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

Ladies and gentlemen, thank you for standing by. I'm Polina, your Chorus Call operator. Welcome, and thank you for joining the Erdemir conference call and live webcast to present and discuss the third quarter 2026 financial results. [Operator Instructions] and the conference is being recorded. [Operator Instructions] Please note Eregli Demir ve Celik Fabrikalari T.A.S. may, when necessary, may create a 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 disclosure policy and has shared such policy with 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 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 not 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 the party is coming to a judgment based on estimates and forward-looking statements, Our company may not have made a 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, Polina. Good afternoon, and welcome to Erdemir Third Quarter 2026 Conference Call and Webcast. I will start by taking you through our investor presentation, which is available on our website and is also being displayed during the webcast. Following the presentation, we will open the floor for our Q&A session and take your questions. As you know, our presentation is structured in 2 main sections, We will begin with an overview of the market environment, followed by our financial performance. Let's begin with the commodity price developments. On Page 3, you will see the prices of fuel-related commodities and HRC. In the third quarter of 2026, coking coal prices were supported by supply constraints in China while weak global steel demand limited further gains. Following mining accidents, tighter safety inspections and production cuts in China core domestic supply. From August onwards, prices crimped to around $285 per ton driven by tighter supply in China and stronger import demand. although the upward momentum in September limited physical supply kept prices at elevated levels. Iron ore prices fluctuated within the $92 to $100 per ton range in the third quarter, remaining volatile and generally subdued. As the anticipated increase in demand failed to materialize in September, prices fell to around $92 per ton CFR China by the end of September. In July, scrap prices fell to as low as $370 per ton CFR. In September, prices gained momentum as fuel makers resumed purchasing and geopolitical developments drove up logistics costs. As a result, imported scrap prices ended the third quarter at $404 per ton CFR. In the third quarter of 2026. global HRT market trends were shaped by rising production costs and regional supply constraints amid weak end-user demand. In China, high inventory levels and subdued domestic demand put downward pressure on prices, while trade measures and limited import options in Europe supported domestic producers. As a result, price disparities between regions became more pronounced. On Page 4, you will find an overview of the Turkish steel markets, including production, consumption, export and import figures. In first 8 months of 2026, Tuk maintained its position as Europe's largest and the world's seventh largest crude steel producer. In the January-August period, Turkish crude steel production increased by 7% to 26.6 million tons and this growth reflects resilience in domestic output despite the challenging global steel market conditions. Going back to the slide, while production rose by 4%, consumption and exports increased by 3%. Imports decreased by 3% over the same period. As a result, the export import coverage ratio increased to 84% in the first 8 months of 2026 higher than the previous year. In the January-August period, China remained the leading supplier despite an 18% year-on-year decline, followed by South Korea and Russia. Asia continued to be the largest import region, supported by an 8% annual increase while we CIS ranked second on the back of higher imports from Russia. Despite an annual decrease, the EU remained Turkey's largest export markets followed by MENA and CIS. Italy was the top destination by volume. As we shared on the previous call, EU's carbon border adjustment mechanism entered its definitive phase on the 1st of January. In addition, the EU's new steel import regime effect on the 1st of July 2026, replacing the previous Seat system. These changes increased carbon costs, quota availability and pricing risks for Turkey's steel exports to the EU. Overall, the Turkish steel industry recorded higher production and consumption alongside improving export import dynamics. Nevertheless, sustaining domestic demand, managing import competition and maintaining access to export markets will remain critical for the sector in the coming months. Let's now turn to our financial and operational performance. On Page 6, you will find a summary of our key results for the first 9 months of the year. We achieved $4.3 billion revenue. Also we generated $490 million EBITDA and $245 million net profit. On Page 7, you will see the operational indicators of our company following the commissioning of the final 2 investments in our previous investment package during the second quarter of 2025. Our crude capacity utilization ratio gradually increased since then and reached the 96% level. Accordingly, sales and production levels returned to their normal levels in 2026. Supported by strong demand in Turgi, we achieved sales of 6.4 million tons in the first 9 months, and we aim sales volumes of 8.4 million tons 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 pipeline profile on a percentage basis. We see similar changes between factors in the loan products, although its share in the total sales is relatively small. Our export volume was 916,000 tons in the first 9 months, representing around 14% export share in total sales. Although our 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 13%, 15% range. Due to 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 markets, we achieved to generate $490 million EBITDA and EBITDA per ton reached $100 in Q3 marking the seventh consecutive quarter of improvement since the low point in Q4 2024. Our EBITDA per ton guidance for 2026 stands in the range of $75 and $85 per ton. In the fourth quarter, we expect EBITDA per ton to decrease through increasing coal prices. In terms of profitability, we closed the first 9 months of the year with a net profit of $245 million. On Page 10, you can see how we reach a net profit from EBITDA. One of the largest items was depreciation, which was $249 million in the first 9 months. The other major item in this chart was financial expenses of $159 million. The tax income amounted to $196 million due to deferred tax income. After other expenses, net profit was $245 million. In the graph below, you can see is the change in cash rate. Our net working capital in Q3 decreased compared to the second quarter due to the increase in inventories. Also, we spent around $300 million to investment activities in 9 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. We also paid dividends of $95 million in June. On Page 11, you will see historical trend of financial borrowings and net debt. As you can see from the financial borrowing chart, our financial borrowings have decreased by the amount of our credit payments. When we look at the third quarter, our net working capital increased compared to the second quarter due to the increase in inventories. We managed to achieve a net debt EBITDA of 1.54x at the end of the quarter. We expect not to exceed 2x in 2026 at the maximum level. Slide 12 represents our cost of sales breakdown. There has been no significant change in our cost breakdown since Q2. In the fourth quarter, we expect higher coal prices to put upward pressure on our total costs and increase the proportion of raw materials in our cost structure. Page 13 represents the historical capital expenditures. Total CapEx was $775 million in 2025 and $350 million in the first 9 months. We expect our CapEx to accelerate in the fourth quarter, driven by our solar power plant investments. So the total CapEx will be approximately $600 million in 2026 with maintenance and other ongoing investments. As you already know, this figure is accrual based and the cash outflow will be lower due to advanced payments. On Page 14just as a reminder, we announced our next road map in 2024. The road map remains unchanged from what we previously shared. The first investment under this package, the solar power plants is expected to be partially commissioned by the year-end 2026. We will now move on to the Q&A session. We look forward to answering your questions. Thank you for listening.

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

Yes. I had a question a little bit about the profitability outlook. The EBITDA per ton was very high this quarter. And it's -- I think, took a lot of us by surprise, so a positive surprise. And I'm just wondering, how should we think about Q4 and into next year? Was there anything unusual in the profits this quarter that won't be repeated?

Thank you for the question. So I think this quarter is to proton a little higher than the expected but the reason is that our analysts calculate the EBITDA proton from the total EBITDA but actually, we use only the main -- our core business from our main products or still product EBITDA diluted to the total sales. So our EBITDA pool calculation relates to our core business of steel sales. By the way, there's an NRV adjustment in this quarter. So yes, there is a one-off item. So this NRE adjustment related to raw materials has been excluded from total EBITDA as it is a one-off item. So the difference arises because of the one-off NRV adjustment is excluded from the $100 million -- sorry, $100 per ton EBITDA. As our calculation is based on finished steel product EBITDA. Therefore, only EBITDA generated from core operations is included so that means the fringe between your calculation and our calculation. But yes, as you mentioned, it is a one-off item. And actually, we expect lower EBITDA per ton in Q4 due to increasing coal prices.

So just a follow-up if I could Idil, so if we were to strip out the nonrecurring item, what would the EBITDA per ton actually be for the quarter? What do you guys think?

Sorry, I can't get the question.

Yes. So if we take out the one-off effect, what do you think the right EBITDA per ton is? Like last quarter, I think we were 75. For this quarter, you think it should have been something similar?

Actually, this is what we did. We took out the one-off item from the EBITDA calculation. So this is what we are doing actually. But when you take the total EBITDA from our -- what we announced, you actually include that one-off item to your calculation. So this is exactly what we did. We took out the one-off item from the -- our calculation of EBITDA per ton.

Okay. And sorry, maybe I missed it, but your guide into Q4 is that EBITDA per ton should be down yes?

For Q4, yes, because of the increase in coal prices. As you already know, there is a 4-month lag in our raw materials. So although the coal prices is normalizing right now in the spot prices, but it was higher than right now. So you will see the high coal prices impact in our fourth quarter EBITDA per ton and the profitability in general. So it's going to be lower. But I can assure that we will reach to our guidance. We will keep our guidance because our guidance was $75 to $85 per ton for the whole year and it was like that at the beginning of the year, and we still keep that guidance for the end of 2026. So although we are expecting a decrease in the fourth quarter, we are still will be between $85 to -- sorry, $75 to $85 per ton for the whole year.

Okay. Now my other question is just on cash flow. So for several months or several quarters, several periods, we had big inflow from working capital. Finally, that seems to have reversed. Are we now at a stable level for working capital? Or do you think we need more working capital outflows to normalize the level of working capital?

So in Q3, our net working capital increased compared to the second quarter due to the increase in inventories, not the tonnage, but the prices, both raw material and finished goods inventories. So considering that Q4 becomes clearer in terms of both price and costs, we expect to see increasing figures in Q4 compared to Q3 in net working capital. In Q4, raw material inventory costs will rise due to an increase in coal prices. Therefore, working capital increase in Q4.

The next question is from the line of kiniaBestrova with Barclays.

Yes. And congrats on results. I have just 2 questions. My first question is a follow-up on the working capital. So you just mentioned that inventory increase in Q3 was due to higher prices? Is that higher prices of steel and raw materials and also just to double check, so you're expecting another increase in Q4. So when we will look at the cash flow statement, we will see an outflow on working capital side. Is that correct?

Thank you for the question. So if you are asking for the cash base, I mean, obviously, the free cash flow remained positive, but we expect negative free cash flow at the end of Q4 due to CapEx. But if you are going back to working capital, yes, because of the increasing inventories, and it was because of the prices, not the tonnages. Our working capital increased compared to the second quarter. And yes, we are also expecting another increase in Q4 due to increase in coal prices.