POSCO (PKX) '17 Earnings Up Y/Y On Higher Operating Profit

Korean steel producer POSCO (NYSE:PKX) reported impressive results for 2017. Net income increased 183.8% year over year to KRW 2,974 billion ($2.6 billion) driven primarily by increase in operating profit and benefit from selling investment securities.

Net earnings were KRW 8,521.5 per share or $7.54 per American Depository Receipt (ADR), significantly above KRW 3,002.9 per share or $2.59 per ADR reported a year ago. However, the bottom line lagged the Zacks Consensus Estimate of $8.84.

Revenues Improve, Crude Steel Production Falls

POSCO generated revenues of KRW 60,655 billion ($53.6 billion) in 2017, reflecting growth of 14.3% from the previous year.

Crude steel production slipped 0.8% year over year to approximately 37.2 million tons due to revamping of the Pohang Works’ Blast Furnace #3 and rationalization at the Pohang Works and the Gwangyang Works facilities.

Product manufacturing in the year was down 2% to 35.2 million tons while product sales fell 3.3% year over year to roughly 34.7 million tons. As noted, POSCO’s domestic sales ratio grew 340 basis points (bps) to 54%.

Margins Improve on Steel and Non-Steel Solid Performance

POSCO’s margin profile improved year over year in 2017 on the back of healthy contributions from both the steel and non-steel businesses.

As a percentage of total revenues, cost of sales was 86.2% compared with 87.4% in the previous year. Gross profit margin expanded 120 bps to 13.8%. Selling and administrative expenses decreased 2.9% to KRW 3,734 billion ($3.3 billion). Operating profit surged 62.5% year over year, with operating margin increasing 220 bps to 7.6%.

From 2014 to 2017, POSCO worked on 150 restructuring cases, including that for 85 subsidiaries and 65 assets. The company declared that these business restructuring activities accumulated positive financial impact of KRW 7 trillion, including approximately KRW 5.7 trillion in proceeds and roughly KRW 1.3 trillion in debt reduction.

Particularly in 2017, the company worked on 26 restructuring cases — 19 subsidiaries and seven assets.

Balance Sheet

Exiting 2017, POSCO had cash balance of KRW 9,595 billion ($8.5 billion), up from KRW 7,623 billion ($6.6 billion) recorded in the previous year. Non-current liabilities decreased 16% year over year to KRW 12,615 billion ($11.2 billion).

The company’s current ratio in 2017 improved 9.4 percentage points year over year to 164.3% while liabilities ratio declined 7.5 percentage points to 66.5%.

POSCO’s board of directors on Jan 24, 2018 decided on payment of year-end dividend of KRW 3,500 per share to shareholders of record as on Dec 31, 2017. The dividend will likely be paid on Apr 9, 2018. The year-end dividend together with quarterly dividend of KRW 4,500 per share brings the annual dividend payment to KRW 8,000 per share.

Outlook

For 2018, POSCO anticipates consolidated revenues to be approximately KRW 61.9 trillion, up from KRW 60.7 trillion recorded in 2017. Finished product sales are estimated to be roughly 35.3 million tons while crude steel production is projected to be nearly 37.4 million tons. Consolidated capital spending is likely to be KRW 4.2 trillion, up from KRW 2.6 trillion in 2017.

In the quarter ahead, the company intends to work on business portfolio of its subsidiaries as well as initiate efforts to relocate growth businesses for enhancing its competitiveness.

Global steel demand worldwide is anticipated to grow 1.6% year over year in 2018 on the back of demand expansion in India, the United States, European Nations, Southeast Asia and other emerging nations. Steel demand in China is projected to be flat year over year.

Other Players in the Industry

Other than POSCO, important players in the industry are Olympic Steel, Inc. (NASDAQ:ZEUS) , Schnitzer Steel Industries, Inc. (NASDAQ:SCHN) and Steel Dynamics, Inc. (NASDAQ:STLD) .

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POSCO (PKX): Free Stock Analysis Report

Steel Dynamics, Inc. (STLD): Free Stock Analysis Report

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Olympic Steel, Inc. (ZEUS): Free Stock Analysis Report

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