Eregli Demir ve Celik Fabrikalari TAS

IST:EREGL.E

Earnings Call Transcript 2021-Q4

[Operator]

Ladies and gentlemen, thank you for standing by. I am Gerli, your Chorus Call operator. Welcome, and thank you for joining the Erdemir conference call and live webcast to present and discuss the full year 2021 financial results. [Operator Instructions] The conference is being recorded.

[Operator Instructions] Please note, Eregli Demir Çelik Fabrikalari T.A.S., 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 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 result -- 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.

At this time, I would like to turn the conference over to Ms. Idil Önay Ergin, Investor Relations Manager. Ms. Ergin, you may now proceed.

[Idil Onay, executive]

Thank you very much, Gerli. Good afternoon, everyone. Welcome to our conference call and webcast of Erdemir and its subsidiaries for 2021.

Today, our CFO, Mr. Serdar 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, Mr. Serdar Basoglu. The line is yours.

[Mustafa Basoglu, executive]

Thank you, Idil. Good afternoon, everyone. Thank you for joining us today. Welcome to our 2021 results conference call. As Idil mentioned, we will share the details of our fourth quarter performance by the presentation. But before starting our presentation, I would like to highlight the developments in 2021 and market expectations for 2022.

2021 was an exceptional year for all steel makers in the world. We witnessed extraordinary price release and drops in all commodities. Steel was one of the sectors that recovered the fastest after COVID-19 in 2022 -- sorry, in 2020. The strong demand for steel and the high sales prices are the main factors of the successful results in global steel sector.

At this point, our company made history with its outstanding results. Achieving these remarkable results was the consequence of both market indicators and successful management.

I want to say I am also personally very proud to be a part of the team that achieved these successful results. As you remember, in the last quarter's conference call, we have announced that EBITDA margin of the third quarter was the highest margin in the company history. Today, we are very delighted to publish another successful quarter with 39.7% EBITDA margin and set a new record in the company history with USD 931 million EBITDA.

Certainly, our successful results are not limited only with the EBITDA margin. Our sales revenue increased by 68%, and our net profit was more than 3x in 2021 compared to previous year. As a result of these positive financial figures, we are pleased to be the most valuable company in Borsa Istanbul at the end of 2021.

When we look at the developments in the commodity prices, as I mentioned in our third quarter call, due to our long position in coal, we were not affected by high coal prices in our 2021 balance sheet. On the other hand, it will affect our costs from the first quarter of 2022, but that's the importance. We anticipate that we will balance these cost increases with the decreasing iron ore prices in the last quarter of 2021 and the sales prices exceeding the yearly averages.

So we expect the year 2022 to normalize after a peak year 2021. However, in light of the data we have so far, I would like to mention that we have started a better year than we expected. We couldn't reach to the level we targeted in CapEx at the end of 2021 due to COVID-19 and, as all of you know, globally supply chain problems.

On the other hand, I would like to add that our CapEx will accelerate in 2022 to the level of nearly USD 600 million. And I want to say in estimate the coke investment is expected to be commissioned in the second quarter and the blast furnace is run in the last quarter of 2022.

And so I will be with you at the end of the presentation, so now I would like to hand over the mic to our IR Director, Idil.

[Idil Onay, executive]

Thank you, Mr. Basoglu. 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 market overview.

In Page 5, you will find crude steel production figures in Eurozone, China and CIS region. Global crude steel production increased by 3.8% in 2021 compared to the previous year, while production in China decreased by 3% compared to 2020.

The European Union produced 153 million tons of crude steel in 2021, up by 15% compared to the last year. China's crude steel production, as you may see on the upper right-hand side, which started in 2021 with strong levels then lost its growth rate after April due to the production restrictions in China. And finally, CIS region produced around 106 million tons of crude steel during this period, and it indicates around 6% increase.

I will explain the latest figures in Turkish steel market in the following slides. So let's continue with the raw material markets. In Page 6, you will see the prices of steel-related commodities. Let's take a look at coking coal, iron ore and scrap prices. Last year was a volatile one in global commodity markets, starting the year with USD 104 per ton. Coking coal has nearly quadrupled to $409 per ton at the end of September. The coking coal, which is currently around $440 per ton, is not expected to decline in the short term due to the flat season and cold cases in Australia.

Iron ore was another commodity with a lot of ups and downs although not as much as coking coal. Iron ore, which peaked at $233 per ton in May, hit its lowest level at $87 per ton in mid-November as China pledged to reduce its steel output. In November Fitch said that the iron ore price rally was over, but iron ore has risen about 70% since then.

On both the coking coal and iron ore side, China's return after the Lunar New Year and Beijing Winter Olympics and the decision whether China will increase its production will have a serious impact on commodity prices.

Scrap reached its highest level in 11 years since April 2010 with $516 per ton at the end of April 2021. At the same time, record levels were seen in scrap imports in Turkey. Due to the green transformation, there is a high demand for scrap in the world. A decrease in prices is not expected in the short term due to the harsh winter and strong domestic market demand in the U.S.A., which is one of the largest scrap exporters.

On Page 7, you will see the production and consumption figures of Turkish steel market in 2021. Since the end of second quarter of 2020, with the reduction of negative effects of COVID-19, both production and consumption have increased. While steel production increased around 12%, steel consumption increased around 13%.

On Page 8, exports and imports data are presented. Turkish steel exports accelerated especially in the second half of the year with the effect of the increase in global demand after the pandemic. Turkish steel exports increased by 20% in terms of quantity and increased by 94% in terms of value in 2021 compared to the previous year. Although steel production reached high levels, record amounts were also realized in flat product imports in 2021. The high share of imports in steel consumption, approximately 45%, will continue to be one of the most critical issues for our country's steel industry.

So let's take a look at the financial results and the operational metrics. On Page 10, you will see the brief summary of our 12 months results. In 2021, we produced 9.2 million tons of liquid steel, which is higher than -- 6% higher than the last year. During this period, long production declined around 135,000 tons, while flat production increased around 250,000 tons. We sold around 8.2 million tons, which was in line with our expectation.

Our revenue is just about $7.7 billion, which is around 68% higher than 2020. Also, we generated $3 billion EBITDA and $1.7 million net profit after tax, which are the new historical high levels. I will explain the details of P&L later in the following slides.

On Page 11, you will see the liquid steel production volumes, and I just will skip this slide quickly and continue with the next slide, which is about the capacity utilization ratio for our group.

Our capacity utilization ratio was realized at 94% in 2021. This ratio was 89% in last year. As you all know, this ratio is far better than the world's average, and this is one of the key strengths of our company.

On the next page, you can see our finished goods production volumes. There is 114,000 ton increase in 12 months year-over-year, which comes mainly from the flat steel. As you know, depending on demand, we can easily shift our production between flat and long steel.

On Page 14 and 15, you will see the comparison of sales volumes and revenue. Our sales volume was around 8.2 million tons this year. It increased by 4% quarter-on-quarter. So basically, it goes flat by quarters.

On Page 15, you can find breakdown of revenue for domestic and export sales. 78% of revenue comes from domestic sales, in line with the domestic volume, which we will discuss in the next page. Our sales revenue increased by almost 80% year-over-year in Q4 2021 driven by the high sales prices.

So let's take a look at the segmental breakdown of domestic sales in Page 16 and export volumes in Page 17. As you can see from the pie chart, there has been a change between sectors due to the effect of market and demand conditions when we compare it to last year's breakdown. There has been a transition from the pipe and profile and rolling industry, which mainly uses HRC, to industries that use value-added products and have higher profitability margins. Sales to rebar and profile producers were relatively low due to the weaker construction sector in Turkey in 2021.

Export volume in Q4 was the highest quarter in 2021, as you can see in Page 17. This is mainly because of the attractive prices in the foreign market.

On Page 18, you will see the historical figures for EBITDA and net profit. The fourth quarter EBITDA value of USD 931 million exceeded the last quarter, creating a new historical peak. Annual EBITDA was $3 billion, increasing more than 3x last year. An EBITDA margin of 39.4% in 2021 created a peak level. It is far better than the steel sector's average. Although the profit in Q4 decreased slightly due to the high deferred tax related to the exchange rate and net profit of $1.7 billion which was achieved in 2021 with an increase of 3.7x the previous year.

On Page 19, you can see how we reached to net profit from EBITDA. The largest item was the tax expenses, which was $881 million in 2021. Only $694 million of this value is cash payment, and the rest of it is accrual. Due to the Turkish lira depreciation, we have recognized additional foreign exchange loss on the deferred taxation, which is $427 million in 12 months. The other major items in this chart were finance expense of $107 million and depreciation of $227 million. After other expenses and noncontrolling interests, we reached to $1.7 billion net profit.

On Page 20, you can see EBITDA to change in cash bridge. Change in working capital is a result of higher inventory, which is around $796 million. The reason of the increase in inventories is the rise in commodity prices. Also, we spent around $450 million to capital expenditures in 2021. This amount also includes advances paid for capital expenditures as well and that you will see the difference between the CapEx page in 27 and this one. After the dividend payment of $907 million and the acquisition of $294 million, 12 months change in cash level was $107 million.

On Page 21, you can see the EBITDA per ton trend. Another indicator that broke a new record in terms of both quarterly and annual value was EBITDA per ton. EBITDA per ton for 12 months was USD 356 per ton. In the fourth quarter, consolidated EBITDA per ton reached $418 per ton, which is the best quarter in terms of EBITDA per ton in company history.

Let's take a look at the balance sheet on Slide 22. We explained the change in working capital and cash before. As I mentioned earlier, after the dividend payment of $907 million and the acquisition of $294 million, cash amount decreased by 6%. There was around 14% increase in fixed assets due to the Kümas acquisition and investment expenses. Also, there is an increase, both in inventories and trade receivables and payables, due to the price increases in steel and raw materials. Other than these items, there is no significant change in our balance sheet position.

On Pages 23 and 24, you will see historical trend of financial borrowings and net cash. Our net cash position will decrease after dividend payment in 2022, and it will increase again with EBITDA generation.

So the next page just shows how we reach to this net cash level since December 2020. Our net cash position was $984 million at the end of 2020. After the dividend payment of $907 million and the acquisition of $294 million, net cash level was $518 million due to the EBITDA generation.

Slide 25 represents the maturity profile of borrowings. As you can see, most of our short-term loans are revolving trade financing facilities, mainly related to the export and import activities.

Slide 26 represents our cost of sales breakdown. There is no significant change in our cost breakdown. However, the composition of iron ore and coking coal in raw material costs has changed, and the percentage of iron ore cost increased in raw material basket, which is in line with the trends in raw material markets.

Page 27 represents the historical CapEx spending. Total CapEx spending, excluding advance payments, is $434 million in 2021. Our ongoing projects, such as new blast furnaces, are on progress, and there is no cancellation from the announced investments. Our capital expenditures will accelerate in the coming quarters.

As the last thing, there is an increase in the number of employees due to the addition of our new subsidiary, Kümas employees.

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

[Operator]

[Operator Instructions] The first question is from the line of Shaw, Dan with Morgan Stanley.

[Dan Shaw, analyst]

Dan Shaw from Morgan Stanley. First one, please, can you just confirm your CapEx guidance for 2022 in U.S. dollars, please? And has that changed much from your previous budget given sort of the inflationary pressures that we're seeing?

[Idil Onay, executive]

Well, as Mr. Basoglu mentioned and also in our third quarter call, we mentioned that we may assume this figure will reach up to $550 million to $600 million, but it's included maintenance and other ongoing investments. So you can take this number for the whole year for 2022. And also, you can assume that this level will be almost the same for the next year, like 2023.

[Dan Shaw, analyst]

Okay. Very clear. And then secondly, when can we expect to hear on the dividend for 2021?

[Idil Onay, executive]

Well, we haven't kept the decision of Board of Directors. But most probably, before the end of this month you will hear us about the dividend payment.

[Dan Shaw, analyst]

Okay. And then just last one, a quick clarification. So on the working capital, this is essentially correlated to iron ore and coking coal prices. So if we see those come down, then we'll see a working capital release, but that's kind of out of your hands. Do I understand that correctly?

[Idil Onay, executive]

So the net working capital will decrease slightly in the first quarter, if this is your question.

[Dan Shaw, analyst]

Yes. I was just -- so I think in your comments, you said that the vast majority was related to inventory, which I guess would be -- are you talking about raw materials there? So the price of iron ore and coking coal obviously elevated versus where we've been in recent years. So if the prices of those quantities come down, then we'll see a -- we'll expect to see a working capital release. So just clarifying that, that was what you were meaning by your comments.

[Idil Onay, executive]

Yes, yes.

[Operator]

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

[Unknown Analyst]

Looking at Iskenderun Demir ve Çelik's financials, the EBITDA per ton over there is actually substantially lower compared to consolidated Eregli at around $300 per ton. So given that we know a vast majority of an important part of Iskenderun sales is slab to Eregli, does this low figure has something to do with slab pricing to the Erdemir -- Eregli plant? And is this something temporary for the quarter? Because also, on the financial items, the FX losses are substantial on Iskenderun part. Maybe this has to do with the interim dividend payment in December and subsequent lira depreciation. So can you elaborate on the poor performance of Iskenderun statistically and if it's going to be lasting -- if it's a one-off or it's sustaining, I mean, the EBITDA per ton level for the coming quarters?

[Idil Onay, executive]

So your comment is correct, actually. There are 2 reasons why Iskenderun's profitability declined. The first one is what you explained, the pricing of slab which was lower in the fourth quarter. I mean, when I said slab, it's mainly slab transferred from Iskenderun to Eregli. So it affected Iskenderun's profitability due to the pricing issue, low price, actually.

And the second one for the profitability decline was the foreign exchange losses. The functional currency of the company is U.S. dollar and TL depreciated 50% in the last quarter, so foreign exchange losses are recorded.

And the main reason for the company's high TL-based cash assets is that the -- with the depreciation of Turkish lira, customer make payments in TL, and the company keeps TL for profit distribution. So overall, these are the reasons why Iskenderun profits declined in the last quarter.

[Unknown Analyst]

So you accumulated TL in the quarter because of the sales, and you did not convert them to U.S. dollars in anticipation for the dividend distribution, right?

[Idil Onay, executive]

Exactly, exactly.

[Mustafa Basoglu, executive]

And also for tax payments, for tax payments.

[Unknown Analyst]

And when I look at the consolidated Eregli financials, I see around $900 million gross Eregli cash in U.S.-based terms, EUR 100 million and TRY 10 billion. This is normally -- historically speaking, this is not the type of composition we are accustomed to see for Eregli's cash position. Normally, the Turkish lira position is much less.

So moving forward, should we expect such a split, Turkish lira-U.S. dollar or foreign currency composition?

[Mustafa Basoglu, executive]

No. Actually, the reason is the same with Isdemir. The reason is the company's high TL-based cash assets is that because with the depreciation of TL, our customer makes, in Eregli also, also payments in TL. And we keep TL for also profit distribution and also high tax payments, so we didn't change our cash management policy.

[Unknown Analyst]

Because your tax amount is comparatively higher compared to last year, you did not want to use Turkish lira for the land bank term to Turkish lira.

[Mustafa Basoglu, executive]

Yes. That's true. We have a high recourse profit, so we will pay high tax.

[Operator]

The next question comes from the line of Jones, Andrew with UBS.

[Andrew Jones, analyst]

I was just hoping you could talk us through some of the dynamics going into 1Q. I mean, the fact that the steel market in Turkey has been falling -- or was falling for -- throughout the second half of the year suggests that prices should obviously be down. Can you give us some idea what sort of pricing decline we should be looking at?

And also, I guess one of the reasons for your rising price trend in the last quarter was because of a longer unusual order book. Can you give us an idea for how long your order book is now compared to your previous levels of more like 2 months?

And just on the cost side, what sort of cost pressure are you expecting to see on a per-ton basis? And what does that mean with the progression in EBITDA per ton into 1Q? And can you also guide on shipments as well, if that's possible?

[Idil Onay, executive]

Andy, so I'll try to answer all your questions in one time. So in 2022, demand is strong, going strong, and we are working with full order book. We already closed the first quarter. Our order book is still full for 2 months, which is normal level. As Mr. Basoglu mentioned at the beginning of the call, we were not affected by high coal prices in our 2021 balance sheet. On the other hand, it will affect our costs from the first quarter of 2022.

And also, yes, increasing energy prices will also affect the 2022 costs, but we anticipate that we will balance these cost increases with the decreasing iron ore prices in the last quarter of 2021 and the sales prices exceeding the yearly averages. So we do not expect iron ore and coal to decline in the short term.

But while HRC Turkey spot prices are still about USD 900 a ton, we just need to remember that these levels are far about our usual $500, $600 per ton levels for years. On the other hand, we do not foresee a decrease in the steel demand in the short term.

So in line with the domestic demand, our domestic sales are going in line with the expectations. So we also expect to see a strong demand in 2022. And also, the sales volumes most probably will be in line with the last year.

[Andrew Jones, analyst]

Okay. But just to push, I mean, it sounds like you -- you're talking about iron ore going down, coal going up, energy costs going up. Like net-net, what sort of cost per ton sort of difference do you expect to see between 4Q and 1Q?

And likewise, on pricing, how much -- given the order book visibility you have, having filled up the first quarter already, how much do you see your pricing coming down by that time?

[Idil Onay, executive]

Well, actually, we can see like, as I mentioned, like 2 months, order book is full. And we closed the first quarter. As you said, yes, decreasing iron ore prices. Also, there is a kind of balance with increasing coking coal prices, but I think the energy price increase will be highly affected starting from the 1st of January.

But this is a situation not only in Turkey but generally in the world. Obviously, energy crisis is the issue for the whole world. So yes, it will be visible in our balance sheet as well.

[Mustafa Basoglu, executive]

But also, I want to mention as an integrated steel producer, we have an advantage at this point at energy point. What I mean because we use also our internal gases, which are the output from our process. So we can balance our energy needs. So we think that we will not be affected like other producers. So we are waiting -- and I can say, still, the basket of raw material prices and also steel prices is at our side. It's enjoyable for us.

[Andrew Jones, analyst]

Okay. Look, I understood, but I appreciate a bit of a numerical guidance, if possible. But if not, no worries.

[Idil Onay, executive]

You mean guidance for the pricing?

[Andrew Jones, analyst]

I mean given you should know what the pricing looks like for 1Q now, like how much is it going down by per ton -- dollars per ton? What's the reduction, and what's the likely cost increase?

[Idil Onay, executive]

I am very sorry, but I mean, we don't share the details, of course. You know that for years. Unfortunately, it's not possible to share it now.

[Operator]

The next question is from the line of Nefedov, Alexander with Renaissance Capital.

[Alexander Nefedov, analyst]

I got a question about dividends. You've mentioned that you are going to make the decision by the end of this month, but I'm interested in what would the company look at considering the payout of dividends. Would it be -- on the income or whatever. Or should we expect the dividend payout in line with historical average?

[Idil Onay, executive]

Alexander, I really couldn't hear your question. Is it possible to repeat it? Very sorry, there's a problem with the line.

[Alexander Nefedov, analyst]

Yes. Could you shed some light on the dividend policy? I mean, what would the company look at considering the dividend decisions? Would it be paid out from net income or free cash flow or in line with historical average payouts?

[Idil Onay, executive]

Okay. Well, actually, the dividend payment policy is exactly the same, just -- I'm going to find the details. Okay. So yes. The dividend distribution policy continues as always. Just as a reminder, according to our dividend policy, we may distribute all of our retained earnings within the provision of forecasted free cash flow generation by considering financial leverage ratios, investments and financing needs.

So this is what is said in our dividend policy, so it continues as always. So most probably, I mean, the payout ratio will be similar. This is what we guess, but there is no Board decision on the subject yet. So as I mentioned at the beginning, most probably, you're going to hear from us before the end of this month about the dividend payment and also the dividend payments date.

[Alexander Nefedov, analyst]

Yes. And could you please repeat the capital guidance? I hear that the figure is about $500 million, including maintenance and ongoing investments. Am I right?

[Idil Onay, executive]

Yes. It's going to be close to the $600 million level. And also, you can take the same number for next year as well. So $600 million included maintenance and ongoing investments.

[Operator]

The next question is from the line of Dmitriev, Ilia with Goldman Sachs.

[Ilia Dmitriev, analyst]

During 2021, we absorbed strong net working capital buildup. So if we assume a broadly stable macro in 2022, do you see net working capital reach potential this year?

[Mustafa Basoglu, executive]

Actually, it all depends on the raw material prices and steel prices also. There's maturity mismatch in our balance sheet. We sell products and pay raw materials mainly in cash. So if -- when the steel prices and raw materials are an increasing trend, we can also -- we will require additional cash, and our working capital increases.

On the reverse side, we can say there's going to be a release from the working capital. Yes, actually -- and also, we are waiting for Q1 some releasing from the working capital.

[Operator]

In the interest of time, ladies and gentlemen, I will now turn the conference over to Mr. Basoglu for any closing comments.

[Mustafa Basoglu, executive]

Thank you. Thank you for joining us today and for your patience. I wish you all healthy days. Hope to see you on the first quarter call. Have a nice day.

[Idil Onay, executive]

Thank you very much. Have a nice day.

[Operator]

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