Posco Holdings Inc (PKX) 2008 Q2 法說會逐字稿

Good evening, ladies and gentlemen. Welcome to the conference call. Miss. Lee is taking your conference. Thank you.

Hello, everyone. We will start the POSCO second quarter earnings conference call now. Here we have Ki-Hong Park, Senior Vice President, Duk Il Yoon, Head of IR Group and staff of POSCO IR Group members. We will walk through the presentation and we'll take questions. I'll hand this to Mr. Park.

Thank you. Good morning, ladies and gentlemen. Thank you for joining us. This is Ki-Hong Park, Senior Vice President in charge of Finance Department of POSCO. I'm pleased to talk to you about the second quarter performance of POSCO.

First, I will give you the highlights of our second quarter performance, then I'll share our views on current steel business environment. After that, we will be able to have a Q&A session.

We had yet another very successful quarter. Due to the recent innovations and increased stainless steel production, [crude] steel production was 8.4m tons, up 2.6% over the last quarter. Sales volume also increased 1.1% to 8m tons.

The sales of hot rolled product dropped because of regular scheduled maintenance, but plate sales increased 6%, 1.2m tons, as newly-added heavy thick plate facility began operation. And stainless steel sales grew in line with the production increase. The sales of strategic products, such as automotive steel, continued to rise; they reached over 4.8m tons in the second quarter.

Thanks to the strong market, our second quarter revenue was KRW7.5 trillion; an increase of 23% over the last quarter. And with our continuous effort to reduce cost and improve productivity, our operating income reached KRW1.9 trillion, giving an operating margin of 25.3%. Both revenue and the income were all-time high on quarterly basis.

Total assets grew to KRW33.1 trillion, mostly because of a rise in the raw material price and, hence, in inventory, but also because of the increasing investments, including new steelmaking mill in Pohang, plate mill in Gwangyang, continuous galvanizing line in Mexico and cold rolling mill in Vietnam.

Key financial ratios that summarize our performance. EBITDA was KRW2.4 trillion with EBBITDA margin of 31.7%. ROE was 19.8%, up from 16.8% last quarter. Liability to equity ratio was 25.5%. In consolidated tons, due to strong performance from the steel sector and the business extension in the engineering and construction sector, revenue grew 25% to KRW10.6 trillion, and operating income grew 43% to KRW2.1 trillion.

Now, I will summarize some of our accomplishments during the second quarter. In India the Supreme Court is deliberating on forest diversion petition for our planned site and State Government of [Orishi] is conducting final review to recommend the best candidate to be given prospecting license for the mine.

In Vietnam, the feasibility study for the integrated steel mill is completed and we submitted the result to the Government. Upon the approval of the Prime Minister's office, we will engage in detailed discussions with the various ministries on issues such as infrastructure. The construction of a cold rolling mill in Vietnam and the continuous galvanizing line in Mexico shows about 50% progress, and will be completed in September and June of 2009 respectively.

We continue to invest in overseas raw material development. Last month POSCO agreed to invest in Macarthur Coal, an Australian coal mine. POSCO also participated in the development of manganese mine in South Africa. Internally, the Board of Directors approved plans to expand our raw material handling and treatment facilities, including the expansion of ports, yards, sintering and cutting plants. We expect these extensions will prepare us for the growing capacity and productivity in blast furnace operations.

On the technology side, we are making steady progress as well. With FINEX, verification for commercialization is complete. We now are devising detailed plans to expand these applications. And, as a result of our ongoing efforts for technology development and quality assurance, we were awarded Best Supplier Award by the General Motors Company.

POSCO is also dedicated for the environment, actively participating in greenhouse gas reduction. We recently put solar panels on the roofs of our factories. We promise we will continue our effort to preserve the environment and respond to climate change.

Now, I would like to move to the current steel market and outlook. Steel price has been rising all over the world and still holds very strong in every region. This is in part to the rising raw material cost, but it also reflects continuing strong demand, especially from emerging economies such as Middle East.

Looking ahead, however, there are mixed signals with growing concerns for rising oil prices and the possibility of [inflation], we may see brief correction in steel price and little weakening in the market. Nevertheless, we believe the price will remain at a high level, especially in the emerging markets, as any development and the shipbuilding industries continue to grow.

On stainless steel side there was a rebound in the market during the second quarter, but the full recovery seems some time away. Nickel price is expected to be weak during the third quarter, but chrome price will continue to be strong due to the shortage in supply from South Africa. For raw materials, iron ore and coal negotiations for 2008 is almost finished, with a drastic increase in price for both. We believe the current imbalance in the supply and demand for these raw materials would not be resolved soon.

Reflecting recent changes in business conditions, we've revised our business plan as well -- as follows. In consolidated terms, crude steel production 35.3m tons, and the revenue KRW41.7 trillion, and in non-consolidated terms, crude steel production 33.6m, sales volume 32m tons, revenue KRW31 trillion and operating income 4. -- KRW5.7 trillion.

This concludes my opening remarks. Thank you for taking time for my presentation. Now we will take questions. For this session, my colleagues from IR Group will join this session. Thank you very much.

Thank you. (OPERATOR INSTRUCTIONS). Our first question comes from Mr. [Alex Latzer] or Merrill Lynch. Please go ahead.

Thank you. Thanks for your presentation. I wonder if you could go over your new business plan volumes again. The connection wasn't as good and I was unable to take down your forecasts.

And then, secondly, if you wouldn't mind giving us an update on your recent acquisition of a stake in the nickel property -- nickel project, the New Caledonia. I was wondering about POSCO's percentage ownership and when we might see nickel from that project. And how much does it cover here, your nickel requirement, to this nickel project in New Caledonia? Thank you.

Well, first of all let me just clear up this. You can see our earnings release presentation material on our website. It should have more detailed numbers and information.

As for the numbers -- the business plan, the volume -- crude steel production our business plan is 33.6m tons and product sales volume is 32m tons. For nickel mine it was a part of the deal that was announced a few years ago, New Caledonia. It's a Joint Venture with New Caledonian Mining Company and us. They -- we go into New Caledonia and develop the mine and we [bring up] nickel ore into Korea and process this make [feral] nickel to be used in our stainless steel facility in Korea.

The factory in Korea will be completed September this year [combined]. We expect to produce about 4,000 tons this year, and 27,000 next year, and 30,000 tons from 2010 on. That would cover almost 50% of our total nickel requirement for annual production.

Okay, thank you.

Thank you. Our next question comes from Mr. Wayne Atwell of Pontis. Please go ahead, sir.

Good morning, and thank you for this presentation. You've touched on this issue partially through your presentation and the previous question. Can you just briefly outline your initiative in terms of securing raw materials such as molybdenum, nickel, coal, how much capital you're willing to commit and how much you would like to secure, 20%, 50%, 100%?

Obviously, there is a major inflation in raw materials, coal, iron ore, molybdenum and such, so how far down the road are you willing to go to secure the materials yourself? By this, what I mean is an equity interest or a partial interest in properties around the world.

Right. Usually, when we make an equity investment in these mining companies we, in return, get a guarantee for certain [off-take] volume for the rest of that mine. That volume is counted as -- in calculating our self-sufficiency rate.

Currently, our self-sufficiency is a little less than 20% for iron ore and coal combined. Our target is to raise that to around 30% within a few years. So that's the target. It's not so aggressive to go to 50% or 100%. We believe 30% is adequate for now.

As for the investment amount, it's a difficult question to give you a definite answer, but we -- it's got to be done case by cases as to meet our target of 30%.

It will be over (inaudible) KRW89b (inaudible) raw material [future]. But it depends on the situation. So if there is a good mine we can spend more, but if there is (inaudible) mine, we can spend less than this.

So each year we allocate some money for that raw material [position] so -- as you know, we have all our (inaudible) so don't worry about the investment amount. So -- yes?

How has this turned out so far? What kind of return on investment have you generated with this initiative?

Yes, we do have internal hurdle rate for rate of return. Basically, for these investments they're well over 10%, so lower teens' percentage rate. Of course, it differs by the project, but we are making adequate returns. But, more importantly, it's a strategic investment to secure raw material supply and raise our self-sufficiency to an adequate level. But return has been adequate in our assessment.

Thank you.

Thank you. (OPERATOR INSTRUCTIONS). Next, we have a follow-up question from Mr. Alex Latzer. Please go ahead.

Thank you. I wonder if the IR team could comment on the timetable with regard to the Daewoo shipbuilding bidding process, how that's proceeding. I know that's something that's on the minds of many investors.

And also, if you could comment looking forward to the second half, what are you seeing in terms of your order rate on stainless steel? I know there's been a production curtailment among a number of stainless companies in China in the hopes of bringing inventories down. Do you expect -- how is that proceeding, the inventory in your assessment? And, again, could we see some improvement in -- perhaps in orders or shipments in the second half? Thank you.

Well, regarding DSME, as you know we don't hear anything from the Government so the rumor in the market in this announcement will be heard end of July or early August. But also rumors are it will be delayed a little bit, so this is what we know so far.

Right, Alex?

Yes. Is that a -- that still remains a strategic priority for POSCO to participate in in this auction? Is there some sort of a level at which it's not -- no longer strategic if you become -- if it becomes extremely competitive, for example, from other shipbuilding companies?

It would seem that they would be in a position to perhaps pay more a shipbuilding company, given the synergies' potential and the higher returns to a shipbuilding company. How -- do you have a sense of how strategic acquiring a stake in this would be for POSCO?

Yes. DSME is one of those strategic carriers, but we have our own solutions, so we will not pay more than reasonable prices I think.

I understand. That's good to hear. I'd also like to know if you'd comment on the stainless (technical difficulty).

Hello?

I think we have a child investor here!

Hello?

Yes, sorry about that. Just on the next question regarding the stainless steel. Thank you.

Okay. Regarding stainless market, we are seeing -- [very little] our second quarter earnings on stainless steel pretty good. The profit margin is more than 10%, but what we are hearing is outlook is not so good. Chinese are trying to reduce the production.

And also, when you think about some reduction in coming quarter, but -- and reduction is much better than reducing our pricing. So we hope around -- positive earnings operating margin is expected in third quarter and -- yes, that's the situation what we are seeing now.

Okay. Thank you.

Thank you. Next, we have a follow-up question from Mr. [Wayne Atwell]. Please go ahead, sir. Thank you.

Thank you. Could you explain your thinking in terms of raising your prices to the world market? What is your current price? And I realize you have a lot of different products, but how does your current price stack up to the world price and what's the chance you may bring your pricing up to the world market?

Yes. When we set a price, we have to take a lot of things into consideration, for example, our long-term relationship with our big customers, our competitiveness in the international market, as well as our customers' competitiveness in the international market, such as car makers and shipbuilders in the international market against Japanese manufacturers. So it's not a simple decision when making a policy.

But as for the level of our price, our -- POSCO's domestic price level is around same level as what Japanese steelmakers are charging their domestic customers, such as Japanese car makers and Japanese shipbuilders. And our price is slightly above Chinese steel price, so these things have to be in consideration as well. Yes, does that answer your question?

So, basically, your initiative is to make your large importer customers competitive and to be able to compete with the Japanese and Chinese competitors.

That's one of the considerations that comes into play when we're making our decision. Of course, there are other things that need to be considered as well. We need to compare our price with the import steel price as well. But the business model is slightly different, because these import steel from, say, China are low-grade and they're being traded in small amount in isolated events to small customers, whereas, our customers -- most of our customers are huge, large customers that buy 1m tons a year and we have been doing business with them for 30 years.

So these relationships, of course, come into play when we're making a decision. But if the gap of our price and intern -- domestic import price from China widens, then we try our best to close that gap.

So if we're trying to anticipate what your pricing is likely to be, if we benchmark you against China and Japan we're likely to understand what your pricing policy is going to be? And I realize that's a delicate issue, but basically we compare you to China and Japan and we can get a good understanding of what you're likely to do and that's unlikely to change going forward. Is that a reasonable assessment?

Yes. We need to compare the -- our price with Japanese makers, their domestic price, and China's -- their domestic price. But we also need to consider a lot of other market situations, supply and demand. Yes. But, for now, that is one of the considerations that came into our decision.

Currently, the major Asian domestic price is around [$800] level, Korea, Taiwan and China and Japan. But our export price to China and other areas is higher than our domestic price. That's the trend in Asian market these days.

Great, thank you.

Thank you. (OPERATOR INSTRUCTIONS). Next, we have a follow-up question from Mr. Alex Latzer. Please go ahead, sir.

Thank you. I wanted to follow up there. You had a very good result in the second quarter. Clearly, there is the margin expansion, and I realize we had selling prices rising. Perhaps we weren't seeing the full impact of the market increase in raw materials.

As you look to the third quarter and the second half, how much of this margin improvement do you think you can hold onto? Where are you now relative to your raw material costs that will be flowing into your cost of goods really beginning in the third quarter compared to your year to date or -- your year-to-date increases in selling prices?

Are we looking at a lower second half average but perhaps maintaining the 2007 rate of around 20% gross margin, 16% operating margin? Or are you on a rate to actually see some margin expansion year on year, because I know that clearly the rate in the second quarter is probably not sustainable? Thank you.

Okay. Well, as you mentioned, second quarter operating margin is definitely larger than the rest of the quarter of the year, because the new raw material price didn't impact 100%. It's probably around 50% to 60% impact on the second quarter. But third quarter it will be around 80% to 90% and the fourth quarter it will be definitely 100%, so margins will be squeezed quarter over quarter.

But definitely our (inaudible) price hike will raise our revenue and also our cost is also increased a lot, so margin will be squeezed, volume will be squeezed. But absolute number, it won't decrease much. So over the year -- through the year, I think we can achieve what I have guided today. That's my answer.

Great, thank you.

Thank you. (OPERATOR INSTRUCTIONS). Our next question comes from Mr. Richard Kim of KIS Korea. Please go ahead. Thank you.

Mr. Yoon, you said 80% of raw material will impact to the third quarter. I can't understand. Actually, I think just 100% impact to -- from the third quarter, I think. Can you clarify that point? Thank you.

Okay. Currently, our raw material inventory is quite stable so, until we're spending all the inventory, the old price inventory, it takes time. So 100% using new price raw material, it will start mainly from October. That's our calculation and on our budget as well.

Thank you.

Thank you. (OPERATOR INSTRUCTIONS).

Ladies and gentlemen, we're going to take one more question, so please press number one if you have any further questions.

Thank you. Our last question comes from Mr. Richard Kim. Please go ahead, Mr. Kim.

Buyback program. I think you've been buying Treasury shares for the last three years. Any plan, or could you give us some -- just comment about that? Thank you.

Okay. Our share buyback, probably -- it depends on our Board of Directors' decision. Also -- so let's see, right, because we have two more Board meetings in second half of this year, so let's wait.

Thank you.

Okay. This is it for the POSCO second quarter earnings conference call. Thank you for attending.

Thank you for your participation. This concludes the conference. Thank you.