Eregli Demir ve Celik Fabrikalari TAS

IST:EREGL.E

Earnings Call Transcript 2020-Q1

[Operator]

Ladies and gentlemen, thank you for standing by. I am Jota, your Chorus Call operator. Welcome, and thank you for joining the Erdemir conference call and live webcast to present and discuss the first quarter 2020 financial results. [Operator Instructions] The conference is being recorded. [Operator Instructions]

Please note, Eregli Demir ve Çelik Fabrikalari T.A.S., Erdemir, may, when necessary, make written or verbal announcements about forward-looking information, expectations, estimates, targets, assessments 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 Markets 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 in time.

At this moment, I would like to turn the conference over to Mr. Avni Sönmezyildiz. You may now proceed.

[Avni Sönmezyildiz, executive]

Thank you. Ladies and gentlemen, welcome to the investor webcast of Eregli Demir ve Çelik Fabrikalari and its subsidiaries for the period ended March 31, 2020. First of all, I wish all of you a healthy and nice day. Today, our CEO, Toker Ozcan; our CFO, Mr. Emrah Silav; and our Investor Relations Manager, Mrs. Idil Önay, are also joining the webcast. First of all, our CEO, Mr. Toker Ozcan, will give you an update on the current conditions, especially about the pandemic and the current market conditions. Then we will go through our presentation, which we are -- we have published in our website yesterday, and you will be also following it during the webcast. And then there's going to be a Q&A session.

Now I -- the line is yours, Mr. Ozcan.

[Toker Ozcan, executive]

Thank you so much, Avni. Ladies and gentlemen, thank you so much for being with us today under these difficult times. We all are wearing our face masks and if you have any difficulty hearing any of us, please let us know. We will do our best to communicate with you.

Avni will take you through the details of the first quarter's performance of our group. But in addition to that, I would like to highlight a couple of things, both referring to quarter 1 as well as some more additions looking ahead, how we see the market, both regional and local.

When we look to the first quarter, we have prepared -- we were prepared for this half year for the steel industry in general, but we were prepared for a long time period, over maybe 12 months, starting from mid this year til mid next year. But this pandemic catalyzed all this effect, and we have realized all this downturn within a couple of weeks. Because of our preparedness, our backlog was very strong when the World Health Organization announced this pandemic on the 23rd of March. So the first quarter results really does not -- do not reflect all the effects of the pandemic.

And recently, World Steel Association announced all the results for the industry. And maybe some of you have already noted that global production of steel was down by 1.4% on average. And when you look into our region, where we operate now, the Greater Europe, it's even worse, especially for the month of March. We have seen a downturn ranging from 20% to 40% in our region.

But given all these tough times, Erdemir did an excellent job. We produced -- and there was one only planned maintenance in our North operation to upgrade both the automation system and some of the hardware of our hot rolling mill #2. Now we planned for a stoppage of 23 days, and we completed that outage as planned, in budget. And it will help us, going forward, to have a better reliability and, hence, some more production from that line.

One more thing actually in terms of our operations. In our South operations, last year, we had an incident in one of our blast furnace, blast furnace #4. And we -- last year, we planned a maintenance to that blast furnace. We took it down in the first week of April, and it will take approximately 35 days to fix it. So we will have it back online in the first week of June.

I will be with you at the end of the presentation to attend your questions. Now I would like to hand it over to Önay so that he can take us through the numbers.

[Idil Onay, executive]

Thanks, Mr. Ozcan. So now we will go through our investor presentation. And as you already know, our presentation consists 2 parts, 2 sections. One of -- the first one is the market overview, and the second one is the financial results. So let's start with the market overview.

In Page 5, you will find crude steel production figures in the Eurozone, CIS region and China. Due to ongoing difficulties presented by the COVID-19 pandemic, many of the March figures are estimates from the nations' and regional associations, unfortunately. And it is possible that this data may be revised by the World Steel Association in the following months, first of all, I have to say that.

According to this data, world steel -- world crude steel production was 443 million tonnes in the first 3 months of 2020, down by 1.4% compared to the same period of 2019. Although China's production was down around 2% in March 2020 compared to the March 2019, it seems like China's crude steel production for the first 3 months was not significantly affected by the pandemic, according to the preliminary data of the World Steel Association. However, European Union produced around 38 million tonnes of crude steel in the first quarter. It is down by 10% compared to the first quarter of last year. And North America's crude steel production in the first quarter was around 30 million tonnes. It says around 4% decrease. Finally, Russia estimates around 9 million tonnes of crude steel production in March 2020, down by around 4.4% when compared to March 2019. And Ukraine produced 1.8 million tonnes of crude steel in March 2020, down by 10% when we compare with last year's number.

According to first 2 months actual data and March estimates, it seems that China's -- CIS region's production trend will be negative as well when we compare with the same quarter of previous year. I will later explain the Turkish steel market conditions in the following slides. So let's continue with the raw material markets in Page 6.

So in Page 6, you will see the price trends in some steel-related commodities. Let's take a look at coking coal, iron ore and scrap prices. Since the beginning of 2020, we see more stable iron ore prices than 2019, as you already know, due to the accident and several factors. It has been a volatile year for iron ore in 2019. Although 62% iron ore prices has spiked to $90 per tonne during the middle of March, last week, we saw prices around $85 in iron ore. Due to low capacity in mines in Brazil and loading issues at the ports, the iron ore prices have not been significantly affected by low production in steel mills during 2020.

However, coking coal prices are on a declining trend since February, while benchmark FOB Australia coking coal index was higher than $160 in February, now we see much lower prices around $135 at the benchmark FOB Australian coking coal prices. It is mainly because of the low loading volume in main ports that ships coking coal in Australia, while there is no supply problem at the mines.

When we look at the scrap prices, the scrap prices were just about $205 level at the beginning of April. However, there was a significant recovery in scrap prices during the last couple of weeks because of the supply concerns related with the pandemic.

In Page 7 and 8, you will see production consumption, export and import figures in Turkish steel market. Unfortunately, Turkish Steel Producers Association has not announced detailed production and consumption figures in March 2020 yet. As 2-month figures indicate, significant recovery in steel production and consumption when compared with the first 2 months of previous year and March production data in worldsteel -- announced by worldsteel, indicates additional recovery in March 2020 as well. March production data in Turkey was 3.1 million tonnes, and it says 4% increase when we compared with March 2019. I have to say that this is preliminary data still, so it could change. But you can find it in worldsteel web page.

Although steel production in Turkey has recovered significantly in the first quarter of 2020, we anticipate that pandemic will affect second quarter steel production and consumption data in Turkey, as Turkey affected from COVID-19 later than China and European countries.

In Page 8, you can see export and import trends in Turkey steel market for January and February. This data says that flat steel exports were declining and flat imports were increasing due to recovery in domestic flat demand until we started to realize effects of COVID-19 on Turkish economy. Starting from April 2020, we anticipate that both exports and imports will be lower than the first quarter of 2020 because of the global economic slowdown resulted from COVID-19.

Now let's take a look at the financial and operational metrics of our group companies. And in Page 10, you will see the brief summary of first quarter results. In the first quarter of 2020, we produced 2.3 million tons of liquid steel, which is 3.6% or 85,000 tons lower than first quarter of 2019. However, flat and long steel production were 150,000 tons lower than the same period of previous year. In the first quarter of 2020, we sold just above 1.9 million tons of finished products, which is 300,000 tons lower than shipments in the first quarter of previous year. The difference between -- and also, when you compare these figures with the previous period, it's also lower. So the difference between the production and the shipment is in finished goods and semi-finished goods inventory of sales orders, which are waiting for shipments in the second quarter. Although some delays in shipments in March and April, we expect that these products will be delivered to the customers during the second quarter. However, we don't expect sudden recovery in steel consumption during 2020 and estimate that sales volumes will be lower than 2019 in 2020.

In Page 11, you will see the comparison of liquid steel production volumes. I will skip this slide quickly and continue with the next slide.

So in the next slide, you can see the crude steel capacity utilization ratios of crude -- of our company. As you already know, worldsteel is not announcing the capacity utilization ratios anymore, so we have removed the worldsteel data from this slide. Although our factories had to adjust work schedules of employees during the COVID-19 pandemic, as of today, all the operation is going as normal and facilities are working with the expected capacities. And there are some planned maintenance, as Mr. Ozcan explained.

If you look at finished goods production in Slide 13, you will see that 44,000 tons decline in finished goods production comes from cold product segment. Also, you will realize that cold sales were also declined more than 30,000 tons in sales breakdown in the next page, as the auto producers took action earlier than the other sectors due to COVID-19 pandemic.

In Page 14 and 15, you will see comparison of sales volumes and revenue. Last quarter, our sales volume was 2.056 million tons. And this quarter, the volume has declined to 1.923 million tons. Decline in total sales volume is completely related with the exports. I will explain share of domestic and export sales in the following slides with some more detail. Also, average sales price of flat products were $540 in the fourth quarter of 2019, while realized is $533 in the first quarter of 2020 on average. Long prices, however, was $449 on average in last quarter. And this quarter, it is realized at USD 469. When we compare the total mixed average price of long and flat products, we can see that there's no significant change between the last quarter and this quarter in the average prices of the mix of flat and long. So we can say that the decrease in revenue comes from the decline in sales volume, not from the change in the prices -- average prices.

When we compare costs between last quarter and this quarter, we see that cost per ton was around $32 lower than previous quarter. It is because of the lagged effect of decline in iron ore prices. As a result of these variances in prices and costs, we have realized USD 28 per ton more EBITDA per ton in this quarter than the previous quarter. To summarize, we can say that increase in EBITDA per ton in this quarter comes from decline in raw material costs, especially iron ore.

In Page 15, you can see the breakdown of total revenue. Our first quarter revenue is just above USD 1 billion and USD 66 million lower than previous quarter, mainly because of low sales volume.

So let's take a look at the segmental breakdown of domestic sales in Page 16 and export volumes in Page 17. As you can see from the pie chart, our domestic sales were around 60,000 tons higher than last quarter of 2019. And it indicates some recovery in domestic steel market, as I mentioned previously at the overview of Turkish domestic market. When we look at the breakdown of domestic sales, we see that our sales to auto industry and distribution chains have declined, while sales to pipe/profile, rolling and general manufacturing industry increased.

However, our export volume has declined to 209,000 tons in the quarter 1 of -- this quarter from 381,000 tons in the last quarter of 2019, as you can see the trend in Page 17. Our export volume in the first quarter is just around 11% of our total sales volume, while it was more than 20% in 2019 annually. This is mainly the result of significant slowdown in Eurozone and the other markets -- global markets because of the COVID-19 pandemic. And we estimate that export volume will stay in the following days because of the pandemic effect.

In Page 18, you will see the historical figures for EBITDA and net profit. This is just a statistical data, and you all already are aware of the numbers. So I'm not going to mention about this slide and skip to the next one.

In Page 19, you will see the EBITDA to net profit bridge. The most important and surprising item in the income statement is taxation expense this quarter. We all -- we know that you are all surprised. Everybody was expecting high deferred tax expenses because of the depreciation of Turkish lira. However, this quarter also, corporate tax expense was also higher than expected. We realized USD 62 million corporate tax and $29 million deferred tax expense in the first quarter. As we seek why this happened, I have to explain. We are keeping our statutory financials, which are subject to taxation in Turkish lira. And in Turkish lira financials, we have recognized significant foreign exchange gains because of the long dollar position in Turkish lira books. Also, operating income in statutory financials is higher than IFRS financials because of the low depreciation expense than IFRS financials in statutory books and higher EBITDA in tax financials, which are denominated in Turkish lira. So we would like to remind you that, as the Turkish lira depreciates, our deferred tax expense and the -- because of the -- as we carry this position, the corporate tax will be higher. And please consider this fact for your future projections.

In Slide 20, you can see EBITDA to change in cash bridge. Decrease in working capital continued into this quarter, and we have recognized additional USD 197 million cash from the working capital. Decrease in working capital is a result of 2 factors, actually. First one is $65 million decrease in trade receivables due to decline in mainly sales volumes. Second one is the positive effect of lower inventory, around USD 137 million, because of the lower raw material prices. Also, we spent around USD 65 million to capital expenditures in the first quarter. This amount also includes advances paid for the capital expenditures as well, and that you will see the difference between the CapEx page in Page 27 and this one. This is the advanced payments that we paid for the capital expenditures.

So let's take a look at the quarterly trends in EBITDA per ton, which is the main KPI for us, you already know. And I already explained that USD 28 recovery in the EBITDA per ton comes from decreasing costs. And most probably, you all wonder why? What will be the trend for the rest of the year? And as you already know, it's very hard to estimate long-term effects of COVID-19 pandemic. And we are not able to share any guidance with you for 2020, like most of the other corporates. However, we expect that, as you can expect, the EBITDA per tonne and sales volume will not be higher than first quarter, as current trend in sales and raw material price still suggests. For the rest of the year, we also don't expect sudden recovery in steel demand and assume that EBITDA per ton will stay lower.

Let's take a look at the balance sheet in Slide 22. We explained the change in working capital and cash before. Other than working capital, there is no significant change in the balance sheet, actually.

Before we move forward, maybe it's worth to give you more information about the general assembly and dividend distribution because I assume that you will be asking this question at the Q&A. So we deferred Annual General Assembly due to COVID-19, as suggested by Trade Ministry of Turkey. Due to the deferral of Annual General Assembly, we also had to cancel Board's proposal for a dividend distribution of TRY 1.2 per share. After the deferral, the government also temporarily restricted dividend distribution, up to 25% of distributable profit of 2019 until September 2020. It means that, if we can -- if we distribute 25% of last year's profit, we can distribute up to TRY 0.23 per share until September 30. Also, Annual General Assembly meeting date has not been decided yet. We have to announce Board proposal for dividend and general assembly 20 days -- 21 days before the meeting time. We will make a public announcement once it's decided, and it's not decided yet. At this point, we cannot comment if there will be additional dividend distribution after September 30.

In Slide 23 and 24, you will see historical trend of financial borrowings and net cash. As we generate free cash flow, thanks to working capital, our net cash position increased USD 763 million at the end of March.

So let's take a look at Slide 25. This represents the maturity profile of borrowings. You all remember that the revolving trade financing facilities were $600 million at the end of 2019. Now it is -- actually, it is just less than $400 million. It is because of the decline in exports.

In Slide 26, you will see the cost of sales breakdown. As the decrease in costs are mainly related with raw materials and Turkish lira conversion costs gets lower because of the depreciation of Turkish lira, there is no significant change in cost breakdown. However, the composition of iron ore and coking coal in raw material costs have changed.

Last 2 slides represents the historical CapEx spending and employee numbers. Total CapEx spending, excluding advances paid, as explained before, is $46 million in the first 3 months of 2020. And our ongoing projects such as the new blast furnaces are continuing, and there is no cancellation from the announced investments. However, there will be delays -- there might be delays due to COVID-19, and some projected CapEx in 2020 could be deferred to following years.

As the last thing, there is no significant change in number of employees, and it's declining with the minor amounts because of the retirements, et cetera.

Now we may continue with the Q&A session. We will be happy to answer your questions with Mr. Toker Ozcan, Mr. Emrah Silav and Ms. Idil Önay. Thank you.

[Operator]

[Operator Instructions] The first question comes from the line of Demirtas, Cemal with Ata Invest.

[Cemal Demirtas, analyst]

My question is related to the domestic market and your domestic market performance. As far as I see, you have around 23% growth in domestic market in first Q, but consumption in Turkey is up more than 40% in the first quarter. How could you read this picture? Because the picture in domestic demand still looks high in both flat and the long, but your volume is more limited. And it was a similar picture in fourth quarter. So I want to understand, what are the drivers? Are other players are gaining market share? I just want to understand that.

[Toker Ozcan, executive]

Thanks, Cemal-bey. The only comment is that while we are limited with our capacity, whatever we sell, consciously made a decision and we channel all those available capacity to high profit margin end users. That is one thing. The other thing really, unfortunately, as you have already noticed, the unfair trade is still going on. We are competing against unfair trade coming from both Europe as well as some of the CIS countries. So we are not losing market share. We still sell whatever we can produce, but we are just channeling our products according to the benefit of our company.

[Cemal Demirtas, analyst]

And Toker-bey, as a follow-up, related to the latest tariffs set on the flat steel imports, as far as I see it, while it's not a very big number, but I am sure regulators thought about that. I just want to understand how that action looks at, at least the right action or the demand. Is it the significant amount to just regulate the market to some extent? Do you think it will help to rebalance the market?

[Toker Ozcan, executive]

No, not really. The bottom line effect will be 0. So it's just a signal to dumping steel producers that we are prepared, they are prepared, our government is prepared to take some additional measures if they continue dumping. But otherwise, I mean, as you may know, most of the imports into Turkey arrive to end users without having any additional import duty. The effect of import duty on average is only 1% due to 2 reasons: Because of our custom union with the Europe. They are exempt from any sort of import duties. The other one is there is a regulation in Turkey, allowing some of our processes -- if they import with the condition of reexporting, they're exempt from an import duty. This is just a symbolic action from the Trade Ministry of Turkey. But they are watching it very closely. And during our communication, we have been informed that they are prepared to take additional measures.

[Cemal Demirtas, analyst]

And the third question, again, about the second quarter, I'm sure the visibility is still low when you look at the market. But compared to the first quarter, could you just give us a rough -- the range that's in your mind, at least, let's say, between this and this figure as that sales volume, just like maybe an idea about how things could get worse? Or are we thinking the worst scenarios? For instance, I'm putting 1.75 million tons for second quarter. But my fear is it could go below five -- 1.50 million tons, and I would be positively surprised if it goes above first quarter. So could you give us any color, if possible, on that side with the order book you have been seeing right now?

[Toker Ozcan, executive]

Sure. In terms of volume, as said, we are fully booked up until the end of second quarter. In terms of shipments, we are fully booked. There's no concern about it. We will move whatever we produce, we will ship. But as I mentioned at the opening speech, we will have one of our blast furnaces down for 35 days in [ Spanish. ] So we will see the effect of that capacity loss. So in terms of volume, I'm quite happy to say that we are able to move whatever we can produce. This is unique, right? I mean, when you look to the producers globally, to the steel manufacturers, there are a couple of exceptions only, I mean, including Eregli Demir, without any capacity cuts.

[Operator]

The next question comes from the line of Fedotov, Anton with Bank of America Merrill Lynch.

[Anton Fedotov, analyst]

I have several questions. First of all, given the very high growth in Turkey's domestic demand in the first 2 months of the year before the coronavirus, and given the low base effect over the last year, what kind of domestic demand dynamic would you expect for the rest of the year? I understand that this is quite difficult to estimate right now. But still, any rough estimate will be really welcome.

The second question, can you please repeat the dividend per share number that you highlighted during the presentation that might be paid in line with the recent ministry recommendation for the dividend for 2019?

And my third question relates to the CapEx. You said that CapEx may be delayed for further years. What level of CapEx should we expect for 2020?

[Idil Onay, executive]

Can I answer the dividend question?

[Toker Ozcan, executive]

Sure. Sure. Go ahead.

[Idil Onay, executive]

Anton, there's a restriction for the dividend payment until September 30 right now. And the companies are allowed to distribute only 25 -- up to 25% of profit of previous year into 2019, I mean. And there is no capital -- there is no dividend distribution allowed from the retained earnings or other reserves. So before this decision, we have announced -- we have proposed to the general assembly a TRY 1.20 distribution.

[Toker Ozcan, executive]

Per share.

[Idil Onay, executive]

Per share, yes. And after the government's decision, there is no dividend decision taken yet, and we will announce it when there's such a decision. And we have to also announce the general assembly time. But even if we distribute all of the allowed amount, which is 25% of distributable profit of 2019, it is -- it's going to be TRY 0.23 per share. This is the maximum amount for -- until September 30, is it clear?

[Toker Ozcan, executive]

Well, I mean let me answer the other 2 questions. One of them is about CapEx. We have not postponed any capital investments up until now, and we are not -- and there are a couple of minor ones, which we just classify as nonessential investment, but those are not major ones, only we are talking about $10 million, $15 million project. So we are going to spend as we had planned. The -- I only mentioned about the delay of some of our projects due to this lack of supervisors expected from abroad from different countries. But other than that, we will spend as planned.

And the difficult question, I'm not sure if there's any here that can answer or that can know the answer to that question. But still, let me comment about the demand recovery. We are expecting a normalization, or at least some relief from the existing measures, lockdown measures in Turkey starting from first week of June. And straight after that, we are expecting a recovery, a quick recovery in the demand, especially as there is a delay in demand, and Turkey would be having several advantages after this release of lockdown because of the depreciation of the Turkish lira. We believe some of the demand will reach to Turkey to our customers. And we are expecting a quick recovery in terms of volume demand. I'm not sure if we will be able to reflect it to our earnings, but at least the demand will be back.

[Anton Fedotov, analyst]

And may I ask you, for the full year, what level of demand growth or decline do you expect versus last year?

[Toker Ozcan, executive]

The total local demand, you mean?

[Anton Fedotov, analyst]

Yes.

[Toker Ozcan, executive]

Well, the total, we are expecting a lower demand. On average, it will be 10% less compared to 2019. That's at least our model, internal model that we use.

[Operator]

Ladies and gentlemen, there are no further questions at this time. I will now turn the conference over to Mr. Avni Sönmezyildiz for any closing comments. Thank you.

Excuse me. Sorry to interrupt. We have a couple of questions. The first one, if it is okay with you, it is from Pinar Uguroglu with BNP Paribas.

[Pinar Uguroglu;BNP Paribas, analyst]

I have a question regarding the capacity. You said one furnace that is stopped -- estimate will be at maintenance. How much it corresponds to annual liquidity or capacity? How much capacity loss that we can infer because of that maintenance? I just want to ask -- I just want to clarify that.

[Toker Ozcan, executive]

Yes. We are planning, in terms of steel equivalent, 200,000 tons, approximately.

[Operator]

We have a follow-up question from the line of Fedotov, Anton with Bank of America Merrill Lynch.

[Anton Fedotov, analyst]

My question was just answered and asked.

[Toker Ozcan, executive]

Okay. Thank you, Anton.

[Operator]

There are no further questions at this time.

[Toker Ozcan, executive]

Ladies and gentlemen, thank you so much for being with us today. I wish you a healthy life ahead of you and your families. Have a good day. Bye-bye.

[Operator]

Ladies and gentlemen, the conference is now concluded, and you may disconnect your telephone. Thank you for calling, and have a pleasant evening.