Posco Holdings Inc (PKX) 2009 Q2 法說會逐字稿

Good morning, good afternoon and good evening, ladies and gentlemen. Welcome to the Citigroup conference call on POSCO. Our Chairperson for today is Mr. Brian Cho. Brian, please begin your call and I'll be standing by for the question and answer session. Thank you.

Thank you. Good morning, good evening, ladies and gentlemen. This is Brian Cho from Citigroup hosting the POSCO second Q '09 results conference call. I would like to welcome every participant for joining this presentation. Throughout the conference the management will briefly go over the milestones on the second Q performance and the second half outlook, which will be followed by a Q&A session afterwards.

Given the limited timeline for everyone, please note that the institutional investors' enquiries will be taken with the priority at this time. Once again, thanks for all your interest and I will now hand over the microphone to POSCO's Senior Vice President, Mr. Young-Hoon Lee.

Good morning. Welcome to POSCO's second quarter earnings conference call. This is Young-Hoon Lee, Senior Vice President in charge of Finance Department of POSCO.

We posted our second quarter results a few hours ago, and by now you would have read through our presentation material. So I will make this statement brief and go into Q&A quickly.

Second quarter was yet another challenging quarter for us. Weak market forced us to cut our price earlier than we hoped, before the new lower raw material contract price began to be fully reflected on our income. But POSCO swiftly switched to contingency plan and the whole Company responded in concert to overcome the challenges.

In the second quarter crude steel production was 7.1m tonnes, 16% increase over the last quarter. And the sales volume grew almost 18% to over 7m tonnes. Leveraging on our cost competitiveness, we sought and secured new customers in overseas emerging markets and expanded export sales ratio to 39%.

But with weak domestic markets and fierce overseas competition, POSCO's average sales price decreased and the revenue declined 2% to KRW6.3 trillion. At the same, time high price raw material from the last year's contracts had to be used up for the better part of the quarter. As a result, operating income dropped by half to KRW170b. You will find our operating performance and key activities in more detail on our presentation material.

And we ask, you rather than just focusing on a few numbers, look closely at the substance of our efforts and accomplishments. For example, we improved speed and efficiency. We lowered inventory and receivables and raised utilization rate. We expanded the customer base with better product quality and service. We continued the cost reduction. In fact, we cut costs by more than KRW800b during the last six months of this year. And we continue to invest to enhance our competitiveness and accelerate growth.

Looking forward, we don't expect any drastic improvement in global steel market in the second half of this year. But as steel-consuming industries gradually increase their production, we do expect our sales to grow even further. Also, from the third quarter, lower price raw material will be fully reflected and will drive down our cost.

At this time we are prepared to give you our forecast of 2009 performance.

Crude steel production will be 29.8m tonnes and sales volume 28.1m tonnes. Revenue will be KRW25.8 trillion with operating income of KRW2.6 trillion, putting operating margin at just over 10% for the whole year. This, of course, implies that we will make more than KRW2 trillion in operating income over the next two quarters.

That concludes my opening remarks. Thank you for your listening.

Okay. That was the presentation of the second Q performance and then second half outlook from Mr. Young-Hoon Lee. Then I would like to take the Q&A session.

We'll take questions now, please.

Operator? Operator?

Yes, thank you, ladies and gentlemen. We will now go for questions. (Operator Instructions). Thank you. Our first question comes from Mr. Leo Larkin of Standard. Please go ahead.

Good evening, and thank you for the presentation. Could you give us any guidance for capital spending this year for 2009? And also do you have a preliminary estimate for 2010, also depreciation and amortization for 2009 and for 2010?

Yes. If you refer to the last page of our presentation, for the whole year of 2009 we gave a guidance of total investment amount to be KRW7.3 trillion. Of that, about KRW4.7 trillion will be pure capital expenditure and will be spent on our existing facilities.

We also allocated about KRW800b for overseas steel and raw material business, and also about KRW100b for energy and other new business. And we reserved KRW1.7 trillion for other growth opportunities that we believe will be available before the end of this year.

As for 2010, the complete expense -- capital expenditure amount is not fixed yet. But as for the pure capital expenditure for our existing facilities, it will be somewhat lower than that of this year.

Steel 2008 depreciation worth KRW1.9 trillion. This year's will be around KRW2 trillion, because from two years ago our overall capital expenditure was really high, our depreciation costs were also very high -- higher than before. So it may be around KRW2 trillion for more several years. It can -- we [can] give you the round number right now.

Thank you.

Thank you. (Operator Instructions). Next we have a follow-up question from Mr. Larkin of Standard. Please go ahead.

Yes. I'm wondering, just within the last two weeks Treck Resources of Canada announced a joint venture with a Chinese company. And I'm wondering if POSCO would consider making a similar type of investment in an effort to become a little bit more vertically integrated to maybe take advantage of current market conditions to secure raw materials at a more favorable -- on more favorable terms?

Yes, increasing self-sufficiency in terms of raw material procurement is -- has been, and still is, at the core of our long-term strategy. Currently, our self-sufficiency is around 20%. And we continue to invest and try to make it over 30% within next three to five years. In line with that, we have made some [equities to the] investment as well as participation in joint ventures.

Notably, in 2008 we made an investment at Macarthur Coal in Australia. Also, last year we made an investment in Brazilian iron ore mine, called Namisa. This year we've made some investments in Jupiter Mine, an Australian iron ore development company. So this investment in the more upstream raw material sector will be continued.

Also, we're making investment in other secondary alloy raw materials, such as ferro-manganese factories and nickel mine as well as nickel -- ferro-nickel factories.

Okay, thank you.

Thanks.

Thank you. (Operator Instructions). Our next question comes from Ling Taylor of SAC Capital. Please go ahead.

Yes. Hi, everyone, and thanks for hosting the call this evening your time. Just a question on the stainless market. With hearing that Chinese stainless steel production has accelerated and [AR Steel] reports an increase of demand, I'm just wondering if you guys had seen a similar thing in your stainless steel business. And do you have any guidance that you can give us in terms of maybe volumes for the second half of the year?

Right. We touched a little bit on stainless market on our presentation. Yes, we are seeing some improvements on stainless market, one, in the anticipation of rising nickel price and, two, after the depletion of built-up inventories there are growing end demand for stainless steel.

If you look at our numbers, POSCO's stainless sales have increased in the second quarter over first quarter. And, quite frankly, until first quarter stainless business in POSCO made some operating loss. But that turned around and we made modest and, in fact, a comfortable level of profit in the second quarter of this year.

Going forward for the second half we believe stainless steel sales for POSCO would continue to increase in a modest level. And our profit level will also grow compared to the second quarter. Does that answer your question somewhat?

Yes, I guess so. Maybe in terms of your actual order book and visibility, it has a length; your book's increased. And do you -- I just wondered, do you sell to end customers, or do you sell through traders for (inaudible)?

Well, our sales, it's all mixed. We do sell most of it. I would say over half of our total sales goes to end customers directly. But, yes, in some exports we do get some help from traders as well. But, yes, our order book is getting better. That's the rationale -- that's the evidence behind my saying that we believe second half our shipment would improve further. And, yes, on monthly basis our sales figure actually have been increasing as well.

Okay, great. Thanks so much for those comments.

Thank you.

Thank you. The next question comes from [Ming Yu] of [Morgan Stanley]. Please go ahead.

Hi. I would like to ask some detail about the Namisa project. Could you talk about how many tonnes of iron ore that you're expecting to ship from Namisa in each year, and if there is going to be additional investment for expansions, and what's the all-in cost per tonne for the Namisa iron ores? Thank you.

Right. Namisa ore, yes, we invested in equity share, in fact, 6.5% equity share of them. Currently, we are getting a little shy of 1m tonnes of iron ore from them right now, but they are going through development. And I believe by 2011, 2012, when they've finished their expansion plan, we'll get as much as 2.5m tonnes from them.

Are we going to -- are you going to invest more into the expansion project there, or --?

So current investment was -- it incorporates all the expansion plans that Namisa has currently. So right now neither Namisa or us are planning to further expand beyond the expansion project that's going on right now.

And could you maybe talk about an all-in cost per tonne of iron ore from there? Is it still at more attractive rates now that iron ore contract prices have come down?

Well, it's difficult to comment on the actual --

(Spoken in foreign language).

Yes, it's -- as for their operating costs, it's difficult to comment. But when we source our iron ore from these entities or these mines that we have invested in, we do purchase them at a market price. And in turn we get the share of their profit in terms of equity method gains. That's the way of hedging it. But, yes, if you look at any iron ore or coal mining company right now, I think they're still making profit.

Okay. Well, thanks very much.

Thank you. (Operator Instructions).

Okay. We're going to wait for 30 seconds. If there is no more questions, we'd like to wrap it up for our conference call. Okay --

I think -- excuse me, Brian, we have a question.

Okay.

Okay. The next question comes from [Mr. Edwards] from [Chemical Associates]. Please go ahead.

Yes, thank you very much for taking the question. A couple I want mainly being on the shipbuilding side, could you talk to any experience you [all] have had regarding order cancellations or, even more importantly, push-backs from orders you've gotten in the past?

Well, there have been some instances of cancellation in the latter half of last year and a few instances in the very beginning of this year, but recently we haven't heard of any cancellations or delays in deliveries of late. We do keep track of their ship -- our shipbuilding companies' actual production activities, and they have been holding steady at around 85% level since -- 85% -- yes, 85% utilization, so to speak, since October last year.

So it has been steady on monthly basis at that level, meaning second half of last year many small-sized newcomers in shipbuilding industry, they either have cut their production steeply or went out of business. But more of the major ones, who are the main customers of our business, they have been producing or in manufacturing ships rather at steady level and that is continuing as we speak, so, yes.

Okay, that's very helpful there. May I ask, are you nervous that you may see order delays going forward in 2009 or 2010?

No. As I said, we have been -- we keep very close check of these activities. But, of late, we don't see any sign -- signals on that. So, yes, we are very keen on that front, but right now we don't think --

Okay, yes.

-- we don't think anything negative of that.

Okay, very helpful. If you don't mind another quick question, if that's all right?

All right.

I know that, of course, here in the US one of the big stories is that de-stocking has pretty much come to an end, and in Europe people are thinking it's maybe a few months away. I was wondering if you could comment on the situation there within Korea.

Okay. In Korea, our inventory level has peaked in January and February. And since then, again, this we keep on -- keep track on weekly basis. They have come down considerably.

In February, the inventory level in a channel in steel market in Korea, including the traders as well as end users, the total level of inventory was as high as 6m tonnes. It has been coming down steadily. As of last week it came down to 4.3m tonnes, so almost 50% down. And it's continuing, so that's a plus.

Okay, so very good. That's what's going to happen. It's still falling. It's not -- I was wondering do you have a feel for when it may trough or when it may bottom out?

I think it may take some time more for it to reverse its course. Again, as I said, we keep track of these numbers on weekly basis, and since February until last week it has been straight line in the speed of the decline.

Very good. Okay, so, the recent past. Okay. Well, that's very helpful there. Anything else --- yes, that's all. Again, thank you very much for your time there.

Thank you.

Bye bye.

Excuse me, Brian, we have no more questions at this point in time. Thank you.

All right. Thanks for participating in the conference. That's for today. Thank you.

Thank you very much.

Thank you for your participation. This concludes the conference.