Eregli Demir ve Celik Fabrikalari TAS

IST:EREGL.E

Earnings Call Transcript 2021-Q1

[Operator]

Ladies and gentlemen, thank you for standing by. I am Alice, your Chorus Call operator. Welcome, and thank you for joining the Erdemir conference call and live webcast to present and discuss the first quarter 2021 financial results.

[Operator Instructions] And 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 a 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 time, I would like to turn your conference over to Mrs. Idil Önay Ergin, Investor Relations Manager.

Ms. Ergin, you may now proceed.

[Idil Onay, executive]

Thank you very much, Alice. Good afternoon, everyone. Welcome to our conference call and webcast of Erdemir and its subsidiaries for the first quarter of 2021.

Today, our CFO, Mr. Serdar Basoglu; and our Financial Control and Reporting Director, Mr. Ulas Yirmibes, are also joining the webcast. First of all, I will go through our investor presentation, which you can find on our website, and you can also follow it through the webcast. Then at the end of this presentation, there is going to be a Q&A session as usual.

Before starting the presentation, I will hand over to our CFO, Mr. Serdar Basoglu.

The line is yours.

[Mustafa Basoglu, executive]

Thanks, Idil. Good afternoon, everyone. Welcome to our webcast.

After 3 months, we are very proud to share our first quarter results with you all. As you all know, our IR Manager, Idil, will take you through the details of first quarter performance of our company, but before starting our presentation, I would like to highlight a couple of things.

First of all, as I mentioned, we are very proud to accomplish a very successful quarter with 37% EBITDA margin and 25% net profits margin. Actually I can say these are the highest margins in the company history. We also beat the market expectations with these figures.

Consistently increasing sales prices and strong demand combined with a successful management were the key factors of this achievement. And while HRC Turkey domestic price was around USD 800 at the end of the -- 2020, it's continuously increased to the level of around USD 1,000 at the end of [ April ]. We can say almost 30% increase, although iron ore spot prices also increased around 18% from USD 160 to USD 190 in the same period. We always consider the margin between raw materials and product prices. As long as the premium between raw materials and steel prices is in our favor, we believe we can keep our margins. Naturally the impact of the increase in iron ore prices will be visible in our financial statements, but also we expect to remain in balance with support of the sales prices. Our order book expanded from 2 months to 3 or, I can say, nearly 4 months, driven by the strong demand. As a result of this, the reflection of the increasing sales prices on financial statements will be late, I can say.

Considering the potential improvements in local steel supply and demand dynamics and also recovery in HRC prices, it is expected that the recovery will continue in the second quarter. However, visibility is low after the first half of 2021, as you all know, but we expect that both indicators, I mean raw material prices and sales prices, will normalize eventually but while keeping margins in our favor. On the other hand, nowadays we clearly see that the domestic demand and also export demand is still very strong at these levels. As you will find in the presentation, we carried out our sales mainly to meet the strong domestic demand.

Finally, thank you again for joining us today. I will be with you at the end of the presentation. So now I would like to hand over the mic to Idil.

Idil?

[Idil Onay, executive]

Thank you, Mr. Basoglu.

Our presentation consists 2 sections, as you already know. The first one is the market overview and then the financial results, so let's start with the market overview.

In Page 5, you will find the crude steel production figures in Eurozone, China and CIS regions.

So world crude steel production was around 487 million tonnes in the first quarter. It means that it's up by 10% compared to the same period of 2020. The European Union produced 38 million tonnes of crude steel in the first quarter of 2021, up by 3% compared to the same quarter of 2020. China's crude steel production, as you may see on the upper right-hand side, reached 271 million tonne, up by 16% when compared to the first quarter of 2020. Finally, CIS region produced around 26 million tonnes of crude steel during this period, and it indicates around 3% increase.

The World Steel Association released its short-range outlook, on April 15, for 2021 and 2022. worldsteel forecasts that steel demand will grow by 5.8% in 2021, to reach 1.87 billion tonnes, after declining by 0.2% in 2020. They also forecast that in 2022 steel demand will see further growth of 2.7%, to reach 1.92 billion tonnes. The current forecast assumes that the ongoing second or third waves of infections will stabilize in the second quarter and that steady progress on vaccinations will be made, allowing a gradual return to normality in major steel-using countries.

I will explain the latest figures in Turkish steel market in the following slides. So let's continue with the raw material markets. In Page 6, you will see the prices of steel-related commodities. Let's take a look at coking coal, iron ore and scrap prices.

Current price level of coking coal is around $110 per tonne. In our year-end conference call 3 months ago, it was around $160 per tonne. It indicates around 30% decrease. Coking coal prices are not expected to increase significantly, by market experts, in the medium term. Iron ore index has more than doubled from $85 per tonne at this time last year. As you all know, the main reasons for high iron ore prices are the lack of supply and China's high demand. The current price level of iron ore is around $190 per tonne. There is uncertainty in the market regarding the iron ore price future. I also would like to remind that Erdemir is around 15% self sufficient in terms of iron ore.

We always mentioned that increase in scrap prices is a kind of disadvantage for the electric arc furnaces when we compare it to integrated steel producers in Turkey. The latest scrap price level is around $430 per tonne; and it is expected to remain in the $420, $450 level.

On Page 7, you will see the production and consumption figures of Turkish steel market for the 2 months of 2021. As you can see, there is an imbalance between production and consumption of long and flat steel in Turkey. Since the end of the second quarter of 2020, with the reduction of negative effects of COVID-19, both production and consumption have increased. While steel production increased around 10%, steel production (sic) [ consumption ] around 16% in first quarter -- in first 2 months.

On Page 8, exports and imports data are presented. Imports are at the same level as the same period of last year. However, exports volume has declined 0.3 million tonnes. This decrease is mainly due to the flat steel as a natural result of strong demand in the domestic markets.

So let's take a look at the financial results and the operational metrics. On Page 10, you will see the brief summary of our annual -- our first quarter results.

In the first 3 months of 2021, we produced 2.4 million tonnes of liquid steel, 13% higher than the last quarter. During this period, long production declined around 50,000 tonnes, while flat production increased around 100,000 tonnes. We sold around 2 million tonnes in Q1 2021, which indicates an increase of 4.6% compared to the first quarter of last year.

Our revenue is just about $1.4 billion, which is around 36% higher than the Q1 2020. Also we generated $526 million EBITDA and $355 million net profit after tax, which are historical high levels.

I will explain the details of P&L later in the following slides. On Page 11, you will see the liquid steel production volumes. And I will skip this slide quickly; and continue with the next slide, which is about capacity utilization ratio of our group.

Our capacity utilization ratio was realized at 97% in the first quarter. As we can see on the page, capacity utilization ratio was 89% in 2020 by the reason of early timing of [ 4 ] blast furnace maintenance in stand-alone plants, but now we expect the usual levels. As you all know, this ratio is far better than the world's average, and this is one of the key strengths of Erdemir.

On the next page, you can see our finished goods production volumes. There's 43,000 tonnes increase in Q1 year-over-year, which comes mainly from the flat steel. As you know, depending on demand, we can easily shift our production between flat and long steel.

On Pages 14 and 15, you will see the comparison of sales volumes and revenue. Our sales volume was around 1.9 million tonnes in Q1 2020, and this quarter, sales volume has increased around 5%. Increase in sales volume on quarterly basis is mainly from hot steel. On Page 15, you can find a breakdown of revenue for domestic and export sales. 88% of revenue comes from the domestic sales, in line with the increase in domestic volume, which we will discuss in the next page. Our sales revenues increased by 35.7% compared to the first quarter of 2020.

So let's take a look at the segmental breakdown of domestic sales in Page 16 and export volumes in Page 17. As we can see from the pie charts, our domestic sales were around [ 84,000 tonnes ] higher than the first 3 months of 2020, while sales through distribution chains, general manufacturing and automotive industry increased compared to last year. Sales to pipe and profile industry declined.

Total export volume in Q1 was lower than the Q4 2020 exports, as we can see in Page 17. This is mainly because of the higher demand in Turkish domestic market.

On Page 18, you will see the historical figures of EBITDA and net profits. We generated $526 million EBITDA in the first quarter of 2021, and our EBITDA margin of 37% is far better than the steel sector's average. Also we announced $355 million net profits and 25% net profit margin in the first quarter of 2021. Our first quarter EBITDA and net profit margins are the highest margins in the company history, as Mr. Basoglu mentioned earlier.

On Page 19, you can see how we reach to net profits from EBITDA. The largest item was tax expenses, which was $167 million, in the first 3 months. Due to the Turkish lira depreciation, we have recognized additional foreign exchange loss on the deferred taxation, which was $65 million (sic) [ $55 million ] in this quarter. The other major item in this chart was finance income of $65 million. After other expenses and noncontrolling interests, we reached to $355 million net profits.

On Page 20, you can see "EBITDA to change in cash" bridge. Change in working capital is a result of 2 factors actually. First one is $68 million increase in trade receivables. Second one is the effect of higher inventory, which is around $160 million. Also we spent around $87 million for CapEx expenditures in Q1 2021. This amount also includes advances paid for the capital expenditures as well and -- that you will see the difference between the CapEx pace in Page 27 and this one. After the dividend payment of [ $825 million ] and the acquisition of $297 million, the first quarter change in cash level was $858 million.

On Page 21, you can see the EBITDA per tonne trend. Although volatile market conditions, we have achieved $250 per tonne in Q1. This is one of the best quarters in terms of EBITDA per tonne, and we are expected to see a better EBITDA per tonne in the second quarter.

Let's take a look at the balance sheet on Slide 22. We explained the change in working capital and cash before. As I mentioned earlier, after the dividend payment and the acquisitions, cash amount decreased by 47%. There is around 6% increase in fixed assets due to the Kümas acquisition. Also there is an increase both in inventories and trade receivables due to the price increases in steel and raw materials. Other than these items, there is no significant change in our balance sheet's position.

On Pages 23 and 24, you will see historical trend of financial borrowings and net cash. Our net cash position will increase again at the end of the year due to the increase in profitability in the steel industry.

So the next page just shows how we reach to this net cash level since December 2020. Our net cash position was $984 million at the end of 2020. After the dividend payment of $827 million and the acquisition of $297 million, the first quarter's net cash level was $58 million due to the degeneration.

Slide 25 represents the maturity profile of borrowings. As we can see, most of our short-term loans are revolving trade financing facilities mainly related to the exports and import activities.

Slide 25 (sic) [ 26 ] represents our cost-of-sales breakdown. There is no significant change in our costs breakdown. However, the composition of iron ore and coking coal in raw material costs have changed. And the percentage of iron ore cost increased in the raw material basket, while coking coal has decreased, which is in line with the trends in raw material market.

Page 27 represents the historical CapEx spending. Total CapEx spending excluding advanced payments is $81 million in the first quarter of 2021. Our ongoing projects such as new blast furnaces are on progress, and there is no cancellation from the announced investments. Our capital expenditures will accelerate in the coming quarters.

As the last thing. There is an increase in the number of employees due to the addition of Kümas employees.

Now we may continue with the Q&A session. We will be happy to answer your questions with Mr. Serdar Basoglu and Mr. Ulas Yirmibes. Thank you for listening.

[Operator]

[Operator Instructions] The first question comes from the line of Dan Shaw with Morgan Stanley.

[Dan Shaw, analyst]

So I joined the call a little bit late, so apologies if you've touched on any of these, but first one, just simple one, can you just confirm your CapEx budget expectations for this year in U.S. dollars, please?

[Idil Onay, executive]

Dan, actually we will -- as long as there is no global lockdown again, CapEx will be spent between 2021 and the first half of 2024. And each year between 2021 and 2023, we are planning to spend approximately $400 million. You may assume this figure will reach up to $550 million, $600 million level with maintenance and other ongoing investments. And maintenance will be around $50 million to $80 million per year, as usual.

[Dan Shaw, analyst]

Okay. And then second one, just sort of a broader question on Turkey. Obviously steel prices are quite high at the moment. And kind of the questions that I'm getting from investors is which countries -- in the CIS and also Turkey as well and MENA, which countries can produce more? So a question to you as the biggest flat producer in Turkey: Do you think that the Turkish market can produce much more flat steel? Or is it pretty much at capacity for you and your peers?

[Idil Onay, executive]

Well, right now there is no additional capacity for flat steel or generally in, let's say, steel capacity, so I think we are working with the maximum capacity of the country. So I mean I don't think in the short term there will be any increase. Let's say, even in next 2 years, there won't be any additional capacity in the market.

[Dan Shaw, analyst]

Great. [ And that's ] the conclusion I came to as well, but just wanted to check.

[Operator]

[Operator Instructions] The next question comes from the line of Ivan Salkovskiy with VTB Capital.

[Ivan Salkovskiy, analyst]

Congratulations [ on results ]. So just several questions from our side. First would be about your EBITDA per tonne in second quarter. I suppose I have some problems with the line, so I missed [ what you noticed ] about your forecast for second quarter of the year, EBITDA per tonne. Could you please repeat?

[Idil Onay, executive]

Ivan, actually we haven't shared the number, but obviously when you look at the indicators in the markets like sales prices and the high demand, we assume that in the second quarter the EBITDA per tonne will be higher than the first quarter, which is the first quarter result was $250 per tonne.

[Ivan Salkovskiy, analyst]

Okay, yes. Very clear, yes. So next question from my side would be about your sales volumes. Could you please provide us with some guidance on your steel sales volumes, if possible, for the entire year 2021?

[Idil Onay, executive]

Well, actually we haven't shared any guidance. And most probably guidance will be announced in the next quarter, as we did in the past, but obviously, this quarter, we have achieved 2 million tonnes sales. But I mean obviously, in next quarters, in coming quarters, it will be higher, around 2.2 million tonnes, maybe each quarter, but I mean this is not an official guidance right now.

[Ivan Salkovskiy, analyst]

Yes, okay. So about 2.5 million tonne, it's indicative number, yes?

[Idil Onay, executive]

Sorry...

[Ivan Salkovskiy, analyst]

Yes. I -- excuse me. I suppose I have some problems on -- with the line. You told about 2.5 million tonne, yes?

[Idil Onay, executive]

Well, for each quarter, you may assume 2.1 -- between 2.1 million and 2.2 million for the coming quarters in this year. So I think in total it's around 8.5 million, 8.6 million. It should be this much, but as I mentioned, this is not an official guidance.

[Ivan Salkovskiy, analyst]

Yes, okay. Pretty clear. And so the next question is about your costs. I mean I think that, in the first quarter, your iron ore costs was pretty flat on quarter-on-quarter basis, while benchmark -- I remember benchmark being some 25% quarter-on-quarter. So could you please provide some explanation, reasons why maybe your prices were lower than benchmark or some other explanation, if possible?

[Idil Onay, executive]

Well, actually we use weighted average costing method for all inventory calculations. In general, we carry 2 months of physical inventory for coal and iron ore, but scrap level is less than 2 months. There are also goods in transit, but the cost of these inventories doesn't affect the cost of sales, so until those cargoes are ready for use physically. So I think this is the effect of 2 months lag, and plus we are using the weighted average costing method for inventory calculation.

[Ivan Salkovskiy, analyst]

Okay, yes. Great, pretty -- very clear.

[Audio Gap]

So did your vision change somehow on this?

[Idil Onay, executive]

Actually, in the last quarter, in the call of last quarter, we haven't shared any guidance. There might be a misunderstanding. We haven't given any numbers for EBITDA actually.

[Operator]

The next question comes from the line of Andrew Jones with UBS.

[Andrew Jones, analyst]

I've got a few questions. What have -- firstly, on the working capital. I mean usually when you have

[Audio Gap]