Posco Holdings Inc (PKX) 2008 Q1 法說會逐字稿

Good day, everyone. You are currently -- excuse me. Good day, everyone, and welcome to the POSCO first quarter 2008 results conference call. Today's conference is being recorded. At this time, for opening remarks, I would like to turn the conference over to your moderator for today, Zayong Koo of Lehman Brothers, Korea. Please go ahead, sir.

Thank you. Good morning. This is Zayong Koo of Lehman Brothers. We're very honored to have Dr. Ki Hong Park, Senior Vice President and Head of Finance, along with Mr. Duk Il Yoon, Head of IR Group, and his team, to discuss POSCO's first quarter results.

Without further ado, Dr. Park.

Good morning. Thank you for joining us. This is Ki Hong Park. I'm Senior Vice President, in charge of finance department. I am pleased to talk to you about the first quarter performance of POSCO.

First, I will present the highlights of our first quarter performance and share our views on current steel business environment. Then, we will go to the Q&A session.

Actually, we completed the upgrade and renovation of our major facilities last year. Therefore, our production capacity increased. As a result, first quarter crude steel production was 8.2m tons, up by 5%, and finished steel production was 8m tons, up by almost 8%. And the sales of our strategic products continued to rise as well.

Thanks to favorable market conditions and increased sales volume, revenue reached an all-time high of KRW6.1 trillion. Operating income also grew to KRW1.3 trillion, with operating margin at 21%. Moreover, stainless steel division, which has been struggling in the last two quarters, are showing improvements as nickel price stabilizes and the stainless steel price rises.

On balance sheet side, despite slight increase in our debt level, due mainly to the changes in foreign exchange rates, overall financial structure continues to remain healthy. Key financial ratios well summarize our performance. EBITDA grew to KRW1.7 trillion, ROE improved to 16.8%, and the total liability to equity ratio dropped to 23.7%.

In consolidated terms, steel business was strong while engineering and construction business showed seasonality in the construction business. But, overall, consolidated revenue grew 3.3% to KRW8.5 trillion and operating profit was KRW1.5 trillion.

Now, I will summarize some of our activities and accomplishments during the first quarter. Progress in India may seem slow, but is in fact steady. We conducted demarcation of the site and are having talks with affected people for relocation and rehabilitation plans. We are still waiting for the final clearance for forest diversion of government-owned land and the prospecting license for the mine, but we believe that these issues will be resolved in due time.

FINEX operation is at optimum, with all metrics on or above the initial target. Productivity, efficiency and [economics] all have been verified and are holding steady. We now are working on plans to scale up the facility for our overseas project.

Investment for expanding premium products continues. Plate mill was upgraded and various other facilities are being upgraded. To enhance our service to customers, we hosted global [whole event involvement] forum, entering partnerships with auto makers. On the other hand, we were recognized with best partner award from Suzuki, for best automotive steel supplier and technical partner.

Technologically, we set new records in productivity and efficiency in iron making, steel making, continuous casting and hot rolling. We also developed new products to enhance our customers' competitiveness.

For market penetration and expansion, we completed construction of a processing center in Vietnam and numerous others are under construction. We also completed a tin plate plant in China and began construction of API pipe plant in the United States. And internally, our efforts to save costs continue. We achieved another KRW200b cost reduction in the first quarter.

On April 1, celebrating the 40th anniversary of POSCO's foundation, we announced Vision 2018, our long-term strategy. This leads to a longer strategic road map, where size, speed and synergy will guide us to becoming the true global leader in steel business and in new strategic businesses.

For growth, we will make more aggressive investments in markets that grow fast and regions that have raw materials. In 10 years, POSCO will have a production capacity of more than 50m tons globally.

For competitiveness, we will increase market dominance through the development of new technology. We will also establish supply chain management basis around the world to better service our customers. And we will reinforce our cost advantages by constant innovation [and leverage upside].

For Group management, we will strengthen current core businesses and seek new growth opportunities. We will also establish Group management systems to improve efficiency. For the past 10 years, POSCO achieved 10% growth every year. With the new vision, we plan to have another 10% growth every year for the next 10 years. That will raise our revenue to KRW100 trillion by year 2018.

Turning our attention to broad steel market conditions, we see many positive signs and limited downside risks. China and other emerging countries continue to drive strong growth in steel demand. This year, global steel consumption is expected to grow another 4% to 5% with China's lead. Production will grow too, but at a slower rate than demand. And we believe oversupply and weakening of markets are less likely to happen.

Reflecting strong demand, steel prices are at all-time high in all regions. In Europe in particular, hot coil is being traded at more than $1,000 per ton.

Even in China, where concerns were building up since the government restricted steel exports, the price remains high and the production surplus continues to drop. In fact, in February, steel exports from China were at the lowest in almost two years.

In the Korean market, demand industries like auto and shipbuilding are still strong, and the overall steel consumption would grow another 4% to 5%.

I'd like to finish my presentation by giving you our revised business plan, reflecting recent changes. We understand that our first quarter results were somewhat higher than what you may have expected. But the pressure on our costs is piling up, as iron ore prices rise around more than 65% and the coal prices being settled at $300 per ton. Won/dollar exchange rate is also higher than we first forecasted.

However, with our recent price increase and continuous cost reduction campaign, we are confident that we will be able to achieve a good performance in year 2008 - crude steel production of 33.4m tons, revenue of KRW27.9 trillion and operating income of KRW4.8 trillion.

This is brief explanation of our first quarter performance. I'd like to open your questions.

Thank you, Dr. Park. We'd like to open up to Q&A now, please.

Thank you. (OPERATOR INSTRUCTIONS). And our first question comes from Jacques Bouthillier from Impala Asset Management.

Hi. Two questions. Thank you for the call. The first question is, on your forecasts for 2018 the non-steel increases in sales are substantial. Does that mean that you plan to make either one or several acquisitions to reach those targets in the non-steel business?

And secondly, on the forecast for 2008, are you assuming further price increases from the ones already announced, in order for you to reach your operating income?

Yes, we have plans to increase our non-steel sales to 300 -- KRW30 trillion, but we don't have a specific plan to acquire some companies. But we'd like to invest more on energy, construction and newly developing industries.

For the second question, our forecast on this year's performance is based on up to the recent price increase. It is not -- it does not include further increase in our product prices.

Okay, thank you.

Our next question comes from Leo Larkin from Standard & Poor's.

Hello. Could you give us guidance for capital spending and depreciation for 2008?

Our CapEx this year is KRW6.9 trillion and our depreciation this year is KRW1.9 trillion.

Thank you.

Yes.

(OPERATOR INSTRUCTIONS). Our next question comes from [Mark Masquerena] from Lehman Brothers.

Hi. Thanks for doing the call again. Just a quick question, speaking about raw material prices, obviously surging. What's your strategy going forward, as far as M&A or taking a stake in companies to secure raw materials?

Since the increase of raw material prices are so high that we'd like to expand our captive mines. Right now, our captive mine ratio is about 17%, but we are going to increase that ratio up to 30% by year 2011.

Anything further, Mr. Masquerena?

No, that's all set.

Thank you. (OPERATOR INSTRUCTIONS). And there are no more questions in the queue, so at this time I would like to turn the conference over -- back over, excuse me, to Mr. Zayong Koo from Lehman Brothers, Korea, for any additional remarks. And I apologize, I do have two more questions now. Are you able to take those?

Yes, go ahead.

And that first question will come from Lindsay Taylor from SAC Capital, S.A.C. Capital.

Hi, guys. Thanks again for the call. I just have a question about your guidance. You raised your production guidance and your revenue guidance, but left your operating profit guidance unchanged. Could you just run through exactly the assumptions you've come to there? So, you've obviously increased prices recently. You've taken that into account. So is it fair to assume that the recent price increase is not enough to maintain margins throughout the whole year?

Yes, you are right. Our sales increases, but the operating profit is the same as we originally planned at the beginning of this year. Therefore, the operating profit ratio decreased by about 2 or 3 percentage points, percent points. At this moment, it is not easy for us to maintain the high operating profit ratio, because the share of raw materials in our total sales becomes so high compared with the beginning of this year. But we will try -- we will do our best to decrease our operating profit, in order to recover the operating profit rate.

Okay. But your prices are already quite a bit below your -- the regional prices, and certainly the import prices into Korea. Should I be expecting another price increase in the next few months to offset that, or is that difficult in this environment, given where your customers are in their order books?

At this moment, I cannot say anything about the further increase of our prices. But if the situation becomes very worsened, then we will reconsider the further increase in prices. But at this moment, there is nothing determined.

Okay. And just a last question. If -- given the raw material price increases that we've seen so far, I assume you haven't got a iron ore price settlement from Rio Tinto or BHP, can you give us an estimate of what is the increase in your cost base for -- just on the raw material base that we've seen so far? And this is obviously before you guys have your cost savings program, which will reduce the impact of that somewhat.

Anything further, Mr. Taylor?

I'm waiting for the answer.

Okay, thank you.

So far, we have a new contract at 65% increase and the negotiation is going right now, underway right now. But it has not been finished yet, so I cannot say any numbers to you. Yes.

Okay. But if we just assume that your iron ore was settled at 65% and we've -- we know you've had a coking coal settlement, can you give us an estimate of what is the impact on your cost base, just from the raw material price increases that we've seen so far?

Well, we cannot disclose the exact average price of our iron ore and coal that's used, because it involves a certain blending technology that's a little bit sensitive. But the new contract price would become effective as of April 1, but since we have month and a half worth of inventory the new price would have an effect -- impact, on our income statement from June on. So about seven months of the total 2008 will be impacted by these new prices and, as I said, a 65% increase in iron ore. And coal, it's a little bit early because, well, hard coking coal, it was about 20% increase but we still have to finish the negotiation with semi-soft and thermal coal.

Okay. Okay, thanks very much.

And next we'll hear from Phil Chung from Morgan Stanley.

Thank you, management, for doing this call. Just now the management mentioned, assuming that the condition worsened, the management will consider increasing price -- the price. Can you maybe share with us what you -- under what circumstances is that? And could you be a bit more specific?

I did note that we do not expect any -- we do not think any specific circumstances. But what I am saying is that if the situation becomes very bad and our expected performance would become very bad, then we will consider a further increase of our product prices. But right now, I cannot tell you a very specific situation, but it is likely to be related to the very big increase in raw materials or other costs.

Okay. Can I have a follow-up question? Where do you see price trend going into the second half of the year? And is your pricing based on industry fundamentals or are you just looking at your cost base and you price your products accordingly?

It depends. Both of them, actually. We have to think about -- consider the market situation as well as our cost burden.

Okay. Given that your cost structure (inaudible), you have almost -- you have finished the negotiation for iron ore and coking coal, these are the major raw materials. Assuming that the spot price in the second half stayed the same at this level, [we should steer 20%] above your second quarter contract price, can we expect a cost -- a price increase under those circumstances?

As we said earlier, we can't really comment that much on what -- how the market will evolve in the future and how we need to respond to the changing market situation. So it's really difficult for us to tell whether we will have a shift in our price policy right now.

Actually, we have some contingency plans for the possible situations in the market, but it is not good for us to reveal that plan at this moment.

Okay. Thank you, management. Thank you.

And we'll have a follow-up question from Mark Masquerena from Lehman Brothers.

Yes, hi. This is Chris Valli, actually, from Lehman. And I was wondering if you could just expand on your hedging strategy and how it's basically changed, let's say over the last three years, and how you anticipate that changing, if at all, going forward over the next three years. Again, if you could expand on that a bit. Thank you.

Well, as you know, we always (inaudible) so we need the dollar, and we -- well, usually we buy the dollar in the market and we call this is natural hedge. Right? So we don't have any specific other strategy for exchange rate.

And how has your strategy changed at all, I guess with respect to the raw materials? Is there anything you are attempting to do? Again, given the dramatic moves we've seen and the impact to the business.

On the raw material side, as we discussed and as it is shown on our presentation, we will increase and we will make aggressive investments on raw material development and trying to increase our portion of captive mine. So currently, on average, our self-sufficiency rate for raw material is around 17%. Our target is to increase that to 30%.

Thank you.

And we have a question from Benjamin Moyer from BlackRock.

Yes. Just a few points of clarification. I wondered if you could just restate for us the history of your price changes year to date, including the most recent price change. And then, if you could just review the -- where that puts us with your price, relative to the prices of your competitors in the various markets around Asia.

I will give you the numbers in terms of hot rolled coil. Beginning of 2006, two years ago, it started out with KRW480,000. We increased that by KRW40,000 to KRW520,000 in July '06. And that price has been maintained until February this year, when we increased another KRW60,000 to KRW580,000, and our today's announcement of increase of KRW120,000. So that leaves it at KRW700,000.

Yes. With our current price at KRW700,000, it was at par with our local domestic competitor's price, but still a little bit lower than import steel price from China and a little lower than the spot prices of our -- other countries in our region, like China and Japan.

And is it below the Japanese -- the price of imported steel from Japan, in Korea?

Slightly lower than the import price from Japan.

Okay. And then I just -- I heard earlier in the call a reference to the profits in the stainless steel business. And I know -- I recall on a call previously that -- I think that you were unprofitable in stainless steel for a period last year, I think. And at the time, the comment was made that you expected fairly significant improvement this year. So I just wonder if you could clarify the extent of the profits or losses being generated from the stainless steel business, and just speak a little bit about the change versus last year.

Okay. We have two good news in stainless side. The one thing is about -- on March we make money, we made a profit. And, of course, the first quarter we have a little bit losses. But from March, definitely we believe the market is recovered and nickel price has stabilized. So the stability possibility is getting better and better. And the other good news is on October we will have a bigger factory in POSCO. So I think it covers more than 30% what we needed per year. So from mainly next year, definitely we did have a loss on our profitability on the stainless side. So the stainless market is better -- our stability and profitability of stainless is getting better and better. Right? So you needed a specific number?

If possible, yes.

Okay. Well, in March our target is about KRW14b. Right?

Yes.

So -- but in the first quarter still we have about KRW7b losses.

Okay. How about for all of last year in the stainless steel business, what was the profit or loss?

KRW90b, KRW90b was the profit.

Okay. And the --

If I use that, from the March stainless steel (inaudible) positive in profitability, we think until -- by end of this year, we think there is a profit around KRW450b. But as you know, stainless it is [very wide] and in terms of (technical difficulty) our target number.

Okay. So KRW90b loss in 2007 and --?

Profit.

Oh sorry, profit, sorry. And this, in 2008, KRW250b profit projection?

Yes, right.

Okay. And the facility that you mentioned, coming on-stream in October, that's a -- is that a nickel --?

Nickel refinery.

Refinery in Korea?

Yes. Actually, we will bring the nickel ore from New Caledonia, from our joint venture. Right? And we will make the nickel to use in Korea. So that is about 30% of our total usage.

Okay. Okay, great. Thank you.

And we have a follow-up question from Lindsay Taylor from SAC Capital.

Yes, hi. Just a quick question. Your production was up quite strongly in the first quarter. The annualized -- at that annualized rate you are going to be hitting just above a few -- well, it's actually 1.5m tons above your guidance for the moment. And also, your costs were -- your operating costs per ton fell about 6% in the quarter, from the fourth quarter. I am just trying to understand if there's -- firstly, if there's an inventory effect that I should be aware of that probably may not continue throughout the rest of the year. And secondly, is the volume guidance -- can you continue with these volumes throughout the full course of the year as well?

I'm sorry. Could you repeat the last part of the question again?

I'm sorry. The question is basically your production in the first quarter was quite strong, obviously. Is that the same all throughout the full year? And secondly, your cost per ton fell about 6% in the first quarter, from the fourth quarter. I am just wondering if there is anything unusual there or if that is a sustainable decrease in your cost base, because your cost (inaudible)?

Yes. If you look at our full year production guidance, that's our latest target and annualized first quarter may be slightly higher. But our annual guidance shouldn't change much at this point.

As for the per-ton cost, which is divide the total cost of goods sold by the volume, yes, that's a little difficult to say right now, because stainless business is also included in that whole thing. So product mix and also product, between carbon steel and stainless steel, has a little bit of impact on that. But as our cost reduction numbers show, during the first quarter of this year we saved about KRW200b in cash costs compared to last year, so that would have impacted on our per-ton cost of goods sold.

Okay. Thank you.

(OPERATOR INSTRUCTIONS). And you have a question from Takeshi Ishiga from Alliance Bernstein.

Good evening. I have a couple of questions. First is what is your assumptions for the [stainless cost] and DCI coal price increase embedded in the recent price increase of these products?

I am sorry, but it is not possible for us to tell you the numbers for the coal prices. (Multiple speakers) position.

So you have seen a lower price increase in terms of percentage vis-a-vis hard coking coal?

I am sorry.

We cannot release our assumptions, because we are under negotiations with coal suppliers, so it's very sensitive (inaudible) so please understand our situation.

Okay. The second question is about Vietnam. Could you tell us the current situation about the upstream capacity build-out? And also, I understand [Ford Motor] recently released the international build of integrated plant in Vietnam, so I would appreciate if you could give us your views on the feasibility of that.

We have almost finished the feasibility study for upstream facilities in Vietnam, and we will report those results to the Vietnamese government soon. And we have many kinds of communications with the Vietnamese government at this moment and we think that we will be able to finalize our decisions on the upstream investment in Vietnam by the end of this year.

You think multiple plants, if possible?

We heard that many other countries and many other businesses in the other countries are interested in investment in Vietnam, but we don't think that there is a very specific progress in those plans.

Thank you.

And we have a follow-up question from Benjamin Moyer from BlackRock.

Yes. You mentioned something about an award you had received from Suzuki. I wonder if you could just comment on the volume of steel that you are supplying to the Japanese auto industry, and how that's been changing, and who some of your better customers are, or bigger customers are?

Yes. We currently -- our total automotive steel, more than 50% we export and we supply to all of the major global automakers. These include Honda, Nissan, Volkswagen, GM, Ford, Chrysler, Mitsubishi and Suzuki, all of them. And of them, Suzuki is one of our bigger customers. Last year, we -- well, the biggest customer currently is Nissan, and Mitsubishi and Suzuki follows the rank to the second and third biggest customer in automotive steel.

Thank you.

(OPERATOR INSTRUCTONS).

We will take maybe one more question.

And it appears there are no further questions today. Gentlemen, I'll turn the conference back over to you.

Okay, great. Thank you. I'd like to thank, once again, Dr. Park and the POSCO team for participating in this conference call. And thank you again, everyone, for calling in. This concludes the POSCO first quarter results conference call. Thank you.

Thank you. Have a nice day.

Thank you very much.

And that does conclude today's conference. Thank you, everyone, for joining us.