Eregli Demir ve Celik Fabrikalari TAS

IST:EREGL.E

Earnings Call Transcript 2017-Q4

[Operator]

Ladies and gentlemen, welcome to Erdemir Group 2017 Fourth Quarter Financial Results Conference Call. Eregli Demir Çelik Fabrikalari 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 of time.

I will now hand you over to Mr. Emrah Silav, CFO, who will take you through the presentation. Mr. Emrah, please go ahead.

[Emrah SIlav, executive]

Okay, thank you. Welcome to our presentation.

I would like to proceed if everybody can hear me well? Okay.

We will start with 2017 market overview. Actually, we would like to start with the steel production including Europe, China and Eastern Europe and relatively closer countries to Turkey. So when we look at EU 28, we see the accrued steel production is increasing related to GDP growth in Euro area and also, relatively better PMI values. And also, for China, the crude steel production is in the [indiscernible] area in 2017, but relatively decreasing because of some of the cautions that China government took over air pollution and related issues. And we see relatively volatile production series in Ukraine and related countries because of geopolitical and other issues.

When we look at the pricing, when we go to Slide 6, these are the main ingredients for our production. When we look at the coking coal prices after the hurricane in Australia, we see the coking coal is quite volatile and after seeing over $300, now it's close to $220.

Iron ore prices are relatively less volatile, but still waving through $90 and $70. Also, the scrap prices are increasing due the demands from China, and also, arc furnace producer companies.

When we look at Slide 7, we see Turkish steel production in 2017 compared to the other years. When we compare it to 2016, we see a 6% increase, reaching 39.2 million tonnes in production. And construction also increased 6%, reaching 36.1 million tonnes.

Also, when we look at the Turkish iron and steel product exports, we see an increase as 8%, as it increased from 13.4 million tonnes to 14.4 million tonnes in 2017. We see a decrease -- on the other side, we see a decrease in volume of tonnes reaching 15.3 millions of tonnes by the end of 2017. And we can also see the byproducts long steel, semi-finished flat and slap in Slide 8.

So I would like to now proceed with the key figures from OYAK Mining and Metallurgy Group, including [indiscernible] and also [indiscernible]. Here are the results compared -- 2017 results compared to 2016 and '15. So when we look at the liquid steel production, we reached nearly 9.4 million tonnes. The flat steel production is at 7.7 million tonnes, and long steel is 1.3 million tonnes.

When we look at the shipments, we see nearly 7.6 million tonnes of flat steel, and 1.3 million tonnes of long steel. So also this year, the revenue reached a record high of $5.1 billion, and our EBITDA is close to $1.5 billion. Also net profit for the year is over $1 billion, which is $1,030,000,000.

When we go through the liquid steel production of our group companies, we see, in 2017, it's close to 9.4 million tonnes in terms of liquid steel production. And on the left-hand side, we see quarter-by-quarter production, which is evenly broken into the quarters as we can see.

Okay. And the next slide, in Slide 12, we see the crude steel capacity utilization ratio. We are -- we see that the world capacity utilization is around 72%. And in Turkey, it's a little bit higher, but when we look at the Erdemir capacity utilization rate, we are close to 97% of our capacity.

The next slide, Slide 13, we look at the production volumes. Now -- by the end of 2017, we broke to 2 million tonnes, 9 million tonnes level and produced 9,041,000 tonnes by the end of 2017, which means a 5% increase with respect to 2016.

When we look at the sales volumes, you can see in Slide 14, we look at the hot, cold and long products, we see a 2% increase, which is very close to 9 million tonnes in 2017. And the hot product is one of the most produced by our production facilities, followed by cold and long products.

It's been mentioned before in previous slides, this net sales revenue is quite high with respect to 2016. We reached $5.1 billion net revenue, which is a 33% increase compared to 2016. And also here, we see domestic market increases quite well as well as the export market.

In Slide 16, we see the flat steel and long steel sales breakdown. As you might all know, the price and profile rolling industry is one of the largest portion that takes from our sales breakdown. It is followed by the general manufacturing and also the distribution chains, and also the automotive industry takes 11%. When we compare this breakdown to 2016, for the flat steel, we don't see a change in terms of the breakdown. And the long steel is a little bit different, given the industrial effects and also the manufacturing industry and also the profile and rebar industry.

It's been mentioned in the previous slides, we see an increase in the exports last year, in 2017, with respect to 2016, and much of this is coming from EU. As we mentioned in the first slide, the growth and relatively better PMI values from EU countries are supporting our exports to this area.

When we look at Slide 18, it gives us information about the net profit compared year-by-year and quarter-by-quarter. The upper side gives the EBITDA and also the EBITDA margin. The EBITDA is very close to $1.5 billion with a margin of 29.2% in dollar terms. And the lower part gives information about the net profit, which is above $1 billion, and the margin, net profit margin is 20.1%.

So here in Slide 19, we see a bridge between our consolidated EBITDA to net profit. When we take the 2017 consolidated EBITDA as $1.5 billion and deduct the depreciation of $197, also include the $26 million of interest income from sales and discounts, we reach an operating income of $1.3 billion. So including financial income and deducting the tax and also noncontrolling interest, we reach the $1.30 million of net profit.

Here is another bridge in Slide 20. Given the bridge between the consolidated EBITDA and consolidated net cash. So when we, again, start with $1.5 billion deduct the change in the working capital and taxes paid, which is $220 million and also net cash using investing, which is $206 million, we reach the free cash flow. When we also go through the dividend payment which is $401 million paid in April 7, 2017, and adjust for the other changes, we reach a $562 million of change in net cash. So this is a very closely followed figure, both by our analysts and by ourselves. So this gives us information about the EBITDA per tonne given by quarter-by-quarter. As you may see here, we reached the highest EBITDA per tonne in the first quarter and in the final quarter of 2017, which is close to $180.

So in Slide 22, we go through the consolidated net assets. When we take the cash and cash equivalents in 2017, which is close to $1.8 billion, and add the working capital, which is $1.7 billion and tangible and intangible assets for $3.5 billion and deduct the financial liabilities, which is close to $1.2 billion in 2017 and provisions for $866 million, we reach the net assets of $598 million by the end of 2017. And when we look at the working capital, we had trade receivables and inventories of $1.3 billion. And when you deduct the trade payables and others, we reached the working capital level of $1.7 billion.

So historically, as you may all know, the dividend payment and the payout ratio is quite high. Even given the dividend payments, the debt is decreasing and by the end of 2017, we don't see a net debt, actually. We -- on the opposite side, we see a plus of net cash accumulation by the end of 2017. And this is a very informative graph, because starting from 2016, this graph gives you an idea about the cash generation capacity of the group.

So in Slide 24, this is a graph of generating the net debt. But as I mentioned before, this is a plus, actually. So we start with a net debt of $190 million and a free cash flow of $897 million, excluding the dividends, we reach a $675 million of plus by the end of 2017. And also, when we will look at the maturity structure profile of the debt, we can start with the net cash position, which is close to $1.8 billion, which is given on the left-hand side with the red bar. And by 2018, this is giving the maturity, but most of our debt is accumulated in 2018. But we are highly utilizing Eximbank ECA credits, Turkish ECA credits, which are less than 1-year maturities. So these are revolving credits, that's why we see an accumulation here, but this would be revolving in the future as we increase our exports.

So the next slide, in Slide 26, we see the cost of sales breakdown. And the -- on the upper side and the lower side, we see the raw materials' breakdown. So when we look at the cost of sales in 2017, we see 73% of our cost comes from our raw materials. And when we look some for raw materials' breakdown for 2017, we see 33% is coming from iron ore; and 35% is coming from coal; and 12% is coming from scrap; and 24% from the others. And when we look to the cost of sales breakdown upwards again, we see that 11% is our personal expenses and 5% comes from the energy expenses.

So Slide 27 gives the capital expenditures, which was about $208 million by the end of 2017.

The next slide, Slide 28, gives a consolidated number of employees, which is around 11,975 employees by the end of 2017.

And I think that's it. We would like to proceed with the Q&A session, if you have any questions.

[Operator]

[Operator Instructions] Our first question comes from [ Kore Amir], [indiscernible].

[Unknown Analyst]

A couple of questions, if I may. First of all, any -- probably no color on your full year guidance. But any color on your first quarter performance. Should we expect an EBITDA per tonne similar to the level that we have observed in the fourth quarter? Maybe not as strong, but can it be close to that level? Secondly, can you provide any color about the potential investment plans? About the timing, about the scale? Or whether they will be undertaken any time soon? Or is it more of a long-term issue? And finally, regarding potential imports tariffs by U.S., do you anticipate any significant change in the regional prices that might indirectly impact your margins?

[Avni Sonmezyildiz, executive]

Kore, this is Avni. For the -- we don't want to give annual guidance at the end of year. So we generally wait for the first quarter for the guidance. And most probably, we will be announcing a guidance when we're announcing the first quarter results. But just give you a hint about the first quarter estimations. The costs are on a rising trend, but there has been an increase on the sales prices also. And considering all of our factors, we expect a similar trend on the first quarter. But as you already know, we haven't saw the second quarter yet. So we don't -- we have limited idea about the second quarter. But as I mentioned, we will give you a guidance at the end of first quarter for the full year. For your second question.

[Emrah SIlav, executive]

For the potential investments, actually, as we went through the slides, we see the capacity utilization rate is very close to 97%, which is like a 100% capacity utilization at this time. We go to different opportunities and detailed analysis. We would like to announce it when we come to an idea about making the capacity increases when it's approved by Board of Directors. So we cannot share too much about this at this point of time. But we will see in the future given this market share, given our market share and our capacity utilization rate. So we would like to have the market share that we have. Right now, we don't want to lose any market share in the future. So these will combine -- these will be combined in a strategic investment decision, because you know the -- we have to go through the cash flow. And [indiscernible] will come back with a solution to our capacity and other utilization issues. For the last question, import tariffs by U.S., actually we don't see a major impact from that side. We -- European growth is more important for us as you have already seen from the presentation. Most of our exports are going to Europe and the developing Europe markets would be beneficial for us in 2018.

[Operator]

Andrew Jones, Wood & Co.

[Andrew Jones, analyst]

Just a few questions from me. Given the amount of cash generation and the current strong position of the balance sheet, is there some potential for you to increase your dividend payout relative to, I mean, typically you tend to give out 90% or so of earnings. Given your strong balance sheet position, could you potentially increase that? That's my first question. My second question is on just clarifying what you just said on to the last question. Did you -- were you suggesting that EBITDA per tonne should be broadly flat quarter-on-quarter in the first quarter? And what's your expectation versus volumes in 1Q? And thirdly on CapEx, I know you don't want to give us any solid guidance for the full year, but you can give us an idea as to your expected spending in 2018 on CapEx?

[Avni Sonmezyildiz, executive]

Andrew, thanks for your questions. For the dividend payments actually, we don't have distributable reserves in our main company. It is already disclosed in the financial statements under shareholders' equity. So we only have around 180 million Turkish lira in addition to the net -- net profit for the year. So actually, there is very limited room for additional dividend distribution. This was your first question. And for your second question. Historically, Q1 is the weakest quarter for us for volume. This is because of the seasonality. The winter season and after the year ends, customers prefer to wait for the second half of the year. So historically, it has been the lowest volume and you might expect same trend in first quarter as well. For -- but for EBITDA per tonne, we cannot disclose a number. But if you make a calculation based on the sales volumes -- sales prices and the effect of the commodity prices, raw material prices, including the inventory effect, so you will find that -- you might find a similar trend with the last quarter of 2017. And for your third question, not, as we mentioned, we are working on that investment plan, so there is no certain answer for the 2018 CapEx plan. But if we don't do anything, we already spent around annual depreciation, which is around $200 million. So if -- even if there is no new additional investment, we will spend around at least $200 million.

[Operator]

Our next question comes from [ Moharram ] [indiscernible] from [indiscernible].

[Unknown Analyst]

I have a few questions, if I may. First of all, what was the PCI usage in the fourth quarter and in the entire 2017? And do you have similar plans on the production in '18 as well on PCI usage? The second one will be on the Air separation unit. I suppose it commenced operation at the end of 2017. So what will be the impact on the overall profitability for '18? And the galvanized mill should also commence operations in '18, if I'm not mistaken. So what would be the combined effect on the profitability? And for the last of all, what should -- should we expect any major maintenance in any of the facilities?

[Unknown Executive]

[ Moharram ], for your first question, I don't have the exact figures right now with me, but I can tell you that there is no change in our PCI usage between the quarters, so it's the same. We can give you an information after the meeting. We have to take a look at the cost figures. So I don't -- to be honest, I don't have that data with me as we have been in another place right now and not in the office. So for your second question, Linde Gas, the gas operation facility will be in operation in 2018. We have already started the tests at the end of 2017, but the effect of the gas usage won't be that much, because it's just a very small part of our business. The main profitability and the cost efficiency comes from other factors such as raw materials usage and the conversion costs. So its effect will be immaterial for a year. And for Galvanizing Line, we hope to finish after the second half of 2018, but considering the ramp-up of the new line, most probably you won't be able to see any effect on the profitability side in 2018. And your third question was about the major maintenance. Right now, there's no plan to [indiscernible] or big major maintenance in 2018. So next couple of years, there won't be any significant [indiscernible] -- ordinary planned [indiscernible] activity.

[Operator]

[Operator Instructions] We have no further questions. Dear speakers, back to you for the conclusion.

[Emrah SIlav, executive]

Thank you so much for participating for our 2017 results. We will hope to talk to you soon again about next quarter, and talk to you soon.

[Unknown Executive]

Bye.

[Operator]

This concludes today's conference call. Thank you for your participation. You may now disconnect.