Eregli Demir ve Celik Fabrikalari TAS

IST:EREGL.E

Earnings Call Transcript 2024-Q1

[Operator]

Ladies and gentlemen, thank you for standing by. I am Vaselius, your Chorus Call operator. Welcome, and thank you for joining the Erdemir Conference Call and Live Webcast to present and discuss the First Quarter 2024 Financial Results. [Operator Instructions] And the conference is being recorded. [Operator Instructions]

Please note that Eregli Demir ve Celik 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 taken 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 same 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 adjustment, 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, we 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 Onay Ergin, Investor Relations Director.

Ms. Ergin, you may now proceed.

[Idil Onay, executive]

Thank you very much, Vaselius. Good afternoon, everyone. Welcome to our conference call and webcast of Erdemir for the first quarter of 2024.

Today, our CFO, Mustafa Basoglu, and our Financial Controller 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, Mustafa Basoglu. The line is yours.

[Mustafa Basoglu, executive]

Thank you, Idil. Good afternoon, everyone. Welcome to our first quarter conference call, and thank you for joining us today.

As we leave 2023 behind, which was a difficult year due to the earthquake, we return to our historical averages like 5% crude steel capacity utilization ratio. 2 million tonnes of sales and USD 124 EBITDA per tonne in the first quarter. We are looking at financial and operational results of our company. It's worth remembering that 2023 was an exception and makes evaluation of 2024, complicated due to the base effect. Although, there was a decline in steel sales prices in the first and second quarter, we expect to see positive impact on gross profit [indiscernible] since the decrease in raw material prices was proactively higher. We reached an agreement on Isdemir insurance claim, advanced payments of USD 155 million in addition to the USD 100 million advanced payments received. This amount was reflected as income in our first quarter financial statements and will be paid until the end of Q3. The total payment amount has not been clarified yet. But we plan to complete the negotiation process and collect the claim payment within 2024.

When we look at the Turkish steel markets, the increase in flat imports continued. Based on the application made by our company, adapting investigation has been opened against the heavy plate originating from South Korea at the beginning of April. In addition, the process regarding the dumping investigation against the HRC originating from China, India, Japan and Russia, that our company and our subsidiary Isdemir are among the applicants continues. It is expected to complete it within the year. We expect that as a result of both investigation final decisions will be made to protect the domestic producers and provide [indiscernible] in Turkey. China is still one of the most important players in the world steel industry. China's HRC capacity continues to increase. In the first 4 months of 2024, 2 new hot rolling mills with a total capacity of approximately 10 million tonnes per year were put into operation.

Although Chinese steel demand from the manufacturing industry has shown healthy tend so far. HRC production and inventories are also increasing with additional capacity. This situation supports the deal that steel exports can remain strong. According to the first quarter data, Turkey is the fourth country to meet China exports to the most in HRC. In 2024, we focused on post cutting self-sufficient investment aimed at increasing our internal efficiency. We plan to commission the new blast furnace in Isdemir In 2024. We still aim to achieve 8.2 million tonnes sales in 2024. Thank you again for listening to me. I will be with you at the end of the presentation. So now I would like to hand over to Idil Ergin.

[Idil Onay, executive]

Thank you, Mr. Basoglu. Our presentation in transactions, as you already know. The first one is market overview and then the financial results. So let's start with commodity price.

In Page 3, you will see the prices of steel-related commodities and HRC. Let's take a look at coking coal, iron ore, scrap and HRC prices. Price [indiscernible] of coking coal was around $324 per tonne at the beginning of the year. It's reached its lowest level in April, and then it has gradually increased and reached $241 per tonne in the fourth month as of today.

Demands from China and India, which was weak in March led to a decrease in coking coal prices in the overseas market due to the increase in Chinese steel prices and production in April. China's coal demand from overseas markets increased. This situation enables the decline in coal prices to remain at the level of $225 per tonne FOB Australia.

Iron ore price was around $140 per tonne at the beginning of the year and it has decreased $116 per tonne today. Iron ore prices, which fell in March due to the weak demand in China, started to rise with the expected support from central government. The start of blast furnaces production in China, which are under maintenance during the winter months supports iron ore prices. Scrap price was around $413 per tonne at the beginning of the year and the current scrap price is $380 per tonne.

Although euro has lost value against U.S. dollar since the beginning of March, the increase in collection costs in Europe supports the scrap price. On the bottom right, we show HRC prices in Black Sea, China and South Europe. In the global HRC market, the strong PMI data in China and the fact that traders selling without vale added taxes are not active in offers to foreign markets have had a slightly positive impact on the price outlook. However, due to the weak demand during the Labor Day holiday last week. Many producers turned to making connections by keeping price levels constant rather than increasing them.

On Page 4, you will see the production, consumption, exports and imports figures of Turkish steel market for the 3 months of 2024. While consumption increased by 9%, production increased by 25%. Exports of steel products increased by 46% in quantity in the first quarter of the year, reaching 3.2 million tonnes.

Imports decreased by 3% to 4.1 million tonnes in the same period. The export import coverage ratio increased to 75%. In the first quarter figures of 2023, production and exports decreased due to the earthquake effect, while imports increase. With the return to normal production levels in 2024, naturally, production and exports increased, while imports decreased slightly.

On Page 7, you will see the operational indicators of our company. The results achieved in the first quarter for sales and production are with an [indiscernible] circle averages. We aim to achieve around 8.2 million tonnes sales in 2024. We are back to the level of 95% in crude steel capacity utilization ratio after the earthquake. As you already know, this ratio is far better than the world's average.

[Technical Difficulty]

[Operator]

Ladies and gentlemen, thank you for standing by. The conference will begin shortly.

[Idil Onay, executive]

Sorry for the disconnection. So let's take a look at segmental breakdown of domestic sales and export volumes in Page 8. As you can see from the pie chart, there has been a change between factors due to the effect of market and demand conditions. When we compare to last year's breakdown.

There has been a transition from the distribution chains and general manufacturing to pipeline profile and auto industry. We see a similar situation in the long product. However, the fact that Isdemir production stopped for about 3 months, which was affected by the earthquake in the first quarter of last year, is also reflected in these numbers. As I mentioned in the previous slide, the unusual decline in exports is mainly caused by the earthquake as seen in the last year's first quarter exports. As of first quarter 2024, we are back to 15% export level.

On Page 9, you can find breakdown of revenue for domestic and export sales. 84% of the revenue comes from domestic sales in line with the domestic volume. The first quarter sales part average for flat and long steel increased compared to the previous quarters. We generated from this $124 EBITDA per tonne in the first quarter. In 2024, we expect to see about $100 per tonne. Despite import pressure in the domestic markets, we achieved to generate $240 million EBITDA and $181 million net profit in the first quarter.

On Page 10, you can see how we reached to net profit from EBITDA. One of the largest items was depreciation, which was $63 million in 3 months. The other major item in this chart was financial expenses.

Net interest expense was $53 million in 3 months. The majority of this interest expense arises from financing ongoing investments. Tax expense was $70 million. And after other expenses, net profit was $181 million. The additional insurance income accrual of $105 million recorded as income in the first quarter and this number is not included in EBITDA calculation since it's a one-off adjustment. While calculating the net profit, $105 million of the $180 million consolidation classification arises from additional insurance income accrual.

In the graph below, you can see a 80% change in cash bridge. Working capital increase due to the inventories. Also, we stand around $214 million through capital expenditures in 3 months. This amount also includes advances paid for capital expenditures as well. And that you see the difference between the CapEx in Page 13 and this one.

On Page 11, you will see the historical trend of financial borrowings and net debt. When we look at the first quarter of 2024, net working capital remained almost stable compared to the end of last year. There is a slight increase in inventories. Our net position was $1.7 billion at the end of the year due to the -- sorry, at the end of the first quarter. Due to the ongoing capital expenditures, the net debt-to-EBITDA ratio was 2 multiplier. We aim to keep our net debt-to-EBITDA ratio at a similar level of 2 multiplier for the rest of the year.

Slide 12 represents our cost of sales breakdown. The use of imported semifinished products, which is imported slabs increased due to the halt of production at Isdemir for 3 months due to the earthquake in 2023 as our own slab production returned to normal levels in the first quarter of 2024, the share of iron ore and pellets in our cost structure increased. Therefore, imported semifinished products, which are included in other items was decreased.

Page 13 represents the total CapEx spendings. The total capital expenditure spending is $167 million in 3 months when we add the advanced payments of $47 million to this figure, we reach the investment expenditure of $214 million. The new first blast furnace in Isdemir will be commissioned in the second half of this year, and we expect that CapEx will reach up to $1 billion again in 2024 with maintenance and other ongoing investments.

As we announced in January, we are proud to announce our net zero road map in 2024. We aim to reduce carbon emission per tonne by 25% by 2030, 40% by 2040 and achieved net zero emissions by 2050 compared to the base year of 2022. We plan to spend $3.2 billion for transformational investment of [Indiscernible] by the end of 2030. 78% of a $3.2 billion investment will be sourced externally, utilizing easily accessible financial resources for the green transformation. Erdemir and Isdemir [indiscernible] reach 30 million tonnes by 2030.

Now we may continue with the Q&A session. We will be delighted to answer your questions with Mustafa Basoglu. Thank you for listening.

[Operator]

[Operator Instructions] The first question comes from the line of Fairclough, Jason with Bank of America.

[Jason Fairclough, analyst]

Idil and Mr. Basoglu, I've got 2, if that's okay. First, I was wondering, could you give some color on the potential timing of the liquidation of the other current assets? And specifically, I'm thinking here about the VAT receivables and also the accrued insurance proceeds. Second question is just, is there any color around the difference between production and sales in Q1? Is this just normal quarterly variation? Or is there something else going on here?

[Idil Onay, executive]

Thank you very much, Jason, for your questions. So the first one, the liquidation of other current assets. So Actually, we would like to share a good news. As of today, we collected all of the value-added tax receivables of TRY 14 billion. In our first quarter results, you've seen TRY 24 billion value-added tax receivables were collected in our reports. But in the second quarter, we collected all of the value-add tax receivables. So that was the first one. And the second part, actually, there's high storm -- very bad storm in our Eregli plant. So because of that, we couldn't ship some of our sales, and that's the main reason you see in the first quarter, a slight decrease in our sales demand.

[Operator]

Did the management completed the answer?

[Idil Onay, executive]

Yes.

[Operator]

The next question comes from the line of John [ Sadriu ] with UBS.

[Unknown Analyst]

I have a few questions. First of all, I'm curious about the impact of these high Chinese export levels on your business. Now I noticed that in the first quarter, the import levels in Turkey didn't really increase year-over-year. I'm wondering if you're expecting to see more pressure there from higher exports coming out of China? That's the first question. And then just on the second quarter bridge. I guess, spread is probably under pressure. But given that kind of delayed some of the shipments, should we see a material step-up in shipments quarter-over-quarter. And could you give us any color around that and also the moving parts of the margin.

[Idil Onay, executive]

Hi, [indiscernible], thank you for the questions. So the first one, yes, you are right. Actually, the import level decreased just the [ 3% ]. But when you look at the flat steel imports, actually it increased, so that's why we have already 2 ongoing dumping investigation in Turkey against HRC and have placed imports. So for HRC antidumping investigation, we expect to see results until the end of this year. And we believe that it's going to support the domestic producers. So we are expecting some kind of positive for the domestic [Indiscernible] results for the domestic producers in Turkey. But yes, of course, the import pressure continues, especially in flat steel from China specifically. And your second question was sale quantity, so for the second quarter -- I mean, for the whole year, we expect to see around 8.2 million tonnes sales and for the second quarter, most probably we're going to have between 2 million to 2.1 million tonnes sales. So if we achieve every quarter around 2 million or 2.1 million tonnes, we're going to reach to our expectation of 8.2 million tonnes.

[Unknown Analyst]

Okay. That's clear. And is it fair to say that spreads should be coming under pressure in the second quarter given that, I mean, obviously, pricing has come down, but you get probably some lagged impact from some of the costs. maybe from the raw material is for -- is it your expectation that spreads decline in Turkey?

[Idil Onay, executive]

Well, the sale price decreased, but also raw materials decreased. Fortunately, actually raw material decrease more than sales prices. But that's why we do not expect gross profitability to decrease in the second quarter. We are expecting some kind of stable position in the second quarter.

[Operator]

[Operator Instructions] 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. Thank you.

[Mustafa Basoglu, executive]

Thank you. Thank you, again, for listening to us for joining our conference call. We wish you to see the second quarter call. Have a nice day.

[Idil Onay, executive]

Thank you very much. Have a nice day.

[Operator]

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