Eregli Demir ve Çelik Fabrikalari T.A.S.

Thank you very much, Vassilios. Good afternoon, everyone.

Welcome to our conference call and webcast of Erdemir for the first quarter of 2024. Today, our CFO, Mr.

Mustafa 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, Mustafa Basoglu. The line is yours.

Thank you, Idil. Good afternoon, everyone.

Welcome to our first quarter conference call and thank you for joining us today. As we leave 2023 behind, which was a difficult year due to the earthquake, we returned to our historical averages, 95% crude steel capacity utilization ratio, 2 million tons of sales, and $124 EBITDA per ton in the first quarter.

When looking at financial and operational results of our company, it's worth remembering that 2023 was an exception and makes evolution of 2024 complicated due to the base effect. Although, there was a decline in steel sales prices in the first and second quarter.

We expect to see positive impact on gross profitability since the decrease in raw material prices was progressively higher. We reached an agreement on an estimate insurance claim advance payment of $155 million in addition to the $100 advance payments received.

This amount was reflected as income in our first part of financial statement and will be paid until the end of the Q3. The total payment amount has not been clarified yet, but we plan to complete the negotiation process and collect the claim payment within 2024.

When we look at the Turkish steel market, the increase in flat imports continued. Based on the application made by our company, adaptive investigation has been opened against the heavy plate originating from South Korea at the beginning of April.

In addition, the process regarding the dumping investigation against the HRC originating from China, India, Japan, and Russia, where our company and our subsidiary is damaged, are among the applicants, continues. It is expected to complete within the year.

We expect that as a result of both investigations, final decisions will be made to protect the domestic producer and prevent dumping in Turkey. China is still one of the most important players in the world's steel industry.

China's HRC capacity continues to increase. In the first four months of 2024, two new hot rolling mills with a total capacity of approximately 10 million tons per year were put into operation.

Although, Chinese steel demand from the manufacturing industry has strong healthy time so far. HRC production and inventories are also increasing with additional capacity.

This situation supports the view that steel exports can remain strong. According to the first quarter data, Turkey is the fourth country to which China exports to the most in HRC.

In 2024, we focused on cost-cutting self-sufficient investments aimed at increasing our internal efficiency. We plan to commission the new blast furnace at Isdemir in 2024.

We still aim to achieve 8.2 million ton sales in 2024. Thank you again for listening to me.

I will be with you at the end of the presentation. So now I would like to hand over the mic to Idil.

Thank you, Mr. Basoglu.

Our presentation has 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 price. In 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. Price level of coking coal was around $325 per ton at the beginning of the year.

It reached its lowest level in April, and then it has gradually increased and reached $241 per ton in the spot market as of today. Demand from China and India, which was weak in March, led to a decrease in coking coal prices in the overseas market due to the increase in Chinese steel prices and production in April.

China's coal demand from overseas markets increased. This situation enables the decline in coal prices to remain at the level of $225 per ton, FOB Australia.

Iron ore price was around $140 per ton at the beginning of the year, and it has decreased $116 per ton today. Iron ore prices which fell in March due to the weak demand in China started to rise with the expected support from the central government.

The start of large furnaces production in China, which are under maintenance during the winter months supports iron ore prices. Scrap price was around $413 per ton at the beginning of the year, and the current scrap price is $380 per ton.

Although, Euro has lost value against US dollar since the beginning of March, the increase in collection cost in Europe supports the scrap price. On the bottom right, we show HRC prices in Black Sea, China and South Europe.

In the global HRC market, the strong PMI data in China and the fact that traders selling without value-added tax are not active in offers to foreign markets have had a slightly positive impact on the price outlook. However, due to the weak demand during the Labor Day holiday last week, many producers turn to making connections by shipping, price levels constant rather than increasing them.

On Page 4, you will see the production, consumption, exports, and import figures of Turkish steel market for the three months of 2024. While consumption increased by 9%, production increased by 25%.

Exports of steel products increased by 46% in quantity in the first quarter of the year, reaching 3.2 million tons. Imports decreased by 3% to 4.1 million tons in the same period.

The export-import coverage ratio increased to 75%. In the first quarter figures of 2023, production and exports decreased due to the earthquake effect, while imports increased.

With the return to normal production levels in 2024, naturally, production and exports increased, while imports decreased slightly. On Page 7, you will see the operational indicators of our company.

The results achieved in the first quarter for sales and production are within our historical averages. We aim to achieve around 8.2 million tons sales in 2024.

We are back to the level of 95%, which includes fuel capacity utilization ratio after the earthquake. As you already know, this ratio is far better than the world's average.

[Technical Difficulty] So let's take a look at segmental breakdown of domestic sales and export volume in Page 8. As you can see from the pie chart, there has been a change between factors due to the effect of market and demand conditions when we compare to last year's breakdown.

There has been a transition from the distribution chains and general manufacturing to pipeline profile and auto industry. We see a similar situation in the long products.

However, the fact that is damaged production stopped for about three months, which was affected by the earthquake in the first quarter of last year is also affected in these numbers. As I mentioned in the previous slide, the unusual decline in exports is mainly caused by the earthquake as seen in the last year's first-quarter export.

As of the first quarter of 2024, we are back to the 15% export level. 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. The first quarter sales price average for flat and long steel increased compared to the previous quarter.

We generated $124 EBITDA per ton in the first quarter. In 2024, we expect to see about $100 per ton.

Despite import pressure in the domestic markets, we achieved to generate $240 million EBITDA and $181 million net profit in the first quarter. On Page 10, you can see how we reached to net profit from EBITDA.

One of the largest items was depreciation, which was $63 million in three months. The other major item in this chart was financial expenses.

Net interest expense was $53 million in three months. The majority of this interest expense arises from financing ongoing investments.

Tax expense was $70 million and after other expenses, net profit was $181 million. The additional insurance income accruals of $105 million recorded as income in the first quarter, and this number is not included in EBITDA calculation since it is a one-off adjustment.

While calculating the net profit, $105 million of the $108 million consolidation class classification arises from additional insurance income accrual. In the graph below, you can see EBITDA to change in cash bridge.

Working capital increased due to the inventories. Also, we spend around $214 million to capital expenditures in three months.

This amount also includes advances paid for capital expenditures as well. And as you see the difference between the CapEx page in Page 13 and this one.

On Page 11, you will see the historical trend of financial borrowings and net debt. When we look at the first quarter of 2024, our net working capital remained almost stable compared to the end of last year.

There was a slight increase in inventories. Our net position was $1.7 million at the end of the year, due to the, I'm sorry, at the end of the first quarter.

Due to the ongoing capital expenditures, the net debt EBITDA ratio was two multipliers. We aim to keep our net debt to EBITDA ratio at a similar level of -- to multiplier for the rest of the year.

Slide 12 represents our cost of sales breakdown. The use of imported semi-finished products, which is imported flat increased due to the total production at Istanbul for three months due to the earthquake in 2023 As our own flat production returned to normal level in the first quarter of 2024, the share of iron ore and pellets in our cost structure increased.

Therefore, imported semi-finished products, which are included in other item was decreased. Page 13 represents the total CapEx spending.

The total capital expenditure spending is $167 million in three months. When we add the advance payments of $47 million to this figure, we reached the investment expenditure of $240 million.

The new blast furnace in Isdemir will be commissioned in the second half of this year. And we expect that CapEx will reach up to $1 billion again in 2024 with maintenance and other ongoing investments.

As we announced in January, we are proud to announce our net zero roadmap in 2024. We aim to reduce carbon emissions per ton by 25% by 2030, 40% by 2040, and achieve net zero emissions by 2050 compared to the base year of 2022.

We plan to spend $3.2 million for transformational investment of Erdemir and Isdemir by the end of 2030. 78% of $3.2 billion investment will be sourced externally, utilizing easily accessible financial resources for the green transformation.

Erdemir and Isdemir's crude steel capacity will reach 13 million tons by 2030. 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.

Hi, good afternoon, Idil and Mr. Basoglu.

Thanks for taking my question. I've got two, if that's okay.

First, I was wondering, could you give some color on the potential timing liquidation of the other current assets? And specifically, I'm thinking here about the VAT receivables and also the accrued insurance proceeds.

Second question is just, is there any color around the difference between production and sales in Q1? Is this just normal quarterly variation?

Or is there something else going on here? Thank you.

So the first one, the liquidation of other current assets. So actually, we have, we would like to share the news.

As of today, we collected all of the value-added tax receivables of 14 billion Turkish lira. In our first quarter results, you've seen approximately 4 billion Turkish lira value-added tax receivables were collected in our reports but in the second quarter, we collected all of the value-added tax receivables.

So that was the first one. And the second one, actually, there was a kind of storm, a very bad storm in our Arabia plant.

So because of that, we couldn't ship some of our sales and that's the main reason you see in the first quarter, a slight decrease in our sales demand.

Oh, yes, thank you.

I have a few questions. First of all, I'm curious about the impact of these high Chinese export levels on your business.

And I noticed that in the first quarter, the import levels in Turkey didn't really increase year-over-year. I'm wondering if you're expecting to see more pressure there from higher exports coming out of China.

That's the first question. And then just on the second quarter bridge, I guess, spreads are probably under pressure.

But given that kind of delays in shipments, should we see a material step up in shipments quarter-over-quarter and could you give us any color around that? And also about moving parts on the margin?

So, you're right. Actually, the imports levels is just 3%, but when you look at the flat steel imports, actually, it increased.

So that's why, we have already two ongoing and ramping investigation in Turkey against HRC and have placed imports. So for HRC, anti-dumping investigation, we expect to see results until the end of this year.

And we believe that it's going to support the domestic producers. So we are expecting some kind of positive for the domestic, positive results for the domestic producers in Turkey.

But yes, of course, the import pressure continues, especially in flat steel from China specifically. And your second question was the safe quantity.

So for the second quarter, I mean, for the whole year, we expect to see around 8.2 million tons of sales. And for the second quarter, most probably we're going to have between 2 million to 2.1 million tons sales.

So if we achieve every quarter around 2 million or 2.1 million tons, we're going to reach to our expectation of 8.2 million tons.

And is it fair to say that spreads should be coming under pressure in the second quarter given that, I mean, obviously, pricing has come down, but you get probably some lagged impact from some costs maybe from the raw materials? Is your expectation that spreads declined in 2Q?

Well, the steel prices decreased, but also raw materials decreased and proportionally, actually raw material decreased more than sales prices. But that's why we do not expect gross profitability to decrease in the second quarter.

So we are expecting some kind of stable position in the second quarter.

Thank you. Thank you again for listening us, for joining our conference call.

We wish you to see the second quarter call. Have a nice day.

Thank you very much. Have a nice day.