Eregli Demir ve Celik Fabrikalari TAS

IST:EREGL.E

Earnings Call Transcript 2018-Q1

[Operator]

Ladies and gentlemen, welcome to Erdemir Group 2018 First Quarter Financial Results Conference Call. Eregli Demir Çelik Fabrikalari may, when necessary, make written or verbal announcements about forward-looking information, expectation, estimates, targets, assessment and opinions. Erdemir has made the necessary arrangements about the amounts and results of such information through its disclosure policy and has shared such policy with the public through the Erdemir website in accordance with the Capital Market Board regulations.

As stated in related policy, information contained in forward-looking statements, whether verbal or written, should not include unrealistic assumptions or forecasts. It should be noted that actual results could materially differ from estimates, taking into account the fact that they are not based on historical facts, but are driven from expectations, beliefs, plans, targets and other factors, which are beyond the control of our company.

As a result, forward-looking statements should not be fully trusted or taken as granted. Forward-looking statements should be considered valid only considering the conditions prevailing at the time of the announcement. In cases where it is understood that forward-looking statements are no longer achievable, such matter will be announced to the public and the statements will be revised, However, the decision to make a revision is a result of subjective evaluation.

Therefore, it should be noted that when a party is coming to a judgment based on estimates and forward-looking statements, our company may not have made a revision at that particular time. Our company makes no commitment to make regular revisions, which would fully cover changes in every parameter. New factors may arise in the future which may not be possible to foresee at this moment of time. I will now hand over to Mr. Avni Sonmezyildiz, Financial Control and Reporting Director, who will take you to the presentation. Dear Mr. Avni, please go ahead.

[Avni Sonmezyildiz, executive]

Good afternoon, ladies and gentlemen. Welcome to our presentation of the first quarter results. I'll be making -- I'll go through the presentation in our website, and our group CFO, Mr. Emrah Silav, is with me. Then we will answer your questions, if any.

So let's start with Slide 5 in our presentation.

Let's take a look at the trend in the steel production all over the world. As you can see from the slide, except CIS region, there is an upward trend in the global crude steel production, where crude steel production was around 427 million tons in the first 3 months of 2018, up by 4% compared to the same period in 2017. And Asia produced 295 million tons of crude steel, which is increase around 5% in the first quarter. And European region produced around 40 million tons of crude steel, which is around 1% up from the same quarter of 2017. And North America crude steel production in the first 3 months of 2018 was around 30 million tons, which is an increase around 2% when we compare with the first quarter of 2017.

And specifically, as you can see from the slide, China's steel production increased around 3% in the first quarter.

So let's take a look at Slide 6. It's about the raw material prices trend. On the left side, you'll see the coking coal prices trend. Actually we'll revise the highest level of coking coal prices at the end of 2017. There is a downward trend in the coking coal prices. And it goes back to around $180s, again, as of April.

And iron ore prices get back to $60 levels again. And then, we'll revise the rising trend and it's something around $66 level.

Scrap prices are more or less at the same level as 2017 year-end levels.

Let's take a look at Slide 7 and 8, which is about Turkish crude -- Turkish production and consumption figures in the steel market. As you can see from Slide 7, both steel consumption and production increased around 8% within the first 2 months of 2018, which is the only available data right now.

And we see the same track in both in flat and long steel production and consumption figures. For the first 2 months, total consumption was around 5.6 million tons, while the production is around 6.6 million tons.

In line with the production and consumption figures, as you can see in the next slide, exports and imports increased around 4%.

Increase in steel exports are mainly related to flat steel, while slab import affected the total import figures in the first 2 months of 2018.

Turkey have realized there are 2.7 million tons of exports and 2.5 million tons of imports in the first 2 months of 2018.

So after briefly giving you some market outlook and the -- the outlook at the Turkish steel market. Let's take a look at our financial results and the operational results.

In Page -- Slide 10. Except decline in long sales and the production, all figures are higher than the first quarter of 2017 -- in the first -- in this quarter. We have achieved around 2.2 million tons of sale. Although it seems lower than the previous quarter, which is around 2.4 million tons, historically, it's a seasonal trend. And in general, the first quarter is the weakest quarter in our sales volumes in the steel business in Turkey.

And it's a normal course of business and we don't expect significant effect of this low volume in the first quarter to the annual sales volume target.

We have realized USD 438 million EBITDA and the net profit of $279 million net profit.

Although EBITDA is in line with the market consensus, our net income -- we don't hit the market expectation because of 2 reasons, mainly related with the FX process recognized.

First, effect is related to the actual of dividend at March 30, which is the general assembly day.

And in -- a sudden decline in the USD prices in March 31 resulted a recognition of around $8 million of FX cost at the end of first quarter.

This is a temporary situation. And after depreciation of Turkish Lira in April, we have recovered more than this temporary loss so far.

And the second effect is related with the FX costs, is resulted from the deferred tax rate. Due to depreciation in Turkish Lira -- depreciation in the first quarter, effective tax rate has became 29% because of the IFRS regulation, mandates, recognition of FX differences coming from deferred tax rate in the P&L. Unfortunately, we have to recognize those losses because of the IFRS regulation.

But both of these FX processes have no cash effect on the balance sheet. And mainly because of this effect, our net income is lower than the expectation and although we have achieved a strong EBITDA.

At the end, we have still achieved higher net profit than the first quarter of 2017 in this quarter.

So let's take a look at Slide 11 and 12. Liquid steel production in the first quarter is around 2.4 million ton, and it's even higher than the last quarter of 2017, although the sales were in -- is lower than the last quarter of 2017.

The difference between sales and liquid steel production is mainly related to the semi-finished crude steel inventory, mainly slab inventory -- increase in the slab inventory.

And as a result of increase in liquid steel production, we have reached 100% capacity utilization in liquid steel production in the first quarter of 2018.

So in Slide 13 and 14, you will see the production of sales volumes figures. Although we have reached 100% capacity utilization on liquid steel, our finished good production is 100,000 tons lower than previous quarters.

As we mentioned previously, the difference is slab and other semi-finished goods inventory, which will be shipped to our customers in the following quarters.

In line with the finished goods production, our sales volume is lower than previous quarter, around 176,000 tons, mainly because of the seasonal trend as we mentioned.

And in Slide 14, you will see the sales volumes as -- only we have mentioned.

And in the next slide, you'll see -- on Slide 15, the trend in the revenue. And actually, we have realized that on 1.4 million tons -- USD 1.4 million revenue in the first quarter, thanks to increase in steel prices, it's similar to the previous quarter. Although the volume is lower.

And let's take a look at the breakdown of sales, domestic sales. And as you can see in Slide 16, there is no significant change in the breakdown of domestic sales on segment basis, it is almost the same.

And let's take a look at the exports. The trend is still strong in export, especially because of the EU region's demand and strong euro. The breakdown -- the European Union sales is getting higher and higher.

So let's take a look at the next slide. We have already discussed the EBITDA and the net profit trend previously. And EBITDA per tons is stronger than previous quarter, while the volume is lower. So the kind of shift between the per ton profitability on the volume, but we have achieved the -- we have achieved almost the same trend in the first quarter.

So in the next slide, Page 19, you will see the bridge between EBITDA and the net profit. And except the increase in tax expenses, there is no significant change in the -- in our EBITDA to affect the net profit bridge.

In the next slide, Page 20, you will see the bridge between EBITDA and increase in net cash. So we were able to increase our net cash around $258 million in this quarter. We have paid $62 million of loan and spent $41 million of cash for the CapEx, and paid around $46 million of tax in Q1. But thanks to good strong EBITDA and a small increase in the working -- increase in the working capital, we have achieved to increase our cash around $358 million in this quarter.

In the next page, Page 21, you'll see the EBITDA per ton figures. EBITDA per ton, it was on the rising trend in the first quarter. So we have almost reached around $200 per ton figures.

Although they expect, of course pressure from the cost side in the following quarter, and the -- this pressure could affect the EBITDA per ton figures, but we assume, it will be compensated by the increase in the volumes and the same profitability level will continue in the second quarter.

So let's -- in Page 22, let's take a look at the balance sheet. Except increase in cash and the dividend payable figure, around USD 755 million, there is no significant change in our balance sheet position and due to decrease in trades receivables and increase in trade payables, there is some release on the working capital in the first quarter, the cash.

In Page 23, you will see the borrowings. There’s no significant change in our borrowings, but as we increase our cash, net cash position is on a rising trend, and we have net cash around USD 1.1 billion. But as you already know, we will be paying this around $760 million dividend at the end of May. It will be lower in the second quarter.

So I'll take you to Page 24, which is the reconciliation between net cash and the free cash flow generation.

In Page 25, you'll see the borrowing maturity profile. There is no significant change. We are still carrying around $500 million -- more than $500 million of revolving trade financing loans and the rest is long term, but cash covers much more than our borrowings so far, so we have no worries for the short-term debt position.

In Page 26, you will see the breakdown in cost of sales. When we compare it with the 2017 annual figures, there is no significant change in the raw material, that's up 2% increase. But there, the wages and salaries had decreased to 9% because of mainly -- because of the Turkish Lira depreciation as we keep our cost in U.S. dollar. The labor expenses in U.S. dollar terms I guess, lower in the first quarter. And there is no significant change in the breakdown of raw materials. The percentage of coal have increased around 3% and the other cost decreased around 3%.

There's no significant CapEx standing in the first quarter, which is around $40 million. So it will -- it might -- it will be -- there will be an increase on the CapEx standing on the following quarters, because normally, we spent less on the first quarter as the start of the -- because of the start of the year and the start of the new project annual maintenance project, et cetera. So it is just $40 million right now.

The decline in the number of employees is continuous, and we have lowered our employees around 130 in this quarter. So before we go through the Q&A session, I would like to explain our guidance policies.

So normally, you -- I know, the analyst and the investors expect guidance from us for volume and the EBITDA and the net profit margin, but we are -- we decided to wait for the actual results of April, and then we will make -- we will work on a new projection for the year-end, and we could May -- we will decide it, we will announce it in May. So we need more time to see the year-end results because there has been a significant decline in the steel prices. So we want to see if it's a temporary or if gets back to normal level. So we will evaluate it once we finish these new projections after the realization of April results.

So now, we can continue to Q&A session, and we will be happy to answer your questions, if you have any.

[Operator]

[Operator Instructions] Our first question comes from [indiscernible].

[Unknown Analyst]

Three quick questions, if I may. First of all, are there any updates on the potential capacity increase or significant investment, timing-wise or size-wise? Secondly, after the announcement of the elections, are you observing a significant change in some of your customers pertaining to the order size? Essentially, are you observing any significant weight and see modes in some of your customers or in some of your product groups? And finally, I fully understand your guidance policy. That said, is it possible to provide a color regarding to your second quarter on its momentum from the numbers that they are saying it may be close to the first quarter, EBITDA per ton wise? And maybe, even slightly -- any color on that will be appreciated.

[Avni Sonmezyildiz, executive]

[indiscernible]. So actually, we will be happy to give you an update on the CapEx, but we are still working on it. We need more time to evaluate and conclude our CapEx plan. And if there's going to be an increase on the CapEx, et cetera. We will -- we need more time to digest and to look on it, the first question. And the second one is the election. Actually, we don't expect significant change in the order book because of the election. So we expect the same strong demand continues as most of our customers are exporters. So we don't expect change in the demand, in domestic market because of the election. Fourth, yes. And the -- we said, we are working on our items, and we can give you a hint about the second quarter. Actually, I already gave you a hint about the cost pressure. So it could create a small pressure on the EBITDA per ton figures, but we assume it will be compensated by the increase in the volumes. So we expect similar trends in the second quarter for the financials and the EBITDA figure. Of course, we don't know what will happen to the foreign exchange U.S. dollars prices, but because it affects net income at the end. But for the EBITDA, the cost pressure could be -- will be effect -- compensated by the increase in the volume in the second quarter.

[Operator]

Our next question comes from Anton Fedotov, Bank of America.

[Anton Fedotov, analyst]

I have 2 questions. First of all, you had some increase in the -- some decrease in the working capital in the first quarter. Would you expect this to be reversible in the next period? That's my first question. And my second question relates to your quite high cash pile which you accumulated in the first quarter, which exceeded $1 billion. What will be the long-term usage of this cash?

[Avni Sonmezyildiz, executive]

Thanks, Anton. For the working capital, we have always been working for the lower [indiscernible] capital and to change our churns without paying any additional interest on them. But it's hard to see its effect on the short term. So we don't expect significant change in our working capital in this short term in the next quarter. It could only be affected by the increase or decrease in the commodity prices on the inventory level. That's all for the second quarter. So we will -- and for the long run, we are working on lowering the inventory pile, and the -- increasing the maturities of the payment. But you'll see it on the long -- the effects on long term, and we will explain them, their effect on the financials in the long run in the later periods. For cash indiscernible] paying dividends, $760 million direct could be used by the new CapEx project, if the board decides a CapEx increase. Other than that, there's no other -- I mean, we have -- we don't have additional reserves to pay additional dividend, extraordinary dividend payments because there is no reserves in the statutory financials to pay additional dividend. And there is no other plans for the additional cash actually such as, I mean to share by the FX, et cetera. So there's no such plan at the moment.

[Operator]

[Operator Instructions] Our next question comes from [ Muharram ] [indiscernible] securities.

[Unknown Analyst]

My question is maybe regarding the second quarter platform. You mentioned that the pretty much the volume is still comp at the cost pressure. What about the average sales price of -- should we expect some, I mean, improvements on the prices as we try to follow from the available databases? Or your sales price will remain pretty much same versus the first quarter?

[Avni Sonmezyildiz, executive]

Actually, you already know, we sell everything prior to production. So we carry around at this 2 months of order book. So we already know what could be the sales prices in the second quarter. And it is -- actually, there is no significant change in the sales prices, seem so. And there's -- but it should be on the stable level in the second quarter.

[Operator]

[Operator Instructions] Our next question comes from Jamal Demirtas, Ata Invest.

[Cemal Demirtas, analyst]

My question is related to the competition in the sector. How do you see the import competition from Russia or the Korea and China? How do you see the global supply/demands balances right now?

[Avni Sonmezyildiz, executive]

Jamal, actually, we don't see -- we haven't realized significant pressure from the Russia because of the section 232 or other pressure from -- the pressure from the other parts of the world like China. We haven't seen [CapEx ] yet. We will see actually, because it's too early to see what's going to happen after the United States decision. Right now, I can tell you there is no such pressure from our point of view.

[Operator]

[Operator Instructions] We have no further questions. Dear speakers, back to you for the conclusion.

[Emrah SIlav, executive]

So thanks for joining our presentation and the teleconference. We would like to see you on the announcement of second quarter result. And as you already know, if you have any questions, you can send e-mail to our Investor Relations or you can call us, and we will be happy to answer your questions. Thank you. And have a nice weekend.

[Operator]

This concludes today's conference call. Thank you for your participation. You may now disconnect.

[Emrah SIlav, executive]

Thank you.