Posco Holdings Inc (PKX) 2007 Q2 法說會逐字稿

Welcome to the POSCO Q2 '07 earnings release conference call. At this time all participants are in a listen-only mode. Today's conference is being recorded. If you have any objections, you may disconnect at this time.

I will now turn the meeting over to your speaker, Mr. Jonathan Rhee. Thank you, sir, you may begin.

Good morning. My name is Jonathon Rhee from Morgan Stanley [Asian Materials] Team. Thank you for joining POSCO's second quarter results conference today. We have here Mr. Duk Yoon, Head of IR Team and the POSCO IR team with us. Mr. Yoon will be giving a presentation of the second quarter results followed by Q&A.

Without further delay, let me hand it over to Mr. Yoon. Mr. Yoon?

Good morning. This is Duk Yoon and our team members are also here to answer your questions. It's our pleasure to have you all on this conference call. I will give a brief summary of our second quarter result and the current trends in the steel industry, then I can take questions.

Compared to the first quarter, the second quarter production went up 4%. This is mainly due to rationalizations of major facilities and the addition of our new facilities, including commercial site FINEX. The sales volume is also increased, thanks to the favorable market and the strong demand.

Sales of Strategic Products are well above target, too. As a result, both revenue and profit increased. Revenue was KRW5.8 trillion and operating income KRW1.2 trillion. Thanks to the strong result from our subsidiary, net income also grew about 4% to KRW1.1 trillion.

Now, the key ratios. Operating margin has been rising steadily and is at 21.5%. Return on equity increased to 18.7%. And the balance sheet remains strong with liability to equity ratio at 24.2%.

The construction of FINEX is finally completed after 15 years of intensive R&D. It is operating at 95%, producing about 4,000 tons per day. By the end of the year we will able to replicate all the benefits that the demo plant has shown.

In India we expect to see more progresses by the fourth quarter of this year. The Prime Minister of Central Government calls bi-monthly meetings to review POSCO's project. Two meetings were held during second quarter and some progress has been made.

Moreover, environmental approval of port and the steel mill construction was given from both the Central Government and State Government. Due to the [re-trade] support from both the Central and the State government, we expect acceleration on the project soon.

In other regions of the world we continue to strengthen our production and marketing capabilities. Groundwork is being done for 1.2m tons Cold Rolled mill in Vietnam and construction will start later this year. Moreover, POSCO signed an MOU with the Vina-Shin Group to perform feasibility study on constructing integrated steel mill in Vietnam.

Shifting production to a premium product is on track, as well. We improve the quality and the productivity in steel making by adding new facilities. We developed new low-cost nickel-free stainless steel product that replaces nickel containing 300 series stainless. This new product will attract more demand for stainless, allowing us to better manage our costs amidst wide volatility in nickel price.

Our effort to save costs continues. We achieved another KRW1b reduction in the second quarter. For the second time in this year we raised our annual cost reduction target, which is now KRW617b.

The global steel market is expected to grow steadily. Steel consumption from BRICs will continue to rise as they move into the faster growth stage of development. Steel markets during second quarter showed a slight slow, down but this is mainly due to the seasonal downturn and the forecast is that price will begin to move upward again after four.

In China major mills are experiencing a weak price due to the strengthened export regulation by the government. With the tax rebate on exports gone and over-capacity [risk] remaining, this rise in domestic steel prices seems less likely, but the government is determined to cut capacity, so this is our hope.

In Korea automobile, shipbuilding and the equipment industries will continue to be strong. [Nominal] steel consumption and export is expected to rise 5.9% and 8.9% respectively, while import went up by 9.7%, largely due to the recent boost in Chinese exporters trying to get around [with] the tax burden in the near future.

On the stainless side, global stainless steel mills are cutting their production, while nickel price had a sharp drop recently from its historical high. It seems nickel price will go through some correction and we expect to see a market recovery after fourth quarter because of production cuts and the seasonal upturn bringing [in the tighter supply market back].

Reflecting recent changes in business conditions, we revised our business plan as follows. Crude steel production, 30.8m tons; sales volume 29.3m tons; revenue KRW22.7 trillion and the capital expenditure slightly increased to KRW6.1 trillion.

That would conclude my opening remarks. Thank you for taking the time to join us. Now, myself and our team will take your questions.

Thank you. (OPERATOR INSTRUCTIONS). One moment for the first question. (OPERATOR INSTRUCTIONS).

The first question comes from [Haytaytay Hassan]. Your line is open.

Mr. Yoon, can you try to -- looking at the consolidated financial summary and the POSCO numbers for steel, they don't seem to tally. Can you try to reconcile the numbers please for me? Thank you.

Could you repeat the question again, please?

[First] numbers.

I'm looking at the consolidated financial summary for steel. The numbers do not seem to tally with the numbers for POSCO's income statement. Can you reconcile them, please?

I am going to have to get back to you on the detailed numbers but, on our consolidated income statement the numbers for under steel business include POSCO, as well as our subsidiary, including POSCO Specialty Steel in Korea, Zhangjiagang Stainless Steel in China and Tsingtao Stainless Steel in China, as well.

Now, the steel on the consolidated, as I said, includes these four and a few other steel companies, as well. Also, as you know, the numbers here exclude a little bit of internal transactions, so the numbers do not match exactly. Does that answer your question?

Yes, thank you very much. And a second question. Can you talk about the stainless steel price reduction that you have made recently? That is, nickel prices have also been coming down. Can I assume that your margins may actually be better than what it was in the second quarter [for] the third quarter?

Hello?

Okay, just a second please.

Yes.

Okay, every quarter we produce almost 500,000 tons of stainless steel, right? But recently our management decided we cut back almost 20% of that from July and August, so 20% will be cut back in third quarter. But if we cut back the production, also we can reduce our cost [that were] because the stainless side, the cost is more than 80% of the total cost, so the raw steel price is very, very important.

So in terms of margin, the margin is -- not really is down because the cost will be down, as well. So we are quite confident, given the sales is down but because the margin will be maintained as the second quarter. The second quarter our stainless side operating margin is about 8.9%. You understand what I'm saying?

Okay. And a last question. Can you elaborate a little bit on India? You mentioned a little bit in the beginning, but where are you now in terms of the Indian operations' project?

There are two things we are waiting for. As we many times have explained to our investors, the mining license and land [acquisition]; two things. And POSCO, we have done everything what we have to do, so now we are waiting for the government decision, means final approval. But because of their internal business, approval is getting delayed. Okay?

Have you finished all the land acquisition?

Not yet, because the 8 -- 90 -- more than 90% is government land.

Right.

Only 10% is private land. The problem is that the acquisition for private land, because there is some resistance in local people, so (inaudible) them and that's why it takes time.

Right. Okay. Thank you very much.

Yes, [supposedly it] is getting better.

Okay.

Does that conclude your question, madam?

Yes.

Thank you. And the next question comes from [Neil Cant]. Sir, your line is open.

Yes, hello. In the presentation you mentioned a very strong recovery in steel prices in early '08. Are you also assuming, in that, reduction in exports from China and when do you expect that to happen?

Well, exports from China is already -- we are seeing the export volume is getting down from May. But we are quite wondering if this is a temporary situation or a real export cut back. We are not deciding yet. So we have to see a couple more months, right? So, June and July we have to wait and see the real volume is getting decreased or not.

And what kind of reduction are you expecting for the sharp increase in prices that you expect?

For '08?

Yes.

We -- yes, we -- let's take a couple of factors that might play into that. First, would be the strong demand. However, there is a concern for increasing capacity. There is a strong fundamental growth in demand, not only from China but in all the other BRIC countries and the Middle East and Eastern Europe. So, strong demand is one of the drivers.

Okay.

Another one, [as this says], the increasing price -- increasing cost in steel scrap that plays some role --

Okay.

-- and these things that's listed there are most of the factors.

So you're not assuming that the [Vermont] shipment of 7m tons, that net exports of 7m tons from China will decline any more?

As Mr. Yoon just mentioned, we are hoping and we are confident that the Chinese Government's determination to control the steel industry within would have some effect, some positive effect soon. But as far as how much reduction there will be in the actual net export of the steel from China, we need to (technical difficulty) for a couple of more months to be more certain.

Okay, thank you. And I read in the news media that you expect 50m tons of capacity by 2010. Is that all organic growth, or do you also factor in some acquisitions?

Well, that 50m tons, you can break it down with 38m tons domestically, that's mainly rationalization and getting rid of bottlenecks in the existing [plants] that we have in Korea. Now, 12m will come from abroad. This includes India project and this may include the Vietnam project that we're studying and a couple other inorganic growth is a possibility, but nothing is fixed yet to answer that [too], I'm sorry.

Okay. Thanks very much.

(OPERATOR INSTRUCTIONS).

(Inaudible).

Sir, there are no further questions.

(Spoken in Korean).

Thank you. Thanks for joining the call this morning. If you have any further questions, please feel free to contact any member of the POSCO IR team or the Morgan Stanley Asian Materials team. Have a good morning.

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