank you, Mr. Kim. Shall we start with Q&A session please?

Yes, thank you. [OPERATOR INSTRUCTIONS]. Our first question comes from Daniel Altman. Sir, you may ask your question and please state your company name.

Hi, thank you. It’s Daniel Altman for Bear Stearns. Thanks for making the time to do this call. Just, I guess, a couple of wide-ranging questions. Firstly, I think there was a comment made that you may strengthen your relationship or cross-ownership structure with Nippon Steel. I just wonder if you can confirm that and maybe the comments you made about Mittal -- Arcelor and Mittal being good for the industry, if you think that there’s going to be any similar moves done in -- within Asia.

Second question is regarding the automotive steel capacity that you have. You mentioned 6.5m tons. I’m just trying to reconcile that with the different lines that you have. If you can maybe just walk through how much capacity you have on each of those lines.

And then lastly, if you can give us a cash balance for the first quarter, so we -- for the second quarter, so we can calculate the net debt balance. Thanks a lot.

On your first question with regarding NSC, we have -- in 2001 we made a strategic alliance on a technical and information exchange, and we have exchanged our stock with NSC at that time. And presently we have not received or gotten any indication to exchange further stocks.

And on Arcelor and Mittal, yes, there has been worry in Asia, but the culture between European and western world and Asia is totally different. It’s more of a -- in Asia we’re still more nationalistic and it would be very difficult to consolidate. So, basically we can probably see more on alliances, cooperation type of pact, instead of a consolidation.

And the second question on automobile - can I have the list? Okay, here it is. Automobile steel capacity in Gwangyang was mostly on cold roll. Number four cold roll mill has a capacity of 2.2m tons. And on the galvanized we have number one, two, four, five, six galvanizing line and that’s 2.1m tons. And on HR coil it’s 2.1m tons. NEG is 0.1m tons.

And I’m wondering whether that will answer your questions?

Yes. I’m just wondering, when you say it’s over 6m tons [a year], isn’t the -- doesn’t the HR go into the CR, which goes into the galvan -- aren’t you double counting the --?

No, no, it’s not. It’s a different usage for cold roll, usually inside of the cars, and galvanized is outside a car. It’s all different usage on all products.

Okay.

And the cash balance, okay, as of end of July it’s KRW0.8m net cash. So, we have borrowed --

June.

Is it June?

The end of June.

End of June, I’m sorry, end of June. And we have borrowed KRW2.2 trillion and the cash is KRW3 trillion. So, net cash is about KRW0.8 trillion -- was it million? Trillion won, I’m sorry.

Okay, and if I can just get one other number from you, which is your shares outstanding at the end of the second quarter.

Outstanding?

Yes.

It’s the same --

We have no [calculate].

87m shares, about.

Okay, but I thought you bought back shares during the quarter?

We did buy the treasury stock and we have at this point no planning for canceling it.

Okay. Can you give us the shares outstanding not including the treasury stock?

That would be 77.687m shares.

Okay, thanks very much.

Thank you. At this time there are no further questions. [OPERATOR INSTRUCTIONS]. Our next question comes from Alex Latzer. You may go ahead with your question and please state your company name.

Yes, thank you, Merrill Lynch. And thank you for the opportunity to discuss your company. I had a question. I’m hearing increasing reports that the Chinese steel producers are increasingly becoming the sole suppliers to some of the auto and appliance industry with higher-value steel. The self-sufficiency has increased over the last few years from about 50% to about 80% currently. And I’m just wondering if you could comment on the quality of some of the domestic steel producers and whether they’re indeed taking some share from some of the imports, for instance, in the higher grades such as cold roll and galvanized, for instance, in the automotive sector? Thank you.

Well, they are, like Baosteel and Wuhan, [Wuhan and Wuhan]. And the thing is they have a technology to produce it but not the product quality to Korean or Japanese, and this -- but only to those companies, the big attrition companies. And most of other steel manufacturers are not yet up to any quality that can be used in automobile. But the self sufficiency, in total not yet.

[Technical difficulty].

They still import a lot. I think they import about -- this is in million, right?

In thousands.

In thousands, okay. It’s 546,000 for cold roll from January to May this year, and coated about 811,000 tons. So, they continuously import -- I’m sorry. No, that was export. I’m sorry. The import is 1.7m for cold roll and coated 1.8m tons. So, they still import a lot from June to May -- January to May, I’m sorry.

So, for instance, based on that then, you’re not seeing any Chinese exports in the higher-value end putting any pressure on?

Not at this moment. And we -- the thing is their car industry is growing so fast that the rate of their facility coming in is far faster than the amount they’re producing, the car that they produce.

I see, thank you very much.

Thank you. [OPERATOR INSTRUCTIONS]. Our next question comes from [Punit Pujara]. You may ask your question and please state your company name.

Yes, hi. This is Punit Pujara from [Apex Capital]. Thank you very much for taking my question. I had two questions. One was how do you see the pricing power on the ongoing basis for the remaining of this year and for early next year, in terms of competition from China and otherwise, but how do you see POSCO’s pricing power?

And the second question I had was what is your buyback strategy on ongoing basis here? Thanks.

Well, by -- on the prices in China for the third quarter, all the major Chinese companies have raised their price for the third quarter. And that’s -- right now we see -- from late June to now we see some dropping in spot prices, because we think it is the seasonal effect or vacation period.

And the thing is, when we go far into third quarter, a lot of companies and steel users have to use a lot of steel and the demand goes up, because of Christmas demand. And so, we expect the price -- even the spot price will go up soon.

And on fourth quarter in the beginning probably we’ll continue. But towards the end we are not quite sure what will happen, because the U.S. industry and other world economies, we are not quite sure what will happen. So, we’re not quite clear on that event.

And, yes, well --

Yes, my second question was on buyback strategy.

The buyback. Presently we have announced that we will buy 4% [inaudible] for the treasury stock. And we did finish buying back 2% on direct buyback through -- from the market. And now we are in a process of buying back on our trust fund. And that is we have bought about 1.2% at this point, so we have another 0.8% to buy back. And that’s for this year and we have no plans at this time to buy back more in this year.

Thank you.

Thank you. At this time there are no further questions. [OPERATOR INSTRUCTIONS]. We have a follow-up question from Daniel Altman. Sir, you may go ahead with your question.

Hi. Can you just remind us the basics behind your trust fund? Thanks.

In Korea if we buy back, what we have to do is we have to hold it. When we buy it we cannot sell it for another six months. But on a trust fund we can -- we buy it and after one month we can sell it or -- we can sell it. So, that’s the two different systems, the law that we have here. That doesn’t mean that we are going to sell our trust fund stocks.

Okay, thank you.

Okay.

Does that conclude your questions, Mr. Altman?

Yes, thank you.

Thank you. Our next question comes from [Elliot Burke]. You may go ahead with your question and please state your company name.

Hi, Millennium Partners. Could you speak a bit about the dividend policy and where you see the dividend going forward?

Yes. Basically we would -- we have a policy for stable dividends policy. And we will -- I expect that is going to happen this next year too. It is -- it’s not legal for Korea -- in Korea to announce any forecasts. So, this is my -- just my thinking.

But, by stable, do you mean unchanged or --?

Stable, unchanged. Of course, they’re about the same level.

Approximately the same level.

That’s right.

And do you have a target level in terms of percentage of profit or is it more flexible than that?

It’s a -- basically it’s a capital allocation policy. And it all depends on how much that we have to [win back] and how much we will -- how much we are going to give back the profit to our stockholders. And at this point we do have a lot of projects coming. So -- then that’s the level that we think is appropriate for future growth and give back to our stockholders. And just -- yes.

Okay. And kind of a parallel question - given the Company’s in a net cash balance situation, generally speaking --

Yong-Woon Kim: Yes.

You probably -- or it’s probably not unfair to say that the Company might be a little bit under-levered, if anything. How does the Company think about leverage and about maximizing return on equity, so to speak?

We definitely do think we are -- we should increase our leverage position, so basically this year we borrowed money and we bought back our treasury stock. And also we’ve got a lot of investment that we are going to make in future. We will try to leverage it. And it’s very difficult, what is the best or what is the optimal level of leverage. So we’re still studying it and definitely 20% is too low, so we will try our best to increase it. But the thing is that we just cannot borrow money and just -- and hoard the money.

And basically, what we are trying to do is we find a good project and we try to find a good investment object or a subject. So basically we are thinking of expanding our capacities, going out to many different -- all over the world and see whether we can invest in a steel industry and buy some purchase or M&A companies all over the world.

Okay. And my last question is also on a parallel subject. How does the Company view the treasury stock? Is it -- why not cancel those, given the previous comments that we’ve -- the stuff we talked about, about return on equity and leveraging up. And on a parallel line, is -- one obvious way to reduce an under-leveraged situation is to return cash to shareholders via a dividend or a share repurchase. And why not get rid of those shares, if you’re so under-levered at this point?

Well, we have that treasury stock and we like to have it for many different reasons. One of them is to have M&A -- spend on M&A or on ESOP, and the strategic alliances and things like that. So we like to have it and we like to use that stock as one of the methods.

Okay. Thank you.

Thank you.

Thank you. We have a follow-up question from Alex Latzer. Sir, you may go ahead with your question.

Thank you. I had a question -- couple of questions, one on raw materials. The first part of that would be on the met coal side. I hear that perhaps we were seeing, on a spot basis, some tighter met coal pricing; I heard of one shipment that was diverted to Korea at as much as $135 a ton. I wonder if you could comment on whether demand is as strong, and that was -- whether that was a one-off or whether we’re seeing [inaudible] raw material?

And then, we recently saw a $25 per ton decrease in some of the export [csots and] price out of China, and I was wondering if that perhaps reflected a little looser hot rolled conditions, perhaps, because BSN was out of the market because of the [strategies] of its plan, and whether now we’re seeing a weaker hot-band market while the value-added grades continue to be tight?

And then lastly, I have a question, can you just remind us on your strategy with respect to joint ventures or acquisitions in China? Thank you.

On coal, we have a yearly contract with major coal or iron ore exporters. And the spot, I have not heard that price yet. And basically, the thing is, when we make a contract for one year that [doesn’t mean] very much. We do not purchase spot very often. And we hear that the new facility for coal production is increasing and I hear that the demand for coal is less than supply, so we expect the price to go down steadily as the new -- the mining becomes in operation.

And on second, on China, Asia price, as I have stated in my opening statement, it is a seasonal thing. Basically, right now the demand for HR coil is loosening, because people go for vacations and such. So this is not -- it’s a seasonal factor. And as soon as the users start to use and the machinery starts to operate, we will probably -- we will see the demand go up in China also. And then usually the third quarter is high-demand period, towards the end of like September and October, because of the Christmas demand.

And on your third question, on the joint venture in China, I have not heard anything and I cannot confirm or deny because I do not know.

Great. Thank you very much.

Thank you. [OPERATOR INSTRUCTIONS]. We have a follow-up question from Punit Pujara. Sir, you may go ahead with your question.

Thank you. I just had a follow-up question on a couple of weeks back you announced that the stainless steel production is going to be cut back. What are the thought processes there and do you see further cutbacks in the stainless steel area on ongoing basis?

Right now, for the stainless steel, it’s very -- the market is very good and the price is constantly going up. It’s not only because the nickel price is going up, but also I see a lot of demand coming in. And as we are making -- for this first quarter we were losing money, but now we are making money and we’re in a pretty good position. And we were able to raise price and we were able to sell all the products that we produce. And I’m not quite sure what is the situation on the stainless steel market, but the demand is there and we are not having any problems selling it.

Yes, but my understanding was that you cut the production a couple of weeks ago on stainless steel?

No, I don’t think -- I think you read it in a newspaper, but we did not reduce steel production.

I see. So that was not the case?

No.

Okay. Thank you.

Thank you. At this time, there are no further questions. [OPERATOR INSTRUCTIONS]. Our next question comes from [Bruce Schoenfeld]. Sir, you may go ahead with your question and please state your company name.

Hi, [Arthur Capital]. Can you just give an update on the project in India? There has been talk recently about some problems with the state government in terms of getting approvals and things like that. One of your competitors is also thinking of building a plant in the same state. So can you just give us an update on that?

Sure. Right now -- let me go into what we are doing here, is that in the land that we are trying to build an integrated steel mill, we have about 440 families in the land that we require to buy. So it’s only 440 households, so it’s not that many that we have to deal with, like with the other plans [in the] Indian companies to go. And mostly it is owned by government -- local government. And local government is, if you want to --

There is an article came out today, how good relationship that POSCO has with the local government. And they’re the ruling party in Orissa state and they are in full support, and also the central government in India is in full support. And about two -- I think on May, on OECD and IASI work conference, our -- Korean government personnel went there and they -- and he had talked to the Indian steel ministry directors. And they had confirmed and the -- even the government officials in India have offered full support on Korean project in their Orissa state.

And also we have sent our medical team to Orissa, the area that we are going to build our plant. And they are going to be there for about a week or so, trying to help the local people and local kids with the problems in their health. And we are having a very good relationship at this point, and we have no quarrel or problem. And basically by the end we will finish purchasing our land -- the local land by end of this year and start our construction next year. That’s our plan and we have not seen any delays on that project.

And also, on Mittal Steel, who just announced that it is going to have -- build another 12m ton capacity steel mill in Orissa state. We basically welcome. If he builds it, then it doesn’t matter, because right now India per capita steel consumption is only 30 kilograms. In Korea it is about 1,000 kilograms per person, and China is about 300 kilograms per person. So, in India, the usage of steel is about 30 to one, compared to Korea. So -- and also, the OECD projection is that in the year 2010 -- sorry, 2020, the total demand will be about 1.1m tons -- sorry, 100m tons demand. So basically, right now, their capacity at this point is about 30,000m tons, so we still have not -- 30m, I’m sorry, 30m capacity.

So there is a lot of room for demand. And if we start building our mill, it will be in by the -- probably full capacity will be in operation by the year 2020. So I think we have enough market for both of us.

Okay, thank you.

Thank you. At this time there are no further questions. [OPERATOR INSTRUCTIONS]. There are no further questions at this time.

If there are no further questions, I will thank you for participating in the conference call. We will -- and if there’s any further questions, please let POSCO’s IR team or myself know. Thank you so much.

Thank you, Mr. Kim.

Thank you.

Thank you. That concludes today’s conference call. Thank you for participating. All lines may now disconnect.