Posco Holdings Inc (PKX) 2009 Q1 法說會逐字稿

Good day, everyone, and welcome to the POSCO first-quarter 2009 earnings release for Asian and European investors. Today's conference is being recorded. At this time, for opening comments I would like to turn the conference over to your moderator for today, Mr. Simon Park of BNP Paribas Securities, Korea. Please go ahead, sir.

Welcome, everyone, and thank you for joining POSCO's 2009 first-quarter earnings conference call. I am Simon Park of BNP Paribas. Let me first introduce the participating representatives from POSCO. I am here with Mr. Young-Hoon Lee, the Senior Vice President of the Finance Department, and Mr. [Togillion], the Group Leader of Investor Relations and, lastly, the members of POSCO Investor Relations team. Mr. Lee will first give you the overview of first quarter 2009 earnings, and then we'll have the Q&A session afterwards. Mr. Lee, I turn it over to you.

Okay, thank you. Good afternoon. Welcome to POSCO's first-quarter 2009 earnings conference call. This is Young-Hoon Lee, Senior Vice President in charge of the Finance Department. I am sure that by now you have seen POSCO's earnings presentation materials on our website. And you must have many questions, so I will make the introduction very brief.

As you know, the first quarter has been difficult for all industries, including auto, home appliance and even shipbuilding industries. Global recession caused a sharp decline in the demand, and the steelmakers around the world faced the toughest challenges in recent years. POSCO was no exception.

We have to cut production for the first time in our 40-year history and our financial results reflect the situation. But we believe we did far better, relative to our global peers. In developed countries steel production was down more than 40%, but we managed with only about 20% production cut. I will talk about our views on steel outlook, but first let me highlight a few things from our first-quarter operations.

First quarter crude steel production was 6.1m tons, down 25% year on year. But we minimized the impact by carrying out already-planned facility upgrades and renovations, and rescheduling some of the investment projects. Sales volume was [60m] tons. To make up for reduced domestic sales we've put in more drive in export sales, and our export ratio went up to 31%. Sales were down for most of the products, except Plate, reflecting weak demand from all industries. Stainless Steel sales were up slightly over the last quarter, but we are still cautious to say this is the start of a full recovery.

Total revenue was KRW6.5 trillion, in line with the drop in sales volume. But weaker Korean won put a burden on our [cost side] and our operating income decreased to KRW373b, giving a margin of a little below 6%. Given the current situation, however, we believe this result is impressive enough. Although POSCO is the first steel company to come out with first quarter earnings, we are confident that our margin is among the top. Balance sheet remains relatively unchanged, but there are some improvements if you look closely. We've tightened control on liquidity, we reduced the level of notes receivables and inventory, while increasing cash [reserve].

A few key financial ratios to summarize. First-quarter EBITDA was KRW851b, with EBITDA margins still remaining double digits, at 13%. Return on equity dropped to 4.7%, due to a decline in net income. And total liability to equity ratio rose to 35%, but still at relatively sound position.

Now, let me highlight some of our key activities. As you know, Mr. Joon-Yang Chung has been appointed as our new Chairman and CEO of POSCO. Under the new leadership, POSCO has reaffirmed its long-term strategy and initiated contingency plan management. We now review our performance and revise business plan on monthly basis. We also raised our cost reduction target to KRW1.3 trillion, and are adjusting our operating -- operation scheme to optimize the process. [For the while], we continue our investment for the post-recession period, however, prudently and with caution. We believe that investing in difficult times always pay off when market turns bullish.

Now I will try to share our [investment] on the outlook of the demand and industry. Governments around the world have announced economic stimulus practices, with large portions allocated to social overhead capital investment. We believe these associated investments will lead to a recovery in the demand, beginning as early as the second half of this year.

As for raw material, coal prices are being settled at 55% to 60% price cuts, depending on the type and grade. We think, by the end of April, contracts for all types of coal will be finished. Things are a little more different with iron ore. There is still a largely -- large gap between what steelmakers demand and what suppliers are willing to accept. We will try our best to make the agreement as soon as possible, but it may take a little time.

Putting all these together, POSCO has devised its business plan. I must tell you that these figures represent the levels of operating result that we feel comfortable at this point. We are trying, and we will try more, to exceed this guidance, I [promise you] now.

The details of POSCO's non-consolidated business plan as -- are as follows. Crude steel production will be 28m tons and the sales volume 26m tons. Revenue will be KRW25 trillion. And our investment plan stays at KRW7.3 trillion, although the schedules for individual projects may be adjusted depending on the market environment. That concludes my opening remarks. Thank you for listening.

Now we will take questions.

Thank you. Today's conference is for institutional investors only. Any sell-side analysts, we would ask that you please direct your questions directly to POSCO IR. (Operator Instructions).

And our first question will come from Andrew Chan, with JPMorgan.

My question is on your plans for the second quarter. I understand that POSCO is looking to increase production and utilization in the second quarter. Can you share with us why this is so, and whether you have seen, or you're expecting, a stronger market in order to absorb the additional volume?

Hello?

Hello?

Yes, hello. Can you hear me?

Yes, okay. Yes, thank you for your questions. Our management, and we revised the second quarter the budget, is where we think -- we believe the first quarter is the bottom. And, as you can see on our presentation, the utilization of all Korean domestic demand, [the three] ratios is getting increased. So we believe second quarter at least the same as the first quarter, so we are very confident to increase our production.

And -- but definitely it depends on the major industry in Korea, utilization ratios trend. So we assume, our Crude Steel and the sales volume will be increased by around 15% compared to first quarter. So that's why we guided second quarter will be the better than the first quarter.

And, of course, there are a few things we can consider. One is on the raw material price negotiation, it is coming soon. And then we will decide how much should we lower our price, some time in second quarter or early second half of this year. But that's all our assumptions for the second quarter.

The additional one point for POSCO's confidence, that in the second half of this year, our second quarter, our production level will be increased compared to our previous quarter, is regarding the export market. POSCO is pushing very hard to penetrate and increase our sales in the export market, including the China and Southeast Asia and Japan.

This [week] POSCO got a contract with Sony in Japan to supply [cold tube] products. And now, in China, the very recent news is our Chinese Government is paying for some subsidies for the Chinese people to buy cars and increase the consumption. Because of that, there is a very high level of capacity utilization of auto industries.

Recently, the Chinese auto industries ask POSCO to supply auto sheet. In the case of [our steel] in China, there is about two months [of delivery] time but, in the case of POSCO, we only deliver two weeks. Because of the kind of cost of our -- competitive advantages, POSCO's export increased, and drive is taking effect from now on. So we are very confident to maintain the increased level of capacity utilization from now on. Is it enough?

And we'll move on to our next question, from Nicholas Allan with Boyer Allan.

I was actually asking a -- was going to ask a similar question, but can I just ask for a couple more details? When you talk about a 15% increase in the second quarter, is that production, or sales, or both?

And could you also discuss what the margin is like on the export sales, as opposed to the domestic sales?

Around 15% is for the Crude Steel production in sales volume as well.

Right, okay.

And based on our first quarter, our margin on export is -- depends on the -- in the product line. But some of our products, like Cold Rolled and Galvanized Coil, margin on export is much higher than domestic margins. So, as Mr. Lee mentioned, using our cost advantage and low-cost advantage together, we can increase our export, mainly in second quarter.

Right.

Okay?

Thanks, yes.

(Operator Instructions). And our next question will come from Lucas Huang, with Third Avenue Management.

Hi. I would like to know that, given that your pricing is higher than some of your domestic peers, and they are demographically cutting price, have you lost market share in the last three months, especially in key product areas like the Cold Rolled products.

And, secondly, what is the differential between your pricing and your competitors in Korea right now?

All right. Well, mainly our price in Korean market is -- looks higher than import market, mainly from Japan, right. But I don't think our market share down significantly because of our pricing higher. As we mention -- as you know, Korean market is a fairly [import] market so, whilst the demand is down, our customers will cut export costs, not the [POSCO] (inaudible). So I think the in portfolio may be down significantly, and POSCO will be the last one to cut for [spare] demand, right. So I don't think our market share down in the second -- in the first quarter.

And the Cold Rolled, because we cut a lot, right, especially our [Gang Yang] works, we cut the Cold Rolled production a lot, so inventory situation is not that much high. So please don't worry, right? That kind of things do not happen yet, and I don't think that kind of things will happen in near future. So, well -- as you know, currently our import prices looks lower than domestic -- our price in Korea. But also we will adjust our price after raw material price negotiations, so that only we can consider in the second quarter this year.

Okay?

Okay, thank you.

And our next question will come from [Stephen Marvin] with [Penzace].

Yes, I actually have three questions. The first question is, I'm not clear as to why your export margins would be better, other than your domestic margins. You're selling the domestic market at over $600 a ton for, say, a sheet, whereas, the Japanese and China Steel are selling into the region at $400 to $450 a ton. So I assume that you're selling at a price that's around the same level, which is considerably lower than your domestic price, so why would your export margins be better? That's my first question.

My second question is, I heard that POSCO has been selling semi-finished products billet or other semi-finished products into the region, in order to reduce inventory. Is this true?

And my third question is, in your coal settlement, your coking coal settlement, we see that the Japanese blast furnace producers have agreed to carry over all of their 2008 volumes that they did not take delivery of, at the 2008 price. Has -- did POSCO not take the full delivery of its contracted coal volumes in 2008? And, if you did not take full delivery, will you pay the 2008 price on the remaining volumes?

Well, if you just compare the Korean, our price, compared to import steel into Korea, there is a gap, we admit. But if you look at domestic prices in nearby regions, especially Japan, although our Hot Coil is being sold at around $600 right now, same quality Hot Coil is being sold by these steelmakers to Japanese customers at well over $700. So when we export to, say, Japan, we're competing with these prices. But there are some differences in where you put the relative point in.

And as for --

(Multiple speakers) your export prices are higher than your domestic prices?

It depends on the region and by product and --

Especially in January and February, especially against the US dollars, they really depreciation -- depreciated at that time. That means our manufacturing cost is relatively higher [is in dollar form] in January and February. And also the export price trend is -- will be down -- in January is better than February and February is better than March. So the margin in export products is getting narrowed right now.

So over the everyday margin is higher in export market than domestic market because the trend is changed right now, because of our Korean won really stabilizing in terms of US dollars. So that's why we are saying exports market there is -- export product is stabilizing than import -- domestic market. But that trend can be changed in second quarter, I mean.

I understand.

In February the average exchange rate of Korean won against US dollars was KRW1,400. And March, it was KRW1,460.

But there hasn't been significant changes in the sales of semi-finished products. If you look at our presentation material, on page four there is a breakdown by product from how much we've sold. The others, at the bottom of the category represented semi-finished products including billets, slabs and blooms, yes, but there hasn't been significant increases.

Is it enough for (inaudible) question?

Yes, thank you.

And the third one, the coal price negotiation, as you know, the coal market's really segmented, I mean, compared to iron ore market. Iron market is just the three players, so they're a bargaining power and everything is bigger than our steelmakers. But the coal market's really segmented, so the negotiation [system] is totally different from the iron ore side. So, in case of coal, we just negotiate one by one. And so the terms and conditions totally different from each companies.

So [for tomorrow] we can disclose our settlement terms and conditions because it's almost a confidential thing. So even though you said Japanese steelmakers didn't get (inaudible) material for negotiation, material for the negotiation, nobody really knows whether they will be carrying it over or not.

So it's the same with POSCO's situation. So we cannot disclose our exact [details] of our price and volumes [this month]. So please understand the situation. So we cannot disclose whether we carry it over or not. So you can see our results at the end of the year. You can get your answer. And furthermore, -- yes, okay.

We are trying very hard to have a very strong negotiation with our core suppliers.

I understand, thank you.

Thank you.

Was there anything further, Mr. Marvin?

No, that's it. All my questions were answered.

(Operator Instructions). And our next question will come from Sameer Kakakhel from AllianceBernstein.

Hi, thanks. Just one thing. If I compare your current level liabilities to the consolidated level, the consolidated level result is almost twice the size. Now we know that the net debt you have mentioned, at the parent level, is about KRW6 trillion. Can you give us some idea of the -- interest bearing debt is about KRW7 trillion in the parent. What will be the net debt level at the gross level? And what are the subsidiaries with the maximum amount of debt? Could you give us some reference sense if you don't have the full numbers.

The full consolidated financial statements are being prepared right now, and we still -- it's a little bit too early for us to give you details. But we recently disclosed -- posted our consolidated financial statements from 2008. It's to our best knowledge. There had been some changes in debt levels of the parent Company, POSCO, but not significant changes during the last three months on subsidiary levels. So that should give you some guidance.

I just -- but we -- I don't have that number in front of me, but was the total number, net level, also twice because your total liabilities are almost twice? I was just wondering whether the net debt level will also be twice that.

Let me try to find those detailed numbers and calculate it. If you're talking about net debt, that's whole debt minus cash positions, right?

Yes, [Tariq], interest bearing debt minus cash. I was just wondering whether -- because there's a lot of change in the working capital items and you have subsidiaries in China and across, I was just wondering whether the overall balance sheet was seeing a bigger change than your parent level.

No, no, no, no, no. There shouldn't be any substantial changes on a subsidiary level. So looking at last year and our balance sheet of consolidated basis, and just considering the changes at parent level on first quarter, that should be the only major changes that happened on consolidated basis as well.

I see. All right, thank you.

Thanks.

(Operator Instructions). And we do have a follow up from Andrew Chan with JPMorgan.

Yes, thanks, hi. Can you elaborate a little bit on your planned increase the cost savings target by some 30%? Where would the additional cost savings come from?

And maybe in relation to costs, can you also talk a bit about how the Finex technology is coming along? Have you reached the optimal cost structure that you want for Finex, or are you still getting continuing improvement in the efficiency?

Okay. Our cost savings target is definitely increased by our new management. And certainly most of the volume and the amount is coming from raw material side. So we believe there are still a lot of room to save in raw material using the low-cost [volume and] call. And that's the target we are looking for.

And Finex, yes, Finex is running well; it's fine. And I think we have a very clear target to reach end of this year. And I don't have that number right now. But it's running very well. And almost -- we are very sure to complete the target by end of this year. So we will show you the number maybe next time. So we didn't describe here this time.

And for Finex operations, the initial operation targets were met during last year, in mid last year?

During the third quarter we revised the operation target at Finex to exceed those operation metrics of blast furnace. So we're right now shooting for it. Currently, it's running much better than our initial target which, by itself, produces a lot of cost savings in operations.

Thanks very much.

And at this time we have no further questions. I would like to turn the call back over to Mr. Simon Park of BNP Paribas Securities, Korea for any additional or closing remarks.

Okay, I guess we'll wrap it up at this point. Once again, thank you all for joining us. And if you have further questions, please feel free to contact either POSCO IR team or BNP Paribas [ourselves] in your respective region, or myself. I wish you a pleasant day. Thank you.

Thank you.

And, once again, that does conclude today's conference. We do thank everyone for their participation, and have a wonderful day.