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Edited Transcript of KEN earnings conference call or presentation 30-Aug-18 1:00pm GMT

Q2 2018 Kenon Holdings Ltd Earnings Call

Sep 6, 2018 (Thomson StreetEvents) -- Edited Transcript of Kenon Holdings Ltd earnings conference call or presentation Thursday, August 30, 2018 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Barak Cohen

Kenon Holdings Ltd. - Director

* Giora Almogy

OPC Energy Ltd. - CEO

* Mark Hasson

Kenon Holdings Ltd. - CFO

* Robert L. Rosen

Kenon Holdings Ltd. - CEO

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Conference Call Participants

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* Richard M. Fels

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by. Welcome to the Kenon Holdings Ltd. conference call to discuss the second quarter 2018 results of Kenon. (Operator Instructions) As a reminder, this conference is being recorded.

Kenon published a press release with Q2 results earlier today. The press release as well as summary financial information of Kenon, OPC and Qoros have been publicly submitted to the Securities and Exchange Commission on Form 6-K. These documents can be accessed from the SEC's website and have been filed with the Tel Aviv Stock Exchange and are available on the company's website.

With us on the call today are the management of Kenon and OPC Energy. This includes Mr. Barak Cohen, Co-CEO of Kenon; Mr. Robert Rosen, Co-CEO of Kenon; Mr. Mark Hasson, CFO of Kenon; and Mr. Giora Almogy, CEO of OPC. Barak will first provide an update on Kenon. Giora will then provide an update on OPC, followed by Mark, who will discuss the financial results of Kenon. We will then open the call for the questions-and-answers session, followed by a concluding statement by Rob.

Before we start, I'd like to point out that this conference call may contain forward-looking statements, including statements regarding expected events, developments of the -- or the unexpected performance of the company and its subsidiaries and associated companies, including those statements identified as forward looking in Kenon's second quarter 2018 results release. These statements are only estimates or plans, and there is no guarantee that they will in fact occur. Actual events or results may differ materially from those projected, including as a result of changing market trends as well as other risks and uncertainties identified in the Risk Factors section of the company's annual report on Form 20-F filed with the Securities and Exchange Commission and in the section entitled Caution Concerning Forward-Looking Statements in the earnings release.

In addition, this conference call includes certain non-IFRS measures, including OPC's EBITDA numbers. For the definition of such terms and a reconciliation to their most directly comparable IFRS measures, see Exhibit 99.2 to the Form 6-K furnished to the SEC today. The Form 6-K is available on the SEC website as well as Kenon's website.

And with that, I will now hand over the call to Barak. Barak, please go ahead.

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Barak Cohen, Kenon Holdings Ltd. - Director [2]

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Thank you, operator. I'd like to welcome all of you and thank you for joining us today for the investor conference call to discuss Kenon's second quarter results.

And I'm pleased to report that Kenon had another strong quarter with solid results from OPC, which Giora, CEO of OPC, will provide further details shortly; and significant operational progress in Qoros; as well as further progress with respect to Qoros transaction that we announced in the beginning of the year.

On the Qoros transaction, I'm happy to share that, in July 2018, the relevant authorities in China approved the capital increase of RMB 6.5 billion, including the conversion of existing shareholder loans owing from Qoros in the principal amount of RMB 944 million, it's approximately USD 143 million, to each of Kenon and Chery. Following such approval, Kenon converted all of its shareholder loans to equity; invested RMB 616 million, approximately $93 million, in Qoros; and retained a total of USD 150 million of cash proceeds from the investment in Qoros that [happened] by the new investor earlier this year. Kenon does not have any further obligations to invest in Qoros.

In addition, Qoros is required to pay Kenon net interest payments on past shareholders loans as well as compensation for foreign exchange fluctuations in the total net amount of approximately USD 11 million, of which USD 7 million has been received to date.

Kenon's wholly owned subsidiary, Quantum, which holds Kenon interest in Qoros, used a portion of these funds to repay the outstanding balance of USD 57 million owed to Ansonia, Kenon's major shareholder, which had previously been loaned directly to Quantum to support financing to Qoros. To date, the net cash proceeds from the investment in Qoros are approximately $200 million, of which approximately $75 million was used to repay the full outstanding balance of the loans from Ansonia. There are no more outstanding amounts to be paid to Ansonia, and Kenon also does not have any outstanding debt.

On the operational side. In terms of car sales, Qoros continued with its significant growth since the beginning of the year. In the second quarter of 2018, Qoros sold approximately 19,200 vehicles, an increase of over 500% as compared to the second quarter of 2017. For comparison, Qoros sold approximately 15,000 cars during the full year of 2017. The sales in 2018 include orders from a leasing company introduced by the New Qoros Investor.

Qoros revenue in Q2 2018 increased to approximately USD 276 million for the quarter as compared to USD 40 million in Q2 2017. In terms of profitability, Qoros gross margin significantly improved this quarter, although it is still negative. However, it includes also depreciation and amortization as part of the cost of sales, and therefore on cash basis, it's better.

We're happy with these developments. And as you know and in line with our track record, Kenon remains committed to its strategy of unlocking and realizing the value inherent within its businesses for its shareholders.

That ends my summary. And now I would like to hand the call over to Giora to discuss the business development and financial results of OPC.

Giora, please go ahead.

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Giora Almogy, OPC Energy Ltd. - CEO [3]

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Thank you, Barak. So in terms of business development, OPC is constructing, through OPC-Hadera, a 148-megawatt co-generation plant. The total investment is estimated $274 million, and as of June 30 this year, we have invested approximately $192 million.

Furthermore, we are developing Tzomet, an open-cycle natural gas-fired power station with a capacity of 396 megawatts. In March this year, OPC completed the acquisition of 95% of the shares of Tzomet for a total consideration of $23 million, of which approximately $7 million has been paid. The rest is pending to financial closing.

In terms of the business results, OPC had another strong quarter of the year. The EBITDA of OPC for the second quarter was $18 million compared to an EBITDA of $14 million last year. The main reason for the increase in EBITDA is the higher availability of the power plant versus last quarter -- the previous quarter last year and also the increasing prices in the beginning of the year.

Please note that OPC results are published in Israeli shekels and are -- could be slightly different than those in dollars. As a result, we will take into account exchange rate fluctuations.

That ends my summary. And I now will hand over to Mark, Kenon's CFO, for a financial summary. Go ahead, Mark.

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Mark Hasson, Kenon Holdings Ltd. - CFO [4]

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Thanks, Giora. Kenon's consolidated results of operations are largely made up of the consolidated results of OPC. The results of Qoros and ZIM are reflected under results from associates. And you can find additional details in our 6-K, which was filed earlier today.

The net loss attributable to Kenon's shareholders for the second quarter of 2018 was $29 million compared to a net profit of $9 million in the second quarter of 2017. In terms of liquidity and capital resources, as of June 30, 2018, Kenon's unconsolidated cash balance was $45 million, and Kenon does not have any debt. Also, as Barak mentioned, following the completion of the Qoros transaction and the repayment to Ansonia, Kenon retained approximately $100 million.

Finally, as a reminder, Kenon is the beneficiary of a 4-year deferred payment agreement in the amount of $175 million, reflecting deferred consideration from the sale of its Inkia power businesses. This amount accrues interest at a rate of 8% per annum, and the interest started accumulating at the beginning of 2018.

That ends our summary, and we will now be happy to take your questions. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question is from [Sage Friedman] of [BAI].

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Unidentified Analyst, [2]

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Do you have any thinking about paying dividends to the shareholders? Because in my recollections, you have something about $150 million.

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Barak Cohen, Kenon Holdings Ltd. - Director [3]

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[Sage], it's Barak here. Yes, you are correct. We have approximately $150 million. We are considering. As you know, Kenon's strategy is eventually to disaggregate and distribute the holdings, so definitely we are considering. But once there is a decision and we would have a clearer understanding of the exact strategy going forward, we will come and announce. But there is no decision at this moment.

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Operator [4]

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The next question is from Richard Fels of Odeon Capital Group.

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Richard M. Fels, [5]

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Could you please elaborate on what the thinking is on ZIM's shipping business and where you see that going or adding value? Because currently, I'm unable to get any transparency of whether that is a drag on earnings or actually contributing. But any color would be helpful.

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Barak Cohen, Kenon Holdings Ltd. - Director [6]

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Richard, thank you for joining. Again it's Barak. And Kenon has a 32% stake in ZIM. Earnings, I think, for a holding company is something that is not the main focus that we look at. We look mainly on value. And we do think on potential strategies how to create the shareholder value from ZIM, from our holding in ZIM. As you understand, we have no control on the holding. We are minority shareholders in these investments, and that is currently the situation. So there are ways that eventually shareholders of Kenon can have value from ZIM. But again when there is something concrete or there is something that we can discuss or talk about, we would. Right now we are just a minority shareholder in ZIM.

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Richard M. Fels, [7]

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I appreciate that. Could you elaborate what some of those value opportunity or value propositions could be in the future? Just speaking freely, nothing concrete, but where do you see value being created there?

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Unidentified Company Representative, [8]

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(inaudible).

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Barak Cohen, Kenon Holdings Ltd. - Director [9]

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I don't want to discuss any speculations, right? So it's -- there are just possibilities that you know as well as I am. There is a possibility, for example, at certain points for an IPO and a distribution, and there is a possibility of some other strategic transactions. So there are different routes that eventually can create or crystallize value to shareholders. By the way, we've done some of them already, in Kenon's track record. So all of the options are on the table, but again there is nothing now that I can say this is where we're going with ZIM. And yes.

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Richard M. Fels, [10]

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So just a final question on this topic. Would you say that you're pleased with the communications that you're getting from ZIM as far as monitoring the investment?

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Barak Cohen, Kenon Holdings Ltd. - Director [11]

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We have 2 board members in ZIM, and we have good transparency with the company...

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Operator [12]

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(Operator Instructions) There are no further questions at this time. Mr. Rosen, would you like to make your concluding statements?

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Robert L. Rosen, Kenon Holdings Ltd. - CEO [13]

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Thank you, operator. On behalf of the management of Kenon Holdings, I would like to thank you all for your interest in our company and for your continued support during another successful quarter. If you have any questions, please feel free to contact Kenon's IR team, whose contact details are on the press release.

One more note. As previously announced, following the positive strategic developments in our businesses over the past 12 months, including in the transactions related to the new investor in Qoros, the sale of Inkia's power businesses and the IPO of OPC Energy, Barak Cohen will be stepping down as Co-CEO of Kenon. He'll be joining the Kenon board and will continue to serve as a director of both Qoros and OPC, and we look forward to his continued active engagement supporting our management team. I would like to personally extend my thank you to him. I will continue to serve as CEO of Kenon. Thank you again, and farewell from me and the team. Have a nice day.

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Operator [14]

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Thank you. This concludes the Kenon Holdings conference call. Thank you for your participation. You may go ahead and disconnect.