Eregli Demir ve Celik Fabrikalari TAS

IST:EREGL.E

Q3-2025 Earnings Call

[Operator]

Ladies and gentlemen, thank you for standing by. I am Mina, your Chorus Call operator. Welcome, and thank you for joining the Erdemir conference call and live webcast to present and discuss the third quarter 2025 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 the 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 containing 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 is 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 a revision at that 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 Mrs. Idil Onay Ergin, Investor Relations Director. Mrs. Ergin, you may now proceed.

[Idil Onay, executive]

Thank you very much, Mina. Good afternoon, everyone. Welcome to our conference call and webcast of Erdemir for the third quarter of 2025. First, I will go through our presentation -- 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. So I'll start with Slide 3. Our presentation consists of 2 sections, as you already know. The first one is 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 2025, the coking coal market showed a volatile yet narrow range trend under supply constraints and regulatory pressures. Production restrictions in steelmaking regions of Northern China and weak demand in India exerted downward pressure on prices. Overall, coking coal prices fluctuated between $170 to $190 per tonne during the quarter, averaging around $184. The iron ore market has been supported by a moderate demand recovery and lower-than-expected production cuts, while current prices remain elevated compared to fundamental indicators. Although downward pressure on steel prices persist in China, iron ore prices holding steady in the $100, $105 per tonne range.

Towards the end of the year, weak domestic demand and rising trade protectionism stand out as key issues that could exert downward pressure on iron ore prices. In Q3, Turkey's imported scrap market remains generally under pressure due to cautious buying from producers and strong supply conditions. Nevertheless, prices averaged around $345 per tonne, in line with the previous quarter. On the bottom right, we show HRC prices in Black Sea, China and South Europe. In the first quarter of 2025, the global HRC market continues to search for direction and weak demand, high inventories and uncertainties in trade policies. As the final quarter begins, regional price differences are expected to become more pronounced with the increase in protectionist measures.

On Page 4, you will see the production consumption, exports and import figure of Turkish steel market for the first 8 months of 2025. While consumption rose slightly by 3% and production increased by 4%, exports of steel products grew by 12% in volume during the first 8 months of the year and reached 10 million tonnes. Imports also increased by 18% to 12.6 million tonnes over the same period, mainly driven by higher semi-finished product imports. As a result, the export import coverage ratio increased to 79% in the first 8 months of 2025. It was observed that the total imports were largely realized under the inward processing regime with the circular published by the Trade Ministry on September 16, it was named mandatory for 25% of the imports of products processed to exports to be supplied domestically.

This change was welcomed in terms of domestic steel production. At the export side, the tariffs imposed by the U.S. and safeguard system, for the revision by European Union have continued to offer Turkish producers a more competitive environment. Under the Trump tariff clause, the U.S. reached agreements with many countries. However, steel was generally excluded and remains subject to a 50% tariff. On the other hand, uncertainty due to carbon border adjustment mechanism, which will come fully into effect from January 1, 2026, and looming safeguard system revisions negatively affected EU buyers import demand. Asian countries, which have been the most negatively affected by the policy, increased their exports to unprotected markets.

So let's take a look at the financial results and operational metrics. On Page 6, you will see the summary of our 9-month results. We achieved USD 3.8 billion revenue, revenue. Also, we generated $341 million EBITDA and $62 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 current investment package in the second quarter, our crude steel capacity utilization ratio, which was 75% in the second quarter increased to 90% in the third quarter. Accordingly, sales and production levels returned to their normal levels. We aim to close the year 2025 with around 7.8 million tonnes of sales. 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 when we compare it to last year's breakdown. There has been a transition from general manufacturing and auto to pipeline profiles and distribution chains on a percentage basis. We see similar changes between sectors in the long products, although its share in total sales is relatively small. We achieved an export volume of 371,000 tonnes in Q3, representing 19.2% export share in our total sales. We are above our historical average with 23% export share in the first 9 months. Although our main focus is the domestic market, we also consider export as an alternative market.

On Page 9, you can find a breakdown of revenue for domestic and export sales. 76% of the revenue comes from domestic sales in line with the domestic volume. Despite import pressure in the domestic market, we achieved to generate $341 million EBITDA and $62 million net profit in the first 9 months of the year. We generated $68 EBITDA per tonne in 9 months. As we approach the year -- end of the year, we would like to share that our EBITDA per tonne expectation stands in the range of $60 to $65 per ton. On Page 10, you can see how we reached a net profit from EBITDA. One of the largest item was depreciation, which was $200 million in 9 months. The other major item in this chart was financial expenses of $177 million. After other expenses, net profit was $62 million. In the graph below, you can see a bit of the change in cash bridge. Our net working capital increased compared to the second quarter due to the expansion of the trade payables maturity.

Additionally, a dividend payment of $43 million was distributed in the third quarter. Also, we spent around $336 million to investment activities in 9 months. This amount also includes CapEx advances paid for the capital expenditures and sale of commercial offices for investment properties as well. On Page 11, you will see historical trend of financial borrowings and net debt. As you can see in the financial borrowings chart, the share of short-term debt in total debt decreased to 24% in Q3 with the support of $950 million Eurobond issuance. When we look at 2025, our net working capital decreased due to the expansion of the trade payables maturities.

Despite high capital expenditures, we succeed in keeping net debt EBITDA below 3 multipliers in the first 9 months, and we expect to keep the net debt-to-EBITDA ratio below 3.2 multipliers for 2025. Slide 12 represents our cost of sales breakdown. Due to the decrease in coal prices, the percentage of coking coal costs decreased in the raw material basket, which is in line with the trends in raw material markets. Since we can see the costs in the fourth quarter, we can say that there will not be a significant cost increase in raw materials. Page 13 represents the historical capital expenditure. Total CapEx was $1.1 billion in 2024 and $631 million in the first 9 months of 2025. The new first blast furnace in Isdemir and #4 coke battery in Erdemir was commissioned in the second quarter of this year. Other than these investments such as pelletizing plants, solar power plants and energy efficiency investments are included in the CapEx figure of 2025.

And the gold mine, we expect the resource announcement for the gold mine to be made in November and the reserve announcement in the first quarter of 2026. As we have shared since the beginning of the year, we expect that CapEx will be around $800 million, $850 million in 2025 with maintenance and other ongoing investments and maintenance will be around $58 million per year as usual. As you already know, this figure is accrual based and the cash outflow will be lower due to advanced payments. So on Page 14, just as a reminder, we announced our net zero road map last year in January. 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 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.

[Operator]

[Operator Instructions] The first question comes from the line of Gabriel, Alain with Morgan Stanley.

[Alain Gabriel, analyst]

My first question is on the CapEx plans for '26 and '27. Do you mind reminding us of how much you're budgeting for the next couple of years? And how would the split work by project roughly? I'm just trying to get a better understanding of what is essential and what can be rephased for a later date if your earnings run rate and if the broader environment for steel in Turkey does not improve materially? That's my first question.

[Idil Onay, executive]

Alain, so sorry, but I couldn't get the question because of the sound problem. Could you please repeat your question?

[Alain Gabriel, analyst]

Yes, yes, absolutely. So my question is on the CapEx plans for '26 and '27. Do you mind reminding us how much you're budgeting for the next couple of years? And what is the split roughly by project? And I'm just trying to get a sense of what is essential and what can be rephased for a later date if the broader environment does not improve for steel in Turkey?

[Idil Onay, executive]

So there is no calculation on net zero road map. So it means that we announced we will spend $3.2 billion in 7 years until the end of 2030. It means that $450 million additional per year will come from -- only from net zero investments, plus we have a regular modernization, which is also included in CapEx and a small amount of maintenance. So altogether, it's going to be around like $650 million. So we can say that the sustainable amount will be in '26 and '27 will be around $600 million, $650 million.

[Alain Gabriel, analyst]

That's very clear. And the second question is on the regulatory environment that is getting more challenging with the EU Steel Action Plan and the Section 232 in the U.S. that's in place. What are you doing to counter these risks? Are you finding new markets that would be an offset? And are there any policy changes that you are discussing with the Turkish government to try to mitigate these risks?

[Idil Onay, executive]

Well, it's a very good question and very popular question because the regulation has recently changed, I mean, inwards processing rating. So let me start from the European Union changes in quotas. So although the proposal has not yet been accepted, we do not expect changes in quotas to have a material impact in our sales volumes because the share of exports in our total sales averages around 20% and the majority of our sales are directed to the domestic market. So approximately half of our exports are made to European Union countries, but we have the flexibility to redirect any potential volume loss resulting from the quota changes to the domestic market or other export destinations.

So in September this year, the Ministry of Trade revised the inward processing regime and making it mandatory to use 25% domestic steel and shortening the certificate validity period from 6 months to 4 months. We see this development as positive for domestic steel producers and believe it will be support domestic prices by reducing imports. So we haven't seen any impact from this regime because since the certificates are obtained in advance, the positive impact of the inward processing regime will begin to be seen in the first quarter of 2026. And for European quota change, actually, the main target is not Turkey. So we know that this change is basically against the far Asian countries, especially China.

So Turkey still holds the largest quota for HRC, for hot-rolled coil. And we believe that Turkey will continue to be the primary import source for Europe as it is now. So of course, there is another part in U.S. So the tariff imposed by the U.S. it continues to offer Turkish producers a more competitive environment. Under the [Trump tariff clause], the U.S. reached agreement with many countries. However, steel was generally excluded and remains subject to a 50% tariff. But again, since the U.S. is not our main export market, we do not see any risk to our exports. So the problem is if some countries cannot go and sell their product, for example, in European Union, if they come to Turkey. So this is the main question. If our imports will increase. But we believe that Turkey will be able to protect itself against imports from other countries with the revision of the inward processing regime and both completed an ongoing antidumping investigation and additional taxes.

So as you remember, last year, the Trade Ministry finalized the antidumping investigation against HRC products from China and some other countries. And the average of additional taxes was around 30% for China, example -- for example. So we believe that these 2 regulation change -- the first one is in more processing regime and the second one, additional taxes from antidumping investigation. We believe that Turkey will be able to protect itself against the risk of increasing imports.

[Operator]

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

[Zenande Meyiwa, analyst]

Can you hear me?

[Idil Onay, executive]

Yes, we can hear you, Zenande.

[Zenande Meyiwa, analyst]

Idil, just a follow-up question on the CapEx figure. Are you saying that you've now revised down your CapEx assumptions to $600 million to $650 million? Or is it still the $800 million per annum that we can now -- should expect?

[Idil Onay, executive]

For 2025, we have been saying since the beginning of the year, we are expecting $800 million, $850 million levels for 2025 CapEx. But for the next year and a year later for 2026 and 2027, it will be less because the biggest part of this year's CapEx was the 2 main investments, one is the blast furnace in Iskenderun and the other one is coke battery in [indiscernible]. So these 2 investments was already completed and commissioned. So the biggest part of $800 million, $850 million from this year was these 2 investments. So they are already completed. That's why next year and a year later, we will see a smaller amount of CapEx.

[Zenande Meyiwa, analyst]

Okay. And then will it increase from 2028 to 2029 on the back of the new EAF installation?

[Idil Onay, executive]

Well, it might change in 2028 because at these years, we will start the electric arc furnaces. The first one will be completed Iskenderun and then at the end of 2030, the second electric arc furnace in [indiscernible] will be completed. So it might increase again, but -- or we can say that it might be stable because most of the additional investments will be completed. For example, solar power plants. We will commission these solar power plants at the end of 2026. So it will be more or less, but will be around like $600 million -- $600 million during the years until the end of 2030.

[Zenande Meyiwa, analyst]

Okay. Okay. That's clear. And then just another question on the near-term stuff. I mean you've had quite a massive working capital release in Q3. Just wanted to ask what should we expect for Q4? Should we expect maybe a little bit of a build since we're going into a seasonally strong quarter? Or should we expect more or less the same release?

[Idil Onay, executive]

Considering that Q4 becomes clearer in terms of both price and cost, we expect to see similar figures in Q4 to Q3 in net working capital.

[Operator]

The next question is from Bystrova, Evgeniia with Barclays.

[Evgeniia Bystrova, analyst]

So I have several questions. So first of all, on your margins. I mean, quarter-on-quarter, it seems that EBITDA margin was down even though that EBITDA per ton was up. So just trying to understand what we can expect in the fourth quarter. I mean you said that your EBITDA per tonne guidance for the year is now down. So what could be the main driver of that? Or basically, what went -- or what was the -- what was unexpected that made you change your -- or revise your guidance down for the full year in EBITDA per ton terms?

And what are you expecting in terms of EBITDA per tonne maybe for 2026? And how much improvement do you expect to come from this commissioned investment in energy efficiency, et cetera? And then my second question is on just a follow-up on CapEx. Could you please repeat the number for maintenance CapEx and also for the gold -- for potential gold CapEx. Is it right to assume that this year, it will not happen, but maybe starting from Q1 2026, we might see additional CapEx related to gold operations?

[Idil Onay, executive]

So unfortunately, I am not able to give any figure for the gold mine. But the good news that we will announce soon the resource report, hopefully, in November. And after we share the resource and then the reserve report in the first quarter of 2026. And then most probably, we will be able to share CapEx figure after this report. So the other question you mentioned that, yes, by the way, it's lower. We said around $70 EBITDA per ton expectation in our last quarter's call. But obviously, the market conditions drive us to lower our EBITDA per ton expectation to $60 to $65 per ton.

And despite the decline in sales prices in Q3, we maintained the balance in EBITDA per ton and even increased it by reducing costs through increased efficiency in our newly commissioned facilities. So the new investments had an impact of approximately $20 on EBITDA per ton. And for 2026, unfortunately, again, I am not able to give any number for the next year. We will start our budgeting process in November. So most probably when we announce our year-end results, we will share some guidance for 2026.

[Evgeniia Bystrova, analyst]

Just as a follow-up on CapEx because previously, you mentioned that if the gold investment goes ahead, you might increase your CapEx this year from $800 million, $850 million to $1 billion. So could we expect maybe a similar increase of CapEx next year depending on the parameters of the gold project?

[Idil Onay, executive]

Yes, you are right. It depends on the size of the gold mine. So yes, we -- at the beginning of the year, we said that we expect to have $800 million, $850 million. That's the regular amount. And if the gold mine has a significant reserve, it might go up to $1 billion. But right now, we will wait and see the amount. But yes, I mean, this number is not that far from our expectations. But again, we would like to wait and see the amount of reserve in gold mine.

[Operator]

The next question is from the line of Jones, Andrew with UBS.

[Andrew Jones, analyst]

I just wanted to ask about CapEx again because I think you said originally $3.2 billion of CapEx by 2030 on the EAF, by the solar and the biomass stuff, I mean, which implies over 5 years, $640 million a year just on that without any maintenance CapEx. So I'm curious to understand how you're now saying it should be $600 million sustainably to the back end of the decade. Can you just again just clarify the moving parts, how much maintenance, how much from the EAF-related spending, how much for projects next year? And how do you see that step-up playing out in the coming years? Because clearly, at some point, spending will have to go back up as far as I can see. I'm not sure why it would stay down at $600 million given that previous guidance and basically what's changed?

[Idil Onay, executive]

And so actually, it's not 5 years, it's 7 years. So we announced it in 2024 -- beginning of 2024, and we started our solar power plant, the first phase of solar power plant in 2024. So until the end of 2030, it's 7 years. And actually, we just divide it equally to per year. So $3.2 billion when you divide it to 7 years, it's $450 million. Plus we have around $150 million, sometimes $200 million regular modernization, small size of modernization, plus we have maintenance, $50 million to $80 million per year. So these are the total package. So it's around $600 million, $650 million per year.

[Andrew Jones, analyst]

That adds up to more than the $650 million -- I mean if you say $450 million plus $150 million to $200 million, you're already basically there, then you've got your maintenance on top of that. I mean it's -- I mean it sounds still to me like it should be closer to $700 million, but maybe it's lower next year and then it steps up later, but is that way to think about it?

[Idil Onay, executive]

Of course, it's not going to be $450 million basically for every year. So it will change during the year. So we are just roughly trying to give a projection to our analysts and investors that it's going to be around $450 million. So sometimes it could be $500 million for a year and next year, it's going to be like $400 million. So it will change from time to time, but the average will be around $450 million.

[Andrew Jones, analyst]

Okay. Cool. And just a clarification on 4Q. Can you just talk us through the moving parts there, like the expectations around volumes, pricing, costs, like what are the moving parts influence that margin and the organic stuff?

[Idil Onay, executive]

Sure. So as I mentioned during the call, we expect 7.8 million tonnes sales. So it's going to be around 2.2 million tonnes sales for Q4. And we expect to have very similar sales prices and costs in Q4. But the thing is the contribution from our new investments will increase. So in this quarter, it's going to -- it will be around $20, and it's going to be around like $40 next quarter. And finally, in the first quarter of 2026, we will see the full impact of $40 from our new investments. So that's the general expectation for the next quarter.

[Andrew Jones, analyst]

And that's $40 per tonne on the whole production base? Or are we just talking about a fraction of it?

[Idil Onay, executive]

Sorry, I couldn't get the question.

[Andrew Jones, analyst]

Sorry, the $40 per tonne is what on the total production, made that on the total margin of the group? Or is that on a proportion impacted by...

[Idil Onay, executive]

No, no. It's $40 contribution to EBITDA per ton. So yes, group's consolidated EBITDA per ton, it will be around $40 contribution to that figure.

[Operator]

The next question is a follow-up question from the line of Bystrova, Evgeniia with Barclays.

[Evgeniia Bystrova, analyst]

Can you hear me now?

[Idil Onay, executive]

Yes, we can hear you.

[Evgeniia Bystrova, analyst]

Yes. Just a quick follow-up. So on the $20 per tonne contribution from the investments. So without this $20, the EBITDA per tonne this quarter would have been $48 per tonne. Is that the right way to think about it?

[Idil Onay, executive]

Yes. Yes, that's correct. So it would have been less if our new investment wasn't completed.

[Operator]

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

[Idil Onay, executive]

Thank you very much for joining us. We hope to meet you again at our year-end conference call. Have a nice day. Thank you.

[Operator]

Ladies and gentlemen, the conference has now concluded, and you may disconnect your telephone. Thank you for calling, and have a good afternoon.