Posco Holdings Inc (PKX) 2011 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the POSCO third-quarter conference call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question and answer session. (Operator Instructions). As a reminder, this conference is being recorded, Friday, October 21, 2011. I would now like to turn the conference over to Yongsuk Son. Please go ahead, sir.

Thank you, Dimitria. Good morning and afternoon. My name is Yongsuk Son from UBS. I cover the Asian regional steel sector. Welcome to POSCO's third-quarter results conference.

We have here the Finance Department Senior Vice President, Tong-Wook Shim, and Finance Planning and IR Group Leader, Min-Yong Noh, and the POSCO IR team. Mr. Shim will briefly comment on the Q2 results and will be followed by Q&A.

Without further delay, I would like to hand it over to Mr. Shim. Mr. Shim.

Thank you. Good morning and good evening. Thank you for joining POSCO's third-quarter earnings conference call.

With me is Tong-Wook Shim, Senior Vice President and in charge of Finance Department at POSCO. I will outline some of the highlights of our third-quarter performance, and we'll take questions at the end of this statement. For details, please refer to the report of POSCO on our website.

Due to the slump in the global economy, consolidated revenues remained relatively flat as the previous quarter at KRW17 trillion. However, due to rising costs and weak demand, especially in the steel sector, operating profit declined to KRW1.3 trillion, with an operating margin of 7.7%.

Further, the sudden upsurge in exchange rate caused our Korean won denominated debt amount to rise, while devaluing our foreign currency debt. This caused a foreign currency translation loss of almost KRW1.1 trillion and brought consolidated net income down to KRW233b. Consequently, total liability to equity ratio rose to 93.8% and return on equity ratio dropped to 2.3% in the third quarter.

Now I will talk about non-consolidated POSCO alone result. Third-quarter crude steel production increased to 9.5m tons and the sales volume remained steady. However, due to weak domestic demand, export ratio increased to 41.7%.

While the steel market remained weak, the high-priced raw material purchased in the second quarter raised our third-quarter manufacturing cost. As a result, revenues stayed flat at KRW10 trillion, but operating profit and operating margin decreased to KRW1.1 trillion and 10.9%, respectively.

Though detailed information regarding the Company's activities is available in the presentation, I would like to highlight a few.

First, in order to overcome the challenges in the steel market and the global economy, we began contingency plan management. We focused even more on cost reduction and raised the target to KRW1.4 trillion. So far, we have saved KRW1.1 trillion in costs. Also, by reviewing our investment plan all over again, we reduced the total investment amount from KRW7.3 trillion to KRW6 trillion.

Second, we continued to strengthen premium product-based marketing. Sales of world best/world first products continued to rise and the customer-focused Total Solution marketing initiatives are showing results.

Third, we are continuing to make investment in raw materials for higher self-sufficiency. In third quarter, coking coal self-sufficiency has increased by 3.6% to 31.9%.

Fourth, our subsidiaries have been very active in strengthening their own business, as well as in providing synergies Company-wide. Amongst our overseas projects, Indonesia's Krakatau integrated steel mill will allow you to visualize the synergies between POSCO parent and POSCO E&C, POSCO ICT and POSCO Power.

Finally, despite reducing total investment amount, POSCO is persisting in overseas project for future growth. Investments are being made in facilities overseas, with the concentration on emerging markets with high growth potential. By 2015, we are expecting total 7m tons of integrated steel capacity and 9.1m tons of downstream capacity overseas. This would be a total of 49m tons of crude steel production by 2015.

Within the next couple of years, we will complete the integrated mill, cold rolling mill and various other downstream mills in China, India, Vietnam and Mexico. We hope to bring you with a visible result in 2012.

Please refer to the activities and accomplishments section of the presentation for further details.

I will now briefly mention the steel market outlook.

Amidst the unsettling global economy, global steel price remained weak. Though global steel demand grew 8% in the first quarter of 2011, we expect the growth rate to be 6% for the whole year, due to slowdown in the second half.

In the domestic market, industry dynamics have taken a turn recently, and Korea is now a net exporter of steel. In addition, the key steel-consuming industries are experiencing overall slump, and it appears inevitable that steel consumption in the second half of 2011 will be weaker than the first.

Fourth-quarter raw material contract price has been settled lower than third quarter. Iron ore price fell 1.5% and the coal price 9.5%. Though the spot price of raw material is falling today, we are cautious because the climate in Australia may once again have a impact on price again in the future.

The stainless market outlook is uncertain, but we believe the stainless steel demand will recover if nickel prices remain at over above $18,000 per ton range.

Before I end my remarks, I will present our 2011 revised business plan. Consolidated revenue of KRW68.7 trillion and a consolidated CapEx of KRW8.7 trillion. Our 2011 business plan for POSCO parent, revenue of KRW39.3 trillion, crude steel production of 37.1m tons, sales volume of 34.7m tons and the CapEx KRW6 trillion.

This concludes my opening remark. Thank you for listening.

Thank you, Mr. Shim. Dimitria, can we start the Q&A, please?

Certainly. Thank you. (Operator Instructions). And our first question comes from the line of Andrew West. Please go ahead with your question.

Good morning. Could you give an update on the status of your various foreign investments, such as in Indonesia and India?

Hi. On the presentation report material that we posted on our website, from slides 15, 16 and 17 you can see the progress of various overseas projects that we are doing right now. Specifically on the Indonesia project, it's a joint venture with a local steel company called Krakatau, and POSCO has a majority stakeholding of 70%. The construction is right on track. The land preparation began October of 2010. Actual construction began July of this year. And everything is going smoothly, and we expect the completion of total 3m ton capacity at December of 2019.

Now, India, we're pursuing various projects, but one that is most familiar is our Orissa project. The land securing is on progress, or the state officials are going in and talking with the residents of government land and compensating them and relocating them to rehabilitation village. So, so far, a little less than half of the total land required has been secured, and for the rest a similar practice is pursued.

On other two projects, Karnataka is at an early stage. And a joint venture with SAIL, we're finalizing the joint venture agreement on some of the issues. But please refer to slide 17 in particular, to view the overall overseas projects.

Okay. And your outlook for the industry appears to have become much more cautious, versus the last quarter, obviously, and now the caution is extending into the next quarter. What do you think would be required to spark an improvement in capacity utilization and rising margins?

As you may know, it is not easy situation to raise our margin at the moment. The most important thing is the economic situation. As far as European turmoil persists for a while, then maybe our consumer they may be reluctant to buy our -- more steel. That means our downstream industry may be affected from future turmoil. But if soon such a thing is improved, then maybe we can go back to the market and we can raise our profit. But for fourth quarter, at the moment, it's not clear at the moment. So today we had an investor meeting for third quarter, but we could not release our target margin for fourth quarter, due to the uncertain market situation. Okay?

Yes. So the export ratio -- your export ratio rose up to over 40%, much higher than recent quarters. Is this a structural change or a temporary result of -- I'm wondering, is this more because of more domestic capacity coming in and it's going to stay at a higher rate? And what implications are there to margins? In other words, are exports structurally going to be lower margin than domestic, or is there a way to think about that?

Well, I don't think it is a structural change. Our export ratio actually rise to 41%, but our market share in domestic market has been rising as well. So that means overall demand from domestic market has fallen. Because of that, our export ratio increased to 41%, whereas our market share in domestic market increased as well. So I don't think it is a structural change.

Okay. Thank you.

A few things I'd like to add for your previous question. First, POSCO's utilization rate has not changed. We are still running at full capacity. And as Mr. Shim mentioned, our domestic market share has been rising.

Again, if you look at key customer base of POSCO, since POSCO produces only flat products, the big customer groups are auto makers, shipbuilders, home appliance makers and pipe manufacturers. So, so far, we have been fortunate that auto industry in Korea has been relatively well. But other industries, especially home appliance, have been weakening, more so going -- coming into the second half. So for our -- for steel market conditions to improve, I think it needs to be accompanied by these industries' recoveries too. Thank you.

Thank you. Does that answer your question?

Yes. Thank you.

Thanks.

(Operator Instructions). We do have another question, from the line of [Neil Cho]. Please go ahead.

Yes. I have two questions. The first would be you have raised -- you haven't raised the flat steel price for half a year. If you do have a plan, until -- if you do have a plan to raise your steel price, how much are you planning to raise the price?

And my second question would be you have cut your CapEx guidance for this year. Are there any further CapEx guidance to come in this year or in the coming future? That's all.

Okay. Due to economic -- global economic situation, we don't have any plan to raise our steel price at the moment. But if, hopefully, market situation improve, then we have to think another way. But at the moment, we raised in this year -- it was May, right? We raised it in May KRW160,000 per ton. But right after, market situation was not good, so we applied some discounted price. So if in the future market improves, then maybe we can reduce our discounted amount.

And for the CapEx plan, we revised 2011 CapEx plan from KRW7.3 trillion to KRW6 trillion. Next round of the business plan announcement will come early next year, when we do full-year earnings release and present full-year business plan. So, by the end of January or early February, when we have another earnings release, then you will be hearing our plan more in detail.

Thank you. That was a very satisfactory answer. Actually, one more question. I would also want to add one question, asking whether there isn't any kind of pressure from the government, putting a cap on the steel price.

No, absolutely no. There is not any involvement from government on our price decision. Don't worry about it.

Okay. Thank you.

A couple of evidences I can give you is that our price, one, because of [extreme] quality and delivery and other type of services, our steel price currently is at a premium over imported steel. And so we mentioned we became -- Korea became an exporter of steel. Korea imports more than 20m tons of steel, out of 50m tons of annual consumption. And our price is at a higher level than imported steel. China is (inaudible) as well. Clear evidence that most of the pressure is (technical difficulty).

Okay. Thank you.

(Operator Instructions). I'm showing no further questions at this time.

If there are no further questions, we'll call it a day. Thank you so much. Thank you for participating in POSCO's Q2 results. If you want a last word.

If you have any further questions, please contact Investor Relations at POSCO.

Or the UBS steel team. And thank you again very much, and have a great weekend. Thank you so much.

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your line.