Posco Holdings Inc (PKX) 2008 Q4 法說會逐字稿

Okay, good morning everyone. My name is Park Sangkyoo, steel analyst at Morgan Stanley. Thank you for joining POSCO's 2008 Earnings Conference Call. We have POSCO's IR team here today headed by Senior Vice President Park Ki-Hong who will review 2008 business results, and then we will have a Q&A session shortly after the review. Hopefully you can hear a candid opinion from management regarding key issues surrounding steel industry and POSCO in a bit more detail.

Now let me turn it over to Mr. Park for reviewing POSCO's 2008 results.

Thank you Mr. Park. Good evening ladies and gentlemen. Welcome to POSCO's 2008 earnings conference call. This is Ki-Hong Park, Senior Vice President in charge of Finance Department in POSCO. I am sure that you have seen POSCO's earnings results document on our website, but let me highlight a few things first. I know you have many questions so I will make the introduction brief.

2008 was a frantic year for the steel industry. It began with rising raw material costs and growing concern for profitability, but the steel demand was strong and the price soared. As a result the steel industry enjoyed healthy profit for a short time. Then came the financial crisis followed by global economic slowdown. So steel industry, along with all other industries, begins this new year struggling for survival.

POSCO faced many challenges too. Raw material price and the foreign exchange rate put pressure on profitability, but we've continued our effort to reduce cost and expand sales of our premium product. As a result, POSCO set new records in the booked sales and earnings. Here is the summary of POSCO's 2008 performance.

In consolidated terms, crude steel production was 34.7m tons and the sales volume 33.8m tons. Total revenue was KRW41.7 trillion with operating income of KRW7.2 trillion. In non-consolidated terms, total sales volume was 31.2 million tons, a 5% increase over 2007. Revenue grew 38% to KRW30.6 trillion, and operating income grew 52% to KRW6.5 trillion, giving operating margin at 21.3%. Net income grew 21% to KRW4.4 trillion. You can find more detailed information on the presentation material.

Financials are not the only achievement POSCO made. We also made headway towards achieving our 10 year vision. We started construction of steel making mills and a plate mill to expand domestic capacity to 41m tons. We acquired stakes in iron-ore and coal mines to increase self sufficiency on raw materials. And our subsidiaries expanded businesses into overseas markets and new green industries like fuel-cell.

But recently, business environment deteriorated sharply to a point where POSCO was forced to cut production for the first time in its history. 2009 may be even tougher than Korean financial crisis in 1998. Undoubtedly Korean industries will experience contractions in both domestic economy and exports. Key steel consuming industries like auto and ship building will reduce production and it seems steel demand will have a negative growth. Furthermore, the uncertainties in raw material price and the foreign exchange rate make it impossible to have any visibility on the outlook.

So in developing this year's business plan, POSCO focused on flexibility and emphasized on being prepared for all possible developments in the environment. Today everyone is going through pain and hardship, but we know that those who overcome these challenges will emerge as a new leader in the new market. So in 2009 POSCO will continue to concentrate on reducing costs and tightening control. But at the same time we must make preparations for when we come out of this tunnel so we are proceeding with our original plans for investment and research and development without any delays or modifications.

As I mentioned POSCO's 2009 business plan is focused on flexibility. So we have prepared various scenarios ranging from best case to the worst case. The details are as follows. Crude steel production will be between 29m and 32m tons, and the sales volume between 27m and 30m tons. Revenue will be between KRW27 trillion and KRW30 trillion for POSCO alone and in consolidated terms it will be between KRW38 trillion to KRW42 trillion, and we plan to invest KRW5.7 trillion to KRW7.5 trillion.

This concludes my opening remarks. Thank you for your attention. Now we will take questions. Thank you.

Operator we are ready to take any questions.

Thank you. (Operator Instructions). One moment please. Our first question comes from [Neil Larkin], your line is open.

Good afternoon or good evening as the case may be. Can you give us some guidance for depreciation for 2009?

And I'd also like to just make sure I heard the correct number on what the CapEx would be for 2009.

The amount of the depreciation will be about the KRW2 trillion.

And our CapEx in 2009 is about KRW7.5 trillion. If the situation becomes worse, then we would reduce that CapEx up to KRW6 trillion later. So we provided the range from KRW5.7 trillion to KRW7.5 trillion so if the situation is good enough then our CapEx will be KRW7.5 trillion. In the worst case it will KRW5.7 trillion.

Okay. Thank you.

(Operator Instructions). We have a follow up from Neil Larkin, your line is open.

Yes. I'm wondering in the current environment would you consider increasing your raw material self sufficiency say through acquisitions.

Yes, if there is a very good chance to invest in mines then we are ready to invest in mining sectors, I mean the iron-ore and the coal mines.

Thank you.

The next question is from [Lindsay Taylor]. Your line is open.

Yes good evening guys. I've just got a question on volumes. You've cut volumes for the first time in the history of the company, and it looks like that's continuing into the first quarter. Can you give us a picture of your order book at the moment, your contract orders, what orders do you sell more on a spot basis?

And also you know we've heard talk that Toyota, you maybe getting some market share off one sale in Toyota and what that might do for your volumes going forward.

You know since our major customer is the auto company in Korea in Japan and in Asia, and we are also assuming announcements by the auto company that they will cut the production and it's not confirmed yet. Also we meet our schedule [pass] through to the other ship building, is we are making plans every month now. So currently it's very difficult to say how much is our order book. So everything is clear, we can give you some numbers and everything. So please leave that for a while.

And there is some news about we tried to supply some volume to Toyota as you know, but it's constant discussion situation so we cannot release the size of contract on supply volumes and everything. So if our negotiation goes further, we will announce our contract or something, but right this is all we can say about that supplying thing.

On exposure to stockmarket, we have very little exposure to the stockmarket directly, less than 4% for own mine sales. We do sell to distributors. That accounts for about 6.5% of total volumes that ultimately finds its way to the stock market, but even with those distributors we deal in volume and write long term contracts.

Okay, and just trying to understand, what's your normal visibility for your order book to your ordering customers? So in a normal year you'd be able to see how far in advance?

The negotiations in terms of volume and usually we do the contract with our auto company annually and end of every year we promise, try to promise, how much we can supply to auto company. And, yes, a year base we do contract and we update every quarter.

Okay, thanks. I just have a quick follow up question. The equity loss on your accounts in the quarter, yes, I understand that a lot of that was the Stainless business. Could -- I mean is it possible to break down the equity loss into the Stainless and other different businesses?

And could you give us a bit of an indication of what's happening with the Stainless joint venture?

We are looking for the metric data. Hold on for a second.

Okay, thank you.

Okay, last quarter, in POSCO's Stainless business still we earned money. But Chinese, our subsidiary in China and they, because of the downturn of the Stainless business in China and they got huge losses. And so you can see every quarter our equity method gain is finally is turn to the losses.

And that is not everything, right, because of last year Korean accounting, the policies, changes. So it impact about 60%. So if there are no policy, accounting policy changes, our equity method definitely is a profit gained because the accounting policy changes impact 60%.

And the -- certainly some Chinese, our subsidiary business is down, so it impacts a little bit. And that our Korean (inaudible) business, especially Construction and the Specialty Steel businesses situation, is not so good. So their incomes are down somewhat. So together-together, our equity method gain, now it is equity method losses.

Okay.

So if we have a chance we will give you details at our [IR team].

Okay. Okay, I'll follow up with you later with that. Thank you.

The next question is from Carlos de Alba. Your line is open.

Yes, good evening. I wonder if you could just give us a sense of what are your views in terms of of coking coal and iron ore negotiations, just on the timing and in terms of the potential outcome of the price negotiations for 2009? Thank you very much.

Actually it is not easy for us to tell you the details of the price negotiations with the miners. I think it's not begun yet actually. The negotiations for the 2009 price is not begun yet because most steel mills reduced their production and the contract, 2008 contract quantities cannot be resolved easily. So we are talking with the coal and iron ore suppliers about the 2008 contract volumes, reducing those volumes. So I think we will be able to begin the discussion about 2009 contract at the end of this month or next month, but nobody knows what will be the result of those negotiations.

Thank you. And just a follow up if I may. We have been hearing that some mills around the world are not buying or stopping buying under contracts for 2008 and trying to secure volumes in the spot market. Is that something that you are seeing as well or maybe you have implemented? Thank you.

Yes. We are not -- Chinese mills do that kind of actions, but in our case, we, actually we, I think we have some kind of negotiations with the suppliers about the reducing the 2008 contract quantities. But we are not doing the actions immediately, right now, actually.

Thank you very much.

Next question is from Daniel Altman. Your line is open.

Hi. Thanks very much. Just a couple of questions. First of all, can you share with us your operating income number just for the fourth quarter?

And second question is, there are some comments in the media that POSCO would not generate any profits in the month of January, I wonder if you can confirm or deny that report.

And thirdly, on your guidance for 2009 I wonder if you can provide a number for operating income. Thank you.

For the fourth quarter operating income the number is about KRW1.4 trillion.

And for your second question regarding the POSCO deficit in January, we don't think that we will get deficit in January. The situation will be very bad, but I think we will be able to get (inaudible) profits even during the January.

And for the third question, I'm sorry but at this moment we cannot provide operating income guidance for 2009 because the situation is very uncertain so it is not easy for us to forecast our operating income level this year. So if, maybe, after the first quarter or second quarter the environment becomes a bit more certain then I think we will be able to provide some guidance about the operating income. I'm sorry, but at this moment it's not possible.

I understand.

Yes, one more thing with Daniel Altman. Welcome back.

Welcome back.

And as a list about the -- in front of the raw material negotiations with -- I think this is coming soon so also it's very difficult to say how much the raw material prices will be. So after everything is clear, we can give you a certain number, right? So please wait for a while.

Okay. I've just one -- thanks very much and good to hear from you, (inaudible). And just one last question, which is it looks like in the fourth quarter there is a pretty significant drop in production volumes versus the third quarter, but it appears as if your drop in revenue was a lot else. So can you maybe explain how that occurred? Was there an increase in average prices during the fourth quarter versus the third quarter?

How do you say? Our fourth quarter production volume, it is down. Now one main reason is 2m tons size at the mini-mill in Gwangyang is shut down from October 1 so it's clearly reduced our production volume mainly from fourth quarter. But the revenue, it didn't reduce much because we didn't change, we didn't lower our selling price, and also because of the higher exchange rate. So, together, our revenue doesn't reduce that much.

Okay, great. Thank you very much.

Thank you. (Operator Instructions). Sir, there are no more questions. I'll turn the call back over to you.

Thank you for your participation. And I can announce that we will have investment forums next week at New York, Boston and -- sorry. No. No, I'm sorry, in New York and Boston. So I hope we can see you at that conference. Thank you very much.

I think it's time to wrap it up here. Thank you very much for your attending this conference. I believe the Q&A session helped clear many of your questions. With this, goodbye. Thank you.

Thank you.

Thank you.

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