Eregli Demir ve Çelik Fabrikalari T.A.S. ($EREGL)

Ladies and gentlemen, thank you for standing by. I'm Paulina, your Chorus Call operator. Welcome, and thank you for joining the Erdemir conference call and live webcast to present and discuss the first quarter 2026 financial results. [Operator Instructions] The conference is being recorded. [Operator Instructions] Please note, Eregli Demir ve Celik 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's 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 revision at a particular time. Our company makes no commitment to make regular revisions, which would fully cover changes in every parameter. New factors may arise in the future, which may not be possible to foresee at this moment in time. At this time, I would like to turn the conference over to Ms. Idil Onay Ergin, Investor Relations Director. Ms. Ergin, you may now proceed.

Thank you very much, Paulina. Good afternoon, everyone. Welcome to our conference call and webcast of Erdemir for the first quarter of 2026. First, 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 will be a Q&A session as usual. Our presentation consists of two sections, as you already know. The first one is the market overview, and then the financial results. So let's start with 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. In the first quarter of 2026, the coking coal market displayed a volatile outlook caught between weak steel demand and seasonal supply side development. Throughout the quarter, the slowdown in steel production in China witnessed in the construction sector and lower-than-expected end user demand limited demand for coking coal. Accordingly, coking coal fluctuated in the range of $218 and $253 per tonne and closed the quarter at around $240 per tonne. Iron ore prices followed a similar trend to the previous quarter in Q1 2026, but fundamental dynamics remained weak. While prices remain resilient around $105 per tonne, they fluctuate between $96 and $110 per tonne throughout the quarter due to the impact of geopolitical uncertainty. High port inventories in China, weaker steel production compared to the previous years, and new supply expectations put downward pressure on prices. Turkish scrap import prices gradually increased throughout the quarter, ranging from $370 and $398 per tonne and about $400 per tonne by the end of the quarter due to the impact of tensions in the Middle East. On the bottom right, we show HRC prices in Black Sea, China and South Europe. The global outlook for the first quarter of 2026 was shaped by geopolitical risks, uncertainties in trade policies and monetary policy expectations. Regional divergences became more pronounced in the global HRC market during the first quarter. In Europe, pricing was determined more by regulations and supply expectations than by demand. CBAM and trade measures made imports more difficult, raising the price expectations of domestic producers. On the Chinese side, the market is caught between policy expectations and weak domestic demand. On the other hand, in Turkey, the cost-demand balance determines the pricing, while the upward trend in the Turkish market is expected to continue as uncertainty persists in global markets. It also seems likely that changes in trade flows due to the war will support the Turkish steel market. Turkey's trade advantage and access to nearby markets supports its competitiveness. On Page 4, you will see the production, consumption, export and import figures of Turkish steel market. In the first 2 months of 2026, Turkey maintained its position as Europe's largest and world's seventh largest crude steel producer. In the January-February period, crude steel production increased by 5% to 6.4 million tonnes. And this growth reflects resilience in domestic output despite the challenging global steel market conditions. Going back to the slide. While production remained at the same level as last year, domestic steel consumption continued its upward trend, rising by 3% to 6.7 million tonnes in the first 2 months of the year. Imports and exports decreased by 13% over the same period. As a result, the export-import coverage ratio remained at 74% in the first 2 months of 2026, the same as the previous year. The European Union remains Turkey's largest export market in the first 2 months, followed by MENA and CIS. Despite the annual decrease, China stayed the largest supplier of flat steel products in the first 2 months. China was followed by South Korea, Russia and Malaysia. The increasing impact of the EU Carbon Border Adjustment Mechanism, CBAM, in 2026 has made carbon intensity a more prominent pricing factor in steel imports. The new safeguard measures, expected to come into effect on July 1, are anticipated to be detailed on a country-by-country basis in the coming days, which is expected to eliminate uncertainty. So let's take a look at the financial results and operational metrics. On Page 6, you will see the summary of our first quarter results. We achieved $1.4 billion revenue. Also, we generated $137 million EBITDA and $9 million net profit. On Page 7, you will see the operational indicators of our company. Following the commissioning of the last 2 investments in our investment package in the second quarter of 2025, our crude steel capacity utilization ratio has gradually increased since then and reached 96%. Accordingly, sales and production levels returned to their normal levels. Supported by strong demand, we achieved sales of 2.1 million tonnes in the first quarter. We aim sales volumes of over 8.2 million tonnes in 2026. So let's take a look at the segmental breakdown of domestic sales and export volumes on Page 8. As you can see from the pie chart, there has been a slight change between sectors when we compare it to last year's breakdown. There has been a transition from distribution chains, general manufacturing and auto to pipe and profile on a percentage basis. We see similar changes between sectors in the long products, although its share in total sales is relatively small. Our export volume was 312,000 tonnes in Q1, representing around 15% export share in total sales. Although our main focus is the domestic market, we also consider export as an alternative market. This year, we aim to keep the share of exports in total sales in the 10% to 15% range. On Page 9, you can find a breakdown of revenue for domestic and export sales. 84% of the revenue comes from domestic sales, which is in line with the domestic volume. Despite import pressure in the domestic market, we achieved to generate $137 million EBITDA. We generated $73 EBITDA per tonne in 3 months. Our EBITDA per tonne guidance for 2026 stands in the range of $75 and $85 per tonne. In the coming quarters of 2026, we expect EBITDA per tonne to increase through cost reductions and increased efficiency resulting from newly commissioned facilities, also increasing HRC prices and our company's increasing sales volumes. The company returned to net profit once the impact stemming from cancellation of inflation accounting disappeared. We generated $9 million net profit in the first quarter of 2026. On Page 10, you can see how we reached a net profit from EBITDA. One of the largest items was depreciation, which was $82 million in the first quarter. The other major item in the chart was financial expenses of $54 million. The tax expense amounted to $11 million. And after other expenses, net profit was $9 million. In the graph below, you can see EBITDA to change in cash bridge. Our net working capital increased compared to the fourth quarter due to the decreasing inventories and increasing trade payables. Also, we spent around $70 million to investment activities in 3 months. This amount also includes CapEx and advances paid for capital expenditures as well. The reason for the change in credit payments is that we paid off our maturing financial debt to reduce our credit interest costs. On Page 11, you will see the historical trend of financial borrowings and net debt. As you can see in the financial borrowing chart, our financial borrowings have decreased by the amount of our credit payments. When we look at the first quarter, our net working capital decreased compared to fourth quarter due to the decreasing inventories and increasing trade payables. We managed to achieve a net debt-EBITDA of 1.25 multipliers at the end of the quarter due to the decrease in working capital and the increase in LTM EBITDA. We expect to keep the net debt-EBITDA around 1.8 multipliers in 2026. Slide 12 represents our cost of sales breakdown. There has been no significant change in our cost breakdown since Q4. In the second quarter, our cost of sales will increase due to the energy and freight costs and insurance costs. However, sales price increases will offset these increased costs. Page 12 (sic) [ Page 13 ] represents the historical capital expenditures. Total CapEx was $775 million in 2025 and $147 million in the first quarter. We expect that CapEx will be approximately $600 million in 2026 with maintenance and other ongoing investments. Investments such as solar power plant, port and crane investments and energy efficiency investments are included in the CapEx figure of 2026. As you already know, the figure is accrual based, and the cash outflow will be lower due to the advanced payments. And lastly, for the gold mine, as you already know, we announced the inferred resource in November 2025. And we expect that the reserve announcement for the gold mine to be made in the second quarter. Investment decisions for the gold mine will be made after this announcement is shared. So Page 14. Just as a reminder, we announced our Net Zero Roadmap in 2024. There are no changes to this roadmap, the details of which we previously shared. The first investment in this package, solar power plant, is planned to be partially commissioned by the end of 2026. 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 Alain Gabriel with Morgan Stanley.

A couple of questions from my side. Firstly, on the guidance, which you've just referenced of $75 to $85, we have seen a very steep increase in Turkish steel prices across both flat and long products. And given your relatively shorter lead times, one would have expected a quicker pass-through to your margins, and yet, the guidance has remained unchanged. Can you share with us a bit more color on the building blocks of the, let's say, the average selling price going forward versus the cost movements that you have referred to in your presentation? That's my first question.

Thanks for the question. Yes, I just shared the EBITDA guidance -- EBITDA per tonne guidance as $75 to $85 per tonne, which is exactly the same, what I shared at the end of the year. So we decided to keep that EBITDA per tonne guidance just because we can only see the second quarter results right now. So yes, it looks that EBITDA will be higher in the second quarter. As you already know, our sales order book is full for 2.5 months. So it means that we already closed the second quarter. That's why we have enough information about the sales prices in the second quarter and the cost for the second quarter. So I can easily say that in the second quarter, our EBITDA per tonne will be higher. And of course, from the spot market, we follow the spot prices for the third quarter. But yes, we didn't start to sell for the third quarter. That's why we didn't revise the guidance. So we just would like to see the third quarter results. Or at least when we start to sell in the third quarter, we will be more relaxed, we will be more comfortable when we decide to revise our EBITDA per tonne guidance. But just to be cautious or just to be conservative, let's say, we decided to keep our EBITDA per tonne guidance, same as we shared on the last quarter's conference call. So the second part of your question, yes, we are expecting higher sales prices. And actually, we expect gradually increasing in each quarter during the year. But also, we expect that higher cost due to the war. So we will see increasing energy prices. We will see increasing freight and insurance cost. But because the sales price is increasing more than the cost increase, we believe that we will offset the increases in the cost. So we believe that EBITDA will also -- EBITDA per tonne will also increase gradually. But again, we can -- we have only the visibility for the second quarter, but we didn't start [ sell ] the third quarter yet. So we just try to be -- stay on the cautious side.

That's very clear. And a follow-up on that question, I guess, on the conflict in the Middle East with energy costs, consumer retrenchment and the broader impact on your business. Can you give us a bit more color on how you're seeing this impacting Erdemir? And on the flip side, are you seeing any opportunities to gain market share now that some of your competitors in the region, like Iran, for example, they have been cut off from the seaborne markets? How are you seeing this conflict shaping your business?

At the beginning of the war, I was saying there will be no negative or positive impact due to the war for the Turkish steel producers. I'm not only speaking on behalf of our company, but also for the Turkish steel producers. But when you look at our results, especially the export ratio and the amount of export, actually, there is a decrease when you compare with the Q4 results. So the increase comes from the semi-finished goods, actually, slab requests from the MENA region. And we believe that this demand comes from the war because there is a demand for slab from the MENA region. But because Iran lost its steel factories, so we just increased our export share due to this slab demand from the MENA region. So that's the only thing I can say that maybe positively affected our results. But other than that, most of the analysts was asking if Chinese imports decreased due to the closing Strait of Hormuz. But actually, no, there is no change because most of Chinese importers are not using the Strait of Hormuz, same as our raw material suppliers. So we also didn't have any negative impact because of the Iran war. None of our raw material suppliers use Strait of Hormuz. So there wasn't any problem getting our raw materials. So yes, overall, as a summary, we did -- we didn't see any material impact, positive or negative, from the war.

The next question is from the line of Krishan Agarwal with Citigroup.

Can you update me with the CapEx guidance for the full year? I'm assuming that your CapEx has continued to come down versus the last year. And also on a related note, how much of the EBITDA improvement we should expect because you are in the phase of commissioning the previous -- the capacity expansion which you have done?

I'm sorry, what was the second question?

How much of the EBITDA improvement we should expect from the commissioning of the new capacities in 2026?

All right. So last year, after we commissioned our new facilities, we were saying that we're going to have a positive impact on our EBITDA per tonne, additional $20, $30 and $40 in each quarter, starting from the third quarter of last year. So actually, we are seeing the full impact of our newly commissioned investments, the plant, blast furnace and coke batteries. So actually, right now, we are at the full impact of the EBITDA per tonne -- additional EBITDA per tonne from the new investments. And the first question, CapEx guidance. So we are expecting to have around $600 million in 2026. So in the first quarter, it was $147 million, which is in line with our yearly expectation of $600 million for the whole year.

I understand. And then also, the steel shipments into the Q1, they were up 12%. So how should we think about the full year expectation for the steel production and the shipments for 2026?

So production and sales, they are highly correlated. So they are almost the same. So we produce and sell, I mean, our order book is full for 2.5 months. So everything we produce, we directly sell it. So we said that we are expecting to have above 8.2 million tonnes for the whole year. So in the first quarter, it was 2.1 million tonnes. And we can just expect very similar figure for the second quarter as well, 2.1 million tonnes.

The next question is from the line of Paul Ciana with Bank of America.

This is Paul Ciana from Bank of America. I just want to follow up on free cash flow. So free cash flow in the quarter was driven in part by working capital. Could you give us some color on how you expect working capital developing in the rest of the year? Or, asked another way, do you think there's more room to improve working capital from here?

Thank you for the question, Paul. So we expect working capital to remain stable in the coming quarters. In addition, we anticipate a slight increase in net debt due to the dividend payments and capital expenditures. But for the working capital, we expect to see this figure to remain stable in the coming quarters.

Okay. That's clear. And maybe another one, if I can squeeze it in quickly. I noticed utilization has stepped up quite a bit from last year into quarter 1. What would you say is a normal level of utilization ratio going forward?

The capacity utilization ratio, you mean?

Yes, correct.

I think our normal is above 95%, so we work with full capacity. But last year, there were some holes in the second quarter because of the commissioning our new investments and uncommissioning the old facilities. So we lost a couple of days in the production. But other than that, our normal level is above 95%. So we can just assume that we will keep this level during the year.

The next question is from the line of Evgeniia Bystrova with Barclays.

I have just a few questions. My first one, could you please say again, repeat what was your net leverage target for this year or where you see the ratio this year? And also given that you -- the company has been generating cash for several quarters -- for several consecutive quarters now to working capital, do you expect maybe more debt repayments or reduction in total debt in the coming quarters of this year? And then my second question is actually related to the energy costs. What would you see is the company's sensitivity right now in terms of the energy costs and EBITDA? For example, if there is like a 10% change in energy cost, what would be the impact on your EBITDA?

The impact in our cost from the increase in energy cost is around $7 per tonne, roughly. So it's a manageable amount of increase, actually. And the first question, the leverage ratio, the target. Actually, we expect to keep the net debt-EBITDA around 1.8 multipliers in 2026. Right now, it's 1.25 multipliers at the end of the first quarter as we did it due to the decrease in working capital, and of course, the increase in LTM EBITDA.

The next question is from the line of Cemal Demirtas with Ata Invest.

My first question is about the sales volume trends. As you mentioned, in first quarter, you have 2.1 million tonnes, and in second quarter, it could be 2.1 million tonnes. Going forward, in the third and fourth quarter, should we expect some deceleration? Or could we have an upside to that sales volume up to 8.5 million tonnes or 8.6 million tonnes? Any possibility on that front? And I want to know, related to this, did you import any slab at this moment in first quarter? And again, related to this, the pricing trends, we see that in your working capital, your inventory level is coming down, and it's helping your net debt reduction because of the lower net working capital. I want to ask inventory side. In this environment, the prices are not declining. Are the amounts declining? What's the justification for this decline, especially on the inventory side? So I'm trying to see for the second quarter. And again, in this -- related to this, do you think any pull forward demand on the steel side happened so far as your order books are filled for 2.5 months, I understand? So could you give just some indication about the trend? Because the price are increasing by 12%, but is it -- the maturity assume some significant improvement in second quarter? Or should we just assume that we are going to benefit in the third quarter? It's a combination of questions. And the last one is about the management change. Recently, you announced yesterday that 2 members of the Board were replaced. And as far as I know, the CFO and the acting executive, CEO, I guess, like Serdar also resigned. Who's going to be the replacement? And could you give us -- what's going to be the direction? I know that -- I'm not talking about the strategic direction, but who's going to be leading the company from now on?

So I'll just start with the first question of sales volume. So yes, we sold 2.1 million tonnes in the first quarter, and we expect to sell a very similar amount, 2.1 million tonnes in the second quarter. So when I gave the guidance for the whole year, I said we are expecting to have about 8.2 million tonnes. So it means that we might keep the level same as 2.1 million tonnes, or it might -- we might have even higher tonnages. Normally, in the last quarter of the year, every year, we have the highest level of sales quantity in the whole year. So most probably, the fourth quarter, again, will be the highest amount of sales in 2026. But again, we just keep our guidance at the same level. So we are expecting to have higher than 8.2 million tonnes for the whole year for 2026. So we didn't import any slabs. That was your second question. In the first quarter, there is no slab imports. The inventory, yes, I mean, our finished goods inventories are at historically low levels. We are also selling from inventory because the demand is strong. Therefore, our inventory levels have decreased. But for the second quarter, you can just assume stable figures, very similar figures to the first quarter. And the sales prices, yes, we are seeing increasing sales prices in the Turkish market, same as you. So as I shared earlier, we already closed the order book for the second quarter, but we haven't closed it for the third quarter. So we are just trying to be conservative. That's why we're not giving any light from third quarter expectations. But again, I can simply say that we are expecting gradually increasing sales prices and EBITDA, EBITDA per tonne during the quarter for 2026. And the management change, yes, these kind of things happened in the quarter. So it's a professional decision of our management. So there won't be any change in doing the business in the working style. So the company -- actually, we already announced who came for the changes, who is the new executive manager. So it's going to be exactly the same business, doing business for Erdemir.

The next question is from the line of Meyiwa, Zenande with UBS.

I just wanted to clarify your comment about working capital remaining stable. Do you mean it will remain stable, and then we'll get a similar level of release in the coming quarter? And then just looking at your inventories, which are near record lows as well as your payables increasing, should we expect a little bit of a release in the coming quarters, especially given the fact that you're planning on increasing your production and also given the fact that your inventories are currently at low levels?

I think we're not going to increase the production. So we are at the maximum levels, our crude steel capacity utilization ratio is 96%. So we are already working with full capacity. And yes, our finished goods inventories are at historically low levels. But because you will see very similar figures in inventory for the second quarter, so we expect working capital to remain stable in the coming quarters as well.

Okay. And then I just wanted to clarify, maybe I missed it at the beginning. I mean, from the 1.3x net debt that you have at the moment to your guidance for the full year to 1.8x, what drives that?

Actually, we anticipate a slight increase in net debt due to the dividend payments and capital expenditures.

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

Thank you very much for joining us. We hope to meet you again at our second quarter conference 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.