Posco Holdings Inc (PKX) 2006 Q4 法說會逐字稿

Welcome. Thank you for standing by. All parties will be in a listen-only mode until the question and answer session of today's conference. This conference 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 speaker, Mr. Yongsuk Son. Thank you, sir. You may begin.

Thank you. Good morning. My name is Yongsuk Son from UBS. Welcome to POSCO's 2006 results conference. We have here present Mr. Kim Yong Keun, Director of IR Group and the IR Team. Mr. Kim will briefly summarize 2006 results as well as guidance for 2007, followed by a Q&A session. Without further delay, let me hand over the call to Mr. Kim.

Good morning and Happy New Year [to you]. This is Yong Kim. I'm in charge of IR Group at POSCO. It is my pleasure to have you all on this conference call. I will give a brief summary of 2006 results and talk a little bit about our plans for this year. Then, I can talk -- take questions.

Before we begin, let me remind you that the Korean regulations requires all public disclosures to be based on consolidated financial statements from fiscal year 2007. Although we still have a year left until it's in force, we are preparing key operating results and plans in consolidated terms from now.

Both crude steel production and sales volumes are down from 2006. This is mainly due to revamping and rationalization on major facilities, but we made up the shortage with value-added products. We focused on shifting our product mix towards higher value-added strategic products. Hence, in 2006, strategic product sales reached 57.1% of the total sales and we accomplished a spectacular KRW1.1 trillion of cost savings. These are real cash cost savings, mostly through developing blending technology to use more cheaper and more low quality materials.

As a result, POSCO showed solid results of 2006 figures. Our revenue was KRW25.4 trillion [sic - see presentation], operating income KRW4.4 trillion and net income KRW3.2 trillion, all in consolidated terms. Financial structure is sounder than ever. Total assets grew from generating profit and new investments. We raised our debt level to buy back shares and make new investments, but total liability ended up lower than 2005.

Now, I'll talk about some of the key business activities. On growth, POSCO completed construction of the integrated stainless steel mill in Zhangjiagang, China. This is the first integrated mill we ever put overseas and this is the first integrated mill any foreign company ever put in China. India project made significant progress. Prospecting license for iron ore mine is approved by state government and recommended to central government, and the site has been designated special economic zone in principle. We strengthened our production, downstream processing and marketing capability overseas with the decision to build cold-rolling mill in Vietnam and galvanizing mine in Mexico. We also added three more processing centers overseas. Now the total is now 14.

We continue to find opportunities to invest in raw materials. In 2006 we started a joint venture developing nickel mines in New Caledonia and refining in Gwangyang mill to process the nickel. And we make some equity investment in Australian coal mines. Also, POSCO made initiatives in future growth engines. We completed [a bulk] acquisition of POSCO Power and began construction for magnesium factory and are making significant progress in fuel cell development.

On the technology side, POSCO is at the final stage of commercializing our own innovative patented technology. Number one, FINEX is nearing its completion and [demo plant for] strip, a strip casting technology, is completed. Now, POSCO is seeking opportunities to strengthen partnerships that would create more value for the Company. As a first step, strategic alliance with NSC has been expanded to cover real and economical synergies, including slab exchange during blast furnace shutdowns, cooperation in recycling business for by-products and possible joint venture developments for raw materials and purchase.

Now, let me briefly explain our plans for 2007. The business environment continues to change rapidly. There is a paradigm shift in the steel industry. M&A is growing and competition for captive mines is fiercer than ever but all the while steel consumption continues to grow. Looking forward, we [think] the current slow market will continue for the first half of this year, but, from the second half, supply and demand situation will improve and steel market will rebound.

Now, our business plan. We will continue to pursue growth. In India, we will finalize acquisition of mining rights and ownership of land. In Vietnam and Mexico, the construction will take off. Internally, we will optimize our facilities for the higher value-added and low-cost production. Revamping of a blast furnace and other renovations for downstream facilities are scheduled. For marketing, we will strengthen our sales capacity for strategic products. We will add 11 more overseas processing centers, ending up with a total of 25 centers in eight countries. Finally, on top of the already achieved KRW1.1 trillion of cost savings, we plan to cut another KRW500b in costs this year.

In closing, I will give some figures to summarize 2007's business plan, all of these consolidated basis. Total crude steel production will be 32.4m tons. Sales of finished products will be 31.7m tons, which will bring in revenue of KRW29.8 trillion. We will --- and we expect operating income to be about KRW4.9 trillion. Total CapEx, including everything, will be KRW7.2 trillion.

That will conclude my presentation and thank you for listening.

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

[OPERATOR INSTRUCTIONS]. The first question comes from Daniel Altman. Your line is open.

Hi. Thanks very much and congratulations on the results. A couple of questions. Firstly, on equity income, the number came in much stronger than we had in our model. I just wonder if you can flesh out what were some of the main components of equity income.

Secondly, when you talk about your guidance for next year, it looks like you're more bullish on revenues but less bullish in terms of margins. I wonder if you can explain where you see your -- what your margin outlook is in '07 versus '06 and some of the thoughts behind that. I think that's it for now. Thanks.

Yes. Equity income did go up a lot compared to last year. In domestic, KRW1.4b -- KRW149b for domestic and, in international, KRW161b. Basically it came, on the domestic side, Changwon Specialty Steel equity income was KRW46.9b and POSCO Construction is KRW41.4b. Overseas, Zhangjiagang Stainless Steel is KRW57.4b and Qingdao Stainless Steel is KRW22.4b. And others --- and basically, because of the high demand in China on the stainless steel, there was basically, [for] higher sales from China's stainless steel sectors.

Also, on operating income side, is basically from stainless steel raw materials, nickel, we expect the price to go up. Also, [perhaps] appreciation. And that's about it. I hope that answers you.

Yes, thank you.

The next question comes from Leo Larkin. Your line is open.

Good afternoon or, excuse me, good morning. Could you give us any guidance for CapEx and DD&A in '07?

If you find the presentation materials, I think it's page 19, you will see consolidated CapEx and CapEx for POSCO.

Okay, thank you.

We have a follow-up question from Daniel Altman. Your line is open.

Hi, just a few follow ups. Firstly, do you have a --- we're trying to reconcile our cash flow for the fourth quarter. Do you have a working capital number for the fourth quarter, the first question?

The second question is, on your CapEx budget, I see it goes from 4.9 this year to 7.4 next year and, I guess, 5.9 on your own. Can you go through what are the three or four largest components of that?

And then the last question is regarding China and I've looked through your presentation. Are you more comfortable now with the China net export position than you were a few months ago or -- that's the sense I get from your presentation, or are you equally concerned as you have been the last few months? Thanks.

Okay. About 49.2% is for domestic revamping and upgrading our steel products, the steel manufacturing mills. And overseas, we are basically looking into the mining equity investments, [cold-roll] and the iron ore. Also, we included India project and also the new business there of [stagnations] and the Vietnam and Mexico prospects --- sorry, that includes an overseas deal and the nickel factories that we are [smeltering smelt].

And on China, this year we expect -- last year was the first year and there was this huge increase, but this year we expect the Chinese are going to reduce their exports - because they have reduced their value-added tax rebate for exports and to basically see many small, inefficient mills in China are going to be closed. There are already one province they have announced [26mm candidates] that is going to close within this year. That's about 36m tons. And we see more small mills are going to be closed soon, so this year we see less exports from China.

On working capital, we will send you your required data, because I don't have it right now.

Okay, thanks. Just again on the CapEx, because the line is not so great, can you give us a breakdown between, let's say, maintenance, expansion and overseas? I didn't quite pick that up.

I can give you [specifics]. For capacity increase, it would be --- okay, here it is. For the strategic products KRW1.2 trillion, capacity expansion KRW0.7 trillion, and maintenance at KRW0.7 trillion, and cost savings KRW0.2 trillion, and environment is KRW0.1 trillion.

And overseas we haven't divided specifically, but I can give you, for India it's about KRW340b, and Vietnam about KRW68b, and Mexico about KRW50b. And for nickel it's about KRW32b -- about KRW34b, and other possible investments, and steel industry overseas and equity investments in foreign -- overseas on our raw materials.

So maintenance, just trying to back out all these numbers, maintenance would be about half of the -- of your CapEx?

That's right.

And just of the numbers you gave, which -- well, I guess two thoughts, one is if you compare the POSCO versus consolidated, there is a KRW1.5 trillion difference. What's the major difference between the two? Is it your -- is that -- what part of your business requires a lot of investment at -- by the [steel]?

Changwon Special Steel and the construction E&C, the engineering and construction that's one. And energy, we are planning to build a new power plant and things like that.

Okay. And vis a vis India, so KRW340b you said, my understanding was you're still deciding where to build the plant, or where to mine. This sounds like a lot of money for this stage, am I wrong in that?

Right now we do have a site already, and the site has been in principally approved to have a -- to get a special economic zone. So, the site has been decided already. And there are three big mining sites, and we expect to get one big mining site from central government by March this year. So, we have to have also purchase land, and relocate and all these things.

Okay, thanks very much.

The next question is from [Dennis Wong]. Your line is open.

Hi, I just wanted to follow up on Daniel's question on the CapEx. You went through the four countries in the nickel mines, and looks like that's roughly KRW500b of total CapEx. You have overseas steel and raw materials of KRW1.7 trillion, and new business and alliance of KRW1.2 trillion, so you've got roughly KRW2.9 trillion [slated] for CapEx. So, the question is, is the majority of that committed? Or are you leaving yourself a lot of room for additional ventures or alliances that you may be looking for in '07? That's the first question.

For the first question, we did have some reserved for specific projects on overseas steel and the raw materials. And -- but on new business and alliance we reserved a little bit on what we have signed with NSC. We still have to do a purchase of their stock. And we have -- just have a contingency unspecified investment in both areas.

But it sounds like there is a large portion of that that is uncommitted at this point, and you are leaving yourself room of flexibility here?

Yes, especially on raw material equity purchase, and also alliances.

Okay, thank you very much.

And the second question with regard to your strategic products. I think you guys mentioned it's 57.1% was what you achieved in '06. What is the goal for '07?

It's at 63%.

And then just lastly on the Chinese steel industry, I know you guys have spoken to the fact that -- to what you believe that exports are going to slow down next year. But, at the same time you [kind of cite a protectionism] increasing in both the U.S. and EU. So, if we go through '07 and the Chinese steel flows are not going into the U.S. or the EU as much, isn't Korea more of a danger because of regional -- most of the steel products stay in the region potentially for your markets? What's your views on that?

That -- you have these products that's why we are going into more strategical products, high value-added products that Chinese are not strong in. And most of Chinese products are long products -- a big portion is long products, which we are not in the market. And [flat] products we are basically going into a higher end, such as automobile [parties] and API grade and CM [bookings] and all these products. So, we expect to see less competition, even though we do in [inaudible] Korea import a lot from China, but we have less competition from Chinese mills.

And also we think that Chinese are going to really try to limit their production as much as possible, because they are in a point where they are very scarce on energy and also water supply. And also the environment problem is creating so much that the government is really concerned. So, we expect they like the Chinese government is going to limit their production as much as possible.

Okay, thanks.

The next question comes from Ben Moyer your line is open.

Thanks, Ben Moyer from Blackrock. I just have a couple of questions. The first one is on equity income. You mentioned the breakdown for 2006 and the total would have been KRW310b. What was the total equity income for 2005, and what is your expectation for 2007? That's the first question.

2005, KRW47b, and if you look at page five, 2005 equity method gains is the KRW47b Korean Won.

Okay, okay great. Okay, I see that, sorry thanks, yes. And what about 2007, can you give us any guidance?

2007, about KRW300 -- about KRW400.

Okay. And is the source for that change just the same company?

Basically, the construction, the E&C, about 70 and Zhangjiagang about 80, Special Steel -- Changwon Special Steel about 60.

Okay, okay. Great, thank you.

And the second question is on stainless steel. Could you just give us some idea -- you mentioned the contributions to equity income from some overseas stainless steel businesses. But I am curious about stainless steel overall, what the contribution is to profit. And I don't know whether you can comment on stainless steel profits at the net income level, or the operating income level, but if you could just give some guidance on the contribution to total profits from stainless steel for 2006 and 2005? I think that there was improvement, but I just don't know how much.

About 20% on sales and about 8% on operating income. And for 2007 I think it's a little bit difficult to really --

The 20% and 8% was that for 2006?

Yes that's right.

Was that better than 2005?

Yes it was.

And at the net level for 2006 I guess that would be more than 8% right?

[Net].

At net income level.

Well net income, yes, around [10%] better.

Okay, and then finally I wanted to ask you another question about China. You mentioned that one province was planning to close 26 mills, and that would account for 36m tons of capacity. What's the name of that province?

Hebdi.

Can you just spell that, because I can't really get the --

H E B D I.

When was that announced approximately?

Early [south].

Pardon me?

October last year. And I think I gave you the wrong number, sorry, I think it is 3.6m instead of the 36m.

Okay.

I think Hebdi produces about 90m or so, that province alone.

Of that 3.6m will be shut down?

Right.

Okay. Thank you.

Currently there are no questions. [OPERATOR INSTRUCTIONS]. We have a follow up from Ben Moyer.

Yes, sorry, on the -- you mentioned the rebate, export rebate reduction in China, and you mentioned something else. I wonder if you could just clarify what's happened in China that would make exports less profitable beginning from this year versus last year, given these changes.

What happened is the value added rebate on export products, what they do is, when they produce they pay value added tax, and when they export they get the rebate from value added tax. So, basically, they -- it was like 11% last year and this year it came down to 8% or so. So, they have less incentives to export overseas.

And also what the Chinese government is trying to do is they are charging higher electrical bills, and also they are charging higher water usage bill. So, inefficient and small companies with the furnace size of three -- less than 300 cubic meters, and also -- I am sorry, 200 cubic meters. And 20 tons [inaudible] size for electric arc mills, they are charging higher electrical bills and higher water usage bills. So, they are having difficulty to really sustain in the market. And the Chinese government is making the small inefficient companies very difficult to survive in the market. So basically that we see is incentive to reduce their total capacity this year.

The 8% VAT rebate, when did that take effect?

Last year, December 14.

Okay. And then what -- I am just curious, what percentage of Chinese capacity do you think would be affected by that higher electric bill and higher water use bill?

I tell you something, it's a guess, so I would rather not say it.

Okay. I noticed that there was a really sharp increase in Chinese exports the last two months or so. And I guess maybe you could think that that was to take advantage of the higher VAT rebate before the cut?

That's right.

Okay thank you.

[OPERATOR INSTRUCTIONS].

If there are no further questions?

There are no questions at this time sir.

If there are no further questions, we thank you for participating in today's call. If you have any further questions please do not hesitate to call or contact POSCO's IR or ourselves at UBS. Thank you and Happy New Year.

Thank you.

That concludes today's conference. You may disconnect at this time.