Posco Holdings Inc (PKX) 2007 Q4 法說會逐字稿

Welcome, and thank you for standing by. 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 first speaker, Mr. Yong-Suk Son. Thank you, sir, you may begin.

Good morning. Welcome to POSCO's 2007 post-results conference call. My name is Yong-Suk Son from UBS, covering the steel sector. We have here with us Mr. Yong-Keun Kim, Head of IR Group, Mr. Yoon Duk Il, Head of IR, and the team. Mr. Kim will briefly summarize POSCO's 2007 results and will be followed by Q&A.

Without further delay, I will hand it over to Yong-Keun Kim.

Thank you. Good morning, this is Yong Kim. I am in charge of Investor Relations Group at POSCO. It is my pleasure to have you all on this conference call. I will give a brief summary of 2007 results and talk a little bit about our plans for this year. Then I will take questions.

Before we begin, let me remind you that we have been preparing key operating results and plans in consolidated terms for 2007, both (technical difficulty) regulatory requirements and to strengthen our consolidated base management.

In consolidated terms, Crude Steel production increased up to 33m tons due to completion of FINEX and full operation of Zhangjiagang Stainless Steel mill in China. And sales volume also increased, due to favorable market conditions and our focus on high grade products.

Sales of strategic product grew to reach 66.1% of total sales; well above annual target of 63%. Our subsidiaries, such as Energy and IT, continue to grew -- continue to grow. Consolidated sales reached KRW31.5 trillion, with KRW4.9 trillion of operating income. Furthermore, we accomplished additional KRW829b of cost savings in 2007.

Now, financial results of POSCO [alone]. Despite weak stainless steel market, annual sales marked a record high KRW22 trillion, due to strong carbon steel market. However, operating income of fourth quarter declined due to one-time expenses related to blast furnace revamping, employee stock ownership plan and etc.

Regarding blast furnace revamping, increased fixed costs per ton, actual revamping costs and sales volumes reductions, all affected operating income of Carbon Steel division. But in 2008 this revamping will contribute to volume increase and operating efficiency, leading to higher performance.

Total asset size grew from generating profit and new investments for strengthening competitiveness in steel sector, developing new growth engine in Energy and IT sectors. However, debt to equity ratio in consolidated terms remained low at 44.2%; slightly higher than 2006.

Going on to the key business activities, after 15 years of intensive R&D, construction of commercialized FINEX plant is finally completed. And we have verified 1.5m tons per year production and cost competitiveness.

Other investment for capacity expansions and premium product line enhanced in domestic facilities continues as well. We have finished revamping of Gwangyang Number 3 blast furnace and renovation of related downstream facilities. And we also added new facilities, such as dephosphhorizer and plate plant heating facility to improve quality and allow mass production for premium steels.

On global growth, India project is making steady progress. We received environmental approval for plant and port and approval for forest diversion and mining prospecting license are at final stage.

In other regions of the world we strengthened our production, downstream processing and marketing capabilities overseas. We began construction for a cold rolled mill in Vietnam and galvanizing mine in Mexico. And for the first time in our Steel business we acquired controlling stake in MEGS Malaysian EG line through M&A. We also added 14 more processing centers overseas, totaling 28.

We continue to find opportunities to invest in raw materials. We started construction of a smelting plant in Gwangyang to process Nickel supplied from our new nickel mine in New Caledonia. We made some equity investments in Australian coal mines and U.S. molybdenum mine.

Our subsidiary continued to make initiatives for further growth. Steel sector improved competitiveness by developing differentiated products. E&C sector expanded its global position by securing new orders from foreign projects. IT sector made significant progress on mobile internet technology and energy sector began fuel cell business and power plant expansion.

Now, let me briefly explain our plans for 2008, beginning with the steel market outlook. The global steel market is expected to grow steadily, due to strong demand from the emerging markets and solid demand in other areas. We think the current strong market will continue for the first half of 2008 and the market will remain healthy in the second half.

In China, both steel consumption and production are expected to rise due to strong demand from automobile and shipbuilding industries. Despite growing production, net exports will stay in 2007 level, due to strict regulations and marketing -- market restructuring.

In Korea, automobile and shipbuilding will lead the steady growth in demand, and high level import is expected due to domestic supply shortage. And the stainless steel market is expected to rebound after its second quarter, as inventory adjustment is completed following extensive production cut of global mills in 2007.

Now, our business plan. To pursue global growth strategy, we will continue to expand our investment for both the fast-growing emerging market and premium-oriented advanced market.

In India, we will finalize the acquisition of mining rights and ownership of the land and begin foundation work for the plant. In Vietnam and Mexico the construction for main facility will be completed and we will begin test running. As in Vietnam, we will complete the feasibility study of building an integrated steel mill.

Internally, we will continue to invest in upstream facilities to meet growing demand and domestic market -- in domestic market. Setting up new steel-making plants in Pohang and plate plant in Gwangyang is scheduled. And we will optimize our downstream facilities to strengthen competitiveness for strategic products.

For marketing we will add seven more overseas processing centers, ending up with total of 35 centers globally. On our cost-cutting efforts, we plan to cut another KRW750b.

In closing, I will give some figures to summarize 2008 business plan, all in consolidated basis.

Total Crude Steel production will be 34.7m tons. Sales of finished product will be 34.1m tons, which will bring end revenue of KRW34.3 trillion. And we expect operating income to be about KRW5.6 trillion. Total investment will be KRW8 trillion.

POSCO's investment of KRW6.7 trillion includes KRW2.9 trillion of CapEx and KRW2.5 trillion of contingency budget in energy and new business.

I assure you that POSCO will commit all of its available resources and effort to achieve the target I just laid out. Thank you.

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

Thank you. (OPERATOR INSTRUCTIONS). Our first question comes from Leo Larkin. Your line is open.

Good morning.

Good morning.

Could you give us any guidance for DD&A for 2008?

DD&A?

Depreciation.

About 17. -- about 8. I'm sorry, KRW1.9 trillion this year. Last year it was about KRW1.7 trillion or so.

Okay, thank you.

Currently, there are no questions. (OPERATOR INSTRUCTIONS). The next question comes from Jacques [Bouthillier]. Your line is open.

Hello. In terms of the guidance that you give for 2008, could you give us a range of raw material cost increases that is embedded in the guidance?

Right now, what we have done is, well, about -- it was done about -- this plan was done in December -- early December, so we have incorporated a rise in raw materials. Actually, what I understand is about 30% increase or so. But whatever happened later on, on our costs, probably would be adjusted and all the price would be adjusted also to transfer our cost to the customers.

So you're saying that if it comes in at greater than 30%, you will just raise prices to offset the raw materials?

That's right. But first of all, our price -- domestic price, our price is about KRW50,000 lower than our competitors and it's also about $50 lower than the Chinese product that is imported to Korea right now.

Probably, if you look at right now, it will be probably more than 70% -- no, $70. Our price is about $560 and our competitors $50 higher, and imported products is $70 to $80 higher --

Okay.

-- from China. So we have ample room to raise our price. And our costs, basically, for when about 30% -- 35% goes up, all we have to raise is about KRW45,000 to KRW50,000 or so.

Okay. And your average price is -- in thousand wan, is what?

In dollars -- in terms about -- in Korean wan it's about -- for carbon steel about KRW600,000 or so.

KRW600,000, okay. So it's less than 10% price increase you need?

Right. Very -- I mean 7 -- 6% to 7%.

6% or 7%, okay. Thank you.

And we definitely have an ample space. And for this year, actually, we are increasing our production by about 2m tons and so we definitely have a better year this year than last year.

Okay. Thank you.

We have a follow-up question from Leo Larkin. Your line is open.

Yes. What plans does the Company have to try and cope with this increasing concentration of iron ore mining that's taking place and possibly could become even more concentrated if Rio Tinto is acquired by BHP?

What I see right now is that it's going to be very difficult for BHP and the Rio Tinto to be merged. First of all, the Chinese are coming out and they are going to -- in a way they have gestured that they will hop in if they were to merge. And I don't think the Western countries would like to lose the raw material availability to Chinese at this point. And it's going to be a very difficult geo-political or economic -- world economic situation by Western eyes to lose the supply.

Since in U.S. last time, what I understand about Afghanistan war was the pipeline that goes through from Caspian Sea to China, the Caspian Sea has a lot of gas. And that's what I see why the U.S. has gone into Afghanistan. And to see that, it would be very difficult for Westerners to see the Chinese taking that raw materials. And that's why we see very difficult that to be realized.

Okay. Do you mean that the Chinese would actually buy a stake in Rio Tinto or --?

That would be right. And when BHP comes in and when they start bidding and I'm sure the Chinese, the National Sun will come in to take over Rio Tinto.

Okay. Thank you.

The next question comes from Benjamin Moyer. Your line is open.

Yes, thank you. I just wanted to get a little more detail on the impact of the blast furnace realigning and the employee stock expenses.

The ESOP is about KRW62b.

And the Number 3 blast furnace -- I'm sorry, let me just get the numbers. On Gwangyang Number 3 and the rationalization together comes in -- the cost comes about KRW71b and due to reduction in the sales, about KRW48b or so. And other cost increase comes about KRW20b or so.

So, in total, about KRW200b or so is increased from the cost just for the Carbon Steel. And also we have to put -- we had our stainless steel market and the growth was very bad and we continued to lose money in stainless steel market products. And I think the third quarter it was 33 and the fourth quarter it was about 60 or so.

That's the loss in the Stainless Steel operation?

Right.

What was the loss for the full year in Stainless Steel?

Actually, it was positive; KRW180,000 or so.

KRW180,000?

I'm sorry, I'm talking about KRW91b.

For the full year it was positive?

Positive, yes.

What was it last year?

Last year, let me see, about KRW34b.

Okay. And what's the outlook for 2008 in Stainless Steel?

Right now, today on the CEO Forum, our Division Executive has said that our Nickel costs in inventory is -- on average, is about $28,000. And right now, when you see the Nickel price LME is around 28 or so. So as we go along now we will be breaking even in the February.

So what we see is, basically, if this stabilized in that level, we will be able to break even. But what we see is a better market in the Stainless Steel for 2008, because right now what we see is that inventory level all over the world is very low due to a production cut by major stainless steel producers. So we will have a better year this year and we will be able to come positive this year.

Okay. Thanks.

You're welcome.

The next question comes from John Evans. Your line is open.

I'm sorry, maybe I missed this, but could you talk a little bit about -- I think you put in your Press Release about significant increases in your raw materials.

And can you talk a little bit about your perception for how much you think your iron ore inputs will be? And maybe do you have any good sense of when these contracts will be settled?

And then also just on net coal and your pricing there.

In about -- in the forecast that we have done, as I have said, it's about 30% or so and that's our budget. And as I've told you, we have ample space and buffer to raise price.

But now the negotiation is still going on between the supplier and the buyers and we expect that it will go on for a while. And we hope that it will be over soon because even the buyers they are not quite sure what the slowdown in U.S. economy will affect them.

So I don't think they will just try to drag that long. And how much will it go up? I don't know, really. Now they're really negotiating, so let's see what happens.

Okay, great. Thank you.

We have a question from Leo Larkin.

Yes. Are there any major blast furnace outages scheduled for 2008?

No, we don't have any outage. We do expect -- we do have a plan for Number 4 blast furnace in Gwangyang 2009.

Thank you.

Currently, there are no questions. (OPERATOR INSTRUCTIONS). We have a question from Benjamin Moyer. Your line is open.

Yes. You mentioned the feasibility study in Vietnam for an integrated steel mill. What would the size be there and what would the estimate of cost be, or just a rough estimate.

Since I haven't seen the feasibility study yet, so I do not know what the cost would be. But it would be in a range -- whenever we talk about the new Greenfield, on average it would be about $700 per ton to $800 per ton to develop a new Greenfield plant.

And right now we haven't decided what the capacity would be, but what I guess is around 4m or 5m, in between, for the first stage. Probably at the end so we will probably come out with about 8m tons plant. But I haven't seen the feasibility study yet, so whatever I say right now is guessing.

Right. In India, what's the cost per ton in India estimated in the first stage?

Right now, with plus the infrastructures and the mining rights and all, it comes out to about 900 to 1,000 or so. It's a little bit less, because I think the first capacity is about 4m and I think $3.7b, so it's a little bit less.

Okay. I thought the India numbers were 12m tons and --

Sort of.

Right. And for the 12m tons, what was the investment?

I think it's 120 -- 12b.

Yes. Yes, okay, thank you.

The next question comes from [Hasiba Haban]. Your line is open.

Hi. Could you talk a little bit about the input shipping costs? When you talk about the 30% increase in raw material costs, does that include shipping? And what is your arrangement for shipping? Do you have long-term shipment arrangements?

Yes, what we do have is -- for shipping, we have a dedicated vessel and it consists about 73% or so. And the freight rate is basically cost plus margin. And most of our vessels are -- the depreciation is almost over, so it's not going to be -- which I cannot disclose, but we do have a really -- it's very competitive price we have.

And the first question was about the raw materials?

Yes, the 30% that you have included in your forecast, is that --?

No, there was -- 50%, no, I think I said about 30% and we have -- so it's just in order to create a budget and we have -- the negotiation is going on at this point and I'm not quite sure what the result will be. But we do have ample space for a buffer compared to our competitor's price. As I said, the competitor is about $50 higher than our price and even Chinese, they're about $70 to $80 higher than our price in the Korean market.

Okay, thank you.

(OPERATOR INSTRUCTIONS). We have a follow up from Benjamin Moyer. Your line is open.

Yes. On the steel prices, you mentioned that the Chinese steel imported into Korea is selling at $70. I guess that's hot rolled coil selling at $70 over your price. What is the price now for hot rolled coil in China?

Much -- it's about -- what I -- Last I saw it was about 630 or so.

Okay. And then there is a --. Okay, I guess if it's a -- there is also a tax -- is there tax on hot rolled coil exports from China?

Yes, about 5%.

That's the new tax, right?

I think that started about October or so.

Okay, great. Thank you.

The next question comes from Louis Sarkes. Your line is open.

Hello, thank you. I wanted to clarify your comments on your thoughts between the proposed merger between BHP and Rio. Obviously, you did not think that this is a favorable outcome for consumers in Asia and you had made mention that you thought that China would -- at least funds would come in for all, or parts of Rio.

What was your [catch] question?

The question was just to clarify if you think that the --

Oh clarify, okay --

-- that that will -- the funds coming in, would it be for all or for part? And would it be only in the event if it looked certain that the merger was going to go through?

First of all, I think all the steel companies, even IISI, International Iron and Steel Institute, have clearly stated that it is going to be a -- it's now -- I think they somehow indicated that it is unfair trade, because when they add up it would consist more than -- around 50% or so. So, I think the IISI is clearly saying that it is going to be an Anti-trust situation in Europe.

And also the Western countries would not like to lose control over Rio Tinto to Chinese control. And that's a political -- there are many different situations around the world that is going to be very difficult for them to merge.

Okay. So you think that eventually that, even if they did not merge, that the Western companies would, in any event, want to retain control of Rio?

I'm sorry?

In any event, if there is no merger, your belief is that Western companies would continue to want to control Rio.

That's right, yes.

Okay. So that there would be no sovereign, or otherwise, an investment company takeover of Rio (inaudible).

Right. Right.

Okay, thank you.

The next question comes from Anindya Mohinta. Your line is open.

Hello. Anindya Mohinta from JPMorgan in London. I had one question on Stainless Steel. If you're seeing any radical moves in the [ostinetic] ratio, i.e., are you seeing sudden -- due to the sort of pricing you've seen in Nickel over the last few years, are you seeing any structural changes in the consumption of [theretics]?

And my second question is there have been reports that a lot of the Chinese mills could be cutting production in plants by 40% in 2008. Have you seen or heard anything that could ratify that?

Well, I don't think the Chinese will reduce 40% production on Stainless Steel, but definitely they will try to reduce it. And the demand, basically, is very strong and so what we see in Asia and Korea, or circles around Asia/Far East, is that the inventory level is coming down very fast and the demand situation is good. So what we see is that now the demand is coming back and they're going to buy more, which will lead to increase in nickel price.

But what I see is the pig iron nickel is increasing also, so there will be a very balanced situation and the price of nickel will be fluctuating, but not as last year, where 54,000 to 25,000. So we basically see the range will be about 20,000 to 30,000.

So if that happens, the Stainless Steel producer would be more able to adjust to the nickel price and also to our Stainless Steel price. So that means we will be able to at least even out or make profit. And I think on the CEO Forum on a consolidated basis, we will definitely make profit. And I think I already said about KRW91b to be in profit this year.

Can you give us a sense of timing when you see the global stainless steel markets returning to normal profitability levels, normal shipment levels? This, of course, is not taking into account any major economic crisis. If you say if things go according to plan, what do you have in mind in terms of a macro view right now? Are we talking about a Q1 recovery or a Q2 recovery?

Right now, I think we will be able to go into breakeven. Just for POSCO, what I can say is we'll be able to go breakeven in February and that we'll be getting better throughout the year.

Thank you.

We have a follow up from Benjamin Moyer. Your line is open.

Yes. I was confused on the Stainless Steel profit number. I just want to confirm you said a KRW33b loss in quarter three and a KRW60b loss in quarter four. And then, for 2006 I heard a KRW34b profit and for 2007 a KRW91b profit. Are those numbers correct?

I'm sorry, for 2006 KRW328b and for 2007, KRW91b.

Okay. And then, did you give an operating profit forecast for Stainless Steel in 2008?

Yes. We definitely think we will -- I like to make in consolidated base -- but I think it's going -- not consolidated base because (inaudible - microphone inaccessible) -- this is consolidated base? But regular -- without consolidation, it's about, we think, 180 or so --

Okay.

-- profit.

Okay, thank you. And then I just wanted to confirm the shares in Treasury at the end of the year. How many do you have?

I think it's 13.6 [shares].

Okay. And the outstanding, is that around 85 or 87 shares issued?

87.

Okay. And has there been any further discussion about acquisition of Daewoo Shipbuilding?

Today, our Chairman said that it's not in the market, first of all, and he said he had continuously expressed interest. But there is no specific timeline that the government or -- have set out, so we have no specific plan. We are interested and we are just looking at it, and that's where we stand at this point. And there is no concrete plan or anything set up yet.

Right. Okay, thank you.

Thank you. (OPERATOR INSTRUCTIONS).

Is there no further questions?

There are no questions, sir.

Before I -- last time this situation came and when I signed off and everybody was questioning whether I tried to cut off the conference call very quickly, so please give us more questions so I can answer to clarify our results on fourth quarter or 2008.

And also we will be going to New York on January 16 this year, so next week. Are there any further questions?

There are no further questions, sir.

Well, if there are no further questions, thank you for joining us for today's conference. Please do not hesitate to contact POSCO's IR team or myself, Yong-Suk Son from UBS, for any questions. Thank you and good day.

Goodbye.

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