Posco Holdings Inc (PKX) 2006 Q3 法說會逐字稿

Good morning, good afternoon and good evening to all participants. Thank you for standing by. [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.

I would now like to turn the call over to your first speaker for today, Mr. Yongsuk Son. Thank you sir, you may begin.

Thank you. Good morning. My name is Yongsuk Son from UBS. Thank you for joining POSCO's Q3 result conference. We have here Mr. Kim, Director of IR Group, Mr. Yoon, Head of IR Team, and a team with us here. Mr. Kim will give a presentation of Q3 results followed by Q&A. Without further delay let me hand it over to Mr. Kim.

Good morning. This is Yong Kim. I'm in charge of IR Group at POSCO. It's my pleasure to have you all on this conference call. I'll give a brief summary of our third quarter [performance] and talk a little bit about current trends in the steel industry. Then I'll take some questions.

Since the completion of major refurbishments in the first half, our third quarter production increased quarter-on-quarter. Crude steel production was up 4.1% and final products 6.1%. At the same time, steel markets started to pick up, and with our efforts to explore new markets in Middle East and India our sales, both domestic and export, increased about 5% as well.

In content the sales breakdown clearly indicates our focus on more high value-added products. Both CR and electrical steel sales rose 11.4% and 39.7%, respectively. Sales of our strategic products are growing steadily and fast, as well. In the third quarter the strategic products accounted for almost 59% of total sales. Accordingly, we raised our annual target for strategic products from 52% to 56%.

As I mentioned, during the third quarter, the market improved and price rose. Together with increased sales, our revenue rose 13.4% to KRW5.3 trillion. But we had to account for some expenses that only occur in the third quarter, such as employee stock ownership program expenses. But through our continuous cost-cutting efforts we were able to absorb the additional costs and neutralize the effects. Hence, our operation income rose 13% [sic - see presentation] to KRW1.1 trillion, with operation margin of 20.1%, in line with last quarter.

On the balance sheet side, both assets and liabilities increased, assets from profit and investments, and liabilities from increasing debt levels, including issuance of the euro bonds -- euro dollar bonds. Consequently, our equity ratio dropped slightly to 81.9%.

On the third quarter we made significant progress on various strategic initiatives. The Indian government recently approved our site for Indian project in a Special Economic Zone in principle. This clearly indicates the strong support of both central and local governments on our project. With the approval, POSCO India will enjoy many benefits, including exemption of income tax, input tariffs and other taxes. As for the project itself, there is a slight delay but we are confident that our original deadline of completion by 2010 will be met.

FINEX Technology is in its final stage. All the technological issues are resolved and only the actual construction of commercial sized plant remains. Operational limits are verified and now all matrix show everything is eye-to-eye with large-sized conventional blast furnace.

Our vision to become the world's leading automotive steel supplier is beginning to shape. We plan to construct a galvanized line in Mexico where demand is growing, order plans concentrated and U.S. customers readily accessible.

Internally we completed third and final phase of Tailor Welded Blank facility. With hydro forming and hot press forming, we are now providing total solutions of auto sheet and auto parts to our customers.

We are strengthening our competitiveness in global market capability. In South East Asia we combined our existing production facilities and regional office to launch POSCO Thailand. This new subsidiary will oversee our whole operation in the region. We also set up the office in Prague to penetrate the European market.

Let me now turn our attention to broader market conditions. Looking back, the steel market in 2006 was better than what most people thought at the end of last year. Both demand and supply of steel showed healthy growth. We believe this trend will continue at least until the end of this year. In 2007 the high level of growth will probably continue in China and other BRIC countries, and the rest of the world should experience slight but stable growth.

Currently the market seems strong everywhere, although, we hear concerns for U.S. economy and exports from China. Thanks to production discipline in the U.S. and strong demand continuing in Europe, the price is being held strong and steady.

Even in China the market seems to be stabilizing. Early this quarter the Chinese market went through some corrections. But after Baosteel's announcement of maintaining fourth quarter price, Wuhan and Anshan raised their price for November, and the spot price is slowly climbing. Domestic steel market will also enjoy stable growth, as steel-consuming industry experiences modest growth.

As for raw materials, nickel price is still fluctuating and zinc price, although stabilized, it is a higher level than a year ago, and will probably continue so for some time. But we are adjusting stainless steel price to accommodate price changes in nickel and [the broader] burden of zinc price is offset by a surcharge in zinc steel.

To sum up, all aspects of business seem stable and steady, although, there still remain uncertainties such as direction of the U.S. economy and over-capacity in China.

At this point we forecast POSCO's performance outlook for 2006 as follows. Crude steel production at 30.1m tons. Sales volume 28.6m tons. Revenue KRW19.8 trillion. Capital expenditure would be same as the budget of KRW3.8 trillion [sic - see presentation].

That will conclude my opening remarks and thank you for taking time to join us. Now I'll take questions.

Thank you. [OPERATOR INSTRUCTIONS]. One moment please. Our first question comes from John Devoy. You may go ahead with your question.

Yes, I'm wondering how many Treasury shares you had on the balance sheet at the end of the third quarter? [Inaudible].

About 10.8%.

10.8% of total shares outstanding?

Right.

Thank you.

Does that conclude your question, sir?

Yes, it does.

Thank you. Our next question comes from Leo Larkin. You may go ahead with your question, and please state your company name.

Yes, it's Leo Larkin with Standard and Poor's Equity Research. Good morning, or good evening, as the case may be.

Good morning.

Could you give us guidance, or is it possible to get guidance for CapEx and for DD&A in 2007?

Presently we are not supposed to give out future CapEx.

Okay, what about DD&A for 2006?

Hold on. KRW1.5 trillion.

Thank you.

Thank you. Our next question comes from Fritz von Carp. You may go ahead with your question, and please state your company name.

Yes, hi. Fritz von Carp, Sage Asset Management in New York. Good evening, gentlemen. I was -- to ask a question for some more color, some more thoughts on your outlook for stable steel price environment. I'm a long way from Asia so I may have this not quite right, but I think I've heard that Japanese sheet prices were negotiated at a lower price and some people have said this might put some downward pressure on steel prices in Asia in the fourth quarter. What are your comments on that point of view?

Well, the Japanese have -- what we understand is that the Japanese sheets went down about 20 or so, and plates went up about 30 or so. And, presently, we do not see any great changes on POSCO's position but on outlook, basically, we have seen the Chinese price in China is stable and climbing and we think it will continue until the mid November. And after that when the Christmas season's over we see some [slacking] in Asian markets. And it will probably continue until Chinese New Year, and after that we expect that the prices to go up though -- and for the end of the latter half of next year we expect the market to be strong. Does that answer?

Yes, thank you.

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

Thank you. John Debs for East Gate Capital Management, Palo Alto, California. Two questions, please.

The first, regarding China with the recent meeting of the Communist party and their new directives more towards environmental improvement, rural development, maybe less foreign capital coming in, impact on Chinese steel outlook both in terms of demand and supply?

And the second question, with the recent problems on the Korean peninsula, do you sense that business confidence has declined in the Asian countries? Thank you.

[Inaudible] just tell you [on] the Korean situation here, today there was -- I think there was about, I think -- the stock market went up about 1.3%, and that's pretty strong here. The sentiment here even though the North Korean's have tested a nuclear weapon, and it has not been verified whether they have been successful. But still, we don't even know whether they have tested a nuclear weapon, so it has to be seen.

And, basically, the U.S. is not going to act militarily. There will be, basically, the U.S. President Bush is still -- has said that America is going to [vote] on a diplomatic solution. So, basically, we do not [inaudible] is not very sensitive in this part. So, basically, we see business as usual here, very stable. The only problem that we see is that the nuclear event has -- we just hope that this event is not going to last and drag out for a long time so that it would affect the confidence of foreign investors. And we hope that it will resolve as soon as possible.

And on the China demand and last time I went to [ISI] and they were predicting the demand is going to grow. However, the supply side is also going to grow, but by 2010 we expect the supply and demand to be equalized out. And in the meantime we see an imbalance in the supply and demand, and we expect the demand to be higher -- I'm sorry, our supply to be higher, hence, the new equipment and investment is going to be commissioned.

We expect the supply to be over demand side. But we hope that the Chinese government policy would [complete back] sooner on consolidation and also closing down the inefficient facilities in China, and we hope that to come, effectively, to be [succeeded] as soon as possible.

Also, we see is that right now China is going to grow next year at about more than 9%. Their economy has grown about 10.6% or [10.5%] [inaudible] in this year. So high growth rate is expected. So we basically hope that the small and inefficient steel mills to be closed as soon as possible. And POSCO right now has in -- as we have in the presentation, our high value added products of the share of the total production that we [felt] is going up. And we expect that to be about 80%, and right now it's about 59%. So, we would have less competition with the Chinese common grade products. And next year I'm sure we will have a better position to be in the market because there's less competition in those value added products.

Thank you.

Thank you. Does that conclude your question, sir?

Yes. Thank you.

Okay. Our next question comes from Daniel Altman. You may go ahead with your question, and please state your company name.

Hi, it's Daniel Altman from Bear Stearns. Thanks again for hosting the call. A few questions, first if you can share with us your cash position so we can calculate net debt?

Second of all is regarding the costs for the quarter, the impact -- I think you took a retroactive charge for the iron ore if I understood the footnote correctly, if you could explain roughly the impact of that?

Thirdly, if you can talk about Chinese exports and, obviously, they've been going up the last three or four months. Where do you see that those exports effecting domestic markets? Is it affecting the Korean market very much, or where do you think those volumes are going, and who are they displacing?

And then the last question, if I could, is regarding acquisitions, some stories about POSCO making an acquisition in China. I wonder if you have any comments on that. Thanks very much.

On costs -- cash position, it's KRW3.13 trillion. And on the retroactive on iron ore, yes, we did [inaudible] retroactive, and on the total thing if you see we still -- the operation margin didn't really change because through we have absorbed the extra expenses on iron ore, and also [inaudible] everything through our cost savings activities. And on -- it's the iron ore, the total expenses on third quarter was about KRW30.9b and it has been absorbed through our cost saving efforts.

And on exports, we see a lot of exports going out from China because their value added tax rebate for exports is going to be affected by -- be lowered about 3%, and everybody is rushing to export before December 15. So we'll probably see a rush for everybody to take advantage of not getting about 3% more return. So, this means they will try to do a lot of exports. And that also affected the price in China to go up a little bit.

And right now also what happened is that what we see here is the Chinese having refurbishment of their equipment during the fourth quarter. So we basically see the hope that the domestic -- the export will move towards the domestic side after December 15.

And on M&A questions in China, yes, we are talking and one or two, but it's still a studying and negotiation situation and it’s not time yet to disclose any specifics. I hope that answers all the questions that are --

Yes, that’s very helpful. Just one follow up again. On China you talked about in going forward you thought the impact would be lasting. I’m just wondering what you’ve seen so far. Do you see a big increase in competitive pressure in Korea or elsewhere because of these Chinese exports?

Well, there is a pressure, yes. But the thing is, basically, China does not export very much to Japan because nobody’s buying there because of the quality of their steel. And POSCO, basically, is trying to shift our market and start up next to higher end. And we have achieved 59% of the higher end products. And we are trying to reduce that to 20% by 2008. And next year we expect that to be in between somewhere around 59 to 80. So we will be in a position where we have less competition with China, and we see a lot of low end producers will have a problem, but we do not see any problem at this point in Korea.

And in South East Asia you don’t have big steel makers, big, major steel makers, so basically we will be competing the Chinese. But basically, as I said again, we are moving away from the low end products and [stay at] the high value added products. So we are in a better position than other companies. Basically we will probably see a lot of competition between Russian imports and Chinese products.

Thank you.

Thank you. Our next question comes from Jonathan Goldberg. You may go ahead with your question and please state your company name.

Hi, Highline Capital Management. I was just hoping you could share your outlook with us for stainless steel?

Well, stainless steel, we see -- I’m not really an expert on stainless steel. I’m basically the carbon sales side and reporting to what I hear from stainless steel people is that, right now, it is very tight, but they are expecting more competition in next year. And that’s about it that I can comment.

Okay, thank you.

Thank you. Our next question comes from James Lee. You may go ahead with your question and please state your company name.

James Lee from SLS. Just wanted to find out what is your thoughts on the outlook on your plate prices. Japanese raised [inaudible] yesterday’s domestic [inaudible] -- Korean domestic company raised as well. So I’m wondering if you’re going to be following suit and what your thoughts are on the outlook on your plate prices.

Yes, the [Sung Do] has raised their price about KRW15,000 and about $30 [inaudible] to Korean shipbuilders. And while we -- whether POSCO will follow their suit. Right now I don’t think they are studying but the price that -- our price is already at the high end of the price and it’s now the Japanese and other people are catching up. And there’s no reason at this point to see whether we are going to raise it. We will study it and I’m sure they’ll do.

And the future, the supply and demand side if you look, the demand is high because right now the shipbuilding side is very, very good and they’re having a lot of the orders by the ship owner. We expect that to continue until -- according to shipbuilding industry, will continue until 2011 or 2012. So we expect the demand to continue to grow, and that’s why we have this [auditing bill]. We are expanding the price capacity and we basically think the plate demand it continues to be very tight, very high and supply is more tracking the demand -- tracing the demand. And probably we’ll -- I don’t see any weakening of price very soon. I hope that answers you.

Where -- you just mentioned about expanding capacity, so where is it now and where are you going to be expanding it to?

Right now we are 3.6m tonnes and we are going to go to 470m -- 4.7m tonnes 2009.

Thank you.

Thank you. At this time there are no further questions. [OPERATOR INSTRUCTIONS]. One moment, please. There are no further questions at this time. [OPERATOR INSTRUCTIONS]. One moment. Our next question comes from Benjamin Moyer. You may go ahead with your question, and please state your company name.

Yes, Ben Moyer from BlackRock. I have a question about the profitability and average selling prices. I’m just looking at your average selling price in the third quarter was up quite a bit from the second quarter. Yet your operating margins were flat, moving from the second quarter to the third quarter. And you mentioned earlier that you had some additional retroactive iron ore costs of KRW31b. Was that by [it's health] enough to explain the flat margins despite the higher average selling price?

Also maybe you can just tell me what the additional cost was from the shares that you contributed to your employees?

The resale cost was about KRW140b and we had a retroactive raise on salary and that was about KRW23b.

Is that an annualized number?

That’s for this quarter only.

Okay.

So in total you have about KRW193b in extra costs. So that has reduced our -- the operation margins. So it’s only one-time expense. So basically that will count widely even though we have average price going up and more sales kept us at the same level to the second quarter and comparative third quarter.

Okay. And then I wanted to ask another question on capital standing. You said your budget for the year was KRW3.8 trillion. How much have you spent so far in the first three quarters? Are you in line? What I really want to know is, are you in line or running below your --

We are in line and we expect to spend all of our planned KRW3.9b -- trillion, I’m sorry, KRW3.9 trillion. It is basically we have to spend on upgrading our facility to adjust our product mix facility as to our product mix, to the strategic product. And we have to upgrade it in order to have a higher value added product to produce.

And maybe -- I may have missed it earlier, but on your Mexican investment, can you just give us the outline of the timing for startup and volumes and the investment? And the focus, the customer focus?

Okay. We are going to invest about 200 -- I’m sorry, 3,000. $250m invested, we want to invest, and capacity is 400,000 tonnes per year, the products are galvannealed and galvanized products. And we are scheduled to begin our construction by 2008 and operation will begin in 2009. And the allocation -- the location of the plant will be Altamira in Mexico. And, basically, our target is the automobile parts and automotive company. And it starts not only in Mexico but also near Alabama region in U.S.

Okay. And then just one final question on -- there was a question earlier about stainless steel. And I remember up until -- up until at least a year ago or maybe two years ago, you were -- your margins in stainless steel were below your average overall margin. And I’m wondering if that gap has shrunk.

Now it turned into a positive and -- here it is. Now it’s about -- now margin is more than 11.7%. Now we’re on a positive side.

Okay. Okay, thank you.

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

Hi, this is Punit Pujara from Apex Capital. Thanks for taking my question. I had actually two questions. First one on buy backs. What are the plans for rest of this year and any plans for early next year on the buy back side? And also, are there any plans to cancel the stock holding in the trust fund?

The second question I had was on M&A [inaudible] alliances. POSCO did the alliance with [Nippon Steel]. Is there more in terms of alliances coming on board and what is the latest data from the Nippon Steel Alliance as well as any M&A, particularly in Korea, if POSCO is looking to acquire anything? Thank you.

Thank you. Buy back next year, we don’t know because the Board will decide on that next year. And whether we will cancel it, we have no plan at this point and we are keeping that [liquidity] stock to have future M&As or consolidation of the industry, basically, in a global position. We are right now talking a few -- with the Chinese companies in China and we also have other plans. We have at this point, I’m not able to disclose. And in Korea, there are a lot of rumors but no specific studying has been studied and examined, so at this point we do not have a plan but we’re still looking for possible M&As.

And on alliances, we are talking with [NSE] Nippon Steel, but we have not -- we don’t have come to any conclusion at this point. And we hope all agreements would come soon. But there’s no concrete agreement yet. We’re still negotiating and talking with Japanese company NSE, and I hope the conclusion will come soon.

Thank you very much.

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

Thank you so much, [inaudible] again. Regarding this ESOP, now is this an annual thing where you’ll be doing this again next year? Or is this one-time and you won’t be repeating this again next year?

That ESOP we had five years ago, that's a five year plan, and this year was the last year, and we have no plan for next year at this point.

Thank you.

Thank you. Our next question comes from Benjamin Moyer. You may go ahead with your question, and please state your company name.

Yes, thanks, BlackRock. I just had a follow up on the M&A question. I think it was a few months ago there were stories that appeared about POSCO considering acquisitions in industries not specifically in the steel industry. I think one was a shipbuilding company. There may have been one or two other stories that appeared about acquisitions of other companies. And I just wonder if the company could comment on the possibility of large acquisitions outside of its core steel business.

There are a lot of rumors, and we have this -- we made a disclosure on Daewoo Shipbuilding saying that we have no plan at this point and also there was -- there are a lot of rumors about [Esso oil] sub-section, we have -- we do not have any plan. And right now we -- our management is basically saying that we would like to stay in our core business side. I hope that answers you.

Okay, thank you.

Thank you. At this time there are no further questions. [OPERATOR INSTRUCTIONS]. One moment.

We will take one last question but if there is none we will --

I’m sorry, there are no further questions at this time.

Thank you very much for taking time to be on a call with us.

Thank you very much, have a nice day and nice weekend.

If you have any further questions, please feel free to call or contact the IR Team at POSCO or UBS for any questions. Thank you and good day.

Thank you. That concludes today’s conference. All lines may now disconnect. Thank you for your participation.