Eregli Demir ve Celik Fabrikalari TAS

IST:EREGL.E

Earnings Call Analysis

A Resilient Performance in Challenging Conditions

In the first nine months of 2024, Erdemir reported a solid revenue of $4.6 billion, alongside $572 million in EBITDA and a net profit of $335 million. This achievement reflects the company's ability to navigate a volatile market environment, especially given a backdrop of fluctuating commodity prices and decreased global demand.

Steady Production Amid Market Fluctuations

Erdemir maintained a high utilization rate in its operations, achieving crude steel production of 6.7 million tons. This puts their utilization at approximately 92%, significantly surpassing both domestic and global averages. The company has set an ambitious target to sell around 8 million tons by the end of 2024, with over 6 million tons already sold in the first three quarters, suggesting a robust finish to the year.

Influence of Commodity Prices on Margins

Despite strong production, Erdemir's margins are under pressure, with an average EBITDA per ton recorded at $99 for the first nine months. Looking ahead, the company anticipates a decline in EBITDA per ton to between $80 and $90 due to ongoing economic slowdowns both domestically and globally. The expected decline reflects the interconnectedness of their operations with global market conditions, influenced heavily by China's recent trade policy changes and pricing adjustments.

Domestic and Export Market Dynamics

Erdemir's revenue is primarily derived from domestic sales, which accounted for 79% of total sales. This domestic focus mitigated risks as overall steel consumption dipped by 5% compared to last year, primarily due to recovery from a year-ago surge caused by earthquake-related damages. Moreover, exports rebounded, reaching pre-earthquake levels with about 20% of total sales, showing a 90% increase in flat product exports.

Insurance Proceeds Boosting Financial Flexibility

The company has seen an inflow of insurance payments totaling $205 million linked to previous earthquake damages. This financial support enhances their cash flow, aiding in operational adjustments and investment capability, though not reflected in EBITDA calculations.

Addressing Financial Leverage and Future Outlook

Erdemir currently faces a net debt-to-EBITDA ratio of 2.8x, which is expected to hover around 3x by year-end. However, management anticipates returning to a more favorable leverage position of less than 2.5x in 2025. This improvement is predicated on a combination of enhanced operational efficiencies and market adjustments following the implementation of anti-dumping duties on imported steel products.

Commitment to Sustainable Growth

Looking toward the long-term, Erdemir introduced a net-zero roadmap targeting a 25% reduction in carbon emissions by 2030. Their strategy involves investing $3.2 billion towards this vision, with a strong emphasis on sourcing 70-80% of funding externally. This commitment not only advances corporate responsibility but potentially positions Erdemir favorably as global demand for sustainable products increases.

Earnings Call Transcript 2024-Q3

[Operator]

Ladies and gentlemen, thank you for standing by. I'm Constantino, your Chorus Call operator. Welcome, and thank you for joining the Erdemir conference call and live webcast to present and discuss the Third Quarter 2024 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 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.

And now 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, Constantino. Good afternoon, everyone. Welcome to our conference call and webcast of Erdemir for the Third Quarter of 2024. 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. So 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 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. During the first 9 months of the year, we have seen a downward pressure on commodity markets due to concerns that the demand outlook in China, multiple macroeconomic uncertainties and high inventories. However, as of September, the Chinese government's announcement of the stimulus package created an optimistic atmosphere in the market. Coking coal prices were around $324 per ton at the beginning of the year. And on coking coal, which fell as low as $180 per ton in September is currently around $202 per ton. The decline in prices was driven by production decrease in China during the third quarter, coupled with weak demand for coking coal.

The impact of stimulus package announced in China has led to an increased appetite for production and an upward movement was observed in coking coal prices again, due to the increase in demand. Iron ore, which was around $140 per ton at the beginning of the year, fell to $89 in September as Chinese steel producers made long-term production cuts due to heavy margin losses and high inventories. Currently, iron ore is fluctuating between $100 to $105 per ton on the optimism of the announced stimulus measures despite weak demand conditions.

The scrap price, which was around $413 per ton at the beginning of the year is currently at $372. In Europe, which is Turkey's largest scrap supplier, scrap purchases have been lower than usual due to weak and product orders, leading scrap suppliers to lower their prices. The stimulus announcements made by Chinese government did not fully support the global scrap markets. However, marginal decline in scrap prices are not expected due to the decline in scrap supply and seasonality.

On the bottom right, we show HRC prices in Black Sea, China and South Europe. In the third quarter of the year, the lowest price levels in Chinese exports were seen after the pandemic. China has reached the highest export tonnage since 2016 with aggressive pricing amid a decline in domestic consumption and high supply. This situation has disrupted global pricing balances and measures are being taken urgently against China worldwide. Recently, Turkey finalized anti-dumping investigation regarding HRC products originating from China, Russia, Japan and India, and has decided to impose duties.

This result is expected to have a positive impact on first quarter 2025 and beyond. Aside from HRC, anti-dumping investigation around regarding imports of heavy plates and tin plates, are expected to be completed within 2025, which results anticipated to positively impact the Turkish steel sector. In Europe, the current high inventory levels are negatively impacting restocking equities, while weak end user demand is putting pressure on trading activities.

On Page 4, you will see the production, consumption, exports and import figures of Turkish steel markets for the 8 months of 2024. In the 8-month period, Turkish steel production increased by approximately 12% compared to the same period last year, with the rights primarily driven by flat steel production. Similar to production, approximately 75% of the increase in Turkish steel exports stems from flat products. During the 8-month period, Turkish flat steel exports increased by 90% to 4 million tons. On the consumption side, steel consumption decreased by 5% compared to the previous year. The decline in consumption can be attributable to the high base effect of last year earthquake induced surge. In January, August 2024 period, total steel imports decreased by 13%, while flat imports also increased by 17% to 5.5 million tons.

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 first 9 months results. We achieved $4.6 billion revenue, and we generated $572 million EBITDA and $335 million net profit.

On Page 7, you will see the operational indicators of our company. We continued our production during the first 9 months of 2024 with high capacity utilization ratios, achieving a liquid steel production of 6.7 million tons. Our crude steel capacity utilization ratio, which stood at 92% is significantly above both the world and country averages. The results achieved in the first 9 months for sales and production are within our historic leverages. We aim to achieve sales of approximately 8 million tons in 2024.

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 the pipe and profile to general manufacturing and also on a percentage basis. We see a similar situation in the long product. However, the fact that 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.

In the 9-month period, exports account for 20% of our sales. In addition to the low base effect caused by the earthquake last year, the moderate recovery in global trade has contributed to our export tonnage approaching pre-earthquake level.

On Page 9, you can find breakdown of revenue for domestic and export sales. 79% of the revenue comes from domestic sales in line with the domestic volume. The average sales prices for flat and long steel in third quarter declined compared to the previous quarter as the rapid price decline in China were reflected globally. We expect that the prices will be supported by the incentives that support consumption in China, and HRC anti-dumping duties in the coming periods. We generated $99 EBITDA per ton in the first 9 months. In 2024, we expect to see between $80 to $90 per ton due to the slowdown in both world economy and steel sectors. Despite import pressure in the domestic market, we achieved to generate $572 million EBITDA and $335 million net profit in the first 9 months.

On Page 10, you can see how we reach to net profit from EBITDA. One of the largest items was depreciation, which was $191 million in 9 months. The other major item in this chart was financial expenses. Net interest expense was $133 million in 9 months. The majority of this interest expense arises from financing ongoing investments. Tax income was $41 million due to deferred tax income. And after the other expenses, net profit was $335 million. The additional insurance income accrued of $105 million recorded as income in the first half is not included in EBITDA calculation since it is a one-off adjustment. While calculating the net profit, $105 million of the USD 111 million consolidation classification arises from additional insurance income accruals.

As you all remember, after the production holds at Isdemir plant, due to the earthquake in February last year, a total of $205 million advanced payment was collected from the insurance companies last year and this year. It is expected that the final amount will be collected before the year-end. In the graph below, you can see EBITDA to change in cash bridge. Working capital increased due to inventories. Also, we spent around $769 million to capital expenditures in 9 months. This amount also includes advanced payments for the capital expenditures as well. And actually, we'll see the difference between the CapEx split 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 9 months of 2024, our net working capital increased compared to 2023 due to raw material procurement. Our net debt position was $2.1 billion at the end of September. Due to the ongoing capital expenditures, the net debt-to-EBITDA ratio was 2.8x.

Slide 12 represents our cost of sales breakdown. The use of imported semifinished products 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 level in the first 9 months of this year, 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 historical capital expenditures. Total CapEx is $680 million in 9 months. When we add the advanced payments of $89 million to this figure, we reached the investment expenditure of $769 million. We expect that CapEx will reach up to $1 billion again in 2024 with maintenance and other ongoing investments.

On Page 14, just as a reminder, we are very 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 Isdemir by the end of 2030. 70%, 80% of the $3.2 billion investment will be sourced externally utilizing easily accessible financial resources for the green transformation. Erdemir and Isdemir's crude steel capacity will reach 13 million tons by 2030.

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

[Operator]

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

[Jason Fairclough, analyst]

Yes. With 2 fairly simple questions from me. First, in terms of steel production for the year. So you're guiding to about 8 million tons. That does imply quite a big step-up as we come into the fourth quarter. So I just wanted to confirm that you're happy with that number and that you do expect steel production to increase as we come into the fourth quarter.

And then the second one is just on EBITDA per ton. You've given some helpful guidance previously on EBITDA per ton. And given the trading environment, how are you thinking about EBITDA per ton for the rest of the year from here?

[Idil Onay, executive]

Jason, so your first question, yes, we guided 8 million tons sales for the whole year. Actually, we already sold, we can say, almost 6 million tons in 9 months. So 2 million or above 2 million tons is reasonable for our companies, mainly in the last quarter, we fell a little more when you compare with the previous quarter. So yes, I mean, we expect to have 8 million tons at the end of this year as sales. And for your second question, actually, we expect to have $80 to $90 per ton as EBITDA per ton for the whole year. So right now, in the first 9 months, the average of first 9 months is $99 per ton. So there will be decrease for the whole year, and we expect to see between $80 to $90.

[Jason Fairclough, analyst]

Okay. Could you just remind me as well, please, Idil, in terms of the raw materials, how do we think about the lag in terms of when the raw materials flow through the income statement?

[Idil Onay, executive]

Generally, we take it as 4 months, the lag for the raw material. And we still keep it as 4 months. So there will be a little decrease on the raw material costs due to declining raw materials, but also the sales prices kept going down. And also, there will be a little more decline in our sales revenue as well.

[Operator]

The next question comes from the line of Ive Erica with MetLife.

[Erica Ive, analyst]

I got a couple. The first one will be on, you mentioned this insurance proceeds. Can you just clarify, you already received one hundred and then -- what is it here that I can see, just a moment, $129 million, yes.

[Idil Onay, executive]

You mean the insurance advance payments.

[Erica Ive, analyst]

Yes, exactly. Insurance payments related to -- I mean, at least is what I understood related to the earthquake. And then you mentioned that you will receive a further $205 million in the last quarter. Is it correct? Or is the $205 million inclusive of the $129 million.

[Idil Onay, executive]

Okay. So we got 2 advanced payments from the insurance companies, $100 million and $105 million. So the total payment that we got from the insurance companies is $205 million until now. And we also expect to get the final payment from the insurance companies until the end of this year. So most probably, we will finalize the procedure soon, and we will announce the final amount. But right now, it's not certain. That's why we cannot share the last payment. But yes, we expect to get it until the end of this year.

[Erica Ive, analyst]

And can you just mention the range of this payment, the additional payment that you expect to receive?

[Idil Onay, executive]

Unfortunately, it's not possible. The negotiations are still ongoing. So we don't know the exact amount.

[Erica Ive, analyst]

Okay. Understood. And then in terms of leverage, well, I haven't plugged the figures. But I guess that by year-end, you will be above your 2.5x net debt-to-EBITDA. Is it a fair assumption?

[Idil Onay, executive]

Yes, it is a fair assumption. I mean, right now, we have 2.8x as net debt-to-EBITDA and most probably, we will be around 3x when we look at the year-end results, expected.

[Erica Ive, analyst]

Right. Because I remember in one of our conversations, you were saying that you were happy to manage CapEx and basically to bring down EBITDA below 2.5x. So when should we expect this to happen next year? Or do you foresee an EBITDA at this level as long as steel prices remain as low as they are now.

[Idil Onay, executive]

It's a very good question, Erica. The first thing that this situation is temporary. I mean it's not a permanent situation because we have a very high investment expenditures this year. Yes, our debt levels are a little higher than earlier. So yes, our net debt-to-EBITDA is higher than 2.5x. But starting to the first quarter of 2025, there will be some positive developments in the Turkish steel market. The first one is antidumping duties imposed by Turkish government, as I mentioned earlier, for HRC to China, Russia, India and Japan.

So we are expecting a positive effect to the Turkish steel on the price base actually. So this kind of positive developments will have effect on our EBITDA. And that's why we will have less net debt-to-EBITDA multiplier in 2025. So most probably starting from next year, our net debt-to-EBITDA level will go back to the less than 2.5x.

[Erica Ive, analyst]

Understood. And can you just remind me how much CapEx do you intend to spend next year?

[Idil Onay, executive]

We expect a decrease in the CapEx because we will finish most of the ongoing investments. So next year, we expect to have $800 million to $850 million for the whole year at CapEx.

[Operator]

The next question comes from the line of Dhaloomal Ali with Bank of America Merrill Lynch.

[Ali Dhaloomal, analyst]

I have just 2 questions. The first one, in regards of your other VAT receivables. Can you update us on how much is still outstanding there? And my second question is just about your -- I mean your net backs or your EBITDA per ton between the domestic market and the export market, let's say, for the similar products flat or long. I mean can you just give us a sense what is the differential there that you have achieved in the third quarter? And also, can you remind us what was the share of exports back, I mean, prior to the earthquake.

[Idil Onay, executive]

Let me start from your second question. So our export level was very similar to pre-earthquake levels. We were around 20%. We have 20% exports in our total shares. So we are back to the pre-earthquake level as of today. I just missed the question about the EBITDA per ton. Could you please repeat your question?

[Ali Dhaloomal, analyst]

No, I was just wondering the differential that you have between your domestic sales and the exports market at this point of time in terms of pricing, if any?

[Idil Onay, executive]

Well, actually, it depends and it changes a lot. So given the number, I mean I would like -- I do not want to generalize a number because it depends on the prices, of course. Right now, the export part is a little higher when you compare with the domestic prices, but it changes a lot. So yes, we have a little difference between export and domestic sales as EBITDA per ton, but it's changed a lot. So I also would like to answer your first question, you asked value-added tax receivables, right?

[Ali Dhaloomal, analyst]

Exactly, yes.

[Idil Onay, executive]

Yes. So as we shared in the first quarter call, we collected all of the value-added tax receivables of TRY 14 billion and 55% of TRY 14 billion was received in cash and the rest was received as an offset to the tax to be paid. So we collected last year's value-added tax receivables. But at the same time, new value-added tax receivables arise with the sales made. But since the tax to be offset, has not occurred yet, the value-added tax receivables continue at the same level.

[Ali Dhaloomal, analyst]

Understood. So still around $500 million?

[Idil Onay, executive]

Kind of, yes.

[Operator]

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

[Operator]

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