Eregli Demir ve Celik Fabrikalari TAS

IST:EREGL.E

Earnings Call Analysis

Erdemir Q3 Results: Recovery and Challenges

Erdemir's Q3 2023 earnings reveal recovery from an earlier earthquake, with revenue reaching $4.6 billion, despite a net loss of $175 million. The company's EBITDA stood at $463 million. Operational glitches led to a 3-month production halt, impacting sales by 600,000 tons. Steel prices normalized post-war peak due to oversupply in China. Export volume decreased by 42%, but domestic sales remained dominant. Financial strain continues with $855 million in CapEx and a $1.4 billion net debt position.

Navigating a Natural Disaster: Erdemir's Financial Resilience in Q3 2023

In the face of adversity characterized by a significant earthquake, Erdemir demonstrated commendable resilience, managing to achieve substantial revenue of $4.6 billion and an EBITDA of $463 million in the first nine months of 2023. The natural disaster led to a loss of approximately three months of production and 600,000 tons in sales. Nonetheless, Erdemir's capacity to bounce back was evident with production and sales regaining normalcy by the third quarter, with both production and sales tonnage reaching 2 million tons.

Market Dynamics and Operating Environment

Erdemir faced fluctuating commodity prices throughout the year, with coking coal prices increasing by 50%, iron ore prices remaining relatively stable, and scrap prices experiencing a significant drop from their 12-year peak in March 2022. Notably, heavy steel exports were impacted, leading to a decrease by 42% in the first eight months of 2023, while imports increased by 22%. This resulted in the export/import coverage ratio falling from 93% to 50%. Domestically, the Turkish steel production slid by 12%, diverging negatively from the global trend, yet steel consumption within Turkey rose by 18%.

Financial Performance and Recovery Post-Earthquake

Although Erdemir was hit by a sharp decline in sales revenues due to the earthquake, the company's quick recovery led to a slightly positive net profit of $3 million in Q3. Despite this, overall, the company still reported a net loss of $175 million over nine months. This was heavily influenced by increased tax expenses, which leaped to $452 million due to a corporate tax rate hike and operational foreign exchange losses. Furthermore, ongoing capital expenditures contributed to the financial strain, amounting to an investment expenditure of approximately $855 million in nine months.

Debt Management and Future Outlook

Erdemir's net debt at the end of September 2023 stood at $1.4 billion, with the net debt-to-EBITDA ratio at 2.7x. This uptick was attributed to the non-operational costs from the earthquake and decreased EBITDA. However, projections indicate a decrease in the net debt-to-EBITDA ratio below 2x as the company anticipates a stabilization of net debt and an increase in EBITDA as recovery continues.

Earnings Call Transcript 2023-Q3

[Operator]

Ladies and gentlemen, thank you for standing by. I'm Poppy, your Chorus Call operator. Welcome, and thank you for joining the Erdemir conference call and live webcast to present and discuss the Third Quarter 2023 Financial Results. [Operator Instructions]

Please note Eregli Demir ve Çelik Fabrikalari, Erdemir, may, when necessary, make written or verbal announcements about forward-looking information, expectation, 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 the conference over to Ms. Idil Onay Ergin, Investor Relations Director. Ms. Ergin, you may now proceed.

[Idil Onay, executive]

Thank you very much, Poppy. Good afternoon, everyone. Welcome to our conference call and webcast of Erdemir for the Third Quarter of 2023. Today, our Financial Control and Reporting Director, Mr. Ulas Yirmibes, is 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 then the financial results. So let's start with commodity prices.

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 level of coking coal was around $295 per ton at the beginning of the year. It reached its lowest level in May with $222 per ton. Since then, it has gradually increased and reached $348 per ton in the spot market as of today. Prices for Australian coking coal have jumped 50% due to factors such as maintenance outages, lower than usual supplies from Queensland and a slower train network. According to analysts' forecasts, stable demand and lower variability will stimulate coking coal prices.

Iron ore price was around $117 per ton at the beginning of the year, and it has reached $120 per ton today with a relatively stable trend. Spot iron ore prices have been volatile but generally moderated since the start of the year, driven by slowing global economic growth and China's property sector weakness. We do not expect a sharp movement in the short term for iron ore prices.

And scrap, after reaching its highest level in 12 years since 2010 with $655 per ton in March 2022, the current scrap price has dropped to $350, and it follows a stable trend.

On the bottom right, we show HRC prices in Black Sea, China and South Europe. HRC prices which peaked in March 2022 due to the Russia-Ukraine War are already normalized. And the main reason for low steel prices is oversupply in the Chinese market. Since the country's government has still not imposed restrictions on steel production, the country's steel makers continue to increase the production of steel products. But domestic demand does not correspond to production volumes and part of the products are exported at lower prices than the world average.

On Page 4, you will see the production consumption, exports and imports figures of Turkish steel market for the 8 months of 2023. While steel production decreased around 5%, steel consumption increased around 18% compared to the same period of the last year. Despite the 0.2% increase in world crude steel production, Turkish crude steel production decreased by 12% and negatively differentiated from the world steel industry.

While exports decreased by 42% in the first 8 months of 2023, the increase in imports by 22% caused the export/import coverage ratio, which was 93% in the first 8 months of last year, to fall 50% in the first 8 months of this year.

So let's take a look at the financial results and the operational metrics. On Page 6, you will see the brief summary of our 9 months results. Despite the earthquake disaster, we achieved $4.6 billion revenue and we generated $463 million EBITDA.

On Page 7, you will see the operational indicators of our company. As you all know, due to the earthquake that occurred on February 6, we lost approximately 3 months of production and 600,000 tons of sales due to the earthquake. All the decreases you see on this page are related with -- mainly with the situation.

The crude steel capacity utilization ratio in the second and third quarters was approximately 80%. Our production and sales returned to normal levels as of third quarter. Despite the decrease in liquid steel production, our final product production increased due to the production planning. Both our production and sales tonnage reached 2 million tons in the third quarter.

So in Page 6, you can see the segmental breakdown of domestic sales and export volumes. 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 pipeline profile and rolling in auto industry to distribution chains.

The similar situation applies to the long product. There has been a transition to industries that use value-added products and have higher profitability margins. As I mentioned in the previous slide, the unusual decline in exports is mainly caused by the earthquake.

On Page 9, you can find breakdown of revenue for domestic and export sales. 88% of the revenue comes from domestic sales, in line with the domestic volume. The decline in sales revenues mainly caused by the earthquake.

The decline in EBITDA per ton due to the earthquake recovered very quickly. We expect to see a similar figure in the coming quarters. In Q3, due to the increase in the corporate tax rate from 20% to 25%, there was an increase of $164 million in total tax expenses, most of which is deferred tax. With the generated EBITDA and the insurance income accruals in the financial statements, the net profit in the third quarter was $3 million.

On Page 10, you can see how we reached to net profit from EBITDA. The largest item was tax expenses, which was $452 million in 9 months. The other major item in this chart was financial expenses, which are high due to the operational foreign exchange loss. Depreciation was $161 million. Also within the expenses from investment activities, there are fixed assets that will be out of use at Erdemir. After other expenses, net loss was $175 million.

In the graph below, you can see EBITDA to change in cash bridge. There was a release of $93 million in working capital. Also, we spent around $855 million to capital expenditures in 9 months. 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 13 and this one. Our $651 million credit was mainly used for net working capital and investments.

On Page 11, you will see historical trend of financial borrowings and net debt. When we look at the first 9 months of 2023, our net working capital remained almost stable compared to the end of last year. There was a decrease -- slight decrease in inventories and trade receivables due to the decline in prices.

Our net debt position was $1.4 billion at the end of September 2023, due to the nonoperational costs incurred because of the earthquake, low EBITDA was realized, and with the ongoing capital expenditures, the net debt-to-EBITDA ratio was 2.7 multiplier. We expect that the EBITDA will increase and net debt will remain stable for the rest of the year, and net debt-to-EBITDA ratio will decrease below 2 multiplier again.

Slide 12, which presents our cost of sales breakdown due to the increase in production after the earthquake. Our raw material usage increased, naturally, due to the price decrease. The biggest change was in coal.

Page 13 represents the historical CapEx spending. Total CapEx spending is $663 million in 9 months. When we add the advance payments of $192 million to this figure, we reach the investment expenditure of $855 million.

Erdemir's #3 Coke Battery modernization was commissioned last year in May. In addition, the new second blast furnace investment in Erdemir will be completed and commissioned on October 29, the 100th anniversary of the Republic of Turkey. Our capital expenditures will accelerate in the coming quarters.

On Page 14, you can find our value generation approach which stands on the 3 pillars of sustainable growth, responsible production and putting people at the heart of what we do, plays a major role in our operations.

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

[Operator]

[Operator Instructions]

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 Fourth Quarter Call. 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 afternoon.