Posco Holdings Inc (PKX) 2009 Q4 法說會逐字稿

Thank you for standing by and welcome to the POSCO 2009 earnings release conference call. At this time all participants are in a listen only mode. There will be a presentation followed by a question and answer session. (Operator Instructions). I must advise you that this conference is being recorded today January 15, 2010.

I would now like to hand the conference over to your speaker today, Mr. Ho Kim from Credit Suisse steel sector. Sir, you may begin.

Thank you for joining and welcome to POSCO's 2009 earnings release conference call. There will be a presentation by POSCO management regarding earnings results followed by Q&A session. Here with us on POSCO are Mr. Young-Hoon Lee, Head of Financial Department Senior VP, and Duk Il Yoon, Head of IR and Financial Planning, and Mr. Tae Hwan Choi, IR Team Leader. This is Ho Kim from Credit Suisse, steel analyst and moderator for this call. And I'd like to turn it over to Mr. Lee for his commentary on the quarter.

Thank you. Good morning and welcome to POSCO's 2009 earning conference call. This is Young-Hoon Lee, Senior Vice President in charge of Finance Department of POSCO. Our earnings presentation was posted on our website a few hours ago. Most of you probably have looked at it already so I will make my statements short and spend more time on answering your questions.

I don't have to tell you how bad it was last year. The economy was in crisis and steel market deteriorated sharply. POSCO was forced to cut production in the first half of last year for the first time in history. Consolidated crude steel production was 31.1m ton and POSCO alone 29.5m ton. Both were down about 10%.

Sales were in decline too. Consolidated shipment was 32.1m ton and POSCO alone 28.4m ton. Weak market bred more competition and lower steel price. As a result consolidated revenue fell to KRW37 trillion and POSCO alone KRW27 trillion. Again was down about 10%.

But through excruciating cost reduction we achieved healthy profit. Consolidated operating income was KRW3.9 trillion and POSCO alone KRW3.1 trillion giving operating margin of 11.7%. This must be one of the highest amongst steel companies. In fact if you look closely at our corporate results you will see that we made the quickest recovery in operation and earnings amongst all steel companies.

Capacity utilization rate was at 75% in the first quarter but it is at 100% today. Fourth quarter shipments returned to 7.5m ton and operating margin climbed back to 20% level. We were able to get here because we put a lot of effort. You will find our key activities in detail on our presentation material but let me highlight some of them.

First, we improved speed and efficiency. We synchronized all activities throughout the value chain and eliminated any losses. We cut cost by KRW1.4 trillion, highest ever. We expanded domestic market share and export sales at the same time.

Secondly, we strengthened domestic investment, focusing capacity and quality. Lastly, we continued overseas growth, upstream project in India and Indonesia, downstream mills in Vietnam, Mexico and US. Acquisition of stainless cold rolling mill, addition of seven new supply chain management bases around the around the world, and investing in mines to raise self-sufficiency.

Looking ahead the business environment should be better than last year. The economy should begin to recover and steel demand should return to 2008 level. But uncertainties remain, raw material price, competitive landscape and impact of exit strategies by different governments.

So we set our business plan based on two distinct notions, defensive for survival and yet aggressive to thrive. We will achieve 34m ton production and 32m ton shipment under any market condition. We will cut cost by another KRW1.1 trillion. We will invest KRW500b in research and development, biggest R&D spending ever. And we will continue to invest in mines, overseas capacity, green business and new growth areas.

Our business plan incorporated flexibility and agility but the targets are aggressive and challenging. These are the targets of POSCO's 2010 business plan. Crude steel production 34.4m ton. Sales volume 32.4m ton. Revenue KRW29.5 trillion. And, including allowance of KRW3 trillion for POSCO growth opportunities, total investment amount will be KRW9.3 trillion.

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

(Operator Instructions). Your first question comes from the line of Leo Larkin.

Good afternoon, good evening, as the case may be. Could you give us any guidance for depreciation in 2010?

Depreciation amount?

Yes.

Yes, because of the increased investment in recent year the total depreciation will be slightly more than that of 2009. For 2010 it's going to be about KRW2.3 trillion.

Okay.

In year total depreciation was slightly over KRW2 trillion.

Okay, thank you that's very helpful. Just one follow-up. In terms of your stainless production do you expect that to be up in 2010 from 2009?

Right, that's the plan, yes. Stainless business is recovering and we believe from second quarter on the demand for stainless steel would improve. At the same time we think nickel price would stay relatively stable throughout the year. So on those assumptions we think stainless steel volume, shipment production, shipment, would increase next year -- no, this year 2010, sorry.

Okay, thanks very much. I'll get back in line.

Thank you.

(Operator Instructions). And at this time there is no further question.

In the meantime, just to give you a more detailed number on depreciation, for 2009 total depreciation was KRW2.06 trillion. 2010, this year, we expect KRW2.38 trillion in total depreciation.

We then have a question from the line of [Gilles Vos].

I'm curious to get your feeling regarding your ability to maintain operating margins in 2010 year, given the pressures that you're facing from increases in raw material prices.

Right, that's one of the reasons that we did not provide operating income guidance this time around because of exactly the uncertainties that remain on raw material price as well as some of the other uncertainties in global economy and on macro level. As our presentation material lays out, global steel market we expect it to improve this year, especially going into the latter part of this year, we think it will recover but still it remains an uncertainty. We do a lot of our business in Korea and Asia steel market but so far we think we'll be able to at least maintain our current price for first quarter and probably for the first half. So we're not seeing that much pressure to lower our price in our business area.

In our presentation we announced that the fourth quarter results of 2009 was recovered at the level of 2008 and the op margin was around 20%. Although it is the market consensus that in the next -- or this year the raw material price will go up between 20% to 40% level. But at -- by the first of half of this year the current raw -- 2009 raw material price will be the actual impact of production cost by the use of inventories. So we can have rather optimistic views next -- this year's operating margin should be higher than this year -- last year's.

Okay. And how do you feel about the opportunities to control more of your iron ore input in terms of long-term arrangements or maybe additional equity stakes in iron ore mines?

Right, currently our self-sufficiency on raw material including iron ore and coal is about 20%. Now our target and medium term goal is to raise that self-sufficiency to 30% by year 2012, that's 2.5 years away. And to achieve that we are making investment on raw material mines.

A couple of years ago we made investment in iron ore mine in Brazil called Namisa Mine. Yesterday we just finished the signing of equity stake investment in Roy Hill Iron Ore Mine in West Australia. And going forward we're studying a lot of other options in participating and making investments into upstream mining assets.

As for our current arrangement more than 95% of all our iron ore procurement is under long-term contract. That means that at least volume wise the iron ore supply is locked in for next on average 10 years. And so, yes, that long-term contract arrangement is in place and we will continue to maintain that mechanism for our procurement.

Let me add some detail regarding the overseas project we announced our investment plan this afternoon. The total reserve for Roy Hill project was about 1b ton and from the 2013, year 2013, the production plan is about 55m ton every year. So POSCO is going to take up to 15% of stake of that project. In that case POSCO will have about 10m ton uptake right. This kind of POSCO's activity and efforts to raise our raw material self-sufficiency will go on for next several years.

Okay. And in terms of selling prices, did you make an earlier comment as part of this my first question that you expected selling prices to increase in 2010 or did I misunderstand that?

Well, our domestic price, we don't have any plan to raise or cut our domestic price for next -- for the first quarter of this year and probably for the first half of this year. From then on we'll have to visit that issue depending on where the raw material price is settled.

Now as for our export price, in line with rising international steel price in China, Japan, Southeast Asia, we are raising our export price depending on which region we sell to slightly. So our average export price for the first quarter of this year will be slightly more than that of fourth quarter last year.

Okay. And your expectation for operating margin is for an improvement in 2010 over 2009 but not to the level that you've reached in the fourth quarter of 2009?

Again, there's still a lot of uncertainties that remain so that we're not prepared to give you a concrete guidance on that. But we'll do our best.

I'm sure you will and I'll go back in line. Thank you very much.

Thank you.

(Operator Instructions). You do have a question from the line of [Jamie Lee].

Hi, this is [Philippe] for Jamie. I have a question on your outlook on the regional markets particularly on the automotive side?

My second question was on your ambition in Japan. I know earlier this year you made some announcements on supplying steel to the Japanese auto manufacturers. And what -- where does that relationship stand and what are your plans?

Right. Well, we tried to provide you some numbers on our presentation material for Chinese steel market outlook and Korean domestic steel market outlook. In Korea we think automotive, home appliance and construction industries would have a modest to healthy growth. So, for example, auto production Korea we expect to increase about 6%, home appliance about 13% and construction about 3%. So although it's not spectacular we think we will enjoy some stronger market demand.

Similar, well, actually much better numbers come from our expectations in China market. We believe Chinese auto production would have 11% growth this year, their shipbuilding about 26%, now this is actual building of the ship rather than receiving orders, and home appliance about 14% growth. So we are rather optimistic on regional steel demand outlook.

Now for Japan steel market, it's pretty important market because Japanese steel market is very premium market and we have been expanding our market share in Japan especially in automotive and high-grade electronics market. And with the starting of supplying premium automotive steel to Toyota last year we think we will get traction on expanding our market share in this premium steel demand. Does that answer your question?

Yes, thank you very much.

Thanks.

Your next question comes from the line of [Matie Chan].

Hi, thanks for the opportunity to ask questions. I think you may have answered this partially with the answer to a previous question but I was just wondering if you could provide some additional color as to your volume and revenue contribution from different regions and whether your export mix will continue to go up in 2010?

Right, yes. During 2009, when Korean steel market went through weakness, say, we explored a lot of new customers in overseas market and expanded our exports. This year with recovery, slight recovery in steel market, we plan to run at 100% that would translate to about 10%, 15% growth in our production and sales volumes.

Now we will maintain our export customers from last year and we will try to expand our domestic market share as we did last year as well. So yes, export ratio would remain relatively same as last year but in terms of volume domestic and volume will both grow more on the domestic sales side.

Thank you.

Thanks.

(Operator Instructions). You do have a follow up question from the line of Gilles Vos.

In terms of your capital spending and expansion of your production facilities, are there any bright spots regarding your plans for India? I know it's been a long haul, be curious if there's anything changing in your timeline there.

And secondly, if you could talk a bit about your plans in Indonesia? Thank you.

Regarding the India project recently we got approval from the India Central Government regarding the site in Orissa State (inaudible) approval. So maybe in the first half of this year we can start the actual construction and groundbreaking in Orissa State.

And the related issue is regarding the mines, there is some bottleneck over the prospecting exploration rights. But this bottleneck will be resolved by the end of February so we are very optimistic to get the exploration and prospecting license from the central government. So India project at least by first half of this year we can see some visible progress.

And in Indonesia, as we announced in the last year, we got MOA with Indonesia partner Krakatau Steel that will be joint venture will be established by -- in the first quarter of this year and from September the groundbreaking will start. And the actual construction is scheduled to begin first half of next year.

Okay. And then in Orissa would you venture a guess as to when you might actually start production of steel there?

After groundbreaking then it needs about 3.5 years to finish the first stage construction of about 4m tons.

Okay and do you have plans for Karnataka as well?

I'm sorry.

Do you have plans to set up facilities in another state in India called Karnataka as well.

It's very early stage.

I'm sorry.

It is very early stage. They issued some very, very preliminary license to POSCO and ArcelorMittal but we -- it is not certain.

Okay, thank you very much.

And there are no further questions at this time. Hello, Mr. Kim.

Yes.

There are no further questions, sir.

There are no questions further, right? So I think we can conclude this call if there's no question.

Okay. Ladies and gentlemen, thank you for your participation. This does conclude today's conference. You may now disconnect.