Eregli Demir ve Çelik Fabrikalari T.A.S.

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

Welcome to our conference call and webcast of Erdemir for the third 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, 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.

During the first nine months of the year, we have seen a downward pressure on commodity markets due to concerns that the demand outlook in China, multiple macroeconomic uncertainties and high inventories. However, as of September, the Chinese government's announcement of the stimulus package created an optimistic atmosphere in the market.

Coking coal prices were around $324 per ton at the beginning of the year. And on coking coal, which fell as low as $180 per ton in September is currently around $202 per ton.

The decline in prices was driven by production decrease in China during the third quarter, coupled with weak demand for coking coal. The impact of stimulus package announced in China has led to an increased appetite for production and an upward movement was observed in coking coal prices again, due to the increase in demand.

Iron ore, which was around $140 per ton at the beginning of the year, fell to $89 in September as Chinese steel producers made long-term production cuts due to heavy margin losses and high inventories. Currently, iron ore is fluctuating between $100 to $105 per ton on the optimism of the announced stimulus measures despite weak demand conditions.

The scrap price, which was around $413 per ton at the beginning of the year is currently at $372. In Europe, which is Turkey's largest scrap supplier, scrap purchases have been lower than usual due to weak and product orders, leading scrap suppliers to lower their prices.

The stimulus announcements made by Chinese government did not fully support the global scrap parts. However, marginal declines in scrap prices are not expected due to the decline in scrap supply and seasonality.

On the bottom line, we show HRC prices in Black Sea, China and South Europe. In the third quarter of the year, the lowest price levels in Chinese exports were seen after the pandemic.

China has reached the highest export tonnage since 2016 with aggressive pricing amid a decline in domestic consumption and high supply. This situation has disrupted global pricing balances and measures are being taken urgently against China worldwide.

Recently, Turkey finalized anti-dumping investigation regarding HRC products originating from China, Russia, Japan and India, and has decided to impose duties. This result is expected to have a positive impact on first quarter 2025 and beyond.

Aside from HRC, anti-dumping investigation around regarding imports of heavy plates and thin plates, are expected to be completed within 2025, which results anticipated to positively impact the Turkish steel sector. In Europe, the current high inventory levels are negatively impacting restocking equities, while weak end user demand is putting pressure on trading activities.

On Page 4, you will see the production, consumption, export and import figures of Turkish steel markets for the eight months of 2024. In the eight-month period, Turkish steel production increased by approximately 12% compared to the same period last year, with the rights primarily driven by flat steel production.

Similar to production, approximately 75% of the increase in Turkish steel exports stems from flat products. During the eight-month period, Turkish flat steel exports increased by 90% to 4 million tons.

On the consumption side, steel consumption decreased by 5% compared to the previous year. The decline in consumption can be attributable to the high base effect of last year’s earthquake induced surge.

In January, August 2024 period, total steel imports decreased by 13%, while flat imports also decreased by 17% to 5.5 million tons. So, let's take look at the financial results and the operational metrics.

On Page 6, you will see the brief summary of our first nine months results. We achieved $4.6 billion revenue, and we generated $572 million EBITDA and $335 million net profit.

On Page 7, you will see the operational indicators of our company. We continued our production during the first nine months of 2024 with high-capacity utilization ratios, achieving a liquid production of 6.7 million tons.

Our crude steel capacity utilization ratio, which stood at 92% is significantly above both the world and country averages. The results achieved in the first nine months for sales and production are within our historic leverages.

We aim to achieve sales of approximately 8 million tons in 2024. So, let's take a look at the segmental breakdown of domestic sales and export volumes in Page 8.

As you can see from the pie chart, there has been a slight change between sectors due to the effect of market and demand conditions when we compare to last year's breakdown. There has been a transition from the pipe and profile to general manufacturing and also on a percentage basis.

We see a similar situation in the long product, however, the fact that estimates production stopped for almost three months, which was affected by the earthquake in the first quarter of last year, is also effective in these numbers. In the nine months period, exports account for 20% of our sales, in addition to the low base effect caused by the earthquake last year, the moderate recovery in global trade has contributed to our export tonnage approaching prior earthquake level.

On Page 9, you can find breakdown of revenue for domestic and export sales. 79% of the revenue comes from domestic sales in line with the domestic volume.

The average sales prices for flat and long steel still in third quarter declined compared to the previous quarter as the rapid price declines in China were reflected globally. We expect that the prices will be supported by the incentives that support consumption in China, and HRC anti-dumping duties in the coming periods.

We generated $99 EBITDA per ton in the first nine months. In 2024, we expect to see between $80 to $90 per ton due to the slowdown in both world economy and steel sectors.

Despite the import pressure in the domestic market, we achieved to generate $572 million EBITDA and $335 million net profit in the first nine months. On Page 10, you can see how we reach to net profit from EBITDA.

One of the largest items was depreciation, which was $191 million in nine months. The other major item in this chart was financial expenses.

Net interest expense was $133 million in nine months. The majority of this interest expense arises from financing ongoing investments.

Tax income was $41 million due to deferred tax income. And after the other expenses, net profit was $335 million.

The additional insurance income accrued of $105 million recorded as income in the first half is not included in EBITDA calculation since it is a one-off adjustment. While calculating the net profit, $105 million of the $111 million U.S.

dollar consolidation classification arises from additional insurance income accruals. As you all remember, after the production holds at Isdemir plant, due to the earthquake in February last year, a total of $205 million advanced payment was collected from the insurance companies last year and this year.

It is expected that the final amount will be collected before the year-end. In the graph below, you can see EBITDA to change in cash bridge.

Working capital increased due to inventories. Also, we spent around $769 million to capital expenditures in nine months.

This amount also includes advanced payments for the capital expenditures as well. And actually, we'll see the difference between the CapEx split in Page 13 and this one.

On Page 11, you will see historical trend of financial borrowings and net debt. When we look at the first nine months of 2024, our net working capital increased compared to 2023 due to raw material procurement.

Our net debt position was $2.1 billion at the end of September. Due to the ongoing capital expenditures, the net debt-to-EBITDA ratio was 2.8 multiplier.

Slide 12 represents our cost of sales breakdown. The use of imported semi-finished products increased due to the halt of production at Isdemir for three months due to the earthquake in 2023 as our own slab production returned to normal level in the first nine months of this year, 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 historical capital expenditures.

Total CapEx is $680 million in nine months. When we add the advanced payments of $89 million to this figure, we reached the investment expenditure of $769 million.

We expect that CapEx will reach up to $1 billion again in 2024 with maintenance and other ongoing investments. On Page 14, just as a reminder, we are very proud to announce our Net Zero road map in January this year.

We aim to reduce carbon emissions per ton by 25% by 2030, 40% by 2040 and achieved Net Zero emissions by 2050 compared to the base year of 2022. We plus spent $3.2 billion for transformational investments of Erdemir and Isdemir by the end of 2030.

70%, 80% of the $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. I will be delighted to answer your questions.

Thank you for listening.

Yes. Thank you for the presentation today.

With two fairly simple questions from me. First, in terms of steel production for the year.

So, you're guiding to about 8 million tons. That does imply quite a big step-up as we come into the fourth quarter.

So, I just wanted to confirm that you're happy with that number and that you do expect steel production to increase as we come into the fourth quarter. And then the second one is just on EBITDA per ton.

You've given some helpful guidance previously on EBITDA per ton. And given the trading environment, how are you thinking about EBITDA per ton for the rest of the year from here?

Jason, so your first question, yes, we guided 8 million tons sales for the whole year. Actually, we already sold, we can say, almost 6 million tons in nine months.

So, 2 million or above 2 million tons is reasonable for our companies, mainly in the last quarter, we fell a little more when you compare with the previous quarter. So yes, I mean, we expect to have 8 million tons at the end of this year as sales.

And for your second question, actually, we expect to have $80 to $90 million per ton as EBITDA per ton for the whole year. So right now, in the first nine months, the average of first nine months is $99 per ton.

So, there will be decrease for the whole year, and we expect between $80 to $90.

Okay. Could you just remind me as well, please, Idil, in terms of the raw materials, how do we think about the lag in terms of when the raw materials flow through the income statement?

Generally, we take it as four months, the lag for the raw material. And we still keep it as four months.

So, there will be a little decrease on the raw material costs due to declining raw materials, but also the sales prices kept going down and also, there will be a little more decline in our sales revenue as well.

I got a couple. The first one will be on.

You mentioned this insurance proceeds. Can you just clarify, you already received 100 and then what is it here that I can see, just a moment $129 million?

Yes.

Insurance or payments.

Yes, exactly. Insurance payments related to -- I mean, at least is what understood related to the earthquake.

And then you mentioned that you will receive a further $205 million in the last quarter. Is it correct?

Or is the $205 million inclusive of the $129 million.

Okay. So, we got two advanced payments from the insurance companies, $100 million and $105 million.

So, the total payment that we got from the insurance companies is $205 million until now. And we also expect to get the final payment from the insurance companies until the end of this year.

So most probably, we will finalize the procedure soon, and we will announce the final amount. But right now, it's not certain.

That's why we cannot share the last payment. But yes, we expect to get it until the end of this year.

And can you just mention the range of this payment, the additional payment that you expect to receive?

Unfortunately, it's not possible. The negotiations are still ongoing.

So, we don't know the exact amount.

Okay. Understood.

And then in terms of leverage, well, I haven't plugged the figures. But I guess that by year-end, you will be above your 2.5x net debt-to-EBITDA.

Is it a fair assumption?

Yes, it is a fair assumption. I mean right now, we have 2.8 months far as net debt to EBITDA and most probably, we will be around three months far when we look at the year-end results, expected.

Because I remember in one of our conversations, you were saying that you were happy to manage CapEx and basically to bring down EBITDA below 2.5. So, when should we expect this to happen next year?

Or do you foresee and EBITDA at this level as long as steel prices remain as low as they are now.

It's a very good question, Erica. The first thing that this situation is temporary.

I mean it's not a permanent situation because we have a very high investment expenditures this year, yes, our debt levels are a little higher than earlier. So yes, our net debt-to-EBITDA is higher than 2.5 multiplier.

But starting to the first quarter of 2025, there will be some positive developments in the steel market. The first one is anti-dumping duties imposed by Turkish government, as I mentioned earlier, for HRC to China, Russia, India and Japan.

So, we are expecting a positive effect to the Turkish bill on the price base actually. So, this kind of positive developments will have effect on our EBITDA.

And that's why we will have less net debt-to-EBITDA multiplier in 2025. So most probably starting from next year, our net debt-to-EBITDA level will go back to the less than 2.5 multiplier.

Understood. And can you just remind me how much CapEx do you intend to spend next year?

We expect a decrease in the CapEx because we will finish most of the ongoing investments. So, next year, we expect to have $800 million to $850 million for the whole year at CapEx.

I have just two questions. The first one, in regards of your other VAT receivables.

Can you update us on how much is still outstanding there? And my second question is just about your -- I mean your net backs or your EBITDA per ton between the domestic market and the export market, let's say, for the similar products flat or long?

I mean can you just give us a sense what is the differential there that you have achieved in the third quarter? And also, can you remind us what was the share of exports back, I mean, prior to the earthquake.

Let me start from your second question. So, our export level was very similar to prior earthquake levels.

We were around 20%. We have 20% exports in our total shares.

So, we are back to the prior earthquake level as of today. I just missed the question about the EBITDA per ton.

Could you please repeat your question?

No. I was just wondering the differential that you have between your domestic sales and the exports market at this point of time in terms of pricing, if any?

Well, actually, it depends and it changes a lot. So given the number, I mean I would like -- I do not want to generalize a number because it depends on the prices, of course.

Right now, the export part is a little higher when you compare with the domestic prices, but it changes a lot. So yes, we have a little difference between export and domestic sales as EBITDA per ton, but it's changed a lot.

So, I also would like to answer your first question, you asked value-added tax receivables, right?

Exactly, yes.

Yes. So, as we shared in the first quarter call, we collected all of the value-added tax receivables of TRY14 billion and 55% of TRY14 billion was received in cash and the rest was received as an offset to the tax to be paid.

So, we collected last year's value-added tax receivables. But at the same time, new value-added tax receivables arise with the sales made.

But since the tax to be offset, has not occurred yet, the value-added tax receivables continue at the same level.

Understood. So still around $500 million?

$500 million, yes.

Thank you very much for joining us. We hope to meet you again in our fourth quarter call.

Have a nice day. Thank you.