Posco Holdings Inc (PKX) 2009 Q3 法說會逐字稿

Good morning, everyone. This is POSCO's third quarter '09 conference call. I'm Wansun Park, steel analyst at JP Morgan. We have Mr. Lee Young-Hoon, Head of Financial Department of POSCO, and the rest of IR team with us. I'll now hand it over to Mr. Lee for presentation and after the Q&A session will follow.

Okay, thank you. Morning. Welcome to POSCO's third quarter earnings conference call. This is Young-Hoon Lee, Senior Vice President in charge of Finance Department. I hope by now you have seen our earnings presentation, posted on our website. And you must have many questions, so I'll make these statements brief and go quickly into Q&A.

Thanks to gradual recovery in global steel market and our prompt response to the rising demand, our third quarter results showed dramatic improvements over the last quarter. Crude steel production was 7.9m tons, 10.5% increase from last quarter. The ramping of Gwangyang Number 4 Blast Furnace was completed in July, and since then POSCO is in full operation.

We achieved average monthly sales of 2.5m tons, as promised last quarter. Sales of most of our products increased, as steel-consuming industries slowly increased their production. Total revenue grew to KRW6.9 trillion, up by 8% from last quarter.

With improving condition of global steel market, POSCO's average export price increased. At the same time, low-price raw material of this year's contracts started to be fully reflected on our earnings. As a result, our operating income increased almost six-fold, reaching over KRW1 trillion, with operating margin returning to double digits.

Balance sheet remains strong as well. Liability to equity ratio slightly decreased, to 29.8%, as earnings increased and debt level reduced.

You will find our key activities and accomplishments in more detail on our presentation, but, to highlight some, we continued facility upgrades for domestic capacity expansion. We strengthened stainless business through M&A and strategic alliance. We made overseas investments to lay foundation for global growth. We began environment-friendly energy and new material business. And we continued cost savings and stayed active in securing technological leadership.

Now I will briefly talk about our view on the steel market outlook. With solid growth in emerging markets and improving condition in developed countries, we expect visible recovery in global steel industry next year.

In China, steel price dropped sharply in August and raised much concern, but price decline has slowed recently and we believe further decline is limited because raw material cost still remains high and steel demand continues to be strong. As World Steel Association announced recently, in 2010, global steel demand is expected to reach 2008 level.

At this point, we are prepared to give you our forecast of 2009 performance. Crude steel production will be 29.5m tons and sales volume 28.3m tons. Revenue will be KRW27.1 trillion, with operating income of KRW3.2 trillion, putting operating margin at 12% for the whole year. This implies that our fourth quarter results will be similar to the peak quarter of 2008, with 7.8m tons in sales and 23% in operating margin.

That concludes my opening remarks. Thank you for listening, and we will now take questions.

(Operator Instructions). We have a question from Leo Larkin, Standard & Poor's. Your line is open.

Good evening. Could you give us guidance for CapEx for 2009 and for 2010?

2009, our guidance for total capital expenditure is KRW4.5 trillion for domestic investments, another KRW1 trillion for overseas steel and raw material investments and about KRW150b for non-steel and energy business. And we have in reserve about KRW1.6 trillion for possible growth opportunities, totaling KRW7.3 trillion for total investment amount items. As for 2010, the numbers are not finalized yet, but for domestic capital expenditure it will be between KRW3.5 trillion to KRW4.5 trillion, other overseas investment. We'll give you more detailed numbers in January next year.

Okay. With respect to acquisitions, would they tend to continue to be -- are you planning to acquire more raw materials?

Yes. We are reviewing quite a few mining-developed raw material upstream investment opportunities. And, yes, we will continue to invest to increase our self sufficiency in both iron ore and coal and other raw materials, as that is necessary for our operations.

Our medium-term target for self sufficiency ratio of raw materials is 30%. Currently, the ratio increased up to 20%, so we need another 10%. So for the iron ore and coking coal as well, we are continuously seeking for the M&A targets.

Okay. Thank you.

(Operator Instructions). We have a question from Andrew West from Harding Loevner. Your line is open.

Hello. Thanks for the call. Could you provide more of your thoughts on the steel pricing environment? It seems like you're getting really good pricing, compared to the benchmark rates. Is this coming from your higher value-added products being an increasing part of the mix? I was just curious about what's supporting the pricing. And then maybe elaborate more on your thoughts for raw materials costs and how they're likely to trend.

Our current domestic price is comparable to the import steel from Japan and China, and comparable to domestic steel price in nearby regions, especially Japan. Taking exchange rate to be about KRW1,200 per US dollar, our HRC base price is around $540 to $550 a ton, and this is in line with what Japanese steel companies are charging when they export into Korea.

So I don't think there's much gap, or our price is too much different from other prices. And we still think, going forward, we will be able to maintain our current price level for quite some time, given, as you mentioned, our quality, service, including delivery, consistency and other types of qualitative services that we provide our customers.

As for the raw material, as we indicated on our presentation, it seems as though the supply will be tight going forward, so we would soon begin negotiating for next year's contract price. It may be challenging, but it's too early to give you any definite color on where it's going to go or by how much it will.

With that answer (multiple speakers).

We have a question from Lindsay Taylor with SAC.

Yes, hi. Good evening, and thanks for hosting the call for us. Could I just -- this might sound a simple question, but what is your current capacity and -- of crude steel production and your current potential production of finished product, as well?

On our blast furnace, we went through Number 4 Blast Furnace in Gwangyang Works. It went through a revamping that was completed at the end of July. Since August, we have been running at almost full operation. The guidance that we gave out for fourth quarter, with crude steel production of 8.4m tons, that's about -- that's assuming full capacity, full production. So, considering that, our current capacity, annualized, is around 33m to 34m tons in terms of crude steel.

Okay, thanks. And just so I understand, in 2010, do you have any (technical difficulty) expansion possibilities through de-bottlenecking or through (inaudible)?

I'm terribly sorry. There was a terrible static that we didn't -- would you repeat the question?

Sure, yes. I was asking whether in 2010 there's any planned either shutdowns or relinings of any of the blast furnaces or any of the finishing lines. And, secondly, is there any possibility of either capacity creep in the finished product lines next year?

As for major maintenance, during the second half of next year, revamping of Number 4 Blast Furnace in Pohang Works is scheduled, so it's going to be shut down for a few months, but when it's completed it will come back with greater capacity. Aside from that, we have been investing in our capacity expansion.

One is a new steelmaking plant in Pohang that will add about 2m additional capacity of crude steel production, and we're also building a new plate mill in Gwangyang that will add another 2m tons. So in crude steel, 4m tons designed capacity expansion, and that will translate into about 4m tons additional capacity in the finished product production. And all these will be finished in the second half of next year, 2010.

Okay, great. Thank you.

We have a question from [Adam Wright]. Your line is open.

Hello, gentlemen. How are you?

All right. How are you?

I'm good. Thank you very much. Thanks for taking the call here. Just calling real quick to ask again about the shipbuilding orders. Last quarter, you all mentioned that you were not worried that there would be any changes to the orders, whether they be cancellations or deferrals. I was wondering, is that still the case? Have you seen anything during the quarter or --?

No. Aside of the impact of change in maintenance on one of our plate mills, our plate steel has been very consistent for last several quarters. And, going forward, we believe this trend will continue, as far as the orders that POSCO receives from domestic shipbuilders. But in our presentation material, we included some of the forecasts for shipbuilding -- for the ship production in Korea, total shipbuilding, in terms of gross tonnage, there will be a slight decline in 2010 compared to 2009. But we are confident POSCO will be able to maintain our current level of production for plate and maintain the orders from shipbuilders.

Right, perfect. Thank you very much.

Thank you.

We have a question from Mr. [Ross] from American Century Investments. Your line is open.

Hi, thank you. I am curious if you're currently in a position to talk about a timeline of starting your project in India.

Timeline, there has been some progress made.

After agreeing (inaudible) with Indian government, it's passed about three and a half years. And now the current stage is firstly regarding the mining rights. Now POSCO is in the situation and position that's waiting for issuing prospecting license from central government of India. In the last year, the Orissa state government already issued and recommended prospecting license to POSCO, and now the central government is going to issue the prospecting license. Then, once POSCO got the prospecting license, then the actual survey for the mining site will started. I think the timing would be November this year.

Secondly, regarding the land purchase in Orissa State, where the steel mill will be established, this afternoon POSCO's CFO confirmed that POSCO purchased more than 90% of designated site. So now POSCO is also constructing the residential site for the Indian people and the job training centers. So we cautiously think and hope maybe first half of next year the construction of steel mill will start.

Have you issued construction contracts for this already? And, if so, are you at liberty to say to whom?

Not yet. We did not give any orders to the -- our engineering companies for the facilities.

Thank you. I have a second question, if I may. Can you comment on the progress you have been making in Japan, and particularly what sort of volume growth you are expecting as a result of your new relationship with Toyota and maybe others in the wings? Thanks.

Now POSCO has total four of (inaudible) management based in Japan. And the last months the Nagoya coil center completed the expansion of second service centers. Now the current operating capacity utilization grade of those four service centers in Japan is slightly over 60%, mainly because the slow recovery in steel demand or automotive steel products in Japan. But every month that utilization rate and the actual sales volume is increasing now.

And we got about 30 hundred thousand ton supply contract with Toyota this year, and hopefully next year that contract amount will be increased. And next week POSCO will have exhibition in Toyota plant in Japan. That exhibition is exclusively open to Toyota and third party suppliers. Exhibition will help to increase our supply volume to Toyota in Japan.

Is enough?

Just if I may, are you in negotiation with other parties to further establish this growing part of the business in Japan?

Yes. We already are supplying automotive steel products with other Japanese car makers, including Nissan and Honda.

So, yes, of the Japanese car makers who have plants in Japan, Toyota was the last to become our customers. Every other car maker in Japan, we have already a long-term relationship and have been supplying automotive steel for a long time.

Thank you very much.

We have a question from [Adam Wright]. Adam, your line is open.

Hello. Can you all hear me fine?

Yes.

Oh great. Thanks for taking the call again. My question is regarding your comments on China, that you said you weren't worried about prices there falling much further due to strong demand and high raw material costs. Could you please address the issue of there is clearly a -- even the Chinese are openly worried about the glut of steel supply in China. There has got to be a destination for that, which seems to be of course over-producing because it's my understanding that demand there has not -- within China has not been as strong as they expected.

Well, our analysis is that, yes, the demand has been rather strong, healthy, steady and -- but in the anticipation of the massive stimulus package the Chinese government has promised in the earlier of the year and the execution of it, I think there was more hopeful anticipation by steelmakers that they increased their production far ahead of the increase in demand. But that has resulted in the buildup of inventory. As you see, everywhere else in the world destocking of inventory has been going on, whereas in China inventory has actually been building up.

Sure.

So, yes, naturally it has gotten to a point where it had an adjustment or correction, and that has been going on for the last couple of months. But, as I mentioned, the spot price has gone too far downwards, that we believe it reached below average cost of production in China. That means almost half of the steelmakers in China will probably be losing money selling steel at current price, given raw material price.

So, from here on, we believe we will see some discipline on supply side, because of the cost push, and then there will be slow gradual destocking of inventories. And as soon as we see some movement in the destocking of inventories, that will probably turn positive and then stronger demand would probably pull.

And when you said something was turning stronger, I couldn't hear that part. You mean the price would turn stronger?

Not the price, the sentiment in the steel market would turn.

Yes. I am sorry. Okay, okay. And in terms of the (multiple speakers).

And the sharp increase in structural steel products in China in the third quarter came from not only the increase in from Chinese steel companies, but also came from the increase in exports to China by other steel companies like Nippon Steel and JFE. Early third quarter, China's steel price was relatively higher than the other countries, so Nippon Steel and JFE tried to increase their exports to China market. For example, the Nippon Steel's export ratio increased from 30% to 50%, and in the case of JFE it was 40% to 60%. So the stockpiling in China, or reasons, was not only for the Chinese production increase.

I see that. And one more quick question, if you don't mind.

But, in China, the steel price -- the Chinese market is one of the lowest steel price markets, so I think the Japanese steelmakers would not try to increase their exports to China market furthermore.

Okay. And also, when you mention the slow destocking process for the excess inventory in China, do you have an idea of how long that might take, that process?

That's difficult, but we are confident that we will see some visible destocking in terms of numbers certainly during the fourth quarter.

In the last week, there was the World Steel Association annual conference in Beijing. And the POSCO CEO and CFO joined that conference, and they met a number of leading persons of Chinese steel industries and government officials. And during the meetings the Chinese -- many steel industry leaders reiterated that the restructuring of Chinese steel industries, and they told them now the major steel companies' expansion plan is totally on the hold, the situation.

Okay. Okay. All right. So, thank you very much for the time.

Thank you.

(Operator Instructions). At this time, I am showing no other questions.

If there is no further question, we will wrap up the conference call here. Thank you everybody for joining. Goodbye.

Thank you.

Thank you.

Today's call is concluded. All parties may disconnect.