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

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 second quarter 2026 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 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 the actual results could materially differ from estimates, taking into account the fact that they are not based on historical facts, but are derived 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 a 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 revisions 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 for Erdemir for the first half 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. During the second quarter of 2026, global market pricing was primarily driven by escalating geopolitical tensions in the Middle East, volatility in energy prices and expectations regarding Central Bank's monetary policy trajectories. In the first half of the quarter, U.S. Iran tensions and supply concerns regarding the Strait of Hormuz increased cost pressures in commodity markets by driving up oil and logistics costs. In the steel and raw material markets, pricing throughout the quarter was mainly shaped by costs and geopolitical developments rather than demand. Additionally, weak domestic demand in China, low consumption in Europe and a slowdown in global steel demand limited to rise in prices. Although pressure from energy costs eased towards the end of the quarter, no significant recovery was observed due to the strong dollar, tight financial conditions and weak final demand in the global steel market. On Page 4, you will see the production consumption, exports and import figures of Turkish steel market. In the first 6 months of 2026, Türkiye maintained its position as Europe's largest and the world's seventh largest crude steel producer. In the January-June period, crude steel production increased by 8% to 19.8 million tonnes. This growth reflects resilience in domestic output despite the challenging global steel market conditions. Going back to the slides, while exports rose slightly by 1%, production and consumption increased by 7 -- excuse me, 5% and 7%, respectively. imports remained in line with the previous year at 9.3 million tonnes. As a result, the export import coverage ratio increased to 84% in the first 6 months of 2026, slightly higher than the previous year. The European Union remained Türkiye's largest export market in the first half of the year, followed by MENA and CIS. In the January-June period, China maintained its position as the leading supplier despite a year-on-year decline followed by South Korea and Russia. As the EU's Carbon Border Adjustment Mechanism, CBAM enters its definitive pace on the 1st of January, carbon intensity has become a more prominent pricing factor in steel imports. In addition, the EU's new steel import regime took effect on the 1st of July 2026. replacing the previous safeguard system. Duty-free tariff rate quotas were reduced by approximately 47% compared to the 2024 reference level, while the out-of-quota duty was raised from 25% to 50%. These changes increased carbon costs, quota availability and pricing risks for Türkiye's steel exports to the EU. So let's take a look at the financial results and the operational metrics on Page 6, you will see the summary of our first half results. We achieved $2.8 billion revenue. Also, we generated $281 million EBITDA, and $201 million net profit. On Page 7, you will see the operational indicators of our company. Following the commissioning of the final two investments in our previous investment package during the second quarter of 2025, our crude steel capacity utilization ratio gradually increased since then and reached the 95% level. Accordingly, sales and production levels returned to their normal levels. Supported by strong demand in Türkiye, we achieved sales of 4.2 million tonnes in the first half, and 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 charts, 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 pipeline 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 602,000 tons in the first half, representing around 14% export share in total sales. Although our focus is the domestic market, we also consider exports as an alternative market. This year, we aim to keep the share of exports in total sales in the 10% to 15% range. Due to the domestic -- strong domestic demand and our flexibility to shift to other markets, we expect the impact of the EU's new steel import regime on our company to be limited, which I mentioned the details in the fourth slide. On Page 9, you can find a breakdown of revenue for domestic and export sales. 84% of the revenue comes from domestic sales in line with the domestic volume. Despite import pressure in the domestic market, we achieved to generate $281 million EBITDA. We generated $75 EBITDA per ton in Q2. And our EBITDA per ton guidance for 2026 stands in the range of $75 and $85 per ton. In the third quarter, we expect EBITDA per ton to increase through increasing HRC prices and our company's increasing sales volumes. Due to the regulatory change in June, setting the corporate tax rate applicable to earnings from production at 12.5% starting from 2027, the impact of this rate change has been reflected in the deferred tax calculation. This deferred tax income is a one-off and the full year impact has been reflected. As a result of that, we generated $201 million net profit in the first half 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 $164 million in the first half. The other major item in this chart was financial expenses of $104 million. The tax income amounted to $202 million due to the deferred tax income. And after other expenses, net profit was $201 million. In the graph below, you can see EBITDA to change in cash bridge. Our net working capital slightly decreased compared to the first quarter due to the increasing inventories. Also, we spent around $117 million to investment activities in six months. This amount also includes CapEx and advances paid for the 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. And we -- finally, we also paid dividend of $95 million in June. On Page 11, you will see total trends of financial borrowings and net debt. As you can see in the financial borrowings chart, our financial borrowings have decreased by the amount of our credit payments. When we look at the second quarter, our net working capital slightly increased compared to the first quarter due to the increasing inventories. We managed to achieve a net debt to EBITDA of 1.45x at the end of the quarter due to the dividend payment. We expect not to exceed 2x in 2026 as a maximum level. Slide 12 represents our cost of sales breakdown. There has been no significant change in our cost breakdown since Q1. In the second quarter, our cost of sales increased due to freight and insurance costs. However, sales price increases offset these rising costs. Page 13 represents the historical capital expenditures. Total CapEx was $775 million in 2025 and $225 million in the first half of this year. We expect that CapEx will be approximately $600 million in 2026 with maintenance and other ongoing investments. And as you already know, maintenance will be around $50 million, $80 million per year as usual. Investments such as solar power plants, port and train 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 advanced payments. As for the gold mines, as you already know, we announced inferred resource in November 2025. There are no new developments regarding the matter. However, further developments will be shared with the public simultaneously. Page 14. As a reminder, we announced our net zero road map in 2024. There are no changes to this road map, 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. Now we may continue with the Q&A session. We will be delighted to answer your questions. Thank you for listening.

Ladies and gentlemen, we will begin the question-and-answer session. [Operator Instructions] Ladies and gentlemen, there are no questions at this time. I will now turn the conference over to Ms. Ergin for any closing comments. Thank you.

Paulina, I think we have two more people right now on the line. Can we just let them ask any questions, please.

Yes, of course. I will announce, just a moment.

Thank you. Thanks very much. Thank you.

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

I have just 2 quick questions. So first, on the domestic demand. Could you please elaborate a little bit on what specifically is driving the strong domestic demand in Turkey for steel, maybe which particular industries or which particular, I don't know, infrastructure investment projects that are ongoing in the country? And do you expect the demand to continue being strong in 2027 and beyond that? And my second question is about the CBAM impact. Could you please maybe provide a bit more color on what has been the impact of the CBAM implementation so far on Turkish producers and maybe like the Turkish market and just the pricing of Turkish steel when it goes into Europe?

Evgeniia, Thank you for the questions. So domestic demand is strong, but there is no specific project that helps to being strong in this year. Actually, our main customer group is pipeline profile and rolling, and we mainly sell HRC to this group customer group. And most of them are exporters actually, most of our customers are exporters, almost half of them. So basically, we don't share any specific reason, any specific project why it's being strong. But generally, it's going back to their normal levels. Because obviously, a couple of -- last couple of years were under pressure because of the imports. Of course, we still feel that pressure from imports in the domestic market. But obviously, starting from last year, there have been many developments, especially from the trade ministry side. They revised import processing regime. They finalized some of the antidumping investigations and announced additional taxes. So these kind of protections help protect the local producers. And of course, it's included the steel user sectors as well. So I think that's the main reason this demand is going strong this year. So the CBAM impact, obviously, let me just clarify our position in export right now. So last year, the export share in our total sales was almost 20%. It was 19.9%, but let me say, 20%. So it was an exceptional year because the local demand was weak last year. So we just tried to concentrate to the export markets. And it's an exceptional year because, obviously, we haven't seen 20% export share in our history at all. So our normal levels for export is generally between 10% to 15%. So right now, we are going back to this level, 10% to 15%. And as we shared earlier, in the first half, our export share in total sales is 14%, which we are going back to our normal levels. So mainly, we are focusing to the local market -- to the domestic market. So intentionally, we are decreasing our export level when you compare to last year. So that's why we said that the impact of CBAM or the new import regime of EU will be limited for our company because actually, we are focusing to the domestic market, and we are intentionally decreasing our export level because the demand is strong in the local market. So that's the general view of why we said the impact of CBAM and new regime will be limited.

Maybe just as a quick follow-up. I understand that maybe the impact of CBAM or import regime is limited for the company, but what about the industry and domestic prices in general, if, for example, domestic demand will weaken, would you expect those measures in Europe to affect the domestic pricing as well?

When we compare the European Union's local prices with our import prices, there was a huge gap between these prices. So Türkiye has the highest quota, by the way, when you look at the European Union's quota. So Türkiye is the leading importer for European Union right now. We have #1 position. So when they announced all these protections, Türkiye wasn't a targeted country for sure. So they are trying to make a [indiscernible] for the much more aggressive countries such as China and the other far east countries. So we do not dump the prices. So when you look at the price differences between European Union and Türkiye, there is a huge gap. And that will help the Turkish producers to import their products. So that's the main reason actually. We have the highest quota. That's number one. And we have a huge price gap between European Union prices and Turkish prices.

The next question is from the line of Adahna Ekoku with Morgan Stanley.

Maybe just on -- following on, on the policy topic. Could you give an update on the latest in terms of the protection or potential protection for the Turkish steel industry? So anything on tightening of the inward processing regime or your own kind of safeguard measures?