Posco Holdings Inc (PKX) 2007 Q3 法說會逐字稿

Welcome and thank you all for standing by. I'd like to inform all parties that their lines will on a listen-only mode until today's question and answer session. Also, today's conference call is being recorded, so if anyone has objections they may disconnect at this time. At this time I'd like to turn the conference call over now to your speaker for today, Mr. Yong-Suk Son. Sir, you may begin.

Thank you, Kelly. Good morning and afternoon. Thank you for joining POSCO's Q3 results conference call today. My name is Yong-Suk Son from UBS, covering POSCO and Asian Steel. We have here with us Mr. Yong-Keun Kim, Head of IR Group, and the team. Mr. Kim will briefly present POSCO's Q3 results and will be followed by a Q&A session.

Without further delay, I will hand it over to Mr. Kim.

Good morning. This is Yong Kim at POSCO. It is my pleasure to have you all again on this conference call. Before we engage in Q&A, I will give a brief summary of our third quarter results and the steel market in general. You can find the detail of our third quarter performance from the presentation material on our IR website.

Our total crude steel production was at 7.9m tons, 0.8% increase quarter on quarter, even after the reduction in stainless steel production. It was possible due to successful operation of FINEX and improved productivity in other facilities. Production and sales of finished products, however, were slightly down because of increased reserve of semi-finished products in preparation for revamping of Gwangyang number three blast furnace and rationalization of major facilities in fourth quarter.

Our drive to expand sales for strategic products is well on track, as we continue to increase sales of premium products including automotive and API steels. Strategic products accounted for 68% of total sales in third quarter, but sales of stainless steel declined about 30%. Because of weak stainless steel market, POSCO cut its stainless price twice in the third quarter, and with drop in sales volume our stainless steel business had revenue of KRW755b, and slight operating loss.

These results affected POSCO's overall performance. Both the revenue and operating income were down from the last quarter but strong carbon steel market and our continuous effort to cut costs, we were able to maintain operating margin at about 20%.

The key financial figures are as follows. EBITDA was KRW1.5 trillion and EBITDA margin 28%. ROE was 17.3% with a slight drop in net income. Liability to equity ratio declined a little as equity grew. And all the while our stock price kept rising. At the end of the quarter, the closing price was KRW673,000 per share, rising our -- raising our market cap to KRW58.6 trillion. In consolidated terms, due to decline in sales of stainless steel at our overseas facilities, revenue dropped to KRW7.4 trillion and operating income was KRW1.1 trillion with margin of 15.1%.

Now, some of our key business activities. In India we were at final stage in all the administrative approvals for the construction. Forest diversion proposal only awaits Supreme Court ruling. Once this is done, sometime this month, the government land will be secured by the end of the year and we should start foundation work early next year.

With respect to the mining rights, the state government is conducting hearing for the duplication applications. Once the hearing is completed, POSCO will be able to begin work on mine.

FINEX reached its daily target production of 4,300 tons. As for the coal ratio, which is the key metric in iron-making process, it dropped to 780 kilograms from 850 kilograms at the beginning of the operations. We plan to optimize the coal ratio by the end of the year to provide the superiority in economics as well.

Continuing expansion into overseas markets, POSCO began constructions for both the Vietnam cold rolling facility and Mexico continuous galvanizing line. With these projects, POSCO will be able to capture fast-growing markets in Southeast Asia and premium auto market in North America.

In Korea we announced plans to build additional steel making mill and plate mill in Gwangyang, to use the increased pig iron production from revamping of number three and number four blast furnaces, and to meet the growing demand for plate in domestic market. To secure stable sources of raw materials, POSCO acquired 19.9% equity stake of Cockatoo, which owns many coal mines in Australia. Once the mine in Queensland is developed, POSCO will receive priority supply of 1m tons of coal.

On our internal cost-cutting efforts, we achieved KRW612b in cost reduction by September, meeting the most recently revised annual target. Accordingly, we raised our annual target for the fourth time this year to KRW804b.

Now, on to the steel market outlook. International Iron and Steel Institute recently announced its projection on global steel demand. BRICS countries and other emerging markets are expected to lead the global steel market in yet another steep growth. China's and India's steel consumption would have another double-digit growth in 2008, and U.S. demand is expected to recover. And current steel market is very strong in every region.

In U.S., hot coil price that used to be $562 in August rose to $584. And in Europe, due to production discipline and strong demand, remained the highest-price region. Even in China, a strong season for steel drove the spot price increase to $512.

Now, on stainless steel market, as you know, stainless steel producers around the world responded to sharp drop in nickel price and resulting decline in stainless demand with price and production cuts. Today, however, nickel price is recovered to $30,000 per ton level and remains rather stable. Accordingly, stainless steel price is recovering and POSCO recently announced rise in its price. There are many different forecasts in nickel supply and demand, but we expect limited upside in nickel price until the first half of this year -- next year.

To sum up, all aspects of business seem positive going forward. At this point, we forecast POSCO's performance outlook for 2007 in consolidated terms as follows - crude steel production 32.4m tons, sales volume 32m tons, revenue KRW31.1 trillion with operating income of KRW5.2 trillion and total capital expenditure KRW6.8 trillion.

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

Thank you. (OPERATOR INSTRUCTIONS). First question comes [Tina Tanner]. Your line is open.

Yes, hi. I just wanted to ask you if you could talk a little bit more about recent comments you've made, and apparently some comments you made in the Korean conference call, regarding your expansion and the M&A strategy.

What M&A strategy? Basically, I think the one that if you heard last time was I basically said we would have -- try consolidate the market if we have synergies. And if we don't have synergies, we have no intention of it. And will that do or --?

No, I was hoping you could expand a little bit. Obviously, there's been comments made publicly about your interest in expanding into Europe and North America. And there's obviously some synergies, given the interest in being a larger player and you have some operations already in North America. If you could expand on maybe the size or the type of company you might look at, or under what circumstances?

I think you are specifically referring Financial Times remark by our Chairman. I was there at the time the interview was conducted, and basically our Chairman was saying that -- first, the Peter Marsh who asked questions, the question was 'Do you think POSCO is globalized?' And our Chairman had answered, saying that POSCO trades about 5% of our total products outside of Asia. And he asked whether -- is that globalized and our Chairman said, 'No, 5% is not enough.' And then he asked 'Do you have any interest in going overseas outside of Korea?' And he said 'Yes, definitely.' And that was basically the question there and he was asking if you have any chance to go into Europe or U.S. And then our Chairman said, 'If the situation allows, we would like to go, expand our market in Europe and in U.S.'

And Peter Marsh apparently asked some expert whether -- who would be the interest that Korea -- POSCO has, and it was his assumption that we might go into -- we might be interested in ThyssenKrupp and U.S. Steel. And I have reported that to Chairman and Chairman was in a way upset that he had never said that, and it's too presumptuous to state that in a newspaper.

So, basically, we have interest in growing overseas. And we have studied and then we have -- we did not find any company that has any synergy -- specific company can create synergy in our product mix or market.

So at this time you haven't found -- are you saying that at this time you haven't found a company that fits your requirements for M&A in North America and Europe yet?

That's right.

Is that reasonable?

Yes, that's right.

Okay. And if you were to find something, it would have to require -- have synergies which means, what, it would have, what, sheet production or what kind of --?

Basically, what we were saying, one plus one has to be over two.

And valuation has to be attractive, is that what I should expect?

That's right. Yes.

Great. Thank you.

Thank you. Our next question comes from [Jacques Bouvier]. Your line is open.

Hi. I was just curious, it looks to me that your business plan for 2007, now you've reduced a little bit your operating income for both the consolidated as well as POSCO, versus what you indicated in September. And I was wondering, given how strong the steel markets are going into the fourth quarter, why is it exactly that you didn't think you could achieve the original plan?

We have never thought -- we have never expected nickel price to go from $54,000 to $25,000, and that has created tremendous reduction of our sales. And also our stainless steel on the third quarter had -- we came out with a loss. So it has been reflected in our new forecast.

And the second question. I know you announced a price increase for plate for the fourth quarter. Any reason why you did not announce a price increase for other flat roll carbon steel products?

We did raise our price on -- as of July on our electrical -- our furnace products, on HR coil. And other products, we at this point are pretty in line with the international market price. And if the international market price goes up and the tightness is continued, I'm sure our marketing will examine the -- study the possible of raising the price.

And the last question is your inventory went up, it looks like pretty significantly. Is that in preparation for some blast furnace outage in the fourth quarter?

No, that's not it. Basically, the outage is usually semi-finished products. And the reason that we have the final product -- the stock going up is because we had a lot of the holidays and especially the Thanksgiving during the September, towards the end of third quarter, and during that period all the logistical is almost stopped. So that's why our stock just went up.

Okay. Thank you.

(OPERATOR INSTRUCTIONS). You have a question from Charles Spencer. Sir, your line is open.

Yes. I just had a follow-up question from your earlier call. Your tax rate was a little bit higher in the third quarter and I wonder -- than it was in the second quarter, and I wondered what your guidance is on the tax rate for the full year.

You know the day of the last day of third quarter was apparently a holiday and we could not pay the tax. Would that do?

It looks like the rate increased to about 25% from 21% in the second quarter. So you're saying that's due to a timing issue regarding the tax payment dates? And is that expected to return back down to the level we saw in the first half of about 21%, if I have the numbers right?

Okay. The thing is this is [interim] tax and we pay tax one -- every one year. And it's sometimes we pay a lot and sometimes we don't, and I think there is a fluctuation a little bit. And all in all, if you come at the end of the year, when we actually pay tax, it will flatten out.

Okay. I guess -- so what you're saying is maybe we will go back down to the average we've seen before. Okay.

Coming back to the stainless markets, it sounds like your outlook there is for things to improve in the fourth quarter. Is it fair to say that most of the Q-on-Q decline in your earnings in the third quarter came from the stainless division so, assuming that division bounces back in the fourth quarter, we should see an up quarter-on-quarter performance?

That's right. I think you're correct, because basically we had about a KRW330m loss this time but usually we have a KRW1.4b or [KRW1.2b] profit. So what we see is now the nickel price is being stabilized and we also have raised our stainless steel price. We announced it and it will be effective from the order of October 15, so we will see better results in the fourth quarter. And also, because the nickel price has been stabilized, people start ordering and all our customers have a very low stock.

Okay. So the direction looks like it's improving for stainless. That's good to hear. Thank you very much.

(OPERATOR INSTRUCTIONS). And at this time, I am still showing no questions.

If there are no questions, I will wrap it up. Thank you for attending to this conference of POSCO. If you have any questions, please do not hesitate to contact POSCO IR or myself at UBS. Thank you so much.

Thank you very much.

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