Eregli Demir ve Celik Fabrikalari TAS

IST:EREGL.E

Earnings Call Transcript 2022-Q1

[Operator]

Ladies and gentlemen, thank you for standing by. I'm Popi, your Chorus Call operator. Welcome, and thank you for joining the Erdemir conference call and live webcast to present and discuss the first quarter 2022 financial results. [Operator Instructions] And the conference is being recorded. [Operator Instructions]

Please note, Eregli Demir 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 the disclosure policy and has shared such policy in 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 case where it's 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 the conference over to Ms. Idil Önay Ergin, Investor Relations Director. Mr. Ergin, you may now proceed.

[Idil Onay, executive]

Thank you very much, Popi. Good afternoon, everyone. Welcome to our conference call and webcast of Erdemir for the first quarter of 2022. 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]

Thank you, Idil. Good afternoon, everyone. Thank you for joining us today. As you know, we will share the detail of our first quarter performance by the presentation. But before starting our presentation, I would like to highlight the development and the market expectations. We witnessed that 2021 was an exceptional year for all steelmakers, as you know, all of in the world, and our company made history with its outstanding results.

We are proud to share our successful financial results in 2021 with our shareholders as high dividend payments. TRY 15.60 billion cash dividend is the highest amount among all dividends announced in most example so far. Erdemir's dividend amount constitutes nearly 29% of the paid dividend of all public companies in 2022. Also, Erdemir has the highest dividend yield with 12%.

Today, we are delighted to publish another successful quarter with 33% EBITDA margin and USD 693 million EBITDA. USD 335 EBITDA per tonne is more than double our previous year's average, except 2021. Our sales revenue increased by 48%; EBITDA, 38%; and net profit, 14% compared to the same period of the last year.

When we look at the developments in the commodity prices, as I mentioned in our last quarter call, high coal prices and increasing energy prices affected our 2022 costs, but we balanced the cost increases with the decreasing iron ore prices and increasing sales prices. We estimate that we will achieve better results in the second quarter with the support of HRC prices.

As all of you know, with the official gazette published on April 19, the payment obligations of the mobile properties sales contracts are required to be fulfilled and accepted in Turkish lira. Our sales prices are still determined in U.S. dollars, and our functional currency is also U.S. dollars.

Our customers will pay in Turkish lira at the exchange rate determined for the payment date. The required portion of the income in TL collection will be used for TL debt payments, which are extremely high, I can say. And the rest of the TL collections will be hedged. Although we start to see the effects of the unexpected Russia-Ukraine war on the steel industry, we do not expect this war to have a negative impact in our company. Obviously, both Russia and Ukraine are the countries with their own strong steel and raw material production. Therefore, they were not an attractive export market for Turkey, but of course, they were the most important players in imports to Turkey. Market experts think that with the decline and perhaps even partly flat steel imports from Russia and Ukraine, there will be an opportunity for domestic steel producers in Turkey. Since our company's crude steel capacity utilization ratio is already high, it will not create a sales tonnage increase for our company, but the domestic sales prices increased due to the recent development.

The increase in the prices of Turkey and other countries after the U.S. ban on Russia steel imports is also a positive signal for Turkish steel producers. As I mentioned at the beginning, 2021 was an exceptional year. We expect the year 2022 to normalize after the peak year 2021. However, with the developments in the global steel sector, we have factored a better year than we expected.

The demand is going strong, and we are working with full order book of 3 months. As I constantly mentioned, we always consider the margin between raw materials and product prices. Despite increasing raw materials, we think that the premium between raw materials and steel prices will be in our favor for next period of the year.

So I will be with you at the end of the presentation. Now I would like to hand over the mic to our IR Director, Idil. Idil, the mic is yours.

[Idil Onay, executive]

Thank you very much, 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 crude steel production figures in Eurozone, China and CIS region. Global crude steel production was 457 million tonnes in the first 3 months of 2022, down by 7% compared to the same period in 2021. The European Union produced 37 million tonnes of crude steel in the first quarter of 2022, down by 4% compared to the same quarter of 2021.

China's crude steel production, as you may see on the upper right-hand side, reached 246 million tonnes, down by 9% when compared to the first quarter of last year. Finally, CIS region produced around 24 million tonnes of crude steel during this period, and it indicates around 9% decrease.

The World Steel Association released its short-range outlook on April 14 for 2022 and '23. We'll still forecast that steel demand will grow by 0.4% in 2022 after increasing by 3% in 2021. They also forecast that in 2023, steel demand will see further growth of 2.2%. They also mentioned that the current forecast is made against the backdrop of the war in Ukraine and is subject to how uncertainty.

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. Price level of coking coal was around $350 per tonne at the beginning of the year. After a rolling coaster Q1, in which Russia's invasion of Ukraine further compounded global supply tightness, coking coal has nearly doubled to $607 per tonne in the mid-March. The coking coal, which is currently around $520 per tonne is not expected to decline in the short term.

Yesterday, China announced that they will cut import tariff for coal to 0 from May to end of March 2023 to help guarantee energy supply. Market experts think this could further tighten coal markets and push up prices.

Iron ore price was around $120 per tonne at the beginning of the year, although it reached the level of $160 at the beginning of April. The current price has dropped to $140. In March, Fitch increased iron ore price assumption for 2022 due to the extended Chinese government support to infrastructure and lower production earlier this year due to the heavier than usual rains in Brazil, accelerated by indications of the Russian-Ukraine conflict on iron ore exports. But the worsening in Chinese demand conditions over the near term has sent iron ore prices into a pale skin.

Scrap reached its highest level in 12 years since 2010 with $665 per tonne in March. A decrease in global scrap prices is not expected in the short term. And we always mention that increasing scrap prices is a kind of advantage for the electric arc furnaces when we compare to the integrated steel producers in Turkey.

On Page 7, you will see the production and consumption figures of Turkish steel market for the 2 months of 2022. While steel production decreased around 5%, steel consumption remains kind of stable compared to the same period of the last year.

On Page 8, exports and imports data are presented. While Turkey steel exports remains almost the same on a tonnage basis, imports increased by 17% in terms of quantity and increased by 68% in terms of value in 2 months of 2022 compared to the same period of last year.

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 3-month results. In the first 3 months of 2022, we produced 2 million tonnes of liquid steel. And during this period, long production increased by 32%, while production remains almost the same. We sold slightly less than 2 million tonnes. Our revenue is just about $2.1 billion, which is around 48% higher than last year. Also, we generated $693 million EBITDA and $405 million net profit after tax, which are higher than the same period of last year. 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 the capacity utilization ratio for our group. Our capacity utilization ratio was realized at 83% by the reason of early timing of planned maintenance holds in Q1 due to the natural gas cuts to the country's industrial sector. Although there is a decrease in crude steel capacity utilization ratio, this ratio still is far better than the growth average and this is one of the key strengths of Erdemir.

On the next page, you can see our finished goods production volumes. There is 61,000 tonnes increase in Q1 year-over-year, which comes mainly from the long steel. As you know, depending on demand, we can easily shift our production between flat and long steel.

On Pages 14 and 15, we'll see the comparison of sales volumes and revenue. Our sales volume was around 3 million tonnes in Q1 2022. So basically, it goes flat year-over-year. As I mentioned on past utilization slide, the timing of planned maintenance holds in Q1 due to the natural gas cuts affected our production and sales.

On Page 15, you can find breakdown of revenue for domestic and export sales. 83% of revenue comes from domestic sales, in line with the domestic molding, which we will discuss in next page. Our sales revenues increased by almost 48% year-over-year in Q1 2022, driven by the high sales prices.

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, there has been a change between sectors due to the effect of market and demand conditions when we compare the last year's breakdown. There has been a transition from pipe and profile and rolling industry, which mainly uses HRC, to industries that use value-added products and have higher profitability margins. On the other hand, we see no change in the long steel sector breakdown.

Total export volume in Q1 '22 was lower than the Q4 2021 exports, as you can see in Page 17. This is mainly because of the high demand in Turkish domestic market.

On Page 18, you will see the historical figures for EBITDA and net profit. We generated $693 million EBITDA in the first quarter, and our EBITDA margin of 33% was far better than the steel sector's average. Also, we announced $405 million net profit and a 19.3% net profit margin in the first quarter of 2022.

On Page 19, you can see how we reached to net profit from EBITDA. The largest item was tax expenses, which was $211 million in Q1. $229 million of this value is cash payments and the rest of it is accrual. The other major item in this chart was depreciation of $55 million. After other expenses and noncontrolling interest, we reached to $405 million net profit.

On Page 20, you can see EBITDA to change in cash bridge. Working capital remains stable while tax payment increased due to the higher net profit in the last quarter of 2021. Also, we stand around $146 million to capital expenditures in Q1. 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. Our USD 303 million credit was used for dividend payments and net working capital. After the dividend payment of $1,025 million, 3 months change in cash level was $658 million.

On Page 21, you can see the EBITDA per tonne trend. Although volatile market conditions, we have achieved $335 per tonne in Q1. This is one of the best quarters in terms of EBITDA per tonne. 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 the working capital and cash before. As I mentioned earlier, after the dividend payment of $1,025 million, cash amount decreased by 36%. The increase in financial liabilities is due to the credit usage. Also, there is an increase both in inventories and trade payables due to the price increases in steel and raw materials. Other than these items, there is no significant change in our balance sheet position.

On Pages 23 and 24, you will see historical trend of financial borrowings and net cash. After the high dividend payment of $1,025 million, net cash position turned to net debt as expected.

So the next page just shows how we reach to this net cash level since December 2021. Our net cash position was $518 million at the end of 2021. And after the dividend payment, net debt level of 3 months was $432 million.

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

Slide 25 -- sorry, 26 represents our cost of sales breakdown. There is no significant change in our cost breakdown. However, the composition of iron ore and coking coal in raw material costs has changed and the percentage of coking coal costs increased in the raw material basket, which is in line with the trends in raw material markets.

Page 27 represents the historical CapEx spending. Total CapEx spending, excluding advance payment, is $85 million in Q1. 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 no significant change in the number of employees.

So now we may continue with the Q&A session. I will be delighted to answer your questions with Mr. Serdar Basoglu. Thank you for listening.

[Operator]

[Operator Instructions] The first question is from the line of Dmitriev, Ilia with Goldman Sachs.

[Ilia Dmitriev, analyst]

I have 3 questions. I will ask one by one, if you don't mind. So first one on domestic prices. So what's your outlook for domestic prices? And can we catch up with European steel prices?

[Idil Onay, executive]

Ilia, you said domestic sales prices catch up with European prices? Is that the question?

[Ilia Dmitriev, analyst]

Yes. I mean Turkish domestic prices, or can they catch up with European steel price dynamics?

[Idil Onay, executive]

Well, nowadays, the Turkish HRC prices is about $1,200 per tonne. I think the last number was $1,250 per tonne for Turkish HRC prices. So yes, I think -- I mean, it's quite high for our region.

[Ilia Dmitriev, analyst]

Okay. Got it. And do you expect to increase export volumes to European Union following recent steel quota relocation?

[Idil Onay, executive]

Well, so as you know, the European Union increased the quotas after ban to Russian steel. So of course, it's going to have some positive effects to all the countries who have higher quota for European Union. But obviously, in line with the domestic demand, our domestic sales are going strong, but we are also in the export market due to the good strides as in foreign markets. So if there is a slowdown in domestic markets, yes, we can focus on export markets.

[Ilia Dmitriev, analyst]

Okay. Understood. And last question from my side. So on MMK assets in Turkey, so MMK discussed the potential sale of its Turkish assets for current time. So if MMK resumes discussions on potential sale of the asset, could you consider acquiring this asset? What are your thoughts on it?

[Idil Onay, executive]

No. Actually, it's not in our agenda right now.

[Operator]

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

[Andrew Jones, analyst]

I just have a few. So first of all, there was a large increase in material costs, excluding iron ore, coking coal and scrap. I'm wondering what -- that was quite noticeable. What were the main drivers of those increases? And how sustainable are they into 2Q, 3Q?

Secondly, just on EBITDA per tonne trend, 2Q, obviously, prices have picked up materially as of some of the import costs. What are your expectations for sort of the EBITDA per tonne expansion into 2Q? And then just on the Russian presence in the Turkish market, clearly, Russians can't sell into Europe for a lot of their material. I hear they may be looking to sort of sell more into Turkey. What have you observed so far? And what sort of -- I mean, prices are still holding up very well. What sort of import pressure, if any, have you seen from the Russian so far since the war?

[Idil Onay, executive]

Okay. So I'm going to start with the material cost. As you mentioned, due to the higher coal prices, we have seen the effect in our Q1 results. So for the second quarter, also, we're going to see the effect of higher coal prices. But also on the revenue side, obviously, we're going to see the effect of higher sales prices, which have already -- I mean, which we've seen like 100 -- $1,300 levels, which was the highest level we have ever witnessed. So yes, there will be material cost effect -- higher material cost effect on the second quarter. But we think that we're going to balance with the revenue side.

And for the EBITDA per tonne on the second quarter, as I mentioned during the presentation, we expect to see a better EBITDA performance in the second quarter due to the higher sales prices. And the Russian imports, actually, we haven't observed any increased imports from Russia. Obviously, we haven't seen any signs on the prices as well because as we talked before, if there were higher imports from Russia, it should have been the lower sales prices, obviously. But right now, sales pricing shows us that there is no pressure from the import side.

[Andrew Jones, analyst]

Just to clarify, sorry, when I was talking about the raw material costs earlier, I said excluding iron ore, coal and scrap. So if you look at the other material costs and you strip that out, the coal and scrap out of the raw material cost line that you give, there's been a very large pickup in that line. So I'm wondering which other raw materials aside from those big 3 have shown the biggest increase is. What -- where those increases come from? And how sustainable those other costs are?

[Idil Onay, executive]

Well, I mean, we have like fair LOEs in other items, but they are not material, really.

[Andrew Jones, analyst]

Because the pickup, if you look at the numbers for those other raw material costs, it's quite substantial. Like I don't have a model in front of me, but it was a material increase if you strip out iron ore, coal and scrap, using those percentage breakdowns that you provided. So...

[Idil Onay, executive]

So you are looking at the actual numbers like the values, not the percentage, right? Because when I look the percentage in raw material breakdown, it's just -- I mean, I see only 2% it's high -- I mean, it was 19% in 2021. And right now, it's 21% in 3 months' results. So I mean, it's not really material.

[Andrew Jones, analyst]

Yes. It's -- I mean, if you look at it in dollars and you do the calculation to sort of work out where it was in 4Q, where it was in 1Q, the speed uplift is pretty significant. And as you say, I mean, the [ federal allies ] maybe one of various factors, but I'm not sure it explains that level of jump. I was curious if you could give some insight into what else was driving it? I'd be happy to take it offline, if you don't have an answer now.

[Idil Onay, executive]

I'll take that again. But as far as I know, the main item is [ federal allies ] in other items. So I think it should be because of the [ federal allies ] price increase.

[Andrew Jones, analyst]

Sure. And on the EBITDA per tonne, can you give us some numerical kind of guidance or just approximate change you expect in EBITDA per tonne quarter-on-quarter in 2Q?

[Idil Onay, executive]

Well, we expect to see an increase, but it's really hard to say any numbers right now. But we will update anyway during the quarter. So we are just in the first month of the quarter. Obviously, our order book is full for 3 months. So we can see the end of the quarter in terms of sales, but not the raw material and the cost side. So it's really hard to give any number right now or any guidance, but we expect to see a higher EBITDA per tonne for the second quarter.

[Operator]

The next question comes from the line of Nefedov, Alexander with Renaissance Capital.

[Alexander Nefedov, analyst]

My questions are on production outlook. Could you please shed light on the production outlook for 2022? And the second question is about steel demand growth in 2023. You mentioned that steel demand is going to grow 2.2%. However, what are the main risks which we should consider in our estimations, which could hamper this growth considering your main clients in construction and automotive sector?

[Idil Onay, executive]

So Alexander, actually, we haven't shared anything for 2023, except the World Steel estimates at the beginning of the presentation. I think you are talking about that number. I mean World Steel announced that -- I mean, their expectation, of course, that they expect to see 2.2% increase in the world crude steel production. Is that the number we are talking about?

[Alexander Nefedov, analyst]

Yes, particularly.

[Idil Onay, executive]

Okay. That's the World Steel estimates, not our company's. And also, I think you asked the production cost. I mean it's not really cost actually. As I mentioned during the call -- or during the presentation, there were and there will be some planned maintenance holds in our plants. But in Q1, due to the natural gas cuts to the country's industrial sector, planned maintenance holds were brought forward. So that's the reason for the decrease in production.

[Operator]

[Operator Instructions] We have a follow-up question from the line of Jones, Andrew with UBS.

[Andrew Jones, analyst]

As no one else is asking, I think just -- could you just reiterate what your CapEx guidance is for this year? You said $550 million to $600 million last time. Slow start to the year in 1Q was just $85 million. Like what's -- are you sticking to that original guidance? Or is there any reason to cut it?

[Idil Onay, executive]

The CapEx guidance, right?

[Andrew Jones, analyst]

Yes, yes.

[Idil Onay, executive]

Okay. No, we haven't changed the guidance. I mean it's not an official guidance, but yes, we are expecting to see $550 million to $600 million CapEx during the year.

[Operator]

Ladies and gentlemen, there are no further questions at this time. I will now turn the conference over to Mr. Basoglu and Ms. Ergin for any closing comments.

[Mustafa Basoglu, executive]

Hello again. Thank you for joining us today. I wish healthy days for you, and hope to see you for next quarter call. Thank you again.

[Idil Onay, executive]

Thank you very much.

[Operator]

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