Eregli Demir ve Çelik Fabrikalari T.A.S. (EREGL) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by. I am Mina, your Chorus Call operator. Welcome, and thank you for joining the Erdemir conference call and live webcast to present and discuss the 12-month 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 throughout 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 recover 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 Mrs. Idil Önay Ergin, Investor Relations Director. Mrs. Ergin, you may now proceed.

Thank you very much, Mina. Good afternoon, everyone. Welcome to our conference call and webcast of Erdemir for the last 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 I will start with Slide 3. Our presentation consists two 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. The prices of key raw materials used in steel production, such as iron ore and coking coal, have fluctuated throughout 2024, but remained relatively stable. However, finished steel product prices have declined much faster than expected due to weakening global demand, oversupply and economic uncertainties. This situation has severely squeezed profit margins for producers, intensifying competition within the sector. Coking coal prices ranged between $185 and $210 per ton in the fourth quarter of 2024. Since the end of December, coal prices have been hanging below the $200 per ton band. There was a slow recovery in steel production outside of China. and this lower-than-expected rebound in non-China steelmaking directly affected the demand for coking coal, putting downward pressure on prices. As 2025 begins, tariffs have put pressure on coking coal prices, unless there is a major Chinese stimulus, coking coal prices are expected to remain below $200 level in the first half of the year. Iron ore prices in 2024 remained more stable than expected despite some supply disruptions and weak demand expectations. The primary reasons for iron ore prices remaining high in 2024 include strong demand due to China's high steel production, geopolitical risks, logistical challenges and the strengthening U.S. dollar. As a result of these factors, iron ore prices have remained close to the high levels seen in 2023. Looking ahead, the market remains cautiously optimistic with the pace of demand recovery and inventory adjustments likely to dictate price movements in the coming weeks. Throughout 2024, scrap supply remained at low levels and cost of supply stayed relatively high, which made it difficult for European scrap sellers to offer attractive prices. In December, prices fell to $335, reaching the lowest point seen in the last 2 years. The year ended with scrap prices at $346, and currently, scrap prices supported due to supply shortage caused by seasonal conditions. On the bottom right, we show HRC prices in Black Sea, China and South Europe. The consumption and macroeconomic indicators being followed in China continue to show no signs of development. In the coming period, the extent of recovery in domestic demand in China, the direction of global trade and China's external strategy will be determining factors for the steel sector. In the European local hot-rolled steel market, prices remained stable in the last quarter due to cautious optimism in the market despite producers aiming for price increases. On the other hand, high energy costs continue to squeeze profit margins for European steel producers. The market is expected to become more dynamic in the second quarter of 2025. Potentially trade restrictions could boost domestic demand, while post economical signals could further drive prices up. On Page 4, you will see the production, consumption, imports and export figures of Turkish steel market for 2024. 2024 has shaped the sector as a year in which the effects of tight monetary policies have been distinctly felt. Asian producers have increased their presence in imports and competition issues have become more apparent. In 2024, Turkish steel flat production reached a historical level of 16.7 million tons. Investments in the sector and modernization efforts have played a crucial role in this growth. Turkish flat steel consumption slightly declined from the peak level of 2023, yet it still managed to remain above the average of previous years with a consumption of 19 million tons in 2024. 2024 has been a year of significant gains, not only in production and consumption, but also in exports with an annual flat steel export volume of 5.8 million tons, Turkey has regained its previous performance. The growing potential in Europe, the Middle East and North Africa has supported exports. The export, import coverage ratio has risen from 57% to 74%, indicating a strengthening of the foreign trade balance in Turkish steel sector. 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 12 months results. We achieved $6.2 billion revenue, and we generated $646 million EBITDA and $411 million net profit. On Page 7, you will see the operational indicators of our company. We continued our production during the year with a high capacity utilization ratios, achieving a liquid steel production of 8.7 million tons. Our crude steel capacity utilization ratio, which stood at 89% is significantly above both the world and country averages. The results achieved in the first 9 months for sales and production are within our historical averages. In 2025, we aim to achieve sales of approximately 8.1 million tons, so slightly higher than 8 million tons, similar to 2024. So let's take a look at the segmental breakdown of domestic sales and export volumes on Page 8. In 2024, the shift in sectoral distribution was driven by our preference for higher profitability sectors. As you can see from the pie chart, there has been a slight change between the sectors when we compare to last year's breakdown. There has been a transition from the pipeline profile to general manufacturing and auto on a percentage basis. We see a similar situation in the long products that its stimulus production stopped for almost 3 months due to the earthquake in 2023 is also affected in these numbers. We achieved an export volume of 1.5 million tons, representing a 19% export share in the total sales. And this figure is the second highest export rate in our history despite the challenging market conditions. On Page 9, you can find a breakdown of revenue for domestic and export sales. 80% of the revenue comes from domestic sales, in line with the domestic volume. We generated $83 EBITDA per ton in 12 months. In 2025, we expect to see between $90 to $100 per ton due to better outlook in the steel sector and cost reduction from our mill investments and energy efficiency investments. Despite import pressure in the domestic market, we achieved to generate $646 million EBITDA and $411 million net profit in 2024. On Page 10, you can see how we reached to net profit from EBITDA. One of the largest items was depreciation, which was $263 million in 12 months. The other major item in this chart was financial expenses. Net interest expense was $177 million in 12 months. The majority of this interest expense arises from financing ongoing investments. Tax income was $20 million due to deferred tax income. After other expenses, net profit was $411 million. The insurance income accruals of $260 million is not included in the EBITDA calculation, as you already know, since it is a one-off adjustment. While calculating the net profit, $260 million of consolidation classification arises from additional insurance income accruals. As you all remember, after the production halt at the Isdemir plant due to the earthquake in February 2023, a total of $360 million insurance claim payment was agreed with insurance companies. And of this amount, $15 million remained to be collected. And it will be collected within the first quarter of this year. So we can say the insurance process is almost completed. In the graph below, you can see EBITDA to change in cash bridge. [indiscernible] increased due to inventory. Also, we spent around $1.1 billion through capital expenditures in 12 months. This amount also includes advances paid for the capital expenditures as well. And you will see the difference between the CapEx page in Page 13 and this one. In 2024, there was a cash outflow of $14 million due to tax payments. The reason for the low tax payment is that value-added tax receivables are offset from tax payments and investment tax incentives are benefited. On Page 11, you will see historical trend of financial borrowings and net debt. As you can see in the financial borrowings chart, the share of the long-term debt in total debt decreased to 30% with the support of $950 million Eurobond issuance. When we look at 2024, net working capital, our net working capital decreased due to the decreasing inventories and value-added tax receivables. Our net debt position was $2.1 billion at the end of 2023 [indiscernible] ongoing capital expenditures, the net debt-EBITDA ratio was 2.8 multiplier. We expect to keep net debt-EBITDA ratio below 3.3 multiplier for 2025. Slide 12 represents our cost of sales breakdown. The use of imported semi-finished products, which is the imported slabs, 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 levels in the 12 months of 2024, 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 the historical capital expenditures. Our total CapEx [indiscernible] $1.1 billion in 12 months. We expect that CapEx will be around $800 million, $850 million in 2025 with maintenance and other ongoing investments. As we announced last year, our [indiscernible] reserve in gold mines is significant -- up to $1 billion. And as usual, maintenance will be around $50 million, $80 million per year. So the last slide, as you know, we announced our Net Zero Roadmap in January 2024. So we plan to spend $3.2 billion for transformational investment of Erdemir and Isdemir by the end of 2030. 70%, 80% of this $3.2 billion investment will be sourced externally, utilizing easily accessible financial resources for the green transformation. And after this first stage of Net Zero Roadmap, Erdemir and Isdemir crude steel capacity will reach 13 million tons by 2030. So now we may continue with the Q&A session. We will be delighted to answer your questions. Thank you for listening.

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

A couple of questions from me. If we look at the EBITDA per ton in the fourth quarter, it went down a lot. And we've got lower steel prices still from here. I realize it's early days, but any thoughts on where we should think about EBITDA per ton for 2025? That's the first question.

Jason, thank you for the question. So yes, EBITDA per ton was at the lowest level at the end of 2024, but we are expecting better EBITDA per ton due to cost reduction from our new investments and energy efficiency investments also. So there will be two new investments coming. One is blast furnace in Iskenderun and coke factory in Eregli. We are also expecting cost reduction and efficiency increase from these new investments. [indiscernible] will be better EBITDA per ton in the first quarter of this year.

So you think sequentially EBITDA per ton should improve quarter-on-quarter. I'm guessing less -- still less than $100 a ton, but maybe more than $50. Is it that sort of a range?

Yes, correct. More than $50, less than $100. So as an informal guidance, let's say, [indiscernible] full year, we expect $90 to $100 as EBITDA per ton in 2025. So yes, you can -- as an expectation, you can expect each quarter will be slightly better -- getting better each quarter.

Okay. Clear. Second question from me, if I could. Just given the balance sheet, do you know how is management, how is the Board thinking about dividend policy from here and balancing that against the leverage?

Dividend policy is the same. We have a dividend -- written dividend policy on our website. And actually, it depends on the Board decision. So every year, our Board [indiscernible] right after the year-end results. So most probably at the end of February or beginning of March, our Board will have another meeting to decide about the dividend payment. Our policy is the same, but they also consider each year's conditions, each year's cash needs and CapEx program. So again, this year, they will, of course, consider all of these factors, and they will decide the amount of dividend payments.

Okay. Last one, if I could. I'm being cheeky. I'm going to take three, if that's okay. When do we hear about the new business, the gold mine?

Okay. That's a very frequently asked question from our analysts and investors. We don't have the timeline yet, but we are working on the official report for the mining reserve. And we will announce it as soon as we get that report. But it's really difficult to give any certain time to announce this, but we will do that as soon as we get the report.

The next question is from the line of Gabriel, Alain with Morgan Stanley.

I have two questions, Idil. The first one is on the CapEx for 2025. Do you have the flexibility to defer or delay any of these investments if the price or margin environment does not improve? That's my first question.

Alain, so we always have the flexibility. But actually, we have no reason to delay any of our investments. But as I mentioned, we have that flexibility. If it's -- if something happens that we haven't expected during 2025, we have that flexibility. But right now, we don't see any problem to go on the time line.

And my second question is on the policy framework vis-a-vis imports in Turkey. Can you discuss the existing anti-dumping tariffs and if they are deterring any cheaper imports from coming into Turkey? And is there anything else in the pipeline that we should be looking forward to, to improve your position in Turkey vis-a-vis the cheaper imports?

Actually, the anti-dumping tariffs that Turkish Ministry implied to -- for countries, it prevented the prices from falling. But the thing is the proportion of HRC imports, especially from China, [indiscernible] inward processing regime, which from China -- from Chinese imports, it's almost 92%. So 92% of the Chinese HRC imports is directly linked to the inward processing regime, which means they do not pay any additional tax. [indiscernible] so that the Trade Ministry is working on this regime to revise it. But again, we don't have any specific time line when they will finish that revision or what kind of revision it will be. But most probably, we expect a positive effect from this revision for the local steel producers.

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

I got, I think, three or four. The first one would be again on CapEx. I remember some time ago, you said that you gave a guidance for around $750 million up to 2030. Is still the case? Or should we expect more around $800 million per year?

Erica, so actually, we expect to have $800 million, $850 million as CapEx in 2025, but depends on the reserve, gold reserve. [indiscernible] reserve, it might rise up to $1 billion. But right now, we expect $800 million, $850 million for the whole year.

No, what I was meaning beyond 2025, how should we think in terms of CapEx on an annual basis?

It's going to be around $600 million, $650 million beyond 2025.

Okay. Even lower. So you said $600 million, $650 million.

It's going to be around $600 million, $650 million.

Okay. So basically, the way I should look at it is that are you committed to not breach the 3.5 debt covenant in the run-up to 2030, in the year 2030?

Actually, I mean, this year, the maximum level we will see is less than 3.3 multiplier. This is the highest level we will reach. So for the Eurobond, I guess your question is for the Eurobond. So it's 3.5 the limit in Eurobond, but we will not exceed it.

I'm not -- again, I'm not talking just about this year. It's about as well in the run-up basically over the next 5 years. I mean my point is that how much flexibility fundamentally you have in your CapEx planning if the market should turn against you?

Actually, last year, our CapEx was at the highest level. So $1.1 billion we spent for the CapEx. And yet, we achieved to keep our net debt-EBITDA level at 2.8 multiplier level. So this year, when we make our budget, we always work at the worst-case scenario. So when I say 3.3 multiplier, this is the highest level at the worst-case scenario, we will see. But for the beyond 2025, because the capital expenditures will be less and also the debt level will be less, it's going to be less than a 3 multiplier, we can say.

Right. That's encouraging. And then I have also a question -- a couple of questions around Europe anti-dumping legislation that is supposed to start or anyway to be announced at the end of March, start in April. So I know that Erdemir, correct me if I'm wrong, exports 10% -- over 10% of production to Europe. So I was wondering, shall we -- how do you intend to offset any increase in duties from Europe?

Okay. So we don't see any risk to increase any tax from Europe. But the only risk that quotas maybe less, for the country quotas. But right now, we haven't heard anything from the Europe side to have less quotas against Turkey.

Okay. And if Europe adopt more stringent anti-dumping legislation to China, would you expect China to reroute more steel into Turkey?

But Turkey is also applying some anti-dumping duties and the average of this additional tax is around 30%, so which is quite high. And also, as I mentioned earlier, the government, the ministry, Trade Ministry is working on some kind of regime revision, which we believe that is going to be have some positive effect for the local producers.

Right. Because you know why I'm asking, I'm worried because we've been seeing the duties that were imposed last year, which haven't been working. And actually, I was researching in Internet. And I don't know if it's correct, but I was reading about a loophole where if what was imported was exported within a separate time frame, then still was not encouraging any duty. Is that -- maybe that the case why the anti-dumping duty that we've seen it last year hasn't worked?

Erica, actually, the main reason that it's not -- actually, it's working, but it's only prevented the prices from falling. So we were expecting some kind of increase on the prices, and it didn't happen because of the inward processing regime. If you export -- sorry, if you import applying to that regime, then if you export and if you produce something and if you export, then you pay 0 tax. So this regime actually almost 92% of Chinese import, HRC import comes to Turkey with inward processing regime. That's why it's not really effectively working. So again, the ministry, the Trade Ministry is working on this regime to revise it because actually, all of the local steel producers, they go to the ministry and they shared that this anti-dumping is not really effectively working because of this inward processing regime. And we know that they are working to revise it, but we don't have the exact details how this revision will be. But we believe that we will hear from the ministry soon. So we will share it with you as well.

That's helpful. And the last question as well was, again -- sorry, on CapEx, I forgot. You are meant to build an electric furnace around, I don't know, 2017, 2018 -- sorry, in 2028 and -- 2027, 2028. So I was wondering what will be the CapEx implied? And shall we assume higher CapEx than the $600 million, $650 million guidance?

Actually, we haven't shared the breakdown of each investment in the [ Net Zero Roadmap ]. We only shared the first phase cost, which is $3.2 billion. So it's included solar power plants, electric arc furnaces and biomass. So three of these investments will cost $3.2 billion. But unfortunately, we haven't shared the breakdown of this cost. And the electric arc furnaces, the first one will be launched in 2028 and the last one [indiscernible] in operation at the end of 2030. So when we finish these electric arc furnaces, the capacity -- the crude steel capacity will be 13 million tons.

The next question comes from the line of with Bystrova, Evgeniya from Barclays.

I have a few questions. So my first one, I didn't hear exactly. You mentioned -- you provided some color on EBITDA per ton that you're expecting this year. Could you please repeat what was the number because the connection wasn't great.

Evgeniya, of course, I can repeat. Actually, we expect EBITDA per ton in 2025 is around $90 to $100 per ton.

Okay. Also my next question. So regarding the Trump tariffs and policies on aluminum and steel, do you expect any direct or indirect impact on yourself, on the company or maybe your customers? Or just in general, what will be the key drivers for steel prices in 2025?

Actually, we believe there will be a positive impact for Turkey [indiscernible] but for the country. We foresee that it will balance the U.S. market by preventing unfair competition between countries.

And do you think it will improve the pricing environment as well?

In U.S., you mean?

No, in Europe or in Turkey.

We expect to see higher local prices in the U.S., but not really in Europe or in Turkey.

Okay. Got you. And maybe my last question. There was an improvement on the working capital side, I think, in fourth quarter, in particular. Could you please provide more color also as to what has driven that?

Of course. So when we look at the fourth quarter of 2024, our net working capital decreased compared to the third quarter due to the decreasing inventories and value-added tax receivables. So we expect to see similar net working capital in Q1 2025 due to the similar market conditions.

The next question comes from the line of Ivanov, Dmitry with Jefferies.

Hello. Can you hear me?

Yes. We can.

Apologies. Can we come back to this EBITDA per ton guidance of $90 to $100 per ton? And like the company reported around $39 of EBITDA per ton in the fourth quarter. And you mentioned like you expect a gradual improvement in this EBITDA per ton metric quarter-by-quarter. But I kind of -- can you please elaborate on the assumptions behind this? Because if I understood correctly from the previous question, you don't assume material increase in steel prices. So is it like -- is this EBITDA per ton increase from $39 to $90 to $100 range will be driven by cost reduction entirely. So it would be great just to unpack this increase because this increase from $39 to $90 to $100 looks a bit ambitious to me.

Okay. So in 2024, for the full year, we had -- we achieved $83 per ton. So yes, we are expecting an increase in 2025, but we will -- and we expect to have stable commodity prices and demand in 2025. So yes, you are right. We do not expect any increase in prices, both in raw material or steel prices. But we will achieve this number due to cost reduction from our [indiscernible] such as blast furnaces and coke batteries and energy efficiency investments. So actually, it's an internal achievement. So we will have some kind of cost reduction due to our new investments and energy efficiency, of course.

And do you still need just to make this investment? So basically, this CapEx program for 2025, $800 million, $850 million includes expected cost initiatives to reduce EBITDA. So without this CapEx, EBITDA per ton won't be achievable in the [ 90% to 100% ] range. Is that the correct understanding?

Yes. I mean these investments will support our EBITDA per ton, obviously. But actually, we are at the end of these investments. So in the first half, they are all will be finished, both blast furnace and coke battery.

Apologies. When do you expect to finish, like first half of 2025?

Yes, it is in first half, but it's really difficult to give specific month, specific date, but it's going to be all finished in the first half of this year.

So is it correct to assume that EBITDA per ton in Q1 and Q2 will be still kind of at relatively depressed levels?

Yes. But we already have energy efficiency, which is already finished. So we are benefiting from these energy efficiency investments, which are completed already. And additionally, these two investments [indiscernible] will also support our EBITDA per ton.

Understood. Understood. So flat commodity prices and increase in EBITDA per ton will be driven by [indiscernible] and will be more like second half weighted in terms of the expected improvement.

Yes, yes. Correct.

And apologies, one question on working capital, you already covered taxes. You also mentioned you paid low taxes, cash taxes in 2024 because of the different incentives. Should we expect increase in cash taxes in 2025? And if so, what's your guidance on the cash tax basis for the 2025? That would be helpful.

It will be at these kind of low levels, our tax payments. So it's going to be similar in the next period.

Okay. So basically, kind of -- okay so similar in absolute amount, okay?

Yes, correct.

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

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

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