Eregli Demir ve Celik Fabrikalari TAS

IST:EREGL.E

Earnings Call Analysis

Strong performance amidst challenges

For the first half of 2024, the company reported $3.2 billion in revenue, with $441 million in EBITDA and a net profit of $316 million. The company's crude steel capacity utilization rebounded to 93% following disruptions from an earthquake. Domestic sales contributed 81% of revenue, despite pressure from imports. The company anticipates EBITDA of $90-$100 per ton for 2024 due to economic and sector slowdowns. Capital expenditures reached $545 million, with expectations to hit $1 billion by year-end. The company is focused on a net zero roadmap, aiming for significant emission reductions by 2050【7:0†source】【7:1†source】【7:2†source】【7:8†source】.

Revenue and Profit Performance

The first half of 2024 showed promising financial outcomes for the company, with a total revenue of $3.2 billion. The EBITDA reached $441 million, leading to a net profit of $316 million. This performance was notably resilient despite disruptions and challenges, highlighting the company's ability to manage and optimize operations effectively after a tumultuous period.

Operational Indicators

The company achieved significant operational metrics, with sales and production aligning with historical averages. Sales expectations are set to surpass 80 million tons in 2024, supported by a 93% crude steel capacity utilization ratio, which is significantly above the global average. This high utilization rate showcases the company’s robust operational capabilities and efficiency.

Segmental Revenue Breakdown

Approximately 81% of the total revenue was generated from domestic sales, reflective of strong local market support. Export sales, which had dipped due to an earthquake in the first quarter of the previous year, recovered to 19% of total sales in the first half of 2024. The decline in global commodity prices was mirrored by a decrease in average sales prices for flat and long steel in the second quarter.

Financial Elements and Investments

Depreciation was a significant expense, standing at $127 million for six months, while financial expenses, mainly from financing ongoing investments, accounted for $96 million. The company’s tax income benefited from deferred tax, totaling $25 million. A considerable investment in capital expenditures amounting to $545 million reflects the company's commitment to growth and technological enhancement through new advancements and infrastructure commitments.

Debt and Financial Management

Net debt was recorded at $1.9 billion by mid-2024, with a net debt-to-EBITDA ratio of 2.2x. The company intends to maintain this ratio below 2.5x for the remainder of the year. The issuance of a Eurobond has facilitated refinancing, significantly increasing the portion of long-term debt from 18% to 50%. This strategic financial maneuvering aims to alleviate short-term debt pressures and enhance fiscal stability.

Cost of Sales and Market Dynamics

Cost of sales witnessed a shift, with increased use of imported semi-finished products due to halted production from past disruptions. Despite high pressure on iron ore and scrap prices due to global economic conditions, the company managed a controlled cost structure. The overall influence of external imports and the domestic steel market trends remain key factors in cost management.

Commitment to Sustainability

In a significant move towards sustainability, the company unveiled a comprehensive net-zero roadmap, aiming to cut carbon emissions by 25% by 2030, 40% by 2040, and achieve net zero by 2050. The planned investment of $3.2 billion towards green transformation underlines a substantial commitment to environmentally responsible growth.

Future Guidance

The company projects an EBITDA per ton of $90 to $100 for the year 2024, accounting for anticipated slowdowns in both the global economy and the steel sector. Continued strategic focus on balancing operational costs with market demand, while navigating through the challenges posed by fluctuating raw material prices and competitive pressures, is integral to sustaining profitability and growth.

Outlook for Sales and Market Position

Despite a challenging global context, the company expects steady sales performance, aiming for total sales above 8 million tons in 2024. The domestic market dynamics, coupled with proactive measures against unfair trade practices such as ongoing anti-dumping investigations, will play a critical role in securing the company's market position and profitability in the coming quarters.

Earnings Call Transcript 2024-Q2

[Operator]

Ladies and gentlemen, thank you for standing by. I am Geli, your Chorus Call operator. Welcome, and thank you for joining the Erdemir conference call and live webcast to present and discuss the second quarter 2024 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, 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 when a party is coming to a judgment based on estimates and forward-looking statements, our company may not have made a revision at the 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. Ms. Ergin, you may now proceed.

[Idil Onay, executive]

Thank you very much, Geli. Good afternoon, everyone. Welcome to our conference call and webcast of Erdemir for the second quarter. Today, our Financial Control and Reporting Director, Mr. Ulas Yirmibes, 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.

Our presentation consists 2 sections, as you already know. The first one is the market overview, and that's the financial results. So let's start with the commodity prices. On 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 level of coking coal was around $324 per ton. At the beginning of the year, it reached its lowest level of $204 per ton in the spot market as of today. Australian coking coal prices trended down in July, likely due to the easing of weather and transport disruptions that have caused supply concerns earlier the year. [indiscernible] purely disrupted output and called extended [indiscernible] in Q1. Iron ore price was around $140 per ton at the beginning of the year, and it has reached to like $93 per ton today.

The decline in iron ore, which face mass pressure due to the decrease in steel production in China last week, below the [ hundred thousand ] level in both forward and spot prices has attracted section. It is also possible to say that the increase in cargo arriving at ports in China pressure on iron ore. Scrap price was around $413 per ton at the beginning of the year, and the current scrap price is around $374 per ton. The prices in Turkish imports scrap market continues to set direction. While interest in scrap purchasing continues to remain weak in Turkish markets due to the weak finished product sales and low price [ but ] bookings buyers continue to resist high price scrap offers.

On the bottom right, we show HRC prices in Black Sea, China and South Europe. While a charter demand continues to remain weak in China. Steel producers have started maintenance work to reduce production and support prices. In Europe, local HRC demand continues to remain sluggish, especially as most of the producers in the South went into holiday, while prices remained relatively flat compared to the previous week.

On Page 4, you will see the production, consumption, export and import figures of Turkish markets for the 6 months of 2024. While consumption decreased by [ 4% ], production increased by 12%. Exports of new products increased by [ 45% ] in quantity in the first half of the year, reaching 6.5 million tons. Imports decreased by 14% to 8.2 million tons in the same period. The export import coverage ratio increased to 79% in 6 months of 2024 from 38% in 6 months of last year. In the first half figures of 2023, production and exports decreased due to the earthquake effect, while imports increased with the return to normal production levels in 2024, production and exports increased while consumption and imports decreased slightly.

So let's take a look at the financial results and operational metrics. On Page 6, you will see the brief summary of our first half results. We achieved $3.2 billion revenue, and we generated $441 million EBITDA and $316 million net profit. On Page 7, you will see the operational indicators of our company. The results achieved in the first half for sales and production are within our historical averages. We aim to achieve sales above 80 million tons in 2024. We are back to the level of 93% in crude steel capacity utilization ratio after the earthquake. As you already know, this ratio is far better than the world's average.

So let's take a look at the segmental breakdown of domestic sales and export volumes in Page 8. As you can see from the pie chart, there has been a slight change between sectors due to the effect of market and demand conditions when we compare to last year's breakdown. There has been a transition from pipe and profile and distribution chains to general manufacturing. We see a similar situation in the [ long ] products. However, the fact that the [ estimate ] production stopped for almost 3 months, which was affected by the earthquake in the first quarter of last year is also effective in these numbers.

As I mentioned in the previous slides, the unusual decline in exports is mainly caused by the earthquake as seen in the last year's first quarter exports. As of first half of 2024, we are back to a 19% export levels. On Page 9, you can find breakdown of revenue for domestic and export sales. 81% of the revenue comes from domestic sales in line with the domestic volume. The average of second quarter sales prices for flat and long steel decreased compared to the previous quarter, in line with the global commodity prices. We generated [ $113 ] EBITDA per ton in the first half. In 2024, we expect to see between $90 and $100 per ton due to the slowdown in both world economy and steel sector. Despite import pressure in the domestic market, we achieved to generate $441 million EBITDA and $316 million net profit in the first half.

On Page 10, you can see how we reach to net profit from EBITDA. One of the largest items was depreciation, which was $127 million in 6 months. The other major item in this chart was financial expenses. Net interest expense was [ $96 million ] in 6 months. And the majority of this interest expense arises from financing ongoing investments. Tax income was $25 million due to the deferred tax income. And after other expenses, net profit was $316 million. The additional insurance income accrued of $105 million recorded as income in the first half is not included in the EBITDA calculation since it is a one-off adjustment. While calculating the net profit, $105 million of the $109 million consolidation classification arises from additional insurance income accrued. In the graph below, you can see EBITDA to change in cash reach. Working capital increased due to inventories. Also, we spend around $545 million to capital expenditures in 6 months. This amount also includes advances paid for the capital expenditures as well, and that you will see the difference between the CapEx paid in Page 13 and this one.

On Page 11, you will see historical trend of financial borrowings and net debt. When we look at the first half of 2024, net or net working capital increased compared to 2023 due to the raw material procurement -- our net debt position was $1.9 billion at the end of first half. Due to the ongoing capital expenditures, the net EBITDA ratio was 2.2x. We aim to keep our net debt-to-EBITDA ratio below 2.5x for the rest of the year.

Slide 12 represents our cost of sales breakdown. The use of imported semifinished products imported scraps increased due to the halt of production at [ estimates ] for almost 3 months due to the earthquake last year as our own plot production returned to normal levels in the first half 2024, the share of iron ore and pellet in our cost structure increase.

Therefore, imported semifinished products, which are included in other item was decreased. Page 13, represents the historical CapEx spending. Total CapEx spending is $421 million in 6 months, when we add the advanced payments of $124 million to this figure, we reached the investment expenditure of $545 million. The new first, blast furnace in [ semis ] and number four, [indiscernible] in Erdemir will be commission until the end of this year. We expect that CapEx will reach up to $1 billion again in 2024 with maintenance and other ongoing [ investments ].

So on Page 14, as we announced last quarter, we are proud to announce our net zero road map in January this year. We aim to reduce carbon emissions per ton 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 investments of Erdemir and [ estimates ] by the end of 2030. Almost [ 70%, 80% ] of the $3.2 billion investment will be sourced externally, utilizing easily accessible financial resources for the green transition. Erdemir and [ estimates ] steel capacity will reach 13 million tons by 2030. Now we may continue with the Q&A session. We'll be delighted to answer your questions. Thank you for listening.

[Operator]

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

[Jason Fairclough, analyst]

Just a couple of quick ones for me. First, could you update us on the status of the other current assets, which was the VAT receivables and the insurance payments are all insurance payments paid out now? And where are we in terms of turning that receivables into cash?

[Idil Onay, executive]

Jason, so actually, we received as cash or tax receivables in Q2. And also in last quarter, I think we announced that we already received it. So it has an effect on the second quarter cash. Also on the insurance side, we also get all the advanced payments, the second advance payment of $105 million in the second quarter as well.

[Jason Fairclough, analyst]

So just so that I'm clear, if we look at the other assets, the other current assets, which I think in lira is about TRL 13 billion. Is that normal now? I think in the past, you're talking a much lower number being normal. Yes?

[Idil Onay, executive]

Well, correct. I mean the current level is the normal level actually.

[Jason Fairclough, analyst]

Okay. The other question I have is in terms of the pellet plant. I think that's part of the current CapEx program. Could you just confirm that? And when should we think about the first pellet and the iron ore from that captive plant coming through your factories?

[Idil Onay, executive]

We are expecting in 2027, Jason.

[Operator]

The next question is from the line of [ Mayiwa Senada ] from UBS.

[Unknown Analyst]

Just a few quick questions. I was just wondering maybe if you could give us a bit of color on your expectations for working capital going into Q3 and maybe Q4, if you can. And then just on the import situation with China having exported quite a lot of product globally. Do you expect any action from government just to curb some of that import pressure and protect the domestic market.

[Idil Onay, executive]

So yes, I can share our expectation for Q3 and Q4. So as I [indiscernible], our order book is full for 2 months, and we don't expect to see a lower level than this. So we expect to see sales of above in 8 million tons total in 2024. So it's normal level actually. But in line with the global trend, there were a decline in commodity prices in the second quarter. And in the first half, HRC prices declined more sharply compared to iron ore prices, causing a contraction of margins in global markets. So if this decline continues in the second half of the year, profitability ratios are expected to decrease further. So as I mentioned during the presentation, we expect to have $90 million to $100 per ton EBITDA for 2024. So this is the general view for the rest of the year. And for your second question, of course, import is one of the most important issues in Turkish steel markets. So while there is a decreasing trend in domestic demand in China, the product capacity increases continue rapidly.

So I just would like to mention the ongoing [ anti-dumping ] investigation against HRC, originating from China, India, Japan and Russia. The Turkish Ministry couple of weeks ago, the Turkish Ministry of Trade has reached the stage of sharing the final notification report with the relevant parties. So most probably in a couple of months, we will hear the final decision. So the process is expected to have a positive impact on fourth quarter and beyond.

[Operator]

The next question is from the line of [indiscernible] with Morgan Stanley.

[Unknown Analyst]

I just have one remaining question on your short-term debt figure. This is quite high, and we just said we just wondered whether you have any plans on how you're going to reduce or refinance.

[Idil Onay, executive]

So actually, very recently, we issued Eurobond. And this Eurobond will help to refinance our short-term debt. For example, we share of our long-term debt in total debt increased from 18% in the first quarter to 50% after the Eurobond issue. So the Eurobond will help refinancing our short-term debt.

[Operator]

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

[Idil Onay, executive]

Thank you very much for joining us. We hope to meet you again in our third quarter call. Have a nice day. Thank you.

[Operator]

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